<PAGE>
As filed with the Securities and Exchange Commission on January 19, 1999
Registration No. 333-63519
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
ON FORM S-1
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
ARCH COMMUNICATIONS GROUP, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
Delaware 4812 31-1358569
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code Number) Identification Number)
jurisdiction of
incorporation or
organization)
</TABLE>
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
(508) 870-6700
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
C. Edward Baker, Jr.
Chairman and Chief Executive Officer
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
(508) 870-6700
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
copies to:
Edward Young, Esq.
Jay E. Bothwick, Esq.
David A. Westenberg, Esq.
c/o Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the effective registration statement for the same
offering. [_]
----------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
section 8(a), may determine.
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<PAGE>
EXPLANATORY STATEMENT
This Registration Statement on Form S-4, which was declared effective on
December 16, 1998, covers warrants (the "Warrants") to acquire a total of up
to 44,893,166 shares (the "Shares") of Common Stock, $.01 par value, of Arch
Communications Group, Inc. ("Arch"), as part of a Rule 145 business
combination transaction (the "Merger"). The current form of prospectus
contained in the Registration Statement (the "Prospectus") is currently being
used to solicit exercises of nontransferable rights ("Rights") to purchase
Shares prior to consummation of the Merger. To the extent that any Rights are
not exercised prior to consummation of the Merger, Arch will deliver to the
holders of such Rights, promptly following such consummation, Warrants to
purchase an equivalent number of Shares. The current form of Prospectus is
also being used to solicit proxies from Arch's stockholders and is therefore
formatted as a proxy statement/prospectus.
This Post-Effective Amendment No. 1 contains a revised form of Prospectus to
be used, following consummation of the Merger, in connection with (i) issuance
of Shares by Arch upon exercise of Warrants and (ii) resales of Shares and
Warrants by selling securityholders.
Ordinarily, a resale prospectus contained in a Form S-4 registration
statement complies with the requirements of Form S-3, This Post-Effective
Amendment No. 1 complies with the requirements of Form S-1, rather than Form
S-3, because (i) Arch does not currently meet the public float test set forth
in General Instruction B(1)(a)(i) to Form S-3, and is therefore eligible to
use Form S-3 only in connection with resales by selling securityholders and
not in connection with issuances of Shares by Arch, and (ii) it is expected
that, at the time the Prospectus contained in Post-Effective Amendment No. 1
is first used, only a portion of the information required to be contained in
such Prospectus will have been set forth in Arch's filings under the
Securities Exchange Act of 1934, so that incorporation by reference of such
filings would be of limited benefit even to the extent Form S-3 were to be
available for resales. It is expected, however, that Arch will meet the public
float test upon (or shortly after) consummation of the Merger and that its
filings under the Exchange Act will thereafter contain substantially all of
the information required to be contained in the Prospectus. At such time, the
Registration Statement will be further amended to contain a briefer form of
Prospectus which will comply with the requirements of Form S-3 and incorporate
by reference most of its required information.
Some of the securities described in the Prospectus are registered on
separate registration statements on Form S-4 (file no. 333-62211) and Form S-1
(to be filed). The form of Prospectus contained in this Post-Effective
Amendment No. 1 is a common prospectus that is intended to form part of such
other registration statements as well as this Registration Statement. Arch
intends to amend and file such other two registration statements after this
Post-Effective Amendment No. 1 either has received comments from the staff of
the Commission or has been accorded no-review status.
----------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+This prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is prohibited. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO CHANGE, PROSPECTUS DATED JANUARY 19, 1999
PROSPECTUS
[LOGO]
ARCH COMMUNICATIONS GROUP, INC.
Shares of Common Stock
Shares of Class B Common Stock
Stock Purchase Warrants
On the date of this prospectus we are issuing warrants to purchase
a total of [ ] shares of our Common Stock in connection with
our acquisition of MobileMedia Communications, Inc. and its
subsidiaries. The exercise price of these warrants is $ per
share, subject to adjustment for stock splits. The warrants expire
at 5:00 p.m., New York City time, on September 1, 2001.
This prospectus relates to our issuance of shares of Common Stock
upon exercise of the warrants and also to resales of warrants and
shares by the selling stockholders named in this prospectus. These
stockholders will sell warrants and shares at prices determined by
the prevailing market price for shares of Common Stock or in
negotiated transactions.
We will not receive any of the proceeds of resale of warrants or
shares by the selling stockholders, although we will receive the
exercise price of the warrants when exercised.
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<CAPTION>
Per Share Total
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<S> <C> <C>
Warrant exercise price................................. $[3.25] $
Underwriting discounts................................. -- --
Proceeds, before expenses, to Arch..................... $[3.25] $
</TABLE>
Our Common Stock is listed on the Nasdaq National Market under the
symbol "APGR".
Neither the SEC nor any state We urge you to carefully read
securities regulators have the "Risk Factors" section,
approved or disapproved the beginning on page 7, before
shares or warrants or you make any investment
determined if this prospectus decision.
is accurate or adequate.
Anyone who tells you
otherwise is committing a
crime.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
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Page
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SUMMARY................................................................... 1
The Company............................................................. 1
Arch.................................................................. 1
MobileMedia........................................................... 2
The Mobile Media Acquisition.......................................... 2
The Combined Company.................................................. 2
Exercises of Warrants................................................... 4
Resales by Selling Stockholders......................................... 5
Risk Factors............................................................ 5
Forward-Looking Statements.............................................. 5
RISK FACTORS.............................................................. 7
Uncertainties Related to the MobileMedia Acquisition ................... 7
Business and Financial Risks............................................ 9
Risks Related to Shares, Warrants and Warrant Exercises................. 16
USE OF PROCEEDS........................................................... 18
DILUTION.................................................................. 18
MARKET PRICE INFORMATION AND DIVIDEND POLICY.............................. 19
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--ARCH....... 20
ARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 22
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--
MOBILEMEDIA.............................................................. 32
MOBILEMEDIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 34
</TABLE>
<TABLE>
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Page
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UNAUDITED SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA................... 49
UNAUDITED COMBINED COMPANY PROJECTIONS..................................... 51
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ........... 58
INDUSTRY OVERVIEW.......................................................... 64
BUSINESS................................................................... 70
Business Strategy........................................................ 70
Arch's Business.......................................................... 72
MobileMedia's Business................................................... 77
Predecessors to the Combined Company..................................... 83
The MobileMedia Acquisition.............................................. 84
MANAGEMENT................................................................. 85
PRINCIPAL STOCKHOLDERS..................................................... 91
DESCRIPTION OF SECURITIES.................................................. 94
DESCRIPTION OF CERTAIN INDEBTEDNESS........................................ 104
PLAN OF DISTRIBUTION....................................................... 111
Exercises of Warrants.................................................... 111
Resales of Warrants and Shares........................................... 114
SELLING STOCKHOLDERS....................................................... 117
LEGAL MATTERS.............................................................. 117
EXPERTS.................................................................... 117
INDEX OF CERTAIN DEFINED TERMS............................................. 118
WHERE YOU CAN FIND MORE INFORMATION........................................ 119
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
We have not authorized any person to make a statement that differs from what
is in this prospectus. If any person does make a statement that differs from
what is in this prospectus, you should not rely on it. This prospectus is not
an offer to sell, nor is it seeking an offer to buy, these securities in any
state in which the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of its date, but the information may
change after that date.
i
<PAGE>
SUMMARY
The following summary highlights selected information contained elsewhere in
this prospectus, and may not contain all of the information that is important
to you. We urge you to read the entire prospectus. In this prospectus, we use
the name "Arch" to refer to Arch Communications Group, Inc. both before and
after the MobileMedia acquisition described below. Sometimes we use the phrase
"combined company" when we wish to emphasize that we are referring specifically
to Arch after the MobileMedia acquisition. None of the financial or share
information in this prospectus reflects the effects of a reverse stock split
which Arch expects to effect during 1999. See "Description of Securities--
Reverse Stock Split".
The Company
Arch is now the second largest provider of wireless messaging services,
primarily paging services, in the United States as measured by pagers in
services and net revenues (total revenues less cost of products sold). This
reflects Arch's acquisition of MobileMedia Communications, Inc. and its
subsidiaries (together, "MobileMedia") on , 1999. Before the MobileMedia
acquisition, Arch and MobileMedia separately conducted two of the largest
paging operations in the country. Arch believes that the MobileMedia
acquisition will benefit Arch operationally and through reduction of Arch's
financial leverage. However, the integration of the companies' businesses may
present difficulties. See "Risk Factors--Integrating the Companies Presents
Challenges".
Arch's strategic objective is to strengthen its position as one of the leading
nationwide paging companies in the United States. Arch believes that larger,
multi-market paging companies enjoy a number of competitive advantages,
including:
. operating efficiencies resulting from more intensive use of existing
paging systems;
. economies of scale in purchasing and administration;
. broader geographic coverage of paging systems;
. greater access to capital markets and lower costs of capital;
. the ability to obtain additional radio spectrum;
. the ability to offer high-quality services at competitive prices; and
. enhanced ability to attract and retain management personnel.
Arch believes that the current size and scope of its operations afford it many
of these advantages and that it has the scope and presence to effectively
compete on a national level. In addition, Arch believes that the paging
industry will undergo further consolidation. Arch intends to participate in
such consolidation.
Arch's operating objectives are to increase its EBITDA (earnings before
interest, taxes, depreciation and amortization), deploy its capital
efficiently, reduce its financial leverage and expand its customer
relationships. To achieve its operating objectives, Arch:
. has selected a low-cost operating strategy as its principal competitive
tactic;
. is seeking to reduce its financial leverage by reducing capital
requirements and increasing EBITDA;
. has focused its capital and marketing resources on one-way paging and
enhanced services while taking steps to position itself to participate
in new and emerging services and applications in narrowband personal
communications services (commonly called "N-PCS"); and
. is pursuing new revenue opportunities associated with its pagers in
service.
Arch
Arch has been a leading provider of wireless messaging services, primarily
paging services. At September 30, 1998, Arch was the third largest paging
company in the United States based on its 4.2 million pagers then in service.
Arch has:
. operated in 41 states and more than 180 of the 200 largest markets in
the United States;
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<PAGE>
. offered local, regional and nationwide paging services employing digital
networks covering approximately 85% of the United States population;
. offered four types of paging services through its networks: digital
display, alphanumeric display, tone-only and tone-plus-voice. These
types of services are described in detail under "Industry Overview--
Paging and Messaging Services" on page 65. You can also turn to "Index
of Certain Defined Terms" beginning on page 117 to find definitions of a
limited number of key abbreviations used in the paging industry; and
. offered enhanced and complementary services, including voice mail,
personalized greeting, message storage and retrieval, pager loss
protection and pager maintenance.
Prior to the MobileMedia acquisition, Arch achieved significant growth in
pagers in service through a combination of internal growth and acquisitions.
From January 1, 1995 through September 30, 1998, Arch's total number of
subscribers grew at a compound rate on an annualized basis of 73.1%. For the
same period on an annualized basis, Arch's compound rate of internal subscriber
growth was 52.8%, excluding pagers added through acquisitions. From
commencement of operations in September 1986 through September 30, 1998, Arch
completed 33 acquisitions representing an aggregate of 1.7 million pagers in
service at the time of purchase. The MobileMedia acquisition has added
approximately 2.9 million additional pagers (net of intercompany pagers). Arch
had revenues of $396.8 million and a net loss of $181.9 million for the year
ended December 31, 1997 and revenues of $309.6 million and a net loss of
$157.8 million for the nine months ended September 30, 1998.
MobileMedia
Prior to its acquisition by Arch, MobileMedia operated one of the largest
paging companies in the United States, with approximately 3.2 million units in
service as of September 30, 1998. Through its sales offices, nationwide retail
distribution network, company-operated retail stores and resellers, MobileMedia
offered local, regional and national coverage to subscribers in all 50 states
and the District of Columbia. This included local coverage to each of the 100
most populated metropolitan markets in the United States.
MobileMedia has marketed its services primarily under the MobileComm brand
name. MobileMedia distributes its paging services using three primary
distribution channels: direct, reseller and retail. MobileMedia's paging and
wireless messaging services consist principally of numeric and alphanumeric
paging services, offering local, regional and national coverage. See
"Business--MobileMedia's Business".
Between January 30, 1997 and , 1999, MobileMedia and some of its
affiliates operated as debtors-in-possession under Chapter 11 of the Bankruptcy
Code. MobileMedia's insolvency proceedings are described under "Business--
MobileMedia--Events Leading Up to MobileMedia's Bankruptcy Filings" and
"MobileMedia Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview". MobileMedia had revenues of $527.4 million
and a loss of $124.6 million for the year ended December 31, 1997 and revenues
of $340.4 million and net income of $42.3 million for the nine months ended
September 30, 1998.
The MobileMedia Acquisition
Arch acquired MobileMedia on , 1999. Arch paid approximately $ million in
cash, including fees and expenses and elimination of certain debt. Arch also
issued a total of shares of its Common Stock and shares of its Class B
Common Stock to creditors of MobileMedia [and stockholders of Arch]. Arch
issued some of these shares in exchange for creditors' claims and received cash
proceeds of approximately $ million for the other shares. See "Business--The
MobileMedia Acquisition".
The Combined Company
The combined company is the second largest paging operator in the United States
as measured by pagers in service and net revenues. On a pro forma basis
2
<PAGE>
(but excluding the impact of expected operational cost synergies), at and for
the nine months ended September 30, 1998, the combined company would have had
approximately 7.1 million pagers in service, net revenues of $605.3 million,
adjusted pro forma EBITDA (as described below) of $190.9 million, net loss
before extraordinary items of $127.2 million and total debt of $1.3 billion.
For the nine-month period ended September 30, 1998, on a similar pro forma
basis, cash flows provided by operating activities would have been $139.2
million, cash flows used in investing activities would have been $487.5 million
and cash flows provided by financing activities would have been $361.4 million.
This adjusted pro forma cash flow information assumes that the MobileMedia
acquisition had been effected as of January 1, 1998.
The combined company's leverage on a pro forma basis for the nine months ended
September 30, 1998, as measured by the ratio of total debt to annualized
adjusted pro forma EBITDA, would have been 5.2 to 1. Adjusted pro forma EBITDA
is EBITDA net of restructuring charges and bankruptcy related expenses, equity
in loss of affiliates, income tax benefit, interest and non-operating expenses
(net), extraordinary items and amortization of deferred gain on tower sale. See
"Business" and "Unaudited Pro Forma Condensed Consolidated Financial
Statements".
The combined company believes that it is well positioned to compete effectively
in the highly competitive paging industry for the following reasons. The
combination of MobileMedia's market presence in major metropolitan markets with
Arch's historical emphasis on middle and small markets has significantly
broadened the geographic scope of Arch's marketing presence and should position
the combined company to compete more effectively for large corporate customers
with diverse geographic operations. With a significantly larger subscriber
base, the combined company should be better able to serve strategic
distribution arrangements, as well as amortize marketing investments over a
larger revenue base. In addition, MobileMedia's third party retail distribution
agreements, which serve the more rapidly growing consumer market, should
complement Arch's over 200 company-owned retail outlets. Similarly,
MobileMedia's two nationwide paging networks (and the potential for higher
revenue nationwide services) should enhance Arch's local coverage and provide
the opportunity to take advantage of Arch's distribution platforms.
MobileMedia's plan to deploy its nationwide N-PCS spectrum over its existing
network infrastructure should permit Arch to market enhanced N-PCS services
(primarily multi-market alphanumeric and text messaging services) sooner than
it would otherwise be able to. These services are expected to provide higher
revenue and more growth potential than basic paging services. Finally,
MobileMedia's investments to date in two national call centers should
supplement Arch's own call center and complement Arch's strategy of evolving to
scalable regional customer service centers. See "Business--Business Strategy".
See, however, "Risk Factors--Integrating the Two Companies Presents
Challenges".
Arch's principal office is located at 1800 West Park Drive, Suite 250,
Westborough, Massachusetts 01581. Its telephone number is (508) 870-6700.
3
<PAGE>
Exercises of Warrants
Securities Offered.......... shares of Common Stock. Each warrant enti-
tles you to purchase one share of Common Stock,
subject to adjustment for stock splits.
Subscription Price.......... $ per share payable in cash.
Expiration Date for
Exercise of Warrants....... 5:00 p.m., New York City time, on September 1,
2001. Warrants cannot be exercised after this
time.
Shares to be Outstanding
Assuming Exercise of
Warrants................... shares of Common Stock (assuming exercise of
all warrants and conversion of all outstanding
convertible securities) based on shares outstand-
ing at , 1999.
Warrant Agent............... The Bank of New York.
Method of Exercise of
Warrants................... You or your transferees may exercise your war-
rants by properly completing and signing the ex-
ercise notice attached to the warrant certificate
for your warrants, and forwarding the exercise
notice and warrant certificate to the warrant
agent, on or before September 1, 2001, together
with payment in good funds of the exercise price
for each share subscribed for. If you forward
exercise notices by mail, Arch recommends that
you use insured, registered mail. Warrant certif-
icates and exercise notices are being mailed to
their original registered holders on or about the
date of this prospectus. See "Plan of Distribu-
tion--Exercise of Warrants--Method of Exercise of
Warrants".
NO REVOCATION............... ONCE YOU HAVE EXERCISED WARRANTS, SUCH EXERCISE
MAY NOT BE REVOKED.
Transfers and Resales....... You may transfer warrants as described under
"Plan of Distribution--Exercises of Warrants--
Method of Transferring Warrants". You may resell
warrants and shares issued upon exercise of war-
rants without registration under the Securities
Act of 1933 if you are not an affiliate of Arch
or an underwriter within the meaning of the Secu-
rities Act. See "--Resales by Selling Stockhold-
ers".
Use of Proceeds............. Arch intends to use substantially all of the pro-
ceeds received upon exercise of the warrants for
general corporate purposes, including working
capital and debt repayment.
Exercise Through Others..... If you hold warrants beneficially through a bro-
ker, dealer, commercial bank, trust company or
other nominee, you should contact the appropriate
institution or nominee and request it to effect
the transaction for you. You should do likewise
if you hold warrants directly but would prefer to
have an institution effect transactions relating
to the warrants on your behalf.
4
<PAGE>
Foreign Holders............. Warrants will not be mailed to holders whose ad-
dresses are outside the United States, but will
be held by the warrant agent for their accounts.
To exercise their warrants, foreign holders must
notify the warrant agent and take all other steps
which are necessary to exercise the warrants on
or prior to September 1, 2001.
Resales by Selling Stockholders
This prospectus covers the public offering and sale of warrants and
shares held by stockholders who are named in this prospectus. These
shares include shares already owned by these stockholders and shares
to be acquired through exercise of warrants. The prices at which
these stockholders may sell warrants and shares will be determined by
the prevailing market price for Common Stock or in negotiated
transactions. We will not receive any proceeds from the sale of their
warrants or shares. See "Plan of Distribution--Resales of Warrants
and Shares" and "Selling Stockholders".
Risk Factors
Before deciding whether to exercise warrants or purchase warrants or
shares, you should consider carefully, among other risks, the risks
associated with integrating the businesses of Arch and MobileMedia
and financing the future capital needs of the combined company. You
should also consider risks of the combined company relating to
competition, technological change, government regulation, subscriber
turnover, reliance on equipment suppliers, dependence on key
personnel and possible volatility of stock price. Each of Arch and
MobileMedia has had a history of operating losses. Arch does not
expect to pay any cash dividends after the MobileMedia acquisition
and expects to continue to have a highly leveraged capital structure.
Exercise of warrants will involve substantial dilution. See "Risk
Factors".
Forward-Looking Statements
This prospectus contains forward-looking statements that are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. You should consider any statements
that are not statements of historical fact to be forward-looking
statements. (These include statements to the effect that Arch or its
management or board of directors "believe", "expect", "anticipate",
"plan" and similar expressions.) A number of important factors could
cause actual results to differ materially from those expressed in any
forward-looking statements. Achieving the anticipated benefits of the
MobileMedia acquisition will depend in significant part upon whether
the integration of the two companies' businesses is accomplished in
an efficient manner, and there can be no assurance that this will
occur. The combination of the two companies will require, among other
things, coordination of administrative, sales and marketing,
distribution and accounting and finance functions and expansion of
information and management systems. The process of combining the
companies could divert the attention of management. The integration
process could also cause the interruption of the activities of the
respective businesses, or a loss of momentum. The difficulty of
combining the businesses may be increased by the need to integrate
personnel and the geographic distance separating the organizations.
There can be no assurance that Arch will retain key employees or that
Arch will realize any of the other anticipated benefits of the
MobileMedia acquisition. Any difficulties or problems encountered in
the integration process could have a material adverse effect on the
combined company . See "Risk Factors".
The unaudited Combined Company Projections contained in this
prospectus were prepared jointly by Arch and MobileMedia as a
projection of possible future results based upon certain assumptions.
5
<PAGE>
Attaining the projected results will depend on many factors over
which neither Arch nor MobileMedia has any control. No assurance can
be given that any of the assumptions on which the Combined Company
Projections are based will prove to be correct. For example, in
preparing the Combined Company Projections, Arch has assumed the
market value of the Arch Common Stock to be $2.00. The last reported
sale price of Arch Common Stock was $ per share on , 1999. See
"Risk Factors--Unaudited Combined Company Projections May Prove to be
Inaccurate" and "Unaudited Combined Company Projections--Unaudited
Financial Projections and Operational Cost Synergies".
The Combined Company Projections were not prepared with a view to public
disclosure or compliance with (1) published guidelines of the SEC, (2) the
guidelines established by the American Institute of Certified Public
Accountants regarding projections or (3) GAAP. Arthur Andersen LLP, the
independent public accountants for Arch, has neither compiled nor examined
such projections and, accordingly, does not express any opinion or any
other form of assurance with respect to such projections and assumes no
responsibility for and disclaims any association with, such projections.
Ernst & Young LLP, who served as independent auditors for MobileMedia, has
neither compiled nor examined such projections and, accordingly, does not
express any opinion or any other form of assurance with respect to,
assumes no responsibility for and disclaims any association with, such
projections. While presented with numerical specificity, such projections
are based upon a variety of assumptions relating to the future business
and operations of Arch and MobileMedia and the integration of their
operations. Such assumptions may not be realized. The projections are
subject to significant uncertainties and contingencies, all of which are
difficult to predict and many of which are beyond the control of Arch and
MobileMedia.
Arch makes no express or implied representation or warranty as to
the attainability of the projected financial information set
forth in the Combined Company Projections or as to the accuracy
or completeness of the assumptions from which that projected
information is derived.
Arch and MobileMedia do not publish their business plans and
strategies or projections of their anticipated financial position or
results of operations. The Combined Company Projections were prepared
for, and are contained in, the disclosure statement that was
distributed to MobileMedia's creditors. They were included in the
disclosure statement in order to satisfy applicable requirements for
information required to be included in a bankruptcy court approved
disclosure statement. They have been provided in Arch's prior filings
under the Securities Act so that Arch stockholders will have the same
information that was provided to MobileMedia's creditors.
Accordingly, Arch does not intend, and disclaims any obligation to,
(1) furnish updated Combined Company Projections, (2) include such
updated information in any other documents which may be required to
be filed with the SEC, or (3) otherwise make such updated information
publicly available.
FOR A DISCUSSION OF SOME OF THE FACTORS WHICH COULD CAUSE FUTURE
RESULTS TO VARY, SEE "RISK FACTORS".
6
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide
whether to exercise warrants or to purchase warrants or shares. The risks
and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties may also adversely impair our
business operations. If any of the following risks actually occur, our
business, financial condition or results of operations would likely
suffer. In such case, the trading price of our Common Stock could
decline, and you might lose all or part of the money you paid to buy our
securities.
Uncertainties Related to the MobileMedia Acquisition
Integrating the Companies Presents Challenges
Arch may not be able to successfully integrate MobileMedia's operations.
Even if integrated in a timely manner, there can be no assurance that
Arch's operating performance after the MobileMedia acquisition will be
successful or will fulfill management's objectives described in
"Business--Business Strategy". Until integration is complete, the two
companies will continue to operate with some autonomy. This degree of
autonomy may blunt the implementation of the combined company's operating
strategy.
The combination of the two companies will require, among other things,
coordination of administrative, sales and marketing, distribution and
accounting and finance functions and expansion of information and
management systems. The integration process could also cause the
interruption of the activities of the two businesses, or a loss of
momentum. The difficulties of such integration may initially be increased
by the necessity of coordinating geographically separate organizations
and integrating personnel with disparate business backgrounds and
corporate cultures. Arch may not be able to retain key employees. The
process of integrating the businesses of Arch and MobileMedia may require
a disproportionate amount of time and attention of Arch's management and
financial and other resources of Arch and may involve other, unforeseen
difficulties.
In addition, many other contingencies beyond the control of Arch may
impede the implementation of Arch's business strategy. These include
general and regional economic conditions, interest rates, competition,
changes in regulation and the ability to attract and retain skilled
employees. There can therefore be no assurance as to the timing or amount
of any synergies or efficiencies that may ultimately be attained.
Similar risks will attend future acquisition opportunities which Arch
intends to pursue. Furthermore, no assurance can be given that suitable
acquisition transactions can be identified, financed and completed on
acceptable terms, or that Arch will participate in any future
consolidation of the paging industry.
Risk of Defaults under Debt Instruments
The MobileMedia acquisition could have adverse consequences for Arch
under various credit agreements, indentures and other contracts. The
magnitude of any such adverse consequences may depend upon, among other
factors, the diligence and vigor with which other parties to such
arrangements may seek to assert any such rights and pursue any such
remedies, and Arch's ability to resolve such matters on acceptable terms.
In particular, under the indentures governing notes issued by Arch and
its wholly owned subsidiary, Arch Communications, Inc. ("ACI"), having an
aggregate principal balance of approximately $722.8 million as of
September 30, 1998, the occurrence of a change of control as defined in
the indentures would require Arch and ACI to offer to repurchase such
notes at their aggregate principal amount, plus accrued and unpaid
interest and liquidated damages. Although Arch believes that the
MobileMedia acquisition did not involve such a change in control, it is
possible that the other parties to such agreements and indentures will
allege that the MobileMedia acquisition constitutes either a breach or a
default or a change in control of Arch. See "Description of Certain
Indebtedness".
7
<PAGE>
Disruption of MobileMedia's Operations During Insolvency Proceedings
MobileMedia's business operations were adversely affected by difficulties
in integrating the operations of certain businesses acquired in 1995 and
1996, by liquidity problems arising prior to its January 30, 1997
bankruptcy filing and by the reluctance of some customers and potential
customers to do business with MobileMedia while it operated under Chapter
11. In addition, one of MobileMedia's primary assets is its experienced
employees, who have the ability to leave MobileMedia and to deprive it of
the skill and knowledge essential for executing its business strategy.
Any further deterioration of MobileMedia's business, or the loss of
significant numbers of key employees following MobileMedia's acquisition
by Arch, could have material adverse effects. See "Business--
MobileMedia's Business".
Downturn in MobileMedia's Subscribers
Subscriber cancellations can significantly affect the results of
operations of wireless messaging service providers. After filing for
bankruptcy protection on January 30, 1997, MobileMedia experienced a
significant decline in subscribers. At September 30, 1998, MobileMedia
had 3,182,207 units in service compared to 3,440,342 units in service at
December 31, 1997. The sales and marketing costs associated with
attracting new subscribers are substantial compared to the costs of
providing service to existing customers. Because the paging business is
characterized by high fixed costs, cancellations directly and adversely
affect EBITDA. A continued increase in the subscriber cancellation rate
could have a material adverse effect on the combined company. See
"Business--MobileMedia's Business--Sales and Marketing".
Substantial Amortization Charges Will Impair Earnings
Under purchase accounting treatment for the MobileMedia acquisition, Arch
must record a substantial amount of goodwill and other intangible assets.
This will result in substantial amortization charges to the consolidated
income of Arch over the useful lives of such assets. Arch estimates the
incremental amount of such charges to be approximately $26.0 million per
year for ten years. However, actual charges could vary significantly if
the underlying assets are impaired or the related useful lives of such
assets are less than currently estimated. See "Unaudited Selected Pro
Forma Consolidated Financial Data".
Unaudited Combined Company Projections May Prove to be Inaccuarate
The managements of Arch and MobileMedia jointly prepared the Combined
Company Projections contained in this prospectus in connection with
MobileMedia's insolvency proceedings to present the projected effects of
the MobileMedia acquisition, if consummated as then proposed. The
Combined Company Projections assumed implementation of the MobileMedia
acquisition on terms which did not materially differ from their actual
terms, except for . The assumptions and estimates underlying such
Combined Company Projections are inherently uncertain and are subject to
significant business, economic and competitive risks and uncertainties
that could cause actual results to differ materially from those
projected. Accordingly, the Combined Company Projections do not
necessarily predict the future financial condition or results of
operations of the combined company following the MobileMedia acquisition,
which may vary significantly from those set forth in the Combined Company
Projections. Consequently, you should not regard the projected financial
information contained in this prospectus as a representation by Arch, its
advisors or any other person that the Combined Company Projections can or
will be achieved. See "Summary--Forward-Looking Statements".
Among other things, the fair value of the assets of MobileMedia must be
determined for financial reporting purposes as of , 1999. Although
such valuation is not presently expected to result in values that are
materially greater or less than the values assumed in the preparation of
the unaudited pro forma condensed consolidated financial statements and
the Combined Company Projections, there can be no assurance about the
matter. Furthermore, the pro forma condensed consolidated financial
statements included in this prospectus assume the market value of the
Common
8
<PAGE>
Stock issued in the MobileMedia Acquisition to be $2.00. On , 1999,
the closing market price of Common Stock was $ . See "Unaudited Pro
Forma Condensed Consolidated Financial Statements".
Business and Financial Risks
Expectation of Continued Losses
Arch and MobileMedia have reported losses in all but one of the periods
shown in the table below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
Nine Months
Ended
September 30,
1995 1996 1997 1998
------ --------- ------- -------------
<S> <C> <C> <C> <C>
Net income (loss): (dollars in million)
Arch.......................... $(36.6) $ (114.7) $(181.9) $(157.8)
MobileMedia................... $(41.1) $(1,059.9) $(124.6) $ 42.3
</TABLE>
Furthermore, MobileMedia's net income during the nine months ended
September 30, 1998 arose solely from a $ gain on the sale of
transmission towers and related equipment. MobileMedia operated as a
debtor-in-possession under Chapter 11 from January 30, 1997 through
, 1999.
After giving effect to the MobileMedia acquisition, Arch would have
incurred, on a pro forma basis, losses before extraordinary item of
$313.3 million for the year ended December 31, 1997 and $127.2 million
for the nine months ended September 30, 1998. See Arch's Consolidated
Financial Statements and MobileMedia's Consolidated Financial Statements
and "Unaudited Pro Forma Condensed Consolidated Statement of Operations".
For both Arch and MobileMedia, these historical net losses have resulted
principally from substantial depreciation and amortization expense,
primarily related to intangible assets and pager depreciation, interest
expense, the impairment of long-lived assets (in the case of MobileMedia)
and other costs of growth. Substantial and increased amounts of debt are
expected to be outstanding for the foreseeable future. This will result
in significant additional interest expense which could have a material
adverse effect on Arch's future income or loss. See "--Future Capital
Needs; Uncertainty of Additional Funding" and "--High Degree of Leverage
Burdens Operations".
Arch expects to continue to report net losses for the foreseeable future.
See "Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations", "MobileMedia Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Arch's Consolidated
Financial Statements and MobileMedia's Consolidated Financial Statements.
Possible Fluctuations in Revenues and Operating Results
Arch believes that future fluctuations in its revenues and operating
results are possible as the result of many factors, including
competition, subscriber turnover, new service developments and
technological change. Arch's current and planned debt repayment levels
are, to a large extent, fixed in the short term, and are based in part on
its expectations as to future revenues and cash flow growth. Arch may be
unable to adjust spending in a timely manner to compensate for any
revenue or cash flow shortfall. It is possible that, due to future
fluctuations Arch's revenue, cash flow or operating results may not meet
the expectations of securities analysts or investors. This may have a
material adverse effect on the price of Arch Common Stock. See "Market
Price Information and Dividend Policy" and "Arch Management's Discussion
and Analysis of Financial Condition and Results of Operations". If
shortfalls caused Arch not to meet the financial covenants contained in
its debt instruments, the debtholders could declare a default and seek
immediate repayment.
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<PAGE>
High Degree of Leverage Burdens Operations
Each of Arch and MobileMedia has been highly leveraged, and the combined
company expects to continue to be highly leveraged. The following table
compares the total debt, total assets and latest nine-month annualized
EBITDA of Arch, MobileMedia and the combined company at or as of
September 30, 1998.
<TABLE>
<CAPTION>
Pro Forma
Combined
Arch MobileMedia Company
------ ----------- ---------
(dollars in millions)
<S> <C> <C> <C>
Total debt............ $992.8 $905.7 $1,314.8
Total assets.......... $942.4 $577.3 $1,602.0
Adjusted EBITDA....... $140.7 $124.1 $254.6
</TABLE>
EBITDA is not a measure defined in GAAP and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with GAAP. EBITDA may not necessarily be comparable to
similarly titled data of other paging companies. See Note (4) to
"Selected Historical Consolidated Financial and Operating Data--Arch".
Arch's adjusted EBITDA consists of EBITDA net of restructuring charges,
equity in loss of affiliates, income tax benefit, interest and non-
operating expenses (net) and extraordinary items. MobileMedia's adjusted
EBITDA consists of earnings before other income (expense), taxes,
depreciation, amortization, impairment of long-lived assets, amortization
of deferred gain on tower sale and restructuring costs. Adjusted pro
forma EBITDA consists of EBITDA net of restructuring charges and
bankruptcy related expenses, equity in loss of affiliates, income tax
benefit, interest and non-operating expenses (net), extraordinary items
and amortization of deferred gain on tower sale. See "Selected Historical
Consolidated Financial and Operating Data--Arch" and "--MobileMedia" and
"Unaudited Selected Pro Forma Consolidated Financial Data".
Arch's high degree of leverage may have adverse consequences for Arch.
These include:
. High leverage may impair or extinguish Arch's ability to obtain
additional financing necessary for acquisitions, working capital,
capital expenditures or other purposes on acceptable terms, if at
all.
. A substantial portion of Arch's cash flow will be required to pay
interest expense; this will reduce the funds which would otherwise
be available for operations and future business opportunities.
. Arch's credit facilities and indentures contain financial and
restrictive covenants; the failure to comply with these covenants
may result in an event of default which, if not cured or waived,
could have a material adverse effect on Arch.
. Arch may be more highly leveraged than its competitors which may
place it at a competitive disadvantage.
. Arch's high degree of leverage will make it more vulnerable to a
downturn in its business or the economy generally.
. Arch's high degree of leverage may impair its ability to
participate in the future consolidation of the paging industry.
In April 1997, Arch reordered its operating priorities to improve capital
efficiency and strengthen its balance sheet by placing a higher priority
on leverage reduction than on subscriber unit growth. As part of its
reordered operating priorities, Arch has implemented various initiatives
to reduce capital costs while endeavoring to sustain acceptable levels of
unit and revenue growth. As a result, Arch's rate of internal growth in
pagers in service has slowed and is expected to remain below the rates of
internal growth previously achieved by Arch, but Arch has not yet
attained its goals for reducing its financial
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<PAGE>
leverage. There can be no assurance that Arch will be able to reduce its
financial leverage as intended or that Arch will achieve an appropriate
balance between growth which it considers acceptable and future
reductions in financial leverage. If Arch is not able to achieve
continued growth in EBITDA, it may be precluded from incurring additional
indebtedness due to cash flow coverage requirements under existing debt
instruments. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Description of Certain
Indebtedness" and Arch's Consolidated Financial Statements and Notes.
Future Capital Needs; Uncertainty of Additional Funding
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including possible acquisitions. Future amounts of capital
required by Arch will depend upon a number of factors. These factors
include subscriber growth, the type of paging devices and services
demanded by customers, service revenues, technological developments,
marketing and sales expenses, competitive conditions, the nature and
timing of Arch's N-PCS strategy and acquisition strategies and
opportunities. No assurance can be given that additional equity or debt
financing will be available to Arch when needed on acceptable terms, if
at all. If sufficient financing is unavailable when needed, Arch may
experience material adverse effects. See "Arch Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources" and "Description of Certain Indebtedness".
No Dividends Expected
Neither Arch nor MobileMedia has ever declared or paid cash dividends on
its Common Stock. The combined company does not intend to declare or pay
any cash dividends on its Common Stock in the foreseeable future. Certain
covenants in various Arch debt instruments effectively prohibit the
declaration or payment of cash dividends by Arch for the foreseeable
future. In addition, the terms of Arch's outstanding Series C Preferred
Stock generally prohibit the payment of cash dividends on Common Stock
unless all accrued and unpaid dividends on the Series C Preferred Stock
are paid in full. See "Market Price Information and Dividend Policy",
"Description of Securities--Series C Preferred Stock" and "Description of
Certain Indebtedness".
Competition and Technological Change May Undermine Arch's Business
Arch and MobileMedia each face competition from other paging service
providers in all markets in which they operate. They also face
competition from certain competitors who hold nationwide licenses. Due in
part to competitive conditions, monthly fees for basic paging services
have generally declined in recent years. The combined company may face
significant price-based competition in the future which could have a
material adverse effect on its revenues and EBITDA. Certain competitors
of Arch and MobileMedia possess greater financial, technical and other
resources than the combined company. A trend towards increasing
consolidation in the paging industry in particular and the wireless
communications industry in general in recent years has led to competition
from increasingly larger and better capitalized competitors. If any of
such competitors were to devote additional resources to the paging
business or focus on Arch's or MobileMedia's particular markets, there
could be a material adverse effect on the combined company.
Competitors are currently using and developing a variety of two-way
paging technologies. Neither Arch nor MobileMedia presently provides such
two-way services, other than as a reseller. Although these services
generally are higher priced than traditional one-way paging services,
this may change. Technological improvements could result in increased
capacity and efficiency for such two-way paging technologies and this
could result in increased competition for the combined company. Future
technological advances in the telecommunications industry could increase
new services or products competitive with the paging services currently
provided by Arch and MobileMedia. Future technological
11
<PAGE>
advances could also require the combined company to reduce the price of
its paging services or incur additional capital expenditures to meet
competitive requirements. Recent and proposed regulatory changes by the
FCC are aimed at encouraging such technological advances and new
services. Other forms of wireless two-way communications technology also
compete with the paging services that Arch and MobileMedia currently
provide. These include cellular and broadband PCS (personal
communications services) and specialized mobile radio services. While
these services are primarily focused on two-way voice communications,
service providers are, in many cases, electing to provide paging services
as an adjunct to their primary services.
Technological change also may affect the value of the pagers owned by
Arch and MobileMedia and leased to their respective subscribers. If
Arch's or MobileMedia's current subscribers request more technologically
advanced pagers, including two-way pagers, the combined company could
incur additional inventory costs and capital expenditures if required to
replace pagers leased to its subscribers within a short period of time.
Such additional investment or capital expenditures could have a material
adverse effect on the combined company. There can be no assurance that
the combined company will be able to compete successfully with current
and future competitors in the paging business or with competitors
offering alternative communication technologies. See "Industry Overview--
Competition".
Government Regulation May Burden Operations; Foreign Ownership and
Possible Redemption of Stock
The combined company's paging operations are subject to regulation by the
FCC and various state regulatory agencies. The FCC paging licenses
granted to Arch and MobileMedia are for varying terms of up to 10 years,
at the end of which renewal applications must be approved by the FCC. In
the past, paging license renewal applications generally have been granted
by the FCC upon a showing of compliance with FCC regulations and of
adequate service to the public. The combined company is unaware of any
circumstances which would prevent the grant of any pending or future
renewal applications [except for a previously pending FCC proceeding
regarding MobileMedia's qualifications to remain an FCC licensee, which
has been .] See "MobileMedia Management's Discussion and Analysis of
Financial Condition and Operating Results--Pending FCC Action Against
MobileMedia". However, no assurance can be given that any of Arch's or
MobileMedia's renewal applications will be free of challenge or will be
granted by the FCC. It is possible that there may be competition for
radio spectrum associated with licenses as they expire. Such competition
would increase the chances of third party interventions in the renewal
proceedings. The FCC has thus far granted each license renewal
application that Arch and MobileMedia have filed, other than those
renewal applications still pending. There can be no assurance that the
FCC and various state regulatory agencies will not propose or adopt
regulations or take actions that would have a material adverse effect on
the combined company.
The FCC's review and revision of rules affecting paging companies is
ongoing. Regulatory requirements that apply to the combined company may
change significantly over time. For example, the FCC has decided to adopt
a market area licensing scheme for all paging channels under which
carriers would be licensed to operate on a particular channel throughout
a broad geographic area (such as a Major Trading Area as defined by Rand
McNally) rather than being licensed on a site-by-site basis. These
geographic area licenses will be awarded pursuant to auction. Incumbent
paging licensees that do not acquire licenses at auction will be entitled
to interference protection from the market area licensee. Arch and
MobileMedia have each been participating actively in this proceeding in
order to protect their existing operations and retain flexibility, on an
interim and long-term basis, to modify systems as necessary to meet
subscriber demands. The FCC has issued a Further Notice of Proposed
Rulemaking in which the FCC seeks comments on, among other matters, (1)
whether it should impose coverage requirements on licensees with
nationwide exclusivity (such as Arch and MobileMedia), (2) whether these
coverage requirements should be imposed on a nationwide or regional
basis, and (3) whether--if
12
<PAGE>
such requirements are imposed--failure to meet the requirements should
result in a revocation of the entire nationwide license or merely a
portion of the license. If the FCC were to impose stringent coverage
requirements on licensees with nationwide exclusivity, the combined
company might have to accelerate the build-out of its systems in certain
areas.
Changes in regulation of the combined company's paging business or the
allocation of radio spectrum for services that compete with its business
could adversely affect its results of operations. In addition, some
aspects of the Telecommunications Act of 1996 may place additional
burdens upon the combined company or subject it to increased competition.
For example, the FCC has adopted new rules that govern compensation to be
paid to pay phone providers. Although these rules are in dispute, they
have resulted in increased costs for certain paging services including
toll-free 1-800 number paging. Arch and MobileMedia have generally passed
these costs on to their subscribers, which makes their services more
expensive and which could affect the attraction or retention of
customers; however, there can be no assurance that the combined company
will be able to continue to pass on these costs. In addition, the FCC
also has adopted new rules regarding payments by telecommunications
companies into a revamped fund that will provide for the widespread
availability of telecommunications services, including to low-income
consumers. The FCC refers to this as universal service. Prior to the
implementation of the Telecommunications Act, Universal Service
obligations largely were met by local telephone companies, supplemented
by long-distance telephone companies. Under the new rules, certain
telecommunications carriers, including Arch and MobileMedia, are required
to contribute to a revised fund created for universal service. In
addition, certain state regulatory authorities have enacted, or have
indicated that they intend to enact, similar contribution requirements
based on state revenues. The combined company cannot yet know the impact
of these state contribution requirements, if enacted and applied to it.
Moreover, neither Arch nor MobileMedia has been able to estimate the
amount of any such payments that it will be able to bill to their
subscribers; however, payments into the universal service fund will
likely increase the cost of doing business.
Moreover, in a rulemaking proceeding pertaining to interconnection
between LECs (local exchange carriers) and CMRS (commercial mobile radio
services) providers such as the combined company, the FCC has concluded
that LECs are required to compensate CMRS providers for the reasonable
costs incurred by such providers in terminating traffic that originates
on LEC facilities, and vice versa. Consistent with this ruling, the FCC
has determined that LECs may not charge a CMRS provider or other carrier
for terminating LEC-originated traffic or for dedicated facilities used
to deliver LEC-originated traffic to one-way paging networks. Nor may
LECs charge CMRS providers for number activation and use fees. These
interconnection issues are still in dispute, and it is unclear whether
the FCC will maintain its current position. Depending on further FCC
disposition of these issues, the combined company may or may not be
successful in securing refunds, future relief or both, with respect to
charges for termination of LEC-originated local traffic. If these issues
are ultimately resolved by the FCC in favor of CMRS providers, then the
combined company will pursue relief through settlement negotiations,
administrative complaint procedures or both. If these issues are
ultimately decided in favor of the LECs, each of Arch and MobileMedia
likely would be required to pay all past due contested charges and may
also be assessed interest and late charges for the amounts withheld.
Although these requirements have not to date had a material adverse
effect on Arch or MobileMedia, these or similar requirements could in the
future have a material adverse effect on the combined company. See
"Industry Overview--Regulation".
The Communications Act also limits foreign investment in and ownership of
entities that are licensed as radio common carriers by the FCC. The
combined company owns or controls several radio common carriers and is
accordingly subject to these foreign investment restrictions. Because the
combined company is the parent of radio common carriers (but is not a
radio common carrier itself), the combined company may not have more than
25% of its stock owned or voted by aliens or their representatives, a
foreign government or its representatives or a foreign corporation if the
FCC finds that the public interest would be served by denying such
ownership. In connection with the World Trade Organization
13
<PAGE>
Agreement (the "WTO Agreement")--agreed to by 69 countries--the FCC
adopted rules effective February 9, 1998 that create a very strong
presumption in favor of permitting a foreign interest in excess of 25% if
the foreign investor's home market country signed the WTO Agreement.
Arch's subsidiaries that are radio common carrier licensees are subject
to more stringent requirements and may have only up to 20% of their stock
owned or voted by aliens or their representatives, a foreign government
or their representatives or a foreign corporation. This ownership
restriction is not subject to waiver. See "Industry Overview--
Regulation". Arch's Certificate of Incorporation permits the redemption
of shares of Arch's capital stock from foreign stockholders where
necessary to protect FCC licenses held by Arch or its subsidiaries, but
such a redemption would be subject to the availability of capital to Arch
and any restrictions contained in applicable debt instruments and under
the Delaware General Corporation Law. These restrictions currently would
not permit any such redemptions. The failure to redeem shares promptly
could jeopardize the FCC licenses held by Arch or its subsidiaries. See
"--High Degree of Leverage Burdens Operations", "--Competition and
Technological Change May Undermine Arch's Business" and "Industry
Overview--Regulation".
Dependence on Third Parties for Products and Services
The combined company does not manufacture any of the pagers used in its
paging operations. Arch and MobileMedia have each bought pagers primarily
from Motorola and NEC America Inc. and the combined company therefore is
dependent on such manufacturers to obtain sufficient pager inventory for
new subscriber and replacement needs. In addition, Arch and MobileMedia
have purchased terminals and transmitters primarily from Glenayre
Electronics, Inc. and Motorola and the combined company is therefore
dependent on these manufacturers for sufficient terminals and
transmitters to meet its expansion and replacement requirements. To date,
neither Arch nor MobileMedia has experienced significant delays in
obtaining pagers, terminals or transmitters, except for MobileMedia, in
the period leading up to MobileMedia's bankruptcy filing. However, the
combined company may experience such delays in the future. Arch's
purchase agreement with Motorola expires on June 19, 1999, although it
provides for one-year term renewals. MobileMedia's agreement with
Motorola expires on February 6, 1999, although it provides for one-year
term renewals. [In addition, the combined company has had to provide
Motorola with credit support in respect of MobileMedia's obligations to
Motorola.] There can be no assurance that Arch's or MobileMedia's
respective agreements with Motorola will be renewed or, if renewed, that
such agreements will be on terms and conditions as favorable to Arch or
MobileMedia as those under the current agreements. Although the combined
company believes that sufficient alternative sources of pagers, terminals
and transmitters exist, there can be no assurance that the combined
company would not be materially adversely affected if it were unable to
obtain these items from current supply sources or on terms comparable to
existing terms. See "Business--Arch's Business--Sources of Equipment" and
"--MobileMedia's Business--Sources of Equipment". Finally, the combined
company relies on third parties to provide satellite transmission for
some aspects of its paging services. To the extent there are satellite
outages or if satellite coverage is otherwise impaired, the combined
company may experience a loss of service until such time as satellite
coverage is restored, which could have a material adverse effect.
Dependence on Key Personnel
The success of Arch will depend, to a significant extent, upon the
continued services of a relatively small group of executive personnel.
Arch does not have employment agreements with any of its current
executive officers, or maintain life insurance on their lives, although
certain executive officers have entered into non-competition agreements
and all executive officers have entered into executive retention
agreements with Arch. The loss or unavailability of one or more of its
executive officers or the inability to attract or retain key employees in
the future could have a material adverse effect on Arch. See "Business--
Arch Management".
14
<PAGE>
Divisional Reorganization of Arch May Not Achieve Objectives
In June 1998, Arch's Board of Directors approved a reorganization of
Arch's operating divisions which is being implemented over a period of 18
to 24 months. Once fully implemented, this divisional reorganization is
expected to result in annual cost savings of approximately $15.0 million.
Arch recorded a restructuring charge of $16.1 million in the second
quarter of 1998. There can be no assurance that the expected cost savings
will be achieved or that the reorganization of Arch's business will be
accomplished smoothly, expeditiously or successfully. The difficulties of
the divisional reorganization may be increased by the need to integrate
MobileMedia's operations in many locations and to combine two corporate
cultures. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations--Divisional Reorganization".
Impact of the Year 2000 Issue Not Assured
The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of
the combined company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar
normal business activities. As a result, within the next year the
computerized systems (including both information and non-information
technology systems) and applications used by the combined company 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.
Although Arch has begun and is undertaking testing of its internal
business-related hardware and software applications, there can be no
assurance that such testing will detect all applications that may be
affected by Year 2000 compliance problems. Arch's objective is to make
its internal computer systems compliant with Year 2000 requirements by
September 30, 1999 but there can be no assurance that this objective will
be met. Furthermore, it is possible that one or more of Arch's mission
critical vendors, such as its utility providers, telephone carriers or
satellite carriers, may not be Year 2000 compliant. Because of the unique
nature of such vendors, alternative providers of these services may not
be available. Lastly, Arch does not manufacture any of the pagers or
paging-related equipment used by its customers or for its own paging
operations. Although Arch has initiated testing of such equipment it has
relied to a large extent on the representations of its vendors with
respect to their readiness. Arch can offer no assurance as to the
accuracy of such vendors' representations. See "Arch Management's
Discussion of Financial Condition and Results of Operations--Risks
Relating to Year 2000" and "MobileMedia Management's Discussion of
Financial Condition and Results of Operations--Risks Relating to Year
2000--Risks Relating to Year 2000 Compliance Matters".
Debt Instruments Restrict Operations
Various debt instruments impose certain operating and financial
restrictions on Arch. The bank credit facility of Arch Paging, Inc.
("API"), a wholly owned operating subsidiary of Arch, requires API and
other Arch subsidiaries to maintain specified financial ratios, among
other obligations, including a maximum leverage ratio and a minimum fixed
charge coverage ratio, each as defined in API's credit facility. In
addition, the API credit facility limits or restricts, among other
things, API's ability to:
. declare dividends or redeem or repurchase capital stock;
. prepay, redeem or purchase debt;
. incur liens and engage in sale/leaseback transactions;
. make loans and investments;
. incur indebtedness and contingent obligations;
. amend or otherwise alter debt instruments and other material
agreements;
15
<PAGE>
. engage in mergers, consolidations, acquisitions and asset sales;
. engage in transactions with affiliates; and
. alter its lines of business or accounting methods.
Other debt instruments limit, among other things:
. the incurrence of additional indebtedness by Arch and its restricted
subsidiaries;
. the payment of dividends and other restricted payments by Arch and
its restricted subsidiaries;
. asset sales;
. transactions with affiliates;
. the incurrence of liens; and
. mergers and consolidations.
Arch's ability to comply with such covenants may be affected by events
beyond its control, including prevailing economic and financial
conditions. A breach of any of these covenants could result in a default
under the API credit facility and/or other debt instruments. Upon the
occurrence of an event of default under the API credit facility and/or
other debt instruments, the creditors could elect to declare all amounts
outstanding, together with accrued and unpaid interest, to be immediately
due and payable. If Arch were unable to repay any such amounts, the
creditors could proceed against the collateral securing certain of such
indebtedness. If the lenders under the API credit facility accelerated
the payment of such indebtedness, there can be no assurance that the
assets of Arch would be sufficient to repay in full such indebtedness and
other indebtedness of Arch. In addition, because the API credit facility
and other debt instruments limit Arch's ability to engage in certain
transactions except under certain circumstances, Arch may be prohibited
from entering into transactions that could be beneficial to Arch. See
"Description of Certain Indebtedness".
Charter Provisions Impede Takeovers of Arch
Arch's Certificate of Incorporation and By-laws include provisions for a
classified Board of Directors, the issuance of "blank check" preferred
stock (the terms of which may be fixed by the Arch's Board of Directors
without further stockholder approval), a prohibition on stockholder
action by written consent in lieu of a meeting and certain procedural
requirements governing stockholder meetings. Arch also has a stockholders
rights plan. In addition, Section 203 of the Delaware corporations
statute will, with certain exceptions, prohibit Arch from engaging in any
business combination with any "interested stockholder" for a three-year
period following the date that such stockholder becomes an interested
stockholder. Such provisions may have the effect of delaying, making more
difficult or preventing a change in control or acquisition of Arch. See
"Description of Securities--Anti-Takeover Provisions".
Risks Related to Shares, Warrants and Warrant Exercises
Warrant Exercise Will Result in Dilution to You
The exercise price per warrant currently exceeds the net tangible book
value per share of Common Stock, which is a negative number. See
"Dilution". Accordingly, you will experience immediate and substantial
dilution if you exercise warrants under current conditions.
Trading Price May Be Volatile
The market price of Common Stock has been experiencing significant
fluctuation and has recently declined. Between November 1, 1997 and
, 1999, the reported sale price of Common Stock on the Nasdaq National
Market has ranged from a high of $8.00 per share (in November 1997) to
16
<PAGE>
a low of $.6875 per share (in October 1998). The trading price of Common
Stock following the MobileMedia acquisition will likely be affected by
numerous factors. These include the risk factors set forth in this
prospectus, as well as prevailing economic and financial trends and
conditions in the public securities markets. During recent periods, share
prices of paging companies such as Arch have exhibited a high degree of
volatility. Shortfalls in revenues or EBITDA from the levels anticipated
by the public markets could have an immediate and significant adverse
effect on the trading price of Common Stock in any given period.
Shortfalls may result from events that are beyond Arch's immediate
control and can be unpredictable. The trading price of Arch's shares may
also be affected by developments which may not have any direct
relationship with Arch's business or long-term prospects. These include
reported financial results and fluctuations in trading prices of the
shares of other publicly held companies in the paging industry generally.
See "Market Price Information and Dividend Policy".
Common Stock May Be Delisted from the Nasdaq National Market
Arch's Common Stock has been listed, and its shares have traded, on the
NNM since January 17, 1992. Arch has received a notice from the NNM
indicating that Arch fails to meet the NNM listing requirements because
the market price of the Common Stock is less than $5.00 per share and
that unless Arch comes in compliance with the continued listing
requirements of the NNM, its Common Stock will be delisted. At a hearing
before the NNM Arch sought the continued listing of Arch Common Stock on
the NNM based, in part, on the anticipated reverse stock split described
in this prospectus; the NNM has not ruled on the proposal and there can
be no assurance that the NNM will not delist the Arch Common Stock. For a
more detailed discussion of the continued listing requirements of the NNM
and the action Arch proposes to take to come into compliance with these
requirements, see "Description of Securities--Reverse Stock Split".
Shares Eligible for Future Sale May Depress Market Price of Common Stock
On , 1999, upon consummation of the MobileMedia acquisition,
million shares of Common Stock were issued and outstanding. In addition,
million shares of Common Stock are issuable upon conversion of
convertible securities and million shares of Common Stock are
issuable upon exercise of the warrants. The issuance of these shares of
Common Stock, together with the issuance of up to shares of Common
Stock currently authorized for issuance under Arch compensation plans,
will substantially dilute the proportionate equity interests of the
holders of the Common Stock. [In addition, the conversion price of the
Series C Preferred Stock may be adjusted if the market price of the
Common Stock exceeds $2.00 at January , 1999, which would result in
additional shares of Common Stock being issuable upon conversion of the
Series C Preferred Stock.] No prediction can be made as to the effect, if
any, that future sales of Common Stock, or the availability of shares for
future sales, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common
Stock (including shares issued upon exercise of warrants or options), or
the perception that such sales could occur, could depress prevailing
market prices of Common Stock.
Possible Inability To Exercise Warrants
A current prospectus covering the shares issuable upon exercise of the
warrants must be in effect before Arch may accept warrant exercises.
There can be no assurance that Arch will be able to have a current
prospectus in effect if this prospectus ceases to be current. See
"Description of Securities--Registration Rights".
Uncertain Trading Market for Warrants
Although the warrants have been approved for listing on the NNM, they
have not yet begun to trade and we cannot predict how much interest or
sales volume there will be. It is possible that trading will be sporadic.
17
<PAGE>
USE OF PROCEEDS
Substantially all of any proceeds from exercises of warrants (a maximum of $
million) are expected to be used for general corporate purposes, including
working capital and repayment of debt. See "Description of Certain
Indebtedness".
DILUTION
Arch currently has a negative tangible net worth. The tangible net book value
of the shares of Common Stock as of September 30, 1998 was a negative $809.2
million or a negative $31.48 per share. Net tangible book value per share
represents the amount of total tangible assets (total assets less intangible
assets) less total liabilities, divided by the number of shares of Common Stock
outstanding, assuming the conversion of all outstanding convertible securities.
After giving effect to (1) the MobileMedia acquisition, including the sale by
Arch of [108,500,000] shares of Common Stock for gross proceeds of [$217.0]
million and the issuance of an additional 14,344,969 shares of Common Stock to
unsecured creditors of MobileMedia, and (2) the exercise of a warrant for one
share, the pro forma net tangible book value of Arch as of September 30, 1998
would have been a negative [$943.4] million, or a negative [$6.35] per share,
representing an immediate and substantial dilution of [$8.35] per share, in
respect of the warrant exercise price. The following table illustrates the per
share dilution for shares purchased pursuant to the exercise of warrants.
<TABLE>
<S> <C> <C>
Warrant exercise price...................................... $ 2.00
Net tangible book value per share before
MobileMedia acquisition and related transactions. $(31.48)
Increase per share attributable to the MobileMedia
acquisition and related transactions............. [25.13]
-------
Pro forma net tangible book value per share after
MobileMedia acquisition and related transactions......... [(6.35)]
-------
Dilution to persons exercising warrants(1)(2)............... $ [8.35]
=======
</TABLE>
- --------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the MobileMedia acquisition from the warrant exercise price per
share.
(2) Reflects the exercise of a warrant for one share, since that would result
in the maximum amount of dilution per share. The exercise of additional
warrants would increase net tangible book value so that dilution per share
would be less than [$8.35] per share.
18
<PAGE>
MARKET PRICE INFORMATION AND DIVIDEND POLICY
Arch's Common Stock has traded on the NNM under the symbol "APGR" since January
1992. The following table sets forth for the periods indicated the high and low
reported sale prices per share of Common Stock on the NNM:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal 1997
First Quarter........................................ $10.00 $3.75
Second Quarter....................................... $ 8.375 $3.75
Third Quarter........................................ $ 9.50 $5.875
Fourth Quarter....................................... $ 9.125 $4.125
Fiscal 1998
First Quarter........................................ $ 6.125 $3.00
Second Quarter....................................... $ 6.938 $3.50
Third Quarter........................................ $ 5.000 $1.6875
Fourth Quarter ...................................... $ 1.75 $0.6875
Fiscal 1999
First Quarter (through , 1999)................... $ $
</TABLE>
The closing sale price per share of Common Stock on the NNM on , 1999 was
$ .
Upon consummation of the MobileMedia acquisition on , 1999, there were
outstanding shares of Common Stock held by stockholders of record,
shares of Class B Common Stock held by stockholders of record and
[250,000] shares of Series C Preferred Stock held by [9] stockholders of
record. The number of record holders may not be representative of the number of
beneficial holders because many shares are held by depositaries, brokers or
other nominees.
Neither Arch nor MobileMedia's parent company has ever declared or paid any
cash dividends on its Common Stock. Arch anticipates that substantially all of
its earnings in the foreseeable future will be used to finance the continued
growth and development of its business and has no current intention to pay cash
dividends. Arch's future dividend policy will depend on its earnings, capital
requirements and financial condition, requirements of the financing agreements
to which it is then a party and other factors considered relevant by Arch's
Board of Directors. The API credit facility prohibits declaration or payment of
cash dividends to Arch stockholders without the written consent of a majority
of the lenders during the term of the credit agreement and until all
obligations under the credit agreement have been met. The terms of certain
outstanding indebtedness only permit the declaration or payment of cash
dividends subject to certain leverage and cash flow requirements (which Arch
does not currently meet). In addition, the terms of the Series C Preferred
Stock generally prohibit the payment of cash dividends on Common Stock unless
all accrued dividends due on to the Series C Preferred Stock have been paid in
full. See "Description of Securities" and "Description of Certain
Indebtedness".
19
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--ARCH
The following table sets forth selected historical consolidated financial and
operating data of Arch for each of the two years ended August 31, 1994, the
four months ended December 31, 1993 and 1994, each of the four years ended
December 31, 1997 and the nine months ended September 30, 1997 and 1998. The
selected financial and operating data as of December 31, 1994, 1995, 1996 and
1997 and for each of the three years ended December 31, 1997 have been derived
from Arch's audited consolidated financial statements and notes thereto. The
selected financial and operating data as of September 30, 1998 and for the nine
months ended September 30, 1997 and 1998 have been derived from Arch's
unaudited consolidated financial statements and notes thereto. The following
consolidated financial information should be read in conjunction with "Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Arch's Consolidated Financial Statements and Notes.
<TABLE>
<CAPTION>
Four Months Nine Months
Year Ended Ended Ended
August 31, (1) December 31, (1) Year Ended December 31, September 30,
------------------ ----------------- ----------------------------------------- --------------------
1993 1994 1993 1994 1994 (1) 1995 (1) 1996 1997 1997 1998
-------- -------- ------- -------- -------- --------- --------- --------- --------- ---------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Service, rental
and maintenance
revenues........ $ 39,610 $ 55,139 $16,457 $ 22,847 $ 61,529 $ 138,466 $ 291,399 $ 351,944 $ 261,570 $ 277,826
Product sales.... 5,698 12,108 2,912 5,178 14,374 24,132 39,971 44,897 34,029 31,811
-------- -------- ------- -------- -------- --------- --------- --------- --------- ---------
Total revenues... 45,308 67,247 19,369 28,025 75,903 162,598 331,370 396,841 295,599 309,637
Cost of products
sold............ (4,031) (10,124) (2,027) (4,690) (12,787) (20,789) (27,469) (29,158) (22,044) (21,863)
-------- -------- ------- -------- -------- --------- --------- --------- --------- ---------
41,277 57,123 17,342 23,335 63,116 141,809 303,901 367,683 273,555 287,774
Operating
expenses:
Service, rental
and
maintenance.... 9,532 13,123 3,959 5,231 14,395 29,673 64,957 79,836 59,227 60,812
Selling......... 7,307 10,243 3,058 4,338 11,523 24,502 46,962 51,474 39,019 36,902
General and
administrative. 13,123 17,717 5,510 7,022 19,229 40,448 86,181 106,041 78,878 84,527
Depreciation and
amortization... 13,764 16,997 5,549 6,873 18,321 60,205 191,871 232,347 179,917 164,990
Restructuring
charge......... -- -- -- -- -- -- -- -- -- 16,100
-------- -------- ------- -------- -------- --------- --------- --------- --------- ---------
Operating income
(loss).......... (2,449) (957) (734) (129) (352) (13,019) (86,070) (102,015) (83,486) (75,557)
Interest and non-
operating
expenses, net... (2,861) (4,112) (1,132) (1,993) (4,973) (22,522) (75,927) (97,159) (72,436) (78,334)
Equity in loss of
affiliate (2)... -- -- -- -- -- (3,977) (1,968) (3,872) (2,828) (2,219)
-------- -------- ------- -------- -------- --------- --------- --------- --------- ---------
Income (loss)
before income
tax benefit and
extraordinary
item............ (5,310) (5,069) (1,866) (2,122) (5,325) (39,518) (163,965) (203,046) (158,750) (156,110)
Income tax
benefit......... -- -- -- -- -- 4,600 51,207 21,172 15,900 --
-------- -------- ------- -------- -------- --------- --------- --------- --------- ---------
Income (loss)
before
extraordinary
item............ (5,310) (5,069) (1,866) (2,122) (5,325) (34,918) (112,758) (181,874) (142,850) (156,110)
Extraordinary
item (3)........ (415) -- -- (1,137) (1,137) (1,684) (1,904) -- -- (1,720)
-------- -------- ------- -------- -------- --------- --------- --------- --------- ---------
Net income
(loss).......... $ (5,725) $ (5,069) $(1,866) $ (3,259) $ (6,462) $ (36,602) $(114,662) $(181,874) $(142,850) $(157,830)
======== ======== ======= ======== ======== ========= ========= ========= ========= =========
Other Operating
Data:
Adjusted EBITDA
(4)............. $ 11,315 $ 16,040 $ 4,815 $ 6,744 $ 17,969 $ 47,186 $ 105,801 $ 130,332 $ 96,431 $ 105,533
Adjusted EBITDA
margin (5)...... 27% 28% 28% 29% 28% 33% 35% 35% 35% 37%
Capital
expenditures,
excluding
acquisitions.... $ 20,853 $ 25,657 $ 7,486 $ 15,279 $ 33,450 $ 60,468 $ 165,206 $ 102,769 $ 74,762 $ 85,785
Cash flows
provided by
operating
activities...... $ 8,721 $ 14,781 $ 5,306 $ 4,680 $ 14,155 $ 14,749 $ 37,802 $ 63,590 $ 44,551 $ 91,415
Cash flows used
in investing
activities...... $(30,998) $(28,982) $(7,486) $(34,364) $(55,860) $(192,549) $(490,626) $(102,769) $ (74,672) $ (85,785)
Cash flows
provided by
(used in)
financing
activities...... $ 11,268 $ 14,636 $11,290 $ 26,108 $ 29,454 $ 179,092 $ 452,678 $ 39,010 $ 31,645 $ (2,387)
Pagers in service
at end of
period.......... 254,000 410,000 288,000 538,000 538,000 2,006,000 3,295,000 3,890,000 3,781,000 4,211,000
</TABLE>
- -------
(footnotes on following page)
20
<PAGE>
<TABLE>
<CAPTION>
As of
August 31, (1) As of December 31, As of
--------------- --------------------------------------- September 30,
1993 1994 1994 1995 1996 1997 1998
------- ------- -------- -------- ---------- ---------- -------------
(dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets.......... $ 4,690 $ 6,751 $ 8,483 $ 33,671 $ 43,611 $ 51,025 $ 55,815
Total assets............ 62,209 76,255 117,858 785,376 1,146,756 1,020,720 942,366
Long-term debt, less
current maturities..... 49,748 67,328 93,420 457,044 918,150 968,896 992,790
Redeemable preferred
stock.................. -- -- -- 3,376 3,712 -- --
Stockholders' equity
(deficit).............. 1,563 (3,304) 9,368 246,884 147,851 (33,255) (165,423)
</TABLE>
- --------
(1) On October 17, 1994, Arch announced that it was changing its fiscal year
end from August 31 to December 31. Arch was required to file a transition
report on Form 10-K with audited financial statements for the period
September 1, 1994 through December 31, 1994 and has elected to include in
this table, for comparative purposes, unaudited financial statements for
the periods September 1, 1993 through December 31, 1993 and January 1, 1994
through December 31, 1994.
(2) Represents Arch's share of losses of Benbow PCS Ventures, Inc. since Arch's
acquisition of Westlink Holdings, Inc. in May 1996. See "Arch Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources".
(3) Reflects extraordinary charge resulting from prepayment of indebtedness.
See "Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations".
(4) EBITDA, as determined by Arch, does not reflect restructuring charge,
equity in loss of affiliate, income tax benefit, interest and non-operating
expenses, net and extraordinary items; consequently EBITDA may not
necessarily be comparable to similarly titled data of other paging
companies. EBITDA is commonly used by analysts and investors as a principal
measure of financial performance in the paging industry. EBITDA is also one
of the primary financial measures used to calculate whether Arch and its
subsidiaries are in compliance with covenants under their respective
indebtedness which covenants, among other things, limit the ability of Arch
and its subsidiaries to: incur additional indebtedness, advance funds to
Benbow, pay dividends, grant liens on its assets, merge, sell or acquire
assets, repurchase or redeem capital stock, incur capital expenditures and
prepay certain indebtedness. EBITDA is also one of the financial measures
used by analysts to value Arch. Therefore Arch management believes that the
presentation of EBITDA provides relevant information to investors. EBITDA
should not be construed as an alternative to operating income or cash flows
from operating activities as determined in accordance with GAAP or as a
measure of liquidity. Amounts reflected as EBITDA or Arch adjusted EBITDA
are not necessarily available for discretionary use as a result of
restrictions imposed by the terms of existing indebtedness and limitations
imposed by applicable law upon the payment of dividends or distributions,
among other things. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operation".
The following table reconciles net income to the presentation of Arch's
adjusted EBITDA:
<TABLE>
<CAPTION>
Four Months
Year Ended Ended Nine Months Ended
August 31, December 31, Year Ended December 31, September 30,
---------------- ---------------- --------------------------------------- --------------------
1993 1994 1993 1994 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- -------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)... $(5,725) $(5,069) $(1,866) $(3,259) $(6,462) $(36,602) $(114,662) $(181,874) $(142,850) $(157,830)
Interest and non-
operating expenses,
net................ 2,861 4,112 1,132 1,993 4,973 22,522 75,927 97,159 72,436 78,334
Income tax benefit.. -- -- -- -- -- (4,600) (51,207) (21,172) (15,900) --
Depreciation and
amortization....... 13,764 16,997 5,549 6,873 18,321 60,205 191,871 232,347 179,917 164,990
Restructuring
charge............. -- -- -- -- -- -- -- -- -- 16,100
Equity in loss of
affiliate.......... -- -- -- -- -- 3,977 1,968 3,872 2,828 2,219
Extraordinary Item.. 415 -- -- 1,137 1,137 1,684 1,904 -- -- 1,720
------- ------- ------- ------- ------- -------- --------- --------- --------- ---------
Adjusted EBITDA..... $11,315 $16,040 $ 4,815 $ 6,744 $17,969 $ 47,186 $ 105,801 $ 130,332 $ 96,431 $ 105,533
======= ======= ======= ======= ======= ======== ========= ========= ========= =========
</TABLE>
(5) Calculated by dividing Arch's adjusted EBITDA by total revenues less cost
of products sold. EBITDA margin is a measure commonly used in the paging
industry to evaluate a company's EBITDA relative to total revenues less
cost of products sold as an indicator of the efficiency of a company's
operating structure.
21
<PAGE>
ARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The following discussion and analysis should be read in conjunction with Arch's
Consolidated Financial Statements and Notes.
Arch has been a leading provider of wireless messaging services, primarily
paging services. Prior to the MobileMedia acquisition, Arch was the third
largest paging company in the United States, based on pagers in service and net
revenues (total revenues less cost of products sold). Arch had 4.2 million
pagers in service at September 30, 1998. From January 1, 1995 through September
30, 1998, Arch's total number of subscribers grew at a compound rate on an
annualized basis of 73.1%. For the same period on an annualized basis, Arch's
compound rate of internal subscriber growth (excluding pagers added through
acquisitions) was 52.8%.
Arch derives the majority of its revenues from fixed periodic (usually monthly)
fees, not dependent on usage, charged to subscribers for paging services. As
long as a subscriber remains on service, operating results benefit from the
recurring payments of the fixed periodic fees without incurrence of additional
selling expenses by Arch. Arch's service, rental and maintenance revenues and
the related expenses exhibit substantially similar growth trends. Arch's
average revenue per subscriber has declined over the last three years for two
principal reasons: (1) an increase in the number of subscriber owned and
reseller owned pagers for which Arch receives no recurring equipment revenue
and (2) an increase in the number of reseller customers whose airtime is
purchased at wholesale rates. The reduction in average paging revenue per
subscriber resulting from these trends has been more than offset by the
elimination of associated expenses so that Arch's margins have improved over
such period. Furthermore, recent data indicates such rate of decline has
slowed.
Arch has achieved significant growth in pagers in service and EBITDA through a
combination of internal growth and acquisitions, including USA Mobile in
September 1995 and Westlink in May 1996. Arch's total revenues have increased
from $162.6 million in the year ended December 31, 1995 to $331.4 million in
the year ended December 31, 1996 and to $396.8 million in the year ended
December 31, 1997. Over the same periods, through operating efficiencies and
economies of scale, Arch has been able to reduce its per pager operating costs
to enhance its competitive position in its markets. Due to the rapid growth in
its subscriber base, Arch has incurred significant selling expenses, which are
charged to operations in the period incurred. Arch had net losses of $36.6
million in the year ended December 31, 1995, $114.7 million in the year ended
December 31, 1996 and $181.9 million in the year ended December 31, 1997,
respectively, as a result of significant depreciation and amortization expenses
related to acquired and developed assets and interest charges associated with
indebtedness. However, as its subscriber base has grown, Arch's operating
results have improved, as evidenced by an increase in Arch Adjusted EBITDA from
$47.2 million in the year ended December 31, 1995 to $105.8 million in the year
ended December 31, 1996 and to $130.3 million in the year ended December 31,
1997.
EBITDA is a commonly used measure of financial performance in the paging
industry and also is one of the financial measures used to calculate whether
Arch and its subsidiaries are in compliance with the covenants under their
respective debt agreements, but should not be construed as an alternative to
operating income or cash flows from operating activities as determined in
accordance with GAAP. One of Arch's financial objectives is to increase its
EBITDA, as such earnings are a significant source of funds for servicing
indebtedness and for investment in continued growth, including purchase of
pagers and paging system equipment, construction and expansion of paging
systems, and possible acquisitions. EBITDA, as determined by Arch, may not
necessarily be comparable to similarly titled data of other paging companies.
Amounts reflected as EBITDA are not necessarily available for discretionary use
as a result of restrictions imposed by the terms of existing or future
indebtedness (including the repayment of such indebtedness or the payment of
associated interest), limitations imposed by applicable law upon the payment of
dividends or distributions or capital expenditure requirements.
22
<PAGE>
The potential effects of the MobileMedia acquisition on Arch are described
under "Business--Business Strategy".
Shift in Operating Focus
In April 1997, Arch reordered its operating priorities to improve capital
efficiency and strengthen its balance sheet by placing a higher priority on
leverage reduction than on subscriber unit growth. As part of its reordered
operating priorities, Arch has implemented various initiatives to reduce
capital costs while sustaining acceptable levels of unit and revenue growth. As
a result, Arch's rate of internal growth in pagers in service slowed during the
second half of 1997 and is expected to remain below the rates of internal
growth previously achieved by Arch. As part of its reordered operating
priorities, Arch is also reviewing the possible sale of non-strategic assets.
In April 1998, Arch commenced its tower site sale for approximately $38.0
million in cash (subject to adjustment). In the tower site sale, ACI is selling
communications towers, real estate, site management contracts and/or leasehold
interests involving 133 sites in 22 states and will rent space on the towers on
which it currently operates communications equipment to service its own paging
network. ACI will use its net proceeds from the tower site sale (estimated to
be $36.0 million) to repay indebtedness. ACI held two closings of the tower
site sale during 1998 with gross proceeds to ACI of approximately $32.4 million
(excluding $1.3 million which was paid to entities affiliated with Benbow for
certain assets owned by such entities and sold as part of this transaction).
Arch currently expects to hold the final closing for the balance of the
transaction in the quarter of 1999, although no assurance can be given
that the final closing will be held as expected. See "Business--Arch's
Business--Investments in Narrowband PCS Licenses".
Divisional Reorganization
The divisional reorganization is being implemented over a period of 18 to 24
months. Arch has consolidated its former Midwest, Western, and Northern
divisions into four existing operating divisions, and is in the process of
consolidating certain regional administrative support functions, such as
customer service, collections, inventory and billing, to reduce redundancy and
take advantage of various operating efficiencies.
Arch estimates that the divisional reorganization, once fully implemented, will
result in annual cost savings of approximately $15.0 million. These cost
savings will consist primarily of a reduction in compensation expense of
approximately $11.5 million, a reduction in rental expense of facilities and
general and administrative costs of approximately $3.5 million. Arch expects to
reinvest a portion of these cost savings to expand its sales activities;
however to date the extent of this reinvestment and therefore the cost has not
yet been determined.
In connection with the divisional reorganization, Arch (1) anticipates a net
reduction of approximately 10% of its workforce, (2) plans to close certain
office locations and redeploy other real estate assets and (3) recorded a
restructuring charge of $16.1 million during the second quarter of 1998. The
restructuring charge consisted of approximately (1) $9.7 million for employee
severance, (2) $3.5 million for lease obligations and terminations, (3) $1.4
million for the writedown of fixed assets and (4) $1.5 million of other costs.
The severance costs and lease obligations will require cash outlays throughout
the 18 to 24 month restructuring period. Management anticipates the cash
requirements for these items to be relatively consistent from quarter to
quarter while the divisional reorganization is taking place. Arch will fund
these cash outlays from operations or API's credit facility. There can be no
assurance that the desired cost savings will be achieved or that the
anticipated reorganization of Arch's business will be accomplished smoothly,
expeditiously or successfully. The difficulties of such reorganization may be
increased by the need to integrate MobileMedia's operations in multiple
locations and to combine two corporate cultures. The inability to successfully
integrate the operations of MobileMedia could have a material adverse effect on
Arch. See Note 9 to Arch's Consolidated Financial Statements.
23
<PAGE>
Results of Operations
The following table presents certain items from Arch's Consolidated Statements
of Operations as a percentage of net revenues (total revenues less cost of
products sold) and certain other information for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
--------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... 114.7 % 109.0 % 107.9 % 108.1% 107.6 %
Cost of products sold... (14.7) (9.0) (7.9) (8.1) (7.6)
--------- --------- --------- ---------- ----------
Net revenues............ 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Service, rental and
maintenance............ 20.9 21.4 21.7 21.6 21.1
Selling................. 17.3 15.4 14.0 14.3 12.8
General and
administrative......... 28.5 28.4 28.8 28.8 29.4
Depreciation and
amortization........... 42.5 63.1 63.2 65.8 57.3
Restructuring charge.... -- -- -- -- 5.6
--------- --------- --------- ---------- ----------
Operating income (loss). (9.2)% (28.3)% (27.7)% (30.5)% (26.2)%
========= ========= ========= ========== ==========
Net income (loss)....... (25.8)% (37.7)% (49.5)% (52.2)% (54.8)%
========= ========= ========= ========== ==========
Arch adjusted EBITDA.... 33.3 % 34.8 % 35.4 % 35.3 % 36.7%
========= ========= ========= ========== ==========
Cash flows provided by
operating activities... $ 14,749 $ 37,802 $ 63,590 $ 44,551 $ 91,415
Cash flows used in in-
vesting activities..... $(192,549) $(490,626) $(102,769) $ (74,672) $ (85,785)
Cash flows provided by
(used in) financing ac-
tivities............... $ 179,092 $ 452,678 $ 39,010 $ 31,645 $ (2,387)
Annual service, rental
and maintenance
expenses per pager..... $ 28 $ 25 $ 22 $ 22 $ 20
</TABLE>
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Total revenues increased to $309.6 million (a 4.7% increase) in the nine months
ended September 30, 1998, from $295.6 million in the nine months ended
September 30, 1997. Net revenues (total revenues less cost of products sold)
increased to $287.8 million (a 5.2% increase) in the nine months ended
September 30, 1998 from $273.6 million in the nine months ended September 30,
1997. Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of pagers, increased to
$277.8 million (a 6.2% increase) in the nine months ended September 30, 1998
from $261.6 million in the nine months ended September 30, 1997. These
increases in revenues were due primarily to the increase through internal
growth in the number of pagers in service from 3.8 million at September 30,
1997 to 4.2 million at September 30, 1998. Maintenance revenues represented
less than 10% of total service, rental and maintenance revenues in the nine
months ended September 30, 1998 and 1997. Arch does not differentiate between
service and rental revenues. Product sales, less cost of products sold,
decreased to $9.9 million (a 17.0% decrease) in the nine months ended September
30, 1998 from $12.0 million in the nine months ended September 30, 1997,
respectively, as a result of a decline in the average revenue per pager sold.
Service, rental and maintenance expenses, which consist primarily of telephone
line and site rental expenses, increased to $60.8 million (21.1% of net
revenues) in the nine months ended September 30, 1998 from $59.2 million (21.7%
of net revenues) in the nine months ended September 30, 1997. The increase was
due primarily to increased expenses associated with system expansions and the
provision of paging services to a greater number of subscribers. As existing
paging systems become more populated through the addition of new subscribers,
the fixed costs of operating these paging systems are spread over a greater
subscriber base. Annualized service, rental and maintenance expenses per
subscriber were $20.00 in the nine months ended September 30, 1998 as compared
to $22.00 in the corresponding 1997 period.
Selling expenses decreased to $36.9 million (12.8% of net revenues) in the nine
months ended September 30, 1998 from $39.0 million (14.3% of net revenues) in
the nine months ended September 30, 1997. The decrease
24
<PAGE>
was due primarily to a decrease in the number of net new subscriber additions
and nonrecurring marketing costs incurred in 1997 to promote Arch's new Arch
Paging brand identity. The number of net new subscriber additions resulting
from internal growth decreased by 34.0% in the nine months ended September 30,
1998 compared to the nine months ended September 30, 1997, primarily due to
Arch's shift in operating focus from unit growth to capital efficiency and
leverage reduction.
General and administrative expenses increased to $84.5 million (29.4% of net
revenues) in the nine months ended September 30, 1998, respectively, from $78.9
million (28.8% of net revenues) in the nine months ended September 30, 1997.
The increase was due primarily to administrative and facility costs associated
with supporting more pagers in service.
Depreciation and amortization expenses decreased to $165.0 million in the nine
months ended September 30, 1998 from $179.9 million in the nine months ended
September 30, 1997. These expenses principally reflect Arch's acquisitions of
paging businesses in prior periods, accounted for as purchases, and investment
in pagers and other system expansion equipment to support growth.
Operating losses were $75.6 million in the nine months ended September 30, 1998
compared to $83.5 million in the nine months ended September 30, 1997, as a
result of the factors outlined above.
Net interest expense increased to $78.3 million in the nine months ended
September 30, 1998 from $72.4 million in the nine months ended September 30,
1997. The increase is principally attributable to an increase in Arch's
outstanding debt. Interest expense for the nine months ended September 30, 1998
and 1997 includes approximately $27.4 million and $24.6 million, respectively,
of non-cash interest accretion on the 10 7/8% Arch Discount Notes under which
semi-annual interest payments commence on September 15, 2001. See "Description
of Certain Indebtedness--Arch Discount Notes".
Arch recognized income tax benefits of $15.9 million in the nine months ended
September 30, 1997. This benefit represents the tax benefit of operating losses
incurred subsequent to the acquisitions of USA Mobile and Westlink which were
available to offset deferred tax liabilities arising from Arch's acquisition of
USA Mobile in September 1995 and Westlink in May 1996. The tax benefit of these
operating losses was fully recognized during 1997. Accordingly, Arch has
established a valuation reserve against its deferred tax asset which reduced
the income tax benefit to zero. Arch does not expect to recover, in the
foreseeable future, its deferred tax asset and will continue to increase its
valuation reserve accordingly.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $157.8 million in the nine months ended September 30,
1998 from $142.9 million in the nine months ended September 30, 1997, as a
result of the factors outlined above.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues increased $65.5 million, or 19.8%, to $396.8 million in the year
ended December 31, 1997 from $331.4 million in the year ended December 31, 1996
and net revenues increased $63.8 million, or 21.0%, from $303.9 million to
$367.7 million over the same period. Service, rental and maintenance revenues
increased $60.5 million, or 20.8%, to $351.9 million in the year ended December
31, 1997 from $291.4 million in the year ended December 31, 1996. These
increases in revenues were due primarily to the increase in the number of
pagers in service from 3.3 million at December 31, 1996 to 3.9 million at
December 31, 1997 and the full year impact of the Westlink acquisition which
was completed in May 1996. Maintenance revenues represented less than 10% of
total service, rental and maintenance revenues in the years ended December 31,
1996 and 1997. Product sales, less cost of products sold, increased 25.9% to
$15.7 million in the year ended December 31, 1997 from $12.5 million in the
year ended December 31, 1996 as a result of a greater number of pager unit
sales.
25
<PAGE>
Service, rental and maintenance expenses increased to $79.8 million (21.7% of
net revenues) in the year ended December 31, 1997 from $65.0 million (21.4% of
net revenues) in the year ended December 31, 1996. The increase was due
primarily to increased expenses associated with system expansions and the
provision of paging services to a greater number of subscribers. Annual
service, rental and maintenance expenses per subscriber decreased to $22.00 in
the year ended December 31, 1997 from $25.00 in the year ended December 31,
1996.
Selling expenses increased to $51.5 million (14.0% of net revenues) in the year
ended December 31, 1997 from $47.0 million (15.4% of net revenues) in the year
ended December 31, 1996. The increase in selling expenses was due to the full
year impact of the Westlink acquisition and the marketing costs incurred to
promote Arch's Arch Paging brand identity. Arch's selling cost per net new
pager in service increased to $87.00 in the year ended December 31, 1997 from
$58.00 in the year ended December 31, 1996, primarily due to fixed selling
costs and increased marketing costs being spread over fewer net new pagers put
into service.
General and administrative expenses increased to $106.0 million (28.8% of net
revenues) in the year ended December 31, 1997 from $86.2 million (28.4% of net
revenues) in the year ended December 31, 1996. The increase in absolute dollars
was due primarily to increased expenses associated with supporting more pagers
in service, including the full year impact of Westlink, as well as expenses
associated with the establishment of Arch's National Services Division. See
"Business--Arch's Business--Subscribers and Marketing".
Depreciation and amortization expenses increased to $232.3 million (63.2% of
net revenues) in the year ended December 31, 1997 from $191.9 million (63.1% of
net revenues) in the year ended December 31, 1996. These expenses reflect
Arch's acquisitions of paging businesses, accounted for as purchases, and
continued investment in pagers and other system expansion equipment to support
continued growth.
Operating loss increased to $102.0 million in the year ended December 31, 1997
from $86.1 million in the year ended December 31, 1996 as a result of the
factors outlined above.
Net interest expense increased to $97.2 million in the year ended December 31,
1997 from $75.9 million in the year ended December 31, 1996. The increase was
attributable to an increase in Arch's average outstanding debt. In 1997 and
1996 interest expense includes approximately $33.0 million and $24.0 million,
respectively, of non-cash interest accretion on Arch's 10 7/8% Senior Discount
Notes due 2008 under which semi-annual interest payments commence on September
15, 2001. See Note 3 to Arch's Consolidated Financial Statements.
During the years ended December 31, 1997 and 1996, Arch recognized income tax
benefits of $21.2 million and $51.2 million, respectively, representing the tax
benefit of operating losses subsequent to the acquisitions of USA Mobile in
September 1995 and Westlink in May 1996 which were available to offset deferred
tax liabilities arising from Arch's acquisitions of USA Mobile and Westlink.
During 1996, Arch recognized an extraordinary charge of $1.9 million,
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under a prior credit facility.
Net loss increased to $181.9 million in the year ended December 31, 1997 from
$114.7 million in the year ended December 31, 1996 as a result of the factors
outlined above. Included in the net loss for the years ended December 31, 1997
and 1996 were charges of $3.9 million and $2.0 million, respectively,
representing Arch's pro rata share of Benbow's losses since the Westlink
acquisition in May 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Total revenues increased $168.8 million, or 103.8%, to $331.4 million in the
year ended December 31, 1996 from $162.6 million in the year ended December 31,
1995 and net revenues increased $162.1 million, or 114.3%, from $141.8 million
to $303.9 million over the same period. Service, rental and maintenance
revenues increased $152.9 million, or 110.4%, to $291.4 million in the year
ended December 31, 1996 from $138.5
26
<PAGE>
million in the year ended December 31, 1995. These increases in revenues were
due primarily to the increase in the number of pagers in service from 2.0
million at December 31, 1995 to 3.3 million at December 31, 1996. Acquisitions
of paging companies added 0.5 million pagers in service during 1996, with the
remaining 0.8 million pagers added through internal growth. Maintenance
revenues represented less than 10% of total service, rental and maintenance
revenues in the years ended December 31, 1995 and 1996. Product sales, less
cost of products sold, increased 274.0% to $12.5 million in the year ended
December 31, 1996 from $3.3 million in the year ended December 31, 1995 as a
result of a greater number of pager unit sales.
Service, rental and maintenance expenses increased to $65.0 million (21.4% of
net revenues) in the year ended December 31, 1996 from $29.7 million (20.9% of
net revenues) in the year ended December 31, 1995. The increase was due
primarily to increased expenses associated with system expansions and the
provision of paging services to a greater number of subscribers. Annual
service, rental and maintenance expenses per subscriber decreased to $25.00 in
the year ended December 31, 1996 from $28.00 in the year ended December 31,
1995.
Selling expenses increased to $47.0 million (15.4% of net revenues) in the year
ended December 31, 1996 from $24.5 million (17.3% of net revenues) in the year
ended December 31, 1995. The increase in selling expenses was due to the
addition of sales personnel to support continued growth in the subscriber base,
as the number of net new pagers in service resulting from internal growth
increased by 122.7% from the year ended December 31, 1995 to the year ended
December 31, 1996. Arch's selling cost per net new pager in service decreased
to $58.00 in the year ended December 31, 1996 from $67.00 in the year ended
December 31, 1995, primarily due to increased sales through indirect
distribution channels.
General and administrative expenses increased to $86.2 million (28.4% of net
revenues) in the year ended December 31, 1996 from $40.4 million (28.5% of net
revenues) in the year ended December 31, 1995. The increase was due primarily
to increased expenses associated with supporting more pagers in service.
Depreciation and amortization expenses increased to $191.9 million (63.1% of
net revenues) in the year ended December 31, 1996 from $60.2 million (42.5% of
net revenues) in the year ended December 31, 1995. These expenses reflect
Arch's acquisitions of paging businesses, accounted for as purchases, and
continued investment in pagers and other system expansion equipment to support
continued growth.
Operating loss increased to $86.1 million in the year ended December 31, 1996
from $13.0 million in the year ended December 31, 1995 as a result of the
factors outlined above.
Net interest expense increased to $75.9 million in the year ended December 31,
1996 from $22.5 million in the year ended December 31, 1995. The increase was
attributable to an increase in Arch's average outstanding debt. Interest
expense in 1996 includes approximately $24.0 million of non-cash interest
accretion on Arch's 10 7/8% Senior Discount Notes due 2008. See Note 3 to
Arch's Consolidated Financial Statements.
During the years ended December 31, 1996 and 1995, Arch recognized income tax
benefits of $51.2 million and $4.6 million, respectively, representing the tax
benefit of operating losses subsequent to the acquisitions of USA Mobile and
Westlink which were available to offset deferred tax liabilities arising from
Arch's acquisitions of USA Mobile and Westlink.
During 1996 and 1995, Arch recognized an extraordinary charge of $1.9 million
and $1.7 million, respectively, representing the write-off of unamortized
deferred financing costs associated with the prepayment of indebtedness under
separate prior credit facilities.
Net loss increased to $114.7 million in the year ended December 31, 1996 from
$36.6 million in the year ended December 31, 1995 as a result of the factors
outlined above. Included in net loss for the year ended December 31, 1995 was a
charge of $4.0 million representing Arch's pro rata share of USA Mobile's net
loss for the period of time from Arch's acquisition of its initial 37% interest
in USA Mobile on May 16, 1995 through the
27
<PAGE>
completion of Arch's acquisition of USA Mobile on September 7, 1995. Included
in the net loss for the year ended December 31, 1996 was a charge of $2.0
million representing Arch's pro rata share of Benbow's losses since the
Westlink acquisition in May 1996.
Liquidity and Capital Resources
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
pagers and paging system equipment, to service debt and to finance
acquisitions.
Capital Expenditures and Commitments
Excluding acquisitions of paging businesses, Arch's capital expenditures were
$60.5 million in the year ended December 31, 1995, $155.6 million in the year
ended December 31, 1996, $102.8 million in the year ended December 31, 1997 and
$85.8 million in the nine months ended September 30, 1998. To date, Arch has
funded its capital expenditures with net cash provided by operating activities
and the incurrence of debt.
Arch currently estimates that it had capital expenditures (excluding deferred
financing costs) of approximately $85.0 million to $90.0 million for the year
ended December 31, 1998 and anticipates that it will have capital expenditures
of approximately $ million to $ million for 1999. The 1998 and 1999 capital
expenditures primarily involve the purchase of pagers, paging system equipment
and transmission equipment, as well as expenditures for information systems and
advances to Benbow (as described below). The amounts for 1999 are subject to
change based on Arch's internal growth rate and acquisition activity, if any,
during 1999. Included in Arch's anticipated capital expenditures for 1999 is
funding to upgrade hardware and to internally develop software for a
centralized billing and management information system which is expected to
offer the back office capability to support significant future growth. See
"Risk Factors--Impact of the Year 2000 Issue Not Assured". Arch believes that
it will have sufficient cash available from operations and credit facilities to
fund these expenditures.
Arch is obligated, to the extent such funds are not available to Benbow from
other sources and subject to the approval of Arch's designee on Benbow's Board
of Directors, to advance to Benbow sufficient funds to service its FCC license-
related debt obligations incurred by Benbow in connection with its acquisition
of its N-PCS licenses and to finance construction of an N-PCS system. The total
cost to Benbow of servicing its debt obligations and constructing an N-PCS
system (including the effect of Benbow's acquisition of Page Call) will be
approximately $180.0 million over the next four years. Arch currently
anticipates that approximately $30.0 million (approximately $10.0 million in
each of the next three years) of such amount will be funded by Arch and the
balance will be funded through vendor financing and other sources. See
"Business--Arch's Business--Investments in Narrowband PCS Licenses".
Other Commitments and Contingencies
Interest payments on the $467.4 million principal amount at maturity of Arch
Discount Notes commence September 15, 2001. Arch expects to service such
interest payments out of cash made available to it by its subsidiaries. Based
on the principal amount of Arch Discount Notes presently outstanding, such
interest payments will equal $25.4 million on March 15 and September 15 of each
year until scheduled maturity on March 15, 2008. A default by Arch in its
payment obligations under the Arch Discount Notes could have a material adverse
effect on the business, financial condition, results of operations or prospects
of Arch. See "Risk Factors--High Degree of Leverage Burdens Operations".
Sources of Funds
Arch's net cash provided by operating activities was $14.7 million in the year
ended December 31, 1995, $37.8 million in the year ended December 31, 1996 and
$63.6 million in the year ended December 31, 1997, and $91.4 million in the
nine months ended September 30, 1998. Arch expects to fund its capital needs
for the
28
<PAGE>
foreseeable future with borrowings under current and future credit facilities,
net cash provided by operations and, depending on Arch's needs and market
conditions, possible sales of equity or debt securities. For additional
information, see Note 3 of Notes to Arch's Consolidated Financial Statements.
Arch's ability to access future borrowings will depend, in part, on its ability
to continue to grow its EBITDA. At , 1999, after giving effect to the
MobileMedia Acquisition and [the offering and sale of the ACI % Notes]
[borrowings under the bridge facility], Arch had [$415.0] million outstanding
under the API credit facility, and approximately [$185.0] million in available
borrowing capacity.
API Credit Facility
In June 1998 and 1999, Arch amended an existing credit facility to establish
senior secured revolving credit and term loan facilities with API as borrower
in the aggregate amount of $600.0 million consisting of:
. Tranche A: a $ million reducing revolving credit facility;
. Tranche B: a $ million 364-day revolving credit facility under which
the principal amount outstanding on the 364th day following the closing
will convert to a term loan; and
. Tranche C: a $ million term loan which was available in a single
drawing on the closing date. See "Description of Certain Indebtedness--
API's Credit Facility".
Bridge Facility
In August 1998, ACI obtained a commitment letter for a bridge facility under
which a $120.0 million term loan became available for a single drawing on the
closing date of the MobileMedia acquisition.
The Bear Stearns Companies, Inc., The Bank of New York, TD Securities (USA)
Inc. and Royal Bank of Canada are lenders under the bridge facility. The bridge
loan will bear interest equal to the LIBOR rate plus 500 basis points
(currently a total of 10.19%), increasing by 50 basis points each quarter after
funding to a maximum rate of 18%. If not paid on or before maturity 180 days
after the closing of the MobileMedia acquisition, the bridge loan will convert
into a term loan due in December 2006. The term loan will bear interest at the
interest rate under the bridge facility at the maturity of the bridge loan plus
50 basis points increasing by 50 basis points each quarter after funding to a
maximum rate of 18%. Arch will be required to grant warrants to the bridge
lenders for the purchase of 5.0% of its outstanding Common Stock on a fully
diluted basis if the bridge loan has not been repaid prior to the bridge loan
maturity date. The bridge lenders were entitled to give notice between January
29, 1999 and consummation of the MobileMedia acquisition requiring ACI to issue
and sell notes in an amount at least sufficient to substitute for or refinance
the bridge loan on such terms and conditions as the bridge lenders might
specify. In such case, the interest rate on the planned ACI notes would be
determined by the bridge lenders in light of then prevailing market conditions,
but in no event would the yield on the notes exceed a rate equal to an agreed
upon margin over the yield to worst on the ACI 12 3/4% Notes. [The bridge
lenders gave such notice, specifying a % interest rate.] The bridge lenders
are entitled to give a similar notice at any time before the bridge loan
maturity date. If any notes are issued after the MobileMedia acquisition, the
bridge lenders may direct Arch to issue all or some of the bridge warrants to
the purchasers of such notes rather than the bridge lenders. The bridge
facility requires payment of certain fees to the bridge lenders. The fees will
vary based on the amount and timing of the bridge facility and the bridge loan.
The bridge lenders have agreed to refund a portion of the fees if the bridge
loan is repaid prior to maturity. In addition, ACI has agreed to permit the
bridge lenders to act as placement agents for the conversion of the bridge loan
into the term loan or the issuance of the notes by ACI for a fee equal to 3.0%
of the principal amount so converted or issued.
Issuance and Sale of Private Notes
In June 1998, ACI issued and sold $130.0 million principal amount of private
notes to Bear Stearns, Barclays Capital Inc., RBC Dominion Securities
Corporation, BNY Capital Markets, Inc and TD Securities (USA) Inc. for net
proceeds of $122.6 million (after deducting the discount to the initial
purchasers and estimated offering expenses payable by Arch) in a private
placement made pursuant to Rule 144A under the Securities Act. The Private
Notes were sold at an initial price to investors of 98.049% of the face amount
of their investment. See "Description of Indebtedness--ACI 12 3/4% Notes and
ACI % Notes".
29
<PAGE>
Sandler Equity Investment
On June 29, 1998, two partnerships managed by Sandler Capital Management
Company, Inc., an investment management firm, together with certain other
private investors, made an equity investment in Arch of $25.0 million in the
form of Series C Preferred Stock. Simultaneously, Arch contributed to ACI as an
equity investment $24.0 million of the net proceeds from the sale of Series C
Preferred Stock, ACI contributed such amount to API as an equity investment and
API used such amount to repay indebtedness under a former credit facility as
part of the establishment of API's credit facility. See "Description of
Securities".
Inflation
Inflation has not had a material effect on Arch's operations to date. Paging
systems equipment and operating costs have not increased in price and Arch's
pager costs have declined substantially in recent years. This reduction in
costs has generally been reflected in lower pager prices charged to subscribers
who purchase their pagers. Arch's general operating expenses, such as salaries,
employee benefits and occupancy costs, are subject to normal inflationary
pressures.
Risks Relating to Year 2000
Arch has initiated the process of designing and implementing contingency plans
relating to the Year 2000 problem. To this end, each department will identify
the likely risks and determine commercially reasonable solutions. Arch's Y2K
project group will collect and review the determinations on both a department-
by-department and company-wide basis. Arch intends to complete its Year 2000
contingency planning during calendar year 1999.
Arch has created the Y2K project group as a cross-functional project group to
work on the Year 2000 problem. The Y2K project group is finishing its analysis
of external and internal areas likely to be affected by the Year 2000 problem.
It has classified the identified areas of concern into either a mission
critical or non-mission critical status. For the external areas, Arch has
distributed vendor surveys to its primary and secondary vendors. The surveys
requested information about hardware and/or software supplied by information
technology vendors as well as non-information technology system vendors that
might use embedded technologies in their systems or products. Information was
requested regarding the vendor's Year 2000 compliance planning, timing, status,
testing and contingency planning. As part of its evaluation of Year 2000
vulnerability related to its pager and paging equipment vendors, Arch has
discussed with them their efforts to identify potential issues associated with
their equipment and/or software and has concluded that, to the extent any
vulnerability exists, it has been addressed. Internally, Arch has initiated an
inventory audit of hardware and software testing for both its corporate and
divisional operations. These areas of operation include: information systems,
finance, operations, inventory, billing, pager activation and purchasing.
Additional testing is scheduled to conclude in the first quarter of 1999.
Arch expects that it will incur costs to replace existing hardware, software
and paging equipment, which will be capitalized and amortized in accordance
with Arch's existing accounting policies, while maintenance or modification
costs will be expensed as incurred. Arch has upgraded hardware to enable
compliance testing to be performed on dedicated test equipment in an isolated
production-like environment. Based on Arch's costs incurred to date, as well as
estimated costs to be incurred over the next fourteen months, Arch does not
expect that resolution of the Year 2000 problem will have a material adverse
effect on its results of operations and financial condition. Costs of the Year
2000 project are based on current estimates and actual results may vary
significantly from such estimates once detailed plans are developed and
implemented.
While it is Arch's stated goal to be compliant, on an internal basis, by
September 30, 1999, Arch may face the possibility that one or more of its
mission critical vendors, such as its utility providers, telephone carriers or
satellite carriers, may not be Year 2000 compliant. Because of the unique
nature of such vendors, alternative providers of these services may not be
available. Additionally, although Arch has initiated its test plan for its
business-related hardware and software applications, there can be no assurance
that such testing will detect all
30
<PAGE>
applications that may be affected by the Year 2000 problem. Lastly, Arch does
not manufacture any of the pagers or paging-related equipment used by its
customers or for its own paging operations. Although Arch has initiated testing
of such equipment it has relied to a large extent on the representations of its
vendors with respect to their readiness. Arch can offer no assurances as to the
accuracy of such vendors' representations.
Recent and Pending Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. Arch adopted SFAS No.
130 in 1998. The adoption of this standard did not have an effect on its
reporting of income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Arch intends to adopt SFAS No. 131 for its year ending December 31,
1998. Arch has not completed its review of SFAS No. 131 but adoption of this
standard is not expected to have a significant impact on its reporting.
In March 1998, the Accounting Standards Committee of the Financial Accounting
Standards Board issued Statement of Position ("SOP") 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes criteria for capitalizing costs of computer software developed or
obtained for internal use. Arch adopted SOP 98-1 in 1998. The adoption of SOP
98-1 has not had a material effect on Arch's financial position or results of
operations.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities". SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. Initial application of
SOP 98-5 will be reported as the cumulative effect of a change in accounting
principle. Arch intends to adopt SOP 98-5 effective January 1, 1999. The
adoption of SOP 98-5 is not expected to have a material effect on Arch's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings. Arch intends to
adopt this standard effective January 1, 2000. Arch has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements, however, adopting
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
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<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--MOBILEMEDIA
The following table sets forth selected historical consolidated financial and
operating data of MobileMedia and Metromedia Paging Services for each of the
five years ended December 31, 1997 and the nine months ended September 30, 1997
and 1998. The historical financial and operating data presented under
consolidated statements of operations data and consolidated balance sheet data
for each of the five years ended December 31, 1997 have been derived from
MobileMedia's and Metromedia Paging Services' audited consolidated financial
statements and notes thereto. The selected financial and operating data as of
September 30, 1998 and for the nine months ended September 30, 1997 and 1998
have been derived from MobileMedia's unaudited consolidated financial
statements and notes thereto. The following consolidated financial information
should be read in conjunction with "MobileMedia Management's Discussion and
Analysis of Financial Condition and Results of Operations" and MobileMedia's
Consolidated Financial Statements and Notes.
<TABLE>
<CAPTION>
(Unaudited)
Eleven Nine Months
Months One Month Ended
Ended Ended Year Ended December 31, September 30,(9)
November 30, December 31, ----------------------------------------------- -------------------------
1993 1993(1) 1994 1995(2) 1996(3) 1997 1997 1998
--------------- ------------ ---------- ---------- ----------- ---------- ---------- -------------
Metromedia
Paging Services MobileMedia
--------------- ---------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Total revenues... $ 173,761 $ 15,058 $ 203,149 $ 252,996 $ 640,710 $ 527,392 $ 407,157 $ 340,369
Cost of products
sold............ (20,170) (522) (18,705) (26,885) (72,595) (35,843) (27,524) (16,531)
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
153,591 14,536 184,444 226,111 568,115 491,549 379,633 323,838
Services, rents
and maintenance,
selling, and
general and
administrative
expenses(4)..... 123,727 11,125 136,672 164,037 459,474 388,476 309,299 230,737
Impairment of
long-lived
assets(5)....... -- -- -- -- 792,478 -- -- --
Restructuring
costs(6)........ -- -- -- -- 4,256 19,811 15,577 13,831
Depreciation and
amortization.... 47,919 4,880 67,651 71,408 348,698 140,238 104,368 88,312
Amortization of
deferred gain on
tower sale...... -- -- -- -- -- -- -- (389)
MobileMedia
Communications,
Inc. Parent
company cost
allocations..... 7,267 -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Operating loss... (25,322) (1,469) (19,879) (9,334) (1,036,791) (56,976) (49,611) (8,653)
Other income
(expense)
Interest expense. (4,914) (1,461) (18,237) (31,745) (92,663) (67,611) (51,531) (42,449)
(Loss) gain on
sale of assets.. -- -- 1,049 -- 68 3 3 94,085
Other............ (405) -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Total other
income
(expense)...... (5,319) (1,461) (17,188) (31,745) (92,595) (67,608) (51,528) (51,636)
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Income (loss)
before income
tax provision
(benefit)....... (30,641) (2,930) (37,067) (41,079) (1,129,386) (124,584) (101,139) 42,983
Income tax
benefit
(provision)..... 7,328 -- -- -- 69,442 -- -- (678)
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Net income
(loss).......... $ (23,313) $ (2,930) $ (37,067) $ (41,079) $(1,059,944) $ (124,584) $ (101,139) $ 42,305
========== ========== ========== ========== =========== ========== ========== ==========
Other Data
Adjusted
EBITDA(7)....... $ 22,597 $ 3,411 $ 47,772 $ 62,074 $ 108,641 $ 103,073 $ 70,334 $ 93,101
Adjusted EBITDA
margin(8)....... 14.7% 23.5% 25.9% 27.5% 19.1% 21.0% 18.5% 28.7%
Units in service
(at end of
period)......... 1,196,079 1,205,233 1,447,352 2,369,101 4,424,107 3,440,342 3,681,069 3,182,207
Capital
expenditures.... $ 31,480 $ 3,250 $ 65,574 $ 86,163 $ 161,861 $ 40,556 $ 32,321 $ 32,394
Cash flows
provided by
(used in)
operating
activities...... $ 27,737 $ 8,381 $ 53,781 $ 43,849 $ 57,194 $ 14,920 $ (2,847) $ 41,585
Cash flows
provided by
(used in)
investing
activities...... $ (31,773) $ (320,753) $ (50,878) $ (312,698) $(1,028,321) $ (40,556) $ (32,321) $ 137,309
Cash flows
provided by
(used in)
financing
activities...... $ 4,036 $ 314,700 -- $ 671,794 $ 586,111 $ 13,396 $ 20,396 $ (180,000)
<CAPTION>
As of December 31,
------------------------------------------------------------
As of
September 30,
1993 1994 1995 1996 1997 1998
------------ ---------- ---------- ----------- ---------- -------------
(dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Balance Sheet
Data
Total assets..... $ 356,744 $ 353,703 $1,128,546 $ 790,230 $ 655,134 $ 577,306
Debt............. 181,992 195,677 476,156 1,074,196 1,075,681 905,681
Total
stockholders'
equity
(deficit)....... 138,567 101,500 578,753 (468,391) (589,579) (547,274)
</TABLE>
- -------
(footnotes on following page)
32
<PAGE>
- --------
(1) MobileMedia Corporation, the publicly traded company which held all of
MobileMedia Communications, Inc.'s outstanding stock prior to the
MobileMedia acquisition, completed the acquisition of MetroMedia Paging
Services on November 30, 1993 for a purchase price of $308.1 million.
(2) MobileMedia completed its acquisition of the paging and wireless messaging
business of Dial Page, Inc. on August 31, 1995 for a purchase price of
$187.4 million. The consolidated statement of operations data includes
Dial Page's results of operations from that date. (See Note 3 to
MobileMedia's Consolidated Financial Statements and "Business--
MobileMedia--Events Leading Up to MobileMedia's Bankruptcy Filings".)
(3) MobileMedia completed the acquisition of Mobile Communications Corporation
of America ("MobileComm") on January 4, 1996 for a purchase price of
$928.7 million. The consolidated statement of operations data includes
MobileComm results of operations from that date. (See Note 3 to
MobileMedia's Consolidated Financial Statements and "Business--
MobileMedia's Business--Events Leading Up to MobileMedia's Bankruptcy
Filings").
(4) Includes non-recurring adjustments to record executive separation expenses
of $2.5 million in 1994 and $0.7 million in 1995.
(5) Includes non-recurring adjustment to record, effective December 31, 1996,
a $792.5 million write-down of intangible assets based upon MobileMedia's
determination that an impairment of long-lived assets existed pursuant to
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (See Note 2 to MobileMedia's Consolidated Financial Statements).
(6) Includes non-recurring adjustments to record restructuring costs related
to MobileMedia's bankruptcy filing on January 30, 1997.
(7) MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, amortization of deferred
gain on tower sale and restructuring costs. MobileMedia's adjusted EBITDA
for the MetroMedia Paging Services includes parent company cost
allocations. EBITDA is a financial measure commonly used in MobileMedia's
industry and should not be construed as an alternative to operating income
(as determined in accordance with GAAP), as an alternative to cash flows
from operating activities (as determined in accordance with GAAP) or as a
measure of liquidity. MobileMedia's adjusted EBITDA is, however, the
primary financial measure by which MobileMedia's covenants are calculated
under the agreements governing MobileMedia's indebtedness. EBITDA is also
one of the financial measures used by analysts to value MobileMedia.
MobileMedia's adjusted EBITDA in 1996 excludes the impact of the $792.5
million writedown of intangible assets. MobileMedia's adjusted EBITDA may
not necessarily be comparable to similarly titled data of other paging
companies. The following table reconciles net income to the presentation
of MobileMedia's adjusted EBITDA.
<TABLE>
<CAPTION>
One Month
Ended Nine Months Ended
Eleven Months Ended December 31, Year Ended December 31, September 30,
November, 30 ------------ ------------------------------------------ ------------------
1993 1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ---- ----
Metro Media Paging
Services MobileMedia
------------------- ---------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)...... $(23,313) $(2,930) $(37,067) $(41,079) $(1,059,944) $(124,584) $(101,139) $42,305
Interest expense....... 4,914 1,461 18,237 31,745 92,663 67,611 51,531 42,449
Income tax provision
(benefit).. (7,328) -- -- -- (69,442) -- -- 678
Depreciation and
amortization.......... 47,919 4,880 67,651 71,408 348,698 140,238 104,368 88,312
Amortization of
deferred gain on tower
sale.................. -- -- -- -- -- -- -- (389)
Restructuring costs.... -- -- -- -- 4,256 19,811 15,577 13,831
Impairment of long
lived assets.......... -- -- -- -- 792,478 -- -- --
Gain/loss on sale of
assets................ -- -- (1,049) -- (68) (3) (3) (94,085)
Other income/expense... 405 -- -- -- -- -- -- --
-------- ------- -------- -------- ----------- --------- --------- -------
Adjusted EBITDA........ $ 22,597 $ 3,411 $ 47,772 $ 62,074 $ 108,641 $ 103,073 $ 70,334 $93,101
======== ======= ======== ======== =========== ========= ========= =======
</TABLE>
(8) Calculated by dividing MobileMedia's adjusted EBITDA by total revenues
less cost of products sold. EBITDA margin is a measure commonly used in
the paging industry to evaluate a company's EBITDA relative to total
revenues less cost of products sold as an indicator of the efficiency of a
company's operating structure. MobileMedia's adjusted EBITDA margin in
1996 excludes the impact of the $792.5 million writedown of intangible
assets.
(9) The interim financial information as of September 30, 1998 and for the
nine months ended September 30, 1997 and 1998 contained in this prospectus
is unaudited. However, in the opinion of MobileMedia management, it
includes all adjustments of a normal recurring nature that are necessary
for a fair presentation of the financial position, results of operations,
and cash flows for the periods presented. Results of operations for the
interim periods presented are not necessarily indicative of results of
operations for the entire year or any future period.
33
<PAGE>
MOBILEMEDIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Presentation of Financial Condition and Results of Operations
The following are principal components of MobileMedia's operating results:
Services, rents and maintenance revenues (also referred to as paging
revenue): includes primarily monthly, quarterly, semi-annually and annually
billed recurring revenue, not dependent on usage, charged to subscribers
for paging and related services such as voice mail and pager repair and
replacement.
Net revenues: includes primarily paging revenues and sales of customer
owned and maintained pagers less cost of pagers sold.
Services, rents and maintenance expenses: includes costs related to the
management, operation and maintenance of MobileMedia's network systems.
Selling expenses: includes salaries, commissions and administrative costs
for MobileMedia's sales force and related marketing and advertising
expenses.
General and administrative expenses: includes primarily customer service
expense, executive management, accounting, office telephone, rents and
maintenance and information services.
Average revenues per unit ("ARPU"): calculated by dividing (i) the average
monthly services, rents and maintenance revenues for the period by (ii) the
weighted average number of units in service for the period. ARPU, as
determined by MobileMedia, may not necessarily be comparable to similarly
titled data of other paging companies.
Average monthly operating expense per unit : calculated by dividing (i) the
average monthly services, rents and maintenance, selling and general and
administrative expenses for the period by (ii) the weighted average number
of units in service for the period.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, impairment of long-lived assets
(see Note 2 of MobileMedia's Notes to Consolidated Financial Statements),
amortization of deferred gain on the tower sale (see Note 3 of MobileMedia's
Notes to Consolidated Financial Statements) and restructuring costs. EBITDA is
a financial measure commonly used in the paging industry and should not be
construed as an alternative to operating income (as determined in accordance
with GAAP), as an alternative to cash flows from operating activities (as
determined in accordance with GAAP) or as a measure of liquidity. EBITDA is,
however, the primary financial measure by which MobileMedia's covenants are
calculated under the agreements governing MobileMedia's indebtedness.
As used below, the term "acquisitions" refers to both the MobileComm
acquisition and the Dial Page acquisition.
Overview
The following discussion and analysis should be read in conjunction with
MobileMedia's Consolidated Financial Statements and Notes.
MobileMedia builds and operates wireless messaging and communications systems,
and generates revenues from the provision of paging and other wireless
communications services. MobileMedia's strategy is to strengthen its industry
leadership position by providing superior paging and messaging services at
competitive prices.
MobileMedia's revenues are derived primarily from fixed periodic recurring
fees, not dependent on usage, charged to MobileMedia's subscribers for paging
services. While a subscriber remains in MobileMedia's service, future operating
results benefit from this recurring revenue stream with minimal requirements
for incremental selling expenses or other costs.
34
<PAGE>
On January 4, 1996, MobileMedia completed its acquisition of MobileComm and on
August 31, 1995, MobileMedia purchased the paging business of Dial Page.
MobileMedia has incurred integration related costs in excess of those
originally anticipated to (1) transfer units-in-service between paging networks
to rationalize capacity, (2) temporarily operate duplicative functions,
primarily customer service, and (3) hire additional employees and consultants
to focus on the integration. Additionally, MobileMedia has experienced
increased loss of subscribers related to the integration difficulties.
Accordingly, MobileMedia's financial results have been negatively impacted by
the higher than anticipated integration costs and increased loss of
subscribers.
On January 30, 1997, MobileMedia's parent company and MobileMedia filed
voluntary petitions for relief under the Bankruptcy Code in order to implement
an operational and financial restructuring. Until Arch's acquisition of
MobileMedia on , 1999, MobileMedia's parent company and MobileMedia operated
their business as debtors-in-possession subject to the jurisdiction of the
Bankruptcy Court. The Bankruptcy Code required MobileMedia Communications, Inc.
and its parent company to file monthly operating reports with the United States
Trustee. Such reports are publicly available through the office of the United
States Trustee, and copies of such reports were filed as Current Reports on
Form 8-K with the SEC. Financial statements included in MobileMedia's periodic
reports for the months of February, 1997 through June, 1998 were not prepared
in accordance with GAAP due to MobileMedia's inability at the time of such
filings to determine the amount of an impairment loss related to long-lived
assets pursuant to Financial Accounting Standard No. 121. Such financial
statements are unaudited and have been revised periodically based on subsequent
determination of changes in facts and circumstances impacting previously filed
unaudited financial statements. The audited financial statements of MobileMedia
included in this prospectus reflect adjustments from the unaudited statements,
including an impairment adjustment of approximately $792.5 million recorded as
of December 31, 1996.
Pending FCC Action Against MobileMedia
MobileMedia disclosed in press releases dated September 27, 1996 and October
21, 1996 that misrepresentations and other violations 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 outside counsel, and a comprehensive
report regarding these matters was provided to the FCC in the fall of 1996. In
cooperation with the FCC, outside counsel's investigation was expanded to
examine all of MobileMedia's paging licenses, and the results of that
investigation were submitted to the FCC on November 8, 1996. As part of the
cooperative process, MobileMedia also proposed to the FCC that a consent order
be entered which would result, among other things, in the return of certain
local paging authorizations then held by MobileMedia, the dismissal of certain
pending applications for paging authorizations, and the voluntary acceptance of
a substantial monetary forfeiture.
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 approximately 94 applications for fill-in sites around existing
paging stations (which had been filed under the so-called "40-mile rule") as
defective 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. With respect to each of the approximately 99
authorizations where the underlying station was untimely constructed, the FCC
granted MobileMedia interim operating authority subject to further action by
the FCC.
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.
35
<PAGE>
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
providing for a change of control of MobileMedia and a permissible transfer of
MobileMedia's FCC licenses. The order was originally granted for ten months and
was extended by the FCC through October 6, 1998. The order, which is based on
an FCC doctrine known as Second Thursday, provides that if there is a change of
control that meets the conditions of Second Thursday, 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. MobileMedia believes that a reorganization plan that provides
for either a conversion of certain existing debt to equity, in which case
existing MobileMedia shares will be eliminated, or a sale or merger of
MobileMedia will result in a change of control that will satisfy the Second
Thursday doctrine. On September 2, 1998, MobileMedia and Arch filed a joint
Second Thursday application. MobileMedia believes the plan of reorganization
contemplated by the Merger Agreement and the Amended Plan satisfies the
conditions of Second Thursday. On October 5, 1998, a supplement was filed to
notify the FCC of certain modifications to the proposed transaction. The
application was accepted for filing by public notice dated October 15, 1998. On
October 16, 1998, MobileMedia and Arch filed a joint supplement of data
requested by the staff of the Wireless Telecommunications Bureau to assist in
their evaluation of the application. MobileMedia submitted additional
information to the Wireless Telecommunications Bureau on November 13, 1998.
Public comments on the Second Thursday application were due on November 16,
1998. On that date, the FCC's Wireless Telecommunications Bureau and the Pre-
Petition Lenders filed comments generally supporting grant of the application
and Orbital Communications Corporation submitted brief informal comments
opposing the application's request to terminate the hearing and to waive the
application fees. MobleMedia, Arch and certain lenders each submitted timely
reply comments on or before November 27, 1998 and David A. Bayer submitted a
brief informal response to Orbital's letter. The designated pleading cycle on
the Second Thursday application is now closed.
[Depending on events prior to the closing of the MobileMedia acquisition,
MobileMedia may be required to proceed with the hearing, which, if adversely
determined, could result in the loss of MobileMedia's FCC licenses or
substantial monetary fines, or both. Such an outcome would have a material
adverse effect on MobileMedia's financial condition and results of operations.]
36
<PAGE>
Results of Operations
Nine Months Ended September 30, 1998 Compared With Nine Months Ended September
30, 1997
The following table presents certain items from MobileMedia's Consolidated
Statement of Operations and certain other information for the periods
indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------
1997 1998
-------------------------- --------------------------
(in thousands, except percentage and unit data)
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data
Revenues
Services, rents and
maintenance........... $ 378,922 99.8% $ 320,002 98.8%
Equipment sales and ac-
tivation fees......... 28,235 7.4% 20,367 6.3%
------------- --------- ------------- ---------
Total revenues........... 407,157 107.2% 340,369 105.1%
Cost of products sold.... (27,524) (7.2)% (16,531) (5.1)%
------------- --------- ------------- ---------
Net revenues............. 379,633 100.0% 323,838 100.0%
Operating expenses
Services, rents and
maintenance........... 110,146 29.0% 83,506 25.8%
Selling................ 53,816 14.2% 45,848 14.2%
General and administra-
tive.................. 145,337 38.3% 101,383 31.3%
Restructuring costs.... 15,577 4.1% 13,831 4.2%
Depreciation and amor-
tization.............. 104,368 27.5% 88,312 27.3%
Amortization of de-
ferred gain on tower
sale.................. -- -- (389) (0.1)%
------------- --------- ------------- ---------
Total operating expenses. 429,244 113.1% 332,491 102.7%
------------- --------- ------------- ---------
Operating loss: (49,611) (13.1)% (8,653) (2.7)%
Other income (expense)...
Interest expense (net)... (51,531) (13.5)% (42,449) (13.1)%
Gain on sale of assets... 3 0.0% 94,085 29.1%
------------- --------- ------------- ---------
Total other income (ex-
pense).................. (51,528) (13.5)% 51,636 15.9%
------------- --------- ------------- ---------
Income (loss) from con-
tinuing operations be-
fore income tax provi-
sion ................... (101,139) (26.6)% 42,983 13.3%
Income tax provision..... -- -- 678 0.2%
------------- --------- ------------- ---------
Income (loss) from con-
tinuing operations...... $(101,139) (26.6)% $ 42,305 13.1%
============= ========= ============= =========
Other Data
MobileMedia Adjusted
EBITDA.................. $ 70,334 18.5% $ 93,101 28.7%
Cash flows provided by
(used in) operating ac-
tivities................ $ (2,847) $ 41,585
Cash flows provided by
(used in) investing ac-
tivities................ $ (32,321) $ 137,309
Cash flows provided by
(used in) financing ac-
tivities................ $ 20,396 $(180,000)
ARPU..................... $ 10.39 $ 10.74
Average monthly operating
expense per unit........ $ 8.48 $ 7.73
Units in service (at end
of period).............. 3,681,069 3,182,207
</TABLE>
Units in service decreased 498,862 from 3,681,069 as of September 30, 1997 to
3,182,207 as of September 30, 1998, a decrease of 13.6% of which 240,727 units
decreased between October 1, 1997 and December 31, 1997. The decrease with
respect to the fourth quarter of 1997 was attributable to continued increases
in unit cancellations due to acquisition integration difficulties, billing
system clean up to remove non-revenue producing units and cancellation of units
for non-payment. In 1998 the decrease was primarily attributable to gross
additions which were below expectations.
37
<PAGE>
Services, rents and maintenance revenues decreased 15.5% to $320.0 million for
the nine months ended September 30, 1998 compared to $378.9 million for the
nine months ended September 30, 1997. The decrease was attributable to fewer
units in service and partially offset by a $0.35 increase in ARPU from $10.39
for the nine months ended September 30, 1997 to $10.74 for the nine months
ended September 30, 1998. The increase in ARPU was largely due to a greater
percentage of units in service in the direct distribution channel and a
smaller percentage in the reseller distribution channel. Units sold through
the direct distribution channel generally are sold at higher ARPU.
Equipment sales and activation fees decreased 27.9% to $20.4 million for the
nine months ended September 30, 1998 compared to $28.2 million for the nine
months ended September 30, 1997. The decrease in equipment sales was primarily
due to a $3.1 million decrease in equipment sold through the retail
distribution channel and a $4.4 million decrease in billings for non-returned
equipment. Equipment sales and activation fees, less cost of products sold,
increased 439.5% to $3.8 million for the nine months ended September 30, 1998
from $0.7 million for the nine months ended September 30, 1997. This increase
was primarily attributable to sales of used pagers with lower net book values
resulting from a change in pager depreciation from a four-year life to a
three-year life as of October 1, 1997.
Net revenues decreased 14.7% to $323.8 million for the nine months ended
September 30, 1998 compared to $379.6 million for the nine months ended
September 30, 1997.
Services, rents and maintenance expenses decreased 24.2% to $83.5 million for
the nine months ended September 30, 1998 compared to $110.1 million for the
nine months ended September 30, 1997. This decrease resulted primarily from
lower subcontracted paging expenses of approximately $12.4 million resulting
from billing reconciliations, increased unit cancellations and customer
migration to company-owned networks and reduced paging related
telecommunications expenses of approximately $12.0 million. The decline in
paging-related telecommunications expenses resulted primarily from the FCC
clarification of its interconnection rules pursuant to the Telecommunications
Act, which prohibit local exchange carriers from charging paging carriers for
the cost of dedicated facilities used to deliver local telecommunications
traffic to paging networks. The FCC clarification, however, noted that the FCC
is considering requests for reconsideration of these rules. In addition,
paging-related telecommunications expense declined as a result of a
reconfiguration of MobileComm's network to maximize usage of lower cost
facilities. As a percentage of net revenue, services, rents and maintenance
expenses decreased from 29.0% to 25.8%.
Selling expenses for the nine months ended September 30, 1998 decreased 14.8%
to $45.8 million compared to $53.8 million for the nine months ended September
30, 1997. The decrease resulted primarily from lower sales personnel costs and
lower commissions attributable to lower sales headcount and lower gross
additions. Selling expenses as a percentage of net revenue were constant at
14.2%.
General and administrative expenses decreased 30.2% to $101.4 million for the
nine months ended September 30, 1998 compared to $145.3 million for the nine
months ended September 30, 1997 and decreased as a percentage of net revenues
to 31.3% for the nine months ended September 30, 1998 from 38.3% for the nine
months ended September 30, 1997. The decrease primarily resulted from reduced
bad debt expense due to improvements in MobileMedia's billing and collections
functions and lower administrative telephone expenses resulting from lower
call volume and lower long distance rates as of October 1, 1997 and lower
customer service and retail activation expenses of $7.2 million primarily
resulting from lower headcount.
Restructuring costs decreased from $15.6 million for the nine months ended
September 30, 1997 to $13.8 million for the nine months ended September 30,
1998 due to a decline in professional fees incurred by MobileMedia as a result
of the bankruptcy filing on January 30, 1997.
Depreciation and amortization decreased 15.4% to $88.3 million for the nine
months ended September 30, 1998 compared to $104.4 million for the nine months
ended September 30, 1997. The decrease was primarily due to
38
<PAGE>
lower pager depreciation attributable to a reduced depreciable base of pager
assets resulting from the change in useful life from four to three years on
October 1, 1997 and decreased pager purchases. As a percentage of net revenues,
depreciation and amortization expense increased to 27.3% for the nine months
ended September 30, 1998 from 27.5% for the nine months ended September 30,
1997.
Amortization of deferred gain on tower sale was $0.4 million for the nine
months ended September 30, 1998. (See Note 3 to MobileMedia's Consolidated
Financial Statements).
Operating loss decreased 82.6% to $8.7 million for the nine months ended
September 30, 1998 from $49.6 million for the nine months ended September 30,
1997. The decrease was primarily due to decreased operating expenses.
Interest expense decreased 17.6% to $42.4 million for the nine months ended
September 30, 1998 compared to $51.5 million for the nine months ended
September 30, 1997. The decrease was primarily due to lower interest expense on
MobileMedia's debtor-in-possession credit facility resulting from lower
outstanding borrowings in 1998.
Gain on sale of assets increased to $94.1 million for the nine months ended
September 30, 1998 primarily as a result of the sale of transmission towers and
related equipment (See Note 3 to MobileMedia's Consolidated Financial
Statements).
Income (loss) from continuing operations before income tax provision, as a
result of the above factors, increased to income of $42.9 million for the nine
months ended September 30, 1998 compared to a loss of $101.1 million for the
nine months ended September 30, 1997.
Income tax provision increased to $0.7 million for the nine months ended
September 30, 1998 primarily as a result of the sale of transmission towers.
39
<PAGE>
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
The following table presents certain items from MobileMedia's Consolidated
Statement of Operations and certain other information for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1997
---------------------------- --------------------------
(in thousands, except percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement
of Operations Data
Revenues
Services, rents and
maintenance.......... $ 568,892 100.1% $ 491,174 99.9%
Equipment sales and
activation fees...... 71,818 12.7 36,218 7.4
--------------- ---------- ------------- ---------
Total revenues.......... 640,710 112.8 527,392 107.3
Cost of products sold. (72,595) (12.8) (35,843) (7.3)
--------------- ---------- ------------- ---------
568,115 100.0 491,549 100.0
Operating expenses
Services, rents and
maintenance.......... 144,050 25.4 139,333 28.3
Selling............... 96,817 17.0 69,544 14.2
General and adminis-
trative.............. 218,607 38.5 179,599 36.5
Impairment of long-
lived assets......... 792,478 139.5 -- --
Restructuring costs... 4,256 0.7 19,811 4.0
Depreciation and amor-
tization............. 348,698 61.4 140,238 28.6
--------------- ---------- ------------- ---------
Total operating ex-
penses................. 1,604,906 282.5 548,525 111.6
--------------- ---------- ------------- ---------
Operating loss.......... (1,036,791) (182.5) (56,976) (11.6)
Total other expense..... (92,595) (16.2) (67,608) (13.7)
--------------- ---------- ------------- ---------
Loss before income tax
benefit................ (1,129,386) (198.7) (124,584) (25.3)
Income tax benefit...... (69,442) 12.2 -- --
--------------- ---------- ------------- ---------
Net loss................ $ (1,059,944) (186.5)% $ (124,584) (25.3)%
=============== ========== ============= =========
Other Data
MobileMedia adjusted
EBITDA................. $ 108,641 19.1% $ 103,073 21.0%
Cash flows provided by
operating activities... $ 57,194 $ 14,920
Cash flows used in in-
vesting activities..... $ (1,028,321) $ (40,556)
Cash flows provided by
financing activities... $ 586,111 $ 13,396
ARPU.................... $ 11.08 $ 10.41
Average monthly operat-
ing expense per unit
(1).................... $ 8.95 $ 8.23
Units in service (at end
of period)............. 4,424,107 3,440,342
</TABLE>
- --------
(1) Does not include impact of $792.5 million asset impairment writedown in
1996.
Units in service decreased from 4,424,107 as of December 31, 1996 to 3,440,342
as of December 31, 1997, a decrease of 22.2%. The decrease was attributable to
a decrease in gross unit additions and an increase in unit cancellations
primarily resulting from acquisition integration difficulties, billing system
clean up to remove non-revenue generating units and cancellation of units for
non-payment.
Services, rents and maintenance revenues decreased 13.7% to $491.2 million for
the year ended December 31, 1997 compared to $568.9 million for the year ended
December 31, 1996 due to fewer units in service and lower ARPU. ARPU decreased
to $10.41 for the year ended December 31, 1997 from $11.08 for the year ended
December 31, 1996 largely due to continued competitive market conditions.
Equipment sales and activation fees decreased 49.6% to $36.2 million for the
year ended December 31, 1997 compared to $71.8 million for the year ended
December 31, 1996. The decrease in equipment sales was
40
<PAGE>
primarily attributable to less equipment sold through the retail distribution
channel. Equipment sales and activation fees, less cost of products sold,
increased from $(0.8) million for the year ended December 31,1996 to $0.4
million for the year ended December 31, 1997 primarily as a result of lower
retail sales of equipment sold at a discount. Cost of products sold for the
year ended December 31, 1996 includes a writedown of $3.2 million, reflecting
the establishment of a lower of cost or market reserve for pagers held for
resale through MobileMedia's retail and reseller distribution channels.
Net revenues decreased 13.5% to $491.5 million for the year ended December 31,
1997 compared to $568.1 million for the year ended December 31, 1996.
Services, rents and maintenance expenses decreased 3.3% to $139.3 million for
the year ended December 31, 1997 compared to $144.1 million for the year ended
December 31, 1996, primarily due to billing reconciliation and lower nationwide
subcontracted paging expenses resulting from cancellations and customer
migration from networks not owned by MobileMedia to company-owned networks.
Selling expenses for the year ended December 31, 1997 decreased 28.2% to $69.5
million from $96.8 million for the year ended December 31, 1996 primarily due
to lower sales personnel costs and lower sales commissions attributable to
lower sales headcount and lower gross additions. In addition, reseller and
retail distribution channel selling expenses declined as a result of lower
sales volume. Selling expenses as a percentage of net revenue decreased to
14.2% for the year ended December 31, 1997 from 17.0% for the year ended
December 31, 1996.
General and administrative expenses decreased 17.8% to $179.6 million for the
year ended December 31, 1997 compared to $218.6 million for the year ended
December 31, 1996. General and administrative expenses decreased as a
percentage of net revenues to 36.5% for the year ended December 31, 1997 from
38.5% for the year ended December 31, 1996 primarily due to decreased bad debt
expense, customer service expenses related to the assimilation of MobileComm's
customer service functions, and consulting fees related to the integration of
the acquisitions. Bad debt expense decreased as a result of increased
collections resulting from improvements in MobileMedia's billing and collection
functions.
Restructuring costs increased from $4.2 million for the year ended December 31,
1996 to $19.8 million for the year ended December 31, 1997 due to professional
fees constituting administrative expenses incurred by MobileMedia as a result
of the bankruptcy filing on January 30, 1997 as compared to the 1996 expenses
incurred in connection with MobileMedia's attempt to restructure its debt.
Depreciation and amortization decreased 59.8% to $140.2 million for the year
ended December 31, 1997 compared to $348.7 million for the year ended December
31, 1996. The decrease was primarily due to a writedown of impaired assets by
$792.5 million pursuant to Statement of Financial Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" effective December 31, 1996 (See Note 2 of MobileMedia's Notes to
Consolidated Financial Statements included elsewhere herein), amortization of a
non-competition agreement related to the MobileComm Acquisition which was fully
amortized in 1996 and decreased pager depreciation resulting from a decrease in
expenses related to unrecoverable subscriber equipment and a reserve
established to lower book values of certain pager models to current market
values in 1996. As a percentage of net revenues, depreciation and amortization
expense decreased to 28.6% for the year ended December 31, 1997 from 61.4% for
the year ended December 31, 1996.
Operating loss decreased to $57.0 million for the year ended December 31, 1997
from $1,036.8 million for the year ended December 31, 1996. The decrease was
primarily due to the $792.5 million asset impairment writedown effective
December 31, 1996 and other factors indicated above.
Total other expense, principally interest expense, decreased 27.0% to $67.6
million for the year ended December 31, 1997 compared to $92.6 million for the
year ended December 31, 1996. The decrease was primarily due to interest
expense related to MobileMedia's $250.0 million Senior Subordinated Notes due
41
<PAGE>
November 1, 2007 and $210.0 million Senior Subordinated Deferred Coupon Notes
not being recognized subsequent to the bankruptcy filing on January 30, 1997.
Loss before income tax benefit, as a result of the above factors, decreased to
$124.6 million for the year ended December 31, 1997 from $1,129.4 million for
the year ended December 31, 1996.
Income tax benefit of $69.4 million resulted from the deferred tax adjustment
attributable to the $792.5 asset impairment writedown effective December 31,
1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
The following table presents certain items from MobileMedia's Consolidated
Statement of Operations and certain other information for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1995 1996
-------------------------- ----------------------------
(in thousands, except percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement
of Operations Data
Revenues
Services, rents and
maintenance.......... $ 220,745 97.6% $ 568,892 100.1%
Equipment sales and
activation fees...... 32,251 14.3 71,818 12.7
------------- --------- --------------- ----------
Total revenues.......... 252,996 111.9 640,710 112.8
Cost of products sold. (26,885) (11.9) (72,595) (12.8)
------------- --------- --------------- ----------
226,111 100.0 568,115 100.0
Operating expenses
Services, rents and
maintenance.......... 59,800 26.4 144,050 25.4
Selling............... 45,203 20.0 96,817 17.0
General and adminis-
trative.............. 59,034 26.1 218,607 38.5
Impairment of long-
lived assets......... -- -- 792,478 139.5
Restructuring costs... -- -- 4,256 0.7
Depreciation and amor-
tization............. 71,408 31.6 348,698 61.4
------------- --------- --------------- ----------
Total operating ex-
penses................. 235,445 104.1 1,604,906 282.5
------------- --------- --------------- ----------
Operating loss.......... (9,334) (4.1) (1,036,791) (182.5)
Total other expense..... (31,745) (14.0) (92,595) (16.2)
------------- --------- --------------- ----------
Loss before income tax
benefit................ (41,079) (18.1) (1,129,386) (198.7)
Income tax benefit...... -- -- (69,442) 12.2
------------- --------- --------------- ----------
Net loss................ $ (41,079) (18.1)% $ (1,059,944) (186.5)%
============= ========= =============== ==========
Other Data
MobileMedia adjusted
EBITDA................. $ 62,074 27.5% $ 108,641 19.1%
Cash flows provided by
operating activities... $ 43,849 $ 57,194
Cash flows used in in-
vesting activities..... $(312,698) $(1,028,321)
Cash flows provided by
financing activities... $ 671,794 $ 586,111
ARPU.................... $ 9.64 $ 11.08
Average monthly operat-
ing expense per unit
(1).................... $ 7.17 $ 8.95
Units in service (at end
of period)............. 2,369,101 4,424,107
</TABLE>
- --------
(1)Does not include impact of $792.5 million asset impairment writedown in
1996.
Units in service increased by 2,055,006 to 4,424,107 as of December 31, 1996
when compared to December 31, 1995. The increase was attributable to 1,764,752
units acquired from the MobileComm acquisition and 290,254 net units acquired
from internal growth through MobileMedia's various sales distribution channels.
42
<PAGE>
Services, rents and maintenance revenues increased 157.7% to $568.9 million for
the year ended December 31, 1996 compared to $220.7 million for the year ended
December 31, 1995 due to additional revenues associated with the acquisitions
and continued growth in the number of units in service. ARPU increased to
$11.08 for the year ended December 31, 1996 from $9.64 for the year ended
December 31, 1995 largely due to the impact of the acquired subscribers from
MobileComm and Dial Page. The ARPU impact of the acquisitions was partly offset
by net units added in 1996 through the reseller distribution channel at lower
ARPU. ARPU also declined as a result of continued competitive market
conditions.
Equipment sales and activation fees increased 122.7% to $71.8 million for the
year ended December 31, 1996 compared to $32.3 million for the year ended
December 31, 1995. The increase in equipment sales is attributable to
MobileMedia's significant presence in retail distribution as a result of the
MobileComm acquisition. Equipment sales and activation fees, less cost of
products sold, decreased 114.5% to $(0.8) million for the year ended December
31,1996. The decrease is attributable to discounting of equipment selling
prices to large retailers as a means of generating subscriber additions through
the retail distribution channel. Cost of products sold also includes an
writedown of $3.2 million in 1996, reflecting the establishment of a lower of
cost or market reserve for pagers held for resale through MobileMedia's retail
and reseller distribution channels.
Net revenues increased 151.3% to $568.1 million for the year ended December 31,
1996 compared to $226.1 million for the year ended December 31, 1995.
Services, rents and maintenance expenses increased 140.9% to $144.1 million for
the year ended December 31, 1996 compared to $59.8 million for the year ended
December 31, 1995, primarily due to increased expense levels related to the
acquisitions and increased transmitter site lease expenses related to
MobileMedia's nationwide paging network which commenced service on April 1,
1996. The balance of the increase resulted primarily from an increase in
subcontracted paging expense by approximately $6.3 million primarily associated
with the increase in nationwide paging units serviced by networks other than
those owned by MobileMedia and $1.6 million in research and development
expenses related to the development of a two-way wireless subscriber device.
Services, rents and maintenance expenses decreased as a percentage of net
revenues to 25.4% for the year ended December 31, 1996 from 26.4% for the year
ended December 31, 1995.
Selling expenses for the year ended December 31, 1996 increased 114.2% to $96.8
million from $45.2 million for the year ended December 31, 1995 primarily due
to the increased expense levels related to the acquisitions. Selling expenses
as a percentage of net revenue decreased to 17.0% for the year ended
December 31, 1996 from 20.0% for the year ended December 31, 1995.
General and administrative expenses increased 270.3% to $218.6 million for the
year ended December 31, 1996 compared to $59.0 million for the year ended
December 31, 1995 primarily due to the increased expense levels related to the
acquisitions. General and administrative expenses increased as a percentage of
net revenues to 38.5% for the year ended December 31, 1996 from 26.1% for the
year ended December 31, 1995. The balance of the increase resulted primarily
from increased bad debt expense, customer service expenses related to the
assimilation of MobileComm's customer service functions, and consulting fees
related to the integration of the acquisitions. During the third and fourth
quarters of 1996, MobileMedia experienced significant difficulty in collecting
outstanding accounts receivable. These difficulties resulted primarily from
inaccurate billing and inadequate resolutions of customer problems largely
caused by difficulties of integrating acquisitions. In addition, MobileMedia
paid $2.1 million in separation expenses in the second half of 1996 due to the
departure of several senior executives of MobileMedia and $0.7 million in
separation expenses in the first quarter of 1995 due to the departure of the
Chairman of the Board of Directors of MobileMedia.
Impairment of long-lived assets of $792.5 million included a writedown of long-
lived assets effective December 31, 1996, pursuant to Statement of Financial
Accounting Standards No. 121. (See Note 2 of MobileMedia's Notes to
Consolidated Financial Statements included elsewhere herein).
Restructuring costs of $4.3 million for the year ended December 31, 1996
included legal and professional fees related to various restructuring
activities by MobileMedia prior to the bankruptcy filing.
43
<PAGE>
Depreciation and amortization increased 388.3% to $348.7 million for the year
ended December 31, 1996 compared to $71.4 million for the year ended December
31, 1995. The increase was primarily due to additional amortization expenses
related to the acquisitions and increased pager depreciation resulting from a
decrease to the depreciable pager base resulting from unrecoverable subscriber
equipment and a reserve established to lower book values of certain pager
models to current market values. As a percentage of net revenues, depreciation
and amortization expense increased to 61.4% for the year ended December 31,
1996 compared to 31.6% for the year ended December 31, 1995.
Operating loss increased to $1,036.8 million for the year ended December 31,
1996 from $9.3 million for the year ended December 31, 1995. The increase was
primarily due to the impairment writedown of certain long-lived assets and
increased amortization expenses relating to the acquisitions offset by the
increase in net revenues.
Total other expense, principally interest expense, increased 191.7% to $92.6
million for the year ended December 31, 1996 compared to $31.7 million for the
year ended December 31, 1996. The increase was primarily due to additional debt
incurred to finance the acquisitions and capital expenditures.
Loss before income tax benefit, as a result of the above factors, increased to
$1,129.4 million for the year ended December 31, 1996 compared to $41.1 million
for the year ended December 31, 1995.
Income tax benefit of $69.4 million resulted from the deferred tax adjustment
attributable to the $792.5 asset impairment writedown effective December 31,
1996.
Liquidity and Capital Resources
MobileMedia's operations and strategy require the availability of substantial
funds to finance the development and installation of wireless communications
systems, to procure subscriber equipment and to service debt. Historically,
these requirements have been funded by net cash from operating activities,
additional borrowings and capital contributions. Following the MobileMedia
acquisition, Arch will need to supply these requirements for MobileMedia. See
"Arch Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources".
Chapter 11 Filing
On January 30, 1997, MobileMedia Communications, Inc. and affiliates filed
voluntary petitions for relief under the Bankruptcy Code in order to implement
an operational and financial restructuring. Until consummation of the
MobileMedia acquisition, they operated their businesses as debtors-in-
possession subject to the jurisdiction of the bankruptcy court.
Agreement with Key Suppliers
In January 1997, MobileMedia sought approval of the bankruptcy court to pay the
pre-petition claims of its key suppliers (Motorola, Glenayre, NEC and
Panasonic) in the aggregate amount of $47.4 million, which approval was granted
by the bankruptcy court on February 6, 1997. Upon entry of the bankruptcy
court's order approving the payments, MobileMedia paid the pre-petition claims
of and entered into supply agreements with each of the key suppliers. Each of
the key suppliers has been shipping product to MobileMedia in accordance with
its respective supply agreement.
44
<PAGE>
Debtor-in-Possession Credit Agreement
Chase Manhattan Bank and certain other financial institutions provided
MobileMedia with up to $200.0 million of post-petition, debtor-in-possession
financing. During 1997, MobileMedia drew down $47.0 million of borrowings to
pay the pre-petition claims of key suppliers, among other things, and repaid
$37.0 million under the debtor-in-possession facility. During January and
February, 1998 MobileMedia repaid an additional $10.0 million. As of September
30, 1998 there were no funded borrowings under the debtor-in-possession
facility.
Capital Expenditures and Commitments
Capital expenditures were $32.4 million for the nine months ended September 30,
1998 compared to $32.3 million for the nine months ended September 30, 1997 and
$40.6 million for the year ended December 31, 1997 compared to $161.9 million
for the year ended December 31, 1996. Capital expenditures increased $0.1
million for the nine months ended September 30, 1998 compared to the nine-month
period ended September 30, 1997 and $121.3 million for the year ended December
31, 1997 compared to the corresponding period in 1996 principally as a result
of lower pager purchases resulting from fewer gross additions and increased
utilization of existing pager inventory stock.
MobileMedia anticipates capital spending for 1999 to be approximately $95.0
million. Capital spending includes approximately $24.0 million in 1999 for
construction of a nationwide N-PCS network providing frequency reuse and
guaranteed message delivery capabilities. The remaining expenditures are
primarily for subscriber equipment and improvements to MobileMedia's one-way
network.
Sources of Funds
MobileMedia's net cash provided by operating activities was $41.6 million for
the nine months ended September 30, 1998 compared to a use of cash of $2.8
million for the nine months ended September 30, 1997. Inventories increased
$0.3 million from December 31, 1996 to September 30, 1998 compared to a
decrease of $9.2 million from December 31, 1996 to September 30, 1997 as a
result of utilizing pager inventory stock and lower sales volume in the retail
sales distribution channel. Accounts payable, accrued expenses and other
liabilities decreased $10.7 million from December 31, 1997 to September 30,
1998 compared to a decrease of $19.4 million from December 31, 1996 to
September 30, 1997. Net accounts receivable decreased $17.3 million from
December 31, 1997 to September 30, 1998 compared to a decrease of $1.1 million
from December 31, 1996 to September 30, 1997 due to improved billing and
collections functions and lower sales volume.
MobileMedia's net cash provided by operating activities was $14.9 million for
the year ended December 31, 1997 compared to $57.2 million for the year ended
December 31, 1996. Inventories decreased $12.5 million from December 31, 1996
to December 31, 1997 as a result of utilizing pager inventory stock and lower
sales volume in the retail sales distribution channel. Accounts payable,
accrued expenses and other liabilities decreased $25.4 million from $181.8
million as of December 31, 1996 to $156.4 million as of December 31, 1997
primarily due to payments to key suppliers during 1997. Net accounts receivable
decreased $11.3 million from $66.7 million as of December 31, 1996 to $55.4
million as of December 31, 1997 due to improved billing and collections
functions.
Tower Sale
On September 3, 1998, MobileMedia completed the sale of 166 transmission towers
for $170.0 million in cash. Under the terms of a lease with the buyer,
MobileMedia will continue to own and utilize transmitters, antennas and other
equipment 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 over
the initial lease period of 15 years. After the sale, MobileMedia distributed
the $170.0 million in proceeds to its secured creditors, who had a lien on such
assets.
45
<PAGE>
Debt Obligations
In addition to the debtor-in-possession credit facility, the debt obligations
of MobileMedia also included the following:
MobileMedia's 1995 credit facility provided for $750.0 million senior secured
and guaranteed credit facility with a syndicate of lenders including The Chase
Manhattan Bank. As of September 30, 1998 there was $479.0 million outstanding
under this facility consisting of term loans of $101.5 million and $304.6
million and loans under a revolving credit facility totaling $72.9 million.
This became available on December 4, 1995, in connection with the financing of
the MobileComm acquisition. Commencing in 1996, MobileMedia was in default
under this facility. As a result of such default and the bankruptcy filing,
MobileMedia had no borrowing capacity under this facility. MobileMedia's
obligations under its 1995 credit facility were secured by substantially all of
the assets of MobileMedia and all of its subsidiaries, including the capital
stock of the subsidiaries, and MobileMedia's parent company and subsidiaries
guaranteed all of MobileMedia's borrowings, including principal and interest.
Performance of the parent company's obligations as a guarantor was secured by a
pledge of the capital stock of MobileMedia Communications, Inc. After filing
under Chapter 11, MobileMedia brought current its interest payments and made
monthly adequate protection payments to the lenders under the 1995 credit
facility equal to the amount of interest accruing under such agreement. On
September 3, 1998, MobleMedia repaid $170.0 million of borrowings under its
1995 credit facility using proceeds from the sale of 166 transmission towers.
MobleMedia issued $250.0 million Senior Subordinated 9 3/8% Notes in November
1995, concurrent with MobileMedia's second offering of Class A Common Stock
(See Note 11 to MobileMedia's Notes to Consolidated Financial Statements).
These notes bore 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 the MobileMedia 9 3/8% Notes which constituted an
event of default under the indenture.
MobleMedia issued $210.0 million of Senior Subordinated Deferred Coupon Notes,
at a discount, in November 1993. These Deferred Coupon Notes accrete at a rate
of 10.5%, compounded semiannually, to an aggregate principal amount of $210.0
million by December 1, 1998 after which interest was payable in cash at a rate
of 10.5% and was payable semiannually.
Risks Relating to Year 2000
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, within the next year, 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.
46
<PAGE>
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 run to identify any Year 2000 compliance issues.
While the results of the tests are still being analyzed, relatively few Year
2000 problems were identified. Additional testing is scheduled for the first
quarter of 1999, including testing of MobileMedia's financial and human
resource software packages. 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 related
Year 2000 compliance efforts of such vendors.
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. To
date, 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 $150,000 for use as redundant equipment in testing for Year 2000
problems in an isolated production environment. MobileMedia estimates that it
will expend approximately $200,000 on additional 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 these vendors'
representations.
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 for Year 2000
compliance during calendar year 1999.
47
<PAGE>
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income", which
is effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of general-
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective for financial statements for fiscal years beginning after December
15, 1997. MobileMedia's management does not anticipate that the adoption of
SFAS No. 130 will have any effect on MobileMedia's reporting.
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" 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, and therefore
MobileMedia will adopt the new requirements retroactively in 1998.
MobileMedia's management has not completed its review of SFAS No. 131, but does
not anticipate that the adoption of this statement will have a significant
effect on MobileMedia's reporting.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued SOP 98-5, "Reporting Costs of Start-Up
Activities", which 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 a material effect on MobileMedia's financial position or
results of operation.
48
<PAGE>
UNAUDITED SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected pro forma financial information gives effect to the
MobileMedia acquisition as if such transaction had been consummated on
September 30, 1998 in the case of the balance sheet and on January 1, 1997 in
the case of the statement of operations data and the other operating data. [The
assumptions on which such selected pro forma financial information was prepared
differed in certain respects from the definitive terms of the MobileMedia
acquisition, but Arch does not believe that these differences are of material
significance. For example, the selected pro forma financial information assumed
that 122,845,000 (rather than the actual shares) shares of Common Stock
having an aggregate market value of $245.7 million at a price of $2.00 per
share, (rather than the actual $ million at a price of $ per share) were
issued to unsecured creditors of MobileMedia and to stockholders of Arch.] The
selected pro forma financial information further assumed that the MobileMedia
acquisition would include, in addition to the merger of MobileMedia
Communications, Inc. into a wholly owned subsidiary of Arch, the following five
related transactions:
. the payment by Arch of an assumed $479.0 million in cash (as compared
with the actual ) to secured creditors and an assumed $ million
for fees and expenses and repayment of debt (as compared with the actual
$ million);
. the issuance of 14,344,969 shares of Common Stock to unsecured creditors
of MobileMedia in recognition of their unsecured claims;
. the issuance and sale of an assumed 108,500,000 shares of Common Stock
(as compared with the actual ) in a rights offering to Unsecured
Creditors of MobileMedia, resulting in proceeds to Arch of an assumed
$217.0 million (as compared with the actual $ million);
. the issuance and sale of an assumed $200.0 million (as compared with the
actual $ million) aggregate principal amount of ACI % Notes (assumed
to bear interest at 13% per annum rather than %); and
. additional borrowings under the API credit facility of an assumed $122.0
million (as compared with the actual $ million).
The following selected pro forma financial information should be read in
conjunction with the unaudited pro forma condensed consolidated financial
statements and notes. The financial impact of expected operational cost
synergies resulting from the MobileMedia acquisition is excluded from this
presentation.
49
<PAGE>
The pro forma information is presented for illustrative purposes only and does
not necessarily predict (1) the operating results or financial position that
would have occurred if the merger and the related transactions had been
consummated as of the above-referenced dates or (2) the future operating
results or financial position of Arch following the merger and the related
transactions.
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
1997 September 30, 1998
------------ ------------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Service, rental and maintenance revenues....... $ 833,785 $ 591,487
Product sales.................................. 81,115 52,178
--------- ---------
Total revenues................................. 914,900 643,665
Cost of products sold.......................... (65,001) (38,394)
--------- ---------
849,899 605,271
Operating expenses:
Service rental and maintenance................ 220,636 145,688
Selling....................................... 121,018 82,750
General and administrative.................... 285,640 185,910
Depreciation and amortization................. 398,606 272,818
Restructuring charge.......................... -- 16,100
Bankruptcy and related expense................ 19,811 13,831
--------- ---------
Operating income (loss)........................ (195,812) (111,826)
Interest and non-operating expenses, net....... (138,618) (14,661)
--------- ---------
Income (loss) before income tax benefit and ex-
traordinary item.............................. (334,430) (126,487)
Income tax benefit (provision)................. 21,172 (678)
--------- ---------
Income (loss) before extraordinary item........ $(313,258) $(127,165)
========= =========
Other Operating Data:
Capital expenditures, excluding acquisitions... 143,325 118,179
Pagers in service at end of period(1).......... 7,130,000 7,143,000
</TABLE>
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Balance Sheet Data:
Current assets.................................................... $ 116,713
Total assets...................................................... 1,601,971
Long-term debt, less current maturities........................... 1,314,790
Stockholders' equity.............................................. 80,267
</TABLE>
- --------
(1) Consolidated pagers in service is calculated by adding the Arch and
MobileMedia amounts less an elimination for intercompany pagers in service.
50
<PAGE>
UNAUDITED COMBINED COMPANY PROJECTIONS
Unaudited Financial Projections and Operational Cost Synergies
Arch and MobileMedia developed unaudited Combined Company Projections in August
1998 in connection with MobileMedia's insolvency proceedings. The Combined
Company Projections consist of projected operating and financial results for
the three-month period ending December 31, 1998 and the twelve-month period
ending December 31, 1999. The Combined Company Projections assume consummation
of the merger as of December 31, 1998.
The Combined Company Projections were developed by management of each of Arch
and MobileMedia, with the assistance of their respective financial advisors,
and were based on:
. Arch's projected financial results, as developed by the management of Arch,
taking into account anticipated cost reductions associated with the
divisional reorganization;
. MobileMedia's projected financial results, as developed by the management
of MobileMedia, taking into account the sale of tower assets and the
related rental by MobileMedia of certain transmitter space and equipment on
such towers;
. Certain adjustments to MobileMedia's projected results made by the
management of Arch to reflect more conservative assumptions with regard to
expected subscriber additions, subscriber turnover and net revenues. Such
adjustments were intended to reflect the continuing potential impact from
the effects of MobileMedia's Chapter 11 filing and the integration of
Arch's and MobileMedia's operations.
Assumptions Used in the Unaudited Financial Projections
The principal assumptions used in preparing the Combined Company Projections
are set forth below. Some of these assumptions differed from subsequent actual
results, although Arch does not believe that the differences are of material
significance. No assurance can be given that the remaining assumptions will be
realized. See "Risk Factors" for a discussion of various factors that could
materially affect the combined company's financial condition, results of
operations, businesses, prospects and securities.
(1) The Combined Company Projections assumed consummation of the
MobileMedia acquisition on December 31, 1998 (rather than the actual date
of , 1999).
(2) The Projections assumed that general economic conditions and their
potential impact on capital spending and revenues within each of the
combined company's operating regions would continue unchanged throughout
the projection period.
(3) The Projections assumed $25.0 million in operating cost reductions
annually after the consummation of the MobileMedia acquisition. However,
due to the time involved in implementing these cost savings, the
Projections assumed that the combined company would recognize only
$12.5 million in operating cost reductions in 1999. The amounts and
timing of these operating cost reductions were estimated during multiple
meetings of the management teams of Arch and MobileMedia. During these
meetings a market-by-market analysis was performed to identify redundant
costs. The Combined Company Projections for the three months ended
December 31, 1998 do not include the financial benefits of potential
operational expense reductions and capital expenditure efficiencies
expected to result from the MobileMedia acquisition.
(4) Service revenues for the combined company have been projected based
on Arch management's estimates for subscriber growth and average revenue
per unit. Based on these estimates, Arch's 1999 service revenues were
projected to increase by approximately 10.5% from 1998 estimates, while
MobileMedia's revenues were projected to decrease by approximately 3.9%
from 1998 estimates. In addition, the Projections assume no immediate
incremental revenues resulting from the MobileMedia acquisition. Pro
forma combined service revenues for the three-month period ending
December 31, 1998
51
<PAGE>
are based upon each company's ongoing financial budgets employing a
similar methodology as stated above.
(5) Projected operating costs for 1999 are based on historical cost
margins for both companies individually and the expected decrease in cost
margins as Arch achieves further cost reductions resulting from the
divisional reorganization. The combined company's projected operating
costs for 1999 are based on the 1998 business plans for the individual
companies, which included two quarters of historical costs at the time
the Projections were created. The cost margins used for 1999 assume only
a small reduction in the historical cost margins (approximately 0.5% of
net revenue) for Arch's base business and assume an increase in the
historical cost margins (approximately 3.0% of net revenue) for
MobileMedia's base business. Projected costs are based upon historical
experience, expected market conditions, and historical decreases in
Arch's costs as Arch increased its operating leverage. These cost
assumptions were then adjusted to reflect the impact of the assumed
synergies. Arch assumed approximately $12.5 million in recognized synergy
savings throughout 1999, consisting of $5.9 million in savings from
service, rent and maintenance costs, $0.8 million in savings from selling
costs, and $5.8 million in savings from general administrative costs.
(6) The Combined Company Projections assumed that the combined company
would utilize proceeds from an anticipated increase in the API credit
facility and the offering proceeds from the sale of ACI % Notes (at an
assumed interest rate of 13%) to fully repay all amounts owed to
MobileMedia's secured creditors, any amounts outstanding under the
debtor-in-possession credit agreement, all administrative claims and
transaction expenses and provide for working capital throughout the
projection period.
(7) Interest expense was calculated using the assumed capital structure
of the related transactions, as described in "Unaudited Selected Pro
Forma Consolidated Financial Data", during the projection period and
includes the amortization of any original issue discounts. New debt
issued as a result of the MobileMedia acquisition was assumed to be
issued as of December 31, 1998; however pro forma interest expense has
been included in the Projections for the three-month period ended
December 31, 1998.
(8) The Combined Company Projections were prepared in accordance with the
applicable principles of purchase accounting. Under purchase accounting
principles, the combined company must record an intangible asset known as
goodwill equal to any excess of the purchase price paid by Arch to
acquire MobileMedia over the net fair market value allocated to the
identifiable assets and liabilities of MobileMedia. The Combined Company
Projections assume that such amount will be amortized on a straight-line
basis (i.e., ratably) over a period of 10 years. The actual calculation
of goodwill depends upon actual market prices of Common Stock at the time
of the Merger, which were approximately $ . For illustrative purposes,
the Combined Company Projections assumed a value of $2.00 per share of
Common Stock to calculate the purchase accounting adjustment and an
assumption that the historical, restated book value of MobileMedia assets
and liabilities generally approximates the fair value thereof. See Note 9
to the "Unaudited Pro Forma Condensed Consolidated Financial Statements"
for additional financial data at an assumed value of $1.50 per share for
Common Stock. [The actual market price of $ per share was to $2.00
than to $1.50.]
These assumptions and resultant computations were made solely for the
purpose of preparing the Combined Company Projections. The combined
company will be required to determine the actual amount of Goodwill and
the appropriate amortization period after consummation of the MobileMedia
acquisition. Such determinations will be based on the fair values of
MobileMedia's net assets and other relevant information as of the
consummation of the MobileMedia acquisition. [Although preliminary
determinations made on the date of this prospectus are not currently
expected to result in the actual amount of Goodwill and related
amortization being materially greater or less than the amounts thereof
assumed for purposes of the Combined Company Projections, there can be no
assurance in that regard.] Any increase in the amount of amortization of
Goodwill would reduce periodic income before taxes and net income.
52
<PAGE>
(9) Projections of changes in certain balance sheet accounts such as
accounts receivable and accounts payable were based on historic ratios of
such accounts to other accounts such as revenue and were modified, where
deemed appropriate, to recognize any adjustment or balance sheet item
changes necessary to reflect the MobileMedia acquisition. For the 1999
projections, Arch assumed approximately 30 days sales outstanding to
estimate the accounts receivable balance and approximately 44 days costs
outstanding to estimate the accounts payable balance. These assumptions
were based on the historical ratios for both companies and the resulting
balances of the pro forma combined company. The projected long-term debt
reflects the accretion of Arch Discount Notes and the draw-down of API's
credit facility to fund working capital requirements throughout 1999.
The Combined Company Projections were not prepared with a view to
complying with the guidelines for prospective financial statements
published by the American Institute of Certified Public Accountants.
Neither the independent accountants for Arch nor the independent auditors
for MobileMedia have examined or compiled the accompanying Combined
Company Projections and accordingly do not express an opinion or any other
form of assurance with respect thereto.
Arch and MobileMedia do not publish their respective business plans and
strategies or projections of their respective anticipated financial
position or results of operations. The Combined Company Projections were
prepared for, and are contained in, the disclosure statement that was
distributed to MobileMedia's creditors. They were included in the
disclosure statement in order to satisfy applicable requirements for
information required to be included in a bankruptcy court approved
disclosure statement. They have been provided in Arch's prior filings
under the Securities Act so that Arch stockholders will have the same
information that was provided to MobileMedia's creditors. Accordingly,
Arch does not intend, and disclaims any obligation to, (1) furnish updated
Combined Company Projections, (2) include such updated information in any
other documents which may be required to be filed with the SEC, or (3)
otherwise make such updated information publicly available.
Arthur Andersen LLP, the independent public accountants for Arch, has
neither compiled nor examined such projections and, accordingly, does not
express any opinion or any other form of assurance with respect to,
assumes no responsibility for and disclaims any association with, such
projections. Ernst & Young LLP, who were the independent auditors for
MobileMedia, has neither compiled nor examined such projections and,
accordingly, does not express any opinion or any other form of assurance
with respect to, assumes no responsibility for and disclaims any
association with, such projections.
The Combined Company Projections have been prepared by Arch and
MobileMedia. The Combined Company Projections, although presented with
numerical specificity, are based upon a series of estimates and
assumptions which, although considered reasonable by Arch and MobileMedia,
may not be realized, and are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which
are beyond the control of Arch and MobileMedia. No representations can be
or are made as to the accuracy of the Combined Company Projections. Some
assumptions inevitably will not materialize, and events and circumstances
occurring subsequent to the date on which the Combined Company Projections
were prepared may be different from those assumed or may be unanticipated
and, accordingly, may affect financial results in a material and possibly
adverse manner. The Combined Company Projections, therefore, may not be
relied upon as a guaranty or other assurance of the actual results that
will occur. The foregoing assumptions and resultant computations were made
solely for purposes of preparing the Combined Company Projections. See
"Summary--Forward-Looking Statements".
53
<PAGE>
UNAUDITED COMBINED COMPANY PROJECTED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................. $ 11.7 $ 5.0
Accounts receivable, net................................... 72.1 76.5
Inventories................................................ 11.7 12.4
Prepaid expenses and other................................. 16.0 10.6
-------- --------
Total current assets..................................... 111.5 104.5
-------- --------
Property and equipment, net................................ 444.7 413.8
Intangible and other assets................................ 1,079.2 902.3
-------- --------
$1,635.4 $1,420.6
======== ========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Current maturities of long-term debt....................... $ -- $ 1.2
Accounts payable........................................... 79.3 83.4
Accrued expenses........................................... 12.5 12.6
Accrued interest........................................... 18.8 18.8
Customer deposits and deferred revenue..................... 44.9 44.9
Accrued restructuring charges.............................. 21.8 --
-------- --------
Total current liabilities................................ 177.3 160.9
-------- --------
Long-term debt, less current maturities.................... 1,325.1 1,396.0
-------- --------
Other long-term liabilities................................ 31.3 31.3
-------- --------
Stockholders' equity (deficit)............................... 101.7 (167.6)
-------- --------
$1,635.4 $1,420.6
======== ========
</TABLE>
54
<PAGE>
UNAUDITED COMBINED COMPANY PROJECTED STATEMENTS OF OPERATIONS
(in millions)
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
December 31, 1998 (1) December 31, 1999 (2)
--------------------- ---------------------
<S> <C> <C>
Service, rental and maintenance
revenues.......................... $198.0 $ 819.6
Product sales...................... 24.8 102.7
------ -------
Total revenues................. 222.8 922.3
Cost of products sold............ (19.4) (81.1)
------ -------
203.4 841.2
Operating expenses:
Service, rental and maintenance.. 51.3 206.4
Selling.......................... 28.5 114.7
General and administrative....... 63.7 252.6
Depreciation and amortization
(3)............................. 89.5 388.8
------ -------
Total operating expenses....... 233.0 962.5
------ -------
Operating income (loss)............ (29.6) (121.3)
Interest expense, net.............. (35.4) (143.0)
Other expenses..................... (2.0) (5.0)
------ -------
Net income (loss).................. $(67.0) $(269.3)
====== =======
</TABLE>
- --------
(1) Does not include the financial impact of potential operational expense
reductions and capital expenditure efficiencies that may be achieved
following the MobileMedia acquisition.
(2) Based upon annualized $25.0 million in projected operational cost synergies
(see "Unaudited Combined Company Projected Statement of Cash Flow--
Potential Operational Cost Savings") expected to be realized by December
31, 1999 (assuming closing on January 1, 1999). One-half of the annualized
savings, or $12.5 million, is projected to be recognized throughout 1999.
(3) Projected depreciation and amortization expense for the year ended December
31, 1999 is less than the historical amounts for the combined company due
to a decline in the price of pagers purchased by Arch and MobileMedia in
1997 and 1998 and a reduction in the number of pagers purchased by
MobileMedia.
55
<PAGE>
UNAUDITED COMBINED COMPANY PROJECTED STATEMENT OF CASH FLOW
(in millions)
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Net cash provided by operating activities.......................... $ 148.7
-------
Cash flows from investing activities:
Additions to property and equipment, net......................... (178.0)
Additions to intangible and other assets......................... (8.0)
-------
Net cash used for investing activities............................. (186.0)
-------
Cash flows from financing activities:
Issuance of long-term debt....................................... 30.6
-------
Net cash provided by financing activities.......................... 30.6
-------
Net decrease in cash and cash equivalents.......................... (6.7)
Cash and cash equivalents, beginning of period..................... 11.7
-------
Cash and cash equivalents, end of period........................... $ 5.0
-------
EBITDA............................................................. $ 267.5
=======
</TABLE>
Potential Operational Cost Savings
During the negotiations of the terms of the MobileMedia acquisition, management
of Arch and MobileMedia estimated operational expense reductions and capital
expenditure efficiencies they believed could be achieved in connection with the
MobileMedia acquisition. Senior management from Arch and MobileMedia, together
with their respective financial advisors, attended several meetings during
April and July 1998 to discuss, review and compare organizational structures
and staffing arrangements in order to identify potential opportunities to
eliminate redundant costs and estimate the resulting financial impact. Three
primary areas of estimated expense reductions included: (1) redundant
managerial and administrative overhead at both Arch and MobileMedia; (2)
duplicative purchased services, including subcontracted paging services; and
(3) duplicative capital expenditures.
Potential personnel redundancies and associated estimated financial impact were
identified following a comparison of staffing levels at corporate, divisional
and regional offices and on a market-by-market basis. No personnel reductions
were identified in information services, call center operations, local market-
level customer service, and most other "customer facing" activities.
Purchased services identified include operations-related services, such as
telecommunications and network services, subcontracted paging network services,
third party dispatch services, and advertising and promotion expenditures, as
well as professional services, including legal and accounting. These purchased
services were reviewed to identify potential cost savings achievable through
volume discounts, conversion to company-owned networks, replacement with lower
cost service providers, and elimination of redundant expenditures.
The two companies' planned capital expenditures were reviewed and savings
opportunities identified for negotiating greater volume discounts on the
purchase of pagers, avoiding network expenditures by using complementary
existing infrastructure, and eliminating duplicative expenditures related to
each company's current N-PCS strategy.
The following table presents the range of estimated annual ongoing expense
reductions and annual capital expenditure savings that management of Arch and
MobileMedia believe might be achieved based upon the foregoing review. These
estimates are based on current operating run-rates and the existing cost
structures of Arch and MobileMedia, respectively. The potential cost savings
shown below represent expense reduction
56
<PAGE>
opportunities and efficiencies that Arch believes will be implemented during
the first twelve months following the closing date of the merger, based on
current expense run-rates. The estimated expense reductions as shown represent
annualized savings. This table does not reflect additional unidentified savings
opportunities or costs and timing risks associated with achieving the potential
cost savings described.
Estimated Range of Annual Operational Expense Reductions Based on Current Costs
(in millions)
<TABLE>
<CAPTION>
Low High
----- -----
<S> <C> <C>
Operating expense reductions:
Market level personnel overlap................................... $ 6.6 $ 8.0
Regional/divisional level management overlap..................... 3.6 4.4
Corporate administrative overlap................................. 5.8 7.6
Purchased services............................................... 7.5 12.5
----- -----
Potential annual expense reductions............................ $23.5 $32.5
===== =====
Capital expenditure efficiencies:
Pager purchases.................................................. $ 1.7 $ 4.2
Network and N-PCS implementation................................. 8.0 10.0
----- -----
Potential annual capital expenditure efficiencies.............. $ 9.7 $14.2
===== =====
</TABLE>
57
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has been
prepared to reflect the merger (using the purchase method of accounting),
assuming the merger and the related transactions had occurred on September 30,
1998. Under the purchase method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the closing date. Income of the combined company will not
include income (or loss) of MobileMedia prior to the closing date. The
unaudited pro forma condensed consolidated statements of operations for the
year ended December 31, 1997 and the nine months ended September 30, 1998
present the results of operations of Arch and MobileMedia assuming the merger
and the related transactions had been effected on January 1, 1997. The
unaudited pro forma financial data should be read in conjunction with the
consolidated historical financial statements of Arch and MobileMedia, including
the notes to both sets of financial statements.
The pro forma condensed consolidated financial data is for information purposes
only and is not necessarily indicative of the results of future operations of
the combined company or the actual results that would have been achieved had
the merger and the related transactions been consummated during the periods
indicated. Moreover, the pro forma condensed consolidated financial statements
reflect preliminary pro forma adjustments made to combine Arch with MobileMedia
utilizing the purchase method of accounting. The actual adjustments will be
made as of the closing date of the merger and the related transactions and may
differ from those reflected in the pro forma financial statements.
For purposes of presenting the pro forma condensed consolidated financial
statements, Arch has assumed the issuance of 122,845,000 shares of Common Stock
at an aggregate market value of $245.7 million and that none of the non-
transferable rights issued to Arch stockholders are exercised. In the event the
market price of Common Stock is greater than $2.00 per share, stockholders'
equity will increase. In the event the market price of Common Stock is less
than $2.00 per share, stockholders' equity will decrease. See Note 9 to the
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements below.
See "Risk Factors--Unaudited Combined Company Projections May Prove to be
Inaccurate".
58
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Arch MobileMedia Pro Forma
(Historical) (Historical) Debits Credits Consolidated
------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 6,571 $ 9,814 $ 16,385
Accounts receivable
net................... 34,496 38,127 72,623
Inventories............ 10,578 1,167 11,745
Prepaid expenses and
other................. 4,170 11,790 15,960
-------- ----------- ----------
Total current assets. 55,815 60,898 116,713
-------- ----------- ----------
Property and
equipment, net........ 223,889 218,873 442,762
Intangible and other
assets (9)............ 662,662 297,535 103,416 (1) 21,117 (1) 1,042,496
-------- ----------- ----------
$942,366 $577,306 $1,601,971
======== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of
long-term debt........ $ -- $ 905,681 479,000 (1) $ --
426,681 (2)
Accounts payable....... 23,571 14,579 12,473 (2) 25,677
Accrued expenses....... 12,523 71,967 23,498 (2) 60,992
Accrued interest....... 18,767 21,746 21,746 (2) 18,767
Customer deposits and
deferred revenue...... 16,689 31,340 48,029
Accrued restructuring.. 14,810 7,001 7,001 (2) 10,000 (1) 24,810
-------- ----------- ----------
Total current
liabilities......... 86,360 1,052,314 178,275
-------- ----------- ----------
Long-term debt, less
current maturities.... 992,790 -- 322,000 (1) 1,314,790
-------- ----------- ----------
Deferred income taxes.. -- 2,655 2,655 (2) --
-------- ----------- ----------
Other long-term
liabilities........... 28,639 69,611 69,611 (2) 28,639
-------- ----------- ----------
Stockholders' equity
(deficit) (9):
Preferred stock........ 3 -- 3
Common stock........... 211 -- 1,228 (1) 1,439
Additional paid-in
capital............... 377,382 676,025 1,228 (1) 245,690 (1) 621,844
676,025 (3)
Accumulated deficit.... (543,019) (1,223,299) 21,117 (1) 563,665 (2) (543,019)
676,025 (3)
4,726 (1)
-------- ----------- ----------
Total stockholders'
equity (deficit).... (165,423) (547,274) 80,267
-------- ----------- ----------
$942,366 $ 577,306 $1,601,971
======== =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
59
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Arch MobileMedia Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 351,944 $ 491,174 $ (9,333)(4) $ 833,785
Products sales.......... 44,897 36,218 -- 81,115
----------- --------- ----------- ------------
Total revenues...... 396,841 527,392 (9,333) 914,900
Cost of products sold... (29,158) (35,843) -- (65,001)
----------- --------- ----------- ------------
367,683 491,549 (9,333) 849,899
----------- --------- ----------- ------------
Operating expenses:
Service, rental and
maintenance.......... 79,836 139,333 10,800 (5) 220,636
(9,333)(4)
Selling............... 51,474 69,544 -- 121,018
General and
administrative....... 106,041 179,599 -- 285,640
Depreciation and
amortization......... 232,347 140,238 10,342 (6) 398,606
15,679 (6)
Bankruptcy related
expense.............. -- 19,811 (7) 19,811
----------- --------- ----------- ------------
Total operating
expenses........... 469,698 548,525 27,488 1,045,711
----------- --------- ----------- ------------
Operating income (loss). (102,015) (56,976) (36,821) (195,812)
Interest expense, net... (97,159) (67,611) 67,611 (8) (134,749)
(37,590)(8)
Other (expenses) income. (3,872) 3 -- (3,869)
----------- --------- ----------- ------------
Income (loss) before
income tax benefit and
extraordinary item..... (203,046) (124,584) (6,800) (334,430)
Benefit from income
taxes.................. 21,172 -- -- 21,172
----------- --------- ----------- ------------
Income (loss) before
extraordinary item..... $ (181,874) $(124,584) $ (6,800) $ (313,258)
=========== ========= =========== ============
Basic/diluted income
(loss) before
extraordinary item per
share.................. $ (8.77) $ (2.18)
=========== ============
Weighted average common
shares outstanding..... 20,746,240 122,845,000 (1) 143,591,240
=========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
60
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Arch MobileMedia Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 277,826 $320,002 $ (6,341)(4) $ 591,487
Products sales.......... 31,811 20,367 -- 52,178
---------- -------- ----------- -----------
Total revenues...... 309,637 340,369 (6,341) 643,665
Cost of products sold... (21,863) (16,531) -- (38,394)
---------- -------- ----------- -----------
287,774 323,838 (6,341) 605,271
---------- -------- ----------- -----------
Operating expenses:
Service, rental and
maintenance.......... 60,812 83,117 8,100 (5) 145,688
(6,341)(4)
Selling............... 36,902 45,848 -- 82,750
General and
administrative....... 84,527 101,383 -- 185,910
Depreciation and
amortization......... 164,990 88,312 7,756 (6) 272,818
11,760 (6)
Restructuring expense. 16,100 -- -- 16,100
Bankruptcy related
expense.............. -- 13,831 (7) 13,831
---------- -------- ----------- -----------
Total operating
expenses........... 363,331 332,491 21,275 717,097
---------- -------- ----------- -----------
Operating income (loss). (75,557) (8,653) (27,616) (111,826)
Interest expense, net... (78,334) (42,449) 42,449 (8) (106,527)
(28,193)(8)
Gain on sale of assets.. -- 94,085 -- 94,085
Other expenses.......... (2,219) -- -- (2,219)
---------- -------- ----------- -----------
Income (loss) before
provision for income
taxes and extraordinary
item................... (156,110) 42,983 (13,360) (126,487)
Provision for income
taxes.................. -- 678 -- 678
---------- -------- ----------- -----------
Income (loss) before
extraordinary item..... $ (156,110) $ 42,305 $ (13,360) $ (127,165)
========== ======== =========== ===========
Basic/diluted income
(loss) before
extraordinary item per
share.................. $ (7.45) $ (0.88)
========== ===========
Weighted average common
shares outstanding..... 20,968,281 122,845,000 (1) 143,813,281
========== =========== ===========
</TABLE>
See accompanying notes to unaudited proforma condensed consolidated financial
statements
61
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) To record (1) $322.0 million of additional Arch borrowings assumed to be
necessary to fund obligations relating to the MobileMedia acquisition, (2)
the issuance of 122,845,000 shares of Common Stock to unsecured creditors
and standby purchasers, having an aggregate value of $245.7 million, (3)
the writeoff of $21.1 million of deferred financing costs associated with
the former MobileMedia credit facility and (4) the excess of purchase price
over the assumed fair value of the identifiable assets acquired. The
historical book value of the tangible and intangible assets of MobileMedia
was assumed to approximate fair value. The excess of purchase price over
the assumed fair value of identifiable assets acquired was calculated as
follows:
<TABLE>
<S> <C>
Consideration exchanged:
Payments to secured creditors................................ $479,000
Assumed fair value of shares issued to unsecured creditors... 28,690
--------
507,690
Liabilities assumed:
Administrative costs....................................... 35,000(a)
Other...................................................... 81,915(b)
--------
Total consideration exchanged................................ 624,605
Transaction costs............................................ 25,000(c)
Restructuring reserve........................................ 10,000(d)
--------
Total purchase price......................................... 659,605
Less fair value of tangible and intangible net assets acquired. 556,189
--------
Excess of purchase price over tangible and intangible net
assets acquired............................................... 103,416
========
</TABLE>
--------
(a) Consists of payments to certain of MobileMedia's creditors, including
and .
(b) This amount relates to operating liabilities such as accounts payable,
accrued expenses and advance billings which Arch will assume in the
Merger.
(c) This amount includes legal, investment banking, financing, accounting
and other costs incurred by Arch to consummate the MobileMedia
acquisition.
(d) Consists of severance costs related primarily to duplicative general
and administrative functions at the corporate, regional and market
levels of MobileMedia, such as technical, marketing, finance and other
support functions. These terminations will occur as the operations of
MobileMedia are integrated into those of Arch and are based on
management's preliminary review of synergies that exist between the
companies. This analysis is expected to be finalized within after
consummation of the MobileMedia acquisition and may result in
additional amounts to be reserved.
(2) To eliminate liabilities of MobileMedia not assumed by Arch, satisfied in
cash or exchanged for Common Stock.
(3) To eliminate MobileMedia equity balances.
(4) To eliminate revenues and expenses between Arch and MobileMedia.
(5) This entry records the incremental rental expense for the use of
transmitter space on the towers that were sold and leased back in
MobileMedia's tower sale transaction.
(6) To record the amortization on the excess of purchase price over the
tangible and intangible assets acquired, calculated on a straight-line
basis over 10 years in the amounts of $10,342 for the year ended
December 31, 1997 and $7,756 for the nine months ended September 30, 1998.
The actual amortization recorded after consummation of the MobileMedia
acquisition may differ from these amounts due to changes in the price of
Common Stock upon consummation of the MobileMedia acquisition as well as
full allocation of purchase price to assets and liabilities assumed
pursuant to APB No. 16. The amortization related to the $276.4 million
assumed fair value of intangible assets, consisting primarily of FCC
licenses with an assumed fair value of $246.4 million and customer lists
with an assumed fair value of $26.8 million, has already been provided in
the historical financial statements of MobileMedia. The MobileMedia
historical amortization was adjusted by $15,679 for the year ended December
31, 1997 and
62
<PAGE>
by $11,760 for the nine months ended September 30, 1998 to conform
MobileMedia's 25 year estimated useful life of FCC licenses to Arch's 10
year estimated useful life. The estimated useful life of the customer
lists was assumed to be 3 years.
(7) These costs represent incremental and non-recurring third-party legal,
accounting and financial advisory fees and expenses incurred by
MobileMedia related to its administration of its insolvency proceedings.
(8) To remove the interest expense associated with the various MobileMedia
credit facilities and notes eliminated as a result of the insolvency
proceedings and to record the interest associated with Arch's additional
borrowings used to fund the MobileMedia acquisition. Interest was
calculated assuming a 9.5% rate on $122.0 million of additional bank
borrowings and a 13% rate on $200.0 million of senior notes. Interest
expense would be as follows if interest rates were to decrease or increase
1/8 of a percent:
<TABLE>
<CAPTION>
Assumed Change in Interest Rate Assumed Interest Expense
------------------------------- -----------------------------------
Nine Months Ended
Year Ended September 30,
December 31, 1997 1998
----------------- -----------------
<S> <C> <C>
Increase of 1/8%...................... $ 37,993 $ 28,494
Decrease of 1/8%...................... $ 37,188 27,891
</TABLE>
(9) The following unaudited pro forma consolidated financial information is
provided to illustrate certain financial measurements if Common Stock were
to be valued at a market price of $1.50. In the following example the
purchase price is $7.2 million lower than the amount set forth in Note 1
due to the decrease in the assumed market value of Common Stock from $2.00
to $1.50 per share.
<TABLE>
<CAPTION>
Approximate Current
Market Price of $1.50
---------------------
<S> <C>
Shares exchanged (000s)............................. 122,845
Excess of purchase price over tangible and
intangible net assets acquired..................... $ 96,244
Total assets........................................ 1,594,799
Stockholders' equity................................ 73,095
Operating income (loss):
For the year ended December 31, 1997.............. (195,095)
For the nine months ended September 30, 1998...... (111,288)
Income (loss) before extraordinary item:
For the year ended December 31, 1997.............. (312,541)
For the nine months ended September 30, 1998...... (126,627)
Basic/diluted income (loss) before extraordinary
item per share:
For the year ended December 31, 1997.............. (2.18)
For the nine months ended September 30, 1998...... (0.88)
</TABLE>
63
<PAGE>
INDUSTRY OVERVIEW
General
Paging is a method of wireless communication which uses an assigned radio
frequency to contact a paging subscriber anywhere within a designated service
area. A subscriber carries a pager which receives messages by the transmission
of a one-way radio signal. To contact a subscriber, a message is usually sent
by placing a telephone call to the subscriber's designated telephone number.
The telephone call is received by an electronic paging switch which generates a
signal that is sent to radio transmitters in the service area. Depending upon
the topography of the service area, the operating radius of a radio transmitter
typically ranges from three to 20 miles. The transmitters broadcast a signal
that is received by the pager a subscriber carries, which alerts the subscriber
by a tone or vibration that there is a voice, tone, digital or alphanumeric
message.
The paging industry has been in existence since 1969 when the FCC allocated a
group of radio frequencies for use in providing one-way and two-way types of
mobile communications services. Throughout its history, the paging industry has
been characterized by consolidation, substantial growth and technological
change. Historically, the paging industry has been highly fragmented, with a
large number of small, local operators. Since the 1980s, concentration in the
paging industry has increased as paging companies continue to grow rapidly
either internally or through acquisitions.
Arch believes that paging is the most cost-effective form of mobile wireless
communications. Paging has an advantage over conventional telephone service
because a pager's reception is not restricted to a single location, and over a
cellular telephone or broadband PCS (personal communication services) handset
because a pager is smaller, has a longer battery life and, most importantly,
because pagers and air time required to transmit an average message cost less
than equipment and air time for cellular telephones or broadband PCS handsets.
Paging subscribers generally pay a flat monthly service fee for pager services,
regardless of the number of messages, unlike cellular telephone or broadband
PCS subscribers, whose bills typically have a significant variable usage
component. For these reasons, some cellular subscribers use a pager in
conjunction with their cellular telephone to screen incoming calls and thus
lower the expense of cellular telephone service, and to a lesser extent, some
broadband PCS subscribers use a pager in conjunction with their broadband PCS
handsets, which often incorporate messaging functions, but have a much shorter
battery life.
Industry sources estimate that, since 1992, the number of pagers in service in
the United States has grown at an annual rate of approximately 25% and will
continue to grow at an annual rate of approximately 8% through the year 2001.
Based on industry sources, Arch believes that there were more than 49 million
pagers in service in the United States at December 31, 1997. Factors
contributing to this growth include: (1) a continuing shift towards a service-
based economy; (2) increasing mobility of workers and the population at large;
(3) increasing awareness of the benefits of mobile communications among the
population at large; (4) the relatively high cost of two-way mobile
communications, such as cellular telephone services; (5) introduction of new or
enhanced paging services, including nationwide paging capability; (6)
continuing improvements in the performance of paging equipment; and (7)
significant price/performance improvements in paging services. The paging
industry has undergone substantial consolidation over the past ten years, and
Arch believes that the top five paging carriers represent approximately 50% of
the pagers in service. Nonetheless, Arch believes that the paging industry
remains fragmented, with more than 300 licensed carriers in the United States,
and will continue to undergo consolidation.
The paging industry has benefited from technological advances resulting from
research and development conducted by vendors of pagers and transmission
equipment. These advances include microcircuitry, liquid crystal display
technology and standard digital encoding formats. These advances have enhanced
the capability and capacity of paging services while lowering equipment and air
time costs. Technological improvements have enabled Arch to provide better
quality services at lower prices to its subscribers and have generally
contributed to strong growth in the market for paging services.
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<PAGE>
The paging industry has traditionally distributed its services through direct
marketing and sales activities. In recent years, additional channels of
distribution have evolved. These include: (1) carrier-operated stores; (2)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; (3) agents who
solicit customers for carriers and are compensated on a commission basis; (4)
retail outlets that often sell a variety of merchandise, including pagers and
other telecommunications equipment; and (5) most recently, the Internet. While
most paging subscribers traditionally have been business users, industry
observers believe that retail consumers have significantly increased their use
of pagers in recent years. In addition, paging subscribers have increasingly
chosen to purchase rather than lease their pagers. Arch expects these trends to
continue.
Paging and Messaging Services
The principal paging and messaging services currently available in the paging
industry are as follows:
<TABLE>
<CAPTION>
Type of Service Description
--------------- -----------
<C> <S>
Numeric (Digital Display) Paging
Service......................... Numeric paging service permits a caller
using a touchtone telephone to transmit to
a subscriber a numeric message consisting
of a telephone number, an account number or
coded information. Numeric pagers have
memory capability to store several such
numeric messages which can be recalled by a
subscriber when desired.
Alphanumeric Paging Service...... Alphanumeric paging service allows
subscribers to receive and store messages
consisting of both letters and numbers.
Alphanumeric pagers have sufficient memory
to store thousands of characters. This
service also has the capability to tie into
computer-based networks to provide advanced
messaging services. Callers may input
messages by using either an operator
dispatch center, a personal computer
equipped with applicable software or a
portable alphanumeric input device.
Voice Mail Service............... Voice mail service enables a caller to
leave a recorded message and automatically
alerts a subscriber, through a pager, that
a message has been recorded. A subscriber
may retrieve messages by calling his or her
voice mailbox at a paging network center.
Wireless Electronic Mail Service. Wireless electronic mail allows the user to
receive messages via wireless receivers
used in conjunction with portable personal
computers or "PDAs" (this service is not
currently offered by Arch or MobileMedia).
</TABLE>
Competition
The paging industry is highly competitive. Providers of numeric display paging
services compete primarily on the basis of price. Companies in the industry
also compete on the basis of coverage area offered to subscribers, available
services offered in addition to basic numeric or tone paging, transmission
quality, system reliability and customer service.
Arch and MobileMedia compete by maintaining competitive pricing of their
products and service offerings, by providing high-quality, reliable
transmission networks and by furnishing subscribers a superior level of
customer service. Several hundred licensed paging companies provide only local
basic numeric or tone paging service. Compared to these companies, Arch and
MobileMedia offer wireless messaging services on a local, regional and
nationwide basis. In addition, Arch and MobileMedia offer enhanced services
such as alphanumeric paging, voice mail and voice mail notifications, news,
sports, weather reports and stock quotes.
65
<PAGE>
Arch and MobileMedia compete with one or more competitors in all markets in
which they operate. Some of Arch's and MobileMedia's competitors are small,
privately owned companies serving one market area but others are large
diversified telecommunications companies serving many markets. Some of Arch's
and MobileMedia's competitors possess financial, technical and other resources
greater than those of Arch and MobileMedia. Major paging carriers that
currently compete in one or more of Arch's and MobileMedia's markets include
PageNet, Metrocall and AirTouch Communications, Inc.
The scope of competition for communications service customers in Arch's and
MobileMedia's markets may broaden as paging services become increasingly
interactive, and as two-way services become increasingly competitive. For
example, the FCC has created potential sources of competition by auctioning new
spectrum for wireless communications services and local multipoint distribution
service and by holding an auction in the 220-222 MHZ service. Further, the FCC
has announced plans to auction licenses in the general wireless communications
service, a service created from spectrum reallocated from federal government
use in 1995. Moreover, entities offering service on wireless two-way
communications technology, including cellular, broadband PCS and specialized
mobile radio services, as well as mobile satellite service providers, also
compete with the paging services that Arch and MobileMedia provide. See "Risk
Factors--Business and Financial Risks--Competition and Technological Change May
Undermine Arch's Business."
In the 1995 FCC auctions for regional narrowband PCS licenses, MobileMedia
purchased licenses for a nationwide system with a common two-way frequency. In
addition, MobileMedia acquired a second narrowband PCS license for a nationwide
system in its MobileComm Acquisition. Competitors of MobileMedia also acquired
PCS licenses in the FCC auctions. Some of these competitors have substantially
greater resources than MobileMedia. One of MobileMedia's competitors, SkyTel,
recently introduced a two-way narrowband PCS wireless data service. Although
Arch cannot predict the types of PCS services which will be offered by those
companies, Arch expects that those services will compete with the narrowband
PCS and paging services to be offered by MobileMedia.
Regulation
Paging operations and the construction, modification, ownership and acquisition
of paging systems are subject to extensive regulation by the FCC under The
Communications Act of 1934 and, to a much more limited extent, by public
utility or public service commissions in certain states. The following
description does not purport to be a complete discussion of all present and
proposed legislation and regulations relating to Arch's and MobileMedia's
paging operations.
Federal Regulation
Regulatory Classification.
Paging companies historically have been subject to different federal regulatory
requirements depending upon whether they were providing service as an RCC
(radio common carrier), a PCP (private carrier paging operator or as a
reseller. Arch's and MobileMedia's paging operations encompass RCC, PCP and
resale operations. However, federal legislation enacted in 1993 required the
FCC to reduce the disparities in the regulatory treatment of similar mobile
services (such as RCC and PCP services). The FCC has taken, and continues to
take, actions to implement this legislation. Under the new regulatory
structure, all of Arch's and MobileMedia's paging services are classified as
CMRS (commercial mobile radio services). As CMRS providers, Arch and
MobileMedia are regulated as common carriers, except that the FCC has exempted
paging services from some typical common carrier regulations, such as tariff
filing and resale requirements, because paging services have been found to be
highly competitive.
The classification of Arch's and MobileMedia's paging operations as CMRS
affects the level of permissible foreign ownership, as discussed below, and the
nature and extent of state regulation. In addition, the FCC now is required to
resolve competing requests for CMRS spectrum by conducting auctions. This may
have the effect of increasing the costs of acquiring additional spectrum in
markets in which Arch and MobileMedia operate. Also, Arch and MobileMedia are
obligated to pay certain regulatory fees in connection with their paging
operations.
66
<PAGE>
FCC Regulatory Approvals and Authorizations
The Communications Act requires radio licensees such as Arch and MobileMedia to
obtain prior approval from the FCC for the assignment or transfer of control of
any construction permit or station license or authorization or any related
rights. This statutory requirement attaches to acquisitions of other paging
companies (or other radio licensees) by Arch and MobileMedia as well as
transfers of a controlling interest in any of Arch's or MobileMedia's licenses,
construction permits or related rights. To date, the FCC has approved each
assignment and transfer of control for which Arch and MobileMedia have sought
approval. Although there can be no assurance that any future requests for
approval of transfers of control and/or assignments of license will be acted
upon in a timely manner by the FCC, or that the FCC will grant the approval
requested, neither Arch nor MobileMedia knows of any reason that any such
applications will not be approved or granted, with the exception of the pending
FCC investigation into MobileMedia's qualification to continue to be an FCC
licensee, which has been .]
Effective April 2, 1998, the FCC's Wireless Telecommunications Bureau, which
directly regulates Arch's and MobileMedia's paging activities, began to forbear
from enforcing its filing requirements with respect to pro forma assignments
and transfers of control of certain wireless authorizations, such as Arch's and
MobileMedia's RCC and PCP licenses. Pursuant to this decision, wireless
telecommunications carriers now only have to file a written notification of a
pro forma transaction within 30 days after the transaction is completed. This
decision will expedite the process and reduce the costs related to corporate
reorganizations; however, Arch and MobileMedia may still be required to obtain
prior FCC approval for the pro forma assignment or transfer of control of some
of their licenses not covered by the forbearance decision, such as certain
business radio authorizations.
The FCC paging licenses granted to Arch and MobileMedia are for varying terms
of up to 10 years, at the end of which renewal applications must be approved by
the FCC. In the past, paging license renewal applications generally have been
granted by the FCC upon a showing of compliance with FCC regulations and of
adequate service to the public. Arch and MobileMedia are unaware of any
circumstances which would prevent the grant of any pending or future renewal
applications except for the pending FCC proceeding regarding MobileMedia's
qualifications to remain an FCC licensee which has been ,]. However, no
assurance can be given that any of Arch's or MobileMedia's renewal applications
will be free of challenge or will be granted by the FCC. It is possible that
there may be competition for radio spectrum associated with licenses as they
expire. This would increase the chances of third-party interventions in the
renewal proceedings. The FCC has so far granted each license renewal
application that Arch or MobileMedia have filed, other than those renewal
applications still pending.
On February 13, 1997, in connection with its filing for protection under the
Bankruptcy Code, MobileMedia sought a grant of permission from the FCC to
execute an involuntary, pro forma assignment of its licenses to MobileMedia as
debtors-in-possession. On March 3, 1997, the FCC granted such permission with
respect to MobileMedia's earth stations, on April 3, 1997, the FCC granted such
permission for the assignment of MobileMedia's microwave licenses and on May
26, 1998 and July 17, 1998, the FCC granted such permission with respect to
MobileMedia's paging, air-to-ground and narrowband PCS licenses. The FCC
subsequently approved the transfer of MobileMedia's licenses in connection with
Arch's acquisition of MobileMedia.
The FCC's review and revision of rules affecting paging companies is ongoing.
The regulatory requirements to which Arch and MobileMedia are subject may
change significantly over time. For example, the FCC has decided to adopt a
market area licensing scheme for all paging channels under which carriers would
be licensed to operate on a particular channel throughout a broad geographic
area (such as a Major Trading Area as defined by Rand McNally) rather than
being licensed on a site-by-site basis. These geographic area licenses will be
awarded through an auction. Incumbent paging licensees that do not acquire
licenses at auction will be entitled to interference protection from the market
area licensee. Arch and MobileMedia have each been participating actively in
this proceeding in order to protect their existing operations and retain
flexibility, on an interim and long-term basis, to modify systems as necessary
to meet subscriber demands.
67
<PAGE>
Currently, however, the Communications Act requires that Arch and MobileMedia
obtain licenses from the FCC to use radio frequencies to conduct their paging
operations at specified locations. FCC licenses issued to Arch and MobileMedia
set forth the technical parameters, such as power strength and tower height,
under which Arch and MobileMedia are authorized to use those frequencies. In
many instances, Arch and MobileMedia require the prior approval of the FCC
before they can implement any significant changes to their radio systems. Once
the FCC's market area licensing rules are implemented, however, these site-
specific licensing obligations will be eliminated, except for applications
still required by Section 22.369 of the FCC rules (request for authority to
operate in a designated Quiet Zone), Section 90.77 (request for authority to
operate in a protected radio receiving location) and Section 1.1301 et seq.
(construction/modification that may have a significant environmental impact) or
for coordination with Canada or Mexico.
The FCC has issued a Further Notice of Proposed Rulemaking in which the FCC
seeks comments on, among other matters, (1) whether it should impose coverage
requirements on licensees with nationwide exclusivity (such as Arch and
MobileMedia), (2) whether these coverage requirements should be imposed on a
nationwide or regional basis, and (3) whether--if such requirements are
imposed--failure to meet the requirements should result in a revocation of the
entire nationwide license or merely a portion of the license. If the FCC were
to impose stringent coverage requirements on licensees with nationwide
exclusivity, the combined company might have to accelerate the build-out of its
systems in certain areas.
Telecommunications Act of 1996
The Telecommunications Act directly affects Arch and MobileMedia. Some aspects
of the Telecommunications Act may place financial obligations upon the combined
company or subject it to increased competition. For example, the FCC has
adopted new rules that govern compensation to be paid to pay phone providers
which has resulted in increased costs for certain paging services including
toll-free 1-800 number paging. Arch and MobileMedia have generally passed these
costs on to their subscribers. This makes their services more expensive and
could affect the attraction or retention of customers. However, there can be no
assurance that the combined company will be able to continue to pass on these
costs. These rules are the subject of several judicial appeals. In addition,
the FCC also has adopted new rules regarding payments by telecommunications
companies into a revamped fund that will provide for the widespread
availability of telecommunications services including Universal Service. Prior
to the implementation of the Telecommunications Act, Universal Service
obligations were largely met by local telephone companies, supplemented by
long-distance telephone companies. Under the new rules, all telecommunications
carriers, including paging companies, will be required to contribute to the
Universal Service Fund. In addition, certain state regulatory authorities have
enacted, or have indicated that they intend to enact, similar contribution
requirements based on intrastate revenues. The combined company cannot yet know
the impact of these state contribution requirements, if enacted and applied to
it. Moreover, neither Arch nor MobileMedia has been able to estimate the amount
of any such payments that it will be able to bill to its subscribers; however,
payments into the universal service fund will likely increase the cost of doing
business.
Some aspects of the Telecommunications Act could have a beneficial effect on
Arch's and MobileMedia's business. For example, proposed federal guidelines
regarding antenna siting issues may remove local and state barriers to the
construction of communications facilities, although states and municipalities
continue to exercise significant control with regard to such siting issues.
Moreover, in a rulemaking proceeding pertaining to interconnection between LECs
(local exchange carriers) and CMRS providers such as the combined company, the
FCC has concluded that LECs are required to compensate CMRS providers for the
reasonable costs incurred by such providers in terminating traffic that
originates on LEC facilities, and vice versa. Consistent with this ruling, the
FCC has determined that LECs may not charge a CMRS provider or other carrier
for terminating LEC-originated traffic or for dedicated facilities used to
deliver LEC-originated traffic to one-way paging networks. Nor may LECs charge
CMRS providers for number activation and use fees. These interconnection issues
are still in dispute, and it is unclear whether the FCC will maintain its
current position.
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<PAGE>
Future Regulation
From time to time, federal or state legislators propose legislation which could
potentially affect Arch and MobileMedia, either beneficially or adversely. It
is possible that legislation will be enacted by the federal or state
governments, or that regulations will be adopted or actions taken by the FCC or
state regulatory authorities, which might materially adversely affect the
business of Arch and/or MobileMedia. Changes such as the allocation by the FCC
of radio spectrum for services that compete with Arch's and MobileMedia's
business could adversely affect Arch's and MobileMedia's results of operations.
See "Risk Factors--Government Regulation May Burden Operations; Foreign
Ownership and Possible Redemption of Stock".
Depending on further FCC disposition of these issues, the combined company may
or may not be successful in securing refunds, future relief or both, with
respect to charges for termination of LEC-originated local traffic. If the FCC
ultimately reaches an unfavorable resolution, then the combined company
believes that it would pursue relief through settlement negotiations,
administrative complaint procedures or both. If these issues are ultimately
decided in favor of the LECs, each of Arch and MobileMedia likely would be
required to pay all past due contested charges and may also be assessed
interest and late charges for amounts withheld.
Foreign Ownership
The Communications Act limits foreign investment in and ownership of entities
that are licensed as radio common carriers by the FCC. The combined company
owns or controls several radio common carriers and is accordingly subject to
these foreign investment restrictions. Because Arch is the parent of radio
common carriers (but is not a radio common carrier itself), Arch may not have
more than 25% of its stock owned or voted by aliens or their representatives, a
foreign government or its representatives or a foreign corporation if the FCC
finds that the public interest would be served by denying such ownership. In
connection with the WTO Agreement--agreed to by 69 countries--the FCC adopted
rules effective February 9, 1998 that create a very strong presumption in favor
of permitting a foreign interest in excess of 25% if the foreign investor's
home market country signed the WTO Agreement. Arch's subsidiaries that are
radio common carrier licensees are subject to more stringent requirements and
may have only up to 20% of their stock owned or voted by aliens or their
representatives, a foreign government or their representatives or a foreign
corporation. This ownership restriction is not subject to waiver. See "Industry
Overview--Regulation". Arch's Certificate of Incorporation permits the
redemption of shares of Arch's capital stock from foreign stockholders where
necessary to protect FCC licenses held by Arch or its subsidiaries, but such
redemption would be subject to the availability of capital to Arch and any
restrictions contained in applicable debt instruments and under the Delaware
corporations statute (which currently would not permit any such redemptions).
The failure to redeem such shares promptly could jeopardize the FCC licenses
held by Arch or its subsidiaries. See "--Competition", "--Regulation" and "Risk
Factors--High Degree of Leverage Burdens Operations".
State Regulation
In addition to regulation by the FCC, certain states impose various regulations
on the common carrier paging operations of Arch and MobileMedia. Regulation in
some states historically required Arch and MobileMedia to obtain certificates
of public convenience and necessity before constructing, modifying or expanding
paging facilities or offering or abandoning paging services. Rates, terms and
conditions under which Arch and MobileMedia provided services, or any changes
to those rates, have also been subject to state regulation. However, as a
general rule, states are preempted from exercising rate and entry regulation of
CMRS, but may choose to regulate other terms and conditions of service (for
example, requiring the identification of an agent to receive complaints).
States may also petition the FCC for authority to continue to regulate CMRS
rates if certain conditions are met. State filings seeking rate authority have
all been denied by the FCC, although new petitions seeking such authority may
be filed in the future. The preemption of state entry regulation was confirmed
in the Telecommunications Act. In certain instances, the construction and
operation of radio transmitters also will be subject to zoning, land use,
public health and safety, consumer protection and other state and local taxes,
levies and ordinances. Furthermore, some states and localities continue to
exert jurisdiction over (1) approval of acquisitions and transfers of wireless
systems and (2) resolution of consumer complaints. Arch and MobileMedia believe
that to date all required filings for Arch's and MobileMedia's paging
operations have been made.
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BUSINESS
The combined company is the second largest paging operator in the United States
as measured by pagers in service and net revenues. On a pro forma basis (but
excluding the impact of expected operational cost synergies), at and for the
nine months ended September 30, 1998, the combined company would have had
approximately 7.1 million pagers in service, net revenues of $605.3 million,
net loss before extraordinary items of $127.2 million and total debt of $1.3
billion. On a pro forma basis, adjusted pro forma EBITDA of the combined
company at September 30, 1998 would have been $190.9 million. On a pro forma
basis, for the nine-month period ended September 30, 1998 the combined
company's cash flows provided by operating activities would have been $139.2
million. Cash flows used in investing activities would have been $487.5 million
and cash flows provided by financing activities would have been $361.4 million.
The combined company's leverage on a pro forma basis for the nine months ended
September 30, 1998, as measured by the ratio of total debt to annualized
adjusted pro forma EBITDA, would have been 5.2 to 1. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements".
The combined company believes that it is well positioned to compete effectively
in the highly competitive paging industry for the following reasons. The
combination of MobileMedia's market presence in major metropolitan markets with
Arch's historical emphasis on middle and small markets has significantly
broadened the geographic scope of Arch's marketing presence and should position
the combined company to compete more effectively for large corporate customers
with diverse geographic operations. With a significantly larger subscriber
base, the combined company should be better able to serve strategic
distribution arrangements, as well as amortize marketing investments over a
larger revenue base. In addition, MobileMedia's third party retail distribution
agreements, which serve the more rapidly growing consumer market, should
complement the more than 200 Arch-owned retail outlets. Similarly,
MobileMedia's two nationwide paging networks (and the potential for higher
revenue nationwide services) should enhance Arch's local coverage and provide
an opportunity to take advantage of Arch's distribution platforms.
MobileMedia's plan to deploy its nationwide N-PCS spectrum utilizing its
existing network infrastructure should permit Arch to market N-PCS (primarily
multi-market alphanumeric and text messaging services) sooner than it would
otherwise have been able to, and these services are expected to offer higher
revenue and more growth potential than basic paging services. Finally,
MobileMedia's investments to date in two national call centers should
supplement Arch's own call center and complement Arch's strategy of evolving to
scalable regional customer service centers. Achieving these intended benefits,
however, will depend on a number of factors and no assurance can be given that
the benefits will be realized, in whole or in part. See "Risk Factors--
Integrating the Companies Presents Challenges".
Business Strategy
Arch's strategic objective is to strengthen its position as one of the leading
nationwide paging companies in the United States. Arch believes that larger,
multi-market paging companies enjoy a number of competitive advantages,
including:
. operating efficiencies resulting from more intensive utilization of
existing paging systems;
. economies of scale in purchasing and administration;
. broader geographic coverage of paging systems;
. greater access to capital markets and lower costs of capital;
. the ability to obtain additional radio spectrum;
. the ability to offer high-quality services at competitive prices; and
. enhanced ability to attract and retain management personnel.
Arch believes that the current size and scope of its operations afford it many
of these advantages, and that it has the scope and presence to effectively
compete on a national level. In addition, Arch believes that the paging
industry will undergo further consolidation, and Arch intends to participate in
such consolidation.
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Historical Operating Strategy. Arch's operating objectives are to increase its
EBITDA, deploy its capital efficiently, reduce its financial leverage and
expand its customer relationships. Arch has pursued the following operating
strategies to achieve its operating objectives:
. Low-Cost Operating Structure. Arch has selected a low-cost operating
strategy as its principal competitive tactic. Arch believes that a low-
cost operating structure, compared to the other two fundamental
competitive tactics in the paging industry (differentiated premium pricing
and niche positioning), maximizes its flexibility to offer competitive
prices while still achieving target margins and EBITDA. Arch maintains a
low-cost operating structure through a combination of (1) the
consolidation of certain operating functions, including centralized
purchases from key vendors, to achieve economies of scale, and (2) the
installation of technologically advanced, reliable, transmission systems.
As part of its divisional reorganization, over a period of 18 to 24
months, Arch plans to consolidate its seven operating divisions into four
operating divisions and consolidate certain regional administrative
support functions, resulting in various operating efficiencies. The
divisional reorganization, once fully implemented, is expected to result
in annual cost savings of approximately $15.0 million (approximately $11.5
million for salary and employee benefits and $3.5 million for lease
obligations). See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations".
. Efficient Capital Deployment. Arch's principal financial objective is to
reduce financial leverage by reducing capital requirements and increasing
EBITDA. To reduce capital expenditures, Arch has implemented a company-
wide focus on the sale, rather than lease, of pagers. This is because
subscriber-owned units require a lower level of capital investment than
Arch-owned units. As a result of these efforts, the number of subscriber-
owned pagers, as a percentage of net new pagers in service, increased from
53.7% in the nine months ended September 30, 1997 to 70.1% in the nine
months ended September 30, 1998. In addition, Arch has modified its
incentive compensation programs for line managers so that bonuses are
based, in part, on capital efficiency.
. Fast Follower on N-PCS Opportunities. Consistent with its low-cost
provider competitive tactic, Arch has focused its capital and marketing
resources on one-way paging and other enhanced services rather than N-PCS
services. However, Arch recognizes the potential benefits to current and
prospective customers and the associated market opportunities from certain
N-PCS applications, such as two-way text and voice messaging services.
Arch has taken steps to position itself to participate in new and emerging
N-PCS services and applications, including marketing N-PCS services as a
reseller and its 49.9% equity interest in Benbow. See "--Arch's Business--
Investments in Narrowband PCS Licenses".
. Exploit Revenue Enhancement Opportunities. Arch believes there are a
number of new revenue opportunities associated with its 4.2 million pagers
in service at September 30, 1998. These include (1) increasing the
proportion of subscribers utilizing alphanumeric display services, which
generate higher revenue, and (2) selling value-added, non-facilities-based
enhanced services such as voicemail, resale of long-distance service and
fax storage and retrieval. See "--Arch's Business--Paging and Messaging
Services, Products and Operations".
Integration Strategy. The combined company intends to execute the following
integration strategy:
. Cost Reductions. Arch's management has worked closely with MobileMedia's
management to identify redundant managerial and administrative functions
that Arch's management believes can be eliminated without material impact
to customer related activities.
. Low Cost Provider. Arch management will continue to evolve its cost
structure to seek greater cost efficiencies. Arch expects to be able to
gradually improve the operating processes of the combined company to
further reduce the combined company's operating costs through continuing
efficiency gains. The greater scale of the combined operations should
permit Arch to further reduce per unit operating costs.
. Balanced Distribution Channels. Arch's combination of direct sales,
company-owned stores, and third party resellers will be supplemented by
MobileMedia's own local market direct sales force and its distribution
agreements with third party regional and national retailers. In addition,
MobileMedia's national accounts sales force should significantly enhance
Arch's efforts to improve distribution to nationwide customers.
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. Expanded Product Line. The combined company has one of the broadest product
offerings in the paging industry. MobileMedia's N-PCS Spectrum will provide
Arch with more economical and broader access to higher average revenues per
unit ("ARPU"), nationwide and regional services and text messaging services,
which to date Arch has marketed on a limited basis through the resale of
other carriers' services on less attractive terms.
. Enhanced Value-Added Services. The combined company's larger subscriber base
should offer new revenue opportunities from the sale of enhanced value-added
services such as voicemail, resale of long-distance service and fax storage
and retrieval.
Arch's Business
Arch has been a leading provider of wireless messaging services, primarily
paging services. Prior to the MobileMedia acquisition, Arch was the third
largest paging company in the United States (based on pagers in service). Arch
had 4.2 million pagers in service at September 30, 1998. Arch has operated in
41 states and more than 180 of the 200 largest markets in the United States.
Arch offers local, regional and nationwide paging services employing digital
networks covering approximately 85% of the United States population. Arch has
offered four types of paging services through its networks: digital display,
alphanumeric display, tone-only and tone-plus-voice. Arch also offers enhanced
and complementary services, including voice mail, personalized greeting,
message storage and retrieval, pager loss protection and pager maintenance.
Arch has achieved significant growth in pagers in service and operating cash
flow through a combination of internal growth and acquisitions. From January 1,
1995 through September 30, 1998, Arch's total number of subscribers grew at a
compound rate on an annualized basis of 73.1%. For the same period on an
annualized basis, Arch's compound rate of internal subscriber growth (excluding
pagers added through acquisitions) was 52.8%. From commencement of operations
in September 1986 through September 30, 1998, Arch completed 33 acquisitions
representing an aggregate of 1.7 million pagers in service at the time of
purchase. The MobileMedia acquisition has added approximately 2.9 million
additional pagers.
The following table sets forth information about the approximate number of
pagers in service with Arch subscribers and net increases in number of pagers
through internal growth and acquisitions:
<TABLE>
<CAPTION>
Pagers in Service Net Increase in
at Beginning of Pagers through Increase in Pagers Pagers in Service
Year Ended August 31, Period Internal Growth(1) through Acquisitions(2) at End of Period
- --------------------- ----------------- ------------------ ----------------------- -----------------
<S> <C> <C> <C> <C>
1987.................... 4,000 3,000 12,000 19,000
1988.................... 19,000 8,000 3,000 30,000
1989.................... 30,000 14,000 34,000 78,000
1990.................... 78,000 20,000 4,000 102,000
1991.................... 102,000 24,000 1,000 127,000
1992.................... 127,000 33,000 -- 160,000
1993.................... 160,000 70,000 24,000 254,000
1994.................... 254,000 138,000 18,000 410,000
<CAPTION>
Four Months Ended December 31,
- ------------------------------
<S> <C> <C> <C> <C>
1994.................... 410,000 64,000 64,000 538,000
<CAPTION>
Year Ended December 31,
- -----------------------
<S> <C> <C> <C> <C>
1995.................... 538,000 366,000 1,102,000 2,006,000
1996.................... 2,006,000 815,000 474,000 3,295,000
1997.................... 3,295,000 595,000 -- 3,890,000
<CAPTION>
Nine Months Ended September 30,
- -------------------------------
<S> <C> <C> <C> <C>
1998.................... 3,890,000 321,000 -- 4,211,000
</TABLE>
- ---------------------
(1) Includes internal growth in acquired paging businesses after their
acquisition by Arch. Increases in pagers through internal growth are net of
subscriber cancellations during each applicable period.
(2) Based on pagers in service of acquired paging businesses at the time of
their acquisition by Arch.
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Paging and Messaging Services, Products and Operations
Arch has provided four basic types of paging services: digital display,
alphanumeric display, tone-only and tone-plus-voice. Depending upon the type of
pager used, a subscriber may receive information displayed or broadcast by the
pager or may receive a signal from the pager indicating that the subscriber
should call a prearranged number or a company operator to retrieve a message.
A digital display pager permits a caller to transmit to the subscriber a
numeric message that may consist of a telephone number, an account number or
coded information, and has the capability to store several such numeric
messages in memory for later recall by the subscriber. An alphanumeric display
pager allows subscribers to receive and store messages consisting of both
numbers and letters. A tone-only pager notifies the subscriber that a call has
been received by emitting an audible beeping sound or vibration. A tone-plus-
voice pager emits a beeping sound followed by a brief voice message. Arch
provides digital display, alphanumeric display and tone-only service in all of
its markets and tone-plus-voice service in only a few markets.
Digital display paging service, which was introduced by the paging industry
nearly 20 years ago, has in recent years grown at a faster rate than tone-only
or tone-plus-voice service and currently represents a majority of all pagers in
service. The growth of alphanumeric display service, which was introduced in
the mid-1980s, has been constrained by its difficulty in inputting data, its
requirements of specialized equipment and its relatively high use of system
capacity during transmission. The following table summarizes the types of
Arch's pagers in service at specified dates:
<TABLE>
<CAPTION>
December 31,
------------------------------------------- September 30,
1995 1996 1997 1998
------------- ------------- ------------- -------------
Units % Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Digital display......... 1,755,000 87% 2,796,000 85% 3,284,000 85% 3,536,000 84%
Alphanumeric display.... 171,000 9 395,000 12 524,000 13 603,000 14
Tone-only............... 37,000 2 54,000 2 43,000 1 38,000 1
Tone-plus-voice......... 43,000 2 50,000 1 39,000 1 34,000 1
--------- --- --------- --- --------- --- --------- ---
Total.................. 2,006,000 100% 3,295,000 100% 3,890,000 100% 4,211,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides paging service to subscribers for a monthly fee. Subscribers
either lease the pager from Arch for an additional fixed monthly fee or they
own the pager, having purchased it either from Arch or from another vendor. The
monthly service fee is generally based upon the type of service provided, the
geographic area covered, the number of pagers provided to the customer and the
period of the subscriber's commitment. Subscriber-owned pagers provide a more
rapid recovery of Arch's capital investment than pagers owned and maintained by
Arch, but may generate less recurring revenue. Arch also sells pagers to third-
party resellers who lease or resell pagers to their own subscribers and resell
Arch's paging services under marketing agreements. The following table
summarizes the number of Arch-owned and leased, subscriber-owned and reseller-
owned pagers in service at specified dates:
<TABLE>
<CAPTION>
December 31,
------------------------------------------- September 30,
1995 1996 1997 1998
------------- ------------- ------------- -------------
Units % Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arch-owned and leased... 902,000 45% 1,533,000 47% 1,740,000 45% 1,836,000 44%
Subscriber-owned........ 596,000 30 914,000 28 1,087,000 28 1,130,000 27
Reseller-owned.......... 508,000 25 848,000 25 1,063,000 27 1,245,000 29
--------- --- --------- --- --------- --- --------- ---
Total.................. 2,006,000 100% 3,295,000 100% 3,890,000 100% 4,211,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides enhancements and ancillary services such as voice mail,
personalized greetings, message storage and retrieval, pager loss protection
and pager maintenance services. Voice mail allows a caller to leave a recorded
message that is stored in Arch's computerized message retrieval center. When a
message is left, the subscriber can be automatically alerted through the
subscriber's pager and can retrieve the stored message by calling Arch's paging
terminal. Personalized greetings allow the subscriber to record a message to
greet callers
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<PAGE>
who reach the subscriber's pager or voice mail box. Message storage and
retrieval allows a subscriber who leaves Arch's service area to retrieve calls
that arrived during the subscriber's absence from the service area. Pager loss
protection allows subscribers who lease pagers to limit their costs of
replacement upon loss or destruction of a pager. Pager maintenance services are
offered to subscribers who own their own equipment. Arch is also in the process
of test marketing various other services that add value, [are not based on
Arch's facilities] and can be integrated with existing paging services. These
include, among other services, voicemail, resale of long distance service and
fax storage and retrieval.
Investments in Narrowband PCS Licenses
Arch has taken the following steps to position itself to participate in new and
emerging N-PCS services and applications.
Benbow PCS Ventures, Inc. Through Arch's May 1996 acquisition of Westlink, Arch
acquired a 49.9% equity interest in Benbow PCS Ventures, Inc. Benbow holds
(through Page Call, Inc.) exclusive rights to a 50 KHz outbound/12.5 KHz
inbound N-PCS license in each of the five regions of the United States. Benbow
is a "designated entity" (a small, minority-controlled or female-controlled
business) under FCC rules and is entitled to discounts and installment payment
schedules in the payment of its N-PCS licenses. Arch has the right to designate
one of Benbow's three directors and has veto rights with respect to specified
major business decisions by Benbow. To the extent that funds are not available
to Benbow from other sources subject to the approval of Arch's designee on
Benbow's Board of Directors, to service debt obligations incurred by Benbow in
connection with the acquisition of its N-PCS licenses and to finance
construction of an N-PCS system, Arch is obligated to advance to Benbow
sufficient funds. The total purchase price for Benbow's licenses (together with
the purchase price of licenses acquired from Page Call), net of the discounts,
was $42.5 million. Arch estimates that the total cost to Benbow of servicing
its license-related debt obligations and constructing such N-PCS system
(including the effect of the Page Call acquisition) will be approximately
$100.0 million over the next five years. Arch's advances to Benbow are secured
by Benbow's assets, bear interest at an interest rate equal to that paid by
Arch on its senior debt, are due on demand and must be repaid prior to any
distribution of profits by Benbow. With certain exceptions, Arch has agreed not
to exercise its right to demand repayment of such advances prior to the
occurrence of a default. As of September 30, 1998, Arch had advanced
approximately $20.0 million to Benbow.
Arch provides management services to Benbow, subject to Benbow's ultimate
control, under a five-year agreement expiring on October 1, 2000. Arch is paid
a management fee and is reimbursed for its expenses. Arch also has a right of
first refusal to provide Benbow with design, engineering and construction
services for its N-PCS system as well as to lease certain equipment to Benbow
for use in connection with such system. Arch has a right of first refusal with
respect to any transfer of shares held by Ms. June Walsh, who holds the
remaining 50.1% equity interest in Benbow. Ms. Walsh has the right to require
Arch, commencing January 23, 2000 (or sooner under certain circumstances), to
repurchase (subject to prior FCC approval) her Benbow shares for an amount
equal to the greater of (1) an amount between $3.5 million and $5.0 million,
depending on the timing and circumstances under which Ms. Walsh exercises her
put option, and (2) the fair market value of her shares (as determined by
arbitration if the parties do not agree). If Arch exercises its right of first
refusal or Ms. Walsh exercises her put option, Benbow could lose some of the
benefits of the discounts and installment payment schedules for its FCC
payments unless another "designated entity" acquired control of Benbow under
FCC rules. See Note 1 of Notes to Arch's Consolidated Financial Statements
included elsewhere herein.
Benbow needs to construct its N-PCS system (or make other arrangements) before
it can offer N-PCS services. Benbow has indicated that it plans to roll out its
services over time to reach approximately one-third of the population in the
licensed areas by the end of 1999. Benbow's network will use a ReFLEX(TM) 25
paging protocol developed by Motorola to support registration, acknowledgement
and two-way paging. Arch believes that Benbow could provide Arch with a
platform for a new generation of wireless messaging services, including two-way
messaging and other enhanced services. Arch also believes that the value of its
Benbow
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relationship was significantly enhanced by the completion of the Page Call
acquisition. Arch has yet to determine how to best integrate its N-PCS strategy
involving Benbow with MobileMedia's strategy of deploying its N-PCS Spectrum
which has already been funded.
On June 29, 1998, Benbow acquired Page Call's outstanding stock by issuing to
Page Call's former stockholders preferred stock and a 12% promissory note for
$17.2 million. Benbow also agreed to pay one of Page Call's stockholders
$911,000 over five years for consulting services. Benbow's preferred stock and
promissory note are exchangeable for Common Stock
. at any time at the holders' option, at an exchange price equal to the
higher of (1) $13.00 per share or (2) the market price of Common Stock,
. mandatorily on April 8, 2000, at the then prevailing market price of
Common Stock, or
. automatically at an exchange price of $13.00 per share, if the market
price of Common Stock equals or exceeds $13.00 for 20 consecutive
trading days.
Arch is permitted to require Benbow to redeem its preferred stock and
promissory note at any time for cash. Arch guaranteed all obligations of Benbow
under the Benbow preferred stock, promissory note and consulting agreement
described above. Arch may elect to make payments under its guarantee in Common
Stock or cash. Benbow's redemption of its preferred stock and promissory note
for cash, or Arch's payment of cash pursuant to its guarantees of Benbow's
preferred stock and promissory note, would depend upon the availability of
capital and any restrictions contained in applicable debt instruments and under
the Delaware corporations statute (which currently would not permit any such
cash redemptions or payments). If Arch issues Common Stock or pays cash
pursuant to its guarantees, Arch will receive from Benbow a promissory note and
non-voting, non-convertible preferred stock of Benbow with an annual yield of
14.5% payable upon an acquisition of Benbow or earlier to the extent that
available cash and applicable law permit. Page Call's stockholders received
customary registration rights for any shares of Common Stock issued in exchange
for Benbow's preferred stock and promissory note or pursuant to Arch's
guarantees.
CONXUS Communications, Inc. Arch currently holds a 10.5% equity interest in
CONXUS Communications, Inc., formerly known as PCS Development Corporation,
which holds exclusive rights to a 50 KHz outbound/50 KHz inbound two-way
messaging license throughout the United States. CONXUS, like Benbow, is a
"designated entity" under FCC rules and is entitled to discounts and
installment payment schedules.
Each stockholder of CONXUS is entitled to purchase services from CONXUS at
"most favored customer" rates, based on like services. CONXUS and Arch have
agreed to negotiate in good faith to enter into mutually acceptable
intercarrier, network access and similar agreements. If Arch wishes to purchase
N-PCS services of the kind offered by CONXUS, Arch has agreed to contract
exclusively with CONXUS for such services so long as such services are
competitive in price and quality with comparable services offered by others.
Arch is currently acting as a reseller of voice messaging services through
CONXUS in a limited number of markets.
Subscribers and Marketing
Arch's paging accounts are generally businesses with employees who travel
frequently but must be immediately accessible to their offices or customers.
Arch's subscribers include proprietors of small businesses, professionals,
management and medical personnel, field sales personnel and service forces,
members of the construction industry and trades, and real estate brokers and
developers. Arch believes that pager use among retail consumers will increase
significantly in the future, although consumers do not currently account for a
substantial portion of Arch's subscriber base.
Although today Arch operates in more than 180 of the 200 largest U.S. markets,
Arch historically has focused on medium-sized and small market areas with lower
rates of pager penetration and attractive demographics. Arch believes that
these markets will continue to offer significant opportunities for growth, and
that its national scope and presence will also provide Arch with growth
opportunities in larger markets.
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Arch markets its paging services through a direct marketing and sales
organization which, as of September 30, 1998, operated approximately 200 retail
stores. Arch also markets its paging services indirectly through independent
resellers, agents and retailers. Arch typically offers resellers paging
services in large quantities at wholesale rates that are lower than retail
rates, and resellers offer the services to end-users at a markup. Arch's costs
of administering and billing resellers are lower than the costs of direct end-
users on a per pager basis.
Arch also acts as a reseller of other paging carriers' services when existing
or potential Arch customers have travel patterns that require paging service
beyond the coverage of Arch's own networks.
In May 1997, Arch established a single national identity, Arch Paging, for its
paging services which previously had been marketed under various trademarks. As
part of this branding initiative, Arch adopted a new corporate logo, developed
a corporate-wide positioning strategy tied to customer service delivery, and
launched its Internet Web site at www.arch.com. Arch believes that its unified
branding identity has given the Arch name national exposure for the first time
and should result in significant economic leverage in its marketing and
communications efforts.
Competition
See "Industry Overview--Competition".
Regulation
See "Industry Overview--Regulation".
Sources of Equipment
Arch does not manufacture any of the pagers or other equipment used in its
paging operations. The equipment used in Arch's paging operations is generally
available for purchase from multiple sources. Arch centralizes price and
quantity negotiations for all of its operating subsidiaries in order to achieve
cost savings from volume purchases. Arch buys pagers primarily from Motorola
and NEC and purchases terminals and transmitters primarily from Glenayre and
Motorola. Arch anticipates that equipment and pagers will continue to be
available in the foreseeable future, consistent with normal manufacturing and
delivery lead times. See "Risk Factors--Dependence on Third Parties for
Products and Services".
Because of the high degree of compatibility among different models of
transmitters, computers and other paging equipment manufactured by suppliers,
Arch is able to design its systems without being dependent upon any single
source of such equipment. Arch routinely evaluates new developments in paging
technology in connection with the design and enhancement of its paging systems
and selection of products to be offered to subscribers. Arch believes that its
paging system equipment is among the most technologically sophisticated in the
paging industry.
Employees
At September 30, 1998, Arch employed approximately 2,700 persons. None of
Arch's employees is represented by a labor union. Arch believes that its
employee relations are good. As part of the divisional reorganization, Arch
anticipates a net reduction of approximately 10% of its workforce. See "Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Divisional Reorganization".
Trademarks
Arch owns the service marks "Arch" and "Arch Paging", and holds a federal
registration for the service mark "Arch Nationwide Paging" as well as various
other trademarks.
Properties
At September 30, 1998, Arch owned five office buildings and leased office space
(including its executive offices) in over 200 localities in 35 states for use
in conjunction with its paging operations. Arch leases transmitter sites and/or
owns transmitters on commercial broadcast towers, buildings and other fixed
structures in approximately 3,200 locations in 45 states. Arch's leases are for
various terms and provide for monthly lease
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payments at various rates. Arch believes that it will be able to obtain
additional space as needed at acceptable cost. In June 1998, Arch began a
process of selling communications towers, real estate, site management
contracts and/or leasehold interests involving 133 sites in 22 states. Arch
will lease back space on the towers on which it currently operates
communications equipment to service its own paging network. Arch expects to
complete the entire transaction in the first quarter of 1999. As part of the
divisional reorganization, Arch will close certain office locations and
redeploy other real estate assets. See "Arch Management's Discussion and
Analysis of Financial Condition and Results of Operations --Shift in Operating
Focus" and "--Divisional Reorganization".
Litigation
Arch, from time to time, is involved in lawsuits arising in the normal course
of business. Arch believes that its currently pending lawsuits will not have a
material adverse effect on Arch.
MobileMedia's Business
MobileMedia has operated one of the largest paging businesses in the United
States, with approximately 3.2 million units in service as of September 30,
1998. Through its sales offices, nationwide retail distribution network,
company-operated retail stores and resellers, MobileMedia offers local,
regional and national coverage to subscribers in all 50 states and the District
of Columbia, including local coverage to each of the 100 most populated
metropolitan markets in the United States. MobileMedia markets its services
primarily under the MobileComm brand name. MobileMedia Communications, Inc. and
various subsidiaries of MobileMedia Communications, Inc. hold MobileMedia's FCC
licenses and, where applicable, state public utility commission authorizations
that grant MobileMedia the authority to operate its paging systems.
MobileMedia distributes its paging services using three primary distribution
channels: direct, reseller and retail, as described below. MobileMedia's paging
and wireless messaging services consist principally of numeric and alphanumeric
paging services offering local, regional and national coverage. As of September
30, 1998, MobileMedia had approximately 2.6 million numeric units in service,
representing approximately 80% of its subscriber base, approximately .6 million
alphanumeric units in service, representing approximately 19% of its subscriber
base, with other types of units in service representing the remaining
approximately 1% of its subscriber base.
Business Strategy
Since making its bankruptcy filing, MobileMedia has been engaged in
restructuring its operations with the objective of improving performance,
principally in the areas of order entry, billing and collections, inventory
controls, management information systems conversion and customer service.
MobileMedia has also undertaken cost reduction analyses and has taken actions
that have the objective of reducing telecommunications, subcontracting and
lease expenses, among others. In addition, MobileMedia has sought to refocus
its marketing and sales efforts in an attempt to achieve unit additions
consistent with positive cash flow, and is continuing to change its management
structure with the objective of establishing profit and loss accountability in
each market.
Paging and Messaging Services Products and Operations
Paging and Messaging Services
MobileMedia currently offers a variety of paging and messaging services. To
send a page to a MobileMedia subscriber, a party must initiate contact with a
paging terminal. This is typically accomplished, depending on the type of
paging service, by use of a touch-tone telephone, with the assistance of an
operator employed by or working on behalf of MobileMedia or through software
loaded onto the sender's personal computer, an input device or the Internet.
The paging terminal then sends an encoded message to MobileMedia's transmitter
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network, which broadcasts the call to its geographic service area. This
broadcast signal is received by the subscriber's pager, which decodes the
information, alerts the subscriber and displays the message received. The main
paging services offered by MobileMedia are:
Numeric (Digital Display) Paging Service. Numeric paging service permits a
caller, using a touch-tone telephone, to transmit to a subscriber a numeric
message consisting of a telephone number, an account number or coded
information. Numeric pagers have memory capability to store several such
numeric messages which can be recalled by a subscriber when desired. As of
September 30, 1998, MobileMedia had approximately 2.6 million numeric units
in service.
Alphanumeric Paging Service. Alphanumeric paging service allows subscribers
to receive and store messages consisting of both letters and numbers.
Alphanumeric pagers have sufficient memory to store numerous messages. This
service has the capability to tie into computer-based networks to provide
advanced messaging services. Callers may send messages either by using an
operator dispatch center, a personal computer equipped with a modem and
MessageSoft software or a portable alphanumeric input device, such as the
AlphaMate manufactured by Motorola. Internet and WorldWide Web access is
also possible for many alphanumeric paging customers. As of September 30,
1998, MobileMedia had approximately .6 million alphanumeric units in
service.
Other Services. In addition to local, regional and nationwide paging
service--both numeric and alphanumeric--MobileMedia offers a variety of
enhanced services such as voice mail and voice mail notification, e-mail
notification and news, sports reports and stock quotes.
The following table sets forth the number of MobileMedia customers by service
type as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31, As of September 30,
------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
Type of Service Number % Number % Number % Number % Number %
--------------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Numeric Display......... 1,934,774 81.7% 3,713,579 83.9% 2,820,443 82.0% 3,033,939 82.4% 2,553,261 80.2%
Alphanumeric............ 384,843 16.2% 658,769 14.9% 593,280 17.2% 614,909 16.7% 613,195 19.3%
Other................... 49,484 2.1% 51,759 1.2% 26,619 0.8% 32,221 0.9% 15,751 0.5%
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 2,369,101 100.0% 4,424,107 100.0% 3,440,342 100.0% 3,681,069 100.0% 3,182,207 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
Customers with
nationwide services
(included above)....... 63,101 325,924 330,254 336,818 334,498
</TABLE>
Products and Services
Subscribers for paging services enter into a service contract with MobileMedia
that provides for either the purchase or lease of pagers and the payment of
airtime and other charges. As of September 30, 1998, approximately 49% of units
in service were purchased either by subscribers or by resellers, and
approximately 51% were owned by MobileMedia and leased to subscribers. COAM
(customer-owned and -maintained) pagers and those owned by resellers do not
require capital investment by MobileMedia, unlike MobileMedia-owned pagers
leased to subscribers. MobileMedia also sells its services in bulk quantities
to resellers, who subsequently sell MobileMedia's services to end-users.
Resellers are responsible for sales, billing, collection and equipment
maintenance costs. MobileMedia sells other products and services, including
pagers and accessories and pager replacement and maintenance contracts. The
following table sets forth MobileMedia's units in service by ownership as of
the dates indicated.
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<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of September 30,
------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
Ownership Number % Number % Number % Number % Number %
--------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company owned and rented
to subscribers......... 1,087,183 45.9% 1,996,141 45.2% 1,712,941 49.8% 1,808,134 49.1% 1,630,340 51.2%
COAM.................... 514,068 21.7% 1,112,194 25.1% 861,250 25.0% 940,302 25.6% 759,229 23.9%
Resellers............... 767,850 32.4% 1,315,772 29.7% 866,151 25.2% 932,633 25.3% 792,638 24.9%
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 2,369,101 100.0% 4,424,107 100.0% 3,440,342 100.0% 3,681,069 100.0% 3,182,207 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
Networks and Licenses
MobileMedia operates local, regional and national paging networks which enable
its customers to receive pages over a broad geographical area. The extensive
coverage provided by this network infrastructure provides MobileMedia with an
advantage over certain competitors whose networks lack comparable coverage in
securing accounts with large corporate clients and retail chains, who
frequently demand national network coverage from their paging service provider.
Although MobileMedia's networks provide local, regional and national coverage,
its networks operate over numerous frequencies and are subject to capacity
constraints in certain geographic markets. Although the
capacity of MobileMedia's networks varies significantly market by market,
almost all of MobileMedia's markets have adequate capacity to meet the demands
of projected growth for the next several years. In addition, MobileMedia is in
the process of adding additional capacity to its network infrastructure through
its Narrowband PCS buildout described below. The use of multiple frequencies
adds complexity to inventory management, customer service and order fulfillment
processes. Certain of MobileMedia's networks utilize older technologies and are
comparatively costlier to operate.
MobileMedia is seeking to improve overall network efficiency through the
deployment of new paging terminals, the consolidation of subscribers on fewer,
higher capacity networks and increasing the transmission speed (baud rate) of
certain of its existing networks. MobileMedia believes its investments in its
network infrastructure will facilitate and improve the delivery of high quality
paging services while at the same time reducing associated costs of such
services.
Nationwide wireless networks. MobileMedia operates two nationwide 900 MHz
networks. As part of the MobileComm Acquisition, MobileMedia acquired
MobileComm's fully operational nationwide wireless "8875" network, which
was upgraded in 1996 to incorporate high-speed FLEX(TM) technology
developed by Motorola. In addition, in 1996, MobileMedia completed the
construction of a second nationwide "5375" network that uses FLEX(TM)
technology. The use of FLEX(TM) technology significantly increases
transmission capacity and represents a marked improvement over other
systems that use older paging protocols.
Nationwide two-way narrowband PCS networks. Narrowband PCS networks enable
paging companies to offer two-way paging services and to make more
efficient use of radio spectrum than do non-PCS networks. MobileMedia
purchased five regional licenses through the FCC's 1994 auction of
narrowband PCS licenses, providing the equivalent of a nationwide 50 kHz
outbound/12.5 kHz inbound PCS system. In addition, as part of the
MobileComm Acquisition, MobileMedia acquired a second two-way narrowband
PCS license for a nationwide 50 kHz outbound/12.5 kHz inbound system.
In order to retain its narrowband PCS licenses, MobileMedia must comply with
certain minimum buildout requirements. With respect to each of the regional PCS
licenses purchased at the FCC's 1994 auction, MobileMedia would be required to
build out the related PCS system to cover 150,000 sq. km. or 37.5% of each of
the five regional populations by April 27, 2000 and 300,000 sq. km. or 75% of
each of the five regional populations by April 27, 2005. With respect to the
nationwide PCS license acquired as part of the MobileComm Acquisition,
MobileMedia would be required to build out the related PCS system to cover
750,000 sq. km. or 37.5% of the U.S. population by September 29, 1999 and
1,500,000 sq. km. or 75% of the U.S. population by September 29, 2004. In each
instance, the population percentage will be determined by
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reference to population figures at the time of the applicable deadline.
MobileMedia estimates that the costs of these minimum build-outs (which would
not be sufficient for MobileMedia to provide significant narrowband PCS
applications) could be as much as approximately $9.0 million. MobileMedia has
concluded that, given the expected high demand for nationwide alphanumeric
services, the potential demand for guaranteed receipt services and
MobileMedia's high fixed costs for maintaining and building out its existing
networks, the most economical means for satisfying projected demand is for
MobileMedia to construct a fully operational narrowband PCS network with
ReFLEX(TM) 25 capability. MobileMedia estimates that the cost for this
construction will be approximately $40.0 million over the next two years, and
that it will be able to complete the construction relatively economically using
its existing nationwide network infrastructure and supplementing it with
additional transmitters and receivers. On May 12, 1998, the bankruptcy court
authorized MobileMedia to enter into contracts during 1998 up to the amount of
$16.0 million in connection with the buildout of the network necessary to
support narrowband PCS services.
Sales and Marketing
MobileMedia's sales and marketing efforts are directed toward adding additional
units with existing subscribers and identifying new potential subscribers.
Subscribers to MobileMedia's paging and wireless communications services
generally have been individuals and organizations whose employees are highly
mobile or whose business involves multiple work locations and who are required
to remain in contact at all times. Traditional subscribers include medical
personnel, sales and service organizations, specialty trade organizations,
manufacturing organizations and governmental agencies. However, paging services
are increasingly appealing to mass market consumers for private, non-business
uses such as communicating with family and friends.
Sales Channels
MobileMedia markets its paging services through three primary sales channels:
direct, reseller and retail.
Direct. In the direct channel, MobileMedia leases or sells pagers directly
to its customers and bills and services such customers. MobileMedia's
direct customers range from individuals and small- and medium-sized
businesses to Fortune 500 accounts and government agencies. Business and
government accounts typically exhibit lower churn rates than consumer
accounts. The direct channel will continue to have the highest priority
among MobileMedia's marketing and sales efforts, given its critical
contribution to recurring revenue and projected growth. MobileMedia is
engaged in efforts to improve sales productivity and strengthen its direct
channel sales force, which suffered from high turnover and open positions
during much of 1997. In addition, MobileMedia has commenced implementing
consumer direct marketing techniques in 1998. As of September 30, 1998, the
direct channel accounted for approximately 79% of recurring revenue.
Reseller. In the reseller channel, MobileMedia sells access to its
transmission networks in bulk to a third party, who then resells such
services to the end users (usually consumers or small businesses).
MobileMedia offers paging services to resellers at bulk discounted rates.
The third party reseller provides customer service, is responsible for
pager maintenance and repair costs, invoices the end user and retains the
credit risk of the end user, although MobileMedia retains the credit risk
of the reseller. Because resellers are responsible for customer equipment,
the capital costs that would otherwise be borne by MobileMedia are reduced.
MobileMedia's resellers generally are not exclusive distributors of
MobileMedia's services and often resell paging services of more than one
provider. Competition among service providers to attract and maintain
reseller distribution is based primarily upon price, including the sale of
pagers to resellers at discounted rates. MobileMedia intends to be an
active participant in the reseller channels and to concentrate on accounts
that are profitable and where longer term partnerships can be established
with selected resellers. As of September 30, 1998, the reseller channel
accounted for approximately 11% of recurring revenue.
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Retail. In the retail channel, MobileMedia sells pagers to retailers and,
after the consumer purchases the pager from the retailer, the consumer
contacts MobileMedia to activate service. The retail channel is targeted at
the consumer market and consists primarily of national retail chains.
Consumers served by the retail channel typically purchase (as opposed to
lease) paging units, reducing MobileMedia's capital investment
requirements. Subscribers obtained through retailers are billed and
serviced directly by MobileMedia. Retail distribution permits MobileMedia
to penetrate the consumer market by supplementing direct sales efforts. As
of September 30, 1998, the retail channel accounted for approximately 10%
of recurring revenue.
Competition
See "Industry Overview--Competition".
Regulation
See "Industry Overview--Regulation".
Sources of Equipment
MobileMedia does not manufacture any of the pagers or related transmitting and
paging terminal equipment used in its paging operations. MobileMedia currently
purchases pagers from a limited number of suppliers and in turn sells or
leases the pagers to its subscribers. Motorola is the primary supplier of
pagers to MobileMedia. Glenayre is MobileMedia's primary supplier of paging
terminals, paging transmitters and voice mail system equipment. On February 6,
1997, MobileMedia obtained bankruptcy court approval to pay the pre-petition
outstanding accounts payable owing to its key suppliers, Motorola, Glenayre,
NEC and Panasonic Communications & Systems Company, in exchange for which each
of Motorola, NEC, Panasonic and Glenayre entered into post-petition supply
agreements with MobileMedia.
Employees
At September 30, 1998, MobileMedia employed 3,072 people in various
capacities, with 161 in MobileMedia's corporate headquarters in Fort Lee, New
Jersey and the balance in its five regions. None of such employees is covered
by collective bargaining agreements. MobileMedia believes its employee
relations are good.
Trademarks
MobileMedia markets its services primarily under the trade name MobileComm and
the federally registered mark MOBILECOMM, except in the Greater Metropolitan
Cincinnati area and in certain parts of Western Pennsylvania and Western New
York, in which it markets its services under the federally registered mark
MOBILEMEDIA. MobileMedia markets its messaging services under the federally
registered mark VOICESTAR, and other services under the federally registered
mark SPORTSCASTER and the unregistered mark MOBILECOMM CITYLINK. MobileMedia
also owns other federally registered marks including: DIAL PAGE, DMC DIGITAL
MOBILE COMMUNICATIONS, EZ ALERT, MEMORY MANAGER, MESSAGESOFT, MOBILEMEDIA (and
design) MOBILEMEDIA (and Globe Design), MOBILEMEDIA PAGING & PERSONALCOM and
PAGERXTRA. In addition, MobileMedia has applications on file for federal
registration of the marks MMS and MOBILECOMM (and design.)
Properties
In addition to its FCC licenses and network infrastructure (which includes
radio transmission and satellite uplink equipment), MobileMedia has the
following categories of assets: (1) pagers (including both pagers held as
fixed assets for lease and pager inventory for sale), pager parts and
accessories; (2) its subscriber base and related accounts receivable; (3)
intellectual property; (4) real estate and improvements; (5) leased assets;
(6) computer and telephone systems and equipment; (7) furniture, fixtures and
equipment; (8) ownership of one-
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third of the equity of Abacus Communications Partners, L.P.; (9) goodwill and
other intangibles; and (10) cash and cash equivalents.
MobileMedia relocated its headquarters to Fort Lee, New Jersey as of March 23,
1998. At September 1, 1998, MobileMedia leased office space (including its
executive offices) in approximately 33 states for use in conjunction with its
paging operations. MobileMedia leases transmitter sites and/or owns
transmitters on commercial broadcast towers, buildings and other fixed
structures. MobileMedia's leases are for various terms and provide for monthly
lease payments at various rates. MobileMedia believes that it will be able to
obtain additional space as needed at acceptable cost.
On September 3, 1998, MobileMedia sold certain transmission towers and
associated assets to an unrelated third party and currently rents transmitter
space on these towers. MobileMedia recognized proceeds from such sale of
$170.0 million, and the annual rental expense is approximately $10.7 million.
Events Leading Up To MobileMedia's Bankruptcy Filings
Beginning in 1995, MobileMedia grew its business primarily through
acquisitions. In August 1995, MobileMedia completed the acquisition of the
paging and wireless messaging business of Dial Page. The
purchase price of the Dial Page acquisition was largely financed through an
initial public offering of 8,800,000 shares of MobileMedia's parent company's
Class A Common Stock which, at a price to the public of $18.50 per share,
generated net proceeds of approximately $151.9 million. These proceeds were
contributed to MobileMedia Communications, Inc. The total purchase price of the
Dial Page acquisition was $187.4 million, which included the assumption of $85
million outstanding principal amount of the 12 1/4% Dial Page notes.
Concurrently with the transaction, MobileMedia Communications, Inc. repurchased
all but approximately $1.6 million of the Dial Page notes. The Dial Page
acquisition added approximately 0.4 million units in service in the
southeastern United States to MobileMedia Communications, Inc.'s subscriber
base.
In January 1996, MobileMedia completed the acquisition of MobileComm, the
paging and wireless messaging unit of BellSouth Corporation and an associated
nationwide two-way narrowband 50/12.5 kHz PCS license. The purchase price for
the MobileComm acquisition was $928.7 million which was financed by
(1) MobileMedia's parent company's public offering of 15,525,000 shares of
Class A Common Stock which, at a price to the public of $23.75 per share,
generated net proceeds of approximately $354.9 million, of which $340.0 million
was contributed by the parent company to MobileMedia Communications, Inc., (2)
a concurrent public offering by MobileMedia Communications, Inc. of $250.0
million aggregate principal amount at maturity of 9 3/8% Notes and (3) loan
facilities aggregating $750.0 million, consisting of a $550.0 million secured
term loan facility and a $200.0 million secured revolving loan facility, $500.0
million of the secured term loan facility was used as consideration for the
MobileComm acquisition. $50.0 million dollars of MobileMedia's 1995 credit
facility was used to repay MobileMedia's former credit facility. The MobileComm
acquisition added approximately 1.7 million units in service to MobileMedia's
subscriber base.
During 1996, MobileMedia experienced difficulties executing its post-
acquisition business strategy. These difficulties related largely to the
process of integration of the operations of Dial Page and MobileComm into those
of MobileMedia. As a result, MobileMedia did not achieve expected growth in its
subscriber base and revenues, nor did it realize anticipated efficiencies and
cost reductions from the elimination of duplicative functions.
During 1996, MobileMedia's financial position deteriorated. As of September 30,
1996, MobileMedia Communications, Inc. was in violation of certain financial
covenants under its $750.0 million 1995 credit agreement, which resulted in the
occurrence of events of default under that agreement and precluded MobileMedia
from borrowing additional funds thereunder. MobileMedia Communications, Inc.'s
obligations under its 1995 credit agreement were guaranteed by its parent
company and by all the subsidiaries of MobileMedia Communications, Inc. In the
fall of 1996, MobileMedia commenced negotiations with The Chase Manhattan Bank,
the agent for the lenders under the 1995 credit agreement, regarding the terms
of a possible financial restructuring.
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In November and December of 1996, MobileMedia sought to modify payment terms
with certain of its larger vendors, some of which had not been paid in
accordance with their scheduled payment terms. In the fall of 1996, Motorola,
MobileMedia's largest supplier of pagers and pager repair parts, informed
MobileMedia that it would require credit support to assure payment of
approximately $35.0 million past due accounts payable and would refuse to
accept orders for products or services from, and refuse to make shipments to,
MobileMedia pending resolution of the matter. Subsequently, Glenayre,
MobileMedia's primary supplier of paging terminals, transmitters and related
parts, and NEC and Panasonic, MobileMedia's secondary suppliers of pagers, also
made demands on MobileMedia for payment of their past due accounts in the
aggregate amount of $11.8 million.
On November 1, 1996, MobileMedia failed to make a scheduled interest payment of
approximately $11.8 million on MobileMedia's 9 3/8% Notes, which failure was
not cured during the 30-day grace period ending November 30, 1996. In addition,
in December 1996 and January 1997, MobileMedia failed to make scheduled
interest payments in the aggregate amount of approximately $13.4 million under
MobileMedia's 1995 Credit Agreement.
Negotiations between MobileMedia and the holders of the MobileMedia 9 3/8%
Notes and certain other outstanding notes and with the MobileMedia's key
suppliers continued through late 1996. When it became apparent that MobileMedia
would be unable, among other things, to reach agreements with the key suppliers
to resume shipments of critical inventory and equipment or to reach agreement
with its lenders and on the terms of a restructuring of its indebtedness
outside of Chapter 11 of the Bankruptcy Code, MobileMedia concluded that it had
no practical alternative other than to seek protection under Chapter 11.
On January 30, 1997, MobileMedia filed a voluntary petition for reorganization
under Chapter 11. For subsequent developments, see "MobileMedia Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview".
Predecessors to the Combined Company
A predecessor to Arch, also named Arch Communications Group, Inc., was
incorporated in January 1986 in Delaware and conducted its operations through
wholly owned direct and indirect subsidiaries. On September 7, 1995, this
predecessor completed its acquisition of USA Mobile Communications Holdings,
Inc. through the merger of the predecessor with and into USA Mobile, which
simultaneously changed its name to Arch Communications Group, Inc. and
continued in existence as a Delaware corporation. In accordance with GAAP, the
predecessor was treated as the acquirer in such merger for accounting and
financial reporting purposes, and Arch reports the historical financial
statements of the predecessor as its historical financial statements. See Note
2 to Arch's Consolidated Financial Statements.
MobileMedia Communications, Inc. and its parent company were each incorporated
in Delaware in 1993. Unless the context otherwise requires, references to
MobileMedia refer to MobileMedia Communications, Inc. and its consolidated
subsidiaries, exclusive of the parent company. In 1995 and 1996, MobileMedia
Communications, Inc. acquired the paging and wireless messaging business of
Dial Page Inc. and acquired Mobile Communications Corporation of America for
approximately $1.1 billion in the aggregate. MobileMedia's financial position
deteriorated during 1996. See "MobileMedia's Business--Events Leading up to
MobileMedia's Bankruptcy Filing". On January 30, 1997, MobileMedia
Communications, Inc. Parent, MobileMedia Communications, Inc. and all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 with
the U.S. Bankruptcy Court for the District of Delaware. During the pendency of
the subsequent insolvency proceedings, MobileMedia's management continued to
manage the operations and affairs of the Companies as debtors-in-possession
under the jurisdiction of the bankruptcy court until Arch acquired MobileMedia
on , 1999. For more information, see "MobileMedia Management's Discussion
and Analysis of Financial Condition and Results of Operations".
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The MobileMedia Acquisition
The Merger
To consummate the MobileMedia acquisition on , 1999, MobileMedia
Communications, Inc. was merged with and into a wholly owned subsidiary of
Arch. Immediately following this merger, Arch contributed all of the
outstanding stock of the surviving corporation to API, an indirect wholly owned
subsidiary of Arch. Immediately prior to the Merger, MobileMedia's parent
company had contributed all of its assets to MobileMedia Communications, Inc.
In connection with the merger, MobileMedia Communications, Inc.'s subsidiaries
were consolidated into a single subsidiary of MobileMedia Communications, Inc.
which became an indirect wholly owned subsidiary of Arch as a result of the
merger.
Purchase Price
Arch acquired MobileMedia for a combination of cash and Arch securities, as
follows:
. Arch paid approximately [$479.0] million in cash to certain secured
creditors of the MobileMedia debtors-in-possession and reimbursed $ of
their attorneys' and other fees;
. Arch paid a total of $ million to pay fees and expenses, repay all
borrowings outstanding under MobileMedia's post-petition credit facility,
pay pre-petition priority claims and post-petition claims incurred by the
debtors-in-possession in the ordinary course of business or authorized by
the bankruptcy court, and pay principal and accrued interest plus certain
indenture trustee fees outstanding under certain senior notes assumed by
MobileMedia in the acquisition of the paging and wireless business of Dial
Page in 1995;
. Arch issued 14,344,969 shares of Common Stock to unsecured creditors of
MobileMedia and its parent company;
. Arch issued and sold an additional shares of Common Stock upon
exercise of transferable rights issued to unsecured creditors and issued and
sold shares of Common Stock and shares of Class B Common Stock to
certain unsecured creditors who agreed to act as standby purchasers and to
purchase shares in case transferable rights to purchase them were not
exercised. The holders of transferable rights and the standby purchasers
paid a price of $2.00 per share for a total of [108,500,000] shares and a
total purchase price of [$217.0] million.
. Arch issued to the Standby Purchasers warrants to acquire up to 3,675,659
shares of Common Stock on or before September 1, 2001 at the warrant
exercise price of [$3.25] per share. The warrant exercise price was equal to
the amount that would result at September 1, 2001 from an investment of
$2.00 on , 1999 (the closing date for the MobileMedia acquisition)
assuming a 20% per annum internal rate of return.
Arch also issued to the holders of Common Stock and Series C Preferred Stock on
, 1999 non-transferable rights to acquire up to 44,893,166 shares of
Common Stock at a price of $2.00 per share. A total of non-transferable
rights were exercised. Because non-transferable rights to acquire shares
were not exercised, Arch has distributed in their place warrants to acquire an
equivalent number of shares of Common Stock at the warrant exercise price of
[$3.25] per share.
Accounting Treatment
The merger is being accounted for under the "purchase" method of accounting;
the purchase price will be allocated based on the fair value of the assets
acquired and the liabilities assumed. In accordance with GAAP, Arch will be
treated as the acquiror in the merger for accounting and financial reporting
purposes, and Arch will continue to report its historical financial statements
as the historical financial statements of the combined company.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of Arch are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Edward Baker, Jr..... 48 Chairman of the Board, Chief Executive Officer and Director
Lyndon R. Daniels....... 46 President and Chief Operating Officer
John B. Saynor.......... 58 Executive Vice President and Director
J. Roy Pottle........... 39 Executive Vice President and Chief Financial Officer
Paul H. Kuzia........... 56 Executive Vice President/Technology and Regulatory Affairs
R. Schorr Berman(1)(2).. 50 Director
James S. Hughes(1)...... 56 Director
Allan L. Rayfield(2).... 63 Director
John A. Shane(1)(2)..... 65 Director
John Kornreich.......... 53 Director
Edwin M. Banks.......... 36 Director
H. Sean Mathis.......... 51 Director
</TABLE>
- --------
(1) Member of the Audit Committee of Arch.
(2) Member of the Executive Compensation and Stock Option Committee of Arch.
C. Edward Baker, Jr. has served as Chief Executive Officer and a director of
Arch since 1988 and of ACI since 1995. Mr. Baker became Chairman of the Board
of Arch in 1989 and of ACI in 1995. He also served as President of Arch from
1988 to January 1998 and of ACI from 1995 to January 1998. From 1986 until
joining Arch in March 1988, Mr. Baker was President and Chief Executive Officer
of US West Paging.
Lyndon R. Daniels joined Arch and ACI in January 1998 as President and Chief
Operating Officer. From November 1993 to January 1998, Mr. Daniels was the
President and Chief Executive Officer of Pacific Bell Mobile Services, a
subsidiary of SBC Communications Inc. From May 1988 until November 1993, Mr.
Daniels was the Chief Financial Officer of Pactel Corp., a mobile telephone
company.
John B. Saynor has served as a director of Arch since 1988 and of ACI since
1995. Mr. Saynor has served as Executive Vice President of ACI since 1995 and
of Arch since 1990. Mr. Saynor is a founder of Arch and served as President and
Chief Executive Officer of Arch from 1986 to March 1988 and as Chairman of the
Board from 1986 until May 1989.
J. Roy Pottle joined Arch and ACI in February 1998 as Executive Vice President
and Chief Financial Officer. From October 1994 to February 1998, Mr. Pottle was
Vice President/Treasurer of Jones Intercable, Inc., a cable television
operator. From September 1989 to October 1994, he served as Vice President and
Relationship Manager at The Bank of Nova Scotia, New York Agency.
Paul H. Kuzia has served as Executive Vice President/Technology and Regulatory
Affairs of Arch and ACI since September 1996. He served as Vice
President/Engineering and Regulatory Affairs of Arch from 1988 to September
1996 and of ACI from 1995 to September 1996. Prior to 1988, Mr. Kuzia was
director of operations at Message Center Inc.
R. Schorr Berman has been a director of Arch since 1986 and of ACI since 1995.
Since 1987, he has been the President and Chief Executive Officer of MDT
Advisers, Inc., an investment adviser. He is a director of Mercury Computer
Systems, Inc. as well as a number of private companies.
James S. Hughes has been a director of Arch since 1986 and of ACI since 1995.
Since 1987, he has been President and Chief Executive Officer of Norwich
Corporation, a real estate investment and service firm, and, since 1992, he has
served as President and Managing Director of Inventa Corporation, an
international business development firm.
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Allan L. Rayfield has been a director of Arch since 1997 and of ACI since 1998.
He has been a consultant since 1995. From November 1993 until December 1994,
Mr. Rayfield served as Chief Executive Officer of M/A Com Inc., a microwave
electrical manufacturing company. From April 1991 until November 1993, he
served as Chief Operating Officer of M/A Com Inc. He is a director of Parker
Hannifin Corporation and Acme Metals Incorporated.
John A. Shane has been a director of Arch since 1988 and of ACI since 1995. He
has been the President of Palmer Service Corporation since 1972. He has been a
general partner of Palmer Partners L.P., a venture capital firm, since 1981. He
serves as a director of Overland Data, Inc., Summa Four, Inc., United Asset
Management Corporation and Gensym Corporation and as a trustee of Nvest Funds.
John Kornreich has been a director of Arch and ACI since June 1998. Mr.
Kornreich has served as a Managing Director of Sandler Capital Management Co.,
Inc. since 1988.
Edwin M. Banks, age 36, has been employed by W.R. Huff Asset Management since
1988 and currently serves as a portfolio manager. From 1985 until he joined
W.R. Huff, Mr. Banks was employed by Merrill Lynch & Company. Mr. Banks
received his B.A. degree from Rutgers College and his MBA degree from Rutgers
University. Mr. Banks also serves as a director of Magellan Health Services,
formerly Charter Medical Corporation, and e.spire Corporation (formerly
American Communications Services, Inc.).
H. Sean Mathis, age 51, has been Chairman of the Board and Chief Executive
Officer of Allis Chalmers, Inc. since January 1996 and previously served as a
Vice President of such company since 1989. From July 1996 to September 1997,
Mr. Mathis was Chairman of the Board of Universal Gym Equipment Inc., a
privately owned company which filed for protection under the Bankruptcy Code in
July 1997. From 1991 to 1993, Mr. Mathis was President of RCL Acquisition
Corp., and from 1993 to 1995 he was President and a director of RCL Capital
Corporation, which was merged into DISC Graphics in November 1995. Previously,
Mr. Mathis was a director and Chief Operating Officer of Ameriscribe
Corporation. Mr. Mathis was the President of a predecessor to, and currently is
a director of, Allied Digital Technologies. He is also a director of Thousand
Trails, Inc.
Arch's Certificate of Incorporation and By-Laws provide that Arch has a
classified Board of Directors composed of three classes, each of which serves
for three years, with one class being elected each year. The term of Messrs.
Hughes and Rayfield [and ] will expire at Arch's annual meeting of
stockholders to be held in 1999, the term of Messrs. Saynor and Shane [and
] will expire at Arch's annual meeting of stockholders to be held in 2000
and the term of Messrs. Baker, Berman and Kornreich [and ] will expire at
Arch's annual meeting of stockholders to be held in 2001.
Two of the standby purchasers, W.R. Huff and Whippoorwill, have the right to
designate one member each for election to the Boards of Directors of Arch and
ACI. This right of designation will continue through 2002 (for W.R. Huff) and
2003 (for Whippoorwill) if the designating stockholder is still entitled to
cast at least 5% of all votes at an Arch stockholders' meeting, and afterwards
if the designating stockholder is still entitled to cast at least 10% of all
such votes. Under this arrangement, Messrs. Banks and Mathis have been elected
to the Arch's Board of Directors and the Board of Directors of ACI.
The holders of Series C Preferred Stock have the right, voting as a separate
class, to elect one member of the Board of Directors of Arch and ACI, and such
director has the right to be a member of any committee of such Boards of
Directors. Mr. Kornreich is currently the director elected by the holders of
Series C Preferred Stock. This right of designation will terminate if less than
50% of the Series C Preferred Stock remains outstanding.
Arch's executive officers are elected by the Board of Directors and hold office
until their successors are elected or until their earlier death, resignation or
removal.
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<PAGE>
Some of Arch's executive officers have entered into non-competition agreements
with Arch which provide that they will not compete with Arch for one year
following termination, or recruit or hire any other Arch employee for three
years following termination.
Certain Relationships and Related Transactions
Arch and three other entities have co-founded an offshore corporation to pursue
wireless messaging opportunities in Latin America. Arch and Mr. Hughes each
contributed $250,000 to this offshore corporation and each owns 13.3% of its
equity.
Between August 6, 1998 and October 28, 1998, Arch's Board of Directors approved
three full recourse, unsecured demand loans totaling $279,500 from Arch to Mr.
Baker. The loans bear interest at approximately 5% annually.
Board Committees
Arch's Board of Directors has an Audit Committee and an Executive Compensation
and Stock Option Committee. The Audit Committee reviews the annual consolidated
financial statements of Arch and its subsidiaries prior to their submission to
Arch's Board of Directors and consults with Arch's independent public
accountants to review financial results, internal financial controls and
procedures, audit plans and recommendations. The Audit Committee also
recommends the selection, retention or termination of independent public
accountants and approves services provided by independent public accountants
prior to the provision of such services. The Compensation Committee recommends
to Arch's Board the compensation of executive officers, key managers and
directors and administers Arch's stock option plans. Arch's Board of Directors
has no standing nominating committee.
Indemnification and Director Liability
Arch's Certificate of Incorporation requires Arch, to the fullest extent
permitted by the Delaware corporations statute, to indemnify all persons whom
it has the power to indemnify against all costs, expenses and liabilities
incurred by them from having been officers or directors of Arch, any subsidiary
of Arch or any other corporation for which such persons acted as an officer or
director at the request of Arch.
The Arch Certificate also provides that the directors of Arch will not be
personally liable for monetary damages to Arch or its stockholders for any act
or omission, except (1) for any breach of the director's duty of loyalty to
Arch or its stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) under Section
174 of the Delaware corporations statute (relating to illegal dividends or
stock redemptions) or (4) for any transaction from which the director derived
an improper personal benefit. If the Delaware corporations statute is amended
to permit further elimination or limitation of the personal liability of
directors, then the liability of a director of Arch shall be eliminated or
limited to the fullest extent permitted by the Delaware corporations statute as
so amended.
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<PAGE>
Executive Compensation
Summary Compensation Table
The annual and long-term compensation of Arch's Chief Executive Officer and
other executive officers named below was as follows for the years ended
December 31, 1996, 1997 and 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------- --------------
Other Annual
Name and Principal Position During 1997 Year Salary $ Bonus $(1) Compensation ($)(2) Options (#)(3)
- --------------------------------------- ---- -------- ---------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
C. Edward Baker, Jr..... 1998 $428,325 $135,000 $600 454,655(4)
Chairman, President and 1997 353,317 227,500 600 459,324(4)
Chief Executive Officer 1996 329,050 36,833 600 268,860(5)(6)
Lyndon R. Daniels....... 1998 295,416 -- -- 140,000
President and Chief 1997 -- -- -- --
Operating Officer
(joined Arch in January
1998)
J. Roy Pottle........... 1998 179,200 -- -- --
Executive Vice 1997 -- -- -- --
President and Chief
Financial Officer
(joined Arch in
February 1998)
John B. Saynor.......... 1998 157,646 41,770 600 51,739(7)
Executive Vice
President 1997 153,188 72,900 600 15,905(8)
1996 146,867 15,300 600 20,000(6)
Paul H. Kuzia........... 1998 165,489 58,435 600 88,848(8)
Executive Vice 1997 157,633 77,400 600 16,887(8)
President/Technology
and Regulatory Affairs 1996 133,800 14,620 600 8,000(6)
</TABLE>
- --------
(1) Represents bonus paid in such fiscal year with respect to prior year.
(2) Represents Arch's matching contributions paid under Arch's 401(k) plan.
(3) No restricted stock awards or SARs were granted to any of the Named
Executive Officers during the years ended December 31, 1996, 1997 or 1998.
(4) Includes options to purchase 409,688 shares granted as part of Arch's
January 16, 1998 option repricing program.
(5) Includes options to purchase 106,860 shares replaced in connection with
Arch's October 23, 1996 option repricing program.
(6) Option replaced in connection with Arch's January 16, 1998 option
repricing program.
(7) Includes options to purchase 35,905 shares granted as part of Arch's
January 16, 1998 option repricing program.
(8) Includes options to purchase 69,687 shares granted as part of Arch's
January 16, 1998 option repricing program.
Executive Retention Agreements
Arch is a party to Executive Retention Agreements for a total of 16 executives,
including Messrs. Baker, Daniels, Kuzia, Pottle and Saynor.
The purpose of the Executive Retention Agreements is to assure the continued
employment and dedication of the executives without distraction from the
possibility of a change in control (as defined in the Executive Retention
Agreements) of Arch. The executive will be eligible to receive benefits if a
change in control occurs,
88
<PAGE>
and Arch terminates the executive's employment at any time within the following
12 months (except for cause, disability or death) or the executive terminates
employment for good reason (as defined in the Executive Retention Agreements).
Such benefits will include (1) a lump sum cash severance payment equal to a
specified multiple of the executive's annual base salary in effect at the time
of the change in control plus a specified multiple of the executive's average
annual bonus paid during the previous three full calendar years, (2) payment of
any accrued but unpaid base salary plus any other amounts earned but unpaid
through the date of termination and (3) any amounts or benefits required to be
paid or provided to the executive or which the executive is eligible to receive
following the executive's termination under any plan, program, policy,
practice, contract or agreement of Arch. In addition, for up to 12 months after
termination, Arch must provide the executive with life, disability, accident
and health insurance benefits similar to those previously maintained until the
executive becomes reemployed with another employer and is eligible to receive
substantially equivalent benefits. The specified multiple of salary and bonus
for Messrs. Baker, Daniels, Kuzia, Pottle and Saynor is three, and the
specified multiple for the other executives is one or two. Good reason is
defined to include, among other things, a material reduction in employment
responsibilities, compensation or benefits. In the case of Mr. Baker, good
reason includes his not becoming the Chief Executive Officer of any entity
succeeding or controlling Arch.
Stock Option Grants
The following options were granted to the five executive officers named in the
summary compensation table during the year ended December 31, 1997. No SARs
were granted during such year.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Options Term(3)
-------------------------------------------------- -------------------
Percent of
Total
Options/SARs
Options/SARs Granted to Exercise or
Granted Employee in Base Price Expiration
(#)(1) Fiscal Year ($/Share)(2) Date 5% ($) 10% ($)
------------ ------------ ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. ... 44,967 2.31 $4.5313 03/04/08 $128,143 $ 324,739
409,688(4) 21.00 5.0625 01/16/08 553,600 2,110,041
Lyndon R. Daniels....... 140,000 7.18 4.9375 01/02/08 434,723 1,101,674
J. Roy Pottle........... 90,000 4.61 3.5625 02/17/08 201,639 510,994
John B. Saynor.......... 15,834 0.81 4.5313 03/04/08 45,122 114,349
35,905(4) 1.84 5.0625 01/16/08 48,517 184,924
Paul H. Kuzia........... 19,161 0.98 4.5313 03/04/08 54,603 138,375
69,687(4) 3.57 5.0625 01/16/08 94,166 358,913
</TABLE>
- --------
(1) Options generally become exercisable at a rate of 20% of the shares subject
to the option on the first anniversary of the date of grant and 5% of the
shares subject to the option per calendar quarter thereafter.
(2) The exercise price is equal to the fair market value of Common Stock on the
date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option terms. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted and are not intended to
forecast future appreciation of the price of the Common Stock. The named
executive officers will realize gain upon the exercise of these options
only if there is an increase in the price of Common Stock which benefits
all Arch stockholders proportionately.
(4) Option granted as part of the January 16, 1998 option repricing program.
89
<PAGE>
Option Exercises and Year-End Option Table
The named executive officers exercised no stock options or SARs during the year
ended December 31, 1997. They held the following stock options as of December
31, 1997.
Aggregated Options/SAR Exercises in Last Fiscal Year
And Fiscal Year-end Options Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Options In-the-Money Options
Acquired on Value at Fiscal Year-End at Fiscal Year-End
Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
Name (#) ($)(1) (#) ($)(2)
---- ----------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr .... 94,032 $270,342 113,722 340,933 -- --
Lyndon R. Daniels....... -- -- -- 140,000 -- --
John B. Saynor.......... -- -- 5,000 46,739 -- --
J. Roy Pottle........... -- -- -- 90,000 -- --
Paul H. Kuzia........... -- -- 19,920 68,928 -- --
</TABLE>
- --------
(1) Represents the difference between the exercise price and the fair market
value of Common Stock on the date of exercise.
(2) Based on the fair market value of Common Stock on December 31, 1997 ($5.125
per share) less the option exercise price.
Compensation Committee Interlocks and Insider Participation
The current members of Arch's Compensation Committee are R. Schorr Berman,
Allan L. Rayfield and John A. Shane. Messrs. Berman, Rayfield and Shane served
on the Compensation Committee throughout 1998, and Mr. Rayfield joined the
Compensation Committee upon his election as a director in July 1998.
C. Edward Baker, Jr., the Chairman and Chief Executive Officer of Arch, makes
recommendations and participates in discussions regarding executive
compensation, but he does not participate directly in discussions regarding his
own compensation. No current executive officer of Arch has served as a director
or member of the Compensation Committee (or other committee serving an
equivalent function) of any other entity that has an executive officer who
serves as a director of Arch or as a member of the Compensation Committee of
Arch.
90
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information about the beneficial
ownership of Common Stock, as of , 1999, immediately after consummation
of the MobileMedia acquisition, by (1) each person who is known by Arch to
beneficially own more than 5% of its outstanding shares of Common Stock, (2)
each current director of Arch, (3) Arch's Chief Executive Officer and the other
named executive officers and (4) all current directors and executive officers
of Arch as a group.
<TABLE>
<CAPTION>
Number of
Name shares (1) Percentage(2)
---- ---------- -------------
<S> <C> <C>
Sandler Capital Management (3)................... 12,837,834 8.0%
C. Edward Baker, Jr.............................. 604,453 *
Lyndon R. Daniels................................ 32,957 *
John B. Saynor................................... 543,523 *
J. Roy Pottle.................................... -- --
Paul H. Kuzia.................................... 57,207 *
R. Schorr Berman (4)............................. 5,387,310 3.5
James S. Hughes.................................. 224,694 *
John Kornreich (5)............................... 13,488,866 8.4
Allan L. Rayfield................................ 8,925 *
John A. Shane (6)................................ 107,596 *
Edwin M. Banks(7)................................
H. Sean Mathis(8)................................
W.R. Huff Asset Management Co., L.L.C. (9)(10)...
The Northwestern Mutual Life Insurance Company
(9)(11).........................................
Credit Suisse First Boston Corporation (9)(12)...
Whippoorwill Associates, Inc. (9)(13)............
All current directors and executive officers of
Arch as a
group (10 persons) (14).........................
</TABLE>
- --------
*Less than 0.5%
(1) Reflects the following: (a) the issuance of a total of [122,845,000]
shares of Common Stock and Class B Common Stock to the unsecured creditors
[and to the stockholders of Arch] and (b) the distribution of warrants to
acquire 3,675,659 shares of Common Stock to the standby purchasers and
warrants to acquire shares of Common Stock to stockholders of Arch who
did not exercise nontransferable rights. Unless otherwise indicated, each
person or entity named in the table has sole voting power and investment
power (or shares such power with his spouse) with respect to all shares of
capital stock listed as owned by such person or entity and has an address
c/o Arch.
(2) Assumes the conversion of Series C Preferred Stock into Common Stock at
the current conversion price of $ per share and the conversion of Class
B Common Stock into Common Stock at a one-for-one conversion ratio. See
"Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Sandler Equity
Investment".
(3) The business address of Sandler is 767 Fifth Avenue, 45th Floor, New York,
New York 10153. Sandler has sole voting and investment power over 955,745
of such shares and shared voting and investment power over 11,882,089 of
such shares. Includes [8,163,400] shares of Common Stock issuable upon the
exercise of warrants [assuming no exercise of nontransferable rights].
(4) Includes 5,349,948 shares held by Memorial Drive Trust, over which Mr.
Berman may be deemed to share voting and investment power as Administrator
and Chief Executive Officer of Memorial Drive Trust. Mr. Berman disclaims
beneficial ownership of such shares held by Memorial Drive Trust. Includes
3,425,170 shares of Common Stock issuable upon the exercise of warrants
[assuming no exercise of nontransferable rights].
(5) Includes 12,837,834 shares beneficially owned by Sandler, over which Mr.
Kornreich may be deemed to have voting and investment power as Managing
Director, and 190,000 shares beneficially owned by two
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<PAGE>
limited partnerships, over which Mr. Kornreich may be deemed to have voting
and investment power as a general partner. Mr. Kornreich disclaims
beneficial ownership of all such shares. Include 8,577,290 shares of Common
Stock issuable upon the exercise of warrants [assuming no exercise of
nontransferable rights].
(6) Includes 2,884 shares owned by Palmer Service Corporation, over which Mr.
Shane may be deemed to have voting and investment power as President and
sole stockholder of Palmer Service Corporation, and 8,525 shares issuable
upon conversion of $52,000 principal amount of Arch's 6 3/4% Convertible
Subordinated Debentures due 2003 held by Palmer Partners, L.P., of which
Mr. Shane is the general partner. See "Description of Certain
Indebtedness--Arch Convertible Debentures". Includes 68,408 shares of
Common Stock issuable upon the exercise of warrants [assuming no exercise
of nontransferable rights].
(7) Includes shares owned by W.R. Huff, of which this director is a
portfolio manager. This director disclaims beneficial ownership of all
such shares.
(8) Includes shares owned by . This director disclaims beneficial
ownership of all such shares.
(9) [These four standby purchasers have filed a report on Schedule 13-D
disclaiming that they constitute a "group" as defined in Rule 13d-5(b).]
(10) The business address of this standby purchaser is . Consists of
shares held as agent for various discretionary accounts and affiliates as
to which shares this standby purchaser disclaims beneficial ownership.
Includes shares of Common Stock issuable upon the exercise of warrants
distributed to this standby purchaser. Includes shares of Class B
Common Stock which were issued to this standby purchaser so that the
standby purchasers would not hold, in the aggregate, shares representing
more than 49.0% of the securities of Arch generally entitled to vote in
the election of directors or 49.0% of the total voting power of the
securities of Arch outstanding upon consummation of the MobileMedia
acquisition. See "Description of Securities--Class B Common Stock".
(11) The business address of this standby purchaser is . Consists of
shares held as general partner of and/or agent for various discretionary
accounts as to which shares this standby purchaser disclaims beneficial
ownership. Includes shares of Common Stock issuable upon the exercise
of warrants distributed to this standby purchaser. Includes shares of
Class B Common Stock which were issued to this standby purchaser so that
the standby purchasers would not hold, in the aggregate, shares
representing more than 49.0% of the securities of Arch generally entitled
to vote in the election of directors or 49.0% of the total voting power
of the securities of Arch outstanding upon consummation of the
MobileMedia acquisition. See "Description of Securities--Class B Common
Stock".
(12) The business address of this standby purchaser is . Includes
shares of Common Stock issuable upon the exercise of warrants distributed
to this standby purchaser. Includes shares of Class B Common Stock
which were issued to this standby purchaser so that the standby
purchasers would not hold, in the aggregate, shares representing more
than 49.0% of the securities of Arch generally entitled to vote in the
election of directors or 49.0% of the total voting power of the
securities of Arch outstanding upon consummation of the MobileMedia
acquisition. See "Description of Securities--Class B Common Stock".
(13) The business address of this standby purchaser is . Includes
shares of Common Stock issuable upon the exercise of warrants distributed
to this standby purchaser and shares of Class B Common Stock which
were issued to this standby purchaser so that the standby purchasers
would not hold, in the aggregate, shares representing more than 49.0% of
the securities of Arch generally entitled to vote in the election of
directors or 49.0% of the total voting power of the securities of Arch
outstanding upon consummation of the MobileMedia acquisition. See
"Description of Securities--Class B Common Stock".
(14) Includes (a) 12,837,834 shares beneficially owned by Sandler and 521,815
shares beneficially owned by two limited partnerships of which Mr.
Kornreich is a general partner, (b) 5,349,984 shares held by Memorial
Drive Trust, (c) 1,051 shares held by Palmer Service Corporation, (d)
8,525 shares issuable upon conversion of $52,000 principal amount of
Arch's 6 3/4% Convertible Subordinated Debentures due 2003 held by Palmer
Partners, L.P., (e) shares issuable upon exercise of warrants, (f)
shares of Common Stock issuable upon conversion of Class B Common
Stock, (g) 168,649 shares issuable upon the
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<PAGE>
exercise of outstanding stock options held by the persons named below
exercisable within 60 days after September 30, 1998 and (h) 13,006,099
shares of Common Stock issuable upon the exercise of warrants distributed to
all current directors and executive officers of Arch as a group [assuming no
exercise of nontransferable rights].
<TABLE>
<CAPTION>
Name Options Warrants
---- ------- ----------
<S> <C> <C>
Mr. Baker................ 108,379 383,774
Mr. Daniels.............. -- 20,957
Mr. Sayner............... 4,000 345,599
Mr. Kuzia................ 19,520 36,367
Mr. Berman............... 11,250 3,425,170
Mr. Hughes............... 11,250 142,857
Mr. Kornreich............ 750 8,577,292
Mr. Rayfield............. 2,250 68,408
Mr. Shane................ 11,250 5,675
------- ----------
168,649 13,006,099
======= ==========
</TABLE>
93
<PAGE>
DESCRIPTION OF SECURITIES
Arch's authorized capital stock consists of 300,000,000 shares of Common Stock,
$.01 par value, 65,000,000 shares of Class B Common Stock, $.01 par value,
shares of Series B Preferred Stock, 250,000 shares of Series C
Preferred Stock and additional shares of Preferred Stock, $.01 par
value. Upon consummation of the MobileMedia acquisition on , 1999, there
were outstanding shares of Common Stock held by stockholders of record,
outstanding shares of Class B Common Stock held by stockholders of record
and [250,000] outstanding shares of Series C Preferred Stock held by [9]
stockholders of record. These numbers do not reflect a reverse stock split that
Arch intends to effect during , 1999. See "--The Reverse Stock Split".
The following summary of certain provisions of Common Stock, Class B Common
Stock, Preferred Stock, Series C Preferred Stock, warrants and Arch's
Certificate of Incorporation and By-laws is not intended to be complete and is
qualified by reference to the provisions of applicable law and to the
Certificate of Incorporation and By-laws.
Common Stock
Holders of Common Stock are entitled to one vote per share. They are entitled
to receive dividends when and if declared by Arch's Board of Directors and to
share ratably in the assets of Arch legally available for distribution to its
stockholders in the event of liquidation, subject to any preferences or
participating or similar rights of any series of Preferred Stock at the time
outstanding. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. All outstanding shares of Common Stock are
fully paid and nonassessable. Holders of Common Stock do not have cumulative
voting rights.
Class B Common Stock
The Class B Common Stock is identical in all respects to Common Stock, except
that holders of Class B Common Stock are not entitled to vote in the election
of directors and are entitled to 1/100th of a vote per share with respect to
all other matters. Class B Common Stock votes as a single class together with
the Common Stock, except as otherwise required by law.
Class B Common Stock is issuable only to the standby purchasers and their
affiliates, or to any other person or group, to the extent that the standby
purchasers and their affiliates, or such other person or group, would own, in
the aggregate, more than 49.0% of the outstanding shares of capital stock of
Arch generally entitled to vote in the election of directors or more than 49.0%
of the voting power of the outstanding voting shares upon consummation of the
MobileMedia acquisition, assuming the conversion of all convertible securities
and assuming the exercise of all warrants held by the standby purchasers and
their affiliates, or by such person or group. Any shares of Class B Common
Stock transferred by any standby purchaser to any transferee other than another
standby purchaser will automatically convert into an equal number of shares of
Common Stock. Class B Common Stock has been used so that the issuance of Stock
to the standby purchasers in connection with the MobileMedia acquisition would
not trigger the change of control repurchase provisions contained in the
indentures governing certain outstanding indebtedness of Arch and ACI. See
"Risk Factors--Uncertainties Related to the MobileMedia Acquisition--Risk of
Default under Debt Instruments" and "Description of Certain Indebtedness".
Preferred Stock
Arch's Board of Directors is authorized, without any further action by the
stockholders of Arch, to issue preferred stock from time to time in one or more
series and to fix the voting, dividend, conversion, redemption and liquidation
rights and preferences of any such series, and such other designations,
preferences and special rights as Arch's Board of Directors may determine. Arch
does not have any present plans to issue shares of its Preferred Stock, other
than the shares of Series C Preferred Stock currently outstanding.
94
<PAGE>
Series C Preferred Stock
The Series C Preferred Stock has the rights and preferences summarized below:
Conversion. The Series C Preferred Stock is convertible into Common Stock at an
initial conversion price of $5.50 per share, subject to certain adjustments.
Such adjustments include the issuance of Common Stock (or rights or options for
Common Stock) at a price less than the market price of Common Stock. [On ,
1999, the conversion price of the Series C Preferred Stock was reduced to
$ , so that shares of Common Stock are currently issuable upon the
conversion of each share of Series C Preferred Stock.]
Dividends. The Series C Preferred Stock earns dividends at an annual rate of
8.0% payable when declared quarterly in cash or, at Arch's option, through the
issuance of shares of Common Stock valued at 95% of the then prevailing market
price. If not paid quarterly, dividends accumulate and become payable upon
redemption or conversion of the Series C Preferred Stock or liquidation of
Arch.
Voting Rights. So long as at least 50% of the Series C Preferred Stock remains
outstanding, the holders of the Series C Preferred Stock have the right, voting
as a separate class, to designate one member of the Boards of Directors of Arch
and ACI. Such director has the right to be a member of any committee of either
such Board of Directors. On all other matters, the Series C Preferred Stock
votes as a single class with Common Stock. Each share of Series C Preferred
Stock is currently entitled to [ ] votes.
Redemption. Holders of Series C Preferred Stock may require Arch to redeem the
Series C Preferred Stock in the year 2005. Arch may elect to pay in cash or in
Common Stock valued at 95% of its then prevailing market price. Series C
Preferred Stock is subject to redemption for cash or Common Stock at Arch's
option in certain circumstances.
Liquidation Preference. Upon liquidation, dissolution or winding up of Arch,
before any distribution or payment is made upon any Common Stock, Arch must pay
to the holders of Series C Preferred Stock (1) $100.00 per share of Series C
Preferred Stock (subject to certain adjustments), plus (2) any accrued and
unpaid dividends on such shares of Series C Preferred Stock. If the assets of
Arch are insufficient to permit full payment of such liquidation preferences to
the holders of Series C Preferred Stock, then the assets will be distributed
pro rata among the holders of the Series C Preferred Stock.
Warrants
In connection with the MobilMedia acquisition, Arch has issued: (1) warrants to
acquire up to 3,675,659 shares of Common Stock to the standby purchasers and
(2) warrants to acquire up to [44,893,166] shares of Common Stock to holders of
record of Common Stock and Series C Preferred Stock on January , 1999. Each
warrant represents the right to purchase one share of Common Stock. The warrant
exercise price of [$3.25] per share is equal to the amount that would result at
September 1, 2001 from an investment of $2.00 made upon consummation of the
MobileMedia acquisition on , 1999, assuming a 20% per annum internal rate of
return.
Each warrant, including any warrants that may be issued upon partial exercise,
replacement, or transfer of outstanding warrants, will be evidenced by, and
subject to the terms of, a warrant certificate. Arch has entered into a Warrant
Agreement with The Bank of New York, as warrant agent. The Warrant Agreement
governs the terms relating to the issuance, form, registration, exercise,
transfer and exchange of warrants, as well as certain adjustment provisions.
The warrant agent will keep books for registration and transfer of the warrant
certificates issued by Arch. Arch and the warrant agent will be entitled to
treat the registered holder of any warrant certificate as the sole owner of the
warrants represented by such warrant certificate for all purposes and will not
be bound to recognize any equitable or other claim or interest in such warrants
on the part of any other person.
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Warrants may be exercised by their holders, in whole or in part, at any time
and from time to time prior to 5:00 p.m., New York City time, on September 1,
2001. However, holders will be able to exercise their warrants only if
(1) a current registration statement under the Securities Act is then in
effect and Arch has delivered to each person exercising a warrant a
current prospectus meeting the requirements of the Securities Act, or
(2) the exercise of the warrants is exempt from the registration
requirements of the Securities Act, and the shares underlying the
warrants are qualified for sale or exempt from qualification under the
applicable securities laws of the states of residence of the holder of
the warrants to be exercised and any other persons to whom it is
proposed that the shares be issued upon exercise of the warrants.
The warrant exercise price and the number of shares purchasable upon exercise
of the warrants will be subject to adjustment from time to time upon the
occurrence of stock dividends, stock splits, reclassifications, issuances of
stock or options at prices below prevailing market prices and other events
enumerated in the Warrant Agreement. Arch may irrevocably reduce the warrant
exercise price for any period of at least 20 calendar days to any amount that
exceeds the par value of Common Stock. Neither Arch nor the warrant agent will
be required to issue fractional shares or fractional interests in any other
securities upon the exercise of warrants. Instead, the warrant holder will
receive cash based upon an appropriate fraction of the then prevailing market
price per share of Common Stock. Arch will deliver to warrant holders copies of
its annual report and the same other information, documents, and other reports
as Arch is required to file with the SEC and furnishes to its stockholders.
Reverse Stock Split
Arch's Board of Directors and Arch's stockholders have approved an amendment to
Arch's Certificate of Incorporation to effect a reverse split of Common Stock.
The reverse split will become effective as of 5:00 p.m., local time, on a date
selected by Arch's Board of Directors (sometimes referred to as the split
date). The Arch's Board of Directors does not intend to effect the reverse
split unless and until it believes the reverse split is necessary for the
continued listing of the Common Stock on the NNM. See "--Purpose of the Reverse
Split".
When the Reserve Split becomes effective, all outstanding shares of Common
Stock will be automatically converted into a smaller number of shares of Common
Stock without any action on the part of any stockholder. The split ratio (that
is, the number of outstanding shares of Common Stock that will be automatically
converted into one share of Common Stock) will be determined by dividing $6.00
by the market price of Common Stock and rounding the result up to the nearest
whole number. The market price of Common Stock will be deemed to be the average
last reported sale price per share of the Common Stock on the NNM (or such
other exchange or market on which the Common Stock may then be traded) for the
ten trading days immediately preceding the split date. If the market price were
to be between $1.50 and $2.00, the split ratio would be one-for-four; if the
market price were between $1.20 and $1.50, the split ratio would be one-for-
five and if the market price were between $1.00 and $1.20, the split ratio
would be one-for-six.
Instead of issuing fractional shares of Common Stock resulting from the reverse
split, Arch will pay cash equal to an appropriate fraction of the market price
for one share on the split date, unless Arch determines that unusual trading
activity has caused such amount to be an inappropriate measure of value and
reasonably determines in good faith to use a different measure of value.
As soon as practical after the split date, Arch will mail a letter of
transmittal to each holder of record of Common Stock outstanding on the split
date. The letter of transmittal will contain instructions for the surrender of
such certificate to Arch's designated exchange agent in exchange for
certificates representing the number of whole shares of Common Stock (plus any
applicable cash payment instead of fractional shares) into which the shares of
Common Stock have been converted as a result of the reverse split. No cash
payment will be made or
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new certificate issued to a stockholder until surrender of outstanding
certificates together with the letter of transmittal to Arch's exchange agent.
Purpose of the Reverse Split
Arch has received a notice from the NNM indicating that unless Arch comes in
compliance with the continued listing requirements of the NNM, Common Stock
will be delisted from the NNM. At a hearing before the NNM Arch has sought the
continued listing of the Common Stock on the NNM based, in part, on the
proposed reverse split but the NNM has issued no decision.
The rules of the NNM require that as a condition of the continued listing of a
company's securities on the NNM, a company must satisfy at least one of several
alternative maintenance requirements. These generally require that a company
meet certain minimum criteria relating to specified financial parameters and
the trading price for its listed securities. Under one such maintenance
requirement, the minimum bid price of Common Stock must equal or exceed $5.00,
among other criteria. The closing price of Common Stock on , 1999 was $
per share.
Arch believes that if the reverse split is effected, a share of Common Stock
will have a minimum bid price in excess of $5.00 per share, and therefore will
satisfy one of the criteria of the NNM maintenance requirement referred to
above. Arch would also need to continue to satisfy other criteria in order for
the Common Stock to be eligible for continued listing and trading on the NNM.
These other criteria consist of maintaining (1) total revenues of at least
$50.0 million and assets of at least $50.0 million, (2) a public float (defined
as shares not held directly or indirectly by any officer, director or 10%
stockholder) of at least 1.1 million shares, (3) a market value of the public
float of at least $15.0 million, (4) at least 400 holders of round lots of 100
shares or more, (5) at least four market makers and (6) compliance with certain
corporate governance requirements. Arch believes that it satisfies all of these
other maintenance criteria. The market value of its public float as of ,
1999 was approximately $ million and, giving effect to the issuance of an
additional million shares in connection with the MobileMedia acquisition,
should considerably exceed $15.0 million. There can be no assurance, however,
that Arch will be able to maintain a market value of its public float of at
least $15.0 million or that Arch will be successful in continuing to meet the
other maintenance criteria even if the reverse split is effected.
If the Common Stock ceases to be approved for quotation on the NNM, it could
adversely affect the liquidity of Common Stock and the ability of Arch to raise
capital. In such event, Arch would intend to make application for listing on
the Nasdaq Small Cap Market. If not approved for listing on the Nasdaq Small
Cap Market, Common Stock would likely be quoted in the "pink sheets" maintained
by the National Quotation Bureau, Inc. or the NASD Electronic Bulletin Board.
In that case, the spread between the bid and ask price of Common Stock would
likely be greater than at present and stockholders would experience a greater
degree of difficulty in effecting trades of Common Stock.
Arch's Board of Directors further believes that low trading prices of Common
Stock have an adverse impact upon the efficient operation of the trading market
in its securities. In particular, brokerage firms often charge a greater
percentage commission on low-priced shares than on a transaction in the same
dollar amount of securities with a higher per share price. Large brokerage
firms will frequently not recommend purchases of low-priced shares to their
clients or make a market in such shares. These tendencies might adversely
affect the trading prices of Common Stock.
Stockholders should note that the effect of the reverse split upon the trading
prices for Common Stock cannot be accurately predicted. In particular, there
can be no assurance that trading prices for Common Stock after the reverse
split will equal the prices for Common Stock immediately prior to the reverse
split multiplied by the split ratio. Furthermore, there can be no assurance
that the proposed reverse split will achieve the desired results which have
been outlined above. It is possible that the reverse split will adversely
impact the trading price of Common Stock and, that any increased price per
share of Common Stock immediately after the
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proposed reverse split will not be sustained for any prolonged period of time.
In addition, the reverse split may have the effect of creating odd lots of
stock for some stockholders and such odd lots may be more difficult to sell or
may have higher brokerage commissions associated with their sale.
Effect of the Reverse Split
As a result of the reverse split, the number of shares of Common Stock held by
stockholders of record as of the close of business on the split date will
automatically, without any action required by the stockholders, be equal to the
number of shares of Common Stock held immediately prior to the close of
business on the split date adjusted by the split ratio, plus cash instead of
any fractional share. The reverse split will not affect a stockholder's
percentage ownership interest in Arch or proportional voting power, except for
immaterial differences resulting from the payment of cash instead of fractional
shares. The rights and privileges of the holders of shares of Common Stock will
be unaffected by the reverse split.
If the reverse split is implemented, the number of authorized shares of Common
Stock will be reduced from 300,000,000 to [65],000,000, and the number of
authorized shares of Class B Common Stock will be reduced from 65,000,000 to
[10],000,000. These reductions of authorized shares will not be proportionate
to the split ratio, and may be greater or less than the split ratio. It is
possible, therefore, that the reverse split may, in effect, increase the number
of authorized but unissued shares of Common Stock. The subsequent issuance of
the additional authorized shares may have the effect of diluting per-share
measurements of value (such as EBITDA), as well as the stock ownership and
voting rights, of outstanding Common Stock. If the reverse split, in effect,
increases the number of authorized but unissued shares of Common Stock, it may
be construed as having an anti-takeover effect by permitting the issuance of
shares to purchasers who might oppose a hostile takeover bid or oppose any
efforts to amend or repeal certain provisions of the Arch Certificate or By-
laws.
Common Stock is currently registered under Section 12(g) of the Exchange Act
and, as a result, Arch is subject to the periodic reporting and other
requirements of the Exchange Act. The reverse split will not affect the
registration of Common Stock under the Exchange Act, and Arch has no current
intention of terminating its registration under the Exchange Act.
Upon consummation of the reverse split, the total number of shares currently
reserved for issuance under Arch's stock and option plans would be decreased
proportionately and the cash consideration payable per share would be increased
proportionately. Upon consummation of the reverse split, the number of shares
issuable upon conversion of all then outstanding convertible securities of Arch
would be decreased proportionately.
Foreign Ownership Restrictions
Under the Communications Act, not more than 25% of Arch's capital stock may be
owned or voted by aliens or their representatives, a foreign government or its
representative or a foreign corporation if the FCC finds that the public
interest would be served by denying such ownership. See "Industry Overview--
Regulation". Accordingly, Arch's Certificate of Incorporation provides that
Arch may redeem outstanding shares of its stock from certain holders if the
continued ownership of such stock by such holders (because of their foreign
citizenship or otherwise) would place the FCC licenses held by Arch in
jeopardy. Required redemptions, if any, will be made at a price per share equal
to the lesser of the fair market value of the shares (as defined in the
Certificate of Incorporation) or, if such shares were purchased within one year
prior to the redemption, the purchase price of such shares.
Anti-Takeover Provisions
Certain provisions of Delaware law and Arch's Certificate of Incorporation and
By-Laws may have the effect of delaying, making more difficult or preventing a
change in control or acquisition of Arch by means of a tender offer, a proxy
contest or otherwise. These provisions, as summarized below, are expected to
discourage
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certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of Arch first to negotiate with
Arch. Arch believes that the benefits of increased protection of Arch's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Arch outweigh the disadvantages
of discouraging such proposals because, among other things, negotiations with
respect to such proposals could result in an improvement of their terms.
Rights Plan
Under Arch's Preferred Stock Rights Plan, each outstanding share of Common
Stock has attached to it one purchase right. Each purchase right entitles its
holder to purchase from Arch a unit consisting of one one-thousandth of a share
of Series B Preferred Stock at a cash purchase price of $150.00 per preferred
stock unit, subject to adjustment. The purchase rights automatically attach to
and trade together with each share of Common Stock.
The purchase rights are not exercisable or transferable separately from the
shares of Common Stock to which they are attached until ten business days
following the earlier of
. a public announcement that an acquiring person, or group of affiliated or
associated acquiring persons, has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of
the Common Stock (up to 33% in certain specified circumstances described
below); or
. the commencement of a tender offer or exchange offer that would result in a
person or group individually owning 30% or more of then outstanding shares
of Common Stock.
The purchase rights will not become exercisable, however, if the acquiring
person offers to purchase all outstanding shares of Common Stock and Arch's
independent directors determine that such offer is fair to Arch's stockholders
and in their best interests.
If the purchase rights become exercisable, each holder of a purchase right
(other than the acquiring person) will have the right to use the exercise price
of the purchase right ($150.00) to purchase shares of Common Stock at one-half
of their then current market price. All purchase rights that are beneficially
owned by an acquiring person will become null and void in such circumstances.
If an acquiring person acquires Common Stock and
. Arch is acquired in a merger or other business combination transaction in
which Arch is not the surviving corporation or the Common Stock is changed
or exchanged (except for a merger that follows an offer determined to be
fair by Arch's independent directors as described above); or
. 50% or more of Arch's assets or earning power is sold or transferred
each holder of a purchase right (other than the acquiring person) will have the
right to use the exercise price of the purchase right ($150.00) to purchase
shares of common stock of the acquiring company at one-half of their then
current market price.
The purchase rights are not currently exercisable. In connection with the
MobileMedia acquisition, Arch amended the Preferred Stock Rights Plan to permit
each standby purchaser to acquire, without becoming an acquiring person, up to
(1) the number of shares distributed to it or purchased by it in connection
with the MobileMedia acquisition, plus (2) an additional 5% of the outstanding
Common Stock (but in no event more than a total of 33% of such outstanding
stock for W.R. Huff, 27% for Whippoorwill, 26% for CS First Boston or 15.5% for
Northwestern Mutual ). The standby purchasers will not be considered to be a
group for purposes of the Preferred Stock Rights Plan solely because of
performance of their contractual commitments as standby purchasers.
Classified Board of Directors
Arch's Certificate of Incorporation and By-laws provide that Arch's Board of
Directors will be divided into three classes, with the terms of each class
expiring in a different year. The By-laws provide that the number of
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directors will be fixed from time to time exclusively by the Board of
Directors, but shall consist of not more than 15 nor less than three directors.
A majority of the Board of Directors then in office has the sole authority to
fill in any vacancies on the Board of Directors. The Certificate of
Incorporation provides that directors may be removed only by the affirmative
vote of holders of at least 80% of the voting power of all then outstanding
shares of stock, voting together as a single class.
Stockholder Actions and Meetings
The Certificate of Incorporation provides that stockholder action can be taken
only at an annual or special meeting of stockholders and prohibits stockholder
action by written consent in lieu of a meeting. The Certificate of
Incorporation and By-Laws provide that special meetings of stockholders can be
called by the Chairman of the Board, pursuant to a resolution approved by a
majority of the total number of directors which Arch would have if there were
no vacancies on the Board of Directors, or by stockholders owning at least 20%
of the stock entitled to vote at the meeting. The business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting by the Chairman of the Board, or at the request of a
majority of the members of the Board of Directors, or as specified in the
stockholders' call for a meeting. The By-laws set forth an advance notice
procedure with regard to the nomination of candidates for election as
directors, other than nominees of the Board of Directors. The By-laws provide
that any stockholder entitled to vote in the election of directors generally
may nominate one or more persons for election as directors only if written
notice of such stockholder's intent to make such nomination has been given to
the Secretary of Arch not later than 80 days prior to the date of any annual or
special meeting. In the event that the date of such annual or special meeting
was not publicly announced by Arch more than 90 days prior to the meeting,
notice from the stockholder must be delivered to the Secretary of Arch not
later than the close of business on the tenth day following the day on which
such announcement of the date of the meeting was communicated to stockholders.
The notice must contain the information about the proposed nominee that would
be required to be included in a proxy statement under the SEC's proxy rules had
the nominee been nominated by the Board of Directors. The notice must also
contain the consent of each nominee to serve as a director of Arch if so
elected and certain information about the stockholder proposing to nominate
such nominee.
Amendment of Certain Provisions of Arch's Certificate of Incorporation and By-
laws
The Certificate of Incorporation requires the affirmative vote of the holders
of at least 80% of the voting power of all then outstanding shares of stock,
voting together as a single class, to amend certain provisions of the
Certificate of Incorporation, including provisions relating to the removal of
directors, the prohibition on stockholder action by written consent instead of
a meeting, the procedural requirements of stockholder meetings and the
adoption, amendment and repeal of certain articles of the By-laws.
Consideration of Non-Economic Factors in Acquisitions
The Certificate of Incorporation empowers Arch's Board of Directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include: (1) comparison of the proposed consideration to be
received by stockholders in relation to the then current market price of the
capital stock, the estimated current value of Arch in a freely negotiated
transaction, and the estimated future value of Arch as an independent entity;
(2) the impact of such a transaction on the subscribers and employees of Arch
and its effect on the communities in which Arch operates; and (3) the ability
of Arch to fulfill its objectives under applicable statutes and regulations.
Restrictions on Certain Purchases of Stock by Arch
The Certificate of Incorporation prohibits Arch from repurchasing any shares of
Arch's stock from any person, entity or group that beneficially owns 5% or more
of Arch's then outstanding voting stock at a price exceeding the average
closing price for the twenty trading business days prior to the purchase date,
unless a majority of Arch's disinterested stockholders approves the
transaction. "Disinterested stockholders" means each holder of less than 5% of
the voting power of Arch. This restriction on purchases by Arch does not apply
to (1) any offer
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to purchase a class of Arch's stock which is made on the same terms and
conditions to all holders of the class of stock, (2) any purchase of stock
owned by such a 5% stockholder occurring more than two years after such
stockholder's last acquisition of Arch's stock, (3) any purchase of Arch's
stock in accordance with the terms of any stock option or employee benefit
plan, or (4) any purchase at prevailing marketing prices pursuant to a stock
repurchase program.
"Blank Check" Preferred Stock
Arch's Board of Directors is authorized, without any further action by the
stockholders of Arch, to issue preferred stock from time to time in one or more
series and to fix, as to any such series, the voting, dividend, conversion,
redemption and liquidation rights and preferences of any such series and such
other designations, preferences and special rights as the Board of Directors
may determine. The issuance of preferred stock, while providing desirable
flexibility in connection with possible financings, acquisitions and other
corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and, under certain circumstances, be used
as a means of discouraging, delaying or preventing a change of control in Arch.
Delaware Anti-Takeover Statute
Section 203 of the Delaware corporations statute is applicable to publicly held
corporations organized under the laws of Delaware, including Arch. Subject to
certain enumerated exceptions, Section 203 provides that a corporation may not
engage in any business combination with any "interested stockholder" for a
three-year period following the date that such stockholder becomes an
interested stockholder unless (1) prior to such date, the board of directors of
the corporation approved either the business combination or the transaction
through which the stockholder became an interested stockholder, (2) upon
consummation of the transaction through which the stockholder became an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares) or (3) on or after such date, the business
combination is approved by the board of directors of the corporation and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. Except as specified in Section 203, an
interested stockholder is defined to mean any person that (1) is the owner of
15% or more of the outstanding voting stock of the corporation or (2) is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date or (3) is an affiliate or associate of a
person referred to in (1) or (2) of this sentence. Under certain circumstances,
Section 203 makes it more difficult for an interested stockholder to effect
various business combinations with a corporation for a three-year period,
although the stockholders may elect not to be governed by Section 203, by
adopting an amendment to the corporation's certificate of incorporation or by-
laws, which becomes effective twelve months after adoption. The Certificate of
Incorporation and By-laws do not exclude Arch from the restrictions imposed
under Section 203. It is anticipated that the provisions of Section 203 may
encourage companies interested in acquiring Arch to negotiate in advance with
Arch's Board of Directors.
Director Liability and Indemnification
Under the Delaware corporations statute, a corporation has the power to
indemnify any director or officer against expenses, judgments, fines and
settlements incurred in a proceeding, other than an action by or in the right
of the corporation, if the person acted in good faith and in a manner that the
person reasonably believed to be in the best interests of the corporation or
not opposed to the best interests of the corporation. Furthermore, if a
criminal proceeding is involved, the indemnified person must have had no reason
to believe his conduct was unlawful. In the case of an action by or in the
right of the corporation, the corporation has the power to indemnify any
officer or director against expenses incurred in defending or settling the
action if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation.
However, no indemnification may be made when a person is adjudged liable to the
corporation, unless a court determines such person is entitled to indemnity for
expenses, and then indemnification may be
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made only to the extent that the court determines. The Delaware corporations
statute requires that a corporation must indemnify an officer or director
against expenses incurred in connection with any third-party or derivative
proceeding, or in defense of any claim, issue or matter therein, to the extent
he is successful on the merits or otherwise.
Under the Delaware corporations statute, a corporation may adopt a provision in
its certificate of incorporation eliminating or limiting the personal liability
of a director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director. However, such a provision may not
eliminate or limit director monetary liability for: (1) breaches of the
director's duty of loyalty to the corporation or its stockholders; (2) acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of laws; (3) the payment of unlawful dividends or unlawful stock
repurchases or redemptions; or (4) transactions in which the director received
an improper personal benefit.
Arch's Certificate of Incorporation provides that Arch will, to the fullest
extent permitted by Section 145 of the Delaware corporations statute, indemnify
all persons whom it has the power to indemnify against all of the costs,
expenses and liabilities incurred by them by reason of having been officers or
directors of Arch, or any subsidiary of Arch, or of any other corporation for
which such persons acted as officer or director at the request of Arch.
Transfer Agent and Registrar
The transfer agent and registrar for Common Stock is The Bank of New York, 101
Barclay Street, New York, New York 10286.
Registration Rights
The warrants issued in connection with the MobileMedia Acquisition are
generally freely tradeable under the Securities Act, provided the holder is not
deemed to be an affiliate of Arch following the Merger within the meaning of
Rule 144 under the Securities Act or an underwriter within the meaning of
Section 2(11) of the Securities Act. Securities of Arch held by a person deemed
to be an "affiliate" of Arch may be sold under Rule 144 subject to certain
restrictions.
Arch has registered the warrants, together with the shares of Common Stock
which may be issued upon exercise of warrants and certain other shares, for
resale by persons who may be deemed to be underwriters, including the standby
purchasers, as required by a Registration Rights Agreement between Arch and the
standby purchasers. The standby purchasers' Registration Rights Agreement
required Arch to file and have declared effective, by the date of this
prospectus, a shelf registration statement relating to resales of the following
types of registrable securities: (1) warrants, (2) Common Stock and Class B
Common Stock currently owned by the standby purchasers or acquired after the
date of this prospectus, (3) Common Stock issuable upon exercise of warrants,
(4) Common Stock issuable upon conversion of the Class B Common Stock owned by
such standby purchasers, and (5) other securities, if any, received from Arch
in respect of the foregoing by reason of stock dividends or similar matters.
Arch is required to use its reasonable best efforts to keep such shelf
registration statement continuously effective until the earliest of (1) March
1, 2003, (2) the date on which all registrable securities covered by the shelf
registration statement have been sold and (3) the date on which all registrable
securities covered by the shelf registration statement may be sold publicly
without either (a) registration under the Securities Act or (b) compliance with
any restrictions under Rule 144 under the Securities Act.
Each standby purchaser also has demand registration rights which may be
exercised no more than twice. In addition, Arch has agreed to provide the
standby purchasers "piggyback" registration rights with respect to other
offerings filed by Arch.
Arch will bear all fees and expenses incurred in connection with the filing of
any registration statements, other than selling commissions, underwriting fees,
discounts and stock transfer taxes applicable to the sale of the Registrable
Securities. Arch will also undertake customary indemnification obligations.
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Arch also agreed that, upon the request of any stockholder who as a result of
the MobileMedia acquisition becomes the beneficial owner of at least 10% of the
outstanding Common Stock, Arch would enter into a separate registration rights
agreement with such 10% stockholder. [To date, no 10% stockholders have made
such a request to Arch.] Any such registration rights agreement will provide
for similar registration rights and indemnification provisions as the standby
purchasers' Registration Rights Agreement, except that Arch need not file a
shelf registration except upon the written request of a 10% stockholder.
The holders of Series C Preferred Stock and the former stockholders of PageCall
are also entitled to certain registration rights. See "Business--Arch's
Business--Investments in Narrowband PCS Licenses".
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Arch and its operating subsidiaries API and ACI each have substantial amounts
of outstanding indebtedness that provide necessary funding and impose various
limitations on the operations of the combined company. See "Risk Factors--High
Degree of Leverage Burdens Operations".
API's Credit Facility
The Bank of New York, Royal Bank of Canada, Toronto Dominion (Texas), Inc. and
certain other financial institutions are lenders under API's credit facility in
the current total amount of $ million. The facility consists of the $
million reducing revolving Tranche A facility, the $ million 364-day
revolving credit Tranche B facility and the $ million Tranche C facility.
The Tranche A Facility will be reduced on a quarterly basis commencing on
September 30, 2000 and will mature on June 30, 2005. The Tranche B Facility
will convert into a term loan on , 2000 and will be amortized in quarterly
installments commencing September 30, 2000, with an ultimate maturity date of
June 30, 2005. The Tranche C Facility will be amortized in annual installments
commencing December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the API credit facility are secured by its pledge of
the capital stock of certain operating subsidiaries. The API credit facility is
guaranteed by Arch, ACI and certain operating subsidiaries. Arch's guarantee is
secured by a pledge of Arch's stock and notes in ACI. The guarantees of the
operating subsidiaries are secured by a security interest in those assets of
such subsidiaries which were pledged under a former credit facility. Lenders
who provide 40% of the loans under the API credit facility have the right to
require ACI and its subsidiaries to grant security interests in certain
additional assets not currently pledged, although ACI would be required to
grant a ratable security interest to holders of the ACI 9 1/2% Notes and the
ACI 14% Notes.
Borrowings under the API credit facility bear interest based on a reference
rate equal to either The Bank of New York's Alternate Base Rate or The Bank of
New York's LIBOR rate, in each case plus a margin determined by ACI's or API's
ratio of total debt to annualized EBITDA.
The API credit facility requires payment of fees on the daily average amount
available to be borrowed under the Tranche A facility and the Tranche B
facility. These fees vary depending on ACI's or API's ratio of total debt to
annualized EBITDA.
The API credit facility contains restrictions that limit, among other things:
additional indebtedness and encumbrances on assets; cash dividends and other
distributions; mergers and sales of assets; the repurchase or redemption of
capital stock; investments; acquisitions that exceed certain dollar limitations
without the lenders' prior approval; and prepayment of indebtedness other than
indebtedness under the API credit facility. In addition, the API credit
facility requires Arch and its subsidiaries to meet certain financial
covenants, including covenants with respect to ratios of EBITDA to fixed
charges, EBITDA to debt service, EBITDA to interest service and total
indebtedness to EBITDA.
ACI 9 1/2% Notes
ACI has outstanding $125.0 million in aggregate principal amount of ACI 9 1/2%
Notes. The ACI 9 1/2% Notes accrue interest at the rate of 9.5% per year,
payable semi-annually on February 1 and August 1. The ACI 9 1/2% Notes are
scheduled to mature on February 1, 2004.
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ACI may choose to redeem any amounts of ACI 9 1/2% Notes on or after February
1, 1999 at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
February 1, 1999 to January 31, 2000....... 104.750% of principal amount
February 1, 2000 to January 31, 2001 ...... 103.167% of principal amount
February 1, 2001 to January 31, 2002....... 101.583% of principal amount
On or after February 1, 2002............... 100.000% of principal amount
</TABLE>
The indenture for the ACI 9 1/2% Notes limits the ability of ACI's subsidiaries
to pay dividends to ACI. The ACI 9 1/2% Notes indenture also imposes
limitations on the ability of ACI and its subsidiaries to incur secured or
unsecured indebtedness, on the disposition of assets, on transactions with
affiliates, on guarantees of the obligations of ACI by any of its subsidiaries,
on the sale or issuance of stock by the subsidiaries of ACI and on any merger,
consolidation or sale of substantially all of the assets of ACI.
Upon the occurrence of a change of control, as defined in the ACI 9 1/2% Notes
indenture, each holder of ACI 9 1/2% Notes has the right to require ACI to
repurchase such holder's ACI 9 1/2% Notes for cash. The repurchase price must
equal 101% of the principal amount of such Notes plus accrued and unpaid
interest to the date of repurchase. The following constitute a change of
control under the ACI 9 1/2% Notes indenture: (1) the acquisition by a person
or group of beneficial ownership of the majority of the securities of ACI or
Arch having the right to vote in the election of directors; (2) certain changes
in the boards of directors of ACI or Arch; (3) the sale or transfer of all or
substantially all of the assets of ACI or (4) the merger or consolidation of
ACI or Arch with or into another corporation which results in a person or group
becoming the beneficial owner of a majority of the securities of the surviving
corporation having the right to vote in the election of directors.
The following constitute "Events of Default" under the ACI 9 1/2% Notes
indenture (subject, in some cases, to specified notice and cure periods):
(1) a default in the timely payment of interest upon the ACI 9 1/2% Notes
if such default continues for 30 days;
(2) a default in the timely payment of principal of (or premium, if any,
on) any of the ACI 9 1/2% Notes either at maturity, upon redemption or
repurchase, by declaration or otherwise;
(3) ACI's failure to observe or perform any of its other covenants or
agreements in the ACI 9 1/2% Notes or in the ACI 9 1/2% Notes indenture for
a period of 60 days after the indenture trustee or the holders of at least
25% in aggregate principal amount of the then outstanding ACI 9 1/2% Notes
give ACI written notice of default;
(4) certain events of bankruptcy, insolvency or reorganization involving
ACI or any of its restricted subsidiaries;
(5) (A) a default in timely payment of principal, premium or interest on
any indebtedness for borrowed money of ACI or any restricted subsidiary
aggregating $5.0 million or more in principal amount or (B) the occurrence
of an event of default as defined in any indenture or instrument involving
at least $5.0 million aggregate principal amount of indebtedness for
borrowed money that gives rise to the acceleration of such indebtedness;
(6) one or more judgments, orders or decrees for the payment of more than a
total of $5.0 million (net of any applicable insurance coverage) shall be
entered against ACI or any restricted subsidiary of ACI or any of their
properties; or
(7) the holder of any secured indebtedness of ACI or any restricted
subsidiary aggregating at least $5.0 million in principal amount seeks
foreclosure, set-off or other recourse against assets of ACI or any of its
restricted subsidiaries having an aggregate fair market value of more than
$5.0 million.
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ACI 14% Notes
ACI has outstanding $100.0 million in aggregate principal amount of ACI 14%
Notes. The ACI 14% Notes accrue interest at the rate of ACI 14% per year,
payable semi-annually on May 1 and November 1. The ACI 14% Notes are scheduled
to mature on November 1, 2004.
ACI may choose to redeem any amounts of ACI 14% Notes at the following
redemption prices,
together with accrued and unpaid interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
November 1, 1999 to October 31, 2000....... 107.000% of principal amount
November 1, 2000 to October 31, 2001....... 104.625% of principal amount
November 1, 2001 to October 31, 2002....... 102.375% of principal amount
On or after November 1, 2002............... 100.000% of principal amount
</TABLE>
The indenture under which the ACI 14% Notes are outstanding limits the ability
of ACI and its subsidiaries to pay dividends to Arch. The ACI 14% Notes
indenture imposes limitations on the ability of ACI and its subsidiaries to
incur secured or unsecured indebtedness, on the disposition of assets, on
transactions with affiliates, on guarantees of the obligations of ACI by any of
its subsidiaries, on the sale or issuance of stock by the subsidiaries of ACI
and on the merger, consolidation or sale of substantially all of the assets of
ACI.
Upon the occurrence of a change of control, as defined in the ACI 14% Notes
indenture, each holder of ACI 14% Notes has the right to require that ACI
repurchase such holder's ACI 14% Notes for cash. The repurchase price must
equal 102% of the principal amount of such Notes plus accrued and unpaid
interest to the date of repurchase. The following constitute a change of
control under the ACI 14% Notes indenture: (1) the acquisition by a person or
group of beneficial ownership of the majority of the securities of ACI or Arch
having the right to vote in the election of directors; (2) certain changes in
the boards of directors of ACI or Arch; (3) the sale or transfer of all or
substantially all of the assets of ACI or (4) the merger or consolidation of
ACI or Arch with or into another corporation which results in a person or group
becoming the beneficial owner of a majority of the securities of the surviving
corporation having the right to vote in the election of directors.
The following constitute "Events of Default" under the ACI 14% Notes indenture:
(1) a default in the timely payment of interest upon the ACI 14% Notes if
such default continues for 30 days;
(2) a default in the payment of principal of (or premium, if any, on) any
of the ACI 14% Notes either at maturity, upon redemption or repurchase, by
declaration or otherwise;
(3) ACI's failure to comply with the covenants limiting mergers and sales
of assets;
(4) ACI's failure to comply with certain other covenants limiting its
ability to incur debt, make restricted payments, impose dividend
restrictions on its subsidiaries, dispose of assets, transact with
affiliates, grant liens, obtain guarantees from its subsidiaries, permit
its subsidiaries to issue stock or suffer a change of control, for a period
of 30 days after notice;
(5) ACI's failure to observe or perform any other of its other covenants or
agreements in the ACI 14% Notes or in the ACI 14% Notes indenture for a
period of 60 days after notice;
(6) certain events of bankruptcy, insolvency or reorganization involving
ACI or any of its restricted subsidiaries;
(7) (A) a default in timely payment of principal, premium or interest on
any indebtedness for borrowed money of ACI or any restricted subsidiary
aggregating $5.0 million or more in principal amount or (B) the
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occurrence of an event of default as defined in any indenture or instrument
involving at least $5.0 million aggregate principal amount of indebtedness
for borrowed money that gives rise to the acceleration of such
indebtedness;
(8) one or more judgments, orders or decrees for the payment of more than
$5.0 million (net of any applicable insurance coverage) shall be entered
against ACI or any restricted subsidiary of ACI or any of their properties;
or
(9) the holder of any secured indebtedness of ACI or any restricted
subsidiary aggregating at least $5.0 million in principal amount seeks
foreclosure, set-off or other recourse against assets of ACI or any of its
restricted subsidiaries having a fair market value of more than of $5.0
million
ACI 12 3/4% Notes and ACI % Notes
ACI has outstanding $127.5 million in aggregate principal amount of ACI 12 3/4%
Notes and $ million in aggregate principal amount of ACI % Notes. The ACI 12
3/4% Notes accrue interest at the rate of 12.75% per year and the ACI % Notes
accrue interest at the rate of % per year. Interest is payable semi-annually
on January 1 and July 1. The ACI 12 3/4% Notes are scheduled to mature on July
1, 2007. The ACI % Notes are scheduled to mature on , 200 .
ACI may choose to redeem any amounts of the ACI 12 3/4% Notes [and the ACI %
Notes] on or after July 1, 2003 at the following redemption prices, together
with accrued and unpaid interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
July 1, 2003 to June 30,
2004 ................... 106.375% of principal amount
July 1, 2004 to June 30,
2005 ................... 104.250% of principal amount
July 1, 2005 to June 30,
2006 ................... 102.125% of principal amount
On or after July 1, 2006
........................ 100.000% of principal amount
</TABLE>
In addition, until July 1, 2001, ACI may elect to use the proceeds of a
qualifying equity offering to redeem up to 35% in principal amount of the ACI
12 3/4% Notes or up to % in principal amount of the ACI % Notes at a
redemption price equal to 112.75% of the principal amount of such Notes,
together with accrued interest. ACI may make such redemptions, however, only if
ACI 12 3/4% Notes with an aggregate principal amount of at least $84.5 million
remain outstanding immediately after giving effect to any such redemption of
ACI 12 3/4% Notes, and only if ACI % Notes with an aggregate principal amount
of at least $ million remain outstanding immediately after giving effect to
any such redemption of ACI % Notes. ACI is not, however, obligated to redeem
any ACI 12 3/4% Notes or ACI % Notes with the proceeds of any equity
offering.
The indenture under which the ACI 12 3/4% Notes were issued limits the ability
of ACI and its subsidiaries to pay dividends. The ACI 12 3/4% Notes indenture
imposes limitations on the ability of ACI and its subsidiaries to incur secured
or unsecured indebtedness, on the occurrence of liens, on the disposition of
assets, on transactions with affiliates, on the sale or issuance of stock by
the subsidiaries of ACI and on the merger or consolidation of Arch and its
subsidiaries or sale of substantially all of the assets of Arch.
Upon the occurrence of a change of control, as defined in the ACI 12 3/4% Notes
indenture, each holder of ACI 12 3/4% Notes has the right to require ACI to
repurchase such holder's ACI 12 3/4% Notes for cash. The repurchase price must
equal 101% of the principal amount of such Notes plus accrued and unpaid
interest to the date of repurchase. The following constitute a change of
control under the ACI 12 3/4% Notes indenture: (1) the acquisition by a person
or group of beneficial ownership of the majority of the voting power of all
classes of voting stock of ACI or Arch; (2) the sale or transfer of all or
substantially all of the assets of Arch or ACI or the merger or consolidation
of Arch or ACI with or into another corporation which results in a person or
group becoming the beneficial owner of a majority of the securities of the
surviving corporation having the right to vote in the election of directors;
(3) certain changes in ACI's Board; or (4) ACI is liquidated or dissolved.
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<PAGE>
The following constitute "Events of Default" under the ACI 12 3/4% Notes
indenture:
(1) a default in the payment of interest upon the ACI 12 3/4% Notes if such
default continues for 30 days;
(2) a default in the payment of principal of (or premium, if any, on) any of
the ACI 12 3/4% Notes either at maturity, upon redemption or repurchase, by
declaration or otherwise;
(3) ACI's failure to comply with the covenants limiting mergers and sales of
assets;
(4) ACI's failure to observe or perform any other of its other covenants or
agreements in the ACI 12 3/4% Notes or in the ACI 12 3/4% Notes indenture for a
period of 60 days after notice;
(5) (A) a default in any timely payment when due on any indebtedness for
borrowed money of ACI or any restricted subsidiary aggregating $5.0 million or
(B) the occurrence of an event of default as defined in any indenture or
instrument involving at least $5.0 million aggregate principal amount of
indebtedness for borrowed money that gives rise to the acceleration of such
indebtedness;
(6) one or more judgments, orders or decrees for the payment of more than $5.0
million shall be entered against ACI or any restricted subsidiary of Arch;
(7) the holder of any secured indebtedness of Arch or any restricted subsidiary
aggregating at least $5.0 million in principal amount seeks foreclosure, set-
off or other recourse against assets of ACI or any restricted subsidiary; or
(8) certain events of bankruptcy, insolvency or reorganization involving ACI or
any of its restricted subsidiaries.
The terms of the indenture under which the ACI % Notes were issued do not
differ in any material respect from the terms of the ACI 12 3/4% Notes
indenture summarized above. They specifically state that the MobileMedia
acquisition did not constitute a change in control of Arch.
Arch Discount Notes
In March 1996, Arch issued $467.4 million in aggregate principal amount at
maturity of Arch Discount Notes. The Arch Discount Notes are scheduled to
mature on March 15, 2008. The Arch Discount Notes were issued at a substantial
discount from the principal amount due at maturity. Interest does not accrue on
the Arch Discount Notes prior to March 15, 2001. After that date, interest on
the Arch Discount Notes will accrue at the rate of 10 7/8% per year, payable
semi-annually on March 15 and September 15, commencing September 15, 2001.
Arch may choose to redeem any amount of Arch Discount Notes on or after March
15, 2001 at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
March 15, 2001 to March 14,
2002....................... 104.078% of principal amount
March 15, 2002 to March 14,
2003....................... 102.719% of principal amount
March 15, 2003 to March 14,
2004....................... 101.359% of principal amount
On or after March 15, 2004 . 100.000% of principal amount
</TABLE>
In addition, on or prior to March 15, 1999, Arch may elect to use the proceeds
of a qualifying equity offering to redeem the Arch Discount Notes at a
redemption price equal to 110.875% of the accreted value on the Notes to the
date of redemption provided that Arch Discount Notes with an aggregate
principal amount at maturity at least equal to 66 2/3% of the original
principal amount at maturity of the Arch Discount Notes remain outstanding
immediately after giving effect to such redemption, Arch is not, however,
obligated to redeem any Arch Discount Notes with the proceeds of any equity
offering.
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<PAGE>
The indenture for the Arch Discount Notes limits the ability of Arch to pay
dividends to its stockholders. The Arch Discount Notes indenture also imposes
limitations on the ability of ACI and its subsidiaries to incur secured or
unsecured indebtedness, on the disposition of assets, on the occurrence of
liens, on transactions with affiliates, on the sale or issuance of stock by the
subsidiaries of Arch and on the merger or consolidation of Arch and its
subsidiaries or sale of substantially all of the assets of Arch.
Upon the occurrence of a change of control, as defined in the Arch Discount
Notes indenture, each holder of Arch Discount Notes has the right to require
Arch to repurchase such holder's Arch Discount Notes for cash. The repurchase
price must equal 101% of the accrued principal amount of such Notes plus
accrued and unpaid interest, if any, to the date of repurchase. The following
constitute a change of control under the Arch Discount Notes indenture: (1) the
acquisition by a person or group of beneficial ownership of the majority of the
securities of Arch having the right to vote in the election of directors; (2)
certain changes in the Arch's Board of Directors; (3) the sale or transfer of
all or substantially all of the assets of Arch or the merger or consolidation
of Arch with or into another corporation which results in a person or group
becoming the beneficial owner of a majority of the securities of the surviving
corporation having the right to vote in the election of directors.
The following constitute "Events of Default" under the Arch Discount Notes
indenture:
(1) a default in the payment of any interest upon the Arch Discount Notes
continuing for a period of 30 days;
(2) a default in the payment of the principal of (or premium, if any, on)
any of the Arch Discount Notes either at maturity, upon redemption or
repurchase, by declaration or otherwise;
(3) Arch's failure to comply with the covenants limiting mergers and sales
of assets;
(4) Arch's failure to duly observe or perform any other of its covenants or
agreements in the Arch Discount Notes or in the Arch Discount Notes
indenture for a period of 60 days after notice;
(5) certain events of bankruptcy, insolvency or reorganization involving
Arch or any of its restricted subsidiaries;
(6) (A) a default in any payment when due at final maturity on any
indebtedness for borrowed money of Arch or any restricted subsidiary
aggregating $5.0 million in principal amount or (B) an event of default as
defined in any indenture or instrument involving at least $5.0 million
aggregate principal amount of indebtedness for borrowed money that gives
rise to the acceleration of such indebtedness;
(7) one or more judgments, orders or decrees for the payment of more than
of $5.0 million shall be entered against Arch or any restricted subsidiary
of Arch; or
(8) the holder of any secured indebtedness of Arch or any restricted
subsidiary aggregating at least $5.0 million in principal amount seeks
foreclosure, set-off or other recourse against assets of Arch or any
restricted subsidiary.
Arch Convertible Debentures
Arch has outstanding $13.4 million in principal amount of Arch Convertible
Debentures, the 6 3/4% Convertible Subordinated Debentures due 2003. The Arch
Convertible Debentures accrue interest at the rate of 6.75% per year, payable
semi-annually on June 1 and December 1. The Arch Convertible Debentures are
scheduled to
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<PAGE>
mature on December 1, 2003. The principal amount of the Arch Convertible
Debentures is convertible into Common Stock at a conversion price of $16.75 per
share at any time prior to redemption or maturity.
Arch may choose to redeem any amount of the Arch Convertible Debentures at any
time, at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
December 1, 1997 to November 30, 1998........ 104.050% of principal amount
December 1, 1998 to November 30, 1999........ 103.375% of principal amount
December 1, 1999 to November 30, 2000........ 102.700% of principal amount
December 1, 2000 to November 30, 2001........ 102.025% of principal amount
December 1, 2001 to November 30, 2002........ 101.350% of principal amount
December 1, 2002 to November 30, 2003........ 100.675% of principal amount
On or after December 1, 2003 ................ 100.000% of principal amount
</TABLE>
Upon the occurrence of a fundamental change, as defined in the indenture under
which the Arch Convertible Debentures were issued, each holder of Arch
Convertible Debentures has the right to require Arch to repurchase such
holder's Arch Convertible Debentures for cash. The repurchase price must equal
100% of the principal amount of the Arch Convertible Debentures, plus accrued
interest to the repurchase date. The following constitute a fundamental change
under the Arch Debenture indenture: (1) the acquisition by a person or group of
beneficial ownership of capital stock of Arch entitled to exercise more than
50% of the total voting power of all capital stock (unless such beneficial
ownership is approved by the board of directors of Arch prior to such person or
group acquiring such beneficial ownership); (2) certain changes in Arch's Board
of Directors; (3) a share exchange of Arch with, or the merger of Arch into,
any other person, any merger of another person into Arch, or any sale or
transfer of all or substantially all of the assets of Arch to another person
(subject in each case to certain exceptions); (4) the purchase by Arch of
beneficial ownership in shares of its Common Stock if such purchase would
result in a default under any senior debt agreements to which Arch is a party;
or (5) certain distributions by Arch of Common Stock.
The Arch Convertible Debentures represent senior unsecured obligations of Arch
and are subordinated to senior indebtedness of Arch, as defined in the Arch
Debenture indenture. The Arch Debenture indenture does not contain any
limitation or restriction on the incurrence of senior indebtedness or other
indebtedness or securities of Arch or its subsidiaries.
The following constitute "Events of Default" under the Arch Debenture
Indenture:
(1) a default in the timely payment of any interest on the Arch Convertible
Debentures if such default continues for 30 days;
(2) a default in the timely payment of principal or premium on any Arch
Convertible Debenture at maturity, upon redemption or otherwise;
(3) a default in the performance of any other covenant or agreement of Arch
that continues for 30 days after written notice of such default;
(4) a default under any indebtedness for money borrowed by Arch that
results in more than $5.0 million of indebtedness being accelerated; or
(5) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to Arch.
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<PAGE>
PLAN OF DISTRIBUTION
Exercises of Warrants
The warrants entitle their holders to purchase up to a total of [ ] shares of
newly issued Common Stock from Arch for a warrant exercise price of [$3.25] per
share in cash. The warrants are exercisable immediately and will expire at 5:00
p.m., New York City time, on September 1, 2001. Any warrants which remain
unexercised at such time will no longer be exercisable.
For a detailed description of the terms of the warrants, see "Description of
Securities--Warrants".
Method of Exercise of Warrants
You may exercise warrants by filling in and signing the exercise notice which
is attached to the warrant certificate and either mailing or hand-delivering
the warrant certificate and the exercise notice to the warrant agent, together
with payment as described below under "--Payment for Shares". You may also
exercise warrants through a broker or other nominee if your warrants are held
in such broker's or nominee's name. Such brokers or nominees may charge a
servicing fee for exercising such warrants for you.
Completed exercise notices must be received by the warrant agent prior to 5:00
p.m., New York City time, on September 1, 2001. The warrant certificate, duly
executed exercise notice and payment should be delivered to the offices of the
warrant agent by one of these two methods:
(1)By mail:
The Bank of New York
(2)By Hand, Express Mail or Overnight Courier:
The Bank of New York
Signatures on exercise notices must correspond exactly to the names as written
on the face of the warrant certificate. Signatures must be guaranteed by a
member firm of a registered national securities exchange, a member of the
National Association of Securities Dealers, Inc. or a commercial bank or trust
company having an office or a correspondent in the United States.
No fractional shares will be issued upon the exercise of warrants. Instead, you
will receive cash based upon an appropriate fraction of the then prevailing
market price per share of common stock.
Payment for Shares
Holders of warrants who choose to buy shares of Common Stock must make payment
in the form of cash, certified check, bank cashier's check or wire transfer in
immediately available funds to an account designated by the warrant agent. To
be accepted, payment, together with the executed warrant certificate and
exercise notice, must be received by the warrant agent, prior to 5:00 p.m., New
York City time, on September 1, 2001.
A payment pursuant to this method must be in United States dollars. Payment
must be payable to Arch Communications Group, Inc., and must accompany an
executed exercise notice. Arch will not accept surrender of Arch stock
certificates as a means of payment for shares.
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<PAGE>
Issuance and delivery of certificates for the shares purchased are subject to
collection of any certified checks or bank cashier's checks. Payment of the
warrant exercise price will be deemed to have been received by the warrant
agent only upon receipt by the warrant agent of any certified check or wire
transfer.
Holders who hold warrants for the account of others, such as brokers, trustees
or depositaries for securities, should notify the beneficial owners of such
warrants to ascertain their intentions and to obtain instructions with respect
to the warrants. If the beneficial owner so instructs, the record holder of
such warrants should complete exercise notices and submit them to the warrant
agent with the proper payment. In addition, if you beneficially own warrants
through such a record holder, you should contact the holder and request the
holder to deal with your warrants in accordance with your instructions.
Please read the instructions accompanying the exercise notice carefully and
follow them exactly. DO NOT SEND WARRANT CERTIFICATES, EXERCISE NOTICES OR
PAYMENTS TO ARCH.
The method of delivery of exercise notices and payment of the warrant exercise
price to Arch will be at your risk. If you send by mail, Arch recommends that
you use registered mail, properly insured, with return receipt requested, and
that you allow a sufficient number of days to ensure delivery to the warrant
agent and clearance of payment prior 5:00 p.m., New York City time, on
September 1, 2001.
All questions concerning the timeliness, validity, form and eligibility of any
exercise of warrants will be determined by Arch, whose determination will be
final and binding. Arch, in its sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any warrant.
Warrant exercises will not be considered to have been received or accepted
until all irregularities have been waived or cured within such time as Arch
determines in its sole discretion. Neither Arch nor the warrant agent will be
under any duty to give you notification of any defect or irregularity in
connection with the submission of exercise notices or incur any liability for
failure to give such notification.
Certificates representing shares of Common Stock purchased will be delivered to
the purchaser within 10 business days after the exercise.
If (1) the number of warrants being exercised is not specified on an exercise
notice or (2) the payment delivered is not sufficient to pay the full aggregate
warrant exercise price for all shares stated to be exercised for, you will be
deemed to have exercised the maximum number of warrants that could be exercised
for the amount of the payment that you delivered. If the payment that you
delivered exceeds the aggregate warrant exercise price for the number of
warrants evidenced by your exercise notice, any excess payment will be returned
to you as soon as practicable by mail, without interest or deduction.
Please direct to Arch any questions or requests for assistance concerning the
method of exercising warrants or requests for additional copies of this
prospectus or the instructions:
Arch Communications Group, Inc.,
1800 West Park Drive, Suite 250
Westborough, Massachusetts
Attention: Investor Relations
Telephone (508) 870-6700.
Transfer of Warrants
Warrants may be purchased or sold in public or private transactions. The
warrants are quoted for trading on the Nasdaq National Market.
You may transfer all of the warrants evidenced by a single warrant certificate
by endorsing the warrant certificate for transfer in accordance with the
instructions. You may transfer a portion of the warrants evidenced
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<PAGE>
by a single warrant certificate by delivering to the warrant agent the warrant
certificate properly endorsed for transfer with instructions to register the
specified portion of the warrants in the name of the transferee (and to issue a
new warrant certificate to the transferee evidencing such transferred
warrants). In such event, the warrant agent will issue a new warrant
certificate evidencing the balance of the warrants to you or, if you so
instruct, to an additional transferee.
If you wish to sell all or a portion of your warrants, you should allow a
sufficient amount of time prior to September 1, 2001 for (1) the transfer
instructions to be received and processed by the warrant agent and (2) a new
warrant certificate for the transferred warrants to be issued and transmitted
to the transferee or transferee's designee and to you with respect to retained
warrants, if any. Neither Arch nor the warrant agent shall have any liability
to a transferee or transferor if warrant certificates are not received in time
for exercise or sale prior to warrants.
Except for fees charged by the warrant agent (which will be paid by Arch as
described below), all commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred in connection with the purchase, sale
or exercise of warrants will be for the account of the transferor of the
warrants. None of such commissions, fees or expenses will be paid by Arch or
the warrant agent.
Procedures for Book Entry-Transfer Facility Participants
Arch anticipates that the warrants will be eligible for transfer through the
facilities of Depository Trust Company, and that the exercise of the warrants
may be effected through such facilities.
Dilution
The subscription price per warrant currently exceeds the net tangible book
value per share of Common Stock, which is a negative number. Accordingly, you
will experience immediate and substantial dilution if you exercise warrants
under current conditions.
Use of Proceeds
Substantially all of the proceeds of warrant exercise will be used for general
corporate purposes, including working capital and repayment of debt.
No Revocation
AFTER YOU HAVE EXERCISED A WARRANT, YOU CANNOT REVOKE SUCH EXERCISE.
Foreign and Certain Other Holders
Warrant certificates will not be mailed to persons whose addresses are outside
the United States, but will be held by the warrant agent for each such holder's
account. To exercise their warrants, foreign persons must notify the warrant
agent prior to 5:00 p.m., New York time, on September 1, 2001. All warrants
will expire at that time.
Certain Federal Income Tax Consequences
The following discussion is based on provisions of the Internal Revenue Code,
applicable Treasury Regulations, judicial authority and administrative rulings
and practice, all as of the date of this prospectus. The IRS is not precluded
from adopting a contrary position. In addition, there can be no assurance that
future legislative, judicial or administrative changes or interpretations will
not adversely affect the accuracy of the statements and conclusions set forth
in this Prospectus. Any such changes or interpretations could be applied
retroactively and could affect the tax considerations discussed in this
Prospectus. Arch has not sought and will not seek an opinion of counsel or a
ruling from the IRS with respect to the statements made and the conclusions
reached in the following discussion, and there can be no assurance that the IRS
will agree with such statements and conclusions.
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<PAGE>
This summary deals only with holders that will hold warrants and shares as
"capital assets" (within the meaning of Section 1221 of the Internal Revenue
Code) and does not address tax considerations applicable to investors that may
be subject to special tax rules, such as banks and other financial
institutions; tax-exempt entities; insurance companies; traders or dealers in
securities or currencies; custodians, nominees or similar financial
intermediaries holding warrants and shares for others; persons that will hold
warrants and shares as a position in a hedging transaction, "straddle" or
"conversion transaction" for tax purposes; or persons that have a "functional
currency" other than the United States dollar. Accordingly, investors
considering the exercise or purchase of warrants or the resale of warrants or
Common Stock should consult their own tax advisors with respect to the
application of the United States federal income tax laws to their particular
situations as well as any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction or under any applicable tax treaty.
Holders of warrants generally will not recognize any gain or loss upon
exercise, except to the extent of cash, if any, paid instead of fractional
shares of Common Stock. A holder's tax basis in the Common Stock received upon
exercise of a warrant will be the exercise price paid plus the holder's basis
in the warrant. The holding period for the new Common Stock will begin on the
day exercised. Upon the expiration of an unexercised warrant, the holder will
recognize loss equal to his adjusted tax basis of the warrant. Such loss will
be long-term capital loss if the warrant has been held for more than one year.
Generally, a holder of warrants or Common Stock acquired by exercise of
warrants will recognize gain or loss upon the sale or other disposition of the
warrants or Common Stock in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis for the
warrants or Common Stock. Gains or losses from the sale or other disposition of
warrants or Common Stock will generally constitute long-term capital gains or
long-term capital losses if the warrants or Common Stock have been held for
more than one year.
Warrant Agent; Fees
Arch has appointed The Bank of New York as warrant agent. For its services in
processing the exercise of warrants, the warrant agent will receive a fee from
Arch estimated to be $ per year and reimbursement for all out-of-pocket
expenses relating to processing the warrants. The warrant agent is also Arch's
transfer agent and registrar. Arch has not employed any brokers, dealers or
underwriters in connection with the solicitation of warrant exercises. Except
as described above, no other commissions, fees or discounts will be paid in
connection with such solicitation. Certain directors and officers of Arch may
answer questions or solicit responses from holders of warrants, but such
directors and officers will not receive any commissions or compensation for
such services other than their normal employment compensation.
Resales of Warrants and Shares
We are registering a maximum of shares and warrants on behalf of the
selling stockholders. All of the shares either were originally issued by us or
will be issued by us upon exercise of warrants. The warrants were issued by us
in connection with the MobileMedia acquisition. The selling stockholders named
in the table below may sell the shares and/or warrants from time to time.
Additional selling stockholders may include pledgees, donees, transferees or
other successors-in-interest selling shares and/or warrants received from a
named selling stockholder as a gift, partnership distribution or other non-
sale-related transfer after the date of this prospectus. All of these selling
stockholders will act independently of Arch in making decisions with respect to
the timing, manner and size of each sale. The sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and at
terms then prevailing or at prices related to the then current market price of
Common Stock, or in negotiated transactions. The selling stockholders may
effect such transactions by selling the shares and/or warrants to or through
broker-dealers or directly to purchasers (in the event of a private sale).
Common Stock may be offered in any manner permitted by law, including through
underwriters, licensed brokers, dealers or agents, and directly to one or more
purchasers. Shares and/or warrants may be sold by one or more of the following
methods or by a combination of the following methods:
. sales to underwriters who will acquire shares of common stock for their
own account and resell them in one or more transactions at fixed prices
or at varying prices determined at time of sale;
114
<PAGE>
. a block trade in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
. purchases by a broker-dealer as principal and resale by such broker-
dealer for its account pursuant to this prospectus;
. an over-the-counter or exchange distribution in accordance with the
rules of the Nasdaq National Market or any stock exchange;
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
. privately negotiated transactions, which may include sales directly to
institutions.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. In effecting sales,
broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in the resales.
The selling stockholders may enter into hedging transactions with broker-
dealers in connection with distributions of the shares and/or warrants or
otherwise. In such transactions, broker-dealers may engage in short sales of
the shares and/or warrants in the course of hedging the positions they assume
with selling stockholders. The selling stockholders may also sell shares and/or
warrants short and redeliver the shares and/or warrants to close out such short
positions. The selling stockholders may enter into option or other transactions
with broker-dealers which require the delivery to the broker-dealer of the
shares and/or warrants. The broker-dealer may then resell or otherwise transfer
such shares and/or warrants pursuant to this prospectus. The selling
stockholders also may loan or pledge the shares and/or warrants to a broker-
dealer. The broker-dealer may sell the shares and/or warrants so loaned, or
upon a default the broker-dealer may sell the pledged shares and/or warrants
pursuant to this prospectus.
Broker-dealers or agents may receive compensation in the form of commissions,
underwriting discounts or concessions from selling stockholders. Broker-dealers
or agents may also receive compensation from the purchasers of the shares
and/or warrants for whom they act as agents or to whom they sell as principals,
or both. Broker-dealers or agents and any other participating broker-dealers or
the selling stockholders may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act in connection with sales of the shares
and/or warrants. Accordingly, any such commission, discount or concession
received by them and any profit on the resale of the shares purchased by them
may be deemed to be underwriting discounts or commissions under the Securities
Act. Because selling stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will
be subject to the prospectus delivery requirements of the Securities Act. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather
than pursuant to this prospectus. The selling stockholders have advised Arch
that they have not entered into agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their securities.
The shares and/or warrants will be sold only through registered or licensed
brokers or dealers if required under applicable state securities laws. In
addition, in certain states the shares and/or warrants may not be sold unless
they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and
is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares and/or warrants may not
simultaneously engage in market making activities with respect to Common Stock
for a specified period prior to the commencement of such distribution. In
addition, each selling stockholder will be subject to applicable provisions of
the Exchange Act and the associated rules and regulations under the Exchange
Act, including Regulation M. These provisions may limit the timing of purchases
and sales of shares of Common Stock by the selling stockholders. We will make
copies of this prospectus available to the selling stockholders and have
informed them of the need for delivery of copies of this prospectus to
purchasers at or prior to the time of any sale of the shares.
115
<PAGE>
We will file a supplement to this prospectus, if required, pursuant to Rule
424(b) under the Securities Act upon being notified by a selling stockholder
that any material arrangement has been entered into with a broker-dealer for
the sale of shares through an underwritten offering, block trade, special
offering, exchange distribution or secondary distribution or a purchase by a
broker or dealer. Such supplement will disclose:
. the name of each such selling stockholder and of the participating
broker-dealer(s);
. the number of shares and/or warrants involved;
. the price at which such shares and/or warrants were sold;
. the commissions paid or underwriting discounts or concessions allowed to
such broker-dealer(s), where applicable;
. a representation that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by
reference in this prospectus; and
. other facts material to the transaction.
We will bear all costs, expenses and fees in connection with the registration
of the shares and warrants. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares and/or warrants.
The selling stockholders may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the shares and/or warrants
against certain liabilities, including liabilities arising under the Securities
Act. The selling stockholders have agreed to indemnify certain persons,
including broker-dealers and agents, against certain liabilities in connection
with the offering of the shares, including liabilities arising under the
Securities Act.
116
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the number of shares and warrants owned by each
of the selling stockholders. None of the selling stockholders has had a
material relationship with Arch within the past three years other than as a
result of the ownership of shares, warrants or other securities of Arch, except
. No estimate can be given as to the amount of shares and/or warrants that
will be held by the selling stockholders after completion of this offering
because the selling stockholders may offer all or some of the shares and
warrants and because there currently are no agreements, arrangements or
understandings with respect to the sale of any of the shares and warrants. The
shares and warrants offered by this prospectus may be offered from time to time
by the selling stockholders named below.
<TABLE>
<CAPTION>
Percent of Number of Securities
Number of Securities Outstanding Registered for Sale
Name of Selling Stockholder Beneficially Owned Securities Hereby (1)
- --------------------------- ----------------------- --------------- -----------------------
Shares Warrants Shares Warrants Shares Warrants
---------- ----------- ------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
---------- --------- ---- --- ---------- ---------
Total..................
========== ========= ==== === ========== =========
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
(1) This registration statement also shall cover any additional shares of
Common Stock which become issuable in connection with the shares and/or
warrants registered for sale hereby by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without the
receipt of consideration which results in an increase in the number of
Arch's outstanding shares of Common Stock.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for Arch by
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts.
EXPERTS
The financial statements of Arch included in this prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of MobileMedia at December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997 included in this
registration statement, as set forth in their report, which is also included in
this registration statement. Their report contains an explanatory paragraph
describing conditions that raise substantial doubt about MobileMedia's ability
to continue as a going concern as described in Note 1 of MobileMedia's Notes to
Consolidated Financial Statements. MobileMedia's consolidated financial
statements are included in this registration statement in reliance on Ernst &
Young's report, given on their authority as experts in accounting and auditing.
With the exception of matters unique to MobileMedia, the descriptions of the
regulatory requirements under the Communications Act and the regulations
thereunder set forth under "Risk Factors--Government Regulation May Burden
Operations; Foreign Ownership and Possible Redemption of Stock" and "Industry
Overview--Regulation" have been included under the authority of Wilkinson,
Barker, Knauer & Quinn, LLP, as experts in telecommunications law. FCC matters
unique to MobileMedia included in the description of the regulatory
requirements under the Communications Act and the regulations thereunder set
forth under "Risk Factors--Business and Financial Risks--Government Regulation
May Burden Operations; Foreign Ownership and Possible Redemption of Stock" and
"Industry Overview--Regulation" have been included under the authority of
Wiley, Rein & Fielding as experts in telecommunications law. Stockholders of
Arch should not rely on Wilkinson, Barker, Knauer & Quinn, LLP or Wiley, Rein &
Fielding with respect to any other matters.
117
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
Defined
Defined Term on Page Abbreviated version of:
------------ ------- -----------------------
<S> <C> <C>
ARPU.................... 34 Average revenues per unit.
CMRS.................... 13 Commercial mobile radio services.
COAM.................... 78 Customer-owned and -maintained.
LECs.................... 13 Local exchange carriers.
N-PCS................... 1 Narrowband personal communications services.
PCS..................... 12 Broadband personal communications services.
PCP..................... 66 Private Carrier Paging Operator.
RCC..................... 66 Radio Common Carrier.
</TABLE>
118
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Arch files reports, proxy statements and other information with the Securities
and Exchange Commission as required by the Exchange Act. MobileMedia
Communications, Inc. and MobileMedia Corporation. have also been subject to the
informational requirements of the Exchange Act but have filed only limited
reports since the commencement of their bankruptcy proceedings in January 1997.
See "Business--MobileMedia--Events Leading Up To MobileMedia's Bankruptcy
Filings". Financial statements included in MobileMedia Communications, Inc. and
MobileMedia Corporation's periodic reports from February 1997 through June 1998
have not been prepared in accordance with generally accepted accounting
principles due to MobileMedia Communications, Inc. and MobileMedia
Corporation's inability at the time of such filings to determine the amount of
an impairment loss related to long-lived assets pursuant to Financial
Accounting Standard No. 121. Such financial statements are unaudited and have
been revised periodically based on subsequent determinations of changes in
facts and circumstances impacting previously filed unaudited financial
statements. The audited financial statements of MobileMedia included in this
prospectus reflect adjustments from the unaudited statements, including but not
limited to an impairment adjustment of $792.5 million recorded as of December
31, 1996.
You can find, copy and inspect information filed by Arch (and, to the extent
available, by MobileMedia Communications, Inc. and MobileMedia Corporation)
with the SEC at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can obtain copies
of information filed by Arch with the SEC at prescribed rates by writing to the
SEC's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
You can call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. You can review Arch's, MobileMedia Communications, Inc. and
MobileMedia Corporation's electronically filed reports, proxy and information
statements on the SEC's world wide web site at http://www.sec.gov. Arch's
Common Stock trades on the Nasdaq National Market under the symbol "APGR."
Therefore, you can inspect reports, proxy statements and other information
concerning Arch at the offices of the National Association of Securities
Dealers, Inc., Market Listing Section, 1735 K Street, N.W., Washington, D.C.
20006. MobileMedia Corporation's Common Stock has not been traded on any
exchange since 1997. Arch maintains a World Wide Web site at
http://www.arch.com. Arch's web site is not a part of this prospectus.
Arch has filed with the SEC a registration statement on Form S-4 under the
Securities Act to register the stock and warrants. The term "registration
statement" includes all amendments, exhibits, annexes and schedules. This
prospectus does not contain all the information you can find in the
registration statement or the exhibits and schedules to the registration
statement. For further information with respect to Arch, MobileMedia
Communications, Inc., MobileMedia Corporation and Arch's Common Stock, please
refer to the registration statement (including its exhibits and schedules). You
may inspect and copy the registration statement, including exhibits and
schedules, as described above. Statements contained in this prospectus about
the contents of any contract or other document are not necessarily complete,
and we refer you, in each case, to the copy of such contract or other document
filed as an exhibit to the registration statement.
You should rely only on the information or representations provided in this
prospectus. Neither Arch nor any of the selling stockholders have authorized
anyone to provide you with different information. Arch and the selling
stockholders are not making an offer of these securities in any state where the
offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
You may request a copy of Arch's filings with the SEC, at no cost, by writing
or telephoning Arch at the following address: Arch Communications Group, Inc.,
1800 West Park Drive, Suite 250, Westborough, Massachusetts 01581, Attention:
Investor Relations, telephone (508) 870-6700. You may request copies of
MobileMedia Communications, Inc. and MobileMedia Corporation's filings with the
SEC, at no cost, by writing or telephoning MobileMedia Corporation, Fort Lee
Executive Park, One Executive Drive, Suite 500, Fort Lee, New Jersey 07024,
Attention: Secretary, telephone (201) 224-9200.
119
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Arch Communications Group, Inc.
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998 (unaudited)......................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (unaudited).......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for Each of
the Three Years in the Period Ended December 31, 1997 and for the Nine
Months Ended September 30, 1998 (unaudited)............................ F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (unaudited).......................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
MobileMedia Communications, Inc. and Subsidiaries
Report of Independent Public Auditors................................... F-22
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998 (unaudited)......................................... F-23
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (unaudited).......................................... F-24
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
Each of the Three Years in the Period Ended December 31, 1997 and for
the Nine Months Ended September 30, 1998 (unaudited)................... F-25
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (unaudited).......................................... F-26
Notes to Consolidated Financial Statements.............................. F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Communications Group, Inc.:
We have audited the accompanying consolidated balance sheets of Arch
Communications Group, Inc. (a Delaware corporation) (the "Company") and
subsidiaries as of December 31, 1996 and 1997, 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, 1997. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the schedule 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arch
Communications Group, Inc. and subsidiaries as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
21(b) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 9, 1998 (except with respect to
the matters discussed in Notes 3 and 4,
as to which the date is June 29, 1998)
F-2
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1996 1997 1998
---------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 3,497 $ 3,328 $ 6,571
Accounts receivable (less reserves of
$4,111, $5,744 and $7,375 in 1996,
1997 and 1998, respectively) 25,344 30,147 34,496
Inventories............................ 10,239 12,633 10,578
Prepaid expenses and other............. 4,531 4,917 4,170
---------- ---------- --------
Total current assets................. 43,611 51,025 55,815
---------- ---------- --------
Property and equipment, at cost:
Land, buildings and improvements....... 8,780 10,089 10,382
Paging and computer equipment.......... 339,391 361,713 393,808
Furniture, fixtures and vehicles....... 9,921 16,233 17,115
---------- ---------- --------
358,092 388,035 421,305
Less accumulated depreciation and
amortization.......................... 96,448 146,542 197,416
---------- ---------- --------
Property and equipment, net............ 261,644 241,493 223,889
---------- ---------- --------
Intangible and other assets (less
accumulated amortization of $141,710,
$260,932 and $342,101 in 1996, 1997 and
1998, respectively)..................... 841,501 728,202 662,662
---------- ---------- --------
$1,146,756 $1,020,720 $942,366
========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of long-term debt... $ 46 $ 24,513 $ --
Accounts payable....................... 17,395 22,486 23,571
Accrued restructuring charge........... -- -- 14,810
Accrued expenses....................... 14,287 11,894 12,523
Accrued interest....................... 10,264 11,249 18,767
Customer deposits...................... 6,698 6,150 5,340
Deferred revenue....................... 7,181 8,787 11,349
---------- ---------- --------
Total current liabilities............ 55,871 85,079 86,360
---------- ---------- --------
Long-term debt, less current maturities.. 918,150 968,896 992,790
---------- ---------- --------
Other long-term liabilities.............. 21,172 -- 28,639
---------- ---------- --------
Commitments and contingencies
Redeemable preferred stock............... 3,712 -- --
---------- ---------- --------
Stockholders' equity (deficit):
Preferred stock--$.01 par value,
authorized 10,000,000 shares, 250,000
shares issued ($25,515 aggregate
liquidation preference)............... -- -- 3
Common stock--$.01 par value,
authorized 75,000,000 shares, issued
and outstanding: 20,712,220,
20,863,563 and 21,067,110 shares in
1996, 1997 and 1998, respectively..... 207 209 211
Additional paid-in capital............. 350,444 351,210 377,382
Accumulated deficit.................... (202,800) (384,674) (543,019)
---------- ---------- --------
Total stockholders' equity (deficit). 147,851 (33,255) (165,423)
---------- ---------- --------
$1,146,756 $1,020,720 $942,366
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 138,466 $ 291,399 $ 351,944 $ 261,570 $ 277,826
Product sales........... 24,132 39,971 44,897 34,029 31,811
---------- ---------- ---------- ---------- ----------
Total revenues...... 162,598 331,370 396,841 295,599 309,637
Cost of products sold... (20,789) (27,469) (29,158) (22,044) (21,863)
---------- ---------- ---------- ---------- ----------
141,809 303,901 367,683 273,555 287,774
---------- ---------- ---------- ---------- ----------
Operating expenses:
Service, rental and
maintenance.......... 29,673 64,957 79,836 59,227 60,812
Selling............... 24,502 46,962 51,474 39,019 36,902
General and
administrative....... 40,448 86,181 106,041 78,878 84,527
Depreciation and
amortization......... 60,205 191,871 232,347 179,917 164,990
Restructuring charge.. -- -- -- -- 16,100
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 154,828 389,971 469,698 357,041 363,331
---------- ---------- ---------- ---------- ----------
Operating income (loss). (13,019) (86,070) (102,015) (83,486) (75,557)
Interest expense........ (22,560) (77,353) (98,063) (73,057) (79,592)
Interest income......... 38 1,426 904 621 1,258
Equity in loss of
affiliate.............. (3,977) (1,968) (3,872) (2,828) (2,219)
---------- ---------- ---------- ---------- ----------
Income (loss) before
income tax benefit and
extraordinary item..... (39,518) (163,965) (203,046) (158,750) (156,110)
Benefit from income
taxes.................. 4,600 51,207 21,172 15,900 --
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item..... (34,918) (112,758) (181,874) (142,850) (156,110)
Extraordinary charge
from early
extinguishment of debt. (1,684) (1,904) -- -- (1,720)
---------- ---------- ---------- ---------- ----------
Net income (loss)....... (36,602) (114,662) (181,874) (142,850) (157,830)
Accretion of redeemable
preferred stock........ (102) (336) (32) (32) --
Preferred stock
dividend............... -- -- -- -- (515)
---------- ---------- ---------- ---------- ----------
Net income (loss) to
common stockholders.... $ (36,704) $ (114,998) $ (181,906) $ (142,882) $ (158,345)
========== ========== ========== ========== ==========
Basic/diluted income
(loss) per common share
before extraordinary
item................... $ (2.60) $ (5.53) $ (8.77) $ (6.89) $ (7.47)
Extraordinary charge
from early
extinguishment of debt
per basic/diluted
common share........... $ (.12) $ (.09) $ -- $ -- $ (.08)
---------- ---------- ---------- ---------- ----------
Basic/diluted net income
(loss) per common
share.................. $ (2.72) $ (5.62) $ (8.77) $ (6.89) $ (7.55)
========== ========== ========== ========== ==========
Basic/diluted weighted
average number of
common shares
outstanding............ 13,497,734 20,445,943 20,746,240 20,735,730 20,968,281
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Preferred Common Paid-In Accumulated Equity
Stock Stock Capital Deficit (Deficit)
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994.................... $-- $ 81 $ 60,823 $ (51,536) $ 9,368
Exercise of options to
purchase 475,903
shares of common
stock................. -- 5 5,137 -- 5,142
Issuance of 7,994,493
shares of common stock
to acquire stock of
paging companies...... -- 80 215,819 -- 215,899
Issuance of 2,706,659
shares of common stock
(net of issuance costs
of $3,016)............ -- 27 46,354 -- 46,381
Issuance of 417,311
shares of common stock
upon conversion of
convertible
subordinated
debentures (net of
costs of conversion of
$192)................. -- 4 6,794 -- 6,798
Accretion of redeemable
preferred stock....... -- -- (102) -- (102)
Net loss............... -- -- -- (36,602) (36,602)
---- ---- -------- --------- ---------
Balance, December 31,
1995.................... -- 197 334,825 (88,138) 246,884
Exercise of options to
purchase 169,308
shares of common
stock................. -- 2 1,469 -- 1,471
Issuance of 46,842
shares of common stock
under Arch's Employee
Stock Purchase Plan... -- -- 373 -- 373
Issuance of 843,039
shares of common stock
upon conversion of
convertible
subordinated
debentures............ -- 8 14,113 -- 14,121
Accretion of redeemable
preferred stock....... -- -- (336) -- (336)
Net loss............... -- -- -- (114,662) (114,662)
---- ---- -------- --------- ---------
Balance, December 31,
1996.................... -- 207 350,444 (202,800) 147,851
Issuance of 151,343
shares of common stock
under Arch's Employee
Stock Purchase Plan... -- 2 798 -- 800
Accretion of redeemable
preferred stock....... -- -- (32) -- (32)
Net loss............... -- -- -- (181,874) (181,874)
---- ---- -------- --------- ---------
Balance, December 31,
1997.................... -- 209 351,210 (384,674) (33,255)
Exercise of options to
purchase 94,032 shares
of common stock
(unaudited)........... -- 1 293 -- 294
Issuance of 250,000
shares of preferred
stock (unaudited)..... 3 -- 24,997 -- 25,000
Issuance of 109,515
shares of common stock
under Arch's Employee
Stock Purchase Plan
(unaudited)........... -- 1 367 -- 368
Preferred stock
dividend.............. -- -- 515 (515) --
Net loss (unaudited)... -- -- -- (157,830) (157,830)
---- ---- -------- --------- ---------
Balance, September 30,
1998 (unaudited)........ $ 3 $211 $377,382 $(543,019) $(165,423)
==== ==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended September 30,
------------------------------ --------------------
1995 1996 1997 1997 1998
-------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $(36,602) $(114,662) $(181,874) $(142,850) $(157,830)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization.......... 60,205 191,871 232,347 179,917 164,990
Deferred income tax
benefit............... (4,600) (51,207) (21,172) (15,900) --
Extraordinary charge
from early
extinguishment of
debt.................. 1,684 1,904 -- -- 1,720
Equity in loss of
affiliate............. 3,977 1,968 3,872 2,828 2,219
Accretion of discount
on senior notes....... -- 24,273 33,259 24,611 27,430
Accounts receivable
loss provision........ 3,915 8,198 7,181 5,585 6,313
Changes in assets and
liabilities, net of
effect from
acquisitions of paging
companies:
Accounts receivable... (9,582) (15,513) (11,984) (8,481) (10,662)
Inventories........... (3,176) 1,845 (2,394) (3,677) 2,055
Prepaid expenses and
other................ (511) 89 (386) 679 747
Accounts payable and
accrued expenses..... (551) (12,520) 3,683 875 24,042
Customer deposits and
deferred revenue..... (10) 1,556 1,058 964 1,752
Other long-term
liabilities.......... -- -- -- -- 28,639
-------- --------- --------- --------- ---------
Net cash provided by
operating activities... 14,749 37,802 63,590 44,551 91,415
-------- --------- --------- --------- ---------
Cash flows from
investing activities:
Additions to property
and equipment, net.... (45,331) (138,899) (87,868) (63,694) (58,029)
Additions to intangible
and other assets...... (15,137) (26,307) (14,901) (10,978) (27,756)
Acquisition of paging
companies, net of cash
acquired.............. (132,081) (325,420) -- -- --
-------- --------- --------- --------- ---------
Net cash used for
investing activities... (192,549) (490,626) (102,769) (74,672) (85,785)
-------- --------- --------- --------- ---------
Cash flows from
financing activities:
Issuance of long-term
debt.................. 191,617 676,000 91,000 91,000 455,964
Repayment of long-term
debt.................. (63,705) (225,166) (49,046) (56,035) (484,013)
Repayment of redeemable
preferred stock....... -- -- (3,744) (3,744) --
Net proceeds from sale
of preferred stock.... -- -- -- -- 25,000
Net proceeds from sale
of common stock....... 51,180 1,844 800 424 662
-------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 179,092 452,678 39,010 31,645 (2,387)
-------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 1,292 (146) (169) 1,524 3,243
Cash and cash
equivalents, beginning
of period.............. 2,351 3,643 3,497 3,497 3,328
-------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
period................. $ 3,643 $ 3,497 $ 3,328 $ 5,021 $ 6,571
======== ========= ========= ========= =========
Supplemental disclosure:
Interest paid.......... $ 20,933 $ 48,905 $ 62,231 $ 45,366 $ 42,962
======== ========= ========= ========= =========
Issuance of common
stock for acquisition
of paging companies... $215,899 $ -- $ -- $ -- $ --
======== ========= ========= ========= =========
Issuance of common
stock for convertible
debentures............ $ 6,990 $ 14,121 $ -- $ -- $ --
======== ========= ========= ========= =========
Accretion of redeemable
preferred stock....... $ 102 $ 336 $ 32 $ 32 $ --
======== ========= ========= ========= =========
Liabilities assumed in
acquisition of paging
companies............. $314,139 $ 58,233 $ -- $ -- $ --
======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization--Arch Communications Group, Inc. ("Arch" or the "Company") is a
leading provider of wireless messaging services, primarily paging services, and
is the second largest paging company in the United States (based on EBITDA).
The Company had 4.2 million pagers in service at September 30, 1998.
Unaudited Interim Consolidated Financial Statements--The consolidated balance
sheet as of September 30, 1998, the consolidated statements of operations and
cash flows for the nine months ended September 30, 1997 and 1998 and the
consolidated statement of stockholders' equity (deficit) for the nine months
ended September 30, 1998 are unaudited and, in the opinion of the Company's
management, include all adjustments and accruals, consisting only of normal
recurring accrual adjustments, which are necessary for a fair presentation of
the Company's consolidated financial position, results of operations and cash
flows. The results of operations for the nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the full
year.
Principles of Consolidation--The accompanying consolidated financial statements
include the accounts of the Company, and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Revenue Recognition--Arch recognizes revenue under rental and service
agreements with customers as the related services are performed. Maintenance
revenues and related costs are recognized ratably over the respective terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions
are recognized as an expense when incurred.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less. The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
Inventories--Inventories consist of new pagers which are held specifically for
resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
Property and Equipment--Pagers sold or otherwise retired are removed from the
accounts at their net book value using the first-in, first-out method. Property
and equipment is stated at cost and is depreciated using the straight-line
method over the following estimated useful lives:
<TABLE>
<CAPTION>
Estimated
Useful
Asset Classification Life
-------------------- ----------
<S> <C>
Buildings and improvements.................................... 20 Years
Leasehold improvements........................................ Lease Term
Pagers........................................................ 3 Years
Paging and computer equipment................................. 5-8 Years
Furniture and fixtures........................................ 5-8 Years
Vehicles...................................................... 3 Years
</TABLE>
Effective October 1, 1995, Arch changed its estimate of the useful life of
pagers from four years to three years. This change was made to better reflect
the estimated period during which pagers will produce equipment rental revenue.
The change did not have a material effect on depreciation expense or net loss
in the quarter ended December 31, 1995.
F-7
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization expense related to property and equipment totaled
$25.0 million, $87.5 million and $108.0 million for the years ended December
31, 1995, 1996 and 1997, respectively.
Intangible and Other Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1996 1997 1998
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Goodwill................ $351,969 $312,017 $281,847
Purchased FCC licenses.. 330,483 293,922 265,873
Purchased subscriber
lists.................. 120,981 87,281 64,341
Deferred financing
costs.................. 12,449 8,752 21,885
Investment in CONXUS
Communications, Inc.... 6,500 6,500 6,500
Investment in Benbow PCS
Ventures, Inc.......... 3,642 6,189 12,362
Non-competition
agreements............. 3,594 2,783 2,026
Other................... 11,883 10,758 7,828
-------- -------- --------
$841,501 $728,202 $662,662
======== ======== ========
</TABLE>
Amortization expense related to intangible and other assets totaled $35.2
million, $104.4 million and $124.3 million for the years ended December 31,
1995, 1996 and 1997, respectively.
Subscriber lists, Federal Communications Commission ("FCC") licenses and
goodwill are amortized over their estimated useful lives, ranging from five to
ten years using the straight-line method. Non-competition agreements are
amortized over the terms of the agreements using the straight-line method.
Other assets consist of contract rights, organizational and FCC application and
development costs which are amortized using the straight-line method over their
estimated useful lives not exceeding ten years. Development and start up costs
include nonrecurring, direct costs incurred in the development and expansion of
paging systems, and are amortized over a two-year period.
Deferred financing costs incurred in connection with Arch's credit agreements
(see Note 3) are being amortized over periods not to exceed the terms of the
related agreements. As credit agreements are amended or renegotiated,
unamortized deferred financing costs are written-off as an extraordinary
charge. During 1995, 1996 and the nine months ended September 30, 1998, charges
of $1.7 million, $1.9 million and $1.7 million, respectively, were recognized
in connection with the closing of new credit facilities.
On November 8, 1994, CONXUS Communications, Inc. ("CONXUS"), formerly PCS
Development Corporation, was successful in acquiring the rights to a two-way
paging license in five designated regions in the United States in the FCC
narrowband wireless spectrum auction. As of December 31, 1997, Arch's
investment in CONXUS totaled $6.5 million representing an equity interest of
10.5% accounted for under the cost method.
In connection with Arch's May 1996 acquisition of Westlink Holdings, Inc.
("Westlink") (see Note 2), Arch acquired Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. ("Benbow"). Benbow has exclusive rights to a
50kHz outbound/12.5kHz inbound narrowband personal communications license in
each of the central and western regions of the United States. Arch is
obligated, to the extent such funds are not available to Benbow from other
sources and subject to the approval of Arch's designee on Benbow's Board of
Directors, to advance Benbow sufficient funds to service debt obligations
incurred by Benbow in connection with its acquisition of its narrowband PCS
licenses and to finance the build out of a regional narrowband PCS system.
Arch's investment in Benbow is accounted for under the equity method whereby
Arch's share of Benbow's losses since the acquisition date of Westlink are
recognized in Arch's accompanying consolidated statements of operations under
the caption equity in loss of affiliate.
F-8
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of" Arch evaluates the recoverability of its carrying value of the
Company's long-lived assets and certain intangible assets based on estimated
undiscounted cash flows to be generated from each of such assets as compared to
the original estimates used in measuring the assets. To the extent impairment
is identified, Arch reduces the carrying value of such impaired assets. To
date, Arch has not had any such impairments.
Fair Value of Financial Instruments--Arch's financial instruments, as defined
under SFAS No. 107 "Disclosures about Fair Value of Financial Instruments",
include its cash, its debt financing and interest rate protection agreements.
The fair value of cash is equal to the carrying value at December 31, 1996 and
1997.
As discussed in Note 3, Arch's debt financing primarily consists of (1) senior
bank debt, (2) fixed rate senior notes and (3) convertible subordinated
debentures. Arch considers the fair value of senior bank debt to be equal to
the carrying value since the related facilities bear a current market rate of
interest. Arch's fixed rate senior notes are traded publicly. The following
table depicts the fair value of the fixed rate senior notes and the convertible
subordinated debentures based on the current market quote as of December 31,
1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Description Value Value Value Value
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
10 7/8% Senior Discount Notes due
2008................................. $299,273 $265,236 $332,532 $288,418
9 1/2% Senior Notes due 2004.......... 125,000 117,500 125,000 122,488
14% Senior Notes due 2004............. 100,000 115,000 100,000 112,540
6 3/4% Convertible Subordinated Deben-
tures due 2003....................... 13,364 12,211 13,364 7,968
</TABLE>
Arch had off balance sheet interest rate protection agreements consisting of
interest rate swaps and interest rate caps with notional amounts of $165.0
million and $55.0 million, respectively, at December 31, 1996 and $140.0
million and $80.0 million, respectively, at December 31, 1997. The fair values
of the interest rate swaps and interest rate caps were $361,000 and $10,000,
respectively, at December 31, 1996 and $47,000 and $9,000, respectively, at
December 31, 1997. See Note 3.
Basic/Diluted Net Income (Loss) Per Common Share -- In February 1997, the
Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share".
The Company adopted this standard in 1997. The adoption of this standard did
not have an effect on the Company's financial position, results of operations
or income (loss) per share. Basic net income (loss) per common share is based
on the weighted average number of common shares outstanding. Shares of stock
issuable pursuant to stock options and upon conversion of the subordinated
debentures (see Note 3) or the Series C Preferred Stock (see Note 4) have not
been considered, as their effect would be anti-dilutive and thus diluted net
income (loss) per common share is the same as basic net income (loss) per
common share.
Reclassifications--Certain amounts of prior periods were reclassified to
conform with the 1997 presentation.
2. Acquisitions
In May 1996, Arch completed its acquisition of all the outstanding capital
stock of Westlink for $325.4 million in cash, including direct transaction
costs. The purchase price was allocated based on the fair values of assets
acquired and liabilities assumed (including deferred income taxes arising in
purchase accounting), which amounted to $383.6 million and $58.2 million,
respectively.
F-9
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 7, 1995, Arch completed its acquisition of USA Mobile
Communications Holdings, Inc. ("USA Mobile"). The acquisition was completed in
two steps. First, in May 1995, Arch acquired approximately 37%, or 5,450,000
shares, of USA Mobile's then outstanding common stock for $83.9 million in
cash, funded by borrowings under the Arch Enterprises Credit Facility (see Note
3). Accordingly, Arch accounted for its investment in USA Mobile under the
equity method of accounting. Arch recorded a charge of $4.0 million for the
year ended December 31, 1995 representing its pro rata share of USA Mobile's
net loss from May until the acquisition was completed. Second, on September 7,
1995, the acquisition was completed through the merger of Arch with and into
USA Mobile ("the USAM Merger"). Upon consummation of the USAM Merger, USA
Mobile was renamed Arch Communications Group, Inc. In the USAM Merger, each
share of USA Mobile's outstanding common stock was exchanged for Arch common
stock on a .8020-for-one basis (an aggregate of 7,599,493 shares of Arch common
stock) and the 5,450,000 USA Mobile shares purchased by Arch in May 1995 were
retired. Outstanding shares of USA Mobile's Series A Redeemable Preferred Stock
were not affected by the USAM Merger (see Note 4). Arch is treated as the
acquirer in the USAM Merger for accounting and financial reporting purposes and
the purchase price was allocated based upon the fair market values of assets
acquired and liabilities assumed. The aggregate consideration paid or exchanged
in the USAM Merger was $582.2 million, consisting of cash paid of $88.9
million, including direct transaction costs, 7,599,493 shares of Arch common
stock valued at $209.0 million and the assumption of liabilities of $284.3
million, including $241.2 million of long-term debt.
During the year ended December 31, 1995, Arch completed five acquisitions of
paging companies, in addition to the USAM Merger, for purchase prices
aggregating approximately $43.0 million, consisting of cash of $36.1 million
and 395,000 shares of Arch common stock valued at $6.9 million. Goodwill
resulting from the acquisitions and the USAM Merger is being amortized over a
ten-year period using the straight-line method.
These acquisitions (including the USAM Merger) have been accounted for as
purchases, and the results of their operations have been included in the
consolidated financial statements from the dates of the respective
acquisitions. The following unaudited pro forma summary presents the
consolidated results of operations as if the acquisitions had occurred at the
beginning of the periods presented, after giving effect to certain adjustments,
including depreciation and amortization of acquired assets and interest expense
on acquisition debt. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisitions been made at the beginning of the period presented, or of
results that may occur in the future.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1995 1996
-------- ---------
(unaudited and in
thousands except
for per share
amounts)
<S> <C> <C>
Revenues............................................ $321,963 $ 358,900
Income (loss) before extraordinary item............. (92,395) (128,444)
Net income (loss)................................... (94,079) (130,348)
Basic/diluted net income (loss) per common share.... (6.97) (6.39)
</TABLE>
F-10
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Long-term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1996 1997 1998
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Senior Bank Debt........................... $380,500 $422,500 $267,000
10 7/8% Senior Discount Notes due 2008..... 299,273 332,532 359,892
9 1/2% Senior Notes due 2004............... 125,000 125,000 125,000
14% Senior Notes due 2004.................. 100,000 100,000 100,000
12 3/4% Senior Notes due 2007.............. -- -- 127,534
Convertible Subordinated Debentures........ 13,364 13,364 13,364
Other...................................... 59 13 --
-------- -------- --------
918,196 993,409 992,790
Less-current maturities.................... 46 24,513 --
-------- -------- --------
Long-term debt............................. $918,150 $968,896 $992,790
======== ======== ========
</TABLE>
Senior Bank Debt--The Company, through its operating subsidiaries, entered into
two credit agreements. Arch Communications Enterprise, Inc. ("ACE") entered
into a credit facility dated May 5, 1995, as amended, with a group of banks and
financial institutions who agreed, subject to certain terms and conditions, to
provide (i) a $250 million, seven-year reducing revolver facility (the "ACE
Revolver"), (ii) a $150 million, seven-year term loan (the "Tranche A Term
Loan"), and (iii) a $100 million, eight-year term loan (the "Tranche B Term
Loan"). The ACE Revolver, which was available for working capital and other
purposes, the Tranche A Term Loan and the Tranche B Term Loan are collectively
referred to as the ACE Credit Facility. The ACE Credit Facility is secured by
all assets of the operating subsidiaries of ACE and a pledge of all the stock
of Arch's direct and indirect subsidiaries. In addition, Arch and the operating
subsidiaries of ACE guaranteed all obligations under the ACE Credit Facility.
The ACE Revolver was subject to scheduled mandatory reductions commencing on
December 31, 1999. The Tranche A Term Loan and Tranche B Term Loan were to be
amortized in quarterly installments commencing on March 31, 1998.
Except for the Tranche B Term Loan, borrowings under the ACE Credit Facility
bear interest based on a reference rate equal to either (i) the agent bank's
Alternate Base Rate, or (ii) the agent bank's LIBOR rate, in each case plus a
margin which is based on the ratio of total debt to annualized operating cash
flow. Borrowings under the Tranche B Term Loan bear interest at either the
agent bank's Alternate Base Rate or LIBOR rate, in each case plus a margin
based on the ratio of total debt to annualized EBITDA. Interest is payable
quarterly in arrears. In addition, an annual commitment fee is payable based on
the average daily unused portion of the ACE Revolver.
ACE is also required to maintain interest rate protection on at least 50% of
outstanding borrowings under the ACE Credit Facility, and has therefore entered
into interest rate swap and interest rate cap agreements. Entering into
interest rate cap and swap agreements involves both the credit risk of dealing
with counterparties and their ability to meet the terms of the contracts and
interest rate risk. In the event of non-performance by the counterparty to
these interest rate protection agreements, ACE would be subject to the
prevailing interest rates specified in the ACE Credit Facility.
F-11
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the interest rate swap agreements, the Company will pay the difference
between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR, and the
Company will receive the difference between LIBOR and the fixed swap rate if
LIBOR exceeds the swap rate. Settlement occurs on the quarterly reset dates
specified by the terms of the contracts. The notional principal amount of the
interest rate swaps outstanding was $140 million at December 31, 1997. The
weighted average fixed payment rate was 5.818% while the weighted average rate
of variable interest payments under the ACE Credit Facility was 5.872% at
December 31, 1997. At December 31, 1996 and 1997, the Company had a net payable
of $124,000 and a net receivable of $18,000, respectively, on the interest rate
swaps.
The interest rate cap agreements will pay the Company the difference between
LIBOR and the cap level if LIBOR exceeds the cap levels at any of the quarterly
reset dates. If LIBOR remains below the cap level, no payment is made to the
Company. The total notional amount of the interest rate cap agreements was $80
million with cap levels between 7.5% and 8% at December 31, 1997. The
transaction fees for these instruments are being amortized over the terms of
the agreements.
The ACE Credit Facility contains restrictive and financial covenants which,
among other things, limit the ability of ACE to: incur additional indebtedness,
advance funds to Benbow (see Note 1), pay dividends, grant liens on its assets,
merge, sell or acquire assets; repurchase or redeem capital stock; incur
capital expenditures; and prepay indebtedness other than indebtedness under the
ACE Credit Facility. As of December 31, 1997, ACE and its operating
subsidiaries were in compliance with the covenants of the ACE Credit Facility.
As of December 31, 1997, $359.5 million was outstanding and $28.7 million was
available under the ACE Credit Facility. At December 31, 1997, such advances
bore interest at an average annual rate of 8.76%.
USA Mobile Communications, Inc. II ("USAM") and the direct subsidiaries of USAM
(the "USAM Borrowing Subsidiaries") are parties to a $110 million reducing
revolving credit facility dated March 19, 1997, as amended, with a group of
banks pursuant to which the banks have agreed to make advances for working
capital and other purposes (the "USAM Credit Facility").
Upon the closing of the USAM Credit Facility, the banks did not require the
contemporaneous grant of a security interest in the assets of USAM and its
subsidiaries but they have reserved the right to require such a security
interest upon the occurrence of certain triggering events. Arch and USAM have
guaranteed the obligations of the USAM Borrowing Subsidiaries under the USAM
Credit Facility. Arch's guarantee is secured by the pledge of the stock of ACE
and USAM.
Obligations under the USAM Credit Facility bear interest based on a reference
rate equal to either (i) the agent bank's Alternate Base Rate or (ii) the agent
bank's LIBOR rate, in each case plus a margin based on the ratio of USAM's
total indebtedness to annualized operating cash flow. The annual commitment fee
is payable based on the average daily unused portion of the USAM Credit
Facility.
The USAM Credit Facility contains restrictive and financial covenants which,
among other things, limit the ability of USAM to: incur additional
indebtedness, pay dividends, grant liens on its assets, merge, sell or acquire
assets; repurchase or redeem capital stock; incur capital expenditures; and
prepay indebtedness other than indebtedness under the USAM Credit Facility. As
of December 31, 1997, USAM and the USAM Borrowing Subsidiaries were in
compliance with the covenants of the USAM Credit Facility.
As of December 31, 1997, $63.0 million was outstanding and $4.6 million was
available under the USAM Credit Facility. At December 31, 1997, such advances
bore interest at an average annual rate of 8.55%.
F-12
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 29, 1998, ACE was merged (the "ACI Merger") into a subsidiary of USAM
named Arch Paging, Inc. ("API"). In connection with the Merger, USAM changed
its name to Arch Communications, Inc. ("ACI"). Contemporaneously with the ACI
Merger, ACE's existing credit facility was amended and restated to establish
senior secured revolving credit and term loan facilities with API, as borrower,
in the aggregate amount of $400.0 million (collectively, the "API Credit
Facility") consisting of (i) a $175.0 million reducing revolving credit
facility (the "Tranche A Facility"), (ii) a $100.0 million 364-day revolving
credit facility under which the principal amount outstanding on the 364th day
following the closing will convert to a term loan (the "Tranche B Facility")
and (iii) a $125.0 million term loan which was available in a single drawing on
the closing date (the "Tranche C Facility").
The Tranche A Facility will be subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term
loan portion of the Tranche B Facility will be amortized in quarterly
installments commencing September 30, 2000, with an ultimate maturity date of
June 30, 2005. The Tranche C Facility will be amortized in annual installments
commencing December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the API credit facility are secured by its pledge of
the capital stock of the former ACE operating subsidiaries. The API credit
facility is guaranteed by Arch, ACI and the former ACE operating subsidiaries.
Arch's guarantee is secured by a pledge of Arch's stock and notes in ACI, and
the guarantees of the former ACE operating subsidiaries are secured by a
security interest in those assets of such subsidiaries which were pledged under
ACE's former credit facility.
Borrowings under the API credit facility bear interest based on a reference
rate equal to either the Bank's Alternate Base Rate or LIBOR rate, in each case
plus a margin based on ACI's or API's ratio of total debt to annualized EBITDA.
The API credit facility requires payment of fees on the daily average amount
available to be borrowed under the Tranche A Facility and the Tranche B
Facility, which fees vary depending on ACI's or API's ratio of total debt to
annualized EBITDA.
The API credit facility contains restrictions that limit, among other things:
additional indebtedness and encumbrances on assets; cash dividends and other
distributions; mergers and sales of assets; the repurchase or redemption of
capital stock; investments; acquisitions that exceed certain dollar limitations
without the lenders' prior approval; and prepayment of indebtedness other than
indebtedness under the API credit facility. In addition, the API credit
facility requires API and its subsidiaries to meet certain financial covenants,
including covenants with respect to ratios of EBITDA to fixed charges, EBITDA
to debt service, EBITDA to interest service and total indebtedness to EBITDA.
Senior Notes--On March 12, 1996, Arch completed a public offering of 10 7/8%
Senior Discount Notes due 2008 (the "Senior Discount Notes") in the aggregate
principal amount at maturity of $467.4 million ($275.0 million initial accreted
value). Interest does not accrue on the Senior Discount Notes prior to March
15, 2001. Commencing September 15, 2001, interest on the Senior Discount Notes
is payable semi-annually at an annual rate of 10 7/8%. The $266.1 million net
proceeds from the issuance of the Senior Discount Notes, after deducting
underwriting discounts and commissions and offering expenses, were used
principally to fund a portion of the purchase price of Arch's acquisition of
Westlink (see Note 2).
Interest on the ACI 14% Notes and the ACI 9 1/2% Notes (collectively, the
"Senior Notes") is payable semiannually. The Senior Discount Notes and Senior
Notes contain certain restrictive and financial covenants which, among other
things, limit the ability of Arch or ACI to: incur additional indebtedness; pay
dividends;
F-13
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
grant liens on its assets; sell assets; enter into transactions with related
parties; merge, consolidate or transfer substantially all of its assets; redeem
capital stock or subordinated debt; and make certain investments.
On June 29, 1998, ACI issued and sold $130.0 million principal amount of 12
3/4% Senior Notes due 2007 (the "Notes") for net proceeds of $122.6 million
(after deducting the discount to the Initial Purchasers and estimated offering
expenses payable by ACI) in a private placement (the "Note Offering") under
Rule 144A under the Securities Act of 1933. The Notes were sold at an initial
price to investors of 98.049%. The Notes mature on July 1, 2007 and bear
interest at a rate of 12 3/4% per annum, payable semi-annually in arrears on
January 1 and July 1 of each year, commencing January 1, 1999.
The covenants in the indenture under which the 12 3/4% Notes were issued ("the
Indenture") contain certain covenants that, among other things, limit the
ability of ACI to incur additional indebtedness, issue preferred stock, pay
dividends or make other distributions, repurchase Capital Stock (as defined in
the Indenture), repay subordinated indebtedness or make other Restricted
Payments (as defined in the Indenture), create certain liens, enter into
certain transactions with affiliates, sell assets, issue or sell Capital Stock
of ACI's Restricted Subsidiaries (as defined in the Indenture) or enter into
certain mergers and consolidations.
Convertible Subordinated Debentures--On March 6, 1996, the holders of $14.1
million principal amount of Arch's 6 3/4% Convertible Subordinated Debentures
due 2003 ("Arch Convertible Debentures") elected to convert their Arch
Convertible Debentures into Arch common stock at a conversion price of $16.75
per share and received approximately 843,000 shares of Arch common stock
together with a $1.6 million cash premium.
Interest on the remaining outstanding Arch Convertible Debentures is payable
semiannually on June 1 and December 1. The Arch Convertible Debentures are
unsecured and are subordinated to all existing indebtedness of Arch.
The Arch Convertible Debentures are redeemable, at the option of Arch, in whole
or in part, at certain prices declining annually to 100% of the principal
amount at maturity plus accrued interest. The Arch Convertible Debentures also
are subject to redemption at the option of the holders, at a price of 100% of
the principal amount plus accrued interest, upon the occurrence of certain
events.
The Arch Convertible Debentures are convertible at their principal amount into
shares of Arch's common stock at any time prior to redemption or maturity at an
initial conversion price of $16.75 per share, subject to adjustment.
Maturities of Debt--Scheduled long-term debt maturities at December 31, 1997
and at September 30, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
Year Ending December 31, 1997 1998
------------------------ ------------ -------------
(unaudited)
<S> <C> <C>
1998......................... $ 24,513 $ --
1999......................... 37,750 1,250
2000......................... 83,000 15,450
2001......................... 74,750 29,650
2002......................... 122,500 29,650
Thereafter................... 650,896 916,790
-------- --------
$993,409 $992,790
======== ========
</TABLE>
F-14
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Redeemable Preferred Stock and Stockholders' Equity
Redeemable Preferred Stock--In connection with the USAM Merger (see Note 2),
Arch assumed the obligations associated with 22,530 outstanding shares of
Series A Redeemable Preferred Stock issued by USA Mobile. The preferred stock
is recorded at its accreted redemption value, based on 10% annual accretion
through the redemption date. On January 30, 1997, all outstanding preferred
stock was redeemed for $3.7 million in cash.
Redeemable Series C Cumulative Convertible Preferred Stock--On June 29, 1998,
two partnerships managed by Sandler Capital Management Company, Inc., an
investment management firm ("Sandler"), together with certain other private
investors, made an equity investment in Arch of $25.0 million in the form of
Series C Convertible Preferred Stock of Arch ("Series C Preferred Stock"). The
Series C Preferred Stock: (i) is convertible into Common Stock of Arch at an
initial conversion price of $5.50 per share, subject to certain adjustments;
(ii) bears dividends at an annual rate of 8.0%, (A) payable quarterly in cash
or, at Arch's option, through the issuance of shares of Arch's Common Stock
valued at 95% of the then prevailing market price or (B) if not paid quarterly,
accumulating and payable upon redemption or conversion of the Series C
Preferred Stock or liquidation of Arch; (iii) permits the holders after seven
years to require Arch, at Arch's option, to redeem the Series C Preferred Stock
for cash or convert such shares into Arch's Common Stock valued at 95% of the
then prevailing market price of Arch's Common Stock; (iv) is subject to
redemption for cash or conversion into Arch's Common Stock at Arch's option in
certain circumstances; (v) in the event of a "Change of Control" as defined in
the indenture governing Arch's 10 7/8% Senior Discount Notes due 2008 (the
"Arch Discount Notes Indenture"), requires Arch, at its option, to redeem the
Series C Preferred Stock for cash or convert such shares into Arch's Common
Stock valued at 95% of the then prevailing market price of Arch's Common Stock,
with such cash redemption or conversion being at a price equal to 105% of the
sum of the original purchase price plus accumulated dividends; (vi) limits
certain mergers or asset sales by Arch; (vii) so long as at least 50% of the
Series C Preferred Stock remains outstanding, limits the incurrence of
indebtedness and "restricted payments" in the same manner as contained in the
Arch Discount Notes Indenture; and (viii) has certain voting and preemptive
rights. Upon an event of redemption or conversion, Arch currently intends to
convert such Series C Preferred Stock into shares of Arch Common Stock.
Stock Options--Arch has a 1989 Stock Option Plan (the "1989 Plan") and a 1997
Stock Option Plan (the "1997 Plan") which provide for the grant of incentive
and nonqualified stock options to key employees, directors and consultants to
purchase Arch's common stock. Incentive stock options are granted at exercise
prices not less than the fair market value on the date of grant. Options
generally vest over a five-year period from the date of grant with the first
such vesting (20% of granted options) occurring one year from the date of grant
and continuing ratably at 5% on a quarterly basis thereafter. However, in
certain circumstances, options may be immediately exercised in full. Options
generally have a duration of 10 years. The 1989 Plan provides for the granting
of options to purchase a total of 1,128,944 shares of common stock. All
outstanding options on September 7, 1995, under the 1989 Plan, became fully
exercisable and vested as a result of the USAM Merger. The 1997 Plan provides
for the granting of options to purchase a total of 1,500,000 shares of common
stock.
Effective October 23, 1996, the Compensation Committee of the Board of
Directors of Arch authorized the grant of new options to each employee who had
an outstanding option at a price greater than $12.50 (the fair market value of
Arch's common stock on October 23, 1996). The new option would be for the total
number of shares (both vested and unvested) subject to each employee's
outstanding stock option agreement(s). As a result of this action 424,206
options were terminated and regranted at a price of $12.50. The Company treated
this as a cancellation and reissuance under APB opinion No. 25 "Accounting for
Stock Issued to Employees".
As a result of the USAM Merger, Arch assumed a stock option plan originally
adopted by USA Mobile in 1994 and amended and restated on January 26, 1995 (the
"1994 Plan"), which provides for the grant of up to
F-15
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
601,500 options to purchase Arch's common stock. Under the 1994 Plan, incentive
stock options may be granted to employees and nonqualified stock options may be
granted to employees, directors and consultants. Incentive stock options are
granted at exercise prices not less than the fair market value on the date of
grant. Option duration and vesting provisions are similar to the 1989 Plan. All
outstanding options under the 1994 Plan became fully exercisable and vested as
a result of the USAM Merger.
In January 1995, Arch adopted a 1995 Outside Directors' Stock Option Plan (the
"1995 Directors' Plan"), which terminated upon completion of the USAM Merger.
Prior to termination of the 1995 Directors' Plan, 15,000 options were granted
at an exercise price of $18.50 per share. Options have a duration of ten years
and vest over a five-year period from the date of grant with the first such
vesting (20% of granted options) occurring one year from the date of grant and
continuing ratably at 5% on a quarterly basis thereafter.
As a result of the USAM Merger, Arch assumed from USA Mobile the Non-Employee
Directors' Stock Option Plan (the "Outside Directors Plan"), which provides for
the grant of up to 80,200 options to purchase Arch's common stock to non-
employee directors of Arch. Outside directors receive a grant of 3,000 options
annually under the Outside Directors Plan, and newly elected or appointed
outside directors receive options to purchase 3,000 shares of common stock as
of the date of their initial election or appointment. Options are granted at
fair market value of Arch's common stock on the date of grant. Options have a
duration of ten years and vest over a three-year period from the date of grant
with the first such vesting (25% of granted options) occurring on the date of
grant and future vesting of 25% of granted options occurring on each of the
first three anniversaries of the date of grant.
On December 16, 1997, the Compensation Committee of the Board of Directors of
Arch authorized the Company to offer an election to its employees who had
outstanding options at a price greater than $5.06 to cancel such options and
accept new options at a lower price. In January 1998, as a result of this
election by certain of its employees, the Company canceled 1,083,216 options
with exercise prices ranging from $5.94 to $20.63 and granted the same number
of new options with an exercise price of $5.06 per share, the fair market value
of the stock on December 16, 1997.
On December 29, 1997, Arch adopted a Deferred Compensation Plan for Nonemployee
Directors. Under this plan, outside directors may elect to defer, for a
specified period of time, receipt of some or all of the annual and meeting fees
which would otherwise be payable for service as a director. A portion of the
deferred compensation may be converted into phantom stock units, at the
election of the director. The number of phantom stock units granted equals the
amount of compensation to be deferred as phantom stock divided by the fair
value of Arch's common stock on the date the compensation would have otherwise
been paid. At the end of the deferral period, the phantom stock units will be
converted to cash based on the fair market value of the Company's common stock
on the date of distribution. Deferred compensation is expensed when earned.
Changes in the value of the phantom stock units are recorded as income/expense
based on the fair market value of the Company's common stock.
F-16
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the activity under Arch's stock option plans for
the periods presented:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
--------- --------
<S> <C> <C>
Options Outstanding at August 31, 1994................ 602,744 $ 7.19
Granted............................................. 41,740 18.58
Exercised........................................... (2,000) 5.94
Terminated.......................................... -- --
--------- ------
Options Outstanding at December 31, 1994.............. 642,484 7.95
Granted............................................. 278,750 23.46
Assumed in USAM Merger.............................. 571,024 11.59
Exercised........................................... (475,903) 10.80
Terminated.......................................... (10,600) 17.57
--------- ------
Options Outstanding at December 31, 1995.............. 1,005,755 13.02
Granted............................................. 695,206 15.46
Exercised........................................... (169,308) 8.69
Terminated.......................................... (484,456) 21.60
--------- ------
Options Outstanding at December 31, 1996.............. 1,047,197 11.37
Granted............................................. 500,394 6.68
Exercised........................................... -- --
Terminated.......................................... (190,636) 10.58
--------- ------
Options Outstanding at December 31, 1997.............. 1,356,955 $ 9.75
========= ======
Options Exercisable at December 31, 1997.............. 639,439 $ 9.64
========= ======
</TABLE>
The following table summarizes the options outstanding and options exercisable
by price range at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.13 - $ 5.94 186,284 1.58 $ 4.39 169,784 $ 4.36
6.25 - 8.25 617,654 7.45 7.09 195,010 7.77
10.29 - 14.10 410,377 8.08 12.34 209,853 12.19
15.85 - 20.63 124,640 8.10 20.12 51,292 19.66
23.50 - 27.56 18,000 7.84 25.53 13,500 25.53
--------------- --------- ---- ------ ------- ------
$ 3.13 - $27.56 1,356,955 6.90 $ 9.75 639,439 $ 9.64
=============== ========= ==== ====== ======= ======
</TABLE>
Employee Stock Purchase Plan--On May 28, 1996, the stockholders approved the
1996 Employee Stock Purchase Plan (ESPP). The ESPP allows eligible employees
the right to purchase common stock, through payroll deductions not exceeding
10% of their compensation, at the lower of 85% of the market price at the
beginning or the end of each six-month offering period. During 1996 and 1997,
46,842 and 151,343 shares were issued at an average price per share of $7.97
and $5.29, respectively. At December 31, 1997, 51,815 shares are available for
future issuance. On May 19, 1998, the stockholders approved an amendment to the
plan to increase the number of shares available for future issuance by 250,000.
Accounting for Stock-Based Compensation--Arch accounts for its stock option and
stock purchase plans under APB Opinion No. 25 "Accounting for Stock Issued to
Employees". Since all options have been issued at
F-17
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a grant price equal to fair market value, no compensation cost has been
recognized in the Statement of Operations. Had compensation cost for these
plans been determined consistent with SFAS No. 123 "Accounting for Stock-Based
Compensation", Arch's net income (loss) and income (loss) per share would have
been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1995 1996 1997
-------- --------- ---------
(in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Net income (loss): As reported $(36,602) $(114,662) $(181,874)
Pro forma (36,740) (115,786) (183,470)
Basic net income (loss) per
common share: As reported (2.72) (5.62) (8.77)
Pro forma (2.73) (5.68) (8.85)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to the
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model. In computing these pro forma amounts, Arch has
assumed a risk-free interest rate of 6%, an expected life of 5 years, an
expected dividend yield of zero and an expected volatility of 50% - 60%.
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1995, 1996 and 1997 were $11.89, $4.95 and
$3.37, respectively. The weighted average fair value of shares sold under the
ESPP in 1996 and 1997 was $5.46 and $2.83, respectively.
Stockholders Rights Plan--Upon completion of the USAM Merger, Arch's existing
stockholders rights plan was terminated. In October 1995, Arch's Board of
Directors adopted a new stockholders rights plan (the "Rights") and declared a
dividend of one preferred stock purchase right (a "Right") for each outstanding
share of common stock to stockholders of record at the close of business on
October 25, 1995. Each Right entitles the registered holder to purchase from
Arch one one-thousandth of a share of Series B Junior Participating Preferred
Stock, at a cash purchase price of $150, subject to adjustment. Pursuant to the
Plan, the Rights automatically attach to and trade together with each share of
common stock. The Rights will not be exercisable or transferable separately
from the shares of common stock to which they are attached until the occurrence
of certain events. The Rights will expire on October 25, 2005, unless earlier
redeemed or exchanged by Arch in accordance with the Plan.
5. Income Taxes
Arch accounts for income taxes under the provisions of SFAS No. 109 "Accounting
for Income Taxes". Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities given the provisions of enacted laws.
The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets at December 31, 1996 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets.................................. $ 94,597 $134,944
Deferred tax liabilities............................. (115,769) (90,122)
-------- --------
(21,172) 44,822
Valuation allowance.................................. -- (44,822)
-------- --------
$(21,172) $ --
======== ========
</TABLE>
F-18
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The approximate effect of each type of temporary difference and carryforward at
December 31, 1996 and 1997 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Net operating losses................................ $ 89,764 $106,214
Intangibles and other assets........................ (115,769) (87,444)
Depreciation of property & equipment................ 3,692 24,388
Accruals and reserves............................... 1,141 1,664
--------- --------
(21,172) 44,822
Valuation allowance................................. -- (44,822)
--------- --------
$(21,172) $ --
========= ========
</TABLE>
The effective income tax rate differs from the statutory federal tax rate
primarily due to the nondeductibility of goodwill amortization. The net
operating loss (NOL) carryforwards expire at various dates through 2012. The
Internal Revenue Code contains provisions that may limit the NOL carryforwards
available to be used in any given year if certain events occur, including
significant changes in ownership, as defined.
The Company has established a valuation reserve against its net deferred tax
asset until it becomes more likely than not that this asset will be realized in
the foreseeable future.
6. Commitments and Contingencies
In the ordinary course of business, the Company and its subsidiaries are
defendants in a variety of judicial proceedings. In the opinion of management,
there is no proceeding pending, or to the knowledge of management threatened,
which in the event of an adverse decision, would result in a material adverse
change in the financial condition of the Company.
Arch has operating leases for office and transmitting sites with lease terms
ranging from one month to approximately ten years. In most cases, Arch expects
that, in the normal course of business, leases will be renewed or replaced by
other leases.
Future minimum lease payments under noncancellable operating leases at December
31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1998............................. $16,909
1999............................. 7,706
2000............................. 4,546
2001............................. 2,689
2002............................. 950
Thereafter....................... 1,680
-------
Total.......................... $34,480
=======
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1995, 1996 and 1997 approximated $6.4 million, $14.7 million, and $19.8
million, respectively.
F-19
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Employee Benefit Plans
Retirement Savings Plan--Arch has a retirement savings plan, qualifying under
Section 401(k) of the Internal Revenue Code covering eligible employees, as
defined. Under the plan, a participant may elect to defer receipt of a stated
percentage of the compensation which would otherwise be payable to the
participant for any plan year (the deferred amount) provided, however, that the
deferred amount shall not exceed the maximum amount permitted under Section
401(k) of the Internal Revenue Code. The plan provides for employer matching
contributions. Matching contributions for the years ended December 31, 1995,
1996 and 1997 approximated $124,000, $217,000 and $302,000, respectively.
8. Tower Site Sale (unaudited)
In April 1998, Arch announced an agreement to sell certain of its tower site
assets (the "Tower Site Sale") for approximately $38.0 million in cash (subject
to adjustment), of which $1.3 million was paid to entities affiliated with
Benbow in payment for certain assets owned by such entities and included in the
Tower Site Sale. In the Tower Site Sale, Arch is selling communications towers,
real estate, site management contracts and/or leasehold interests involving 133
sites in 22 states and will rent space on the towers on which it currently
operates communications equipment to service its own paging network. Arch will
use its net proceeds from the Tower Site Sale (estimated to be $36.0 million)
to repay indebtedness under the API credit facility. Arch held the initial
closing of the Tower Site Sale on June 26, 1998 with gross proceeds to Arch of
approximately $12.0 million (excluding $1.3 million which was paid to entities
affiliated with Benbow for certain assets which such entities sold as part of
this transaction) and held a second closing on September 29, 1998 with gross
proceeds to Arch of approximately $20.4 million. The final closing for the
balance of the transaction is expected to be completed in the fourth quarter of
1998, although no assurance can be given that the final closing will be held as
expected.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain is deferred and included in other long-term
liabilities. At September 30, 1998, Arch had sold 117 of the 133 sites which
resulted in a total gain of approximately $23.5 million and through September
30, 1998 approximately $1.5 million of this gain had been recognized in the
statement of operations and is included in operating income.
9. Divisional Reorganization (unaudited)
In June 1998, Arch's Board of Directors approved a reorganization of Arch's
operations (the "Divisional Reorganization"). As part of the Divisional
Reorganization, which is being implemented over a period of 18 to 24 months,
Arch has consolidated its former Midwest, Western and Northern divisions into
four existing operating divisions and is in the process of consolidating
certain regional administrative support functions, such as customer service,
collections, inventory and billing, to reduce redundancy and take advantage of
various operating efficiencies. In connection with the Divisional
Reorganization, Arch (i) anticipates a net reduction of approximately 10% of
its workforce, (ii) plans to close certain office locations and redeploy other
assets and (iii) has recorded a restructuring charge of $16.1 million, or $0.77
per share (basic and diluted) in the second quarter of 1998. The restructuring
charge consisted of approximately (i) $9.7 million for employee severance, (ii)
$3.5 million for lease obligations and terminations, (iii) $1.4 million for the
writedown of fixed assets and (iv) $1.5 million of other costs.
The provision for lease obligations and terminations relates primarily to
future lease commitments on local, regional and divisional office facilities
that will be closed as part of the Divisional Reorganization. The charge
represents future lease obligations, on such leases past the dates the offices
will be closed by the Company, or for certain leases, the cost of terminating
the leases prior to their scheduled expiration. Cash payments on the leases and
lease terminations will occur over the remaining lease terms, the majority of
which expire prior to 2001.
F-20
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Through the elimination of certain local and regional administrative operations
and the consolidation of certain support functions, the Company will eliminate
approximately 280 net positions. As a result of eliminating these positions,
the Company will involuntarily terminate an estimated 900 personnel. The
majority of the positions to be eliminated will be related to customer service,
collections, inventory and billing functions in local and regional offices
which will be closed as a result of the Divisional Reorganization. As of
September 30, 1998, 114 employees had been terminated due to the Divisional
Reorganization. The majority of the severance and benefits costs to be paid by
the Company will be paid during the remainder of 1998 and in 1999.
The Company's restructuring activity as of September 30, 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
Reserve Utilization of Reserve
Initially --------------------------Remaining
Established Cash Non-Cash Reserve
----------- ------------ ----------------------
<S> <C> <C> <C> <C>
Severance costs........... $ 9,700 $ 1,105 $ -- $ 8,595
Lease obligation costs.... 3,500 34 -- 3,466
Write-down of fixed
assets................... 1,400 -- -- 1,400
Other costs............... 1,500 151 -- 1,349
------- ------------ ---------- -------
Total................... $16,100 $ 1,290 $ -- $14,810
======= ============ ========== =======
</TABLE>
10. Quarterly Financial Results (unaudited)
Quarterly financial information for the years ended December 31, 1996 and 1997
is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Revenues............................ $ 67,171 $ 78,983 $ 90,886 $ 94,330
Operating income (loss)............. (12,949) (18,821) (23,647) (30,653)
Income (loss) before extraordinary
item............................... (19,377) (25,678) (32,178) (35,525)
Extraordinary charge................ -- (1,904) -- --
Net income (loss)................... (19,377) (27,582) (32,178) (35,525)
Basic net income (loss) per common
share:
Income (loss) before extraordinary
item............................. (.98) (1.26) (1.56) (1.72)
Extraordinary charge.............. -- (.09) -- --
Net income (loss)................. (.98) (1.35) (1.56) (1.72)
Year Ended December 31, 1997:
Revenues............................ $ 95,539 $ 98,729 $101,331 $101,242
Operating income (loss)............. (26,632) (29,646) (27,208) (18,529)
Net income (loss)................... (45,815) (49,390) (47,645) (39,024)
Basic net income (loss) per common
share:
Net income (loss)................. (2.21) (2.38) (2.29) (1.88)
</TABLE>
F-21
<PAGE>
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, 1996
and 1997, 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, 1997. 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, 1996 and 1997
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1997 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 12, 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, which hearing has been
stayed by the FCC until October 6, 1998. 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 debtors-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)
formulate a plan of reorganization which will gain approval of the creditors
and confirmation by the Bankruptcy Court, (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
July 31, 1998
F-22
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1996 1997 1998
----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............. $ 23,160 $ 10,920 $ 9,814
Accounts receivable (less allowance
for uncollectible accounts of
$56,189, $26,497 and $17,424 in
1996, 1997 and 1998, respectively)... 66,709 55,432 38,127
Inventories........................... 13,382 868 1,167
Prepaid expense....................... 1,118 5,108 6,391
Other................................. 1,583 2,783 5,399
----------- ----------- -----------
Total current assets................ 105,952 75,111 60,898
----------- ----------- -----------
Investment in net assets of equity
affiliate............................. 1,857 1,788 1,691
Property and equipment, net............ 327,757 257,937 218,873
Intangible assets, net................. 325,753 295,358 273,287
Other assets........................... 28,911 24,940 22,557
----------- ----------- -----------
Total assets........................ $ 790,230 $ 655,134 $ 577,306
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit
facility............................. $ -- $ 10,000 $ --
Accrued restructuring costs........... -- 4,897 7,001
Accrued wages, benefits and payroll... -- 11,894 12,398
Accounts payable--post petition....... -- 2,362 2,106
Accrued interest...................... -- 4,777 4,145
Accrued expenses and other current
liabilities.......................... 6,703 35,959 36,071
Advance billing and customer
deposits............................. 37,022 34,252 31,340
Deferred gain on tower sale........... -- -- 69,611
----------- ----------- -----------
Total liabilities not subject to
compromise......................... 43,725 104,141 162,672
----------- ----------- -----------
Liabilities subject to compromise
Accrued wages, benefits and payroll
taxes................................ 9,443 562 555
Accrued interest...................... 31,443 18,450 17,601
Accounts payable--pre petition........ 45,484 19,646 12,473
Accrued expenses and other current
liabilities.......................... 48,215 20,663 20,121
Debt.................................. 1,074,196 1,075,681 905,681
Other................................. 3,460 2,915 2,822
----------- ----------- -----------
Total liabilities subject to
compromise......................... 1,212,241 1,137,917 959,253
----------- ----------- -----------
Deferred tax liabilities.............. 2,655 2,655 2,655
Stockholders' equity (deficit)
Common stock (1 share, no par value,
issued and outstanding at December
31, 1996 and 1997 and September 30,
1998)................................ -- -- --
Additional paid-in-capital............ 672,629 676,025 676,025
Accumulated deficit--pre petition..... (1,141,020) (1,154,420) (1,154,420)
Accumulated deficit--post petition.... -- (111,184) (68,879)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (468,391) (589,579) (547,274)
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)................... $ 790,230 $ 655,134 $ 577,306
=========== =========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine months
Year Ended December 31, Ended September 30,
----------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- ------------ ---------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
Services, rents and
maintenance.......... $ 220,745 $ 568,892 $ 491,174 $ 378,922 $ 320,002
Product sales......... 32,251 71,818 36,218 28,235 20,367
--------- ------------ ---------- ---------- ---------
Total revenues...... 252,996 640,710 527,392 407,157 340,369
Cost of products sold... (26,885) (72,595) (35,843) (27,524) (16,531)
--------- ------------ ---------- ---------- ---------
226,111 568,115 491,549 379,633 323,838
Operating expenses
Services, rents and
maintenance.......... 59,800 144,050 139,333 110,146 83,506
Selling............... 45,203 96,817 69,544 53,816 45,848
General and
administrative....... 59,034 218,607 179,599 145,337 101,383
Impairment of long-
lived assets......... -- 792,478 -- -- --
Restructuring costs... -- 4,256 19,811 15,577 13,831
Depreciation.......... 50,399 136,434 110,376 81,988 65,919
Amortization.......... 21,009 212,264 29,862 22,380 22,393
Amortization of
deferred gain on
tower sale........... -- -- -- -- (389)
--------- ------------ ---------- ---------- ---------
Total operating
expenses........... 235,445 1,604,906 548,525 429,244 332,491
--------- ------------ ---------- ---------- ---------
Operating (loss)........ (9,334) (1,036,791) (56,976) (49,611) (8,653)
Other income (expense)
Interest expense, net
..................... (31,745) (92,663) (67,611) (51,531) (42,449)
Gain (loss) on sale of
assets............... -- 68 3 3 94,085
--------- ------------ ---------- ---------- ---------
Total other expense. (31,745) (92,595) (67,608) (51,528) 51,636
--------- ------------ ---------- ---------- ---------
Income (loss) before
income taxes (benefit). (41,079) (1,129,386) (124,584) (101,139) 42,983
Income taxes (benefit).. -- (69,442) -- -- 678
--------- ------------ ---------- ---------- ---------
Net income (loss)....... $ (41,079) $ (1,059,944) $ (124,584) $ (101,139) $ 42,305
========= ============ ========== ========== =========
</TABLE>
See accompanying notes.
F-24
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Accumulated Accumulated
Additional Deficit Deficit
Paid in Pre- Post-
Capital Petition Petition Total
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.. $141,497 $ (39,997) $ 0 $ 101,500
Capital contribution from
MobileMedia.................. 518,332 -- -- 518,332
Net loss...................... -- (41,079) -- (41,079)
-------- ----------- --------- -----------
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 (unaudited)........ -- -- 42,305 42,305
-------- ----------- --------- -----------
Balance at September 30, 1998
(unaudited).................. $676,025 $(1,154,420) $ (68,879) $ (547,274)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------- -------------------
1995 1996 1997 1997 1998
----------- ----------- --------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)...... $ (41,079) $(1,059,944) $(124,584) $(101,139) $ 42,305
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 71,408 348,698 140,238 104,368 88,312
Amortization of
deferred gain on tower
sale.................. (389)
Income tax provision
(benefit)............. -- (69,442) -- -- 678
Accretion of note
payable discount...... 15,159 16,792 1,485 1,485
Provision for
uncollectible
accounts.............. 4,259 56,556 65,181 57,965 13,011
Write-off of
unamortized debt
issuance costs........ 5,391 -- -- -- --
Recognized gain on sale
of tower assets....... -- -- -- -- (94,165)
Impairment of long-
lived assets.......... -- 792,478 -- -- --
Undistributed earnings
of affiliate, net..... (303) 160 69 (54) 97
Change in operating
assets and liabilities:
Accounts receivable.... (17,595) (55,965) (53,904) (56,888) 4,294
Inventories............ (3,353) 2,433 12,514 9,239 (299)
Prepaid expenses and
other assets.......... 133 12,145 (686) 1,555 (1,541)
Accounts payable,
accrued expenses and
other liabilities..... 9,829 13,283 (25,393) (19,378) (10,718)
----------- ----------- --------- --------- --------
Net cash provided by
(used in) operating
activities............ 43,849 57,194 14,920 (2,847) 41,585
----------- ----------- --------- --------- --------
Investing activities:
Construction and
capital expenditures,
including net changes
in pager assets....... (86,163) (161,861) (40,556) (32,321) (32,394)
Net proceeds from the
sale of tower assets.. -- -- -- -- 169,703
Investment in net
assets of equity
affiliates............ (1,641) -- -- -- --
Acquisition of
businesses............ (171,223) (866,460) -- -- --
MAP Mobile channel
exchange agreement.... (10,175) -- -- -- --
Cash paid to FCC for
PCS license........... (42,935) -- -- -- --
Other.................. (561) -- -- -- --
----------- ----------- --------- --------- --------
Net cash provided by
(used in) investing
activities............. (312,698) (1,028,321) (40,556) (32,321) 137,309
----------- ----------- --------- --------- --------
Financing activities:
Capital contribution by
MobileMedia
Corporation........... 518,332 12,800 3,396 3,396 --
Proceeds from sale of
notes, net............ 245,863 -- -- -- --
Repayment of Dial Page. (83,430) -- -- -- --
Payment of debt issue
costs................. (22,721) (6,939) -- -- --
Borrowing from
revolving credit
facilities............ 1,071,000 580,250 -- -- --
Repayments on revolving
credit facilities..... (1,057,250) -- -- -- (170,000)
Borrowing from DIP
credit facilities..... -- -- 47,000 17,000 --
Repayments on DIP
credit facilities..... -- -- (37,000) -- (10,000)
----------- ----------- --------- --------- --------
Net cash provided by
(used in) financing
activities............. 671,794 586,111 13,396 20,396 (180,000)
----------- ----------- --------- --------- --------
Net (decrease) increase
in cash, cash
equivalents designated
and cash designated for
the MobileComm
acquisition............ 402,945 (385,016) (12,240) (14,772) (1,106)
Cash and cash
equivalents at
beginning of period.... 5,231 408,176 23,160 23,160 10,920
----------- ----------- --------- --------- --------
Cash and cash
equivalents at end of
period................. $ 408,176 $ 23,160 $ 10,920 $ 8,388 $ 9,814
=========== =========== ========= ========= ========
</TABLE>
See accompanying notes.
F-26
<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's Inc.'s subsidiaries ("MobileMedia")
(collectively with Parent and MobileMedia, 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 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 which 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
September 30, 1998, approximately 2,400 proofs of claim have 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
September 30, 1998, the Debtors had secured orders of the Bankruptcy Court
reducing approximately 1,292 claims filed in an aggregate amount of
approximately $110.8 million to an allowed amount of $5.51 million. The Debtors
expect the objection process to continue.
F-27
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Confirmation and consummation of a plan of reorganization are the principal
objectives of a Chapter 11 reorganization case. A plan of reorganization sets
forth the means for satisfying claims against, and interests in, a debtor.
Confirmation of a plan requires, among other things, the affirmative vote of
creditors holding at least two-thirds in total dollar amount and more than one-
half in number of the allowed claims in each impaired class of claims that have
voted on the plan, and two-thirds in amount of equity interests in each
impaired class of interests that voted on the plan. Section 1129(b) of the
Bankruptcy Code--commonly referred to as the "cramdown" provision--permits
confirmation of a plan over the objection of an impaired class under certain
circumstances. Confirmation of a plan of reorganization by a bankruptcy court
makes the plan binding upon the debtor, any issuer of securities under the
plan, any person acquiring property under the plan and any creditor or equity
security holder of the debtor. Subject to certain limited exceptions, the
confirmation order discharges the debtor from any debt that arose prior to the
date of confirmation of the plan and substitutes therefore the obligations
specified under the confirmed plan.
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. Concurrently, 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 (the "Plan").) Under the Plan, Debtors' secured
creditors will receive cash in an amount equal to their allowed pre-petition
claims and 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.
The consolidated financial statements at December 31, 1996 and 1997 and
September 30, 1998 (unaudited) 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
it's wholly-owned subsidiaries (MobileMedia Communications of California, Inc.,
MobileMedia Paging, Inc., MobileMedia DP Properties, Inc., Dial Page Southeast,
Inc., RadioCall Company of Virginia, 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.
F-28
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 temporary cash investments with high-quality
institutions and, by policy, limits its credit exposure to any one institution.
Although MobileMedia faces significant credit risk from its customers, which
has been aggravated due to MobileMedia's operating problems, 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.
Reclassifications
Certain 1995 financial statement items have been reclassified to conform to the
1996 and 1997 presentation.
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.
While several companies manufacture pagers, 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.
F-29
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization are computed using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
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
</TABLE>
Intangible Assets
Intangible assets consist primarily of customer lists, FCC licenses, a non-
competition agreement, software and the excess of consideration paid over fair
values of net assets acquired and are being amortized principally using the
straight-line method over periods ranging from 1 to 40 years. In connection
with the impairment writedown discussed below, MobileMedia revised the lives of
FCC licenses and customer lists to 25 years and 3 years, respectively.
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 $26,582 at December 31, 1996, $22,939 at December 31, 1997 and
$20,206 at September 30, 1998 (unaudited) and are being amortized on a straight
line basis over the term of the related debt.
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-30
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Interim Financial Statements
The interim financial information as of September 30, 1998 and the nine months
ended September 30, 1997 and 1998 contained herein is unaudited but, in the
opinion of management, includes all adjustments of a normal recurring nature
that are necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. Results of operations
for the interim periods presented are not necessarily indicative of results of
operations for the entire year.
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"), which is effective for years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 is effective for financial statements for fiscal years beginning after
December 15, 1997, and therefore MobileMedia will adopt the new requirements
retroactively in 1998. Management does not anticipate that the adoption of
SFAS No. 130 will have a significant effect on MobileMedia's reporting.
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. Management has not completed its review of SFAS No. 131, but does
not anticipate that the adoption of this statement will have any effect on
MobileMedia's 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 a material
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
F-31
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<S> <C>
Current assets.................................................... $ 55,301
Property and equipment............................................ 112,986
Intangible assets................................................. 934,269
Other assets...................................................... 143
Liabilities assumed............................................... (149,662)
---------
$ 953,037
=========
</TABLE>
On August 31, 1995, MobileMedia purchased the paging assets and messaging
services business (the "Paging Business") of Dial Page, Inc. ("Dial Page"),
including the capital stock of two wholly-owned Dial Page subsidiaries, and
assumed certain liabilities of the Paging Business (the "Dial Page
Acquisition"). The purchase price for the Paging Business was $187,396,
comprised of cash and the assumption by MobileMedia of the aggregate principal
amount of and accrued interest on certain indebtedness of Dial Page.
The Dial Page 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 August 31, 1995 reflect
the purchase price, including bond tender premium and consent, and fees of
$7,444 and transaction costs of $5,339, allocated to tangible and intangible
assets acquired and liabilities assumed based on their estimated fair values as
of August 31, 1995.
The allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Current assets..................................................... $ 3,441
Property and equipment............................................. 37,406
Intangible assets.................................................. 167,101
Other assets....................................................... 74
Liabilities assumed................................................ (7,843)
--------
$200,179
========
</TABLE>
Results of operations for the year ended December 31, 1995 include results of
Dial Page subsequent to August 31, 1995. The following unaudited pro forma
information reflects the results of operations of MobileMedia assuming the Dial
Page and MobileComm acquisitions had occurred as of January 1, 1995.
<TABLE>
<CAPTION>
Year ended
December 31, 1995
-----------------
<S> <C>
Net revenue................................................ $ 559,236
Net loss................................................... $(213,173)
</TABLE>
On October 23, 1995, MobileMedia completed the purchase of additional capacity
for its nationwide Private Carrier Paging channel for $10,175 from MAP Mobile
Communications, Inc.
F-32
<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,
----------------- September 30,
1996 1997 1998
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Pagers.......................................... $228,924 $196,791 $175,994
Radio transmission equipment.................... 191,952 202,296 201,822
Computer equipment.............................. 25,641 30,896 32,215
Furniture and fixtures.......................... 19,435 20,918 21,890
Leasehold improvements.......................... 14,943 14,652 16,022
Construction in progress........................ 1,494 1,128 4,664
Land, buildings and other....................... 12,947 7,911 6,476
-------- -------- --------
495,336 474,592 459,083
Accumulated depreciation........................ 167,579 216,655 240,210
-------- -------- --------
Property and equipment, net..................... $327,757 $257,937 $218,873
======== ======== ========
</TABLE>
5. Intangible Assets
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1996 1997 September 30, 1998 (unaudited)
-------------------------------------------- ------------------------------ ------------------------------
FAS 121
Accumulated Impairment Adjusted Accumulated Adjusted Accumulated
Cost Amortization Charge Net Cost Amortization Net Cost Amortization Net
---------- ------------ ---------- -------- -------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FCC Licenses.... $ 774,731 $ (22,757) $(490,651) $261,323 $261,323 $ (8,918) $252,405 $261,323 $(14,882) $246,441
Customer lists.. 288,137 (102,735) (120,972) 64,430 64,430 (21,477) 42,953 64,430 (37,584) 26,846
Software........ 3,500 (1,167) (2,333) -- -- -- -- -- -- --
Non-competition
agreement...... 125,999 (114,029) (11,970) -- -- -- -- -- -- --
Excess of
consideration
paid over fair
value of net
assets
acquired....... 176,646 (10,094) (166,552) -- -- -- -- -- -- --
---------- --------- --------- -------- -------- -------- -------- -------- -------- --------
$1,369,013 $(250,782) $(792,478) $325,753 $325,753 $(30,395) $295,358 $325,753 $(52,466) $273,287
========== ========= ========= ======== ======== ======== ======== ======== ======== ========
</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, since the construction
of paging networks related to such licenses has not been completed.
F-33
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1996 1997 1998
---------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
DIP credit facility........................ $ -- $ 10,000 $ --
Revolving loan............................. 99,000 99,000 72,900
Term loan.................................. 550,000 550,000 406,100
10 1/2% Senior Subordinated Deferred Coupon
Notes due December 1, 2003................ 172,628 174,125 174,125
9 3/8% Senior Subordinated Notes due
November 1, 2007.......................... 250,000 250,000 250,000
Dial Page Notes............................ 1,570 1,570 1,570
Note Payable............................... 998 986 986
---------- ---------- --------
Total debt............................... $1,074,196 $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 September 30, 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. 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.
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 September 30, 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).
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the "9 3/8%
Notes") issued in November 1995, concurrent with MobileMedia's second offering
of Class A Common Stock (See Note 11). 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 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.
F-34
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1995, 1996 and 1997, and the
nine months ended September 30, 1997 and 1998 (unaudited) was $9,828, $65,978,
$76,624, $58,114 and $41,321, respectively. Total interest cost incurred for
the years ended December 31, 1995, 1996 and 1997 was $31,952, $94,231 and
$68,409, respectively of which $176, $1,292 and $1,249 was capitalized. Total
interest cost incurred for the nine months ended September 30, 1997 and 1998
was $51,661 and $42,573, respectively of which $130 and $124 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 the nine months ended
September 30, 1997 and 1998 (unaudited) would have been approximately $104,152,
$78,067 and $75,994 respectively.
7. Related Party Transactions
On February 8, 1995 Parent called upon certain investors for an additional
$25,000 of capital which was required to be contributed to MobileMedia in
exchange for 137,095 shares of Class A and 2,362,900 shares of Class B common
stock at $10 per share and warrants to purchase 51,014 shares of Class A Common
Stock. On June 13, 1995, MobileMedia received the $25,000 from the exercise of
such call.
8. Income Taxes
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1995 1996 1997
------- --------- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $ --
State and local.................................. -- -- --
------- --------- -------
Deferred:
Federal.......................................... -- 52,081 --
State and local.................................. -- 17,361 --
------- --------- -------
Total.......................................... $ -- $ 69,442 $ --
======= ========= =======
</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-35
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income tax benefit 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,
-----------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Tax benefit at federal statutory rate........ $ 14,377 $ 395,285 $ 43,604
Goodwill and intangible amortization and
writedown................................... -- (95,362) --
Valuation allowance on federal deferred tax
assets...................................... (14,377) (230,481) (43,604)
-------- --------- --------
Total...................................... $ -- $ 69,442 $ --
======== ========= ========
</TABLE>
The effect of the valuation allowance shown above represents federal tax
effects on income from continuing operations.
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,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Difference in book and tax basis of fixed assets.... $ -- $ 10,206
Other............................................... -- 68
--------- ---------
Net deferred tax liabilities...................... -- 10,274
Deferred tax assets:
Accounts receivable reserves........................ 22,476 10,578
Differences between the book and tax basis of
intangible assets.................................. 136,492 128,462
Difference between book and tax basis of accrued
liabilities........................................ 3,425 5,089
Net operating loss carryforward..................... 80,440 161,840
Difference between book and tax basis of fixed
assets............................................. 2,208 --
Other............................................... 1,357 --
--------- ---------
Total deferred assets............................. 246,398 305,969
Valuation allowances for deferred tax assets...... (249,053) (298,350)
--------- ---------
Net deferred tax assets........................... (2,655) 7,619
========= =========
Net deferred tax liabilities...................... $ 2,655 $ 2,655
========= =========
</TABLE>
As of December 31, 1997, MobileMedia has available net operating loss
carryforwards for tax purposes of approximately $400,000 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. If a second ownership change occurred subsequent
to November 7, 1995, which has not been determined, use of MobileMedia's net
operating losses would be severely limited. It is also anticipated that the net
operating loss carryforwards and possibly other tax attributes will be
substantially reduced as a result of consummation of the Plan.
F-36
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Leases
Certain facilities and equipment used in operations are held under operating
leases. In accordance with the Bankruptcy Code, all lease contracts will be
reviewed, and subject to Court approval, are subject to rejection. Rental
expenses under operating leases were $14,983, $44,574, $43,453, $32,891 and
$30,847 for the years ended December 31, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998 (unaudited), respectively. At December
31, 1997, the aggregate minimum rental commitments under leases were as
follows:
<TABLE>
<S> <C>
1998................................................................ $ 23,566
1999................................................................ 18,953
2000................................................................ 14,037
2001................................................................ 7,625
2002................................................................ 4,788
Thereafter.......................................................... 7,707
--------
$ 76,676
========
</TABLE>
On March 23, 1998, MobileMedia moved into a new headquarters facility pursuant
to a lease with Miller Freeman, Inc. entered into with Bankruptcy Court
approval. On April 1, 1998, MobileMedia, with Bankruptcy Court approval,
assigned its prior lease of rental property used for its Headquarters office to
Southwestern Bell Yellow Pages, Inc. The lease expires in June, 2001. The
estimated annual savings related to this lease assignment and the lease with
Miller Freeman, Inc. is approximately $1,400. The cost savings is not reflected
in the above minimum rental commitments.
10. 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 $555 and $506 for the nine months ended September 30, 1997 and 1998
(unaudited), respectively.
Employees of MobileComm and Dial Page who were hired by MobileMedia were
eligible to participate in MobileMedia's retirement savings plan based on their
recognized MobileComm and Dial Page service date. As of the date of the
MobileComm and Dial Page Acquisitions employees with one year and at least
1,000 hours of credited service were eligible to participate.
11. Common Stock, Stock Option Plans and Stock Warrants
On July 6, 1995, Parent issued an aggregate of 8,000,000 shares of Class A
Common Stock in a public offering at a price of $18.50 per share. Parent
received net proceeds from the sale of approximately $137,975. In addition, on
July 25, 1995, the underwriters exercised their over-allotment option to
purchase an additional 800,000 shares of Class A Common Stock at the initial
public offering price. Accordingly, Parent received additional net proceeds of
$13,910 for the over-allotment shares. On November 13, 1995, Parent issued an
aggregate of 13,500,000 shares of Class A Common Stock at a public offering
price of $23.75 resulting in net proceeds of approximately $308,755. In
addition, the underwriters exercised their over-allotment option to purchase an
additional 2,025,000 shares of Class A Common Stock at the public offering
price resulting in additional net proceeds of approximately $46,170.
F-37
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-Employee Directors
MobileMedia adopted a stock option plan under which options to purchase
MobileMedia's Class A Common Stock would be granted to the Company's non-
employee directors. Options for a total of 121,800 shares of Class A Common
Stock were issued under the Plan since the beginning of the Plan. All exercise
prices per share were considered to be the fair market value at the date of
grant. The plan was amended in 1997 to provide that no additional options may
be granted. Accordingly, no additional options were granted after 1996 under
the Plan. At December 31, 1996, options for a total of 92,040 shares of Class A
Common Stock, at exercise prices ranging from $10.00 to $26.38, were
outstanding. At December 31, 1997, options for a total of 90,290 shares of
Class A Common Stock were outstanding.
Employees
MobileMedia has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of MobileMedia's employee stock option equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. In light of MobileMedia's current circumstances, the pro forma
effect of stock compensation expense pursuant to SFAS No. 123 has not been
calculated. MobileMedia adopted the 1993 MobileMedia Corporation Stock Option
Plan (the "Option Plan") under which options to purchase shares of
MobileMedia's Class A Common Stock may be granted to officers and key employees
of MobileMedia.
Two types of options may be granted under the Option Plan: options intended to
qualify as incentive stock options under Section 422 of the Code, and "non-
qualified" stock options not specifically authorized or qualified for favorable
federal income tax treatment under the Code. The option exercise price for
incentive stock options granted under the Option Plan may not be less than the
fair market value (as defined in the Option Plan) of Parent's Class A Common
Stock on the date the option is granted. The exercise price of non-qualified
stock options may be set by the Board of Directors at a discount from fair
market value. Prior to the Petition date, qualified and non-qualified options
issued to certain current and former officers and key employees of MobileMedia
to purchase up to 1,618,740, 1,414,893 and 1,276,515, shares of Class A Common
Stock at December 31, 1996 and 1997 and September 30, 1998, respectively, at
exercise prices ranging from $6.81 to $10.00 per share, were outstanding.
12. 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 discovered
misrepresentations and other violations that 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. In cooperation with the FCC, outside counsel's investigation was
expanded to examine all MobileMedia's paging licenses, and the results of that
investigation were submitted to the FCC on November 8, 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 approximately 93 applications for fill-in sites
F-38
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
around existing paging stations (which had been filed under the so-called "40-
mile rule") as defective 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. With respect to the approximately 99
authorizations where the underlying station was untimely constructed, the FCC
granted MobileMedia interim operating authority subject to further action by
the FCC.
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 order was originally granted for ten months
and was extended by the FCC through October 6, 1998. The order, which is based
on an FCC doctrine known as Second Thursday, provides that, if there is a
change of control that meets the conditions of Second Thursday, 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. MobileMedia believes that a reorganization plan that provides
for either a conversion of certain existing debt to equity, in which case
existing MobileMedia shares will be eliminated, or a sale or merger of
MobileMedia will result in a change of control that will satisfy the Second
Thursday doctrine. On September 2, 1998, MobileMedia and Arch Communications
Group, Inc. ("Arch") filed a joint Second Thursday application. MobileMedia
believes the plan of reorganization referenced in the application satisfies the
conditions of Second Thursday. On October 5, 1998, a supplement was filed to
notify the FCC of certain modifications to the proposed transaction. The
application was accepted for filing by public notice dated October 15, 1998. On
October 16, 1998, MobileMedia and Arch filed a joint supplement of data
requested by the staff of the Wireless Telecommunications Bureau to assist in
their evaluation of the application.
In the event that MobileMedia was unable to consummate a plan of reorganization
that satisfies the conditions of Second Thursday, MobileMedia would be required
to proceed with the hearing, which, if adversely determined, could result in
the loss of MobileMedia's licenses or substantial monetary fines, or both. Such
an outcome would have a material adverse effect on MobileMedia's financial
condition and results of operations.
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.
F-39
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
Three former employees have pre-petition agreements which provide an incentive
payment of up to $300 to each of them if the EBITDA for 1996 of an entity
specified in such agreements equals or exceeds $82,000, subject to certain
adjustments (the "1996 Target"), and of up to $1,000 to each of them if the
EBITDA for 1998 of an entity specified in such agreements equals or exceeds
$125,100, subject to certain adjustments (the "1998 Target"). One current and
four former employees have pre-petition agreements which provide for incentive
payments of up to $150 to each of them if the specified entity meets the 1996
Target and of up to $300 to each of them if the specified entity meets the 1998
Target. Several former employees have submitted proofs of claim with the
Bankruptcy Court with respect to these incentive payments. MobileMedia intends
to object to these unsecured claims.
13. Other Investments
On March 21, 1995, MobileMedia purchased a 33% interest in Abacus
Communications Partners, L.P., 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,
1995, 1996 and 1997 and for the nine months ended September 30, 1997 and 1998
(unaudited), was $(303), $162, $69, $(54) and $97, respectively.
14. 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.
F-40
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 run to identify any Year 2000 compliance issues.
While the results of the tests are still being analyzed, relatively few Year
2000 problems were identified. Additional testing is scheduled for the first
quarter of 1999, including testing of MobileMedia's financial and human
resource software packages. 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. To
date, 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 $150,000 for use as redundant equipment in testing for Year 2000
problems in an isolated production environment. MobileMedia estimates that it
will expend approximately $200,000 on additional 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
F-41
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 calendar year 1999.
F-42
<PAGE>
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- -------------------------------------------------------------------------------
We have not authorized any person to make a statement that differs from what
is in this prospectus. If any person does make a statement that differs from
what is in this prospectus, you should not rely on it. This prospectus is not
an offer to sell, nor is it seeking an offer to buy, these securities in any
state in which the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of its date, but the information may
change after that date.
-----------------
Summary Table of Contents
<TABLE>
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Page
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<S> <C>
Summary .................................................................. 1
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 18
Dilution.................................................................. 18
Market Price Information and Dividend Policy.............................. 19
Selected Historical Consolidated Financial and Operating Data and
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 20
Unaudited Selected Pro Forma Consolidated Financial Data.................. 49
Unaudited Combined Company Projections.................................... 51
Unaudited Pro Forma Condensed Consolidated Financial Statements........... 58
Industry Overview......................................................... 64
Business.................................................................. 70
Management................................................................ 85
Principal Stockholders.................................................... 91
Description of Securities................................................. 94
Description of Certain Indebtedness....................................... 104
Plan of Distribution...................................................... 111
Selling Stockholders...................................................... 117
Legal Matters............................................................. 117
Experts................................................................... 117
Index of Certain Defined Terms............................................ 118
Where You Can Find More Information....................................... 119
Index to Financial Statements............................................. F-1
</TABLE>
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[ARCH LOGO]
Arch Communications Group, Inc.
shares of Common Stock
shares of Class B Common Stock
Stock Purchase Warrants
-----------------
PROSPECTUS
-----------------
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arch Certificate provides that Arch will, to the fullest extent permitted
by the Delaware corporations statute, indemnify all persons whom it has the
power to indemnify against all costs, expenses and liabilities incurred by them
by reason of having been officers or directors of Arch, any subsidiary of Arch
or any other corporation for which such persons acted as an officer or director
at the request of Arch.
The Arch Certificate also provides that the directors of Arch will not be
personally liable for monetary damages to Arch or its stockholders for any act
or omission provided that the foregoing shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
Arch or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware corporations statute (relating to illegal dividends
or stock redemptions) or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware corporations statute is
amended to permit further elimination or limitation of the personal liability
of directors, then the liability of a director of Arch shall be eliminated or
limited to the fullest extent permitted by the Delaware corporations statute as
so amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 18, 1998, by and among
Arch Communications Group, Inc., Farm Team Corp., MobileMedia Corporation
and MobileMedia Communications, Inc.
2.2 First Amendment to Agreement and Plan of Merger, dated as of September 3,
1998, by and among Arch Communications Group, Inc., Farm Team Corp. and
MobileMedia Communications, Inc.
2.3 Second Amendment to Agreement and Plan of Merger, dated as of December 1,
1998, by and among Arch Communications Group, Inc., Farm Team Corp. and
MobileMedia Communications, Inc.
3.1 Restated Certificate of Incorporation. (1)
3.2 Certificate of Designations establishing the Series B Junior
Participating Preferred Stock. (2)
3.3 Certificate of Correction, filed with the Secretary of State of Delaware
on February 15, 1996. (1)
3.4 Certificate of Designations establishing the Series C Convertible
Preferred Stock. (3)
3.5 Form of Certificate of Amendment to the Restated Certificate of
Incorporation
3.6 Form of Certificate of Amendment to the Restated Certificate of
Incorporation
3.7 By-laws, as amended. (1)
4.1 Indenture, dated February 1, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United States
Trust Company of New York, as Trustee, relating to the 9 1/2% Senior
Notes due 2004 of Arch Communications, Inc. (4)
4.2 Indenture, dated December 15, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United States
Trust Company of New York, as Trustee, relating to the 14% Senior Notes
due 2004 of Arch Communications, Inc. (5)
4.3 Indenture, dated June 29, 1998, between Arch Communications, Inc. and
U.S. Bank Trust National Association, as Trustee, relating to the 12 3/4%
Senior Notes due 2007 of Arch Communications, Inc. (3)
5.1 Opinion of Hale and Dorr LLP
8.1 Tax opinion of Hale and Dorr LLP
10.1 Second Amended and Restated Credit Agreement (Tranche A and Tranche C
Facilities), dated June 29, 1998, among Arch Paging, Inc., the Lenders
party thereto, The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (3)
10.2 Second Amended and Restated Credit Agreement (Tranche B Facility), dated
June 29, 1998, among Arch Paging, Inc., the Lenders party thereto. The
Bank of New York, Royal Bank of Canada and Toronto Dominion (Texas), Inc.
(3)
10.3 Asset Purchase and Sale Agreement, dated April 10, 1998, among
OmniAmerica, Inc. and certain subsidiaries of Arch Communications Group,
Inc. (3)
10.4 Letter agreement, dated June 10, 1998, between Arch Communications Group,
Inc. and Motorola, Inc. (3)(6)
10.5 Debtors' Third Amended Joint Plan of Reorganization, dated as of December
1, 1998, included as Annex C to the Proxy Statement/Prospectus which is
part of this Registration Statement.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.6 Commitment Letters to Purchase Stock and Warrants, dated as of August
18, 1998, by and among Arch Communications Group, Inc., MobileMedia
Communications Inc. and W. R. Huff Asset Management Co., L.L.C., The
Northwestern Mutual Life Insurance Company, Northwestern Mutual Series
Fund, Inc., Credit Suisse First Boston Corporation and Whippoorwill
Associates, Inc.
10.7 Amendments to Commitment Letters to Purchase Stock and Warrants, dated
as of September 3, 1998, by and among Arch Communications Group, Inc.,
MobileMedia Communications, Inc. and W.R. Huff Asset Management Co.,
L.L.C., The Northwestern Mutual Life Insurance Company, Northwestern
Mutual Series Fund, Inc., Credit Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
10.8 Amendments to Commitment Letters to Purchase Stock and Warrants, dated
as of December 1, 1998, by and among Arch Communications Group, Inc.,
MobileMedia Communications, Inc. and W.R. Huff Asset Management Co.,
L.L.C., The Northwestern Mutual Life Insurance Company, Northwestern
Mutual Series Fund, Inc., Credit Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
10.9 Form of Registration Rights Agreement among Arch Communications Group,
Inc., and W.R. Huff Asset Management Co., L.L.C., The Northwestern
Mutual Life Insurance Company, Northwestern Mutual Series Fund, Inc.,
Credit Suisse First Boston Corporation and Whippoorwill Associates,
Inc.
10.10 Form of Registration Rights Agreement among Arch Communications Group,
Inc. and certain Stockholders.
10.11 Amendment No. 1 to Rights Agreement, dated June 29, 1998, between Arch
Communications Group, Inc. and the Bank of New York. (3)
10.12 Amendment No. 2 to Rights Agreement, dated as of August 18, 1998,
amending the Rights Agreement between Arch Communications Group, Inc.
and the Bank of New York.
10.13 Amendment No. 3 to Rights Agreement, dated September 3, 1998, amending
the Rights Agreement between Arch Communications Group, Inc. and the
Bank of New York.
10.14 Form of Warrant Agreement, between Arch Communications Group, Inc. and
the Bank of New York, as provided for in the First Amendment to
Agreement and Plan of Merger dated as of September 3, 1998, by and
among Arch Communications Group, Inc., Farm Team Corp. and MobileMedia
Communication Inc.
10.15 Commitment Letter, dated as of August 18, 1998, by and among Arch
Paging, Inc. and The Bank of New York, BNY Capital markets, Inc.,
Toronto Dominion (Texas) Inc., TD Securities (USA) Inc., Royal Bank of
Canada and Barclays Bank PLC amending the Second and Amended Restated
Credit Agreements, dated June 29, 1998 (Tranche A, B and C Facilities).
10.16 Bridge Commitment Letter, dated as of August 20, 1998, among Arch
Communications, Inc., Arch Communications Group, Inc. and The Bear
Stearns Companies, Inc., The Bank of New York, TD Securities (USA) Inc.
and the Royal Bank of Canada.
10.17 Amendment No. 1 to Registration Rights Agreement, dated August 19,
1998, amending the Registration Rights Agreement dated as of June 29,
1998 by and among Arch Communications Group, Inc. and the Sandler
Capital Partners IV, LP, Sandler Capital Partners IV, FTE LP, South
Fork Partners, The Georgica International Fund Limited, Aspen Partners
and Consolidated Press International Limited.
+10.18 Amended and Restated Stock Option Plan (8)
+10.19 Non-Employee Directors' Stock Option Plan (9)
+10.20 1989 Stock Option Plan, as amended (1)
+10.21 1995 Outside Directors' Stock Option Plan (10)
+10.22 1996 Employee Stock Purchase Plan (11)
+10.23 1997 Stock Option plan (12)
+10.24 Deferred Compensation Plan for Nonemployee Directors (13)
+10.25 Form of Executive Retention Agreement by and between Messrs. Baker,
Daniels, Kuzia, Pottle and Saynor (13)
10.26 Stock Purchase Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV, L.P., Sandler
Capital Partners IV FTE, L.P., Harvey Sandler, John Kornreich, Michael
J. Marocco, Andrew Sandler, South Fork Partners, the Georgica
International Fund Limited, Aspen partners and Consolidated Press
International Limited (3)
10.27 Registration Rights Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV, L.P., Sandler
Capital Partners IV FTE, L.P., Harvey Sandler, John Kornreich, Michael
J. Marocco, Andrew Sandler, South Fork Partners, The Georgica
International Fund Limited, Aspen Partners and Consolidated Press
International Limited (3)
</TABLE>
II-2
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<TABLE>
<C> <S>
10.28 Exchange Agreement, dated June 29, 1998, between Adelphia
Communications Corporation and Benbow PCS Ventures, Inc. (3)
10.29 Promissory Note, dated June 29, 1998, in the Principal amount of
$285,015, issued by Benbow PCS Ventures, Inc. to Lisa-Gaye Shearing
(3)
10.30 Guaranty, dated June 29, 1998, given by Arch Communications Group,
Inc. to Adelphia Communications Corporations (3)
10.31 Guaranty, dated June 29, 1998, given by Arch Communications Group,
Inc. to Lisa-Gaye Shearing (3)
10.32 Registration Rights Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Adelphia Communications Corporation and
Lisa-Gaye Shearing (3)
21.1 Subsidiaries of the Registrant
23.1 Consent of Hale and Dorr LLP (contained in its opinion filed as
Exhibit 5.1)
23.2** Consent of Arthur Andersen LLP
23.3** Consent of Ernst & Young LLP
23.4** Consent of Wilkinson, Barker, Knauer & Quinn, LLP
23.5** Consent of Wiley, Rein & Fielding
24.1 Power of Attorney (included on signature page to this Registration
Statement)
27.1 Financial Data Schedule (7)
99.1 Form of Subscription Certificate and related documents
99.2 Form of Proxy for the Common Stock of Arch for Arch Annual Meeting
</TABLE>
--------
** Filed herewith.
+ Identifies exhibits constituting a management contract or compensation
plan.
(1) Incorporated by reference from the Registration Statement on Form S-3
(File No. 333-542 of Arch Communications Group, Inc.
(2) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated October 13, 1995 and filed on October
24, 1995.
(3) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998 and filed on July 23,
1998.
(4) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-72646) of Arch Communications, Inc.
(5) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-85580) of Arch Communications, Inc.
(6) A Confidential Treatment Request has been filed with respect to
portions of this exhibit so incorporated by reference.
(7) Incorporated by reference from the Quarterly Report on Form 10-Q of
Arch Communications Group, Inc. for the quarter ended September 30,
1998.
(8) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. (then known as USA Mobile Communications
Inc. II) for the fiscal year ended December 31, 1994.
(9) Incorporated by reference form the Registration Statement on Form S-4
(File No. 333-83648) of Arch (then known as USA Mobile Communications
Inc. II).
(10) Incorporated by reference from the Registration Statement on Form S-3
(File No. 33-87474) of Arch Communications Group, Inc.
(11) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1995.
(12) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1996.
(13) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1997.
(b) Financial Statement Schedules
(a) Schedule II--Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS
(a)The undersigned registrant hereby undertakes:
II-3
<PAGE>
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the SEC
by the registrant pursuant to Section 13 or 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) If the registration is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Securities Act need not be
furnished, provided, that the registrant includes in the prospectus, by means
of a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Securities Act or Rule 3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the SEC by the registrant pursuant to Section 13 or Section 15(d)
of the Exchange Act that are incorporated by reference in the Form F-3.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such offering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (1) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a
II-4
<PAGE>
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(d) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of a registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(f) The registrant undertakes to respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11,
or 13 of this form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of responding to
the request.
(g) The registrant undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Westborough,
Commonwealth of Massachusetts on January 19, 1999.
Arch Communications Group, Inc.
By: /s/ C. Edward Baker
_______________________________
C. Edward Baker, Jr.Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
Signature Title
Date
/s/ C. Edward Baker Chairman of the Board and January 19,
- ------------------------- Chief Executive Officer 1999
C. Edward Baker, Jr. Director (principal executive officer)
/s/ J. Roy Pottle Executive Vice President and January 19,
- ------------------------- Chief Financial Officer 1999
J. Roy Pottle (principal financial officer and
principal accounting officer)
* Director January 19,
- ------------------------- 1999
R. Schorr Berman
* Director January 19,
- ------------------------- 1999
James S. Hughes
* Director January 19,
- ------------------------- 1999
John Kornreich
* Director January 19,
- ------------------------- 1999
Allan L. Rayfield
* Director January 19,
- ------------------------- 1999
John B. Saynor
* Director January 19,
- ------------------------- 1999
John A. Shane
*By: /s/ Gerald J.
Cimmino
-------------------------
Gerald J. Cimmino
Attorney-in-Fact
</TABLE>
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<PAGE>
SCHEDULE II
ARCH COMMUNICATIONS GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Balance Other Balance
Allowance for Doubtful at Beginning Charged Additions to Write- at End
Accounts of Period to Expense Allowance(1) Offs of Period
---------------------- ------------ ---------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997................... $4,111 $7,181 $ -- $(5,548) $5,744
====== ====== ====== ======= ======
Year ended December 31,
1996................... $2,125 $8,198 $1,757 $(7,969) $4,111
====== ====== ====== ======= ======
Year ended December 31,
1995................... $ 707 $3,915 $1,251 $(3,748) $2,125
====== ====== ====== ======= ======
</TABLE>
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(1) Additions arising through acquisitions of paging companies
S-1
<PAGE>
EXHIBIT INDEX
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2.1 Agreement and Plan of Merger, dated as of August 18, 1998, by and among
Arch Communications Group, Inc., Farm Team Corp., MobileMedia
Corporation and MobileMedia Communications, Inc.
2.2 First Amendment to Agreement and Plan of Merger, dated as of September
3, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
and MobileMedia Communications, Inc.
2.3 Second Amendment to Agreement and Plan of Merger, dated as of December
1, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
and MobileMedia Communications, Inc.
3.1 Restated Certificate of Incorporation. (1)
3.2 Certificate of Designations establishing the Series B Junior
Participating Preferred Stock. (2)
3.3 Certificate of Correction, filed with the Secretary of State of Delaware
on February 15, 1996. (1)
3.4 Certificate of Designations establishing the Series C Convertible
Preferred Stock. (3)
3.5 Form of Certificate of Amendment to the Restated Certificate of
Incorporation
3.6 Form of Certificate of Amendment to the Restated Certificate of
Incorporation
3.7 By-laws, as amended. (1)
4.1 Indenture, dated February 1, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United States
Trust Company of New York, as Trustee, relating to the 9 1/2% Senior
Notes due 2004 of Arch Communications, Inc. (4)
4.2 Indenture, dated December 15, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United States
Trust Company of New York, as Trustee, relating to the 14% Senior Notes
due 2004 of Arch Communications, Inc. (5)
4.3 Indenture, dated June 29, 1998, between Arch Communications, Inc. and
U.S. Bank Trust National Association, as Trustee, relating to the 12
3/4% Senior Notes due 2007 of Arch Communications, Inc. (3)
5.1 Opinion of Hale and Dorr LLP
8.1 Tax opinion of Hale and Dorr LLP
10.1 Second Amended and Restated Credit Agreement (Tranche A and Tranche C
Facilities), dated June 29, 1998, among Arch Paging, Inc., the Lenders
party thereto, The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (3)
10.2 Second Amended and Restated Credit Agreement (Tranche B Facility), dated
June 29, 1998, among Arch Paging, Inc., the Lenders party thereto. The
Bank of New York, Royal Bank of Canada and Toronto Dominion (Texas),
Inc. (3)
10.3 Asset Purchase and Sale Agreement, dated April 10, 1998, among
OmniAmerica, Inc. and certain subsidiaries of Arch Communications Group,
Inc. (3)
10.4 Letter agreement, dated June 10, 1998, between Arch Communications
Group, Inc. a nd Motorola, Inc. (3)(6)
10.5 Debtors' Third Amended Joint Plan of Reorganization, dated as of
December 1, 1998, included as Annex C to the Proxy Statement/Prospectus
which is part of this Registration Statement.
10.6 Commitment Letters to Purchase Stock and Warrants, dated as of August
18, 1998, by and among Arch Communications Group, Inc., MobileMedia
Communications Inc. and W. R. Huff Asset Management Co., L.L.C., The
Northwestern Mutual Life Insurance Company, Northwestern Mutual Series
Fund, Inc., Credit Suisse First Boston Corporation and Whippoorwill
Associates, Inc.
10.7 Amendments to Commitment Letters to Purchase Stock and Warrants, dated
as of September 3, 1998, by and among Arch Communications Group, Inc.,
MobileMedia Communications, Inc. and W.R. Huff Asset Management Co.,
L.L.C., The Northwestern Mutual Life Insurance Company, Northwestern
Mutual Series Fund, Inc., Credit Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
10.8 Amendments to Commitment Letters to Purchase Stock and Warrants, dated
as of December 1, 1998, by and among Arch Communications Group, Inc.,
MobileMedia Communications, Inc. and W.R. Huff Asset Management Co.,
L.L.C., The Northwestern Mutual Life Insurance Company, Northwestern
Mutual Series Fund, Inc., Credit Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
10.9 Form of Registration Rights Agreement among Arch Communications Group,
Inc., and W.R. Huff Asset Management Co., L.L.C., The Northwestern
Mutual Life Insurance Company, Northwestern Mutual Series Fund, Inc.,
Credit Suisse First Boston Corporation and Whippoorwill Associates, Inc.
</TABLE>
<PAGE>
<TABLE>
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10.10 Form of Registration Rights Agreement among Arch Communications Group,
Inc. and certain Stockholders.
10.11 Amendment No. 1 to Rights Agreement, dated June 29, 1998, between Arch
Communications Group, Inc. and the Bank of New York. (3)
10.12 Amendment No. 2 to Rights Agreement, dated as of August 18, 1998,
amending the Rights Agreement between Arch Communications Group, Inc.
and the Bank of New York.
10.13 Amendment No. 3 to Rights Agreement, dated September 3, 1998, amending
the Rights Agreement between Arch Communications Group, Inc. and the
Bank of New York.
10.14 Form of Warrant Agreement, between Arch Communications Group, Inc. and
the Bank of New York, as provided for in the First Amendment to
Agreement and Plan of Merger dated as of September 3, 1998, by and
among Arch Communications Group, Inc., Farm Team Corp. and MobileMedia
Communication Inc.
10.15 Commitment Letter, dated as of August 18, 1998, by and among Arch
Paging, Inc. and The Bank of New York, BNY Capital markets, Inc.,
Toronto Dominion (Texas) Inc., TD Securities (USA) Inc., Royal Bank of
Canada and Barclays Bank PLC amending the Second and Amended Restated
Credit Agreements, dated June 29, 1998 (Tranche A, B and C Facilities).
10.16 Bridge Commitment Letter, dated as of August 20, 1998, among Arch
Communications, Inc., Arch Communications Group, Inc. and The Bear
Stearns Companies, Inc., The Bank of New York, TD Securities (USA) Inc.
and the Royal Bank of Canada.
10.17 Amendment No. 1 to Registration Rights Agreement, dated August 19,
1998, amending the Registration Rights Agreement dated as of June 29,
1998 by and among Arch Communications Group, Inc. and the Sandler
Capital Partners IV, LP, Sandler Capital Partners IV, FTE LP, South
Fork Partners, The Georgica International Fund Limited, Aspen Partners
and Consolidated Press International Limited.
+10.18 Amended and Restated Stock Option Plan (8)
+10.19 Non-Employee Directors' Stock Option Plan (9)
+10.20 1989 Stock Option Plan, as amended (1)
+10.21 1995 Outside Directors' Stock Option Plan (10)
+10.22 1996 Employee Stock Purchase Plan (11)
+10.23 1997 Stock Option plan (12)
+10.24 Deferred Compensation Plan for Nonemployee Directors (13)
+10.25 Form of Executive Retention Agreement by and between Messrs. Baker,
Daniels, Kuzia, Pottle and Saynor (13)
10.26 Stock Purchase Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV, L.P., Sandler
Capital Partners IV FTE, L.P., Harvey Sandler, John Kornreich, Michael
J. Marocco, Andrew Sandler, South Fork Partners, the Georgica
International Fund Limited, Aspen partners and Consolidated Press
International Limited (3)
10.27 Registration Rights Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV, L.P., Sandler
Capital Partners IV FTE, L.P., Harvey Sandler, John Kornreich, Michael
J. Marocco, Andrew Sandler, South Fork Partners, The Georgica
International Fund Limited, Aspen Partners and Consolidated Press
International Limited (3)
10.28 Exchange Agreement, dated June 29, 1998, between Adelphia
Communications Corporation and Benbow PCS Ventures, Inc. (3)
10.29 Promissory Note, dated June 29, 1998, in the Principal amount of
$285,015, issued by Benbow PCS Ventures, Inc. to Lisa-Gaye Shearing (3)
10.30 Guaranty, dated June 29, 1998, given by Arch Communications Group, Inc.
to Adelphia Communications Corporations (3)
10.31 Guaranty, dated June 29, 1998, given by Arch Communications Group, Inc.
to Lisa-Gaye Shearing (3)
10.32 Registration Rights Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Adelphia Communications Corporation and
Lisa-Gaye Shearing (3)
21.1 Subsidiaries of the Registrant
23.1 Consent of Hale and Dorr LLP (contained in its opinion filed as Exhibit
5.1)
</TABLE>
<PAGE>
<TABLE>
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23.2** Consent of Arthur Andersen LLP
23.3** Consent of Ernst & Young LLP
23.4** Consent of Wilkinson, Barker, Knauer & Quinn, LLP
23.5** Consent of Wiley, Rein & Fielding
24.1 Power of Attorney (included on signature page to this Registration
Statement)
27.1 Financial Data Schedule (7)
99.1 Form of Subscription Certificate and related documents
99.2 Form of Proxy for the Common Stock of Arch for Arch Annual Meeting
</TABLE>
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** Filed herewith.
+ Identifies exhibits constituting a management contract or compensation
plan.
(1) Incorporated by reference from the Registration Statement on Form S-3
(File No. 333-542 of Arch Communications Group, Inc.
(2) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated October 13, 1995 and filed on October
24, 1995.
(3) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998 and filed on July 23,
1998.
(4) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-72646) of Arch Communications, Inc.
(5) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-85580) of Arch Communications, Inc.
(6) A Confidential Treatment Request has been filed with respect to
portions of this exhibit so incorporated by reference.
(7) Incorporated by reference from the Quarterly Report on Form 10-Q of
Arch Communications Group, Inc. for the quarter ended September 30,
1998.
(8) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. (then known as USA Mobile Communications
Inc. II) for the fiscal year ended December 31, 1994.
(9) Incorporated by reference form the Registration Statement on Form S-4
(File No. 333-83648) of Arch (then known as USA Mobile Communications
Inc. II).
(10) Incorporated by reference from the Registration Statement on Form S-3
(File No. 33-87474) of Arch Communications Group, Inc.
(11) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1995.
(12) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1996.
(13) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1997.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated February 9, 1998 (except with
respect to the matters discussed in Notes 3 and 4, as to which the date is June
29, 1998) included herein and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 15, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 31, 1998 with respect to the financial
statements of MobileMedia Communications, Inc. as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997, included
in the prospectus of Arch Communications Group, Inc. that is made a part of
Post-Effective Amendment No. 1 on Form S-1 to the Registration Statement (Form
S-4 No. 333-63519) for the registration of 48,568,825 shares of its common
stock and warrants to purchase such stock.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 15, 1999
<PAGE>
Exhibit 23.4
CONSENT
We hereby consent to the reference to our firm under the heading "Experts" in
the Prospectus constituting part of the Registration Statement on Form S-4
(File Number 333-63519) of Arch Communications Group, Inc. As noted therein,
our review and input only pertains to FCC matters unique to Arch included in
the description of the regulatory requirements under the Communications Act and
the Telecommunications Act of 1996, and the regulations thereunder, set forth
under "Risk Factors--Business and Financial Risks--Government Regulation,
Foreign Ownership and Possible Redemption" and "Industry Overview--Regulation."
Stockholders of Arch should not rely on Wilkinson, Barker, Knauer & Quinn with
respect to any others matters or any other sections of the document.
Wilkinson, Barker, Knauer & Quinn,
LLP
/s/ Kenneth D. Patrich
By: ____________________________
Kenneth D. Patrich
Date: January 15, 1999
<PAGE>
EXHIBIT 23.5
CONSENT
We hereby consent to the reference to our firm under the heading "Experts" in
the Prospectus constituting part of Post-Effective Amendment No. 1 to the
Registration Statement on Form S-4 (File Number 333-63519) of Arch
Communications Group, Inc. As noted therein, our review and input has only
pertained to FCC matters unique to MobileMedia included in the description of
the regulatory requirements under the Communications Act and the regulations
thereunder set forth under "Risk Factors--Business and Financial Risks--
Government Regulation, Foreign Ownership and Possible Redemption" and "Industry
Overview--Regulation." Stockholders of Arch should not rely on Wiley, Rein &
Fielding with respect to any other matters or any other sections of the
document.
WILEY, REIN & FIELDING
By: /s/ Nancy J. Victory
-----------------------------
Nancy J. Victory
Dated: January 15, 1999
