<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): July 31, 1999
Arch Communications Group, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
<TABLE>
<S> <C>
0-23232/1-14248 31-1358569
- ------------------------------------- -------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
</TABLE>
1800 West Park Drive, Suite 250, Westborough, MA 01581
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(508) 870-6700
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS
On June 3, 1999, Arch Communications Group, Inc. ("Arch") acquired
MobileMedia Communications Inc. ("MobileMedia"). Because Arch's acquisition of
MobileMedia occurred after Arch filed its Annual Report on Form 10-K, Arch is
filing this Current Report on Form 8-K to provide investors with a detailed
description of Arch's business after its acquisition of MobileMedia. All share
data in this report reflect a one-for-three reverse stock split which occurred
in June 1999.
SUMMARY CONTENTS
<TABLE>
<S> <C>
Selected Historical Consolidated Financial and Operating Data--Arch........ 1
Arch Management's Discussion and Analaysis of Financial Condition and
Results of Operations..................................................... 3
Selected Historical Consolidated Financial and Operating Data--MobileMedia
.......................................................................... 20
MobileMedia Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 22
Industry Overview.......................................................... 34
Business................................................................... 39
Business Strategy......................................................... 39
Arch's Paging and Messaging Services, Products and Operations............. 40
MobileMedia's Paging and Messaging Services, Products and Operations...... 42
Networks and Licenses..................................................... 43
Subscribers and Marketing................................................. 46
Sources of Equipment...................................................... 47
Employees................................................................. 47
Trademarks................................................................ 48
Properties................................................................ 48
Litigation................................................................ 49
Predecessors to the Combined Company; Events Leading up to MobileMedia's
Bankruptcy Filings....................................................... 49
The MobileMedia Acquisition............................................... 50
The Merger................................................................ 50
Purchase Price............................................................ 50
Accounting Treatment...................................................... 51
Management................................................................. 52
Principal Stockholders..................................................... 58
Description of Securities.................................................. 61
Description of Outstanding Indebtedness.................................... 68
</TABLE>
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--ARCH
The following table sets forth selected historical consolidated financial and
operating data of Arch for the year ended August 31, 1994, the four months
ended December 31, 1993 and 1994, each of the five years ended December 31,
1998 and the three months ended March 31, 1998 and 1999. The selected financial
and operating data as of December 31, 1994, 1995, 1996, 1997 and 1998 and for
each of the five years ended December 31, 1998 have been derived from Arch's
audited consolidated financial statements and notes. The selected financial and
operating data as of March 31, 1999 and for the three months ended March 31,
1998 and 1999 have been derived from Arch's unaudited consolidated financial
statements and notes. You should read the following consolidated financial
information in conjunction with "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations" set forth below and Arch's
consolidated financial statements and notes contained in its Annual Report on
Form 10-K for the year ended December 31, 1998.
During 1994, Arch changed its fiscal year end from August 31 to December 31.
Arch was required to file a transition report on Form 10-K with audited
financial statements for the period September 1, 1994 through December 31, 1994
and has elected to include in the following table, for comparative purposes,
unaudited financial statements for the periods September 1, 1993 through
December 31, 1993 and January 1, 1994 through December 31, 1994.
In the following table, equity in loss of affiliate represents Arch's share
of net losses of USA Mobile Communications Holdings, Inc. for the period of
time from Arch's acquisition of its initial 37% interest in USA Mobile on May
16, 1995 through the completion of Arch's acquisition of USA Mobile on
September 7, 1995 and Arch's share of net losses of Benbow PCS Ventures, Inc.
since Arch's acquisition of Westlink Holdings, Inc. in May 1996. See "Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
The extraordinary item is an extraordinary charge resulting from prepayment
of indebtedness. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations".
Adjusted EBITDA, as determined by Arch, does not reflect restructuring
charge, equity in loss of affiliate, and extraordinary items; consequently
adjusted EBITDA may not necessarily be comparable to similarly titled data of
other paging companies. EBITDA is commonly used by analysts and investors as a
principal measure of financial performance in the paging industry. EBITDA is
also one of the primary financial measures used to calculate whether Arch and
its subsidiaries are in compliance with financial covenants under their debt
agreements. These covenants, among other things, limit the ability of Arch and
its subsidiaries to: incur additional indebtedness, advance funds to Benbow,
pay dividends, grant liens on its assets, merge, sell or acquire assets,
repurchase or redeem capital stock, incur capital expenditures and prepay
certain indebtedness. EBITDA is also one of the financial measures used by
analysts to value Arch. Therefore Arch management believes that the
presentation of EBITDA provides relevant information to investors. EBITDA
should not be construed as an alternative to operating income or cash flows
from operating activities as determined in accordance with GAAP or as a measure
of liquidity. Amounts reflected as EBITDA or adjusted EBITDA are not
necessarily available for discretionary use as a result of restrictions imposed
by the terms of existing indebtedness and limitations imposed by applicable law
upon the payment of dividends or distributions, among other things. See "Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operation".
1
<PAGE>
Adjusted EBITDA margin is calculated by dividing Arch's adjusted EBITDA by
total revenues less cost of products sold. EBITDA margin is a measure commonly
used in the paging industry to evaluate a company's EBITDA relative to total
revenues less cost of products sold as an indicator of the efficiency of a
company's operating structure.
<TABLE>
<CAPTION>
Four Months
Year Ended Ended
August 31, December 31, Year Ended December 31,
---------- -------------------- -----------------------------------------------------------
1994 1993 1994 1994 (1) 1995 (1) 1996 1997 1998
---------- --------- -------- -------- --------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Service, rental
and maintenance
revenues........ $ 55,139 $ 16,457 $ 22,847 $ 61,529 $ 138,466 $ 291,399 $ 351,944 $ 371,154
Product sales.... 12,108 2,912 5,178 14,374 24,132 39,971 44,897 42,481
-------- --------- -------- -------- --------- ---------- ---------- ----------
Total revenues... 67,247 19,369 28,025 75,903 162,598 331,370 396,841 413,635
Cost of products
sold............ (10,124) (2,027) (4,690) (12,787) (20,789) (27,469) (29,158) (29,953)
-------- --------- -------- -------- --------- ---------- ---------- ----------
57,123 17,342 23,335 63,116 141,809 303,901 367,683 383,682
Operating
expenses:
Service, rental
and
maintenance.... 13,123 3,959 5,231 14,395 29,673 64,957 79,836 80,782
Selling......... 10,243 3,058 4,338 11,523 24,502 46,962 51,474 49,132
General and
administrative. 17,717 5,510 7,022 19,229 40,448 86,181 106,041 112,181
Depreciation and
amortization... 16,997 5,549 6,873 18,321 60,205 191,871 232,347 221,316
Restructuring
charge......... -- -- -- -- -- -- -- 14,700
-------- --------- -------- -------- --------- ---------- ---------- ----------
Operating income
(loss).......... (957) (734) (129) (352) (13,019) (86,070) (102,015) (94,429)
Interest and non-
operating
expenses, net... (4,112) (1,132) (1,993) (4,973) (22,522) (75,927) (97,159) (104,213)
Equity in loss of
affiliate....... -- -- -- -- (3,977) (1,968) (3,872) (5,689)
-------- --------- -------- -------- --------- ---------- ---------- ----------
Income (loss)
before income
tax benefit,
extraordinary
item and
accounting
change.......... (5,069) (1,866) (2,122) (5,325) (39,518) (163,965) (203,046) (204,331)
Income tax
benefit......... -- -- -- -- 4,600 51,207 21,172 --
-------- --------- -------- -------- --------- ---------- ---------- ----------
Income (loss)
before
extraordinary
item and
accounting
change.......... (5,069) (1,866) (2,122) (5,325) (34,918) (112,758) (181,874) (204,331)
Extraordinary
item............ -- -- (1,137) (1,137) (1,684) (1,904) -- (1,720)
Cumulative effect
of accounting
change.......... -- -- -- -- -- -- -- --
-------- --------- -------- -------- --------- ---------- ---------- ----------
Net income
(loss).......... $ (5,069) $ (1,866) $ (3,259) $ (6,462) $ (36,602) $ (114,662) $ (181,874) $ (206,051)
======== ========= ======== ======== ========= ========== ========== ==========
Other Operating
Data:
Adjusted EBITDA.. $ 16,040 $ 4,815 $ 6,744 $ 17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587
Adjusted EBITDA
margin.......... 28 % 28 % 29 % 28 % 33 % 35 % 35 % 37 %
Capital
expenditures,
excluding
acquisitions.... $ 25,657 $ 7,486 $ 15,279 $ 33,450 $ 60,468 $ 165,206 $ 102,769 $ 113,184
Cash flows
provided by
operating
activities...... $ 14,781 $ 5,306 $ 4,680 $ 14,155 $ 14,749 $ 37,802 $ 63,590 $ 81,105
Cash flows used
in investing
activities...... $(28,982) $ (7,486) $(34,364) $(55,860) $(192,549) $ (490,626) $ (102,769) $ (82,868)
Cash flows
provided by
(used in)
financing
activities...... $ 14,636 $ 11,290 $ 26,108 $ 29,454 $ 179,092 $ 452,678 $ 39,010 $ 68
Units in service
at end of
period.......... 410,000 288,000 538,000 538,000 2,006,000 3,295,000 3,890,000 4,276,000
<CAPTION>
As of
August 31, As of December 31,
---------- -----------------------------------------------------------
1994 1994 1995 1996 1997 1998
---------- -------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Current assets... $ 6,751 $ 8,483 $ 33,671 $ 43,611 $ 51,025 $ 50,712
Total assets..... 76,255 117,858 785,376 1,146,756 1,020,720 904,285
Long-term debt,
less current
maturities...... 67,328 93,420 457,044 918,150 968,896 1,003,499
Redeemable
preferred stock. -- -- 3,376 3,712 -- --
Stockholders'
equity
(deficit)....... (3,304) 9,368 246,884 147,851 (33,255) (213,463)
<CAPTION>
Three Months
Ended
March 31,
------------------------
1998 1999
----------- ------------
(unaudited)
<S> <C> <C>
Statements of Operations
Data:
Service, rental
and maintenance
revenues........ $ 91,397 $ 90,529
Product sales.... 10,642 10,359
----------- ------------
Total revenues... 102,039 100,888
Cost of products
sold............ (7,366) (6,926)
----------- ------------
94,673 93,962
Operating
expenses:
Service, rental
and
maintenance.... 20,189 20,293
Selling......... 11,870 13,011
General and
administrative. 28,318 25,626
Depreciation and
amortization... 53,714 51,118
Restructuring
charge......... -- --
----------- ------------
Operating income
(loss).......... (19,418) (16,086)
Interest and non-
operating
expenses, net... (25,366) (26,477)
Equity in loss of
affiliate....... (1,055) (3,200)
----------- ------------
Income (loss)
before income
tax benefit,
extraordinary
item and
accounting
change.......... (45,839) (45,763)
Income tax
benefit......... -- --
----------- ------------
Income (loss)
before
extraordinary
item and
accounting
change.......... (45,839) (45,763)
Extraordinary
item............ -- --
Cumulative effect
of accounting
change.......... -- (3,361)
----------- ------------
Net income
(loss).......... $ (45,839) $ (49,124)
=========== ============
Other Operating
Data:
Adjusted EBITDA.. $ 34,296 $ 35,032
Adjusted EBITDA
margin.......... 36 % 37 %
Capital
expenditures,
excluding
acquisitions.... $ 21,319 $ 25,528
Cash flows
provided by
operating
activities...... $ 9,992 $ 12,379
Cash flows used
in investing
activities...... $ (21,319) $ (24,910)
Cash flows
provided by
(used in)
financing
activities...... $ 12,539 $ 23,000
Units in service
at end of
period.......... 4,016,000 4,329,000
<CAPTION>
As of March 31,
------------------------
1998 1999
----------- ------------
<S> <C> <C>
Balance Sheet
Data:
Current assets... $ 4,540 $ 12,102
Total assets..... 993,977 883,432
Long-term debt,
less current
maturities...... 995,214 1,036,441
Redeemable
preferred stock. -- --
Stockholders'
equity
(deficit)....... (78,796) (262,392)
</TABLE>
2
<PAGE>
The following table reconciles net income to the presentation of Arch's
adjusted EBITDA:
<TABLE>
<CAPTION>
Four Months
Year Ended Ended Three Months
August 31, December 31, Year Ended December 31, Ended March 31,
---------- ---------------- -------------------------------------------------- ------------------
1994 1993 1994 1994 1995 1996 1997 1998 1998 1999
---------- ------- ------- ------- -------- --------- --------- --------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss). $(5,069) $(1,866) $(3,259) $(6,462) $(36,602) $(114,662) $(181,874) $(206,051) $(45,839) $(49,124)
Interest and non-
operating
expenses, net.... 4,112 1,132 1,993 4,973 22,522 75,927 97,159 104,213 25,366 26,477
Income tax
benefit.......... -- -- -- -- (4,600) (51,207) (21,172) -- -- --
Depreciation and
amortization..... 16,997 5,549 6,873 18,321 60,205 191,871 232,347 221,316 53,714 51,118
Restructuring
charge........... -- -- -- -- -- -- -- 14,700 -- --
Equity in loss of
affiliate........ -- -- -- -- 3,977 1,968 3,872 5,689 1,055 3,200
Extraordinary
Item............. -- -- 1,137 1,137 1,684 1,904 -- 1,720 -- --
Cumulative effect
of accounting
charge........... -- -- -- -- -- -- -- -- -- 3,361
------- ------- ------- ------- -------- --------- --------- --------- -------- --------
Adjusted EBITDA... $16,040 $ 4,815 $ 6,744 $17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587 $ 34,296 $ 35,032
======= ======= ======= ======= ======== ========= ========= ========= ======== ========
</TABLE>
ARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
You should read the following discussion and analysis in conjunction with
Arch's consolidated financial statements and notes. This discussion and
analysis updates, in light of consummation of the MobileMedia acquisition, the
discussion and analysis contained in Arch's Annual Report on Form 10-K for the
year ended December 31, 1998.
Arch derives most of its revenues from fixed monthly or other periodic fees
charged to subscribers for paging services. Such fees are not dependent on
usage. As long as a subscriber remains on service, operating results benefit
from the recurring payments of the fixed periodic fees without incurrence of
additional selling expenses by Arch. Arch's service, rental and maintenance
revenues and the related expenses exhibit substantially similar growth trends.
Arch's average revenue per subscriber has declined over the last three years
for two principal reasons:
. an increase in the number of subscriber owned and reseller owned units
for which Arch receives no recurring equipment revenue and
. an increase in the number of reseller customers who purchase airtime at
wholesale rates.
The reduction in average paging revenue per subscriber resulting from these
trends has been more than offset by the elimination of associated expenses so
that Arch's margins have improved over this period. Furthermore, recent data
indicates that the rate of decline in revenue per customer has slowed.
Arch has achieved significant growth in units in service and adjusted EBITDA
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. Arch's total revenues
have increased from $331.4 million in the year ended December 31, 1996 to
$396.8 million in the year ended December 31, 1997 and to $413.6 million in the
year ended December 31, 1998. Over the same periods, through operating
efficiencies and economies of scale, Arch has been able to reduce its per pager
operating costs to enhance its competitive position in its markets. Due to the
rapid growth in its subscriber base, Arch has incurred significant selling
expenses, which are charged to operations in the period incurred. Arch had net
losses of $114.7 million in the year ended December 31, 1996, $181.9 million in
the year ended December 31, 1997 and $206.1 million in the year ended December
31, 1998, as a result of significant depreciation and amortization expenses
related
3
<PAGE>
to acquired and developed assets and interest charges associated with
indebtedness. However, as its subscriber base has grown, Arch's operating
results have improved, as evidenced by an increase in Arch Adjusted EBITDA from
$105.8 million in the year ended December 31, 1996 to $130.3 million in the
year ended December 31, 1997 and to $141.6 million in the year ended December
31, 1998.
EBITDA is a commonly used measure of financial performance in the paging
industry. Adjusted EBITDA is also one of the financial measures used to
calculate whether Arch and its subsidiaries are in compliance with the
financial covenants under their debt agreements. Adjusted EBITDA should not be
construed as an alternative to operating income or cash flows from operating
activities as determined in accordance with GAAP. One of Arch's financial
objectives is to increase its adjusted EBITDA, since this is a significant
source of funds for servicing indebtedness and for investment in continued
growth, including purchase of units and paging system equipment, construction
and expansion of paging systems, and possible acquisitions. Adjusted EBITDA, as
determined by Arch, may not necessarily be comparable to similarly titled data
of other paging companies. Amounts reflected as adjusted EBITDA are not
necessarily available for discretionary use as a result of restrictions imposed
by the terms of existing or future indebtedness, including the repayment of
such indebtedness or the payment of associated interest, limitations imposed by
applicable law upon the payment of dividends or distributions or capital
expenditure requirements.
The potential effects of the MobileMedia acquisition on Arch are described
under "Business--Business Strategy".
Divisional Reorganization
To reduce redundancy and take advantage of various operating efficiencies,
Arch is reorganizing its operating divisions 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
regional administrative support functions, such as customer service,
collections, inventory and billing. Arch expects to complete the divisional
reorganization in mid to late 2000.
Arch estimates that the divisional reorganization, once fully implemented,
will result in annual cost savings of approximately $15.0 million. These cost
savings will consist primarily of a reduction in compensation expense of
approximately $11.5 million and a reduction in rental expense of facilities and
general and administrative costs of approximately $3.5 million. Arch expects to
reinvest a portion of these cost savings to expand its sales activities,
although to date the extent and cost of this reinvestment has not yet been
determined.
In connection with the divisional reorganization, Arch (1) anticipates a net
reduction of approximately 10% of its workforce, (2) is closing certain office
locations and redeploying other real estate assets and (3) recorded a
restructuring charge of $14.7 million during 1998. The restructuring charge
consisted of approximately (1) $9.7 million for employee severance, (2) $3.5
million for lease obligations and terminations and (3) $1.5 million of other
costs. The severance costs and lease obligations will require cash outlays
throughout the 18 to 24 month restructuring period. Arch will fund these cash
outlays from operations or its secured credit facility. Due to the MobileMedia
acquisition, Arch's management is reassessing the size and scope of the
divisional reorganization. Arch is also determining the size and scope of
additional restructuring reserves required as a direct result of the
MobileMedia acquisition. There can be no assurance that the desired cost
savings will be achieved or that the anticipated reorganization of Arch's
business will be accomplished smoothly, expeditiously or successfully. The
difficulties of such reorganization may be increased by the need to integrate
MobileMedia's operations in multiple locations and to combine two corporate
cultures. The inability to successfully integrate the operations of MobileMedia
could have a material adverse effect on Arch. See Note 9 to Arch's consolidated
financial statements.
4
<PAGE>
Results of Operations
The following table presents selected items from Arch's consolidated
statements of operations as a percentage of net revenues and certain other
information for the periods indicated. Net revenues are total revenues less
cost of products sold.
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
-------------------------------- -------------------
1996 1997 1998 1998 1999
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues.......... 109.0 % 107.9 % 107.8 % 107.8 % 107.4 %
Cost of products sold... (9.0) (7.9) (7.8) (7.8) (7.4)
--------- --------- -------- -------- --------
Net revenues............ 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Service, rental and
maintenance............ 21.4 21.7 21.1 21.3 21.6
Selling................. 15.4 14.0 12.8 12.6 13.8
General and
administrative......... 28.4 28.8 29.2 29.9 27.3
Depreciation and
amortization........... 63.1 63.2 57.7 56.7 54.4
Restructuring charge.... -- -- 3.8 -- --
--------- --------- -------- -------- --------
Operating income (loss). (28.3)% (27.7)% (24.6)% (20.5)% (17.1)%
========= ========= ======== ======== ========
Net income (loss)....... (37.7)% (49.5)% (53.7)% (48.4)% (52.3)%
========= ========= ======== ======== ========
Arch adjusted EBITDA.... 34.8 % 35.4 % 36.9 % 36.2 % 37.3 %
========= ========= ======== ======== ========
Cash flows provided by
operating activities... $ 37,802 $ 63,590 $ 81,105 $ 9,992 $ 12,379
Cash flows used in in-
vesting activities..... $(490,626) $(102,769) $(82,868) $(21,319) $(24,910)
Cash flows provided by
financing activities... $ 452,678 $ 39,010 $ 68 $ 12,539 $ 23,000
Annual service, rental
and maintenance
expenses per pager..... $ 25 $ 22 $ 20 $ 20 $ 19
</TABLE>
Results of Operations
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Total revenues decreased $1.2 million, or 1.1%, to $100.9 million in the
three months ended March 31, 1999 from $102.0 million in the three months ended
March 31, 1998, and net revenues decreased $0.7 million or 0.8% from $94.7
million to $94.0 million over the same period. Total revenues and net revenues
in the 1999 period were adversely affected by a general slowing of paging
industry growth, compared to prior years. Revenues were also adversely affected
by: (1) Arch's decision in the fourth quarter of 1998, in anticipation of the
MobileMedia acquisition, not to replace normal attrition among direct sales
personnel; (2) the reduced effectiveness of the reseller channel of
distribution; and (3) reduced sales through Arch's company-owned stores.
Service, rental and maintenance revenues, which consist primarily of recurring
revenues associated with the sale or lease of pagers, decreased $0.9 million or
1.0% to $90.5 million in the three months ended March 31, 1999 from $91.4
million in the three months ended March 31, 1998. Maintenance revenues
represented less than 10% of total service, rental and maintenance revenues in
the three months ended March 31, 1999 and 1998. Arch does not differentiate
between service and rental revenues. Product sales, less cost of products sold,
increased 4.8% to $3.4 million in the three months ended March 31, 1999 from
$3.3 million in the three months ended March 31, 1998.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $20.3 million, or 21.6%
of net revenues, in the three months ended March 31, 1999 from $20.2 million,
or 21.3% of net revenues, in the three months ended March 31, 1998. The
increase was due primarily to increased expenses associated with system
expansions and the provision of paging services to a greater number of
subscribers. As existing paging systems become more populated through the
addition of new subscribers, the fixed costs of operating these paging systems
are spread over a greater subscriber base. Annualized service, rental and
maintenance expenses per subscriber decreased to $19 in the three months ended
March 31, 1999 from $20 in the three months ended March 31, 1998.
5
<PAGE>
Selling expenses increased to $13.0 million, or 13.8% of net revenues, in the
three months ended March 31, 1999 from $11.9 million, or 12.5% of net revenues,
in the three months ended March 31, 1998 due primarily to increased hiring of
direct sales personnel.
General and administrative expenses decreased to $25.6 million, or 27.3% of
net revenues, in the three months ended March 31, 1999 from $28.3 million, or
29.9% of net revenues, in the three months ended March 31, 1998. The decrease
was due primarily to reduction of headcount as a result of the divisional
reorganization which began in June 1998.
Depreciation and amortization expenses decreased to $51.1 million, or 54.4%
of net revenues, in the three months ended March 31, 1999 from $53.7 million,
or 56.7% of net revenues, in the three months ended March 31, 1998. These
expenses principally reflect Arch's acquisitions of paging businesses in prior
periods accounted for as purchases, and investment in pagers and other system
expansion equipment to support growth.
Operating loss decreased to $16.1 million in the three months ended March 31,
1999 from $19.4 million in the three months ended March 31, 1998 as a result of
the factors outlined above.
Net interest expense increased to $26.5 million in the three months ended
March 31, 1999 from $25.4 million in the three months ended March 31, 1998. The
increase was attributable to an increase in Arch's average outstanding debt.
Interest expense in the three months ended March 31, includes approximately
$9.9 million and $8.9 million in 1998 of non-cash interest accretion on Arch's
10 7/8% senior discount notes due 2008.
Initial application of SOP 98-5 resulted in a $3.4 million charge which was
reported as the cumulative effect of a change in accounting principle. See "--
Recent and Pending Accounting Pronouncements".
Net losses increased to $49.1 million in the three months ended March 31,
1999 from $45.8 million in the three months ended March 31, 1998 as a result of
the factors outlined above.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Total revenues increased to $413.6 million, a 4.2% increase, in 1998 from
$396.8 million in 1997. Net revenues increased to $383.7 million, a 4.4%
increase, in 1998 from $367.7 million in 1997. Total revenues and net revenues
in 1998 were adversely affected by a general slowing of industry growth,
compared to prior years. Although industry sources estimate that the number of
paging units in service grew at an annual rate of approximately 25% between
1992 and 1997, growth in basic paging services has slowed considerably since
1997. Revenues were also adversely affected in the fourth quarter of 1998 by:
. Arch's decision, in anticipation of the MobileMedia acquisition, not to
replace normal attrition among direct sales personnel
. the reduced effectiveness of Arch's reseller channel of distribution
. reduced sales through Arch-operated retail stores.
Arch expects revenue to continue to be adversely affected in 1999 due to
these factors.
Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of units, increased to
$371.2 million, a 5.5% increase, in 1998 from $351.9 million in 1997. These
increases in revenues were due primarily to the increase, through internal
growth, in the number of units in service from 3.9 million at December 31, 1997
to 4.3 million at December 31, 1998. Maintenance revenues represented less than
10% of total service, rental and maintenance revenues in 1998 and 1997. Arch
does not differentiate between service and rental revenues. Product sales, less
cost of products sold, decreased to $12.5 million, a 20.4% decrease, in 1998
from $15.7 million in 1997, as a result of a decline in the average revenue per
pager sold.
6
<PAGE>
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $80.8 million, or 21.1%
of net revenues, in 1998 from $79.8 million, or 21.7% of net revenues, in 1997.
The increase was due primarily to increased expenses associated with system
expansions and an increase in the number of units in service. As existing
paging systems became more populated through the addition of new subscribers,
the fixed costs of operating these paging systems are spread over a greater
subscriber base. Annualized service, rental and maintenance expenses per
subscriber were $20.00 in 1998 compared to $22.00 in 1997.
Selling expenses decreased to $49.1 million, or 12.8% of net revenues, in
1998 from $51.5 million, or 14.0% of net revenues, in 1997. The decrease was
due primarily to a decrease in the number of net new units in service and to
nonrecurring marketing costs incurred in 1997 to promote Arch's new Arch Paging
brand identity. The number of net new units in service resulting from internal
growth decreased by 35.1% in 1998 compared to 1997 primarily due to the factors
set forth above that adversely affect revenues. Arch expects its selling
expenses to increase in 1999 due to increased hiring of direct sales personnel.
General and administrative expenses increased to $112.2 million, or 29.2% of
net revenues, in 1998, from $106.0 million, or 28.8% of net revenues, in 1997.
The increase was due primarily to administrative and facility costs associated
with supporting more units in service.
Depreciation and amortization expenses decreased to $221.3 million in 1998
from $232.3 million in 1997. These expenses principally reflect Arch's
acquisitions of paging businesses in prior periods accounted for as purchases.
They also reflect investment in units and other system expansion equipment to
support growth.
Operating losses were $94.4 million in 1998 compared to $102.0 million in
1997, as a result of the factors outlined above.
Net interest expense increased to $104.2 million in 1998 from $97.2 million
in 1997. The increase is principally attributable to an increase in Arch's
outstanding debt. Interest expense for 1998 includes approximately $37.0
million of interest which accretes on Arch's 10 7/8% senior discount notes even
though the cash payment of the interest is deferred. Interest expense for 1997
includes approximately $33.3 million of accretion on these notes.
Arch recognized an income tax benefit of $21.2 million in 1997. This benefit
represented the tax benefit of operating losses incurred after the acquisitions
of USA Mobile and Westlink which were available to offset deferred tax
liabilities arising from those acquisitions. The tax benefit of these operating
losses was fully recognized during 1997. Accordingly, Arch has established a
valuation reserve against its deferred tax assets which reduced the income tax
benefit to zero as of December 31, 1998. Arch does not expect to recover its
deferred tax asset in the foreseeable future and will continue to increase its
valuation reserve accordingly. See Note 5 to Arch's consolidated financial
statements.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $206.1 million in 1998 from $181.9 million in 1997, as
a result of the factors outlined above.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues increased $65.5 million, or 19.8%, to $396.8 million in 1997
from $331.4 million in 1996 and net revenues increased $63.8 million, or 21.0%,
from $303.9 million to $367.7 million over the same period. Service, rental and
maintenance revenues increased $60.5 million, or 20.8%, to $351.9 million in
1997 from $291.4 million in 1996. These increases in revenues were due
primarily to the increase in the number of units in service from 3.3 million at
December 31, 1996 to 3.9 million at December 31, 1997 and the full year
7
<PAGE>
impact of the Westlink acquisition which was completed in May 1996. Maintenance
revenues represented less than 10% of total service, rental and maintenance
revenues in 1996 and 1997. Product sales, less cost of products sold, increased
25.9% to $15.7 million in 1997 from $12.5 million in 1996 as a result of a
greater number of pager unit sales.
Service, rental and maintenance expenses increased to $79.8 million, or 21.7%
of net revenues, in 1997 from $65.0 million, or 21.4% of net revenues, in 1996.
The increase was due primarily to increased expenses associated with system
expansions and the provision of paging services to a greater number of
subscribers. Annual service, rental and maintenance expenses per subscriber
decreased to $22.00 in 1997 from $25.00 in 1996.
Selling expenses increased to $51.5 million, or 14.0% of net revenues, in
1997 from $47.0 million, or 15.4% of net revenues, in 1996. The increase in
selling expenses was due to the full year impact of the Westlink acquisition
and the marketing costs incurred to promote Arch's Arch Paging brand identity.
Arch's selling cost per net new pager in service increased to $87.00 in 1997
from $58.00 in 1996, primarily due to fixed selling costs and increased
marketing costs being spread over fewer net new units put into service.
General and administrative expenses increased to $106.0 million, or 28.8% of
net revenues, in 1997 from $86.2 million, or 28.4% of net revenues, in 1996.
The increase in absolute dollars was due primarily to increased expenses
associated with supporting more units in service, including the full year
impact of Westlink, as well as expenses associated with the establishment of
Arch's national services division. See "Business-- Subscribers and Marketing--
Arch".
Depreciation and amortization expenses increased to $232.3 million, or 63.2%
of net revenues, in 1997 from $191.9 million, or 63.1% of net revenues, in
1996. These expenses reflect Arch's acquisitions of paging businesses,
accounted for as purchases, and continued investment in units and other system
expansion equipment to support continued growth.
Operating loss increased to $102.0 million in 1997 from $86.1 million in 1996
as a result of the factors outlined above.
Net interest expense increased to $97.2 million in 1997 from $75.9 million in
1996. The increase was attributable to an increase in Arch's average
outstanding debt. Interest expense includes approximately $33.0 million in 1997
and $24.0 million in 1996, of non-cash interest accretion on Arch's 10 7/8%
senior discount notes due 2008 under which semi-annual interest payments
commence on September 15, 2001. See Note 3 to Arch's consolidated financial
statements.
Arch recognized income tax benefits of $21.2 million in 1997 and $51.2
million in 1996, representing the tax benefit of operating losses subsequent to
the acquisitions of USA Mobile in September 1995 and Westlink in May 1996 which
were available to offset deferred tax liabilities arising from Arch's
acquisitions of USA Mobile and Westlink.
During 1996, Arch recognized an extraordinary charge of $1.9 million,
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under a prior credit facility.
Net loss increased to $181.9 million in 1997 from $114.7 million in 1996 as a
result of the factors outlined above. Included in the net loss were charges of
$3.9 million for 1997 and $2.0 million for 1996, representing Arch's pro rata
share of Benbow's losses since the Westlink acquisition in May 1996.
Liquidity and Capital Resources
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
paging units and paging system equipment, to service debt and to finance
acquisitions.
8
<PAGE>
Capital Expenditures and Commitments
Excluding acquisitions of paging businesses, Arch's capital expenditures were
$165.2 million in 1996, $102.8 million in 1997 and $113.2 million in 1998. To
date, Arch has funded its capital expenditures with net cash provided by
operating activities and the incurrence of debt. Arch believes that it will
have sufficient cash available from operations and credit facilities to fund
its capital expenditures for the remainder of 1999.
Arch's 1998 capital expenditures primarily involved the purchase of paging
units, paging system equipment and transmission equipment, information systems,
advances to Benbow, as described below, and capitalized financing costs.
Arch estimates the amount of capital that will be required to fund capital
expenditures by the combined company for 1999 will be approximately $140.0
million. Such expenditures will be used primarily for subscriber equipment,
network infrastructure, information systems and the construction of certain
markets for a nationwide network of narrowband personal communications
services, which are commonly referred to as N-PCS. However, the actual amount
of capital to be required by the combined company will depend upon a number of
factors. These 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. Arch
believes it will have sufficient cash available from operations and from
borrowings under the secured credit facility to fund anticipated capital
expenditures of the combined company for 1999.
Arch was formerly obligated to advance to Benbow Ventures, Inc. sufficient
funds to service debt obligations incurred by Benbow in connection with its
acquisition of its N-PCS licenses and to finance construction of an N-PCS
system unless funds were available to Benbow from other sources. This
obligation was subject to the approval of Arch's designee on Benbow's board of
directors. As of March 31, 1999, Arch had advanced approximately $23.7 million
to Benbow. In June 1999, Arch, Benbow and Benbow's principal stockholder, Ms.
June Walsh, agreed that:
. the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated
. Benbow will not make any further FCC payments and will not pursue
construction of an N-PCS system
. Arch will not be obligated to fund FCC payments or construction of an N-
PCS system by Benbow
. the parties will seek FCC approval of the forgiveness of Benbow's
remaining payment obligations and the transfer of Ms. Walsh's Benbow
shares to Arch
. the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of FCC approval
. Arch will pay Ms. Walsh, in installments, $3.5 million (if the
transaction closes before January 23, 2001) or $3.8 million (if the
transaction closes on January 23, 2001)
As a result of these arrangements, Benbow will not have any meaningful
business operations and is unlikely to retain its N-PCS licenses. The closing
of the transaction will not affect the funding obligations of Arch in
connection with Benbow's acquisition of Page Call in June 1998. See "Business--
Arch's Investments in N-PCS Licenses".
Other Commitments and Contingencies
Interest payments on the $467.4 million principal amount at maturity of
Arch's discount notes commence September 15, 2001. Arch expects to service such
interest payments out of cash made available to it by its subsidiaries. Based
on the principal amount of Arch's discount notes now outstanding, such interest
payments will equal $25.4 million on March 15 and September 15 of each year
until scheduled maturity on March 15, 2008. A default by Arch in its payment
obligations under the discount notes could have a material adverse effect on
the business, financial condition, results of operations or prospects of Arch.
9
<PAGE>
On June 29, 1998, Benbow acquired all of the outstanding stock of Page Call
by issuing to Page Call's former stockholders preferred stock and a 12%
promissory note for $17.2 million. Benbow also agreed to pay one of Page Call's
stockholders $911,000 over five years for consulting services. Benbow's
preferred stock and promissory note are exchangeable for common stock
. at any time at the holders' option, at an exchange price equal to the
higher of (1) $13.00 per share or (2) the market price of common stock,
. mandatorily on April 8, 2000, at the then prevailing market price of
common stock, or
. automatically at an exchange price of $13.00 per share, if the market
price of common stock equals or exceeds $13.00 for 20 consecutive
trading days.
Arch is permitted to require Benbow to redeem its preferred stock and
promissory note at any time for cash. Arch guaranteed all obligations of Benbow
under the Benbow preferred stock, promissory note and consulting agreement
described above. Arch may elect to make payments under its guarantee in common
stock or cash. Benbow's redemption of its preferred stock and promissory note
for cash, or Arch's payment of cash pursuant to its guarantees of Benbow's
preferred stock and promissory note, would depend upon the availability of
capital and any restrictions contained in applicable debt instruments and under
the Delaware corporations statute, which currently would not permit any such
cash redemptions or payments. If Arch issues common stock or pays cash pursuant
to its guarantees, Arch will receive from Benbow a promissory note and non-
voting, non-convertible preferred stock of Benbow with an annual yield of 14.5%
payable upon an acquisition of Benbow or earlier to the extent that available
cash and applicable law permit. Page Call's stockholders received customary
registration rights for any shares of common stock issued in exchange for
Benbow's preferred stock and promissory note or pursuant to Arch's guarantees.
Sources of Funds
Arch's net cash provided by operating activities was $37.8 million in 1996,
$63.6 million in 1997, $81.1 million in 1998 and $12.4 million in the three
months ended March 31, 1999. Arch expects to fund its capital needs for the
foreseeable future with borrowings under current and future credit facilities,
net cash provided by operations and, depending on Arch's needs and market
conditions, possible sales of equity or debt securities. For additional
information, see Note 3 to Arch's consolidated financial statements. Arch's
ability to access future borrowings will depend, in part, on its ability to
continue to grow its EBITDA. At June 3, 1999, after giving effect to the
MobileMedia acquisition and the associated drawdown of funds, Arch had
approximately $100.0 million in available borrowing capacity under its secured
credit facility.
Secured Credit Facility
In June 1998 and March 1999, Arch amended an existing credit facility to
establish senior secured revolving credit and term loan facilities with a
wholly owned subsidiary as borrower in the aggregate amount of $581.0 million
consisting of:
. Tranche A: a $175.0 million reducing revolving credit facility;
. Tranche B: a $100.0 million 364-day revolving credit facility under which
the principal amount outstanding on June 27, 1999 was converted into a
term loan; and
. Tranche C: a $306.0 million term loan of which $125.0 million was made
available in a single drawing on June 29, 1998 and $181.0 million was
made available in a single drawing on the closing date of the MobileMedia
acquisition.
The amount of these facilities will reduce as time passes. See "Description
of Outstanding Indebtedness--Secured Credit Facility".
Recent Issuances of Notes
In June 1998, a subsidiary of Arch issued $130.0 million principal amount of
12 3/4% senior notes due 2007 for net proceeds of $127.5 million, before
deducting selling discounts and expenses, in a private placement made
10
<PAGE>
pursuant to Rule 144A under the Securities Act. These notes were sold at an
initial price to investors of 98.049% of the face amount of their investment.
On June 3, 1999, the same subsidiary received the proceeds of an offering of
$147.0 million principal amount of 13 3/4% senior notes due 2008 to qualified
institutional buyers under Rule 144A. The notes were sold at 95.091% of the
face amount for proceeds of $139.8 million, before selling discounts and
expenses. See "Description of Outstanding Indebtedness--Senior Notes".
Sandler Equity Investment
On June 29, 1998, two partnerships managed by Sandler Capital Management
Company, Inc., an investment management firm, together with certain other
private investors, made an equity investment in Arch of $25.0 million in the
form of Series C preferred stock. Arch used such amount to repay indebtedness
under a former credit facility as part of the establishment of the current
secured credit facility. See "Description of Securities--Series C Preferred
Stock".
During 1999 Arch will accrue dividends of $2.1 million on the Series C
preferred stock, payable upon redemption or conversion of the Series C
preferred stock or liquidation of Arch.
Inflation
Inflation has not had a material effect on Arch's operations to date. Paging
systems equipment and operating costs have not increased in price and Arch's
pager costs have declined substantially in recent years. This reduction in
costs has generally been reflected in lower pager prices charged to subscribers
who purchase their units. Arch's general operating expenses, such as salaries,
employee benefits and occupancy costs, are subject to normal inflationary
pressures.
Year 2000 Compliance
Arch has created a cross-functional Y2K project group to work on the Year
2000 problem. The Y2K project group is continuing its analysis of external and
internal areas likely to be affected by the Year 2000 problem and classifying
the identified areas of concern into either a mission critical or non-mission
critical status. For external areas, Arch has distributed, and continues to
distribute, surveys requesting information about the Year 2000 readiness of
certain vendors. As part of its evaluation of Year 2000 vulnerability related
to its pager and paging equipment vendors, Arch has discussed their efforts
with them to identify potential issues associated with their equipment and/or
software. Internally, Arch is completing an inventory audit of hardware and
software testing for both its corporate and divisional operations.
The costs associated with the replacement of hardware, software and paging
equipment will be capitalized and amortized in accordance with Arch's existing
accounting policies and any future costs relating thereto will be capitalized
and amortized in a similar manner. Maintenance or modification costs have been,
and are expected to, be expensed as incurred. Based on Arch's costs incurred to
date, as well as estimated costs to be incurred later in 1999, Arch does not
expect that resolution of the Year 2000 problem will have a material adverse
effect on its results of operations and financial condition. Costs of the Year
2000 project are based on current estimates and actual results may vary
significantly from such estimates once plans are further developed and
implemented.
Arch is designing and implementing contingency plans relating to the Year
2000 problem, identifying the likely risks and determining commercially
reasonable solutions. Arch intends to complete its Year 2000 contingency
planning during calendar year 1999.
11
<PAGE>
Factors Affecting Future Operating Results
Relating to Operations
Integrating Arch and MobileMedia 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 described in "Business--Business Strategy". Until integration is
complete, the two companies will continue to operate with some autonomy. This
degree of autonomy may blunt the implementation of the combined company's
operating strategy.
The combination of the two companies will require, among other things,
coordination of administrative, sales and marketing, distribution and
accounting and finance functions and expansion of information and management
systems. The integration process could 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. See "Business".
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. See "Business--
MobileMedia's Paging and Messaging Services, Products and Operations".
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. See "Industry
Overview--Competition".
12
<PAGE>
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.
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. Specific examples of regulatory changes that
could impose additional administrative and/or economic burdens on the combined
company, or that could benefit competing technologies, are discussed under
"Industry Overview--FCC Regulatory Approval and Authorizations", "--
Telecommunications Act of 1996", "--Future Regulation", "--State Regulation",
and "--Competition".
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. Arch may not have more than 25% of its
stock owned or voted by aliens or their representatives, a foreign government
or its representatives or a foreign corporation if the FCC finds that the
public interest would be served by denying
13
<PAGE>
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. See "Industry Overview--Regulation". Arch's
certificate of incorporation permits the redemption of shares of its 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. See "--High degree of leverage burdens operations", "--
Competition and technological change may undermine Arch's business" and
"Industry Overview--Regulation".
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 February 6, 2000, and March 17, 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. See "Business--Sources
of Equipment".
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. See
"Management".
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. See "Arch Management's Discussion and Analysis of Financial Condition
and Results of Operations--Divisional Reorganization".
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.
14
<PAGE>
The combined company is in the process of reviewing, evaluating and, where
necessary, modifying or replacing its computerized systems and applications to
enable it to be 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 end of year 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, other paging carriers, satellite carriers or other
telecommunication providers, may not be Year 2000 compliant. Because of the
unique nature of 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. See "--Year 2000 Compliance", "Mobile Media Management's
Discussion of Financial Condition and Results of Operations--Year 2000
Compliance" and "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operation--Year 2000 Compliance."
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. See "MobileMedia Management's Discussion and Analysis of
Financial Condition and Results of Operations", and the consolidated financial
statements and notes of Arch and MobileMedia.
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 millions)
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. See the consolidated financial statements
and notes of Arch and MobileMedia and "Unaudited Pro Forma Condensed
Consolidated Statement of Operations".
For both Arch and MobileMedia, these historical net losses have resulted
principally from substantial depreciation and amortization expense, primarily
related to intangible assets and pager depreciation, interest expense, the
impairment of long-lived assets in the case of MobileMedia and other costs of
growth. Substantial and increased amounts of debt are expected to be
outstanding for the foreseeable future. This will result in significant
additional interest expense which could have a material adverse effect on
Arch's future income or loss. See "--Funding for future capital needs is not
assured" and "--High degree of leverage burdens operations".
15
<PAGE>
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, 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.
Relating to Liquidity, Capital Resources and Capital Structure.
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. See "Selected Historical Consolidated Financial and Operating Data--
Arch".
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. See "Description of Outstanding
Indebtedness" and the consolidated financial statements and notes of Arch and
MobileMedia.
16
<PAGE>
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.
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. See "Description
of Outstanding Indebtedness".
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. See "--Liquidity and Capital Resources" and
"Description of Outstanding Indebtedness".
17
<PAGE>
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. See "Description of Securities--Anti-
Takeover Provisions".
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 3, 1999, the reported sale price of common stock on the Nasdaq National
Market has ranged from a high of $6.1875 per share in June 1998 to a low of
$0.6875 per share in October 1998. The trading price of common stock following
the MobileMedia acquisition will likely be affected by numerous factors. These
include the risk factors set forth in this prospectus, as well as prevailing
economic and financial trends and conditions in the public securities markets.
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.
Recent and Pending Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Arch adopted SFAS No. 130 in 1998. The
adoption of this standard did not have an effect on its reporting of income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Arch adopted SFAS No. 131 for its year ending December 31, 1998.
Adoption of this standard did not have a significant impact on Arch's
reporting.
In March 1998, the Accounting Standards Committee of the Financial Accounting
Standards Board issued Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes
criteria for capitalizing costs of computer software developed or obtained for
internal use. Arch adopted SOP 98-1 in 1998. The adoption of SOP 98-1 has not
had a material effect on Arch's financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities". SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. Arch adopted SOP 98-5
effective January 1, 1999. The initial application of SOP 98-5 resulted in a
$3.4 million charge which was reported as
18
<PAGE>
the cumulative effect of a change in accounting principle. The charge
represents the unamortized portion of start-up and organization costs which had
been deferred in prior years. The adoption of SOP 98-5 is not expected to have
a material effect on Arch's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings. Arch intends to
adopt this standard effective January 1, 2001. Arch has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements; however, adopting
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
19
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--MOBILEMEDIA
The following table sets forth selected historical consolidated financial and
operating data of MobileMedia for each of the five years in the period ended
December 31, 1998 and the three months ended March 31, 1998 and 1999. The
historical financial and operating data presented under consolidated statements
of operations data and consolidated balance sheet data for each of the five
years in the period ended December 31, 1998 have been derived from
MobileMedia's audited consolidated financial statements and notes. The selected
financial and operating data as of March 31, 1998 and for the three months
ended March 31, 1998 and 1999 have been derived from MobileMedia's unaudited
consolidated financial statements and notes. You should read the following
consolidated financial information in conjunction with "MobileMedia
Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth below and MobileMedia's consolidated financial statements
and notes contained in Arch's Current Report on Form 8-K/A dated June 24, 1999.
MobileMedia completed its acquisition of the paging and wireless messaging
business of Dial Page, Inc. on August 31, 1995 for a purchase price of $187.4
million. The consolidated statement of operations data includes Dial Page's
results of operations from that date. See Note 3 to MobileMedia's consolidated
financial statements and "Business--Predecessors to the Combined Company;
Events Leading Up to MobileMedia's Bankruptcy Filings". MobileMedia completed
the acquisition of Mobile Communications Corporation of America, commonly known
as MobileComm, on January 4, 1996 for a purchase price of $928.7 million. The
consolidated statement of operations data includes MobileComm results of
operations from that date. See Note 3 to MobileMedia's consolidated financial
statements and "Business--Predecessors to the Combined Company; Events Leading
Up to MobileMedia's Bankruptcy Filings".
In the following table, services, rents and maintenance, selling, general and
administrative expenses includes non-recurring adjustments to record executive
separation expenses of $2.5 million in 1994 and $0.7 million in 1995.
Impairment of long-lived assets includes a non-recurring adjustment to
record, effective December 31, 1996, a $792.5 million write-down of intangible
assets based upon MobileMedia's determination that an impairment of long-lived
assets existed pursuant to Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". See Note 2 to MobileMedia's consolidated financial
statements.
Restructuring costs includes non-recurring adjustments to record
restructuring costs related to MobileMedia's bankruptcy filing on January 30,
1997.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, amortization of deferred gain on
tower sale, impairment of long-lived assets and restructuring costs. EBITDA is
a financial measure commonly used in MobileMedia's industry and should not be
construed as an alternative to operating income, as determined in accordance
with GAAP, as an alternative to cash flows from operating activities, as
determined in accordance with GAAP, or as a measure of liquidity. MobileMedia's
adjusted EBITDA is, however, the primary financial measure by which
MobileMedia's covenants are calculated under the agreements governing
MobileMedia's indebtedness. EBITDA is also one of the financial measures used
by analysts to value MobileMedia. MobileMedia's adjusted EBITDA in 1996
excludes the impact of the $792.5 million writedown of intangible assets.
MobileMedia's adjusted EBITDA may not necessarily be comparable to similarly
titled data of other paging companies.
Adjusted EBITDA margin is calculated by dividing MobileMedia's adjusted
EBITDA by total revenues less cost of products sold. EBITDA margin is a measure
commonly used in the paging industry to evaluate a company's EBITDA relative to
total revenues less cost of products sold as an indicator of the efficiency of
a company's operating structure. MobileMedia's adjusted EBITDA margin in 1996
excludes the impact of the $792.5 million writedown of intangible assets.
The interim financial information as of March 31, 1999 and for the three
months ended March, 1998 and 1999 contained in this prospectus is unaudited.
However, in the opinion of MobileMedia management, it includes all
20
<PAGE>
adjustments of a normal recurring nature that are necessary for a fair
presentation of the financial position, results of operations and cash flows
for the periods presented. Results of operations for the interim periods
presented are not necessarily indicative of results of operations for the
entire year or any future period.
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended
Year Ended December 31, March 31,
--------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ---------- ---------- ----------
MobileMedia
-----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Total revenues.......... $ 203,149 $ 252,996 $ 640,710 $ 527,392 $ 449,681 $ 115,163 $ 105,824
Cost of products sold... (18,705) (26,885) (72,595) (35,843) (22,162) (5,513) (3,516)
---------- ---------- ----------- ---------- ---------- ---------- ----------
184,444 226,111 568,115 491,549 427,519 109,650 102,308
Services, rents and
maintenance, selling,
and general and
administrative
expenses............... 136,672 164,037 459,474 388,476 305,698 79,510 72,694
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 and
amortization........... 67,651 71,408 348,698 140,238 116,459 31,671 27,969
Amortization of deferred
gain on tower sale..... -- -- -- -- (1,556) -- (1,167)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Operating (loss) income. (19,879) (9,334) (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense)
Interest expense........ (18,237) (31,745) (92,663) (67,611) (53,043) (14,626) (10,018)
(Loss) gain on sale of
assets................. 1,049 -- 68 3 94,165 1 (323)
Other................... -- -- -- -- (338) -- 2,063
---------- ---------- ----------- ---------- ---------- ---------- ----------
Total other income
(expense)............. (17,188) (31,745) (92,595) (67,608) 40,784 (14,625) (8,278)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Income (loss) before
income tax provision
(benefit).............. (37,067) (41,079) (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income tax benefit
(provision)............ -- -- 69,442 -- (3,958) -- (209)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (37,067) $ (41,079) $(1,059,944) $ (124,584) $ 35,581 $ (20,714) $ (7,692)
========== ========== =========== ========== ========== ========== ==========
Other Data
Adjusted EBITDA......... $ 47,772 $ 62,074 $ 108,641 $ 103,073 $ 121,821 $ 30,140 $ 29,614
Adjusted EBITDA margin.. 25.9 % 27.5 % 19.1 % 21.0 % 28.5 % 27.5 % 28.9 %
Units in service (at end
of period)............. 1,447,352 2,369,101 4,424,107 3,440,342 3,143,968 3,319,553 3,106,775
Capital expenditures.... $ 65,574 $ 86,163 $ 161,861 $ 40,556 $ 53,867 $ 4,854 $ 26,806
Cash flows provided by
operating activities... $ 53,781 $ 43,849 $ 57,194 $ 14,920 $ 54,462 $ 19,542 $ 17,552
Cash flows provided by
(used in) investing
activities............. $ (50,878) $ (312,698) $(1,028,321) $ (40,556) $ 115,836 $ (4,854) $ (25,025)
Cash flows provided by
(used in) financing
activities............. -- $ 671,794 $ 586,111 $ 13,396 $ (180,000) $ (10,000) $ 6,255
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------
As of
March 31,
1994 1995 1996 1997 1998 1999
-------- ---------- ---------- ---------- --------- -----------
(dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data
Total assets............ $353,703 $1,128,546 $ 790,230 $ 655,134 $ 561,454 $ 554,009
Debt.................... 195,677 476,156 1,074,196 1,075,681 905,681 910,681
Total stockholders'
equity (deficit)....... 101,500 578,753 (468,391) (589,579) (553,998) (561,690)
</TABLE>
The following table reconciles net income to the presentation of MobileMedia's
adjusted EBITDA.
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Year Ended December 31, Ended March 31,
---------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- ----------- --------- -------- -------- --------
MobileMedia
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $(37,067) $(41,079) $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
Interest expense........ 18,237 31,745 92,663 67,611 53,043 14,626 10,018
Income tax provision
(benefit).. -- -- (69,442) -- 3,958 -- 209
Depreciation and
amortization........... 67,651 71,408 348,698 140,238 116,459 31,671 27,969
Amortization of deferred
gain on tower sale..... -- -- -- -- (1,556) -- (1,167)
Restructuring costs..... -- -- 4,256 19,811 18,624 4,558 5,067
Impairment of long lived
assets................. -- -- 792,478 -- -- -- --
Reduction of liabilities
subject to compromise.. -- -- -- -- (10,461) -- (3,050)
Gain/loss on sale of
assets................. (1,049) -- (68) (3) (94,165) (1) 323
Other income/expense.... -- -- -- -- 338 -- (2,063)
-------- -------- ----------- --------- -------- -------- --------
Adjusted EBITDA......... $ 47,772 $ 62,074 $ 108,641 $ 103,073 $121,821 $ 30,140 $ 29,614
======== ======== =========== ========= ======== ======== ========
</TABLE>
21
<PAGE>
MOBILEMEDIA MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Presentation of Financial Condition and Results of Operations
The following are principal components of MobileMedia's operating results:
. Services, rents and maintenance revenues, also referred to as paging
revenue: includes primarily monthly, quarterly, semi-annually and
annually billed recurring revenue, not dependent on usage, charged to
subscribers for paging and related services such as voice mail and pager
repair and replacement.
. Net revenues: includes primarily paging revenues and sales of customer
owned and maintained units less cost of units sold.
. Services, rents and maintenance expenses: includes costs related to the
management, operation and maintenance of MobileMedia's network systems.
. Selling expenses: includes salaries, commissions and administrative costs
for MobileMedia's sales force and related marketing and advertising
expenses.
. General and administrative expenses: includes primarily customer service
expense, executive management, accounting, office telephone, rents and
maintenance and information services.
. Average revenues per unit, or ARPU: calculated by dividing (1) the
average monthly services, rents and maintenance revenues for the period
by (2) the weighted average number of units in service for the period.
ARPU, as determined by MobileMedia, may not necessarily be comparable to
similarly titled data of other paging companies.
. Average monthly operating expense per unit : calculated by dividing (1)
the average monthly services, rents and maintenance, selling and general
and administrative expenses for the period by (2) the weighted average
number of units in service for the period.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, impairment of long-lived assets,
amortization of deferred gain on the tower sale and restructuring costs. See
Notes 2 and 3 to MobileMedia's consolidated financial statements. EBITDA is a
financial measure commonly used in the paging industry and should not be
construed as an alternative to operating income as determined in accordance
with GAAP, as an alternative to cash flows from operating activities as
determined in accordance with GAAP or as a measure of liquidity. EBITDA is,
however, the primary financial measure by which MobileMedia's covenants are
calculated under the agreements governing MobileMedia's indebtedness.
As used below, the term "acquisitions" refers to both the MobileComm
acquisition and the Dial Page acquisition.
Overview
The following discussion and analysis should be read in conjunction with
MobileMedia's consolidated financial statements and notes.
MobileMedia builds and operates wireless messaging and communications systems
and generates revenues from the provision of paging and other wireless
communications services. MobileMedia's strategy is to strengthen its industry
leadership position by providing superior paging and messaging services at
competitive prices.
MobileMedia's revenues are derived primarily from fixed periodic recurring
fees charged to MobileMedia's subscribers for paging services. These fees are
not dependent on usage. While a subscriber remains in MobileMedia's service,
future operating results benefit from this recurring revenue stream with
minimal requirements for incremental selling expenses or other costs.
22
<PAGE>
MobileMedia completed its acquisition of MobileComm in January 1996 and
MobileMedia purchased the paging business of Dial Page in August 1995.
MobileMedia incurred integration related costs in excess of those originally
anticipated to (1) transfer units-in-service between paging networks to
rationalize capacity, (2) temporarily operate duplicative functions, primarily
customer service, and (3) hire additional employees and consultants to focus on
the integration. MobileMedia also experienced increased loss of subscribers
related to the integration difficulties. MobileMedia's financial results have
been negatively impacted by the higher than anticipated integration costs and
increased loss of subscribers.
On January 30, 1997, MobileMedia and its parent company filed voluntary
petitions for relief under the Bankruptcy Code in order to implement an
operational and financial restructuring. Until Arch's acquisition of
MobileMedia on June 3, 1999, MobileMedia and its parent company operated their
business as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court. The Bankruptcy Code required MobileMedia Communications, Inc. and its
parent company to file monthly operating reports with the United States
Trustee. Copies of the reports were filed as Current Reports on Form 8-K with
the SEC. Financial statements included in MobileMedia's periodic reports for
the months of February 1997 through June 1998 were not prepared in accordance
with GAAP due to MobileMedia's inability at the time of such filings to
determine the amount of an impairment loss related to long-lived assets
pursuant to Financial Accounting Standard No. 121. Such financial statements
are unaudited and have been revised periodically based on subsequent
determination of changes in facts and circumstances impacting previously filed
unaudited financial statements. The audited financial statements of MobileMedia
included in this prospectus reflect adjustments from the unaudited statements,
including an impairment adjustment of approximately $792.5 million recorded as
of December 31, 1996.
23
<PAGE>
Results of Operations
The following table presents selected items from MobileMedia's consolidated
statement of operations and selected other information for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1998 1999
--------------- ---------------
(in thousands, except
percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenues
Services, rents and maintenance.......... $108,542 99.0 % $100,631 98.4 %
Equipment sales and activation fees...... 6,621 6.0 5,193 5.1
-------- ----- -------- -----
Total revenues............................. 115,163 105.0 105,824 103.4
Cost of products sold...................... (5,513) (5.0) (3,516) (3.4)
-------- ----- -------- -----
Net revenues............................... 109,650 100.0 102,308 100.0
Operating expenses
Services, rents and maintenance.......... 28,899 26.4 27,077 26.5
Selling.................................. 15,703 14.3 14,136 13.8
General and administrative............... 34,908 31.8 31,481 30.8
Reduction of liabilities subject to
compromise.............................. -- -- (3,050) (3.0)
Restructuring costs...................... 4,558 4.2 5,067 5.0
Depreciation and amortization............ 31,671 28.9 27,969 27.3
Amortization of deferred gain on tower
sale.................................... -- -- (1,167) (1.1)
-------- ----- -------- -----
Total operating expenses................... 115,739 105.6 101,513 99.2
-------- ----- -------- -----
Operating income (loss).................... (6,089) (5.6) 795 0.8
Other income (expense)
Interest expense (net)................... (14,626) (13.3) (10,018) (9.8)
Gain (loss) on sale of assets............ 1 0.0 (323) (0.3)
Other income ............................ -- -- 2,063 2.0
-------- ----- -------- -----
Total other income (expense)............... (14,625) (13.3) (8,278) (8.1)
-------- ----- -------- -----
Income from continuing operations before
income tax provision...................... (20,714) (18.9) (7,483) (7.3)
Income tax provision....................... -- -- 209 0.2
-------- ----- -------- -----
Income from continuing operations.......... $(20,714) (18.9)% $ (7,692) (7.5)%
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1999
-------------- --------------
(in thousands, except
percentage and unit data)
<S> <C> <C>
Other Data
Adjusted EBITDA................................ $ 30,140 $ 29,614
Cash flows provided by operating activities.... $ 19,542 $ 17,552
Cash flows used in investing activities........ $ (4,854) $ (25,025)
Cash flows Provided by (used in) financing
activities.................................... $ (10,000) $ 6,255
ARPU........................................... $ 10.70 $ 10.73
Average monthly operating expense per unit..... $ 7.84 $ 7.75
Units in service (at end of period)............ 3,319,553 3,106,775
</TABLE>
24
<PAGE>
Three Months Ended March 31, 1999 Compared With Three Months Ended March 31,
1998
Units in service decreased 212,778 from 3,319,553 as of March 31, 1998 to
3,106,775 as of March 31, 1999, a decrease of 6.4%. The decrease was primarily
attributable to gross additions which were below expectations.
Services, rents and maintenance revenues decreased 7.3% to $100.6 million for
the three months ended March 31, 1999 compared to $108.5 million for the three
months ended March 31, 1998. The decrease was attributable to fewer units in
service and partially offset by a $0.03 increase in ARPU from $10.70 for the
three months ended March 31, 1998 to $10.73 for the three months ended March
31, 1999. The increase in ARPU was largely due to a greater percentage of
alphanumeric units in service and a smaller percentage in the reseller
distribution channel. Alphanumeric units generally are sold at higher ARPU and
units sold through the reseller distribution channel generally are sold at
lower ARPU.
Equipment sales and activation fees decreased 21.6% to $5.2 million for the
three months ended March 31, 1999 compared to $6.6 million for the three months
ended March 31, 1998. The decrease in equipment sales was primarily due to a
$0.7 million decrease in equipment sold through the direct distribution channel
and a $0.6 million decrease in billings for non-returned equipment. Equipment
sales and activation fees, less cost of products sold, increased to $1.7
million for the three months ended March 31, 1999 from $1.1 million for the
three months ended March 31, 1998. This increase was primarily attributable to
improved equipment sales margins on units sold through the retail distribution
channel.
Net revenues decreased 6.7% to $102.3 million for the three months ended
March 31, 1999 compared to $109.7 million for the three months ended March 31,
1998.
Services, rents and maintenance expenses decreased 6.3% to $27.1 million for
the three months ended March 31, 1999 compared to $28.9 million for the three
months ended March 31, 1998. This decrease resulted primarily from lower
subcontracted paging expenses of approximately $3.2 million arising from
billing reconciliations, increased unit cancellations and customer migration to
company-owned networks, lower paging-related telecommunications expenses of
approximately $0.6 million as a result of continued usage of lower cost
facilities and lower pager repair expenses of $0.4 million. These expense
reductions were offset by an increase in antenna site lease expense of $2.7
million primarily resulting from the leaseback of antenna sites on transmission
towers sold to Pinnacle Towers, Inc. See Note 3 to MobileMedia's consolidated
financial statements. As a percentage of net revenue, services, rents and
maintenance expenses were constant at approximately 26.5%.
Selling expenses for the three months ended March 31, 1999 decreased 10.0% to
$14.1 million compared to $15.7 million for the three months ended March 31,
1998. The decrease resulted primarily from lower sales personnel costs of
approximately $0.8 million attributable to lower sales headcount, lower
advertising expenses of approximately $0.6 million and lower retail
distribution channel selling expenses of approximately $0.2 million resulting
from lower retail sales. Selling expenses as a percentage of net revenue
decreased from 14.3% to 13.8%.
General and administrative expenses decreased 9.8% to $31.5 million for the
three months ended March 31, 1999 compared to $34.9 million for the three
months ended March 31, 1998 and decreased as a percentage of net revenues to
30.8% for the three months ended March 31, 1999 from 31.8% for the three months
ended March 31, 1998. The decrease primarily resulted from reduced bad debt
expense of $1.3 million due to improvements in MobileMedia's billing and
collections functions, lower administrative telephone expenses of $1.0 million
resulting from lower call volume and lower customer service expenses of $1.4
million primarily resulting from lower headcount.
Reduction of liabilities subject to compromise was $3.1 million for the three
months ended March 31, 1999. See Note 2 to MobileMedia's consolidated financial
statements.
25
<PAGE>
Restructuring costs increased 11.2% from $4.6 million for the three months
ended March 31, 1998 to $5.1 million for the three months ended March 31, 1999
due to an increase in professional fees incurred by MobileMedia resulting from
its confirmed plan of reorganization on April 12, 1999 (see Note 1 to
MobileMedia's consolidated financial statements).
Depreciation and amortization decreased 11.7% to $28.0 million for the three
months ended March 31, 1999 compared to $31.7 million for the three months
ended March 31, 1998. The decrease was primarily due to lower pager
depreciation attributable to a reduced depreciable base of pager assets and
decreased pager purchases. As a percentage of net revenues, depreciation and
amortization expense decreased to 27.3% for the three months ended March 31,
1999 from 28.9% for the three months ended March 31, 1998.
Amortization of deferred gain on tower sale was $1.2 million for the three
months ended March 31, 1999. See Note 3 to MobileMedia's consolidated financial
statements.
Operating income (loss) increased 113.1% to income of $0.8 million for the
three months ended March 31, 1999 from a loss of $6.1 million for the three
months ended March 31, 1998. The increase was primarily due to decreased
operating expenses.
Interest expense decreased 31.5% to $10.0 million for the three months ended
March 31, 1999 compared to $14.7 million for the three months ended March 31,
1998. The decrease was primarily due to lower interest expense on MobileMedia's
pre-petition credit facility resulting from lower outstanding borrowings in the
three months ended March 31, 1999.
Gain (loss) on sale of assets of $0.3 million for the three months ended
March 31, 1999 is primarily due to the write off of equipment related to the
resolution of a legal dispute with an equipment provider.
Other income was $2.1 million for the three months ended March 31, 1999 and
primarily resulted from a legal settlement due to MobileMedia as a result of
the resolution of a dispute with an equipment provider.
Loss from continuing operations before income tax provision, as a result of
the above factors, decreased to $7.5 million for the three months ended March
31, 1999 compared to $20.7 million for the three months ended March 31, 1998
Income tax provision increased to $0.2 million for the three months ended
March 31, 1999 primarily as a result of state income tax expense.
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998
----------------- -----------------
(in thousands, except percentage
and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data
Revenues
Services, rents and maintenance...... $ 491,174 99.9 % $ 423,059 99.0 %
Equipment sales and activation fees.. 36,218 7.4 26,622 6.2
---------- ----- ---------- -----
Total revenues......................... 527,392 107.3 449,681 105.2
Cost of products sold.................. (35,843) (7.3) (22,162) (5.2)
---------- ----- ---------- -----
Net revenues........................... 491,549 100.0 427,519 100.0
Operating expenses
Services, rents and maintenance...... 139,333 28.3 111,589 26.1
Selling.............................. 69,544 14.2 61,106 14.3
General and administrative........... 179,599 36.5 133,003 31.1
Reduction of liabilities subject to
compromise.......................... -- -- (10,461) (2.4)
Restructuring costs.................. 19,811 4.0 18,624 4.4
Depreciation and amortization........ 140,238 28.6 116,459 27.2
Amortization of deferred gain on
tower sale.......................... -- -- (1,556) (0.4)
---------- ----- ---------- -----
Total operating expenses............... 548,525 111.6 428,764 100.3
---------- ----- ---------- -----
Operating loss......................... (56,976) (11.6) (1,245) (0.3)
Other income (expense)
Interest expense (net)............... (67,611) (13.7) (53,043) (12.4)
Gain on sale of assets............... 3 0.0 93,827 21.9
---------- ----- ---------- -----
Total other income (expense)........... (67,608) (13.7) 40,784 9.5
---------- ----- ---------- -----
Income (loss) from continuing
operations before income tax
provision............................. (124,584) (25.3) 39,539 9.2
Income tax provision................... -- -- 3,958 0.9
---------- ----- ---------- -----
Income (loss) from continuing
operations............................ $ (124,584) (25.3)% $ 35,581 8.3 %
========== ===== ========== =====
Other Data
Adjusted EBITDA........................ $ 103,073 21.0 % $ 121,821 28.5 %
Cash flows provided by operating
activities............................ 14,920 54,462
Cash flows provided by (used in) in-
vesting
activities............................ (40,556) 115,836
Cash flows provided by (used in)
financing activities.................. 13,396 (180,000)
ARPU................................... 10.41 10.71
Average monthly operating expense per
unit.................................. 8.23 7.74
Units in service (at end of period).... 3,440,342 3,143,968
</TABLE>
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Units in service decreased 296,374 from 3,440,342 as of December 31, 1997 to
3,143,968 as of December 31, 1998, a decrease of 8.6%. The decrease was
primarily attributable to gross additions which were below expectations.
27
<PAGE>
Services, rents and maintenance revenues decreased 13.9% to $423.1 million
for 1998 compared to $491.2 million for 1997. The decrease was attributable to
fewer units in service and was partially offset by a $0.30 increase in ARPU
from $10.41 for 1997 to $10.71 for 1998. The increase in ARPU was largely due
to a greater percentage of alphanumeric units in service, increased units in
service in the direct distribution channel and a smaller percentage in the
reseller distribution channel. Alphanumeric units and units sold through the
direct distribution channel generally are sold at higher ARPU.
Equipment sales and activation fees decreased 26.5% to $26.6 million for 1998
compared to $36.2 million for 1997. The decrease in equipment sales was
primarily due to a $2.7 million decrease in equipment sold through the retail
distribution channel and a $5.7 million decrease in billings for non-returned
equipment. Equipment sales and activation fees, less cost of products sold,
increased to $4.5 million for 1998 from $0.4 million for 1997. This increase
was primarily attributable to sales of used pagers with lower net book values
resulting from a change in pager depreciation from a four-year life to a three-
year life as of October 1, 1997.
Net revenues decreased 13.0% to $427.5 million for 1998 compared to $491.5
million for 1997.
Services, rents and maintenance expenses decreased 19.9% to $111.6 million
for 1998 compared to $139.3 million for 1997. This decrease resulted primarily
from lower subcontracted paging expenses of approximately $15.9 million arising
from billing reconciliations, increased unit cancellations, increased movement
of customers to company-owned networks and a reduction of approximately $10.4
million in paging-related telecommunications expenses. The decline in paging-
related telecommunications expenses resulted primarily from the FCC's
clarification of its interconnection rules pursuant to the Telecommunications
Act. These rules prohibit local exchange carriers from charging paging carriers
for the cost of dedicated facilities used to deliver local telecommunications
traffic to paging networks. The FCC clarification, however, noted that the FCC
is considering requests for reconsideration of these rules. In addition,
paging-related telecommunications expense declined as a result of a
reconfiguration of MobileMedia's network to maximize usage of lower cost
facilities. As a percentage of net revenue, services, rents and maintenance
expenses decreased from 28.3% to 26.1%.
Selling expenses for 1998 decreased 12.1% to $61.1 million compared to $69.5
million for 1997. The decrease resulted primarily from lower sales personnel
costs of approximately $6.4 million attributable to lower sales headcount and
lower retail distribution channel selling expenses of approximately $2.2
million resulting from lower retail sales. Selling expenses as a percentage of
net revenues were constant at approximately 14.3%.
General and administrative expenses decreased 25.9% to $133.0 million for
1998 compared to $179.6 million for 1997 and decreased as a percentage of net
revenues to 31.1% for 1998 from 36.5% for 1997. The decrease primarily resulted
from reduced bad debt expense of $27.8 million due to improvements in
MobileMedia's billing and collections functions, lower administrative telephone
expenses of $7.0 million resulting from lower call volume and lower long
distance rates as of October 1, 1997 and lower customer service and retail
activation expenses of $9.7 million primarily resulting from lower headcount.
Reduction of liabilities subject to compromise was $10.5 million for the year
ended December 31, 1998. See Note 2 to MobileMedia's consolidated financial
statements.
Restructuring costs decreased from $19.8 million for 1997 to $18.6 million
for 1998 due to a decline in professional fees incurred by MobileMedia as a
result of the bankruptcy filing on January 30, 1997.
Depreciation and amortization decreased 17.0% to $116.5 million for 1998
compared to $140.2 million for 1997. The decrease was primarily due to lower
pager depreciation attributable to a reduced depreciable base of pager assets
resulting from the change in useful life from four to three years on October 1,
1997 and decreased pager purchases. As a percentage of net revenues,
depreciation and amortization expense decreased to 27.2% for 1998 from 28.5%
for 1997.
Amortization of deferred gain on tower sale was $1.6 million for 1998. See
Note 3 to MobileMedia's consolidated financial statements.
28
<PAGE>
Operating loss decreased 97.8% to $1.2 million for 1998 from $57.0 million
for 1997. The decrease was primarily due to decreased operating expenses.
Interest expense decreased 21.5% to $53.0 million for 1998 compared to $67.6
million for 1997. The decrease was primarily due to lower interest expense on
MobileMedia's debtor-in-possession credit facility resulting from lower
outstanding borrowings in 1998.
Gain on sale of assets increased to $93.8 million for 1998 primarily as a
result of the sale of transmission towers and related equipment. See Note 3 to
MobileMedia's consolidated financial statements.
Income (loss) from continuing operations before income tax provision, as a
result of the above factors, increased to income of $39.5 million for 1998
compared to a loss of $124.6 million for 1997.
Income tax provision increased to $4.0 million for 1998 primarily as a result
of the sale of transmission towers.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
The following table presents selected items from MobileMedia's Consolidated
Statement of Operations and selected other information for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1997
--------------------------- --------------------------
(in thousands, except percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data
Revenues
Services, rents and
maintenance........... $ 568,892 100.1 % $ 491,174 99.9 %
Equipment sales and ac-
tivation fees......... 71,818 12.7 36,218 7.4
-------------- --------- ------------- --------
Total revenues........... 640,710 112.8 527,392 107.3
Cost of products sold.. (72,595) (12.8) (35,843) (7.3)
-------------- --------- ------------- --------
568,115 100.0 491,549 100.0
Operating expenses
Services, rents and
maintenance........... 144,050 25.4 139,333 28.3
Selling................ 96,817 17.0 69,544 14.2
General and administra-
tive.................. 218,607 38.5 179,599 36.5
Impairment of long-
lived assets.......... 792,478 139.5 -- --
Restructuring costs.... 4,256 0.7 19,811 4.0
Depreciation and amor-
tization.............. 348,698 61.4 140,238 28.6
-------------- --------- ------------- --------
Total operating expenses. 1,604,906 282.5 548,525 111.6
-------------- --------- ------------- --------
Operating loss........... (1,036,791) (182.5) (56,976) (11.6)
Total other expense...... (92,595) (16.2) (67,608) (13.7)
-------------- --------- ------------- --------
Loss before income tax
benefit................. (1,129,386) (198.7) (124,584) (25.3)
Income tax benefit....... (69,442) 12.2 -- --
-------------- --------- ------------- --------
Net loss................. $ (1,059,944) (186.5)% $ (124,584) (25.3)%
============== ========= ============= ========
Other Data
MobileMedia adjusted
EBITDA.................. $ 108,641 19.1 % $ 103,073 21.0 %
Cash flows provided by
operating activities.... $ 57,194 $ 14,920
Cash flows used in in-
vesting activities...... $ (1,028,321) $ (40,556)
Cash flows provided by
financing activities.... $ 586,111 $ 13,396
ARPU..................... $ 11.08 $ 10.41
Average monthly operating
expense per unit (1).... $ 8.95 $ 8.23
Units in service (at end
of period).............. 4,424,107 3,440,342
</TABLE>
- --------
(1) Does not include impact of $792.5 million asset impairment writedown in
1996.
29
<PAGE>
Units in service decreased from 4,424,107 as of December 31, 1996 to
3,440,342 as of December 31, 1997, a decrease of 22.2%. The decrease was
attributable to a decrease in gross unit additions and an increase in unit
cancellations primarily resulting from acquisition integration difficulties,
billing system clean up to remove non-revenue generating units and cancellation
of units for non-payment.
Services, rents and maintenance revenues decreased 13.7% to $491.2 million
for 1997 compared to $568.9 million for 1996 due to fewer units in service and
lower ARPU. ARPU decreased to $10.41 for 1997 from $11.08 for 1996 largely due
to continued competitive market conditions.
Equipment sales and activation fees decreased 49.6% to $36.2 million for 1997
compared to $71.8 million for 1996. The decrease in equipment sales was
primarily attributable to less equipment sold through the retail distribution
channel. Equipment sales and activation fees, less cost of products sold,
increased from $(0.8) million for 1996 to $0.4 million for 1997 primarily as a
result of lower retail sales of equipment sold at a discount. Cost of products
sold for 1996 includes a writedown of $3.2 million, reflecting the
establishment of a lower of cost or market reserve for units held for resale
through MobileMedia's retail and reseller distribution channels.
Net revenues decreased 13.5% to $491.5 million for 1997 compared to $568.1
million for 1996.
Services, rents and maintenance expenses decreased 3.3% to $139.3 million for
1997 compared to $144.1 million for 1996, primarily due to billing
reconciliation and lower nationwide subcontracted paging expenses resulting
from cancellations and customer migration from networks not owned by
MobileMedia to company-owned networks.
Selling expenses for 1997 decreased 28.2% to $69.5 million from $96.8 million
for 1996 primarily due to lower sales personnel costs and lower sales
commissions attributable to lower sales headcount and lower gross additions. In
addition, reseller and retail distribution channel selling expenses declined as
a result of lower sales volume. Selling expenses as a percentage of net revenue
decreased to 14.2% for 1997 from 17.0% for 1996.
General and administrative expenses decreased 17.8% to $179.6 million for
1997 compared to $218.6 million for 1996. General and administrative expenses
decreased as a percentage of net revenues to 36.5% for 1997 from 38.5% for 1996
primarily due to decreased bad debt expense, customer service expenses related
to the assimilation of MobileComm's customer service functions, and consulting
fees related to the integration of the acquisitions. Bad debt expense decreased
as a result of increased collections resulting from improvements in
MobileMedia's billing and collection functions.
Restructuring costs increased from $4.2 million for 1996 to $19.8 million for
1997 due to professional fees constituting administrative expenses incurred by
MobileMedia as a result of the bankruptcy filing on January 30, 1997 as
compared to the 1996 expenses incurred in connection with MobileMedia's attempt
to restructure its debt.
Depreciation and amortization decreased 59.8% to $140.2 million for 1997
compared to $348.7 million for 1996. The decrease was primarily due to a
writedown of impaired assets by $792.5 million pursuant to Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" effective December 31, 1996, as
described in Note 2 to MobileMedia's consolidated financial statements,
amortization of a non-competition agreement related to the MobileComm
Acquisition which was fully amortized in 1996 and decreased pager depreciation
resulting from a decrease in expenses related to unrecoverable subscriber
equipment and a reserve established to lower book values of certain pager
models to current market values in 1996. As a percentage of net revenues,
depreciation and amortization expense decreased to 28.6% for 1997 from 61.4%
for 1996.
Operating loss decreased to $57.0 million for 1997 from $1,036.8 million for
1996. The decrease was primarily due to the $792.5 million asset impairment
writedown effective December 31, 1996 and other factors indicated above.
30
<PAGE>
Total other expense, principally interest expense, decreased 27.0% to $67.6
million for 1997 compared to $92.6 million for 1996. The decrease was primarily
due to interest expense related to MobileMedia's $250.0 million senior
subordinated notes due November 1, 2007 and $210.0 million senior subordinated
deferred coupon notes not being recognized subsequent to the bankruptcy filing
on January 30, 1997.
Loss before income tax benefit, as a result of the above factors, decreased
to $124.6 million for 1997 from $1,129.4 million for 1996.
Income tax benefit of $69.4 million resulted from the deferred tax adjustment
attributable to the $792.5 asset impairment writedown effective December 31,
1996.
Liquidity and Capital Resources
MobileMedia's operations and strategy require the availability of substantial
funds to finance the development and installation of wireless communications
systems, to procure subscriber equipment and to service debt. Historically,
these requirements have been funded by net cash from operating activities,
additional borrowings and capital contributions from its former parent company.
Following the MobileMedia acquisition, Arch will need to supply these
requirements for MobileMedia. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
Chapter 11 Filing
On January 30, 1997, MobileMedia Communications, Inc. and affiliates filed
voluntary petitions for relief under the Bankruptcy Code in order to implement
an operational and financial restructuring. Until consummation of the
MobileMedia acquisition, they operated their businesses as debtors-in-
possession subject to the jurisdiction of the bankruptcy court.
Agreement with Key Suppliers
In January 1997, the bankruptcy court approved payment of a total of $47.4
million of the pre-petition claims of MobileMedia's key suppliers, Motorola,
Glenayre, NEC and Panasonic. MobileMedia also entered into supply agreements
with each of the key suppliers.
Debtor-in-Possession Credit Agreement
Chase Manhattan Bank and certain other financial institutions initially
provided MobileMedia with up to $200.0 million of debtor-in-possession
financing during its Chapter 11 proceedings. During 1997, MobileMedia drew down
$47.0 million of borrowings to pay the pre-petition claims of key suppliers,
and later repaid $37.0 million. During January and February, 1998 MobileMedia
repaid an additional $10.0 million. Through subsequent extensions the debtor-
in-possession facility was reduced. Currently, the facility is at $75.0 million
and expires on December 31,1999. As of March 31, 1999 there was $5.0 million of
funded borrowings under the debtor-in-possession facility.
Capital Expenditures and Commitments
Capital expenditures were $26.8 million for the three months ended March 31,
1999 compared to $4.9 million for the three months ended March 31, 1998 and
$53.9 million for the year ended December 31, 1998 compared to $40.6 million
for the year ended December 31, 1997. Capital expenditures increased $21.9
million for the three months ended March 31, 1999 compared to the three-month
period ended March 31, 1998 primarily as a result of increased pager purchases,
and $13.3 million for the 1998 year compared to the 1997 year principally as a
result of capital spending for the construction of a nationwide NPCS network.
31
<PAGE>
Sources of Funds
MobileMedia's net cash provided by operating activities was $17.6 million for
the three months ended March 31, 1999 compared to $19.5 million for the three
months ended March 31, 1998. Inventories decreased $0.6 million from December
31, 1998 to March 31, 1999 compared to a decrease of $0.4 million from December
31, 1997 to March 31, 1998 as a result of utilizing pager inventory stock and
lower sales volume in the retail sales distribution channel. Accounts payable,
accrued expenses and other liabilities decreased $2.0 million from December 31,
1998 to March 31, 1999 compared to a increase of $1.4 million from December 31,
1997 to March 31, 1998. Net accounts receivable decreased $1.7 million from
December 31, 1998 to March 31, 1999 compared to a decrease of $7.8 million from
December 31, 1997 to March 31, 1998, primarily due to collections of past due
accounts receivable in the first quarter of 1998 and lower sales volume.
MobileMedia's net cash provided by operating activities was $54.5 million for
the year ended December 31, 1998 compared to $14.9 million for the year ended
December 31, 1997. Inventories increased $1.3 million from December 31, 1997 to
December 31, 1998 as a result of additional pagers purchased for sale through
the retail sales distribution channel. Accounts payable, accrued expenses and
other liabilities decreased $7.1 million from $156.4 million as of December 31,
1997 to $149.3 million as of December 31, 1998. Net accounts receivable
decreased $16.5 million from $55.4 million as of December 31, 1997 to $38.9
million as of December 31, 1998 due to improved billing and collections
functions.
Tower Sale
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers for $170.0 million in cash. Under the terms of a lease with the buyer,
MobileMedia will continue to own and utilize transmitters, antennas and other
equipment located on these towers for an initial period of 15 years at an
aggregate annual rental of $10.7 million. The sale was accounted for in
accordance with Statement of Financial Accounting Standards No. 28, Accounting
for Sales with Leasebacks, and resulted in a recognized gain of $94.2 million
and a deferred gain of $70.0 million. The deferred gain will be amortized over
the initial lease period of 15 years. After the sale, MobileMedia distributed
the $170.0 million in proceeds to its secured creditors, who had a lien on such
assets.
Debt Obligations
In addition to the debtor-in-possession credit facility, the debt obligations
of MobileMedia during the periods described above also included the following:
MobileMedia's 1995 credit facility provided for $750.0 million senior secured
and guaranteed credit facility with a syndicate of lenders including The Chase
Manhattan Bank. As of September 30, 1998 there was $479.0 million outstanding
under this facility consisting of term loans of $101.5 million and $304.6
million and loans under a revolving credit facility totaling $72.9 million.
This became available on December 4, 1995, in connection with the financing of
the MobileComm acquisition. Commencing in 1996, MobileMedia was in default
under this facility. As a result of such default and the bankruptcy filing,
MobileMedia had no borrowing capacity under this facility. After filing under
Chapter 11, MobileMedia brought current its interest payments and made monthly
adequate protection payments to the lenders under the 1995 credit facility
equal to the amount of interest accruing under such agreement. On September 3,
1998, MobleMedia repaid $170.0 million of borrowings under its 1995 credit
facility using proceeds from the sale of 166 transmission towers.
MobleMedia issued $250.0 million senior subordinated 9 3/8% notes in November
1995, concurrent with MobileMedia's second offering of Class A common stock.
See Note 11 to MobileMedia's consolidated financial statements. These notes
bore interest at a rate of 9 3/8% payable semiannually on May 1 and November 1
of each year. On November 1, 1996, MobileMedia did not make its scheduled
interest payment on the 9 3/8% notes which constituted an event of default
under the indenture.
32
<PAGE>
MobleMedia issued $210.0 million of senior subordinated deferred coupon
notes, at a discount, in November 1993. These deferred coupon notes accreted at
a rate of 10.5%, compounded semiannually, to an aggregate principal amount of
$210.0 million by December 1, 1998 after which interest was payable in cash at
a rate of 10.5% and was payable semiannually.
Year 2000 Compliance
State of Readiness
Prior to the Merger, MobileMedia had formed an internal task force comprised
of representatives of several departments to address Year 2000 compliance
matters. The task force conducted a preliminary review of internal and external
areas that are likely to be affected by Year 2000 compliance matters and
classified the various areas as mission critical, important or non-
critical/non-important.
With respect to internal matters, MobileMedia had completed a review of its
hardware and software to determine whether its business-related application
will be Year 2000 ready. Tests revealed relatively few Year 2000-related
problems, which were addressed and retested, and the implemented solutions
appear to have been successful. There can be no assurance, however, that such
testing detected all compliance issues related to the Year 2000 problem.
With respect to external matters, MobileMedia distributed questionnaires
requesting information concerning the Year 2000 readiness of certain vendors.
The combined company continues to distribute such questionnaires and are in the
process of evaluating vendor responses and preparing contingency plans based on
the responses.
Estimated Year 2000 Compliance Costs
MobileMedia's information and technology staff addressed technical issues
relating to the Year 2000 compliance matters. Based on costs incurred to date,
as well as estimated costs to be incurred later in 1999, Arch does not expect
the resolution of Year 2000 related problems to have a material adverse effect
on its results of operations and financial condition. Costs of the Year 2000
project are based on current estimates and actual results may vary
significantly from such estimates once plans are further developed and
implemented.
Contingency Planning
MobileMedia began the process, and Arch has continued the process, of
assessing contingency plans in the event of either internal or external Year
2000 compliance problems, Arch intends to complete the contingency planning for
Year 2000 compliance during calendar year 1999.
New Authoritative Accounting Pronouncements
See "Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of new accounting pronouncements.
Management does not believe that MobileMedia's adoption of SFAS No. 130, SFAS
No. 131 and SOP 98-5 has had or will have any material effects.
33
<PAGE>
INDUSTRY OVERVIEW
Paging is a method of wireless communication which uses an assigned radio
frequency to contact a paging subscriber anywhere within a designated service
area. A subscriber carries a pager which receives messages by the transmission
of a one-way radio signal. To contact a subscriber, a message is usually sent
by placing a telephone call to the subscriber's designated telephone number.
The telephone call is received by an electronic paging switch which generates a
signal that is sent to radio transmitters in the service area. Depending upon
the topography of the service area, the operating radius of a radio transmitter
typically ranges from three to 20 miles. The transmitters broadcast a signal
that is received by the pager a subscriber carries, which alerts the subscriber
by a tone or vibration that there is a voice, tone, digital or alphanumeric
message. See "Business--Arch's Paging and Messaging Services, Products and
Operations".
The paging industry has been in existence since 1969 when the FCC allocated a
group of radio frequencies for use in providing one-way and two-way types of
mobile communications services. Throughout its history, the paging industry has
been characterized by consolidation, substantial growth and technological
change. Historically, the paging industry has been highly fragmented, with a
large number of small, local operators. Since the 1980s, concentration in the
paging industry has increased as paging companies continue to grow rapidly
either internally or through acquisitions.
Arch believes that paging is the most cost-effective form of mobile wireless
communications. Paging has an advantage over conventional telephone service
because a pager's reception is not restricted to a single location. Paging has
an advantage over a cellular telephone or broadband PCS handset because a pager
is smaller, has a longer battery life and, most importantly, because paging
units and air time required to transmit an average message cost less than
equipment and air time for cellular telephones or broadband PCS handsets.
Paging subscribers generally pay a flat monthly service fee for pager services,
regardless of the number of messages, unlike cellular telephone or broadband
PCS subscribers, whose bills typically have a significant variable usage
component. For these reasons, some cellular subscribers use a pager in
conjunction with their cellular telephone to screen incoming calls and thus
lower the expense of cellular telephone service, and to a lesser extent, some
broadband PCS subscribers use a pager in conjunction with their broadband PCS
handsets, which often incorporate messaging functions, but have a much shorter
battery life.
The paging industry has benefited from technological advances resulting from
research and development conducted by vendors of paging units and transmission
equipment. These advances include microcircuitry, liquid crystal display
technology and standard digital encoding formats. These advances have enhanced
the capability and capacity of paging services while lowering equipment and air
time costs. Technological improvements have generally contributed to strong
growth in the market for paging services and enable the combined company to
provide better quality services at lower prices to its subscribers.
The paging industry has traditionally distributed its services through direct
marketing and sales activities. In recent years, additional channels of
distribution have evolved. These include: (1) carrier-operated stores; (2)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; (3) agents who
solicit customers for carriers and are compensated on a commission basis; (4)
retail outlets that often sell a variety of merchandise, including paging units
and other telecommunications equipment; and (5) most recently, the Internet.
While most paging subscribers traditionally have been business users, industry
observers believe that retail consumers have significantly increased their use
of paging units in recent years. In addition, paging subscribers have
increasingly chosen to purchase rather than lease their paging units. Arch
expects these trends to continue.
Competition
The paging industry is highly competitive. Providers of numeric display
paging services compete primarily on the basis of price. Companies in the
industry also compete on the basis of coverage area offered to subscribers,
available services offered in addition to basic numeric or tone paging,
transmission quality, system reliability and customer service. The combined
company believes that it will generally compete effectively based on these
factors.
34
<PAGE>
Arch and MobileMedia have competed by maintaining competitive pricing of
their products and services, by providing high-quality, reliable transmission
networks and by furnishing subscribers a superior level of customer service.
Several hundred licensed paging companies provide only local basic numeric or
tone paging service. Compared to these companies, the combined company offers
wireless messaging services on a local, regional and nationwide basis. It also
offers enhanced services such as alphanumeric paging, voice mail and voice mail
notifications, news, sports, weather reports and stock quotes.
The combined company competes with one or more competitors in all markets in
which it operates. Some competitors are small, privately owned companies
serving one market area but others are large diversified telecommunications
companies serving many markets. Some competitors possess financial, technical
and other resources greater than those of the combined company. Major paging
carriers that currently compete in one or more of the combined company's
markets include Paging Network, Inc., Metrocall, Inc. and AirTouch Paging Inc.
The scope of competition for communications service customers in the combined
company's markets will broaden as paging services become increasingly
interactive and as two-way services become increasingly competitive. For
example, the FCC has created potential sources of competition by auctioning new
spectrum for wireless communications services, local multipoint distribution
service and the 220-222 MHZ service. Furthermore, the FCC has announced plans
to auction licenses in the general wireless communications service, a service
created from spectrum reallocated from federal government use in 1995.
Moreover, entities offering service on wireless two-way communications
technology, including cellular, broadband PCS N-PCS and specialized mobile
radio services, as well as mobile satellite service providers, also compete
with the paging services that the combined company provides.
MobileMedia holds one nationwide and five regional N-PCS licenses.
Competitors of MobileMedia also hold PCS licenses. Some of these competitors
have substantially greater resources than MobileMedia. One of MobileMedia's
competitors, SkyTel, recently introduced a two-way N-PCS wireless data service.
Although the combined company cannot predict the types of PCS services which
will be offered by those companies, the combined company expects that those
services will compete with the N-PCS and paging services to be offered by the
combined company.
Regulation
Paging operations and the construction, modification, ownership and
acquisition of paging systems are subject to extensive regulation by the FCC
under The Communications Act of 1934 and, to a much more limited extent, by
public utility or public service commissions in certain states. Each of Arch
and MobileMedia is separately licensed to conduct various types of paging
operations. Although the following description is intended to address all
material aspects of governmental regulation, it does not purport to be a
complete discussion of all present and proposed legislation and regulations
relating to the paging operations of the combined company.
Federal Regulation
Regulatory Classification
Paging companies historically have been subject to different federal
regulatory requirements depending upon whether they were providing service as a
radio common carrier, or RCC, as a private carrier paging operator, or PCP, or
as a reseller. Arch's and MobileMedia's paging operations encompass RCC, PCP
and resale operations. However, federal legislation enacted in 1993 required
the FCC to reduce the disparities in the regulatory treatment of similar mobile
services such as RCC and PCP services. The FCC has taken, and continues to
take, actions to implement this legislation. As CMRS providers, Arch and
MobileMedia are regulated as common carriers, except that the FCC has exempted
paging services from some typical common carrier regulations, such as tariff
filing and resale requirements, because paging services have been found to be
highly competitive.
35
<PAGE>
The classification of Arch's and MobileMedia's paging operations as CMRS
affects the level of permissible foreign ownership in the combined company, as
discussed below, and the nature and extent of state regulation. In addition,
the FCC now is required to resolve competing requests for CMRS spectrum by
conducting auctions. This may have the effect of increasing the costs of
acquiring additional spectrum in markets in which the combined company
operates. Also, Arch and MobileMedia are obligated to pay certain regulatory
fees in connection with their paging operations.
FCC Regulatory Approvals and Authorizations
The Communications Act requires radio licensees such as Arch and MobileMedia
to obtain prior approval from the FCC for the assignment or transfer of control
of any construction permit or station license or authorization or any related
rights. This statutory requirement attaches to acquisitions of other paging
companies (or other radio licensees) by Arch and MobileMedia as well as
transfers of a controlling interest in any of Arch's or MobileMedia's licenses,
construction permits or related rights; however the FCC's Wireless
Telecommunications Bureau, which directly regulates Arch's and MobileMedia's
paging activities, has decided to forbear from enforcing its filing
requirements with respect to pro forma assignments and transfers of control of
certain wireless authorizations, such as Arch's and MobileMedia's RCC and PCP
licenses. Pursuant to this decision, wireless telecommunications carriers now
only have to file a written notification of a pro forma transaction within 30
days after the transaction is completed. Note, however, that Arch and
MobileMedia may still be required to obtain prior FCC approval for the pro
forma assignment or transfer of control of some of their licenses not covered
by the forbearance decision, such as certain business radio authorizations.
To date, the FCC has approved each assignment and transfer of control for
which Arch and MobileMedia have sought approval, including the transfer of
MobileMedia's licenses in connection with Arch's acquisition of MobileMedia.
Although there can be no assurance that any future requests for approval of
transfers of control and/or assignments of license will be acted upon in a
timely manner by the FCC, or that the FCC will grant the approval requested,
neither Arch nor MobileMedia knows of any reason that any such applications
will not be approved or granted.
The FCC paging licenses granted to Arch and MobileMedia are for varying terms
of up to 10 years, at the end of which renewal applications must be approved by
the FCC. The combined company is unaware of any circumstances which would
prevent the grant of any pending or future renewal applications made by Arch or
MobileMedia. However, no assurance can be given that any of Arch's or
MobileMedia's renewal applications will be free of challenge or will be granted
by the FCC. It is possible that there may be competition for radio spectrum
associated with licenses as they expire. This would increase the chances of
third-party interventions in the renewal proceedings. The FCC has so far
granted each license renewal application that Arch or MobileMedia have filed,
other than those renewal applications still pending.
The FCC's review and revision of rules affecting paging companies is ongoing.
The regulatory requirements to which Arch and MobileMedia are subject may
change significantly over time. For example, the FCC has decided to adopt a
market area licensing scheme for all paging channels under which carriers would
be licensed to operate on a particular channel throughout a broad geographic
area (such as a major economic area as defined by The Bureau of Economic
Affairs of the U.S. Department of Commerce) rather than being licensed on a
site-by-site basis. These geographic area licenses will be awarded through an
auction. Incumbent paging licensees that do not acquire licenses at auction
will be entitled to interference protection from the market area licensee. Arch
and MobileMedia have each been participating actively in this proceeding in
order to protect their existing operations and retain flexibility, on an
interim and long-term basis, to modify systems as necessary to meet subscriber
demands.
Currently, however, the Communications Act requires that Arch and MobileMedia
obtain licenses from the FCC to use radio frequencies to conduct their paging
operations at specified locations. FCC licenses issued to Arch and MobileMedia
set forth the technical parameters, such as power strength and tower height,
under which Arch and MobileMedia are authorized to use those frequencies. In
many instances, Arch and
36
<PAGE>
MobileMedia require the prior approval of the FCC before they can implement any
significant changes to their radio systems. Once the FCC's market area
licensing rules are implemented, however, these site-specific licensing
obligations will be eliminated, except for applications still required by
Section 22.369 of the FCC rules (request for authority to operate in a
designated Quiet Zone), Section 90.77 (request for authority to operate in a
protected radio receiving location) and Section 1.1301 et seq.
(construction/modification that may have a significant environmental impact) or
for coordination with Canada or Mexico.
The FCC has issued a Further Notice of Proposed Rulemaking in which the FCC
seeks comments on, among other matters, (1) whether it should impose coverage
requirements on licensees with nationwide exclusivity (such as Arch and
MobileMedia), (2) whether these coverage requirements should be imposed on a
nationwide or regional basis, and (3) whether--if such requirements are
imposed--failure to meet the requirements should result in a revocation of the
entire nationwide license or merely a portion of the license. If the FCC were
to impose stringent coverage requirements on licensees with nationwide
exclusivity, the combined company might have to accelerate the build-out of its
systems in certain areas.
Telecommunications Act of 1996
The Telecommunications Act directly affects Arch and MobileMedia. Some
aspects of the Telecommunications Act may place financial obligations upon the
combined company or subject it to increased competition. For example, the FCC
has adopted new rules that govern compensation to be paid to pay phone
providers which has resulted in increased costs for certain paging services
including toll-free 1-800 number paging. Arch and MobileMedia have generally
passed these costs on to their subscribers. This makes their services more
expensive and could affect the attraction or retention of customers. However,
there can be no assurance that the combined company will be able to continue to
pass on these costs. These rules are the subject of several judicial appeals.
In addition, the FCC also has adopted new rules regarding payments by
telecommunications companies into a revamped fund that will provide for the
widespread availability of telecommunications services including universal
service. Prior to the implementation of the Telecommunications Act, universal
service obligations were largely met by local telephone companies, supplemented
by long-distance telephone companies. Under the new rules, all
telecommunications carriers, including paging companies, are required to
contribute to the universal service fund. In addition, certain state regulatory
authorities have enacted, or have indicated that they intend to enact, similar
contribution requirements based on intrastate revenues. The combined company
cannot yet know the impact of these state contribution requirements, if enacted
and applied to it. Moreover, neither Arch nor MobileMedia has been able to
estimate the amount of any such payments that it will be able to bill to its
subscribers; however, payments into the universal service fund will likely
increase the cost of doing business.
Some aspects of the Telecommunications Act could have a beneficial effect on
Arch's and MobileMedia's business. For example, proposed federal guidelines
regarding antenna siting issues may remove local and state barriers to the
construction of communications facilities, although states and municipalities
continue to exercise significant control with regard to such siting issues.
Moreover, in a rulemaking proceeding pertaining to interconnection between
LECs (local exchange carriers) and CMRS providers such as the combined company,
the FCC has concluded that LECs are required to compensate CMRS providers for
the reasonable costs incurred by such providers in terminating traffic that
originates on LEC facilities, and vice versa. Consistent with this ruling, the
FCC has determined that LECs may not charge a CMRS provider or other carrier
for terminating LEC-originated traffic or for dedicated facilities used to
deliver LEC-originated traffic to one-way paging networks. Nor may LECs charge
CMRS providers for number activation and use fees. These interconnection issues
are still in dispute, and it is unclear whether the FCC will maintain its
current position.
Depending on further FCC disposition of these issues, the combined company
may or may not be successful in securing refunds, future relief or both, with
respect to charges for termination of LEC-originated local traffic. If the FCC
ultimately reaches an unfavorable resolution, then the combined company
believes that it would pursue relief through settlement negotiations,
administrative complaint procedures or both. If these
37
<PAGE>
issues are ultimately decided in favor of the LECs, each of Arch and
MobileMedia likely would be required to pay all past due contested charges and
may also be assessed interest and late charges for amounts withheld.
Future Regulation
From time to time, federal or state legislators propose legislation which
could potentially affect Arch and MobileMedia, either beneficially or
adversely. It is possible that legislation will be enacted by the federal or
state governments, or that regulations will be adopted or actions taken by the
FCC or state regulatory authorities, which might materially adversely affect
the business of Arch and/or MobileMedia. Changes such as the allocation by the
FCC of radio spectrum for services that compete with Arch's and MobileMedia's
business could adversely affect Arch's and MobileMedia's results of operations.
Foreign Ownership
The Communications Act limits foreign investment in and ownership of entities
that are licensed as radio common carriers by the FCC. The combined company
owns or controls several radio common carriers and is accordingly subject to
these foreign investment restrictions. Because Arch is the parent of radio
common carriers (but is not a radio common carrier itself), Arch may not have
more than 25% of its stock owned or voted by aliens or their representatives, a
foreign government or its representatives or a foreign corporation if the FCC
finds that the public interest would be served by denying such ownership. In
connection with the WTO Agreement--agreed to by 69 countries--the FCC adopted
rules effective February 9, 1998 that create a very strong presumption in favor
of permitting a foreign interest in excess of 25% if the foreign investor's
home market country signed the WTO Agreement. Arch's subsidiaries that are
radio common carrier licensees are subject to more stringent requirements and
may have only up to 20% of their stock owned or voted by aliens or their
representatives, a foreign government or their representatives or a foreign
corporation. This ownership restriction is not subject to waiver. See "Industry
Overview--Regulation". Arch's certificate of Incorporation permits the
redemption of shares of Arch's capital stock from foreign stockholders where
necessary to protect FCC licenses held by Arch or its subsidiaries, but such
redemption would be subject to the availability of capital to Arch and any
restrictions contained in applicable debt instruments and under the Delaware
corporations statute (which currently would not permit any such redemptions).
The failure to redeem such shares promptly could jeopardize the FCC licenses
held by Arch or its subsidiaries. See "--Competition" and "--Regulation".
State Regulation
In addition to regulation by the FCC, certain states impose various
regulations on the common carrier paging operations of Arch and MobileMedia.
Rates, terms and conditions under which Arch and MobileMedia provided services,
or any changes to those rates, have also been subject to state regulation. In
certain instances, the construction and operation of radio transmitters also
will be subject to zoning, land use, public health and safety, consumer
protection and other state and local taxes, levies and ordinances. However, as
a general rule, states are preempted from exercising rate and entry regulation
of CMRS, but may choose to regulate other terms and conditions of service: for
example, requiring the identification of an agent to receive complaints. States
may also petition the FCC for authority to continue to regulate CMRS rates if
certain conditions are met. State filings seeking rate authority have all been
denied by the FCC, although new petitions seeking such authority may be filed
in the future. Furthermore, some states and localities continue to exert
jurisdiction over (1) approval of acquisitions and transfers of wireless
systems and (2) resolution of consumer complaints. Arch and MobileMedia believe
that to date all required filings for Arch's and MobileMedia's paging
operations have been made.
38
<PAGE>
BUSINESS
The combined company is the second largest paging operator in the United
States as measured by units in service and net revenues.
The combined company believes that it is well positioned to compete
effectively in the highly competitive paging industry for the following
reasons. The combination of MobileMedia's market presence in major metropolitan
markets with Arch's historical emphasis on middle and small markets has
significantly broadened the geographic scope of Arch's marketing presence and
should position the combined company to compete more effectively for large
corporate customers with diverse geographic operations. With a significantly
larger subscriber base, the combined company should be better able to obtain
strategic distribution arrangements, as well as amortize marketing investments
over a larger revenue base. In addition, MobileMedia's third-party retail
distribution agreements, which serve the more rapidly growing consumer market,
should complement the more than 175 Arch-operated retail outlets. Similarly,
MobileMedia's two nationwide paging networks and the associated potential for
higher revenue nationwide services should enhance Arch's local coverage and
provide an opportunity to take advantage of Arch's distribution networks.
MobileMedia's plan to deploy its nationwide N-PCS spectrum using its existing
network infrastructure, together with Arch's recent agreement with PageMart
Wireless described below, should permit Arch to market N-PCS services, such as
multi-market alphanumeric and text messaging services, sooner than it would
otherwise be able to, and these services are expected to offer higher revenue
and more growth potential than basic paging services. Finally, MobileMedia's
investments to date in two national call centers should supplement Arch's own
call center and complement Arch's strategy of evolving to regional customer
service centers. Achieving these intended benefits, however, will depend on a
number of factors and no assurance can be given that the benefits will be
realized, in whole or in part. See "Arch Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors Affecting Future
Operating Results" and "--Arch's Investments in N-PCS Licenses".
Business Strategy
The combined company's strategic objective is to strengthen its position as
one of the leading nationwide paging companies in the United States. It
believes that larger, multi-market paging companies enjoy a number of
competitive advantages, including:
. operating efficiencies resulting from more intensive use of existing
paging systems;
. economies of scale in purchasing and administration;
. broader geographic coverage of paging systems;
. greater access to capital markets and lower costs of capital;
. the ability to obtain additional radio spectrum;
. the ability to offer high-quality services at competitive prices; and
. enhanced ability to attract and retain management personnel.
The combined company believes that the current size and scope of its
operations afford it many of these advantages, and that it has the scope and
presence to effectively compete on a national level. It also believes that the
paging industry will undergo further consolidation, and it intends to
participate in such consolidation. See "Arch Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Operating Results".
Operating Strategy. The combined company's operating objectives are to
increase its adjusted EBITDA, deploy its capital efficiently, reduce its
financial leverage and expand its customer relationships. The combined company
will pursue the following strategies to achieve its operating objectives:
. Low-Cost Operating Structure. The combined company has selected a low-
cost operating strategy as its principal competitive tactic. Management
believes that a low-cost operating structure, compared to
39
<PAGE>
differentiated premium pricing and niche positioning, the other two
fundamental competitive tactics in the paging industry, will maximize its
flexibility to offer competitive prices while still achieving target
margins and adjusted EBITDA. Arch's management has worked closely with
MobileMedia's management to identify redundant managerial and
administrative functions that Arch's management believes can be eliminated
without material impact to customer related activities. The combined
company will continue to improve its low-cost operating structure by
consolidating some operating functions, including centralized purchases
from key vendors, to achieve economies of scale, and installing
technologically advanced and reliable transmission systems.
. Efficient Capital Deployment. The combined company's principal financial
objective is to reduce financial leverage by reducing capital
requirements and increasing adjusted EBITDA. To reduce capital
expenditures, Arch has already implemented a company-wide focus on the
sale, rather than lease, of pagers. This is because subscriber-owned
units require a lower level of capital investment than company-owned
units. As a result of these efforts to date, the number of subscriber-
owned units in service, as a percentage of net new units in service,
increased from 65.2% in the year ended December 31, 1997 to 69.7% in the
year ended December 31, 1998. In addition, Arch has modified its
incentive compensation programs for line managers so that bonuses are
based, in part, on capital efficiency.
. Balanced Distribution. Arch's combination of direct sales, company-owned
stores and third party resellers will be supplemented by MobileMedia's
local market direct sales force and its distribution agreements with
third-party regional and national retailers. In addition, MobileMedia's
national accounts sales force should significantly enhance Arch's efforts
to improve distribution to nationwide customers.
. Capitalize on Revenue Enhancement Opportunities. The combined company
will have one of the broadest product offerings in the paging industry,
including traditional paging services as well as new services such as
assured message delivery and acknowledgement, wireless e-mail and content
delivery services. Arch intends to deliver these new services through a
strategic alliance with PageMart Wireless, Inc. pursuant to which Arch
will utilize and share certain costs of PageMart's N-PCS network. This
will provide the combined company with more economical and broader access
to higher ARPU nationwide, regional or text messaging services. To date,
Arch has marketed these services only on a limited basis through the
resale of other carriers' services on less attractive terms. Arch
believes there will be a number of new revenue opportunities associated
with its approximately 7.2 million units in service, including selling
enhanced services which add value such as voicemail, resale of long-
distance service and fax storage and retrieval. See "Business--Arch's
Paging and Messaging Services, Products and Operations" and "--Arch's
Investments in NPCS Licenses".
Arch's Paging and Messaging Services, Products and Operations
Arch has been a leading provider of wireless messaging services, primarily
paging services. Prior to the MobileMedia acquisition, Arch was the third
largest paging company in the United States, based on its 4.3 million units in
service at March 31, 1999. Arch has operated in 41 states and more than 180 of
the 200 largest markets in the United States. Arch has offered local, regional
and nationwide paging services employing digital networks covering
approximately 85% of the United States population.
40
<PAGE>
The following table sets forth information about the approximate number of
units in service with Arch subscribers and net increases in number of units
through internal growth and acquisitions:
<TABLE>
<CAPTION>
Units in Service Net Increase in
at Beginning of Units through Increase in Units Units in Service
Year Ended August 31, Period Internal Growth(1) through Acquisitions(2) at End of Period
- --------------------- ---------------- ------------------ ----------------------- ----------------
<S> <C> <C> <C> <C>
1987.................... 4,000 3,000 12,000 19,000
1988.................... 19,000 8,000 3,000 30,000
1989.................... 30,000 14,000 34,000 78,000
1990.................... 78,000 20,000 4,000 102,000
1991.................... 102,000 24,000 1,000 127,000
1992.................... 127,000 33,000 -- 160,000
1993.................... 160,000 70,000 24,000 254,000
1994.................... 254,000 138,000 18,000 410,000
<CAPTION>
Four Months Ended December 31,
- ------------------------------
<S> <C> <C> <C> <C>
1994.................... 410,000 64,000 64,000 538,000
<CAPTION>
Year Ended December 31,
- -----------------------
<S> <C> <C> <C> <C>
1995.................... 538,000 366,000 1,102,000 2,006,000
1996.................... 2,006,000 815,000 474,000 3,295,000
1997.................... 3,295,000 595,000 -- 3,890,000
1998.................... 3,890,000 386,000 -- 4,276,000
<CAPTION>
Three Months Ended March 31,
- ----------------------------
<S> <C> <C> <C> <C>
1999.................... 4,276,000 53,000 -- 4,329,000
</TABLE>
Net increase in units through internal growth includes internal growth in
acquired paging businesses after their acquisition by Arch and is net of
subscriber cancellations during each applicable period. Increase in units
through acquisitions is based on units in service of acquired paging businesses
at the time of their acquisition by Arch.
Arch has provided four basic types of paging services: digital display,
alphanumeric display, tone-only and tone-plus-voice. Arch provides digital
display, alphanumeric display and tone-only service in all of its markets and
tone-plus-voice service in only a few markets.
A digital display pager permits a caller to transmit to the subscriber a
numeric message that may consist of a telephone number, an account number or
coded information, and has the capability to store several such numeric
messages in memory for later recall by the subscriber. An alphanumeric display
pager allows subscribers to receive and store messages consisting of both
numbers and letters. A tone-only pager notifies the subscriber that a call has
been received by emitting an audible beeping sound or vibration. A tone-plus-
voice pager emits a beeping sound followed by a brief voice message.
Digital display paging service, which was introduced by the paging industry
nearly 20 years ago, has in recent years grown at a faster rate than tone-only
or tone-plus-voice service and currently represents a majority of all units in
service. The growth of alphanumeric display service, which was introduced in
the mid-1980s, has been constrained by its difficulty in inputting data, its
requirements of specialized equipment and its relatively high use of system
capacity during transmission.
41
<PAGE>
The following table summarizes the types of Arch's units in service at
specified dates:
<TABLE>
<CAPTION>
December 31,
------------------------------------------- March 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
Units % Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Digital display......... 2,796,000 85% 3,284,000 85% 3,586,000 84% 3,635,000 84%
Alphanumeric display.... 395,000 12 524,000 13 621,000 14 631,000 14
Tone-only............... 54,000 2 43,000 1 35,000 1 32,000 1
Tone-plus-voice......... 50,000 1 39,000 1 34,000 1 31,000 1
--------- --- --------- --- --------- --- --------- ---
Total.................. 3,295,000 100% 3,890,000 100% 4,276,000 100% 4,329,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides paging service to subscribers for a monthly fee. Subscribers
either lease the pager from Arch for an additional fixed monthly fee or they
own the pager, having purchased it either from Arch or from another vendor. The
monthly service fee is generally based upon the type of service provided, the
geographic area covered, the number of units provided to the customer and the
period of the subscriber's commitment. Subscriber-owned units provide a more
rapid recovery of Arch's capital investment than units owned and maintained by
Arch, but may generate less recurring revenue. Arch also sells units to third-
party resellers who lease or resell units to their own subscribers and resell
Arch's paging services under marketing agreements. The following table
summarizes the number of Arch-owned and leased, subscriber-owned and reseller-
owned units in service at specified dates:
<TABLE>
<CAPTION>
December 31,
------------------------------------------- March 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
Units % Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arch-owned and leased... 1,533,000 47% 1,740,000 45% 1,857,000 43% 1,875,000 43%
Subscriber-owned........ 914,000 28 1,087,000 28 1,135,000 27 1,128,000 26
Reseller-owned.......... 848,000 25 1,063,000 27 1,284,000 30 1,326,000 31
--------- --- --------- --- --------- --- --------- ---
Total.................. 3,295,000 100% 3,890,000 100% 4,276,000 100% 4,329,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides enhancements and ancillary services such as voice mail,
personalized greetings, message storage and retrieval, pager loss protection
and pager maintenance services. Voice mail allows a caller to leave a recorded
message that is stored in Arch's computerized message retrieval center. When a
message is left, the subscriber can be automatically alerted through the
subscriber's pager and can retrieve the stored message by calling Arch's paging
terminal. Personalized greetings allow the subscriber to record a message to
greet callers who reach the subscriber's pager or voice mail box. Message
storage and retrieval allows a subscriber who leaves Arch's service area to
retrieve calls that arrived during the subscriber's absence from the service
area. Pager loss protection allows subscribers who lease pagers to limit their
costs of replacement upon loss or destruction of a pager. Pager maintenance
services are offered to subscribers who own their own equipment. Arch is also
in the process of test marketing various other services that add value, and can
be integrated with existing paging services. These include, among other
services, voicemail, resale of long distance service and fax storage and
retrieval.
MobileMedia's Paging and Messaging Services, Products and Operations
MobileMedia has operated one of the largest paging businesses 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, including local coverage to each of the 100 most populated
metropolitan markets in the United States. MobileMedia's paging and wireless
messaging services consist principally of digital display and alphanumeric
display paging services.
Recent Business Strategy
After making its bankruptcy filing, MobileMedia restructured its operations
with the objective of improving performance, principally in the areas of order
entry, billing and collections, inventory controls,
42
<PAGE>
management information systems conversion and customer service. MobileMedia
also undertook cost reduction analyses and took actions to reduce
telecommunications, subcontracting and lease expenses, among others.
MobileMedia also sought to refocus its marketing and sales efforts in an
attempt to achieve unit additions consistent with positive cash flow, and
changed its management structure with the objective of establishing profit and
loss accountability in each market.
Paging and Messaging Services
MobileMedia currently offers a variety of paging and messaging services. The
main paging services offered by MobileMedia are digital display, with
approximately 2,448,800 units in service at March 31, 1999 and alphanumeric
display, with approximately 645,583 units in service at March 31, 1999.
MobileMedia also offers a variety of enhanced services such as voice mail and
voice mail notification, e-mail notification and news, sports reports and stock
quotes.
The following table sets forth the number of MobileMedia customers by service
type as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
Type of Service Number % Number % Number % Number % Number %
--------------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Numeric Display......... 3,713,579 83.9% 2,820,443 82.0% 2,499,735 79.5% 2,707,363 81.6% 2,448,800 78.8%
Alphanumeric............ 658,769 14.9 593,280 17.2 630,448 20.0 590,076 17.8 645,583 20.8
Other................... 51,759 1.2 26,619 0.8 13,785 0.5 22,114 0.6 12,392 0.4
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 4,424,107 100.0% 3,440,342 100.0% 3,143,968 100.0% 3,319,553 100.0% 3,106,775 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
Customers with
nationwide services
(included above)....... 325,924 330,254 291,427 328,724 341,316
</TABLE>
Products and Services
Subscribers for paging services enter into a service contract with
MobileMedia that provides for either the purchase or lease of units and the
payment of airtime and other charges. As of March 31, 1999, approximately 46.4%
of units in service were purchased either by subscribers or by resellers, and
approximately 53.6% were owned by MobileMedia and leased to subscribers.
MobileMedia-owned units leased to subscribers require capital investment by
MobileMedia, while customer-owned and -maintained units, commonly referred to
as COAM units, and those owned by resellers do not. MobileMedia also sells its
services in bulk quantities to resellers, who subsequently sell MobileMedia's
services to end-users. Resellers are responsible for sales, billing, collection
and equipment maintenance costs. MobileMedia sells other products and services,
including units and accessories and pager replacement and maintenance
contracts. The following table sets forth MobileMedia's units in service by
ownership as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
Ownership Number % Number % Number % Number % Number %
--------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company owned and rented
to subscribers......... 1,996,141 45.2% 1,712,941 49.8% 1,645,869 52.4% 1,658,463 50.0% 1,666,348 53.6%
COAM.................... 1,112,194 25.1 861,250 25.0 728,297 23.2 825,842 24.8 705,108 22.7
Resellers............... 1,315,772 29.7 866,151 25.2 769,802 24.4 835,248 25.2 735,319 23.7
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 4,424,107 100.0% 3,440,342 100.0% 3,143,968 100.0% 3,319,553 100.0% 3,106,775 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
Networks and Licenses
MobileMedia's Networks and Licenses, Including N-PCS
MobileMedia operates local, regional and national paging networks which
enable its customers to receive pages over a broad geographical area. The
extensive coverage provided by this network infrastructure provides
43
<PAGE>
MobileMedia with an advantage over some of its competitors whose networks lack
comparable coverage in securing accounts with large corporate clients and
retail chains, which frequently demand national network coverage from their
paging service provider.
Although MobileMedia's networks provide local, regional and national
coverage, its networks operate over numerous frequencies and are subject to
capacity constraints in certain geographic markets. Although the
capacity of MobileMedia's networks varies significantly market by market,
almost all of MobileMedia's markets have adequate capacity to meet the demands
of projected growth for the next several years. The use of multiple frequencies
adds complexity to inventory management, customer service and order fulfillment
processes. Some of MobileMedia's networks use older technologies and are
comparatively costlier to operate.
MobileMedia is seeking to improve overall network efficiency by deploying new
paging terminals, consolidating subscribers on fewer, higher capacity networks
and increasing the transmission speed, or baud rate, of certain of its existing
networks. MobileMedia believes its investments in its network infrastructure
will facilitate and improve the delivery of high quality paging services while
at the same time reducing associated costs of such services.
Nationwide wireless networks. MobileMedia operates two nationwide 900 MHz
networks. As part of its MobileComm acquisition, MobileMedia acquired
MobileComm's fully operational nationwide wireless "8875" network, which
was upgraded in 1996 to incorporate high-speed FLEX(TM) technology
developed by Motorola. In addition, in 1996, MobileMedia completed the
construction of a second nationwide "5375" network that uses FLEX(TM)
technology. The use of FLEX(TM) technology significantly increases
transmission capacity and represents a marked improvement over other
systems that use older paging protocols.
Nationwide two-way N-PCS networks. N-PCS networks enable paging companies
to offer two-way paging services and to make more efficient use of radio
spectrum than do non-PCS networks. MobileMedia purchased five regional
licenses through the FCC's 1994 auction of N-PCS licenses, providing the
equivalent of a nationwide 50 kHz outbound/12.5 kHz inbound PCS system. In
addition, as part of the MobileComm acquisition, MobileMedia acquired a
second two-way N-PCS license for a nationwide 50 kHz outbound/12.5 kHz
inbound system.
In order to retain its N-PCS licenses, MobileMedia must comply with certain
minimum buildout requirements. With respect to each of the regional PCS
licenses purchased at the FCC's 1994 auction, MobileMedia would be required to
build out the related PCS system to cover 150,000 sq. km. or 37.5% of each of
the five regional populations by April 27, 2000 and 300,000 sq. km. or 75% of
each of the five regional populations by April 27, 2005. With respect to the
nationwide PCS license acquired as part of the MobileComm acquisition,
MobileMedia would be required to build out the related PCS system to cover
750,000 sq. km. or 37.5% of the U.S. population by September 29, 1999 and
1,500,000 sq. km. or 75% of the U.S. population by September 29, 2004. In each
instance, the population percentage will be determined by reference to
population figures at the time of the applicable deadline. MobileMedia
estimates that the costs of these minimum build-outs would be approximately
$9.0 million. Although these minimum build-outs would be sufficient to satisfy
regulatory requirements, they would not be sufficient for MobileMedia to
provide significant N-PCS applications of the types which the combined company
intends to provide.
Arch's Investments in N-PCS Licenses
Arch has taken the following steps to position itself to participate in new
and emerging N-PCS services and applications.
PageMart Wireless, Inc. In May 1999, Arch and PageMart Wireless, Inc. signed
a five-year agreement for the provision of N-PCS services. The agreement calls
for Arch and PageMart to share certain capital and operating expenses. Under
the agreement, Arch plans to market N-PCS advanced messaging services,
including assured message delivery and full two-way messaging, using PageMart's
Internet Protocol-based network. Arch
44
<PAGE>
expects to begin marketing these services nationwide during the third quarter
of 1999. As demand for advanced messaging increases over time, Arch plans to
construct its own N-PCS network, leveraging PageMart's infrastructure and
receiver sites. Arch believes its arrangements with PageMart will provide it
with more economical and broader access to N-PCS services than its prior
arrangements with Benbow and CONXUS Communications, Inc. PageMart previously
announced similar agreements with each of Metrocall, Inc. and Airtouch
Communications, Inc.
Benbow PCS Ventures, Inc. Through Arch's May 1996 acquisition of Westlink,
Arch acquired a 49.9% equity interest in Benbow. Benbow holds exclusive rights
to a 50 KHz outbound/12.5 KHz inbound N-PCS license in each of the five regions
of the United States. Benbow is a "designated entity" (a small, minority-
controlled or female-controlled business) under FCC rules and is entitled to
discounts and installment payment schedules in the payment of its N-PCS
licenses. Arch has the right to designate one of Benbow's three directors and
has veto rights with respect to specified major business decisions by Benbow.
Arch provides management services to Benbow, subject to Benbow's ultimate
control, under a five-year agreement expiring on October 1, 2000. Arch is paid
a management fee and is reimbursed for its expenses. Arch has a right of first
refusal with respect to any transfer of shares held by Ms. June Walsh, who
holds the remaining 50.1% equity interest in Benbow.
In June 1999, Arch, Benbow and Ms. Walsh agreed that:
. the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated
. Benbow will not make any further FCC payments and will not pursue
construction of an N-PCS system
. Arch will not be obligated to fund FCC payments or construction of an N-
PCS system by Benbow
. the parties will seek FCC approval of the forgiveness of Benbow's
remaining payment obligations and the transfer of Ms. Walsh's Benbow
shares to Arch
. the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of FCC approval
. Arch will pay Ms. Walsh, in installments, $3.5 million (if the
transaction closes before January 23, 2001) or $3.8 million (if the
transaction closes on January 23, 2001)
As a result of these arrangements, Benbow will not have any meaningful business
operations and is unlikely to retain its N-PCS licenses.
CONXUS Communications, Inc. Arch currently holds a 6.6% equity interest in
CONXUS, which holds exclusive rights to a 50 KHz outbound/50 KHz inbound two-
way messaging license throughout the United States. CONXUS, like Benbow, is a
"designated entity" under FCC rules. If Arch wishes to purchase N-PCS services
of the kind offered by CONXUS, Arch has agreed to contract exclusively with
CONXUS for such services so long as such services are competitive in price and
quality with comparable services offered by others. Arch is currently acting as
a reseller of voice messaging services through CONXUS in a limited number of
markets under an agreement which is renewable from year to year unless
terminated by either party. On May 18, 1999, CONXUS filed for Chapter 11
protection in the U.S. Bankruptcy Court in Delaware. Arch is unable to predict
the effect of CONXUS' bankruptcy filing on Arch's equity interest in CONXUS or
the existing agreements between Arch and CONXUS.
Each stockholder of CONXUS is entitled to purchase services from CONXUS at
"most favored customer" rates, based on like services. CONXUS and Arch have
agreed to negotiate in good faith to enter into mutually acceptable
intercarrier, network access and similar agreements. If Arch wishes to purchase
N-PCS services of the kind offered by CONXUS, Arch has agreed to contract
exclusively with CONXUS for such services so long as such services are
competitive in price and quality with comparable services offered by others.
Arch is currently acting as a reseller of voice messaging services through
CONXUS in a limited number of markets under an agreement which is renewable
from year to year unless terminated by either party.
45
<PAGE>
Subscribers and Marketing
The combined company's paging accounts are generally businesses with
employees who travel frequently but must be immediately accessible to their
offices or customers. Arch's subscribers have historicaly included proprietors
of small businesses, professionals, management and medical personnel, field
sales personnel and service forces, members of the construction industry and
trades, and real estate brokers and developers. Mobile Media's traditional
subscribers include medical personnel, sales and service organizations,
specialty trade organizations, manufacturing organizations and governmental
agencies. The combined company believes that pager use among retail consumers
will increase significantly in the future, although consumers do not currently
account for a substantial portion of Arch's subscriber base.
Arch
Although today Arch operates in more than 180 of the 200 largest U.S.
markets, Arch historically has focused on medium-sized and small market areas
with lower rates of pager penetration and attractive demographics. Arch
believes that these markets will continue to offer significant opportunities
for growth, and that its national scope and presence will also provide Arch
with growth opportunities in larger markets.
Arch markets its paging services through a direct marketing and sales
organization which operated approximately 175 retail stores as of March 31,
1998. Arch also markets its paging services indirectly through independent
resellers, agents and retailers. Arch typically offers resellers paging
services in large quantities at wholesale rates that are lower than retail
rates, and resellers offer the services to end-users at a markup. Arch's costs
of administering and billing resellers are lower than the costs of direct end-
users on a per pager basis.
Arch also acts as a reseller of other paging carriers' services when existing
or potential Arch customers have travel patterns that require paging service
beyond the coverage of Arch's own networks.
In May 1997, Arch established a single national identity, Arch Paging, for
its paging services which previously had been marketed under various
trademarks. As part of this branding initiative, Arch adopted a new corporate
logo, developed a corporate-wide positioning strategy tied to customer service
delivery, and launched its Internet Web site at www.arch.com. Arch believes
that its unified branding identity has given the Arch name national exposure
for the first time and should result in significant economic leverage in its
marketing and communications efforts.
MobileMedia
MobileMedia's sales and marketing efforts are directed toward adding further
units with existing subscribers and identifying new potential subscribers.
MobileMedia markets its paging services through three primary sales channels:
direct, reseller and retail.
Direct. In the direct channel, MobileMedia leases or sells paging units
directly to its customers and bills and services such customers.
MobileMedia's direct customers range from individuals and small- and
medium-sized businesses to Fortune 500 accounts and government agencies.
Business and government accounts typically experience less turnover than
consumer accounts. The direct channel will continue to have the highest
priority among MobileMedia's marketing and sales efforts, because of its
critical contribution to recurring revenue and projected growth.
MobileMedia has been engaged in efforts to improve sales productivity and
strengthen its direct channel sales force, which suffered from high
turnover and open positions during much of 1997. In addition, MobileMedia
commenced implementing consumer direct marketing techniques in 1998. As of
March 31, 1999, the direct channel accounted for approximately 80.5% of
recurring revenue.
Reseller. In the reseller channel, MobileMedia sells access to its
transmission networks in bulk to a third party, who then resells such
services to consumers or small businesses or other end users. MobileMedia
46
<PAGE>
offers paging services to resellers at bulk discounted rates. The third
party reseller provides customer service, is responsible for pager
maintenance and repair costs, invoices the end user and retains the credit
risk of the end user, although MobileMedia retains the credit risk of the
reseller. Because resellers are responsible for customer equipment, the
capital costs that would otherwise be borne by MobileMedia are reduced.
MobileMedia's resellers generally are not exclusive distributors of
MobileMedia's services and often resell paging services of more than one
provider. Competition among service providers to attract and maintain
reseller distribution is based primarily upon price, including the sale of
paging units to resellers at discounted rates. MobileMedia intends to be an
active participant in the reseller channels and to concentrate on accounts
that are profitable and where longer term partnerships can be established
with selected resellers. As of March 31, 1999, the reseller channel
accounted for approximately 10.3% of recurring revenue.
Retail. In the retail channel, MobileMedia sells units to retailers and,
after the consumer purchases the pager from the retailer, the consumer
contacts MobileMedia to activate service. The retail channel is targeted at
the consumer market and consists primarily of national retail chains.
Consumers served by the retail channel typically purchase, rather than
lease, paging units. This reduces MobileMedia's capital investment
requirements. Subscribers obtained through retailers are billed and
serviced directly by MobileMedia. Retail distribution permits MobileMedia
to penetrate the consumer market by supplementing direct sales efforts. As
of March 31, 1999, the retail channel accounted for approximately 9.2% of
recurring revenue.
Sources of Equipment
Arch does not manufacture any of the pagers or other equipment used in its
paging operations. The equipment used in Arch's paging operations is generally
available for purchase from multiple sources. Arch centralizes price and
quantity negotiations for all of its operating subsidiaries to achieve cost
savings from volume purchases. Arch buys pagers primarily from Motorola and NEC
and purchases terminals and transmitters primarily from Glenayre and Motorola.
Arch anticipates that equipment and pagers will continue to be available in the
foreseeable future, consistent with normal manufacturing and delivery lead
times.
Because of the high degree of compatibility among different models of
transmitters, computers and other paging equipment manufactured by suppliers,
Arch is able to design its systems without being dependent upon any single
source of such equipment. Arch routinely evaluates new developments in paging
technology in connection with the design and enhancement of its paging systems
and selection of products to be offered to subscribers. Arch believes that its
paging system equipment is among the most technologically sophisticated in the
paging industry.
MobileMedia does not manufacture any of the units or related transmitting and
paging terminal equipment used in its paging operations. MobileMedia currently
purchases units from a limited number of suppliers and in turn sells or leases
the units to its subscribers. Motorola is the primary supplier of units to
MobileMedia. Glenayre is MobileMedia's primary supplier of paging terminals,
paging transmitters and voice mail system equipment. NEC and Panasonic also
supply paging units.
Employees
At March 31, 1999, Arch employed approximately 2,600 persons. None of Arch's
employees is represented by a labor union. Arch believes that its employee
relations are good. As part of its divisional reorganization, Arch anticipates
a net reduction of approximately 10% of its workforce. See "Arch Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Divisional Reorganization".
47
<PAGE>
At March 31, 1999, MobileMedia employed 2,885 people in various capacities,
with 156 in MobileMedia's corporate headquarters in Fort Lee, New Jersey and
the balance in its five regions. None of such employees is covered by
collective bargaining agreements. MobileMedia believes its employee relations
are good.
Trademarks
Arch owns the service marks "Arch" and "Arch Paging", and holds a federal
registration for the service mark "Arch Nationwide Paging" as well as various
other trademarks.
MobileMedia markets its services primarily under the trade name MobileComm
and the federally registered mark MOBILECOMM, except in the Greater
Metropolitan Cincinnati area and in certain parts of Western Pennsylvania and
Western New York, in which it markets its services under the federally
registered mark MOBILEMEDIA. MobileMedia markets its messaging services under
the federally registered mark VOICESTAR, and other services under the
federally registered mark SPORTSCASTER and the unregistered mark MOBILECOMM
CITYLINK. MobileMedia also owns other federally registered marks including:
DIAL PAGE, DMC DIGITAL MOBILE COMMUNICATIONS, EZ ALERT, MEMORY MANAGER,
MESSAGESOFT, MOBILEMEDIA (and design), MOBILEMEDIA (and Globe Design),
MOBILEMEDIA PAGING & PERSONALCOM and PAGERXTRA. In addition, MobileMedia has
applications on file for federal registration of the marks MMS and MOBILECOMM
(and design.)
Properties
At March 31, 1999, Arch owned four office buildings and leased office space,
including its executive offices, in approximately 175 localities in 35 states
for use in its paging operations. Arch leases transmitter sites and/or owns
transmitters on commercial broadcast towers, buildings and other fixed
structures in approximately 3,400 locations in 45 states. Arch's leases are
for various terms and provide for monthly lease payments at various rates.
Arch believes that it will be able to obtain additional space as needed at
acceptable cost. Arch sold off substantially all of its tower sites during
1998 and 1999 and currently rents transmitter space. As part of its divisional
reorganization, Arch is closing some office locations and redeploying other
real estate assets. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations --Effects of Tower Site Sale"
and "--Divisional Reorganization".
In addition to its FCC licenses and network infrastructure, which includes
radio transmission and satellite uplink equipment, MobileMedia has the
following categories of assets: (1) pagers, including both pagers held as
fixed assets for lease and pager inventory for sale, pager parts and
accessories; (2) its subscriber base and related accounts receivable; (3)
intellectual property; (4) real estate and improvements; (5) leased assets;
(6) computer and telephone systems and equipment; (7) furniture, fixtures and
equipment; (8) goodwill and other intangibles; and (9) cash and cash
equivalents.
MobileMedia relocated its headquarters to Fort Lee, New Jersey in March
1998. At March 31, 1999, MobileMedia leased office space, including its
executive offices, in approximately 33 states for use in its paging
operations. MobileMedia leases transmitter sites and/or owns transmitters on
commercial broadcast towers, buildings and other fixed structures.
MobileMedia's leases are for various terms and provide for monthly lease
payments at various rates. MobileMedia believes that it will be able to obtain
additional space as needed at acceptable cost.
On September 3, 1998, MobileMedia sold certain transmission towers and
associated assets to an unrelated third party and currently rents transmitter
space on these towers. MobileMedia recognized proceeds of $170.0 million from
the sale and the annual rental expense is approximately $10.7 million.
48
<PAGE>
Litigation
Arch, from time to time, is involved in lawsuits arising in the normal course
of business. Arch believes that its currently pending lawsuits will not have a
material adverse effect on its financial condition or results of operations.
MobileMedia disclosed in 1996 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 outside
counsel, and a comprehensive report regarding these matters was provided to the
FCC in the fall of 1996. In cooperation with the FCC, outside counsel's
investigation was expanded to examine all of MobileMedia's paging licenses, and
the results of that investigation were submitted to the FCC on November 8,
1996.
On January 13, 1997, the FCC issued a Public Notice relating to the status of
some of the FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (1) automatically terminated
approximately 185 authorizations for paging facilities that were not
constructed by the expiration date of their construction permits and remained
unconstructed, (2) dismissed approximately 94 applications for fill-in sites
around existing paging stations (which had been filed under the so-called "40-
mile rule") as defective because they were predicated upon unconstructed
facilities and (3) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. With respect to each of the approximately
99 authorizations where the underlying station was untimely constructed, the
FCC granted MobileMedia interim operating authority subject to further action
by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an administrative law judge to take evidence and develop a full
factual record on directed issues concerning MobileMedia's filing of false
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the
hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
providing for a change of control of MobileMedia and a permissible transfer of
MobileMedia's FCC licenses.
On September 2, 1998, MobileMedia and Arch filed a joint application to
transfer control of MobileMedia to Arch. On February 5, 1999, the FCC released
an order granting the transfer and terminating the hearing into MobileMedia's
qualifications to remain an FCC licensee, subject to certain conditions which
have since been satisfied. The order also required divestiture, within six
months after the closing of the MobileMedia acquisition, of certain N-PCC
interests and those MobileMedia facilities operating under special temporary
authority.
Predecessors to the Combined Company; Events Leading up to MobileMedia's
Bankruptcy Filings
Arch was incorporated in Delaware in 1988 as USA Mobile Communications, Inc.
II and changed its name to Arch Communications, Inc. in June 1998. Arch has
conducted its operations through wholly owned direct and indirect subsidiaries.
MobileMedia Communications, Inc. and its publicly traded parent company were
each incorporated in Delaware in 1993. In this prospectus, references to
MobileMedia refer to MobileMedia Communications, Inc. and its consolidated
subsidiaries, but not to the parent company unless we indicate otherwise. In
1995 and 1996, MobileMedia Communications, Inc. acquired the paging and
wireless messaging business of Dial Page Inc. and Mobile Communications
Corporation of America for approximately $1.1 billion in the aggregate.
49
<PAGE>
During 1996, MobileMedia experienced difficulties executing its post-
acquisition business strategy. These difficulties related largely to the
process of integration of the operations of Dial Page and MobileComm into those
of MobileMedia. As a result, MobileMedia did not achieve expected growth in its
subscriber base and revenues, nor did it realize anticipated efficiencies and
cost reductions from the elimination of duplicative functions. During 1996,
MobileMedia's financial position deteriorated. As of September 30, 1996,
MobileMedia Communications, Inc. was in violation of certain financial
covenants under its $750.0 million 1995 credit agreement, which resulted in the
occurrence of events of default under that agreement and precluded MobileMedia
from borrowing additional funds. In the fall of 1996, MobileMedia commenced
negotiations with The Chase Manhattan Bank, the agent for the lenders under the
1995 credit agreement, regarding the terms of a possible financial
restructuring.
In November and December of 1996, MobileMedia sought to modify payment terms
with certain of its larger vendors, some of which had not been paid in
accordance with their scheduled payment terms. In the fall of 1996, Motorola,
MobileMedia's largest supplier of units and pager repair parts, informed
MobileMedia that it would require credit support to assure payment of
approximately $35.0 million past due accounts payable and would refuse to
accept orders for products or services from and refuse to make shipments to
MobileMedia pending resolution of the matter. Subsequently, other key suppliers
also made demands on MobileMedia for payment of their past due accounts in the
aggregate amount of $11.8 million.
Between November 1996 and January 1997, MobileMedia failed to make scheduled
interest payments of approximately $25.2 million on MobileMedia's 9 3/8% notes
and under MobileMedia's 1995 credit agreement.
Negotiations between MobileMedia and the holders of the MobileMedia 9 3/8%
notes and certain other outstanding notes and with MobileMedia's key suppliers
continued through late 1996. When it became apparent that MobileMedia would be
unable, among other things, to reach agreements with the key suppliers to
resume shipments of critical inventory and equipment or to reach agreement with
its lenders and on the terms of a restructuring of its indebtedness outside of
Chapter 11 of the Bankruptcy Code, MobileMedia concluded that it had no
practical alternative other than to seek protection under Chapter 11.
On January 30, 1997, MobileMedia filed a voluntary petition for
reorganization under Chapter 11. For subsequent developments, see "MobileMedia
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview".
The MobileMedia Acquisition
The Merger
To consummate the MobileMedia acquisition in June, 1999, MobileMedia
Communications, Inc. was merged with and into a wholly owned subsidiary of
Arch. Immediately following this merger, Arch contributed all of the
outstanding stock of the surviving corporation to an indirect wholly owned
subsidiary of Arch. Immediately prior to the merger, MobileMedia's parent
company had contributed all of its assets to MobileMedia Communications, Inc.
In connection with the merger, MobileMedia Communications, Inc.'s subsidiaries
were consolidated into a single subsidiary of MobileMedia Communications, Inc.
which became an indirect wholly owned subsidiary of Arch as a result of the
merger.
Purchase Price
Arch acquired MobileMedia for a combination of cash and Arch securities, as
follows:
. Arch paid approximately $479.0 million in cash to certain secured
creditors of the MobileMedia debtors-in-possession;
. Arch paid a total of $58.0 million to pay fees and expenses, repay all
borrowings outstanding under MobileMedia's post-petition credit facility,
pay pre-petition priority claims and post-petition claims
50
<PAGE>
incurred by the debtors-in-possession in the ordinary course of business
or authorized by the bankruptcy court, and pay principal and accrued
interest plus certain indenture trustee fees outstanding under certain
senior notes assumed by MobileMedia in the acquisition of the paging and
wireless business of Dial Page in 1995;
. issued 4,781,656 shares of its common stock to unsecured creditors of
MobileMedia and MobileMedia's parent company;
. issued and sold additional shares of its common stock upon exercise of
transferable rights issued to unsecured creditors and issued and sold
shares of its common stock and sold shares of Class B common stock to
four unsecured creditors who agreed to act as standby purchasers and to
purchase shares in case transferable rights to purchase those shares were
not exercised. The holders of transferable rights and the standby
purchasers paid a price of $6.00 per share for a total of 36,207,265
shares and a total purchase price of $217.2 million; and
. issued to the standby purchasers warrants to acquire up to 1,225,219
shares of its common stock on or before September 1, 2001 at a warrant
exercise price of $3.01 per warrant ($9.03 per share).
Arch also issued to the holders of its common stock and Series C preferred
stock on January 27, 1999 non-transferable rights to acquire up to 14,964,388
shares of its common stock at a price of $6.00 per share. A total of 102,964
non-transferable rights were exercised. Because non-transferable rights to
acquire 14,861,424 shares were not exercised, Arch has distributed in their
place warrants to acquire an equivalent number of shares of its common stock
at the warrant exercise price of $3.01 per warrant ($9.03 per share).
Accounting Treatment
The merger is being accounted for under the purchase method of accounting;
the purchase price will be allocated based on the fair value of the assets
acquired and the liabilities assumed. In accordance with GAAP, Arch will be
treated as the acquiror in the merger for accounting and financial reporting
purposes, and Arch will continue to report its historical financial statements
as the historical financial statements of the combined company.
51
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of Arch are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Edward Baker, Jr..... 48 Chairman of the Board, Chief Executive Officer and Director
Lyndon R. Daniels....... 46 President and Chief Operating Officer
John B. Saynor.......... 58 Executive Vice President and Director
J. Roy Pottle........... 40 Executive Vice President and Chief Financial Officer
Paul H. Kuzia........... 57 Executive Vice President/Technology and Regulatory Affairs
R. Schorr Berman(1)(2).. 50 Director
James S. Hughes(1)...... 56 Director
Allan L. Rayfield(2).... 64 Director
John A. Shane(1)(2)..... 66 Director
John Kornreich.......... 53 Director
Edwin M. Banks.......... 36 Director
H. Sean Mathis.......... 51 Director
</TABLE>
- --------
(1) Member of the audit committee
(2) Member of the executive compensation and stock option committee
C. Edward Baker, Jr. has served as Chief Executive Officer and a director of
Arch since 1988. Mr. Baker became Chairman of the Board of Arch in 1989. He
also served as President of Arch from 1988 to January 1998. From 1986 until
joining Arch in March 1988, Mr. Baker was President and Chief Executive Officer
of US West Paging.
Lyndon R. Daniels joined Arch in January 1998 as President and Chief Operating
Officer. From November 1993 to January 1998, Mr. Daniels was the President and
Chief Executive Officer of Pacific Bell Mobile Services, a subsidiary of SBC
Communications Inc. From May 1988 until November 1993, Mr. Daniels was the
Chief Financial Officer of Pactel Corp., a mobile telephone company.
John B. Saynor has served as a director of Arch since 1988. Mr. Saynor has
served as Executive Vice President of Arch since 1990. Mr. Saynor is a founder
of Arch and served as President and Chief Executive Officer of Arch from 1986
to March 1988 and as Chairman of the Board from 1986 until May 1989.
J. Roy Pottle joined Arch in February 1998 as Executive Vice President and
Chief Financial Officer. From October 1994 to February 1998, Mr. Pottle was
Vice President/Treasurer of Jones Intercable, Inc., a cable television
operator. From September 1989 to October 1994, he served as Vice President and
Relationship Manager at The Bank of Nova Scotia, New York Agency.
Paul H. Kuzia has served as Executive Vice President/Technology and Regulatory
Affairs of Arch since September 1996. He served as Vice President/Engineering
and Regulatory Affairs of Arch from 1988 to September 1996. Prior to 1988, Mr.
Kuzia was director of operations at Message Center Inc.
R. Schorr Berman has been a director of Arch since 1986. Since 1987, he has
been the President and Chief Executive Officer of MDT Advisers, Inc., an
investment adviser. He is a director of Mercury Computer Systems, Inc. as well
as a number of private companies.
James S. Hughes has been a director of Arch since 1986. Since 1987, he has been
President and Chief Executive Officer of Norwich Corporation, a real estate
investment and service firm, and, since 1992, he has served as President and
Managing Director of Inventa Corporation, an international business development
firm.
52
<PAGE>
Allan L. Rayfield has been a director of Arch since 1997. He has been a
consultant since 1995. From November 1993 until December 1994, Mr. Rayfield
served as Chief Executive Officer of M/A Com Inc., a microwave electrical
manufacturing company. From April 1991 until November 1993, he served as Chief
Operating Officer of M/A Com Inc. He is a director of Parker Hannifin
Corporation and Acme Metals Incorporated.
John A. Shane has been a director of Arch since 1988. He has been the President
of Palmer Service Corporation since 1972. He has been a general partner of
Palmer Partners L.P., a venture capital firm, since 1981. He serves as a
director of Overland Data, Inc., United Asset Management Corporation and Gensym
Corporation and as a trustee of Nvest Funds.
John Kornreich has been a director of Arch since June 1998. Mr. Kornreich has
served as a Managing Director of Sandler Capital Management Co., Inc. since
1988.
Edwin M. Banks has been employed by W.R. Huff Asset Management since 1988 and
currently serves as a portfolio manager. From 1985 until he joined W.R. Huff,
Mr. Banks was employed by Merrill Lynch & Company. Mr. Banks also serves as a
director of Magellan Health Services, formerly Charter Medical Corporation, and
e.spire Corporation, formerly American Communications Services, Inc..
H. Sean Mathis has been Chairman of the Board and Chief Executive Officer of
Allis Chalmers, Inc. since January 1996 and previously served as a Vice
President of that company since 1989. From July 1996 to September 1997, Mr.
Mathis was Chairman of the Board of Universal Gym Equipment Inc., a privately
owned company which filed for protection under the Bankruptcy Code in July
1997. From 1991 to 1993, Mr. Mathis was President of RCL Acquisition Corp., and
from 1993 to 1995 he was President and a director of RCL Capital Corporation,
which was merged into DISC Graphics in November 1995. Previously, Mr. Mathis
was a director and Chief Operating Officer of Ameriscribe Corporation. Mr.
Mathis is a director of Thousand Trails, Inc.
Arch's certificate of incorporation and by-laws provide that Arch has a
classified board of directors composed of three classes, each of which serves
for three years, with one class being elected each year. The term of Messrs.
Saynor, Shane and Mathis will expire at Arch's annual meeting of stockholders
to be held in 2000. The term of Messrs. Baker, Berman and Kornreich will expire
at Arch's annual meeting of stockholders to be held in 2001. The term of
Messrs. Hughes, Rayfield and Banks will expire at Arch's annual meeting of
stockholders to be held in 2002.
Two of the standby purchasers, W.R. Huff and Whippoorwill, have the right to
designate one member each for election to Arch's board of directors. This right
of designation will continue through 2002 for W.R. Huff and 2003 for
Whippoorwill if the designating stockholder is still entitled to cast at least
5% of all votes at an Arch stockholders' meeting, and will continue afterwards
if the designating stockholder is still entitled to cast at least 10% of all
such votes. Under this arrangement, Mr. Banks has been elected to Arch's board
of directors on behalf of W.R. Huff and Mr. Mathis has been elected on behalf
of Whippoorwill.
The holders of Series C preferred stock have the right, voting as a separate
class, to elect one member of Arch's board of directors, and such director has
the right to be a member of any committee of the board. Mr. Kornreich is
currently the director elected by the holders of Series C preferred stock. This
right of designation will terminate if less than 50% of the Series C preferred
stock remains outstanding.
Arch's executive officers are elected by the board of directors and hold
office until their successors are elected or until their earlier death,
resignation or removal.
Most of Arch's executive officers have entered into non-competition
agreements with Arch which provide that they will not compete with Arch for one
year following termination, or recruit or hire any other Arch employee for
three years following termination. See "--Executive Retention Agreements".
53
<PAGE>
Certain Relationships and Related Transactions
Arch and three other entities have co-founded an offshore corporation to
pursue wireless messaging opportunities in Latin America. Arch and Mr. Hughes
each contributed $250,000 to this offshore corporation and each owns
approximately 12% of its equity. Arch's Board of Directors has approved an
additional investment of $200,000 by Arch, subject to certain conditions.
Between August 6, 1998 and October 28, 1998, Arch's board of directors
approved three full recourse, unsecured demand loans totaling $279,500 from
Arch to Mr. Baker. The loans bear interest at approximately 5% annually.
Board Committees
Arch's board of directors has an audit committee and an executive
compensation and stock option committee. The audit committee reviews the annual
consolidated financial statements of Arch and its subsidiaries before their
submission to Arch's board of directors and consults with Arch's independent
public accountants to review financial results, internal financial controls and
procedures, audit plans and recommendations. The audit committee also
recommends the selection, retention or termination of independent public
accountants and approves services provided by independent public accountants
prior to the provision of such services. The compensation committee recommends
to Arch's board the compensation of executive officers, key managers and
directors and administers Arch's stock option plans. Arch's board of directors
has no standing nominating committee.
Indemnification and Director Liability
Arch's certificate of incorporation eliminates the liability of its directors
for monetary damages for breaches of fiduciary duties, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions that involve intentional misconduct or a
knowing violation of law. The certificate of incorporation also requires Arch
to indemnify its directors and officers to the fullest extent permitted by the
Delaware corporations statute.
54
<PAGE>
Executive Compensation
Summary Compensation Table
The annual and long-term compensation of Arch's Chief Executive Officer and
other executive officers named below was as follows for the years ended
December 31, 1996, 1997 and 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------- --------------
Other Annual
Name and Principal Position During 1997 Year Salary $ Bonus $(1) Compensation ($)(2) Options (#)(3)
- --------------------------------------- ---- -------- ---------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
C. Edward Baker, Jr..... 1998 $373,742 $135,000 $ 600 151,554(4)
Chairman, President and 1997 353,317 227,500 600 16,545(4)
Chief Executive Officer 1996 329,050 36,833 600 89,621(5)(6)
Lyndon R. Daniels....... 1998 295,416 -- 113,905(7) 46,666
President and Chief 1997 -- -- -- --
Operating Officer
(joined Arch in January
1998)
J. Roy Pottle........... 1998 179,200 -- 99,304(7) 30,000
Executive Vice 1997 -- -- -- --
President and Chief
Financial Officer
(joined Arch in
February 1998)
John B. Saynor.......... 1998 157,646 41,770 600 17,247(8)
Executive Vice
President 1997 153,188 72,900 600 5,302(9)
1996 146,867 15,300 600 6,667(6)
Paul H. Kuzia........... 1998 165,489 58,435 600 29,616(9)
Executive Vice 1997 157,633 77,400 600 5,629(9)
President/Technology
and Regulatory Affairs 1996 133,800 14,620 600 2,667(6)
</TABLE>
- --------
(1) Represents bonus paid in such fiscal year with respect to prior year.
(2) Represents Arch's matching contributions paid under Arch's 401(k) plan.
(3) No restricted stock awards or SARs were granted to any of the named
executive officers during the years ended December 31, 1996, 1997 or 1998.
(4) Includes options to purchase 136,563 shares granted as part of Arch's
January 16, 1998 option repricing program.
(5) Includes options to purchase 35,620 shares replaced in connection with
Arch's October 23, 1996 option repricing program.
(6) Option replaced in connection with Arch's January 16, 1998 option
repricing program.
(7) Represents reimbursement for certain relocation costs and associated
taxes.
(8) Includes options to purchase 11,968 shares granted as part of Arch's
January 16, 1998 option repricing program.
(9) Includes options to purchase 23,229 shares granted as part of Arch's
January 16, 1998 option repricing program.
Executive Retention Agreements
Arch is a party to executive retention agreements for a total of 16
executives, including Messrs. Baker, Daniels, Kuzia, Pottle and Saynor.
The purpose of the executive retention agreements is to assure the continued
employment and dedication of the executives without distraction from the
possibility of a change in control of Arch as defined in the executive
retention agreements. The executive will be eligible to receive benefits if a
change in control occurs,
55
<PAGE>
and Arch terminates the executive's employment at any time within the following
12 months except for cause, disability or death, or the executive terminates
employment for good reason, as defined in the executive retention agreements.
Such benefits will include (1) a lump sum cash severance payment equal to a
specified multiple of the executive's annual base salary in effect at the time
of the change in control plus a specified multiple of the executive's average
annual bonus paid during the previous three full calendar years, (2) payment of
any accrued but unpaid base salary plus any other amounts earned but unpaid
through the date of termination and (3) any amounts or benefits required to be
paid or provided to the executive or which the executive is eligible to receive
following the executive's termination under any plan, program, policy,
practice, contract or agreement of Arch. In addition, for up to 12 months after
termination, Arch must provide the executive with life, disability, accident
and health insurance benefits similar to those previously maintained until the
executive becomes reemployed with another employer and is eligible to receive
substantially equivalent benefits. The specified multiple of salary and bonus
for Messrs. Baker, Daniels, Kuzia, Pottle and Saynor is three, and the
specified multiple for the other executives is one or two. Good reason is
defined to include, among other things, a material reduction in employment
responsibilities, compensation or benefits. In the case of Mr. Baker, good
reason includes his not becoming the chief executive officer of any entity
succeeding or controlling Arch.
Stock Option Grants
The following options were granted to the five executive officers named in
the summary compensation table during 1998. No SARs were granted during 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Options Term(3)
-------------------------------------------------- -------------------
Percent of
Total
Options/SARs
Options/SARs Granted to Exercise or
Granted Employee in Base Price Expiration
(#)(1) Fiscal Year ($/Share)(2) Date 5% ($) 10% ($)
------------ ------------ ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. ... 14,991 2.31% $13.5939 03/04/08 $128,143 $ 324,739
136,563(4) 21.00 15.1875 01/16/08 553,600 2,110,041
Lyndon R. Daniels....... 46,666 7.18 14.8125 01/02/08 434,723 1,101,674
J. Roy Pottle........... 30,000 4.61 10.6875 02/17/08 201,639 510,994
John B. Saynor.......... 5,279 0.81 13.5939 03/04/08 45,122 114,349
11,968(4) 1.84 15.1875 01/16/08 48,517 184,924
Paul H. Kuzia........... 6,387 0.98 13.5939 03/04/08 54,603 138,375
23,229(4) 3.57 15.1875 01/16/08 94,166 358,913
</TABLE>
- --------
(1) Options generally become exercisable at a rate of 20% of the shares subject
to the option on the first anniversary of the date of grant and 5% of the
shares subject to the option per calendar quarter thereafter.
(2) The exercise price is equal to the fair market value of common stock on the
date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option terms. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the options were granted and are not intended to forecast future
appreciation of the price of the common stock. The named executive officers
will realize gain upon the exercise of these options only if there is an
increase in the price of common stock which benefits all Arch stockholders
proportionately.
(4) Option granted as part of the January 16, 1998 option repricing program.
56
<PAGE>
Option Exercises and Year-End Option Table
The named executive officers exercised no stock options or SARs during 1998.
They held the following stock options as of December 31, 1998:
Aggregated Options/SAR Exercises in Last Fiscal Year
and Fiscal Year-end Options Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Options In-the-Money Options
Acquired on Value at Fiscal Year-End at Fiscal Year-End
Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
Name (#) ($)(1) (#) ($)(2)
---- ----------- -------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr .... 31,344 $270,342 37,914 113,641 -- --
Lyndon R. Daniels....... -- -- -- 46,666 -- --
John B. Saynor.......... -- -- 1,668 15,580 -- --
J. Roy Pottle........... -- -- -- 30,000 -- --
Paul H. Kuzia........... -- -- 6,644 22,973 -- --
</TABLE>
- --------
(1) Represents the difference between the exercise price and the fair market
value of common stock on the date of exercise.
(2) Based on the fair market value of common stock on December 31, 1998
($4.3125 per share) less the option exercise price.
Compensation Committee Interlocks and Insider Participation
The current members of Arch's compensation committee are R. Schorr Berman,
Allan L. Rayfield and John A. Shane. Messrs. Berman, Rayfield and Shane served
on the compensation committee throughout 1998, and Mr. Rayfield joined the
compensation committee upon his election as a director in July 1998.
C. Edward Baker, Jr., the chairman and chief executive officer of Arch, makes
recommendations and participates in discussions regarding executive
compensation, but he does not participate directly in discussions regarding his
own compensation. No current executive officer of Arch has served as a director
or member of the compensation committee (or other committee serving an
equivalent function) of any other entity that has an executive officer who
serves as a director of Arch or as a member of the compensation committee of
Arch.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information about the beneficial
ownership of Arch's common stock as of June 30, 1999, after consummation of the
MobileMedia acquisition and the implementation of the reverse stock split, by
. each person who is known by Arch to beneficially own more than 5% of its
outstanding shares of common stock;
. each current director of Arch;
. Arch's chief executive officer and the other named executive officers;
and
. all current directors and executive officers of Arch as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
based upon voting or investment power over the securities. The number of shares
of common stock outstanding that is used in calculating the percentage for each
listed person includes any shares that that person has the right to acquire
through exercise of warrants or options within 60 days after June 30, 1999.
These shares, however, are not deemed to be outstanding for the purpose of
calculating the percentage beneficially owned by any other person.
Unless otherwise indicated, each person or entity listed in the table has
sole voting power and investment power, or shares such power with his spouse,
with respect to all shares of capital stock listed as owned by such person or
entity. The inclusion of shares in the table does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of the
shares.
The table reflects
. the issuance of a total of 40,988,921 shares of common stock and Class B
common stock to the unsecured creditors of MobileMedia and to the
stockholders of Arch;
. the distribution of warrants to acquire 1,225,219 shares of common stock
to the standby purchasers and warrants to acquire 14,861,424 shares of
common stock to stockholders of Arch who did not exercise their
nontransferable subscription rights; and
. a one-for-three reverse stock split. All numbers of shares in this
prospectus have been adjusted to reflect this reverse stock split.
The table assumes
. the conversion of Series C preferred stock into common stock at the
current conversion price of $16.38 per share; and
. the conversion of Class B common stock into common stock at a one-for-one
conversion ratio.
Because Class B common stock is not entitled to vote in the election of
directors, the voting power of its holders is less than their percentages of
beneficial ownership shown in the table. Thus, the four standby purchasers
listed in the table would be entitled to cast a maximum of 49.0% of the votes
in the election of directors, assuming that they --and only they-- exercised
outstanding options and warrants. This contrasts with the more than 54.9% of
beneficial ownership which is obtained by adding their individual beneficial
ownership percentages in the table.
58
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------
Shares Options and Warrants
Outstanding at Exercisable Prior to
Name June 30, 1999 August 29, 1999 Total Percentage
---- -------------- -------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sandler Capital Management (1)........ 1,649,121 2,751,495 4,400,616 8.8%
C. Edward Baker, Jr................... 37,433 127,552 164,985 *
Lyndon R. Daniels..................... 4,000 20,915 24,915 *
John B. Saynor........................ 64,641 116,975 181,616 *
J. Roy Pottle......................... -- 9,000 9,000 *
Paul H. Kuzia......................... 1,319 14,717 16,036 *
R. Schorr Berman (2).................. 655,663 1,139,282 1,794,945 3.6%
James S. Hughes....................... 40,196 46,670 86,866 *
John Kornreich (3).................... 1,728,982 2,890,124 4,619,106 9.3%
Allan L. Rayfield..................... 333 3,076 3,409 *
John A. Shane (4)..................... 6,855 16,852 23,707 *
Edwin M. Banks (5).................... 8,834,357 569,002 9,403,359 18.9%
H. Sean Mathis ....................... -- 1,000 1,000 *
W.R. Huff Asset Management Co., L.L.C.
(6).................................. 8,834,357 568,002 9,402,359 18.9%
The Northwestern Mutual Life Insurance
Company (7).......................... 3,243,630 207,543 3,451,173 6.9%
Credit Suisse First Boston
Corporation.......................... 4,504,319 9,770 4,514,089 9.1%
Whippoorwill Associates, Inc. (8)..... 7,706,045 439,904 8,145,949 16.4%
Resurgence Asset Management L.L.C. (9)
Resurgence Asset Management
International L.L.C. (9)
Re/Enterprise Asset Management, L.L.C.
(9)................................... 8,919,361 -- 8,919,361 17.9%
All current directors and executive
officers of Arch as a group (12
persons)............................. 11,373,779 4,955,165 16,328,944 32.7%
</TABLE>
- --------
*Less than 1%
(1) Sandler has sole voting and investment power over 116,000 of such shares
and 200,500 of the shares issuable upon exercise of warrants and shared
voting and investment power over the remaining shares and warrants.
(2) Includes 649,330 shares and 1,122,334 shares issuable upon exercise of
warrants held by Memorial Drive Trust, over which Mr. Berman may be deemed
to share voting and investment power as administrator and chief executive
officer of Memorial Drive Trust. Mr. Berman disclaims beneficial ownership
of such shares held by Memorial Drive Trust.
(3) Includes 1,649,121 shares and 2,751,495 shares issuable upon exercise of
warrants beneficially owned by Sandler, over which Mr. Kornreich may be
deemed to have voting and investment power as managing director, and
63,333 shares beneficially owned by two limited partnerships, over which
Mr. Kornreich may be deemed to have voting and investment power as a
general partner. Mr. Kornreich disclaims beneficial ownership of all such
shares.
(4) Includes 350 shares and 606 shares issuable upon exercise of warrants
owned by Palmer Service Corporation, over which Mr. Shane may be deemed to
have voting and investment power as president and sole stockholder of
Palmer Service Corporation, 159 shares issuable upon conversion of $8,000
principal amount of Arch's 6 3/4% convertible subordinated debentures due
2003 held by Palmer Service Corporation, and 418 shares issuable upon
conversion of Arch's 6 3/4% convertible subordinated debentures held by
Mr. Shane. See "Description of Outstanding Indebtedness--Arch Convertible
Debentures".
(5) Includes 7,528,218 shares and 568,002 shares issuable upon exercise of
warrants W.R. Huff manages on behalf of various discretionary accounts and
1,306,139 shares held by The Huff Alternative Income Fund, L.P., an
affiliate of W.R. Huff. This director is a portfolio manager of W.R. Huff.
This director disclaims beneficial ownership of all such shares.
(6) Consists of 7,528,218 shares and 568,002 shares issuable upon exercise of
warrants W.R. Huff manages on behalf of various discretionary accounts and
1,306,139 shares held by The Huff Alternative Income Fund, L.P., an
affiliate of W.R. Huff. This standby purchaser disclaims beneficial
ownership of these shares.
(7) Consists of 2,632,048 shares held by The Northwestern Mutual Life
Insurance Company, 158,287 of which are issuable upon exercise of
warrants, 638,686 shares 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),
38,361 of which are issuable upon exercise of warrants, and 180,439 shares
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, 10,895 shares of which are
issuable upon exercise of warrants. Northwestern Mutual Investment
Services, LLC, a wholly-owned subsidiary of The Northwestern Mutual Life
Insurance Company and a registered investment advisor, serves as
investment adviser to the High Yield Bond Portfolio of Northwestern Mutual
Series Fund, Inc.
59
<PAGE>
(8) All of such shares are owned by various limited partnerships, a limited
liability company, a trust and third party accounts for which
Whippoorwill Associates, Inc. has discretionary authority and acts as
general partner or investment manager.
(9) Resurgence Asset Management, L.L.C., Resurgence Asset Management
International L.L.C. and Re/Enterprise Asset Management, L.L.C. exercise
voting power and investment power over these shares on behalf of certain
client accounts and accounts managed by their affiliates with which such
powers are shared. Additionally, employees of Resurgence Asset
Management, L.L.C., Resurgence Asset Management International L.L.C. and
Re/Enterprise Asset Management, L.L.C. and their affiliates have an
indirect beneficial interest in certain of the client entities which own
these shares. Each of Resurgence Asset Management, L.L.C., Resurgence
Asset Management International L.L.C. and Re/Enterprise Asset Management,
L.L.C. disclaims beneficial ownership of shares owned by their clients.
James B. Rubin shares voting and investment power in the above shares as
Chief Investment Officer and a Manager of each of Resurgence Asset
Management, L.L.C., Resurgence Asset Management International L.L.C. and
Re/Enterprise Asset Management, L.L.C. Mr. Rubin disclaims beneficial
ownership of these shares.
Each person or entity listed in the table has an address c/o Arch's parent
company except for:
. Sandler Capital Management, 767 Fifth Avenue, 45th Floor, New York, New
York 10153
. W.R. Huff Asset Management Co., L.L.C., 67 Park Place, Ninth Floor,
Morristown, NJ 07960
. The Northwestern Mutual Life Insurance Company, 720 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202
. Credit Suisse First Boston Corporation, 11 Madison Avenue, New York, New
York 10010
. Whippoorwill Associates, Inc., 11 Martine Avenue, White Plains, New York
10606
. Resurgence Asset Management L.L.C., 10 New King Street, 1st Floor, White
Plains, New York 10604.
60
<PAGE>
DESCRIPTION OF SECURITIES
Arch's authorized capital stock consists of 100,000,000 shares of common
stock, 21,666,666 shares of Class B common stock and 10,000,000 shares of
preferred stock, consisting of 300,000 shares of Series B preferred stock
250,000 shares of Series C preferred stock and 9,450,000 additional shares of
preferred stock. Each share has a par value of $.01. On July 31, 1999, there
were 42,700,521 outstanding shares of common stock held by approximately 190
stockholders of record, 5,360,261 outstanding shares of Class B common stock
held by approximately 4 stockholders of record and 250,000 outstanding shares
of Series C preferred stock held by 9 stockholders of record.
The following summary of certain provisions of common stock, Class B common
stock, preferred stock, Series C preferred stock, warrants and Arch's
certificate of incorporation and by-laws is not intended to be complete and is
qualified by reference to the provisions of applicable law and to the
certificate of incorporation and by-laws. To learn how to obtain copies of the
certificate of incorporation and by-laws, see "Where You Can Find More
Information".
Common Stock
Holders of common stock are entitled to one vote per share. They are entitled
to receive dividends when and if declared by Arch's board of directors and to
share, on the basis of their shareholdings, in the assets of Arch that are
available for distribution to its stockholders in the event of liquidation.
These rights of the common stock are subject to any preferences or
participating or similar rights of any series of preferred stock that is
outstanding at the time. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. All outstanding shares of common
stock are fully paid and nonassessable. Holders of common stock do not have
cumulative voting rights.
Class B Common Stock
The Class B common stock is identical to common stock, except that holders of
Class B common stock are not entitled to vote in the election of directors and
are entitled to 1/100th of a vote per share on all other matters. Class B
common stock and common stock vote together as a single class, except as
otherwise required by law.
Class B common stock has been issued only to the standby purchasers and their
affiliates, and only to the extent that the standby purchasers and their
affiliates would otherwise have owned, in the aggregate, more than 49.0% of the
outstanding shares of capital stock of Arch generally entitled to vote in the
election of directors or more than 49.0% of the voting power of the outstanding
voting shares upon consummation of the MobileMedia acquisition, assuming the
conversion of all convertible securities and assuming the exercise of all
warrants held by the standby purchasers and their affiliates. Any shares of
Class B common stock transferred by any standby purchaser to any transferee
other than another standby purchaser will automatically convert into an equal
number of shares of common stock. Class B Common Stock has been used so that
the issuance of stock to the standby purchasers in connection with the
MobileMedia acquisition would not trigger the change of control repurchase
provisions contained in the indentures governing certain outstanding
indebtedness of Arch. See "Risk Factors--Debt instruments restrict operations"
and "Description of Certain Indebtedness".
Preferred Stock
Arch's board of directors is authorized, without any further action by the
stockholders of Arch, to issue preferred stock from time to time in one or more
series and to fix the voting, dividend, conversion, redemption and liquidation
rights and preferences of any such series and whatever other designations,
preferences and special rights Arch's board of directors may decide upon. Arch
does not have any present plans to issue shares of its preferred stock, other
than the shares of Series C preferred stock currently outstanding.
61
<PAGE>
Series C Preferred Stock
The Series C preferred stock has the rights and preferences summarized below:
Conversion. The Series C preferred stock was convertible into common stock at
an initial conversion rate of 18.18 shares of common stock for each share of
Series C preferred stock, subject to certain adjustments. These adjustments
include the issuance of common stock, or rights or options for common stock, at
a price less than the market price of common stock. The conversion of the
Series C preferred stock automatically adjusts on a quarterly basis to reflect
the accrual of dividends to the extent that dividends are not paid on a current
basis in cash or stock. Until September 30, 1999, the conversion rate will be
6.61-to-1, so that 1,652,773 shares of common stock are issuable upon the
conversion of all shares of Series C preferred stock in the aggregate. This
aggregate number of common shares increases by approximately 32,000 shares per
quarter.
Dividends. The Series C preferred stock earns dividends at an annual rate of
8.0% payable when declared quarterly in cash or, at Arch's option, through the
issuance of shares of common stock valued at 95% of the then prevailing market
price. If not paid quarterly, dividends accumulate and become payable upon
redemption or conversion of the Series C preferred stock or upon liquidation of
Arch.
Voting Rights. So long as at least 50% of the Series C preferred stock
remains outstanding, the holders of the Series C preferred stock have the
right, voting as a separate class, to designate one member of the boards of
directors of Arch and a principal subsidiary. The director has the right to be
a member of any committee of either board of directors. On all other matters,
the Series C preferred stock and the common stock vote together as a single
class. Each share of Series C preferred stock is entitled to as many votes as
the number of shares of common stock into which it is convertible (6.61 until
September 30, 1999).
Redemption. Holders of Series C preferred stock may require Arch to redeem
the Series C preferred stock in the year 2005. Arch may elect to pay the
redemption price in cash or in common stock valued at 95% of its then
prevailing market price. Series C preferred stock is subject to redemption for
cash or common stock at Arch's option in specified circumstances.
Liquidation Preference. Upon liquidation, dissolution or winding up of Arch,
before any distribution or payment is made to holders of common stock, Arch
must pay to the holders of Series C preferred stock $100.00 per share of
Series C preferred stock, subject to specified adjustments, plus any accrued
and unpaid dividends on such shares of Series C preferred stock. If the assets
of Arch are insufficient to permit full payment of such liquidation preferences
to the holders of Series C preferred stock, then the assets will be distributed
pro rata among the holders of the Series C preferred stock.
Warrants
In connection with the 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 14,861,424 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
62
<PAGE>
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.
Foreign Ownership Restrictions
Under the Communications Act, not more than 25% of Arch's capital stock may
be owned or voted by aliens or their representatives, a foreign government or
its representative or a foreign corporation if the FCC finds that the public
interest would be served by denying such ownership. See "Industry Overview--
Regulation". Accordingly, Arch's certificate of incorporation provides that
Arch may redeem outstanding shares of its stock from certain holders if the
continued ownership of such stock by such holders, because of their foreign
citizenship or otherwise, would place the FCC licenses held by Arch in
jeopardy. Required redemptions, if any, will be made at a price per share equal
to the lesser of the fair market value of the shares, as defined in the
certificate of incorporation, or, if such shares were purchased within one year
prior to the redemption, the purchase price of such shares.
Anti-Takeover Provisions
Certain provisions of Delaware law and Arch's certificate of incorporation
and by-laws may have the effect of delaying, making more difficult or
preventing a change in control or acquisition of Arch by means of a tender
offer, a proxy contest or otherwise. These provisions, as summarized below, are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
Arch first to negotiate with Arch. Arch believes that the benefits of increased
protection of Arch's potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure Arch outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiations with respect to such proposals could result in an improvement of
their terms.
Rights Plan
Under Arch's preferred stock rights plan, each outstanding share of common
stock has attached to it one purchase right. Each purchase right entitles its
holder to purchase from Arch a unit consisting of one one-thousandth of a share
of Series B preferred stock at a cash purchase price of $150.00 per preferred
stock unit, subject to adjustment. The purchase rights automatically attach to
and trade together with each share of common stock.
63
<PAGE>
The purchase rights are not exercisable or transferable separately from the
shares of common stock to which they are attached until ten business days
following the earlier of
. a public announcement that an acquiring person, or group of affiliated or
associated acquiring persons, has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of
the common stock, or up to 33% in certain specified circumstances
described below, or
. the commencement of a tender offer or exchange offer that would result in
a person or group individually owning 30% or more of then outstanding
shares of common stock.
The purchase rights will not become exercisable, however, if the acquiring
person offers to purchase all outstanding shares of common stock and Arch's
independent directors determine that such offer is fair to Arch's stockholders
and in their best interests.
If the purchase rights become exercisable, each holder of a purchase right,
other than the acquiring person, will have the right to use the exercise price
of the purchase right ($150.00) to purchase shares of common stock at one-half
of their then current market price. All purchase rights that are beneficially
owned by an acquiring person will become null and void in such circumstances.
If an acquiring person acquires common stock and
. Arch is acquired in a merger or other business combination transaction in
which Arch is not the surviving corporation or the common stock is
changed or exchanged, except for a merger that follows an offer
determined to be fair by Arch's independent directors as described above,
or
. 50% or more of Arch's assets or earning power is sold or transferred
each holder of a purchase right, other than the acquiring person, will have the
right to use the exercise price of the purchase right ($150.00) to purchase
shares of common stock of the acquiring company at one-half of their then
current market price.
The purchase rights are not currently exercisable. In connection with the
MobileMedia acquisition, Arch amended the preferred stock rights plan to permit
each standby purchaser to acquire, without becoming an acquiring person, up to
(1) the number of shares distributed to it or purchased by it in connection
with the MobileMedia acquisition, plus (2) an additional 5% of the outstanding
common stock, but in no event more than a total of 33% of such outstanding
stock for W.R. Huff, 27% for Whippoorwill, 26% for CS First Boston, 15.5% for
Northwestern Mutual or 19.0% for Resurgence. The standby purchasers will not be
considered to be a group for purposes of the preferred stock rights plan solely
because of performance of their contractual commitments as standby purchasers.
Classified Board of Directors
Arch's certificate of incorporation and by-laws provide that Arch's board of
directors will be divided into three classes, with the terms of each class
expiring in a different year. The by-laws provide that the number of directors
will be fixed from time to time exclusively by the board of directors, but
shall consist of not more than 15 nor less than three directors. A majority of
the board of directors then in office has the sole authority to fill in any
vacancies on the board of directors. The certificate of incorporation provides
that directors may be removed only by the affirmative vote of holders of at
least 80% of the voting power of all then outstanding shares of stock, voting
together as a single class.
Stockholder Actions and Meetings
Arch's certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The certificate of
incorporation and by-laws provide that special meetings of stockholders can be
called by the chairman of the board, pursuant to a resolution approved by a
majority of the total number of directors which
64
<PAGE>
Arch would have if there were no vacancies on the board of directors, or by
stockholders owning at least 20% of the stock entitled to vote at the meeting.
The business permitted to be conducted at any special meeting of stockholders
is limited to the business brought before the meeting by the chairman of the
board, or at the request of a majority of the members of the board of
directors, or as specified in the stockholders' call for a meeting.
The by-laws set forth an advance notice procedure with regard to the
nomination of candidates for election as directors who are not nominees of the
board of directors. The by-laws provide that any stockholder entitled to vote
in the election of directors generally may nominate one or more persons for
election as directors only if detailed written notice has been given to the
Secretary of Arch within specified time periods.
Amendment of Certain Provisions of Arch's Certificate of Incorporation and By-
laws
Arch's certificate of incorporation requires the affirmative vote of the
holders of at least 80% of the voting power of all then outstanding shares of
stock, voting together as a single class, to amend specified provisions of the
certificate of incorporation. These include provisions relating to the removal
of directors, the prohibition on stockholder action by written consent instead
of a meeting, the procedural requirements of stockholder meetings and the
adoption, amendment and repeal of certain articles of the by-laws.
Consideration of Non-Economic Factors in Acquisitions
Arch's certificate of incorporation empowers Arch's board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include: (1) comparison of the proposed consideration to be
received by stockholders in relation to the then current market price of the
capital stock, the estimated current value of Arch in a freely negotiated
transaction, and the estimated future value of Arch as an independent entity;
(2) the impact of such a transaction on the subscribers and employees of Arch
and its effect on the communities in which Arch operates; and (3) the ability
of Arch to fulfill its objectives under applicable statutes and regulations.
Restrictions on Purchases of Stock by Arch
Arch's certificate of incorporation prohibits Arch from repurchasing any
shares of Arch's stock from any person, entity or group that beneficially owns
5% or more of Arch's then outstanding voting stock at a price exceeding the
average closing price for the twenty trading business days prior to the
purchase date, unless a majority of Arch's disinterested stockholders approves
the transaction. A disinterested stockholder is a person who holds less than 5%
of the voting power of Arch. This restriction on purchases by Arch does not
apply to (1) any offer to purchase a class of Arch's stock which is made on the
same terms and conditions to all holders of the class of stock, (2) any
purchase of stock owned by such a 5% stockholder occurring more than two years
after such stockholder's last acquisition of Arch's stock, (3) any purchase of
Arch's stock in accordance with the terms of any stock option or employee
benefit plan, or (4) any purchase at prevailing marketing prices pursuant to a
stock repurchase program.
"Blank Check" Preferred Stock
Arch's board of directors is authorized, without any further action by the
stockholders of Arch, to issue preferred stock from time to time in one or more
series and to fix the voting, dividend, conversion, redemption and liquidation
rights and preferences of any such series and whatever other designations,
preferences and special rights the board of directors may determine. The
issuance of preferred stock, while providing desirable flexibility in
connection with possible financings, acquisitions and other corporate purposes,
could, among other things, adversely affect the voting power of the holders of
common stock and, under certain circumstances, be used as a means of
discouraging, delaying or preventing a change of control in Arch.
65
<PAGE>
Delaware Anti-Takeover Statute
Section 203 of the Delaware corporations statute is applicable to publicly
held corporations organized under the laws of Delaware, including Arch. Subject
to various exceptions, Section 203 provides that a corporation may not engage
in any "business combination" with any "interested stockholder" for a three-
year period after such stockholder becomes an interested stockholder unless the
interested stockholder attained that status with the approval of the board of
directors or the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
which result in a financial benefit to the interested stockholder. Subject to
various exceptions, an interested stockholder is a person who, together with
affiliates and associates, owns 15% or more of the corporation's outstanding
voting stock or was the owner of 15% or more of the outstanding voting stock
within the previous three years. Under certain circumstances, Section 203 makes
it more difficult for an interested stockholder to effect various business
combinations with a corporation for a three-year period. The stockholders may
elect not to be governed by Section 203, by adopting an amendment to the
corporation's certificate of incorporation or by-laws which becomes effective
twelve months after adoption. Arch's certificate of incorporation and by-laws
do not exclude Arch from the restrictions imposed by Section 203. It is
anticipated that the provisions of Section 203 may encourage companies
interested in acquiring Arch to negotiate in advance with Arch's board of
directors.
Transfer Agent and Registrar
The transfer agent and registrar for common stock is The Bank of New York,
101 Barclay Street, New York, New York 10286.
Registration Rights
The warrants issued in connection with the MobileMedia acquisition are
generally freely tradeable under the Securities Act, so long as the holder is
not deemed to be an affiliate of Arch following the acquisition within the
meaning of Rule 144 under the Securities Act or an underwriter within the
meaning of Section 2(11) of the Securities Act. Securities of Arch held by a
person deemed to be an "affiliate" of Arch may be sold under Rule 144 subject
to certain restrictions.
As required by a registration rights agreement between Arch and the standby
purchasers, Arch has registered the warrants, together with the shares of
common stock which may be issued upon exercise of warrants and certain other
shares, for resale by the standby purchasers or other persons who may be deemed
to be underwriters. The standby purchasers' registration rights agreement
required Arch to file a shelf registration statement and have it declared
effective, so that resales can be made of the following types of registrable
securities: (1) warrants, (2) common stock and Class B common stock currently
owned by the standby purchasers or acquired after the date of this prospectus,
(3) common stock issuable upon exercise of warrants, (4) common stock issuable
upon conversion of the Class B common stock owned by such standby purchasers,
and (5) other securities, if any, received from Arch by reason of stock
dividends or similar matters. Arch is required to use its reasonable best
efforts to keep such shelf registration statement continuously effective until
March 1, 2003, unless all registrable securities covered by the shelf
registration statement have been sold or can be sold publicly without either
registration under the Securities Act or compliance with any restrictions under
Rule 144.
Each standby purchaser also has demand registration rights which may be
exercised no more than twice. In addition, Arch has agreed to provide the
standby purchasers "piggyback" registration rights with respect to other
offerings filed by Arch.
Arch will bear all fees and expenses incurred in connection with the filing
of any registration statements, other than selling commissions, underwriting
fees, discounts and stock transfer taxes applicable to the sale of the
registrable securities. Arch will also undertake customary indemnification
obligations.
66
<PAGE>
Arch also agreed that, upon the request of any stockholder who becomes the
beneficial owner of at least 10% of Arch's outstanding common stock as a result
of the MobileMedia acquisition, Arch would enter into a separate registration
rights agreement with such 10% stockholder. To date, no 10% stockholders have
made such a request to Arch. Any such registration rights agreement will
provide for similar registration rights and indemnification provisions as the
standby purchasers' registration rights agreement, except that Arch need not
file a shelf registration unless requested by a 10% stockholder.
The holders of Series C preferred stock and the former stockholders of
PageCall are also entitled to certain registration rights. See "Business--
Arch's Investments in N-PCS Licenses".
67
<PAGE>
DESCRIPTION OF OUTSTANDING INDEBTEDNESS
Arch and its principal operating subsidiaries each have substantial amounts
of outstanding indebtedness that provide necessary funding and impose various
limitations on the operations of the combined company.
Secured Credit Facility
A principal operating subsidiary has a secured credit facility in the current
total amount of $581.0 million with The Bank of New York, Royal Bank of Canada,
Toronto Dominion (Texas), Inc., Barclays Bank, PLC and other financial
institutions.
The facility consists of a $175 million reducing revolving Tranche A
facility, a $100 million 364-day revolving credit Tranche B facility and a $306
million Tranche C facility. The Tranche A Facility will be reduced on a
quarterly basis commencing on September 30, 2000 and will mature on June 30,
2005. The Tranche B Facility converted into a term loan on June 27, 1999 and
will be amortized in quarterly installments commencing September 30, 2000, with
an ultimate maturity date of June 30, 2005. The Tranche C Facility will be
amortized in annual installments commencing December 31, 1999, with an ultimate
maturity date of June 30, 2006.
Arch and substantially all of its operating subsidiaries are either borrowers
or guarantors under the secured credit facility. Direct obligations and
guarantees under the facility are secured by a pledge of the capital stock of
all principal operating subsidiaries and by security interests in various
assets.
Borrowings under the secured credit facility bear interest based on a
reference rate equal to either The Bank of New York's alternate base rate or
The Bank of New York's LIBOR rate, in each case plus a margin determined by
specified ratios of total debt to annualized EBITDA.
The secured credit facility requires payment of fees on the daily average
amount available to be borrowed under the Tranche A facility. These fees vary
depending on specified ratios of total debt to annualized EBITDA.
The secured 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 secured credit facility. In addition, the
secured credit facility requires Arch and its subsidiaries to meet certain
financial covenants, including ratios of EBITDA to fixed charges, EBITDA to
debt service, EBITDA to interest service and total indebtedness to EBITDA.
Subsidiary's Senior Notes
Another principal operating subsidiary has the following issues of unsecured
senior notes outstanding:
<TABLE>
<CAPTION>
Interest Maturity Interest Payment
Principal Amount Rate Date Dates
---------------- -------- ---------------- --------------------
<S> <C> <C> <C>
$125.0 million .......... 9 1/2% February 1, 2004 February 1, August 1
$100.0 million .......... 14% November 1, 2004 May 1, November 1
$127.5 million .......... 12 3/4% July 1, 2007 January 1, July 1
$139.8 million........... 13 3/4% April 15, 2008 April 15, October 1
</TABLE>
68
<PAGE>
Redemption
The subsidiary may choose to redeem any amounts of these senior notes during
the periods indicated in the following table. The redemption prices will equal
the indicated percentages of the principal amount of the notes, together with
accrued and unpaid interest to the redemption date:
<TABLE>
<CAPTION>
9 1/2% Senior Notes 14% Senior Notes
- ------------------------------------------ ------------------------------------------
Redemption Date Redemption Price Redemption Date Redemption Price
- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C>
February 1, 1999 to November 1, 1999 to
January 31, 2000........ 104.750% October 31, 2000........ 107.000%
February 1, 2000 to November 1, 2000 to
January 31, 2001........ 103.167% October 31, 2001........ 104.625%
February 1, 2001 to November 1, 2001 to
January 31, 2002........ 101.583% October 31, 2002........ 102.375%
On or after February 1, On or after November 1,
2002.................... 100.000% 2002.................... 100.000%
</TABLE>
<TABLE>
<CAPTION>
12 3/4% Senior Notes 13 3/4% Senior Notes
- ------------------------------------------ ------------------------------------------
Redemption Date Redemption Price Redemption Date Redemption Price
- --------------- ---------------- --------------- ----------------
<S> <C> <S> <C>
July 1, 2003 to June 30, April 15, 2004 to April
2004 .................. 106.375% 14, 2005................ 106.875%
July 1, 2004 to June 30, April 15, 2005 to April
2005 .................. 104.250% 14, 2006................ 104.583%
July 1, 2005 to June 30, April 15, 2006 to April
2006 .................. 102.125% 14, 2007................ 102.291%
On or after July 1, 2006 On or after April 15,
....................... 100.000% 2007 ................... 100.000%
</TABLE>
In addition, until July 1, 2001, the subsidiary may elect to use the proceeds
of a qualifying equity offering to redeem up to 35% in principal amount of the
12 3/4% senior notes until July 1, 2001, or up to 35% in principal amount of
the 13 3/4% senior notes until April 15, 2002, at a redemption price equal to
112.75% of the principal amount of the 12 3/4 senior notes or 113.75% of the
principal amount of the 13 3/4% senior notes, together with accrued interest.
The subsidiary may make such redemption, however, only if 12 3/4% senior notes
with an aggregate principal amount of at least $84.5 million remain outstanding
immediately after giving effect to any such redemption of 12 3/4% senior notes,
and only if 13 3/4% senior notes with an aggregate principal amount of at least
$95.6 million remain outstanding immediately after giving effect to any such
redemption of 13 3/4% senior notes. Arch is not, however, obligated to redeem
any 12 3/4% senior notes or 13 3/4% senior notes with the proceeds of any
equity offering.
Restrictive Covenants
The indentures for the senior notes limit the ability of specified
subsidiaries to pay dividends, incur secured or unsecured indebtedness, incur
liens, dispose of assets, enter into transactions with affiliates, guarantee
parent company obligations, sell or issue stock and engage in any merger,
consolidation or sale of substantially all of their assets.
Changes in Control
Upon the occurrence of a change of control of Arch or a principal operating
subsidiary, each holder of senior notes has the right to require repurchase of
its senior notes for cash. The repurchase prices for the four series of senior
notes vary from 101% to 102% of the principal amount of such notes plus accrued
and unpaid interest to the date of repurchase. A change of control of a
corporation, as defined in the indentures, includes:
. the acquisition by a person or group of beneficial ownership of the
majority of securities having the right to vote in the election of
directors;
. specified types of changes in the board of directors;
. the sale or transfer of all or substantially all of the corporation's
assets or
. merger or consolidation with another corporation which results in a
person or group becoming the beneficial owner of a majority of the
securities of the surviving corporation having the right to vote in the
election of directors.
69
<PAGE>
Events of Default
The following constitute events of default under the indentures:
. a default in the timely payment of interest on the senior notes if such
default continues for 30 days;
. a default in the timely payment of principal of, or premium, if any, on
any of the senior notes either at maturity, upon redemption or
repurchase, by declaration or otherwise;
. the borrowers' failure to observe or perform any of their other covenants
or agreements in the senior notes or in the indenture, but generally only
if the failure continues for a period of 30 or 60 days after written
notice of default;
. specified events of bankruptcy, insolvency or reorganization involving
the borrowers;
. a default in timely payment of principal, premium or interest on any
indebtedness for borrowed money aggregating $5.0 million or more in
principal amount;
. the occurrence of an event of default as defined in any indenture or
instrument involving at least $5.0 million aggregate principal amount of
indebtedness for borrowed money that gives rise to the acceleration of
such indebtedness;
. the entry of one or more judgments, orders or decrees for the payment of
more than a total of $5.0 million, net of any applicable insurance
coverage, against the borrowers or any of their properties; or
. the holder of any secured indebtedness aggregating at least $5.0 million
in principal amount seeks foreclosure, set-off or other recourse against
assets of the borrowers having an aggregate fair market value of more
than $5.0 million.
Arch's Discount Notes
In March 1996, Arch issued discount notes representing $467.4 million in
aggregate principal amount at maturity. The discount notes are scheduled to
mature on March 15, 2008. The discount notes were issued at a substantial
discount from the principal amount due at maturity. Interest does not accrue on
the discount notes prior to March 15, 2001. After that date, interest will
accrue at the rate of 10 7/8% per year, payable semi-annually on March 15 and
September 15, commencing September 15, 2001.
Arch may choose to redeem any amount of discount notes on or after March 15,
2001 at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
March 15, 2001 to March 14,
2002....................... 104.078% of principal amount
March 15, 2002 to March 14,
2003....................... 102.719% of principal amount
March 15, 2003 to March 14,
2004....................... 101.359% of principal amount
On or after March 15, 2004 . 100.000% of principal amount
</TABLE>
The indenture for the discount notes contains restrictive covenants, change
in control provisions and events of default that are generally comparable to
those of the subsidiary's senior notes described above.
Arch's Convertible Debentures
Arch has outstanding $13.4 million in principal amount of 6 3/4% convertible
subordinated debentures due 2003. Interest is payable twice a year on June 1
and December 1. The convertible debentures are scheduled to mature on December
1, 2003. The principal amount of the convertible debentures is currently
convertible into common stock at a conversion price of $50.25 per share at any
time prior to redemption or maturity.
70
<PAGE>
Arch may choose to redeem any amount of the convertible debentures at any
time, at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
December 1, 1997 to November 30, 1998....... 104.050% of principal amount
December 1, 1998 to November 30, 1999....... 103.375% of principal amount
December 1, 1999 to November 30, 2000....... 102.700% of principal amount
December 1, 2000 to November 30, 2001....... 102.025% of principal amount
December 1, 2001 to November 30, 2002....... 101.350% of principal amount
December 1, 2002 to November 30, 2003....... 100.675% of principal amount
On or after December 1, 2003................ 100.000% of principal amount
</TABLE>
The convertible debentures represent senior unsecured obligations of Arch and
are subordinated to senior indebtedness of Arch, as defined in the indenture.
The indenture does not contain any limitation or restriction on the incurrence
of senior indebtedness or other indebtedness or securities of Arch or its
subsidiaries.
Upon the occurrence of a fundamental change, as defined in the indenture, each
holder of convertible debentures has the right to require Arch to repurchase
its convertible debentures for cash, at a repurchase price of 100% of the
principal amount of the convertible debentures, plus accrued interest to the
repurchase date. The following constitute fundamental changes:
. acquisition by a person or a group of beneficial ownership of stock of
Arch entitled to exercise a majority of the total voting power of all
capital stock, unless such beneficial ownership is approved by the board
of directors;
. specified types of changes in Arch's board of directors;
. any merger, share exchange, or sale or transfer of all or substantially
all of the assets of Arch to another person, with specified exceptions;
. the purchase by Arch of beneficial ownership of shares of its common
stock if the purchase would result in a default under any senior debt
agreements to which Arch is a party; or
. distributions of common stock by Arch to its stockholders in specified
circumstances.
The following constitute events of default under the indenture:
. a default in the timely payment of any interest on the convertible
debentures if such default continues for 30 days;
. a default in the timely payment of principal or premium on any
convertible debenture at maturity, upon redemption or otherwise;
. a default in the performance of any other covenant or agreement of Arch
that continues for 30 days after written notice of such default;
. a default under any indebtedness for money borrowed by Arch that results
in more than $5.0 million of indebtedness being accelerated; or
. the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to Arch.
71
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 6, 1999 ARCH COMMUNICATIONS GROUP, INC.
By: /s/ Gerald J. Cimmino
---------------------------------------
Title: Vice President and Treasurer
72
