<PAGE>
As filed with the Securities and Exchange Commission on June 1, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
ARCH COMMUNICATIONS GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 4812 31-1358569
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code Number) Identification Number)
jurisdiction of
incorporation or
organization)
</TABLE>
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
(508) 870-6700
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
C. Edward Baker, Jr.
Chairman and Chief Executive Officer
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
(508) 870-6700
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
copies to:
Edward Young, Esq.
Jay E. Bothwick, Esq.
David A. Westenberg, Esq.
c/o Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the effective registration statement for the same
offering. [_]
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Maximum Proposed
Amount Offering Maximum Amount of
Title of Each Class of to be Price Aggregate Registration
Securities to be Registered Registered Per Unit Offering Price Fee(1)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value ... 3,675,659 3.01 $11,063,733.59 $3,075.71
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Common Stock, $.01 par value.... 152 2.34 $356.29 $.10
</TABLE>
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- --------------------------------------------------------------------------------
(1) Calculated in accordance with Rule 457 under the Securities Act of 1933,
as amended.
----------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
section 8(a), may determine.
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<PAGE>
EXPLANATORY STATEMENT
Some of the securities described in the Prospectus which forms part of this
Registration Statement are registered on separate registration statements on
Form S-4 (file no. 333-63519 and 62211). Such Prospectus is a common prospectus
for all three registration statements.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is prohibited. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO CHANGE, PROSPECTUS DATED MAY 28, 1999
PROSPECTUS
[LOGO]
ARCH COMMUNICATIONS GROUP, INC.
119,387,874 Shares of Common Stock
8,125,106 Shares of Class B Common Stock
3,675,659 Stock Purchase Warrants
On the date of this prospectus we are issuing warrants to purchase
a total of 48,259,933 shares of our common stock in connection
with our acquisition of MobileMedia Communications, Inc. and its
subsidiaries. The exercise price of these warrants is initially
$3.01 per share, but may be adjusted for stock splits and in
various other circumstances. The warrants expire at 5:00 p.m., New
York City time, on September 1, 2001.
This prospectus relates to our issuance of shares of common stock
upon exercise of the warrants and also to resales of warrants and
shares by the selling stockholders named in this prospectus. We
expect that these stockholders will sell warrants and shares at
prices determined by the prevailing market price for shares of
common stock or in negotiated transactions.
We will not receive any of the proceeds of resale of warrants or
shares by the selling stockholders, although we will receive the
exercise price of the warrants when exercised.
<TABLE>
<CAPTION>
Per Share Total
--------- ---------------
<S> <C> <C>
Warrant exercise price........................ $3.01 $145,262,398.33
Underwriting discounts........................ -- --
Proceeds, before expenses, to Arch............ $3.01 $145,262,398.33
</TABLE>
Our common stock is traded on the Nasdaq National Market under the
symbol "APGR".
Neither the SEC nor any state
securities regulators have
approved or disapproved the
shares or warrants or
determined if this prospectus
is accurate or adequate.
Anyone who tells you
otherwise is committing a
crime.
We urge you to carefully read
the
"Risk Factors" section,
beginning
on page 5, before you make
any
investment decision.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................... 1
Our Business............................................................ 1
Arch.................................................................. 1
MobileMedia........................................................... 2
The Mobile Media Acquisition.......................................... 2
The Combined Company.................................................. 2
Other Information about Arch............................................ 3
Resales by Selling Stockholders......................................... 3
Risk Factors.............................................................. 5
Uncertainties Related to the MobileMedia Acquisition ................... 5
Business and Financial Risks............................................ 6
Risks Related to Shares, Warrants and Warrant Exercises................. 11
Forward-Looking Statements................................................ 14
Dilution.................................................................. 14
Use of Proceeds........................................................... 15
Market Price Information and Dividend Policy.............................. 15
Selected Historical Consolidated Financial and Operating Data--Arch....... 16
Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 18
Selected Historical Consolidated Financial and Operating Data--
MobileMedia.............................................................. 29
MobileMedia Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 30
Unaudited Selected Pro Forma Consolidated Financial Data.................. 44
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Statements .......... 44
Industry Overview......................................................... 50
Business.................................................................. 55
Business Strategy....................................................... 55
Arch's Paging and Messaging Services, Products and Operations........... 56
MobileMedia's Paging and Messaging Services, Products and Operations.... 58
Networks and Licenses................................................... 59
Subscribers and Marketing............................................... 62
Sources of Equipment.................................................... 63
Employees............................................................... 63
Trademarks.............................................................. 64
Properties.............................................................. 64
Litigation.............................................................. 64
Predecessors to the Combined Company; Events Leading up to MobileMedia's
Bankruptcy Filings..................................................... 65
The MobileMedia Acquisition............................................. 66
Management................................................................ 68
Principal Stockholders.................................................... 74
Description of Securities................................................. 77
Description of Outstanding Indebtedness................................... 86
Plan of Distribution...................................................... 90
Selling Stockholders...................................................... 96
Legal Matters............................................................. 97
Experts................................................................... 97
Where You Can Find More Information ...................................... 98
Index to Financial Statements............................................. F-1
</TABLE>
i
<PAGE>
SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. It may not contain all of the information that is important to you.
We urge you to read the entire prospectus, including financial statements and
"Risk Factors". In this prospectus, we use the name "Arch" to refer to Arch
Communications Group, Inc. and its consolidated subsidiaries both before and
after the MobileMedia acquisition described below. Sometimes we use the phrase
"combined company" when we wish to emphasize that we are referring specifically
to Arch after the MobileMedia acquisition.
Our Business
Arch is now the second largest provider of wireless messaging services,
primarily paging services, in the United States based on its net revenues and
its approximately 7.2 million units in service. This reflects Arch's
acquisition of MobileMedia Communications, Inc. and its subsidiaries on June ,
1999. Before the MobileMedia acquisition, Arch and MobileMedia separately
conducted two of the largest paging operations in the country. Arch believes
that the MobileMedia acquisition will benefit Arch through operating synergies,
cost savings and a reduction in Arch's financial leverage. However, the
integration of the companies' businesses may present difficulties. See "Risk
Factors--Integrating the two companies presents challenges".
Arch's operating objectives are to increase its EBITDA, or earnings before
interest, taxes, depreciation and amortization; deploy its capital efficiently;
reduce its financial leverage; and expand its customer relationships. To
achieve its operating objectives, Arch:
. has selected a low-cost operating strategy as its principal competitive
tactic;
. is seeking to reduce its financial leverage by reducing capital
requirements and increasing EBITDA;
. is distributing its products and services through several different
channels; and
. is pursuing new revenue opportunities associated with its units in
service, including applications in narrowband personal communications
services, which are commonly referred to as N-PCS.
Arch
Arch has been a leading provider of wireless messaging services, primarily
paging services. At March 31, 1999, Arch was the third largest paging company
in the United States based on its 4.3 million units then in service. Arch has:
. operated in 41 states and more than 180 of the 200 largest markets in the
United States;
. offered local, regional and nationwide paging services employing digital
networks covering approximately 85% of the United States population;
. offered four types of paging services through its networks: digital
display, alphanumeric display, tone-only and tone-plus-voice. These types
of services are described in detail under "Business--Arch's Paging and
Messaging Services, Products and Operations" on page 57; and
. offered enhanced and complementary services, including voice mail,
personalized greeting, message storage and retrieval, pager loss
protection and pager maintenance.
Prior to the MobileMedia acquisition, Arch achieved significant growth in units
in service through a combination of internal growth and acquisitions. From
January 1, 1996 through March 31, 1999, Arch's total number of units in service
grew at a compound rate on an annualized basis of 26.7%. For the same period on
an annualized basis, Arch's compound rate of internal growth in units in
service was 22.3%, excluding units added through acquisitions. From
commencement of operations in September 1986 through March 31, 1999, Arch
1
<PAGE>
completed 33 acquisitions involving an aggregate of 1.7 million units in
service at the time of purchase. The MobileMedia acquisition has added
approximately 2.9 million additional units, net of intercompany units.
Arch had revenues of $413.6 million and a net loss of $206.1 million for the
year ended December 31, 1998 and revenues of $100.9 million and a net loss of
$49.1 million for the three months ended March 31, 1999.
MobileMedia
Prior to its acquisition by Arch, MobileMedia operated one of the largest
paging companies in the United States, with approximately 3.1 million units in
service as of March 31, 1999. Through its sales offices, nationwide retail
distribution network, company-operated retail stores and resellers, MobileMedia
has offered local, regional and national coverage to subscribers in all 50
states and the District of Columbia. This has included local coverage to each
of the 100 most populated metropolitan markets in the United States.
MobileMedia has marketed its services primarily under the MobileComm brand
name. MobileMedia's paging and wireless messaging services have consisted
principally of numeric and alphanumeric paging services. See "Business--
MobileMedia's Paging and Messaging Services, Products and Operations".
Between January 30, 1997 and June , 1999, MobileMedia and several affiliated
companies operated as debtors-in-possession under Chapter 11 of the Bankruptcy
Code. MobileMedia's insolvency proceedings are described under "Business--
Predecessors to the Combined Company; Events Leading Up to MobileMedia's
Bankruptcy Filings" and "MobileMedia Management's Discussion and Analysis of
Financial Condition and Results of Operations".
MobileMedia had revenues of $449.7 million and net income of $35.6 million for
the year ended December 31, 1998 and revenues of $105.8 million and a net loss
of $7.7 million for the three months ended March 31, 1999.
The MobileMedia Acquisition
Arch acquired MobileMedia on June , 1999. Arch paid approximately $537.0
million in cash, including fees and expenses and elimination of certain debt.
Arch also issued a total of 115.0 million shares of its common stock and 8.1
million shares of its Class B common stock to creditors of MobileMedia and
stockholders of Arch. Arch issued some of these shares in exchange for
cancellation of creditors' claims and received cash proceeds of approximately
$217.5 million for the other shares. Arch has also borrowed approximately
$320.0 million to help fund the acquisition. See "Business--The MobileMedia
Acquisition".
The Combined Company
The combined company is the second largest paging operator in the United States
as measured by units in service and net revenues. On a pro forma basis, but
excluding the impact of expected operational cost synergies, at and for the
year ended December 31, 1998, the combined company would have had:
. approximately 7.2 million units in service;
. net revenues of $802.7 million;
. adjusted pro forma EBITDA, as described below, of $252.6 million;
. net loss before extraordinary items of $193.2 million; and
. total debt of $1.3 billion.
For the year ended December 31, 1998, on a similar pro forma basis, cash flows
provided by operating activities would have been $138.3 million, cash flows
used in investing activities would have been $506.0 million and cash flows
provided by financing activities would have been $359.1 million.
For the three months ended March 31, 1999, the combined company would have had:
. net revenues of $194.2 million;
. adjusted pro forma EBITDA of $64.6 million;
. net loss before extraordinary items of $60.1 million;
. total debt of $1.3 billion; and
. cash flows of $30.1 million provided by operating activities, $589.9
million used in investing activities and $568.3 million provided by
financing activities.
2
<PAGE>
This adjusted pro forma information assumes that the MobileMedia acquisition
had been effected as of January 1, 1998.
The combined company's leverage on a pro forma basis, as measured by the ratio
of total debt to annualized adjusted pro forma EBITDA, would have been 5.2 to 1
for the year ended December 31, 1998 and 5.2 to 1 for the three months ended
March 31, 1999. Adjusted pro forma EBITDA is EBITDA net of restructuring
charges and bankruptcy related expenses, equity in loss of affiliates,
extraordinary items, amortization of deferred gain on tower sale, impairment of
long-lived assets and reduction of liabilities subject to compromise. See
"Business" and "Unaudited Pro Forma Condensed Consolidated Financial
Statements".
Other Information about Arch
Our principal office is located at 1800 West Park Drive, Suite 250,
Westborough, Massachusetts 01581. Our telephone number is (508) 870-6700.
"Arch" and "Arch Paging" are service marks of Arch. "MobileComm" is a
registered service mark of MobileMedia, which is not associated with MobilComm
Inc. of Cincinnati, Ohio. Additional trademarks, service marks and trade names
of Arch and MobileMedia also appear in this prospectus. See "Business--
Trademarks". Other trademarks, service marks and trade names used in this
prospectus are owned by persons who are not associated with Arch.
Our web site is not part of this prospectus.
None of the financial or share information in this prospectus reflects the
effects of a reverse stock split which we expect to effect during June 1999.
See "Description of Securities--Reverse Stock Split".
Resales by Selling Stockholders
This prospectus covers the public offering and sale of warrants and shares held
by stockholders who are named in this prospectus. These shares include shares
already owned by these stockholders and shares to be acquired through exercise
of warrants. We expect that the prices at which these stockholders may sell
warrants and shares will be determined by the prevailing market price for
common stock or in negotiated transactions. We will not receive any proceeds
from the sale of their warrants or shares. See "Plan of Distribution--Resales
of Warrants and Shares" and "Selling Stockholders".
3
<PAGE>
Exercises of Warrants
Securities offered.......... 48,259,933 shares of common stock. Each warrant
entitles you to purchase one share of common
stock, subject to adjustment for stock splits and
similar transactions, issuances of stock or op-
tions at prices below prevailing market prices
and other events described under "Descriptions of
Securities--Warrants".
Subscription price.......... $3.01 per share payable in cash.
Expiration date for
exercise of warrants.......
5:00 p.m., New York City time, on September 1,
2001. Warrants cannot be exercised after this
time.
Shares to be outstanding
assuming exercise of
warrants................... 198,208,369 shares of common stock, based on
shares outstanding at June , 1999 and assuming
exercise of all warrants and conversion of all
outstanding convertible securities.
Warrant agent............... The Bank of New York.
Method of exercise of You or your transferees may exercise your war-
warrants................... rants by properly completing and signing the ex-
ercise notice attached to the warrant certificate
for your warrants, and forwarding the exercise
notice and warrant certificate to the warrant
agent, on or before September 1, 2001, together
with payment in good funds of the exercise price
for each share subscribed for. If you forward
exercise notices by mail, Arch recommends that
you use insured, registered mail. Warrant certif-
icates and exercise notices are being mailed to
their original registered holders on or about the
date of this prospectus. See "Plan of Distribu-
tion--Exercises of Warrants--Method of Exercise
of Warrants".
No revocation............... Once you have exercised warrants, you may not re-
voke your exercise.
Transfers and resales....... You may transfer warrants as described under
"Plan of Distribution--Exercises of Warrants--
Transfer of Warrants". You may resell warrants
and shares issued upon exercise of warrants with-
out registration under the Securities Act of 1933
if you are not an affiliate of Arch or an under-
writer within the meaning of the Securities Act.
See "--Resales of Warrants and Shares".
Use of proceeds............. Arch intends to use substantially all of the pro-
ceeds received upon exercise of the warrants for
general corporate purposes, including working
capital and debt repayment.
Exercise through others..... If you hold warrants beneficially through a bro-
ker, dealer, commercial bank, trust company or
other nominee, you should contact the appropriate
institution or nominee and request it to effect
the transaction for you. You should do likewise
if you hold warrants directly but would prefer to
have an institution effect transactions relating
to the warrants on your behalf.
4
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide whether
to exercise warrants or to purchase warrants or shares. If any of these
possible developments occur, our business, financial condition and/or results
of operations would likely suffer. In that case, the trading price of our
common stock could decline, and you might lose all or part of the money you
paid to buy our warrants or shares.
Uncertainties Related to the MobileMedia Acquisition
Integrating the two companies presents challenges
Arch may not be able to successfully integrate MobileMedia's operations. Any
difficulties or problems encountered in the integration process could have a
material adverse effect on the combined company. Even if integrated in a timely
manner, there can be no assurance that Arch's operating performance after the
MobileMedia acquisition will be successful or will fulfill management's
objectives described in "Business--Business Strategy". Until integration is
complete, the two companies will continue to operate with some autonomy. This
degree of autonomy may blunt the implementation of the combined company's
operating strategy.
The combination of the two companies will require, among other things,
coordination of administrative, sales and marketing, distribution and
accounting and finance functions and expansion of information and management
systems. The integration process could cause the interruption of the activities
of the two businesses, or a loss of momentum. The difficulties of such
integration may initially be increased by the necessity of coordinating
geographically separate organizations and integrating personnel with disparate
business backgrounds and corporate cultures. Arch may not be able to retain key
employees. The process of integrating the businesses of Arch and MobileMedia
may require a disproportionate amount of time and attention of Arch's
management and financial and other resources of Arch and may involve other,
unforeseen difficulties.
Similar risks will attend future acquisition opportunities which Arch intends
to pursue. Furthermore, no assurance can be given that suitable acquisition
transactions can be identified, financed and completed on acceptable terms, or
that Arch will participate in any future consolidation of the paging industry.
Disruption of MobileMedia's operations that occurred during insolvency
proceedings may continue
MobileMedia's business operations were adversely affected by difficulties in
integrating the operations of certain businesses acquired in 1995 and 1996, by
liquidity problems arising prior to its January 30, 1997 bankruptcy filing and
by the reluctance of some customers and potential customers to do business with
MobileMedia while it operated under Chapter 11. Any continued deterioration of
MobileMedia's business, including the loss of significant numbers of key
employees following MobileMedia's acquisition by Arch, could have material
adverse effects. See "Business".
Downturn in MobileMedia's units in service may continue
Cancellation of units in service can significantly affect the results of
operations of wireless messaging service providers. The sales and marketing
costs associated with attracting new subscribers are substantial compared to
the costs of providing service to existing customers. Because the paging
business is characterized by high fixed costs, cancellations directly and
adversely affect EBITDA.
After filing for bankruptcy protection on January 30, 1997, MobileMedia
experienced a significant decline in units in service. At March 31, 1999,
MobileMedia had 3,106,775 units in service compared to 3,440,342 units in
service at December 31, 1997. A failure to correct this cancellation trend
could have a material adverse effect on the combined company. See "Business--
MobileMedia's Business--Sales and Marketing".
5
<PAGE>
Amortization charges may affect earnings sooner than expected
Under purchase accounting treatment for the MobileMedia acquisition, Arch
must record a substantial amount of goodwill and other intangible assets. This
will result in substantial amortization charges to the consolidated income of
Arch over the useful lives of such assets. Arch estimates the incremental
amount of such charges to be approximately $26.0 million per year for ten
years. However, actual charges could vary significantly if the underlying
assets are impaired or if the useful lives of such assets are less than
currently estimated. See "Unaudited Selected Pro Forma Consolidated Financial
Data".
Creditors may allege defaults
It is possible that holders of some of Arch's outstanding indebtedness may
allege that the MobileMedia acquisition constitutes either a breach or a
default or a change in control of Arch entitling them to immediate repayment of
their indebtedness. See "Description of Outstanding Indebtedness". The
magnitude of any resulting adverse consequences would depend upon, among other
factors, the diligence and vigor with which debt holders may seek to assert any
such rights and pursue any such remedies, and Arch's ability to prevail in its
interpretation of the loan documents or otherwise resolve matters on acceptable
terms.
Business and Financial Risks
Continued losses are likely
The combined company expects to continue to report net losses for the
foreseeable future and cannot predict when, if ever, it is likely to attain
profitability. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations", "MobileMedia Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the
consolidated financial statements and notes of Arch and MobileMedia.
Arch and MobileMedia have reported losses in all but one of the periods shown
in the table below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
Three Months
Ended
March 31,
1996 1997 1998 1999
--------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss): (dollars in million)
Arch................. $ (114.7) $(181.9) $(206.1) $(49.1)
MobileMedia.......... $(1,059.9) $(124.6) $ 35.6 $( 7.7)
</TABLE>
Furthermore, MobileMedia had net income during the year ended December 31,
1998 solely because of a $94.2 million gain on the sale of transmission towers
and related equipment. After giving effect to the MobileMedia acquisition, Arch
would have incurred, on a pro forma basis, losses before extraordinary item of
$193.2 million for the year ended December 31, 1998 and $60.1 million for the
three months ended March 31, 1999. See the consolidated financial statements
and notes of Arch and MobileMedia and "Unaudited Pro Forma Condensed
Consolidated Statement of Operations".
For both Arch and MobileMedia, these historical net losses have resulted
principally from substantial depreciation and amortization expense, primarily
related to intangible assets and pager depreciation, interest expense, the
impairment of long-lived assets in the case of MobileMedia and other costs of
growth. Substantial and increased amounts of debt are expected to be
outstanding for the foreseeable future. This will result in significant
additional interest expense which could have a material adverse effect on
Arch's future income or loss. See "--Funding for future capital needs is not
assured" and "--High degree of leverage burdens operations".
6
<PAGE>
Revenues and operating results may fluctuate
Arch believes that future fluctuations in its revenues and operating results
may occur due to many factors, including competition, subscriber turnover, new
service developments and technological change. Arch's current and planned debt
repayment levels are, to a large extent, fixed in the short term, and are based
in part on its expectations as to future revenues and cash flow growth. Arch
may be unable to adjust spending in a timely manner to compensate for any
revenue or cash flow shortfall. It is possible that, due to future
fluctuations, Arch's revenue, cash flow or operating results may not meet the
expectations of securities analysts or investors. This may have a material
adverse effect on the price of Arch's common stock. See "Market Price
Information and Dividend Policy" and "Arch Management's Discussion and Analysis
of Financial Condition and Results of Operations". If shortfalls were to cause
Arch not to meet the financial covenants contained in its debt instruments, the
debtholders could declare a default and seek immediate repayment.
High degree of leverage burdens operations
Each of Arch and MobileMedia has been highly leveraged, and the combined
company expects to continue to be highly leveraged. The following table
compares the total debt, total assets and latest three-month annualized
adjusted EBITDA of Arch, MobileMedia and the combined company at or as of March
31, 1999.
<TABLE>
<CAPTION>
Pro Forma
Combined
Arch MobileMedia Company
-------- ----------- ---------
(dollars in millions)
<S> <C> <C> <C>
Total debt................................ $1,038.0 $910.7 $1,349.7
Total assets.............................. $ 883.4 $554.0 $1,538.4
Annualized adjusted EBITDA................ $ 140.1 $118.5 $ 258.6
</TABLE>
Adjusted EBITDA is not a measure defined in GAAP and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with GAAP. Adjusted EBITDA, as determined by Arch and MobileMedia,
may not necessarily be comparable to similarly titled data of other paging
companies. See "Selected Historical Consolidated Financial and Operating Data--
Arch".
Arch's high degree of leverage may have adverse consequences for Arch. These
include the following:
. High leverage may impair or extinguish Arch's ability to obtain
additional financing necessary for acquisitions, working capital,
capital expenditures or other purposes on acceptable terms, if at all.
. A substantial portion of Arch's cash flow will be required to pay
interest expense; this will reduce the funds which would otherwise be
available for operations and future business opportunities.
. Arch's credit facilities and indentures contain financial and
restrictive covenants; the failure to comply with these covenants may
result in an event of default which could have a material adverse effect
on Arch if not cured or waived.
. Arch may be more highly leveraged than its competitors which may place
it at a competitive disadvantage.
. Arch's high degree of leverage will make it more vulnerable to a
downturn in its business or the economy generally.
. Arch's high degree of leverage may impair its ability to participate in
the future consolidation of the paging industry.
There can be no assurance that Arch will be able to reduce its financial
leverage as it intends, nor that Arch will achieve an appropriate balance
between growth which it considers acceptable and future reductions in financial
leverage. If Arch is not able to achieve continued growth in EBITDA, it may be
precluded from incurring additional indebtedness due to cash flow coverage
requirements under existing debt instruments. See "Arch Management's Discussion
and Analysis of Financial Condition and Results of Operations", "Description of
Certain Indebtedness" and the consolidated financial statements and notes of
Arch and MobileMedia.
7
<PAGE>
Funding for future capital needs is not assured
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including possible acquisitions. Future amounts of capital required
by Arch will depend upon a number of factors. These factors include subscriber
growth, the type of paging devices and services demanded by customers, service
revenues, technological developments, marketing and sales expenses, competitive
conditions, the nature and timing of Arch's N-PCS strategy and acquisition
strategies and opportunities. No assurance can be given that additional equity
or debt financing will be available to Arch when needed on acceptable terms, if
at all. If sufficient financing is unavailable when needed, Arch may experience
material adverse effects. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Description of Outstanding Indebtedness".
Competition and technological change may undermine Arch's business
There can be no assurance that the combined company will be able to compete
successfully with current and future competitors in the paging business or with
competitors offering alternative communication technologies. See "Industry
Overview--Competition".
Competition may intensify and may adversely affect margins
Arch and MobileMedia have each faced competition from other paging service
providers in all markets in which they operate, including some competitors who
hold nationwide licenses. Due in part to competitive conditions, monthly fees
for basic paging services have generally declined in recent years. The combined
company may face significant price-based competition in the future which could
have a material adverse effect on its revenues and EBITDA. Some competitors
possess greater financial, technical and other resources than the combined
company. A trend towards increasing consolidation in the paging industry in
particular and the wireless communications industry in general in recent years
has led to competition from increasingly larger and better capitalized
competitors. If any of such competitors were to devote additional resources to
the paging business or focus on Arch's or MobileMedia's historical markets,
there could be a material adverse effect on the combined company.
New two-way paging technology may adversely affect Arch's competitive position
Competitors are currently using and developing a variety of two-way paging
technologies. Neither Arch nor MobileMedia currently provides such two-way
services, other than as a reseller. Although these services generally are
higher priced than traditional one-way paging services, this situation may
change. Technological improvements could result in increased capacity and
efficiency for two-way paging technologies and this could result in increased
competition for the combined company. Future technological advances in the
telecommunications industry could increase new services or products competitive
with the paging services historically provided by Arch and MobileMedia. Future
technological advances could also require the combined company to reduce the
price of its paging services or incur additional capital expenditures to meet
competitive requirements. Recent and proposed regulatory changes by the FCC are
aimed at encouraging such technological advances and new services. Other forms
of wireless two-way communications technology also compete with the paging
services that the combined company provides. These include cellular and
broadband personal communications services, which are commonly referred to as
PCS, as well as specialized mobile radio services. Although these services are
primarily focused on two-way voice communications, many service providers are
electing to provide paging services as an adjunct to their primary services.
Obsolescence in company-owned units may impose additional costs on Arch
Technological change may also adversely affect the value of the paging units
owned by Arch and MobileMedia that are leased to their subscribers. If Arch's
or MobileMedia's current subscribers request more technologically advanced
units, including two-way units, the combined company could incur additional
8
<PAGE>
inventory costs and capital expenditures if required to replace units leased to
its subscribers within a short period of time. Such additional investment or
capital expenditures could have a material adverse effect on the combined
company.
Government regulation may burden operations
Licenses may not be automatically renewed
The combined company's FCC paging licenses are for varying terms of up to 10
years. When the licenses expire, renewal applications must receive approval
from the FCC. To date, the FCC has approved each assignment and transfer of
control for which Arch and MobileMedia have sought approval; however, no
assurance can be given that any of the combined company's renewal applications
will be free of challenge or will be granted by the FCC.
Regulatory changes could add burdens or benefit competing technologies
The FCC continually reviews and revises its rules affecting paging companies.
Therefore, regulatory requirements that apply to the combined company may
change significantly over time. Specific examples of regulatory changes that
could impose additional administrative and/or economic burdens on the combined
company, or that could benefit competing technologies, are discussed under
"Industry Overview--FCC Regulatory Approval and Authorizations", "--
Telecommunications Act of 1996", "--Future Regulation", "--State Regulation",
and "--Competition".
Acquisitions of Arch's stock by foreigners could jeopordize Arch's licenses
The Communications Act limits foreign investment in and ownership of radio
common carriers licensed by the FCC, as well as their parent companies. The
combined company may not have more than 25% of its stock owned or voted by
aliens or their representatives, a foreign government or its representatives or
a foreign corporation if the FCC finds that the public interest would be served
by denying such ownership. Arch's subsidiaries that are radio common carrier
licensees are subject to more stringent requirements and may have only up to
20% of their stock owned or voted by aliens or their representatives, a foreign
government or their representatives or a foreign corporation. This ownership
restriction is not subject to waiver. See "Industry Overview--Regulation".
Arch's certificate of incorporation permits the redemption of shares of Arch's
capital stock from foreign stockholders where necessary to protect FCC licenses
held by Arch or its subsidiaries, but such a redemption would be subject to the
availability of capital to Arch and any restrictions contained in applicable
debt instruments and under the Delaware corporations statute. These
restrictions currently would not permit any such redemptions. The failure to
redeem shares promptly could jeopardize the FCC licenses held by Arch or its
subsidiaries. See "--High degree of leverage burdens operations", "--
Competition and technological change may undermine Arch's business" and
"Industry Overview--Regulation".
Arch cannot control third parties on whom Arch depends for products and
services
The combined company does not manufacture any of the paging units used in its
paging operations. It is dependent primarily on Motorola and NEC America Inc.
to obtain sufficient pager inventory for new subscriber and replacement needs
and on Glenayre Electronics, Inc. and Motorola for sufficient terminals and
transmitters to meet its expansion and replacement requirements. Significant
delays in obtaining paging units, terminals or transmitters, such as
MobileMedia experienced before its bankruptcy filing, could lead to disruptions
in operations and adverse financial consequences. Purchase agreements with
Motorola expire on June 19, 1999 and February 6, 2000. There can be no
assurance that the agreements with Motorola will be renewed or, if renewed,
that such agreements will be on terms and conditions as favorable to the
combined company as those under the current agreements. See "Business--Sources
of Equipment".
9
<PAGE>
The combined company relies on third parties to provide satellite
transmission for some aspects of its paging services. To the extent there are
satellite outages or if satellite coverage is impaired in other ways, the
combined company may experience a loss of service until such time as satellite
coverage is restored, which could have a material adverse effect.
Loss of key personnel could adversely impact operations
Arch's success will depend, to a significant extent, upon the continued
services of a relatively small group of executive personnel. Arch does not have
employment agreements with any of its current executive officers, or maintain
life insurance on their lives, although all executive officers have entered
into executive retention agreements with Arch. The loss or unavailability of
one or more of its executive officers or the inability to attract or retain key
employees in the future could have a material adverse effect on Arch. See
"Management".
Divisional reorganization may not achieve objectives
Arch is currently reorganizing its operating divisions. Once fully
implemented, this divisional reorganization is expected to result in annual
cost savings of approximately $15.0 million. Arch recorded a restructuring
charge of $14.7 million in 1998. There can be no assurance that the expected
cost savings will be achieved or that the reorganization of Arch's business
will be accomplished smoothly, expeditiously or successfully. The difficulties
of the divisional reorganization may be increased by the need to integrate
MobileMedia's operations in many locations and to combine two corporate
cultures. See "Arch Management's Discussion and Analysis of Financial Condition
and Results of Operations--Divisional Reorganization".
Impact of the Year 2000 issue is not fully known
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
combined company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Within the next few months, the combined company must finish the process of
reviewing, evaluating and, if and where necessary, modifying or replacing its
computerized systems and applications to ensure that all financial, information
and operating systems are Year 2000 ready. This includes both information and
non-information technology systems. Any failure of systems or products to be
Year 2000 ready could have a material adverse effect on the combined company's
business, financial condition, results of operations or prospects.
Although Arch and MobileMedia each began testing its internal business-
related hardware and software applications in 1998, there can be no assurance
that such testing has detected or will detect all applications that may be
affected by Year 2000 compliance problems. The combined company's objective is
to make its internal computer systems Year 2000 ready by September 30, 1999 but
there can be no assurance that this objective will be met. Furthermore, it is
possible that one or more mission critical vendors, such as utility providers,
telephone carriers or satellite carriers, may not be Year 2000 compliant.
Because of the unique nature of those vendors, alternative providers of these
services may not be available. Furthermore, all pagers and paging-related
equipment used by the combined company and its customers are manufactured by
third parties. Although the combined company has initiated testing of such
equipment, it has relied to a large extent on the representations of its
vendors with respect to their readiness and cannot offer any assurance about
the accuracy of its vendors' representations. See "Arch Management's Discussion
of Financial Condition and Results of Operations--Year 2000 Compliance" and
"MobileMedia Management's Discussion of Financial Condition and Results of
Operations--Year 2000 Compliance".
10
<PAGE>
Debt instruments restrict operations
Various debt instruments impose operating and financial restrictions on Arch.
The combined company's secured credit facility requires various Arch operating
subsidiaries to maintain specified financial ratios, including a maximum
leverage ratio and a minimum fixed charge coverage ratio. In addition, the
secured credit facility limits or restricts, among other things, the operating
subsidiaries' ability to:
. declare dividends or redeem or repurchase capital stock;
. prepay, redeem or purchase debt;
. incur liens and engage in sale/leaseback transactions;
. make loans and investments;
. incur indebtedness and contingent obligations;
. amend or otherwise alter debt instruments and other material agreements;
. engage in mergers, consolidations, acquisitions and asset sales;
. engage in transactions with affiliates; and
. alter its lines of business or accounting methods.
Other debt instruments limit, among other things:
. the incurrence of additional indebtedness by Arch and its subsidiaries;
. the payment of dividends and other restricted payments by Arch and its
subsidiaries;
. asset sales;
. transactions with affiliates;
. the incurrence of liens; and
. mergers and consolidations.
The combined company's ability to comply with such covenants may be affected
by events beyond its control, including prevailing economic and financial
conditions. A breach of any of these covenants could result in a default under
the secured credit facility and/or other debt instruments. Upon the occurrence
of an event of default, the creditors could elect to declare all amounts
outstanding to be immediately due and payable, together with accrued and unpaid
interest. If Arch were unable to repay any such amounts, the secured creditors
could proceed against the collateral securing a portion of the indebtedness. If
the lenders under the secured credit facility or other debt instruments
accelerated the payment of such indebtedness, there can be no assurance that
the assets of Arch would be sufficient to repay in full such indebtedness and
other indebtedness of Arch. In addition, because the secured credit facility
and other debt instruments limit Arch's ability to engage in certain
transactions except under certain circumstances, Arch may be prohibited from
entering into transactions that could be beneficial to Arch. See "Description
of Certain Indebtedness".
Risks Related to Shares, Warrants and Warrant Exercises
Warrant exercise will result in dilution to you
The exercise price per warrant currently exceeds the net tangible book value
per share of common stock, which is a negative number. Accordingly, you will
experience immediate and substantial dilution if you exercise warrants under
current conditions. See "Dilution".
Trading prices may be volatile
The market price of Arch's common stock has been experiencing significant
fluctuation and has declined materially since 1996. Between January 1, 1998 and
June , 1999, the reported sale price of common stock on the Nasdaq National
Market has ranged from a high of $6.1875 per share in June 1998 to a low of
$0.6875 per
11
<PAGE>
share in October 1998. The trading price of common stock following the
MobileMedia acquisition will likely be affected by numerous factors. These
include the risk factors set forth in this prospectus, as well as prevailing
economic and financial trends and conditions in the public securities markets.
Share prices of paging companies such as Arch have exhibited a high degree of
volatility during recent periods. Shortfalls in revenues or EBITDA from the
levels anticipated by the public markets could have an immediate and
significant adverse effect on the trading price of Arch's common stock in any
given period. Shortfalls may result from events that are beyond Arch's
immediate control and can be unpredictable. The trading price of Arch's shares
may also be affected by developments which may not have any direct relationship
with Arch's business or long-term prospects. These include reported financial
results and fluctuations in trading prices of the shares of other publicly held
companies in the paging industry generally. See "Market Price Information and
Dividend Policy".
Common stock might be delisted from the Nasdaq National Market
The Nasdaq Stock Market, Inc. has notified Arch that Arch's common stock is
not in compliance with the minimum closing bid price requirement of $5.00 per
share for continued trading on the Nasdaq National Market. Nasdaq has informed
Arch that Arch must be in compliance with all requirements for continued
trading on the Nasdaq National Market by June 30, 1999 or the common stock will
be delisted on that date. Arch intends to implement a reverse stock split
designed to increase the minimum closing bid price of the common stock above
$5.00 per share. There can be no assurance, however, that Arch will continue to
meet the Nasdaq's requirements for continued trading.
Shares eligible for future sale may depress market price of common stock
On June , 1999, upon consummation of the MobileMedia acquisition, 136.2
million shares of common stock were issued and outstanding. In addition, 13.8
million shares of common stock are issuable upon conversion of convertible
securities and 48.3 million shares of common stock are issuable upon exercise
of the warrants. The issuance of these shares of common stock, together with
the issuance of up to 8.5 million shares of common stock currently authorized
for issuance under Arch compensation plans, will substantially dilute the
proportionate equity interests of the holders of the common stock. No
prediction can be made as to the effect, if any, that future sales of common
stock, or the availability of shares for future sales, will have on the market
price of the common stock prevailing from time to time. Sales of substantial
amounts of common stock, including shares issued upon exercise of warrants or
options, or the perception that such sales could occur, could depress
prevailing market prices of common stock.
It may become impossible to exercise warrants
A current prospectus covering the shares issuable upon exercise of the
warrants must be in effect before Arch may accept warrant exercises. There can
be no assurance that Arch will be able to have a current prospectus in effect
if this prospectus ceases to be current. See "Description of Securities--
Registration Rights".
There is no established trading market for warrants
The warrants will not be traded on the Nasdaq system, and we cannot predict
how much interest or sales volume there will be. Trading may be very sporadic.
12
<PAGE>
Charter provisions may impede takeovers of Arch
Arch's certificate of incorporation and by-laws provide for a classified
board of directors, the issuance of "blank check" preferred stock whose terms
may be fixed by Arch's board of directors without further stockholder approval,
a prohibition on stockholder action by written consent in lieu of a meeting and
certain procedural requirements governing stockholder meetings. Arch also has a
stockholders rights plan. In addition, Section 203 of the Delaware corporations
statute will, with certain exceptions, prohibit Arch from engaging in any
business combination with any "interested stockholder" for a three-year period
after such stockholder becomes an interested stockholder. Such provisions may
have the effect of delaying, making more difficult or preventing a change in
control or acquisition of Arch even though such a transaction might be
beneficial to Arch's stockholders. See "Description of Securities--Anti-
Takeover Provisions".
13
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are made under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
You should consider any statements that are not statements of historical fact
to be forward-looking statements. These include statements to the effect that
Arch or its management or board of directors "believe", "expect", "anticipate",
"plan" and similar expressions. A number of important factors could cause
actual results to differ materially from those expressed in any forward-looking
statements. See "Risk Factors". Arch undertakes no obligation to update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
DILUTION
The following table illustrates the per share dilution for shares purchased
through the exercise of warrants. Dilution is determined by subtracting pro
forma net tangible book value per share after the MobileMedia acquisition and
related transactions from the warrant exercise price per share.
Arch currently has a negative tangible net worth. The tangible net book value
of the outstanding shares of Arch's common stock as of March 31, 1999 was a
negative $836.6 million or a negative $31.13 per share. Net tangible book value
per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding,
assuming the conversion of all outstanding convertible securities at conversion
rates currently in effect. After giving effect to the MobileMedia acquisition,
including the sale by Arch of 108,728,673 shares of common stock and Class B
common stock for gross proceeds of $217.5 million and the issuance of an
additional 14,344,969 shares of common stock to unsecured creditors of
MobileMedia, the exercise of one warrant for one share would result in the pro
forma net tangible book value of Arch as of March 31, 1999 being a negative
$965.8 million, or a negative $6.44 per share. This represents an immediate and
substantial dilution of $9.45 per share from the warrant exercise price. For
purposes of illustration, we have assumed the exercise of one warrant for one
share because that assumption results in the maximum amount of dilution per
share. The exercise of additional warrants would increase net tangible book
value so that dilution per share would be less than $9.45 per share.
<TABLE>
<S> <C> <C>
Warrant exercise price........................................ $3.01
Net tangible book value per share before MobileMedia
acquisition and related transactions............... $(31.13)
Increase per share attributable to the MobileMedia
acquisition and related transactions............... 24.69
-------
Pro forma net tangible book value per share after MobileMedia
acquisition and related transactions....................... (6.44)
-----
Dilution to persons exercising warrants....................... $9.45
=====
</TABLE>
14
<PAGE>
USE OF PROCEEDS
The maximum proceeds that Arch will receive from any exercises of warrants
will be $145,262,398.33 if all the warrants are exercised. Arch expects to use
substantially all of any such proceeds for general corporate purposes,
including working capital and repayment of debt. See "Description of
Outstanding Indebtedness".
MARKET PRICE INFORMATION AND DIVIDEND POLICY
Arch's common stock has traded on the Nasdaq National Market under the symbol
"APGR" since January 1992. The following table sets forth for the periods
indicated the high and low reported sale prices per share of common stock on
the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
Fiscal 1997
First Quarter....................................... $10.00 $3.75
Second Quarter...................................... $ 8.375 $3.75
Third Quarter....................................... $ 9.50 $5.875
Fourth Quarter...................................... $ 9.125 $4.125
Fiscal 1998
First Quarter....................................... $ 6.125 $3.00
Second Quarter...................................... $ 6.938 $3.50
Third Quarter....................................... $ 5.000 $1.6875
Fourth Quarter ..................................... $ 1.75 $0.6875
Fiscal 1999
First Quarter ...................................... $ 2.3125 $1.125
Second Quarter (through June , 1999) .............. $ $
</TABLE>
The closing sale price per share of common stock on the Nasdaq National
Market on June , 1999 was $ .
On June , 1999, after consummation of the MobileMedia acquisition, there
were outstanding 136,164,119 shares of common stock held by stockholders of
record, 8,125,106 shares of Class B common stock held by stockholders of
record and 250,000 shares of Series C preferred stock held by [9] stockholders
of record. The number of record holders may not be indicative of the number of
beneficial holders because many shares are held by depositaries, brokers or
other nominees.
Neither Arch nor MobileMedia's former parent company has ever declared or
paid any cash dividends on its common stock. Arch anticipates that
substantially all of its earnings in the foreseeable future will be used to
finance the continued growth and development of its business and has no current
intention to pay cash dividends. Arch's future dividend policy will depend on
its earnings, capital requirements and financial condition, as well as
requirements of its financing agreements and other factors that Arch's board of
directors considers relevant. Arch's secured credit facility prohibits
declaration or payment of cash dividends to Arch stockholders without the
written consent of a majority of the lenders. The terms of other outstanding
indebtedness only permit the declaration or payment of cash dividends if
specified leverage and cash flow requirements are met. Arch does not currently
meet these requirements. In addition, the terms of Arch's outstanding Series C
preferred stock generally prohibit the payment of cash dividends on common
stock unless all accrued dividends due on to the Series C preferred stock have
been paid in full. See "Description of Securities" and "Description of
Outstanding Indebtedness".
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--ARCH
The following table sets forth selected historical consolidated financial and
operating data of Arch for the year ended August 31, 1994, the four months
ended December 31, 1993 and 1994, each of the five years ended December 31,
1998 and the three months ended March 31, 1998 and 1999. The selected financial
and operating data as of December 31, 1994, 1995, 1996, 1997 and 1998 and for
each of the five years ended December 31, 1998 have been derived from Arch's
audited consolidated financial statements and notes. The selected financial and
operating data as of March 31, 1999 and for the three months ended March 31,
1998 and 1999 have been derived from Arch's unaudited consolidated financial
statements and notes. You should read the following consolidated financial
information in conjunction with "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Arch's consolidated
financial statements and notes.
During 1994, Arch changed its fiscal year end from August 31 to December 31.
Arch was required to file a transition report on Form 10-K with audited
financial statements for the period September 1, 1994 through December 31, 1994
and has elected to include in the following table, for comparative purposes,
unaudited financial statements for the periods September 1, 1993 through
December 31, 1993 and January 1, 1994 through December 31, 1994.
In the following table, equity in loss of affiliate represents Arch's share
of net losses of USA Mobile Communications Holdings, Inc. for the period of
time from Arch's acquisition of its initial 37% interest in USA Mobile on May
16, 1995 through the completion of Arch's acquisition of USA Mobile on
September 7, 1995 and Arch's share of net losses of Benbow PCS Ventures, Inc.
since Arch's acquisition of Westlink Holdings, Inc. in May 1996. See "Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
The extraordinary item is an extraordinary charge resulting from prepayment
of indebtedness. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations".
Adjusted EBITDA, as determined by Arch, does not reflect restructuring
charge, equity in loss of affiliate, and extraordinary items; consequently
adjusted EBITDA may not necessarily be comparable to similarly titled data of
other paging companies. EBITDA is commonly used by analysts and investors as a
principal measure of financial performance in the paging industry. EBITDA is
also one of the primary financial measures used to calculate whether Arch and
its subsidiaries are in compliance with financial covenants under their debt
agreements. These covenants, among other things, limit the ability of Arch and
its subsidiaries to: incur additional indebtedness, advance funds to Benbow,
pay dividends, grant liens on its assets, merge, sell or acquire assets,
repurchase or redeem capital stock, incur capital expenditures and prepay
certain indebtedness. EBITDA is also one of the financial measures used by
analysts to value Arch. Therefore Arch management believes that the
presentation of EBITDA provides relevant information to investors. EBITDA
should not be construed as an alternative to operating income or cash flows
from operating activities as determined in accordance with GAAP or as a measure
of liquidity. Amounts reflected as EBITDA or adjusted EBITDA are not
necessarily available for discretionary use as a result of restrictions imposed
by the terms of existing indebtedness and limitations imposed by applicable law
upon the payment of dividends or distributions, among other things. See "Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operation".
16
<PAGE>
Adjusted EBITDA margin is calculated by dividing Arch's adjusted EBITDA by
total revenues less cost of products sold. EBITDA margin is a measure commonly
used in the paging industry to evaluate a company's EBITDA relative to total
revenues less cost of products sold as an indicator of the efficiency of a
company's operating structure.
<TABLE>
<CAPTION>
Four Months Three Months
Year Ended Ended Ended
August 31, December 31, Year Ended December 31, March 31,
---------- ------------------- ------------------------------------------------------- ---------------------
1994 1993 1994 1994 (1) 1995 (1) 1996 1997 1998 1998 1999
---------- --------- -------- -------- --------- ---------- ---------- ---------- --------- ----------
(dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Service, rental
and maintenance
revenues........ $ 55,139 $ 16,457 $ 22,847 $ 61,529 $ 138,466 $ 291,399 $ 351,944 $ 371,154 $ 91,397 $ 90,529
Product sales.... 12,108 2,912 5,178 14,374 24,132 39,971 44,897 42,481 10,642 10,359
-------- --------- -------- -------- --------- ---------- ---------- ---------- --------- ----------
Total revenues... 67,247 19,369 28,025 75,903 162,598 331,370 396,841 413,635 102,039 100,888
Cost of products
sold............ (10,124) (2,027) (4,690) (12,787) (20,789) (27,469) (29,158) (29,953) (7,366) (6,926)
-------- --------- -------- -------- --------- ---------- ---------- ---------- --------- ----------
57,123 17,342 23,335 63,116 141,809 303,901 367,683 383,682 94,673 93,962
Operating
expenses:
Service, rental
and
maintenance.... 13,123 3,959 5,231 14,395 29,673 64,957 79,836 80,782 20,189 20,293
Selling......... 10,243 3,058 4,338 11,523 24,502 46,962 51,474 49,132 11,870 13,011
General and
administrative. 17,717 5,510 7,022 19,229 40,448 86,181 106,041 112,181 28,318 25,626
Depreciation and
amortization... 16,997 5,549 6,873 18,321 60,205 191,871 232,347 221,316 53,714 51,118
Restructuring
charge......... -- -- -- -- -- -- -- 14,700 -- --
-------- --------- -------- -------- --------- ---------- ---------- ---------- --------- ----------
Operating income
(loss).......... (957) (734) (129) (352) (13,019) (86,070) (102,015) (94,429) (19,418) (16,086)
Interest and non-
operating
expenses, net... (4,112) (1,132) (1,993) (4,973) (22,522) (75,927) (97,159) (104,213) (25,366) (26,477)
Equity in loss of
affiliate....... -- -- -- -- (3,977) (1,968) (3,872) (5,689) (1,055) (3,200)
-------- --------- -------- -------- --------- ---------- ---------- ---------- --------- ----------
Income (loss)
before income
tax benefit,
extraordinary
item and
accounting
change.......... (5,069) (1,866) (2,122) (5,325) (39,518) (163,965) (203,046) (204,331) (45,839) (45,763)
Income tax
benefit......... -- -- -- -- 4,600 51,207 21,172 -- -- --
-------- --------- -------- -------- --------- ---------- ---------- ---------- --------- ----------
Income (loss)
before
extraordinary
item and
accounting
change.......... (5,069) (1,866) (2,122) (5,325) (34,918) (112,758) (181,874) (204,331) (45,839) (45,763)
Extraordinary
item............ -- -- (1,137) (1,137) (1,684) (1,904) -- (1,720) -- --
Cumulative effect
of accounting
change.......... -- -- -- -- -- -- -- -- -- (3,361)
-------- --------- -------- -------- --------- ---------- ---------- ---------- --------- ----------
Net income
(loss).......... $ (5,069) $ (1,866) $ (3,259) $ (6,462) $ (36,602) $ (114,662) $ (181,874) $ (206,051) $ (45,839) $ (49,124)
======== ========= ======== ======== ========= ========== ========== ========== ========= ==========
Other Operating
Data:
Adjusted EBITDA.. $ 16,040 $ 4,815 $ 6,744 $ 17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587 $ 34,296 $ 35,032
Adjusted EBITDA
margin.......... 28% 28% 29% 28% 33% 35% 35% 37% 36% 37%
Capital
expenditures,
excluding
acquisitions.... $ 25,657 $ 7,486 $ 15,279 $ 33,450 $ 60,468 $ 165,206 $ 102,769 $ 113,184 $ 21,319 $ 25,528
Cash flows
provided by
operating
activities...... $ 14,781 $ 5,306 $ 4,680 $ 14,155 $ 14,749 $ 37,802 $ 63,590 $ 81,105 $ 9,992 $ 12,379
Cash flows used
in investing
activities...... $(28,982) $ (7,486) $(34,364) $(55,860) $(192,549) $ (490,626) $ (102,769) $ (82,868) $ (21,319) $ (24,910)
Cash flows
provided by
(used in)
financing
activities...... $ 14,636 $ 11,290 $ 26,108 $ 29,454 $ 179,092 $ 452,678 $ 39,010 $ 68 $ 12,539 $ 23,000
Units in service
at end of
period.......... 410,000 288,000 538,000 538,000 2,006,000 3,295,000 3,890,000 4,276,000 4,016,000 4,329,000
<CAPTION>
As of
August 31, As of December 31, As of March 31,
---------- ------------------------------------------------------- ---------------------
1994 1994 1995 1996 1997 1998 1998 1999
---------- -------- --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Current assets... $ 6,751 $ 8,483 $ 33,671 $ 43,611 $ 51,025 $ 50,712 $ 4,540 $ 12,102
Total assets..... 76,255 117,858 785,376 1,146,756 1,020,720 904,285 993,977 883,432
Long-term debt,
less current
maturities...... 67,328 93,420 457,044 918,150 968,896 1,003,499 995,214 1,036,441
Redeemable
preferred stock. -- -- 3,376 3,712 -- -- -- --
Stockholders'
equity
(deficit)....... (3,304) 9,368 246,884 147,851 (33,255) (213,463) (78,796) (262,392)
</TABLE>
17
<PAGE>
The following table reconciles net income to the presentation of Arch's
adjusted EBITDA:
<TABLE>
<CAPTION>
Four Months
Year Ended Ended Three Months
August 31, December 31, Year Ended December 31, Ended March 31,
---------- ---------------- -------------------------------------------------- ------------------
1994 1993 1994 1994 1995 1996 1997 1998 1998 1999
---------- ------- ------- ------- -------- --------- --------- --------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss). $(5,069) $(1,866) $(3,259) $(6,462) $(36,602) $(114,662) $(181,874) $(206,051) $(45,839) $(49,124)
Interest and non-
operating
expenses, net.... 4,112 1,132 1,993 4,973 22,522 75,927 97,159 104,213 25,366 26,477
Income tax
benefit.......... -- -- -- -- (4,600) (51,207) (21,172) -- -- --
Depreciation and
amortization..... 16,997 5,549 6,873 18,321 60,205 191,871 232,347 221,316 53,714 51,118
Restructuring
charge........... -- -- -- -- -- -- -- 14,700 -- --
Equity in loss of
affiliate........ -- -- -- -- 3,977 1,968 3,872 5,689 1,055 3,200
Extraordinary
Item............. -- -- 1,137 1,137 1,684 1,904 -- 1,720 -- --
Cumulative effect
of accounting
charge........... -- -- -- -- -- -- -- -- -- 3,361
------- ------- ------- ------- -------- --------- --------- --------- -------- --------
Adjusted EBITDA... $16,040 $ 4,815 $ 6,744 $17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587 $ 34,296 $ 35,032
======= ======= ======= ======= ======== ========= ========= ========= ======== ========
</TABLE>
ARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
You should read the following discussion and analysis in conjunction with
Arch's consolidated financial statements and notes.
Arch derives most of its revenues from fixed monthly or other periodic fees
charged to subscribers for paging services. Such fees are not dependent on
usage. As long as a subscriber remains on service, operating results benefit
from the recurring payments of the fixed periodic fees without incurrence of
additional selling expenses by Arch. Arch's service, rental and maintenance
revenues and the related expenses exhibit substantially similar growth trends.
Arch's average revenue per subscriber has declined over the last three years
for two principal reasons:
. an increase in the number of subscriber owned and reseller owned units
for which Arch receives no recurring equipment revenue and
. an increase in the number of reseller customers who purchase airtime at
wholesale rates.
The reduction in average paging revenue per subscriber resulting from these
trends has been more than offset by the elimination of associated expenses so
that Arch's margins have improved over this period. Furthermore, recent data
indicates that the rate of decline in revenue per customer has slowed.
Arch has achieved significant growth in units in service and adjusted EBITDA
through a combination of internal growth and acquisitions. From January 1, 1996
through March 31, 1999, Arch's total number of units in service grew at a
compound rate on an annualized basis of 26.7%. For the same period on an
annualized basis, Arch's compound rate of internal growth in units in service
was 22.3%, excluding units added through acquisitions. Arch's total revenues
have increased from $331.4 million in the year ended December 31, 1996 to
$396.8 million in the year ended December 31, 1997 and to $413.6 million in the
year ended December 31, 1998. Over the same periods, through operating
efficiencies and economies of scale, Arch has been able to reduce its per pager
operating costs to enhance its competitive position in its markets. Due to the
rapid growth in its subscriber base, Arch has incurred significant selling
expenses, which are charged to operations in the period incurred. Arch had net
losses of $114.7 million in the year ended December 31, 1996, $181.9 million in
the year ended December 31, 1997 and $206.1 million in the year ended December
31, 1998, as a result of significant depreciation and amortization expenses
related to acquired and developed assets and interest charges associated with
indebtedness. However, as its subscriber base has grown, Arch's operating
results have improved, as evidenced by an increase in Arch Adjusted EBITDA from
$105.8 million in the year ended December 31, 1996 to $130.3 million in the
year ended December 31, 1997 and to $141.6 million in the year ended December
31, 1998.
18
<PAGE>
EBITDA is a commonly used measure of financial performance in the paging
industry. Adjusted EBITDA is also one of the financial measures used to
calculate whether Arch and its subsidiaries are in compliance with the
financial covenants under their debt agreements. Adjusted EBITDA should not be
construed as an alternative to operating income or cash flows from operating
activities as determined in accordance with GAAP. One of Arch's financial
objectives is to increase its adjusted EBITDA, since this is a significant
source of funds for servicing indebtedness and for investment in continued
growth, including purchase of units and paging system equipment, construction
and expansion of paging systems, and possible acquisitions. Adjusted EBITDA, as
determined by Arch, may not necessarily be comparable to similarly titled data
of other paging companies. Amounts reflected as adjusted EBITDA are not
necessarily available for discretionary use as a result of restrictions imposed
by the terms of existing or future indebtedness, including the repayment of
such indebtedness or the payment of associated interest, limitations imposed by
applicable law upon the payment of dividends or distributions or capital
expenditure requirements.
The potential effects of the MobileMedia acquisition on Arch are described
under "Business--Business Strategy".
Divisional Reorganization
To reduce redundancy and take advantage of various operating efficiencies,
Arch is reorganizing its operating divisions over a period of 18 to 24 months.
Arch has consolidated its former Midwest, Western, and Northern divisions into
four existing operating divisions, and is in the process of consolidating
regional administrative support functions, such as customer service,
collections, inventory and billing. Arch expects to complete the divisional
reorganization in mid to late 2000.
Arch estimates that the divisional reorganization, once fully implemented,
will result in annual cost savings of approximately $15.0 million. These cost
savings will consist primarily of a reduction in compensation expense of
approximately $11.5 million and a reduction in rental expense of facilities and
general and administrative costs of approximately $3.5 million. Arch expects to
reinvest a portion of these cost savings to expand its sales activities,
although to date the extent and cost of this reinvestment has not yet been
determined.
In connection with the divisional reorganization, Arch (1) anticipates a net
reduction of approximately 10% of its workforce, (2) is closing certain office
locations and redeploying other real estate assets and (3) recorded a
restructuring charge of $14.7 million during 1998. The restructuring charge
consisted of approximately (1) $9.7 million for employee severance, (2) $3.5
million for lease obligations and terminations and (3) $1.5 million of other
costs. The severance costs and lease obligations will require cash outlays
throughout the 18 to 24 month restructuring period. Arch will fund these cash
outlays from operations or its secured credit facility. Due to the MobileMedia
acquisition, Arch's management is reassessing the size and scope of the
divisional reorganization. Arch is also determining the size and scope of
additional restructuring reserves required as a direct result of the
MobileMedia acquisition. There can be no assurance that the desired cost
savings will be achieved or that the anticipated reorganization of Arch's
business will be accomplished smoothly, expeditiously or successfully. The
difficulties of such reorganization may be increased by the need to integrate
MobileMedia's operations in multiple locations and to combine two corporate
cultures. The inability to successfully integrate the operations of MobileMedia
could have a material adverse effect on Arch. See Note 9 to Arch's consolidated
financial statements.
19
<PAGE>
Results of Operations
The following table presents selected items from Arch's consolidated
statements of operations as a percentage of net revenues and certain other
information for the periods indicated. Net revenues are total revenues less
cost of products sold.
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
-------------------------------- -------------------
1996 1997 1998 1998 1999
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues.......... 109.0 % 107.9 % 107.8 % 107.8% 107.4%
Cost of products sold... (9.0) (7.9) (7.8) (7.8) (7.4)
--------- --------- -------- -------- --------
Net revenues............ 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Service, rental and
maintenance............ 21.4 21.7 21.1 21.3 21.6
Selling................. 15.4 14.0 12.8 12.6 13.8
General and
administrative......... 28.4 28.8 29.2 29.9 27.3
Depreciation and
amortization........... 63.1 63.2 57.7 56.7 54.4
Restructuring charge.... -- -- 3.8 -- --
--------- --------- -------- -------- --------
Operating income (loss). (28.3)% (27.7)% (24.6)% (20.5)% (17.1)%
========= ========= ======== ======== ========
Net income (loss)....... (37.7)% (49.5)% (53.7)% (48.4)% (52.3)%
========= ========= ======== ======== ========
Arch adjusted EBITDA.... 34.8 % 35.4 % 36.9 % 36.2 % 37.3 %
========= ========= ======== ======== ========
Cash flows provided by
operating activities... $ 37,802 $ 63,590 $ 81,105 $ 9,992 $ 12,379
Cash flows used in in-
vesting activities..... $(490,626) $(102,769) $(82,868) $(21,319) $(24,910)
Cash flows provided by
financing activities... $ 452,678 $ 39,010 $ 68 $ 12,539 $ 23,000
Annual service, rental
and maintenance
expenses per pager..... $ 25 $ 22 $ 20 $ 20 $ 19
</TABLE>
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998.
Results of Operations
Total revenues decreased $1.2 million, or 1.1%, to $100.9 million in the
three months ended March 31, 1999 from $102.0 million in the three months ended
March 31, 1998, and net revenues decreased $0.7 million or 0.8% from $94.7
million to $94.0 million over the same period. Total revenues and net revenues
in the 1999 period were adversely affected by a general slowing of paging
industry growth, compared to prior years. Revenues were also adversely affected
by: (1) Arch's decision in the fourth quarter of 1998, in anticipation of the
MobileMedia acquisition, not to replace normal attrition among direct sales
personnel; (2) the reduced effectiveness of the reseller channel of
distribution; and (3) reduced sales through Arch's company-owned stores.
Service, rental and maintenance revenues, which consist primarily of recurring
revenues associated with the sale or lease of pagers, decreased $0.9 million or
1.0% to $90.5 million in the three months ended March 31, 1999 from $91.4
million in the three months ended March 31, 1998. Maintenance revenues
represented less than 10% of total service, rental and maintenance revenues in
the three months ended March 31, 1999 and 1998. Arch does not differentiate
between service and rental revenues. Product sales, less cost of products sold,
increased 4.8% to $3.4 million in the three months ended March 31, 1999 from
$3.3 million in the three months ended March 31, 1998.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $20.3 million, or 21.6%
of net revenues, in the three months ended March 31, 1999 from $20.2 million,
or 21.3% of net revenues, in the three months ended March 31, 1998. The
increase was due primarily to increased expenses associated with system
expansions and the provision of paging services to a greater number of
subscribers. As existing paging systems become more populated through the
addition of new subscribers, the fixed costs of operating these paging systems
are spread over a greater subscriber base. Annualized service, rental and
maintenance expenses per subscriber decreased to $19 in the three months ended
March 31, 1999 from $20 in the three months ended March 31, 1998.
20
<PAGE>
Selling expenses increased to $13.0 million, or 13.8% of net revenues, in the
three months ended March 31, 1999 from $11.9 million, or 12.5% of net revenues,
in the three months ended March 31, 1998 due primarily to increased hiring of
direct sales personnel.
General and administrative expenses decreased to $25.6 million, or 27.3% of
net revenues, in the three months ended March 31, 1999 from $28.3 million, or
29.9% of net revenues, in the three months ended March 31, 1998. The decrease
was due primarily to reduction of headcount as a result of the divisional
reorganization which began in June 1998.
Depreciation and amortization expenses decreased to $51.1 million, or 54.4%
of net revenues, in the three months ended March 31, 1999 from $53.7 million,
or 56.7% of net revenues, in the three months ended March 31, 1998. These
expenses principally reflect Arch's acquisitions of paging businesses in prior
periods accounted for as purchases, and investment in pagers and other system
expansion equipment to support growth.
Operating loss decreased to $16.1 million in the three months ended March 31,
1999 from $19.4 million in the three months ended March 31, 1998 as a result of
the factors outlined above.
Net interest expense increased to $26.5 million in the three months ended
March 31, 1999 from $25.4 million in the three months ended March 31, 1998. The
increase was attributable to an increase in Arch's average outstanding debt.
Interest expense in the three months ended March 31, includes approximately
$9.9 million and $8.9 million in 1998 of non-cash interest accretion on Arch's
10 7/8% senior discount notes due 2008.
Initial application of SOP 98-5 resulted in a $3.4 million charge which was
reported as the cumulative effect of a change in accounting principle. See "--
Recent and Pending Accounting Pronouncements".
Net losses increased to $49.1 million in the three months ended March 31,
1999 from $45.8 million in the three months ended March 31, 1998 as a result of
the factors outlined above.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997.
Total revenues increased to $413.6 million, a 4.2% increase, in 1998 from
$396.8 million in 1997. Net revenues increased to $383.7 million, a 4.4%
increase, in 1998 from $367.7 million in 1997. Total revenues and net revenues
in 1998 were adversely affected by a general slowing of industry growth,
compared to prior years. Although industry sources estimate that the number of
paging units in service grew at an annual rate of approximately 25% between
1992 and 1997, growth in basic paging services has slowed considerably since
1997. Revenues were also adversely affected in the fourth quarter of 1998 by:
. Arch's decision, in anticipation of the MobileMedia acquisition, not to
replace normal attrition among direct sales personnel
. the reduced effectiveness of Arch's reseller channel of distribution
. reduced sales through Arch-operated retail stores.
Arch expects revenue to continue to be adversely affected in 1999 due to
these factors.
Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of units, increased to
$371.2 million, a 5.5% increase, in 1998 from $351.9 million in 1997. These
increases in revenues were due primarily to the increase, through internal
growth, in the number of units in service from 3.9 million at December 31, 1997
to 4.3 million at December 31, 1998. Maintenance revenues represented less than
10% of total service, rental and maintenance revenues in 1998 and 1997. Arch
does not differentiate between service and rental revenues. Product sales, less
cost of products sold, decreased to $12.5 million, a 20.4% decrease, in 1998
from $15.7 million in 1997, as a result of a decline in the average revenue per
pager sold.
21
<PAGE>
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $80.8 million, or 21.1%
of net revenues, in 1998 from $79.8 million, or 21.7% of net revenues, in 1997.
The increase was due primarily to increased expenses associated with system
expansions and an increase in the number of units in service. As existing
paging systems became more populated through the addition of new subscribers,
the fixed costs of operating these paging systems are spread over a greater
subscriber base. Annualized service, rental and maintenance expenses per
subscriber were $20.00 in 1998 compared to $22.00 in 1997.
Selling expenses decreased to $49.1 million, or 12.8% of net revenues, in
1998 from $51.5 million, or 14.0% of net revenues, in 1997. The decrease was
due primarily to a decrease in the number of net new units in service and to
nonrecurring marketing costs incurred in 1997 to promote Arch's new Arch Paging
brand identity. The number of net new units in service resulting from internal
growth decreased by 35.1% in 1998 compared to 1997 primarily due to the factors
set forth above that adversely affect revenues. Arch expects its selling
expenses to increase in 1999 due to increased hiring of direct sales personnel.
General and administrative expenses increased to $112.2 million, or 29.2% of
net revenues, in 1998, from $106.0 million, or 28.8% of net revenues, in 1997.
The increase was due primarily to administrative and facility costs associated
with supporting more units in service.
Depreciation and amortization expenses decreased to $221.3 million in 1998
from $232.3 million in 1997. These expenses principally reflect Arch's
acquisitions of paging businesses in prior periods accounted for as purchases.
They also reflect investment in units and other system expansion equipment to
support growth.
Operating losses were $94.4 million in 1998 compared to $102.0 million in
1997, as a result of the factors outlined above.
Net interest expense increased to $104.2 million in 1998 from $97.2 million
in 1997. The increase is principally attributable to an increase in Arch's
outstanding debt. Interest expense for 1998 includes approximately $37.0
million of interest which accretes on Arch's 10 7/8% senior discount notes even
though the cash payment of the interest is deferred. Interest expense for 1997
includes approximately $33.3 million of accretion on these notes.
Arch recognized an income tax benefit of $21.2 million in 1997. This benefit
represented the tax benefit of operating losses incurred after the acquisitions
of USA Mobile and Westlink which were available to offset deferred tax
liabilities arising from those acquisitions. The tax benefit of these operating
losses was fully recognized during 1997. Accordingly, Arch has established a
valuation reserve against its deferred tax assets which reduced the income tax
benefit to zero as of December 31, 1998. Arch does not expect to recover its
deferred tax asset in the foreseeable future and will continue to increase its
valuation reserve accordingly. See Note 5 to Arch's consolidated financial
statements.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $206.1 million in 1998 from $181.9 million in 1997, as
a result of the factors outlined above.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues increased $65.5 million, or 19.8%, to $396.8 million in 1997
from $331.4 million in 1996 and net revenues increased $63.8 million, or 21.0%,
from $303.9 million to $367.7 million over the same period. Service, rental and
maintenance revenues increased $60.5 million, or 20.8%, to $351.9 million in
1997 from $291.4 million in 1996. These increases in revenues were due
primarily to the increase in the number of units in service from 3.3 million at
December 31, 1996 to 3.9 million at December 31, 1997 and the full year
22
<PAGE>
impact of the Westlink acquisition which was completed in May 1996. Maintenance
revenues represented less than 10% of total service, rental and maintenance
revenues in 1996 and 1997. Product sales, less cost of products sold, increased
25.9% to $15.7 million in 1997 from $12.5 million in 1996 as a result of a
greater number of pager unit sales.
Service, rental and maintenance expenses increased to $79.8 million, or 21.7%
of net revenues, in 1997 from $65.0 million, or 21.4% of net revenues, in 1996.
The increase was due primarily to increased expenses associated with system
expansions and the provision of paging services to a greater number of
subscribers. Annual service, rental and maintenance expenses per subscriber
decreased to $22.00 in 1997 from $25.00 in 1996.
Selling expenses increased to $51.5 million, or 14.0% of net revenues, in
1997 from $47.0 million, or 15.4% of net revenues, in 1996. The increase in
selling expenses was due to the full year impact of the Westlink acquisition
and the marketing costs incurred to promote Arch's Arch Paging brand identity.
Arch's selling cost per net new pager in service increased to $87.00 in 1997
from $58.00 in 1996, primarily due to fixed selling costs and increased
marketing costs being spread over fewer net new units put into service.
General and administrative expenses increased to $106.0 million, or 28.8% of
net revenues, in 1997 from $86.2 million, or 28.4% of net revenues, in 1996.
The increase in absolute dollars was due primarily to increased expenses
associated with supporting more units in service, including the full year
impact of Westlink, as well as expenses associated with the establishment of
Arch's national services division. See "Business-- Subscribers and Marketing--
Arch".
Depreciation and amortization expenses increased to $232.3 million, or 63.2%
of net revenues, in 1997 from $191.9 million, or 63.1% of net revenues, in
1996. These expenses reflect Arch's acquisitions of paging businesses,
accounted for as purchases, and continued investment in units and other system
expansion equipment to support continued growth.
Operating loss increased to $102.0 million in 1997 from $86.1 million in 1996
as a result of the factors outlined above.
Net interest expense increased to $97.2 million in 1997 from $75.9 million in
1996. The increase was attributable to an increase in Arch's average
outstanding debt. Interest expense includes approximately $33.0 million in 1997
and $24.0 million in 1996, of non-cash interest accretion on Arch's 10 7/8%
senior discount notes due 2008 under which semi-annual interest payments
commence on September 15, 2001. See Note 3 to Arch's consolidated financial
statements.
Arch recognized income tax benefits of $21.2 million in 1997 and $51.2
million in 1996, representing the tax benefit of operating losses subsequent to
the acquisitions of USA Mobile in September 1995 and Westlink in May 1996 which
were available to offset deferred tax liabilities arising from Arch's
acquisitions of USA Mobile and Westlink.
During 1996, Arch recognized an extraordinary charge of $1.9 million,
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under a prior credit facility.
Net loss increased to $181.9 million in 1997 from $114.7 million in 1996 as a
result of the factors outlined above. Included in the net loss were charges of
$3.9 million for 1997 and $2.0 million for 1996, representing Arch's pro rata
share of Benbow's losses since the Westlink acquisition in May 1996.
Liquidity and Capital Resources
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
paging units and paging system equipment, to service debt and to finance
acquisitions.
23
<PAGE>
Capital Expenditures and Commitments
Excluding acquisitions of paging businesses, Arch's capital expenditures were
$165.2 million in 1996, $102.8 million in 1997 and $113.2 million in 1998. To
date, Arch has funded its capital expenditures with net cash provided by
operating activities and the incurrence of debt. Arch believes that it will
have sufficient cash available from operations and credit facilities to fund
its capital expenditures for the remainder of 1999.
Arch's 1998 capital expenditures primarily involved the purchase of paging
units, paging system equipment and transmission equipment, information systems,
advances to Benbow, as described below, and capitalized financing costs.
Arch estimates the amount of capital that will be required to fund capital
expenditures by the combined company for 1999 will be approximately $140.0
million. Such expenditures will be used primarily for subscriber equipment,
network infrastructure, information systems and the construction of certain
markets for a nationwide N-PCS network. However, the actual amount of capital
to be required by the combined company will depend upon a number of factors.
These include subscriber growth, the type of paging devices and services
demanded by customers, service revenues, technological developments, marketing
and sales expenses, competitive conditions, the nature and timing of Arch's N-
PCS strategy, and acquisition strategies and opportunities. Arch believes it
will have sufficient cash available from operations and from borrowings under
the secured credit facility to fund anticipated capital expenditures of the
combined company for 1999.
Arch is obligated to advance to Benbow sufficient funds to service debt
obligations incurred by Benbow in connection with its acquisition of its N-PCS
licenses and to finance construction of an N-PCS system unless funds 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 also
funding ongoing obligations in connection with Benbow's acquisition of Page
Call in June 1998. The total purchase price for Benbow's licenses, together
with the purchase price of licenses acquired from Page Call, net of the
discounts, was $42.5 million. Arch estimates that the total cost to Benbow of
servicing its license-related debt obligations and constructing its N-PCS
system (including the effect of the Page Call acquisition), if pursued, would
be approximately $100.0 million over the next five years. As of March 31, 1999,
Arch had advanced approximately $23.7 million to Benbow. Arch's advances to
Benbow are secured by Benbow's assets, bear interest at an interest rate equal
to that paid by Arch on its senior debt, are due on demand and must be repaid
prior to any distribution of profits by Benbow. With certain exceptions, Arch
has agreed not to exercise its right to demand repayment of such advances prior
to the occurrence of a default.
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 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's Investments in N-PCS Licenses".
Other Commitments and Contingencies
Interest payments on the $467.4 million principal amount at maturity of
Arch's discount notes commence September 15, 2001. Arch expects to service such
interest payments out of cash made available to it by its subsidiaries. Based
on the principal amount of Arch's discount notes now outstanding, such interest
payments will equal $25.4 million on March 15 and September 15 of each year
until scheduled maturity on March 15, 2008. A default by Arch in its payment
obligations under the discount notes could have a material adverse effect on
the business, financial condition, results of operations or prospects of Arch.
See "Risk Factors--High degree of leverage burdens operations".
24
<PAGE>
On June 29, 1998, Benbow acquired Page Call's outstanding stock by issuing to
Page Call's former stockholders preferred stock and a 12% promissory note for
$17.2 million. Benbow also agreed to pay one of Page Call's stockholders
$911,000 over five years for consulting services. Benbow's preferred stock and
promissory note are exchangeable for common stock
. at any time at the holders' option, at an exchange price equal to the
higher of (1) $13.00 per share or (2) the market price of common stock,
. mandatorily on April 8, 2000, at the then prevailing market price of
common stock, or
. automatically at an exchange price of $13.00 per share, if the market
price of common stock equals or exceeds $13.00 for 20 consecutive
trading days.
Arch is permitted to require Benbow to redeem its preferred stock and
promissory note at any time for cash. Arch guaranteed all obligations of Benbow
under the Benbow preferred stock, promissory note and consulting agreement
described above. Arch may elect to make payments under its guarantee in common
stock or cash. Benbow's redemption of its preferred stock and promissory note
for cash, or Arch's payment of cash pursuant to its guarantees of Benbow's
preferred stock and promissory note, would depend upon the availability of
capital and any restrictions contained in applicable debt instruments and under
the Delaware corporations statute, which currently would not permit any such
cash redemptions or payments. If Arch issues common stock or pays cash pursuant
to its guarantees, Arch will receive from Benbow a promissory note and non-
voting, non-convertible preferred stock of Benbow with an annual yield of 14.5%
payable upon an acquisition of Benbow or earlier to the extent that available
cash and applicable law permit. Page Call's stockholders received customary
registration rights for any shares of common stock issued in exchange for
Benbow's preferred stock and promissory note or pursuant to Arch's guarantees.
Sources of Funds
Arch's net cash provided by operating activities was $37.8 million in 1996,
$63.6 million in 1997, $81.1 million in 1998 and $12.4 million in the three
months ended March 31, 1999. Arch expects to fund its capital needs for the
foreseeable future with borrowings under current and future credit facilities,
net cash provided by operations and, depending on Arch's needs and market
conditions, possible sales of equity or debt securities. For additional
information, see Note 3 to Arch's consolidated financial statements. Arch's
ability to access future borrowings will depend, in part, on its ability to
continue to grow its EBITDA. At June , 1999, after giving effect to the
MobileMedia acquisition and the associated drawdown of funds, Arch had
approximately $100.0 million in available borrowing capacity under its secured
credit facility.
Secured Credit Facility
In June 1998 and March 1999, Arch amended an existing credit facility to
establish senior secured revolving credit and term loan facilities with a
wholly owned subsidiary as borrower in the aggregate amount of $581.0 million
consisting of:
. Tranche A: a $175.0 million reducing revolving credit facility;
. Tranche B: a $100.0 million 364-day revolving credit facility under which
the principal amount outstanding on June 27, 1999 will convert to a term
loan; and
. Tranche C: a $306.0 million term loan of which $125.0 million was made
available in a single drawing on June 29, 1998 and $181.0 million was
made available in a single drawing on the closing date of the MobileMedia
acquisition.
The amount of these facilities will reduce as time passes. See "Description
of Outstanding Indebtedness--Secured Credit Facility".
Recent Issuances of Notes
In June 1998, a subsidiary of Arch issued $130.0 million principal amount of
12 3/4% senior notes due 2007 for net proceeds of $127.5 million, before
deducting selling discounts and expenses, in a private placement made pursuant
to Rule 144A under the Securities Act. These notes were sold at an initial
price to
25
<PAGE>
investors of 98.049% of the face amount of their investment. On June , 1999,
the same subsidiary received the proceeds of an offering of $147.0 million
principal amount of 13 3/4% senior notes due 2008 to qualified institutional
buyers under Rule 144A. The notes were sold at 95.091% of the face amount for
proceeds of $139.8 million, before selling discounts and expenses. See
"Description of Indebtedness--Subsidiary's Senior Notes".
Sandler Equity Investment
On June 29, 1998, two partnerships managed by Sandler Capital Management
Company, Inc., an investment management firm, together with certain other
private investors, made an equity investment in Arch of $25.0 million in the
form of Series C preferred stock. Arch used such amount to repay indebtedness
under a former credit facility as part of the establishment of the current
secured credit facility. See "Description of Securities--Series C Preferred
Stock".
During 1999 Arch will accrue dividends of $2.1 million on the Series C
preferred stock, payable upon redemption or conversion of the Series C
preferred stock or liquidation of Arch.
Inflation
Inflation has not had a material effect on Arch's operations to date. Paging
systems equipment and operating costs have not increased in price and Arch's
pager costs have declined substantially in recent years. This reduction in
costs has generally been reflected in lower pager prices charged to subscribers
who purchase their units. Arch's general operating expenses, such as salaries,
employee benefits and occupancy costs, are subject to normal inflationary
pressures.
Year 2000 Compliance
Arch has created a cross-functional Y2K project group to work on the Year
2000 problem. The Y2K project group is finishing its analysis of external and
internal areas likely to be affected by the Year 2000 problem. It has
classified the identified areas of concern into either a mission critical or
non-mission critical status. For external areas, Arch has distributed surveys
to its primary and secondary vendors. The surveys requested information about
hardware and/or software supplied by information technology vendors as well as
non-information technology system vendors that might use embedded technologies
in their systems or products. Arch requested information regarding the vendor's
Year 2000 compliance planning, timing, status, testing and contingency
planning. As part of its evaluation of Year 2000 vulnerability related to its
pager and paging equipment vendors, Arch has discussed with them their efforts
to identify potential issues associated with their equipment and/or software.
Internally, Arch is completing an inventory audit of hardware and software
testing for both its corporate and divisional operations. These areas of
operation include: information systems, finance, operations, inventory,
billing, pager activation and purchasing. Additional testing is scheduled to
conclude in the second quarter of 1999.
The costs which Arch expects to incur to replace existing hardware, software
and paging equipment will be capitalized and amortized in accordance with
Arch's existing accounting policies. Maintenance or modification costs will be
expensed as incurred. Arch has upgraded hardware to enable compliance testing
to be performed on dedicated test equipment in an isolated production-like
environment. Based on Arch's costs incurred to date, as well as estimated costs
to be incurred later in 1999, Arch does not expect that resolution of the Year
2000 problem will have a material adverse effect on its results of operations
and financial condition. Costs of the Year 2000 project are based on current
estimates and actual results may vary significantly from such estimates once
plans are further developed and implemented.
For a discussion of risks associated with the Year 2000 problem, see "Risk
Factors--Impact of the Year 2000 issue is not fully known".
26
<PAGE>
Arch is designing and implementing contingency plans relating to the Year
2000 problem. To this end, each department is identifying the likely risks and
determining commercially reasonable solutions. Arch's Y2K project group is
collecting and reviewing the determinations on both a department-by-department
and company-wide basis. Arch intends to complete its Year 2000 contingency
planning during calendar year 1999.
Recent and Pending Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Arch adopted SFAS No. 130 in 1998. The
adoption of this standard did not have an effect on its reporting of income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Arch adopted SFAS No. 131 for its year ending December 31, 1998.
Adoption of this standard did not have a significant impact on Arch's
reporting.
In March 1998, the Accounting Standards Committee of the Financial Accounting
Standards Board issued Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes
criteria for capitalizing costs of computer software developed or obtained for
internal use. Arch adopted SOP 98-1 in 1998. The adoption of SOP 98-1 has not
had a material effect on Arch's financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities". SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. Arch adopted SOP 98-5
effective January 1, 1999. The initial application of SOP 98-5 resulted in a
$3.4 million charge which was reported as the cumulative effect of a change in
accounting principle. The charge represents the unamortized portion of start-up
and organization costs which had been deferred in prior years. The adoption of
SOP 98-5 is not expected to have a material effect on Arch's financial position
or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings. Arch intends to
adopt this standard effective January 1, 2000. Arch has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements; however, adopting
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
27
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--MOBILEMEDIA
The following table sets forth selected historical consolidated financial and
operating data of MobileMedia for each of the five years in the period ended
December 31, 1998 and the three months ended March 31, 1998 and 1999. The
historical financial and operating data presented under consolidated statements
of operations data and consolidated balance sheet data for each of the five
years in the period ended December 31, 1998 have been derived from
MobileMedia's audited consolidated financial statements and notes. The selected
financial and operating data as of March 31, 1998 and for the three months
ended March 31, 1998 and 1999 have been derived from MobileMedia's unaudited
consolidated financial statements and notes. You should read the following
consolidated financial information in conjunction with "MobileMedia
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and MobileMedia's consolidated financial statements and notes.
MobileMedia completed its acquisition of the paging and wireless messaging
business of Dial Page, Inc. on August 31, 1995 for a purchase price of $187.4
million. The consolidated statement of operations data includes Dial Page's
results of operations from that date. See Note 3 to MobileMedia's consolidated
financial statements and "Business--Predecessors to the Combined Company;
Events Leading Up to MobileMedia's Bankruptcy Filings". MobileMedia completed
the acquisition of Mobile Communications Corporation of America, commonly known
as MobileComm, on January 4, 1996 for a purchase price of $928.7 million. The
consolidated statement of operations data includes MobileComm results of
operations from that date. See Note 3 to MobileMedia's consolidated financial
statements and "Business--Predecessors to the Combined Company; Events Leading
Up to MobileMedia's Bankruptcy Filings".
In the following table, services, rents and maintenance, selling, general and
administrative expenses includes non-recurring adjustments to record executive
separation expenses of $2.5 million in 1994 and $0.7 million in 1995.
Impairment of long-lived assets includes a non-recurring adjustment to
record, effective December 31, 1996, a $792.5 million write-down of intangible
assets based upon MobileMedia's determination that an impairment of long-lived
assets existed pursuant to Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". See Note 2 to MobileMedia's consolidated financial
statements.
Restructuring costs includes non-recurring adjustments to record
restructuring costs related to MobileMedia's bankruptcy filing on January 30,
1997.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, amortization of deferred gain on
tower sale, impairment of long-lived assets and restructuring costs. EBITDA is
a financial measure commonly used in MobileMedia's industry and should not be
construed as an alternative to operating income, as determined in accordance
with GAAP, as an alternative to cash flows from operating activities, as
determined in accordance with GAAP, or as a measure of liquidity. MobileMedia's
adjusted EBITDA is, however, the primary financial measure by which
MobileMedia's covenants are calculated under the agreements governing
MobileMedia's indebtedness. EBITDA is also one of the financial measures used
by analysts to value MobileMedia. MobileMedia's adjusted EBITDA in 1996
excludes the impact of the $792.5 million writedown of intangible assets.
MobileMedia's adjusted EBITDA may not necessarily be comparable to similarly
titled data of other paging companies.
Adjusted EBITDA margin is calculated by dividing MobileMedia's adjusted
EBITDA by total revenues less cost of products sold. EBITDA margin is a measure
commonly used in the paging industry to evaluate a company's EBITDA relative to
total revenues less cost of products sold as an indicator of the efficiency of
a company's operating structure. MobileMedia's adjusted EBITDA margin in 1996
excludes the impact of the $792.5 million writedown of intangible assets.
The interim financial information as of March 31, 1999 and for the three
months ended March, 1998 and 1999 contained in this prospectus is unaudited.
However, in the opinion of MobileMedia management, it includes all
28
<PAGE>
adjustments of a normal recurring nature that are necessary for a fair
presentation of the financial position, results of operations and cash flows
for the periods presented. Results of operations for the interim periods
presented are not necessarily indicative of results of operations for the
entire year or any future period.
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended
Year Ended December 31, March 31,
----------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ---------- ---------- ----------
MobileMedia
-----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Total revenues.......... $ 203,149 $ 252,996 $ 640,710 $ 527,392 $ 449,681 $ 115,163 $ 105,824
Cost of products sold... (18,705) (26,885) (72,595) (35,843) (22,162) (5,513) (3,516)
---------- ---------- ----------- ---------- ---------- ---------- ----------
184,444 226,111 568,115 491,549 427,519 109,650 102,308
Services, rents and
maintenance, selling,
and general and
administrative
expenses............... 136,672 164,037 459,474 388,476 305,698 79,510 72,694
Reduction of liabilities
subject to compromise . -- -- -- -- (10,461) -- (3,050)
Impairment of long-lived
assets................. -- -- 792,478 -- -- -- --
Restructuring costs..... -- -- 4,256 19,811 18,624 4,558 5,067
Depreciation and
amortization........... 67,651 71,408 348,698 140,238 116,459 31,671 27,969
Amortization of deferred
gain on tower sale..... -- -- -- -- (1,556) -- (1,167)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Operating (loss) income. (19,879) (9,334) (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense)
Interest expense........ (18,237) (31,745) (92,663) (67,611) (53,043) (14,626) (10,018)
(Loss) gain on sale of
assets................. 1,049 -- 68 3 94,165 1 (323)
Other................... -- -- -- -- (338) -- 2,063
---------- ---------- ----------- ---------- ---------- ---------- ----------
Total other income
(expense)............. (17,188) (31,745) (92,595) (67,608) 40,784 (14,625) (8,278)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Income (loss) before
income tax provision
(benefit).............. (37,067) (41,079) (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income tax benefit
(provision)............ -- -- 69,442 -- (3,958) -- (209)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (37,067) $ (41,079) $(1,059,944) $ (124,584) $ 35,581 $ (20,714) $ (7,692)
========== ========== =========== ========== ========== ========== ==========
Other Data
Adjusted EBITDA......... $ 47,772 $ 62,074 $ 108,641 $ 103,073 $ 121,821 $ 30,140 $ 29,614
Adjusted EBITDA margin.. 25.9% 27.5% 19.1% 21.0% 28.5% 27.5% 28.9%
Units in service (at end
of period)............. 1,447,352 2,369,101 4,424,107 3,440,342 3,143,968 3,319,553 3,106,775
Capital expenditures.... $ 65,574 $ 86,163 $ 161,861 $ 40,556 $ 53,867 $ 4,854 $ 26,806
Cash flows provided by
operating activities... $ 53,781 $ 43,849 $ 57,194 $ 14,920 $ 54,462 $ 19,542 $ 17,552
Cash flows provided by
(used in) investing
activities............. $ (50,878) $ (312,698) $(1,028,321) $ (40,556) $ 115,836 $ (4,854) $ (25,025)
Cash flows provided by
(used in) financing
activities............. -- $ 671,794 $ 586,111 $ 13,396 $ (180,000) $ (10,000) $ 6,255
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------
As of
March 31,
1994 1995 1996 1997 1998 1999
-------- ---------- ---------- ---------- --------- -----------
(dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data
Total assets............ $353,703 $1,128,546 $ 790,230 $ 655,134 $ 561,454 $ 554,009
Debt.................... 195,677 476,156 1,074,196 1,075,681 905,681 910,681
Total stockholders'
equity (deficit)....... 101,500 578,753 (468,391) (589,579) (553,998) (561,690)
</TABLE>
The following table reconciles net income to the presentation of MobileMedia's
adjusted EBITDA.
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Year Ended December 31, Ended March 31,
---------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- ----------- --------- -------- -------- --------
MobileMedia
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $(37,067) $(41,079) $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
Interest expense........ 18,237 31,745 92,663 67,611 53,043 14,626 10,018
Income tax provision
(benefit).. -- -- (69,442) -- 3,958 -- 209
Depreciation and
amortization........... 67,651 71,408 348,698 140,238 116,459 31,671 27,969
Amortization of deferred
gain on tower sale..... -- -- -- -- (1,556) -- (1,167)
Restructuring costs..... -- -- 4,256 19,811 18,624 4,558 5,067
Impairment of long lived
assets................. -- -- 792,478 -- -- -- --
Reducation of
liabilities subject to
compromise............. -- -- -- -- (10,461) -- (3,050)
Gain/loss on sale of
assets................. (1,049) -- (68) (3) (94,165) (1) (323)
Other income/expense.... -- -- -- -- 338 -- 2063
-------- -------- ----------- --------- -------- -------- --------
Adjusted EBITDA......... $ 47,772 $ 62,074 $ 108,641 $ 103,073 $121,821 $ 30,140 $ 29,614
======== ======== =========== ========= ======== ======== ========
</TABLE>
29
<PAGE>
MOBILEMEDIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Presentation of Financial Condition and Results of Operations
The following are principal components of MobileMedia's operating results:
. Services, rents and maintenance revenues, also referred to as paging
revenue: includes primarily monthly, quarterly, semi-annually and
annually billed recurring revenue, not dependent on usage, charged to
subscribers for paging and related services such as voice mail and pager
repair and replacement.
. Net revenues: includes primarily paging revenues and sales of customer
owned and maintained units less cost of units sold.
. Services, rents and maintenance expenses: includes costs related to the
management, operation and maintenance of MobileMedia's network systems.
. Selling expenses: includes salaries, commissions and administrative costs
for MobileMedia's sales force and related marketing and advertising
expenses.
. General and administrative expenses: includes primarily customer service
expense, executive management, accounting, office telephone, rents and
maintenance and information services.
. Average revenues per unit, or ARPU: calculated by dividing (1) the
average monthly services, rents and maintenance revenues for the period
by (2) the weighted average number of units in service for the period.
ARPU, as determined by MobileMedia, may not necessarily be comparable to
similarly titled data of other paging companies.
. Average monthly operating expense per unit : calculated by dividing (1)
the average monthly services, rents and maintenance, selling and general
and administrative expenses for the period by (2) the weighted average
number of units in service for the period.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, impairment of long-lived assets,
amortization of deferred gain on the tower sale and restructuring costs. See
Notes 2 and 3 to MobileMedia's consolidated financial statements. EBITDA is a
financial measure commonly used in the paging industry and should not be
construed as an alternative to operating income as determined in accordance
with GAAP, as an alternative to cash flows from operating activities as
determined in accordance with GAAP or as a measure of liquidity. EBITDA is,
however, the primary financial measure by which MobileMedia's covenants are
calculated under the agreements governing MobileMedia's indebtedness.
As used below, the term "acquisitions" refers to both the MobileComm
acquisition and the Dial Page acquisition.
Overview
The following discussion and analysis should be read in conjunction with
MobileMedia's consolidated financial statements and notes.
MobileMedia builds and operates wireless messaging and communications systems
and generates revenues from the provision of paging and other wireless
communications services. MobileMedia's strategy is to strengthen its industry
leadership position by providing superior paging and messaging services at
competitive prices.
MobileMedia's revenues are derived primarily from fixed periodic recurring
fees charged to MobileMedia's subscribers for paging services. These fees are
not dependent on usage. While a subscriber remains in MobileMedia's service,
future operating results benefit from this recurring revenue stream with
minimal requirements for incremental selling expenses or other costs.
30
<PAGE>
MobileMedia completed its acquisition of MobileComm in January 1996 and
MobileMedia purchased the paging business of Dial Page in August 1995.
MobileMedia incurred integration related costs in excess of those originally
anticipated to (1) transfer units-in-service between paging networks to
rationalize capacity, (2) temporarily operate duplicative functions, primarily
customer service, and (3) hire additional employees and consultants to focus on
the integration. MobileMedia also experienced increased loss of subscribers
related to the integration difficulties. MobileMedia's financial results have
been negatively impacted by the higher than anticipated integration costs and
increased loss of subscribers.
On January 30, 1997, MobileMedia and its parent company filed voluntary
petitions for relief under the Bankruptcy Code in order to implement an
operational and financial restructuring. Until Arch's acquisition of
MobileMedia on June , 1999, MobileMedia and its parent company operated their
business as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court. The Bankruptcy Code required MobileMedia Communications, Inc. and its
parent company to file monthly operating reports with the United States
Trustee. Copies of the reports were filed as Current Reports on Form 8-K with
the SEC. Financial statements included in MobileMedia's periodic reports for
the months of February 1997 through June 1998 were not prepared in accordance
with GAAP due to MobileMedia's inability at the time of such filings to
determine the amount of an impairment loss related to long-lived assets
pursuant to Financial Accounting Standard No. 121. Such financial statements
are unaudited and have been revised periodically based on subsequent
determination of changes in facts and circumstances impacting previously filed
unaudited financial statements. The audited financial statements of MobileMedia
included in this prospectus reflect adjustments from the unaudited statements,
including an impairment adjustment of approximately $792.5 million recorded as
of December 31, 1996.
31
<PAGE>
Results of Operations
The following table presents selected items from MobileMedia's consolidated
statement of operations and selected other information for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1998 1999
--------------- ---------------
(in thousands, except
percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenues
Services, rents and maintenance.......... $108,542 99.0% $100,631 98.4%
Equipment sales and activation fees...... 6,621 6.0 5,193 5.1
-------- ----- -------- -----
Total revenues............................. 115,163 105.0 105,824 103.4
Cost of products sold...................... (5,513) (5.0) (3,516) (3.4)
-------- ----- -------- -----
Net revenues............................... 109,650 100.0 102,308 100.0
Operating expenses
Services, rents and maintenance.......... 28,899 26.4 27,077 26.5
Selling.................................. 15,703 14.3 14,136 13.8
General and administrative............... 34,908 31.8 31,481 30.8
Reduction of liabilities subject to
compromise.............................. -- -- (3,050) (3.0)
Restructuring costs...................... 4,558 4.2 5,067 5.0
Depreciation and amortization............ 31,671 28.9 27,969 27.3
Amortization of deferred gain on tower
sale.................................... -- -- (1,167) (1.1)
-------- ----- -------- -----
Total operating expenses................... 115,739 105.6 101,513 99.2
-------- ----- -------- -----
Operating income (loss).................... (6,089) (5.6) 795 0.8
Other income (expense)
Interest expense (net)................... (14,626) (13.3) (10,018) (9.8)
Gain (loss) on sale of assets............ 1 0.0 (323) (0.3)
Other income ............................ -- -- 2,063 2.0
-------- ----- -------- -----
Total other income (expense)............... (14,625) (13.3) (8,278) (8.1)
-------- ----- -------- -----
Income from continuing operations before
income tax provision...................... (20,714) (18.9) (7,483) (7.3)
Income tax provision....................... -- -- 209 0.2
-------- ----- -------- -----
Income from continuing operations.......... $(20,714) (18.9)% $ (7,692) (7.5)%
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1999
-------------- --------------
(in thousands, except
percentage and unit data)
<S> <C> <C>
Other Data
Adjusted EBITDA................................ $ 30,140 $ 29,614
Cash flows provided by operating activities.... $ 19,542 $ 17,552
Cash flows used in investing activities........ $ (4,854) $ (25,025)
Cash flows Provided by (used in) financing
activities.................................... $ (10,000) $ 6,255
ARPU........................................... $ 10.70 $ 10.73
Average monthly operating expense per unit..... $ 7.84 $ 7.75
Units in service (at end of period)............ 3,319,553 3,106,775
</TABLE>
32
<PAGE>
Three Months Ended March 31, 1999 Compared With Three Months Ended March 31,
1998
Units in service decreased 212,778 from 3,319,553 as of March 31, 1998 to
3,106,775 as of March 31, 1999, a decrease of 6.4%. The decrease was primarily
attributable to gross additions which were below expectations.
Services, rents and maintenance revenues decreased 7.3% to $100.6 million for
the three months ended March 31, 1999 compared to $108.5 million for the three
months ended March 31, 1998. The decrease was attributable to fewer units in
service and partially offset by a $0.03 increase in ARPU from $10.70 for the
three months ended March 31, 1998 to $10.73 for the three months ended March
31, 1999. The increase in ARPU was largely due to a greater percentage of
alphanumeric units in service and a smaller percentage in the reseller
distribution channel. Alphanumeric units generally are sold at higher ARPU and
units sold through the reseller distribution channel generally are sold at
lower ARPU.
Equipment sales and activation fees decreased 21.6% to $5.2 million for the
three months ended March 31, 1999 compared to $6.6 million for the three months
ended March 31, 1998. The decrease in equipment sales was primarily due to a
$0.7 million decrease in equipment sold through the direct distribution channel
and a $0.6 million decrease in billings for non-returned equipment. Equipment
sales and activation fees, less cost of products sold, increased to $1.7
million for the three months ended March 31, 1999 from $1.1 million for the
three months ended March 31, 1998. This increase was primarily attributable to
improved equipment sales margins on units sold through the retail distribution
channel.
Net revenues decreased 6.7% to $102.3 million for the three months ended
March 31, 1999 compared to $109.7 million for the three months ended March 31,
1998.
Services, rents and maintenance expenses decreased 6.3% to $27.1 million for
the three months ended March 31, 1999 compared to $28.9 million for the three
months ended March 31, 1998. This decrease resulted primarily from lower
subcontracted paging expenses of approximately $3.2 million arising from
billing reconciliations, increased unit cancellations and customer migration to
company-owned networks, lower paging-related telecommunications expenses of
approximately $0.6 million as a result of continued usage of lower cost
facilities and lower pager repair expenses of $0.4 million. These expense
reductions were offset by an increase in antenna site lease expense of $2.7
million primarily resulting from the leaseback of antenna sites on transmission
towers sold to Pinnacle Towers, Inc. See Note 3 to MobileMedia's consolidated
financial statements. As a percentage of net revenue, services, rents and
maintenance expenses were constant at approximately 26.5%.
Selling expenses for the three months ended March 31, 1999 decreased 10.0% to
$14.1 million compared to $15.7 million for the three months ended March 31,
1998. The decrease resulted primarily from lower sales personnel costs of
approximately $0.8 million attributable to lower sales headcount, lower
advertising expenses of approximately $0.6 million and lower retail
distribution channel selling expenses of approximately $0.2 million resulting
from lower retail sales. Selling expenses as a percentage of net revenue
decreased from 14.3% to 13.8%.
General and administrative expenses decreased 9.8% to $31.5 million for the
three months ended March 31, 1999 compared to $34.9 million for the three
months ended March 31, 1998 and decreased as a percentage of net revenues to
30.8% for the three months ended March 31, 1999 from 31.8% for the three months
ended March 31, 1998. The decrease primarily resulted from reduced bad debt
expense of $1.3 million due to improvements in MobileMedia's billing and
collections functions, lower administrative telephone expenses of $1.0 million
resulting from lower call volume and lower customer service expenses of $1.4
million primarily resulting from lower headcount.
Reduction of liabilities subject to compromise was $3.1 million for the three
months ended March 31, 1999. See Note 2 to MobileMedia's consolidated financial
statements.
33
<PAGE>
Restructuring costs increased 11.2% from $4.6 million for the three months
ended March 31, 1998 to $5.1 million for the three months ended March 31, 1999
due to an increase in professional fees incurred by MobileMedia resulting from
its confirmed plan of reorganization on April 12, 1999 (see Note 1 to
MobileMedia's consolidated financial statements).
Depreciation and amortization decreased 11.7% to $28.0 million for the three
months ended March 31, 1999 compared to $31.7 million for the three months
ended March 31, 1998. The decrease was primarily due to lower pager
depreciation attributable to a reduced depreciable base of pager assets and
decreased pager purchases. As a percentage of net revenues, depreciation and
amortization expense decreased to 27.3% for the three months ended March 31,
1999 from 28.9% for the three months ended March 31, 1998.
Amortization of deferred gain on tower sale was $1.2 million for the three
months ended March 31, 1999. See Note 3 to MobileMedia's consolidated financial
statements.
Operating income (loss) increased 113.1% to income of $0.8 million for the
three months ended March 31, 1999 from a loss of $6.1 million for the three
months ended March 31, 1998. The increase was primarily due to decreased
operating expenses.
Interest expense decreased 31.5% to $10.0 million for the three months ended
March 31, 1999 compared to $14.7 million for the three months ended March 31,
1998. The decrease was primarily due to lower interest expense on MobileMedia's
pre-petition credit facility resulting from lower outstanding borrowings in the
three months ended March 31, 1999.
Gain (loss) on sale of assets of $0.3 million for the three months ended
March 31, 1999 is primarily due to the write off of equipment related to the
resolution of a legal dispute with an equipment provider.
Other income was $2.1 million for the three months ended March 31, 1999 and
primarily resulted from a legal settlement due to MobileMedia as a result of
the resolution of a dispute with an equipment provider.
Loss from continuing operations before income tax provision, as a result of
the above factors, decreased to $7.5 million for the three months ended March
31, 1999 compared to $20.7 million for the three months ended March 31, 1998
Income tax provision increased to $0.2 million for the three months ended
March 31, 1999 primarily as a result of state income tax expense.
34
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1998
---------------- ---------------
(in thousands, except
percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenues
Services, rents and maintenance.......... $ 491,174 99.9% $423,059 99.0%
Equipment sales and activation fees...... 36,218 7.4 26,622 6.2
--------- ----- -------- -----
Total revenues............................. 527,392 107.3 449,681 105.2
Cost of products sold...................... (35,843) (7.3) (22,162) (5.2)
--------- ----- -------- -----
Net revenues............................... 491,549 100.0 427,519 100.0
Operating expenses
Services, rents and maintenance.......... 139,333 28.3 111,589 26.1
Selling.................................. 69,544 14.2 61,106 14.3
General and administrative............... 179,599 36.5 133,003 31.1
Reduction of liabilities subject to
compromise.............................. -- -- (10,461) (2.4)
Restructuring costs...................... 19,811 4.0 18,624 4.4
Depreciation and amortization............ 140,238 28.6 116,459 27.2
Amortization of deferred gain on tower
sale.................................... -- -- (1,556) (0.4)
--------- ----- -------- -----
Total operating expenses................... 548,525 111.6 428,764 100.3
--------- ----- -------- -----
Operating loss............................. (56,976) (11.6) (1,245) (0.3)
Other income (expense)
Interest expense (net)................... (67,611) (13.7) (53,043) (12.4)
Gain on sale of assets................... 3 0.0 93,827 21.9
--------- ----- -------- -----
Total other income (expense)............... (67,608) (13.7) 40,784 9.5
--------- ----- -------- -----
Income (loss) from continuing operations
before income tax provision............... (124,584) (25.3) 39,539 9.2
Income tax provision....................... -- -- 3,958 0.9
Income (loss) from continuing operations... $(124,584) (25.3)% $ 35,581 8.3%
========= ===== ======== =====
</TABLE>
<TABLE>
<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.
35
<PAGE>
Services, rents and maintenance revenues decreased 13.9% to $423.1 million
for 1998 compared to $491.2 million for 1997. The decrease was attributable to
fewer units in service and was partially offset by a $0.30 increase in ARPU
from $10.41 for 1997 to $10.71 for 1998. The increase in ARPU was largely due
to a greater percentage of alphanumeric units in service, increased units in
service in the direct distribution channel and a smaller percentage in the
reseller distribution channel. Alphanumeric units and units sold through the
direct distribution channel generally are sold at higher ARPU.
Equipment sales and activation fees decreased 26.5% to $26.6 million for 1998
compared to $36.2 million for 1997. The decrease in equipment sales was
primarily due to a $2.7 million decrease in equipment sold through the retail
distribution channel and a $5.7 million decrease in billings for non-returned
equipment. Equipment sales and activation fees, less cost of products sold,
increased to $4.5 million for 1998 from $0.4 million for 1997. This increase
was primarily attributable to sales of used pagers with lower net book values
resulting from a change in pager depreciation from a four-year life to a three-
year life as of October 1, 1997.
Net revenues decreased 13.0% to $427.5 million for 1998 compared to $491.5
million for 1997.
Services, rents and maintenance expenses decreased 19.9% to $111.6 million
for 1998 compared to $139.3 million for 1997. This decrease resulted primarily
from lower subcontracted paging expenses of approximately $15.9 million arising
from billing reconciliations, increased unit cancellations, increased movement
of customers to company-owned networks and a reduction of approximately $10.4
million in paging-related telecommunications expenses. The decline in paging-
related telecommunications expenses resulted primarily from the FCC's
clarification of its interconnection rules pursuant to the Telecommunications
Act. These rules prohibit local exchange carriers from charging paging carriers
for the cost of dedicated facilities used to deliver local telecommunications
traffic to paging networks. The FCC clarification, however, noted that the FCC
is considering requests for reconsideration of these rules. In addition,
paging-related telecommunications expense declined as a result of a
reconfiguration of MobileMedia's network to maximize usage of lower cost
facilities. As a percentage of net revenue, services, rents and maintenance
expenses decreased from 28.3% to 26.1%.
Selling expenses for 1998 decreased 12.1% to $61.1 million compared to $69.5
million for 1997. The decrease resulted primarily from lower sales personnel
costs of approximately $6.4 million attributable to lower sales headcount and
lower retail distribution channel selling expenses of approximately $2.2
million resulting from lower retail sales. Selling expenses as a percentage of
net revenues were constant at approximately 14.3%.
General and administrative expenses decreased 25.9% to $133.0 million for
1998 compared to $179.6 million for 1997 and decreased as a percentage of net
revenues to 31.1% for 1998 from 36.5% for 1997. The decrease primarily resulted
from reduced bad debt expense of $27.8 million due to improvements in
MobileMedia's billing and collections functions, lower administrative telephone
expenses of $7.0 million resulting from lower call volume and lower long
distance rates as of October 1, 1997 and lower customer service and retail
activation expenses of $9.7 million primarily resulting from lower headcount.
Reduction of liabilities subject to compromise was $10.5 million for the year
ended December 31, 1998. See Note 2 to MobileMedia's consolidated financial
statements.
Restructuring costs decreased from $19.8 million for 1997 to $18.6 million
for 1998 due to a decline in professional fees incurred by MobileMedia as a
result of the bankruptcy filing on January 30, 1997.
Depreciation and amortization decreased 17.0% to $116.5 million for 1998
compared to $140.2 million for 1997. The decrease was primarily due to lower
pager depreciation attributable to a reduced depreciable base of pager assets
resulting from the change in useful life from four to three years on October 1,
1997 and decreased pager purchases. As a percentage of net revenues,
depreciation and amortization expense decreased to 27.2% for 1998 from 28.5%
for 1997.
Amortization of deferred gain on tower sale was $1.6 million for 1998. See
Note 3 to MobileMedia's consolidated financial statements.
36
<PAGE>
Operating loss decreased 97.8% to $1.2 million for 1998 from $57.0 million
for 1997. The decrease was primarily due to decreased operating expenses.
Interest expense decreased 21.5% to $53.0 million for 1998 compared to $67.6
million for 1997. The decrease was primarily due to lower interest expense on
MobileMedia's debtor-in-possession credit facility resulting from lower
outstanding borrowings in 1998.
Gain on sale of assets increased to $93.8 million for 1998 primarily as a
result of the sale of transmission towers and related equipment. See Note 3 to
MobileMedia's consolidated financial statements.
Income (loss) from continuing operations before income tax provision, as a
result of the above factors, increased to income of $39.5 million for 1998
compared to a loss of $124.6 million for 1997.
Income tax provision increased to $4.0 million for 1998 primarily as a result
of the sale of transmission towers.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
The following table presents selected items from MobileMedia's Consolidated
Statement of Operations and selected other information for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1997
--------------------------- --------------------------
(in thousands, except percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data
Revenues
Services, rents and
maintenance........... $ 568,892 100.1% $ 491,174 99.9%
Equipment sales and ac-
tivation fees......... 71,818 12.7 36,218 7.4
-------------- --------- ------------- --------
Total revenues........... 640,710 112.8 527,392 107.3
Cost of products sold.. (72,595) (12.8) (35,843) (7.3)
-------------- --------- ------------- --------
568,115 100.0 491,549 100.0
Operating expenses
Services, rents and
maintenance........... 144,050 25.4 139,333 28.3
Selling................ 96,817 17.0 69,544 14.2
General and administra-
tive.................. 218,607 38.5 179,599 36.5
Impairment of long-
lived assets.......... 792,478 139.5 -- --
Restructuring costs.... 4,256 0.7 19,811 4.0
Depreciation and amor-
tization.............. 348,698 61.4 140,238 28.6
-------------- --------- ------------- --------
Total operating expenses. 1,604,906 282.5 548,525 111.6
-------------- --------- ------------- --------
Operating loss........... (1,036,791) (182.5) (56,976) (11.6)
Total other expense...... (92,595) (16.2) (67,608) (13.7)
-------------- --------- ------------- --------
Loss before income tax
benefit................. (1,129,386) (198.7) (124,584) (25.3)
Income tax benefit....... (69,442) 12.2 -- --
-------------- --------- ------------- --------
Net loss................. $ (1,059,944) (186.5)% $ (124,584) (25.3)%
============== ========= ============= ========
Other Data
MobileMedia adjusted
EBITDA.................. $ 108,641 19.1% $ 103,073 21.0%
Cash flows provided by
operating activities.... $ 57,194 $ 14,920
Cash flows used in in-
vesting activities...... $ (1,028,321) $ (40,556)
Cash flows provided by
financing activities.... $ 586,111 $ 13,396
ARPU..................... $ 11.08 $ 10.41
Average monthly operating
expense per unit (1).... $ 8.95 $ 8.23
Units in service (at end
of period).............. 4,424,107 3,440,342
</TABLE>
- --------
(1) Does not include impact of $792.5 million asset impairment writedown in
1996.
37
<PAGE>
Units in service decreased from 4,424,107 as of December 31, 1996 to
3,440,342 as of December 31, 1997, a decrease of 22.2%. The decrease was
attributable to a decrease in gross unit additions and an increase in unit
cancellations primarily resulting from acquisition integration difficulties,
billing system clean up to remove non-revenue generating units and cancellation
of units for non-payment.
Services, rents and maintenance revenues decreased 13.7% to $491.2 million
for 1997 compared to $568.9 million for 1996 due to fewer units in service and
lower ARPU. ARPU decreased to $10.41 for 1997 from $11.08 for 1996 largely due
to continued competitive market conditions.
Equipment sales and activation fees decreased 49.6% to $36.2 million for 1997
compared to $71.8 million for 1996. The decrease in equipment sales was
primarily attributable to less equipment sold through the retail distribution
channel. Equipment sales and activation fees, less cost of products sold,
increased from $(0.8) million for 1996 to $0.4 million for 1997 primarily as a
result of lower retail sales of equipment sold at a discount. Cost of products
sold for 1996 includes a writedown of $3.2 million, reflecting the
establishment of a lower of cost or market reserve for units held for resale
through MobileMedia's retail and reseller distribution channels.
Net revenues decreased 13.5% to $491.5 million for 1997 compared to $568.1
million for 1996.
Services, rents and maintenance expenses decreased 3.3% to $139.3 million for
1997 compared to $144.1 million for 1996, primarily due to billing
reconciliation and lower nationwide subcontracted paging expenses resulting
from cancellations and customer migration from networks not owned by
MobileMedia to company-owned networks.
Selling expenses for 1997 decreased 28.2% to $69.5 million from $96.8 million
for 1996 primarily due to lower sales personnel costs and lower sales
commissions attributable to lower sales headcount and lower gross additions. In
addition, reseller and retail distribution channel selling expenses declined as
a result of lower sales volume. Selling expenses as a percentage of net revenue
decreased to 14.2% for 1997 from 17.0% for 1996.
General and administrative expenses decreased 17.8% to $179.6 million for
1997 compared to $218.6 million for 1996. General and administrative expenses
decreased as a percentage of net revenues to 36.5% for 1997 from 38.5% for 1996
primarily due to decreased bad debt expense, customer service expenses related
to the assimilation of MobileComm's customer service functions, and consulting
fees related to the integration of the acquisitions. Bad debt expense decreased
as a result of increased collections resulting from improvements in
MobileMedia's billing and collection functions.
Restructuring costs increased from $4.2 million for 1996 to $19.8 million for
1997 due to professional fees constituting administrative expenses incurred by
MobileMedia as a result of the bankruptcy filing on January 30, 1997 as
compared to the 1996 expenses incurred in connection with MobileMedia's attempt
to restructure its debt.
Depreciation and amortization decreased 59.8% to $140.2 million for 1997
compared to $348.7 million for 1996. The decrease was primarily due to a
writedown of impaired assets by $792.5 million pursuant to Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" effective December 31, 1996, as
described in Note 2 to MobileMedia's consolidated financial statements,
amortization of a non-competition agreement related to the MobileComm
Acquisition which was fully amortized in 1996 and decreased pager depreciation
resulting from a decrease in expenses related to unrecoverable subscriber
equipment and a reserve established to lower book values of certain pager
models to current market values in 1996. As a percentage of net revenues,
depreciation and amortization expense decreased to 28.6% for 1997 from 61.4%
for 1996.
Operating loss decreased to $57.0 million for 1997 from $1,036.8 million for
1996. The decrease was primarily due to the $792.5 million asset impairment
writedown effective December 31, 1996 and other factors indicated above.
38
<PAGE>
Total other expense, principally interest expense, decreased 27.0% to $67.6
million for 1997 compared to $92.6 million for 1996. The decrease was primarily
due to interest expense related to MobileMedia's $250.0 million senior
subordinated notes due November 1, 2007 and $210.0 million senior subordinated
deferred coupon notes not being recognized subsequent to the bankruptcy filing
on January 30, 1997.
Loss before income tax benefit, as a result of the above factors, decreased
to $124.6 million for 1997 from $1,129.4 million for 1996.
Income tax benefit of $69.4 million resulted from the deferred tax adjustment
attributable to the $792.5 asset impairment writedown effective December 31,
1996.
Liquidity and Capital Resources
MobileMedia's operations and strategy require the availability of substantial
funds to finance the development and installation of wireless communications
systems, to procure subscriber equipment and to service debt. Historically,
these requirements have been funded by net cash from operating activities,
additional borrowings and capital contributions from its former parent company.
Following the MobileMedia acquisition, Arch will need to supply these
requirements for MobileMedia. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
Chapter 11 Filing
On January 30, 1997, MobileMedia Communications, Inc. and affiliates filed
voluntary petitions for relief under the Bankruptcy Code in order to implement
an operational and financial restructuring. Until consummation of the
MobileMedia acquisition, they operated their businesses as debtors-in-
possession subject to the jurisdiction of the bankruptcy court.
Agreement with Key Suppliers
In January 1997, the bankruptcy court approved payment of a total of $47.4
million of the pre-petition claims of MobileMedia's key suppliers, Motorola,
Glenayre, NEC and Panasonic. MobileMedia also entered into supply agreements
with each of the key suppliers.
Debtor-in-Possession Credit Agreement
Chase Manhattan Bank and certain other financial institutions provided
MobileMedia with up to $200.0 million of debtor-in-possession financing during
its Chapter 11 proceedings. During 1997, MobileMedia drew down $47.0 million of
borrowings to pay the pre-petition claims of key suppliers, and later repaid
$37.0 million under the debtor-in-possession facility. During January and
February, 1998 MobileMedia repaid an additional $10.0 million. As of March 31,
1999 there was $5.0 million of funded borrowings under the debtor-in-possession
facility.
Capital Expenditures and Commitments
Capital expenditures were $26.8 million for the three months ended March 31,
1999 compared to $4.9 million for the three months ended March 31, 1998 and
$53.9 million for the year ended December 31, 1998 compared to $40.6 million
for the year ended December 31, 1997. Capital expenditures increased $21.9
million for the three months ended March 31, 1999 compared to the three-month
period ended March 31, 1998 primarily as a result of increased pager purchases,
and $13.3 million for the 1998 year compared to the 1997 year principally as a
result of capital spending for the construction of a nationwide NPCS network.
39
<PAGE>
Sources of Funds
MobileMedia's net cash provided by operating activities was $17.6 million for
the three months ended March 31, 1999 compared to $19.5 million for the three
months ended March 31, 1998. Inventories decreased $0.6 million from December
31, 1998 to March 31, 1999 compared to a decrease of $0.4 million from December
31, 1997 to March 31, 1998 as a result of utilizing pager inventory stock and
lower sales volume in the retail sales distribution channel. Accounts payable,
accrued expenses and other liabilities decreased $2.0 million from December 31,
1998 to March 31, 1999 compared to a increase of $1.4 million from December 31,
1997 to March 31, 1998. Net accounts receivable decreased $1.7 million from
December 31, 1998 to March 31, 1999 compared to a decrease of $7.8 million from
December 31, 1997 to March 31, 1998 due to lower sales volume.
MobileMedia's net cash provided by operating activities was $54.5 million for
the year ended December 31, 1998 compared to $14.9 million for the year ended
December 31, 1997. Inventories increased $1.3 million from December 31, 1997 to
December 31, 1998 as a result of additional pagers purchased for sale through
the retail sales distribution channel. Accounts payable, accrued expenses and
other liabilities decreased $7.1 million from $156.4 million as of December 31,
1997 to $149.3 million as of December 31, 1998. Net accounts receivable
decreased $16.5 million from $55.4 million as of December 31, 1997 to $38.9
million as of December 31, 1998 due to improved billing and collections
functions.
Tower Sale
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers for $170.0 million in cash. Under the terms of a lease with the buyer,
MobileMedia will continue to own and utilize transmitters, antennas and other
equipment located on these towers for an initial period of 15 years at an
aggregate annual rental of $10.7 million. The sale was accounted for in
accordance with Statement of Financial Accounting Standards No. 28, Accounting
for Sales with Leasebacks, and resulted in a recognized gain of $94.2 million
and a deferred gain of $70.0 million. The deferred gain will be amortized over
the initial lease period of 15 years. After the sale, MobileMedia distributed
the $170.0 million in proceeds to its secured creditors, who had a lien on such
assets.
Debt Obligations
In addition to the debtor-in-possession credit facility, the debt obligations
of MobileMedia during the periods described above also included the following:
MobileMedia's 1995 credit facility provided for $750.0 million senior secured
and guaranteed credit facility with a syndicate of lenders including The Chase
Manhattan Bank. As of September 30, 1998 there was $479.0 million outstanding
under this facility consisting of term loans of $101.5 million and $304.6
million and loans under a revolving credit facility totaling $72.9 million.
This became available on December 4, 1995, in connection with the financing of
the MobileComm acquisition. Commencing in 1996, MobileMedia was in default
under this facility. As a result of such default and the bankruptcy filing,
MobileMedia had no borrowing capacity under this facility. After filing under
Chapter 11, MobileMedia brought current its interest payments and made monthly
adequate protection payments to the lenders under the 1995 credit facility
equal to the amount of interest accruing under such agreement. On September 3,
1998, MobleMedia repaid $170.0 million of borrowings under its 1995 credit
facility using proceeds from the sale of 166 transmission towers.
MobleMedia issued $250.0 million senior subordinated 9 3/8% notes in November
1995, concurrent with MobileMedia's second offering of Class A common stock.
See Note 11 to MobileMedia's consolidated financial statements. These notes
bore interest at a rate of 9 3/8% payable semiannually on May 1 and November 1
of each year. On November 1, 1996, MobileMedia did not make its scheduled
interest payment on the 9 3/8% notes which constituted an event of default
under the indenture.
40
<PAGE>
MobleMedia issued $210.0 million of senior subordinated deferred coupon
notes, at a discount, in November 1993. These deferred coupon notes accreted at
a rate of 10.5%, compounded semiannually, to an aggregate principal amount of
$210.0 million by December 1, 1998 after which interest was payable in cash at
a rate of 10.5% and was payable semiannually.
Year 2000 Compliance
State of Readiness
MobileMedia has formed an internal task force comprised of representatives of
several 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.
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related application
will be year 2000 ready. These include applications relating to distribution,
finance, inventories, operations, pager activation, purchasing and
sales/marketing. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain business-
related files were created and run to identify any Year 2000 compliance issues.
Additional testing took place in the first quarter of 1999, including the
testing of MobileMedia's financial and human resource software packages. The
tests revealed relatively few Year 2000-related problems. Such problems have
been addressed and retested, and the implemented solutions appear to have been
successful. There can be no assurance, however, that such testing has, or will,
detect all compliance issues related to the Year 2000 problem.
With respect to external matters, MobileMedia has distributed questionnaires
and requests for certification to its mission critical vendors and is in the
process of obtaining and reviewing the responses. The questionnaires have
requested information concerning embedded technologies of such vendors, the
hardware and software applications used by such vendors and the related Year
2000 compliance efforts of such vendors. MobileMedia is in the process of
evaluating vendor responses and preparing contingency plans based on the
responses.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to the Year 2000 compliance
matters. To date, MobileMedia has incurred approximately $50,000 in costs,
excluding in-house labor and hardware, in connection with Year 2000 compliance
matters. In addition, MobileMedia has purchased upgraded hardware at a cost of
approximately $150,000 for use as redundant equipment in testing for Year 2000
problems in an isolated production environment. MobileMedia estimates that it
will expend approximately $500,000 on additional software and other items
related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200,000
in costs relating to Year 2000 remediation efforts for its paging network
hardware. MobileMedia has also upgraded its paging network hardware in 1998 and
early 1999 and plans further upgrades later in 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
See "Risk Factors--Impact of the Year 2000 issue is not fully known".
41
<PAGE>
Contingency Planning
MobileMedia has begun the process of assessing contingency plans that might
be available in the event of either internal or external Year 2000 compliance
problems. To this end, MobileMedia's various internal departments have begun to
prepare assessments of potential contingency alternatives. The task force will
undertake a review of these assessments in respect of application of
contingency plans on a department-by-department basis and on a company-wide
basis. MobileMedia intends to complete its contingency planning for Year 2000
compliance during calendar year 1999.
New Authoritative Accounting Pronouncements
See "Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of new accounting pronouncements.
Management does not believe that MobileMedia's adoption of SFAS No. 130, SFAS
No. 131 and SOP 98-5 has had or will have any material effects.
42
<PAGE>
UNAUDITED SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma financial information gives effect
to the MobileMedia acquisition as if such transaction had been consummated on
March 31, 1999 in the case of the balance sheet and on January 1, 1998 in the
case of the statement of operations data and the other operating data. The
assumptions on which the selected pro forma financial information was prepared
differed in certain respects from the definitive terms of the MobileMedia
acquisition, but Arch does not believe that these differences are of material
significance.
The following selected pro forma financial information should be read in
conjunction with the unaudited pro forma condensed consolidated financial
statements and notes. The financial impact of expected operational cost
synergies resulting from the MobileMedia acquisition is excluded from this
presentation.
The pro forma information is presented for illustrative purposes only and
does not necessarily predict the operating results or financial position that
would have occurred if the MobileMedia acquisition had been consummated as of
the dates indicated above. Nor does it predict the future operating results or
financial position of Arch following the MobileMedia acquisition.
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended
1998 March 31, 1999
------------ --------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Service, rental and maintenance revenues........... $ 785,759 $ 189,046
Product sales...................................... 69,103 15,552
---------- ----------
Total revenues..................................... 854,862 204,598
Cost of products sold.............................. (52,115) (10,442)
---------- ----------
802,747 194,156
Operating expenses:
Service rental and maintenance.................... 194,717 45,256
Selling........................................... 110,238 27,147
General and administrative........................ 245,184 57,107
Depreciation and amortization..................... 363,330 84,698
Restructuring charge.............................. 14,700 --
Bankruptcy and related expense.................... 8,163 2,017
---------- ----------
Operating income (loss)............................ (133,585) (22,069)
Interest and non-operating expenses, net........... (55,608) (37,820)
---------- ----------
Income (loss) before income tax benefit and ex-
traordinary item.................................. (189,193) (59,889)
Income tax benefit (provision)..................... (3,958) (209)
---------- ----------
Income (loss) before extraordinary item............ $ (193,151) $ (60,098)
========== ==========
Other Operating Data:
Capital expenditures, excluding acquisitions....... $ 167,051 $ 49,935
Units in service at end of period(1)............... 7,170,000 7,186,000
</TABLE>
<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Balance Sheet Data:
Current assets....................................................... 111,050
Total assets......................................................... 1,538,375
Long-term debt, less current maturities.............................. 1,348,441
Stockholders' equity................................................. (11,897)
</TABLE>
- --------
(1) Consolidated units in service is calculated by adding the Arch and
MobileMedia amounts less an elimination for intercompany units in service.
43
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has
been prepared to reflect the MobileMedia acquisition, assuming it had occurred
on March 31, 1999 and using the purchase method of accounting. Under the
purchase method of accounting, the purchase price is allocated to assets
acquired and liabilities assumed based on their estimated fair values at the
time of the acquisition. Income of the combined company will not include income
or loss of MobileMedia prior to the acquisition. The unaudited pro forma
condensed consolidated statements of operations for the year ended December 31,
1998 and the three months ended March 31, 1999 present the results of
operations of Arch and MobileMedia assuming the MobileMedia acquisition had
been effected on January 1, 1998. You should read the unaudited pro forma
financial data in conjunction with the consolidated historical financial
statements of Arch and MobileMedia, including the notes to both sets of
financial statements.
The pro forma condensed consolidated financial data is for information
purposes only and is not necessarily indicative of the results of future
operations of the combined company or the actual results that would have been
achieved had the MobileMedia acquisition 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
using the purchase method of accounting. The actual adjustments will be made
after the closing and may differ from those reflected in the pro forma
financial statements.
For purposes of presenting the pro forma condensed consolidated financial
statements, Arch has assumed the issuance of 122,845,000 shares of common stock
at an aggregate market value of $245.7 million and has assumed that none of the
non-transferable rights issued to Arch stockholders are exercised. If the
market price of common stock is greater than $2.00 per share, stockholders'
equity will increase. If the market price of common stock is less than $2.00
per share, stockholders' equity will decrease.
44
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1999
(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........... $ 12,102 -- $ 12,102
Accounts receivable
net................... 30,757 $ 37,270 68,027
Inventories............ 9,803 1,609 11,412
Prepaid expenses and
other................. 9,348 10,161 19,509
---------- ----------- ----------
Total current assets. 62,010 49,040 111,050
---------- ----------- ----------
Property and
equipment, net........ 218,608 225,566 444,174
Intangible and other
assets................ 602,814 279,403 114,317(1) 18,384(1) 978,150
---------- ----------- ----------
$ 883,432 $ 554,009 $1,533,374
========== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of
long-term debt........ $ 1,250 $ 910,681 479,000(1) $ 1,250
431,681(2)
Accounts payable....... 26,564 23,940 15,351(2) 35,153
Accrued expenses....... 10,068 53,912 12,707(2) 51,273
Accrued interest....... 17,187 21,144 17,578(2) 20,753
Customer deposits and
deferred revenue...... 16,633 28,892 45,525
Accrued restructuring.. 11,032 7,197 7,197(2) 21,032
10,000(1)
---------- ----------- ----------
Total current
liabilities......... 82,734 1,045,766 174,986
---------- ----------- ----------
Long-term debt, less
current maturities.... 1,036,441 -- 312,000(1) 1,348,441
---------- ----------- ----------
Deferred income taxes.. -- 2,655 2,655(2) --
---------- ----------- ----------
Other long-term
liabilities........... 26,844 67,278 67,278(2) 26,844
---------- ----------- ----------
Stockholders' equity
(deficit) (9):
Preferred stock........ 3 -- 3
Common stock........... 212 -- 1,228(1) 1,440
Additional paid-in
capital............... 378,590 676,025 676,025(3) 623,052
1,228(1) 245,690(1)
Accumulated deficit.... (641,392) (1,237,715) 554,447(2) (641,392)
18,384(1) 676,025(3)
25,627(1)
---------- ----------- ----------
Total stockholders'
equity (deficit).... (262,587) (561,690) (16,897)
---------- ----------- ----------
$ 883,432 $ 554,009 $1,533,374
========== =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
45
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Arch MobileMedia Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 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 11,432 (6) 363,330
15,679 (6)
Restructuring expense
..................... 14,700 -- -- 14,700
Bankruptcy related
expense ............. -- 8,163(7) 8,163
----------- -------- ----------- -----------
Total operating
expenses........... 478,111 428,764 29,457 936,332
----------- -------- ----------- -----------
Operating income (loss). (94,429) (1,245) (37,911) (133,585)
Interest expense, net... (104,213) (53,043) 53,043 (8) (143,746)
(39,533)(8)
Gain on sale of assests
....................... -- 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 (24,401) (189,193)
Provision for income
taxes.................. -- 3,958 -- 3,958
----------- -------- ----------- -----------
Income (loss) before
extraordinary item..... (204,331) $ 35,581 $ (24,401) $ (193,151)
=========== ======== =========== ===========
Basic/diluted income
(loss) before
extraordinary item per
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.
46
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Arch MobileMedia Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 90,529 $100,631 $ (2,114)(4) $ 189,046
Products sales.......... 10,359 5,193 15,552
----------- -------- ------------ ------------
Total revenues...... 100,888 105,824 (2,114) 204,598
Cost of products sold... (6,926) (3,516) (10,442)
----------- -------- ------------ ------------
93,962 102,308 (2,114) 194,156
----------- -------- ------------ ------------
Operating expenses:
Service, rental and
maintenance.......... 20,293 27,077 (2,114)(5) 45,256
Selling............... 13,011 14,136 27,147
General and
administrative....... 25,626 31,481 57,107
Depreciation and
amortization......... 51,118 26,802 2,858 (6) 84,698
3,920 (6)
Bankruptcy related
expense.............. -- 2,017 2,017
----------- -------- ------------ ------------
Total operating
expenses........... 110,048 101,513 4,664 216,225
----------- -------- ------------ ------------
Operating income (loss). (16,086) 795 (6,778) (22,069)
Interest expense, net... (26,477) (10,018) (9,883)(8) (36,360)
10,018 (8)
Gain on sale of assets.. -- 1,740 -- 1,740
Other expenses.......... (3,200) -- (3,200)
----------- -------- ------------ ------------
Income (loss) before
provision for income
taxes and extraordinary
item................... (45,763) (7,483) (6,643) (59,889)
Provision for income
taxes.................. -- 209 -- 209
----------- -------- ------------ ------------
Income (loss) before
extraordinary item..... $ (45,763) $ (7,692) $ (6,643) $ (60,098)
=========== ======== ============ ============
Basic/diluted income
(loss) before
extraordinary item per
share.................. $ (2.18) -- $ (0.42)
=========== ============
Weighted average common
shares outstanding..... 21,215,583 -- 122,845,000 (1) 144,060,583
=========== ============ ============
</TABLE>
See accompanying notes to unaudited proforma condensed consolidated financial
statements
47
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) To record
. $312.0 million of additional Arch borrowings necessary to fund its
obligations in connection with the MobileMedia acquisition,
. the issuance of 122,845,000 shares of common stock, having an aggregate
value of $245.7 million, to unsecured creditors and standby purchasers
. the writeoff of $18.4 million of deferred financing costs associated
with the former MobileMedia credit facility and
. the excess of purchase price over the assumed fair value of the
identifiable assets acquired.
The historical book value of the tangible and intangible assets of
MobileMedia was assumed to approximate fair value. The excess of purchase
price over the assumed fair value of identifiable assets acquired was
calculated as follows:
<TABLE>
<S> <C>
Consideration exchanged:
Payments to secured creditors................................... $479,000
Assumed fair value of shares issued to unsecured creditors...... 28,690
--------
507,690
Liabilities assumed:
Administrative costs.......................................... 25,000
Other......................................................... 82,252
--------
Total consideration exchanged................................... 614,942
Transaction costs............................................... 25,000
Restructuring reserve........................................... 10,000
--------
Total purchase price............................................ 649,942
Less fair value of tangible and intangible net assets acquired.... 535,625
--------
Excess of purchase price over tangible and intangible net assets
acquired......................................................... 114,317
========
</TABLE>
--------
(a) Administrative costs consist of payments to some of MobileMedia's
creditors.
(b) Other liabilities assumed include operating liabilities such as accounts
payable, accrued expenses and advance billings which Arch assumed in
connection with the MobileMedia acquisition.
(c) Transaction costs include legal, investment banking, financing,
accounting and other costs incurred by Arch to consummate the MobileMedia
acquisition.
(d) Restructuring reserve consists of severance costs related primarily to
duplicative general and administrative functions at the corporate,
regional and market levels of MobileMedia, such as technical, marketing,
finance and other support functions. These terminations will occur as the
operations of MobileMedia are integrated into those of Arch and are based
on management's preliminary review of synergies that exist between the
companies. This analysis is expected to be finalized after consummation
of the MobileMedia acquisition and may result in additional amounts to be
reserved.
(2) To eliminate liabilities of MobileMedia not assumed by Arch, satisfied in
cash or exchanged for common stock.
(3) To eliminate MobileMedia equity balances.
(4) To eliminate revenues and expenses between Arch and MobileMedia.
(5) This entry records the incremental rental expense for the use of
transmitter space on the towers that were sold and leased back in
MobileMedia's tower sale transaction.
48
<PAGE>
(6) To record the amortization on the excess of purchase price over the
tangible and intangible assets acquired, calculated on a straight-line
basis over 10 years in the amounts of $11,432 for the year ended
December 31, 1998 and $2,858 for the three months ended March 31, 1999. The
actual amortization recorded after consummation of the MobileMedia
acquisition may differ from these amounts due to changes in the price of
common stock upon closing of the MobileMedia acquisition as well as full
allocation of purchase price to assets and liabilities assumed pursuant to
APB No. 16. The amortization relates to the $258.8 million assumed fair
value of intangible assets, consisting primarily of FCC licenses with an
assumed fair value of $242.7 million and customer lists with an assumed
fair value of $16.7 million. This amortization has already been provided in
the historical financial statements of MobileMedia. The MobileMedia
historical amortization was adjusted by $15,679 for the year ended December
31, 1998 and by $3,920 for the three months ended March 31, 1999 to conform
MobileMedia's 25 year estimated useful life of FCC licenses to Arch's 10
year estimated useful life. The estimated useful life of the customer lists
was assumed to be 3 years.
(7) These costs represent incremental and non-recurring third-party legal,
accounting and financial advisory fees and expenses incurred by MobileMedia
related to its administration of its insolvency proceedings.
(8) To remove the interest expense associated with the various MobileMedia
credit facilities and notes eliminated as a result of the insolvency
proceedings and to record the interest associated with Arch's additional
borrowings used to fund the MobileMedia acquisition. Interest was
calculated assuming an 11% rate on $173.0 million of additional bank
borrowings and a 14.75% rate on $139.0 million of senior notes. Interest
expense would be as follows if interest rates on the bank borrowings were
to decrease or increase 1/8 of a percent:
<TABLE>
<CAPTION>
Assumed Change in Interest Rate Assumed Interest Expense
------------------------------- ------------------------------------
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
<S> <C> <C>
Increase of 1/8%.................... $39,923 $9,981
Decrease of 1/8%.................... $39,143 $9,786
</TABLE>
49
<PAGE>
INDUSTRY OVERVIEW
Paging is a method of wireless communication which uses an assigned radio
frequency to contact a paging subscriber anywhere within a designated service
area. A subscriber carries a pager which receives messages by the transmission
of a one-way radio signal. To contact a subscriber, a message is usually sent
by placing a telephone call to the subscriber's designated telephone number.
The telephone call is received by an electronic paging switch which generates a
signal that is sent to radio transmitters in the service area. Depending upon
the topography of the service area, the operating radius of a radio transmitter
typically ranges from three to 20 miles. The transmitters broadcast a signal
that is received by the pager a subscriber carries, which alerts the subscriber
by a tone or vibration that there is a voice, tone, digital or alphanumeric
message. See "Business--Arch's Paging and Messaging Services, Products and
Operations".
The paging industry has been in existence since 1969 when the FCC allocated a
group of radio frequencies for use in providing one-way and two-way types of
mobile communications services. Throughout its history, the paging industry has
been characterized by consolidation, substantial growth and technological
change. Historically, the paging industry has been highly fragmented, with a
large number of small, local operators. Since the 1980s, concentration in the
paging industry has increased as paging companies continue to grow rapidly
either internally or through acquisitions.
Arch believes that paging is the most cost-effective form of mobile wireless
communications. Paging has an advantage over conventional telephone service
because a pager's reception is not restricted to a single location. Paging has
an advantage over a cellular telephone or broadband PCS handset because a pager
is smaller, has a longer battery life and, most importantly, because paging
units and air time required to transmit an average message cost less than
equipment and air time for cellular telephones or broadband PCS handsets.
Paging subscribers generally pay a flat monthly service fee for pager services,
regardless of the number of messages, unlike cellular telephone or broadband
PCS subscribers, whose bills typically have a significant variable usage
component. For these reasons, some cellular subscribers use a pager in
conjunction with their cellular telephone to screen incoming calls and thus
lower the expense of cellular telephone service, and to a lesser extent, some
broadband PCS subscribers use a pager in conjunction with their broadband PCS
handsets, which often incorporate messaging functions, but have a much shorter
battery life.
The paging industry has benefited from technological advances resulting from
research and development conducted by vendors of paging units and transmission
equipment. These advances include microcircuitry, liquid crystal display
technology and standard digital encoding formats. These advances have enhanced
the capability and capacity of paging services while lowering equipment and air
time costs. Technological improvements have generally contributed to strong
growth in the market for paging services and enable the combined company to
provide better quality services at lower prices to its subscribers.
The paging industry has traditionally distributed its services through direct
marketing and sales activities. In recent years, additional channels of
distribution have evolved. These include: (1) carrier-operated stores; (2)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; (3) agents who
solicit customers for carriers and are compensated on a commission basis; (4)
retail outlets that often sell a variety of merchandise, including paging units
and other telecommunications equipment; and (5) most recently, the Internet.
While most paging subscribers traditionally have been business users, industry
observers believe that retail consumers have significantly increased their use
of paging units in recent years. In addition, paging subscribers have
increasingly chosen to purchase rather than lease their paging units. Arch
expects these trends to continue.
Competition
The paging industry is highly competitive. Providers of numeric display
paging services compete primarily on the basis of price. Companies in the
industry also compete on the basis of coverage area offered to subscribers,
available services offered in addition to basic numeric or tone paging,
transmission quality, system reliability and customer service. The combined
company believes that it will generally compete effectively based on these
factors.
50
<PAGE>
Arch and MobileMedia have competed by maintaining competitive pricing of
their products and services, by providing high-quality, reliable transmission
networks and by furnishing subscribers a superior level of customer service.
Several hundred licensed paging companies provide only local basic numeric or
tone paging service. Compared to these companies, the combined company offers
wireless messaging services on a local, regional and nationwide basis. It also
offers enhanced services such as alphanumeric paging, voice mail and voice mail
notifications, news, sports, weather reports and stock quotes.
The combined company competes with one or more competitors in all markets in
which it operates. Some competitors are small, privately owned companies
serving one market area but others are large diversified telecommunications
companies serving many markets. Some competitors possess financial, technical
and other resources greater than those of the combined company. Major paging
carriers that currently compete in one or more of the combined company's
markets include Paging Network, Inc., Metrocall, Inc. and AirTouch Paging Inc.
The scope of competition for communications service customers in the combined
company's markets will broaden as paging services become increasingly
interactive and as two-way services become increasingly competitive. For
example, the FCC has created potential sources of competition by auctioning new
spectrum for wireless communications services, local multipoint distribution
service and the 220-222 MHZ service. Furthermore, the FCC has announced plans
to auction licenses in the general wireless communications service, a service
created from spectrum reallocated from federal government use in 1995.
Moreover, entities offering service on wireless two-way communications
technology, including cellular, broadband PCS N-PCS and specialized mobile
radio services, as well as mobile satellite service providers, also compete
with the paging services that the combined company provides. See "Risk
Factors--Competition and technological change may undermine Arch's business".
MobileMedia holds one nationwide and five regional N-PCS licenses.
Competitors of MobileMedia also hold PCS licenses. Some of these competitors
have substantially greater resources than MobileMedia. One of MobileMedia's
competitors, SkyTel, recently introduced a two-way N-PCS wireless data service.
Although the combined company cannot predict the types of PCS services which
will be offered by those companies, the combined company expects that those
services will compete with the N-PCS and paging services to be offered by the
combined company.
Regulation
Paging operations and the construction, modification, ownership and
acquisition of paging systems are subject to extensive regulation by the FCC
under The Communications Act of 1934 and, to a much more limited extent, by
public utility or public service commissions in certain states. Each of Arch
and MobileMedia is separately licensed to conduct various types of paging
operations. Although the following description is intended to address all
material aspects of governmental regulation, it does not purport to be a
complete discussion of all present and proposed legislation and regulations
relating to the paging operations of the combined company.
Federal Regulation
Regulatory Classification
Paging companies historically have been subject to different federal
regulatory requirements depending upon whether they were providing service as a
radio common carrier, or RCC, as a private carrier paging operator, or PCP, or
as a reseller. Arch's and MobileMedia's paging operations encompass RCC, PCP
and resale operations. However, federal legislation enacted in 1993 required
the FCC to reduce the disparities in the regulatory treatment of similar mobile
services such as RCC and PCP services. The FCC has taken, and continues to
take, actions to implement this legislation. As CMRS providers, Arch and
MobileMedia are regulated as common carriers, except that the FCC has exempted
paging services from some typical common carrier regulations, such as tariff
filing and resale requirements, because paging services have been found to be
highly competitive.
51
<PAGE>
The classification of Arch's and MobileMedia's paging operations as CMRS
affects the level of permissible foreign ownership in the combined company, as
discussed below, and the nature and extent of state regulation. In addition,
the FCC now is required to resolve competing requests for CMRS spectrum by
conducting auctions. This may have the effect of increasing the costs of
acquiring additional spectrum in markets in which the combined company
operates. Also, Arch and MobileMedia are obligated to pay certain regulatory
fees in connection with their paging operations.
FCC Regulatory Approvals and Authorizations
The Communications Act requires radio licensees such as Arch and MobileMedia
to obtain prior approval from the FCC for the assignment or transfer of control
of any construction permit or station license or authorization or any related
rights. This statutory requirement attaches to acquisitions of other paging
companies (or other radio licensees) by Arch and MobileMedia as well as
transfers of a controlling interest in any of Arch's or MobileMedia's licenses,
construction permits or related rights; however the FCC's Wireless
Telecommunications Bureau, which directly regulates Arch's and MobileMedia's
paging activities, has decided to forbear from enforcing its filing
requirements with respect to pro forma assignments and transfers of control of
certain wireless authorizations, such as Arch's and MobileMedia's RCC and PCP
licenses. Pursuant to this decision, wireless telecommunications carriers now
only have to file a written notification of a pro forma transaction within 30
days after the transaction is completed. Note, however, that Arch and
MobileMedia may still be required to obtain prior FCC approval for the pro
forma assignment or transfer of control of some of their licenses not covered
by the forbearance decision, such as certain business radio authorizations.
To date, the FCC has approved each assignment and transfer of control for
which Arch and MobileMedia have sought approval, including the transfer of
MobileMedia's licenses in connection with Arch's acquisition of MobileMedia.
Although there can be no assurance that any future requests for approval of
transfers of control and/or assignments of license will be acted upon in a
timely manner by the FCC, or that the FCC will grant the approval requested,
neither Arch nor MobileMedia knows of any reason that any such applications
will not be approved or granted.
The FCC paging licenses granted to Arch and MobileMedia are for varying terms
of up to 10 years, at the end of which renewal applications must be approved by
the FCC. The combined company is unaware of any circumstances which would
prevent the grant of any pending or future renewal applications made by Arch or
MobileMedia. However, no assurance can be given that any of Arch's or
MobileMedia's renewal applications will be free of challenge or will be granted
by the FCC. It is possible that there may be competition for radio spectrum
associated with licenses as they expire. This would increase the chances of
third-party interventions in the renewal proceedings. The FCC has so far
granted each license renewal application that Arch or MobileMedia have filed,
other than those renewal applications still pending.
The FCC's review and revision of rules affecting paging companies is ongoing.
The regulatory requirements to which Arch and MobileMedia are subject may
change significantly over time. For example, the FCC has decided to adopt a
market area licensing scheme for all paging channels under which carriers would
be licensed to operate on a particular channel throughout a broad geographic
area (such as a major economic area as defined by The Bureau of Economic
Affairs of the U.S. Department of Commerce) rather than being licensed on a
site-by-site basis. These geographic area licenses will be awarded through an
auction. Incumbent paging licensees that do not acquire licenses at auction
will be entitled to interference protection from the market area licensee. Arch
and MobileMedia have each been participating actively in this proceeding in
order to protect their existing operations and retain flexibility, on an
interim and long-term basis, to modify systems as necessary to meet subscriber
demands.
Currently, however, the Communications Act requires that Arch and MobileMedia
obtain licenses from the FCC to use radio frequencies to conduct their paging
operations at specified locations. FCC licenses issued to Arch and MobileMedia
set forth the technical parameters, such as power strength and tower height,
under which Arch and MobileMedia are authorized to use those frequencies. In
many instances, Arch and
52
<PAGE>
MobileMedia require the prior approval of the FCC before they can implement any
significant changes to their radio systems. Once the FCC's market area
licensing rules are implemented, however, these site-specific licensing
obligations will be eliminated, except for applications still required by
Section 22.369 of the FCC rules (request for authority to operate in a
designated Quiet Zone), Section 90.77 (request for authority to operate in a
protected radio receiving location) and Section 1.1301 et seq.
(construction/modification that may have a significant environmental impact) or
for coordination with Canada or Mexico.
The FCC has issued a Further Notice of Proposed Rulemaking in which the FCC
seeks comments on, among other matters, (1) whether it should impose coverage
requirements on licensees with nationwide exclusivity (such as Arch and
MobileMedia), (2) whether these coverage requirements should be imposed on a
nationwide or regional basis, and (3) whether--if such requirements are
imposed--failure to meet the requirements should result in a revocation of the
entire nationwide license or merely a portion of the license. If the FCC were
to impose stringent coverage requirements on licensees with nationwide
exclusivity, the combined company might have to accelerate the build-out of its
systems in certain areas.
Telecommunications Act of 1996
The Telecommunications Act directly affects Arch and MobileMedia. Some
aspects of the Telecommunications Act may place financial obligations upon the
combined company or subject it to increased competition. For example, the FCC
has adopted new rules that govern compensation to be paid to pay phone
providers which has resulted in increased costs for certain paging services
including toll-free 1-800 number paging. Arch and MobileMedia have generally
passed these costs on to their subscribers. This makes their services more
expensive and could affect the attraction or retention of customers. However,
there can be no assurance that the combined company will be able to continue to
pass on these costs. These rules are the subject of several judicial appeals.
In addition, the FCC also has adopted new rules regarding payments by
telecommunications companies into a revamped fund that will provide for the
widespread availability of telecommunications services including universal
service. Prior to the implementation of the Telecommunications Act, universal
service obligations were largely met by local telephone companies, supplemented
by long-distance telephone companies. Under the new rules, all
telecommunications carriers, including paging companies, are required to
contribute to the universal service fund. In addition, certain state regulatory
authorities have enacted, or have indicated that they intend to enact, similar
contribution requirements based on intrastate revenues. The combined company
cannot yet know the impact of these state contribution requirements, if enacted
and applied to it. Moreover, neither Arch nor MobileMedia has been able to
estimate the amount of any such payments that it will be able to bill to its
subscribers; however, payments into the universal service fund will likely
increase the cost of doing business.
Some aspects of the Telecommunications Act could have a beneficial effect on
Arch's and MobileMedia's business. For example, proposed federal guidelines
regarding antenna siting issues may remove local and state barriers to the
construction of communications facilities, although states and municipalities
continue to exercise significant control with regard to such siting issues.
Moreover, in a rulemaking proceeding pertaining to interconnection between
LECs (local exchange carriers) and CMRS providers such as the combined company,
the FCC has concluded that LECs are required to compensate CMRS providers for
the reasonable costs incurred by such providers in terminating traffic that
originates on LEC facilities, and vice versa. Consistent with this ruling, the
FCC has determined that LECs may not charge a CMRS provider or other carrier
for terminating LEC-originated traffic or for dedicated facilities used to
deliver LEC-originated traffic to one-way paging networks. Nor may LECs charge
CMRS providers for number activation and use fees. These interconnection issues
are still in dispute, and it is unclear whether the FCC will maintain its
current position.
Depending on further FCC disposition of these issues, the combined company
may or may not be successful in securing refunds, future relief or both, with
respect to charges for termination of LEC-originated local traffic. If the FCC
ultimately reaches an unfavorable resolution, then the combined company
believes that it would pursue relief through settlement negotiations,
administrative complaint procedures or both. If these
53
<PAGE>
issues are ultimately decided in favor of the LECs, each of Arch and
MobileMedia likely would be required to pay all past due contested charges and
may also be assessed interest and late charges for amounts withheld.
Future Regulation
From time to time, federal or state legislators propose legislation which
could potentially affect Arch and MobileMedia, either beneficially or
adversely. It is possible that legislation will be enacted by the federal or
state governments, or that regulations will be adopted or actions taken by the
FCC or state regulatory authorities, which might materially adversely affect
the business of Arch and/or MobileMedia. Changes such as the allocation by the
FCC of radio spectrum for services that compete with Arch's and MobileMedia's
business could adversely affect Arch's and MobileMedia's results of operations.
See "Risk Factors--Government regulation burdens operations".
Foreign Ownership
The Communications Act limits foreign investment in and ownership of entities
that are licensed as radio common carriers by the FCC. The combined company
owns or controls several radio common carriers and is accordingly subject to
these foreign investment restrictions. Because Arch is the parent of radio
common carriers (but is not a radio common carrier itself), Arch may not have
more than 25% of its stock owned or voted by aliens or their representatives, a
foreign government or its representatives or a foreign corporation if the FCC
finds that the public interest would be served by denying such ownership. In
connection with the WTO Agreement--agreed to by 69 countries--the FCC adopted
rules effective February 9, 1998 that create a very strong presumption in favor
of permitting a foreign interest in excess of 25% if the foreign investor's
home market country signed the WTO Agreement. Arch's subsidiaries that are
radio common carrier licensees are subject to more stringent requirements and
may have only up to 20% of their stock owned or voted by aliens or their
representatives, a foreign government or their representatives or a foreign
corporation. This ownership restriction is not subject to waiver. See "Industry
Overview--Regulation". Arch's certificate ofiIncorporation permits the
redemption of shares of Arch's capital stock from foreign stockholders where
necessary to protect FCC licenses held by Arch or its subsidiaries, but such
redemption would be subject to the availability of capital to Arch and any
restrictions contained in applicable debt instruments and under the Delaware
corporations statute (which currently would not permit any such redemptions).
The failure to redeem such shares promptly could jeopardize the FCC licenses
held by Arch or its subsidiaries. See "--Competition", "--Regulation" and "Risk
Factors--High degree of leverage burdens operations".
State Regulation
In addition to regulation by the FCC, certain states impose various
regulations on the common carrier paging operations of Arch and MobileMedia.
Rates, terms and conditions under which Arch and MobileMedia provided services,
or any changes to those rates, have also been subject to state regulation. In
certain instances, the construction and operation of radio transmitters also
will be subject to zoning, land use, public health and safety, consumer
protection and other state and local taxes, levies and ordinances. However, as
a general rule, states are preempted from exercising rate and entry regulation
of CMRS, but may choose to regulate other terms and conditions of service: for
example, requiring the identification of an agent to receive complaints. States
may also petition the FCC for authority to continue to regulate CMRS rates if
certain conditions are met. State filings seeking rate authority have all been
denied by the FCC, although new petitions seeking such authority may be filed
in the future. Furthermore, some states and localities continue to exert
jurisdiction over (1) approval of acquisitions and transfers of wireless
systems and (2) resolution of consumer complaints. Arch and MobileMedia believe
that to date all required filings for Arch's and MobileMedia's paging
operations have been made.
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<PAGE>
BUSINESS
The combined company is the second largest paging operator in the United
States as measured by units in service and net revenues.
The combined company believes that it is well positioned to compete
effectively in the highly competitive paging industry for the following
reasons. The combination of MobileMedia's market presence in major metropolitan
markets with Arch's historical emphasis on middle and small markets has
significantly broadened the geographic scope of Arch's marketing presence and
should position the combined company to compete more effectively for large
corporate customers with diverse geographic operations. With a significantly
larger subscriber base, the combined company should be better able to obtain
strategic distribution arrangements, as well as amortize marketing investments
over a larger revenue base. In addition, MobileMedia's third-party retail
distribution agreements, which serve the more rapidly growing consumer market,
should complement the more than 175 Arch-operated retail outlets. Similarly,
MobileMedia's two nationwide paging networks and the associated potential for
higher revenue nationwide services should enhance Arch's local coverage and
provide an opportunity to take advantage of Arch's distribution networks.
MobileMedia's plan to deploy its nationwide N-PCS spectrum using its existing
network infrastructure, together with Arch's recent agreement with PageMart
Wireless described below, should permit Arch to market N-PCS services, such as
multi-market alphanumeric and text messaging services, sooner than it would
otherwise be able to, and these services are expected to offer higher revenue
and more growth potential than basic paging services. Finally, MobileMedia's
investments to date in two national call centers should supplement Arch's own
call center and complement Arch's strategy of evolving to regional customer
service centers. Achieving these intended benefits, however, will depend on a
number of factors and no assurance can be given that the benefits will be
realized, in whole or in part. See "Risk Factors--Integrating the two companies
presents challenges" and "--Arch's Investments in N-PCS Licenses".
Business Strategy
The combined company's strategic objective is to strengthen its position as
one of the leading nationwide paging companies in the United States. It
believes that larger, multi-market paging companies enjoy a number of
competitive advantages, including:
. operating efficiencies resulting from more intensive use of existing
paging systems;
. economies of scale in purchasing and administration;
. broader geographic coverage of paging systems;
. greater access to capital markets and lower costs of capital;
. the ability to obtain additional radio spectrum;
. the ability to offer high-quality services at competitive prices; and
. enhanced ability to attract and retain management personnel.
The combined company believes that the current size and scope of its
operations afford it many of these advantages, and that it has the scope and
presence to effectively compete on a national level. It also believes that the
paging industry will undergo further consolidation, and it intends to
participate in such consolidation. See "Risk Factors--Integrating the two
companies presents challenges".
Operating Strategy. The combined company's operating objectives are to
increase its adjusted EBITDA, deploy its capital efficiently, reduce its
financial leverage and expand its customer relationships. The combined company
will pursue the following strategies to achieve its operating objectives:
. Low-Cost Operating Structure. The combined company has selected a low-
cost operating strategy as its principal competitive tactic. Management
believes that a low-cost operating structure, compared to
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<PAGE>
differentiated premium pricing and niche positioning, the other two
fundamental competitive tactics in the paging industry, will maximize its
flexibility to offer competitive prices while still achieving target
margins and adjusted EBITDA. Arch's management has worked closely with
MobileMedia's management to identify redundant managerial and
administrative functions that Arch's management believes can be eliminated
without material impact to customer related activities. The combined
company will continue to improve its low-cost operating structure by
consolidating some operating functions, including centralized purchases
from key vendors, to achieve economies of scale, and installing
technologically advanced and reliable transmission systems.
. Efficient Capital Deployment. The combined company's principal financial
objective is to reduce financial leverage by reducing capital
requirements and increasing adjusted EBITDA. To reduce capital
expenditures, Arch has already implemented a company-wide focus on the
sale, rather than lease, of pagers. This is because subscriber-owned
units require a lower level of capital investment than company-owned
units. As a result of these efforts to date, the number of subscriber-
owned units in service, as a percentage of net new units in service,
increased from 65.2% in the year ended December 31, 1997 to 69.7% in the
year ended December 31, 1998. In addition, Arch has modified its
incentive compensation programs for line managers so that bonuses are
based, in part, on capital efficiency.
. Balanced Distribution. Arch's combination of direct sales, company-owned
stores and third party resellers will be supplemented by MobileMedia's
local market direct sales force and its distribution agreements with
third-party regional and national retailers. In addition, MobileMedia's
national accounts sales force should significantly enhance Arch's efforts
to improve distribution to nationwide customers.
. Capitalize on Revenue Enhancement Opportunities. The combined company
will have one of the broadest product offerings in the paging industry,
including traditional paging services as well as new services such as
assured message delivery and acknowledgement, wireless e-mail and content
delivery services. Arch intends to deliver these new services through a
strategic alliance with PageMart Wireless, Inc. pursuant to which Arch
will utilize and share certain costs of PageMart's N-PCS network. This
will provide the combined company with more economical and broader access
to higher ARPU nationwide, regional or text messaging services. To date,
Arch has marketed these services only on a limited basis through the
resale of other carriers' services on less attractive terms. Arch
believes there will be a number of new revenue opportunities associated
with its approximately 7.2 million units in service, including selling
enhanced services which add value such as voicemail, resale of long-
distance service and fax storage and retrieval. See "Business--Arch's
Paging and Messaging Services, Products and Operations" and "--Arch's
Investments in NPCS Licenses".
Arch's Paging and Messaging Services, Products and Operations
Arch has been a leading provider of wireless messaging services, primarily
paging services. Prior to the MobileMedia acquisition, Arch was the third
largest paging company in the United States, based on its 4.3 million units in
service at March 31, 1999. Arch has operated in 41 states and more than 180 of
the 200 largest markets in the United States. Arch has offered local, regional
and nationwide paging services employing digital networks covering
approximately 85% of the United States population.
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<PAGE>
The following table sets forth information about the approximate number of
units in service with Arch subscribers and net increases in number of units
through internal growth and acquisitions:
<TABLE>
<CAPTION>
Units in Service Net Increase in
at Beginning of Units through Increase in Units Units in Service
Year Ended August 31, Period Internal Growth(1) through Acquisitions(2) at End of Period
- --------------------- ---------------- ------------------ ----------------------- ----------------
<S> <C> <C> <C> <C>
1987.................... 4,000 3,000 12,000 19,000
1988.................... 19,000 8,000 3,000 30,000
1989.................... 30,000 14,000 34,000 78,000
1990.................... 78,000 20,000 4,000 102,000
1991.................... 102,000 24,000 1,000 127,000
1992.................... 127,000 33,000 -- 160,000
1993.................... 160,000 70,000 24,000 254,000
1994.................... 254,000 138,000 18,000 410,000
<CAPTION>
Four Months Ended December 31,
- ------------------------------
<S> <C> <C> <C> <C>
1994.................... 410,000 64,000 64,000 538,000
<CAPTION>
Year Ended December 31,
- -----------------------
<S> <C> <C> <C> <C>
1995.................... 538,000 366,000 1,102,000 2,006,000
1996.................... 2,006,000 815,000 474,000 3,295,000
1997.................... 3,295,000 595,000 -- 3,890,000
1998.................... 3,890,000 386,000 -- 4,276,000
<CAPTION>
Three Months Ended March 31,
- ----------------------------
<S> <C> <C> <C> <C>
1999.................... 4,276,000 53,000 -- 4,329,000
</TABLE>
Net increase in units through internal growth includes internal growth in
acquired paging businesses after their acquisition by Arch and is net of
subscriber cancellations during each applicable period. Increase in units
through acquisitions is based on units in service of acquired paging businesses
at the time of their acquisition by Arch.
Arch has provided four basic types of paging services: digital display,
alphanumeric display, tone-only and tone-plus-voice. Arch provides digital
display, alphanumeric display and tone-only service in all of its markets and
tone-plus-voice service in only a few markets.
A digital display pager permits a caller to transmit to the subscriber a
numeric message that may consist of a telephone number, an account number or
coded information, and has the capability to store several such numeric
messages in memory for later recall by the subscriber. An alphanumeric display
pager allows subscribers to receive and store messages consisting of both
numbers and letters. A tone-only pager notifies the subscriber that a call has
been received by emitting an audible beeping sound or vibration. A tone-plus-
voice pager emits a beeping sound followed by a brief voice message.
Digital display paging service, which was introduced by the paging industry
nearly 20 years ago, has in recent years grown at a faster rate than tone-only
or tone-plus-voice service and currently represents a majority of all units in
service. The growth of alphanumeric display service, which was introduced in
the mid-1980s, has been constrained by its difficulty in inputting data, its
requirements of specialized equipment and its relatively high use of system
capacity during transmission.
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<PAGE>
The following table summarizes the types of Arch's units in service at
specified dates:
<TABLE>
<CAPTION>
December 31,
------------------------------------------- March 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
Units % Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Digital display......... 2,796,000 85% 3,284,000 85% 3,586,000 84% 3,635,000 84%
Alphanumeric display.... 395,000 12 524,000 13 621,000 14 631,000 14
Tone-only............... 54,000 2 43,000 1 35,000 1 32,000 1
Tone-plus-voice......... 50,000 1 39,000 1 34,000 1 31,000 1
--------- --- --------- --- --------- --- --------- ---
Total.................. 3,295,000 100% 3,890,000 100% 4,276,000 100% 4,329,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides paging service to subscribers for a monthly fee. Subscribers
either lease the pager from Arch for an additional fixed monthly fee or they
own the pager, having purchased it either from Arch or from another vendor. The
monthly service fee is generally based upon the type of service provided, the
geographic area covered, the number of units provided to the customer and the
period of the subscriber's commitment. Subscriber-owned units provide a more
rapid recovery of Arch's capital investment than units owned and maintained by
Arch, but may generate less recurring revenue. Arch also sells units to third-
party resellers who lease or resell units to their own subscribers and resell
Arch's paging services under marketing agreements. The following table
summarizes the number of Arch-owned and leased, subscriber-owned and reseller-
owned units in service at specified dates:
<TABLE>
<CAPTION>
December 31,
------------------------------------------- March 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
Units % Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arch-owned and leased... 1,533,000 47% 1,740,000 45% 1,857,000 43% 1,875,000 43%
Subscriber-owned........ 914,000 28 1,087,000 28 1,135,000 27 1,128,000 26
Reseller-owned.......... 848,000 25 1,063,000 27 1,284,000 30 1,326,000 31
--------- --- --------- --- --------- --- --------- ---
Total.................. 3,295,000 100% 3,890,000 100% 4,276,000 100% 4,329,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides enhancements and ancillary services such as voice mail,
personalized greetings, message storage and retrieval, pager loss protection
and pager maintenance services. Voice mail allows a caller to leave a recorded
message that is stored in Arch's computerized message retrieval center. When a
message is left, the subscriber can be automatically alerted through the
subscriber's pager and can retrieve the stored message by calling Arch's paging
terminal. Personalized greetings allow the subscriber to record a message to
greet callers who reach the subscriber's pager or voice mail box. Message
storage and retrieval allows a subscriber who leaves Arch's service area to
retrieve calls that arrived during the subscriber's absence from the service
area. Pager loss protection allows subscribers who lease pagers to limit their
costs of replacement upon loss or destruction of a pager. Pager maintenance
services are offered to subscribers who own their own equipment. Arch is also
in the process of test marketing various other services that add value, and can
be integrated with existing paging services. These include, among other
services, voicemail, resale of long distance service and fax storage and
retrieval.
MobileMedia's Paging and Messaging Services, Products and Operations
MobileMedia has operated one of the largest paging businesses in the United
States, with approximately 3.1 million units in service as of March 31, 1999.
Through its sales offices, nationwide retail distribution network, company-
operated retail stores and resellers, MobileMedia has offered local, regional
and national coverage to subscribers in all 50 states and the District of
Columbia, including local coverage to each of the 100 most populated
metropolitan markets in the United States. MobileMedia's paging and wireless
messaging services consist principally of digital display and alphanumeric
display paging services.
Recent Business Strategy
After making its bankruptcy filing, MobileMedia restructured its operations
with the objective of improving performance, principally in the areas of order
entry, billing and collections, inventory controls,
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<PAGE>
management information systems conversion and customer service. MobileMedia
also undertook cost reduction analyses and took actions to reduce
telecommunications, subcontracting and lease expenses, among others.
MobileMedia also sought to refocus its marketing and sales efforts in an
attempt to achieve unit additions consistent with positive cash flow, and
changed its management structure with the objective of establishing profit and
loss accountability in each market.
Paging and Messaging Services
MobileMedia currently offers a variety of paging and messaging services. The
main paging services offered by MobileMedia are digital display, with
approximately 2,448,800 units in service at March 31, 1999 and alphanumeric
display, with approximately 645,583 units in service at March 31, 1999.
MobileMedia also offers a variety of enhanced services such as voice mail and
voice mail notification, e-mail notification and news, sports reports and stock
quotes.
The following table sets forth the number of MobileMedia customers by service
type as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
Type of Service Number % Number % Number % Number % Number %
--------------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Numeric Display......... 3,713,579 83.9% 2,820,443 82.0% 2,499,735 79.5% 2,707,363 81.6% 2,448,800 78.8%
Alphanumeric............ 658,769 14.9 593,280 17.2 630,448 20.0 590,076 17.8 645,583 20.8
Other................... 51,759 1.2 26,619 0.8 13,785 0.5 22,114 0.6 12,392 0.4
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 4,424,107 100.0% 3,440,342 100.0% 3,143,968 100.0% 3,319,553 100.0% 3,106,775 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
Customers with
nationwide services
(included above)....... 325,924 330,254 291,427 328,724 341,316
</TABLE>
Products and Services
Subscribers for paging services enter into a service contract with
MobileMedia that provides for either the purchase or lease of units and the
payment of airtime and other charges. As of March 31, 1999, approximately 46.4%
of units in service were purchased either by subscribers or by resellers, and
approximately 53.6% were owned by MobileMedia and leased to subscribers.
MobileMedia-owned units leased to subscribers require capital investment by
MobileMedia, while customer-owned and -maintained units, commonly referred to
as COAM units, and those owned by resellers do not. MobileMedia also sells its
services in bulk quantities to resellers, who subsequently sell MobileMedia's
services to end-users. Resellers are responsible for sales, billing, collection
and equipment maintenance costs. MobileMedia sells other products and services,
including units and accessories and pager replacement and maintenance
contracts. The following table sets forth MobileMedia's units in service by
ownership as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
Ownership Number % Number % Number % Number % Number %
--------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company owned and rented
to subscribers......... 1,996,141 45.2% 1,712,941 49.8% 1,645,869 52.4% 1,658,463 50.0% 1,666,348 53.6%
COAM.................... 1,112,194 25.1 861,250 25.0 728,297 23.2 825,842 24.8 705,108 22.7
Resellers............... 1,315,772 29.7 866,151 25.2 769,802 24.4 835,248 25.2 735,319 23.7
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 4,424,107 100.0% 3,440,342 100.0% 3,143,968 100.0% 3,319,553 100.0% 3,106,775 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
Networks and Licenses
MobileMedia's Networks and Licenses, Including N-PCS
MobileMedia operates local, regional and national paging networks which
enable its customers to receive pages over a broad geographical area. The
extensive coverage provided by this network infrastructure provides
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MobileMedia with an advantage over some of its competitors whose networks lack
comparable coverage in securing accounts with large corporate clients and
retail chains, which frequently demand national network coverage from their
paging service provider.
Although MobileMedia's networks provide local, regional and national
coverage, its networks operate over numerous frequencies and are subject to
capacity constraints in certain geographic markets. Although the
capacity of MobileMedia's networks varies significantly market by market,
almost all of MobileMedia's markets have adequate capacity to meet the demands
of projected growth for the next several years. The use of multiple frequencies
adds complexity to inventory management, customer service and order fulfillment
processes. Some of MobileMedia's networks use older technologies and are
comparatively costlier to operate.
MobileMedia is seeking to improve overall network efficiency by deploying new
paging terminals, consolidating subscribers on fewer, higher capacity networks
and increasing the transmission speed, or baud rate, of certain of its existing
networks. MobileMedia believes its investments in its network infrastructure
will facilitate and improve the delivery of high quality paging services while
at the same time reducing associated costs of such services.
Nationwide wireless networks. MobileMedia operates two nationwide 900 MHz
networks. As part of its MobileComm acquisition, MobileMedia acquired
MobileComm's fully operational nationwide wireless "8875" network, which
was upgraded in 1996 to incorporate high-speed FLEX(TM) technology
developed by Motorola. In addition, in 1996, MobileMedia completed the
construction of a second nationwide "5375" network that uses FLEX(TM)
technology. The use of FLEX(TM) technology significantly increases
transmission capacity and represents a marked improvement over other
systems that use older paging protocols.
Nationwide two-way N-PCS networks. N-PCS networks enable paging companies
to offer two-way paging services and to make more efficient use of radio
spectrum than do non-PCS networks. MobileMedia purchased five regional
licenses through the FCC's 1994 auction of N-PCS licenses, providing the
equivalent of a nationwide 50 kHz outbound/12.5 kHz inbound PCS system. In
addition, as part of the MobileComm acquisition, MobileMedia acquired a
second two-way N-PCS license for a nationwide 50 kHz outbound/12.5 kHz
inbound system.
In order to retain its N-PCS licenses, MobileMedia must comply with certain
minimum buildout requirements. With respect to each of the regional PCS
licenses purchased at the FCC's 1994 auction, MobileMedia would be required to
build out the related PCS system to cover 150,000 sq. km. or 37.5% of each of
the five regional populations by April 27, 2000 and 300,000 sq. km. or 75% of
each of the five regional populations by April 27, 2005. With respect to the
nationwide PCS license acquired as part of the MobileComm acquisition,
MobileMedia would be required to build out the related PCS system to cover
750,000 sq. km. or 37.5% of the U.S. population by September 29, 1999 and
1,500,000 sq. km. or 75% of the U.S. population by September 29, 2004. In each
instance, the population percentage will be determined by reference to
population figures at the time of the applicable deadline. MobileMedia
estimates that the costs of these minimum build-outs would be approximately
$9.0 million. Although these minimum build-outs would be sufficient to satisfy
regulatory requirements, they would not be sufficient for MobileMedia to
provide significant N-PCS applications of the types which the combined company
intends to provide.
Arch's Investments in N-PCS Licenses
Arch took the following steps, prior to the MobileMedia acquisition, to
position itself to participate in new and emerging N-PCS services and
applications.
PageMart Wireless, Inc. In May 1999, Arch and PageMart Wireless, Inc. signed
a five-year agreement for the provision of N-PCS services. The agreement calls
for Arch and PageMart to share certain capital and operating expenses. Under
the agreement, Arch plans to market N-PCS advanced messaging services,
including assured message delivery and full two-way messaging, using PageMart's
Internet Protocol-based network. Arch
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expects to begin marketing these services nationwide during the third quarter
of 1999. As demand for advanced messaging increases over time, Arch plans to
construct its own N-PCS network, leveraging PageMart's infrastructure and
receriver sites. PageMart previously announced similar agreements with each of
Metrocall, Inc. and Airtouch Communications, Inc.
Benbow PCS Ventures, Inc. Through Arch's May 1996 acquisition of Westlink,
Arch acquired a 49.9% equity interest in Benbow PCS Ventures, Inc. Benbow holds
exclusive rights to a 50 KHz outbound/12.5 KHz inbound N-PCS license in each of
the five regions of the United States. Benbow is a "designated entity" (a
small, minority-controlled or female-controlled business) under FCC rules and
is entitled to discounts and installment payment schedules in the payment of
its N-PCS licenses. Arch has the right to designate one of Benbow's three
directors and has veto rights with respect to specified major business
decisions by Benbow. Arch 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 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 "Arch Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Capital Expenditures and Commitments".
Arch provides management services to Benbow, subject to Benbow's ultimate
control, under a five-year agreement expiring on October 1, 2000. Arch is paid
a management fee and is reimbursed for its expenses. Arch also has a right of
first refusal to provide Benbow with design, engineering and construction
services for its N-PCS system as well as to lease certain equipment to Benbow
for use in connection with such system. Arch has a right of first refusal with
respect to any transfer of shares held by Ms. June Walsh, who holds the
remaining 50.1% equity interest in Benbow. Ms. Walsh has a put right to require
Arch, commencing January 23, 2000, or sooner under certain circumstances, to
repurchase her Benbow shares, subject to prior FCC approval, for an amount
equal to the greater of (1) an amount between $3.5 million and $5.0 million,
depending on the timing and circumstances under which Ms. Walsh exercises her
put option, and (2) the fair market value of her shares (as determined by
arbitration if the parties do not agree). If Arch exercises its right of first
refusal or Ms. Walsh exercises her put option, Benbow could lose some of the
benefits of the discounts and installment payment schedules for its FCC
payments unless another "designated entity" acquired control of Benbow under
FCC rules. See Note 1 to Arch's consolidated financial statements.
CONXUS Communications, Inc. Arch currently holds a 6.6% equity interest in
CONXUS Communications, Inc., which holds exclusive rights to a 50 KHz
outbound/50 KHz inbound two-way messaging license throughout the United States.
CONXUS, like Benbow, is a "designated entity" under FCC rules and is entitled
to discounts and installment payment schedules.
Each stockholder of CONXUS is entitled to purchase services from CONXUS at
"most favored customer" rates, based on like services. CONXUS and Arch have
agreed to negotiate in good faith to enter into mutually acceptable
intercarrier, network access and similar agreements. If Arch wishes to purchase
N-PCS services of the kind offered by CONXUS, Arch has agreed to contract
exclusively with CONXUS for such services so long as such services are
competitive in price and quality with comparable services offered by others.
Arch is currently acting as a reseller of voice messaging services through
CONXUS in a limited number of markets under an agreement which is renewable
from year to year unless terminated by either party.
On May 18, 1999, CONXUS filed for Chapter 11 protection in the U.S.
Bankruptcy Court in Delaware. Arch is unable to predict the effect of CONXUS'
bankruptcy filing on Arch's equity interest in CONXUS or the existing
agreements between Arch and CONXUS.
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Subscribers and Marketing
The combined company's paging accounts are generally businesses with
employees who travel frequently but must be immediately accessible to their
offices or customers. Arch's subscribers have historicaly included proprietors
of small businesses, professionals, management and medical personnel, field
sales personnel and service forces, members of the construction industry and
trades, and real estate brokers and developers. Mobile Media's traditional
subscribers include medical personnel, sales and service organizations,
specialty trade organizations, manufacturing organizations and governmental
agencies. The combined company believes that pager use among retail consumers
will increase significantly in the future, although consumers do not currently
account for a substantial portion of Arch's subscriber base.
Arch
Although today Arch operates in more than 180 of the 200 largest U.S.
markets, Arch historically has focused on medium-sized and small market areas
with lower rates of pager penetration and attractive demographics. Arch
believes that these markets will continue to offer significant opportunities
for growth, and that its national scope and presence will also provide Arch
with growth opportunities in larger markets.
Arch markets its paging services through a direct marketing and sales
organization which operated approximately 175 retail stores as of March 31,
1998. Arch also markets its paging services indirectly through independent
resellers, agents and retailers. Arch typically offers resellers paging
services in large quantities at wholesale rates that are lower than retail
rates, and resellers offer the services to end-users at a markup. Arch's costs
of administering and billing resellers are lower than the costs of direct end-
users on a per pager basis.
Arch also acts as a reseller of other paging carriers' services when existing
or potential Arch customers have travel patterns that require paging service
beyond the coverage of Arch's own networks.
In May 1997, Arch established a single national identity, Arch Paging, for
its paging services which previously had been marketed under various
trademarks. As part of this branding initiative, Arch adopted a new corporate
logo, developed a corporate-wide positioning strategy tied to customer service
delivery, and launched its Internet Web site at www.arch.com. Arch believes
that its unified branding identity has given the Arch name national exposure
for the first time and should result in significant economic leverage in its
marketing and communications efforts.
MobileMedia
MobileMedia's sales and marketing efforts are directed toward adding further
units with existing subscribers and identifying new potential subscribers.
MobileMedia markets its paging services through three primary sales channels:
direct, reseller and retail.
Direct. In the direct channel, MobileMedia leases or sells paging units
directly to its customers and bills and services such customers.
MobileMedia's direct customers range from individuals and small- and
medium-sized businesses to Fortune 500 accounts and government agencies.
Business and government accounts typically experience less turnover than
consumer accounts. The direct channel will continue to have the highest
priority among MobileMedia's marketing and sales efforts, because of its
critical contribution to recurring revenue and projected growth.
MobileMedia has been engaged in efforts to improve sales productivity and
strengthen its direct channel sales force, which suffered from high
turnover and open positions during much of 1997. In addition, MobileMedia
commenced implementing consumer direct marketing techniques in 1998. As of
March 31, 1999, the direct channel accounted for approximately 80.5% of
recurring revenue.
Reseller. In the reseller channel, MobileMedia sells access to its
transmission networks in bulk to a third party, who then resells such
services to consumers or small businesses or other end users. MobileMedia
offers paging services to resellers at bulk discounted rates. The third
party reseller provides customer
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<PAGE>
service, is responsible for pager maintenance and repair costs, invoices
the end user and retains the credit risk of the end user, although
MobileMedia retains the credit risk of the reseller. Because resellers are
responsible for customer equipment, the capital costs that would otherwise
be borne by MobileMedia are reduced.
MobileMedia's resellers generally are not exclusive distributors of
MobileMedia's services and often resell paging services of more than one
provider. Competition among service providers to attract and maintain
reseller distribution is based primarily upon price, including the sale of
paging units to resellers at discounted rates. MobileMedia intends to be an
active participant in the reseller channels and to concentrate on accounts
that are profitable and where longer term partnerships can be established
with selected resellers. As of March 31, 1999, the reseller channel
accounted for approximately 10.3% of recurring revenue.
Retail. In the retail channel, MobileMedia sells units to retailers and,
after the consumer purchases the pager from the retailer, the consumer
contacts MobileMedia to activate service. The retail channel is targeted at
the consumer market and consists primarily of national retail chains.
Consumers served by the retail channel typically purchase, rather than
lease, paging units. This reduces MobileMedia's capital investment
requirements. Subscribers obtained through retailers are billed and
serviced directly by MobileMedia. Retail distribution permits MobileMedia
to penetrate the consumer market by supplementing direct sales efforts. As
of March 31, 1999, the retail channel accounted for approximately 9.2% of
recurring revenue.
Sources of Equipment
Arch does not manufacture any of the pagers or other equipment used in its
paging operations. The equipment used in Arch's paging operations is generally
available for purchase from multiple sources. Arch centralizes price and
quantity negotiations for all of its operating subsidiaries to achieve cost
savings from volume purchases. Arch buys pagers primarily from Motorola and NEC
and purchases terminals and transmitters primarily from Glenayre and Motorola.
Arch anticipates that equipment and pagers will continue to be available in the
foreseeable future, consistent with normal manufacturing and delivery lead
times. See "Risk Factors--Arch cannot control third parties on whom Arch
depends for products and services".
Because of the high degree of compatibility among different models of
transmitters, computers and other paging equipment manufactured by suppliers,
Arch is able to design its systems without being dependent upon any single
source of such equipment. Arch routinely evaluates new developments in paging
technology in connection with the design and enhancement of its paging systems
and selection of products to be offered to subscribers. Arch believes that its
paging system equipment is among the most technologically sophisticated in the
paging industry.
MobileMedia does not manufacture any of the units or related transmitting and
paging terminal equipment used in its paging operations. MobileMedia currently
purchases units from a limited number of suppliers and in turn sells or leases
the units to its subscribers. Motorola is the primary supplier of units to
MobileMedia. Glenayre is MobileMedia's primary supplier of paging terminals,
paging transmitters and voice mail system equipment. NEC and Panasonic also
supply paging units.
Employees
At March 31, 1999, Arch employed approximately 2,600 persons. None of Arch's
employees is represented by a labor union. Arch believes that its employee
relations are good. As part of its divisional reorganization, Arch anticipates
a net reduction of approximately 10% of its workforce. See "Arch Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Divisional Reorganization".
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At March 31, 1999, MobileMedia employed 2,885 people in various capacities,
with 493 in MobileMedia's corporate headquarters in Fort Lee, New Jersey and
the balance in its five regions. None of such employees is covered by
collective bargaining agreements. MobileMedia believes its employee relations
are good.
Trademarks
Arch owns the service marks "Arch" and "Arch Paging", and holds a federal
registration for the service mark "Arch Nationwide Paging" as well as various
other trademarks.
MobileMedia markets its services primarily under the trade name MobileComm
and the federally registered mark MOBILECOMM, except in the Greater
Metropolitan Cincinnati area and in certain parts of Western Pennsylvania and
Western New York, in which it markets its services under the federally
registered mark MOBILEMEDIA. MobileMedia markets its messaging services under
the federally registered mark VOICESTAR, and other services under the
federally registered mark SPORTSCASTER and the unregistered mark MOBILECOMM
CITYLINK. MobileMedia also owns other federally registered marks including:
DIAL PAGE, DMC DIGITAL MOBILE COMMUNICATIONS, EZ ALERT, MEMORY MANAGER,
MESSAGESOFT, MOBILEMEDIA (and design) MOBILEMEDIA (and Globe Design),
MOBILEMEDIA PAGING & PERSONALCOM and PAGERXTRA. In addition, MobileMedia has
applications on file for federal registration of the marks MMS and MOBILECOMM
(and design.)
Properties
At March 31, 1999, Arch owned four office buildings and leased office space,
including its executive offices, in approximately 175 localities in 35 states
for use in its paging operations. Arch leases transmitter sites and/or owns
transmitters on commercial broadcast towers, buildings and other fixed
structures in approximately 3,400 locations in 45 states. Arch's leases are
for various terms and provide for monthly lease payments at various rates.
Arch believes that it will be able to obtain additional space as needed at
acceptable cost. Arch sold off substantially all of its tower sites during
1998 and 1999 and currently rents transmitter space. As part of its divisional
reorganization, Arch is closing some office locations and redeploying other
real estate assets. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations --Effects of Tower Site Sale"
and "--Divisional Reorganization".
In addition to its FCC licenses and network infrastructure, which includes
radio transmission and satellite uplink equipment, MobileMedia has the
following categories of assets: (1) pagers, including both pagers held as
fixed assets for lease and pager inventory for sale, pager parts and
accessories; (2) its subscriber base and related accounts receivable; (3)
intellectual property; (4) real estate and improvements; (5) leased assets;
(6) computer and telephone systems and equipment; (7) furniture, fixtures and
equipment; (8) goodwill and other intangibles; and (9) cash and cash
equivalents.
MobileMedia relocated its headquarters to Fort Lee, New Jersey in March
1998. At March 31, 1999, MobileMedia leased office space, including its
executive offices, in approximately 33 states for use in its paging
operations. MobileMedia leases transmitter sites and/or owns transmitters on
commercial broadcast towers, buildings and other fixed structures.
MobileMedia's leases are for various terms and provide for monthly lease
payments at various rates. MobileMedia believes that it will be able to obtain
additional space as needed at acceptable cost.
On September 3, 1998, MobileMedia sold certain transmission towers and
associated assets to an unrelated third party and currently rents transmitter
space on these towers. MobileMedia recognized proceeds of $170.0 million from
the sale and the annual rental expense is approximately $10.7 million.
Litigation
Arch, from time to time, is involved in lawsuits arising in the normal
course of business. Arch believes that its currently pending lawsuits will not
have a material adverse effect on its financial condition or results of
operations.
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MobileMedia disclosed in 1996 that misrepresentations and other violations
had occurred during the licensing process for as many as 400 to 500, or
approximately 6% to 7%, of its approximately 8,000 local transmission one-way
paging stations. MobileMedia caused an investigation to be conducted by outside
counsel, and a comprehensive report regarding these matters was provided to the
FCC in the fall of 1996. In cooperation with the FCC, outside counsel's
investigation was expanded to examine all of MobileMedia's paging licenses, and
the results of that investigation were submitted to the FCC on November 8,
1996.
On January 13, 1997, the FCC issued a Public Notice relating to the status of
some of the FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (1) automatically terminated
approximately 185 authorizations for paging facilities that were not
constructed by the expiration date of their construction permits and remained
unconstructed, (2) dismissed approximately 94 applications for fill-in sites
around existing paging stations (which had been filed under the so-called "40-
mile rule") as defective because they were predicated upon unconstructed
facilities and (3) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. With respect to each of the approximately
99 authorizations where the underlying station was untimely constructed, the
FCC granted MobileMedia interim operating authority subject to further action
by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an administrative law judge to take evidence and develop a full
factual record on directed issues concerning MobileMedia's filing of false
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the
hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
providing for a change of control of MobileMedia and a permissible transfer of
MobileMedia's FCC licenses.
On September 2, 1998, MobileMedia and Arch filed a joint application to
transfer control of MobileMedia to Arch. On February 5, 1999, the FCC released
an order granting the transfer and terminating the hearing into MobileMedia's
qualifications to remain an FCC licensee, subject to certain conditions which
have since been satisfied. The order also required divestiture, within six
months after the closing of the MobileMedia acquisition, of certain NPCS
interests and those MobileMedia facilities operating under special temporary
authority.
Predecessors to the Combined Company; Events Leading up to MobileMedia's
Bankruptcy Filings
A predecessor to Arch, also named Arch Communications Group, Inc., was
incorporated in January 1986 in Delaware and conducted its operations through
wholly owned direct and indirect subsidiaries. On September 7, 1995, this
predecessor completed its acquisition of USA Mobile Communications Holdings,
Inc. through the merger of the predecessor with and into USA Mobile, which
simultaneously changed its name to Arch Communications Group, Inc. and
continued in existence as a Delaware corporation. In accordance with GAAP, the
predecessor was treated as the acquirer in the merger for accounting and
financial reporting purposes, and Arch reports the historical financial
statements of the predecessor as its historical financial statements. See Note
2 to Arch's consolidated financial statements.
MobileMedia Communications, Inc. and its publicly traded parent company were
each incorporated in Delaware in 1993. In this prospectus, references to
MobileMedia refer to MobileMedia Communications, Inc. and its consolidated
subsidiaries, but not to the parent company unless we indicate otherwise. In
1995 and 1996, MobileMedia Communications, Inc. acquired the paging and
wireless messaging business of Dial Page Inc. and Mobile Communications
Corporation of America for approximately $1.1 billion in the aggregate. During
1996, MobileMedia experienced difficulties executing its post-acquisition
business strategy. These difficulties related largely to the process of
integration of the operations of Dial Page and MobileComm into
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those of MobileMedia. As a result, MobileMedia did not achieve expected growth
in its subscriber base and revenues, nor did it realize anticipated
efficiencies and cost reductions from the elimination of duplicative functions.
During 1996, MobileMedia's financial position deteriorated. As of September 30,
1996, MobileMedia Communications, Inc. was in violation of certain financial
covenants under its $750.0 million 1995 credit agreement, which resulted in the
occurrence of events of default under that agreement and precluded MobileMedia
from borrowing additional funds. In the fall of 1996, MobileMedia commenced
negotiations with The Chase Manhattan Bank, the agent for the lenders under the
1995 credit agreement, regarding the terms of a possible financial
restructuring.
In November and December of 1996, MobileMedia sought to modify payment terms
with certain of its larger vendors, some of which had not been paid in
accordance with their scheduled payment terms. In the fall of 1996, Motorola,
MobileMedia's largest supplier of units and pager repair parts, informed
MobileMedia that it would require credit support to assure payment of
approximately $35.0 million past due accounts payable and would refuse to
accept orders for products or services from and refuse to make shipments to
MobileMedia pending resolution of the matter. Subsequently, other key suppliers
also made demands on MobileMedia for payment of their past due accounts in the
aggregate amount of $11.8 million.
Between November 1996 and January 1997, MobileMedia failed to make scheduled
interest payments of approximately $25.2 million on MobileMedia's 9 3/8% notes
and under MobileMedia's 1995 credit agreement.
Negotiations between MobileMedia and the holders of the MobileMedia 9 3/8%
notes and certain other outstanding notes and with MobileMedia's key suppliers
continued through late 1996. When it became apparent that MobileMedia would be
unable, among other things, to reach agreements with the key suppliers to
resume shipments of critical inventory and equipment or to reach agreement with
its lenders and on the terms of a restructuring of its indebtedness outside of
Chapter 11 of the Bankruptcy Code, MobileMedia concluded that it had no
practical alternative other than to seek protection under Chapter 11.
On January 30, 1997, MobileMedia filed a voluntary petition for
reorganization under Chapter 11. For subsequent developments, see "MobileMedia
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview".
The MobileMedia Acquisition
The Merger
To consummate the MobileMedia acquisition in June, 1999, MobileMedia
Communications, Inc. was merged with and into a wholly owned subsidiary of
Arch. Immediately following this merger, Arch contributed all of the
outstanding stock of the surviving corporation to an indirect wholly owned
subsidiary of Arch. Immediately prior to the merger, MobileMedia's parent
company had contributed all of its assets to MobileMedia Communications, Inc.
In connection with the merger, MobileMedia Communications, Inc.'s subsidiaries
were consolidated into a single subsidiary of MobileMedia Communications, Inc.
which became an indirect wholly owned subsidiary of Arch as a result of the
merger.
Purchase Price
Arch acquired MobileMedia for a combination of cash and Arch securities, as
follows:
. Arch paid approximately $479.0 million in cash to certain secured
creditors of the MobileMedia debtors-in-possession;
. Arch paid a total of $58.0 million to pay fees and expenses, repay all
borrowings outstanding under MobileMedia's post-petition credit facility,
pay pre-petition priority claims and post-petition claims incurred by the
debtors-in-possession in the ordinary course of business or authorized by
the bankruptcy court, and pay principal and accrued interest plus certain
indenture trustee fees outstanding under certain senior notes assumed by
MobileMedia in the acquisition of the paging and wireless business of
Dial Page in 1995;
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. Arch issued 14,344,969 shares of its common stock to unsecured creditors
of MobileMedia and MobileMedia's parent company;
. Arch issued and sold additional shares of its common stock upon exercise
of transferable rights issued to unsecured creditors and issued and sold
shares of its common stock and sold shares of Class B common stock to
four unsecured creditors who agreed to act as standby purchasers and to
purchase shares in case transferable rights to purchase those shares were
not exercised. The holders of transferable rights and the standby
purchasers paid a price of $2.00 per share for a total of 108,728,673
shares and a total purchase price of $217.5 million; and
. Arch issued to the standby purchasers warrants to acquire up to 3,675,659
shares of its common stock on or before September 1, 2001 at a warrant
exercise price of $3.01 per share. The warrant exercise price was equal
to the amount that would result at September 1, 2001 from an investment
of $2.00 on June , 1999, the closing date for the MobileMedia
acquisition, assuming a 20% per annum internal rate of return.
Arch also issued to the holders of its common stock and Series C preferred
stock on January 27, 1999 non-transferable rights to acquire up to 44,893,166
shares of its common stock at a price of $2.00 per share. A total of 308,892
non-transferable rights were exercised. Because non-transferable rights to
acquire 44,584,274 shares were not exercised, Arch has distributed in their
place warrants to acquire an equivalent number of shares of its common stock at
the warrant exercise price of $3.01 per share.
Accounting Treatment
The merger is being accounted for under the purchase method of accounting;
the purchase price will be allocated based on the fair value of the assets
acquired and the liabilities assumed. In accordance with GAAP, Arch will be
treated as the acquiror in the merger for accounting and financial reporting
purposes, and Arch will continue to report its historical financial statements
as the historical financial statements of the combined company.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of Arch are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Edward Baker, Jr..... 48 Chairman of the Board, Chief Executive Officer and Director
Lyndon R. Daniels....... 46 President and Chief Operating Officer
John B. Saynor.......... 58 Executive Vice President and Director
J. Roy Pottle........... 40 Executive Vice President and Chief Financial Officer
Paul H. Kuzia........... 57 Executive Vice President/Technology and Regulatory Affairs
R. Schorr Berman(1)(2).. 50 Director
James S. Hughes(1)...... 56 Director
Allan L. Rayfield(2).... 64 Director
John A. Shane(1)(2)..... 66 Director
John Kornreich.......... 53 Director
Edwin M. Banks.......... 36 Director
H. Sean Mathis.......... 51 Director
</TABLE>
- --------
(1) Member of the audit committee
(2) Member of the excutive compensation and stock option committee
C. Edward Baker, Jr. has served as Chief Executive Officer and a director of
Arch since 1988. Mr. Baker became Chairman of the Board of Arch in 1989. He
also served as President of Arch from 1988 to January 1998. From 1986 until
joining Arch in March 1988, Mr. Baker was President and Chief Executive Officer
of US West Paging.
Lyndon R. Daniels joined Arch in January 1998 as President and Chief Operating
Officer. From November 1993 to January 1998, Mr. Daniels was the President and
Chief Executive Officer of Pacific Bell Mobile Services, a subsidiary of SBC
Communications Inc. From May 1988 until November 1993, Mr. Daniels was the
Chief Financial Officer of Pactel Corp., a mobile telephone company.
John B. Saynor has served as a director of Arch since 1988. Mr. Saynor has
served as Executive Vice President of Arch since 1990. Mr. Saynor is a founder
of Arch and served as President and Chief Executive Officer of Arch from 1986
to March 1988 and as Chairman of the Board from 1986 until May 1989.
J. Roy Pottle joined Arch in February 1998 as Executive Vice President and
Chief Financial Officer. From October 1994 to February 1998, Mr. Pottle was
Vice President/Treasurer of Jones Intercable, Inc., a cable television
operator. From September 1989 to October 1994, he served as Vice President and
Relationship Manager at The Bank of Nova Scotia, New York Agency.
Paul H. Kuzia has served as Executive Vice President/Technology and Regulatory
Affairs of Arch since September 1996. He served as Vice President/Engineering
and Regulatory Affairs of Arch from 1988 to September 1996. Prior to 1988, Mr.
Kuzia was director of operations at Message Center Inc.
R. Schorr Berman has been a director of Arch since 1986. Since 1987, he has
been the President and Chief Executive Officer of MDT Advisers, Inc., an
investment adviser. He is a director of Mercury Computer Systems, Inc. as well
as a number of private companies.
James S. Hughes has been a director of Arch since 1986. Since 1987, he has been
President and Chief Executive Officer of Norwich Corporation, a real estate
investment and service firm, and, since 1992, he has served as President and
Managing Director of Inventa Corporation, an international business development
firm.
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<PAGE>
Allan L. Rayfield has been a director of Arch since 1997. He has been a
consultant since 1995. From November 1993 until December 1994, Mr. Rayfield
served as Chief Executive Officer of M/A Com Inc., a microwave electrical
manufacturing company. From April 1991 until November 1993, he served as Chief
Operating Officer of M/A Com Inc. He is a director of Parker Hannifin
Corporation and Acme Metals Incorporated.
John A. Shane has been a director of Arch since 1988. He has been the President
of Palmer Service Corporation since 1972. He has been a general partner of
Palmer Partners L.P., a venture capital firm, since 1981. He serves as a
director of Overland Data, Inc., United Asset Management Corporation and Gensym
Corporation and as a trustee of Nvest Funds.
John Kornreich has been a director of Arch since June 1998. Mr. Kornreich has
served as a Managing Director of Sandler Capital Management Co., Inc. since
1988.
Edwin M. Banks has been employed by W.R. Huff Asset Management since 1988 and
currently serves as a portfolio manager. From 1985 until he joined W.R. Huff,
Mr. Banks was employed by Merrill Lynch & Company. Mr. Banks also serves as a
director of Magellan Health Services, formerly Charter Medical Corporation, and
e.spire Corporation, formerly American Communications Services, Inc..
H. Sean Mathis has been Chairman of the Board and Chief Executive Officer of
Allis Chalmers, Inc. since January 1996 and previously served as a Vice
President of that company since 1989. From July 1996 to September 1997, Mr.
Mathis was Chairman of the Board of Universal Gym Equipment Inc., a privately
owned company which filed for protection under the Bankruptcy Code in July
1997. From 1991 to 1993, Mr. Mathis was President of RCL Acquisition Corp., and
from 1993 to 1995 he was President and a director of RCL Capital Corporation,
which was merged into DISC Graphics in November 1995. Previously, Mr. Mathis
was a director and Chief Operating Officer of Ameriscribe Corporation. Mr.
Mathis was the President of a predecessor to, and currently is a director of,
Allied Digital Technologies. He is also a director of Thousand Trails, Inc.
Arch's certificate of incorporation and by-laws provide that Arch has a
classified board of directors composed of three classes, each of which serves
for three years, with one class being elected each year. The term of Messrs.
Saynor, Shane and Mathis will expire at Arch's annual meeting of stockholders
to be held in 2000. The term of Messrs. Baker, Berman and Kornreich will expire
at Arch's annual meeting of stockholders to be held in 2001. The term of
Messrs. Hughes, Rayfield and Banks will expire at Arch's annual meeting of
stockholders to be held in 2002.
Two of the standby purchasers, W.R. Huff and Whippoorwill, have the right to
designate one member each for election to Arch's board of directors. This right
of designation will continue through 2002 for W.R. Huff and 2003 for
Whippoorwill if the designating stockholder is still entitled to cast at least
5% of all votes at an Arch stockholders' meeting, and will continue afterwards
if the designating stockholder is still entitled to cast at least 10% of all
such votes. Under this arrangement, Messrs. Banks and Mathis have been elected
to Arch's board of directors.
The holders of Series C preferred stock have the right, voting as a separate
class, to elect one member of Arch's board of directors, and such director has
the right to be a member of any committee of the board. Mr. Kornreich is
currently the director elected by the holders of Series C preferred stock. This
right of designation will terminate if less than 50% of the Series C preferred
stock remains outstanding.
Arch's executive officers are elected by the board of directors and hold
office until their successors are elected or until their earlier death,
resignation or removal.
Most of Arch's executive officers have entered into non-competition
agreements with Arch which provide that they will not compete with Arch for one
year following termination, or recruit or hire any other Arch employee for
three years following termination. See "--Executive Retention Agreements".
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Certain Relationships and Related Transactions
Arch and three other entities have co-founded an offshore corporation to
pursue wireless messaging opportunities in Latin America. Arch and Mr. Hughes
each contributed $250,000 to this offshore corporation and each owns
approximately 12% of its equity.
Between August 6, 1998 and October 28, 1998, Arch's board of directors
approved three full recourse, unsecured demand loans totaling $279,500 from
Arch to Mr. Baker. The loans bear interest at approximately 5% annually.
Board Committees
Arch's board of directors has an audit committee and an executive
compensation and stock option committee. The audit committee reviews the annual
consolidated financial statements of Arch and its subsidiaries before their
submission to Arch's board of directors and consults with Arch's independent
public accountants to review financial results, internal financial controls and
procedures, audit plans and recommendations. The audit committee also
recommends the selection, retention or termination of independent public
accountants and approves services provided by independent public accountants
prior to the provision of such services. The compensation committee recommends
to Arch's board the compensation of executive officers, key managers and
directors and administers Arch's stock option plans. Arch's board of directors
has no standing nominating committee.
Indemnification and Director Liability
Arch's certificate of incorporation eliminates the liability of its directors
for monetary damages for breaches of fiduciary duties, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions that involve intentional misconduct or a
knowing violation of law. The certificate of incorporation also requires Arch
to indemnify its directors and officers to the fullest extent permitted by the
Delaware corporations statute.
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Executive Compensation
Summary Compensation Table
The annual and long-term compensation of Arch's Chief Executive Officer and
other executive officers named below was as follows for the years ended
December 31, 1996, 1997 and 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------- --------------
Other Annual
Name and Principal Position During 1997 Year Salary $ Bonus $(1) Compensation ($)(2) Options (#)(3)
- --------------------------------------- ---- -------- ---------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
C. Edward Baker, Jr..... 1998 $373,742 $135,000 $ 600 454,655(4)
Chairman, President and 1997 353,317 227,500 600 459,324(4)
Chief Executive Officer 1996 329,050 36,833 600 268,860(5)(6)
Lyndon R. Daniels....... 1998 295,416 -- 113,905(7) 140,000
President and Chief 1997 -- -- -- --
Operating Officer
(joined Arch in January
1998)
J. Roy Pottle........... 1998 179,200 -- 99,304(7) 90,000
Executive Vice 1997 -- -- -- --
President and Chief
Financial Officer
(joined Arch in
February 1998)
John B. Saynor.......... 1998 157,646 41,770 600 51,739(8)
Executive Vice
President 1997 153,188 72,900 600 15,905(9)
1996 146,867 15,300 600 20,000(6)
Paul H. Kuzia........... 1998 165,489 58,435 600 88,848(9)
Executive Vice 1997 157,633 77,400 600 16,887(9)
President/Technology
and Regulatory Affairs 1996 133,800 14,620 600 8,000(6)
</TABLE>
- --------
(1) Represents bonus paid in such fiscal year with respect to prior year.
(2) Represents Arch's matching contributions paid under Arch's 401(k) plan.
(3) No restricted stock awards or SARs were granted to any of the named
executive officers during the years ended December 31, 1996, 1997 or 1998.
(4) Includes options to purchase 409,688 shares granted as part of Arch's
January 16, 1998 option repricing program.
(5) Includes options to purchase 106,860 shares replaced in connection with
Arch's October 23, 1996 option repricing program.
(6) Option replaced in connection with Arch's January 16, 1998 option
repricing program.
(7) Represents reimbursement for certain relocation costs and associated
taxes.
(8) Includes options to purchase 35,905 shares granted as part of Arch's
January 16, 1998 option repricing program.
(9) Includes options to purchase 69,687 shares granted as part of Arch's
January 16, 1998 option repricing program.
Executive Retention Agreements
Arch is a party to executive retention agreements for a total of 16
executives, including Messrs. Baker, Daniels, Kuzia, Pottle and Saynor.
The purpose of the executive retention agreements is to assure the continued
employment and dedication of the executives without distraction from the
possibility of a change in control of Arch as defined in the executive
retention agreements. The executive will be eligible to receive benefits if a
change in control occurs,
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and Arch terminates the executive's employment at any time within the following
12 months except for cause, disability or death, or the executive terminates
employment for good reason, as defined in the executive retention agreements.
Such benefits will include (1) a lump sum cash severance payment equal to a
specified multiple of the executive's annual base salary in effect at the time
of the change in control plus a specified multiple of the executive's average
annual bonus paid during the previous three full calendar years, (2) payment of
any accrued but unpaid base salary plus any other amounts earned but unpaid
through the date of termination and (3) any amounts or benefits required to be
paid or provided to the executive or which the executive is eligible to receive
following the executive's termination under any plan, program, policy,
practice, contract or agreement of Arch. In addition, for up to 12 months after
termination, Arch must provide the executive with life, disability, accident
and health insurance benefits similar to those previously maintained until the
executive becomes reemployed with another employer and is eligible to receive
substantially equivalent benefits. The specified multiple of salary and bonus
for Messrs. Baker, Daniels, Kuzia, Pottle and Saynor is three, and the
specified multiple for the other executives is one or two. Good reason is
defined to include, among other things, a material reduction in employment
responsibilities, compensation or benefits. In the case of Mr. Baker, good
reason includes his not becoming the chief executive officer of any entity
succeeding or controlling Arch.
Stock Option Grants
The following options were granted to the five executive officers named in
the summary compensation table during 1998. No SARs were granted during 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Options Term(3)
-------------------------------------------------- -------------------
Percent of
Total
Options/SARs
Options/SARs Granted to Exercise or
Granted Employee in Base Price Expiration
(#)(1) Fiscal Year ($/Share)(2) Date 5% ($) 10% ($)
------------ ------------ ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. ... 44,967 2.31% $4.5313 03/04/08 $128,143 $ 324,739
409,688(4) 21.00 5.0625 01/16/08 553,600 2,110,041
Lyndon R. Daniels....... 140,000 7.18 4.9375 01/02/08 434,723 1,101,674
J. Roy Pottle........... 90,000 4.61 3.5625 02/17/08 201,639 510,994
John B. Saynor.......... 15,834 0.81 4.5313 03/04/08 45,122 114,349
35,905(4) 1.84 5.0625 01/16/08 48,517 184,924
Paul H. Kuzia........... 19,161 0.98 4.5313 03/04/08 54,603 138,375
69,687(4) 3.57 5.0625 01/16/08 94,166 358,913
</TABLE>
- --------
(1) Options generally become exercisable at a rate of 20% of the shares subject
to the option on the first anniversary of the date of grant and 5% of the
shares subject to the option per calendar quarter thereafter.
(2) The exercise price is equal to the fair market value of common stock on the
date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option terms. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the options were granted and are not intended to forecast future
appreciation of the price of the common stock. The named executive officers
will realize gain upon the exercise of these options only if there is an
increase in the price of common stock which benefits all Arch stockholders
proportionately.
(4) Option granted as part of the January 16, 1998 option repricing program.
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<PAGE>
Option Exercises and Year-End Option Table
The named executive officers exercised no stock options or SARs during 1998.
They held the following stock options as of December 31, 1998:
Aggregated Options/SAR Exercises in Last Fiscal Year
And Fiscal Year-end Options Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Options In-the-Money Options
Acquired on Value at Fiscal Year-End at Fiscal Year-End
Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
Name (#) ($)(1) (#) ($)(2)
---- ----------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr .... 94,032 $270,342 113,722 340,933 -- --
Lyndon R. Daniels....... -- -- -- 140,000 -- --
John B. Saynor.......... -- -- 5,000 46,739 -- --
J. Roy Pottle........... -- -- -- 90,000 -- --
Paul H. Kuzia........... -- -- 19,920 68,928 -- --
</TABLE>
- --------
(1) Represents the difference between the exercise price and the fair market
value of common stock on the date of exercise.
(2) Based on the fair market value of common stock on December 31, 1998
($1.4375 per share) less the option exercise price.
Compensation Committee Interlocks and Insider Participation
The current members of Arch's compensation committee are R. Schorr Berman,
Allan L. Rayfield and John A. Shane. Messrs. Berman, Rayfield and Shane served
on the compensation committee throughout 1998, and Mr. Rayfield joined the
compensation committee upon his election as a director in July 1998.
C. Edward Baker, Jr., the chairman and chief executive officer of Arch, makes
recommendations and participates in discussions regarding executive
compensation, but he does not participate directly in discussions regarding his
own compensation. No current executive officer of Arch has served as a director
or member of the compensation committee (or other committee serving an
equivalent function) of any other entity that has an executive officer who
serves as a director of Arch or as a member of the compensation committee of
Arch.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information about the beneficial
ownership of Arch's common stock as of June , 1999, immediately after
consummation of the MobileMedia acquisition but before the implementation of
the reverse stock split, by
. each person who is known by Arch to beneficially own more than 5% of its
outstanding shares of common stock;
. each current director of Arch;
. Arch's chief executive officer and the other named executive officers;
and
. all current directors and executive officers of Arch as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
based upon voting or investment power over the securities. The number of shares
of common stock outstanding that is used in calculating the percentage for each
listed person includes any shares that that person has the right to acquire
through exercise of warrants or options within 60 days after June , 1999.
These shares, however, are not deemed to be outstanding for the purpose of
calculating the percentage beneficially owned by any other person.
Unless otherwise indicated, each person or entity listed in the table has
sole voting power and investment power, or shares such power with his spouse,
with respect to all shares of capital stock listed as owned by such person or
entity. The inclusion of shares in the table does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of the
shares.
The table reflects
. the issuance of a total of 123,073,642 shares of common stock and Class B
common stock to the unsecured creditors of MobileMedia and to the
stockholders of Arch; and
. the distribution of warrants to acquire 3,675,659 shares of common stock
to the standby purchasers and warrants to acquire 44,584,274 shares of
common stock to stockholders of Arch who did not exercise their
nontransferable subscription rights.
The table assumes
. the conversion of Series C preferred stock into common stock at the
current conversion price of $5.46 per share; and
. the conversion of Class B common stock into common stock at a one-for-one
conversion ratio.
Because Class B common stock is not entitled to vote in the election of
directors, the voting power of its holders is less than their percentages of
beneficial ownership shown in the table. Thus, the four standby purchasers
listed in the table would be entitled to cast a maximum of 49.0% of the votes
in the election of directors, assuming that they --and only they-- exercised
outstanding options and warrants. This contrasts with the more than 55.5% of
beneficial ownership which is obtained by adding their individual beneficial
ownership percentages in the table.
74
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------
Shares Options and Warrants
Outstanding at Exercisable Prior to
Name June , 1999 August , 1999 Total Percentage
---- -------------- -------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sandler Capital
Management (1)......... 4,864,463 1,223,743 6,088,206 4.1%
C. Edward Baker, Jr..... 112,300 377,869 490,169 *
Lyndon R. Daniels....... 12,000 62,741 74,741 *
John B. Saynor.......... 193,924 350,918 544,842 *
J. Roy Pottle........... -- 22,500 22,500 *
Paul H. Kuzia........... 3,958 41,139 48,097 *
R. Schorr Berman (2).... 1,966,990 3,414,344 5,381,834 3.6%
James S. Hughes......... 120,587 137,006 257,593 *
John Kornreich (3)...... 5,103,076 1,554,398 6,654,474 4.5%
Allan L. Rayfield....... 1,000 6,228 7,228 *
John A. Shane (4)....... 20,566 47,554 68,120 *
Edwin M. Banks (5)...... 26,503,071 1,707,006 28,213,077 *
H. Sean Mathis ......... -- 3,000 3,000
W.R. Huff Asset
Management Co., L.L.C.
(6).................... 26,503,071 1,704,006 28,207,077 18.9%
The Northwestern Mutual
Life Insurance
Company(7)............. 9,730,889 622,631 10,353,520 6.9%
Credit Suisse First
Boston Corporation..... 19,912,506 29,309 19,941,815 13.4%
Whippoorwill Associates,
Inc. (8)............... 23,032,312 1,319,713 24,352,025 16.3%
Resurgence Asset
Management L.L.C. ..... 26,758,084 -- 26,758,084 17.9%
All current directors
and executive officers
of Arch as a group (12
persons)............... 34,037,472 7,728,204 41,765,676 27.9%
</TABLE>
- --------
*Less than 1%
(1) Sandler has sole voting and investment power over 348,000 of such shares
and 601,501 of the warrants and shared voting and investment power over
the remaining shares and warrants.
(2) Includes 1,947,990 shares and 5,314,993 warrants held by Memorial Drive
Trust, over which Mr. Berman may be deemed to share voting and investment
power as administrator and chief executive officer of Memorial Drive
Trust. Mr. Berman disclaims beneficial ownership of such shares held by
Memorial Drive Trust.
(3) Includes 4,846,463 shares and 1,223,743 warrants beneficially owned by
Sandler, over which Mr. Kornreich may be deemed to have voting and
investment power as managing director, and 190,000 shares beneficially
owned by two limited partnerships, over which Mr. Kornreich may be deemed
to have voting and investment power as a general partner. Mr. Kornreich
disclaims beneficial ownership of all such shares.
(4) Includes 1,051 shares and 1,817 warrants owned by Palmer Service
Corporation, over which Mr. Shane may be deemed to have voting and
investment power as president and sole stockholder of Palmer Service
Corporation, 478 shares issuable upon conversion of $8,000 principal
amount of Arch's 6 3/4% convertible subordinated debentures due 2003 held
by Palmer Service Corporation, and 1,254 shares issuable upon conversion
of Arch's 6 3/4% convertible subordinated debentures held by Mr. Shane.
See "Description of Outstanding Indebtedness--Arch Convertible
Debentures".
(5) Includes 22,584,655 shares and 1,704,006 warrants W.R. Huff manages on
behalf of various discretionary accounts and 3,918,416 shares held by The
Huff Alternative Income Fund, L.P., an affiliate of W.R. Huff. This
director is a portfolio manager of W.R. Huff. This director disclaims
beneficial ownership of all such shares.
(6) Consists of 22,584,655 shares and 1,704,006 warrants W.R. Huff manages on
behalf of various discretionary accounts and 3,918,416 shares held by The
Huff Alternative Income Fund, L.P., an affiliate of W.R. Huff. This
standby purchaser disclaims beneficial ownership of these shares.
(7) Consists of 7,896,146 shares held by The Northwestern Mutual Life
Insurance Company, 474,861 of which are issuable upon exercise of
warrants, 1,916,057 shares held in The Northwestern Mutual Life Insurance
Company Group Annuity Separate Account (as to which The Northwestern
Mutual Life Insurance Company has shared voting and investment power),
115,084 of which are issuable upon exercise of warrants, and 541,317
shares held by the High Yield Bond Portfolio of Northwestern Mutual
Series Fund, Inc., a wholly-owned subsidiary of The Northwestern Mutual
Life Insurance Company and a registered investment company, 32,686 shares
of which are issuable upon exercise of warrants. Northwestern Mutual
Investment Services, LLC, a wholly-owned subsidiary of The Northwestern
Mutual Life Insurance Company and a registered investment advisor, serves
as investment adviser to the High Yield Bond Portfolio of Northwestern
Mutual Series Fund, Inc.
75
<PAGE>
(8) All of such shares are owned by various limited partnerships, third party
accounts and a trust for which Whippoorwill Associates, Inc. has
discretionary authority and acts as general partner or investment manager.
Each person or entity listed in the table has an address c/o Arch except for:
. Sandler Capital Management, 767 Fifth Avenue, 45th Floor, New York, New
York 10153.
. W.R. Huff Asset Management Co., L.L.C. 67 Park Place, Ninth Floor,
Morristown, NJ 07960
. The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202
. Credit Suisse First Boston Corporation, 11 Madison Avenue, New York, New
York 10010.
. Whippoorwill Associates, Inc., 11 Martine Avenue, White Plains, New York
10606.
. Resurgence Asset Management L.L.C., 10 New King Street, White Plains, New
York 10604.
76
<PAGE>
DESCRIPTION OF SECURITIES
Arch's authorized capital stock consists of 300,000,000 shares of common
stock, 65,000,000 shares of Class B common stock, 10,000,000 shares of
preferred stock, 300,000 shares of Series B preferred stock 250,000 shares of
Series C preferred stock and 9,450,000 additional shares of preferred stock.
Each share has a par value of $.01. Upon consummation of the MobileMedia
acquisition on June , 1999, there were 136,164,119 outstanding shares of
common stock held by stockholders of record, 8,125,106 outstanding shares of
Class B common stock held by stockholders of record and 250,000 outstanding
shares of Series C preferred stock held by [9] stockholders of record. These
numbers do not reflect a reverse stock split that Arch intends to effect later
in June 1999. See "--The Reverse Stock Split".
The following summary of certain provisions of common stock, Class B common
stock, preferred stock, Series C preferred stock, warrants and Arch's
certificate of incorporation and by-laws is not intended to be complete and is
qualified by reference to the provisions of applicable law and to the
certificate of incorporation and by-laws. To learn how to obtain copies of the
certificate of incorporation and by-laws, see "Where You Can Find More
Information".
Common Stock
Holders of common stock are entitled to one vote per share. They are entitled
to receive dividends when and if declared by Arch's board of directors and to
share, on the basis of their shareholdings, in the assets of Arch that are
available for distribution to its stockholders in the event of liquidation.
These rights of the common stock are subject to any preferences or
participating or similar rights of any series of preferred stock that is
outstanding at the time. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. All outstanding shares of common
stock are fully paid and nonassessable. Holders of common stock do not have
cumulative voting rights.
Class B Common Stock
The Class B common stock is identical to common stock, except that holders of
Class B common stock are not entitled to vote in the election of directors and
are entitled to 1/100th of a vote per share on all other matters. Class B
common stock and common stock vote together as a single class, except as
otherwise required by law.
Class B common stock has been issued only to the standby purchasers and their
affiliates, and only to the extent that the standby purchasers and their
affiliates would otherwise have owned, in the aggregate, more than 49.0% of the
outstanding shares of capital stock of Arch generally entitled to vote in the
election of directors or more than 49.0% of the voting power of the outstanding
voting shares upon consummation of the MobileMedia acquisition, assuming the
conversion of all convertible securities and assuming the exercise of all
warrants held by the standby purchasers and their affiliates. Any shares of
Class B common stock transferred by any standby purchaser to any transferee
other than another standby purchaser will automatically convert into an equal
number of shares of common stock. Class B Common Stock has been used so that
the issuance of stock to the standby purchasers in connection with the
MobileMedia acquisition would not trigger the change of control repurchase
provisions contained in the indentures governing certain outstanding
indebtedness of Arch. See "Risk Factors--Debt instruments restrict operations"
and "Description of Certain Indebtedness".
Preferred Stock
Arch's board of directors is authorized, without any further action by the
stockholders of Arch, to issue preferred stock from time to time in one or more
series and to fix the voting, dividend, conversion, redemption and liquidation
rights and preferences of any such series and whatever other designations,
preferences and special rights Arch's board of directors may decide upon. Arch
does not have any present plans to issue shares of its preferred stock, other
than the shares of Series C preferred stock currently outstanding.
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<PAGE>
Series C Preferred Stock
The Series C preferred stock has the rights and preferences summarized below:
Conversion. The Series C preferred stock was convertible into common stock at
an initial conversion rate of 18.18 shares of common stock for each share of
Series C preferred stock, subject to certain adjustments. These adjustments
include the issuance of common stock, or rights or options for common stock, at
a price less than the market price of common stock. The conversion of the
Series C preferred stock automatically adjusts on a quarterly basis to reflect
the accrual of dividends to the extent that dividends are not paid on a current
basis in cash or stock. Until June 30, 1999, the conversion rate will be 19.45-
to-1, so that 4,861,359 shares of common stock are issuable upon the conversion
of all shares of Series C preferred stock in the aggregate. This aggregate
number of common shares increases by approximately 94,000 shares per quarter.
Dividends. The Series C preferred stock earns dividends at an annual rate of
8.0% payable when declared quarterly in cash or, at Arch's option, through the
issuance of shares of common stock valued at 95% of the then prevailing market
price. If not paid quarterly, dividends accumulate and become payable upon
redemption or conversion of the Series C preferred stock or upon liquidation of
Arch.
Voting Rights. So long as at least 50% of the Series C preferred stock
remains outstanding, the holders of the Series C preferred stock have the
right, voting as a separate class, to designate one member of the boards of
directors of Arch and a principal subsidiary. The director has the right to be
a member of any committee of either board of directors. On all other matters,
the Series C preferred stock and the common stock vote together as a single
class. Each share of Series C preferred stock is entitled to as many votes as
the number of shares of common stock into which it is convertible (19.45 until
June 30, 1999).
Redemption. Holders of Series C preferred stock may require Arch to redeem
the Series C preferred stock in the year 2005. Arch may elect to pay the
redemption price in cash or in common stock valued at 95% of its then
prevailing market price. Series C preferred stock is subject to redemption for
cash or common stock at Arch's option in specified circumstances.
Liquidation Preference. Upon liquidation, dissolution or winding up of Arch,
before any distribution or payment is made to holders of common stock, Arch
must pay to the holders of Series C preferred stock $100.00 per share of
Series C preferred stock, subject to specified adjustments, plus any accrued
and unpaid dividends on such shares of Series C preferred stock. If the assets
of Arch are insufficient to permit full payment of such liquidation preferences
to the holders of Series C preferred stock, then the assets will be distributed
pro rata among the holders of the Series C preferred stock.
Warrants
In connection with the MobileMedia acquisition, Arch has issued:
. warrants to acquire up to 3,675,659 shares of common stock to the standby
purchasers and
. warrants to acquire up to 44,584,274 shares of common stock to persons
who were holders of record of common stock and Series C preferred stock
on January 27, 1999.
Each warrant represents the right to purchase one share of common stock. The
warrant exercise price of $3.01 per share is equal to the amount that would
result at September 1, 2001 from an investment of $2.00 made upon consummation
of the MobileMedia acquisition on June , 1999, assuming a 20% per annum
internal rate of return.
Each warrant will be evidenced by a warrant certificate, and will be subject
to its terms. This includes any warrants that may be issued upon partial
exercise, replacement, or transfer of outstanding warrants. Arch has entered
into a warrant agreement with The Bank of New York, as warrant agent. The
warrant agreement governs the terms relating to the issuance, form,
registration, exercise, transfer and exchange of warrants, as well as
adjustment provisions. The warrant agent will keep books for registration and
transfer of the warrant certificates
78
<PAGE>
issued by Arch. Arch and the warrant agent will be entitled to treat the
registered holder of any warrant certificate as the sole owner of the warrants
represented by the warrant certificate for all purposes and will not be bound
to recognize any equitable or other claim or interest in the warrants on the
part of any other person.
Warrants may be exercised by their holders, in whole or in part, at any time
and from time to time prior to 5:00 p.m., New York City time, on September 1,
2001. However, holders will be able to exercise their warrants only if
. a current registration statement under the Securities Act is then in
effect and Arch has delivered to each person exercising a warrant a
current prospectus meeting the requirements of the Securities Act, or
. the exercise of the warrants is exempt from the registration
requirements of the Securities Act, and the shares underlying the
warrants are qualified for sale or exempt from qualification under the
applicable securities laws of the states of residence of the holder of
the warrants to be exercised and any other persons to whom it is
proposed that the shares be issued upon exercise of the warrants.
The warrant exercise price and the number of shares purchasable upon exercise
of the warrants will be subject to adjustment from time to time upon the
occurrence of stock dividends, stock splits, reclassifications, issuances of
stock or options at prices below prevailing market prices and other events
described in the warrant agreement. Arch may irrevocably reduce the warrant
exercise price for any period of at least 20 calendar days to any amount that
exceeds the par value of common stock. Warrant holders will not receive
fractional shares or fractional interests in any other securities upon the
exercise of warrants. Instead, the warrant holder will receive cash based upon
an appropriate fraction of the then prevailing market price per share of common
stock. Arch will deliver to warrant holders copies of its annual report and the
same other information, documents, and other reports as Arch is required to
file with the SEC and furnishes to its stockholders.
Reverse Stock Split
Arch's board of directors and stockholders have approved an amendment to
Arch's certificate of incorporation to effect a reverse split of common stock.
The reverse split will become effective as of 5:00 p.m., local time, on a date
selected by Arch's board of directors, which is sometimes referred to as the
split date.
When the reverse split becomes effective, all outstanding shares of common
stock will be automatically converted into a smaller number of shares of common
stock without any action on the part of any stockholder. The split ratio (that
is, the number of outstanding shares of common stock that will be automatically
converted into one share of common stock) will be determined by dividing $6.00
by the market price of common stock and rounding the result up to the nearest
whole number. The market price of common stock will be deemed to be the average
last reported sale price per share of the common stock on the Nasdaq National
Market for the ten trading days immediately preceding the split date. If the
market price were to be between $2.00 and $3.00, the split ratio would be one-
for-three; if the market price were to be between $1.50 and $2.00, the split
ratio would be one-for-four; and if the market price were between $1.20 and
$1.50, the split ratio would be one-for-five.
Instead of issuing fractional shares of common stock resulting from the
reverse split, Arch will pay cash equal to an appropriate fraction of the
market price for one share on the split date, unless Arch determines that
unusual trading activity has caused such amount to be an inappropriate measure
of value and reasonably determines in good faith to use a different measure of
value.
As soon as practical after the split date, Arch will mail a letter of
transmittal to each holder of record of common stock outstanding on the split
date. The letter of transmittal will contain instructions for the surrender of
such certificate to Arch's designated exchange agent in exchange for
certificates representing the number of whole shares of common stock, plus any
applicable cash payment instead of fractional shares into which the shares of
common stock have been converted as a result of the reverse split. No cash
payment will be made or new certificate issued to a stockholder until surrender
of outstanding certificates together with the letter of transmittal to Arch's
exchange agent.
79
<PAGE>
Purpose of the Reverse Split
Arch has received a notice from the Nasdaq National Market indicating that
unless Arch comes into compliance with the continued listing requirements of
the Nasdaq National Market by June 30, 1999, its common stock will be delisted
from the Nasdaq National Market. The rules of the Nasdaq National Market
require that as a condition of the continued trading of a company's securities
on the Nasdaq National Market, a company must satisfy at least one of several
alternative maintenance requirements. These generally require that a company
meet certain minimum financial criteria and a minimum trading price for its
listed securities. Under one such maintenance requirement, the minimum bid
price of common stock must equal or exceed $5.00. The closing price of common
stock on June , 1999 was $ per share.
Arch believes that if the reverse split is effected, a share of common stock
will have a minimum bid price in excess of $5.00 per share, and therefore will
satisfy one of the criteria of the Nasdaq National Market maintenance
requirement referred to above. Arch would also need to continue to satisfy
other criteria in order for the common stock to be eligible for continued
trading on the Nasdaq National Market. These other criteria consist of
maintaining (1) total revenues of at least $50.0 million and assets of at least
$50.0 million, (2) a public float, defined as shares not held directly or
indirectly by any officer, director or 10% stockholder, of at least 1.1 million
shares, (3) a market value of the public float of at least $15.0 million, (4)
at least 400 holders of round lots of 100 shares or more, (5) at least four
market makers and (6) compliance with certain corporate governance
requirements. Arch believes that it satisfies all of these other maintenance
criteria. The market value of its public float as of June , 1999 was
approximately $ million and, giving effect to the issuance of an additional
122.8 million shares in connection with the MobileMedia acquisition, should
considerably exceed $15.0 million. There can be no assurance, however, that
Arch will be able to maintain a market value of its public float of at least
$15.0 million or that Arch will be successful in continuing to meet the other
maintenance criteria even if the reverse split is effected.
If the common stock ceases to be approved for trading on the Nasdaq National
Market, it could adversely affect the liquidity of common stock and the ability
of Arch to raise capital. In such event, Arch would intend to make application
for trading on the Nasdaq Small Cap Market. If not approved for trading on the
Nasdaq Small Cap Market, common stock would likely be quoted in the "pink
sheets" maintained by the National Quotation Bureau, Inc. or the NASD
Electronic Bulletin Board. In that case, the spread between the bid and ask
price of common stock would likely be greater than at present and stockholders
would experience a greater degree of difficulty in effecting trades of common
stock.
Arch's board of directors further believes that low trading prices of common
stock have an adverse impact upon the efficient operation of the trading market
in its securities. In particular, brokerage firms often charge a greater
percentage commission on low-priced shares than on a transaction in the same
dollar amount of securities with a higher per share price. Large brokerage
firms will frequently not recommend purchases of low-priced shares to their
clients or make a market in such shares. These tendencies might adversely
affect the trading prices of common stock.
The effect of the reverse split upon the trading prices for common stock
cannot be accurately predicted. In particular, there can be no assurance that
trading prices for common stock after the reverse split will equal the prices
for common stock immediately prior to the reverse split multiplied by the split
ratio. Furthermore, there can be no assurance that the proposed reverse split
will achieve the desired results which have been outlined above. It is possible
that the reverse split will adversely impact the trading price of common stock
and, that any increased price per share of common stock immediately after the
proposed reverse split will not be sustained for any prolonged period of time.
In addition, the reverse split may have the effect of creating odd lots of
stock for some stockholders and such odd lots may be more difficult to sell or
may have higher brokerage commissions associated with their sale.
80
<PAGE>
Effect of the Reverse Split
As a result of the reverse split, the number of shares of common stock held
by stockholders of record as of the close of business on the split date will
automatically, without any action required by the stockholders, be equal to the
number of shares of common stock held immediately prior to the close of
business on the split date adjusted by the split ratio, plus cash instead of
any fractional share. The reverse split will not affect a stockholder's
percentage ownership interest in Arch or proportional voting power, except for
immaterial differences resulting from the payment of cash instead of fractional
shares. The rights and privileges of the holders of shares of common stock will
be unaffected by the reverse split.
If the reverse split is implemented, the number of authorized shares of
common stock will be reduced from 300,000,000 to 65,000,000, and the number of
authorized shares of Class B common stock will be reduced from 65,000,000 to
10,000,000. These reductions of authorized shares will not be proportionate to
the split ratio, and may be greater or less than the split ratio. It is
possible, therefore, that the reverse split may, in effect, increase the
portion of Arch's authorized shares of common stock that are unissued. The
subsequent issuance of additional authorized shares may have the effect of
diluting per-share measurements of value (such as EBITDA), as well as the stock
ownership and voting rights, of outstanding common stock. If the reverse split,
in effect, increases the number of authorized but unissued shares of common
stock, it may be construed as having an anti-takeover effect by permitting the
issuance of shares to purchasers who might oppose a hostile takeover bid or
oppose any efforts to amend or repeal certain provisions of Arch's certificate
of incorporation or by-laws.
Common stock is currently registered under Section 12(g) of the Exchange Act
and, as a result, Arch is subject to the periodic reporting and other
requirements of the Exchange Act. The reverse split will not affect the
registration of common stock under the Exchange Act, and Arch has no current
intention of terminating its registration under the Exchange Act.
Upon consummation of the reverse split, the total number of shares currently
reserved for issuance under Arch's stock and option plans would be decreased
proportionately and the cash consideration payable per share would be increased
proportionately. Upon consummation of the reverse split, the number of shares
issuable upon conversion of all then outstanding convertible securities of Arch
would be decreased proportionately.
Foreign Ownership Restrictions
Under the Communications Act, not more than 25% of Arch's capital stock may
be owned or voted by aliens or their representatives, a foreign government or
its representative or a foreign corporation if the FCC finds that the public
interest would be served by denying such ownership. See "Industry Overview--
Regulation". Accordingly, Arch's certificate of incorporation provides that
Arch may redeem outstanding shares of its stock from certain holders if the
continued ownership of such stock by such holders, because of their foreign
citizenship or otherwise, would place the FCC licenses held by Arch in
jeopardy. Required redemptions, if any, will be made at a price per share equal
to the lesser of the fair market value of the shares, as defined in the
certificate of incorporation, or, if such shares were purchased within one year
prior to the redemption, the purchase price of such shares.
Anti-Takeover Provisions
Certain provisions of Delaware law and Arch's certificate of incorporation
and by-laws may have the effect of delaying, making more difficult or
preventing a change in control or acquisition of Arch by means of a tender
offer, a proxy contest or otherwise. These provisions, as summarized below, are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
Arch first to negotiate with Arch. Arch believes that the benefits of increased
protection of Arch's potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure Arch outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiations with respect to such proposals could result in an improvement of
their terms.
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<PAGE>
Rights Plan
Under Arch's preferred stock rights plan, each outstanding share of common
stock has attached to it one purchase right. Each purchase right entitles its
holder to purchase from Arch a unit consisting of one one-thousandth of a share
of Series B preferred stock at a cash purchase price of $150.00 per preferred
stock unit, subject to adjustment. The purchase rights automatically attach to
and trade together with each share of common stock.
The purchase rights are not exercisable or transferable separately from the
shares of common stock to which they are attached until ten business days
following the earlier of
. a public announcement that an acquiring person, or group of affiliated or
associated acquiring persons, has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of
the common stock, or up to 33% in certain specified circumstances
described below, or
. the commencement of a tender offer or exchange offer that would result in
a person or group individually owning 30% or more of then outstanding
shares of common stock.
The purchase rights will not become exercisable, however, if the acquiring
person offers to purchase all outstanding shares of common stock and Arch's
independent directors determine that such offer is fair to Arch's stockholders
and in their best interests.
If the purchase rights become exercisable, each holder of a purchase right,
other than the acquiring person, will have the right to use the exercise price
of the purchase right ($150.00) to purchase shares of common stock at one-half
of their then current market price. All purchase rights that are beneficially
owned by an acquiring person will become null and void in such circumstances.
If an acquiring person acquires common stock and
. Arch is acquired in a merger or other business combination transaction in
which Arch is not the surviving corporation or the common stock is
changed or exchanged, except for a merger that follows an offer
determined to be fair by Arch's independent directors as described above,
or
. 50% or more of Arch's assets or earning power is sold or transferred
each holder of a purchase right, other than the acquiring person, will have the
right to use the exercise price of the purchase right ($150.00) to purchase
shares of common stock of the acquiring company at one-half of their then
current market price.
The purchase rights are not currently exercisable. In connection with the
MobileMedia acquisition, Arch amended the preferred stock rights plan to permit
each standby purchaser to acquire, without becoming an acquiring person, up to
(1) the number of shares distributed to it or purchased by it in connection
with the MobileMedia acquisition, plus (2) an additional 5% of the outstanding
common stock, but in no event more than a total of 33% of such outstanding
stock for W.R. Huff, 27% for Whippoorwill, 26% for CS First Boston, 15.5% for
Northwestern Mutual or 19.0% for Resurgence. The standby purchasers will not be
considered to be a group for purposes of the preferred stock rights plan solely
because of performance of their contractual commitments as standby purchasers.
Classified Board of Directors
Arch's certificate of incorporation and by-laws provide that Arch's board of
directors will be divided into three classes, with the terms of each class
expiring in a different year. The by-laws provide that the number of directors
will be fixed from time to time exclusively by the board of directors, but
shall consist of not more than 15 nor less than three directors. A majority of
the board of directors then in office has the sole authority to fill in any
vacancies on the board of directors. The certificate of incorporation provides
that directors may be removed only by the affirmative vote of holders of at
least 80% of the voting power of all then outstanding shares of stock, voting
together as a single class.
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Stockholder Actions and Meetings
Arch's certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The certificate of
incorporation and by-laws provide that special meetings of stockholders can be
called by the chairman of the board, pursuant to a resolution approved by a
majority of the total number of directors which Arch would have if there were
no vacancies on the board of directors, or by stockholders owning at least 20%
of the stock entitled to vote at the meeting. The business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting by the chairman of the board, or at the request of a
majority of the members of the board of directors, or as specified in the
stockholders' call for a meeting.
The by-laws set forth an advance notice procedure with regard to the
nomination of candidates for election as directors who are not nominees of the
board of directors. The by-laws provide that any stockholder entitled to vote
in the election of directors generally may nominate one or more persons for
election as directors only if detailed written notice has been given to the
Secretary of Arch within specified time periods.
Amendment of Certain Provisions of Arch's Certificate of Incorporation and By-
laws
Arch's certificate of incorporation requires the affirmative vote of the
holders of at least 80% of the voting power of all then outstanding shares of
stock, voting together as a single class, to amend specified provisions of the
certificate of incorporation. These include provisions relating to the removal
of directors, the prohibition on stockholder action by written consent instead
of a meeting, the procedural requirements of stockholder meetings and the
adoption, amendment and repeal of certain articles of the by-laws.
Consideration of Non-Economic Factors in Acquisitions
Arch's certificate of incorporation empowers Arch's board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include: (1) comparison of the proposed consideration to be
received by stockholders in relation to the then current market price of the
capital stock, the estimated current value of Arch in a freely negotiated
transaction, and the estimated future value of Arch as an independent entity;
(2) the impact of such a transaction on the subscribers and employees of Arch
and its effect on the communities in which Arch operates; and (3) the ability
of Arch to fulfill its objectives under applicable statutes and regulations.
Restrictions on Purchases of Stock by Arch
Arch's certificate of incorporation prohibits Arch from repurchasing any
shares of Arch's stock from any person, entity or group that beneficially owns
5% or more of Arch's then outstanding voting stock at a price exceeding the
average closing price for the twenty trading business days prior to the
purchase date, unless a majority of Arch's disinterested stockholders approves
the transaction. A disinterested stockholder is a person who holds less than 5%
of the voting power of Arch. This restriction on purchases by Arch does not
apply to (1) any offer to purchase a class of Arch's stock which is made on the
same terms and conditions to all holders of the class of stock, (2) any
purchase of stock owned by such a 5% stockholder occurring more than two years
after such stockholder's last acquisition of Arch's stock, (3) any purchase of
Arch's stock in accordance with the terms of any stock option or employee
benefit plan, or (4) any purchase at prevailing marketing prices pursuant to a
stock repurchase program.
"Blank Check" Preferred Stock
Arch's board of directors is authorized, without any further action by the
stockholders of Arch, to issue preferred stock from time to time in one or more
series and to fix the voting, dividend, conversion, redemption and liquidation
rights and preferences of any such series and whatever other designations,
preferences and special rights the board of directors may determine. The
issuance of preferred stock, while providing desirable flexibility in
connection with possible financings, acquisitions and other corporate purposes,
could, among other things, adversely affect the voting power of the holders of
common stock and, under certain circumstances, be used as a means of
discouraging, delaying or preventing a change of control in Arch.
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<PAGE>
Delaware Anti-Takeover Statute
Section 203 of the Delaware corporations statute is applicable to publicly
held corporations organized under the laws of Delaware, including Arch. Subject
to various exceptions, Section 203 provides that a corporation may not engage
in any "business combination" with any "interested stockholder" for a three-
year period after such stockholder becomes an interested stockholder unless the
interested stockholder attained that status with the approval of the board of
directors or the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
which result in a financial benefit to the interested stockholder. Subject to
various exceptions, an interested stockholder is a person who, together with
affiliates and associates, owns 15% or more of the corporation's outstanding
voting stock or was the owner of 15% or more of the outstanding voting stock
within the previous three years. Under certain circumstances, Section 203 makes
it more difficult for an interested stockholder to effect various business
combinations with a corporation for a three-year period. The stockholders may
elect not to be governed by Section 203, by adopting an amendment to the
corporation's certificate of incorporation or by-laws which becomes effective
twelve months after adoption. Arch's certificate of incorporation and by-laws
do not exclude Arch from the restrictions imposed by Section 203. It is
anticipated that the provisions of Section 203 may encourage companies
interested in acquiring Arch to negotiate in advance with Arch's board of
directors.
Transfer Agent and Registrar
The transfer agent and registrar for common stock is The Bank of New York,
101 Barclay Street, New York, New York 10286.
Registration Rights
The warrants issued in connection with the MobileMedia acquisition are
generally freely tradeable under the Securities Act, so long as the holder is
not deemed to be an affiliate of Arch following the acquisition within the
meaning of Rule 144 under the Securities Act or an underwriter within the
meaning of Section 2(11) of the Securities Act. Securities of Arch held by a
person deemed to be an "affiliate" of Arch may be sold under Rule 144 subject
to certain restrictions.
As required by a registration rights agreement between Arch and the standby
purchasers, Arch has registered the warrants, together with the shares of
common stock which may be issued upon exercise of warrants and certain other
shares, for resale by the standby purchasers or other persons who may be deemed
to be underwriters. The standby purchasers' registration rights agreement
required Arch to file a shelf registration statement and have it declared
effective, so that resales can be made of the following types of registrable
securities: (1) warrants, (2) common stock and Class B common stock currently
owned by the standby purchasers or acquired after the date of this prospectus,
(3) common stock issuable upon exercise of warrants, (4) common stock issuable
upon conversion of the Class B common stock owned by such standby purchasers,
and (5) other securities, if any, received from Arch by reason of stock
dividends or similar matters. Arch is required to use its reasonable best
efforts to keep such shelf registration statement continuously effective until
March 1, 2003, unless all registrable securities covered by the shelf
registration statement have been sold or can be sold publicly without either
registration under the Securities Act or compliance with any restrictions under
Rule 144.
Each standby purchaser also has demand registration rights which may be
exercised no more than twice. In addition, Arch has agreed to provide the
standby purchasers "piggyback" registration rights with respect to other
offerings filed by Arch.
Arch will bear all fees and expenses incurred in connection with the filing
of any registration statements, other than selling commissions, underwriting
fees, discounts and stock transfer taxes applicable to the sale of the
registrable securities. Arch will also undertake customary indemnification
obligations.
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<PAGE>
Arch also agreed that, upon the request of any stockholder who becomes the
beneficial owner of at least 10% of Arch's outstanding common stock as a result
of the MobileMedia acquisition, Arch would enter into a separate registration
rights agreement with such 10% stockholder. To date, no 10% stockholders have
made such a request to Arch. Any such registration rights agreement will
provide for similar registration rights and indemnification provisions as the
standby purchasers' registration rights agreement, except that Arch need not
file a shelf registration unless requested by a 10% stockholder.
The holders of Series C preferred stock and the former stockholders of
PageCall are also entitled to certain registration rights. See "Business--
Arch's Investments in N-PCS Licenses".
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<PAGE>
DESCRIPTION OF OUTSTANDING INDEBTEDNESS
Arch and its principal operating subsidiaries each have substantial amounts
of outstanding indebtedness that provide necessary funding and impose various
limitations on the operations of the combined company. See "Risk Factors--High
degree of leverage burdens operations".
Secured Credit Facility
A principal operating subsidiary has a secured credit facility in the current
total amount of $581.0 million with The Bank of New York, Royal Bank of Canada,
Toronto Dominion (Texas), Inc., Barclays Bank, PLC and other financial
institutions.
The facility consists of a $175 million reducing revolving Tranche A
facility, a $100 million 364-day revolving credit Tranche B facility and a $306
million Tranche C facility. The Tranche A Facility will be reduced on a
quarterly basis commencing on September 30, 2000 and will mature on June 30,
2005. The Tranche B Facility will convert into a term loan on June 27, 1999 and
will be amortized in quarterly installments commencing September 30, 2000, with
an ultimate maturity date of June 30, 2005. The Tranche C Facility will be
amortized in annual installments commencing December 31, 1999, with an ultimate
maturity date of June 30, 2006.
Arch and substantially all of its operating subsidiaries are either borrowers
or guarantors under the secured credit facility. Direct obligations and
guarantees under the facility are secured by a pledge of the capital stock of
all principal operating subsidiaries and by security interests in various
assets.
Borrowings under the secured credit facility bear interest based on a
reference rate equal to either The Bank of New York's alternate base rate or
The Bank of New York's LIBOR rate, in each case plus a margin determined by
specified ratios of total debt to annualized EBITDA.
The secured credit facility requires payment of fees on the daily average
amount available to be borrowed under the Tranche A facility and the Tranche B
facility. These fees vary depending on specified ratios of total debt to
annualized EBITDA.
The secured credit facility contains restrictions that limit, among other
things: additional indebtedness and encumbrances on assets; cash dividends and
other distributions; mergers and sales of assets; the repurchase or redemption
of capital stock; investments; acquisitions that exceed certain dollar
limitations without the lenders' prior approval; and prepayment of indebtedness
other than indebtedness under the secured credit facility. In addition, the
secured credit facility requires Arch and its subsidiaries to meet certain
financial covenants, including ratios of EBITDA to fixed charges, EBITDA to
debt service, EBITDA to interest service and total indebtedness to EBITDA.
Subsidiary's Senior Notes
Another principal operating subsidiary has the following issues of unsecured
senior notes outstanding:
<TABLE>
<CAPTION>
Interest Maturity Interest Payment
Principal Amount Rate Date Dates
---------------- -------- ---------------- --------------------
<S> <C> <C> <C>
$125.0 million .......... 9 1/2% February 1, 2004 February 1, August 1
$100.0 million .......... 14% November 1, 2004 May 1, November 1
$127.5 million .......... 12 3/4% July 1, 2007 January 1, July 1
$139.8 million .......... 13 3/4% April 15, 2008 April 15, October 1
</TABLE>
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<PAGE>
Redemption
The subsidiary may choose to redeem any amounts of these senior notes during
the periods indicated in the following table. The redemption prices will equal
the indicated percentages of the principal amount of the notes, together with
accrued and unpaid interest to the redemption date:
9 1/2% Senior Notes
- -------------------------------------
<TABLE>
<CAPTION>
Redemption Date Redemption Price
- --------------- ----------------
<S> <C>
February 1, 1999 to
January 31, 2000........ 104.750%
February 1, 2000 to
January 31, 2001........ 103.167%
February 1, 2001 to
January 31, 2002........ 101.583%
On or after February 1,
2002.................... 100.000%
</TABLE>
14% Senior Notes
- -------------------------------------
<TABLE>
<CAPTION>
Redemption Date Redemption Price
- --------------- ----------------
<S> <C>
November 1, 1999 to
October 31, 2000........ 107.000%
November 1, 2000 to
October 31, 2001........ 104.625%
November 1, 2001 to
October 31, 2002........ 102.375%
On or after November 1,
2002.................... 100.000%
</TABLE>
12 3/4% Senior Notes
- -------------------------------------
<TABLE>
<CAPTION>
Redemption Date Redemption Price
- --------------- ----------------
<S> <C>
July 1, 2003 to June 30,
2004 .................. 106.375%
July 1, 2004 to June 30,
2005 .................. 104.250%
July 1, 2005 to June 30,
2006 .................. 102.125%
On or after July 1, 2006
....................... 100.000%
</TABLE>
13 3/4% Senior Notes
- -------------------------------------
<TABLE>
<CAPTION>
Redemption Date Redemption Price
- --------------- ----------------
<S> <C>
April 15, 2004 to April
14, 2005................ 106.875%
April 15, 2005 to April
14, 2006................ 104.583%
April 15, 2006 to April
14, 2007................ 102.291%
On or after April 15,
2007 ................... 100.000%
</TABLE>
In addition, until July 1, 2001, the subsidiary may elect to use the proceeds
of a qualifying equity offering to redeem up to 35% in principal amount of the
12 3/4% senior notes until July 1, 2001, or up to 35% in principal amount of
the 13 3/4% senior notes until April 15, 2002, at a redemption price equal to
112.75% of the principal amount of the 12 3/4 senior notes or 113.75% of the
principal amount of the 13 3/4% senior notes, together with accrued interest.
The subsidiary may make such redemptions, however, only if 12 3/4% senior notes
with an aggregate principal amount of at least $84.5 million remain outstanding
immediately after giving effect to any such redemption of 12 3/4% senior notes,
and only if 13 3/4% senior notes with an aggregate principal amount of at least
$95.6 million remain outstanding immediately after giving effect to any such
redemption of 13 3/4% senior notes. Arch is not, however, obligated to redeem
any 12 3/4% senior notes or 13 3/4% senior notes with the proceeds of any
equity offering.
Restrictive Covenants
The indentures for the senior notes limit the ability of specified
subsidiaries to pay dividends, incur secured or unsecured indebtedness, incur
liens, dispose of assets, enter into transactions with affiliates, guarantee
parent company obligations, sell or issue stock and engage in any merger,
consolidation or sale of substantially all of their assets.
Changes in Control
Upon the occurrence of a change of control of Arch or a principal operating
subsidiary, each holder of senior notes has the right to require repurchase of
its senior notes for cash. The repurchase prices for the four series of senior
notes vary from 101% to 102% of the principal amount of such notes plus accrued
and unpaid interest to the date of repurchase. A change of control of a
corporation, as defined in the indentures, includes:
. the acquisition by a person or group of beneficial ownership of the
majority of securities having the right to vote in the election of
directors;
. specified types of changes in the board of directors;
. the sale or transfer of all or substantially all of the corporation's
assets or
. merger or consolidation with another corporation which results in a
person or group becoming the beneficial owner of a majority of the
securities of the surviving corporation having the right to vote in the
election of directors.
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<PAGE>
Events of Default
The following constitute events of default under the indentures:
. a default in the timely payment of interest on the senior notes if such
default continues for 30 days;
. a default in the timely payment of principal of, or premium, if any, on
any of the senior notes either at maturity, upon redemption or
repurchase, by declaration or otherwise;
. the borrowers' failure to observe or perform any of their other covenants
or agreements in the senior notes or in the indenture, but generally only
if the failure continues for a period of 30 or 60 days after written
notice of default;
. specified events of bankruptcy, insolvency or reorganization involving
the borrowers;
. a default in timely payment of principal, premium or interest on any
indebtedness for borrowed money aggregating $5.0 million or more in
principal amount;
. the occurrence of an event of default as defined in any indenture or
instrument involving at least $5.0 million aggregate principal amount of
indebtedness for borrowed money that gives rise to the acceleration of
such indebtedness;
. the entry of one or more judgments, orders or decrees for the payment of
more than a total of $5.0 million, net of any applicable insurance
coverage, against the borrowers or any of their properties; or
. the holder of any secured indebtedness aggregating at least $5.0 million
in principal amount seeks foreclosure, set-off or other recourse against
assets of the borrowers having an aggregate fair market value of more
than $5.0 million.
Arch's Discount Notes
In March 1996, Arch issued discount notes representing $467.4 million in
aggregate principal amount at maturity. The discount notes are scheduled to
mature on March 15, 2008. The discount notes were issued at a substantial
discount from the principal amount due at maturity. Interest does not accrue on
the discount notes prior to March 15, 2001. After that date, interest will
accrue at the rate of 10 7/8% per year, payable semi-annually on March 15 and
September 15, commencing September 15, 2001.
Arch may choose to redeem any amount of discount notes on or after March 15,
2001 at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
March 15, 2001 to March 14,
2002....................... 104.078% of principal amount
March 15, 2002 to March 14,
2003....................... 102.719% of principal amount
March 15, 2003 to March 14,
2004....................... 101.359% of principal amount
On or after March 15, 2004 . 100.000% of principal amount
</TABLE>
The indenture for the discount notes contains restrictive covenants, change
in control provisions and events of default that are generally comparable to
those of the subsidiary's senior notes described above.
Arch's Convertible Debentures
Arch has outstanding $13.4 million in principal amount of 6 3/4% convertible
subordinated debentures due 2003. Interest is payable semi-annually on June 1
and December 1. The convertible debentures are scheduled to mature on December
1, 2003. The principal amount of the convertible debentures is convertible into
common stock at a conversion price of $16.75 per share at any time prior to
redemption or maturity.
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<PAGE>
Arch may choose to redeem any amount of the convertible debentures at any
time, at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
December 1, 1997 to November 30, 1998....... 104.050% of principal amount
December 1, 1998 to November 30, 1999....... 103.375% of principal amount
December 1, 1999 to November 30, 2000....... 102.700% of principal amount
December 1, 2000 to November 30, 2001....... 102.025% of principal amount
December 1, 2001 to November 30, 2002....... 101.350% of principal amount
December 1, 2002 to November 30, 2003....... 100.675% of principal amount
On or after December 1, 2003................ 100.000% of principal amount
</TABLE>
The convertible debentures represent senior unsecured obligations of Arch and
are subordinated to senior indebtedness of Arch, as defined in the indenture.
The indenture does not contain any limitation or restriction on the incurrence
of senior indebtedness or other indebtedness or securities of Arch or its
subsidiaries.
Upon the occurrence of a fundamental change, as defined in the indenture, each
holder of convertible debentures has the right to require Arch to repurchase
its convertible debentures for cash, at a repurchase price of 100% of the
principal amount of the convertible debentures, plus accrued interest to the
repurchase date. The following constitute fundamental changes:
. acquisition by a person or a group of beneficial ownership of stock of
Arch entitled to exercise a majority of the total voting power of all
capital stock, unless such beneficial ownership is approved by the board
of directors;
. specified types of changes in Arch's board of directors;
. any merger, share exchange, or sale or transfer of all or substantially
all of the assets of Arch to another person, with specified exceptions;
. the purchase by Arch of beneficial ownership of shares of its common
stock if the purchase would result in a default under any senior debt
agreements to which Arch is a party; or
. distributions of common stock by Arch to its stockholders in specified
circumstances.
The following constitute events of default under the indenture:
. a default in the timely payment of any interest on the convertible
debentures if such default continues for 30 days;
. a default in the timely payment of principal or premium on any
convertible debenture at maturity, upon redemption or otherwise;
. a default in the performance of any other covenant or agreement of Arch
that continues for 30 days after written notice of such default;
. a default under any indebtedness for money borrowed by Arch that results
in more than $5.0 million of indebtedness being accelerated; or
. the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to Arch.
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<PAGE>
PLAN OF DISTRIBUTION
Exercises of Warrants
The warrants entitle their holders to purchase up to a total of 48,259,933
shares of newly issued common stock from Arch for a warrant exercise price of
$3.01 per share in cash. The warrants are exercisable immediately and will
expire at 5:00 p.m., New York City time, on September 1, 2001. Any warrants
which remain unexercised at such time will no longer be exercisable.
For a detailed description of the terms of the warrants, see "Description of
Securities--Warrants".
Method of Exercise of Warrants
You may exercise warrants by filling in and signing the exercise notice which
is attached to the warrant certificate and either mailing or hand-delivering
the warrant certificate and the exercise notice to the warrant agent, together
with payment as described below under "--Payment for Shares". You may also
exercise warrants through a broker or other nominee if your warrants are held
in such broker's or nominee's name. Such brokers or nominees may charge a
servicing fee for exercising such warrants for you.
Completed exercise notices must be received by the warrant agent prior to
5:00 p.m., New York City time, on September 1, 2001. The warrant certificate,
duly executed exercise notice and payment should be delivered to the offices of
the warrant agent by one of these two methods:
(1)By mail:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attention: Reorganization Department
(2)By Hand, Express Mail or Overnight Courier:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attention: Reorganization Department
Signatures on exercise notices must correspond exactly to the names as
written on the face of the warrant certificate. Signatures must be guaranteed
by an "eligible guarantor institution" meeting the requirements of the warrant
agent, which requirements include membership or participation in the Security
Transfer Agent Medallion Program or STAMP program or such other "signature
guarantee program" as may be determined by the warrant agent in addition to, or
in substitution for, STAMP, all in accordance with the Exchange Act.
No fractional shares will be issued upon the exercise of warrants. Instead,
you will receive cash based upon an appropriate fraction of the then prevailing
market price per share of common stock.
Payment for Shares
Holders of warrants who choose to buy shares of common stock must make
payment in the form of cash, certified check, bank cashier's check or wire
transfer in immediately available funds to an account designated by the warrant
agent. To be accepted, payment, together with the executed warrant certificate
and exercise notice, must be received by the warrant agent, prior to 5:00 p.m.,
New York City time, on September 1, 2001.
A payment pursuant to this method must be in United States dollars. Payment
must be payable to Arch Communications Group, Inc., and must accompany an
executed exercise notice. Arch will not accept surrender of Arch stock
certificates as a means of payment for shares.
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<PAGE>
Issuance and delivery of certificates for the shares purchased are subject to
collection of any certified checks or bank cashier's checks. Payment of the
warrant exercise price will be deemed to have been received by the warrant
agent only upon receipt by the warrant agent of any certified check or wire
transfer.
Holders who hold warrants for the account of others, such as brokers,
trustees or depositaries for securities, should notify the beneficial owners of
such warrants to ascertain their intentions and to obtain instructions with
respect to the warrants. If the beneficial owner so instructs, the record
holder of such warrants should complete exercise notices and submit them to the
warrant agent with the proper payment. In addition, if you beneficially own
warrants through such a record holder, you should contact the holder and
request the holder to deal with your warrants in accordance with your
instructions.
Please read the instructions accompanying the exercise notice carefully and
follow them exactly. Do not send warrant certificates, exercise notices or
payments to Arch.
The method of delivery of exercise notices and payment of the warrant
exercise price to Arch will be at your risk. If you send by mail, Arch
recommends that you use registered mail, properly insured, with return receipt
requested, and that you allow a sufficient number of days to ensure delivery to
the warrant agent and clearance of payment prior 5:00 p.m., New York City time,
on September 1, 2001.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of warrants will be determined by Arch. Arch's determination will
be final and binding. Arch, in its sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any warrant.
Warrant exercises will not be considered to have been received or accepted
until all irregularities have been waived or cured within such time as Arch
determines in its sole discretion. Neither Arch nor the warrant agent will be
under any duty to give you notification of any defect or irregularity in
connection with the submission of exercise notices or incur any liability for
failure to give such notification.
Certificates representing shares of common stock purchased will be delivered
to the purchaser within 10 business days after the exercise.
You will be deemed to have exercised the maximum number of warrants that
could be exercised for the amount of the payment that you delivered if (1) the
number of warrants being exercised is not specified on an exercise notice or
(2) the payment delivered is not sufficient to pay the full aggregate warrant
exercise price for all shares stated to be exercised for. If the payment that
you delivered exceeds the aggregate warrant exercise price for the number of
warrants evidenced by your exercise notice, any excess payment will be returned
to you as soon as practicable by mail, without interest or deduction.
Please direct to Arch any questions or requests for assistance concerning the
method of exercising warrants or requests for additional copies of this
prospectus or the instructions:
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Attention: Investor Relations
Telephone (508) 870-6700
Transfer of Warrants
Warrants may be purchased or sold in public or private transactions. The
warrants are quoted for trading on the Nasdaq National Market.
You may transfer all of the warrants evidenced by a single warrant
certificate by endorsing the warrant certificate for transfer in accordance
with the instructions. You may transfer a portion of the warrants evidenced
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<PAGE>
by a single warrant certificate by delivering to the warrant agent the warrant
certificate properly endorsed for transfer with instructions to register the
specified portion of the warrants in the name of the transferee, and to issue a
new warrant certificate to the transferee evidencing such transferred warrants.
In such event, the warrant agent will issue a new warrant certificate
evidencing the balance of the warrants to you or, if you so instruct, to an
additional transferee.
If you wish to sell all or a portion of your warrants, you should allow a
sufficient amount of time prior to September 1, 2001 for (1) the transfer
instructions to be received and processed by the warrant agent and (2) a new
warrant certificate for the transferred warrants to be issued and transmitted
to the transferee or transferee's designee and to you with respect to retained
warrants, if any. Neither Arch nor the warrant agent shall have any liability
to a transferee or transferor if warrant certificates are not received in time
for exercise or sale prior to the expiration date of the warrants.
Except for fees charged by the warrant agent, which will be paid by Arch as
described below, all commissions, fees and other expenses including brokerage
commissions and transfer taxes incurred in connection with the purchase, sale
or exercise of warrants will be for the account of the transferor of the
warrants. None of such commissions, fees or expenses will be paid by Arch or
the warrant agent.
Procedures for Book Entry-Transfer Facility Participants
Arch anticipates that the warrants will be eligible for transfer through the
facilities of Depository Trust Company, and that the exercise of the warrants
may be effected through such facilities.
Dilution
The subscription price per warrant currently exceeds the net tangible book
value per share of common stock, which is a negative number. Accordingly, you
will experience immediate and substantial dilution if you exercise warrants
under current conditions. See "Dilution."
Use of Proceeds
Substantially all of the proceeds of warrant exercise will be used for
general corporate purposes, including working capital and repayment of debt.
No Revocation
After you have exercised a warrant, you cannot revoke your exercise.
Foreign and Certain Other Holders
Warrant certificates will not be mailed to persons whose addresses are
outside the United States, but will be held by the warrant agent for each such
holder's account. To exercise their warrants, foreign persons must notify the
warrant agent prior to 5:00 p.m., New York time, on September 1, 2001. All
warrants will expire at that time.
Material Federal Income Tax Consequences
The following discussion is based on provisions of the Internal Revenue Code,
applicable Treasury Regulations, judicial authority and administrative rulings
and practice, all as of the date of this prospectus. The IRS is not precluded
from adopting a contrary position. In addition, there can be no assurance that
future legislative, judicial or administrative changes or interpretations will
not adversely affect the accuracy of the statements and conclusions set forth
in this prospectus. Any such changes or interpretations could be applied
retroactively and could affect the tax considerations discussed in this
prospectus. Arch has not sought and will not seek an opinion of counsel or a
ruling from the IRS with respect to the statements made and the conclusions
reached in the following discussion, and there can be no assurance that the IRS
will agree with such statements and conclusions.
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This summary deals only with holders that will hold warrants and shares as
"capital assets" within the meaning of Section 1221 of the Internal Revenue
Code. This summary does not address tax considerations applicable to investors
that may be subject to special tax rules, such as banks and other financial
institutions; tax-exempt entities; insurance companies; traders or dealers in
securities or currencies; custodians, nominees or similar financial
intermediaries holding warrants and shares for others; persons that will hold
warrants and shares as a position in a hedging transaction, "straddle" or
"conversion transaction" for tax purposes; or persons that have a "functional
currency" other than the United States dollar. Accordingly, investors
considering the exercise or purchase of warrants or the resale of warrants or
common stock should consult their own tax advisors with respect to the
application of the United States federal income tax laws to their particular
situations as well as any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction or under any applicable tax treaty.
Holders of warrants generally will not recognize any gain or loss upon
exercise, except to the extent of any cash paid instead of fractional shares of
common stock. A holder's tax basis in the common stock received upon exercise
of a warrant will be the exercise price paid plus the holder's basis in the
warrant. The holding period for the new common stock will begin on the day the
warrant is exercised. Upon the expiration of an unexercised warrant, the holder
will recognize loss equal to his adjusted tax basis for the warrant. Such loss
will be long-term capital loss if the warrant has been held for more than one
year. Generally, a holder of warrants or common stock acquired by exercise of
warrants will recognize gain or loss upon the sale or other disposition of the
warrants or common stock in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis for the
warrants or common stock. Gains or losses from the sale or other disposition of
warrants or common stock will generally constitute long-term capital gains or
long-term capital losses if the warrants or common stock have been held for
more than one year.
Warrant Agent; Fees
Arch has appointed The Bank of New York as warrant agent. For its services in
processing the exercise of warrants, the warrant agent will receive a fee from
Arch estimated to be $7,500 per year and reimbursement for all out-of-pocket
expenses relating to processing the warrants. The warrant agent is also Arch's
transfer agent and registrar. Arch has not employed any brokers, dealers or
underwriters in connection with the solicitation of warrant exercises. Except
as described above, no other commissions, fees or discounts will be paid in
connection with such solicitation. Certain directors and officers of Arch may
answer questions or solicit responses from holders of warrants, but such
directors and officers will not receive any commissions or compensation for
such services other than their normal employment compensation.
Resales of Warrants and Shares
We are registering a maximum of 127,512,980 shares and 3,675,659 warrants on
behalf of the selling stockholders. All of the shares either were originally
issued by us or will be issued by us upon exercise of warrants. We issued the
warrants in connection with the MobileMedia acquisition. The selling
stockholders named in the table below may sell the shares and/or warrants from
time to time. Additional selling stockholders may include pledgees, donees,
transferees or other successors-in-interest selling shares and/or warrants
received from a named selling stockholder as a gift, partnership distribution
or other non-sale-related transfer after the date of this prospectus. All of
these selling stockholders will act independently of Arch in making decisions
with respect to the timing, manner and size of each sale. The sales may be made
on one or more exchanges or in the over-the-counter market or otherwise, at
prices and at terms then prevailing or at prices related to the then current
market price of common stock, or in negotiated transactions. The selling
stockholders may effect such transactions by selling the shares and/or warrants
to or through broker-dealers or directly to purchasers, in the event of a
private sale. Common stock may be offered in any manner permitted by law,
including through underwriters, licensed brokers, dealers or agents, and
directly to one or more purchasers. Shares and/or warrants may be sold by one
or more of the following methods or by a combination of the following methods:
. sales to underwriters who will acquire shares of common stock for their
own account and resell them in one or more transactions at fixed prices
or at varying prices determined at time of sale;
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<PAGE>
. a block trade in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
. purchases by a broker-dealer as principal and resale by such broker-
dealer for its account pursuant to this prospectus;
. an over-the-counter or exchange distribution in accordance with the rules
of the Nasdaq National Market or any stock exchange;
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
. privately negotiated transactions, which may include sales directly to
institutions.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. In effecting sales,
broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in the resales.
The selling stockholders may enter into hedging transactions with broker-
dealers in connection with distributions of the shares and/or warrants or
otherwise. In these transactions, broker-dealers may engage in short sales of
the shares and/or warrants in the course of hedging the positions they assume
with selling stockholders. The selling stockholders may also sell shares and/or
warrants short and redeliver the shares and/or warrants to close out short
positions. The selling stockholders may enter into option transactions or other
transactions with broker-dealers which require the delivery to the broker-
dealer of the shares and/or warrants. The broker-dealer may then resell or
otherwise transfer such shares and/or warrants pursuant to this prospectus. The
selling stockholders also may loan or pledge the shares and/or warrants to a
broker-dealer. The broker-dealer may sell the shares and/or warrants that are
loaned, or upon a default the broker-dealer may sell the pledged shares and/or
warrants pursuant to this prospectus.
Broker-dealers or agents may receive compensation in the form of commissions,
underwriting discounts or concessions from selling stockholders. Broker-dealers
or agents may also receive compensation from the purchasers of the shares
and/or warrants for whom they act as agents or to whom they sell as principals,
or both. Broker-dealers or agents and any other participating broker-dealers or
the selling stockholders may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act in connection with sales of the shares
and/or warrants. Accordingly, any such commission, discount or concession
received by them and any profit on the resale of the shares purchased by them
may be deemed to be underwriting discounts or commissions under the Securities
Act. Because selling stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will
be subject to the prospectus delivery requirements of the Securities Act. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act or Section 4(1) of the Securities
Act may be sold under Rule 144 or Section 4(1) rather than pursuant to this
prospectus. The selling stockholders have advised Arch that, as of the date of
this prospectus, they have not entered into agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of
their securities.
The shares and/or warrants will be sold only through registered or licensed
brokers or dealers if required under applicable state securities laws. In
addition, in certain states the shares and/or warrants may not be sold unless
they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and
is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares and/or warrants may not
simultaneously engage in market making activities with respect to common stock
for a specified period prior to the commencement of such distribution. In
addition, each selling stockholder will be subject to applicable provisions of
the Exchange Act and the associated rules and regulations under the Exchange
Act, including Regulation M. These provisions may limit the timing of purchases
and sales of shares of common stock by the selling stockholders. We will make
copies of this prospectus available to the selling stockholders and have
informed them of the need for delivery of copies of this prospectus to
purchasers at or prior to the time of any sale of the shares.
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We will file a supplement to this prospectus, if required, pursuant to Rule
424(b) under the Securities Act upon being notified by a selling stockholder
that any material arrangement has been entered into with a broker-dealer for
the sale of shares through an underwritten offering, block trade, special
offering, exchange distribution or secondary distribution or a purchase by a
broker or dealer. Such supplement will disclose:
. the name of each such selling stockholder and of the participating
broker-dealer(s);
. the number of shares and/or warrants involved;
. the price at which such shares and/or warrants were sold;
. the commissions paid or underwriting discounts or concessions allowed to
such broker-dealer(s), where applicable;
. a representation that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by
reference in this prospectus; and
. other facts material to the transaction.
We will bear all costs, expenses and fees in connection with the registration
of the shares and warrants. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares and/or warrants.
The selling stockholders may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the shares and/or warrants
against specified liabilities, including liabilities arising under the
Securities Act. The selling stockholders have agreed to indemnify specified
persons, including broker-dealers and agents, against specified liabilities in
connection with the offering of the shares, including liabilities arising under
the Securities Act.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the number of shares and warrants owned by
each of the selling stockholders. None of the selling stockholders has had a
material relationship with Arch, MobileMedia or any other Arch affiliate,
within the past three years other than as a result of the ownership of shares,
warrants or other securities of Arch, except as set forth in the table below or
as otherwise disclosed in this prospectus. No estimate can be given as to the
amount of shares and/or warrants that will be held by the selling stockholders
after completion of this offering because the selling stockholders may offer
all or some of the shares and warrants and because there currently are no
agreements, arrangements or understandings with respect to the sale of any of
the shares and warrants. The shares and warrants offered by this prospectus may
be offered from time to time by the selling stockholders named below.
<TABLE>
<CAPTION>
Percent of Number of Securities
Number of Securities Outstanding Registered for Sale
Name of Selling Stockholder Beneficially Owned Securities Hereby (1)
- --------------------------- -------------------- --------------- --------------------
Shares Warrants Shares Warrants Shares Warrants
---------- --------- ------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
The President and Fellows 6,144,859 295,748 4.3% * 6,144,859 295,748
of Harvard College (2)
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
The Rockefeller Foundation 2,396,953 154,274 1.7% * 2,396,953 154,274
(2)
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Partners, L.P. (2) 888,040 -- * -- 888,040 --
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Partners II, L.P. (2) 2,348,037 173,674 1.6% * 2,348,037 173,674
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Partners III, L.P. (2) 5,990,641 293,240 4.2% * 5,990,641 293,240
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Partners IV, L.P. (2) 4,095,406 257,080 2.8% * 4,095,406 257,080
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Vega Offshore Fund Trust 1,029,191 145,037 * * 1,029,191 145,037
(2)
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Saranac Investors, L.P. (2) 100,283 -- * -- 100,283 --
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
Whippoorwill Profit Sharing 38,902 660 * * 38,902 660
Plan (2)
c/o Whippoorwill
Associates, Incorporated
11 Martine Avenue, White
Plains, NY 10606
Attn: Shelley F. Greenhaus
The Northwestern Mutual 9,730,889 622,631 6.7% 1.3% 9,730,889 622,631
Life Insurance Company(3)
Credit Suisse First Boston 19,912,354 29,309 13.8% * 19,912,354 29,309
Corporation
W.R. Huff Asset Management 26,503,071 1,704,006 18.4% 3.5% 26,503,071 1,704,006
Co., L.L.C.(4)
---------- --------- ----- ---- ---------- ---------
Total.................. 79,178,626 3,675,659 79,178,626 3,675,659
========== ========= ===== ==== ========== =========
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
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(1) This registration statement also shall cover any additional shares of
common stock which become issuable in connection with the shares and/or
warrants registered for sale hereby by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without the
receipt of consideration which results in an increase in the number of
Arch's outstanding shares of common stock.
(2) Whippoorwill Associates, Inc. has discretionary authority and acts as
general partner or investment manager for various limited partnerships, a
limited liability company, a trust and third party accounts with respect to
such shares and warrants.
(3) Of the 9,730,889 shares, 7,421,285 shares are held by The Northwestern
Mutual Life Insurance Company, 1,800,973 shares are held in The
Northwestern Mutual Life Insurance Company Group Annuity Separate Account
(as to which The Northwestern Mutual Life Insurance Company has shared
voting and investment power), and 508,631 shares are held by the High Yield
Bond Portfolio of Northwestern Mutual Series Fund, Inc., a wholly-owned
subsidiary of The Northwestern Mutual Life Insurance Company and a
registered investment company. Northwestern Mutual Investment Services,
LLC, a wholly-owned subsidiary of The Northwestern Mutual Life Insurance
Company and a registered investment adviser, serves as investment adviser
to the High Yield Bond Portfolio of Northwestern Mutual Series Fund, Inc.
Of the 622,631 warrants, 474,861 warrants are held by The Northwestern
Mutual Life Insurance Company, 115,084 warrants are held by The
Northwestern Mutual Life Insurance Company Group Annuity Separate Account
(as to which The Northwestern Mutual Life Insurance Company has shared
voting and investment power), and 32,686 warrants are held by the High
Yield Bond Portfolio of Northwestern Mutual Series Fund, Inc.
(4) Of the 26,503,071 shares and 1,704,006 warrants, 22,584,655 shares and
1,704,006 warrants are managed by W.R. Huff on behalf of various
discretionary accounts and 3,918,416 shares are held by the Huff
Alternative Income Fund, L.P., an affiliate of W.R. Huff.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for Arch by
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts.
EXPERTS
The financial statements of Arch included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports which are included in this prospectus in reliance upon their
authority as experts in accounting and auditing in giving those reports.
Ernst & Young LLP, independent auditors, have audited MobileMedia's
consolidated financial statements at December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, as set forth in their
report. Their report contains an explanatory paragraph describing conditions
that raise substantial doubt about MobileMedia's ability to continue as a going
concern as described in Note 1 of MobileMedia's notes to consolidated financial
statements. We have included MobileMedia's financial statements in the
prospectus and registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
The descriptions of the regulatory requirements under the Communications Act
and associated regulations set forth under "Risk Factors--Government regulation
may burden operations" and "Industry Overview--Regulation", except for matters
that are unique to MobileMedia, have been included under the authority of
Wilkinson, Barker, Knauer LLP, as experts in telecommunications law. FCC
matters unique to MobileMedia included in the description of these regulatory
requirements have been included under the authority of Wiley, Rein & Fielding
as experts in telecommunications law. Stockholders of Arch should not rely on
Wilkinson, Barker, Knauer LLP or Wiley, Rein & Fielding with respect to any
other matters.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Arch files reports, proxy statements and other information with the SEC as
required by the Exchange Act.
MobileMedia Communications, Inc. and MobileMedia Corporation have also been
subject to the informational requirements of the Exchange Act but have filed
only limited reports since the commencement of their bankruptcy proceedings in
January 1997. See "Business--Predecessors to the Combined Company; Events
Leading Up To MobileMedia's Bankruptcy Filings". Financial statements included
in MobileMedia Communications, Inc. and MobileMedia Corporation's periodic
reports from February 1997 through June 1998 have not been prepared in
accordance with generally accepted accounting principles due to those
companies' inability at the time of such filings to determine the amount of an
impairment loss related to long-lived assets pursuant to Financial Accounting
Standard No. 121. Those financial statements are unaudited and have been
revised periodically based on subsequent determinations of changes in facts and
circumstances impacting previously filed unaudited financial statements. The
audited financial statements of MobileMedia included in this prospectus reflect
adjustments from the unaudited statements, including an impairment adjustment
of $792.5 million recorded as of December 31, 1996.
You can find, copy and inspect information filed by Arch and, to the extent
available, by MobileMedia Communications, Inc. and MobileMedia Corporation with
the SEC at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can obtain copies
of information filed by Arch with the SEC at prescribed rates by writing to the
SEC's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
You can call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. You can review Arch's, MobileMedia Communications, Inc. and
MobileMedia Corporation's electronically filed reports, proxy and information
statements on the SEC's world wide web site at http://www.sec.gov. Arch's
common stock trades on the Nasdaq National Market under the symbol "APGR".
Therefore, you can inspect reports, proxy statements and other information
concerning Arch at the offices of the National Association of Securities
Dealers, Inc., Market Listing Section, 1735 K Street, N.W., Washington, D.C.
20006. MobileMedia Corporation's common stock has not been traded on any
exchange since 1997. Arch maintains a World Wide Web site at
http://www.arch.com. Arch's web site is not a part of this prospectus.
Arch has filed with the SEC a registration statement on Form S-4 under the
Securities Act to register the stock and warrants. The term "registration
statement" includes all amendments, exhibits, annexes and schedules. This
prospectus does not contain all the information you can find in the
registration statement or the exhibits and schedules to the registration
statement. For further information about Arch, MobileMedia Communications,
Inc., MobileMedia Corporation and Arch's common stock, please refer to the
registration statement, including its exhibits and schedules. You may inspect
and copy the registration statement, including exhibits and schedules, as
described above. Statements contained in this prospectus about the contents of
any contract or other document are not necessarily complete, and we refer you,
in each case, to the copy of such contract or other document filed as an
exhibit to the registration statement.
You may request a copy of Arch's filings with the SEC, at no cost, by writing
or telephoning Arch at the following address:
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Attention: Investor Relations
Telephone (508) 870-6700
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<PAGE>
You may request copies of MobileMedia Communications, Inc. and MobileMedia
Corporation's filings with the SEC, at no cost, by writing or telephoning Arch
or:
MobileMedia Corporation
Fort Lee Executive Park
One Executive Drive, Suite 500
Fort Lee, New Jersey 07024
Attention: Secretary
Telephone (201) 224-9200.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Arch Communications Group, Inc. and Subsidiaries
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited).................................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998 and for the Three
Months Ended March 31, 1999 (unaudited)................................. F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-6
Notes to Consolidated Financial Statements............................... F-7
MobileMedia Communications, Inc. and Subsidiaries
Report of Independent Auditors........................................... F-21
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited).................................................... F-22
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-23
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
Each of the Three Years in the Period Ended December 31, 1998 and for
the Three Months Ended March 31, 1999 (unaudited)....................... F-24
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-25
Notes to Consolidated Financial Statements............................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Communications Group, Inc.:
We have audited the accompanying consolidated balance sheets of Arch
Communications Group, Inc. (a Delaware corporation) (the "Company") and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements 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.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
21(b)(a) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 24, 1999
F-2
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1997 1998 1999
ASSETS ---------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 3,328 $ 1,633 $ 12,102
Accounts receivable (less reserves of
$5,744, $6,583 and $6,173 in 1997, 1998
and 1999, respectively).................. 30,147 30,753 30,757
Inventories............................... 12,633 10,319 9,803
Prepaid expenses and other................ 4,917 8,007 9,348
---------- --------- ----------
Total current assets.................... 51,025 50,712 62,010
---------- --------- ----------
Property and equipment, at cost:
Land, buildings and improvements.......... 10,089 10,480 10,539
Paging and computer equipment............. 361,713 400,312 411,351
Furniture, fixtures and vehicles.......... 16,233 17,381 17,673
---------- --------- ----------
388,035 428,173 439,563
Less accumulated depreciation and
amortization............................. 146,542 209,128 220,955
---------- --------- ----------
Property and equipment, net............... 241,493 219,045 218,608
---------- --------- ----------
Intangible and other assets (less
accumulated amortization of $260,932,
$372,122 and $386,500 in 1997, 1998 and
1999, respectively)........................ 728,202 634,528 602,814
---------- --------- ----------
$1,020,720 $ 904,285 $ 883,432
========== ========= ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt...... $ 24,513 $ 1,250 $ 1,250
Accounts payable.......................... 22,486 25,683 26,564
Accrued restructuring charge.............. -- 11,909 11,032
Accrued expenses.......................... 11,894 11,689 10,068
Accrued interest.......................... 11,249 20,997 17,187
Customer deposits......................... 6,150 4,528 4,380
Deferred revenue.......................... 8,787 10,958 12,253
---------- --------- ----------
Total current liabilities............... 85,079 87,014 82,734
---------- --------- ----------
Long-term debt, less current maturities..... 968,896 1,003,499 1,036,441
---------- --------- ----------
Other long-term liabilities............... -- 27,235 26,844
---------- --------- ----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock--$.01 par value,
authorized 10,000,000 shares; issued
250,000 shares (aggregate liquidation
preference of $26,030 and $26,543 in 1998
and 1999, respectively).................. -- 3 3
Common stock--$.01 par value, authorized
75,000,000 shares, issued and
outstanding: 20,863,563, 21,215,583 and
21,215,583 shares in 1997, 1998 and 1999,
respectively............................. 209 212 212
Additional paid-in capital................ 351,210 378,077 378,590
Accumulated deficit....................... (384,674) (591,755) (641,392)
---------- --------- ----------
Total stockholders' equity (deficit).... (33,255) (213,463) (262,587)
---------- --------- ----------
$1,020,720 $ 904,285 $ 883,432
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 291,399 $ 351,944 $ 371,154 $ 91,397 $ 90,529
Product sales........... 39,971 44,897 42,481 10,642 10,359
---------- ---------- ---------- ---------- ----------
Total revenues........ 331,370 396,841 413,635 102,039 100,888
Cost of products sold... (27,469) (29,158) (29,953) (7,366) (6,926)
---------- ---------- ---------- ---------- ----------
303,901 367,683 383,682 94,673 93,962
---------- ---------- ---------- ---------- ----------
Operating expenses:
Service, rental and
maintenance.......... 64,957 79,836 80,782 20,189 20,293
Selling............... 46,962 51,474 49,132 11,870 13,011
General and
administrative....... 86,181 106,041 112,181 28,318 25,626
Depreciation and
amortization......... 191,871 232,347 221,316 53,714 51,118
Restructuring charge.. -- -- 14,700 -- --
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 389,971 469,698 478,111 114,091 110,048
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. (86,070) (102,015) (94,429) (19,418) (16,086)
Interest expense........ (77,353) (98,063) (105,979) (25,512) (27,010)
Interest income......... 1,426 904 1,766 146 533
Equity in loss of
affiliate.............. (1,968) (3,872) (5,689) (1,055) (3,200)
---------- ---------- ---------- ---------- ----------
Income (loss) before in-
come tax benefit, ex-
traordinary item and
accounting change...... (163,965) (203,046) (204,331) (45,839) (45,763)
Benefit from income
taxes.................. 51,207 21,172 -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item and
accounting change ..... (112,758) (181,874) (204,331) (45,839) (45,763)
Extraordinary charge
from early extinguish-
ment of debt........... (1,904) -- (1,720) --
Cumulative effect of
accounting change...... -- -- -- -- (3,361)
---------- ---------- ---------- ---------- ----------
Net income (loss)....... (114,662) (181,874) (206,051) (45,839) (49,124)
Accretion of redeemable
preferred stock........ (336) (32) -- -- --
Preferred stock
dividend............... -- -- (1,030) -- (513)
---------- ---------- ---------- ---------- ----------
Net income (loss) appli-
cable to common stock-
holders................ $ (114,998) $ (181,906) $ (207,081) $ (45,839) $ (49,637)
========== ========== ========== ========== ==========
Basic/diluted income
(loss) per common share
before extraordinary
item and accounting
charge................. $ (5.53) $ (8.77) $ (9.78) $ (2.20) $ (2.18)
Extraordinary charge
from early extinguish-
ment of debt per
basic/diluted common
share.................. $ (.09) $ -- $ (.08) -- --
Cumulative effect of ac-
counting change per
basic/diluted common
share ................. -- -- -- -- (.16)
---------- ---------- ---------- ---------- ----------
Basic/diluted net income
(loss) per common
share.................. $ (5.62) $ (8.77) $ (9.86) $ (2.20) $ (2.34)
========== ========== ========== ========== ==========
Basic/diluted weighted
average number of com-
mon shares outstand-
ing.................... 20,445,943 20,746,240 20,993,192 20,877,076 21,215,583
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Preferred Common Paid-in Accumulated Equity
Stock Stock Capital Deficit (Deficit)
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995.................... $-- $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)
Preferred stock divi-
dend (unaudited)...... -- -- 513 (513) --
Net loss (unaudited)... -- -- -- (49,124) (49,124)
--- ---- -------- --------- ---------
Balance, March 31, 1999
(unaudited)............. $ 3 $212 $378,590 $(641,392) $(262,587)
=== ==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $(114,662) $(181,874) $(206,051) $ (45,839) $ (49,124)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 191,871 232,347 221,316 53,714 51,118
Deferred income tax
benefit.............. (51,207) (21,172) -- -- --
Extraordinary charge
from early
extinguishment of
debt................. 1,904 -- 1,720 -- --
Cumulative effect of
accounting change ... -- -- -- -- 3,361
Equity in loss of
affiliate............ 1,968 3,872 5,689 1,055 3,200
Accretion of discount
on senior notes...... 24,273 33,259 37,115 8,880 9,942
Gain on Tower Site
Sale................. -- -- (2,500) -- (507)
Accounts receivable
loss provision....... 8,198 7,181 8,545 1,831 2,335
Changes in assets and
liabilities, net of
effect from
acquisitions of
paging companies:
Accounts
receivable......... (15,513) (11,984) (9,151) (3,108) (2,339)
Inventories......... 1,845 (2,394) 2,314 (5,569) 516
Prepaid expenses and
other.............. 89 (386) (3,090) 1,351 (1,341)
Accounts payable and
accrued expenses... (12,520) 3,683 24,649 (3,996) (5,427)
Customer deposits
and deferred
revenue............ 1,556 1,058 549 1,673 1,147
Other long-term
liabilities ....... -- -- -- -- (502)
--------- --------- --------- --------- ---------
Net cash provided by
operating activities... 37,802 63,590 81,105 9,992 12,379
--------- --------- --------- --------- ---------
Cash flows from
investing activities:
Additions to property
and equipment, net... (138,899) (87,868) (79,249) (15,915) (21,125)
Additions to
intangible and other
assets............... (26,307) (14,901) (33,935) (5,404) (4,403)
Net proceeds from
Tower Site Sale...... -- -- 30,316 -- 618
Acquisition of paging
companies, net of
cash acquired........ (325,420) -- -- -- --
--------- --------- --------- --------- ---------
Net cash used for
investing activities... (490,626) (102,769) (82,868) (21,319) (24,910)
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
Issuance of long-term
debt................. 676,000 91,000 463,239 24,500 23,000
Repayment of long-term
debt................. (225,166) (49,046) (489,014) (12,259) --
Repayment of
redeemable preferred
stock................ -- (3,744) -- -- --
Net proceeds from sale
of preferred stock... -- -- 25,000 -- --
Net proceeds from sale
of common stock...... 1,844 800 843 298 --
--------- --------- --------- --------- ---------
Net cash provided by
financing activities... 452,678 39,010 68 12,539 23,000
--------- --------- --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents............ (146) (169) (1,695) 1,212 10,469
Cash and cash
equivalents, beginning
of period.............. 3,643 3,497 3,328 3,328 1,633
--------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
period................. $ 3,497 $ 3,328 $ 1,633 $ 4,540 $ 12,102
========= ========= ========= ========= =========
Supplemental disclosure:
Interest paid......... $ 48,905 $ 62,231 $ 57,151 $ 15,289 $ 20,212
========= ========= ========= ========= =========
Issuance of common
stock for convertible
debentures........... $ 14,121 $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Accretion of
redeemable preferred
stock................ $ 336 $ 32 $ -- $ -- $ --
========= ========= ========= ========= =========
Preferred stock
dividend............. $ -- $ -- $ 1,030 $ -- $ 513
========= ========= ========= ========= =========
Liabilities assumed in
acquisition of paging
companies............ $ 58,233 $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization--Arch Communications Group, Inc. ("Arch" or the "Company") is a
leading provider of wireless messaging services, primarily paging services, and
is the third largest paging company in the United States (based on units in
service).
Unaudited Interim Consolidated Financial Statements--The consolidated balance
sheets as of March 31, 1999, the consolidated statements of operations and cash
flows for the three months ended March 31, 1998 and 1999 and the consolidated
statement of stockholders' equity (deficit) for the three months ended March
31, 1999 are unaudited and, in the opinion of the Company's management, include
all adjustments and accruals, consisting only of normal recurring accrual
adjustments, which are necessary for a fair presentation of the Company's
consolidated financial position, results of operations and cash flows. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full year.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition--Arch recognizes revenue under rental and service
agreements with customers as the related services are performed. Maintenance
revenues and related costs are recognized ratably over the respective terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions
are recognized as an expense when incurred.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less. The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
Inventories--Inventories consist of new pagers which are held primarily for
resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
Property and Equipment--Pagers sold or otherwise retired are removed from the
accounts at their net book value using the first-in, first-out method. Property
and equipment is stated at cost and is depreciated using the straight-line
method over the following estimated useful lives:
<TABLE>
<CAPTION>
Estimated
Useful
Asset Classification Life
-------------------- ----------
<S> <C>
Buildings and improvements........................................ 20 Years
Leasehold improvements............................................ Lease Term
Pagers............................................................ 3 Years
Paging and computer equipment..................................... 5-8 Years
Furniture and fixtures............................................ 5-8 Years
Vehicles.......................................................... 3 Years
</TABLE>
Depreciation and amortization expense related to property and equipment
totaled $87.5 million, $108.0 million and $101.1 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-7
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible and Other Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Goodwill....................................... $312,017 $271,808 $261,782
Purchased FCC licenses......................... 293,922 256,519 247,193
Purchased subscriber lists..................... 87,281 56,825 49,456
Deferred financing costs....................... 8,752 22,072 22,463
Investment in Benbow PCS Ventures, Inc......... 6,189 11,347 8,953
Investment in CONXUS Communications, Inc....... 6,500 6,500 6,500
Non-competition agreements..................... 2,783 1,790 1,525
Other.......................................... 10,758 7,667 4,942
-------- -------- --------
$728,202 $634,528 $602,814
======== ======== ========
</TABLE>
Amortization expense related to intangible and other assets totaled $104.4
million, $124.3 million and $120.2 million for the years ended December 31,
1996, 1997 and 1998, respectively.
Subscriber lists, Federal Communications Commission ("FCC") licenses and
goodwill are amortized over their estimated useful lives, ranging from five to
ten years using the straight-line method. Non-competition agreements are
amortized over the terms of the agreements using the straight-line method.
Other assets consist of contract rights, organizational and FCC application and
development costs which are amortized using the straight-line method over their
estimated useful lives not exceeding ten years. Development and start up costs
include nonrecurring, direct costs incurred in the development and expansion of
paging systems, and are amortized over a two-year period. In April 1998, the
Accounting Standards Executive Committee of the Financial Accounting Standards
Board issued Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of
Start-Up Activities". SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Arch adopted SOP 98-5 effective
January 1, 1999. Initial application of SOP 98-5 was reported as the cumulative
effect of a change in accounting principle.
Deferred financing costs incurred in connection with Arch's credit agreements
(see Note 3) are being amortized over periods not to exceed the terms of the
related agreements. As credit agreements are amended and restated, unamortized
deferred financing costs are written off as an extraordinary charge. During
1996 and 1998, charges of $1.9 million and $1.7 million, respectively, were
recognized in connection with the closing of new credit facilities.
In connection with Arch's May 1996 acquisition of Westlink Holdings, Inc.
("Westlink") (see Note 2), Arch acquired Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. ("Benbow"). Benbow has exclusive rights to a
50kHz outbound/12.5kHz inbound narrowband personal communications license in
each of the central and western regions of the United States. Arch is
obligated, to the extent such funds are not available to Benbow from other
sources, and subject to the approval of Arch's designee on Benbow's Board of
Directors, to advance Benbow sufficient funds to service debt obligations
incurred by Benbow in connection with its acquisition of its narrowband PCS
licenses and to finance the build out of a regional narrowband PCS system.
Arch's investment in Benbow is accounted for under the equity method whereby
Arch's share of Benbow's losses, since the acquisition date of Westlink, are
recognized in Arch's accompanying consolidated statements of operations under
the caption equity in loss of affiliate.
On November 8, 1994, CONXUS Communications, Inc. ("CONXUS"), formerly PCS
Development Corporation, was successful in acquiring the rights to a two-way
paging license in five designated regions in the
F-8
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
United States in the FCC narrowband wireless spectrum auction. As of December
31, 1998, Arch's investment in CONXUS totaled $6.5 million and is accounted for
under the cost method.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
To Be Disposed Of" Arch evaluates the recoverability of its carrying value of
the Company's long-lived assets and certain intangible assets based on
estimated undiscounted cash flows to be generated from each of such assets as
compared to the original estimates used in measuring the assets. To the extent
impairment is identified, Arch reduces the carrying value of such impaired
assets. To date, Arch has not had any such impairments.
Fair Value of Financial Instruments--Arch's financial instruments, as defined
under SFAS No. 107 "Disclosures about Fair Value of Financial Instruments",
include its cash, its debt financing and interest rate protection agreements.
The fair value of cash is equal to the carrying value at December 31, 1997 and
1998.
As discussed in Note 3, Arch's debt financing primarily consists of (1)
senior bank debt, (2) fixed rate senior notes and (3) convertible subordinated
debentures. Arch considers the fair value of senior bank debt to be equal to
the carrying value since the related facilities bear a current market rate of
interest. Arch's fixed rate senior notes are traded publicly. The following
table depicts the fair value of the fixed rate senior notes and the convertible
subordinated debentures based on the current market quote as of December 31,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
Carrying Fair Carrying Fair
Description Value Value Value Value
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
10 7/8% Senior Discount Notes due 2008..... $332,532 $288,418 $369,506 $221,704
9 1/2% Senior Notes due 2004............... 125,000 122,488 125,000 112,500
14% Senior Notes due 2004.................. 100,000 112,540 100,000 103,000
12 3/4% Senior Notes due 2007.............. -- -- 127,604 127,604
6 3/4% Convertible Subordinated Debentures
due 2003.................................. 13,364 7,968 13,364 6,682
</TABLE>
Arch had off-balance-sheet interest rate protection agreements consisting of
interest rate swaps and interest rate caps with notional amounts of $140.0
million and $80.0 million, respectively, at December 31, 1997 and $265.0
million and $40.0 million, respectively, at December 31, 1998. The fair values
of the interest rate swaps and interest rate caps were $47,000 and $9,000,
respectively, at December 31, 1997. The cost to terminate the outstanding
interest rate swaps and interest rate caps at December 31, 1998 would have been
$6.4 million. See Note 3.
Basic/Diluted Net Income (Loss) Per Common Share -- In February 1997, the
Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share".
The Company adopted this standard in 1997. The adoption of this standard did
not have an effect on the Company's financial position, results of operations
or income (loss) per share. Basic net income (loss) per common share is based
on the weighted average number of common shares outstanding. Shares of stock
issuable pursuant to stock options and upon conversion of the subordinated
debentures (see Note 3) or the Series C Preferred Stock (see Note 4) have not
been considered, as their effect would be anti-dilutive and thus diluted net
income (loss) per common share is the same as basic net income (loss) per
common share.
Reclassifications--Certain amounts of prior periods were reclassified to
conform with the 1998 presentation.
F-9
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions
In May 1996, Arch completed its acquisition of all the outstanding capital
stock of Westlink for $325.4 million in cash, including direct transaction
costs. The purchase price was allocated based on the fair values of assets
acquired and liabilities assumed (including deferred income taxes arising in
purchase accounting), which amounted to $383.6 million and $58.2 million,
respectively.
This acquisition has been accounted for as a purchase, and the results of its
operations have been included in the consolidated financial statements from the
date of the acquisition. Goodwill resulting from the acquisition is being
amortized over a ten-year period using the straight-line method.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the period
presented, after giving effect to certain adjustments, including depreciation
and amortization of acquired assets and interest expense on acquisition debt.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made at the beginning of the period presented, or of results that may
occur in the future.
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
---------------------------
(unaudited and in thousands
except for per share
amounts)
<S> <C>
Revenues........................................ $358,900
Income (loss) before extraordinary item......... (128,444)
Net income (loss)............................... (130,348)
Basic/diluted net income (loss) per common
share.......................................... (6.39)
</TABLE>
3. Long-term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1997 1998 1999
-------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Senior Bank Debt............................. $422,500 $ 267,000 $ 290,000
10 7/8% Senior Discount Notes due 2008....... 332,532 369,506 379,377
9 1/2% Senior Notes due 2004................. 125,000 125,000 125,000
14% Senior Notes due 2004.................... 100,000 100,000 100,000
12 3/4% Senior Notes due 2007................ -- 127,604 127,675
Convertible Subordinated Debentures.......... 13,364 13,364 13,364
Other........................................ 13 2,275 2,275
-------- ---------- ----------
993,409 1,004,749 1,037,691
Less--Current maturities..................... 24,513 1,250 1,250
-------- ---------- ----------
Long-term debt............................... $968,896 $1,003,499 $1,036,441
======== ========== ==========
</TABLE>
Senior Bank Debt--The Company, through its operating subsidiary, Arch Paging,
Inc. ("API") entered into senior secured revolving credit and term loan
facilities in the aggregate amount of $400.0 million (collectively, the "API
Credit Facility") consisting of (i) a $175.0 million reducing revolving credit
facility (the "Tranche A Facility"), (ii) a $100.0 million 364-day revolving
credit facility under which the principal amount outstanding on June 27, 1999
will convert to a term loan (the "Tranche B Facility") and (iii) a $125.0
million term loan (the "Tranche C Facility").
F-10
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Tranche A Facility will be subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term
loan portion of the Tranche B Facility will be amortized in quarterly
installments commencing September 30, 2000, with an ultimate maturity date of
June 30, 2005. The Tranche C Facility will be amortized in annual installments
commencing December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the API Credit Facility are secured by its pledge of
its interests in Arch LLC and Arch Connecticut Valley, Inc. The API Credit
Facility is guaranteed by Arch, Arch Communications, Inc. ("ACI") and Arch LLC
and Arch Connecticut Valley, Inc. Arch's guarantee is secured by a pledge of
Arch's stock and notes in ACI, and the guarantees of Arch LLC and Arch
Connecticut Valley, Inc. are secured by a security interest in those assets
that were pledged under ACE's former credit facility.
Borrowings under the API Credit Facility bear interest based on a reference
rate equal to either the agent bank's Alternate Base Rate or LIBOR, in each
case plus a margin based on ACI's or API's ratio of total debt to annualized
Adjusted EBITDA.
The API Credit Facility requires payment of fees on the daily average amount
available to be borrowed under the Tranche A Facility and the Tranche B
Facility, which fees vary depending on ACI's or API's ratio of total debt to
annualized Adjusted EBITDA.
The API Credit Facility requires that at least 50% of total ACI debt,
including outstanding borrowings under the API Credit Facility, be subject to a
fixed interest rate or interest rate protection agreements. Entering into
interest rate cap and swap agreements involves both the credit risk of dealing
with counterparties and their ability to meet the terms of the contracts and
interest rate risk. In the event of nonperformance by the counterparty to these
interest rate protection agreements, API would be subject to the prevailing
interest rates specified in the API Credit Facility.
Under the interest rate swap agreements, the Company will pay the difference
between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR, and the
Company will receive the difference between LIBOR and the fixed swap rate if
LIBOR exceeds the swap rate. Settlement occurs on the quarterly reset dates
specified by the terms of the contracts. The notional principal amount of the
interest rate swaps outstanding was $65.0 million at December 31, 1998. The
weighted average fixed payment rate was 5.93%, while the weighted average rate
of variable interest payments under the API Credit Facility was 5.30% at
December 31, 1998. At December 31, 1997 and 1998, the Company had a net
receivable of $18,000 and a net payable of $47,000, respectively, on the
interest rate swaps.
The interest rate cap agreements will pay the Company the difference between
LIBOR and the cap level if LIBOR exceeds the cap levels at any of the quarterly
reset dates. If LIBOR remains below the cap level, no payment is made to the
Company. The total notional amount of the interest rate cap agreements was
$40.0 million with cap levels between 7.5% and 8% at December 31, 1998. The
transaction fees for these instruments are being amortized over the terms of
the agreements.
The API Credit Facility contains restrictions that limit, among other things:
additional indebtedness and encumbrances on assets; cash dividends and other
distributions; mergers and sales of assets; the repurchase or redemption of
capital stock; investments; acquisitions that exceed certain dollar limitations
without the lenders' prior approval; and prepayment of indebtedness other than
indebtedness under the API Credit Facility. In addition, the API Credit
Facility requires API and its subsidiaries to meet certain financial covenants,
including covenants with respect to ratios of EBITDA to fixed charges, EBITDA
to debt service, EBITDA to interest service and total indebtedness to EBITDA.
As of December 31, 1998, API and its operating subsidiaries were in compliance
with the covenants of the API Credit Facility.
F-11
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, $267.0 million was outstanding and $93.5 million was
available under the API Credit Facility. At December 31, 1998, such advances
bore interest at an average annual rate of 8.45%.
On November 16, 1998, the lenders to API approved an increase in API's
existing credit facility from $400.0 million to $600.0 million. The increase of
$200.0 million (the "API Credit Facility Increase") was to fund a portion of
the cash necessary for Arch to complete the MobileMedia Merger. The API Credit
Facility Increase was available by its terms only through March 31, 1999. API
has executed a commitment letter with certain of its lenders for the extension
of $181.0 million of the API Credit Facility Increase through June 30, 1999,
subject to definitive documentation and other conditions.
Senior Notes--On March 12, 1996, Arch completed a public offering of 10 7/8%
Senior Discount Notes due 2008 (the "Senior Discount Notes") in the aggregate
principal amount at maturity of $467.4 million ($275.0 million initial accreted
value). Interest does not accrue on the Senior Discount Notes prior to March
15, 2001. Commencing September 15, 2001, interest on the Senior Discount Notes
is payable semi-annually at an annual rate of 10 7/8%. The $266.1 million net
proceeds from the issuance of the Senior Discount Notes, after deducting
underwriting discounts and commissions and offering expenses, were used
principally to fund a portion of the purchase price of Arch's acquisition of
Westlink (see Note 2).
Interest on ACI's 14% Senior Notes due 2004 (the "ACI 14% Notes") and ACI's 9
1/2% Senior Notes due 2004 (the "ACI 9 1/2% Notes") (collectively, the "Senior
Notes") is payable semiannually. The Senior Discount Notes and Senior Notes
contain certain restrictive and financial covenants, which, among other things,
limit the ability of Arch or ACI to: incur additional indebtedness; pay
dividends; grant liens on its assets; sell assets; enter into transactions with
related parties; merge, consolidate or transfer substantially all of its
assets; redeem capital stock or subordinated debt; and make certain
investments.
Arch has entered into interest rate swap agreements in connection with the
ACI 14% Notes. Under the interest rate swap agreements, the Company has
effectively reduced the interest rate on the ACI 14% Notes from 14% to the
fixed swap rate of 9.45%. In the event of nonperformance by the counterparty to
these interest rate protection agreements, the Company would be subject to the
14% interest rate specified on the notes. As of December 31, 1998, the Company
had received $2,275,000 in excess of the amounts paid under the swap
agreements, which is included in long-term debt in the accompanying balance
sheet. At December 31, 1998, the Company had a net receivable of $733,500 on
these interest rate swaps.
On June 29, 1998, ACI issued and sold $130.0 million principal amount of 12
3/4% Senior Notes due 2007 (the "ACI 12 3/4% Notes") for net proceeds of $122.6
million (after deducting the discount to the initial purchasers and estimated
offering expenses payable by ACI). The ACI 12 3/4% Notes were sold at an
initial price to investors of 98.049%. The ACI 12 3/4% Notes mature on July 1,
2007 and bear interest at a rate of 12 3/4% per annum, payable semi-annually in
arrears on January 1 and July 1 of each year, commencing January 1, 1999.
The indenture under which the ACI 12 3/4% Notes were issued ("the Indenture")
contains certain covenants that, among other things, limit the ability of ACI
to incur additional indebtedness, issue preferred stock, pay dividends or make
other distributions, repurchase Capital Stock (as defined in the Indenture),
repay subordinated indebtedness or make other Restricted Payments (as defined
in the Indenture), create certain liens, enter into certain transactions with
affiliates, sell assets, issue or sell Capital Stock of ACI's Restricted
Subsidiaries (as defined in the Indenture) or enter into certain mergers and
consolidations.
Convertible Subordinated Debentures--On March 6, 1996, the holders of $14.1
million principal amount of Arch's 6 3/4% Convertible Subordinated Debentures
due 2003 ("Arch Convertible Debentures") elected to
F-12
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
convert their Arch Convertible Debentures into Arch common stock at a
conversion price of $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
and at March 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
Year Ending December 31, 1998 1999
------------------------ ------------ ----------
<S> <C> <C>
1999............................................ $ 1,250 $ 1,250
2000............................................ 17,725 17,725
2001............................................ 29,650 29,650
2002............................................ 29,650 29,650
2003............................................ 43,014 43,014
Thereafter...................................... 883,460 916,402
---------- ----------
$1,004,749 $1,037,691
========== ==========
</TABLE>
4. Redeemable Preferred Stock and Stockholders' Equity
Redeemable Preferred Stock--In connection with the its merger (the "USAM
Merger") with USA Mobile Communications Holdings, Inc. ("USA Mobile"), Arch
assumed the obligations associated with 22,530 outstanding shares of Series A
Redeemable Preferred Stock issued by USA Mobile. The preferred stock was
recorded at its accreted redemption value, based on 10% annual accretion
through the redemption date. On January 30, 1997, all outstanding preferred
stock was redeemed for $3.7 million in cash.
Redeemable Series C Cumulative Convertible Preferred Stock--On June 29, 1998,
two partnerships managed by Sandler Capital Management Company, Inc., an
investment management firm ("Sandler"), together with certain other private
investors, made an equity investment in Arch of $25.0 million in the form of
Series C Convertible Preferred Stock of Arch ("Series C Preferred Stock"). The
Series C Preferred Stock: (i) is convertible into Common Stock of Arch at an
initial conversion price of $5.50 per share, subject to certain adjustments;
(ii) bears dividends at an annual rate of 8.0%, (A) payable quarterly in cash
or, at Arch's option, through the issuance of shares of Arch's Common Stock
valued at 95% of the then prevailing market price or (B) if not paid quarterly,
accumulating and payable upon redemption or conversion of the Series C
Preferred Stock or liquidation of Arch; (iii) permits the holders after seven
years to require Arch, at Arch's option, to redeem the Series C Preferred Stock
for cash or convert such shares into Arch's Common Stock valued at 95% of the
then prevailing market price of Arch's Common Stock; (iv) is subject to
redemption for cash or conversion into Arch's Common Stock at Arch's option in
certain circumstances; (v) in the event of a "Change of Control" as defined in
the indenture governing Arch's 10 7/8% Senior Discount Notes due 2008 (the
"Senior
F-13
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Discount Notes Indenture"), requires Arch, at its option, to redeem the Series
C Preferred Stock for cash or convert such shares into Arch's Common Stock
valued at 95% of the then prevailing market price of Arch's Common Stock, with
such cash redemption or conversion being at a price equal to 105% of the sum of
the original purchase price plus accumulated dividends; (vi) limits certain
mergers or asset sales by Arch; (vii) so long as at least 50% of the Series C
Preferred Stock remains outstanding, limits the incurrence of indebtedness and
"restricted payments" in the same manner as contained in the Senior Discount
Notes Indenture; and (viii) has certain voting and preemptive rights. Upon an
event of redemption or conversion, Arch currently intends to convert such
Series C Preferred Stock into shares of Arch Common Stock.
Stock Options--Arch has a 1989 Stock Option Plan (the "1989 Plan") and a 1997
Stock Option Plan (the "1997 Plan"), which provide for the grant of incentive
and nonqualified stock options to key employees, directors and consultants to
purchase Arch's common stock. Incentive stock options are granted at exercise
prices not less than the fair market value on the date of grant. Options
generally vest over a five-year period from the date of grant with the first
such vesting (20% of granted options) occurring one year from the date of grant
and continuing ratably at 5% on a quarterly basis thereafter. However, in
certain circumstances, options may be immediately exercised in full. Options
generally have a duration of 10 years. The 1989 Plan provides for the granting
of options to purchase a total of 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)
F-14
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
occurring on the date of grant and future vesting of 25% of granted options
occurring on each of the first three anniversaries of the date of grant.
On December 16, 1997, the Compensation Committee of the Board of Directors of
Arch authorized the Company to offer an election to its employees who had
outstanding options at a price greater than $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>
F-15
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.44-$ 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%.
F-16
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1996, 1997 and 1998 were $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.
F-17
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has established a valuation reserve against its net deferred tax
asset until it becomes more likely than not that this asset will be realized in
the foreseeable future.
6. Commitments and Contingencies
In the ordinary course of business, the Company and its subsidiaries are
defendants in a variety of judicial proceedings. In the opinion of management,
there is no proceeding pending, or to the knowledge of management threatened,
which, in the event of an adverse decision, would result in a material adverse
change in the financial condition of the Company.
Arch has operating leases for office and transmitting sites with lease terms
ranging from one month to approximately ten years. In most cases, Arch expects
that, in the normal course of business, leases will be renewed or replaced by
other leases.
Future minimum lease payments under noncancellable operating leases at
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999............................................................... $21,372
2000............................................................... 13,826
2001............................................................... 8,853
2002............................................................... 6,026
2003............................................................... 2,495
Thereafter......................................................... 1,516
-------
Total............................................................ $54,088
=======
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1996, 1997 and 1998 approximated $14.7 million, $19.8 million and $19.6
million, respectively.
7. Employee Benefit Plans
Retirement Savings Plan--Arch has a retirement savings plan, qualifying under
Section 401(k) of the Internal Revenue Code covering eligible employees, as
defined. Under the plan, a participant may elect to defer receipt of a stated
percentage of the compensation which would otherwise be payable to the
participant for any plan year (the deferred amount) provided, however, that the
deferred amount shall not exceed the maximum amount permitted under Section
401(k) of the Internal Revenue Code. The plan provides for employer matching
contributions. Matching contributions for the years ended December 31, 1996,
1997 and 1998 approximated $217,000, $302,000 and $278,000, respectively.
8. Tower Site Sale
In April 1998, Arch announced an agreement to sell certain of its tower site
assets (the "Tower Site Sale") for approximately $38.0 million in cash (subject
to adjustment), of which $1.3 million was paid to entities affiliated with
Benbow in payment for certain assets owned by such entities and included in the
Tower Site Sale. In the Tower Site Sale, Arch is selling communications towers,
real estate, site management contracts and/or leasehold interests involving 133
sites in 22 states and will rent space on the towers on which it currently
operates communications equipment to service its own paging network. Arch used
its net proceeds from the Tower Site Sale to repay indebtedness under the API
Credit Facility. Arch held the initial closing of the Tower Site Sale on June
26, 1998 with gross proceeds to Arch of approximately $12.0 million (excluding
F-18
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$1.3 million which was paid to entities affiliated with Benbow for certain
assets which such entities sold as part of this transaction) and held a second
closing on September 29, 1998 with gross proceeds to Arch of approximately
$20.4 million.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain is deferred and included in other long-term
liabilities. At December 31, 1998, Arch had sold 117 of the 133 sites, which
resulted in a total gain of approximately $23.5 million and through December
31, 1998 approximately $2.5 million of this gain had been recognized in the
statement of operations and is included in operating income.
9. Divisional Reorganization
In June 1998, Arch's Board of Directors approved a reorganization of Arch's
operations (the "Divisional Reorganization"). As part of the Divisional
Reorganization, which is being implemented over a period of 18 to 24 months,
Arch has consolidated its former Midwest, Western and Northern divisions into
four existing operating divisions and is in the process of consolidating
certain regional administrative support functions, such as customer service,
collections, inventory and billing, to reduce redundancy and take advantage of
various operating efficiencies. In connection with the Divisional
Reorganization, Arch (i) anticipates a net reduction of approximately 10% of
its workforce, (ii) is closing certain office locations and redeploying other
assets and (iii) recorded a restructuring charge of $14.7 million, or $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 and March 31,
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
(unaudited)
Remaining
Remaining Reserve
Reserve Utilization Reserve at Utilization at
Initially of Reserve December 31, of Reserve March 31,
Established in 1998 1998 in 1999 1999
----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Severance costs......... $ 9,700 $2,165 $ 7,535 $710 $ 6,825
Lease obligation costs.. 3,500 366 3,134 142 2,992
Other costs............. 1,500 260 1,240 25 1,215
------- ------ ------- ---- -------
Total................. $14,700 $2,791 $11,909 $877 $11,032
======= ====== ======= ==== =======
</TABLE>
10. Segment Reporting
The Company operates in one industry: providing wireless messaging services.
On December 31, 1998, the Company operated approximately 175 retail stores in
35 states of the United States.
F-19
<PAGE>
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Quarterly Financial Results (Unaudited)
Quarterly financial information for the years ended December 31, 1997 and
1998 is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Revenues............................... $ 95,539 $ 98,729 $101,331 $101,242
Operating income (loss)................ (26,632) (29,646) (27,208) (18,529)
Net income (loss)...................... (45,815) (49,390) (47,645) (39,024)
Basic net income (loss) per common
share:
Net income (loss).................... (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>
F-20
<PAGE>
Report of Independent Auditors
The Board of Directors
MobileMedia Communications, Inc.
We have audited the accompanying consolidated balance sheets of MobileMedia
Communications, Inc. and Subsidiaries ("MobileMedia") as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MobileMedia Communications, Inc. and Subsidiaries at December 31, 1997 and
1998 and the consolidated results of their operations and cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
MobileMedia will continue as a going concern. As more fully described in Note
1, on January 30, 1997, MobileMedia Corporation and substantially all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court). Additionally, as more fully
described in Note 11, on April 8, 1997, the Federal Communications Commission
("FCC") issued a Public Notice commencing an administrative hearing into the
qualification of MobileMedia to remain a licensee. These events, and
circumstances relating to the Chapter 11 filing with the Bankruptcy Court,
including MobileMedia's highly leveraged financial structure, non-compliance
with certain covenants of loan agreements with banks and note indentures, net
working capital deficiency and recurring losses from operations, raise
substantial doubt about MobileMedia's ability to continue as a going concern.
Although MobileMedia is currently operating the business as a debtor-in-
possession under the jurisdiction of the Bankruptcy Court, the continuation of
the business as a going concern is contingent upon, among other things, the
ability to (a) gain approval of the creditors and confirmation by the
Bankruptcy Court of a plan of reorganization, (b) maintain compliance with all
covenants under the debtor-in-possession financing agreement, (c) achieve
satisfactory levels of future operating profit and (d) retain FCC qualification
as a licensee. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
the outcome of these uncertainties.
/s/ Ernst & Young LLP
MetroPark, New Jersey
February 12, 1999, except for the eighth and ninth paragraphs of
Note 1 and the second paragraph of Note 6, as to which the date
is March 26, 1999
F-21
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets
Cash and cash equivalents............. $ 10,920 $ 1,218 $ --
Accounts receivable (less allowance
for uncollectible accounts of
$26,500, $15,000 and $14,893 in 1997,
1998 and 1999, respectively) ........ 55,432 38,942 37,270
Inventories........................... 868 2,192 1,609
Prepaid expense....................... 5,108 5,523 5,261
Other current assets.................. 2,783 4,855 4,900
----------- ----------- -----------
Total current assets................ 75,111 52,730 49,040
----------- ----------- -----------
Investment in net assets of equity
affiliate.............................. 1,788 1,400 --
Property and equipment, net............. 257,937 219,642 225,566
Intangible assets, net.................. 295,358 266,109 258,793
Other assets............................ 24,940 21,573 20,610
----------- ----------- -----------
Total assets........................ $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit
facility............................. $ 10,000 $ -- $ 5,000
Accrued restructuring costs........... 4,897 5,163 7,197
Accrued wages, benefits and payroll... 11,894 12,033 9,944
Book cash overdraft................... -- -- 1,255
Accounts payable--post petition....... 2,362 1,703 7,334
Accrued interest...................... 4,777 3,692 3,566
Accrued expenses and other current
liabilities.......................... 35,959 35,735 30,061
Current income taxes payable.......... -- 2,871 1,200
Advance billing and customer
deposits............................. 34,252 28,554 28,892
Deferred gain on tower sale........... -- 68,444 67,278
----------- ----------- -----------
Total liabilities not subject to
compromise......................... 104,141 158,195 161,727
----------- ----------- -----------
Liabilities subject to compromise
Accrued wages, benefits and payroll
taxes................................ 562 647 476
Accrued interest...................... 18,450 17,579 17,578
Accounts payable--pre petition........ 19,646 15,410 15,351
Accrued expenses and other current
liabilities.......................... 20,663 15,285 12,231
Debt.................................. 1,075,681 905,681 905,681
Other liabilities..................... 2,915 -- --
----------- ----------- -----------
Total liabilities subject to
compromise......................... 1,137,917 954,602 951,317
----------- ----------- -----------
Deferred tax liabilities.............. 2,655 2,655 2,655
Stockholders' deficit
Common stock (1 share, no par value,
issued and outstanding at
December 31, 1997 and 1998 and March
31, 1999)............................ -- -- --
Additional paid-in-capital............ 676,025 676,025 676,025
Accumulated deficit--pre petition..... (1,154,420) (1,154,420) (1,154,420)
Accumulated deficit--post petition.... (111,184) (75,603) (83,295)
----------- ----------- -----------
Total stockholders' deficit......... (589,579) (553,998) (561,690)
----------- ----------- -----------
Total liabilities and stockholders'
deficit............................ $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------- ------------------
1996 1997 1998 1998 1999
----------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue (unaudited)
Services, rents and
maintenance........... $ 568,892 $ 491,174 $423,059 $108,542 $100,631
Product sales.......... 71,818 36,218 26,622 6,621 5,193
----------- --------- -------- -------- --------
Total revenues....... 640,710 527,392 449,681 115,163 105,824
Cost of products sold.... (72,595) (35,843) (22,162) (5,513) (3,516)
----------- --------- -------- -------- --------
568,115 491,549 427,519 109,650 102,308
Operating expenses
Services, rents and
maintenance........... 144,050 139,333 111,589 28,899 27,077
Selling................ 96,817 69,544 61,106 15,703 14,136
General and
administrative........ 218,607 179,599 133,003 34,908 31,481
Reduction of
liabilities subject to
compromise............ -- -- (10,461) -- (3,050)
Impairment of long-
lived assets.......... 792,478 -- -- -- --
Restructuring costs.... 4,256 19,811 18,624 4,558 5,067
Depreciation........... 136,434 110,376 86,624 24,193 20,501
Amortization........... 212,264 29,862 29,835 7,478 7,468
Amortization of
deferred gain on tower
sale.................. -- -- (1,556) -- (1,167)
----------- --------- -------- -------- --------
Total operating
expenses............ 1,604,906 548,525 428,764 115,739 101,513
----------- --------- -------- -------- --------
Operating (loss)......... (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense)
Interest expense, net.. (92,663) (67,611) (53,043) (14,626) (10,018)
Gain (loss) on
sale/disposal of
assets................ 68 3 94,165 1 (323)
Other.................. -- -- (338) -- 2,063
----------- --------- -------- -------- --------
Total other expense.. (92,595) (67,608) 40,784 (14,625) (8,278)
----------- --------- -------- -------- --------
Income (loss) before
income taxes (benefit).. (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income taxes (benefit)... (69,442) -- 3,958 -- 209
----------- --------- -------- -------- --------
Net income (loss)........ $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
=========== ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Accumulated Accumulated
Additional Deficit Deficit
Paid in Pre- Post-
Capital Petition Petition Total
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.. $659,829 $ (81,076) $ 0 $ 578,753
Capital contribution from
MobileMedia.................. 12,800 -- -- 12,800
Net loss...................... -- (1,059,944) -- (1,059,944)
-------- ----------- --------- -----------
Balance at December 31, 1996.. 672,629 (1,141,020) 0 (468,391)
Capital contribution from
MobileMedia.................. 3,396 -- -- 3,396
Net loss...................... -- (13,400) (111,184) (124,584)
-------- ----------- --------- -----------
Balance at December 31, 1997.. 676,025 (1,154,420) (111,184) (589,579)
Net income.................... -- -- 35,581 35,581
-------- ----------- --------- -----------
Balance at December 31, 1998
............................. 676,025 (1,154,420) (75,603) (553,998)
Net loss (unaudited).......... -- -- (7,692) (7,692)
-------- ----------- --------- -----------
Balance at March 31, 1999
(unaudited).................. $676,025 $(1,154,420) $ (83,295) $ (561,690)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------- --------------------
1996 1997 1998 1998 1999
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating activities (unaudited)
Net income (loss)..... $(1,059,944) $(124,584) $ 35,581 $(20,714) $(7,692)
Adjustments to reconcile
net loss to net cash
provided by (used in)
Operating activities:
Depreciation and amor-
tization............. 348,698 140,238 116,459 31,672 27,969
Amortization of de-
ferred gain on tower
sale................. (1,556) -- (1,167)
Income tax benefit.... (69,442) -- -- -- --
Accretion of note pay-
able discount........ 16,792 1,485 -- -- --
Provision for uncol-
lectible accounts.... 56,556 65,181 14,841 4,981 2,131
Reduction of liabili-
ties subject to com-
promise.............. -- -- (10,461) -- (3,050)
Recognized gain on
sale of tower as-
sets................. -- -- (94,165) -- --
Impairment of long-
lived assets......... 792,478 -- -- -- --
Undistributed earnings
of affiliate, net.... 160 69 (87) 22 --
Change in operating as-
sets and liabilities:
Accounts receivable... (55,965) (53,904) 1,649 2,813 (459)
Inventories........... 2,433 12,514 (1,324) 407 583
Prepaid expenses and
other assets......... 12,145 (686) 590 (1,052) 1,028
Accounts payable, ac-
crued expenses and
other liabilities.... 13,283 (25,393) (7,065) 1,413 (1,791)
----------- --------- --------- --------- --------
Net cash provided by
(used in) operating
activities........... 57,194 14,920 54,462 19,542 17,552
----------- --------- --------- --------- --------
Investing activities:
Construction and capi-
tal expenditures, in-
cluding net changes
in pager assets...... (161,861) (40,556) (53,867) (4,854) (26,806)
Net proceeds from the
sale of tower as-
sets................. -- -- 169,703 --
Net proceeds from the
sale of investment in
Abacus............... -- -- -- -- 1,400
Net loss on the dis-
posal of fixed as-
sets................. -- -- -- -- 381
Acquisition of busi-
nesses............... (866,460) -- -- --
----------- --------- --------- --------- --------
Net cash provided by
(used in) investing ac-
tivities............... (1,028,321) (40,556) 115,836 (4,854) (25,025)
----------- --------- --------- --------- --------
Financing activities:
Book cash overdraft... -- -- -- -- 1,255
Capital contribution
by MobileMedia Corpo-
ration............... 12,800 3,396 -- -- --
Payment of debt issue
costs................ (6,939) -- -- -- --
Borrowing from revolv-
ing credit facili-
ties................. 580,250 -- -- -- --
Repayments on revolv-
ing credit facili-
ties................. -- -- (170,000) -- --
Borrowing from DIP
credit facilities.... -- 47,000 -- -- 5,000
Repayments on DIP
credit facilities.... -- (37,000) (10,000) (10,000) --
----------- --------- --------- --------- --------
Net cash provided by
(used in) financing ac-
tivities............... 586,111 13,396 (180,000) (10,000) 6,255
----------- --------- --------- --------- --------
Net (decrease) increase
in cash, cash equiva-
lents designated and
cash designated for the
MobileComm acquisi-
tion................... (385,016) (12,240) (9,702) 4,688 (1,218)
Cash and cash equiva-
lents at beginning of
period................. 408,176 23,160 10,920 10,920 1,218
----------- --------- --------- --------- --------
Cash and cash equiva-
lents at end of peri-
od..................... $ 23,160 $ 10,920 $ 1,218 $ 15,608 $ 0
=========== ========= ========= ========= ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Chapter 11 Reorganization and Basis of Presentation
On January 30, 1997 (the "Petition date"), MobileMedia Corporation
("Parent"), its wholly owned subsidiary MobileMedia Communications, Inc., and
all seventeen of MobileMedia Communications, Inc.'s subsidiaries
("MobileMedia") (collectively with Parent, the "Debtors"), filed for protection
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
The Debtors are operating as debtors-in-possession and are subject to the
jurisdiction of the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). Chapter 11 is the principal business reorganization
chapter of the Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a
debtor is authorized to reorganize its business for the benefit of its
creditors and stockholders. In addition to permitting rehabilitation of the
debtor, another goal of Chapter 11 is to promote equality of treatment of
creditors and equity security holders of equal rank with respect to the
restructuring of debt. In furtherance of these two goals, upon the filing of a
petition for reorganization under Chapter 11, section 362(a) of the Bankruptcy
Code generally provides for an automatic stay of substantially all acts and
proceedings against the debtor and its property, including all attempts to
collect claims or enforce liens that arose prior to the commencement of the
debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations of
the Debtors with respect to the employment of attorneys, investment bankers and
other professionals, and transactions out of the Debtors' ordinary course of
business or otherwise requiring bankruptcy court approval under the Bankruptcy
Code. The Debtors have been paying undisputed obligations that have arisen
subsequent to the Petition date on a timely basis.
Since the Petition date, the Bankruptcy Court has entered orders, among other
things, allowing the Debtors (i) to pay certain customer refunds and deposits
in the ordinary course of business, (ii) to pay wages, salaries and benefits
owing to employees, and (iii) to pay specified pre-petition taxes owing to
various governmental entities. On February 6, 1997, the Bankruptcy Court
entered an order authorizing the Debtors to pay approximately $46,000 in pre-
petition amounts owing to certain essential vendors.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts and other unexpired executory pre-petition leases and contracts,
subject to Bankruptcy Court approval. Assumption of a contract requires the
Debtors, among other things, to cure all defaults under the contract, including
payment of all pre-petition liabilities. Rejection of a contract constitutes a
breach of that contract as of the moment immediately preceding the Chapter 11
filing and the other party has the right to assert a general, unsecured claim
against the bankruptcy estate for damages arising out of such breach. These
parties may also seek to assert post-petition administrative claims against the
Debtors to the extent that the Debtors utilize the collateral or services of
such parties subsequent to the commencement of the Chapter 11 proceedings. The
Debtors cannot presently determine or reasonably estimate the ultimate
liability that may result from payments required to cure defaults under assumed
leases and contracts or from the filing of claims for all leases and contracts
which may be rejected.
In connection with the Chapter 11 filing, the Debtors notified all known
claimants that pursuant to an order of the Bankruptcy Court, all proofs of
claims, on account of pre-petition obligations, other than for certain
governmental entities, were required to be filed by June 16, 1997 (the "Bar
Date"). As of March 31, 1999, approximately 2,581 proofs of claim had been
filed against the Debtors. Included among the claims filed are claims of
unspecified and undeterminable amounts. The Debtors consider the amounts set
forth in certain proofs of claim to be inaccurate estimates of the Debtors'
liabilities. As of March 31, 1999, the Debtors had secured orders of the
Bankruptcy Court reducing approximately 1,607 claims filed in an aggregate
amount of approximately $143,362 to an allowed amount of $10,239. As of March
31, 1999, the Debtors had also analyzed and resolved an additional 876 proofs
of claim, representing an aggregate allowed amount of $8,389. The Debtors
expect the objection process to continue.
F-26
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On August 20, 1998, MobileMedia announced that it had executed a merger
agreement with Arch Communications Group, Inc. ("Arch"), pursuant to which
MobileMedia Communications, Inc. will be merged with and into a wholly-owned
subsidiary of Arch. Immediately prior to the Merger, Parent will contribute all
of its assets to MobileMedia Communications, Inc. Also on August 20, 1998, the
Debtors filed a First Amended Joint Plan of Reorganization that reflects the
proposed merger with Arch. On September 3, 1998, Arch and MobileMedia executed
an amendment to the merger agreement and the Debtors filed a subsequent Second
Amended Joint Plan of Reorganization. On December 1, 1998 Arch and MobileMedia
executed a second amendment to the merger agreement and on December 2, 1998,
the Debtors filed a Third Amended Joint Plan of Reorganization (the "Plan"). As
of February 9, 1999, Arch and MobileMedia executed a third amendment to the
merger agreement. Under the Plan, the Debtors' secured creditors will receive
cash in an amount equal to their allowed pre-petition claims and the Debtors'
unsecured creditors will receive cash or equity securities of Arch in
satisfaction of their pre-petition claims against the Debtors. Because there
are a variety of conditions precedent to the consummation of the Plan and the
merger with Arch, there can be no assurance that the transactions contemplated
thereby will be consummated.
In December 1998 and January 1999, MobileMedia solicited the votes of its
creditors on the Plan. 100% of the voting creditors in Class 4 voted to accept
the Plan. As to Allowed Claims in Class 5, 83% in number and 91% in amount of
those voting voted to accept the Plan. Of the Allowed Claims in Class 6 that
voted on the Plan, 968 of such holders (approximately 94% in number and 69% in
amount) voted to accept the Plan, and 61 of such holders (approximately 6% in
number and 31% in amount) voted to reject the Plan.
Objections to confirmation were filed by New Generation Advisors, Inc. ("New
Generation"), Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc.--High Income Portfolio and State Street Research High Income Fund
(the "Objectors"). On February 12, 1999, at a continued hearing on confirmation
of the Plan, the Bankruptcy Court ordered MobileMedia to provide due diligence
to a nominee of New Generation, to prepare supplemental disclosure to the
holders of Allowed Claims in Class 6, and to resolicit the votes of such
holders on the Plan. At a hearing held before the Bankruptcy Court on February
18, 1999, the Bankruptcy Court entered an order approving a form of Notice and
Supplemental Disclosure, directing MobileMedia to resolicit the votes of all
holders of Allowed Class 6 Claims and establishing March 23, 1999 as (a) the
Supplemental Voting Deadline for Class 6 and (b) the deadline for any further
objections to confirmation of the Plan arising out of the matters set forth in
the Notice of Supplemental Disclosure. No further objections to the Plan were
received by March 23, 1999. Taking into account the resolicitation of Class 6,
the Plan was accepted by 59.6% in number and 69.3% in dollar amount of voting
Class 6 creditors.
On March 22, 1999, the Debtors and various other parties (including the
Objectors, Arch, the Committee and the Agent for the Company's pre-petition
secured lenders) executed a stipulation (the "Stipulation") that was approved
by the Bankruptcy Court, effective as of March 23, 1999. The Stipulation
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.
F-27
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The consolidated financial statements at December 31, 1997, 1998 and March
31, 1999 (unaudited) have been prepared on a going concern basis which assumes
continuity of operations and realization of assets and liquidation of
liabilities in the ordinary course of business. As discussed herein, there are
significant uncertainties relating to the ability of MobileMedia to continue as
a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or the amounts and classification of liabilities that might be
necessary as a result of the outcome of the uncertainties discussed herein.
2. The Company and Summary of Significant Accounting Policies
The Company
MobileMedia provides paging and wireless messaging services in the United
States, including the 100 largest metropolitan areas.
Consolidation
The consolidated financial statements include the accounts of MobileMedia and
its wholly-owned subsidiaries (MobileMedia Communications, Inc. (California),
MobileMedia Paging, Inc., MobileMedia DP Properties, Inc., Dial Page Southeast,
Inc., Radio Call Company of Va., Inc., MobileMedia PCS, Inc., Mobile
Communications Corporation of America, MobileComm of Florida, Inc., MobileComm
of Tennessee, Inc., MobileComm of the Midsouth, Inc., MobileComm Nationwide
Operations, Inc., MobileComm of the West, Inc., MobileComm of the Northeast,
Inc., MobileComm of the Southeast, Inc., MobileComm of the Southeast Private
Carrier Operations, Inc., MobileComm of the Southwest, Inc. and FWS Radio,
Inc.). All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents
MobileMedia considers all highly-liquid securities with an original maturity
of less than three months to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject MobileMedia to concentrations
of credit risk consist principally of temporary cash investments and accounts
receivable. MobileMedia places its cash with high-quality institutions and, by
policy, limits its credit exposure to any one institution. Although MobileMedia
faces significant credit risk from its customers, such risk does not result
from a concentration of credit risk as a result of the large number of
customers which comprise MobileMedia's customer base. MobileMedia generally
does not require collateral or other security to support customer receivables.
Inventories
MobileMedia values inventories at the lower of specific cost or market value.
Inventories consist of pagers held specifically for resale by MobileMedia.
Revenue Recognition
MobileMedia recognizes revenue under service, rent and maintenance agreements
with customers at the time the related services are performed. Advance billings
for services are deferred and recognized as revenue when earned. MobileMedia
leases (as lessor) certain pagers under operating leases. Sales of pagers are
recognized upon delivery.
F-28
<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
F-29
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
estimated fair value. Fair value was determined through the application of
generally accepted valuation methods to MobileMedia's projected cash flows,
discounted at an estimated market rate of interest. The remaining carrying
amount of long-lived assets are expected to be recovered based on MobileMedia's
estimates of cash flows. However, it is possible that such estimates could
change based upon the uncertainties of the bankruptcy process and because
future operating and financial results may differ from those projected which
may require further writedowns to fair value.
Debt Issue Costs
Debt issue costs, which relate to the long term debt discussed in Note 6, are
reported as "Other assets" in the accompanying balance sheets. Such costs
amounted to $22,939 at December 31, 1997 and $19,295 at December 31, 1998 and
$18,384 at March 31, 1999 (unaudited) and are being amortized on a straight
line basis over the term of the related debt.
Book Cash Overdraft
Under MobileMedia's cash management system, checks issued but not presented
to banks occasionally result in overdraft balances for accounting purposes and
are classified as "Book Cash Overdrafts" in the balance sheet.
Liabilities Subject to Compromise
Liabilities subject to compromise consists of pre-petition liabilities that
may be affected by a plan of reorganization. In accordance with AICPA Statement
of Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", MobileMedia records liabilities subject to compromise based
on the expected amount of the allowed claims related to these liabilities.
Accordingly, in December 1998 and March 1999 MobileMedia reduced such
liabilities by approximately $10,461 and $3,050 (unaudited), respectively, to
reflect changes in estimated allowed claims.
Restructuring Costs
Restructuring costs are primarily comprised of professional fees constituting
administrative expenses incurred by MobileMedia as a result of reorganization
under Chapter 11 of the Bankruptcy Code.
Income Taxes
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services,
F-30
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. MobileMedia has
adopted SFAS No. 131 as of December 31, 1998. Such adoption did not have an
impact on MobileMedia's financial reporting.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 ("SOP 98-5")
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of SOP 98-5 will be reported as the cumulative effect of a change
in accounting principle. MobileMedia intends to adopt SOP 98-5 effective
January 1, 1999. The adoption of SOP 98-5 is not expected to have any effect on
MobileMedia's financial position or results of operations.
3. Acquisitions and Divestitures
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers to Pinnacle Towers, Inc. ("Pinnacle") for $170,000 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>
F-31
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
4. Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31, (unaudited)
----------------- March 31,
1997 1998 1999
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Pagers...................................... $196,791 $176,610 $190,903
Radio transmission equipment................ 202,296 203,048 204,054
Computer equipment.......................... 30,896 32,679 32,866
Furniture and fixtures...................... 20,918 22,019 21,187
Leasehold improvements...................... 14,652 16,516 16,745
Construction in progress.................... 1,128 11,624 13,140
Land, buildings and other................... 7,911 6,697 6,591
-------- -------- --------
474,592 469,193 485,486
Accumulated depreciation.................... 216,655 249,551 259,920
-------- -------- --------
Property and equipment, net................. $257,937 $219,642 $225,566
======== ======== ========
</TABLE>
5. Intangible Assets
<TABLE>
<CAPTION>
December 31, March 31, 1999 (unaudited)
-------------------------------------------------------------- ------------------------------
1997 1998
------------------------------- ------------------------------
Accumulated Accumulated Accumulated
Cost Amortization Net Cost Amortization Net Cost Amortization Net
--------- ------------ -------- -------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FCC Licenses............ $ 261,323 $ (8,918) $252,405 $261,523 $(16,891) $244,632 $261,623 $(18,937) $242,686
Customer lists.......... 64,430 (21,477) 42,953 64,430 (42,953) 21,477 64,430 (48,323) 16,107
--------- -------- -------- -------- -------- -------- -------- -------- --------
$ 325,753 $(30,395) $295,358 $325,953 $(59,844) $266,109 $326,053 (67,260) $258,793
========= ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
MobileMedia is not amortizing the cost of two nationwide Personal
Communications Services ("PCS") licenses, one acquired directly from the FCC
and the other as a result of the MobileComm acquisition, because the
construction of paging networks related to such licenses has not been
completed. These networks are expected to begin commercial operation in 1999
and, accordingly, amortization of these licenses will begin at such time.
F-32
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
6. Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, (unaudited)
------------------- March 31,
1997 1998 1999
---------- -------- -----------
<S> <C> <C> <C>
DIP credit facility...................... $ 10,000 $ -- $ 5,000
Revolving loan........................... 99,000 72,900 72,900
Term loan................................ 550,000 406,100 406,100
10 1/2% Senior Subordinated Deferred
Coupon Notes due December 1, 2003....... 174,125 174,125 174,125
9 3/8% Senior Subordinated Notes due
November 1, 2007........................ 250,000 250,000 250,000
Dial Page Notes.......................... 1,570 1,570 1,570
Note Payable............................. 986 986 986
---------- -------- --------
Total debt............................. $1,085,681 $905,681 $910,681
========== ======== ========
</TABLE>
The debt obligations of MobileMedia include:
1) A debtor-in-possession credit facility ("DIP Facility") with a
syndicate of lenders including The Chase Manhattan Bank, as Agent (the "DIP
Lenders"). As of March 31, 1999 there was $5,000 of borrowings outstanding
under this facility, as of December 31, 1998 there were no funded
borrowings and as of December 31, 1997, there was $10,000 of borrowings
outstanding under this facility. MobileMedia is subject to certain
financial and operating restrictions customary to credit facilities of this
type including a limitation on periodic capital expenditures, minimum
allowable periodic EBITDA and retention of a turnaround professional.
Additionally, MobileMedia is required to make monthly interest payments to
the DIP Lenders and pay a commitment fee of 0.5% on any unused portion of
the DIP Facility. The DIP Facility bears interest at a rate of LIBOR plus
250 basis points or Base Rate plus 150 basis points, at the option of
MobileMedia. During 1997, the Debtors drew down $47,000 of borrowings and
repaid $37,000 under the DIP Facility. During January and February, 1998
the Debtors repaid an additional $10,000. On January 27, 1998, the DIP
Facility was amended and reduced from $200,000 to $100,000. On August 12,
1998, MobileMedia received approval from the Bankruptcy Court to extend the
DIP Facility to March 31, 1999 and further reduce it from $100,000 to
$75,000. MobileMedia has negotiated an extension of the DIP Facility
through and including December 31, 1999.
2) A $750,000 senior secured and guaranteed credit agreement (the "Pre-
Petition Credit Agreement") with a syndicate of lenders including The Chase
Manhattan Bank, as Agent. As of December 31, 1998 there was $479,000
outstanding under this facility consisting of term loans of $101,500 and
$304,600 and loans under a revolving credit facility totaling $72,900. This
agreement was entered into on December 4, 1995, in connection with the
financing of the MobileComm Acquisition. Commencing in 1996 MobileMedia was
in default under this agreement. As a result of such default and the
bankruptcy filing, MobileMedia has no borrowing capacity under this
agreement. Since the Petition date, MobileMedia has brought current its
interest payments and has been making monthly payments to the lenders under
the Pre-Petition Credit Agreement equal to the amount of interest accruing
under such agreement. On September 3, 1998, MobileMedia repaid $170,000 of
borrowings under the Pre-Petition Credit Agreement with proceeds from the
Tower Sale (see Note 3).
F-33
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the "9 3/8%
Notes") issued in November 1995. These notes bear interest at a rate of 9
3/8% payable semi-annually on May 1 and November 1 of each year. On
November 1, 1996, MobileMedia did not make its scheduled interest payment
on its 9 3/8% Notes which constituted an event of default. The note holders
have not exercised any rights or remedies afforded holders (which rights
include, but are not limited to, acceleration of the stated maturity of the
notes). Since the Petition date, any such right or remedy is subject to the
automatic stay created by the Bankruptcy Code.
4) $210,000 of Senior Subordinated Deferred Coupon Notes (the "Deferred
Coupon Notes") issued, at a discount, in November 1993. The Deferred Coupon
Notes accrete at a rate of 10 1/2%, compounded semi-annually, to an
aggregate principal amount of $210,000 by December 1, 1998 after which
interest is paid in cash at a rate of 10 1/2% and is payable semi-annually.
By virtue of the missed interest payments on the 9 3/8% Notes and the Pre-
Petition Credit Agreement an event of default has occurred. The note
holders have not exercised any rights or remedies afforded such holders
(which rights include, but are not limited to, acceleration of the stated
maturity of the notes). Since the Petition date, any such right or remedy
is subject to the automatic stay created by the Bankruptcy Code.
Interest Expense on Debt
Interest paid during the years ended December 31, 1996, 1997 and 1998, and
the three months ended March 31, 1998 and 1999 (unaudited) was $65,978,
$70,817, $51,560, $13,915 and $9,383 respectively. Total interest cost incurred
for the years ended December 31, 1996, 1997 and 1998 was $94,231, $68,409 and
$53,982, respectively of which $1,292, $176 and $228 was capitalized. Total
interest cost incurred for the three months ended March 31, 1998 and 1999
(unaudited), was $14,793 and $10,248, respectively, of which $21 and $149 was
capitalized.
Subsequent to the Petition date, interest was accrued and paid only on the
Pre-Petition Credit Agreement and the DIP Facility. If not for the filing,
interest expense for the year ended December 31, 1997 and 1998 and March 31,
1998 and 1999 (unaudited), would have been approximately $104,152, $97,776,
$25,724 and $21,187, respectively.
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>
F-34
<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 presentedin the accompanying financial statements as
if MobileMedia filed tax returns as a separate consolidated entity.
A reconciliation of income tax benefit (expense) and the amount computed by
applying the statutory federal income tax rate to loss before income taxes is
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Tax benefit (expense) at federal statutory rate... $395,285 $43,604 $(13,838)
Goodwill and intangible amortization and
writedown........................................ (95,362) -- --
State income taxes................................ -- -- (1,783)
Nondeductible expenses............................ -- -- (4,765)
Valuation allowance on federal deferred tax
assets........................................... (230,481) (43,604) 16,428
-------- ------- --------
Total........................................... $ 69,442 $ -- $ (3,958)
======== ======= ========
</TABLE>
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
F-35
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
carryforwards will be limited annually by the Section 382 Limitation, which is
estimated to be approximately $40,000. In addition, if a second ownership
change has occurred subsequent to November 7, 1995, which has not yet been
determined, use of MobileMedia's net operating losses would be severely
limited. It is also anticipated that the net operating loss carryforwards and
certain other tax attributes of MobileMedia will be substantially reduced and
their utilization signifantly limited as a result of consummation of the Plan.
8. Leases
Certain facilities and equipment used in operations are held under operating
leases. Rental expenses under operating leases were $44,574, 43,453, $40,936,
$10,423 and $12,989 for the years ended December 31, 1996, 1997 and 1998 and
the three months ended March 31, 1998 and 1999 (unaudited), respectively. At
December 31, 1998, the aggregate minimum rental commitments under leases were
as follows:
<TABLE>
<S> <C>
1999............................................................ $ 48,951
2000............................................................ 25,457
2001............................................................ 19,250
2002............................................................ 15,726
2003............................................................ 13,327
Thereafter...................................................... 15,783
---------
$ 138,494
=========
</TABLE>
9. Employee Benefit Plans
MobileMedia has adopted a retirement savings plan that allows all employees
who have been employed for one year and have at least 1,000 hours of credited
service to contribute and defer up to 15% of their compensation. Effective
February 1, 1996, MobileMedia began a matching contribution of 50% of the first
2% of the elected deferral plus an additional 25% of the next 4% of the elected
deferral. MobileMedia's matching contribution was $700 in 1996, $730 in 1997
and $692 in 1998 and $160 and $178 for the three months ended March 31, 1998
and 1999 (unaudited), respectively.
10. Stock Option Plans
MobileMedia has two stock option plans under which approximately 1.3 million
options are currently outstanding. Under the proposed Plan of Reorganization,
MobileMedia's equity holders will receive no value for their ownership
interests in the Company, and accordingly, the options are also deemed to have
no value.
11. Commitments and Contingencies
MobileMedia is party to a number of lawsuits and other matters arising in the
ordinary course of business.
As announced on September 27, 1996 and October 21, 1996, MobileMedia
disclosed that misrepresentations and other violations had occurred during the
licensing process for as many as 400 to 500, or approximately 6% to 7%, of its
approximately 8,000 local transmission one-way paging stations. MobileMedia
caused an investigation to be conducted by its outside counsel, and a
comprehensive report regarding these matters was provided to the FCC in the
fall of 1996.
F-36
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On January 13, 1997, the FCC issued a Public Notice relating to the status of
certain FCC authorizations held by MobileMedia. Pursuant to the Public Notice,
the FCC announced that it had (i) automatically terminated approximately 185
authorizations for paging facilities that were not constructed by the
expiration date of their construction permits and remained unconstructed, (ii)
dismissed as defective approximately 94 applications for fill-in sites around
existing paging stations because they were predicated upon unconstructed
facilities and (iii) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. However, the FCC granted MobileMedia
interim operating authority to operate transmitters in this last category
subject to further action by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an Administrative Law Judge to take evidence and develop a full
factual record on directed issues concerning MobileMedia's filing of false
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the
hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible transfer
of MobileMedia's FCC licenses. The grant of the stay was premised on the
availability of an FCC doctrine known as Second Thursday, which provides that,
if there is a change of control that meets certain conditions, the regulatory
issues designated for administrative hearing will be resolved by the transfer
of MobileMedia's FCC licenses to the new owners of MobileMedia and the hearing
will not proceed. The stay was originally granted for ten months and was
extended by the FCC through October 6, 1998.
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.
F-37
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
In addition to the New Jersey Actions, two lawsuits (together, the
"California Actions" and, together with the New Jersey Actions, the "Securities
Actions") were filed in September 1997 in the United States District Court for
the Northern District of California and the Superior Court of California naming
as defendants certain former officers and certain present and former directors
of MobileMedia, certain investment entities and the Debtors' independent
auditors. None of the Debtors is named as defendant in the California Actions.
On November 4, 1997, the Debtors commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At hearings held on December 10, 1997 and May 29,
1998, the Bankruptcy Court enjoined the plaintiffs in the California Actions
until September 15, 1998 from taking certain actions in connection with the
California Actions, with certain exceptions.
The plaintiffs in both the New Jersey Actions and California Actions are
currently conducting discovery of MobileMedia in connection with their
prosecution of the actions against the named defendants. Following consummation
of the Plan of Reorganization, the Company may be subject to further discovery
in these proceedings.
Neither the New Jersey Actions nor the California Actions name any of the
Debtors as a defendant. However, proofs of claim have been filed against the
Debtors by the plaintiffs in the New Jersey Actions, and both the New Jersey
Actions and the California Actions may give rise to claims against the Debtors'
Directors, Officers and Corporate Liability Insurance Policy. It is anticipated
that under any plan of reorganization for MobileMedia these Claims will receive
no distributions.
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
F-38
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
non-information technology systems) and applications used by MobileMedia will
need to be reviewed, evaluated and, if and where necessary, modified or
replaced to ensure that all financial, information and operating systems are
Year 2000 compliant.
State of Readiness
MobileMedia has formed an internal task force comprised of representatives of
its various relevant departments to address Year 2000 compliance matters. The
task force has undertaken a preliminary review of internal and external areas
that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or non-
critical/non-important. MobileMedia also expects to hire outside consultants to
review MobileMedia's testing methodology and test results, to assess its
contingency planning and to provide general oversight relating to Year 2000
compliance matters.
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be Year 2000
compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain business-
related files were created and executed to identify any Year 2000 compliance
issues. The testing unearthed a few Year 2000 problems all of which have been
addressed and retested for Year 2000 readiness. Additional testing took place
the first quarter of 1999, which included testing of MobileMedia's financial
and human resource software packages. Although the results of these tests are
still being analyzed, relatively few Year 2000 problems were identified. There
can be no assurance, however, that such testing has detected, or will detect,
all compliance issues related to the Year 2000 problem.
With respect to external matters, MobileMedia has distributed questionnaires
and requests for certification to its mission-critical vendors and is in the
process of obtaining and reviewing the responses thereto. The questionnaires
have requested information concerning embedded technologies of such vendors,
the hardware and software applications used by such vendors and the Year 2000
compliance efforts of such vendors relating thereto.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to Year 2000 compliance matters.
Through December 31, 1998, MobileMedia has incurred approximately $50 in costs
(excluding in-house labor and hardware) in connection with Year 2000 compliance
matters. In addition, MobileMedia has purchased upgraded hardware at a cost of
approximately $175 for use as redundant equipment in testing for Year 2000
problems in an isolated production environment. MobileMedia estimates that it
will expend approximately $500 on additional hardware, software and other items
related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200 in
costs relating to Year 2000 remediation efforts for its paging network
hardware. MobileMedia also upgraded its paging network hardware during 1998 and
plans further upgrades in fiscal year 1999. Such upgrades have not been and are
not expected to be purchased solely for remediation of the Year 2000 compliance
problems; such upgrades are not themselves expected to have Year 2000
compliance problems.
F-39
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Risks Relating to Year 2000 Compliance Matters
MobileMedia has a goal to become Year 2000 compliant with respect to internal
matters during 1999. Although MobileMedia has begun testing of its internal
business-related hardware and software applications, there can be no assurances
that such testing will detect all applications that may be affected by Year
2000 compliance problems. With respect to external matters, due to the multi-
dependent and interdependent issues raised by Year 2000 compliance, including
many factors beyond its control, MobileMedia may face the possibility that one
or more of its mission-critical vendors, such as its utilities, telephone
carriers, equipment manufacturers or satellite carriers, may not be Year 2000
compliant on a timely basis. Because of the unique nature of such vendors,
alternate providers may not be available. Finally, MobileMedia does not
manufacture any of the pagers, paging-related hardware or network equipment
used by MobileMedia or its customers in connection with MobileMedia's paging
operations. Although MobileMedia has tested such equipment, it has also relied
upon the representations of its vendors with respect to their Year 2000
readiness. MobileMedia can give no assurance as to the accuracy of such
vendors' representations.
Contingency Planning
MobileMedia has begun the process of assessing contingency plans that might
be available in the event of either internal or external Year 2000 compliance
problems. To this end, MobileMedia's various internal departments have begun to
prepare assessments of potential contingency alternatives. The task force will
undertake a review of these assessments on a department-by-department basis and
on a company-wide basis. MobileMedia intends to complete its contingency
planning during the second quarter of 1999.
F-40
<PAGE>
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We have not authorized any person to make a statement that differs from what
is in this prospectus. If any person does make a statement that differs from
what is in this prospectus, you should not rely on it. This prospectus is not
an offer to sell, nor is it seeking an offer to buy, these securities in any
state in which the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of its date, but the information may
change after that date.
------------------
Summary Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary .................................................................. 1
Risk Factors.............................................................. 5
Forward-Looking Statements................................................ 14
Dilution.................................................................. 14
Use of Proceeds........................................................... 15
Market Price Information and Dividend
Policy................................................................... 15
Selected Historical Consolidated Financial
and Operating Data--Arch ................................................ 16
Arch Management's Discussion and Analysis of Financial Condition and Re-
sults of
Operations............................................................... 18
Selected Historical Consolidated Financial and Operating Data--MobileMedia
......................................................................... 29
MobileMedia Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 30
Unaudited Selected Pro Forma Consolidated Financial Data.................. 44
Unaudited Pro Forma Condensed Consolidated Financial Statements........... 44
Industry Overview......................................................... 50
Business.................................................................. 55
Management................................................................ 68
Principal Stockholders.................................................... 74
Description of Securities................................................. 77
Description of Outstanding Indebtedness................................... 86
Plan of Distribution...................................................... 90
Selling Stockholders...................................................... 96
Legal Matters............................................................. 97
Experts................................................................... 97
Where You Can Find More Information....................................... 98
Index to Financial Statements............................................. F-1
</TABLE>
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[ARCH LOGO]
Arch Communications Group, Inc.
119,387,874 Shares
Common Stock
8,125,106 Shares
Class B Common Stock
3,675,659 Stock
Purchase Warrants
------------------
PROSPECTUS
------------------
, 1999
- -------------------------------------------------------------------------------
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arch Certificate provides that Arch will, to the fullest extent permitted
by the Delaware corporations statute, indemnify all persons whom it has the
power to indemnify against all costs, expenses and liabilities incurred by them
by reason of having been officers or directors of Arch, any subsidiary of Arch
or any other corporation for which such persons acted as an officer or director
at the request of Arch.
The Arch Certificate also provides that the directors of Arch will not be
personally liable for monetary damages to Arch or its stockholders for any act
or omission provided that the foregoing shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
Arch or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware corporations statute (relating to illegal dividends
or stock redemptions) or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware corporations statute is
amended to permit further elimination or limitation of the personal liability
of directors, then the liability of a director of Arch shall be eliminated or
limited to the fullest extent permitted by the Delaware corporations statute as
so amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 18, 1998, by and among
Arch Communications Group, Inc., Farm Team Corp., MobileMedia
Corporation and MobileMedia Communications, Inc.
2.2 First Amendment to Agreement and Plan of Merger, dated as of September
3, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
and MobileMedia Communications, Inc.
2.3 Second Amendment to Agreement and Plan of Merger, dated as of December
1, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
and MobileMedia Communications, Inc.
3.1 Restated certificate of incorporation. (1)
3.2 Certificate of Designations establishing the Series B Junior
Participating Preferred Stock. (2)
3.3 Certificate of Correction, filed with the Secretary of State of
Delaware on February 15, 1996. (1)
3.4 Certificate of Designations establishing the Series C Convertible
Preferred Stock. (3)
3.5 Form of Certificate of Amendment to the Restated certificate of
incorporation
3.6 Form of Certificate of Amendment to the Restated certificate of
incorporation
3.7 By-laws, as amended. (1)
4.1 Indenture, dated February 1, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United
States Trust Company of New York, as Trustee, relating to the 9 1/2%
Senior notes due 2004 of Arch Communications, Inc. (4)
4.2 Indenture, dated December 15, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United
States Trust Company of New York, as Trustee, relating to the 14%
Senior notes due 2004 of Arch Communications, Inc. (5)
4.3 Indenture, dated June 29, 1998, between Arch Communications, Inc. and
U.S. Bank Trust National Association, as Trustee, relating to the 12
3/4% Senior notes due 2007 of Arch Communications, Inc. (3)
5.1** Opinion of Hale and Dorr LLP
8.1 Tax opinion of Hale and Dorr LLP
10.1 Second Amended and Restated Credit Agreement (Tranche A and Tranche C
Facilities), dated June 29, 1998, among Arch Paging, Inc., the Lenders
party thereto, The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (3)
10.2 Second Amended and Restated Credit Agreement (Tranche B Facility),
dated June 29, 1998, among Arch Paging, Inc., the Lenders party
thereto. The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (3)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.3 Asset Purchase and Sale Agreement, dated April 10, 1998, among
OmniAmerica, Inc. and certain subsidiaries of Arch Communications
Group, Inc. (3)
10.4 Letter agreement, dated June 10, 1998, between Arch Communications
Group, Inc. and Motorola, Inc. (3)(6)
10.5 Debtors' Third Amended Joint Plan of Reorganization, dated as of
December 1, 1998, included as Annex C to the Proxy Statement/Prospectus
which is part of this Registration Statement.
10.6 Commitment Letters to Purchase Stock and Warrants, dated as of August
18, 1998, by and among Arch Communications Group, Inc., MobileMedia
Communications Inc. and W. R. Huff Asset Management Co., L.L.C., The
Northwestern Mutual Life Insurance Company, Northwestern Mutual Series
Fund, Inc., Credit Suisse First Boston Corporation and Whippoorwill
Associates, Inc.
10.7 Amendments to Commitment Letters to Purchase Stock and Warrants, dated
as of September 3, 1998, by and among Arch Communications Group, Inc.,
MobileMedia Communications, Inc. and W.R. Huff Asset Management Co.,
L.L.C., The Northwestern Mutual Life Insurance Company, Northwestern
Mutual Series Fund, Inc., Credit Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
10.8 Amendments to Commitment Letters to Purchase Stock and Warrants, dated
as of December 1, 1998, by and among Arch Communications Group, Inc.,
MobileMedia Communications, Inc. and W.R. Huff Asset Management Co.,
L.L.C., The Northwestern Mutual Life Insurance Company, Northwestern
Mutual Series Fund, Inc., Credit Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
10.9 Form of Registration Rights Agreement among Arch Communications Group,
Inc., and W.R. Huff Asset Management Co., L.L.C., The Northwestern
Mutual Life Insurance Company, Northwestern Mutual Series Fund, Inc.,
Credit Suisse First Boston Corporation and Whippoorwill Associates,
Inc.
10.10 Form of Registration Rights Agreement among Arch Communications Group,
Inc. and certain Stockholders.
10.11 Amendment No. 1 to Rights Agreement, dated June 29, 1998, between Arch
Communications Group, Inc. and the Bank of New York. (3)
10.12 Amendment No. 2 to Rights Agreement, dated as of August 18, 1998,
amending the Rights Agreement between Arch Communications Group, Inc.
and the Bank of New York.
10.13 Amendment No. 3 to Rights Agreement, dated September 3, 1998, amending
the Rights Agreement between Arch Communications Group, Inc. and the
Bank of New York.
10.14 Form of Warrant Agreement, between Arch Communications Group, Inc. and
the Bank of New York, as provided for in the First Amendment to
Agreement and Plan of Merger dated as of September 3, 1998, by and
among Arch Communications Group, Inc., Farm Team Corp. and MobileMedia
Communication Inc.
10.15 Commitment Letter, dated as of August 18, 1998, by and among Arch
Paging, Inc. and The Bank of New York, BNY Capital markets, Inc.,
Toronto Dominion (Texas) Inc., TD Securities (USA) Inc., Royal Bank of
Canada and Barclays Bank PLC amending the Second and Amended Restated
Credit Agreements, dated June 29, 1998 (Tranche A, B and C Facilities).
10.16 Bridge Commitment Letter, dated as of August 20, 1998, among Arch
Communications, Inc., Arch Communications Group, Inc. and The Bear
Stearns Companies, Inc., The Bank of New York, TD Securities (USA) Inc.
and the Royal Bank of Canada.
10.17 Amendment No. 1 to Registration Rights Agreement, dated August 19,
1998, amending the Registration Rights Agreement dated as of June 29,
1998 by and among Arch Communications Group, Inc. and the Sandler
Capital Partners IV, LP, Sandler Capital Partners IV, FTE LP, South
Fork Partners, The Georgica International Fund Limited, Aspen Partners
and Consolidated Press International Limited.
+10.18 Amended and Restated Stock Option Plan (8)
+10.19 Non-Employee Directors' Stock Option Plan (9)
+10.20 1989 Stock Option Plan, as amended (1)
+10.21 1995 Outside Directors' Stock Option Plan (10)
+10.22 1996 Employee Stock Purchase Plan (11)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
+10.23 1997 Stock Option plan (12)
+10.24 Deferred Compensation Plan for Nonemployee Directors (13)
+10.25 Form of Executive Retention Agreement by and between Messrs. Baker,
Daniels, Kuzia, Pottle and Saynor (13)
10.26 Stock Purchase Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV, L.P., Sandler
Capital Partners IV FTE, L.P., Harvey Sandler, John Kornreich, Michael
J. Marocco, Andrew Sandler, South Fork Partners, the Georgica
International Fund Limited, Aspen partners and Consolidated Press
International Limited (3)
10.27 Registration Rights Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV, L.P., Sandler
Capital Partners IV FTE, L.P., Harvey Sandler, John Kornreich, Michael
J. Marocco, Andrew Sandler, South Fork Partners, The Georgica
International Fund Limited, Aspen Partners and Consolidated Press
International Limited (3)
10.28 Exchange Agreement, dated June 29, 1998, between Adelphia
Communications Corporation and Benbow PCS Ventures, Inc. (3)
10.29 Promissory Note, dated June 29, 1998, in the Principal amount of
$285,015, issued by Benbow PCS Ventures, Inc. to Lisa-Gaye Shearing
(3)
10.30 Guaranty, dated June 29, 1998, given by Arch Communications Group,
Inc. to Adelphia Communications Corporations (3)
10.31 Guaranty, dated June 29, 1998, given by Arch Communications Group,
Inc. to Lisa-Gaye Shearing (3)
10.32 Registration Rights Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Adelphia Communications Corporation and
Lisa-Gaye Shearing (3)
10.33 Amendment to Rights Plan (14)
21.1 Subsidiaries of the Registrant
23.1 Consent of Hale and Dorr LLP (contained in its opinion filed as
Exhibit 5.1)
23.2** Consent of Arthur Andersen LLP
23.3** Consent of Ernst & Young LLP
23.4** Consent of Wilkinson, Barker, Knauer & Quinn, LLP
23.5** Consent of Wiley, Rein & Fielding
24.1 Power of Attorney (included on signature page to this Registration
Statement)
27.1 Financial Data Schedule (7)
99.1 Form of Subscription Certificate and related documents
99.2 Form of Proxy for the Common Stock of Arch for Arch Annual Meeting
</TABLE>
- --------
** Filed herewith.
+ Identifies exhibits constituting a management contract or compensation plan.
(1) Incorporated by reference from the Registration Statement on Form S-3
(File No. 333-542 of Arch Communications Group, Inc.
(2) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated October 13, 1995 and filed on October 24,
1995.
(3) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998 and filed on July 23, 1998.
(4) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-72646) of Arch Communications, Inc.
(5) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-85580) of Arch Communications, Inc.
(6) A Confidential Treatment Request has been filed with respect to portions
of this exhibit so incorporated by reference.
(7) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
Communications Group, Inc. for the quarter ended March 31, 1999.
(8) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. (then known as USA Mobile Communications Inc.
II) for the fiscal year ended December 31, 1994.
II-3
<PAGE>
(9) Incorporated by reference form the Registration Statement on Form S-4
(File No. 333-83648) of Arch (then known as USA Mobile Communications Inc.
II).
(10) Incorporated by reference from the Registration Statement on Form S-3
(File No. 33-87474) of Arch Communications Group, Inc.
(11) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1995.
(12) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1996.
(13) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1997.
(14) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. filed on May 14, 1999.
(b) Financial Statement Schedules
(a) Schedule II--Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS
(a)The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the SEC
by the registrant pursuant to Section 13 or 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) If the registration is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Securities Act need not be
furnished, provided, that the registrant includes in the prospectus, by means
of a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration
II-4
<PAGE>
statements on Form F-3, a post-effective amendment need not be filed to include
financial statements and information required by Section 10(a)(3) of the
Securities Act or Rule 3-19 of this chapter if such financial statements and
information are contained in periodic reports filed with or furnished to the
SEC by the registrant pursuant to Section 13 or Section 15(d) of the Exchange
Act that are incorporated by reference in the Form F-3.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such offering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (1) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of a registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(f) The registrant undertakes to respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11,
or 13 of this form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of responding to
the request.
(g) The registrant undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Westborough,
Commonwealth of Massachusetts on May 28, 1999.
Arch Communications Group, Inc.
By: /s/ C. Edward Baker
____________________________________
C. Edward Baker, Jr.Chairman of
the Board and Chief Executive
Officer
SIGNATURES AND POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints J.
Roy Pottle, Gerald J. Cimmino and David A. Westenberg as his or her true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments
and any Registration Statement pursuant to Rule 462(b)) to this Registration
Statement on Form S-1 and to file the same with all exhibits thereto and any
other documents in connection therewith, with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
</TABLE>
Signature Title Date
/s/ C. Edward Baker Chairman of the Board and May 28, 1999
- ------------------------- Chief Executive Officer
C. Edward Baker, Jr. Director (principal executive officer)
/s/ J. Roy Pottle Executive Vice President and May 28, 1999
- ------------------------- Chief Financial Officer
J. Roy Pottle (principal financial officer and
principal accounting officer)
/s/ R. Schorr Berman Director May 28, 1999
- -------------------------
R. Schorr Berman
/s/ James S. Hughes Director May 28, 1999
- -------------------------
James S. Hughes
II-6
<PAGE>
<TABLE>
<S> <C>
Signature Title
Date
Director May , 1999
- -------------------------
John Kornreich
Director May , 1999
- -------------------------
Allan L. Rayfield
Director May , 1999
- -------------------------
John B. Saynor
/s/ John A. Shane Director May 28, 1999
- -------------------------
John A. Shane
</TABLE>
II-7
<PAGE>
SCHEDULE II
ARCH COMMUNICATIONS GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance Other Balance
Allowance for Doubtful at Beginning Charged Additions to Write- at End
Accounts of Period to Expense Allowance(1) Offs of Period
---------------------- ------------ ---------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996................... $2,125 $8,198 $1,757 $(7,969) $4,111
====== ====== ====== ======= ======
Year ended December 31,
1997................... $4,111 $7,181 $-- $(5,548) $5,744
====== ====== ====== ======= ======
Year ended December 31,
1998................... $5,744 $8,545 $-- $(7,706) $6,583
====== ====== ====== ======= ======
</TABLE>
- --------
(1) Additions arising through acquisitions of paging companies
<TABLE>
<CAPTION>
Balance at Balance
Accrued Restructuring Beginning Charged Other at End of
Charge of Period to Expense Additions Deductions Period
--------------------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998 .................... $-- $14,700 $-- $(2,791) $11,909
==== ======= ==== ======= =======
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 18, 1998, by and
among Arch Communications Group, Inc., Farm Team Corp., MobileMedia
Corporation and MobileMedia Communications, Inc.
2.2 First Amendment to Agreement and Plan of Merger, dated as of September
3, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
and MobileMedia Communications, Inc.
2.3 Second Amendment to Agreement and Plan of Merger, dated as of December
1, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
and MobileMedia Communications, Inc.
3.1 Restated certificate of incorporation. (1)
3.2 Certificate of Designations establishing the Series B Junior
Participating Preferred Stock. (2)
3.3 Certificate of Correction, filed with the Secretary of State of
Delaware on February 15, 1996. (1)
3.4 Certificate of Designations establishing the Series C Convertible
Preferred Stock. (3)
3.5 Form of Certificate of Amendment to the Restated certificate of
incorporation
3.6 Form of Certificate of Amendment to the Restated certificate of
incorporation
3.7 By-laws, as amended. (1)
4.1 Indenture, dated February 1, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United
States Trust Company of New York, as Trustee, relating to the 9 1/2%
Senior Notes due 2004 of Arch Communications, Inc. (4)
4.2 Indenture, dated December 15, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United
States Trust Company of New York, as Trustee, relating to the 14%
Senior Notes due 2004 of Arch Communications, Inc. (5)
4.3 Indenture, dated June 29, 1998, between Arch Communications, Inc. and
U.S. Bank Trust National Association, as Trustee, relating to the 12
3/4% Senior Notes due 2007 of Arch Communications, Inc. (3)
5.1** Opinion of Hale and Dorr LLP
8.1 Tax opinion of Hale and Dorr LLP
10.1 Second Amended and Restated Credit Agreement (Tranche A and Tranche C
Facilities), dated June 29, 1998, among Arch Paging, Inc., the Lenders
party thereto, The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (3)
10.2 Second Amended and Restated Credit Agreement (Tranche B Facility),
dated June 29, 1998, among Arch Paging, Inc., the Lenders party
thereto. The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (3)
10.3 Asset Purchase and Sale Agreement, dated April 10, 1998, among
OmniAmerica, Inc. and certain subsidiaries of Arch Communications
Group, Inc. (3)
10.4 Letter agreement, dated June 10, 1998, between Arch Communications
Group, Inc. a nd Motorola, Inc. (3)(6)
10.5 Debtors' Third Amended Joint Plan of Reorganization, dated as of
December 1, 1998, included as Annex C to the Proxy
Statement/Prospectus which is part of this Registration Statement.
10.6 Commitment Letters to Purchase Stock and Warrants, dated as of August
18, 1998, by and among Arch Communications Group, Inc., MobileMedia
Communications Inc. and W. R. Huff Asset Management Co., L.L.C., The
Northwestern Mutual Life Insurance Company, Northwestern Mutual Series
Fund, Inc., Credit Suisse First Boston Corporation and Whippoorwill
Associates, Inc.
10.7 Amendments to Commitment Letters to Purchase Stock and Warrants, dated
as of September 3, 1998, by and among Arch Communications Group, Inc.,
MobileMedia Communications, Inc. and W.R. Huff Asset Management Co.,
L.L.C., The Northwestern Mutual Life Insurance Company, Northwestern
Mutual Series Fund, Inc., Credit Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
10.8 Amendments to Commitment Letters to Purchase Stock and Warrants, dated
as of December 1, 1998, by and among Arch Communications Group, Inc.,
MobileMedia Communications, Inc. and W.R. Huff Asset Management Co.,
L.L.C., The Northwestern Mutual Life Insurance Company, Northwestern
Mutual Series Fund, Inc., Credit Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
10.9 Form of Registration Rights Agreement among Arch Communications Group,
Inc., and W.R. Huff Asset Management Co., L.L.C., The Northwestern
Mutual Life Insurance Company, Northwestern Mutual Series Fund, Inc.,
Credit Suisse First Boston Corporation and Whippoorwill Associates,
Inc.
</TABLE>
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10.10 Form of Registration Rights Agreement among Arch Communications Group,
Inc. and certain Stockholders.
10.11 Amendment No. 1 to Rights Agreement, dated June 29, 1998, between Arch
Communications Group, Inc. and the Bank of New York. (3)
10.12 Amendment No. 2 to Rights Agreement, dated as of August 18, 1998,
amending the Rights Agreement between Arch Communications Group, Inc.
and the Bank of New York.
10.13 Amendment No. 3 to Rights Agreement, dated September 3, 1998, amending
the Rights Agreement between Arch Communications Group, Inc. and the
Bank of New York.
10.14 Form of Warrant Agreement, between Arch Communications Group, Inc. and
the Bank of New York, as provided for in the First Amendment to
Agreement and Plan of Merger dated as of September 3, 1998, by and
among Arch Communications Group, Inc., Farm Team Corp. and MobileMedia
Communication Inc.
10.15 Commitment Letter, dated as of August 18, 1998, by and among Arch
Paging, Inc. and The Bank of New York, BNY Capital markets, Inc.,
Toronto Dominion (Texas) Inc., TD Securities (USA) Inc., Royal Bank of
Canada and Barclays Bank PLC amending the Second and Amended Restated
Credit Agreements, dated June 29, 1998 (Tranche A, B and C Facilities).
10.16 Bridge Commitment Letter, dated as of August 20, 1998, among Arch
Communications, Inc., Arch Communications Group, Inc. and The Bear
Stearns Companies, Inc., The Bank of New York, TD Securities (USA) Inc.
and the Royal Bank of Canada.
10.17 Amendment No. 1 to Registration Rights Agreement, dated August 19,
1998, amending the Registration Rights Agreement dated as of June 29,
1998 by and among Arch Communications Group, Inc. and the Sandler
Capital Partners IV, LP, Sandler Capital Partners IV, FTE LP, South
Fork Partners, The Georgica International Fund Limited, Aspen Partners
and Consolidated Press International Limited.
+10.18 Amended and Restated Stock Option Plan (8)
+10.19 Non-Employee Directors' Stock Option Plan (9)
+10.20 1989 Stock Option Plan, as amended (1)
+10.21 1995 Outside Directors' Stock Option Plan (10)
+10.22 1996 Employee Stock Purchase Plan (11)
+10.23 1997 Stock Option plan (12)
+10.24 Deferred Compensation Plan for Nonemployee Directors (13)
+10.25 Form of Executive Retention Agreement by and between Messrs. Baker,
Daniels, Kuzia, Pottle and Saynor (13)
10.26 Stock Purchase Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV, L.P., Sandler
Capital Partners IV FTE, L.P., Harvey Sandler, John Kornreich, Michael
J. Marocco, Andrew Sandler, South Fork Partners, the Georgica
International Fund Limited, Aspen partners and Consolidated Press
International Limited (3)
10.27 Registration Rights Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV, L.P., Sandler
Capital Partners IV FTE, L.P., Harvey Sandler, John Kornreich, Michael
J. Marocco, Andrew Sandler, South Fork Partners, The Georgica
International Fund Limited, Aspen Partners and Consolidated Press
International Limited (3)
10.28 Exchange Agreement, dated June 29, 1998, between Adelphia
Communications Corporation and Benbow PCS Ventures, Inc. (3)
10.29 Promissory Note, dated June 29, 1998, in the Principal amount of
$285,015, issued by Benbow PCS Ventures, Inc. to Lisa-Gaye Shearing (3)
10.30 Guaranty, dated June 29, 1998, given by Arch Communications Group, Inc.
to Adelphia Communications Corporations (3)
10.31 Guaranty, dated June 29, 1998, given by Arch Communications Group, Inc.
to Lisa-Gaye Shearing (3)
10.32 Registration Rights Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Adelphia Communications Corporation and
Lisa-Gaye Shearing (3)
10.33 Amendment to Rights Plan
21.1 Subsidiaries of the Registrant
</TABLE>
<PAGE>
<TABLE>
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23.1 Consent of Hale and Dorr LLP (contained in its opinion filed as Exhibit
5.1)
23.2** Consent of Arthur Andersen LLP
23.3** Consent of Ernst & Young LLP
23.4** Consent of Wilkinson, Barker, Knauer & Quinn, LLP
23.5** Consent of Wiley, Rein & Fielding
24.1 Power of Attorney (included on signature page to this Registration
Statement)
27.1 Financial Data Schedule (7)
99.1 Form of Subscription Certificate and related documents
99.2 Form of Proxy for the Common Stock of Arch for Arch Annual Meeting
</TABLE>
--------
** Filed herewith.
+ Identifies exhibits constituting a management contract or compensation
plan.
(1) Incorporated by reference from the Registration Statement on Form S-3
(File No. 333-542 of Arch Communications Group, Inc.
(2) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated October 13, 1995 and filed on October
24, 1995.
(3) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998 and filed on July 23,
1998.
(4) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-72646) of Arch Communications, Inc.
(5) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-85580) of Arch Communications, Inc.
(6) A Confidential Treatment Request has been filed with respect to
portions of this exhibit so incorporated by reference.
(7) Incorporated by reference from the Quarterly Report on Form 10-Q of
Arch Communications Group, Inc. for the quarter ended March 31, 1999.
(8) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. (then known as USA Mobile Communications
Inc. II) for the fiscal year ended December 31, 1994.
(9) Incorporated by reference form the Registration Statement on Form S-4
(File No. 333-83648) of Arch (then known as USA Mobile Communications
Inc. II).
(10) Incorporated by reference from the Registration Statement on Form S-3
(File No. 33-87474) of Arch Communications Group, Inc.
(11) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1995.
(12) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1996.
(13) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31,
1997.
(14) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. filed on May 14, 1999.
<PAGE>
Exhibit 5.1
Hale and Dorr LLP
Counsellors at Law
60 State Street, Boston, Massachusetts 02109
617-526-6000 . fax 617-526-5000
June 1, 1999
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, MA 01581
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration Statement
on Form S-1 (the "Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), for the registration of (i) 152 shares of
Common Stock, $.01 par value per share (the "Common Stock"), of Arch
Communications Group, Inc., a Delaware corporation (the "Company") previously
held by Credit Suisse First Boston Corporation and (ii) up to 3,675,659 shares
of the Company's Common Stock issuable upon exercise of warrants to purchase
Common Stock of the Company (collectively, the "Securities").
We are acting as counsel for the Company in connection with the issuance by
the Company of the Securities. We have examined signed copies of the
Registration Statement as filed with the Commission. We have also examined and
relied upon the minutes of meetings of the Board of Directors of the Company as
provided to us by the Company, record books of the Company as provided to us by
the Company, the Certificate of Incorporation and By-Laws of the Company, each
as restated and/or amended to date, and such other documents as we have deemed
necessary for purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as copies, the authenticity of the originals of such latter
documents and the legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the issuance of
the Securities to register and qualify the Securities for sale under all
applicable state securities or "blue sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America. To the extent that any other laws govern the matters as to which we
are opining herein, we have assumed that such laws are identical to the state
laws of the Commonwealth of Massachusetts, and we are expressing no opinion
herein as to whether such assumption is reasonable or correct.
Based upon and subject to the foregoing, we are of the opinion that, subject
to the approval of the Certificate of Amendment to the Company's Restated
Certificate of Incorporation (in the form attached as Exhibit 3.5 to the
Registration Statement) by the stockholders of the Company and the filing of
such Certificate of Amendment with the Secretary of State of the State of
Delaware, the Securities to be issued by the Company will be duly authorized
for issuance and, when the Securities referred to in clause (ii) above are
issued against payment of the stipulated warrant exercise price, all of such
Securities will be validly issued, fully paid and nonassessable.
1
<PAGE>
It is understood that this opinion is to be used only in connection with the
issuance of the Securities while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions, and we disclaim any obligation to advise you of any change in any of
these sources of law or subsequent legal or factual developments which might
affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters."
In giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
Hale and Dorr LLP
2
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated February 24, 1999 included herein
and to all references to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 25, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated 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, with respect to the financial statements of MobileMedia
Communications, Inc. as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, included in the prospectus of Arch
Communications Group, Inc. that is made a part of: (i) Post-Effective Amendment
No. 2 on Form S-1 to Form S-4 Registration Statement (No. 333-63519); (ii)
Post-Effective Amendment No. 1 on Form S-1 to form S-4 Registration Statement
(No. 333-62211); and (iii) Registration Statement on Form S-4 (No. 333-XXXXX)
for the registration of up to 3,675,659 shares of its common stock.
/s/ Ernst & Young LLP
MetroPark, New Jersey
May 26, 1999
<PAGE>
Exhibit 23.4
CONSENT
We hereby consent to the reference to our firm under the heading "experts" in
the Prospectus of Arch Communications Group, Inc. constituting part of: (i)
Post-Effective Amendment No. 2 on Form S-1 to Form S-4 Registration Statement
(No. 333-63519); (ii) Post-Effective Amendment No. 1 on Form S-1 to Form S-4
Registration Statement (No. 333-62211); and (iii) Registration Statement on
Form S-4 (No. 33-XXXXX) for the registration of up to 3,675,659 shares of its
common stock. As noted therein, our review and input only pertains to FCC
matters unique to Arch included in the description of the regulatory
requirements under the Communications Act and the Telecommunications Act of
1996, and the regulations thereunder, set forth under "Risk Factors--Government
regulation may burden operations" and "Industry Overview--Regulation."
Stockholders of Arch should not rely on Wilkinson, Barker, Knauer with respect
to any other matters or any other sections of the Prospectus.
Wilkinson, Barker, Knauer LLP
/s/ Kenneth D. Patrich
By: _________________________________
Kenneth D. Patrich
Date: May 26, 1999
<PAGE>
EXHIBIT 23.5
CONSENT
We hereby consent to the reference to our firm under the heading "Experts" in
the Prospectus of Arch Communications Group, Inc. constituting part of: (i)
Post-Effective Amendment No. 2 on Form S-1 to the Registration Statement on
Form S-4 (File Number 333-63519); (ii) Post-Effective Amendment No. 1 on Form
S-1 to the Registration Statement on Form S-4 (No. 333-62211); and (iii)
Registration Statement on Form S-4 (No. 333-XXXXX) for the registration of up
to 3,675,659 shares of common stock. As noted therein, our review and input
only pertains to FCC matters unique to MobileMedia included in the description
of the regulatory requirements under the Communications Act and the
Telecommunications Act of 1996 and the regulations thereunder set forth under
"'Risk Factors--Government regulation may burden operations" and "'Industry
Overview--Regulation." Stockholders of Arch should not rely on Wiley, Rein &
Fielding with respect to any other matters or any other sections of the
document.
WILEY, REIN & FIELDING
By: /s/ Nancy J. Victory
-----------------------------
Nancy J. Victory
Dated: May 26, 1999
