<PAGE>
[ARCH LOGO APPEARS HERE]
Filed pursuant to Rule 424(b)(3)
Registration No. 333-62211
ARCH COMMUNICATIONS GROUP, INC.
PROSPECTUS SUPPLEMENT
DATED APRIL 20, 1999
This is a supplement to the prospectus dated January 5, 1999 of Arch
Communications Group, Inc. relating to Arch's offering of:
. up to 108,500,000 shares of Arch's common stock and Class B common stock,
offered to MobileMedia's unsecured creditors
. transferable subscription rights to purchase the 108,500,000 shares of
common stock and Class B common stock for $2.00 per share, offered to
MobileMedia's unsecured creditors
. warrants to purchase up to 3,675,659 shares of common stock for
approximately $3.00 per share, offered to the standby purchasers
You should read this supplement in conjunction with the prospectus.
Please see the section entitled "Risk Factors" on page 13 of the prospectus
for a discussion of risks associated with the offering.
Neither the United States Securities and Exchange Commission nor any state
securities commission has approved or disapproved the Arch securities to be
issued in the offering or determined if this supplement to the prospectus is
accurate or adequate. Any representation to the contrary is a criminal
offense.
Pending Merger
Arch expects to complete its acquisition of MobileMedia in early June 1999.
On April 12, 1999, the bankruptcy court entered an order confirming
MobileMedia's plan of reorganization, including the merger of MobileMedia into
Arch. On March 7, 1999, the FCC's order approving the transfer of
MobileMedia's FCC licenses to Arch in connection with the merger became final.
See "The Merger and the Reorganization", "The Merger Agreement" and "The
MobileMedia Plan of Reorganization".
Rights Offering
The rights offering will expire at 5:00 p.m., New York City time, on May 14,
1999.
Financing Arrangements
On April 9, 1999, Arch's subsidiary, Arch Escrow, completed an offering of
$147.0 million principal amount of 13.75% senior notes due 2008 to qualified
institutional buyers under Rule 144A. The notes were sold at 95.091% of par
for proceeds before selling discounts and expenses of $139.8 million.
On April 9, 1999, five lenders executed a commitment letter with Arch's
subsidiary, API, to increase API's existing credit facility from $400.0
million to $581.0 million, subject to certain reductions. See "Description of
Certain Arch Indebtedness -- API Credit Facility".
Arch intends to fund the merger through a combination of:
. the proceeds of Arch Escrow's senior note offering
. borrowings under API's credit facility
. the proceeds from the rights offering, including the related purchase
commitments of the standby purchasers, and the proceeds from the
concurrent rights offering being made to Arch's existing stockholders
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<PAGE>
Reverse Stock Split
On July 27, 1998, The Nasdaq Stock Market, Inc. notified Arch that Arch's
common stock was not in compliance with the minimum closing bid price
requirement of $5.00 per share for continued listing on the Nasdaq National
Market. In response to Nasdaq's notification, Arch sought and obtained
approval from its stockholders on January 26, 1999 for a reverse stock split
designed to increase the minimum closing bid price of the common stock above
$5.00 per share. Nasdaq has informed Arch that it must be in compliance with
all requirements for continued listing on the Nasdaq National Market by June
30, 1999 or the common stock will be delisted on that date. Listing of the
common stock on the Nasdaq National Market is a condition to the consummation
of the merger. Arch intends to implement the reverse stock split in
conjunction with or shortly after the closing of the merger. The size of the
reverse stock split depends on the market price of the common stock and will
be announced prior to implementation.
Updated Financial Information for Arch and MobileMedia
Attached as Appendix A are Arch's audited financial statements as of
December 31, 1997 and 1998 and for each of the three years ended December 31,
1998. Attached as Appendix B are MobileMedia's audited financial statements as
of December 31, 1997 and 1998 and for each of the three years ended December
31, 1998.
Arch Financial Information and Results of Operations
The following table presents selected items from Arch's Consolidated
Statements of Operations as a percentage of net revenues (total revenues less
cost of products sold). It also presents other selected information for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
--------- --------- --------
(dollars in thousands except
per pager data)
<S> <C> <C> <C>
Total revenues............................. 109.0% 107.9% 107.8%
Cost of products sold...................... (9.0) (7.9) (7.8)
--------- --------- --------
Net revenues............................... 100.0 100.0 100.0
Operating expenses:
Service, rental and maintenance............ 21.4 21.7 21.1
Selling.................................... 15.4 14.0 12.8
General and administrative................. 28.4 28.8 29.2
Depreciation and amortization.............. 63.1 63.2 57.7
Restructuring charge....................... -- -- 3.8
--------- --------- --------
Operating income (loss).................... (28.3)% (27.7)% (24.6)%
========= ========= ========
Net income (loss).......................... (37.7)% (49.5)% (53.7)%
========= ========= ========
Adjusted EBITDA............................ 34.8% 35.4% 36.9%
========= ========= ========
Cash flows provided by operating
activities................................ $ 37,802 $ 63,590 $ 81,105
Cash flows used in investing activities.... $(490,626) $(102,769) $(82,868)
Cash flows provided by financing
activities................................ $ 452,678 $ 39,010 $ 68
Annual service, rental and maintenance
expenses per pager........................ $ 25 $ 22 $ 20
</TABLE>
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997.
Total revenues increased to $413.6 million (a 4.2% increase) in the year
ended December 31, 1998 from $396.8 million in the year ended December 31,
1997. Net revenues (total revenues less cost of products sold) increased to
$383.7 million (a 4.4% increase) in the year ended December 31, 1998 from
$367.7 million in the year ended December 31, 1997. Total revenues and net
revenues in the year ended December 31, 1998 were
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<PAGE>
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 merger, 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 pagers, increased to
$371.2 million (a 5.5% increase) in the year ended December 31, 1998 from
$351.9 million in the year ended December 31, 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 the years ended December
31, 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 the year ended December 31, 1998 from $15.7
million in the year ended December 31, 1997, as a result of a decline in the
average revenue per pager sold.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $80.8 million (21.1% of
net revenues) in the year ended December 31, 1998 from $79.8 million (21.7% of
net revenues) in the year ended December 31, 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 become
more populated through the addition of new subscribers, the fixed costs of
operating these paging systems are spread over a greater subscriber base.
Annualized service, rental and maintenance expenses per subscriber were $20.00
in the year ended December 31, 1998 compared to $22.00 in the corresponding
1997 period.
Selling expenses decreased to $49.1 million (12.8% of net revenues) in the
year ended December 31, 1998 from $51.5 million (14.0% of net revenues) in the
year ended December 31, 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 the year ended December 31, 1998 compared to the year ended December 31,
1997, primarily due to the factors set forth above as adversely affecting
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 (29.2% of
net revenues) in the year ended December 31, 1998, from $106.0 million (28.8%
of net revenues) in the year ended December 31, 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 the
year ended December 31, 1998 from $232.3 million in the year ended December
31, 1997. These expenses principally reflect Arch's acquisitions of paging
businesses in prior periods accounted for as purchases. They also reflect
investment in pagers and other system expansion equipment to support growth.
Operating losses were $94.4 million in the year ended December 31, 1998
compared to $102.0 million in the year ended December 31, 1997, as a result of
the factors outlined above.
Net interest expense increased to $104.2 million in the year ended December
31, 1998 from $97.2 million in the year ended December 31, 1997. The increase
is principally attributable to an increase in Arch's outstanding debt.
Interest expense for the year ended December 31, 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 the prior year includes approximately $33.3 million of accretion.
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<PAGE>
Arch recognized an income tax benefit of $21.2 million in the year ended
December 31, 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 the year ended December 31, 1998
from $181.9 million in the year ended December 31, 1997, as a result of the
factors outlined above.
MobileMedia Financial Information and Results of Operation
The following table presents some items from MobileMedia's consolidated
statement of operations and other information for the periods indicated:
<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
operationsbefore 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%
========= ===== ======== =====
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1998
--------------- ---------------
(in thousands, except
percentage and unit data)
<S> <C> <C> <C> <C>
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) investing
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.
Services, rents and maintenance revenues decreased 13.9% to $423.1 million
for the year ended December 31, 1998 compared to $491.2 million for the year
ended December 31, 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
the year ended December 31, 1997 to $10.71 for the year ended December 31,
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 the
year ended December 31, 1998 compared to $36.2 million for the year ended
December 31, 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 year ended December 31, 1998 from $0.4 million for the year ended
December 31, 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 the year ended December
31, 1998 compared to $491.5 million for the year ended December 31, 1997.
Services, rents and maintenance expenses decreased 19.9% to $111.6 million
for the year ended December 31, 1998 compared to $139.3 million for the year
ended December 31, 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 the year ended December 31, 1998 decreased 12.1% to
$61.1 million compared to $69.5 million for the year ended December 31, 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%.
S-5
<PAGE>
General and administrative expenses decreased 25.9% to $133.0 million for
the year ended December 31, 1998 compared to $179.6 million for the year ended
December 31, 1997 and decreased as a percentage of net revenues to 31.1% for
the year ended December 31, 1998 from 36.5% for the year ended December 31,
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 the year ended December
31, 1997 to $18.6 million for the year ended December 31, 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 the year
ended December 31, 1998 compared to $140.2 million for the year ended December
31, 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 the year ended December 31, 1998
from 28.5% for the year ended December 31, 1997.
Amortization of deferred gain on tower sale was $1.6 million for the year
ended December 31, 1998. (See Note 3 to MobileMedia's Consolidated Financial
Statements.)
Operating loss decreased 97.8% to $1.2 million for the year ended December
31, 1998 from $57.0 million for the year ended December 31, 1997. The decrease
was primarily due to decreased operating expenses.
Interest expense decreased 21.5% to $53.0 million for the year ended
December 31, 1998 compared to $67.6 million for the year ended December 31,
1997. The decrease was primarily due to lower interest expense on
MobileMedia's DIP facility resulting from lower outstanding borrowings in
1998.
Gain on sale of assets increased to $93.8 million for the year ended
December 31, 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 the year
ended December 31, 1998 compared to a loss of $124.6 million for the year
ended December 31, 1997.
Income tax provision increased to $4.0 million for the year ended December
31, 1998 primarily as a result of the sale of transmission towers.
Recent and Projected Financial Results
For the two months ended February 28, 1999, Arch and MobileMedia had on a
pro forma consolidated basis:
. total revenues of $138.2 million
. net revenues of $131.2 million
. adjusted EBITDA of $43.2 million
The total number of units in service for Arch and MobileMedia on a pro forma
consolidated basis increased from 7,170,000 at December 31, 1998 to 7,174,000
at February 28, 1999.
S-6
<PAGE>
Arch's operating results for the first two months of 1999 have been
adversely affected by the factors highlighted in the bullet points on page 1
above and as a result of the adoption of a new accounting rule requiring that
Arch expense immediately, rather than capitalize and amortize, start up
activity and organizational costs. Based on presently known information and
assumptions, Arch believes that its net revenues and adjusted EBITDA will be
lower in the first quarter of 1999 than in the fourth quarter of 1998.
MobileMedia has exceeded its projected adjusted EBITDA for the fourth
quarter of 1998 and the first two months of 1999, primarily due to its
achievement of greater cost reductions than previously projected.
The actual adjusted EBITDA for Arch and MobileMedia on a pro forma
consolidated basis for the fourth quarter of 1998 and the first two months of
1999 exceeded the projected adjusted EBITDA for these periods.
The projected financial results and operational cost savings for Arch and
MobileMedia on a consolidated basis were originally prepared in mid-1998 for
inclusion in MobileMedia's disclosure statement. The projections assumed
confirmation of the reorganization plan and consummation of the merger as of
December 31, 1998. Some of the estimates or assumptions used in preparing the
projections may not materialize, and events or circumstances occurring
subsequent to the date on which the projections were prepared may differ from
those assumed or may be unanticipated. As a result, actual results may differ
materially from the projections.
Arch expects to close the merger in early June 1999. The delay in
consummating the merger has delayed the realization of projected operational
cost savings and the planned reinvestment in direct sales personnel. Arch
currently believes that the projected net revenues for Arch and MobileMedia on
a pro forma consolidated basis for the year ending December 31, 1999 remain
attainable, except for the impact of the delay in the planned reinvestment in
direct sales personnel. Arch currently believes that the projected EBITDA for
Arch and MobileMedia on a pro forma consolidated basis for the year ending
December 31, 1999 remains attainable, except for the impact of the delay in
the realization of projected operational cost savings and the delay in the
planned reinvestment in direct sales personnel. Arch continues to believe that
the projected annualized operational cost savings of $25.0 million are
achievable within the first twelve months after consummation of the merger.
This information is preliminary, unaudited and subject to adjustment. See
"Unaudited Combined Company Projections", "Business--Arch Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--MobileMedia Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Attached as Appendix C are Arch's unaudited pro forma condensed consolidated
balance sheet as of December 31, 1998 and Arch's unaudited pro forma condensed
consolidated statement of operations for the year ended December 31, 1998. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements".
Benbow Update
In connection with 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. Arch is obligated to advance to Benbow sufficient funds to
service debt obligations incurred by Benbow in connection with the acquisition
of its N-PCS licenses and to finance construction of an N-PCS system, unless
funds are available to Benbow from other sources. This obligation is subject
to the approval of Arch's designee on Benbow's Board of Directors. Arch is
currently evaluating the prospects for Benbow's N-PCS system and services and
the likelihood of Benbow generating sufficient revenue to repay the advances
from Arch (or other sources) that would be required in order to fund Benbow's
remaining N-PCS license obligations and the construction of its N-PCS system.
Arch is unable to predict whether Benbow will obtain sufficient financing to
fund Benbow's remaining N-PCS license obligations and the construction of
Benbow's N-PCS system or whether Benbow will be able to repay Arch's existing
advances or any future advances from Arch or other sources. See "Business--
Arch--Investments in Narrowband PCS Licenses".
S-7
<PAGE>
APPENDIX A
ARCH COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. A-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. A-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1998........................................... A-4
Consolidated Statements of Stockholders' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998........................ A-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998........................................... A-6
Notes to Consolidated Financial Statements................................ A-7
</TABLE>
A-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Communications Group, Inc.:
We have audited the accompanying consolidated balance sheets of Arch
Communications Group, Inc. (a Delaware corporation) (the "Company") and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and the schedule, based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Arch Communications Group, Inc. and subsidiaries as of December 31, 1997
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 24, 1999
A-2
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1997 1998
ASSETS ---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 3,328 $ 1,633
Accounts receivable (less reserves of $5,744 and
$6,583 in 1997 and 1998, respectively)............... 30,147 30,753
Inventories........................................... 12,633 10,319
Prepaid expenses and other............................ 4,917 8,007
---------- ---------
Total current assets................................ 51,025 50,712
---------- ---------
Property and equipment, at cost:
Land, buildings and improvements...................... 10,089 10,480
Paging and computer equipment......................... 361,713 400,312
Furniture, fixtures and vehicles...................... 16,233 17,381
---------- ---------
388,035 428,173
Less accumulated depreciation and amortization........ 146,542 209,128
---------- ---------
Property and equipment, net........................... 241,493 219,045
---------- ---------
Intangible and other assets (less accumulated
amortization of $260,932 and $372,122 in 1997 and 1998,
respectively).......................................... 728,202 634,528
---------- ---------
$1,020,720 $ 904,285
========== =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt.................. $ 24,513 $ 1,250
Accounts payable...................................... 22,486 25,683
Accrued restructuring charge.......................... -- 11,909
Accrued expenses...................................... 11,894 11,689
Accrued interest...................................... 11,249 20,997
Customer deposits..................................... 6,150 4,528
Deferred revenue...................................... 8,787 10,958
---------- ---------
Total current liabilities........................... 85,079 87,014
---------- ---------
Long-term debt, less current maturities................. 968,896 1,003,499
---------- ---------
Other long-term liabilities........................... -- 27,235
---------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock--$.01 par value, authorized 10,000,000
shares; issued 250,000 shares ($26,030 aggregate
liquidation preference).............................. -- 3
Common stock--$.01 par value, authorized 75,000,000
shares, issued and outstanding: 20,863,563 and
21,215,583 shares in 1997 and 1998, respectively..... 209 212
Additional paid-in capital............................ 351,210 378,077
Accumulated deficit................................... (384,674) (591,755)
---------- ---------
Total stockholders' equity (deficit)................ (33,255) (213,463)
---------- ---------
$1,020,720 $ 904,285
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-3
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Service, rental and maintenance
revenues................................. $ 291,399 $ 351,944 $ 371,154
Product sales............................. 39,971 44,897 42,481
---------- ---------- ----------
Total revenues.......................... 331,370 396,841 413,635
Cost of products sold..................... (27,469) (29,158) (29,953)
---------- ---------- ----------
303,901 367,683 383,682
---------- ---------- ----------
Operating expenses:
Service, rental and maintenance......... 64,957 79,836 80,782
Selling................................. 46,962 51,474 49,132
General and administrative.............. 86,181 106,041 112,181
Depreciation and amortization........... 191,871 232,347 221,316
Restructuring charge.................... -- -- 14,700
---------- ---------- ----------
Total operating expenses.............. 389,971 469,698 478,111
---------- ---------- ----------
Operating income (loss)................... (86,070) (102,015) (94,429)
Interest expense.......................... (77,353) (98,063) (105,979)
Interest income........................... 1,426 904 1,766
Equity in loss of affiliate............... (1,968) (3,872) (5,689)
---------- ---------- ----------
Income (loss) before income tax benefit
and extraordinary item................... (163,965) (203,046) (204,331)
Benefit from income taxes................. 51,207 21,172 --
---------- ---------- ----------
Income (loss) before extraordinary item... (112,758) (181,874) (204,331)
Extraordinary charge from early
extinguishment of debt................... (1,904) -- (1,720)
---------- ---------- ----------
Net income (loss)......................... (114,662) (181,874) (206,051)
Accretion of redeemable preferred stock... (336) (32) --
Preferred stock dividend.................. -- -- (1,030)
---------- ---------- ----------
Net income (loss) applicable to common
stockholders............................. $ (114,998) $ (181,906) $ (207,081)
========== ========== ==========
Basic/diluted income (loss) per common
share before extraordinary item.......... $ (5.53) $ (8.77) $ (9.78)
Extraordinary charge from early
extinguishment of debt per basic/diluted
common share............................. $ (.09) $ -- $ (.08)
---------- ---------- ----------
Basic/diluted net income (loss) per common
share.................................... $ (5.62) $ (8.77) $ (9.86)
========== ========== ==========
Basic/diluted weighted average number of
common shares outstanding................ 20,445,943 20,746,240 20,993,192
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-4
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Preferred Common Paid-in Accumulated Equity
Stock Stock Capital Deficit (Deficit)
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995.................... $-- $197 $334,825 $ (88,138) $ 246,884
Exercise of options to
purchase 169,308
shares of common
stock................. -- 2 1,469 -- 1,471
Issuance of 46,842
shares of common stock
under Arch's Employee
Stock Purchase Plan... -- -- 373 -- 373
Issuance of 843,039
shares of common stock
upon conversion of
convertible
subordinated
debentures............ -- 8 14,113 -- 14,121
Accretion of redeemable
preferred stock....... -- -- (336) -- (336)
Net loss............... -- -- -- (114,662) (114,662)
--- ---- -------- --------- ---------
Balance, December 31,
1996.................... -- 207 350,444 (202,800) 147,851
Issuance of 151,343
shares of common stock
under Arch's Employee
Stock Purchase Plan... -- 2 798 -- 800
Accretion of redeemable
preferred stock....... -- -- (32) -- (32)
Net loss............... -- -- -- (181,874) (181,874)
--- ---- -------- --------- ---------
Balance, December 31,
1997.................... -- 209 351,210 (384,674) (33,255)
Exercise of options to
purchase 94,032 shares
of common stock....... -- 1 293 -- 294
Issuance of 250,000
shares of preferred
stock................. 3 -- 24,997 -- 25,000
Issuance of 257,988
shares of common stock
under Arch's Employee
Stock Purchase Plan... -- 2 547 -- 549
Preferred stock
dividend.............. -- -- 1,030 (1,030) --
Net loss............... -- -- -- (206,051) (206,051)
--- ---- -------- --------- ---------
Balance, December 31,
1998.................... $ 3 $212 $378,077 $(591,755) $(213,463)
=== ==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-5
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $(114,662) $(181,874) $(206,051)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............... 191,871 232,347 221,316
Deferred income tax benefit................. (51,207) (21,172) --
Extraordinary charge from early
extinguishment of debt..................... 1,904 -- 1,720
Equity in loss of affiliate................. 1,968 3,872 5,689
Accretion of discount on senior notes....... 24,273 33,259 37,115
Gain on Tower Site Sale..................... -- -- (2,500)
Accounts receivable loss provision.......... 8,198 7,181 8,545
Changes in assets and liabilities, net of
effect from acquisitions of paging
companies:
Accounts receivable....................... (15,513) (11,984) (9,151)
Inventories............................... 1,845 (2,394) 2,314
Prepaid expenses and other................ 89 (386) (3,090)
Accounts payable and accrued expenses..... (12,520) 3,683 24,649
Customer deposits and deferred revenue.... 1,556 1,058 549
--------- --------- ---------
Net cash provided by operating activities..... 37,802 63,590 81,105
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net.... (138,899) (87,868) (79,249)
Additions to intangible and other assets.... (26,307) (14,901) (33,935)
Net proceeds from Tower Site Sale........... -- -- 30,316
Acquisition of paging companies, net of cash
acquired................................... (325,420) -- --
--------- --------- ---------
Net cash used for investing activities........ (490,626) (102,769) (82,868)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt.................. 676,000 91,000 463,239
Repayment of long-term debt................. (225,166) (49,046) (489,014)
Repayment of redeemable preferred stock..... -- (3,744) --
Net proceeds from sale of preferred stock... -- -- 25,000
Net proceeds from sale of common stock...... 1,844 800 843
--------- --------- ---------
Net cash provided by financing activities..... 452,678 39,010 68
--------- --------- ---------
Net decrease in cash and cash equivalents..... (146) (169) (1,695)
Cash and cash equivalents, beginning of
period....................................... 3,643 3,497 3,328
--------- --------- ---------
Cash and cash equivalents, end of period...... $ 3,497 $ 3,328 $ 1,633
========= ========= =========
Supplemental disclosure:
Interest paid............................... $ 48,905 $ 62,231 $ 57,151
========= ========= =========
Issuance of common stock for convertible
debentures................................. $ 14,121 $ -- $ --
========= ========= =========
Accretion of redeemable preferred stock..... $ 336 $ 32 $ --
========= ========= =========
Preferred stock dividend.................... $ -- $ -- $ 1,030
========= ========= =========
Liabilities assumed in acquisition of paging
companies.................................. $ 58,233 $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-6
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization--Arch Communications Group, Inc. ("Arch" or the "Company") is a
leading provider of wireless messaging services, primarily paging services,
and is the third largest paging company in the United States (based on units
in service).
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition--Arch recognizes revenue under rental and service
agreements with customers as the related services are performed. Maintenance
revenues and related costs are recognized ratably over the respective terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions
are recognized as an expense when incurred.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less. The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
Inventories--Inventories consist of new pagers which are held primarily for
resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
Property and Equipment--Pagers sold or otherwise retired are removed from
the accounts at their net book value using the first-in, first-out method.
Property and equipment is stated at cost and is depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
Estimated
Useful
Asset Classification Life
-------------------- ----------
<S> <C>
Buildings and improvements........................................ 20 Years
Leasehold improvements............................................ Lease Term
Pagers............................................................ 3 Years
Paging and computer equipment..................................... 5-8 Years
Furniture and fixtures............................................ 5-8 Years
Vehicles.......................................................... 3 Years
</TABLE>
Depreciation and amortization expense related to property and equipment
totaled $87.5 million, $108.0 million and $101.1 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
A-7
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible and Other Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Goodwill.................................................. $312,017 $271,808
Purchased FCC licenses.................................... 293,922 256,519
Purchased subscriber lists................................ 87,281 56,825
Deferred financing costs.................................. 8,752 22,072
Investment in Benbow PCS Ventures, Inc.................... 6,189 11,347
Investment in CONXUS Communications, Inc.................. 6,500 6,500
Non-competition agreements................................ 2,783 1,790
Other..................................................... 10,758 7,667
-------- --------
$728,202 $634,528
======== ========
</TABLE>
Amortization expense related to intangible and other assets totaled $104.4
million, $124.3 million and $120.2 million for the years ended December 31,
1996, 1997 and 1998, respectively.
Subscriber lists, Federal Communications Commission ("FCC") licenses and
goodwill are amortized over their estimated useful lives, ranging from five to
ten years using the straight-line method. Non-competition agreements are
amortized over the terms of the agreements using the straight-line method.
Other assets consist of contract rights, organizational and FCC application
and development costs which are amortized using the straight-line method over
their estimated useful lives not exceeding ten years. Development and start up
costs include nonrecurring, direct costs incurred in the development and
expansion of paging systems, and are amortized over a two-year period. In
April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 ("SOP 98-5")
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Arch
adopted SOP 98-5 effective January 1, 1999. Initial application of SOP 98-5
will be reported as the cumulative effect of a change in accounting principle.
Deferred financing costs incurred in connection with Arch's credit
agreements (see Note 3) are being amortized over periods not to exceed the
terms of the related agreements. As credit agreements are amended and
restated, unamortized deferred financing costs are written off as an
extraordinary charge. During 1996 and 1998, charges of $1.9 million and $1.7
million, respectively, were recognized in connection with the closing of new
credit facilities.
In connection with Arch's May 1996 acquisition of Westlink Holdings, Inc.
("Westlink") (see Note 2), Arch acquired Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. ("Benbow"). Benbow has exclusive rights to
a 50kHz outbound/12.5kHz inbound narrowband personal communications license in
each of the central and western regions of the United States. Arch is
obligated, to the extent such funds are not available to Benbow from other
sources, and subject to the approval of Arch's designee on Benbow's Board of
Directors, to advance Benbow sufficient funds to service debt obligations
incurred by Benbow in connection with its acquisition of its narrowband PCS
licenses and to finance the build out of a regional narrowband PCS system.
Arch's investment in Benbow is accounted for under the equity method whereby
Arch's share of Benbow's losses, since the acquisition date of Westlink, are
recognized in Arch's accompanying consolidated statements of operations under
the caption equity in loss of affiliate.
On November 8, 1994, CONXUS Communications, Inc. ("CONXUS"), formerly PCS
Development Corporation, was successful in acquiring the rights to a two-way
paging license in five designated regions in the
A-8
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
United States in the FCC narrowband wireless spectrum auction. As of December
31, 1998, Arch's investment in CONXUS totaled $6.5 million and is accounted
for under the cost method.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
To Be Disposed Of" Arch evaluates the recoverability of its carrying value of
the Company's long-lived assets and certain intangible assets based on
estimated undiscounted cash flows to be generated from each of such assets as
compared to the original estimates used in measuring the assets. To the extent
impairment is identified, Arch reduces the carrying value of such impaired
assets. To date, Arch has not had any such impairments.
Fair Value of Financial Instruments--Arch's financial instruments, as
defined under SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", include its cash, its debt financing and interest rate
protection agreements. The fair value of cash is equal to the carrying value
at December 31, 1997 and 1998.
As discussed in Note 3, Arch's debt financing primarily consists of (1)
senior bank debt, (2) fixed rate senior notes and (3) convertible subordinated
debentures. Arch considers the fair value of senior bank debt to be equal to
the carrying value since the related facilities bear a current market rate of
interest. Arch's fixed rate senior notes are traded publicly. The following
table depicts the fair value of the fixed rate senior notes and the
convertible subordinated debentures based on the current market quote as of
December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
Carrying Fair Carrying Fair
Description Value Value Value Value
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
10 7/8% Senior Discount Notes due 2008.... $332,532 $288,418 $369,506 $221,704
9 1/2% Senior Notes due 2004.............. 125,000 122,488 125,000 112,500
14% Senior Notes due 2004................. 100,000 112,540 100,000 103,000
12 3/4% Senior Notes due 2007............. -- -- 127,604 127,604
6 3/4% Convertible Subordinated Debentures
due 2003................................. 13,364 7,968 13,364 6,682
</TABLE>
Arch had off-balance-sheet interest rate protection agreements consisting of
interest rate swaps and interest rate caps with notional amounts of $140.0
million and $80.0 million, respectively, at December 31, 1997 and $265.0
million and $40.0 million, respectively, at December 31, 1998. The fair values
of the interest rate swaps and interest rate caps were $47,000 and $9,000,
respectively, at December 31, 1997. The cost to terminate the outstanding
interest rate swaps and interest rate caps at December 31, 1998 would have
been $6.4 million. See Note 3.
Basic/Diluted Net Income (Loss) Per Common Share -- In February 1997, the
Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share".
The Company adopted this standard in 1997. The adoption of this standard did
not have an effect on the Company's financial position, results of operations
or income (loss) per share. Basic net income (loss) per common share is based
on the weighted average number of common shares outstanding. Shares of stock
issuable pursuant to stock options and upon conversion of the subordinated
debentures (see Note 3) or the Series C Preferred Stock (see Note 4) have not
been considered, as their effect would be anti-dilutive and thus diluted net
income (loss) per common share is the same as basic net income (loss) per
common share.
Reclassifications--Certain amounts of prior periods were reclassified to
conform with the 1998 presentation.
A-9
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions
In May 1996, Arch completed its acquisition of all the outstanding capital
stock of Westlink for $325.4 million in cash, including direct transaction
costs. The purchase price was allocated based on the fair values of assets
acquired and liabilities assumed (including deferred income taxes arising in
purchase accounting), which amounted to $383.6 million and $58.2 million,
respectively.
This acquisition has been accounted for as a purchase, and the results of
its operations have been included in the consolidated financial statements
from the date of the acquisition. Goodwill resulting from the acquisition is
being amortized over a ten-year period using the straight-line method.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the
period presented, after giving effect to certain adjustments, including
depreciation and amortization of acquired assets and interest expense on
acquisition debt. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition been made at the beginning of the period presented, or of
results that may occur in the future.
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
---------------------------
(unaudited and in thousands
except for per share
amounts)
<S> <C>
Revenues....................................... $358,900
Income (loss) before extraordinary item........ (128,444)
Net income (loss).............................. (130,348)
Basic/diluted net income (loss) per common
share......................................... (6.39)
</TABLE>
3. Long-term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Senior Bank Debt........................................ $422,500 $ 267,000
10 7/8% Senior Discount Notes due 2008.................. 332,532 369,506
9 1/2% Senior Notes due 2004............................ 125,000 125,000
14% Senior Notes due 2004............................... 100,000 100,000
12 3/4% Senior Notes due 2007........................... -- 127,604
Convertible Subordinated Debentures..................... 13,364 13,364
Other................................................... 13 2,275
-------- ----------
993,409 1,004,749
Less--Current maturities................................ 24,513 1,250
-------- ----------
Long-term debt.......................................... $968,896 $1,003,499
======== ==========
</TABLE>
Senior Bank Debt--The Company, through its operating subsidiary, Arch
Paging, Inc. ("API") entered into senior secured revolving credit and term
loan facilities in the aggregate amount of $400.0 million (collectively, the
"API Credit Facility") consisting of (i) a $175.0 million reducing revolving
credit facility (the "Tranche A Facility"), (ii) a $100.0 million 364-day
revolving credit facility under which the principal amount outstanding on June
27, 1999 will convert to a term loan (the "Tranche B Facility") and (iii) a
$125.0 million term loan (the "Tranche C Facility").
A-10
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Tranche A Facility will be subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term
loan portion of the Tranche B Facility will be amortized in quarterly
installments commencing September 30, 2000, with an ultimate maturity date of
June 30, 2005. The Tranche C Facility will be amortized in annual installments
commencing December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the API Credit Facility are secured by its pledge of
its interests in Arch LLC and Arch Connecticut Valley, Inc. The API Credit
Facility is guaranteed by Arch, Arch Communications, Inc. ("ACI") and Arch LLC
and Arch Connecticut Valley, Inc. Arch's guarantee is secured by a pledge of
Arch's stock and notes in ACI, and the guarantees of Arch LLC and Arch
Connecticut Valley, Inc. are secured by a security interest in those assets
that were pledged under ACE's former credit facility.
Borrowings under the API Credit Facility bear interest based on a reference
rate equal to either the agent bank's Alternate Base Rate or LIBOR, in each
case plus a margin based on ACI's or API's ratio of total debt to annualized
Adjusted EBITDA.
The API Credit Facility requires payment of fees on the daily average amount
available to be borrowed under the Tranche A Facility and the Tranche B
Facility, which fees vary depending on ACI's or API's ratio of total debt to
annualized Adjusted EBITDA.
The API Credit Facility requires that at least 50% of total ACI debt,
including outstanding borrowings under the API Credit Facility, be subject to
a fixed interest rate or interest rate protection agreements. Entering into
interest rate cap and swap agreements involves both the credit risk of dealing
with counterparties and their ability to meet the terms of the contracts and
interest rate risk. In the event of nonperformance by the counterparty to
these interest rate protection agreements, API would be subject to the
prevailing interest rates specified in the API Credit Facility.
Under the interest rate swap agreements, the Company will pay the difference
between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR, and the
Company will receive the difference between LIBOR and the fixed swap rate if
LIBOR exceeds the swap rate. Settlement occurs on the quarterly reset dates
specified by the terms of the contracts. The notional principal amount of the
interest rate swaps outstanding was $65.0 million at December 31, 1998. The
weighted average fixed payment rate was 5.93%, while the weighted average rate
of variable interest payments under the API Credit Facility was 5.30% at
December 31, 1998. At December 31, 1997 and 1998, the Company had a net
receivable of $18,000 and a net payable of $47,000, respectively, on the
interest rate swaps.
The interest rate cap agreements will pay the Company the difference between
LIBOR and the cap level if LIBOR exceeds the cap levels at any of the
quarterly reset dates. If LIBOR remains below the cap level, no payment is
made to the Company. The total notional amount of the interest rate cap
agreements was $40.0 million with cap levels between 7.5% and 8% at December
31, 1998. The transaction fees for these instruments are being amortized over
the terms of the agreements.
The API Credit Facility contains restrictions that limit, among other
things: additional indebtedness and encumbrances on assets; cash dividends and
other distributions; mergers and sales of assets; the repurchase or redemption
of capital stock; investments; acquisitions that exceed certain dollar
limitations without the lenders' prior approval; and prepayment of
indebtedness other than indebtedness under the API Credit Facility. In
addition, the API Credit Facility requires API and its subsidiaries to meet
certain financial covenants, including covenants with respect to ratios of
EBITDA to fixed charges, EBITDA to debt service, EBITDA to interest service
and total indebtedness to EBITDA. As of December 31, 1998, API and its
operating subsidiaries were in compliance with the covenants of the API Credit
Facility.
A-11
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, $267.0 million was outstanding and $93.5 million
was available under the API Credit Facility. At December 31, 1998, such
advances bore interest at an average annual rate of 8.45%.
On November 16, 1998, the lenders to API approved an increase in API's
existing credit facility from $400.0 million to $600.0 million. The increase
of $200.0 million (the "API Credit Facility Increase") was to fund a portion
of the cash necessary for Arch to complete the MobileMedia Merger. The API
Credit Facility Increase was available by its terms only through March 31,
1999. API is currently in discussions with certain of its lenders for the
extension of between $135.0 million and $200.0 million of the API Credit
Facility Increase through June 30, 1999, subject to definitive documentation
and other conditions.
Senior Notes--On March 12, 1996, Arch completed a public offering of 10 7/8%
Senior Discount Notes due 2008 (the "Senior Discount Notes") in the aggregate
principal amount at maturity of $467.4 million ($275.0 million initial
accreted value). Interest does not accrue on the Senior Discount Notes prior
to March 15, 2001. Commencing September 15, 2001, interest on the Senior
Discount Notes is payable semi-annually at an annual rate of 10 7/8%. The
$266.1 million net proceeds from the issuance of the Senior Discount Notes,
after deducting underwriting discounts and commissions and offering expenses,
were used principally to fund a portion of the purchase price of Arch's
acquisition of Westlink (see Note 2).
Interest on ACI's 14% Senior Notes due 2004 (the "ACI 14% Notes") and ACI's
9 1/2% Senior Notes due 2004 (the "ACI 9 1/2% Notes") (collectively, the
"Senior Notes") is payable semiannually. The Senior Discount Notes and Senior
Notes contain certain restrictive and financial covenants, which, among other
things, limit the ability of Arch or ACI to: incur additional indebtedness;
pay dividends; grant liens on its assets; sell assets; enter into transactions
with related parties; merge, consolidate or transfer substantially all of its
assets; redeem capital stock or subordinated debt; and make certain
investments.
Arch has entered into interest rate swap agreements in connection with the
ACI 14% Notes. Under the interest rate swap agreements, the Company has
effectively reduced the interest rate on the ACI 14% Notes from 14% to the
fixed swap rate of 9.45%. In the event of nonperformance by the counterparty
to these interest rate protection agreements, the Company would be subject to
the 14% interest rate specified on the notes. As of December 31, 1998, the
Company had received $2,275,000 in excess of the amounts paid under the swap
agreements, which is included in long-term debt in the accompanying balance
sheet. At December 31, 1998, the Company had a net receivable of $733,500 on
these interest rate swaps.
On June 29, 1998, ACI issued and sold $130.0 million principal amount of 12
3/4% Senior Notes due 2007 (the "ACI 12 3/4% Notes") for net proceeds of
$122.6 million (after deducting the discount to the initial purchasers and
estimated offering expenses payable by ACI). The ACI 12 3/4% Notes were sold
at an initial price to investors of 98.049%. The ACI 12 3/4% Notes mature on
July 1, 2007 and bear interest at a rate of 12 3/4% per annum, payable semi-
annually in arrears on January 1 and July 1 of each year, commencing January
1, 1999.
The indenture under which the ACI 12 3/4% Notes were issued ("the
Indenture") contains certain covenants that, among other things, limit the
ability of ACI to incur additional indebtedness, issue preferred stock, pay
dividends or make other distributions, repurchase Capital Stock (as defined in
the Indenture), repay subordinated indebtedness or make other Restricted
Payments (as defined in the Indenture), create certain liens, enter into
certain transactions with affiliates, sell assets, issue or sell Capital Stock
of ACI's Restricted Subsidiaries (as defined in the Indenture) or enter into
certain mergers and consolidations.
Convertible Subordinated Debentures--On March 6, 1996, the holders of $14.1
million principal amount of Arch's 6 3/4% Convertible Subordinated Debentures
due 2003 ("Arch Convertible Debentures") elected to
A-12
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
convert their Arch Convertible Debentures into Arch common stock at a
conversion price of $16.75 per share and received approximately 843,000 shares
of Arch common stock together with a $1.6 million cash premium.
Interest on the remaining outstanding Arch Convertible Debentures is payable
semiannually on June 1 and December 1. The Arch Convertible Debentures are
unsecured and are subordinated to all existing indebtedness of Arch.
The Arch Convertible Debentures are redeemable, at the option of Arch, in
whole or in part, at certain prices declining annually to 100% of the
principal amount at maturity plus accrued interest. The Arch Convertible
Debentures also are subject to redemption at the option of the holders, at a
price of 100% of the principal amount plus accrued interest, upon the
occurrence of certain events.
The Arch Convertible Debentures are convertible at their principal amount
into shares of Arch's common stock at any time prior to redemption or maturity
at an initial conversion price of $16.75 per share, subject to adjustment.
Maturities of Debt--Scheduled long-term debt maturities at December 31,
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999......................................................... $ 1,250
2000......................................................... 17,725
2001......................................................... 29,650
2002......................................................... 29,650
2003......................................................... 43,014
Thereafter................................................... 883,460
----------
$1,004,749
==========
</TABLE>
4. Redeemable Preferred Stock and Stockholders' Equity
Redeemable Preferred Stock--In connection with the its merger (the "USAM
Merger") with USA Mobile Communications Holdings, Inc. ("USA Mobile"), Arch
assumed the obligations associated with 22,530 outstanding shares of Series A
Redeemable Preferred Stock issued by USA Mobile. The preferred stock was
recorded at its accreted redemption value, based on 10% annual accretion
through the redemption date. On January 30, 1997, all outstanding preferred
stock was redeemed for $3.7 million in cash.
Redeemable Series C Cumulative Convertible Preferred Stock--On June 29,
1998, two partnerships managed by Sandler Capital Management Company, Inc., an
investment management firm ("Sandler"), together with certain other private
investors, made an equity investment in Arch of $25.0 million in the form of
Series C Convertible Preferred Stock of Arch ("Series C Preferred Stock"). The
Series C Preferred Stock: (i) is convertible into Common Stock of Arch at an
initial conversion price of $5.50 per share, subject to certain adjustments;
(ii) bears dividends at an annual rate of 8.0%, (A) payable quarterly in cash
or, at Arch's option, through the issuance of shares of Arch's Common Stock
valued at 95% of the then prevailing market price or (B) if not paid
quarterly, accumulating and payable upon redemption or conversion of the
Series C Preferred Stock or liquidation of Arch; (iii) permits the holders
after seven years to require Arch, at Arch's option, to redeem the Series C
Preferred Stock for cash or convert such shares into Arch's Common Stock
valued at 95% of the then prevailing market price of Arch's Common Stock; (iv)
is subject to redemption for cash or conversion into Arch's Common Stock at
Arch's option in certain circumstances; (v) in the event of a "Change of
Control"
A-13
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as defined in the indenture governing Arch's 10 7/8% Senior Discount Notes due
2008 (the "Senior Discount Notes Indenture"), requires Arch, at its option, to
redeem the Series C Preferred Stock for cash or convert such shares into
Arch's Common Stock valued at 95% of the then prevailing market price of
Arch's Common Stock, with such cash redemption or conversion being at a price
equal to 105% of the sum of the original purchase price plus accumulated
dividends; (vi) limits certain mergers or asset sales by Arch; (vii) so long
as at least 50% of the Series C Preferred Stock remains outstanding, limits
the incurrence of indebtedness and "restricted payments" in the same manner as
contained in the Senior Discount Notes Indenture; and (viii) has certain
voting and preemptive rights. Upon an event of redemption or conversion, Arch
currently intends to convert such Series C Preferred Stock into shares of Arch
Common Stock.
Stock Options--Arch has a 1989 Stock Option Plan (the "1989 Plan") and a
1997 Stock Option Plan (the "1997 Plan"), which provide for the grant of
incentive and nonqualified stock options to key employees, directors and
consultants to purchase Arch's common stock. Incentive stock options are
granted at exercise prices not less than the fair market value on the date of
grant. Options generally vest over a five-year period from the date of grant
with the first such vesting (20% of granted options) occurring one year from
the date of grant and continuing ratably at 5% on a quarterly basis
thereafter. However, in certain circumstances, options may be immediately
exercised in full. Options generally have a duration of 10 years. The 1989
Plan provides for the granting of options to purchase a total of 1,128,944
shares of common stock. All outstanding options on September 7, 1995, under
the 1989 Plan, became fully exercisable and vested as a result of the USAM
Merger. The 1997 Plan provides for the granting of options to purchase a total
of 6,000,000 shares of common stock.
Effective October 23, 1996, the Compensation Committee of the Board of
Directors of Arch authorized the grant of new options to each employee who had
an outstanding option at a price greater than $12.50 (the fair market value of
Arch's common stock on October 23, 1996). The new option would be for the
total number of shares (both vested and unvested) subject to each employee's
outstanding stock option agreement(s). As a result of this action 424,206
options were terminated and regranted at a price of $12.50. The Company
treated this as a cancellation and reissuance under APB opinion No. 25,
"Accounting for Stock Issued to Employees".
As a result of the USAM Merger, Arch assumed a stock option plan originally
adopted by USA Mobile in 1994 and amended and restated on January 26, 1995
(the "1994 Plan"), which provides for the grant of up to 601,500 options to
purchase Arch's common stock. Under the 1994 Plan, incentive stock options may
be granted to employees and nonqualified stock options may be granted to
employees, directors and consultants. Incentive stock options are granted at
exercise prices not less than the fair market value on the date of grant.
Option duration and vesting provisions are similar to the 1989 Plan. All
outstanding options under the 1994 Plan became fully exercisable and vested as
a result of the USAM Merger.
In January 1995, Arch adopted a 1995 Outside Directors' Stock Option Plan
(the "1995 Directors' Plan"), which terminated upon completion of the USAM
Merger. Prior to termination of the 1995 Directors' Plan, 15,000 options were
granted at an exercise price of $18.50 per share. Options have a duration of
ten years and vest over a five-year period from the date of grant with the
first such vesting (20% of granted options) occurring one year from the date
of grant and continuing ratably at 5% on a quarterly basis thereafter.
As a result of the USAM Merger, Arch assumed from USA Mobile the Non-
Employee Directors' Stock Option Plan (the "Outside Directors Plan"), which
provides for the grant of up to 80,200 options to purchase Arch's common stock
to non-employee directors of Arch. Outside directors receive a grant of 3,000
options annually under the Outside Directors Plan, and newly elected or
appointed outside directors receive options to purchase 3,000 shares of common
stock as of the date of their initial election or appointment. Options are
granted at fair market value of Arch's common stock on the date of grant.
Options have a duration of ten years and vest over a three-year period from
the date of grant with the first such vesting (25% of granted options)
occurring on
A-14
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the date of grant and future vesting of 25% of granted options occurring on
each of the first three anniversaries of the date of grant.
On December 16, 1997, the Compensation Committee of the Board of Directors
of Arch authorized the Company to offer an election to its employees who had
outstanding options at a price greater than $5.06 to cancel such options and
accept new options at a lower price. In January 1998, as a result of this
election by certain of its employees, the Company canceled 1,083,216 options
with exercise prices ranging from $5.94 to $20.63 and granted the same number
of new options with an exercise price of $5.06 per share, the fair market
value of the stock on December 16, 1997.
On December 29, 1997, Arch adopted a Deferred Compensation Plan for
Nonemployee Directors. Under this plan, outside directors may elect to defer,
for a specified period of time, receipt of some or all of the annual and
meeting fees which would otherwise be payable for service as a director. A
portion of the deferred compensation may be converted into phantom stock
units, at the election of the director. The number of phantom stock units
granted equals the amount of compensation to be deferred as phantom stock
divided by the fair value of Arch's common stock on the date the compensation
would have otherwise been paid. At the end of the deferral period, the phantom
stock units will be converted to cash based on the fair market value of the
Company's common stock on the date of distribution. Deferred compensation is
expensed when earned. Changes in the value of the phantom stock units are
recorded as income/expense based on the fair market value of the Company's
common stock.
The following table summarizes the activity under Arch's stock option plans
for the periods presented:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
---------- --------
<S> <C> <C>
Options Outstanding at December 31, 1995................... 1,005,755 $13.02
Granted.................................................. 695,206 15.46
Exercised................................................ (169,308) 8.69
Terminated............................................... (484,456) 21.60
---------- ------
Options Outstanding at December 31, 1996................... 1,047,197 11.37
Granted.................................................. 500,394 6.68
Exercised................................................ -- --
Terminated............................................... (186,636) 10.65
---------- ------
Options Outstanding at December 31, 1997................... 1,360,955 9.74
Granted.................................................. 1,968,337 4.76
Exercised................................................ (94,032) 3.13
Terminated............................................... (1,290,407) 9.51
---------- ------
Options Outstanding at December 31, 1998................... 1,944,853 $ 5.17
========== ======
Options Exercisable at December 31, 1998................... 333,541 $ 6.92
========== ======
</TABLE>
A-15
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.44-$ 4.13 162,533 9.38 $3.36 4,500 $1.89
4.53- 4.53 511,201 9.17 4.53 -- --
4.56- 4.94 152,625 9.00 4.91 6,625 4.59
5.06- 5.06 969,057 9.04 5.06 231,827 5.06
6.25- 27.56 149,437 7.02 10.29 90,589 12.11
------------ --------- ---- ----- ------- -----
$1.44-$27.56 1,944,853 8.94 $5.17 333,541 $6.92
============ ========= ==== ===== ======= =====
</TABLE>
Employee Stock Purchase Plans--On May 28, 1996, the stockholders approved
the 1996 Employee Stock Purchase Plan (the "1996 ESPP"). The 1996 ESPP allows
eligible employees the right to purchase common stock, through payroll
deductions not exceeding 10% of their compensation, at the lower of 85% of the
market price at the beginning or the end of each six-month offering period.
During 1996, 1997 and 1998, 46,842, 151,343 and 257,988 shares were issued at
an average price per share of $7.97, $5.29 and $2.13, respectively. At
December 31, 1998, 43,827 shares are available for future issuance.
On January 26, 1999, the stockholders approved the 1999 Employee Stock
Purchase Plan ( the "1999 ESPP"). The 1999 ESPP allows eligible employees the
right to purchase common stock, through payroll deductions not exceeding 10%
of their compensation, at the lower of 85% of the market price at the
beginning or the end of each six-month offering period. The stockholders
authorized 1,500,000 shares for future issuance under this plan.
Accounting for Stock-Based Compensation--Arch accounts for its stock option
and stock purchase plans under APB Opinion No. 25 "Accounting for Stock Issued
to Employees". Since all options have been issued at a grant price equal to
fair market value, no compensation cost has been recognized in the Statement
of Operations. Had compensation cost for these plans been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation",
Arch's net income (loss) and income (loss) per share would have been increased
to the following pro forma amounts:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Net income (loss): As reported........ $(114,662) $(181,874) $(206,051)
Pro forma.......... (115,786) (183,470) (208,065)
Basic net income (loss) per common share: As reported........ (5.62) (8.77) (9.86)
Pro forma.......... (5.68) (8.85) (9.96)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to the
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. In computing these pro forma amounts, Arch
has assumed risk-free interest rates of 4.5%--6%, an expected life of 5 years,
an expected dividend yield of zero and an expected volatility of 50%--85%.
A-16
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1996, 1997 and 1998 were $4.95, $3.37 and
$2.78, respectively. The weighted average fair value of shares sold under the
ESPP in 1996, 1997 and 1998 was $5.46, $2.83 and $1.88, respectively.
Stockholders Rights Plan--Upon completion of the USAM Merger, Arch's
existing stockholders rights plan was terminated. In October 1995, Arch's
Board of Directors adopted a new stockholders rights plan (the "Rights") and
declared a dividend of one preferred stock purchase right (a "Right") for each
outstanding share of common stock to stockholders of record at the close of
business on October 25, 1995. Each Right entitles the registered holder to
purchase from Arch one one-thousandth of a share of Series B Junior
Participating Preferred Stock, at a cash purchase price of $150, subject to
adjustment. Pursuant to the Plan, the Rights automatically attach to and trade
together with each share of common stock. The Rights will not be exercisable
or transferable separately from the shares of common stock to which they are
attached until the occurrence of certain events. The Rights will expire on
October 25, 2005, unless earlier redeemed or exchanged by Arch in accordance
with the Plan.
5. Income Taxes
Arch accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities, given the provisions of enacted laws.
The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets at December 31, 1997 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets...................................... $134,944 $179,484
Deferred tax liabilities................................. (90,122) (67,652)
-------- --------
44,822 111,832
Valuation allowance...................................... (44,822) (111,832)
-------- --------
$ -- $ --
======== ========
</TABLE>
The approximate effect of each type of temporary difference and carryforward
at December 31, 1997 and 1998 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Net operating losses.................................... $106,214 $128,213
Intangibles and other assets............................ (87,444) (62,084)
Depreciation of property and equipment.................. 24,388 39,941
Accruals and reserves................................... 1,664 5,762
-------- --------
44,822 111,832
Valuation allowance..................................... (44,822) (111,832)
-------- --------
$ -- $ --
======== ========
</TABLE>
The effective income tax rate differs from the statutory federal tax rate
primarily due to the nondeductibility of goodwill amortization and the
inability to recognize the benefit of current net operating loss ("NOL")
carryforwards. The NOL carryforwards expire at various dates through 2013. The
Internal Revenue Code contains provisions that may limit the NOL carryforwards
available to be used in any given year if certain events occur, including
significant changes in ownership, as defined.
A-17
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has established a valuation reserve against its net deferred tax
asset until it becomes more likely than not that this asset will be realized
in the foreseeable future.
6. Commitments and Contingencies
In the ordinary course of business, the Company and its subsidiaries are
defendants in a variety of judicial proceedings. In the opinion of management,
there is no proceeding pending, or to the knowledge of management threatened,
which, in the event of an adverse decision, would result in a material adverse
change in the financial condition of the Company.
Arch has operating leases for office and transmitting sites with lease terms
ranging from one month to approximately ten years. In most cases, Arch expects
that, in the normal course of business, leases will be renewed or replaced by
other leases.
Future minimum lease payments under noncancellable operating leases at
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999............................................................... $21,372
2000............................................................... 13,826
2001............................................................... 8,853
2002............................................................... 6,026
2003............................................................... 2,495
Thereafter......................................................... 1,516
-------
Total............................................................ $54,088
=======
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1996, 1997 and 1998 approximated $14.7 million, $19.8 million and $19.6
million, respectively.
7. Employee Benefit Plans
Retirement Savings Plan--Arch has a retirement savings plan, qualifying
under Section 401(k) of the Internal Revenue Code covering eligible employees,
as defined. Under the plan, a participant may elect to defer receipt of a
stated percentage of the compensation which would otherwise be payable to the
participant for any plan year (the deferred amount) provided, however, that
the deferred amount shall not exceed the maximum amount permitted under
Section 401(k) of the Internal Revenue Code. The plan provides for employer
matching contributions. Matching contributions for the years ended December
31, 1996, 1997 and 1998 approximated $217,000, $302,000 and $278,000,
respectively.
8. Tower Site Sale
In April 1998, Arch announced an agreement to sell certain of its tower site
assets (the "Tower Site Sale") for approximately $38.0 million in cash
(subject to adjustment), of which $1.3 million was paid to entities affiliated
with Benbow in payment for certain assets owned by such entities and included
in the Tower Site Sale. In the Tower Site Sale, Arch is selling communications
towers, real estate, site management contracts and/or leasehold interests
involving 133 sites in 22 states and will rent space on the towers on which it
currently operates communications equipment to service its own paging network.
Arch used its net proceeds from the Tower Site Sale to repay indebtedness
under the API Credit Facility. Arch held the initial closing of the Tower Site
Sale on June 26, 1998 with gross proceeds to Arch of approximately $12.0
million (excluding $1.3 million which was
A-18
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
paid to entities affiliated with Benbow for certain assets which such entities
sold as part of this transaction) and held a second closing on September 29,
1998 with gross proceeds to Arch of approximately $20.4 million.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain is deferred and included in other long-term
liabilities. At December 31, 1998, Arch had sold 117 of the 133 sites, which
resulted in a total gain of approximately $23.5 million and through December
31, 1998 approximately $2.5 million of this gain had been recognized in the
statement of operations and is included in operating income.
9. Divisional Reorganization
In June 1998, Arch's Board of Directors approved a reorganization of Arch's
operations (the "Divisional Reorganization"). As part of the Divisional
Reorganization, which is being implemented over a period of 18 to 24 months,
Arch has consolidated its former Midwest, Western and Northern divisions into
four existing operating divisions and is in the process of consolidating
certain regional administrative support functions, such as customer service,
collections, inventory and billing, to reduce redundancy and take advantage of
various operating efficiencies. In connection with the Divisional
Reorganization, Arch (i) anticipates a net reduction of approximately 10% of
its workforce, (ii) is closing certain office locations and redeploying other
assets and (iii) recorded a restructuring charge of $14.7 million, or $0.70
per share (basic and diluted) in 1998. The restructuring charge consisted of
approximately (i) $9.7 million for employee severance, (ii) $3.5 million for
lease obligations and terminations and (iii) $1.5 million of other costs.
The provision for lease obligations and terminations relates primarily to
future lease commitments on local, regional and divisional office facilities
that will be closed as part of the Divisional Reorganization. The charge
represents future lease obligations, on such leases past the dates the offices
will be closed by the Company, or for certain leases, the cost of terminating
the leases prior to their scheduled expiration. Cash payments on the leases
and lease terminations will occur over the remaining lease terms, the majority
of which expire prior to 2001.
Through the elimination of certain local and regional administrative
operations and the consolidation of certain support functions, the Company
will eliminate approximately 280 net positions. As a result of eliminating
these positions, the Company will involuntarily terminate an estimated 900
personnel. The majority of the positions to be eliminated will be related to
customer service, collections, inventory and billing functions in local and
regional offices which will be closed as a result of the Divisional
Reorganization. As of December 31, 1998, 217 employees had been terminated due
to the Divisional Reorganization. The majority of the remaining severance and
benefits costs to be paid by the Company will be paid during 1999.
The Company's restructuring activity as of December 31, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
Reserve
Initially Utilization Remaining
Established of Reserve Reserve
----------- ----------- ---------
<S> <C> <C> <C>
Severance costs.......................... $ 9,700 $2,165 $ 7,535
Lease obligation costs................... 3,500 366 3,134
Other costs.............................. 1,500 260 1,240
------- ------ -------
Total.................................. $14,700 $2,791 $11,909
======= ====== =======
</TABLE>
10. Segment Reporting
The Company operates in one industry: providing wireless messaging services.
On December 31, 1998, the Company operated approximately 175 retail stores in
35 states of the United States.
A-19
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Quarterly Financial Results (Unaudited)
Quarterly financial information for the years ended December 31, 1997 and
1998 is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Revenues............................... $ 95,539 $ 98,729 $101,331 $101,242
Operating income (loss)................ (26,632) (29,646) (27,208) (18,529)
Net income (loss)...................... (45,815) (49,390) (47,645) (39,024)
Basic net income (loss) per common
share:
Net income (loss).................... (2.21) (2.38) (2.29) (1.88)
Year Ended December 31, 1998:
Revenues............................... $102,039 $103,546 $104,052 $103,998
Operating income (loss)................ (19,418) (35,356) (20,783) (18,872)
Income (loss) before extraordinary
item.................................. (45,839) (62,277) (47,994) (48,221)
Extraordinary charge................... -- (1,720) -- --
Net income (loss)...................... (45,839) (63,997) (47,994) (48,221)
Basic net income (loss) per common
share:
Income (loss) before extraordinary
item................................ (2.20) (2.97) (2.30) (2.31)
Extraordinary charge................. -- (.08) -- --
Net income (loss).................... (2.20) (3.05) (2.30) (2.31)
</TABLE>
A-20
<PAGE>
APPENDIX B
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
MobileMedia Communications, Inc. and Subsidiaries
Report of Independent Auditors.......................................... B-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............ B-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1998......................................... B-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
Each of the Three Years in the Period Ended December 31, 1998.......... B-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998......................................... B-6
Notes to Consolidated Financial Statements.............................. B-7
</TABLE>
B-1
<PAGE>
Report of Independent Auditors
The Board of Directors
MobileMedia Communications, Inc.
We have audited the accompanying consolidated balance sheets of MobileMedia
Communications, Inc. and Subsidiaries ("MobileMedia") as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MobileMedia Communications, Inc. and Subsidiaries at December 31, 1997 and
1998 and the consolidated results of their operations and cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
MobileMedia will continue as a going concern. As more fully described in Note
1, on January 30, 1997, MobileMedia Corporation and substantially all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware (the Bankruptcy Court). Additionally, as more fully
described in Note 11, on April 8, 1997, the Federal Communications Commission
("FCC") issued a Public Notice commencing an administrative hearing into the
qualification of MobileMedia to remain a licensee. These events, and
circumstances relating to the Chapter 11 filing with the Bankruptcy Court,
including MobileMedia's highly leveraged financial structure, non-compliance
with certain covenants of loan agreements with banks and note indentures, net
working capital deficiency and recurring losses from operations, raise
substantial doubt about MobileMedia's ability to continue as a going concern.
Although MobileMedia is currently operating the business as a debtor-in-
possession under the jurisdiction of the Bankruptcy Court, the continuation of
the business as a going concern is contingent upon, among other things, the
ability to (a) gain approval of the creditors and confirmation by the
Bankruptcy Court of a plan of reorganization, (b) maintain compliance with all
covenants under the debtor-in-possession financing agreement, (c) achieve
satisfactory levels of future operating profit and (d) retain FCC
qualification as a licensee. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
Ernst & Young LLP
MetroPark, New Jersey
February 12, 1999, except for the eighth and ninth paragraphs of
Note 1 and the second paragraph of Note 6, as to which the date
is March 26, 1999
B-2
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................... $ 10,920 $ 1,218
Accounts receivable (less allowance for
uncollectible accounts of $26,500
and $15,000 in 1997 and 1998, respectively) ...... 55,432 38,942
Inventories........................................ 868 2,192
Prepaid expense.................................... 5,108 5,523
Other current assets............................... 2,783 4,855
----------- -----------
Total current assets............................. 75,111 52,730
----------- -----------
Investment in net assets of equity affiliate......... 1,788 1,400
Property and equipment, net.......................... 257,937 219,642
Intangible assets, net............................... 295,358 266,109
Other assets......................................... 24,940 21,573
----------- -----------
Total assets..................................... $ 655,134 $ 561,454
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit facility......... $ 10,000 $ --
Accrued restructuring costs........................ 4,897 5,163
Accrued wages, benefits and payroll................ 11,894 12,033
Accounts payable--post petition.................... 2,362 1,703
Accrued interest................................... 4,777 3,692
Accrued expenses and other current liabilities..... 35,959 35,735
Current income taxes payable....................... -- 2,871
Advance billing and customer deposits.............. 34,252 28,554
Deferred gain on tower sale........................ -- 68,444
----------- -----------
Total liabilities not subject to compromise...... 104,141 158,195
----------- -----------
Liabilities subject to compromise
Accrued wages, benefits and payroll taxes.......... 562 647
Accrued interest................................... 18,450 17,579
Accounts payable--pre petition..................... 19,646 15,410
Accrued expenses and other current liabilities..... 20,663 15,285
Debt............................................... 1,075,681 905,681
Other liabilities.................................. 2,915 --
----------- -----------
Total liabilities subject to compromise.......... 1,137,917 954,602
----------- -----------
Deferred tax liabilities........................... 2,655 2,655
Stockholders' deficit
Common stock (1 share, no par value, issued and
outstanding at December 31, 1997 and 1998)........ -- --
Additional paid-in-capital......................... 676,025 676,025
Accumulated deficit--pre petition.................. (1,154,420) (1,154,420)
Accumulated deficit--post petition................. (111,184) (75,603)
----------- -----------
Total stockholders' deficit...................... (589,579) (553,998)
----------- -----------
Total liabilities and stockholders' deficit...... $ 655,134 $ 561,454
=========== ===========
</TABLE>
See accompanying notes.
B-3
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
----------- --------- --------
<S> <C> <C> <C>
Revenue
Services, rents and maintenance............ $ 568,892 $ 491,174 $423,059
Product sales.............................. 71,818 36,218 26,622
----------- --------- --------
Total revenues........................... 640,710 527,392 449,681
Cost of products sold........................ (72,595) (35,843) (22,162)
----------- --------- --------
568,115 491,549 427,519
Operating expenses
Services, rents and maintenance............ 144,050 139,333 111,589
Selling.................................... 96,817 69,544 61,106
General and administrative................. 218,607 179,599 133,003
Reduction of liabilities subject to
compromise................................ -- -- (10,461)
Impairment of long-lived assets............ 792,478 -- --
Restructuring costs........................ 4,256 19,811 18,624
Depreciation............................... 136,434 110,376 86,624
Amortization............................... 212,264 29,862 29,835
Amortization of deferred gain on tower
sale...................................... -- -- (1,556)
----------- --------- --------
Total operating expenses................. 1,604,906 548,525 428,764
----------- --------- --------
Operating (loss)............................. (1,036,791) (56,976) (1,245)
Other income (expense)
Interest expense, net...................... (92,663) (67,611) (53,043)
Gain on sale of assets..................... 68 3 94,165
Other...................................... -- -- (338)
----------- --------- --------
Total other expense...................... (92,595) (67,608) 40,784
----------- --------- --------
Income (loss) before income taxes (benefit).. (1,129,386) (124,584) 39,539
Income taxes (benefit)....................... (69,442) -- 3,958
----------- --------- --------
Net income (loss)............................ $(1,059,944) $(124,584) $ 35,581
=========== ========= ========
</TABLE>
See accompanying notes.
B-4
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Accumulated Accumulated
Additional Deficit Deficit
Paid in Pre- Post-
Capital Petition Petition Total
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31,
1995........................ $659,829 $ (81,076) $ 0 $ 578,753
Capital contribution from
MobileMedia................. 12,800 -- -- 12,800
Net loss..................... -- (1,059,944) -- (1,059,944)
-------- ----------- --------- -----------
Balance at December 31,
1996........................ 672,629 (1,141,020) 0 (468,391)
Capital contribution from
MobileMedia................. 3,396 -- -- 3,396
Net loss..................... -- (13,400) (111,184) (124,584)
-------- ----------- --------- -----------
Balance at December 31,
1997........................ 676,025 (1,154,420) (111,184) (589,579)
Net income................... -- -- 35,581 35,581
-------- ----------- --------- -----------
Balance at December 31, 1998
............................ $676,025 $(1,154,420) $ (75,603) $ (553,998)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
B-5
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss)......................... $(1,059,944) $(124,584) $ 35,581
Adjustments to reconcile net loss to net
cash provided by (used in)
Operating activities:
Depreciation and amortization............. 348,698 140,238 116,459
Amortization of deferred gain on tower
sale..................................... (1,556)
Income tax benefit........................ (69,442) -- --
Accretion of note payable discount........ 16,792 1,485 --
Provision for uncollectible accounts...... 56,556 65,181 14,841
Reduction of liabilities subject to
compromise............................... -- -- (10,461)
Recognized gain on sale of tower assets... -- -- (94,165)
Impairment of long-lived assets........... 792,478 -- --
Undistributed earnings of affiliate, net.. 160 69 (87)
Change in operating assets and liabilities:
Accounts receivable....................... (55,965) (53,904) 1,649
Inventories............................... 2,433 12,514 (1,324)
Prepaid expenses and other assets......... 12,145 (686) 590
Accounts payable, accrued expenses and
other liabilities........................ 13,283 (25,393) (7,065)
----------- --------- ---------
Net cash provided by (used in) operating
activities............................... 57,194 14,920 54,462
----------- --------- ---------
Investing activities:
Construction and capital expenditures,
including net changes in pager assets.... (161,861) (40,556) (53,867)
Net proceeds from the sale of tower
assets................................... -- -- 169,703
Acquisition of businesses................. (866,460) -- --
----------- --------- ---------
Net cash provided by (used in) investing
activities................................. (1,028,321) (40,556) 115,836
----------- --------- ---------
Financing activities:
Capital contribution by MobileMedia
Corporation.............................. 12,800 3,396 --
Payment of debt issue costs............... (6,939) -- --
Borrowing from revolving credit
facilities............................... 580,250 -- --
Repayments on revolving credit
facilities............................... -- -- (170,000)
Borrowing from DIP credit facilities...... -- 47,000 --
Repayments on DIP credit facilities....... -- (37,000) (10,000)
----------- --------- ---------
Net cash provided by (used in) financing
activities................................. 586,111 13,396 (180,000)
----------- --------- ---------
Net (decrease) increase in cash, cash
equivalents designated and cash designated
for the MobileComm acquisition............. (385,016) (12,240) (9,702)
Cash and cash equivalents at beginning of
period..................................... 408,176 23,160 10,920
----------- --------- ---------
Cash and cash equivalents at end of period.. $ 23,160 $ 10,920 $ 1,218
=========== ========= =========
</TABLE>
See accompanying notes.
B-6
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Chapter 11 Reorganization and Basis of Presentation
On January 30, 1997 (the "Petition date"), MobileMedia Corporation
("Parent"), its wholly owned subsidiary MobileMedia Communications, Inc., and
all seventeen of MobileMedia Communications, Inc.'s subsidiaries
("MobileMedia") (collectively with Parent, the "Debtors"), filed for
protection under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code"). The Debtors are operating as debtors-in-possession and are
subject to the jurisdiction of the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). Chapter 11 is the principal
business reorganization chapter of the Bankruptcy Code. Under Chapter 11 of
the Bankruptcy Code, a debtor is authorized to reorganize its business for the
benefit of its creditors and stockholders. In addition to permitting
rehabilitation of the debtor, another goal of Chapter 11 is to promote
equality of treatment of creditors and equity security holders of equal rank
with respect to the restructuring of debt. In furtherance of these two goals,
upon the filing of a petition for reorganization under Chapter 11, section
362(a) of the Bankruptcy Code generally provides for an automatic stay of
substantially all acts and proceedings against the debtor and its property,
including all attempts to collect claims or enforce liens that arose prior to
the commencement of the debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations of
the Debtors with respect to the employment of attorneys, investment bankers
and other professionals, and transactions out of the Debtors' ordinary course
of business or otherwise requiring bankruptcy court approval under the
Bankruptcy Code. The Debtors have been paying undisputed obligations that have
arisen subsequent to the Petition date on a timely basis.
Since the Petition date, the Bankruptcy Court has entered orders, among
other things, allowing the Debtors (i) to pay certain customer refunds and
deposits in the ordinary course of business, (ii) to pay wages, salaries and
benefits owing to employees, and (iii) to pay specified pre-petition taxes
owing to various governmental entities. On February 6, 1997, the Bankruptcy
Court entered an order authorizing the Debtors to pay approximately $46,000 in
pre-petition amounts owing to certain essential vendors.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts and other unexpired executory pre-petition leases and contracts,
subject to Bankruptcy Court approval. Assumption of a contract requires the
Debtors, among other things, to cure all defaults under the contract,
including payment of all pre-petition liabilities. Rejection of a contract
constitutes a breach of that contract as of the moment immediately preceding
the Chapter 11 filing and the other party has the right to assert a general,
unsecured claim against the bankruptcy estate for damages arising out of such
breach. These parties may also seek to assert post-petition administrative
claims against the Debtors to the extent that the Debtors utilize the
collateral or services of such parties subsequent to the commencement of the
Chapter 11 proceedings. The Debtors cannot presently determine or reasonably
estimate the ultimate liability that may result from payments required to cure
defaults under assumed leases and contracts or from the filing of claims for
all leases and contracts which may be rejected.
In connection with the Chapter 11 filing, the Debtors notified all known
claimants that pursuant to an order of the Bankruptcy Court, all proofs of
claims, on account of pre-petition obligations, other than for certain
governmental entities, were required to be filed by June 16, 1997 (the "Bar
Date"). As of December 31, 1998, approximately 2,400 proofs of claim had been
filed against the Debtors. Included among the claims filed are claims of
unspecified and undeterminable amounts. The Debtors consider the amounts set
forth in certain proofs of claim to be inaccurate estimates of the Debtors'
liabilities. As of December 31, 1998, the Debtors had secured orders of the
Bankruptcy Court reducing approximately 1,292 claims filed in an aggregate
amount of approximately $114,000 to an allowed amount of $6,190. As of
December 31, 1998, the Debtors had also analyzed and resolved an additional
864 proofs of claim, representing an aggregate allowed amount of $8,450. The
Debtors expect the objection process to continue.
B-7
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On August 20, 1998, MobileMedia announced that it had executed a merger
agreement with Arch Communications Group, Inc. ("Arch"), pursuant to which
MobileMedia Communications, Inc. will be merged with and into a wholly-owned
subsidiary of Arch. Immediately prior to the Merger, Parent will contribute
all of its assets to MobileMedia Communications, Inc. Also on August 20, 1998,
the Debtors filed a First Amended Joint Plan of Reorganization that reflects
the proposed merger with Arch. On September 3, 1998, Arch and MobileMedia
executed an amendment to the merger agreement and the Debtors filed a
subsequent Second Amended Joint Plan of Reorganization. On December 1, 1998
Arch and MobileMedia executed a second amendment to the merger agreement and
on December 2, 1998, the Debtors filed a Third Amended Joint Plan of
Reorganization (the "Plan"). As of February 9, 1999, Arch and MobileMedia
executed a third amendment to the merger agreement. Under the Plan, the
Debtors' secured creditors will receive cash in an amount equal to their
allowed pre-petition claims and the Debtors' unsecured creditors will receive
cash or equity securities of Arch in satisfaction of their pre-petition claims
against the Debtors. Because there are a variety of conditions precedent to
the consummation of the Plan and the merger with Arch, there can be no
assurance that the transactions contemplated thereby will be consummated.
In December 1998 and January 1999, MobileMedia solicited the votes of its
creditors on the Plan. 100% of the voting creditors in Class 4 voted to accept
the Plan. As to Allowed Claims in Class 5, 83% in number and 91% in amount of
those voting voted to accept the Plan. Of the Allowed Claims in Class 6 that
voted on the Plan, 968 of such holders (approximately 94% in number and 69% in
amount) voted to accept the Plan, and 61 of such holders (approximately 6% in
number and 31% in amount) voted to reject the Plan.
Objections to confirmation were filed by New Generation Advisors, Inc. ("New
Generation"), Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc.--High Income Portfolio and State Street Research High Income Fund
(the "Objectors"). On February 12, 1999, at a continued hearing on
confirmation of the Plan, the Bankruptcy Court ordered MobileMedia to provide
due diligence to a nominee of New Generation, to prepare supplemental
disclosure to the holders of Allowed Claims in Class 6, and to resolicit the
votes of such holders on the Plan. At a hearing held before the Bankruptcy
Court on February 18, 1999, the Bankruptcy Court entered an order approving a
form of Notice and Supplemental Disclosure, directing MobileMedia to resolicit
the votes of all holders of Allowed Class 6 Claims and establishing March 23,
1999 as (a) the Supplemental Voting Deadline for Class 6 and (b) the deadline
for any further objections to confirmation of the Plan arising out of the
matters set forth in the Notice of Supplemental Disclosure. No further
objections to the Plan were received by March 23, 1999. Taking into account
the resolicitation of Class 6, the Plan was accepted by 59.6% in number and
69.3% in dollar amount of voting Class 6 creditors.
On March 22, 1999, the Debtors and various other parties (including the
Objectors, Arch, the Committee and the Agent for the Company's pre-petition
secured lenders) executed a stipulation (the "Stipulation") that was approved
by the Bankruptcy Court, effective as of March 23, 1999. The Stipulation
resolves the pending objections to the Plan by providing for the withdrawal of
the Objectors' objections and the waiver of all appeal rights of the
Objectors. In addition, the Stipulation, among other things, establishes a
process for the conduct of due diligence and the pursuit of a possible
alternative plan proposal by the Objectors (the "Objectors Proposal"), which
proposal must be delivered to the Debtors by April 1, 1999 and must (i) be
capable of consummation within a reasonable time, (ii) provide for cash
payments of approximately $550,000 to certain creditors and for a distribution
to Class 6 (general unsecured creditors) that is materially greater in value
than the distribution under the Plan, (iii) have financing committed or
reasonably capable of being committed and (iv) be superior to the Plan
(collectively, "the Requirements"). As a result, the Stipulation narrows the
scope of the confirmation hearing to essentially one issue (other than the
conformity of the Plan with section 1129 of the Bankruptcy Code)--whether the
Objectors Proposal meets the Requirements. In accordance with the terms of the
Stipulation, the Confirmation Hearing will resume on April 12, 1999.
B-8
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The consolidated financial statements at December 31, 1996, 1997 and 1998
have been prepared on a going concern basis which assumes continuity of
operations and realization of assets and liquidation of liabilities in the
ordinary course of business. As discussed herein, there are significant
uncertainties relating to the ability of MobileMedia to continue as a going
concern. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts,
or the amounts and classification of liabilities that might be necessary as a
result of the outcome of the uncertainties discussed herein.
2. The Company and Summary of Significant Accounting Policies
The Company
MobileMedia provides paging and wireless messaging services in the United
States, including the 100 largest metropolitan areas.
Consolidation
The consolidated financial statements include the accounts of MobileMedia
and its wholly-owned subsidiaries (MobileMedia Communications, Inc.
(California), MobileMedia Paging, Inc., MobileMedia DP Properties, Inc., Dial
Page Southeast, Inc., Radio Call Company of Va., Inc., MobileMedia PCS, Inc.,
Mobile Communications Corporation of America, MobileComm of Florida, Inc.,
MobileComm of Tennessee, Inc., MobileComm of the Midsouth, Inc., MobileComm
Nationwide Operations, Inc., MobileComm of the West, Inc., MobileComm of the
Northeast, Inc., MobileComm of the Southeast, Inc., MobileComm of the
Southeast Private Carrier Operations, Inc., MobileComm of the Southwest, Inc.
and FWS Radio, Inc.). All significant intercompany accounts and transactions
have been eliminated.
Cash Equivalents
MobileMedia considers all highly-liquid securities with an original maturity
of less than three months to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject MobileMedia to concentrations
of credit risk consist principally of temporary cash investments and accounts
receivable. MobileMedia places its cash with high-quality institutions and, by
policy, limits its credit exposure to any one institution. Although
MobileMedia faces significant credit risk from its customers, such risk does
not result from a concentration of credit risk as a result of the large number
of customers which comprise MobileMedia's customer base. MobileMedia generally
does not require collateral or other security to support customer receivables.
Inventories
MobileMedia values inventories at the lower of specific cost or market
value. Inventories consist of pagers held specifically for resale by
MobileMedia.
Revenue Recognition
MobileMedia recognizes revenue under service, rent and maintenance
agreements with customers at the time the related services are performed.
Advance billings for services are deferred and recognized as revenue when
earned. MobileMedia leases (as lessor) certain pagers under operating leases.
Sales of pagers are recognized upon delivery.
B-9
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Property and Equipment
Effective October 1, 1997, MobileMedia shortened the estimated useful life
of pagers from four to three years. This change resulted in additional
depreciation expense of approximately $2,500 in 1997.
Property and equipment are stated at cost, less accumulated depreciation.
MobileMedia purchases a significant percentage of its pagers from one
supplier. Any disruption of such supply could have a material impact on
MobileMedia's operations.
Expenditures for maintenance are charged to expense as incurred.
Upon retirement of pagers, the cost and related accumulated depreciation are
removed from the accounts and the net book value, if any, is charged to
depreciation expense. Upon the sale of pagers, the net book value is charged
to cost of products sold.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Pagers......................................................... 3 years
Radio transmission equipment................................... 10 years
Computer equipment............................................. 4 years
Furniture and fixtures......................................... 5 years
Leasehold improvements......................................... 1-10 years
Buildings...................................................... 30 years
</TABLE>
Intangible Assets
Intangible assets consist primarily of customer lists and FCC licenses which
are being amortized principally using the straight-line method over periods
ranging from 3 to 25 years. In connection with the impairment writedown
discussed below, MobileMedia revised the useful lives of FCC licenses and
customer lists to 25 years and 3 years, respectively.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", MobileMedia records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the net book value of those assets. In 1997,
MobileMedia determined impairment existed with respect to its long-lived
assets as of December 31, 1996. Such determination was based upon the
existence of adverse business circumstances, such as MobileMedia's bankruptcy,
its 1996 operating results and the uncertainty associated with the pending FCC
proceeding. In July 1998, MobileMedia evaluated the ongoing value of its long-
lived assets effective December 31, 1996 and, based on this evaluation,
MobileMedia determined that intangible assets with a net book value of
$1,118,231 were impaired and wrote them down by $792,478 to their estimated
fair value. Fair value
B-10
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
was determined through the application of generally accepted valuation methods
to MobileMedia's projected cash flows, discounted at an estimated market rate
of interest. The remaining carrying amount of long-lived assets are expected
to be recovered based on MobileMedia's estimates of cash flows. However, it is
possible that such estimates could change based upon the uncertainties of the
bankruptcy process and because future operating and financial results may
differ from those projected which may require further writedowns to fair
value.
Debt Issue Costs
Debt issue costs, which relate to the long term debt discussed in Note 6,
are reported as "Other assets" in the accompanying balance sheets. Such costs
amounted to $22,939 at December 31, 1997 and $19,295 at December 31, 1998 and
are being amortized on a straight line basis over the term of the related
debt.
Liabilities Subject to Compromise
Liabilities subject to compromise consists of pre-petition liabilities that
may be affected by a plan of reorganization. In accordance with AICPA
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code", MobileMedia records liabilities subject to
compromise based on the expected amount of the allowed claims related to these
liabilities. Accordingly, in December 1998 MobileMedia reduced such
liabilities by approximately $10,461 to reflect changes in estimated allowed
claims.
Restructuring Costs
Restructuring costs are primarily comprised of professional fees
constituting administrative expenses incurred by MobileMedia as a result of
reorganization under Chapter 11 of the Bankruptcy Code.
Income Taxes
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December
15, 1997. MobileMedia has adopted SFAS No. 131 as of December 31, 1998. Such
adoption did not have an impact on MobileMedia's financial reporting.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 ("SOP 98-5")
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of SOP 98-5 will be reported as the cumulative effect of a change
in accounting principle. MobileMedia intends to adopt SOP 98-5 effective
January 1, 1999. The adoption of SOP 98-5 is not expected to have any effect
on MobileMedia's financial position or results of operations.
B-11
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
3. Acquisitions and Divestitures
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers to Pinnacle Towers, Inc. ("Pinnacle") for $170,000 in cash (the "Tower
Sale"). Under the terms of a lease with Pinnacle, MobileMedia will lease
antenna sites located on these towers for an initial period of 15 years at an
aggregate annual rental of $10,700. The sale was accounted for in accordance
with Statement of Financial Accounting Standards No. 28, Accounting for Sales
with Leasebacks, and resulted in a recognized gain of $94,200 and a deferred
gain of $70,000. The deferred gain will be amortized on a straight-line basis
over the initial lease period of 15 years. Subsequent to the sale, MobileMedia
distributed the $170,000 in proceeds to its secured creditors, who had a lien
on such assets.
On January 4, 1996, MobileMedia completed its acquisition of MobileComm,
BellSouth's paging and wireless messaging unit, and an associated nationwide
two-way narrowband 50/12.5 kHz PCS license, and BellSouth agreed to enter into
a two-year non-compete agreement and a five-year reseller agreement with
MobileMedia (the "MobileComm Acquisition"). The aggregate consideration paid
for the MobileComm Acquisition (excluding fees and expenses and related
financing costs) was approximately $928,709.
The MobileComm Acquisition has been accounted for as a purchase transaction
in accordance with Accounting Principles Board Opinion No. 16 and,
accordingly, the financial statements for the periods subsequent to January 4,
1996 reflect the purchase price and transaction costs of $24,328, allocated to
tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values as of January 4, 1996. The allocation of the purchase
price is summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Current assets............................................ $ 55,301
Property and equipment.................................... 112,986
Intangible assets......................................... 934,269
Other assets.............................................. 143
Liabilities assumed....................................... (149,662)
---------
$ 953,037
=========
</TABLE>
4. Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
(in thousands)
<S> <C> <C>
Pagers................................................. $196,791 $176,610
Radio transmission equipment........................... 202,296 203,048
Computer equipment..................................... 30,896 32,679
Furniture and fixtures................................. 20,918 22,019
Leasehold improvements................................. 14,652 16,516
Construction in progress............................... 1,128 11,624
Land, buildings and other.............................. 7,911 6,697
-------- --------
474,592 469,193
Accumulated depreciation............................... 216,655 249,551
-------- --------
Property and equipment, net............................ $257,937 $219,642
======== ========
</TABLE>
B-12
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
5. Intangible Assets
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1998
------------------------------- ------------------------------
Adjusted Accumulated Adjusted Accumulated
Cost Amortization Net Cost Amortization Net
--------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
FCC Licenses.... $ 261,323 $ (8,918) $252,405 $261,523 $(16,891) $244,632
Customer lists.. 64,430 (21,477) 42,953 64,430 (42,953) 21,477
--------- -------- -------- -------- -------- --------
$ 325,753 $(30,395) $295,358 $325,753 $(59,844) $266,109
========= ======== ======== ======== ======== ========
</TABLE>
MobileMedia is not amortizing the cost of two nationwide Personal
Communications Services ("PCS") licenses, one acquired directly from the FCC
and the other as a result of the MobileComm acquisition, because the
construction of paging networks related to such licenses has not been
completed. These networks are expected to begin commercial operation in 1999
and, accordingly, amortization of these licenses will begin at such time.
6. Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
---------- --------
<S> <C> <C>
DIP credit facility................................. $ 10,000 $ --
Revolving loan...................................... 99,000 72,900
Term loan........................................... 550,000 406,100
10 1/2% Senior Subordinated Deferred Coupon Notes
due December 1, 2003............................... 174,125 174,125
9 3/8% Senior Subordinated Notes due November 1,
2007............................................... 250,000 250,000
Dial Page Notes..................................... 1,570 1,570
Note Payable........................................ 986 986
---------- --------
Total debt........................................ $1,085,681 $905,681
========== ========
</TABLE>
The debt obligations of MobileMedia include:
1) A debtor-in-possession credit facility ("DIP Facility") with a
syndicate of lenders including The Chase Manhattan Bank, as Agent (the "DIP
Lenders"). As of December 31, 1998 there were no funded borrowings and as
of December 31, 1997, there was $10,000 of borrowings outstanding under
this facility. MobileMedia is subject to certain financial and operating
restrictions customary to credit facilities of this type including a
limitation on periodic capital expenditures, minimum allowable periodic
EBITDA and retention of a turnaround professional. Additionally,
MobileMedia is required to make monthly interest payments to the DIP
Lenders and pay a commitment fee of 0.5% on any unused portion of the DIP
Facility. The DIP Facility bears interest at a rate of LIBOR plus 250 basis
points or Base Rate plus 150 basis points, at the option of MobileMedia.
During 1997, the Debtors drew down $47,000 of borrowings and repaid $37,000
under the DIP Facility. During January and February, 1998 the Debtors
repaid an additional $10,000. On January 27, 1998, the DIP Facility was
amended and reduced from $200,000 to $100,000. On August 12, 1998,
MobileMedia received approval from the Bankruptcy Court to extend the DIP
Facility to March 31, 1999 and further reduce it from $100,000 to $75,000.
MobileMedia has negotiated an extension of the DIP Facility through and
including December 31, 1999. Interim approval of this extension was granted
by the Bankruptcy Court on March 26, 1999. The interim approval will become
final on April 12, 1999 unless objections are filed by April 8, 1999.
B-13
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
2) A $750,000 senior secured and guaranteed credit agreement (the "Pre-
Petition Credit Agreement") with a syndicate of lenders including The Chase
Manhattan Bank, as Agent. As of December 31, 1998 there was $479,000
outstanding under this facility consisting of term loans of $101,500 and
$304,600 and loans under a revolving credit facility totaling $72,900. This
agreement was entered into on December 4, 1995, in connection with the
financing of the MobileComm Acquisition. Commencing in 1996 MobileMedia was
in default under this agreement. As a result of such default and the
bankruptcy filing, MobileMedia has no borrowing capacity under this
agreement. Since the Petition date, MobileMedia has brought current its
interest payments and has been making monthly payments to the lenders under
the Pre-Petition Credit Agreement equal to the amount of interest accruing
under such agreement. On September 3, 1998, MobileMedia repaid $170,000 of
borrowings under the Pre-Petition Credit Agreement with proceeds from the
Tower Sale (see Note 3).
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the "9 3/8%
Notes") issued in November 1995. These notes bear interest at a rate of 9
3/8% payable semi-annually on May 1 and November 1 of each year. On
November 1, 1996, MobileMedia did not make its scheduled interest payment
on its 9 3/8% Notes which constituted an event of default. The note holders
have not exercised any rights or remedies afforded holders (which rights
include, but are not limited to, acceleration of the stated maturity of the
notes). Since the Petition date, any such right or remedy is subject to the
automatic stay created by the Bankruptcy Code.
4) $210,000 of Senior Subordinated Deferred Coupon Notes (the "Deferred
Coupon Notes") issued, at a discount, in November 1993. The Deferred Coupon
Notes accrete at a rate of 10 1/2%, compounded semi-annually, to an
aggregate principal amount of $210,000 by December 1, 1998 after which
interest is paid in cash at a rate of 10 1/2% and is payable semi-annually.
By virtue of the missed interest payments on the 9 3/8% Notes and the Pre-
Petition Credit Agreement an event of default has occurred. The note
holders have not exercised any rights or remedies afforded such holders
(which rights include, but are not limited to, acceleration of the stated
maturity of the notes). Since the Petition date, any such right or remedy
is subject to the automatic stay created by the Bankruptcy Code.
Interest Expense on Debt
Interest paid during the years ended December 31, 1996, 1997 and 1998, was
$65,978, $70,817, $51,560, respectively. Total interest cost incurred for the
years ended December 31, 1996, 1997 and 1998 was $94,231, $68,409 and $53,982,
respectively of which $1,292, $176 and $228 was capitalized.
Subsequent to the Petition date, interest was accrued and paid only on the
Pre-Petition Credit Agreement and the DIP Facility. If not for the filing,
interest expense for the year ended December 31, 1997 and 1998 would have been
approximately $104,152 and $97,776, respectively.
7. Income Taxes
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
Year ended December
31,
---------------------
1996 1997 1998
------- ----- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $(1,757)
State and local.................................. -- -- (2,201)
------- ----- -------
-- -- (3,958)
Deferred:
Federal.......................................... 52,081 -- --
State and local.................................. 17,361 -- --
------- ----- -------
Total.......................................... $69,442 $ -- $(3,958)
======= ===== =======
</TABLE>
B-14
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
MobileMedia is included in the Parent's consolidated federal income tax
return. Income taxes are presented
in the accompanying financial statements as if MobileMedia filed tax returns
as a separate consolidated entity.
A reconciliation of income tax benefit (expense) and the amount computed by
applying the statutory federal income tax rate to loss before income taxes is
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Tax benefit (expense) at federal statutory rate.. $395,285 $43,604 $(13,838)
Goodwill and intangible amortization and
writedown....................................... (95,362) -- --
State income taxes............................... -- -- (1,783)
Nondeductible expenses........................... -- -- (4,765)
Valuation allowance on federal deferred tax
assets.......................................... (230,481) (43,604) 16,428
-------- ------- --------
Total.......................................... $ 69,442 $ -- $ (3,958)
======== ======= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for federal and state income tax purposes. The
components of deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Difference in book and tax basis of fixed assets......... $ 10,206 $ 19,974
Other.................................................... 68 27
-------- --------
Deferred tax liabilities............................... 10,274 20,001
Deferred tax assets:
Tax credit carryforwards................................. -- 1,757
Accounts receivable reserves............................. 10,578 6,000
Differences between the book and tax basis of intangible
assets.................................................. 128,462 121,526
Difference between book and tax basis of accrued
liabilities............................................. 5,089 4,794
Net operating loss carryforward.......................... 161,840 135,458
Deferred gain on tower sale.............................. -- 27,378
-------- --------
Total deferred assets.................................. 305,969 296,913
Valuation allowances for deferred tax assets........... (298,350) (279,567)
-------- --------
Deferred tax assets.................................... 7,619 17,346
======== ========
Net deferred tax liabilities........................... $ 2,655 $ 2,655
======== ========
</TABLE>
As of December 31, 1998, MobileMedia has available net operating loss
carryforwards for tax purposes of approximately $330,000 which expire in years
2008 through 2012. Utilization of these losses may be limited under Section
382 of the Internal Revenue Code.
MobileMedia believes consummation of the public offering of 15,525,000
shares of Parent's Class A Common Stock on November 7, 1995 caused an
ownership change for MobileMedia for purposes of Section 382 of the Code. As a
result, the use of MobileMedia's pre-ownership change net operating loss
carryforwards will be limited annually by the Section 382 Limitation, which is
estimated to be approximately $40,000. In addition, if a second ownership
change has occurred subsequent to November 7, 1995, which has not yet been
determined,
B-15
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
use of MobileMedia's net operating losses would be severely limited. It is
also anticipated that the net operating loss carryforwards and certain other
tax attributes of MobileMedia will be substantially reduced and their
utilization signifantly limited as a result of consummation of the Plan.
8. Leases
Certain facilities and equipment used in operations are held under operating
leases. Rental expenses under operating leases were $44,574, 43,453 and
$40,936, for the years ended December 31, 1996, 1997 and 1998, respectively.
At December 31, 1998, the aggregate minimum rental commitments under leases
were as follows:
<TABLE>
<S> <C>
1999............................................................ $ 48,951
2000............................................................ 25,457
2001............................................................ 19,250
2002............................................................ 15,726
2003............................................................ 13,327
Thereafter...................................................... 15,783
---------
$ 138,494
=========
</TABLE>
9. Employee Benefit Plans
MobileMedia has adopted a retirement savings plan that allows all employees
who have been employed for one year and have at least 1,000 hours of credited
service to contribute and defer up to 15% of their compensation. Effective
February 1, 1996, MobileMedia began a matching contribution of 50% of the
first 2% of the elected deferral plus an additional 25% of the next 4% of the
elected deferral. MobileMedia's matching contribution was $700 in 1996, $730
in 1997 and $692 in 1998, respectively.
10. Stock Option Plans
MobileMedia has two stock option plans under which approximately 1.3 million
options are currently outstanding. Under the proposed Plan of Reorganization,
MobileMedia's equity holders will receive no value for their ownership
interests in the Company, and accordingly, the options are also deemed to have
no value.
11. Commitments and Contingencies
MobileMedia is party to a number of lawsuits and other matters arising in
the ordinary course of business.
As announced on September 27, 1996 and October 21, 1996, MobileMedia
disclosed that misrepresentations and other violations had occurred during the
licensing process for as many as 400 to 500, or approximately 6% to 7%, of its
approximately 8,000 local transmission one-way paging stations. MobileMedia
caused an investigation to be conducted by its outside counsel, and a
comprehensive report regarding these matters was provided to the FCC in the
fall of 1996.
On January 13, 1997, the FCC issued a Public Notice relating to the status
of certain FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (i) automatically terminated
approximately 185 authorizations for paging facilities that were not
constructed by the expiration date of their construction permits and remained
unconstructed, (ii) dismissed as defective approximately 94 applications for
fill-in sites around existing paging stations because they were predicated
upon unconstructed facilities and (iii) automatically terminated approximately
99 other authorizations for paging facilities that were constructed after the
expiration date of their construction permits. However, the FCC granted
MobileMedia interim operating authority to operate transmitters in this last
category subject to further action by the FCC.
B-16
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an Administrative Law Judge to take evidence and develop a full
factual record on directed issues concerning MobileMedia's filing of false
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the
hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible
transfer of MobileMedia's FCC licenses. The grant of the stay was premised on
the availability of an FCC doctrine known as Second Thursday, which provides
that, if there is a change of control that meets certain conditions, the
regulatory issues designated for administrative hearing will be resolved by
the transfer of MobileMedia's FCC licenses to the new owners of MobileMedia
and the hearing will not proceed. The stay was originally granted for ten
months and was extended by the FCC through October 6, 1998.
On September 2, 1998, MobileMedia and Arch Communications Group, Inc.
("Arch") filed a joint Second Thursday application. The FCC released an order
granting the application on February 5, 1999. The order, which is conditioned
on confirmation of the plan and consummation thereof within nine months,
expressly terminated the administrative hearing and resolved the issues
designated therein. The order denied the parties' request for permanent
authority to operate transmitters for which MobileMedia was granted interim
authority on January 13, 1997. If the Merger is consummated, Arch must cease
operating these facilities within 6 months after the merger. The order also
denied the parties' request for a waiver of the spectrum cap (which prohibits
narrowband PCS licensees from having ownership interest in more than three
channels in any geographic area). Arch must divest any excess channels within
6 months after the merger.
Prior to the Petition date, five actions allegedly arising under the federal
securities laws were filed against MobileMedia and certain of its present and
former officers, directors and underwriters in the United States District
Court for the District of New Jersey (the "New Jersey District Court"). These
actions were subsequently consolidated as In re MobileMedia Securities
Litigation, No. 96-5723 (AJL) (the "New Jersey Actions"). A consolidated
amended complaint (the "Complaint") was filed on November 21, 1997. The
Complaint does not name MobileMedia as a defendant.
In June 1997, the Debtors initiated an Adversary Proceeding in the
Bankruptcy Court to stay the prosecution of the New Jersey Actions. Pursuant
to a Stipulation entered into among the Debtors and the plaintiffs in the New
Jersey Actions and "So Ordered" by the Bankruptcy Court on October 31, 1997,
the plaintiffs in the New Jersey Actions could conduct only limited discovery
in connection with the New Jersey Actions and could not file any pleadings,
except responses to motions to dismiss, until the earlier of September 30,
1998 and the effective date of a plan of reorganization. On October 21, 1998,
the defendents' motion to dismiss the New Jersey Actions filed with the New
Jersey District Court on January 16, 1998 was denied.
In addition to the New Jersey Actions, two lawsuits (together, the
"California Actions" and, together with the New Jersey Actions, the
"Securities Actions") were filed in September 1997 in the United States
District Court for the Northern District of California and the Superior Court
of California naming as defendants certain former officers and certain present
and former directors of MobileMedia, certain investment entities and the
Debtors' independent auditors. None of the Debtors is named as defendant in
the California Actions.
On November 4, 1997, the Debtors commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At hearings held on December 10, 1997 and May
29, 1998, the Bankruptcy Court enjoined the plaintiffs in the California
Actions until September 15, 1998 from taking certain actions in connection
with the California Actions, with certain exceptions.
B-17
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The plaintiffs in both the New Jersey Actions and California Actions are
currently conducting discovery of MobileMedia in connection with their
prosecution of the actions against the named defendants. Following
consummation of the Plan of Reorganization, the Company may be subject to
discovery in these proceedings.
Neither the New Jersey Actions nor the California Actions name any of the
Debtors as a defendant. However, proofs of claim have been filed against the
Debtors by the plaintiffs in the New Jersey Actions, and both the New Jersey
Actions and the California Actions may give rise to claims against the
Debtors' Directors, Officers and Corporate Liability Insurance Policy. It is
anticipated that under any plan of reorganization for MobileMedia these Claims
will receive no distributions.
12. Other Investments
On March 21, 1995, MobileMedia purchased a 33% interest in Abacus
Communications Partners, L.P., ("Abacus") a Delaware limited partnership, from
Abacus Business Services, Inc. for $1,641. Abacus Communications Partners,
L.P. is one of MobileMedia's alphanumeric dispatch services providers. The
investment has been accounted for under the equity method in accordance with
Accounting Principles Board Opinion No. 18. Under the equity method, original
investments are recorded at cost and adjusted by MobileMedia's share of
undistributed earnings or losses of the purchased company. MobileMedia's share
of income (loss) of affiliate, net of distribution, for the years ended
December 31, 1996, 1997 and 1998, was $160, $69, and $(87), respectively. On
December 30, 1998 MobileMedia reached an agreement to sell its interest in
Abacus to Abacus Exchange Inc. for $1,400 and subsequently completed the sale
on January 25, 1999. Accordingly, MobileMedia wrote down its investment in
Abacus from $1,612 to $1,400 as of December 31, 1998.
13. Impact of Year 2000 (unaudited)
General
Computer systems were originally designed to recognize calendar years by the
last two digits in the date code field. Beginning in the year 2000, these date
code fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates. Any of MobileMedia's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, in less than two
years, the computerized systems (including both information and non-
information technology systems) and applications used by MobileMedia will need
to be reviewed, evaluated and, if and where necessary, modified or replaced to
ensure that all financial, information and operating systems are Year 2000
compliant.
State of Readiness
MobileMedia has formed an internal task force comprised of representatives
of its various relevant departments to address Year 2000 compliance matters.
The task force has undertaken a preliminary review of internal and external
areas that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or non-
critical/non-important. MobileMedia also expects to hire outside consultants
to review MobileMedia's testing methodology and test results, to assess its
contingency planning and to provide general oversight relating to Year 2000
compliance matters.
B-18
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be Year
2000 compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain
business-related files were created and executed to identify any Year 2000
compliance issues. The testing unearthed a few Year 2000 problems all of which
have been addressed and retested for Year 2000 readiness. Additional testing
took place the first quarter of 1999, which included testing of MobileMedia's
financial and human resource software packages. Although the results of these
tests are still being analyzed, relatively few Year 2000 problems were
identified. There can be no assurance, however, that such testing has
detected, or will detect, all compliance issues related to the Year 2000
problem.
With respect to external matters, MobileMedia has distributed questionnaires
and requests for certification to its mission-critical vendors and is in the
process of obtaining and reviewing the responses thereto. The questionnaires
have requested information concerning embedded technologies of such vendors,
the hardware and software applications used by such vendors and the Year 2000
compliance efforts of such vendors relating thereto.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to Year 2000 compliance matters.
Through December 31, 1998, MobileMedia has incurred approximately $50,000 in
costs (excluding in-house labor and hardware) in connection with Year 2000
compliance matters. In addition, MobileMedia has purchased upgraded hardware
at a cost of approximately $175,000 for use as redundant equipment in testing
for Year 2000 problems in an isolated production environment. MobileMedia
estimates that it will expend approximately $500,000 on additional hardware,
software and other items related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200,000
in costs relating to Year 2000 remediation efforts for its paging network
hardware. MobileMedia also upgraded its paging network hardware during 1998
and plans further upgrades in fiscal year 1999. Such upgrades have not been
and are not expected to be purchased solely for remediation of the Year 2000
compliance problems; such upgrades are not themselves expected to have Year
2000 compliance problems.
Risks Relating to Year 2000 Compliance Matters
MobileMedia has a goal to become Year 2000 compliant with respect to
internal matters during 1999. Although MobileMedia has begun testing of its
internal business-related hardware and software applications, there can be no
assurances that such testing will detect all applications that may be affected
by Year 2000 compliance problems. With respect to external matters, due to the
multi-dependent and interdependent issues raised by Year 2000 compliance,
including many factors beyond its control, MobileMedia may face the
possibility that one or more of its mission-critical vendors, such as its
utilities, telephone carriers, equipment manufacturers or satellite carriers,
may not be Year 2000 compliant on a timely basis. Because of the unique nature
of such vendors, alternate providers may not be available. Finally,
MobileMedia does not manufacture any of the pagers, paging-related hardware or
network equipment used by MobileMedia or its customers in connection with
MobileMedia's paging operations. Although MobileMedia has tested such
equipment, it has also relied upon the representations of its vendors with
respect to their Year 2000 readiness. MobileMedia can give no assurance as to
the accuracy of such vendors' representations.
B-19
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Contingency Planning
MobileMedia has begun the process of assessing contingency plans that might
be available in the event of either internal or external Year 2000 compliance
problems. To this end, MobileMedia's various internal departments have begun
to prepare assessments of potential contingency alternatives. The task force
will undertake a review of these assessments on a department-by-department
basis and on a company-wide basis. MobileMedia intends to complete its
contingency planning during the second quarter of 1999.
B-20
<PAGE>
APPENDIX C
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has
been prepared to reflect the merger (using the purchase method of accounting),
assuming the closing had occurred on December 31, 1998. Under the purchase
method of accounting, the purchase price will be allocated to assets acquired
and liabilities assumed based on their estimated fair values at the effective
time of the merger. Income of Arch will not include income (or loss) of
MobileMedia prior to the effective time. The unaudited pro forma condensed
consolidated statement of operations for the year ended December 31, 1998
presents the results of operations of Arch and MobileMedia assuming the merger
had been effected on January 1, 1998. The unaudited pro forma financial data
should be read in conjunction with the notes following the data and the
consolidated historical financial statements of Arch and MobileMedia,
including the notes, which are included in Appendices A and B.
The pro forma condensed consolidated financial data is for information
purposes only and is not necessarily indicative of the results of future
operations of Arch or the actual results that would have been achieved had the
merger been consummated during the period indicated. Moreover, the pro forma
condensed consolidated financial statements reflect preliminary pro forma
adjustments made to combine Arch with MobileMedia utilizing the purchase
method of accounting. The actual adjustments will be made as of the effective
time and may differ from those reflected in the pro forma financial
statements.
For purposes of presenting these pro forma condensed consolidated financial
statements, Arch has assumed the issuance of 122,845,000 shares of Arch's
common stock at an aggregate market value of $245.7 million and that none of
the rights issued to the stockholders of Arch in connection with the merger
are exercised. In the event the market price of Arch's common stock is greater
than $2.00 per share, stockholders' equity will increase. In the event the
market price of Arch's common stock is less than $2.00 per share,
stockholders' equity will decrease.
C-1
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Arch MobileMedia Pro Forma
(Historical) (Historical) Debits Credits Consolidated
------------ ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 1,633 $ 1,218 $ 2,851
Accounts receivable
net................... 30,753 38,942 69,695
Inventories............ 10,319 2,192 12,511
Prepaid expenses and
other................. 8,007 10,378 18,385
--------- ----------- ----------
Total current
assets.............. 50,712 52,730 103,442
--------- ----------- ----------
Property and
equipment, net........ 219,045 219,642 438,687
Intangible and other
assets................ 634,528 289,082 $ 108,249 (1) $ 21,117 (1) 1,010,742
--------- ----------- ----------
$ 904,285 $ 561,454 $1,552,871
========= =========== ==========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of
long-term debt........ $ 1,250 $ 905,681 $ 479,000 (1) $ 1,250
426,681 (2)
Accounts payable....... 25,683 17,113 15,410 (2) 27,386
Accrued expenses....... 11,689 66,571 15,932 (2) 62,328
Accrued interest....... 20,997 21,271 21,271 (2) 20,997
Customer deposits and
deferred revenue...... 15,486 28,554 44,040
Accrued
restructuring......... 11,909 5,163 5,163 (2) $ 10,000 (1) 21,909
--------- ----------- ----------
Total current
liabilities......... 87,014 1,044,353 177,910
--------- ----------- ----------
Long-term debt, less
current maturities.... 1,003,499 -- 312,000 (1) 1,315,499
--------- ----------- ----------
Deferred income
taxes................. -- 2,655 2,655 (2) --
--------- ----------- ----------
Other long-term
liabilities........... 27,235 68,444 68,444 (2) 27,235
--------- ----------- ----------
Stockholder's equity:
Preferred stock........ 3 3
Common stock........... 212 1,228 (5) 1,440
Additional paid-in
capital............... 378,077 676,025 676,025 (3) 245,690 (1) 622,539
1,228 (5)
Accumulated deficit.... (591,755) (1,230,023) 21,117 (1) 555,556 (2) (591,755)
676,025 (3)
19,559 (1)
--------- ----------- ----------
Total stockholder's
equity (deficit).... (213,463) (553,998) 32,227
--------- ----------- ----------
$ 904,285 $ 561,454 $1,552,871
========= =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
C-2
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Arch MobileMedia Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues .. $ 371,154 $423,059 $ (8,454)(4) $ 785,759
Products sales.......... 42,481 26,622 -- 69,103
---------- -------- ----------- -----------
Total revenues...... 413,635 449,681 (8,454) 854,862
Cost of products sold... (29,953) (22,162) -- (52,115)
---------- -------- ----------- -----------
383,682 427,519 (8,454) 802,747
---------- -------- ----------- -----------
Operating expenses:
Service, rental and
maintenance.......... 80,782 111,589 10,800 (5) 194,717
(8,454)(4)
Selling............... 49,132 61,106 -- 110,238
General and
administrative....... 112,181 133,003 -- 245,184
Depreciation and
amortization......... 221,316 114,903 10,825 (6) 362,723
15,679 (6)
Restructuring
expense.............. 14,700 -- -- 14,700
Bankruptcy related
expense.............. -- 8,163 (7) 8,163
---------- -------- ----------- -----------
Total operating
expense............ 478,111 428,764 28,850 935,725
---------- -------- ----------- -----------
Operating (loss)........ (94,429) (1,245) (37,304) (132,978)
Interest expense, net... (104,213) (53,043) 53,043 (8) (143,746)
(39,533)(8)
Gain on sale of assets.. -- 94,165 -- 94,165
Other expenses.......... (5,689) (338) -- (6,027)
---------- -------- ----------- -----------
Income (loss) before
provision for income
taxes and extraordinary
item................... (204,331) 39,539 (23,794) (188,586)
Provision for income
taxes.................. -- 3,958 -- 3,958
---------- -------- ----------- -----------
Income (loss) before
extraordinary item..... $ (204,331) $ 35,581 $ (23,794) $ (192,544)
========== ======== =========== ===========
Basic/diluted income
(loss) before
extraordinary item per
common share........... $ (9.78) $ (1.35)
========== ===========
Weighted average common
shares outstanding..... 20,993,192 122,845,000 (1) 143,838,192
========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
C-3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) To record (i) $312.0 million of additional Arch borrowings necessary to
fund its obligations in connection with the MobileMedia Transactions, (ii)
the issuance of 122,845,000 shares of Arch Common Stock in the MobileMedia
Transactions, having an aggregate value of $245.7 million, (iii) the
writeoff of $21.1 million of deferred financing costs associated with the
former MobileMedia credit facility and (iv) the excess of purchase price
over the assumed fair value of the identifiable assets acquired. The
historical book value of the tangible and intangible assets of MobileMedia
was assumed to approximate fair value. The excess of purchase price over
the assumed fair value of identifiable assets acquired is calculated as
follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Consideration exchanged:
Payments to secured creditors................................ $479,000
Assumed fair value of shares issued to unsecured creditors... 28,690
--------
507,690
Liabilities assumed:
Administrative costs....................................... 25,000(a)
Other...................................................... 80,896(b)
--------
Total consideration exchanged................................ 613,586
Transaction costs............................................ 25,000(c)
Restructuring reserve........................................ 10,000(d)
--------
Total purchase price......................................... 648,586
Less fair value of tangible and intangible net assets
acquired...................................................... 540,337
--------
Excess of purchase price over tangible and intangible net
assets acquired............................................... $108,249
========
</TABLE>
--------
(a) Consists of payments to certain of MobileMedia's creditors.
(b) This amount relates to operating liabilities such as accounts payable,
accrued expenses and advance billings which Arch will assume in the
MobileMedia Transactions.
(c) This amount includes legal, investment banking, financing, accounting
and other costs incurred by Arch to consummate the MobileMedia
Transactions and the Offering.
(d) Consists of severance costs related primarily to duplicative general
and administrative functions at the corporate, regional and market
levels of MobileMedia, such as technical, marketing, finance and other
support functions. These terminations will occur as the operations of
MobileMedia are integrated into those of Arch and are based on
management's preliminary review of synergies that exist between the
companies. This analysis will be finalized after consummation of the
MobileMedia Transactions and may result in additional amounts to be
reserved.
(2) To eliminate liabilities of MobileMedia which (i) Arch will not assume,
(ii) will be satisfied in cash or (iii) will be exchanged for Arch Common
Stock.
(3) To eliminate MobileMedia equity balances.
(4) To eliminate revenues and expenses between Arch and MobileMedia.
(5) This entry records the incremental rental expense for the use of
transmitter space on certain transmission towers that were sold and leased
back in the MobileMedia Tower Sale (as defined herein).
(6) To record the amortization on the excess of purchase price over the
tangible and intangible assets acquired, calculated on a straight-line
basis over 10 years in the amount of $10.8 million for the year ended
December 31, 1998. The actual amortization recorded upon consummation of
the MobileMedia Transactions may differ from this amount due to changes in
the price of Arch Common Stock at the Effective Time as well as full
allocation of purchase price to assets and liabilities assumed pursuant to
APB No. 16. The amortization related to the $268.0 million assumed fair
value of intangible assets, consisting primarily of FCC licenses and
customer lists with assumed fair values of $244.6 million and
C-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(CONTINUED)
$21.5 million, respectively, has already been provided in the historical
financial statements of MobileMedia. The MobileMedia historical
amortization was adjusted by $15.7 million for the year ended December 31,
1998 to conform MobileMedia's 25 year estimated useful life of FCC
licenses to Arch's 10 year estimated useful life. The estimated useful
life of the customer lists was assumed to be 3 years.
(7) These costs represent incremental third-party legal, accounting and
financial advisory fees and expenses incurred by MobileMedia related to
its administration of bankruptcy proceedings which are non-recurring, less
a $10.5 million reduction of liabilities subject to compromise.
(8) To remove the interest expense associated with the various MobileMedia
credit facilities and notes eliminated pursuant to the Reorganization Plan
and to record the interest associated with the additional Arch borrowings
used to fund the MobileMedia Transactions. Interest was calculated
assuming a 11% rate on $172.2 million of additional bank borrowings and a
14 3/4% rate on $139.8 million of the Notes. Interest expense would be
$39.1 million and $39.9 million for the year ended December 31, 1998 if
the assumed interest rates were to decrease or increase 1/8 of a percent,
respectively.
C-5
