<PAGE>
Filed pursuant to Rule 424(b)(3)
Registration No. 333-62211
333-79769
333-63519
PROSPECTUS
[ARCH LOGO APPEARS HERE]
ARCH COMMUNICATIONS GROUP, INC.
42,511,985 Shares of Common Stock
5,360,262 Shares of Class B Common Stock
3,675,659 Stock Purchase Warrants
On June 3, 1999 we issued warrants to purchase a total of 16,086,645
shares of our common stock in connection with our acquisition of
MobileMedia Communications, Inc. and its subsidiaries. Each warrant
currently entitles its holder to purchase one third of one share of
common stock for an exercise price of $3.01 per warrant ($9.03 per
share), but these financial terms may be adjusted for future stock
splits and in various other circumstances. 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. We expect that 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.
<TABLE>
<CAPTION>
Per Warrant Per Share Total
----------- --------- ---------------
<S> <C> <C> <C>
Warrant exercise price........... $3.01 $9.03 $145,262,398.33
Underwriting discounts........... -- -- --
Proceeds, before expenses, to
Arch............................ $3.01 $9.03 $145,262,398.33
</TABLE>
Our common stock is traded on the Nasdaq National Market under the
symbol "APGR".
<TABLE>
<S> <C>
Neither the SEC nor any state
securities regulators have
approved or disapproved the
shares or warrants or determined
if this prospectus is accurate
or adequate. Anyone who tells
you otherwise is committing a
crime.
We urge you to carefully read
the
"Risk Factors" section,
beginning
on page 5, before you make any
investment decision.
</TABLE>
The date of this prospectus is September 17, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 1
Our Business............................................................. 1
Arch................................................................... 1
MobileMedia............................................................ 2
The Mobile Media Acquisition........................................... 2
The Combined Company................................................... 2
Other Information about Arch............................................. 3
Resales by Selling Stockholders.......................................... 3
Risk Factors............................................................... 5
Uncertainties Related to the MobileMedia Acquisition .................... 5
Business and Financial Risks............................................. 6
Risks Related to Shares, Warrants and Warrant Exercises.................. 11
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Forward-Looking Statements................................................. 13
Dilution................................................................... 13
Use of Proceeds............................................................ 14
Description of Warrants.................................................... 14
Market Price Information and Dividend Policy............................... 15
Plan of Distribution....................................................... 16
Selling Stockholders....................................................... 22
Legal Matters.............................................................. 23
Experts.................................................................... 23
Where You Can Find More Information ....................................... 24
Incorporation by Reference................................................. 25
</TABLE>
i
<PAGE>
SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. It may not contain all of the information that is important to you.
We urge you to read the entire prospectus, including "Risk Factors", and all of
the information incorporated by reference into the prospectus. We use the name
"Arch" to refer to Arch Communications Group, Inc. and its consolidated
subsidiaries 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.
All share information in this prospectus reflects the effects of a 1-for-3
reverse stock split effected during June 1999.
Our Business
Arch is now the second largest provider of wireless messaging services,
primarily paging services, in the United States based on its net revenues and
its approximately 7.2 million units in service. This reflects Arch's
acquisition of MobileMedia Communications, Inc. and its subsidiaries on June ,
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 through operating synergies,
cost savings and a reduction in Arch's financial leverage. However, the
integration of the companies' businesses may present difficulties. See "Risk
Factors--Integrating the two companies presents challenges".
Arch's operating objectives are to increase its EBITDA, or 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;
. is distributing its products and services through several different
channels; and
. is pursuing new revenue opportunities associated with its units in
service, including applications in narrowband personal communications
services, which are commonly referred to as N-PCS.
Arch
Arch has been a leading provider of wireless messaging services, primarily
paging services. At March 31, 1999, Arch was the third largest paging company
in the United States based on its 4.3 million units then in service. Arch has:
. operated in 41 states and more than 180 of the 200 largest markets in the
United States;
. 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; 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 units
in service through a combination of internal growth and acquisitions. From
January 1, 1996 through March 31, 1999, Arch's total number of units in service
grew at a compound rate on an annualized basis of 26.7%. For the same period on
an annualized basis, Arch's compound rate of internal growth in units in
service was 22.3%, excluding units added through acquisitions. From
commencement of operations in September 1986 through March 31, 1999, Arch
completed 33 acquisitions involving an aggregate of 1.7 million units in
service at the time of purchase. The MobileMedia acquisition has added
approximately 2.9 million additional units, net of intercompany units.
1
<PAGE>
Arch had revenues of $413.6 million and a net loss of $206.1 million for the
year ended December 31, 1998 and revenues of $100.9 million and a net loss of
$49.1 million for the three months ended March 31, 1999.
MobileMedia
Prior to its acquisition by Arch, MobileMedia operated one of the largest
paging companies in the United States, with approximately 3.1 million units in
service as of March 31, 1999. Through its sales offices, nationwide retail
distribution network, company-operated retail stores and resellers, MobileMedia
has offered local, regional and national coverage to subscribers in all 50
states and the District of Columbia. This has 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's paging and wireless messaging services have consisted
principally of numeric and alphanumeric paging services.
Between January 30, 1997 and June 3, 1999, MobileMedia and several affiliated
companies operated as debtors-in-possession under Chapter 11 of the Bankruptcy
Code.
MobileMedia had revenues of $449.7 million and net income of $35.6 million for
the year ended December 31, 1998 and revenues of $105.8 million and a net loss
of $7.7 million for the three months ended March 31, 1999.
The MobileMedia Acquisition
Arch acquired MobileMedia on June 3, 1999. Arch paid approximately $537.0
million in cash, including fees and expenses and elimination of certain debt.
Arch also issued a total of 35.6 million shares of its common stock and 5.4
million shares of its Class B common stock to creditors of MobileMedia and
stockholders of Arch. Arch issued some of these shares in exchange for
cancellation of creditors' claims and received cash proceeds of approximately
$217.2 million for the other shares. Arch has also borrowed approximately
$320.0 million to help fund the acquisition.
The Combined Company
The combined company is the second largest paging operator in the United States
as measured by units in service and net revenues. On a pro forma basis, but
excluding the impact of expected operational cost synergies, at and for the
year ended December 31, 1998, the combined company would have had:
. approximately 7.2 million units in service;
. net revenues of $802.7 million;
. adjusted pro forma EBITDA, as described below, of $252.6 million;
. net loss before extraordinary items of $193.2 million; and
. total debt of $1.3 billion.
For the year ended December 31, 1998, on a similar pro forma basis, cash flows
provided by operating activities would have been $138.3 million, cash flows
used in investing activities would have been $506.0 million and cash flows
provided by financing activities would have been $359.1 million.
For the three months ended March 31, 1999, the combined company would have had:
. net revenues of $194.2 million;
. adjusted pro forma EBITDA of $64.6 million;
. net loss before extraordinary items of $60.1 million;
. total debt of $1.3 billion; and
. cash flows of $30.1 million provided by operating activities, $589.9
million used in investing activities and $568.3 million provided by
financing activities.
This adjusted pro forma information assumes that the MobileMedia acquisition
had been effected as of January 1, 1998.
The combined company's leverage on a pro forma basis, as measured by the ratio
of total debt to annualized adjusted pro forma EBITDA, would have been 5.2 to 1
for the year ended December 31, 1998 and 5.2 to 1 for the three months ended
March 31, 1999. Adjusted pro forma EBITDA is EBITDA net of restructuring
charges and bankruptcy related expenses, equity in loss of affiliates,
extraordinary items, amortization of deferred gain on tower sale, impairment of
long-lived assets and reduction of liabilities subject to compromise.
2
<PAGE>
Other Information about Arch
Our principal office is located at 1800 West Park Drive, Suite 250,
Westborough, Massachusetts 01581. Our telephone number is (508) 870-6700.
"Arch" and "Arch Paging" are service marks of Arch. "MobileComm" is a
registered service mark of MobileMedia, which is not associated with MobilComm
Inc. of Cincinnati, Ohio. Other trademarks, service marks and trade names used
in this prospectus are owned by persons who are not associated with Arch.
Our web site is not part of this prospectus.
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. We expect that 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".
3
<PAGE>
Exercises of Warrants
Securities offered.......... 16,086,643 shares of common stock. Each warrant
entitles you to purchase one third of one share
of common stock, subject to adjustment for stock
splits and similar transactions, issuances of
stock or options at prices below prevailing mar-
ket prices and other specified events.
Subscription price.......... $3.01 per warrant ($9.03 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................... 66,033,830 shares of common stock, based on
shares outstanding at June 3, 1999 and assuming
exercise of all warrants and conversion of all
outstanding convertible securities.
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--Exercises of Warrants--Method of Exercise
of Warrants".
No revocation............... Once you have exercised warrants, you may not re-
voke your exercise.
Transfers and resales....... You may transfer warrants as described under
"Plan of Distribution--Exercises of Warrants--
Transfer of Warrants". You may resell warrants
and shares issued upon exercise of warrants with-
out registration under the Securities Act of 1933
if you are not an affiliate of Arch or an under-
writer within the meaning of the Securities Act.
See "--Resales of Warrants and Shares".
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>
RISK FACTORS
You should consider carefully the following risks before you decide whether
to exercise warrants or to purchase warrants or shares. If any of these
possible developments occur, our business, financial condition and/or results
of operations would likely suffer. In that 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 warrants or shares.
Uncertainties Related to the MobileMedia Acquisition
Integrating the two companies presents challenges
Arch may not be able to successfully integrate MobileMedia's operations. Any
difficulties or problems encountered in the integration process could have a
material adverse effect on the combined company. 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. 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 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.
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.
Disruption of MobileMedia's operations that occurred during insolvency
proceedings may continue
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. Any continued deterioration of
MobileMedia's business, including the loss of significant numbers of key
employees following MobileMedia's acquisition by Arch, could have material
adverse effects.
Downturn in MobileMedia's units in service may continue
Cancellation of units in service can significantly affect the results of
operations of wireless messaging service providers. 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.
After filing for bankruptcy protection on January 30, 1997, MobileMedia
experienced a significant decline in units in service. At March 31, 1999,
MobileMedia had 3,106,775 units in service compared to 3,440,342 units in
service at December 31, 1997. A failure to correct this cancellation trend
could have a material adverse effect on the combined company.
5
<PAGE>
Amortization charges may affect earnings sooner than expected
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 if the useful lives of such assets are less than
currently estimated.
Creditors may allege defaults
It is possible that holders of some of Arch's outstanding indebtedness may
allege that the MobileMedia acquisition constitutes either a breach or a
default or a change in control of Arch entitling them to immediate repayment of
their indebtedness. The magnitude of any resulting adverse consequences would
depend upon, among other factors, the diligence and vigor with which debt
holders may seek to assert any such rights and pursue any such remedies, and
Arch's ability to prevail in its interpretation of the loan documents or
otherwise resolve matters on acceptable terms.
Business and Financial Risks
Continued losses are likely
The combined company expects to continue to report net losses for the
foreseeable future and cannot predict when, if ever, it is likely to attain
profitability.
Arch and MobileMedia have reported losses in all but one of the periods shown
in the table below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
Three Months
Ended
March 31,
1996 1997 1998 1999
--------- ------- ------- ------------
<S> <C> <C> <C> <C>
Net income (loss): (dollars in million)
Arch.......................... $ (114.7) $(181.9) $(206.1) $(49.1)
MobileMedia................... $(1,059.9) $(124.6) $ 35.6 $( 7.7)
</TABLE>
Furthermore, MobileMedia had net income during the year ended December 31,
1998 solely because of a $94.2 million gain on the sale of transmission towers
and related equipment. After giving effect to the MobileMedia acquisition, Arch
would have incurred, on a pro forma basis, losses before extraordinary item of
$193.2 million for the year ended December 31, 1998 and $60.1 million for the
three months ended March 31, 1999.
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.
Revenues and operating results may fluctuate
Arch believes that future fluctuations in its revenues and operating results
may occur due to 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,
6
<PAGE>
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's common stock. If shortfalls were to cause Arch not to meet
the financial covenants contained in its debt instruments, the debtholders
could declare a default and seek immediate repayment.
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 three-month annualized
adjusted EBITDA of Arch, MobileMedia and the combined company at or as of March
31, 1999.
<TABLE>
<CAPTION>
Pro Forma
Combined
Arch MobileMedia Company
-------- ----------- ---------
(dollars in millions)
<S> <C> <C> <C>
Total debt................................ $1,038.0 $910.7 $1,349.7
Total assets.............................. $ 883.4 $554.0 $1,538.4
Annualized adjusted EBITDA................ $ 140.1 $118.5 $ 258.6
</TABLE>
Adjusted 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. Adjusted EBITDA, as determined by Arch and MobileMedia,
may not necessarily be comparable to similarly titled data of other paging
companies.
Arch's high degree of leverage may have adverse consequences for Arch. These
include the following:
. 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 could have a material adverse effect
on Arch if not cured or waived.
. 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.
There can be no assurance that Arch will be able to reduce its financial
leverage as it intends, nor 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.
Funding for future capital needs is not assured
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.
7
<PAGE>
Competition and technological change may undermine Arch's business
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.
Competition may intensify and may adversely affect margins
Arch and MobileMedia have each faced competition from other paging service
providers in all markets in which they operate, including some 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. Some competitors
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 historical markets,
there could be a material adverse effect on the combined company.
New two-way paging technology may adversely affect Arch's competitive position
Competitors are currently using and developing a variety of two-way paging
technologies. Neither Arch nor MobileMedia currently provides such two-way
services, other than as a reseller. Although these services generally are
higher priced than traditional one-way paging services, this situation may
change. Technological improvements could result in increased capacity and
efficiency for 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 historically provided by Arch and MobileMedia. Future
technological 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 the combined company provides. These include cellular and
broadband personal communications services, which are commonly referred to as
PCS, as well as specialized mobile radio services. Although these services are
primarily focused on two-way voice communications, many service providers are
electing to provide paging services as an adjunct to their primary services.
Obsolescence in company-owned units may impose additional costs on Arch
Technological change may also adversely affect the value of the paging units
owned by Arch and MobileMedia that are leased to their subscribers. If Arch's
or MobileMedia's current subscribers request more technologically advanced
units, including two-way units, the combined company could incur additional
inventory costs and capital expenditures if required to replace units 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.
Government regulation may burden operations
Licenses may not be automatically renewed
The combined company's FCC paging licenses are for varying terms of up to 10
years. When the licenses expire, renewal applications must receive approval
from the FCC. To date, the FCC has approved each assignment and transfer of
control for which Arch and MobileMedia have sought approval; however, no
assurance can be given that any of the combined company's renewal applications
will be free of challenge or will be granted by the FCC.
8
<PAGE>
Regulatory changes could add burdens or benefit competing technologies
The FCC continually reviews and revises its rules affecting paging companies.
Therefore, regulatory requirements that apply to the combined company may
change significantly over time.
Acquisitions of Arch's stock by foreigners could jeopordize Arch's licenses
The Communications Act limits foreign investment in and ownership of radio
common carriers licensed by the FCC, as well as their parent companies. 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. 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. 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 corporations statute. 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.
Arch cannot control third parties on whom Arch depends for products and
services
The combined company does not manufacture any of the paging units used in its
paging operations. It is dependent primarily on Motorola and NEC America Inc.
to obtain sufficient pager inventory for new subscriber and replacement needs
and on Glenayre Electronics, Inc. and Motorola for sufficient terminals and
transmitters to meet its expansion and replacement requirements. Significant
delays in obtaining paging units, terminals or transmitters, such as
MobileMedia experienced before its bankruptcy filing, could lead to disruptions
in operations and adverse financial consequences. Purchase agreements with
Motorola expire on June 19, 1999 and February 6, 2000. There can be no
assurance that the agreements with Motorola will be renewed or, if renewed,
that such agreements will be on terms and conditions as favorable to the
combined company as those under the current agreements.
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 impaired in other ways, the
combined company may experience a loss of service until such time as satellite
coverage is restored, which could have a material adverse effect.
Loss of key personnel could adversely impact operations
Arch's success 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 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.
Divisional reorganization may not achieve objectives
Arch is currently reorganizing its operating divisions. 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 $14.7 million in 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.
9
<PAGE>
Impact of the Year 2000 issue is not fully known
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.
Within the next few months, the combined company must finish the process of
reviewing, evaluating and, if and where necessary, modifying or replacing its
computerized systems and applications to ensure that all financial, information
and operating systems are Year 2000 ready. This includes both information and
non-information technology systems. Any failure of systems or products to be
Year 2000 ready could have a material adverse effect on the combined company's
business, financial condition, results of operations or prospects.
Although Arch and MobileMedia each began testing its internal business-
related hardware and software applications in 1998, there can be no assurance
that such testing has detected or will detect all applications that may be
affected by Year 2000 compliance problems. The combined company's objective is
to make its internal computer systems Year 2000 ready by September 30, 1999 but
there can be no assurance that this objective will be met. Furthermore, it is
possible that one or more mission critical vendors, such as utility providers,
telephone carriers or satellite carriers, may not be Year 2000 compliant.
Because of the unique nature of those vendors, alternative providers of these
services may not be available. Furthermore, all pagers and paging-related
equipment used by the combined company and its customers are manufactured by
third parties. Although the combined company has initiated testing of such
equipment, it has relied to a large extent on the representations of its
vendors with respect to their readiness and cannot offer any assurance about
the accuracy of its vendors' representations.
Debt instruments restrict operations
Various debt instruments impose operating and financial restrictions on Arch.
The combined company's secured credit facility requires various Arch operating
subsidiaries to maintain specified financial ratios, including a maximum
leverage ratio and a minimum fixed charge coverage ratio. In addition, the
secured credit facility limits or restricts, among other things, the operating
subsidiaries' 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;
. 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 subsidiaries;
. the payment of dividends and other restricted payments by Arch and its
subsidiaries;
. asset sales;
. transactions with affiliates;
. the incurrence of liens; and
. mergers and consolidations.
10
<PAGE>
The combined company'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 secured credit facility and/or other debt instruments. Upon the occurrence
of an event of default, the creditors could elect to declare all amounts
outstanding to be immediately due and payable, together with accrued and unpaid
interest. If Arch were unable to repay any such amounts, the secured creditors
could proceed against the collateral securing a portion of the indebtedness. If
the lenders under the secured credit facility or other debt instruments
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 secured 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.
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. Accordingly, you will
experience immediate and substantial dilution if you exercise warrants under
current conditions. See "Dilution".
Trading prices may be volatile
The market price of Arch's common stock has been experiencing significant
fluctuation and has declined materially since 1996. Between January 1, 1998 and
June 30, 1999, the reported sale price of common stock on the Nasdaq National
Market has ranged from a high of $20.8125 per share in June 1998 to a low of
$2.0625 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.
Share prices of paging companies such as Arch have exhibited a high degree of
volatility during recent periods. 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 Arch's 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.
Shares eligible for future sale may depress market price of common stock
On June 30, 1999, 48.1 million shares of common stock were issued and
outstanding. In addition, 1.8 million shares of common stock are issuable upon
conversion of convertible securities and 16.1 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 2.8 million 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. 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.
It may become impossible 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.
11
<PAGE>
There is no established trading market for warrants
The warrants will not be traded on the Nasdaq system, and we cannot predict
how much interest or sales volume there will be. Purchases and sales of
warrants may be very sporadic.
Charter provisions may impede takeovers of Arch
Arch's certificate of incorporation and by-laws provide for a classified
board of directors, the issuance of "blank check" preferred stock whose terms
may be fixed by 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
after 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 even though such a transaction might be
beneficial to Arch's stockholders.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are made under 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. See "Risk Factors". Arch undertakes no obligation to update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
DILUTION
The following table illustrates the per share dilution for shares purchased
through the exercise of warrants. Dilution is determined by subtracting pro
forma net tangible book value per share after the MobileMedia acquisition and
related transactions from the warrant exercise price per share.
Arch currently has a negative tangible net worth. The tangible net book value
of the outstanding shares of Arch's common stock as of March 31, 1999 was a
negative $836.6 million or a negative $93.39 per share. Net tangible book value
per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding,
assuming the conversion of all outstanding convertible securities at conversion
rates currently in effect. After giving effect to the MobileMedia acquisition,
including the sale by Arch of 36,207,265 shares of common stock and Class B
common stock for gross proceeds of $217.2 million and the issuance of an
additional 4,781,656 shares of common stock to unsecured creditors of
MobileMedia, the exercise of one warrant for one share would result in the pro
forma net tangible book value of Arch as of March 31, 1999 being a negative
$965.8 million, or a negative $19.35 per share. This represents an immediate
and substantial dilution of $28.38 per share from the warrant exercise price.
For purposes of illustration, we have assumed the exercise of one warrant for
one share because that assumption results 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 $28.38 per share.
<TABLE>
<S> <C> <C>
Warrant exercise price......................................... $ 9.03
Net tangible book value per share before MobileMedia
acquisition and related transactions............... $ (93.39)
Increase per share attributable to the MobileMedia
acquisition and related transactions............... 74.04
--------
Pro forma net tangible book value per share after MobileMedia
acquisition and related transactions........................ (19.35)
------
Dilution to persons exercising warrants........................ $28.38
======
</TABLE>
13
<PAGE>
USE OF PROCEEDS
The maximum proceeds that Arch will receive from any exercises of warrants
will be $145,262,398.33 if all the warrants are exercised. Arch expects to use
substantially all of any such proceeds for general corporate purposes,
including working capital and repayment of debt.
DESCRIPTION OF WARRANTS
In connection with the MobileMedia acquisition, Arch has issued:
. warrants to acquire up to 1,225,220 shares of common stock to the standby
purchasers and
. warrants to acquire up to 14,861,425 shares of common stock to persons
who were holders of record of common stock and Series C preferred stock
on January 27, 1999.
Each warrant represents the right to purchase one-third of one share of
common stock. The warrant exercise price of $3.01 per warrant ($9.03 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
June 3, 1999, assuming a 20% per annum internal rate of return. This exercise
price was determined by negotiations between Arch and MobileMedia.
Each warrant will be evidenced by a warrant certificate, and will be subject
to its terms. This includes any warrants that may be issued upon partial
exercise, replacement, or transfer of outstanding warrants. 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
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 the warrant certificate for all purposes and will not be bound
to recognize any equitable or other claim or interest in the warrants on the
part of any other person.
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
. 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
. 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 or 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
described 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. Warrant holders will not receive
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.
14
<PAGE>
MARKET PRICE INFORMATION AND DIVIDEND POLICY
Arch's common stock has traded on the Nasdaq National Market 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 Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
Fiscal 1997
First Quarter....................................... $30.00 $11.25
Second Quarter...................................... $25.125 $11.25
Third Quarter....................................... $28.50 $17.625
Fourth Quarter...................................... $27.375 $12.375
Fiscal 1998
First Quarter....................................... $18.375 $ 9.00
Second Quarter...................................... $20.8125 $10.50
Third Quarter....................................... $15.00 $ 5.0625
Fourth Quarter ..................................... $ 5.4375 $ 2.0625
Fiscal 1999
First Quarter ...................................... $ 7.5 $ 3.1875
Second Quarter ..................................... $ 11.625 $ 3.375
</TABLE>
On June 30, 1999, there were outstanding 42,700,521 shares of common stock
held by approximately 190 stockholders of record, 5,360,261 shares of Class B
common stock held by approximately 4 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 indicative of the number of beneficial holders
because many shares are held by depositaries, brokers or other nominees.
Neither Arch nor MobileMedia's former 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, as well as
requirements of its financing agreements and other factors that Arch's board of
directors considers relevant. Arch's secured credit facility prohibits
declaration or payment of cash dividends to Arch stockholders without the
written consent of a majority of the lenders. The terms of other outstanding
indebtedness only permit the declaration or payment of cash dividends if
specified leverage and cash flow requirements are met. Arch does not currently
meet these requirements. 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 dividends due on to the Series C preferred stock have
been paid in full.
15
<PAGE>
PLAN OF DISTRIBUTION
Exercises of Warrants
The warrants entitle their holders to purchase up to a total of 16,086,643
shares of newly issued common stock from Arch for a warrant exercise price of
$9.03 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.
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
101 Barclay Street
New York, New York 10286
Attention: Reorganization Department
(2)By Hand, Express Mail or Overnight Courier:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attention: Reorganization Department
Signatures on exercise notices must correspond exactly to the names as
written on the face of the warrant certificate. Signatures must be guaranteed
by an "eligible guarantor institution" meeting the requirements of the warrant
agent, which requirements include membership or participation in the Security
Transfer Agent Medallion Program or STAMP program or such other "signature
guarantee program" as may be determined by the warrant agent in addition to, or
in substitution for, STAMP, all in accordance with the Exchange Act.
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.
16
<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. Arch's 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.
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 (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. 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 01581
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
17
<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 the expiration date of the 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 your 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.
Material 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.
18
<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. This summary 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 any cash 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 the
warrant is exercised. Upon the expiration of an unexercised warrant, the holder
will recognize loss equal to his adjusted tax basis for 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 $7,500 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 47,872,247 shares and 3,675,659 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. We issued the
warrants 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;
19
<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 these 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 short
positions. The selling stockholders may enter into option transactions 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 that are
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 or Section 4(1) of the Securities
Act may be sold under Rule 144 or Section 4(1) rather than pursuant to this
prospectus. The selling stockholders have advised Arch that, as of the date of
this prospectus, 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.
20
<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 specified liabilities, including liabilities arising under the
Securities Act. The selling stockholders have agreed to indemnify specified
persons, including broker-dealers and agents, against specified liabilities in
connection with the offering of the shares, including liabilities arising under
the Securities Act.
21
<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, MobileMedia or any other Arch affiliate,
within the past three years other than as a result of the ownership of shares,
warrants or other securities of Arch, except as set forth in the table below or
as otherwise disclosed in this prospectus. 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>
The President and Fellows 2,048,286 295,748 4.3% * 2,048,286 295,748
of Harvard College (2)
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
The Rockefeller Foundation 798,984 154,274 1.7% * 798,984 154,274
(2)
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Partners, L.P. (2) 296,013 -- * -- 296,013 --
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Partners II, L.P. (2) 782,679 173,674 1.6% * 782,679 173,674
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Partners III, L.P. (2) 1,996,880 293,240 4.2% * 1,996,880 293,240
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Partners IV, L.P. (2) 1,365,135 257,080 2.8% * 1,365,135 257,080
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Offshore Fund Ltd. (2) 343,063 145,037 * * 343,063 145,037
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Saranac Investors, L.P. (2) 33,427 -- * -- 33,427 --
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Whippoorwill Profit Sharing 12,967 660 * * 12,967 660
Plan (2)
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
The Northwestern Mutual 3,243,629 622,631 6.7% 1.3% 3,243,629 622,631
Life Insurance Company(3)
Credit Suisse First Boston 6,637,451 29,309 13.8% * 6,637,451 29,309
Corporation
W.R. Huff Asset Management 8,834,357 1,704,006 18.4% 3.5% 8,834,357 1,704,006
Co., L.L.C.(4)
---------- --------- ---- --- ---------- ---------
Total.................. 26,392,871 3,675,659 26,392,871 3,675,659
========== ========= ==== === ========== =========
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
22
<PAGE>
(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.
(2) Whippoorwill Associates, Inc. has discretionary authority and acts as
general partner or investment manager for various limited partnerships, a
limited liability company, a trust and third party accounts with respect to
such shares and warrants.
(3) Of the 3,243,629 shares, 2,473,762 shares are held by The Northwestern
Mutual Life Insurance Company, 600,324 shares are held in The Northwestern
Mutual Life Insurance Company Group Annuity Separate Account (as to which
The Northwestern Mutual Life Insurance Company has shared voting and
investment power), and 169,543 shares are held by the High Yield Bond
Portfolio of Northwestern Mutual Series Fund, Inc., a wholly-owned
subsidiary of The Northwestern Mutual Life Insurance Company and a
registered investment company. Northwestern Mutual Investment Services,
LLC, a wholly-owned subsidiary of The Northwestern Mutual Life Insurance
Company and a registered investment adviser, serves as investment adviser
to the High Yield Bond Portfolio of Northwestern Mutual Series Fund, Inc.
Of the 622,631 warrants, 474,861 warrants are held by The Northwestern
Mutual Life Insurance Company, 115,084 warrants are held by The
Northwestern Mutual Life Insurance Company Group Annuity Separate Account
(as to which The Northwestern Mutual Life Insurance Company has shared
voting and investment power), and 32,686 warrants are held by the High
Yield Bond Portfolio of Northwestern Mutual Series Fund, Inc.
(4) Of the 8,834,357 shares and 1,704,006 warrants, 7,528,219 shares and
1,704,006 warrants are managed by W.R. Huff on behalf of various
discretionary accounts and 1,306,138 shares are held by the Huff
Alternative Income Fund, L.P., an affiliate of W.R. Huff.
LEGAL MATTERS
The validity of the securities offered by Arch 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 which are included in this prospectus in reliance upon their
authority as experts in accounting and auditing in giving those reports.
The consolidated financial statements of MobileMedia at December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
appearing in Arch Communication Group, Inc.'s Current Report on Form 8-K/A
dated June 3, 1999 filed with the Securities and Exchange Commission on June
24, 1999, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon (which 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
the consolidated financial statements) included therein and incorporated herein
by reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The descriptions of the regulatory requirements under the Communications Act
and associated regulations set forth under "Risk Factors--Government regulation
may burden operations" and under "Industry Overview--Regulation" in the
information that is incorporated by reference into this prospectus, except for
matters that are unique to MobileMedia, have been included under the authority
of Wilkinson, Barker, Knauer LLP, as experts in telecommunications law. FCC
matters unique to MobileMedia included in the description of these regulatory
requirements 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 LLP or Wiley, Rein & Fielding with respect to any
other matters.
23
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Arch files reports, proxy statements and other information with the SEC as
required by the Exchange Act.
MobileMedia Communications, Inc. and MobileMedia Corporation were also
subject to the informational requirements of the Exchange Act but filed only
limited reports after the commencement of their bankruptcy proceedings in
January 1997. Financial statements included in MobileMedia Communications, Inc.
and MobileMedia Corporation's periodic reports from February 1997 through June
1998 were not prepared in accordance with generally accepted accounting
principles due to those companies' 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. Those 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
contained in Arch's filings under the Exchange Act that are incorporated by
reference into this prospectus reflect adjustments from the unaudited
statements, including 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. 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 about 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 may request a copy of Arch's and MobileMedia'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
24
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
Some of the information that you may want to consider in deciding whether to
exercise warrants or purchase warrants or shares is not physically included in
this prospectus, but rather is "incorporated by reference" to documents that
Arch previously filed with the SEC. The information incorporated by reference
is an important part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. The
following Arch documents filed with the SEC are incorporated by reference in
this prospectus.
1. Annual Report on Form 10-K for the fiscal year ended December 31, 1998;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
3. Current Reports on Form 8-K filed June 16 and August 6, 1999; and
4. The description of Arch's capital stock contained in Arch's Current Report
on Form 8-K dated June 28, 1999.
All documents and reports filed by Arch pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this prospectus are also
incorporated by reference in this prospectus and will be deemed a part of this
prospectus from the dates of filing of such documents or reports.
Statements contained in documents incorporated or deemed to be incorporated
by reference will modify statement in any other subsequently filed documents to
the extent the new information differs from the old information. Any statements
modified or superseded will no longer constitute a part of this in their
original form.
25
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Arch Communications Group, Inc. and Subsidiaries
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited).................................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998 and for the Three
Months Ended March 31, 1999 (unaudited)................................. F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-6
Notes to Consolidated Financial Statements............................... F-7
MobileMedia Communications, Inc. and Subsidiaries
Report of Independent Auditors........................................... F-21
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited).................................................... F-22
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-23
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
Each of the Three Years in the Period Ended December 31, 1998 and for
the Three Months Ended March 31, 1999 (unaudited)....................... F-24
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-25
Notes to Consolidated Financial Statements............................... F-26
</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, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated 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 Arch Communications Group, Inc. and subsidiaries as of December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 24, 1999 (except with respect to the matters
discussed in Note 12, as to which the date is June 28, 1999)
F-2
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1997 1998 1999
ASSETS ---------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 3,328 $ 1,633 $ 12,102
Accounts receivable (less reserves of
$5,744, $6,583 and $6,173 in 1997, 1998
and 1999, respectively).................. 30,147 30,753 30,757
Inventories............................... 12,633 10,319 9,803
Prepaid expenses and other................ 4,917 8,007 9,348
---------- --------- ----------
Total current assets.................... 51,025 50,712 62,010
---------- --------- ----------
Property and equipment, at cost:
Land, buildings and improvements.......... 10,089 10,480 10,539
Paging and computer equipment............. 361,713 400,312 411,351
Furniture, fixtures and vehicles.......... 16,233 17,381 17,673
---------- --------- ----------
388,035 428,173 439,563
Less accumulated depreciation and
amortization............................. 146,542 209,128 220,955
---------- --------- ----------
Property and equipment, net............... 241,493 219,045 218,608
---------- --------- ----------
Intangible and other assets (less
accumulated amortization of $260,932,
$372,122 and $386,500 in 1997, 1998 and
1999, respectively)........................ 728,202 634,528 602,814
---------- --------- ----------
$1,020,720 $ 904,285 $ 883,432
========== ========= ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt...... $ 24,513 $ 1,250 $ 1,250
Accounts payable.......................... 22,486 25,683 26,564
Accrued restructuring charge.............. -- 11,909 11,032
Accrued expenses.......................... 11,894 11,689 10,068
Accrued interest.......................... 11,249 20,997 17,187
Customer deposits......................... 6,150 4,528 4,380
Deferred revenue.......................... 8,787 10,958 12,253
---------- --------- ----------
Total current liabilities............... 85,079 87,014 82,734
---------- --------- ----------
Long-term debt, less current maturities..... 968,896 1,003,499 1,036,441
---------- --------- ----------
Other long-term liabilities............... -- 27,235 26,844
---------- --------- ----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock--$.01 par value,
authorized 10,000,000 shares; issued
250,000 shares (aggregate liquidation
preference of $26,030 and $26,543 in 1998
and 1999, respectively).................. -- 3 3
Common stock--$.01 par value, authorized
100,000,000 shares, issued and
outstanding: 6,954,521, 7,071,861 and
7,071,861 shares in 1997, 1998 and 1999,
respectively............................. 70 71 71
Additional paid-in capital................ 351,349 378,218 378,731
Accumulated deficit....................... (384,674) (591,755) (641,392)
---------- --------- ----------
Total stockholders' equity (deficit).... (33,255) (213,463) (262,587)
---------- --------- ----------
$1,020,720 $ 904,285 $ 883,432
========== ========= ==========
</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>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 291,399 $ 351,944 $ 371,154 $ 91,397 $ 90,529
Product sales........... 39,971 44,897 42,481 10,642 10,359
---------- ---------- ---------- ---------- ----------
Total revenues........ 331,370 396,841 413,635 102,039 100,888
Cost of products sold... (27,469) (29,158) (29,953) (7,366) (6,926)
---------- ---------- ---------- ---------- ----------
303,901 367,683 383,682 94,673 93,962
---------- ---------- ---------- ---------- ----------
Operating expenses:
Service, rental and
maintenance.......... 64,957 79,836 80,782 20,189 20,293
Selling............... 46,962 51,474 49,132 11,870 13,011
General and
administrative....... 86,181 106,041 112,181 28,318 25,626
Depreciation and
amortization......... 191,871 232,347 221,316 53,714 51,118
Restructuring charge.. -- -- 14,700 -- --
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 389,971 469,698 478,111 114,091 110,048
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. (86,070) (102,015) (94,429) (19,418) (16,086)
Interest expense........ (77,353) (98,063) (105,979) (25,512) (27,010)
Interest income......... 1,426 904 1,766 146 533
Equity in loss of
affiliate.............. (1,968) (3,872) (5,689) (1,055) (3,200)
---------- ---------- ---------- ---------- ----------
Income (loss) before in-
come tax benefit, ex-
traordinary item and
accounting change...... (163,965) (203,046) (204,331) (45,839) (45,763)
Benefit from income
taxes.................. 51,207 21,172 -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item and
accounting change ..... (112,758) (181,874) (204,331) (45,839) (45,763)
Extraordinary charge
from early extinguish-
ment of debt........... (1,904) -- (1,720) --
Cumulative effect of
accounting change...... -- -- -- -- (3,361)
---------- ---------- ---------- ---------- ----------
Net income (loss)....... (114,662) (181,874) (206,051) (45,839) (49,124)
Accretion of redeemable
preferred stock........ (336) (32) -- -- --
Preferred stock
dividend............... -- -- (1,030) -- (513)
---------- ---------- ---------- ---------- ----------
Net income (loss) appli-
cable to common stock-
holders................ $ (114,998) $ (181,906) $ (207,081) $ (45,839) $ (49,637)
========== ========== ========== ========== ==========
Basic/diluted income
(loss) per common share
before extraordinary
item and accounting
change................. $ (16.59) $ (26.31) $ (29.34) $ (6.60) $ (6.54)
Extraordinary charge
from early extinguish-
ment of debt per
basic/diluted common
share.................. $ (.27) $ -- $ (.24) -- --
Cumulative effect of ac-
counting change per
basic/diluted common
share ................. -- -- -- -- (.48)
---------- ---------- ---------- ---------- ----------
Basic/diluted net income
(loss) per common
share.................. $ (16.86) $ (26.31) $ (29.58) $ (6.60) $ (7.02)
========== ========== ========== ========== ==========
Basic/diluted weighted
average number of com-
mon shares outstand-
ing.................... 6,815,314 6,915,413 6,997,730 6,959,025 7,071,861
========== ========== ========== ========== ==========
</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,
1995.................... $-- $ 66 $384,956 $ (88,138) $ 246,884
Exercise of options to
purchase 56,436 shares
of common stock....... -- 1 1,470 -- 1,471
Issuance of 15,614
shares of common stock
under Arch's Employee
Stock Purchase Plan... -- -- 373 -- 373
Issuance of 281,013
shares of common stock
upon conversion of
convertible
subordinated
debentures............ -- 3 14,118 -- 14,121
Accretion of redeemable
preferred stock....... -- -- (336) -- (336)
Net loss............... -- -- -- (114,662) (114,662)
---- ---- -------- --------- ---------
Balance, December 31,
1996.................... -- 70 350,581 (202,800) 147,851
Issuance of 50,447
shares of common stock
under Arch's Employee
Stock Purchase Plan... -- -- 800 -- 800
Accretion of redeemable
preferred stock....... -- -- (32) -- (32)
Net loss............... -- -- -- (181,874) (181,874)
---- ---- -------- --------- ---------
Balance, December 31,
1997.................... -- 70 351,349 (384,674) (33,255)
Exercise of options to
purchase 31,344 shares
of common stock....... -- -- 294 -- 294
Issuance of 250,000
shares of preferred
stock................. 3 -- 24,997 -- 25,000
Issuance of 85,996
shares of common stock
under Arch's Employee
Stock Purchase Plan... -- 1 548 -- 549
Preferred stock
dividend.............. -- -- 1,030 (1,030) --
Net loss............... -- -- -- (206,051) (206,051)
---- ---- -------- --------- ---------
Balance, December 31,
1998.................... 3 71 378,218 (591,755) (213,463)
Preferred stock divi-
dend (unaudited)...... -- -- 513 (513) --
Net loss (unaudited)... -- -- -- (49,124) (49,124)
---- ---- -------- --------- ---------
Balance, March 31, 1999
(unaudited)............. $ 3 $ 71 $378,731 $(641,392) $(262,587)
==== ==== ======== ========= =========
</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>
Three Months Ended
Years Ended December 31, March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $(114,662) $(181,874) $(206,051) $ (45,839) $ (49,124)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 191,871 232,347 221,316 53,714 51,118
Deferred income tax
benefit.............. (51,207) (21,172) -- -- --
Extraordinary charge
from early
extinguishment of
debt................. 1,904 -- 1,720 -- --
Cumulative effect of
accounting change ... -- -- -- -- 3,361
Equity in loss of
affiliate............ 1,968 3,872 5,689 1,055 3,200
Accretion of discount
on senior notes...... 24,273 33,259 37,115 8,880 9,942
Gain on Tower Site
Sale................. -- -- (2,500) -- (507)
Accounts receivable
loss provision....... 8,198 7,181 8,545 1,831 2,335
Changes in assets and
liabilities, net of
effect from
acquisitions of
paging companies:
Accounts
receivable......... (15,513) (11,984) (9,151) (3,108) (2,339)
Inventories......... 1,845 (2,394) 2,314 (5,569) 516
Prepaid expenses and
other.............. 89 (386) (3,090) 1,351 (1,341)
Accounts payable and
accrued expenses... (12,520) 3,683 24,649 (3,996) (5,427)
Customer deposits
and deferred
revenue............ 1,556 1,058 549 1,673 1,147
Other long-term
liabilities ....... -- -- -- -- (502)
--------- --------- --------- --------- ---------
Net cash provided by
operating activities... 37,802 63,590 81,105 9,992 12,379
--------- --------- --------- --------- ---------
Cash flows from
investing activities:
Additions to property
and equipment, net... (138,899) (87,868) (79,249) (15,915) (21,125)
Additions to
intangible and other
assets............... (26,307) (14,901) (33,935) (5,404) (4,403)
Net proceeds from
Tower Site Sale...... -- -- 30,316 -- 618
Acquisition of paging
companies, net of
cash acquired........ (325,420) -- -- -- --
--------- --------- --------- --------- ---------
Net cash used for
investing activities... (490,626) (102,769) (82,868) (21,319) (24,910)
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
Issuance of long-term
debt................. 676,000 91,000 463,239 24,500 23,000
Repayment of long-term
debt................. (225,166) (49,046) (489,014) (12,259) --
Repayment of
redeemable preferred
stock................ -- (3,744) -- -- --
Net proceeds from sale
of preferred stock... -- -- 25,000 -- --
Net proceeds from sale
of common stock...... 1,844 800 843 298 --
--------- --------- --------- --------- ---------
Net cash provided by
financing activities... 452,678 39,010 68 12,539 23,000
--------- --------- --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents............ (146) (169) (1,695) 1,212 10,469
Cash and cash
equivalents, beginning
of period.............. 3,643 3,497 3,328 3,328 1,633
--------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
period................. $ 3,497 $ 3,328 $ 1,633 $ 4,540 $ 12,102
========= ========= ========= ========= =========
Supplemental disclosure:
Interest paid......... $ 48,905 $ 62,231 $ 57,151 $ 15,289 $ 20,212
========= ========= ========= ========= =========
Issuance of common
stock for convertible
debentures........... $ 14,121 $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Accretion of
redeemable preferred
stock................ $ 336 $ 32 $ -- $ -- $ --
========= ========= ========= ========= =========
Preferred stock
dividend............. $ -- $ -- $ 1,030 $ -- $ 513
========= ========= ========= ========= =========
Liabilities assumed in
acquisition of paging
companies............ $ 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 third largest paging company in the United States (based on units in
service).
Unaudited Interim Consolidated Financial Statements--The consolidated balance
sheets as of March 31, 1999, the consolidated statements of operations and cash
flows for the three months ended March 31, 1998 and 1999 and the consolidated
statement of stockholders' equity (deficit) for the three months ended March
31, 1999 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 three months ended March 31, 1999 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 in consolidation.
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 primarily 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>
Depreciation and amortization expense related to property and equipment
totaled $87.5 million, $108.0 million and $101.1 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-7
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible and Other Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Goodwill....................................... $312,017 $271,808 $261,782
Purchased FCC licenses......................... 293,922 256,519 247,193
Purchased subscriber lists..................... 87,281 56,825 49,456
Deferred financing costs....................... 8,752 22,072 22,463
Investment in Benbow PCS Ventures, Inc......... 6,189 11,347 8,953
Investment in CONXUS Communications, Inc....... 6,500 6,500 6,500
Non-competition agreements..................... 2,783 1,790 1,525
Other.......................................... 10,758 7,667 4,942
-------- -------- --------
$728,202 $634,528 $602,814
======== ======== ========
</TABLE>
Amortization expense related to intangible and other assets totaled $104.4
million, $124.3 million and $120.2 million for the years ended December 31,
1996, 1997 and 1998, 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. 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. Arch adopted SOP 98-5 effective
January 1, 1999. Initial application of SOP 98-5 was reported as the cumulative
effect of a change in accounting principle.
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 and restated, unamortized
deferred financing costs are written off as an extraordinary charge. During
1996 and 1998, charges of $1.9 million and $1.7 million, respectively, were
recognized in connection with the closing of new credit facilities.
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.
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
F-8
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
United States in the FCC narrowband wireless spectrum auction. As of December
31, 1998, Arch's investment in CONXUS totaled $6.5 million and is accounted for
under the cost method.
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, 1997 and
1998.
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,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
Carrying Fair Carrying Fair
Description Value Value Value Value
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
10 7/8% Senior Discount Notes due 2008..... $332,532 $288,418 $369,506 $221,704
9 1/2% Senior Notes due 2004............... 125,000 122,488 125,000 112,500
14% Senior Notes due 2004.................. 100,000 112,540 100,000 103,000
12 3/4% Senior Notes due 2007.............. -- -- 127,604 127,604
6 3/4% Convertible Subordinated Debentures
due 2003.................................. 13,364 7,968 13,364 6,682
</TABLE>
Arch had off-balance-sheet interest rate protection agreements consisting of
interest rate swaps and interest rate caps with notional amounts of $140.0
million and $80.0 million, respectively, at December 31, 1997 and $265.0
million and $40.0 million, respectively, at December 31, 1998. The fair values
of the interest rate swaps and interest rate caps were $47,000 and $9,000,
respectively, at December 31, 1997. The cost to terminate the outstanding
interest rate swaps and interest rate caps at December 31, 1998 would have been
$6.4 million. 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 1998 presentation.
F-9
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
This acquisition has been accounted for as a purchase, and the results of its
operations have been included in the consolidated financial statements from the
date of the acquisition. Goodwill resulting from the acquisition is being
amortized over a ten-year period using the straight-line method.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the period
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 acquisition
been made at the beginning of the period presented, or of results that may
occur in the future.
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
---------------------------
(unaudited and in thousands
except for per share
amounts)
<S> <C>
Revenues........................................ $358,900
Income (loss) before extraordinary item......... (128,444)
Net income (loss)............................... (130,348)
Basic/diluted net income (loss) per common
share.......................................... (6.39)
</TABLE>
3. Long-term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1997 1998 1999
-------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Senior Bank Debt............................. $422,500 $ 267,000 $ 290,000
10 7/8% Senior Discount Notes due 2008....... 332,532 369,506 379,377
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................ -- 127,604 127,675
Convertible Subordinated Debentures.......... 13,364 13,364 13,364
Other........................................ 13 2,275 2,275
-------- ---------- ----------
993,409 1,004,749 1,037,691
Less--Current maturities..................... 24,513 1,250 1,250
-------- ---------- ----------
Long-term debt............................... $968,896 $1,003,499 $1,036,441
======== ========== ==========
</TABLE>
Senior Bank Debt--The Company, through its operating subsidiary, Arch Paging,
Inc. ("API") entered into senior secured revolving credit and term loan
facilities 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 June 27, 1999
will convert to a term loan (the "Tranche B Facility") and (iii) a $125.0
million term loan (the "Tranche C Facility").
F-10
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
its interests in Arch LLC and Arch Connecticut Valley, Inc. The API Credit
Facility is guaranteed by Arch, Arch Communications, Inc. ("ACI") and Arch LLC
and Arch Connecticut Valley, Inc. Arch's guarantee is secured by a pledge of
Arch's stock and notes in ACI, and the guarantees of Arch LLC and Arch
Connecticut Valley, Inc. are secured by a security interest in those assets
that 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 agent bank's Alternate Base Rate or LIBOR, in each
case plus a margin based on ACI's or API's ratio of total debt to annualized
Adjusted 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 Adjusted EBITDA.
The API Credit Facility requires that at least 50% of total ACI debt,
including outstanding borrowings under the API Credit Facility, be subject to a
fixed interest rate or interest rate protection 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 nonperformance by the counterparty to these
interest rate protection agreements, API would be subject to the prevailing
interest rates specified in the API Credit Facility.
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 $65.0 million at December 31, 1998. The
weighted average fixed payment rate was 5.93%, while the weighted average rate
of variable interest payments under the API Credit Facility was 5.30% at
December 31, 1998. At December 31, 1997 and 1998, the Company had a net
receivable of $18,000 and a net payable of $47,000, 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
$40.0 million with cap levels between 7.5% and 8% at December 31, 1998. The
transaction fees for these instruments are being amortized over the terms of
the agreements.
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.
As of December 31, 1998, API and its operating subsidiaries were in compliance
with the covenants of the API Credit Facility.
F-11
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, $267.0 million was outstanding and $93.5 million was
available under the API Credit Facility. At December 31, 1998, such advances
bore interest at an average annual rate of 8.45%.
On November 16, 1998, the lenders to API approved an increase in API's
existing credit facility from $400.0 million to $600.0 million. The increase of
$200.0 million (the "API Credit Facility Increase") was to fund a portion of
the cash necessary for Arch to complete the MobileMedia Merger. The API Credit
Facility Increase was available by its terms only through March 31, 1999. API
has executed a commitment letter with certain of its lenders for the extension
of $181.0 million of the API Credit Facility Increase through June 30, 1999,
subject to definitive documentation and other conditions.
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 ACI's 14% Senior Notes due 2004 (the "ACI 14% Notes") and ACI's 9
1/2% Senior Notes due 2004 (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; 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.
Arch has entered into interest rate swap agreements in connection with the
ACI 14% Notes. Under the interest rate swap agreements, the Company has
effectively reduced the interest rate on the ACI 14% Notes from 14% to the
fixed swap rate of 9.45%. In the event of nonperformance by the counterparty to
these interest rate protection agreements, the Company would be subject to the
14% interest rate specified on the notes. As of December 31, 1998, the Company
had received $2,275,000 in excess of the amounts paid under the swap
agreements, which is included in long-term debt in the accompanying balance
sheet. At December 31, 1998, the Company had a net receivable of $733,500 on
these interest rate swaps.
On June 29, 1998, ACI issued and sold $130.0 million principal amount of 12
3/4% Senior Notes due 2007 (the "ACI 12 3/4% Notes") for net proceeds of $122.6
million (after deducting the discount to the initial purchasers and estimated
offering expenses payable by ACI). The ACI 12 3/4% Notes were sold at an
initial price to investors of 98.049%. The ACI 12 3/4% Notes mature on July 1,
2007 and bear interest at a rate of 12 3/4% per annum, payable semi-annually in
arrears on January 1 and July 1 of each year, commencing January 1, 1999.
The indenture under which the ACI 12 3/4% Notes were issued ("the Indenture")
contains 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
F-12
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
convert their Arch Convertible Debentures into Arch common stock at a
conversion price of $50.25 per share and received approximately 281,000 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 $50.25 per share, subject to adjustment.
Maturities of Debt--Scheduled long-term debt maturities at December 31, 1998
and at March 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
Year Ending December 31, 1998 1999
------------------------ ------------ ----------
<S> <C> <C>
1999............................................ $ 1,250 $ 1,250
2000............................................ 17,725 17,725
2001............................................ 29,650 29,650
2002............................................ 29,650 29,650
2003............................................ 43,014 43,014
Thereafter...................................... 883,460 916,402
---------- ----------
$1,004,749 $1,037,691
========== ==========
</TABLE>
4. Redeemable Preferred Stock and Stockholders' Equity
Redeemable Preferred Stock--In connection with the its merger (the "USAM
Merger") with USA Mobile Communications Holdings, Inc. ("USA Mobile"), Arch
assumed the obligations associated with 22,530 outstanding shares of Series A
Redeemable Preferred Stock issued by USA Mobile. The preferred stock was
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 $16.50 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
"Senior
F-13
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Senior 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 376,315 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 2,000,000 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 $37.50 (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 141,402
options were terminated and regranted at a price of $37.50. 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 200,500 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, 5,000 options were
granted at an exercise price of $55.50 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 26,733 options to purchase Arch's common stock to non-
employee directors of Arch. Outside directors receive a grant of 1,000 options
annually under the Outside Directors Plan, and newly elected or appointed
outside directors receive options to purchase 1,000 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)
F-14
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $15.19 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 361,072 options with
exercise prices ranging from $17.82 to $61.88 and granted the same number of
new options with an exercise price of $15.19 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.
The following table summarizes the activity under Arch's stock option plans
for the periods presented:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Options Price
-------- --------
<S> <C> <C>
Options Outstanding at December 31, 1995..................... 335,250 $39.06
Granted.................................................... 231,738 46.37
Exercised.................................................. (56,436) 26.07
Terminated................................................. (161,487) 64.79
-------- ------
Options Outstanding at December 31, 1996..................... 349,065 34.11
Granted.................................................... 166,785 20.03
Exercised.................................................. -- --
Terminated................................................. (62,207) 31.97
-------- ------
Options Outstanding at December 31, 1997..................... 453,643 29.22
Granted.................................................... 656,096 14.27
Exercised.................................................. (31,344) 9.38
Terminated................................................. (430,127) 28.52
-------- ------
Options Outstanding at December 31, 1998..................... 648,268 $15.51
======== ======
Options Exercisable at December 31, 1998..................... 111,249 $20.77
======== ======
</TABLE>
F-15
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 4.31-$12.38 54,178 9.38 $10.08 1,500 $ 5.66
13.59- 13.59 170,389 9.17 13.59 -- --
13.69- 14.81 50,875 9.00 14.72 2,209 13.78
15.19- 15.19 323,018 9.04 15.19 77,321 15.19
18.75- 82.68 49,808 7.02 30.86 30,219 36.32
------------- ------- ---- ------ ------- ------
$ 4.31-$82.68 648,268 8.94 $15.51 111,249 $20.77
============= ======= ==== ====== ======= ======
</TABLE>
Employee Stock Purchase Plans--On May 28, 1996, the stockholders approved the
1996 Employee Stock Purchase Plan (the "1996 ESPP"). The 1996 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, 1997 and 1998, 15,614, 50,447 and 85,996 shares were issued at an
average price per share of $23.91, $15.87 and $6.39, respectively. At December
31, 1998, 14,609 shares are available for future issuance.
On January 26, 1999, the stockholders approved the 1999 Employee Stock
Purchase Plan ( the "1999 ESPP"). The 1999 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. The stockholders authorized 500,000
shares for future issuance under this plan.
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 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>
Years Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Net income (loss): As reported........ $(114,662) $(181,874) $(206,051)
Pro forma.......... (115,786) (183,470) (208,065)
Basic net income (loss) per common share: As reported........ (16.86) (26.31) (29.58)
Pro forma.......... (17.04) (26.55) (29.88)
</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 risk-free interest rates of 4.5%--6%, an expected life of 5 years, an
expected dividend yield of zero and an expected volatility of 50%--85%.
F-16
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1996, 1997 and 1998 were $14.85, $10.11 and
$8.34, respectively. The weighted average fair value of shares sold under the
ESPP in 1996, 1997 and 1998 was $16.38, $8.49 and $5.64, 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, 1997 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets...................................... $134,944 $179,484
Deferred tax liabilities................................. (90,122) (67,652)
-------- --------
44,822 111,832
Valuation allowance...................................... (44,822) (111,832)
-------- --------
$ -- $ --
======== ========
</TABLE>
The approximate effect of each type of temporary difference and carryforward
at December 31, 1997 and 1998 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Net operating losses.................................... $106,214 $128,213
Intangibles and other assets............................ (87,444) (62,084)
Depreciation of property and equipment.................. 24,388 39,941
Accruals and reserves................................... 1,664 5,762
-------- --------
44,822 111,832
Valuation allowance..................................... (44,822) (111,832)
-------- --------
$ -- $ --
======== ========
</TABLE>
The effective income tax rate differs from the statutory federal tax rate
primarily due to the nondeductibility of goodwill amortization and the
inability to recognize the benefit of current net operating loss ("NOL")
carryforwards. The NOL carryforwards expire at various dates through 2013. 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.
F-17
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999............................................................... $21,372
2000............................................................... 13,826
2001............................................................... 8,853
2002............................................................... 6,026
2003............................................................... 2,495
Thereafter......................................................... 1,516
-------
Total............................................................ $54,088
=======
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1996, 1997 and 1998 approximated $14.7 million, $19.8 million and $19.6
million, respectively.
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, 1996,
1997 and 1998 approximated $217,000, $302,000 and $278,000, respectively.
8. Tower Site Sale
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 used
its net proceeds from the Tower Site Sale 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
F-18
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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.
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 December 31, 1998, Arch had sold 117 of the 133 sites, which
resulted in a total gain of approximately $23.5 million and through December
31, 1998 approximately $2.5 million of this gain had been recognized in the
statement of operations and is included in operating income.
9. Divisional Reorganization
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) is closing certain office locations and redeploying other
assets and (iii) recorded a restructuring charge of $14.7 million, or $2.10 per
share (basic and diluted) in 1998. The restructuring charge consisted of
approximately (i) $9.7 million for employee severance, (ii) $3.5 million for
lease obligations and terminations and (iii) $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.
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 December 31, 1998, 217 employees had been terminated due to the Divisional
Reorganization. The majority of the remaining severance and benefits costs to
be paid by the Company will be paid during 1999.
The Company's restructuring activity as of December 31, 1998 and March 31,
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
(unaudited)
Remaining
Remaining Reserve
Reserve Utilization Reserve at Utilization at
Initially of Reserve December 31, of Reserve March 31,
Established in 1998 1998 in 1999 1999
----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Severance costs......... $ 9,700 $2,165 $ 7,535 $710 $ 6,825
Lease obligation costs.. 3,500 366 3,134 142 2,992
Other costs............. 1,500 260 1,240 25 1,215
------- ------ ------- ---- -------
Total................. $14,700 $2,791 $11,909 $877 $11,032
======= ====== ======= ==== =======
</TABLE>
10. Segment Reporting
The Company operates in one industry: providing wireless messaging services.
On December 31, 1998, the Company operated approximately 175 retail stores in
35 states of the United States.
F-19
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Quarterly Financial Results (Unaudited)
Quarterly financial information for the years ended December 31, 1997 and
1998 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, 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).................... (6.63) (7.14) (6.87) (5.64)
Year Ended December 31, 1998:
Revenues............................... $102,039 $103,546 $104,052 $103,998
Operating income (loss)................ (19,418) (35,356) (20,783) (18,872)
Income (loss) before extraordinary
item.................................. (45,839) (62,277) (47,994) (48,221)
Extraordinary charge................... -- (1,720) -- --
Net income (loss)...................... (45,839) (63,997) (47,994) (48,221)
Basic net income (loss) per common
share:
Income (loss) before extraordinary
item................................ (6.60) (8.91) (6.90) (6.93)
Extraordinary charge................. -- (.24) -- --
Net income (loss).................... (6.60) (9.15) (6.90) (6.93)
</TABLE>
12. Subsequent Event
On June 3, 1999, Arch acquired MobileMedia Communications, Inc. for a $479.0
million in cash and approximately 4.8 million shares of Arch's common stock.
Arch financed the acquisition through the issuance of approximately 36.2
million shares of Arch's common stock in a rights offering at $6.00 per share,
$134.6 million through the issuance of $147.0 million principal amount of 13
3/4% senior notes due 2008 by ACI and $181.0 additional borrowings under the
API Credit Facility.
On June 28, 1999, Arch effected a one for three reverse stock split. Arch's
share data for all periods presented have been adjusted to give effect to this
reverse stock split.
F-20
<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, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MobileMedia Communications, Inc. and Subsidiaries at December 31, 1997 and
1998 and the consolidated results of their operations and cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
MobileMedia will continue as a going concern. As more fully described in Note
1, on January 30, 1997, MobileMedia Corporation and substantially all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court). Additionally, as more fully
described in Note 11, on April 8, 1997, the Federal Communications Commission
("FCC") issued a Public Notice commencing an administrative hearing into the
qualification of MobileMedia to remain a licensee. These events, and
circumstances relating to the Chapter 11 filing with the Bankruptcy Court,
including MobileMedia's highly leveraged financial structure, non-compliance
with certain covenants of loan agreements with banks and note indentures, net
working capital deficiency and recurring losses from operations, raise
substantial doubt about MobileMedia's ability to continue as a going concern.
Although MobileMedia is currently operating the business as a debtor-in-
possession under the jurisdiction of the Bankruptcy Court, the continuation of
the business as a going concern is contingent upon, among other things, the
ability to (a) gain approval of the creditors and confirmation by the
Bankruptcy Court of a plan of reorganization, (b) maintain compliance with all
covenants under the debtor-in-possession financing agreement, (c) achieve
satisfactory levels of future operating profit and (d) retain FCC qualification
as a licensee. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
the outcome of these uncertainties.
/s/ Ernst & Young LLP
MetroPark, New Jersey
February 12, 1999, except for the eighth paragraph of Note 1 and
the second paragraph of Note 6, as to which the date is March 26, 1999
and the ninth paragraph of Note 1, as to which the date is April 12, 1999
F-21
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets
Cash and cash equivalents............. $ 10,920 $ 1,218 $ --
Accounts receivable (less allowance
for uncollectible accounts of
$26,500, $15,000 and $14,893 in 1997,
1998 and 1999, respectively) ........ 55,432 38,942 37,270
Inventories........................... 868 2,192 1,609
Prepaid expense....................... 5,108 5,523 5,261
Other current assets.................. 2,783 4,855 4,900
----------- ----------- -----------
Total current assets................ 75,111 52,730 49,040
----------- ----------- -----------
Investment in net assets of equity
affiliate.............................. 1,788 1,400 --
Property and equipment, net............. 257,937 219,642 225,566
Intangible assets, net.................. 295,358 266,109 258,793
Other assets............................ 24,940 21,573 20,610
----------- ----------- -----------
Total assets........................ $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit
facility............................. $ 10,000 $ -- $ 5,000
Accrued restructuring costs........... 4,897 5,163 7,197
Accrued wages, benefits and payroll... 11,894 12,033 9,944
Book cash overdraft................... -- -- 1,255
Accounts payable--post petition....... 2,362 1,703 7,334
Accrued interest...................... 4,777 3,692 3,566
Accrued expenses and other current
liabilities.......................... 35,959 35,735 30,061
Current income taxes payable.......... -- 2,871 1,200
Advance billing and customer
deposits............................. 34,252 28,554 28,892
Deferred gain on tower sale........... -- 68,444 67,278
----------- ----------- -----------
Total liabilities not subject to
compromise......................... 104,141 158,195 161,727
----------- ----------- -----------
Liabilities subject to compromise
Accrued wages, benefits and payroll
taxes................................ 562 647 476
Accrued interest...................... 18,450 17,579 17,578
Accounts payable--pre petition........ 19,646 15,410 15,351
Accrued expenses and other current
liabilities.......................... 20,663 15,285 12,231
Debt.................................. 1,075,681 905,681 905,681
Other liabilities..................... 2,915 -- --
----------- ----------- -----------
Total liabilities subject to
compromise......................... 1,137,917 954,602 951,317
----------- ----------- -----------
Deferred tax liabilities.............. 2,655 2,655 2,655
Stockholders' deficit
Common stock (1 share, no par value,
issued and outstanding at
December 31, 1997 and 1998 and March
31, 1999)............................ -- -- --
Additional paid-in-capital............ 676,025 676,025 676,025
Accumulated deficit--pre petition..... (1,154,420) (1,154,420) (1,154,420)
Accumulated deficit--post petition.... (111,184) (75,603) (83,295)
----------- ----------- -----------
Total stockholders' deficit......... (589,579) (553,998) (561,690)
----------- ----------- -----------
Total liabilities and stockholders'
deficit............................ $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------- ------------------
1996 1997 1998 1998 1999
----------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue (unaudited)
Services, rents and
maintenance........... $ 568,892 $ 491,174 $423,059 $108,542 $100,631
Product sales.......... 71,818 36,218 26,622 6,621 5,193
----------- --------- -------- -------- --------
Total revenues....... 640,710 527,392 449,681 115,163 105,824
Cost of products sold.... (72,595) (35,843) (22,162) (5,513) (3,516)
----------- --------- -------- -------- --------
568,115 491,549 427,519 109,650 102,308
Operating expenses
Services, rents and
maintenance........... 144,050 139,333 111,589 28,899 27,077
Selling................ 96,817 69,544 61,106 15,703 14,136
General and
administrative........ 218,607 179,599 133,003 34,908 31,481
Reduction of
liabilities subject to
compromise............ -- -- (10,461) -- (3,050)
Impairment of long-
lived assets.......... 792,478 -- -- -- --
Restructuring costs.... 4,256 19,811 18,624 4,558 5,067
Depreciation........... 136,434 110,376 86,624 24,193 20,501
Amortization........... 212,264 29,862 29,835 7,478 7,468
Amortization of
deferred gain on tower
sale.................. -- -- (1,556) -- (1,167)
----------- --------- -------- -------- --------
Total operating
expenses............ 1,604,906 548,525 428,764 115,739 101,513
----------- --------- -------- -------- --------
Operating Income (loss).. (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense)
Interest expense, net.. (92,663) (67,611) (53,043) (14,626) (10,018)
Gain (loss) on
sale/disposal of
assets................ 68 3 94,165 1 (323)
Other.................. -- -- (338) -- 2,063
----------- --------- -------- -------- --------
Total other expense.. (92,595) (67,608) 40,784 (14,625) (8,278)
----------- --------- -------- -------- --------
Income (loss) before
income taxes (benefit).. (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income taxes (benefit)... (69,442) -- 3,958 -- 209
----------- --------- -------- -------- --------
Net income (loss)........ $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
=========== ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-23
<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, 1995.. $659,829 $ (81,076) $ 0 $ 578,753
Capital contribution from
MobileMedia.................. 12,800 -- -- 12,800
Net loss...................... -- (1,059,944) -- (1,059,944)
-------- ----------- --------- -----------
Balance at December 31, 1996.. 672,629 (1,141,020) 0 (468,391)
Capital contribution from
MobileMedia.................. 3,396 -- -- 3,396
Net loss...................... -- (13,400) (111,184) (124,584)
-------- ----------- --------- -----------
Balance at December 31, 1997.. 676,025 (1,154,420) (111,184) (589,579)
Net income.................... -- -- 35,581 35,581
-------- ----------- --------- -----------
Balance at December 31, 1998
............................. 676,025 (1,154,420) (75,603) (553,998)
Net loss (unaudited).......... -- -- (7,692) (7,692)
-------- ----------- --------- -----------
Balance at March 31, 1999
(unaudited).................. $676,025 $(1,154,420) $ (83,295) $ (561,690)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------- --------------------
1996 1997 1998 1998 1999
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating activities (unaudited)
Net income (loss)..... $(1,059,944) $(124,584) $ 35,581 $(20,714) $(7,692)
Adjustments to reconcile
net loss to net cash
provided by (used in)
Operating activities:
Depreciation and amor-
tization............. 348,698 140,238 116,459 31,672 27,969
Amortization of de-
ferred gain on tower
sale................. -- -- (1,556) -- (1,167)
Income tax benefit.... (69,442) -- -- -- --
Accretion of note pay-
able discount........ 16,792 1,485 -- -- --
Provision for uncol-
lectible accounts.... 56,556 65,181 14,841 4,981 2,131
Reduction of liabili-
ties subject to com-
promise.............. -- -- (10,461) -- (3,050)
Recognized gain on
sale of tower as-
sets................. -- -- (94,165) -- --
Impairment of long-
lived assets......... 792,478 -- -- -- --
Undistributed earnings
of affiliate, net.... 160 69 (87) 22 --
Change in operating as-
sets and liabilities:
Accounts receivable... (55,965) (53,904) 1,649 2,813 (459)
Inventories........... 2,433 12,514 (1,324) 407 583
Prepaid expenses and
other assets......... 12,145 (686) 590 (1,052) 1,028
Accounts payable, ac-
crued expenses and
other liabilities.... 13,283 (25,393) (7,065) 1,413 (1,791)
----------- --------- --------- --------- --------
Net cash provided by
(used in) operating
activities........... 57,194 14,920 54,462 19,542 17,552
----------- --------- --------- --------- --------
Investing activities:
Construction and capi-
tal expenditures, in-
cluding net changes
in pager assets...... (161,861) (40,556) (53,867) (4,854) (26,806)
Net proceeds from the
sale of tower as-
sets................. -- -- 169,703 -- --
Net proceeds from the
sale of investment in
Abacus............... -- -- -- -- 1,400
Net loss on the dis-
posal of fixed as-
sets................. -- -- -- -- 381
Acquisition of busi-
nesses............... (866,460) -- -- -- --
----------- --------- --------- --------- --------
Net cash provided by
(used in) investing ac-
tivities............... (1,028,321) (40,556) 115,836 (4,854) (25,025)
----------- --------- --------- --------- --------
Financing activities:
Book cash overdraft... -- -- -- -- 1,255
Capital contribution
by MobileMedia Corpo-
ration............... 12,800 3,396 -- -- --
Payment of debt issue
costs................ (6,939) -- -- -- --
Borrowing from revolv-
ing credit facili-
ties................. 580,250 -- -- -- --
Repayments on revolv-
ing credit facili-
ties................. -- -- (170,000) -- --
Borrowing from DIP
credit facilities.... -- 47,000 -- -- 5,000
Repayments on DIP
credit facilities.... -- (37,000) (10,000) (10,000) --
----------- --------- --------- --------- --------
Net cash provided by
(used in) financing ac-
tivities............... 586,111 13,396 (180,000) (10,000) 6,255
----------- --------- --------- --------- --------
Net (decrease) increase
in cash, cash equiva-
lents designated and
cash designated for the
MobileComm acquisi-
tion................... (385,016) (12,240) (9,702) 4,688 (1,218)
Cash and cash equiva-
lents at beginning of
period................. 408,176 23,160 10,920 10,920 1,218
----------- --------- --------- --------- --------
Cash and cash equiva-
lents at end of peri-
od..................... $ 23,160 $ 10,920 $ 1,218 $ 15,608 $ 0
=========== ========= ========= ========= ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 Communications, Inc.'s subsidiaries
("MobileMedia") (collectively with Parent, the "Debtors"), filed for protection
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
The Debtors are operating as debtors-in-possession and are subject to the
jurisdiction of the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). Chapter 11 is the principal business reorganization
chapter of the Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a
debtor is authorized to reorganize its business for the benefit of its
creditors and stockholders. In addition to permitting rehabilitation of the
debtor, another goal of Chapter 11 is to promote equality of treatment of
creditors and equity security holders of equal rank with respect to the
restructuring of debt. In furtherance of these two goals, upon the filing of a
petition for reorganization under Chapter 11, section 362(a) of the Bankruptcy
Code generally provides for an automatic stay of substantially all acts and
proceedings against the debtor and its property, including all attempts to
collect claims or enforce liens that arose prior to the commencement of the
debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations of
the Debtors with respect to the employment of attorneys, investment bankers and
other professionals, and transactions out of the Debtors' ordinary course of
business or otherwise requiring bankruptcy court approval under the Bankruptcy
Code. The Debtors have been paying undisputed obligations that have arisen
subsequent to the Petition date on a timely basis.
Since the Petition date, the Bankruptcy Court has entered orders, among other
things, allowing the Debtors (i) to pay certain customer refunds and deposits
in the ordinary course of business, (ii) to pay wages, salaries and benefits
owing to employees, and (iii) to pay specified pre-petition taxes owing to
various governmental entities. On February 6, 1997, the Bankruptcy Court
entered an order authorizing the Debtors to pay approximately $46,000 in pre-
petition amounts owing to certain essential vendors.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts and other unexpired executory pre-petition leases and contracts,
subject to Bankruptcy Court approval. Assumption of a contract requires the
Debtors, among other things, to cure all defaults under the contract, including
payment of all pre-petition liabilities. Rejection of a contract constitutes a
breach of that contract as of the moment immediately preceding the Chapter 11
filing and the other party has the right to assert a general, unsecured claim
against the bankruptcy estate for damages arising out of such breach. These
parties may also seek to assert post-petition administrative claims against the
Debtors to the extent that the Debtors utilize the collateral or services of
such parties subsequent to the commencement of the Chapter 11 proceedings. The
Debtors cannot presently determine or reasonably estimate the ultimate
liability that may result from payments required to cure defaults under assumed
leases and contracts or from the filing of claims for all leases and contracts
which may be rejected.
In connection with the Chapter 11 filing, the Debtors notified all known
claimants that pursuant to an order of the Bankruptcy 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 March 31, 1999, approximately 2,581 proofs of claim had been
filed against the Debtors. Included among the claims filed are claims of
unspecified and undeterminable amounts. The Debtors consider the amounts set
forth in certain proofs of claim to be inaccurate estimates of the Debtors'
liabilities. As of March 31, 1999, the Debtors had secured orders of the
Bankruptcy Court reducing approximately 1,607 claims filed in an aggregate
amount of approximately $143,362 to an allowed amount of $10,239. As of March
31, 1999, the Debtors had also analyzed and resolved an additional 876 proofs
of claim, representing an aggregate allowed amount of $8,389. The Debtors
expect the objection process to continue.
F-26
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On August 20, 1998, MobileMedia announced that it had executed a merger
agreement with Arch Communications Group, Inc. ("Arch"), pursuant to which
MobileMedia Communications, Inc. will be merged with and into a wholly-owned
subsidiary of Arch. Immediately prior to the Merger, Parent will contribute all
of its assets to MobileMedia Communications, Inc. Also on August 20, 1998, the
Debtors filed a First Amended Joint Plan of Reorganization that reflects the
proposed merger with Arch. On September 3, 1998, Arch and MobileMedia executed
an amendment to the merger agreement and the Debtors filed a subsequent Second
Amended Joint Plan of Reorganization. On December 1, 1998 Arch and MobileMedia
executed a second amendment to the merger agreement and on December 2, 1998,
the Debtors filed a Third Amended Joint Plan of Reorganization (the "Plan"). As
of February 9, 1999, Arch and MobileMedia executed a third amendment to the
merger agreement. Under the Plan, the Debtors' secured creditors will receive
cash in an amount equal to their allowed pre-petition claims and the Debtors'
unsecured creditors will receive cash or equity securities of Arch in
satisfaction of their pre-petition claims against the Debtors. Because there
are a variety of conditions precedent to the consummation of the Plan and the
merger with Arch, there can be no assurance that the transactions contemplated
thereby will be consummated.
In December 1998 and January 1999, MobileMedia solicited the votes of its
creditors on the Plan. 100% of the voting creditors in Class 4 voted to accept
the Plan. As to Allowed Claims in Class 5, 83% in number and 91% in amount of
those voting voted to accept the Plan. Of the Allowed Claims in Class 6 that
voted on the Plan, 968 of such holders (approximately 94% in number and 69% in
amount) voted to accept the Plan, and 61 of such holders (approximately 6% in
number and 31% in amount) voted to reject the Plan.
Objections to confirmation were filed by New Generation Advisors, Inc. ("New
Generation"), Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc.--High Income Portfolio and State Street Research High Income Fund
(the "Objectors"). On February 12, 1999, at a continued hearing on confirmation
of the Plan, the Bankruptcy Court ordered MobileMedia to provide due diligence
to a nominee of New Generation, to prepare supplemental disclosure to the
holders of Allowed Claims in Class 6, and to resolicit the votes of such
holders on the Plan. At a hearing held before the Bankruptcy Court on February
18, 1999, the Bankruptcy Court entered an order approving a form of Notice and
Supplemental Disclosure, directing MobileMedia to resolicit the votes of all
holders of Allowed Class 6 Claims and establishing March 23, 1999 as (a) the
Supplemental Voting Deadline for Class 6 and (b) the deadline for any further
objections to confirmation of the Plan arising out of the matters set forth in
the Notice of Supplemental Disclosure. No further objections to the Plan were
received by March 23, 1999. Taking into account the resolicitation of Class 6,
the Plan was accepted by 59.6% in number and 69.3% in dollar amount of voting
Class 6 creditors.
On March 22, 1999, the Debtors and various other parties (including the
Objectors, Arch, the Committee and the Agent for the Company's pre-petition
secured lenders) executed a stipulation (the "Stipulation") that was approved
by the Bankruptcy Court, effective as of March 23, 1999. The Stipulation
resolved the pending objections to the Plan by providing for the withdrawal of
the Objectors' objections and the waiver of all appeal rights of the Objectors.
The Plan was confirmed by the Bankruptcy Court on April 12, 1999.
The consolidated financial statements at December 31, 1997, 1998 and March
31, 1999 (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.
F-27
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
2. The Company and Summary of Significant Accounting Policies
The Company
MobileMedia provides paging and wireless messaging services in the United
States, including the 100 largest metropolitan areas.
Consolidation
The consolidated financial statements include the accounts of MobileMedia and
its wholly-owned subsidiaries (MobileMedia Communications, Inc. (California),
MobileMedia Paging, Inc., MobileMedia DP Properties, Inc., Dial Page Southeast,
Inc., Radio Call Company of Va., Inc., MobileMedia PCS, Inc., Mobile
Communications Corporation of America, MobileComm of Florida, Inc., MobileComm
of Tennessee, Inc., MobileComm of the Midsouth, Inc., MobileComm Nationwide
Operations, Inc., MobileComm of the West, Inc., MobileComm of the Northeast,
Inc., MobileComm of the Southeast, Inc., MobileComm of the Southeast Private
Carrier Operations, Inc., MobileComm of the Southwest, Inc. and FWS Radio,
Inc.). All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents
MobileMedia considers all highly-liquid securities with an original maturity
of less than three months to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject MobileMedia to concentrations
of credit risk consist principally of temporary cash investments and accounts
receivable. MobileMedia places its cash with high-quality institutions and, by
policy, limits its credit exposure to any one institution. Although MobileMedia
faces significant credit risk from its customers, such risk does not result
from a concentration of credit risk as a result of the large number of
customers which comprise MobileMedia's customer base. MobileMedia generally
does not require collateral or other security to support customer receivables.
Inventories
MobileMedia values inventories at the lower of specific cost or market value.
Inventories consist of pagers held specifically for resale by MobileMedia.
Revenue Recognition
MobileMedia recognizes revenue under service, rent and maintenance agreements
with customers at the time the related services are performed. Advance billings
for services are deferred and recognized as revenue when earned. MobileMedia
leases (as lessor) certain pagers under operating leases. Sales of pagers are
recognized upon delivery.
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.
F-28
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Property and Equipment
Effective October 1, 1997, MobileMedia shortened the estimated useful life of
pagers from four to three years. This change resulted in additional
depreciation expense of approximately $2,500 in 1997.
Property and equipment are stated at cost, less accumulated depreciation.
MobileMedia purchases a significant percentage of its pagers from one
supplier. Any disruption of such supply could have a material impact on
MobileMedia's operations.
Expenditures for maintenance are charged to expense as incurred.
Upon retirement of pagers, the cost and related accumulated depreciation are
removed from the accounts and the net book value, if any, is charged to
depreciation expense. Upon the sale of pagers, the net book value is charged to
cost of products sold.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
<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 and FCC licenses which
are being amortized principally using the straight-line method over periods
ranging from 3 to 25 years. In connection with the impairment writedown
discussed below, MobileMedia revised the useful lives of FCC licenses and
customer lists to 25 years and 3 years, respectively.
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.
F-29
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Debt Issue Costs
Debt issue costs, which relate to the long term debt discussed in Note 6, are
reported as "Other assets" in the accompanying balance sheets. Such costs
amounted to $22,939 at December 31, 1997 and $19,295 at December 31, 1998 and
$18,384 at March 31, 1999 (unaudited) and are being amortized on a straight
line basis over the term of the related debt.
Book Cash Overdraft
Under MobileMedia's cash management system, checks issued but not presented
to banks occasionally result in overdraft balances for accounting purposes and
are classified as "Book cash overdraft" in the balance sheet.
Liabilities Subject to Compromise
Liabilities subject to compromise consists of pre-petition liabilities that
may be affected by a plan of reorganization. In accordance with AICPA Statement
of Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", MobileMedia records liabilities subject to compromise based
on the expected amount of the allowed claims related to these liabilities.
Accordingly, in December 1998 and March 1999 MobileMedia reduced such
liabilities by approximately $10,461 and $3,050 (unaudited), respectively, to
reflect changes in estimated allowed claims.
Restructuring Costs
Restructuring costs are primarily comprised of professional fees constituting
administrative expenses incurred by MobileMedia as a result of reorganization
under Chapter 11 of the Bankruptcy Code.
Income Taxes
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 15, 1997.
MobileMedia has adopted SFAS No. 131 as of December 31, 1998. Such adoption did
not have an impact on MobileMedia's financial reporting.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 ("SOP 98-5")
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of SOP 98-5 will be reported as the cumulative effect of a change
in accounting principle. MobileMedia has adopted SOP 98-5 effective January 1,
1999. Such adoption did not have any effect on MobileMedia's financial position
or results of operations.
F-30
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
3. Acquisitions and Divestitures
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers to Pinnacle Towers, Inc. ("Pinnacle") for $170,000 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 $10,700. 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 $94,200 and a deferred
gain of $70,000. 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 $170,000 in proceeds to its secured creditors, who had a lien
on such assets.
On January 4, 1996, MobileMedia completed its acquisition of MobileComm,
BellSouth's paging and wireless messaging unit, and an associated nationwide
two-way narrowband 50/12.5 kHz PCS license, and BellSouth agreed to enter into
a two-year non-compete agreement and a five-year reseller agreement with
MobileMedia (the "MobileComm Acquisition"). The aggregate consideration paid
for the MobileComm Acquisition (excluding fees and expenses and related
financing costs) was approximately $928,709.
The MobileComm Acquisition has been accounted for as a purchase transaction
in accordance with Accounting Principles Board Opinion No. 16 and, accordingly,
the financial statements for the periods subsequent to January 4, 1996 reflect
the purchase price and transaction costs of $24,328, allocated to tangible and
intangible assets acquired and liabilities assumed based on their estimated
fair values as of January 4, 1996. The allocation of the purchase price is
summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
<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>
4. Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
-------- -------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C>
Pagers...................................... $196,791 $176,610 $190,903
Radio transmission equipment................ 202,296 203,048 204,054
Computer equipment.......................... 30,896 32,679 32,866
Furniture and fixtures...................... 20,918 22,019 21,187
Leasehold improvements...................... 14,652 16,516 16,745
Construction in progress.................... 1,128 11,624 13,140
Land, buildings and other................... 7,911 6,697 6,591
-------- -------- --------
474,592 469,193 485,486
Accumulated depreciation.................... 216,655 249,551 259,920
-------- -------- --------
Property and equipment, net................. $257,937 $219,642 $225,566
======== ======== ========
</TABLE>
F-31
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
5. Intangible Assets
<TABLE>
<CAPTION>
December 31, March 31, 1999 (unaudited)
-------------------------------------------------------------- ------------------------------
1997 1998
------------------------------- ------------------------------
Accumulated Accumulated Accumulated
Cost Amortization Net Cost Amortization Net Cost Amortization Net
--------- ------------ -------- -------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FCC Licenses............ $ 261,323 $ (8,918) $252,405 $261,523 $(16,891) $244,632 $261,623 $(18,937) $242,686
Customer lists.......... 64,430 (21,477) 42,953 64,430 (42,953) 21,477 64,430 (48,323) 16,107
--------- -------- -------- -------- -------- -------- -------- -------- --------
$ 325,753 $(30,395) $295,358 $325,953 $(59,844) $266,109 $326,053 $(67,260) $258,793
========= ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
MobileMedia is not amortizing the cost of two nationwide Personal
Communications Services ("PCS") licenses, one acquired directly from the FCC
and the other as a result of the MobileComm acquisition, because the
construction of paging networks related to such licenses has not been
completed. These networks are expected to begin commercial operation in 1999
and, accordingly, amortization of these licenses will begin at such time.
6. Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
------------------- -----------
1997 1998 1999
---------- -------- -----------
(unaudited)
<S> <C> <C> <C>
DIP credit facility...................... $ 10,000 $ -- $ 5,000
Revolving loan........................... 99,000 72,900 72,900
Term loan................................ 550,000 406,100 406,100
10 1/2% Senior Subordinated Deferred
Coupon Notes due December 1, 2003....... 174,125 174,125 174,125
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............................. 986 986 986
---------- -------- --------
Total debt............................. $1,085,681 $905,681 $910,681
========== ======== ========
</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 March 31, 1999 there was $5,000 of borrowings outstanding
under this facility, as of December 31, 1998 there were no funded
borrowings and as of December 31, 1997, there was $10,000 of borrowings
outstanding under this facility. MobileMedia is subject to certain
financial and operating restrictions customary to credit facilities of this
type including a limitation on periodic capital expenditures, minimum
allowable periodic EBITDA and retention of a turnaround professional.
Additionally, MobileMedia is required to make monthly interest payments to
the DIP Lenders and pay a commitment fee of 0.5% on any unused portion of
the DIP Facility. The DIP Facility bears interest at a rate of LIBOR plus
250 basis points or Base Rate plus 150 basis points, at the option of
MobileMedia. During 1997, the Debtors drew down $47,000 of borrowings and
repaid $37,000
F-32
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
under the DIP Facility. During January and February, 1998 the Debtors
repaid an additional $10,000. On January 27, 1998, the DIP Facility was
amended and reduced from $200,000 to $100,000. On August 12, 1998,
MobileMedia received approval from the Bankruptcy Court to extend the DIP
Facility to March 31, 1999 and further reduce it from $100,000 to $75,000.
MobileMedia has negotiated an extension of the DIP Facility through and
including December 31, 1999.
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 March 31, 1999 and December 31, 1998 there
was $479,000 outstanding under this facility consisting of term loans of
$101,500 and $304,600 and loans under a revolving credit facility totaling
$72,900. This agreement was entered into on December 4, 1995, in connection
with the financing of the MobileComm Acquisition. Commencing in 1996
MobileMedia was in default under this agreement. As a result of such
default and the bankruptcy filing, MobileMedia has no borrowing capacity
under this agreement. Since the Petition date, MobileMedia has brought
current its interest payments and has been making monthly payments to the
lenders under the Pre-Petition Credit Agreement equal to the amount of
interest accruing under such agreement. On September 3, 1998, MobileMedia
repaid $170,000 of borrowings under the Pre-Petition Credit Agreement with
proceeds from the Tower Sale (see Note 3).
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the "9 3/8%
Notes") issued in November 1995. These notes bear interest at a rate of 9
3/8% payable semi-annually on May 1 and November 1 of each year. On
November 1, 1996, MobileMedia did not make its scheduled interest payment
on its 9 3/8% Notes which constituted an event of default. The note holders
have not exercised any rights or remedies afforded holders (which rights
include, but are not limited to, acceleration of the stated maturity of the
notes). Since the Petition date, any such right or remedy is subject to the
automatic stay created by the Bankruptcy Code.
4) $210,000 of Senior Subordinated Deferred Coupon Notes (the "Deferred
Coupon Notes") issued, at a discount, in November 1993. The Deferred Coupon
Notes accrete at a rate of 10 1/2%, compounded semi-annually, 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 semi-annually.
By virtue of the missed interest payments on the 9 3/8% Notes and the Pre-
Petition Credit Agreement an event of default has occurred. The note
holders have not exercised any rights or remedies afforded such holders
(which rights include, but are not limited to, acceleration of the stated
maturity of the notes). Since the Petition date, any such right or remedy
is subject to the automatic stay created by the Bankruptcy Code.
Interest Expense on Debt
Interest paid during the years ended December 31, 1996, 1997 and 1998, and
the three months ended March 31, 1998 and 1999 (unaudited) was $65,978,
$70,817, $51,560, $13,915 and $9,383 respectively. Total interest cost incurred
for the years ended December 31, 1996, 1997 and 1998 was $94,231, $68,409 and
$53,982, respectively of which $1,292, $176 and $228 was capitalized. Total
interest cost incurred for the three months ended March 31, 1998 and 1999
(unaudited), was $14,793 and $10,248, respectively, of which $21 and $149 was
capitalized.
Subsequent to the Petition date, interest was accrued and paid only on the
Pre-Petition Credit Agreement and the DIP Facility. If not for the filing,
interest expense for the year ended December 31, 1997 and 1998 and March 31,
1998 and 1999 (unaudited), would have been approximately $104,152, $97,776,
$25,724 and $21,187, respectively.
F-33
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
7. Income Taxes
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
Year ended December
31,
---------------------
1996 1997 1998
------- ----- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $(1,757)
State and local.................................. -- -- (2,201)
------- ----- -------
-- -- (3,958)
Deferred:
Federal.......................................... 52,081 -- --
State and local.................................. 17,361 -- --
------- ----- -------
Total.......................................... $69,442 $ -- $(3,958)
======= ===== =======
</TABLE>
MobileMedia is included in the Parent's consolidated federal income tax
return. Income taxes are presentedin the accompanying financial statements as
if MobileMedia filed tax returns as a separate consolidated entity.
A reconciliation of income tax benefit (expense) and the amount computed by
applying the statutory federal income tax rate to loss before income taxes is
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Tax benefit (expense) at federal statutory rate... $395,285 $43,604 $(13,838)
Goodwill and intangible amortization and
writedown........................................ (95,362) -- --
State income taxes................................ -- -- (1,783)
Nondeductible expenses............................ -- -- (4,765)
Valuation allowance on federal deferred tax
assets........................................... (230,481) (43,604) 16,428
-------- ------- --------
Total........................................... $ 69,442 $ -- $ (3,958)
======== ======= ========
</TABLE>
F-34
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for federal and state income tax purposes. The
components of deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Difference in book and tax basis of fixed assets......... $ 10,206 $ 19,974
Other.................................................... 68 27
-------- --------
Deferred tax liabilities............................... 10,274 20,001
Deferred tax assets:
Tax credit carryforwards................................. -- 1,757
Accounts receivable reserves............................. 10,578 6,000
Differences between the book and tax basis of intangible
assets.................................................. 128,462 121,526
Difference between book and tax basis of accrued
liabilities............................................. 5,089 4,794
Net operating loss carryforward.......................... 161,840 135,458
Deferred gain on tower sale.............................. -- 27,378
-------- --------
Total deferred assets.................................. 305,969 296,913
Valuation allowances for deferred tax assets........... (298,350) (279,567)
-------- --------
Deferred tax assets.................................... 7,619 17,346
======== ========
Net deferred tax liabilities........................... $ 2,655 $ 2,655
======== ========
</TABLE>
As of December 31, 1998, MobileMedia has available net operating loss
carryforwards for tax purposes of approximately $330,000 which expire in years
2008 through 2012. Utilization of these losses may be limited under Section 382
of the Internal Revenue Code.
MobileMedia believes consummation of the public offering of 15,525,000 shares
of Parent's 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 $40,000. In addition, if a second ownership change has occurred
subsequent to November 7, 1995, which has not yet been determined, use of
MobileMedia's net operating losses would be severely limited. It is also
anticipated that the net operating loss carryforwards and certain other tax
attributes of MobileMedia will be substantially reduced and their utilization
signifantly limited as a result of consummation of the Plan.
8. Leases
Certain facilities and equipment used in operations are held under operating
leases. Rental expenses under operating leases were $44,574, 43,453, $40,936,
$10,423 and $12,989 for the years ended December 31, 1996, 1997 and 1998 and
the three months ended March 31, 1998 and 1999 (unaudited), respectively. At
December 31, 1998, the aggregate minimum rental commitments under leases were
as follows:
<TABLE>
<S> <C>
1999............................................................ $ 48,951
2000............................................................ 25,457
2001............................................................ 19,250
2002............................................................ 15,726
2003............................................................ 13,327
Thereafter...................................................... 15,783
---------
$ 138,494
=========
</TABLE>
F-35
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
9. Employee Benefit Plans
MobileMedia has adopted a retirement savings plan that allows all employees
who have been employed for one year and have at least 1,000 hours of credited
service to contribute and defer up to 15% of their compensation. Effective
February 1, 1996, MobileMedia began a matching contribution of 50% of the first
2% of the elected deferral plus an additional 25% of the next 4% of the elected
deferral. MobileMedia's matching contribution was $700 in 1996, $730 in 1997
and $692 in 1998 and $160 and $178 for the three months ended March 31, 1998
and 1999 (unaudited), respectively.
10. Stock Option Plans
MobileMedia has two stock option plans under which approximately 1.3 million
options are currently outstanding. Under the proposed Plan of Reorganization,
MobileMedia's equity holders will receive no value for their ownership
interests in the Company, and accordingly, the options are also deemed to have
no value.
11. Commitments and Contingencies
MobileMedia is party to a number of lawsuits and other matters arising in the
ordinary course of business.
As announced on September 27, 1996 and October 21, 1996, MobileMedia
disclosed that misrepresentations and other violations had occurred during the
licensing process for as many as 400 to 500, or approximately 6% to 7%, of its
approximately 8,000 local transmission one-way paging stations. MobileMedia
caused an investigation to be conducted by its outside counsel, and a
comprehensive report regarding these matters was provided to the FCC in the
fall of 1996.
On January 13, 1997, the FCC issued a Public Notice relating to the status of
certain FCC authorizations held by MobileMedia. Pursuant to the Public Notice,
the FCC announced that it had (i) automatically terminated approximately 185
authorizations for paging facilities that were not constructed by the
expiration date of their construction permits and remained unconstructed, (ii)
dismissed as defective approximately 94 applications for fill-in sites around
existing paging stations because they were predicated upon unconstructed
facilities and (iii) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. However, the FCC granted MobileMedia
interim operating authority to operate transmitters in this last category
subject to further action by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an Administrative Law Judge to take evidence and develop a full
factual record on directed issues concerning MobileMedia's filing of false
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the
hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible transfer
of MobileMedia's FCC licenses. The grant of the stay was premised on the
availability of an FCC doctrine known as Second Thursday, which provides that,
if there is a change of control that meets certain conditions, the regulatory
issues designated for administrative hearing will be resolved by the transfer
of MobileMedia's FCC licenses to the new owners of MobileMedia and the hearing
will not proceed. The stay was originally granted for ten months and was
extended by the FCC through October 6, 1998.
F-36
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On September 2, 1998, MobileMedia and Arch Communications Group, Inc.
("Arch") filed a joint Second Thursday application. The FCC released an order
granting the application on February 5, 1999. The order, which is conditioned
on confirmation of the plan and consummation thereof within nine months,
expressly terminated the administrative hearing and resolved the issues
designated therein. The order denied the parties' request for permanent
authority to operate transmitters for which MobileMedia was granted interim
authority on January 13, 1997. If the Merger is consummated, Arch must cease
operating these facilities within 6 months after the merger. The order also
denied the parties' request for a waiver of the spectrum cap (which prohibits
narrowband PCS licensees from having ownership interest in more than three
channels in any geographic area). Arch must divest any excess channels within 6
months after the merger.
Prior to the Petition date, five actions allegedly arising under the federal
securities laws were filed against MobileMedia and certain of its present and
former officers, directors and underwriters in the United States District Court
for the District of New Jersey (the "New Jersey District Court"). These actions
were subsequently consolidated as In re MobileMedia Securities Litigation, No.
96-5723 (AJL) (the "New Jersey Actions"). A consolidated amended complaint (the
"Complaint") was filed on November 21, 1997. The Complaint does not name
MobileMedia as a defendant.
In June 1997, the Debtors initiated an Adversary Proceeding in the Bankruptcy
Court to stay the prosecution of the New Jersey Actions. Pursuant to a
Stipulation entered into among the Debtors and the plaintiffs in the New Jersey
Actions and "So Ordered" by the Bankruptcy Court on October 31, 1997, the
plaintiffs in the New Jersey Actions could conduct only limited discovery in
connection with the New Jersey Actions and could not file any pleadings, except
responses to motions to dismiss, until the earlier of September 30, 1998 and
the effective date of a plan of reorganization. On October 21, 1998, the
defendents' motion to dismiss the New Jersey Actions filed with the New Jersey
District Court on January 16, 1998 was denied.
In addition to the New Jersey Actions, two lawsuits (together, the
"California Actions" and, together with the New Jersey Actions, the "Securities
Actions") were filed in September 1997 in the United States District Court for
the Northern District of California and the Superior Court of California naming
as defendants certain former officers and certain present and former directors
of MobileMedia, certain investment entities and the Debtors' independent
auditors. None of the Debtors is named as defendant in the California Actions.
On November 4, 1997, the Debtors commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At hearings held on December 10, 1997 and May 29,
1998, the Bankruptcy Court enjoined the plaintiffs in the California Actions
until September 15, 1998 from taking certain actions in connection with the
California Actions, with certain exceptions.
The plaintiffs in both the New Jersey Actions and California Actions are
currently conducting discovery of MobileMedia in connection with their
prosecution of the actions against the named defendants. Following consummation
of the Plan of Reorganization, the Company may be subject to further discovery
in these proceedings.
Neither the New Jersey Actions nor the California Actions name any of the
Debtors as a defendant. However, proofs of claim have been filed against the
Debtors by the plaintiffs in the New Jersey Actions, and both the New Jersey
Actions and the California Actions may give rise to claims against the Debtors'
Directors, Officers and Corporate Liability Insurance Policy. It is anticipated
that under any plan of reorganization for MobileMedia these Claims will receive
no distributions.
F-37
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
12. Other Investments
On March 21, 1995, MobileMedia purchased a 33% interest in Abacus
Communications Partners, L.P., ("Abacus") a Delaware limited partnership, from
Abacus Business Services, Inc. for $1,641. Abacus Communications Partners, L.P.
is one of MobileMedia's alphanumeric dispatch services providers. The
investment has been accounted for under the equity method in accordance with
Accounting Principles Board Opinion No. 18. Under the equity method, original
investments are recorded at cost and adjusted by MobileMedia's share of
undistributed earnings or losses of the purchased company. MobileMedia's share
of income (loss) of affiliate, net of distribution, for the years ended
December 31, 1996, 1997 and 1998, was $160, $69, and $(87), respectively. On
December 30, 1998 MobileMedia reached an agreement to sell its interest in
Abacus to Abacus Exchange Inc. for $1,400 and subsequently completed the sale
on January 25, 1999. Accordingly, MobileMedia wrote down its investment in
Abacus from $1,612 to $1,400 as of December 31, 1998.
13. Impact of Year 2000 (unaudited)
General
Computer systems were originally designed to recognize calendar years by the
last two digits in the date code field. Beginning in the year 2000, these date
code fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates. Any of MobileMedia's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. As a result, in less than two years, the
computerized systems (including both information and non-information technology
systems) and applications used by MobileMedia will need to be reviewed,
evaluated and, if and where necessary, modified or replaced to ensure that all
financial, information and operating systems are Year 2000 compliant.
State of Readiness
MobileMedia has formed an internal task force comprised of representatives of
its various relevant departments to address Year 2000 compliance matters. The
task force has undertaken a preliminary review of internal and external areas
that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or non-
critical/non-important. MobileMedia also expects to hire outside consultants to
review MobileMedia's testing methodology and test results, to assess its
contingency planning and to provide general oversight relating to Year 2000
compliance matters.
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be Year 2000
compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain business-
related files were created and executed to identify any Year 2000 compliance
issues. The testing unearthed a few Year 2000 problems all of which have been
addressed and retested for Year 2000 readiness. Additional testing took place
the first quarter of 1999, which included testing of MobileMedia's financial
and human resource software packages. Although the results of these tests are
still being analyzed, relatively few Year 2000 problems were identified. There
can be no assurance, however, that such testing has detected, or will detect,
all compliance issues related to the Year 2000 problem.
F-38
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 Year 2000 compliance matters.
Through December 31, 1998, MobileMedia has incurred approximately $50 in costs
(excluding in-house labor and hardware) in connection with Year 2000 compliance
matters. In addition, MobileMedia has purchased upgraded hardware at a cost of
approximately $175 for use as redundant equipment in testing for Year 2000
problems in an isolated production environment. MobileMedia estimates that it
will expend approximately $500 on additional hardware, software and other items
related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200 in
costs relating to Year 2000 remediation efforts for its paging network
hardware. MobileMedia also upgraded its paging network hardware during 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 1999. Although MobileMedia has begun testing of its internal
business-related hardware and software applications, there can be no assurances
that such testing will detect all applications that may be affected by Year
2000 compliance problems. With respect to external matters, due to the multi-
dependent and interdependent issues raised by Year 2000 compliance, including
many factors beyond its control, MobileMedia may face the possibility that one
or more of its mission-critical vendors, such as its utilities, telephone
carriers, equipment manufacturers or satellite carriers, may not be Year 2000
compliant on a timely basis. Because of the unique nature of such vendors,
alternate providers may not be available. Finally, MobileMedia does not
manufacture any of the pagers, paging-related hardware or network equipment
used by MobileMedia or its customers in connection with MobileMedia's paging
operations. Although MobileMedia has tested such equipment, it has also relied
upon the representations of its vendors with respect to their Year 2000
readiness. MobileMedia can give no assurance as to the accuracy of such
vendors' representations.
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 on a department-by-department basis and
on a company-wide basis. MobileMedia intends to complete its contingency
planning during the second quarter of 1999.
F-39
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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>
<CAPTION>
Page
----
<S> <C>
Summary ................................................................... 1
Risk Factors............................................................... 5
Forward-Looking Statements................................................. 13
Dilution................................................................... 13
Use of Proceeds............................................................ 14
Description of Warrants.................................................... 14
Plan of Distribution....................................................... 16
Selling Stockholders....................................................... 22
Legal Matters.............................................................. 23
Experts.................................................................... 23
Where You Can Find More Information........................................ 24
Incorporation by Reference................................................. 25
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[ARCH LOGO APPEARS HERE]
Arch Communications Group, Inc.
42,511,985 Shares
Common Stock
5,360,262 Shares
Class B Common Stock
3,675,659 Stock
Purchase Warrants
------------------
PROSPECTUS
------------------
August / , 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
