<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1998
Registration No. 333-59807
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ARCH COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 31-1236804
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
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, 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.
DAVID A. WESTENBERG, ESQ.
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 statement number of the earlier effective registration statement
for the same offering. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER 22, 1998
OFFER TO EXCHANGE
12 3/4% SENIOR NOTES DUE 2007 (THE "EXCHANGE NOTES")
FOR ALL OUTSTANDING 12 3/4% SENIOR NOTES DUE 2007 (THE "PRIVATE NOTES")
OF
ARCH COMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JANUARY ,
1999 UNLESS EXTENDED.
----------
Arch Communications, Inc., a Delaware corporation ("Arch"), hereby makes an
Exchange Offer, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal, to exchange $1,000
principal amount of its 12 3/4% Senior Notes due 2007 (the "Exchange Notes"),
which notes have been registered under the Securities Act of 1933, as amended,
pursuant to a Registration Statement of which this Prospectus is a part, for
each $1,000 principal amount of its outstanding 12 3/4% Senior Notes due 2007
(the "Private Notes"), of which $130.0 million in aggregate principal amount
are outstanding as of the date hereof. The form and terms of the Exchange Notes
are the same as the form and terms of the Private Notes except that (i) the
Exchange Notes have been registered under the Securities Act and, therefore,
the Exchange Notes will not bear legends restricting the transfer thereof, (ii)
holders of the Exchange Notes will not be entitled to certain rights of holders
of the Private Notes under the Exchange and Registration Rights Agreement
described herein and (iii) certain provisions relating to an increase in the
stated interest rate on the Private Notes provided for under certain
circumstances will be eliminated. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of an Indenture dated as of June 29, 1998 governing the Private
Notes and the Exchange Notes. The Private Notes and the Exchange Notes are
sometimes referred to herein collectively as the "Notes". See "The Exchange
Offer" and "Description of Notes".
Arch, a wholly owned subsidiary of Arch Communications Group, Inc., a
Delaware corporation ("Parent"), is an intermediate holding company with no
material assets other than the stock of its subsidiaries. The Private Notes
are, and the Exchange Notes will be, obligations of Arch; none of Arch's
subsidiaries will have any obligation to pay any amounts due with respect to
the Notes or to make any funds available therefor. The Private Notes are, and
the Exchange Notes will be, structurally subordinated to all current or future
liabilities of Arch's subsidiaries, including trade payables and indebtedness.
At September 30, 1998, the Notes were structurally subordinated to $329.8
million of liabilities of Arch's subsidiaries. In addition, Parent will not
have any obligation to pay any amounts due with respect to the Notes or to make
any funds available therefor. At September 30, 1998, Parent had $373.6 million
of liabilities (excluding liabilities of its subsidiaries and Parent's
guarantees thereof). See "Risk Factors--Holding Company Structure and
Structural Subordination of the Notes" and "Description of Notes--General".
Parent has agreed to enter into a business combination involving MobileMedia
Communications, Inc. ("MMC" and, together with its subsidiaries, "MobileMedia")
and MMC's parent company, MobileMedia Corporation ("MMC Parent"), which, if
consummated, will result in material increases in the outstanding indebtedness
of Arch and its subsidiaries. See "Prospectus Summary--Recent Developments--
Anticipated MobileMedia Transaction" and Annex A.
Arch will not be required to make any mandatory redemption or sinking fund
payment with respect to the Notes prior to maturity. The Notes will be
redeemable at the option of Arch, in whole or in part, at any time after July
1, 2003 at the redemption prices set forth herein. In addition, at the option
of Arch, up to 35% of the Notes may be redeemed prior to July 1, 2001 at the
redemption price set forth herein with the net proceeds of an Equity Offering
(as defined herein) by Arch or Parent, provided that at least $84.5 million
aggregate principal amount of the Notes remains outstanding following each such
redemption. Upon the occurrence of a Change of Control (as defined herein) at
any time, Arch will be required to make an offer to repurchase each holder's
Notes (each a "Holder") at a price equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages (as
defined herein), if any, to the date of purchase. The Notes will be senior
unsecured obligations of Arch and will rank pari passu in right of payment with
other existing and future senior unsecured indebtedness of Arch. See
"Description of Notes".
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at
the rate of 12 3/4% per annum from and including January 1, 1999 and the
interest thereon will be payable semi-annually in arrears on January 1 and July
1 of each year, commencing July 1, 1999. The Private Notes bear interest from
and including the date of issuance of the Private Notes (June 29, 1998).
Interest accrued on Private Notes through December 31, 1998 will be paid on
January 1, 1999 to Holders of record on December 15, 1998. Holders whose
Private Notes are accepted for exchange will be deemed to have waived the right
to receive any interest accrued on the Private Notes after December 31, 1998.
----------
SEE "RISK FACTORS", BEGINNING ON PAGE 15, FOR A DISCUSSION OF CERTAIN FACTORS
THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
ARCH WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED PRIVATE NOTES NOT
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON JANUARY , 1999, UNLESS
THE EXCHANGE OFFER IS EXTENDED BY ARCH IN ITS SOLE DISCRETION (THE "EXPIRATION
DATE"). TENDERS OF PRIVATE NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE OFFER IS NOT
CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF PRIVATE NOTES BEING TENDERED
FOR EXCHANGE. PRIVATE NOTES MAY BE TENDERED ONLY IN INTEGRAL MULTIPLES OF
$1,000. IN THE EVENT ARCH TERMINATES THE EXCHANGE OFFER AND DOES NOT ACCEPT FOR
EXCHANGE ANY PRIVATE NOTES, ARCH WILL PROMPTLY RETURN ALL PREVIOUSLY TENDERED
PRIVATE NOTES TO THE HOLDERS THEREOF. THE EXCHANGE OFFER IS SUBJECT TO
CUSTOMARY CONDITIONS. SEE "THE EXCHANGE OFFER--CONDITIONS".
----------
The date of this Prospectus is December , 1998
<PAGE>
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC" or "Commission") set forth in no-action letters issued
to third parties, Arch believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a Holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from Arch to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of Arch within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act; provided that the Holder is
acquiring the Exchange Notes in the ordinary course of its business and is not
participating, and has had no arrangement or understanding with any person to
participate, in a distribution of the Exchange Notes. Holders of Private Notes
wishing to accept the Exchange Offer must represent to Arch, as required by
the Exchange and Registration Rights Agreement (as defined herein), that such
conditions have been met. Arch believes that none of the registered holders of
the Private Notes is an affiliate (as such term is defined in Rule 405) of
Arch.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Exchange Notes will not be listed on any securities exchange, but the
Private Notes are eligible for trading in the National Association of
Securities Dealers, Inc.'s Private Offerings, Resales and Trading through
Automatic Linkages (PORTAL) market. There can be no assurance that an active
market for the Notes will develop. To the extent that a market for the Notes
does develop, the market value of the Notes will depend on market conditions
(such as yields on alternative investments), general economic conditions,
Arch's financial condition and certain other factors. Such conditions might
cause the Notes, to the extent that they are traded, to trade at a significant
discount from face value. See "Risk Factors--Absence of Public Market for
Notes".
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of such Exchange Notes. Any broker-dealer that resells Exchange Notes that
were received by it for its own account pursuant to the Exchange Offer may be
deemed to be an "underwriter" within the meaning of the Securities Act. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities. Arch has
indicated its intention to make this Prospectus (as it may be amended or
supplemented) available to any broker-dealer for use in connection with any
such resale for a period of one year after the Expiration Date. See "The
Exchange Offer--Resale of the Exchange Notes" and "Plan of Distribution".
Arch will not receive any proceeds from, and has agreed to bear the expenses
of, the Exchange Offer. No underwriter is being used in connection with the
Exchange Offer. See "The Exchange Offer".
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL ARCH ACCEPT SURRENDERS FOR
EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY ARCH. NEITHER THE DELIVERY OF THIS PROSPECTUS OR
ii
<PAGE>
THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF ARCH, ITS SUBSIDIARIES OR PARENT SINCE THE DATE HEREOF OR
THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
ITS DATE.
UNTIL MARCH , 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS
IN CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
Arch expects that the Exchange Notes will be represented by a single,
permanent global note, which will be deposited with the Trustee (as defined
herein), as custodian for The Depository Trust Company ("DTC"), and registered
in DTC's name or in the name of Cede & Co., its nominee, in each case for
credit to an account of a direct or indirect participant in DTC, including
Morgan Guaranty Trust Company of New York, Brussels office, as operator of the
Euroclear System ("Euroclear") and Citibank, N.A., as depositary for Cedel
Bank, Societe Anonyme ("Cedel Bank"). Subject to certain exceptions,
beneficial interests in the global note representing the Exchange Notes will
be shown on, and transfers thereof to qualified institutional buyers and non-
U.S. Persons (as defined herein) only will be effected through, records
maintained by DTC and its participants. See "Description of Notes".
----------------
NOTICE TO UNITED KINGDOM RESIDENTS
THESE SECURITIES MAY NOT BE OFFERED OR SOLD IN OR INTO THE UNITED KINGDOM
EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING,
HOLDING, MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE
PURPOSES OF THEIR BUSINESSES (OR IN OTHER CIRCUMSTANCES THAT DO NOT CONSTITUTE
AN OFFER TO THE PUBLIC IN THE UNITED KINGDOM FOR THE PURPOSE OF THE PUBLIC
OFFERS OF SECURITIES REGULATIONS 1995), AND THIS DOCUMENT MAY ONLY BE ISSUED
OR PASSED ON IN OR INTO THE UNITED KINGDOM TO ANY PERSON TO WHOM THE DOCUMENT
MAY LAWFULLY BE ISSUED OR PASSED ON BY REASON OF, OR OF ANY REGULATION MADE
UNDER, SECTION 58 OF THE FINANCIAL SERVICES ACT 1986.
NOTICE TO CANADIAN INVESTORS
(PRIVATE NOTE OFFERING RESTRICTED TO BRITISH COLUMBIA, MANITOBA, ONTARIO AND
QUEBEC)
PRIVATE NOTE OFFERING
This Prospectus constitutes an offering of the securities described herein
only in those Canadian jurisdictions and to those persons where and to whom
they may be lawfully offered for sale, and therein only by persons permitted
to sell such securities. This Prospectus is not, and under no circumstances is
to be construed as, an advertisement or a public offering of the securities
referred to herein. No securities commission or similar authority in Canada
has reviewed or in any way passed upon this document or the merits of the
securities described herein and any representation to the contrary is an
offense. This Prospectus constitutes an offering in Canada of the securities
described herein only in the provinces of British Columbia, Manitoba, Ontario
and Quebec.
RESALE RESTRICTIONS
The distribution of the Notes in Canada is being made only on a private
placement basis and is exempt from the requirement that Arch prepare and file
a prospectus with the relevant Canadian securities
iii
<PAGE>
regulatory authorities. Accordingly, any resale of the Notes and, if
applicable, the Exchange Notes (as defined herein) must be made in accordance
with applicable securities laws, which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
exemptions from registration and prospectus requirements. Purchasers are
advised to seek legal advice prior to any resale of the Notes and, if
applicable, the Exchange Notes.
OBLIGATIONS OF PURCHASERS
Each Canadian purchaser who acquires Exchange Notes will be deemed to have
represented to Arch, the Initial Purchasers and any dealer who sells Notes to
such purchaser that: (i) such purchaser has reviewed the terms referred to
above under "--Resale Restrictions"; (ii) where required by law, such
purchaser is purchasing as principal and not as agent; and (iii) such
purchaser or any ultimate purchaser for which such purchaser is acting as
agent is not an individual and is entitled under applicable Canadian
securities laws to purchase such Notes without the benefit of a prospectus
qualified under such securities laws, and (a) in the case of a purchaser
located in a province other than Ontario, without the dealer having to be
registered, (b) in the case of a purchaser located in Manitoba, such purchaser
is purchasing for investment only and not with a view to resale or
distribution, (c) in the case of a purchaser located in Ontario, such
purchaser is a person to whom a dealer registered as an international dealer
in Ontario may sell Notes, and (d) in the case of a purchaser located in
Quebec, such purchaser is a "sophisticated purchaser" within the meaning of
the Securities Act (Quebec).
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Notes should consult their own legal and tax advisers
with respect to the tax consequences of an investment in the Exchange Notes,
in their particular circumstances and with respect to the eligibility of the
Exchange Notes for investment by such purchasers under relevant Canadian
legislation.
ENFORCEMENT OF LEGAL RIGHTS
Arch is organized under the laws of the State of Delaware. All of Arch's
directors and officers as well as the experts named herein may be located
outside of Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon Arch or such
persons. All or a substantial portion of the assets of Arch and said persons
may be located outside of Canada and, as a result, it may not be possible to
satisfy a judgment against Arch or such persons in Canada or to enforce a
judgment obtained in Canadian courts against Arch or such persons outside of
Canada.
NO CONTRACTUAL RIGHT OF ACTION FOR RESCISSION OR DAMAGES IN ONTARIO
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
THE FOREGOING SUMMARY IS SUBJECT TO THE EXPRESS PROVISIONS OF THE SECURITIES
ACT (ONTARIO) AND THE RULES AND REGULATIONS THEREUNDER AND REFERENCE IS MADE
TO THE COMPLETE TEXT OF SUCH PROVISIONS CONTAINED THEREIN. SUCH PROVISIONS MAY
CONTAIN LIMITATIONS AND STATUTORY DEFENSES ON WHICH ARCH MAY RELY. THE
ENFORCEABILITY OF THESE RIGHTS MAY BE LIMITED AS DESCRIBED HEREIN UNDER "--
ENFORCEMENT OF LEGAL RIGHTS".
THE RIGHTS DISCUSSED ABOVE ARE IN ADDITION TO AND WITHOUT DEROGATION FROM
ANY OTHER RIGHT OR REMEDY WHICH INVESTORS MAY HAVE AT LAW. IN LIGHT OF U.S.
JURISPRUDENCE, INCLUDING A JUDGMENT FROM THE SUPREME COURT OF THE UNITED
STATES, PROSPECTIVE PURCHASERS ARE ADVISED TO CONSULT THEIR OWN LEGAL ADVISORS
AS TO WHICH, OR WHETHER ANY, OF SUCH RIGHTS MAY BE AVAILABLE TO THEM.
iv
<PAGE>
LANGUAGE OF DOCUMENTS
You hereby acknowledge that you have expressly requested that all documents
evidencing or relating in any way to the sale of the securities described
herein (including for greater certainty any purchase confirmation or any
notice) be drawn up in the English language only. Vous reconnaissez par les
presentes que vous avez expressement exige que tous les documents faisant foi
ou se rapportant de quelque maniere que ce soit a la vente des valeurs
mobilieres decrites aux presentes (incluant, pour plus de certitude, toute
confirmation d'achat ou tout avis) soient rediges en anglais seulement.
----------------
FORWARD-LOOKING INFORMATION
This Prospectus contains forward-looking statements and information relating
to Arch, its subsidiaries and Parent that are based on the beliefs of Arch's
management as well as assumptions made by and information currently available
to Arch's management. These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. When used
herein, words such as "anticipate", "believe", "estimate", "expect", "intend"
and similar expressions, as they relate to Arch, Parent or their management,
identify forward-looking statements. Such statements reflect the current views
of Arch with respect to future events and are subject to certain risks,
uncertainties and assumptions, including but not limited to those factors set
forth below under the caption "Risk Factors". Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein as anticipated, believed, estimated, expected or intended. Investors
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their respective dates. Arch undertakes no obligation
to update or revise any forward-looking statements. All subsequent written or
oral forward-looking statements attributable to Arch or persons acting on
behalf of Arch are expressly qualified in their entirety by the discussion
under "Risk Factors".
For special considerations relating to forward-looking statements made in
Annex A, see "Forward-Looking Statements" in Annex A.
v
<PAGE>
AVAILABLE INFORMATION
Arch and Parent are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith,
file reports, proxy statements and other information with the Securities and
Exchange Commission. MMC and MMC Parent, two companies which are involved in
the MobileMedia Transaction, are also 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 "Annex A--
Business of MobileMedia--Events Leading up to MobileMedia's Bankruptcy
Filings". Financial statements included in their periodic reports from
February 1997 through June 1998 have not been prepared in accordance with
generally accepted accounting principles due to their 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, 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 MMC included in
Annex A reflect adjustments from the unaudited statements, including but not
limited to an impairment adjustment of $792.5 million recorded as of December
31, 1996. The reports, proxy statements and other information filed with the
SEC by Arch and Parent and, to the extent available, by MMC and MMC Parent,
can be inspected and copied at the public reference facilities maintained by
the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the following Regional Offices of the SEC: Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material also can be
obtained at prescribed rates from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of
the SEC's public reference room is available by calling the SEC at 1-800-SEC-
0330. In addition, Arch, Parent, MMC and MMC Parent, are required to file
electronic versions of these documents with the SEC through the SEC's
Electronic Data Gathering, Analysis and Retrieval system. The SEC maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. Parent's Common Stock is traded on the Nasdaq
National Market under the symbol "APGR" and Parent maintains a World Wide Web
site at http://www.arch.com. Parent's web site is not a part of this
Prospectus. Reports and other information filed by Parent can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. MMC
Parent's Common Stock is not currently traded on any exchange.
Arch has filed with the SEC a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended with respect to the securities offered
hereby. As used herein the term "Registration Statement" includes all
amendments, exhibits, annexes and schedules thereto. As permitted by the rules
and regulations of the SEC, this Prospectus omits certain information,
exhibits and undertakings contained in the Registration Statement. For further
information with respect to Arch, Parent, MMC Parent and MMC and the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ARCH, PARENT, MMC AND MMC PARENT, OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS
NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION OF AN OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF ARCH, ITS
SUBSIDIARIES, PARENT, MMC OR MMC PARENT, SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
COPIES OF ARCH'S AND PARENT'S FILINGS WITH THE SEC MAY BE OBTAINED UPON
WRITTEN OR ORAL REQUEST WITHOUT CHARGE FROM ARCH COMMUNICATIONS GROUP, INC.,
1800 WEST PARK DRIVE, SUITE 250, WESTBOROUGH, MASSACHUSETTS 01581, ATTENTION:
INVESTOR RELATIONS, TELEPHONE (508) 870-6700. COPIES OF MMC PARENT'S AND MMC'S
FILINGS WITH THE SEC MAY BE OBTAINED UPON WRITTEN OR ORAL REQUEST WITHOUT
CHARGE FROM MOBILEMEDIA CORPORATION, FORT LEE EXECUTIVE PARK, ONE EXECUTIVE
DRIVE, SUITE 500, FORT LEE, NEW JERSEY 07024, ATTENTION: SECRETARY, TELEPHONE
(201) 224-9200. TO OBTAIN TIMELY DELIVERY, FILINGS MUST BE REQUESTED NO LATER
THAN JANUARY , 1999.
vi
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
The Company.............................................................. 1
Recent Developments...................................................... 2
June 1998 Subsidiary Restructuring and Debt Financing................... 2
Tower Site Sale......................................................... 2
Anticipated MobileMedia Transaction..................................... 2
Divisional Reorganization............................................... 3
The Exchange Offer....................................................... 5
The Exchange Offer...................................................... 5
Exchange and Registration Rights Agreement.............................. 5
Expiration Date......................................................... 5
Accrued Interest on the Exchange Notes and the Private Notes............ 6
Conditions to the Exchange Offer........................................ 6
Procedures for Tendering Private Notes.................................. 6
Special Procedures for Beneficial Owners................................ 7
Guaranteed Delivery Procedures.......................................... 7
Acceptance of the Private Notes and Delivery of the Exchange Notes...... 8
Withdrawal Rights....................................................... 8
Material Federal Income Tax Considerations.............................. 8
Exchange Agent.......................................................... 8
The Exchange Notes ...................................................... 8
Securities Offered...................................................... 8
Maturity................................................................ 8
Interest................................................................ 9
Ranking................................................................. 9
Optional Redemption..................................................... 9
Change of Control....................................................... 9
Certain Covenants....................................................... 10
Risk Factors............................................................. 10
Summary Financial and Operating Data..................................... 11
Corporate Structure...................................................... 13
Current Structure....................................................... 13
Anticipated Structure................................................... 14
Risk Factors.............................................................. 15
Indebtedness and High Degree of Leverage................................. 15
Holding Company Structure and Structural Subordination of the Notes...... 15
Debt Service; Limitations on Access to Cash Flow of Operating
Subsidiaries............................................................ 16
Anticipated Effects of the MobileMedia Transaction....................... 16
Credit Facility and Indenture Restrictions............................... 17
Possible Inability to Repurchase Notes Upon Change of Control............ 18
Future Capital Needs..................................................... 18
History of Losses........................................................ 18
Possible Fluctuations in Revenues and Operating Results.................. 19
Possible Acquisition Transactions........................................ 19
Possible Non-Consummation of the MobileMedia Transaction................. 20
</TABLE>
vii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Dependence on Key Personnel............................................. 20
Competition and Technological Change.................................... 20
Subscriber Turnover..................................................... 21
Dependence on Third Parties............................................. 21
Government Regulation, Foreign Ownership and Possible Redemption........ 21
Impact of the Year 2000 Issue .......................................... 23
Arch................................................................... 23
MobileMedia............................................................ 24
Estimated Year 2000 Compliance Costs................................... 25
Risks relating to Year 2000 Compliance Matters......................... 25
Contingency Planning................................................... 25
Absence of Public Market for Notes...................................... 25
Failure to Exchange Private Notes....................................... 26
The Exchange Offer....................................................... 27
Purpose of the Exchange Offer........................................... 27
Resale of the Exchange Notes............................................ 27
Terms of the Exchange Offer............................................. 27
Expiration Date; Extensions; Amendments................................. 28
Interest on the Exchange Notes.......................................... 28
Procedures for Tendering................................................ 29
Return of Private Notes................................................. 31
Book-Entry Transfer..................................................... 31
Guaranteed Delivery Procedures.......................................... 31
Withdrawal of Tenders................................................... 31
Conditions.............................................................. 32
Liquidated Damages ..................................................... 32
Termination of Certain Rights .......................................... 33
Exchange Agent ......................................................... 34
Fees and Expenses ...................................................... 34
Consequence of Failure to Exchange ..................................... 34
Accounting Treatment ................................................... 34
Use of Proceeds.......................................................... 35
Capitalization........................................................... 36
Selected Consolidated Financial and Operating Data....................... 37
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Overview ............................................................... 41
Shift in Operating Focus ............................................... 41
Divisional Reorganization .............................................. 42
Results of Operations .................................................. 43
Nine Months Ended September 30, 1998 Compared with Nine Months Ended
September 30, 1997 ................................................... 43
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
...................................................................... 44
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
...................................................................... 45
Liquidity and Capital Resources ........................................ 46
Capital Expenditures and Commitments .................................. 47
</TABLE>
viii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Other Commitments and Contingencies ..................................... 47
Credit Facility ......................................................... 48
Planned Arch Notes ...................................................... 49
Bridge Facility ......................................................... 49
Sources of Funds ........................................................ 49
Equity Investment ....................................................... 49
Acquisitions ............................................................ 50
Inflation ................................................................ 51
Recent and Pending Accounting Pronouncements ............................. 51
Business................................................................... 52
General .................................................................. 52
Paging Industry Overview ................................................. 53
Business Strategy ........................................................ 54
Low-Cost Operating Structure ............................................ 54
Efficient Capital Deployment ............................................ 54
Fast Follower on N-PCS Opportunities .................................... 55
Exploit Revenue Enhancement Opportunities ............................... 55
Paging Operations ........................................................ 55
Investments in Narrowband PCS Licenses ................................... 56
Benbow PCS Ventures, Inc. ............................................... 56
CONXUS Communications, Inc .............................................. 57
Subscribers and Marketing ................................................ 58
Competition .............................................................. 58
Sources of Equipment ..................................................... 59
Regulation ............................................................... 59
FCC Regulatory Approvals and Authorizations ............................. 60
Telecommunications Act of 1996 .......................................... 61
Future Regulations ...................................................... 62
Foreign Ownership ....................................................... 62
State Regulation ........................................................ 62
Trademarks ............................................................... 63
Properties ............................................................... 63
Employees ................................................................ 63
Legal Proceedings ........................................................ 63
The Combined Company ..................................................... 63
Arch Management .......................................................... 65
Directors and Executive Officers ........................................ 65
Certain Transactions ..................................................... 67
Board Committees ......................................................... 67
Indemnification and Director Liability ................................... 67
Arch Executive Compensation .............................................. 68
Summary Compensation Table .............................................. 68
Executive Retention Agreements .......................................... 69
Stock Option Grants ..................................................... 69
Option Exercises and Year-End Option Table .............................. 70
Compensation Committee Interlocks and Insider Participation ............. 70
</TABLE>
ix
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders .................................................. 71
Description of Certain Indebtedness....................................... 73
Credit Facility ......................................................... 73
Bridge Facility ......................................................... 74
9 1/2% Notes ............................................................ 74
14% Notes ............................................................... 76
Parent Discount Notes ................................................... 77
Parent Convertible Debentures ........................................... 79
Description of Notes...................................................... 81
General ................................................................. 81
Principal, Maturity and Interest ........................................ 81
Seniority; Ranking ...................................................... 82
Optional Redemption ..................................................... 82
Selection and Notice .................................................... 83
Mandatory Redemption .................................................... 83
Repurchase at the Option of Holders ..................................... 83
Change of Control ...................................................... 83
Asset Sales ............................................................ 84
Certain Covenants ....................................................... 85
Restricted Payments .................................................... 85
Incurrence of Indebtedness ............................................. 88
Liens .................................................................. 89
Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries .......................................................... 89
Consolidation, Merger or Sale of Assets ................................ 90
Transactions with Affiliates and Related Persons ....................... 91
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries .......................................................... 91
Subsidiary Guarantees .................................................. 91
Unrestricted Subsidiaries .............................................. 91
Payments for Consent ................................................... 92
Reports ................................................................ 92
Events of Default and Remedies .......................................... 92
No Personal Liability of Directors, Officers, Employees, Incorporators
and Stockholders ....................................................... 94
Legal Defeasance or Covenant Defeasance ................................. 94
Satisfaction and Discharge .............................................. 95
Transfer and Exchange ................................................... 96
Amendment, Supplement and Waiver ........................................ 96
Concerning the Trustee .................................................. 96
Additional Information .................................................. 97
Book-Entry, Delivery and Form ........................................... 97
The Global Note ........................................................ 97
Additional Information Concerning Euroclear and Cedel Bank .............. 99
Certificated Securities ................................................. 100
Same-Day Settlement and Payment ......................................... 100
Registration Rights; Liquidated Damages ................................. 101
Certain Definitions ..................................................... 102
</TABLE>
x
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Governing Law .......................................................... 109
Material Federal Income Tax Considerations............................... 110
United States Holders .................................................. 110
Payment of Interest ................................................... 110
Original Issue Discount ............................................... 111
Market Discount ....................................................... 111
Bond Premium .......................................................... 111
Sale, Exchange or Redemption of Notes ................................. 112
Information Reporting and Backup Withholding .......................... 112
Non-United States Holders .............................................. 112
Payment of Interest ................................................... 112
Sale, Exchange or Redemption of Notes ................................. 113
Information Reporting and Backup Withholding .......................... 113
Plan of Distribution..................................................... 115
Legal Matters............................................................ 116
Experts.................................................................. 116
Glossary of Defined Terms ............................................... 117
Index to Financial Statements............................................ F-1
Annex A- Additional Information about MobileMedia and about Arch
Following the MobileMedia Transaction................................... A-1
</TABLE>
xi
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, contained elsewhere in this Prospectus, including
Annex A hereto. As used in this Prospectus, unless the context otherwise
requires, (i) the terms "Arch" or the "Company" refer to Arch Communications,
Inc. and, for periods prior to the Subsidiary Restructuring (as defined
herein), its predecessors on a combined basis, together with their wholly owned
direct and indirect subsidiaries, (ii) the term "Parent" refers to Arch
Communications Group, Inc. and does not include its subsidiaries, (iii)
"MobileMedia" refers to MobileMedia Communications, Inc., a Delaware
corporation, together with its subsidiaries, and (iv) the "MobileMedia
Transaction" refers to (A) the proposed merger pursuant to which MobileMedia
would become a wholly owned subsidiary of API (as defined herein) and
(B) associated debt and equity financings, as described under "--Recent
Developments--Anticipated MobileMedia Transaction". Certain terms not otherwise
defined herein are defined in the Glossary of Defined Terms located on page
117.
THE COMPANY
Arch is a leading provider of wireless messaging services, primarily paging
services, and is the third largest paging company in the United States based on
pagers in service. Arch had 4.2 million pagers in service at September 30,
1998. Arch operates in 41 states and more than 180 of the 200 largest markets
in the United States. Arch offers local, regional and nationwide paging
services employing digital networks covering approximately 85% of the United
States population. Arch offers four types of paging services through its
networks: digital display, alphanumeric display, tone-only and tone-plus-voice.
Arch also offers enhanced and complementary services, including voice mail,
personalized greeting, message storage and retrieval, pager loss protection and
pager maintenance.
Arch has achieved significant growth in pagers in service through a
combination of internal growth and acquisitions. From January 1, 1995 through
September 30, 1998, Arch's total number of subscribers grew at a compound rate
on an annualized basis of 73.1%. For the same period on an annualized basis,
Arch's compound rate of internal subscriber growth (excluding pagers added
through acquisitions) was 52.8%. From commencement of operations in September
1986, Arch has completed 33 acquisitions representing an aggregate of 1.7
million pagers in service at the time of purchase.
Arch's strategic objective is to strengthen its position as one of the
leading nationwide paging companies in the United States. Arch believes that
larger, multi-market paging companies enjoy a number of competitive advantages,
including: (i) operating efficiencies resulting from more intensive utilization
of existing paging systems; (ii) economies of scale in purchasing and
administration; (iii) broader geographic coverage of paging systems; (iv)
greater access to capital markets and lower costs of capital; (v) the ability
to obtain additional radio spectrum; (vi) the ability to offer high-quality
services at competitive prices; and (vii) enhanced ability to attract and
retain management personnel. Arch believes that the current size and scope of
its operations afford it many of these advantages and that it has the scope and
presence to effectively compete on a national level. In addition, Arch believes
that the paging industry will undergo further consolidation, and Arch expects
to participate in such consolidation, either as an acquiror or an acquiree. See
"--Recent Developments--Anticipated MobileMedia Acquisition" and "Risk
Factors--Possible Acquisition Transactions".
Arch's operating objectives are to increase its earnings before interest,
taxes, depreciation and amortization ("EBITDA"), deploy its capital
efficiently, reduce its financial leverage and expand its customer
relationships. To achieve its operating objectives, Arch: (i) has selected a
low-cost operating strategy as its principal competitive tactic; (ii) is
seeking to reduce its financial leverage by reducing capital requirements and
increasing EBITDA; (iii) has focused its capital and marketing resources on
one-way paging and enhanced services while taking steps to position itself to
participate in new and emerging services and applications in narrowband
wireless personal communications; and (iv) is pursuing new revenue
opportunities associated with its 4.2 million pagers in service.
1
<PAGE>
RECENT DEVELOPMENTS
JUNE 1998 SUBSIDIARY RESTRUCTURING AND DEBT FINANCING
On June 29, 1998, Parent effected a number of restructuring transactions
involving certain of its direct and indirect wholly owned subsidiaries (the
"Subsidiary Restructuring"). As a result, Arch, a wholly owned subsidiary of
Parent, is now an intermediate holding company which owns directly or
indirectly all of the stock of its principal operating subsidiary, Arch Paging,
Inc. ("API") and other operating subsidiaries. See "--Corporate Structure",
"Risk Factors--Holding Company Structure and Structural Subordination of Notes"
and "Business--General".
Contemporaneously with the Subsidiary Restructuring, an existing credit
facility was amended and restated to establish senior secured revolving credit
and term loan facilities with API as borrower in the aggregate amount of $400.0
million (collectively, the "Credit Facility") consisting of (i) a $175.0
million reducing revolving credit 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 and (iii) a $125.0 million term loan which
was available in a single drawing on June 29, 1998. See "Description of Certain
Indebtedness--Credit Facility".
Contemporaneously with the Subsidiary Restructuring, Arch issued and sold
$130.0 million principal amount of Private Notes to Bear, Stearns & Co., Inc.,
Barclays Capital Inc., RBC Dominion Securities Corporation, BNY Capital
Markets, Inc. and TD Securities (USA) Inc. (the "Initial Purchasers") for net
proceeds of $122.6 million (after deducting the discount to the Initial
Purchasers and estimated offering expenses payable by Arch) in a private
placement (the "Private Note Offering") made pursuant to Rule 144A under the
Securities Act. The Private Notes were sold at an initial price to investors of
98.049% of their principal amount. The proceeds of the Private Note Offering
were applied as described in "Use of Proceeds".
Contemporaneously with the Subsidiary Restructuring, Parent contributed $24.0
million of the net proceeds from a private placement of Series C Convertible
Preferred Stock of Parent ("Series C Preferred Stock") to Arch as an equity
investment (the "Equity Investment"), Arch contributed such amount to API as an
equity investment and API used such amount to repay indebtedness under a former
credit facility as part of the establishment of the Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Equity Investment".
ANTICIPATED MOBILEMEDIA TRANSACTION
Parent has agreed to acquire MobileMedia, one of the largest paging companies
in the United States, as part of the MobileMedia Transaction, in which, among
other things, Parent would issue certain stock, warrants and stock purchase
rights, pay $479.0 million in cash to certain creditors of MobileMedia, pay
approximately $85.0 million of administrative, transactional and related costs,
raise $217.0 million in cash through rights offerings of its stock, and cause
Arch and API to borrow a total of approximately $350.0 to $355.0 million. After
consummation of the MobileMedia Transaction, which is expected to occur during
the first quarter of 1999, MMC would become a wholly owned subsidiary of API.
See the chart set forth under "--Corporate Structure". Following consummation
of the MobileMedia Transaction, Parent, through its Arch subsidiaries
(collectively, Arch, Parent, the Arch subsidiaries and MobileMedia are referred
to as the "Combined Company"), would be the second largest paging operator in
the United States as measured by pagers in service and net revenues (total
revenues less cost of products sold). See "Business--The Combined Company" and
Annex A. Parent believes that the MobileMedia Transaction, if effected, would
result in a reduction in the overall financial leverage of Parent and its
subsidiaries, on a consolidated basis, as well as certain anticipated operating
synergies and cost savings.
2
<PAGE>
MobileMedia and MMC Parent are operating as debtors-in-possession in
connection with their pending insolvency proceedings under Chapter 11 of the
U.S. Bankruptcy Code. Consummation of the MobileMedia Transaction is subject to
Bankruptcy Court approval, approval by Parent's stockholders and MobileMedia's
creditors, approval by the Federal Communications Commission, performance by
third parties of their contractual obligations, the availability of sufficient
financing and other conditions. THERE CAN BE NO ASSURANCE THAT PARENT WILL
ACQUIRE MOBILEMEDIA OR THAT, IF PARENT ACQUIRES MOBILEMEDIA, PARENT WOULD
REALIZE ITS ANTICIPATED IMPROVEMENTS IN FINANCIAL LEVERAGE, OPERATING SYNERGIES
OR COST SAVINGS. An acquisition of MobileMedia by Parent will increase Arch's
and API's indebtedness and will involve significant operational and financial
risks. See "Risk Factors--Possible Acquisition Transactions". If Parent does
not acquire MobileMedia, Parent will in most circumstances be solely
responsible for its own fees and expenses, estimated at between $15.0 million
and $30.0 million (depending on the date of termination) and in certain
specified circumstances Parent will also be obligated to pay MobileMedia
$32.5 million in cash. See "Risk Factors--Possible Non-Consummation of the
MobileMedia Transaction".
Parent expects to issue securities constituting a majority of Parent's equity
to MobileMedia's creditors in connection with the MobileMedia Transaction.
However, Parent does not intend to issue equity securities in a manner that
would constitute a "change of control" under any of its or Arch's financing
arrangements. Parent's present management and Board of Directors would continue
to control Parent if Parent acquires MobileMedia.
DIVISIONAL REORGANIZATION
In June 1998, Parent'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. 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; however, the extent and cost of this
reinvestment has not yet been determined.
In connection with the Divisional Reorganization, Parent (i) anticipates a
net reduction of approximately 10% of its workforce, (ii) plans to close
certain office locations and redeploy other assets and (iii) recorded a
restructuring charge of $16.1 million during the second quarter of 1998. The
restructuring charge consisted of approximately (i) $9.7 million for employee
severance, (ii) $3.5 million for lease obligations and terminations, (iii)
$1.4 million for the writedown of fixed assets and (iv) $1.5 million of other
costs. The severance costs and lease obligations will require cash outlays
through the 18 to 24 month restructuring period. Management anticipates that
the cash requirements for these items will be relatively consistent from
quarter to quarter throughout the Divisional Reorganization period. These cash
outlays will be funded from operations or the Credit Facility.
There can be no assurance that the desired cost savings will be achieved or
that the Divisional Reorganization will be accomplished smoothly, expeditiously
or successfully. The difficulties of effecting the Divisional 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 following the MobileMedia Transaction. See Note 9 to Arch's Consolidated
Financial Statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Divisional Reorganization" and "Business".
3
<PAGE>
TOWER SITE SALE
In April 1998, Parent announced an agreement to sell certain of Arch's tower
site assets (the "Tower Site Sale") for approximately $38.0 million in cash
(subject to adjustment). 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 is using its net proceeds from the Tower Site Sale (estimated to be $36.0
million) to repay indebtedness. Arch held the initial closing of the Tower Site
Sale on June 26, 1998 with gross proceeds to Arch of approximately $12.0
million (excluding $1.3 million which was paid to entities affiliated with
Benbow PCS Ventures, Inc. ("Benbow") for certain assets owned by such entities
and sold as part of the initial closing), held a second closing on September
29, 1998 with gross proceeds to Arch of $20.4 million and currently expects to
hold the final closing for the balance of the transaction in the fourth quarter
of 1998, although no assurance can be given that the final closing will be held
as expected. The final closing of the Tower Site Sale is subject to receipt of
certain customary regulatory approvals and other conditions. See
"Capitalization", "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Shift in Operating Focus" and "Business--
Properties".
--------------------
Arch was incorporated in Delaware in 1988 as USA Mobile Communications, Inc.
II and changed its name to Arch Communications, Inc. in June 1998. See
"Business--General". Arch's principal offices are located at 1800 West Park
Drive, Suite 250, Westborough, Massachusetts 01581, and its telephone number is
(508) 870-6700.
4
<PAGE>
THE EXCHANGE OFFER
THE EXCHANGE OFFER.......... Arch is offering to exchange $1,000 principal
amount of Exchange Notes for each $1,000
principal amount of Private Notes that are
properly tendered and accepted. Arch will issue
Exchange Notes on or promptly after the
Expiration Date (as defined herein). There is
$130.0 million aggregate principal amount of
Private Notes outstanding. See "The Exchange
Offer--Purpose of the Exchange Offer".
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, Arch believes that the Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Private Notes may be offered for
resale, resold and otherwise transferred by a
Holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from Arch
to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or
(ii) a person that is an affiliate of Arch within
the meaning of Rule 405), without compliance with
the registration and prospectus delivery
provisions of the Securities Act; provided that
the Holder is acquiring Exchange Notes in the
ordinary course of its business and is not
participating, and had no arrangement or
understanding with any person to participate, in
a distribution of the Exchange Notes. Each
broker-dealer that receives Exchange Notes for
its own account in exchange for Private Notes,
where such Private Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange
Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own
account pursuant to the Exchange Offer may be
deemed to be an "underwriter" within the meaning
of the Securities Act. The Letter of Transmittal
states that by so acknowledging and by delivering
a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the
meaning of the Securities Act. See "The Exchange
Offer--Resale of the Exchange Notes".
EXCHANGE AND REGISTRATION
RIGHTS AGREEMENT............ The Private Notes were sold by Arch on June 29,
1998 to the Initial Purchasers pursuant to a
Purchase Agreement, dated June 24, 1998, by and
among Arch and the Initial Purchasers (the
"Purchase Agreement"). Pursuant to the Purchase
Agreement, Arch and the Initial Purchasers
entered into an Exchange and Registration Rights
Agreement, dated as of June 24, 1998 (the
"Exchange and Registration Rights Agreement"),
which grants the holders of the Private Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such
rights, which will terminate upon the
consummation of the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights".
EXPIRATION DATE............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on January , 1999, unless the
Exchange Offer is extended by Arch
5
<PAGE>
in its sole discretion, in which case the term
"Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. See
"The Exchange Offer--Expiration Date;
Extensions; Amendments".
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND THE
PRIVATE NOTES............... The Exchange Notes will bear interest from and
including January 1, 1999. The Private Notes bear
interest from and including the date of issuance
of the Private Notes (June 29, 1998). The Private
Notes also reflect additional interest which
accrued on the Private Notes between October 27,
1998 and December , 1998 at a rate of 0.25% per
annum as liquidated damages ("Liquidated
Damages") due to delays in the registration of
the Exchange Notes under the Securities Act.
Interest and Liquidated Damages accrued on
Private Notes through December 31, 1998 will be
paid on January 1, 1999 to holders of record on
December 15, 1998. Holders whose Private Notes
are accepted for exchange will be deemed to have
waived the right to receive any interest or
Liquidated Damages accrued on the Private Notes
after December 31, 1998. See "The Exchange
Offer--Interest on the Exchange Notes".
CONDITIONS TO THE EXCHANGE
OFFER....................... Arch reserves the right in its sole and absolute
discretion, subject to applicable law, at any
time and from time to time, (i) to delay the
acceptance of the Private Notes for exchange,
(ii) to terminate the Exchange Offer if certain
specified conditions have not been satisfied,
(iii) to extend the Expiration Date of the
Exchange Offer and retain all Private Notes
tendered pursuant to the Exchange Offer, subject,
however, to the right of holders of Private Notes
to withdraw their tendered Private Notes, or (iv)
to waive any condition or otherwise amend the
terms of the Exchange Offer in any respect. See
"The Exchange Offer--Terms of the Exchange
Offer". In addition, the Exchange Offer is
subject to certain customary conditions that may
be waived by Arch. The Exchange Offer is not
conditioned upon any minimum aggregate principal
amount of Private Notes being tendered for
exchange. See "The Exchange Offer--Conditions".
PROCEDURES FOR TENDERING
PRIVATE NOTES............... Each holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Private Notes
and any other required documentation to U.S. Bank
Trust National Association, as exchange agent
(the "Exchange Agent"), at the address set forth
herein. By executing the Letter of Transmittal,
the holder will represent to and agree with Arch
that, among other things, (i) the Exchange Notes
to be acquired by such holder of Private Notes in
connection with the Exchange Offer are being
acquired by such holder in the ordinary course of
its business, (ii) if such holder is not a
broker-dealer, such holder is not currently
participating in, does not intend to participate
in, and has no arrangement or understanding with
any person to participate in a distribution of
the Exchange Notes, (iii) if such holder is a
broker-
6
<PAGE>
dealer registered under the Exchange Act or is
participating in the Exchange Offer for the
purpose of distributing the Exchange Notes, such
holder will comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of
the staff of the Commission set forth in no-
action letters (see "The Exchange Offer--Resale
of the Exchange Notes"), (iv) such holder
understands that a secondary resale transaction
described in clause (iii) above and any resales
of Exchange Notes obtained by such holder in
exchange for Private Notes acquired by such
holder directly from Arch should be covered by an
effective registration statement containing the
selling securityholder information required by
Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) such
holder is not an "affiliate", as defined in Rule
405, of Arch. Any broker-dealer that resells
Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer may be
deemed to be an "underwriter" within the meaning
of the Securities Act. If the holder is a broker-
dealer that will receive Exchange Notes for its
own account in exchange for Private Notes that
were acquired as a result of market-making
activities or other trading activities, such
holder will be required to acknowledge in the
Letter of Transmittal that such holder will
deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus,
such holder will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--
Procedures for Tendering".
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........... Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Private Notes in
the Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. Holders who intend to tender Private
Notes through the DTC's ATOP procedures need not
submit a Letter of Transmittal. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering such owner's Private Notes, either
make appropriate arrangements to register
ownership of the Private Notes in such owner's
name or obtain a properly completed bond power
from the registered holder. The transfer of
registered ownership may take considerable time
and may not be able to be completed prior to the
Expiration Date. See "The Exchange Offer--
Procedures for Tendering".
GUARANTEED DELIVERY
PROCEDURES.................. Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other
7
<PAGE>
documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures
set forth under "The Exchange Offer--Guaranteed
Delivery Procedures".
ACCEPTANCE OF THE PRIVATE
NOTES AND DELIVERY OF THE
EXCHANGE NOTES ............. Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, Arch will
accept for exchange any and all Private Notes
that are properly tendered in the Exchange Offer
prior to the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer".
WITHDRAWAL RIGHTS........... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders".
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS ............. The exchange of Private Notes for Exchange Notes
should be non-taxable for federal income tax
purposes. As a result, no material federal income
tax consequences should result to Holders
exchanging Private Notes for Exchange Notes. See
"Material Federal Income Tax Considerations".
EXCHANGE AGENT.............. U.S. Bank Trust National Association, the Trustee
under the Indenture, is serving as the Exchange
Agent in connection with the Exchange Offer. The
mailing address of the Exchange Agent is 180 E.
5th Street, St. Paul, Minnesota 55101. For
assistance and requests for additional copies of
this Prospectus, the Letter of Transmittal or the
Notice of Guaranteed Delivery, the telephone
number for the Exchange Agent is (612) 244-0721,
and the facsimile number for the Exchange Agent
is (612) 244-1537.
THE EXCHANGE NOTES
The Exchange Offer applies to the entire aggregate principal amount of the
Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes except that (i) the Exchange Notes will
have been registered under the Securities Act and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof, (ii) Holders of
the Exchange Notes will not be entitled to certain rights of Holders of the
Private Notes under the Exchange and Registration Rights Agreement, and (iii)
certain provisions relating to an increase in the stated interest rate on the
Private Notes provided for under certain circumstances will be eliminated. The
Exchange Notes will evidence the same debt as the Private Notes (which they
replace) and will be issued under, and be entitled to the benefits of, the
Indenture. For further information and for definitions of certain capitalized
terms used below, see "Description of the Notes".
SECURITIES OFFERED.......... $130.0 million aggregate principal amount of 12
3/4% Senior Notes due 2007.
MATURITY.................... July 1, 2007.
8
<PAGE>
INTEREST.................... The Notes will 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. In addition, Liquidated Damages
accrued at a rate of 0.25% per annum between
October 27, 1998 and December , 1998.
RANKING..................... The Notes will be senior unsecured obligations of
Arch and will rank pari passu in right of payment
with other existing and future senior unsecured
indebtedness of Arch. Arch is an intermediate
holding company with no material assets other
than the stock of its subsidiaries. The Notes
will be structurally subordinated to all current
or future liabilities of Arch's subsidiaries,
including trade payables and indebtedness. At
September 30, 1998, the Notes were structurally
subordinated to $329.8 million of liabilities of
Arch's subsidiaries. In addition, Parent will not
have any obligation to pay any amounts due with
respect to the Notes or to make any funds
available therefor. At September 30, 1998, Parent
had $373.6 million of liabilities (excluding
liabilities of its subsidiaries and Parent's
guarantees thereof). The MobileMedia Transaction,
if consummated, is expected to increase Arch's
indebtedness by approximately $350.0 million to
$355.0 million, although the debt-to-equity ratio
and ratio of total debt to annualized EBITDA for
Parent and Arch, each on a consolidated basis,
are expected to decrease (and the ratio of EBITDA
to interest expense is expected to increase). See
"Risk Factors--Holding Company Structure and
Structural Subordination of the Notes".
OPTIONAL REDEMPTION......... Except as set forth below, the Notes will not be
redeemable at the option of Arch prior to July 1,
2003. Thereafter, the Notes will be subject to
redemption at the option of Arch, in whole or in
part, at the redemption prices set forth herein
plus accrued and unpaid interest and Liquidated
Damages, if any, to the applicable redemption
date. Notwithstanding the foregoing, at any time
prior to July 1, 2001, Arch may redeem up to 35%
of the Notes at a redemption price of 112 3/4% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the redemption date, with the net cash
proceeds of an Equity Offering (as defined in the
Indenture for the Notes) by Arch or Parent;
provided that at least $84.5 million aggregate
principal amount of the Notes originally issued
under the Indenture remain outstanding
immediately after the occurrence of each such
redemption; and provided further, that such
redemption shall occur within 75 days following
the date of the consummation of each such Equity
Offering. See "Description of Notes--Optional
Redemption".
CHANGE OF CONTROL........... Upon the occurrence of a Change of Control (as
defined in the Indenture) at any time, Arch will
be obligated to make an offer to repurchase each
Holder's Notes at a price equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if
any, to the date of purchase. There can
9
<PAGE>
be no assurance that Arch will have the financial
resources to repurchase the Notes upon a Change
of Control. See "Description of Notes--Repurchase
at the Option of Holders--Change of Control".
CERTAIN COVENANTS........... The Indenture contains certain covenants that,
among other things, limit the ability of Arch to
incur additional indebtedness, issue preferred
stock, pay dividends or make other distributions,
repurchase Capital Stock (as defined herein),
repay subordinated indebtedness or make other
Restricted Payments (as defined herein), create
certain liens, enter into certain transactions
with affiliates, sell assets, issue or sell
Capital Stock of Arch's Restricted Subsidiaries
(as defined herein) or enter into certain mergers
and consolidations. See "Description of Notes--
Certain Covenants".
RISK FACTORS
See "Risk Factors" beginning on page 15 of this Prospectus and page A-4 of
Annex A for a discussion of risk factors that should be considered in
connection with an investment in the Exchange Notes offered hereby.
10
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
Prior to consummation of the Subsidiary Restructuring, Arch Communications
Enterprises, Inc. ("ACE") and USA Mobile Communications, Inc. II ("USAM"),
Arch's predecessors by merger, were wholly owned subsidiaries of Parent. The
Subsidiary Restructuring has been accounted for under the pooling of interests
method. The following summary financial and operating data reflects the
consolidated results and operating data of ACE and USAM as if Arch had been
formed on January 1, 1994, the earliest date presented herein.
The following summary financial and operating data as of December 31, 1996
and 1997 and for each of the years in the three-year period ended December 31,
1997 has been derived from Arch's audited Consolidated Financial Statements and
Notes thereto included elsewhere in this Prospectus. The following summary
financial information and operating data as of and for the year ended December
31, 1994 has been derived from unaudited financial statements that have been
prepared on the same basis as the audited financial statements and, in the
opinion of Arch's management, contain all adjustments, consisting only of
normal recurring accruals, necessary for the fair presentation of the results
of operations for such period. The following summary financial and operating
data as of September 30, 1998 and for the nine-month periods ended September
30, 1997 and 1998 have been derived from Arch's unaudited Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The following consolidated financial information should be read in conjunction
with "Selected Consolidated Financial and Operating Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Arch's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------
1994 (1) 1995 (1) 1996 1997 1997 1998
-------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Service, rental and
maintenance revenues.. $ 61,529 $ 138,466 $ 291,399 $ 351,944 $ 261,570 $ 277,826
Product sales.......... 14,374 24,132 39,971 44,897 34,029 31,811
-------- --------- --------- --------- --------- ---------
Total revenues......... 75,903 162,598 331,370 396,841 295,599 309,637
Cost of products sold.. (12,787) (20,789) (27,469) (29,158) (22,044) (21,863)
-------- --------- --------- --------- --------- ---------
63,116 141,809 303,901 367,683 273,555 287,774
Depreciation and
amortization.......... 18,321 60,037 191,101 231,376 179,188 164,290
Operating income
(loss)................ (352) (12,851) (85,300) (101,044) (82,757) (74,857)
Interest and non-
operating expenses,
net................... (4,973) (20,397) (49,060) (62,884) (47,015) (50,344)
Equity in loss of
affiliate (2)......... -- -- (1,968) (3,872) (2,828) (2,219)
Net income (loss)...... (6,462) (30,332) (87,025) (146,628) (116,700) (129,140)
OTHER OPERATING DATA:
Adjusted EBITDA (3).... $ 17,969 $ 47,186 $ 105,801 $ 130,332 $ 96,431 $ 105,533
Adjusted EBITDA margin
(4)................... 28% 33% 35% 35% 35% 37%
Capital expenditures,
excluding
acquisitions.......... $ 33,450 $ 60,468 $ 155,575 $ 102,767 $ 74,672 $ 85,785
Cash flows provided by
operating activities.. 14,155 16,874 40,476 64,606 45,135 91,819
Cash flows used in
investing activities.. (55,860) (192,549) (480,995) (102,767) (74,672) (85,785)
Cash flows provided by
(used in) financing
activities............ 29,454 176,966 438,163 38,777 31,430 (3,387)
Pagers in service at
end of period......... 538,000 2,006,000 3,295,000 3,890,000 3,781,000 4,211,000
Ratio of EBITDA to
interest expense...... 2.1x
Ratio of total debt to
annualized EBITDA
(5)................... 4.4x
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Current assets........................................ $ 53,778
Total assets.......................................... 931,796
Current maturities of long-term debt.................. --
Long-term debt, less current maturities............... 619,534
Stockholder's equity.................................. 197,564
</TABLE>
- --------------------
(1) Arch Communications Group, Inc. ("Old Parent") was incorporated in January
1986 in Delaware and conducted its operations through wholly-owned direct
and indirect subsidiaries. On September 7, 1995, Old Parent completed its
acquisition of USA Mobile Communications Holdings, Inc. ("USA Mobile")
through the merger (the "USA Mobile Merger") of Old Parent 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, Old Parent was treated as the acquirer in the USA
Mobile Merger for accounting and financial reporting purposes, and Parent
reports the historical financial statements of Old Parent as the historical
financial statements of Parent. USAM was a wholly owned subsidiary of USA
Mobile and subsequently a wholly owned subsidiary of Parent; ACE did not
conduct operations prior to the USA Mobile Merger. Effective January 1,
1995, Parent changed its fiscal year end from August 31 to December 31.
(2) Represents Arch's share of the losses of Benbow, in which Arch holds a
49.9% equity interest, since Arch's acquisition of Westlink Holdings, Inc.
in May 1996. See "Business--General" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resourses--Acquisitions".
(3) Adjusted EBITDA consists of EBITDA (net of restructuring charges, equity in
loss of affiliates, income tax benefit, interest and non-operating expenses
(net) and extraordinary items). EBITDA, as determined by Arch, does not
reflect restructuring charge, equity in loss of affiliate, income tax
benefit, interest and non-operating expenses, net and extraordinary items;
consequently EBITDA may not necessarily be comparable to similarly titled
data of other paging companies. EBITDA is commonly used by analysts and
investors as a principal measure of financial performance in the paging
industry. EBITDA is also one of the primary financial measures used to
calculate whether Arch and its subsidiaries are in compliance with
covenants under their respective indebtedness which covenants, among other
things, limit the ability of Arch and its subsidiaries to: incur additional
indebtedness, advance funds to Benbow, pay dividends, grant liens on its
assets, merge, sell or acquire assets, repurchase or redeem capital stock,
incur capital expenditures and prepay certain indebtedness. EBITDA is also
one of the financial measures used by analysts to value the Company.
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, among other things, restrictions imposed
by the terms of existing indebtedness or limitations imposed by applicable
law upon the payment of dividends or distributions. See "Business--Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operation".
The following table reconciles net income to the presentation of Adjusted
EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------
1994 1995 1996 1997 1997 1998
------- -------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $(6,462) $(30,332) $(87,025) $(146,628) $(116,700) $(129,140)
Interest and non-
operating expenses,
net.................... 4,973 20,397 49,060 62,884 47,015 50,344
Income tax benefit...... -- (4,600) (51,207) (21,172) (15,900) --
Depreciation and
amortization........... 18,321 60,037 191,101 231,376 179,188 164,290
Restructuring charge.... -- -- -- -- -- 16,100
Equity in loss of
affiliate.............. -- -- 1,968 3,872 2,828 2,219
Extraordinary Item...... 1,137 1,684 1,904 -- -- 1,720
------- -------- -------- --------- --------- ---------
Adjusted EBITDA......... $17,969 $ 47,186 $105,801 $ 130,332 $ 96,431 $ 105,533
======= ======== ======== ========= ========= =========
</TABLE>
(4) Calculated by dividing 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 net revenues as an
indicator of the efficiency of a company's operations.
(5) Calculated by dividing total debt by annualized EBITDA for the nine months
ended September 30, 1998.
12
<PAGE>
CORPORATE STRUCTURE
CURRENT STRUCTURE
The following chart summarizes (i) the current organizational structure of
Parent, Arch and Arch's operating subsidiaries and (ii) their respective debt
obligations and guarantees thereof. See "--Recent Developments",
"Capitalization", "Description of Certain Indebtedness", "Description of Notes"
and Arch's Consolidated Financial Statements and Notes thereto. The chart which
appears on page 14 illustrates the organizational structure of Parent and its
subsidiaries following consummation of the MobileMedia Transaction, if effected
as currently contemplated.
ARCH COMMUNICATIONS GROUP, INC.
10 7/8% Senior Discount Notes due 2008
6 3/4% Convertible Subordinated Debentures due 2003
Guarantee of Credit Facility(1)
ARCH COMMUNICATIONS, INC.
12 3/4% SENIOR NOTES DUE 2007(PRIVATE NOTES AND EXCHANGE NOTES)
- -------------------- 9 1/2% Senior Notes due 2004(2)
14 % Senior Notes due 2004(2)
(1) This obligation is secured by Parent's pledge of the capital stock and
notes of Arch.
Guarantee of Credit Facility
(2) The Notes rank pari passu in right of payment with this obligation.
(3) The Notes are structurally subordinated in right of payment to this
obligation. This obligation is secured by a pledge of the capital stock of
Arch.
ARCH PAGING, INC.
Credit Facility(3)
(4) Consists of the former ACE operating subsidiaries and Benbow Investments.
Arch is in the process of consolidating certain of ACE's former operating
subsidiaries into a single subsidiary which it expects to complete prior to
January 1, 1999.
FORMER ACE OPERATING SUBSIDIARIES(4)
(5) Certain of ACE's former operating subsidiaries have provided guarantees
which are secured by a security interest in those assets of such
subsidiaries which were pledged under ACE's former credit facility.
Guarantee of Credit Facility(5)
13
<PAGE>
ANTICIPATED STRUCTURE
The following chart summarizes (i) the organizational structure of Parent,
Arch and their respective operating subsidiaries and (ii) their respective debt
obligations and guarantees thereof, as in effect if the MobileMedia Transaction
is consummated in the manner currently contemplated. See "--Recent
Developments", "Capitalization", "Description of Notes" and Arch's Consolidated
Financial Statements and Notes thereto. The chart on the previous page
illustrates the current organizational structure and debt obligations of Parent
and its subsidiaries.
ARCH COMMUNICATIONS GROUP, INC.
10 7/8% Senior Discount Notes due 2008
6 3/4% Convertible Subordinated Debentures due 2003
Guarantee of Credit Facility(1)
ARCH COMMUNICATIONS, INC.
12 3/4% Senior Notes due 2007(Private Notes and Exchange Notes)
9 1/2% Senior Notes due 2004(2)
14% Senior Notes due 2004(2)
Planned Arch Notes(3)
Guarantee of Credit Facility
ARCH PAGING, INC.
Credit Facility, reflecting the
Credit Facility Increase(4)
FORMER ACE OPERATING SUBSIDIARIES(5) MOBILEMEDIA COMMUNICATIONS, INC.
Guarantee of Credit Facility(6) Guarantee of Credit Facility
MOBILEMEDIA OPERATING SUBSIDIARIES
Guarantee of Credit Facility
- --------------------
(1) This obligation is secured by Parent's pledge of the capital stock and
notes of Arch.
(2) The Notes rank pari passu in right of payment with this obligation.
(3) Expected to rank pari passu in right of payment with the Notes; may be
replaced by the Bridge Facility described under "Description of Certain
Indebtedness--Bridge Facility".
(4) The Notes are structurally subordinated in right of payment to this
obligation. This obligation is secured by a pledge of the capital stock of
the former Arch operating subsidiaries.
(5) Consists of the former ACE operating subsidiaries and Benbow Investments.
Arch is considering the consolidation of certain of ACE's former operating
subsidiaries into a single subsidiary prior to January 1, 1999.
(6) Certain of ACE's former operating subsidiaries have provided guarantees
which are secured by a security interest in those assets of such
subsidiaries which were pledged under Arch's former credit facility.
14
<PAGE>
RISK FACTORS
Before making an investment in the Exchange Notes, prospective investors
should carefully consider the following matters, as well as the other
information contained in this Prospectus.
INDEBTEDNESS AND HIGH DEGREE OF LEVERAGE
Arch is highly leveraged. At September 30, 1998, after giving effect to the
Private Note Offering and application of the net proceeds therefrom as
described under "Use of Proceeds", the Subsidiary Restructuring, borrowings
pursuant to the Credit Facility and the Equity Investment and application of
the proceeds therefrom, Arch had outstanding $619.5 million of total debt,
including (i) $125.0 million principal amount of 9 1/2% Senior Notes due 2004
(the "9 1/2 % Notes"), (ii) $100.0 million principal amount of 14 % Senior
Notes due 2004 (the "14 % Notes" and, collectively with the 9 1/2% Notes, the
"USAM Notes"), (iii) $127.5 million principal amount of Private Notes and (iv)
$267.0 million of borrowings under the Credit Facility. Arch's high degree of
leverage may have adverse consequences for Arch, including: (i) the ability of
Arch and its subsidiaries to obtain additional financing for acquisitions,
working capital, capital expenditures or other purposes, if necessary, may be
impaired or such financing may not be available on acceptable terms, if at
all; (ii) a substantial portion of the Adjusted EBITDA of Arch and its
subsidiaries will be required to pay interest expense, which will reduce the
funds which would otherwise be available for operations and future business
opportunities; (iii) the Credit Facility, the Indenture and the indentures
under which the USAM Notes are outstanding contain financial and restrictive
covenants, the failure to comply with which may result in an event of default
which, if not cured or waived, could have a material adverse effect on Arch;
(iv) Arch may be more highly leveraged than its competitors which may place it
at a competitive disadvantage; (v) Arch's high degree of leverage will make it
more vulnerable to a downturn in its business or the economy generally; and
(vi) Arch's high degree of leverage may impair its ability to participate in
future consolidation of the paging industry. In April 1997, Parent reordered
its operating priorities to improve capital efficiency and strengthen its
balance sheet by placing a higher priority on leverage reduction than
subscriber unit growth. As part of its reordered operating priorities, Parent
has implemented various initiatives to reduce capital costs while endeavouring
to sustain acceptable levels of unit and revenue growth. As a result, Arch's
rate of internal growth in pagers in service has slowed and is expected to
remain below the rates of internal growth previously achieved by Arch, but
Arch has not yet been able to reduce its financial leverage significantly.
There can be no assurance that Arch will be able to reduce its financial
leverage significantly or that Arch will achieve an appropriate balance
between growth which it considers acceptable and future reductions in
financial leverage. If Arch is not able to achieve continued growth in EBITDA,
it may be precluded from incurring additional indebtedness due to cash flow
coverage requirements under existing debt instruments, including Parent's 10
7/8% Senior Discount Notes due 2008 (the "Parent Discount Notes"). The
anticipated effects of the MobileMedia Transaction on Arch's indebtedness and
financial leverage are discussed under "--Anticipated Effects of the
MobileMedia Transaction". 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, may
not necessarily be comparable to similarly titled data of other paging
companies. See "Use of Proceeds", "Capitalization", "Selected Consolidated
Financial and Operating Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Description of Certain
Indebtedness" and Arch's Consolidated Financial Statements and Notes thereto.
HOLDING COMPANY STRUCTURE AND STRUCTURAL SUBORDINATION OF THE NOTES
Arch is an intermediate holding company with no material assets other than
the capital stock of its subsidiaries. Arch's subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts due with respect to the Notes or to make any funds available
therefor, whether by dividends, loans or other payments. The Notes are
structurally subordinated to all current or future liabilities of Arch's
subsidiaries, including trade payables and indebtedness. Any right of Arch to
receive assets of any subsidiary upon such subsidiary's liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in any distribution of those assets) is structurally subordinated
to the claims of that subsidiary's creditors, except to the extent that Arch
is itself recognized as a creditor of such subsidiary, in which
15
<PAGE>
case the claims of Arch would still be subject to any security interests in
the assets of such subsidiary and any liabilities of such subsidiary senior to
that held by Arch and may otherwise be challenged in a liquidation or
reorganization proceeding. At September 30, 1998, after giving effect to the
Private Note Offering and application of the net proceeds therefrom as
described herein under "Use of Proceeds", borrowings pursuant to the Credit
Facility and the Equity Investment, the Notes were structurally subordinated
to $329.8 million of liabilities of Arch's subsidiaries. Although the Notes
rank pari passu in right of payment with the USAM Notes, if the lenders under
the Credit Facility are granted a security interest in certain additional
assets not currently pledged thereunder, the USAM Notes would be entitled, and
the Notes would not be entitled, to be secured equally and ratably with the
lenders under the Credit Facility to the extent of such additional assets. In
that event, the Notes would be structurally subordinated to the USAM Notes to
the extent of the additional collateral securing the USAM Notes so long as the
USAM Notes are outstanding. See "Description of Notes--Certain Covenants--
Liens".
In addition, Parent does not have any obligation to pay any amounts due with
respect to the Notes or to make any funds available therefor. At September 30,
1998, Parent had $373.6 million of liabilities (excluding liabilities of its
subsidiaries and Parent's guarantees thereof). Parent expects to service the
interest payments of $50.8 million annually, commencing September 15, 2001, on
its $467.4 million principal amount at maturity of the Parent Discount Notes
out of cash made available to it by Arch and Arch's subsidiaries, but there
can be no assurance that Arch and Arch's subsidiaries will be able to generate
sufficient cash flow to service such interest payments. In addition,
limitations contained in the indentures under which the USAM Notes are
outstanding would not currently permit Arch and its subsidiaries to make
sufficient payments to Parent to enable Parent to pay interest on the Parent
Discount Notes. Arch may need to modify the Credit Facility, amend the
indentures under which the USAM Notes are outstanding or redeem the USAM Notes
in order to make payments to enable Parent to pay interest on the Parent
Discount Notes. No assurance can be given that, if necessary, Arch would be
able to modify the Credit Facility, amend such indentures or redeem the USAM
Notes. A default by Parent in its payment obligations under the Parent
Discount Notes could have a material adverse effect on the business, financial
condition, results of operations or prospects of Parent or Arch, or Arch's
ability to make payments with respect to the Notes when due. See
"Capitalization", "Selected Consolidated Financial and Operating Data",
"Description of Certain Indebtedness" and "Description of Notes".
DEBT SERVICE; LIMITATIONS ON ACCESS TO CASH FLOW OF OPERATING SUBSIDIARIES
Arch expects to service the interest payments on the Notes, which commence
January 1, 1999 and total $16.6 million annually, out of cash made available
to it by its subsidiaries. The ability of Arch to make payments of principal
and interest on the Notes will be dependent upon Arch's subsidiaries achieving
and sustaining levels of performance in the future that would permit such
subsidiaries to pay dividends, distributions or fees to Arch which are
sufficient to permit such payments on the Notes. Many factors, some of which
will be beyond Arch's control, such as prevailing economic conditions, will
affect the performance of Arch's subsidiaries. There can be no assurance that
Arch's subsidiaries will be able to generate sufficient cash flow to cover
required interest and principal payments on their current and future
indebtedness or the Notes. If Arch is unable to meet interest and principal
payments in the future, it may, depending upon the circumstances which then
exist, seek additional equity or debt financing, attempt to refinance its
existing indebtedness or sell all or part of its business or assets to raise
funds to repay its indebtedness. There can be no assurance that sufficient
equity or debt financing will be available or, if available, that it will be
on terms acceptable to Arch, that Arch will be able to refinance its existing
indebtedness or that sufficient funds could be raised through asset sales. See
"Use of Proceeds", "Selected Consolidated Financial and Operating Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Description of Certain Indebtedness" and Arch's Consolidated
Financial Statements and Notes thereto.
ANTICIPATED EFFECTS OF THE MOBILEMEDIA TRANSACTION
The MobileMedia Transaction, if consummated, is expected to increase Arch's
indebtedness by approximately $200.0 million and API's indebtedness by
approximately $150.0 million, and will cause API to
16
<PAGE>
own additional subsidiaries having liabilities of their own. The debt-to-
equity ratio for Arch (without regard to its subsidiaries) is expected to
increase, although the debt-to-equity ratio and the ratio of the total debt to
annualized EBITDA for Parent and for Arch, each on a consolidated basis, is
expected to decrease (and the ratio of EBITDA to interest expense is expected
to increase). The Notes will not be guaranteed by API's new MobileMedia
subsidiaries following consummation of the MobileMedia Transaction. For the
reasons described under "--Holding Company Structure and Structural
Subordination of the Notes", the assets and EBITDA of API's new MobileMedia
subsidiaries will primarily benefit the creditors of API and only indirectly
benefit the holders of the Notes or other creditors of Arch, if at all. See
the chart which appears on page 14.
To fund the estimated cash payments required by the MobileMedia Transaction
of approximately $347.0 million (net of the expected proceeds of Parent's
proposed rights offering), API and The Bank of New York, Toronto Dominion
(Texas), Inc., Royal Bank of Canada and Barclays Bank, PLC have executed a
commitment letter for a $200.0 million increase to the Credit Facility (the
"Credit Facility Increase"), API intends to borrow an additional $150.0
million under the Credit Facility and Arch intends to issue $200.0 million of
new senior notes (the "Planned Arch Notes"). In addition, there can be no
assurance that Arch will complete an offering of the Planned Arch Notes on
terms satisfactory to it, or at all. As a result, Arch and The Bear Stearns
Companies, Inc., TD Securities (USA), Inc. The Bank of New York and Royal Bank
of Canada (the "Bridge Lenders") have executed a commitment letter for a
$120.0 million bridge facility (the "Bridge Facility") which would be
available to Arch in the absence of an offering of the Planned Arch Notes. The
Planned Arch Notes, the Bridge Facility and the MobileMedia Transaction each
require approval by the Required Lenders (as defined in the Credit Facility),
and there can be no assurance such approval will be granted on a timely basis,
if at all. See "Description of Certain Indebtedness--Bridge Facility". If
API's lenders do not grant the foregoing approvals, and Parent is not able to
arrange alternative financing to make the cash payments required by the
MobileMedia Transaction and therefore cannot consummate the MobileMedia
Transaction, and Parent's failure to perform its obligation to do so is not
otherwise excused, Parent will be liable to pay a fee of $32.5 million to MMC.
See "--Possible Non-Consummation of the MobileMedia Transaction".
CREDIT FACILITY AND INDENTURE RESTRICTIONS
The Credit Facility and the Indenture impose certain operating and financial
restrictions on Arch. The Credit Facility requires API, and in certain cases
Arch, to maintain specified financial ratios, among other obligations,
including a maximum leverage ratio and a minimum fixed charge coverage ratio,
each as defined in the Credit Facility. In addition, the Credit Facility
limits or restricts, among other things, API's ability to: (i) declare
dividends or redeem or repurchase capital stock; (ii) prepay, redeem or
purchase debt; (iii) incur liens and engage in sale/leaseback transactions;
(iv) make loans and investments; (v) incur indebtedness and contingent
obligations; (vi) amend or otherwise alter debt and other material agreements;
(vii) engage in mergers, consolidations, acquisitions and asset sales; (viii)
engage in transactions with affiliates; and (ix) alter its lines of business
or accounting methods. In addition, the Indenture limits, among other things:
(i) the incurrence of additional indebtedness by Arch and its Restricted
Subsidiaries (as defined therein); (ii) the payment of dividends and other
restricted payments by Arch and its Restricted Subsidiaries; (iii) asset
sales; (iv) transactions with affiliates; (v) the incurrence of liens; and
(vi) mergers and consolidations. Arch's ability to comply with such covenants
may be affected by events beyond its control, including prevailing economic
and financial conditions. A breach of any of these covenants could result in a
default under the Credit Facility and/or Indenture. Upon the occurrence of an
event of default under the Credit Facility or the Indenture, the lenders under
the Credit Facility could elect to declare all amounts outstanding under the
Credit Facility, together with accrued and unpaid interest, to be immediately
due and payable. If Arch were unable to repay any such amounts, the lenders
could proceed against the collateral securing such indebtedness. If the
lenders under the Credit Facility accelerate 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 the other indebtedness of Arch, including the
Notes. In addition, because the Credit Facility and the Indenture limit the
ability of Arch 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" and
"Description of Notes".
17
<PAGE>
The Bridge Facility contains restrictions that are substantially similar to
those contained in the Credit Facility, including without limitation
restrictions that, among other things, limit 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 and mergers; and transactions with affiliates or between Parent
and its subsidiaries. In addition, the Bridge Facility requires Arch and its
subsidiaries to meet certain financial covenants, including covenants with
respect to ratios of EBITDA to fixed charges, EBITDA to debt service, EBITDA
to interest expense and total indebtedness to EBITDA.
POSSIBLE INABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL
The Credit Facility limits the ability of Arch to repurchase any of the
Notes, and also provides that certain change of control events with respect to
Arch will constitute a default thereunder. Any future credit agreements or
other agreements relating to indebtedness to which Arch becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when Arch is prohibited from repurchasing the Notes, Arch
could seek the consent of its lenders to repurchase the Notes or could attempt
to refinance the borrowings that contain such prohibition. If Arch does not
obtain such consent or repay such borrowings, Arch will remain prohibited from
repurchasing the Notes by the terms of the relevant indebtedness. In such
case, Arch's failure to repurchase the tendered Notes would constitute an
event of default under the Indenture which would, in turn, constitute a
default under the Credit Facility and could constitute a default under other
indebtedness. Furthermore, no assurance can be given that Arch will have
sufficient funds available to satisfy its repurchase obligation with respect
to the Notes following a Change of Control. Arch believes that consummation of
the MobileMedia Transaction will not constitute such a Change in Control;
however, there can be no assurance that creditors will not allege that the
MobileMedia Transaction constitutes a Change in Control. See "Description of
Certain Indebtedness" and "Description of Notes".
FUTURE CAPITAL NEEDS
Arch's business strategy requires the availability of substantial funds to
finance the continued development and further growth and expansion of its
operations, including possible acquisitions. The amount of capital required by
Arch will depend upon a number of factors, including 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 narrowband personal communications
services ("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. The
unavailability of sufficient financing when needed would have a material
adverse effect on the business, financial condition, results of operations or
prospects of Arch or its ability to make payments with respect to the Notes
when due. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources", "Business",
"Description of Certain Indebtedness" and "Description of Notes". For a
discussion of the anticipated effects of the MobileMedia Transaction on Arch's
capital needs and capital resources, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
HISTORY OF LOSSES
Arch has not reported any net income since its inception. Arch reported net
losses of $30.3 million, $87.0 million, $146.6 million and $129.4 million in
the years ended December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1998, respectively. These net losses resulted principally
from substantial depreciation and amortization expense, primarily related to
intangible assets and pager depreciation, interest expense and other costs of
growth. Substantial and increased amounts of debt are expected to be
outstanding for the foreseeable future, which will result in significant
additional interest expense which could have a material adverse effect on the
business, financial condition, results of operations or prospects of Arch or
its ability to make payments with respect to the Notes when due. Arch expects
to continue to report net losses for the foreseeable future. See "Selected
Consolidated Financial and Operating Data", "Management's Discussion and
18
<PAGE>
Analysis of Financial Condition and Results of Operations" and Arch's
Consolidated Financial Statements and Notes thereto.
POSSIBLE FLUCTUATIONS IN REVENUES AND OPERATING RESULTS
Arch believes that future fluctuations in its revenues and operating results
are possible as the result of many factors, including competition, subscriber
turnover, new service developments and technological change. Arch's current
and planned debt repayment levels are, to a large extent, fixed in the short
term, and are based in part on its expectations as to future revenues, and
Arch may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall. Due to the foregoing or other factors, it is possible that
due to future fluctuations Arch's revenue or operating results may not meet
the expectations of securities analysts or investors. See "--Management's
Discussion and Analysis of Financial Condition and Results of Operations".
POSSIBLE ACQUISITION TRANSACTIONS
Arch believes that the paging industry will undergo further consolidation,
and Arch expects to participate in such continued industry consolidation. Arch
has evaluated and expects to continue to evaluate possible acquisition
transactions on an ongoing basis and at any given time may be engaged in
discussions with respect to possible acquisitions or other business
combinations. The process of integrating acquired paging businesses may
involve unforeseen difficulties and may require a disproportionate amount of
the time and attention of Arch's management and of Arch's financial and other
resources. No assurance can be given that suitable acquisition transactions
can be identified, financed and completed on acceptable terms, that Arch's
future acquisitions will be successful, or that Arch will participate in any
future consolidation of the paging industry. See "Business".
An acquisition of MobileMedia by Parent will increase the indebtedness of
Arch and its subsidiaries and will involve significant operational and
financial risks, including but not limited to the risks associated with
integrating MobileMedia's operations with the current operations of Parent and
its subsidiaries. These risks may be exacerbated by the fact that MobileMedia
is currently operating under the jurisdiction of the Bankruptcy Court. See
"Prospectus Summary--Recent Developments--Anticipated MobileMedia Transaction"
and Annex A.
There can be no assurance that Parent's expectations regarding future
operations following the MobileMedia Transaction will be fulfilled. The
success of the MobileMedia Transaction will depend in part on the ability of
Parent to effectively integrate the businesses of Arch and MobileMedia. The
process of integrating the businesses of Arch and MobileMedia may involve
unforeseen difficulties and may require a disproportionate amount of time and
attention of Arch's management and financial and other resources of Arch
following the MobileMedia Transaction. Although it is anticipated that the
MobileMedia Transaction will provide the opportunity for synergies and
efficiencies, there can be no assurance as to the timing or amount of
synergies or efficiencies that may ultimately be attained. Certain of the
anticipated benefits of the MobileMedia Transaction may not be achieved if
Arch's and MobileMedia's existing operations are not successfully integrated
in a timely manner. 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. There can be no assurance that Arch will be able to
successfully integrate MobileMedia's operations or, even if successfully
integrated, that Arch's operating performance after the MobileMedia
Transaction will be successful. If Arch is not successful in integrating
MobileMedia's operations or if the integrated operations fail to achieve
market acceptance, Arch would be materially adversely affected. In addition,
following the MobileMedia Transaction, the implementation of Arch's business
strategy will be subject to numerous other contingencies beyond the control of
Arch, including general and regional economic conditions, interest rates,
competition, changes in regulation and the ability to attract and maintain
skilled employees. As a result, no assurance can be given that the MobileMedia
Transaction will be successful or that Arch's business strategies will prove
effective or that Arch will achieve its goals after the MobileMedia
Transaction. See also "Risk Factors" in Annex A.
19
<PAGE>
POSSIBLE NON-CONSUMMATION OF THE MOBILEMEDIA TRANSACTION
Consummation of the MobileMedia Transaction is subject to Bankruptcy Court
approval, approval by Parent's stockholders and MobileMedia's creditors, FCC
approval, performance by third parties of their contractual obligations, the
availability of sufficient financing and other conditions. THERE CAN BE NO
ASSURANCE THAT PARENT WILL ACQUIRE MOBILEMEDIA OR THAT, IF PARENT ACQUIRES
MOBILEMEDIA, PARENT WOULD REALIZE ITS ANTICIPATED IMPROVEMENTS IN FINANCIAL
LEVERAGE, OPERATING SYNERGIES OR COST SAVINGS. See Annex A.
If MobileMedia terminates the MobileMedia Transaction as the result of
Parent being in material breach of its representations, warranties and
covenants, the failure of Parent's Board of Directors to recommend the
MobileMedia Transaction for stockholder approval or the failure of the
MobileMedia Transaction to be approved by Parent's stockholders, or Parent or
MobileMedia terminates the MobileMedia Transaction as a result of Parent's
failure to obtain the financing necessary to effect the MobileMedia
Transaction (when all other conditions to Parent's obligations to close have
been satisfied), and at the time of such termination MobileMedia is not in
material breach of any material covenant or obligation required to be
performed by MobileMedia thereunder at or before such time and is not in
breach of its representations and warranties (except where the matters in
respect of which such representations and warranties are in breach would not
in the aggregate have a material adverse effect on MobileMedia), then Parent
must pay to MobileMedia as promptly as practicable after demand therefor (but
in no event later than the third business day thereafter) the amount of $32.5
million in cash (the "MobileMedia Breakup Fee"). Parent would also be solely
responsible for its own fees and expenses in connection with the MobileMedia
Transaction, which are estimated at between $15.0 million and $30.0 million
(depending on the date of termination). If the MobileMedia Transaction is
terminated for reasons that do not require payment of a MobileMedia Breakup
Fee by Parent, Parent would be responsible for its own fees and expenses,
subject in certain specified circumstances to payment by MobileMedia of a
breakup fee to Parent in the amount of $25.0 million.
DEPENDENCE ON KEY PERSONNEL
The success of Arch will be dependent, to a significant extent, upon the
continued services of a relatively small group of executive personnel. Arch
does not have employment agreements with, or maintain key man life insurance
on, any of its current executive officers, although certain executive officers
have entered into non-competition agreements and all executive officers have
entered into executive retention agreements with Arch. The loss or
unavailability of one or more of its executive officers or the inability to
attract or retain key employees in the future could have a material adverse
effect on the business, financial condition, results of operations or
prospects of Arch or its ability to make payments with respect to the Notes
when due. See "Business--Arch Management--Directors and Executive Officers".
COMPETITION AND TECHNOLOGICAL CHANGE
Arch faces competition from other paging service providers in all markets in
which it operates as well as from certain competitors who hold nationwide
licenses. Monthly fees for basic paging services have, in general, declined in
recent years, due in part to competitive conditions, and Arch may face
significant price-based competition in the future which could have a material
adverse effect on Arch. Certain of Arch's competitors possess greater
financial, technical and other resources than Arch. 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 its strategy on Arch's markets, there could be a material adverse effect
on the business, financial condition, results of operations or prospects of
Arch or its ability to make payments with respect to the Notes when due.
Competitors are currently using and developing a variety of two-way paging
technologies. Arch does not presently provide such two-way services, other
than as a reseller. Although such services generally are higher priced than
traditional one-way paging services, technological improvements could result
in increased capacity
20
<PAGE>
and efficiency for such two-way paging technologies and, accordingly, could
result in increased competition for Arch. Future technological advances in the
telecommunications industry could increase new services or products
competitive with the paging services provided by Arch or could require Arch 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,
including cellular and broadband personal communications services ("PCS"), and
specialized mobile radio services, also compete with the paging services that
Arch provides. While such services are primarily focused on two-way voice
communications, service providers are, in many cases, electing to provide
paging services as an adjunct to their primary services. Technological change
also may affect the value of the pagers owned by Arch and leased to its
subscribers. If Arch's subscribers requested more technologically advanced
pagers, including but not limited to two-way pagers, Arch could incur
additional inventory costs and capital expenditures if it were required to
replace pagers leased to its subscribers within a short period of time. Such
additional investment or capital expenditures could have a material adverse
effect on the business, financial condition, results of operations or
prospects of Arch or its ability to make payments with respect to the Notes
when due. There can be no assurance that Arch will be able to compete
successfully with its current and future competitors in the paging business or
with competitors offering alternative communication technologies. See
"Business--Competition".
SUBSCRIBER TURNOVER
The results of operations of wireless messaging service providers, such as
Arch, can be significantly affected by subscriber cancellations. The sales and
marketing costs associated with attracting new subscribers are substantial
relative 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. An increase in the subscriber cancellation rate
could have a material adverse effect on the business, financial condition,
results of operations or prospects of Arch or its ability to make payments
with respect to the Notes when due. See "Business".
DEPENDENCE ON THIRD PARTIES
Arch does not manufacture any of the pagers used in its paging operations.
Arch buys pagers primarily from Motorola, Inc. and NEC America, Inc. and
therefore is dependent on such manufacturers to obtain sufficient pager
inventory for new subscriber and replacement needs. In addition, Arch
purchases terminals and transmitters primarily from Glenayre Technologies,
Inc. and Motorola and thus is dependent on such manufacturers for sufficient
terminals and transmitters to meet its expansion and replacement requirements.
To date, Arch has not experienced significant delays in obtaining pagers,
terminals or transmitters, but there can be no assurance that Arch will not
experience such delays in the future. Arch's purchase agreement with Motorola
expires on June 19, 1999, although it contains a provision for one-year term
renewals. There can be no assurance that Arch's agreement with Motorola will
be renewed or, if renewed, that such agreement will be on terms and conditions
as favorable to Arch as those under the current agreement. Although Arch
believes that sufficient alternative sources of pagers, terminals and
transmitters exist, there can be no assurance that Arch would not be
materially adversely affected if it were unable to obtain these items from
current supply sources or on terms comparable to existing terms. See
"Business--Sources of Equipment". Arch also relies on third parties to provide
satellite transmission for some aspects of its paging services. To the extent
there are satellite outages or if satellite coverage is otherwise impaired,
Arch may experience a loss of service until such time as satellite coverage is
restored, which could have an adverse material effect on Arch. See also "--
Impact of the Year 2000 Issue".
GOVERNMENT REGULATION, FOREIGN OWNERSHIP AND POSSIBLE REDEMPTION
The paging operations of Arch and MobileMedia are subject to regulation by
the FCC and various state regulatory agencies. The FCC paging licenses granted
to Arch and MobileMedia are for varying terms of up to 10 years, at the end of
which renewal applications must be approved by the FCC. In the past, paging
license renewal applications generally have been granted by the FCC upon a
showing of compliance with FCC
21
<PAGE>
regulations and of adequate service to the public. With the exception of the
pending FCC proceeding regarding MobileMedia's qualifications to remain an FCC
licensee (see "MobileMedia Management's Discussion and Analysis of Financial
Condition and Results of Operations--Pending FCC Action Against MobileMedia"
in Annex A). Arch and MobileMedia are unaware of any circumstances which would
prevent the grant of any pending or future renewal applications; 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, thereby increasing the chances of third party
interventions in the renewal proceedings. Other than those renewal
applications still pending, the FCC has thus far granted each license renewal
application that Arch and MobileMedia have filed. There can be no assurance
that the FCC and various state regulatory agencies will not propose or adopt
regulations or take actions that would have a material adverse effect on Arch
or MobileMedia or, if the Merger is consummated, on the Combined Company
following the Merger.
The FCC's review and revision of rules affecting paging companies is ongoing
and 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 (for example, a Major Trading Area as defined by Rand McNally)
rather than being licensed on a site-by-site basis. These geographic area
licenses will be awarded pursuant to auction. Incumbent paging licensees that
do not acquire licenses at auction will be entitled to interference protection
from the market area licensee. Arch and MobileMedia are each participating
actively in this proceeding in order to protect their existing operations and
retain flexibility, on an interim and long-term basis, to modify systems as
necessary to meet subscriber demands. The FCC has issued a Further Notice of
Proposed Rulemaking in which the FCC seeks comments on, among other matters,
whether it should impose coverage requirements on licensees with nationwide
exclusivity (such as Arch and MobileMedia), whether these coverage
requirements should be imposed on a nationwide or regional basis, and
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, Arch and MobileMedia
might have to accelerate the build-out of their systems in certain areas.
Changes in regulation of Arch's and MobileMedia's paging businesses or the
allocation of radio spectrum for services that compete with Arch's and
MobileMedia's business could adversely affect their results of operations. In
addition, some aspects of the Telecommunications Act of 1996 (the
"Telecommunications Act") may place additional burdens upon Arch and
MobileMedia or subject them 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, which makes their services more expensive
and which could affect the attraction or retention of customers; however,
there can be no assurance that Arch and MobileMedia 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 to low-
income consumers ("Universal Service"). Prior to the implementation of the
Telecommunications Act, Universal Service obligations largely were met by
local telephone companies, supplemented by long-distance telephone companies.
Under the new rules, certain telecommunications carriers, including Arch and
MobileMedia, are required to contribute to a revised fund created for
Universal Service (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 state revenues. Neither Arch
nor MobileMedia can yet know the impact of these state contribution
requirements, if enacted and applied to Arch and MobileMedia. Moreover,
neither Arch nor MobileMedia is able at this time to estimate the amount of
any such payments that it will be able to bill to their subscribers; however,
payments into the Universal Service Fund will likely increase the cost of
doing business.
Moreover, in a rulemaking proceeding pertaining to interconnection between
local exchange carriers ("LECs") and commercial mobile radio services ("CMRS")
providers such as MobileMedia and Arch, the FCC
22
<PAGE>
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,
Arch and MobileMedia may or may not be successful in securing refunds, future
relief or both, with respect to charges for termination of LEC-originated
local traffic. If these issues are ultimately resolved by the FCC in favor of
CMRS providers, then Arch and MobileMedia will pursue relief through
settlement negotiations, administrative complaint procedures or both. If these
issues are ultimately decided in favor of the LECs, Arch and MobileMedia
likely would be required to pay all past due contested charges and may also be
assessed interest and late charges for the withheld amounts. Although these
requirements have not to date had a material adverse effect on Arch or
MobileMedia, these or similar requirements could in the future have a material
adverse effect on Arch or MobileMedia. See "Business--Regulation".
The Communications Act also limits foreign investment in and ownership of
entities that are licensed as radio common carriers by the FCC. Arch and
MobileMedia own or control several radio common carriers and are accordingly
subject to these foreign investment restrictions. Because Arch and MobileMedia
are each individually parents of radio common carriers (but are not radio
common carriers themselves), Arch and MobileMedia may not have more than 25%
of their stock owned or voted by aliens or their representatives, a foreign
government or its representatives or a foreign corporation if the FCC finds
that the public interest would be served by denying such ownership. In
connection with the World Trade Organization Agreement (the "WTO Agreement")--
agreed to by 69 countries--the FCC adopted rules effective February 9, 1998
that create a very strong presumption in favor of permitting a foreign
interest in excess of 25% if the foreign investor's home market country signed
the WTO Agreement. Arch's and MobileMedia'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 "Business--Paging Industry
Overview" and "Business--Regulation". Arch's Restated Certificate of
Incorporation permits the redemption of shares of Arch's capital stock from
foreign stockholders where necessary to protect FCC licenses held by Arch or
its subsidiaries, but such redemption would be subject to the availability of
capital to Arch and any restrictions contained in applicable debt instruments
and under the DGCL (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 (including MobileMedia following the Merger).
See "--Indebtedness and High Degree of Leverage", "--Competition and
Technological Change" and "Business--Regulation".
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
Combined Company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. As a result,
within the next year the computerized systems (including both information and
non-information technology systems) and applications used by the Combined
Company will need to be reviewed, evaluated and, if and where necessary,
modified or replaced to ensure that all financial, information and operating
systems are Year 2000 compliant.
Arch
Arch has created a cross-functional project group (the "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 the external areas, Arch
has distributed vendor surveys to its primary and secondary
23
<PAGE>
vendors. The surveys requested information about hardware and/or software
supplied by information technology vendors as well as non-information
technology system vendors that might use embedded technologies in their
systems or products. Information was requested regarding the vendor's Year
2000 compliance planning, timing, status, testing and contingency planning. As
part of its evaluation of Year 2000 vulnerability related to its pager and
paging equipment vendors, Arch has discussed with them their efforts to
identify potential issues associated with their equipment and/or software and
has concluded that, to the extent any vulnerability exists, it has been
addressed. Internally, Arch has initiated an inventory audit of hardware and
software testing for both its corporate and divisional operations. These areas
of operation include: information systems, finance, operations, inventory,
billing, pager activation and purchasing. Additional testing is scheduled to
conclude in the first quarter of 1999.
Arch expects that it will incur costs to replace existing hardware, software
and paging equipment, which will be capitalized and amortized in accordance
with Arch's existing accounting policies, while maintenance or modification
costs will be expensed as incurred. Arch has upgraded hardware to enable
compliance testing to be performed on dedicated test equipment in an isolated
production-like environment. Based on Arch's costs incurred to date, as well
as estimated costs to be incurred over the next fourteen months, Arch does not
expect that resolution of the Year 2000 problem will have a material adverse
effect on its results of operations and financial condition. Costs of the Year
2000 project are based on current estimates and actual results may vary
significantly from such estimates once detailed plans are developed and
implemented.
While it is Arch's stated goal to be compliant, on an internal basis, by
September 30, 1999, Arch may face the possibility that one or more of its
mission critical vendors, such as its utility providers, telephone carriers or
satellite carriers, may not be Year 2000 compliant. Because of the unique
nature of such vendors, alternative providers of these services may not be
available. Additionally, although Arch has initiated its test plan for its
business-related hardware and software applications, there can be no assurance
that such testing will detect all applications that may be affected by the
Year 2000 problem. Lastly, Arch does not manufacture any of the pagers or
paging-related equipment used by its customers or for its own paging
operations. Although Arch has initiated testing of such equipment it has
relied to a large extent on the representations of its vendors with respect to
their readiness. Arch can offer no assurances as to the accuracy of such
vendors' representations.
Arch has initiated the process of designing and implementing contingency
plans relating to the Year 2000 problem. To this end, each department will
identify the likely risks and determine commercially reasonable solutions. The
Y2K Project Group will collect and review the determinations on both a
department-by-department and company-wide basis. Arch intends to complete its
Year 2000 contingency planning during calendar year 1999.
MobileMedia
MobileMedia has formed an internal task force comprised of representatives
of its various relevant departments to address Year 2000 compliance matters.
The task force has undertaken a preliminary review of internal and external
areas that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or non-
critical/non-important. MobileMedia also expects to hire outside consultants
to review MobileMedia's testing methodology and test results, to assess its
contingency planning and to provide general oversight relating to Year 2000
compliance matters.
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be year
2000 compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain
business-related files were created and run to identify any Year 2000
compliance issues. While the results of the tests are still being analyzed,
relatively few Year 2000 problems were identified. Additional testing is
scheduled for the first quarter of 1999, including testing of MobileMedia's
financial and human resource software packages. There can be no assurance,
however, that such testing has, or will, detect all compliance issues related
to the Year 2000 problem.
24
<PAGE>
With respect to external matters, MobileMedia has distributed questionnaires
and requests for certification to its mission critical vendors and is in the
process of obtaining and reviewing the responses thereto. The questionnaires
have requested information concerning embedded technologies of such vendors,
the hardware and software applications used by such vendors and the Year 2000
compliance efforts of such vendors relating thereto.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to the Year 2000 compliance
matters. To date, MobileMedia has incurred approximately $50,000 in costs
(excluding in-house labor and hardware) in connection with Year 2000
compliance matters. In addition, MobileMedia has purchased upgraded hardware
at a cost of approximately $150,000 for use as redundant equipment in testing
for Year 2000 problems in an isolated production environment. MobileMedia
estimates that it will expend approximately $200,000 on additional software
and other items related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200,000
in costs relating to Year 2000 remediation efforts for its paging network
hardware. MobileMedia has also upgraded its paging network hardware over the
fiscal year 1998 and plans further upgrades in fiscal year 1999. Such upgrades
have not been and are not expected to be purchased solely for remediation of
the Year 2000 compliance problems; such upgrades are not themselves expected
to have Year 2000 compliance problems.
Risks relating to Year 2000 Compliance Matters
MobileMedia has a goal to become Year 2000 compliant with respect to
internal matters during calendar year 1999. Although MobileMedia has begun and
is undertaking testing of its internal business-related hardware and software
applications, there can be no assurance 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 in respect of application of
contingency plans on a department-by-department basis and on a company-wide
basis. MobileMedia intends to complete its contingency planning in respect of
Year 2000 compliance during calendar year 1999.
ABSENCE OF PUBLIC MARKET FOR NOTES
The Private Notes have not been registered under the Securities Act or any
state securities law and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws. Although the Exchange Notes may be resold or otherwise
transferred by the holders (who are not affiliates of Arch) without compliance
with the registration requirements under the Securities Act, they will be new
securities for which there is currently no established trading market. Arch
does not intend to apply for listing of the Exchange Notes
25
<PAGE>
on a national securities exchange or for quotation of the Exchange Notes on an
automated dealer quotation system. Although the Initial Purchasers in the
offering of the Private Notes have informed Arch that they currently intend to
make a market in the Exchange Notes, they are not obligated to do so, and any
such market-making, if initiated, may be discontinued at any time without
notice. The liquidity of market for the Exchange Notes will depend upon the
number of holders of the Exchange Notes, the interest of securities dealers in
making a market in the Exchange Notes and other factors. Accordingly, there
can be no assurance as to the development or liquidity of any market for the
Exchange Notes. If an active trading market for the Exchange Notes does not
develop, the market price and liquidity of the Exchange Notes may be adversely
affected. If the Exchange Notes are traded, they may trade at a discount from
their face value, depending upon prevailing interest rates, the market for
similar securities, the performance of Arch and certain other factors.
Notwithstanding the registration of the Exchange Notes under the Securities
Act, Holders who are "affiliates" (as defined under Rule 405 of the Securities
Act) of Arch may publicly offer for sale or resell the Exchange Notes only in
compliance with the provisions of Rule 144 under the Securities Act.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor Arch is under any duty
to give notification of defects or irregularities with respect to tenders of
Private Notes for exchange. Private Notes that are not tendered or are
tendered but not accepted will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Private Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes, will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or any other trading activities, must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer may be deemed to be an "underwriter"
within the meaning of the Securities Act. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. To the extent that Private Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Private Notes could be adversely affected due to the limited
amount, or "float", of the Private Notes that are expected to remain
outstanding following the Exchange Offer. Generally, a lower "float" of a
security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Private Notes are not tendered or are
tendered and not accepted in the Exchange Offer, the trading market for the
Exchange Notes could be adversely affected. See "The Exchange Offer" and "Plan
of Distribution".
26
<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by Arch on June 29, 1998 (the "Closing Date") to
the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently sold the Private Notes to "qualified institutional
buyers" ("QIBs"), as defined in Rule 144A under the Securities Act, in
reliance on Rule 144A. As a condition to the sale of the Private Notes, Arch
and the Initial Purchasers entered into the Exchange and Registration Rights
Agreement on June 24, 1998. Pursuant to the Exchange and Registration Rights
Agreement, Arch agreed that, unless the Exchange Offer is not permitted by
applicable law or Commission policy, it would (i) file with the Commission a
Registration Statement under the Securities Act with respect to the Exchange
Notes within 30 days after the Closing Date, and (ii) use its best efforts to
cause such Registration Statement to become effective under the Securities Act
within 120 days after the Closing Date. A copy of the Exchange and
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement. The Registration Statement is intended to satisfy certain of Arch's
obligations under the Exchange and Registration Rights Agreement and the
Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, Arch believes that a Holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from Arch to resell pursuant to Rule
144A or any other available exemption under the Securities Act) or (ii) any
such Holder that is an "affiliate" of Arch within the meaning of Rule 405
under the Securities Act) who exchanges Private Notes for Exchange Notes in
the ordinary course of business and who is not participating, does not intend
to participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell Exchange Notes
to the public without further registration under the Securities Act and
without delivering to the purchasers of the Exchange Notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if
any holder acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in the distribution of the Exchange Notes or is
a broker-dealer, such holder cannot rely on the position of the staff of the
Commission enumerated in certain no-action letters issued to third parties and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where
such Private Notes were acquired by such broker-dealer as a result of market-
making or other trading activities. Pursuant to the Exchange and Registration
Rights Agreement, Arch has agreed to make this Prospectus, as it may be
amended or supplemented from time to time, available to broker-dealers for use
in connection with any resale for a period of one year after the Expiration
Date. See "Plan of Distribution".
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, Arch will accept any and all Private Notes
validly tendered and not withdrawn prior to the Expiration Date. Arch will
issue $1,000 principal amount of Exchange Notes in exchange for each $1,000
principal amount of outstanding Private Notes surrendered pursuant to the
Exchange Offer. Private Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the Exchange Notes will be registered
under the Securities Act and, therefore, the Exchange Notes will
27
<PAGE>
not bear legends restricting the transfer thereof and (ii) Holders of the
Exchange Notes will not be entitled to any of the rights of holders of the
Private Notes under the Exchange and Registration Rights Agreement. The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be issued under, and be entitled to the benefits of,
the Indenture, which also authorized the issuance of the Private Notes, such
that both series of Notes will be treated as a single class of debt securities
under the Indenture.
As of the date of this Prospectus, $130.0 million in aggregate principal
amount of the Private Notes are outstanding. Only a registered holder of the
Private Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Private Notes entitled to participate in the
Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. Arch intends to
conduct the Exchange Offer in accordance with the provisions of the Exchange
and Registration Rights Agreement and the applicable requirements of the
Securities Act, the Exchange Act of 1934, and the rules and regulations of the
Commission thereunder.
Arch shall be deemed to have accepted validly tendered Private Notes when,
as and if Arch has given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Private
Notes for the purposes of receiving the Exchange Notes from Arch.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. Arch will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "--Fees and Expenses".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
January , 1999, unless Arch, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, Arch will (i) notify the Exchange
Agent of any extension by oral or written notice, and (ii) mail to the
registered holders an announcement thereof which shall include disclosure of
the approximate number of Private Notes deposited to date, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
Arch reserves the right, in its reasonable discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such
delay, extension or termination to the Exchange Agent. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by Arch to constitute a
material change, Arch will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
Arch will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure
to the registered holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 12 3/4% per annum
from and including January 1, 1999. Interest on the Exchange Notes will be
payable semi-annually on each January 1 and July 1, commencing July 1, 1999.
Holders of Private Notes on the record date of December 15, 1998 will receive
interest on January
28
<PAGE>
1, 1999 from and including the date of initial issuance of the Private Notes
through and including December 31, 1998, plus an amount equal to the accrued
interest and accrued Liquidated Damages on the Private Notes. Holders of
Private Notes that are accepted for exchange will be deemed to have waived the
right to receive any interest accrued on the Private Notes after December 31,
1998.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "Exchange
Agent" for receipt prior to the Expiration Date. In addition, either (i)
certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at the Depositary
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
holder must comply with the guaranteed delivery procedures described below.
The tender by a Holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such Holder and Arch in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO ARCH. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner of the Private Notes whose Private Notes are registered
in the name of a broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender should contact the registered holder promptly
and instruct such registered holder to tender on such beneficial owner's
behalf. Holders who intend to tender Private Notes through DTC's ATOP
procedures need not submit a Letter of Transmittal. If such beneficial owner
wishes to tender on such owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal and delivering such owner's
Private Notes, either make appropriate arrangements to register ownership of
the Private Notes in such owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may
take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
29
<PAGE>
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by Arch,
evidence satisfactory to Arch of their authority to so act must be submitted
with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes. All
questions as to the validity, form, eligibility (including time of receipt),
acceptance and withdrawal of tendered Private Notes will be determined by Arch
in its sole discretion, which determination will be final and binding. Arch
reserves the absolute right to reject any and all Private Notes not properly
tendered or any Private Notes Arch's acceptance of which would, in the opinion
of counsel for Arch, be unlawful. Arch also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Private
Notes. Arch's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as
Arch shall determine. Although Arch intends to notify holders of defects or
irregularities with respect to tenders of Private Notes, neither Arch, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Private Notes will not be deemed to have
been made until such defects or irregularities have been cured or waived.
While Arch has no present plan to acquire any Private Notes that are not
tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, Arch reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "--Conditions", to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase
Private Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each Holder of Private Notes will represent to Arch that,
among other things, (i) Exchange Notes to be acquired by such Holder of
Private Notes in connection with the Exchange Offer are being acquired by such
Holder in the ordinary course of the respective business of such Holder, (ii)
such Holder has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes, (iii) such Holder acknowledges and
agrees that any person who is a broker-dealer registered under the Exchange
Act or is participating in the Exchange Offer for the purposes of distributing
the Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) such Holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such Holder in exchange for Private Notes acquired by such Holder directly
from Arch should be covered by an effective registration statement containing
the selling securityholder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission and (v) such Holder is not an
"affiliate", as defined in Rule 405, of Arch, that it is not a broker-dealer
that owns Private Notes acquired directly from the Issuer or an affiliate of
the Issuer, that it is acquiring the Exchange Notes in the ordinary course of
the undersigned's business and that the undersigned has no defined arrangement
with any person to participate in the distribution of the Exchange Notes. If
the Holder is a broker-dealer that will receive Exchange Notes for such
Holder's own account in exchange for Private Notes that were acquired as a
result of market-making activities or other trading activities, such Holder
will be required to acknowledge in the Letter of Transmittal that such Holder
will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, such
Holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
30
<PAGE>
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depositary pursuant to the book-entry transfer
procedures described below, such Private Notes will be credited to an account
maintained with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in
accordance with the Depositary's procedures for transfer. However, although
delivery of Private Notes may be effected through book-entry transfer at the
Depositary, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by Arch (by
facsimile transmission, mail or hand delivery) setting forth the name
and address of the holder, the certificate number(s) of such Private
Notes and the principal amount of Private Notes tendered, stating that
the tender is being made thereby and guaranteeing that, within five New
York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or a facsimile thereof), together with the
certificate(s) representing the Private Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and any
other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m. on the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having
31
<PAGE>
deposited the Private Notes to be withdrawn (the "Depositor"), (ii) identify
the Private Notes to be withdrawn (including the certificate number or numbers
and principal amount of such Private Notes) and (iii) be signed by the holder
in the same manner as the original signature on the Letter of Transmittal by
which such Private Notes were tendered (including any required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by Arch in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered.
Properly withdrawn Private Notes may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Arch shall not be
required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates
applicable law, rules or regulations or an applicable interpretation of the
staff of the Commission.
If Arch reasonably determines that such condition (that the Exchange Offer
not violate applicable law, rules, regulations or interpretation of the Staff)
is not satisfied, Arch may (i) refuse to accept any Private Notes and return
all tendered Private Notes to the tendering holders or (ii) extend the
Exchange Offer and retain all Private Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Private Notes (see "--Withdrawal of Tenders").
LIQUIDATED DAMAGES
Arch has filed with the SEC the Registration Statement of which this
Prospectus is a part, in order to register the Exchange Notes as required by
the Exchange and Registration Rights Agreement. If (i) Arch is not permitted
to consummate the Exchange Offer because the Exchange Offer is not permitted
by applicable law or SEC policy or (ii) any holder of Private Notes that
constitute Transfer Restricted Securities (as defined herein) notifies Arch
prior to the 20th day following consummation of the Exchange Offer that (a) it
is prohibited by law or SEC policy from participating in the Exchange Offer or
(b) that it may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and this Prospectus is not
appropriate or available for such resales or (c) that it is a broker-dealer
and owns Notes acquired directly from Arch or an affiliate of Arch, Arch will
file with the SEC a shelf registration statement (the "Shelf Registration
Statement") to cover resales of the Notes by the holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. Arch must use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the SEC. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until (i) the date on which a Private Note has
been exchanged by a person other than a broker-dealer for an Exchange Note in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of a Note for an Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or prior
to the date of such sale a copy of this Prospectus, (iii) the date on which
such Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iv) the
date on which such Note is distributed to the public pursuant to Rule 144
under the Act.
The Exchange and Registration Rights Agreement provides that (i) Arch must
have filed the Registration Statement with the SEC on or prior to July 29,
1998 (ii) Arch must have used its best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to
October 27, 1998, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, Arch will commence the Exchange Offer and
use its best efforts to issue, on or prior to 30 business days after the date
on which the Registration Statement was declared effective by the Commission,
Exchange Notes in exchange for all Private Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration
32
<PAGE>
Statement, Arch shall file the Shelf Registration Statement with the
Commission on or prior to 30 days after such filing obligation arises and use
its best efforts to cause the Shelf Registration to be declared effective by
the Commission on or prior to 90 days after such obligation arises. If
(a) Arch fails to file any registration statement required by the Exchange and
Registration Rights Agreement on or before the date specified for such filing,
(b) any such registration statement is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) Arch fails to consummate the Exchange Offer
within 30 business days of the Effectiveness Target Date or (d) any such
registration statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Exchange and Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above
a "Registration Default"), then Arch will pay Liquidated Damages to each
holder of Notes, with respect to the first 90-day period, or any portion
thereof, immediately following the occurrence of such a Registration Default,
in an amount equal to 25 basis points per annum of the principal amount of
Notes held by such holder. The amount of the Liquidated Damages will increase
by an additional 25 basis points per annum of the principal amount of Notes
with respect to each subsequent 90-day period, or any portion thereof, until
all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of 100 basis points per annum of the principal amount of
Notes. All accrued and unpaid Liquidated Damages will be paid by Arch on each
Interest Payment Date to the Global Note holder by wire transfer of
immediately available funds or by federal funds check and to holders of
Certificated Securities by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Pursuant to the foregoing provisions, Liquidated Damages totalling $ per
$1,000 of principal accrued on the Notes between October 27, 1998 and December
, 1998 due to the Registration Default caused by delays in the effectiveness
of the Registration Statement. Such amount will be paid in the same manner as
accrued interest on the Notes.
The summary herein of certain provisions of the Exchange and Registration
Rights Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Exchange
and Registration Rights Agreement, a copy of which is available upon request
to Arch.
TERMINATION OF CERTAIN RIGHTS
All rights under the Exchange and Registration Rights Agreement (including
registration rights) of holders of the Private Notes eligible to participate
in the Exchange Offer will terminate upon consummation of the Exchange Offer
except with respect to Arch's continuing obligations (i) to indemnify such
Holders (including any broker-dealers) and certain parties related to such
Holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any Holder of a
Transfer-Restricted Security, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Private Notes
pursuant to Rule 144A, (iii) use its best efforts to keep the Registration
Statement effective and to amend and supplement this Prospectus in order to
permit this Prospectus to be lawfully delivered by all persons subject to the
prospectus delivery requirements of the Securities Act for such period of time
as such persons must comply with such requirement in order to resell the
Exchange Notes and (iv) to provide copies of the latest version of the
Prospectus to broker-dealers upon their request for a period of not less than
180 days after the Expiration Date.
33
<PAGE>
EXCHANGE AGENT
U.S. Bank Trust National Association has been appointed as Exchange Agent of
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Registered or Certified By Facsimile:
Mail or (612) 244-5011
Overnight Delivery: Attn: Flora Gomez
U.S. Bank Trust National
Association
180 E. 5th Street Confirm by Telephone:
St. Paul, Minnesota 55101 (612) 244-8161
Attn: Specialized Finance
Department
Delivery of the Letter of Transmittal to an address other than as set forth
above or transmission of instructions via facsimile other than as set forth
above does not constitute a valid delivery of such Letter of Transmittal.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Arch. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, telephone or in person by officers and regular employees of
Arch and its affiliates.
Arch has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. Arch, however, will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Arch and are estimated in the aggregate to be approximately
$125,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
Arch will pay all transfer taxes, if any, applicable to the exchange of
Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant
to the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered Holder or any other persons) will be payable by the
tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such tendering
Holder.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to an entity which the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule 144A under
the Securities Act, (ii) in a transaction meeting the requirements of Rule 144
under the Securities Act, (iii) outside the United States to a foreign person
in a transaction meeting the requirements of Rule 904 under the Securities
Act, (iv) in accordance with another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel if
Arch so requests), (v) to Arch or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, Arch will recognize no gain or loss as a result of
the Exchange Offer. The expenses of the Exchange Offer will be amortized over
the term of the Exchange Notes.
34
<PAGE>
USE OF PROCEEDS
Arch will not receive any proceeds from the Exchange Offer. In consideration
for issuing the Exchange Notes as contemplated in this Prospectus, Arch will
receive in exchange Private Notes in like principal amount, the terms of which
are identical in all material respects to the Exchange Notes except that (i)
the Exchange Notes will have been registered under the Securities Act, (ii)
the Exchange Notes are not subject to transfer restrictions and (iii) the
provisions relating to Liquidated Damages (through an increase in the stated
interest rate on the Private Notes provided for under certain circumstances)
will be eliminated (although accrued Liquidated Damages between October 27,
1998 and December , 1998 will be paid on January 1, 1999 to persons who were
Holders of Private Notes on the record date of December 15, 1998). The Private
Notes surrendered in exchange for Exchange Notes will be retired and cancelled
and cannot be reissued. Accordingly, issuance of the Exchange Notes will not
result in a change in the outstanding indebtedness of Arch. See "The Exchange
Offer".
The net proceeds of the Private Note Offering (after deducting the discount
to the Initial Purchasers and Private Note Offering expenses paid by Arch)
were $122.6 million. Arch has used such net proceeds, together with borrowings
under the Credit Facility and the proceeds from the Equity Investment, to
repay a portion of the indebtedness under ACE's previous credit facility (the
"ACE Credit Facility") and all outstanding indebtedness under USAM's previous
credit facility (the "USAM Credit Facility"). Amounts not repaid under the ACE
Credit Facility became outstanding under the Credit Facility.
The ACE Credit Facility provided for borrowings of up to $450.0 million
consisting of (i) a $212.2 million reducing revolving credit facility (the
"ACE Revolver"), (ii) a $138.8 million term loan and (iii) a $99.0 million
term loan. The ACE Credit Facility bore interest at either (i) the alternative
base rate of The Bank of New York or (ii) such bank's reserve-adjusted London
Interbank Offered Rate ("LIBOR") rate, in each case plus a margin based on the
ratio of total debt to annualized EBITDA. For the year ended December 31,
1997, the average borrowing rate was 8.76%. The ACE Revolver and the $138.8
million term loan were scheduled to mature on December 31, 2002 and the $99.0
million term loan was scheduled to mature on December 31, 2003. The ACE Credit
Facility was amended and restated to create the Credit Facility upon
consummation of the Private Note Offering. As of September 30, 1998, $267.0
million of indebtedness was outstanding under the Credit Facility.
The USAM Credit Facility provided for borrowings of up to $110.0 million and
bore interest at either (i) the Bank's alternative base rate or (ii) the
Bank's reserve-adjusted LIBOR rate, in each case plus a margin based on the
ratio of total debt to annualized EBITDA. For the year ended December 31,
1997, the average borrowing rate was 8.55%. The USAM Credit Facility was
scheduled to mature on June 30, 2000 but was terminated upon the establishment
of the Credit Facility.
For additional information regarding the ACE Credit Facility and the USAM
Credit Facility, see Note 3 of Notes to Arch's Consolidated Financial
Statements. For a description of the Credit Facility, see "Description of
Certain Indebtedness--Credit Facility".
35
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Arch at September 30,
1998 reflecting, among other things, (a) the Private Note Offering and
application of the net proceeds therefrom, (b) the Subsidiary Restructuring,
(c) borrowings pursuant to the Credit Facility and (d) the Equity Investment
and application of the net proceeds therefrom. See "Prospectus Summary--Recent
Developments", "Use of Proceeds" and "Description of Notes". This table should
be read in conjunction with the other financial information appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Current maturities of long-term debt................... $ --
========
Long-term debt, less current maturities:
Credit Facility(1)(2)................................ $267,000(3)
12 3/4% Senior Notes due 2007........................ 127,534
9 1/2% Senior Notes due 2004(4) ..................... 125,000
14% Senior Notes due 2004(4) ........................ 100,000
--------
Total long-term debt............................... 619,534(3)
Stockholder's equity:
Common stock--$.01 par value,
authorized 1,000 shares, issued and
outstanding 849 shares.............................. --
Additional paid-in capital........................... 642,225
Accumulated deficit.................................. (444,661)
--------
197,564
--------
Total capitalization............................... $817,098
========
</TABLE>
- --------
(1) The Notes are structurally subordinated in right of payment to this
obligation. This obligation is secured by certain assets and pledges of
certain capital stock and benefits from certain guarantees. See
"Prospectus Summary--Corporate Structure".
(2) Does not reflect Arch's use of the net proceeds from the final closing of
the Tower Site Sale. Arch will use such net proceeds (estimated to be $4.0
million) to temporarily repay indebtedness under the Credit Facility until
such amounts are used to purchase assets for use in Arch's business.
(3) If the MobileMedia Transaction is consummated, Arch expects to increase
its total borrowings by approximately $350.0 to $355.0 million, consisting
of either (a) approximately $150.0 million under the Credit Facility and
approximately $200.0 million of Planned Arch Notes or (b) approximately
$235.0 million under the Credit Facility and approximately $120.0 million
under the Bridge Facility.
(4) The Notes rank pari passu in right of payment with this obligation.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Prior to the Subsidiary Restructuring, ACE and USAM were wholly owned
subsidiaries of Parent. The Subsidiary Restructuring has been accounted for
under the pooling of interests method. The following selected summary
financial and operating data reflects the consolidated results and operating
data of ACE and USAM as if Arch had been formed on September 1, 1992, the
earliest date presented herein. See "Prospectus Summary--Recent Developments--
Anticipated MobileMedia Transaction".
The following summary financial and operating data as of December 31, 1996
and 1997 and for each of the years in the three-year period ended December 31,
1997 has been derived from Arch's audited Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. The following summary
financial information and operating data as of and for the four months ended
December 31, 1993 and 1994 and the year ended December 31, 1994 and each of
the years in the two-year period ended August 31, 1994 has been derived from
Parent's consolidated financial statements which are not included in this
Prospectus. The following summary financial and operating data as of September
30, 1998 and for the nine-month periods ended September 30, 1997 and 1998 have
been derived from Arch's unaudited Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. For certain other predecessor
information, see footnote (8) to the following table. The following
consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Arch's Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOUR MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
AUGUST 31, (1) DECEMBER 31, (1) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------- ------------------ ---------------------------------------- --------------------
1993 1994 1993 1994 1994 (1) 1995 (1) 1996 1997 1997 1998
------- -------- -------- -------- -------- -------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Service, rental
and maintenance
revenues....... $39,610 $ 55,139 $ 16,457 $ 22,847 $61,529 $138,466 $ 291,399 $ 351,944 $ 261,570 $ 277,826
Product sales... 5,698 12,108 2,912 5,178 14,374 24,132 39,971 44,897 34,029 31,811
------- -------- -------- -------- ------- -------- --------- --------- --------- ---------
Total revenues.. 45,308 67,247 19,369 28,025 75,903 162,598 331,370 396,841 295,599 309,637
Cost of products
sold........... (4,031) (10,124) (2,027) (4,690) (12,787) (20,789) (27,469) (29,158) (22,044) (21,863)
------- -------- -------- -------- ------- -------- --------- --------- --------- ---------
41,277 57,123 17,342 23,335 63,116 141,809 303,901 367,683 273,555 287,774
Operating
expenses:
Service, rental
and
maintenance.... 9,532 13,123 3,959 5,231 14,395 29,673 64,957 79,836 59,227 60,812
Selling......... 7,307 10,243 3,058 4,338 11,523 24,502 46,962 51,474 39,019 36,902
General and
administrative.. 13,123 17,717 5,510 7,022 19,229 40,448 86,181 106,041 78,878 84,527
Depreciation and
amortization... 13,764 16,997 5,549 6,873 18,321 60,037 191,101 231,376 179,188 164,290
Restructuring
Charge......... -- -- -- -- -- -- -- -- -- 16,100
------- -------- -------- -------- ------- -------- --------- --------- --------- ---------
Operating income
(loss)......... (2,449) (957) (734) (129) (352) (12,851) (85,300) (101,044) (82,757) (74,857)
Interest and
non-operating
expenses, net.. (2,861) (4,112) (1,132) (1,993) (4,973) (20,397) (49,060) (62,884) (47,015) (50,344)
Equity in loss
of affiliate
(2)............ -- -- -- -- -- -- (1,968) (3,872) (2,828) (2,219)
------- -------- -------- -------- ------- -------- --------- --------- --------- ---------
Income (loss)
before income
tax benefit and
extraordinary
item........... (5,310) (5,069) (1,866) (2,122) (5,325) (33,248) (136,328) (167,800) (132,600) (127,420)
Income tax
benefit........ -- -- -- -- -- 4,600 51,207 21,172 15,900 --
------- -------- -------- -------- ------- -------- --------- --------- --------- ---------
Income (loss)
before
extraordinary
item........... (5,310) (5,069) (1,866) (2,122) (5,325) (28,648) (85,121) (146,628) (116,700) (127,420)
Extraordinary
item (3)....... (415) -- -- (1,137) (1,137) (1,684) (1,904) -- -- (1,720)
------- -------- -------- -------- ------- -------- --------- --------- --------- ---------
Net income
(loss)......... $(5,725) $ (5,069) $ (1,866) $ (3,259) $(6,462) $(30,332) $ (87,025) $(146,628) $(116,700) $(129,140)
======= ======== ======== ======== ======= ======== ========= ========= ========= =========
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
FOUR MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
AUGUST 31, (1) DECEMBER 31, (1) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------- ------------------ ----------------------------------------- --------------------
1993 1994 1993 1994 1994 (1) 1995 (1) 1996 1997 1997 1998
------- ------- -------- -------- -------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Adjusted EBITDA (4).... $11,315 $16,040 $4,815 $6,744 $17,969 $47,186 $105,801 $130,332 $96,431 $105,533
Adjusted EBITDA margin
(5)................... 27% 28% 28% 29% 28% 33% 35% 35% 35% 37%
Capital expenditures,
excluding
acquisitions.......... $20,853 $25,657 $7,486 $15,279 $33,450 $60,468 $155,575 $102,767 $74,672 $85,756
Cash flows provided by
operating activities.. 8,721 14,781 5,306 4,680 14,155 16,874 40,476 64,606 45,135 91,819
Cash flows used in
investing activities.. (30,998) (28,982) (7,486) (34,364) (55,860) (192,549) (480,995) (102,767) (74,672) (85,785)
Cash flows provided by
financing activities.. 11,268 14,636 11,290 26,108 29,454 176,966 438,163 38,777 31,430 (3,387)
Pagers in service at
end of period......... 254,000 410,000 288,000 538,000 538,000 2,006,000 3,295,000 3,890,000 3,781,000 4,211,000
Ratio of earnings to
fixed
charges (6)(7)........ -- -- -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF
AUGUST 31, (1) AS OF DECEMBER 31,
--------------- ----------------------------------- AS OF
1993 1994 1994 1995 1996 1997 SEPTEMBER 30, 1998
------- ------- ------- ------- --------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets......... $4,690 $6,751 $8,483 $33,655 $41,385 $49,584 $53,778
Total assets........... 62,209 76,255 117,858 784,019 1,134,328 1,010,046 931,796
Long-term debt, less
current maturities.... 49,748 67,328 93,420 429,559 605,513 623,000 619,534
Stockholder's equity... 1,563 (3,304) 9,368 276,543 451,847 302,042 197,564
</TABLE>
- ---------------------
(1) Old Parent was incorporated in January 1986 in Delaware and conducted its
operations through wholly owned direct and indirect subsidiaries. On
September 7, 1995, Old Parent completed the USA Mobile Merger. In
accordance with GAAP, Old Parent was treated as the acquirer in the USA
Mobile Merger for accounting and financial reporting purposes, and Parent
reports the historical financial statements of Old Parent as the
historical financial statements of Parent. Effective January 1, 1995,
Parent changed its fiscal year end from August 31 to December 31.
(2) Represents Arch's share of Benbow's losses since Arch's acquisition of
Westlink Holdings, Inc. in May 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources --Acquisitions".
(3) Reflects extraordinary charge resulting from prepayment of indebtedness.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations".
(4) EBITDA, as determined by Arch, does not reflect restructuring charge,
equity in loss of affiliate, income tax benefit, interest and non-
operating expenses, net and extraordinary items; consequently EBITDA may
not necessarily be comparable to similarly titled data of other paging
companies. EBITDA is commonly used by analysts and investors as a
principal measure of financial performance in the paging industry. EBITDA
is also one of the primary financial measures used to calculate whether
Arch and its subsidiaries are in compliance with covenants under their
respective indebtedness which covenants, among other things, limit the
ability of Arch and its subsidiaries to: incur additional indebtedness,
advance funds to Benbow, pay dividends, grant liens on its assets, merge,
sell or acquire assets, repurchase or redeem capital stock, incur capital
expenditures and prepay certain indebtedness. EBITDA is also one of the
financial measures used by analysts to value the Company. 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, among other things, restrictions imposed by the terms
of existing indebtedness or limitations imposed by applicable law upon the
payment of dividends or distributions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
38
<PAGE>
The following table reconciles net income to the presentation of Adjusted
EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------
1994 1995 1996 1997 1997 1998
------- -------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)...... $(6,462) $(30,332) $(87,025) $(146,628) $(116,700) $(129,140)
Interest and non-
operating............. 4,973 20,397 49,060 62,884 47,015 50,344
Income tax benefit..... -- (4,600) (51,207) (21,172) (15,900) --
Depreciation and
amortization.......... 18,321 60,037 191,101 231,376 179,188 164,290
Restructuring charge... -- -- -- -- -- 16,100
Equity in loss of
affiliate............. -- -- 1,968 3,872 2,828 2,219
Extraordinary Item..... 1,137 1,684 1,904 -- -- 1,720
------- -------- -------- --------- --------- ---------
Adjusted EBITDA....... $17,969 $ 47,186 $105,801 $130,332 $96,431 $105,533
======= ======== ======== ========= ========= =========
</TABLE>
(5) Calculated by dividing 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 net revenues as an
indicator of the efficiency of a company's operations.
(6) For the purpose of this calculation, "earnings" consist of net income
(loss) before income taxes, restructuring charges and fixed charges.
"Fixed charges" consist of interest expense and amortization of debt
discount and related expenses believed by management to be representative
of the interest factor thereon.
(7) Earnings were insufficient to cover fixed charges for the years ended
August 31, 1993 and 1994, the four months ended December 31, 1993 and
1994, the years ended December 31, 1994, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998 by $5.7 million, $5.1 million,
$1.9 million, $3.3 million, $6.5 million, $34.9 million, $138.2 million,
$167.8 million, $132.6 million and $129.1 million, respectively.
(8) As described in footnote (1), summary Statement of Operations Data in the
foregoing table reports the historical financial information of Old Parent
as the historical financial information of Arch. Set forth below is
summary Statement of Operations Data for USAM prior to the USA Mobile
Merger. In connection with the USA Mobile Merger, Parent applied purchase
accounting adjustments to the historical USAM data which primarily
resulted in higher values being assigned to intangible assets and related
increases in amortization expense. As a result, the following information
is not comparable to the financial statements of USAM subsequent to the
USA Mobile Merger:
39
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------ JANUARY 1, 1995 TO
1993 1994 SEPTEMBER 7, 1995
----------- ----------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service, rental and
maintenance revenues........ $ 42,249 $ 52,688 $ 72,185
Product sales................ 5,770 8,482 9,996
----------- ----------- --------
Total revenues............... 48,019 61,170 82,181
Cost of products sold........ (3,289) (5,663) (6,726)
----------- ----------- --------
44,730 55,507 75,455
Operating expenses:
Service, rental and
maintenance................. 7,306 9,895 13,875
Selling...................... 7,596 7,996 11,916
General and administrative... 11,323 13,710 19,267
Depreciation and
amortization................ 12,805 17,491 29,239
----------- ----------- --------
Operating income (loss)...... 5,700 6,415 1,158
Interest and non-operating
expenses, net............... (8,565) (16,260) (26,366)
----------- ----------- --------
Income (loss) before income
tax benefit and
extraordinary item.......... (2,865) (9,845) (25,208)
Income tax benefit........... -- -- 2,675
----------- ----------- --------
Net income (loss)............ $ (2,865) $ (9,845) $(22,533)
=========== =========== ========
OTHER OPERATING DATA:
Adjusted EBITDA.............. $ 18,505 $ 23,906 $ 30,397
EBITDA margin................ 41% 43% 40%
Capital expenditures,
excluding acquisitions...... $ 16,126 $ 33,887 $ 36,856
Pagers in service at end of
period...................... 354,000 720,000 959,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1993 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.................................... $ 7,411 $ 52,918
Total assets...................................... 51,453 272,245
Long-term debt, less current maturities........... 1,826 228,305
Stockholders' equity (deficit).................... (84,801) (4,051)
</TABLE>
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
Arch's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
Arch is a leading provider of wireless messaging services, primarily paging
services, and is the third largest paging company in the United States (based
on pagers in service). Arch had 4.2 million pagers in service at September 30,
1998. From January 1, 1995 through September 30, 1998, Arch's total number of
subscribers grew at a compound rate on an annualized basis of 73.1%. For the
same period on an annualized basis, Arch's compound rate of internal
subscriber growth (excluding pagers added through acquisitions) was 52.8%.
Arch derives the majority of its revenues from fixed periodic (usually
monthly) fees, not dependent on usage, charged to subscribers for paging
services. As long as a subscriber remains on service, operating results
benefit from the recurring payments of the fixed periodic fees without
incurrence of additional selling expenses by Arch. Arch's service, rental and
maintenance revenues and the related expenses exhibit substantially similar
growth trends. Arch's average revenue per subscriber has declined over the
last three years for two principal reasons: (i) an increase in the number of
subscriber owned and reseller owned pagers for which Arch receives no
recurring equipment revenue and (ii) an increase in the number of reseller
customers whose airtime is purchased at wholesale rates. The reduction in
average paging revenue per subscriber resulting from these trends has been
more than offset by the elimination of associated expenses so that Arch's
margins have improved over such period. Furthermore, recent data indicates
such rate of decline has slowed.
Arch has achieved significant growth in pagers in service and EBITDA through
a combination of internal growth and acquisitions, including USA Mobile in
September 1995 and Westlink Holdings, Inc. ("Westlink") in May 1996. Arch's
total revenues have increased from $162.6 million in the year ended December
31, 1995 to $331.4 million in the year ended December 31, 1996 and to $396.8
million in the year ended December 31, 1997. Over the same periods, through
operating efficiencies and economies of scale, Arch has been able to reduce
its per pager operating costs to enhance its competitive position in its
markets. Due to the rapid growth in its subscriber base, Arch has incurred
significant selling expenses, which are charged to operations in the period
incurred. Arch had net losses of $30.3 million, $87.0 million and $146.6
million in the years ended December 31, 1995, 1996 and 1997, respectively, as
a result of significant depreciation and amortization expenses related to
acquired and developed assets and interest charges associated with
indebtedness. However, as its subscriber base has grown, Arch's operating
results have improved, as evidenced by an increase in its Adjusted EBITDA from
$47.2 million in the year ended December 31, 1995 to $105.8 million in the
year ended December 31, 1996 and to $130.3 million in the year ended December
31, 1997.
EBITDA is a commonly used measure of financial performance in the paging
industry and also is one of the financial measures used to calculate whether
Arch and its subsidiaries are in compliance with the covenants under their
respective debt agreements, but 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 EBITDA, as such earnings are a significant source of funds for
servicing indebtedness and for investment in continued growth, including
purchase of pagers and paging system equipment, construction and expansion of
paging systems, and possible acquisitions. EBITDA, as determined by Arch, may
not necessarily be comparable to similarly titled data of other paging
companies. Amounts reflected as EBITDA are not necessarily available for
discretionary use as a result of restrictions imposed by the terms of existing
or future indebtedness (including the repayment of such indebtedness or the
payment of interest thereon), limitations imposed by applicable law upon the
payment of dividends or distributions or capital expenditure requirements.
SHIFT IN OPERATING FOCUS
In April 1997, Parent reordered its operating priorities to improve capital
efficiency and strengthen its balance sheet by placing a higher priority on
leverage reduction than subscriber unit growth. As part of its
41
<PAGE>
reordered operating priorities, Parent has implemented various initiatives to
reduce capital costs while endeavouring to sustain acceptable levels of unit
and revenue growth. As a result, Arch's rate of internal growth in pagers in
service slowed during the second half of 1997 and is expected to remain below
the rates of internal growth previously achieved by Arch. Parent is also
reviewing the possible sale of non-strategic assets. In April 1998, Parent
announced an agreement to sell certain of Arch's tower site assets in the
Tower Site Sale for approximately $38.0 million in cash (subject to
adjustment). 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 is
using its net proceeds from the Tower Site Sale (estimated to be $36.0
million) to repay indebtedness. Arch held the initial closing of the Tower
Site Sale on June 26, 1998 with gross proceeds to Arch of approximately $12.0
million (excluding $1.3 million which was paid to entities affiliated with
Benbow for certain assets owned by such entities and sold as part of the
initial closing), held a second closing on September 29, 1998 with gross
proceeds to Arch of $20.4 million and currently expects to hold the final
closing for the balance of the transaction in the fourth quarter of 1998,
although no assurance can be given that the final closing will be held as
expected. The closing of the Tower Site Sale is subject to receipt of
customary regulatory approvals and other conditions. See "Business--
Investments in Narrowband PCS Licenses".
DIVISIONAL REORGANIZATION
In June 1998, Parent's Board of Directors approved the Divisional
Reorganization. As part of the Divisional Reorganization, which is being
implemented over a period of 18 to 24 months, Parent has consolidated its
former Midwest, Western and Northern divisions into four existing operating
divisions and is in the process consolidating certain regional administrative
support functions, such as customer service, collections, inventory and
billing to reduce redundancy and take advantage of various operating
efficiencies.
Arch estimates that the Divisional Reorganization, once fully implemented,
will result in annual cost savings of approximately $15.0 million. These cost
savings will consist primarily of a reduction in compensation expense of
approximately $11.5 million 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; however, to date the extent of this reinvestment and therefore the
cost has not yet been determined.
In connection with the Divisional Reorganization, Parent (i) anticipates a
net reduction of approximately 10% of its workforce, (ii) plans to close
certain office locations and redeploy other real estate assets and (iii)
recorded a restructuring charge of $16.1 million during the second quarter of
1998. The restructuring charge consisted of approximately (i) $9.7 million for
employee severance, (ii) $3.5 million for lease obligations and terminations
(iii) $1.4 million for the writedown of fixed assets and (iv) $1.5 million of
other costs. The severance costs and lease obligations will require cash
outlays throughout the 18 to 24 month restructuring period. Management
anticipates the cash requirements for these items to be relatively consistent
from quarter to quarter throughout the Divisional Reorganization period. These
cash outlays will be funded from operations or the Credit Facility. There can
be no assurance that the desired cost savings will be achieved or that the
anticipated reorganization of Arch's business will be accomplished smoothly,
expeditiously or successfully. The difficulties of such reorganization may be
increased by the need to integrate MobileMedia's operations in multiple
locations and to combine two corporate cultures. The inability to successfully
integrate the operations of MobileMedia could have a material adverse effect
on Arch following the MobileMedia Transaction. See Note 9 to Arch's
Consolidated Financial Statements.
The Subsidiary Restructuring is described under "Business--General".
42
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain items from Arch's Consolidated
Statements of Operations as a percentage of net revenues (total revenues less
cost of products sold) and certain other information for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -------------------
1995 1996 1997 1997 1998
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues.......... 114.7 % 109.0 % 107.9 % 108.1 % 107.6 %
Cost of products sold... (14.7) (9.0) (7.9) (8.1) (7.6)
--------- --------- --------- -------- --------
Net revenues............ 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Service, rental and
maintenance.......... 20.9 21.4 21.7 21.6 21.1
Selling............... 17.3 15.4 14.0 14.3 12.8
General and
administrative....... 28.5 28.4 28.9 28.8 29.4
Depreciation and
amortization......... 42.4 62.9 62.9 65.5 57.1
Restructuring charge.. -- -- -- 0 5.6
--------- --------- --------- -------- --------
Operating income
(loss)................. (9.1)% (28.1)% (27.5)% (30.2)% (26.0)%
========= ========= ========= ======== ========
Net income (loss)....... (21.4)% (28.6)% (39.9)% (42.7)% (44.9)%
========= ========= ========= ======== ========
Adjusted EBITDA......... 33.3 % 34.8 % 35.4 % 35.3 % 36.7 %
========= ========= ========= ======== ========
Cash flows provided by
operating activities... $ 16,874 $ 40,476 $ 64,606 $ 45,135 $ 91,819
Cash flows used in
investing activities... $(192,549) $(480,995) $(102,767) $(74,672) $(85,785)
Cash flows provided by
(used in) financing
activities............. $ 176,966 $ 438,163 $ 38,777 $ 31,430 $ (3,387)
Annual service, rental
and maintenance
expenses per pager..... $ 28 $ 25 $ 22 $ 22 $ 20
</TABLE>
Nine Months Ended September 30, 1998 Compared with Nine Months Ended
September 30, 1997
Total revenues increased $14.0 million, or 4.7%, to $309.6 million in the
nine months ended September 30, 1998 from $295.6 million in the nine months
ended September 30, 1997, and net revenues (total revenues less cost of
products sold) increased $14.2 million, or 5.2%, from $273.6 million to $287.8
million over the same period. Service, rental and maintenance revenues, which
consist primarily of recurring revenues associated with the sale or lease of
pagers, increased $16.3 million, or 6.2%, to $277.8 million in the nine months
ended September 30, 1998 from $261.6 million in the nine months ended
September 30, 1997. These increases in revenues were due primarily to an
increase through internal growth in the number of pagers in service from 3.8
million at September 30, 1997 to 4.2 million at September 30, 1998.
Maintenance revenues represented less than 10% of total service, rental and
maintenance revenues in the nine months ended September 30, 1998 and 1997.
Arch does not differentiate between service and rental revenues. Product
sales, less cost of products sold, decreased 17.0% to $9.9 million in the nine
months ended September 30, 1998 from $12.0 million in the nine months ended
September 30, 1997 as a result of a decline in the average revenue per pager
sold.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $60.8 million (21.1% of
net revenues) in the nine months ended September 30, 1998 from $59.2 million
(21.6% of net revenues) in the nine months ended September 30, 1997. The
increase was due primarily to increased expenses associated with system
expansions and the provision of paging services to a greater number of
subscribers. As existing paging systems become more populated through the
addition of new subscribers, the fixed costs of operating these paging systems
are spread over a greater subscriber base. Annualized service, rental and
maintenance expenses per subscriber decreased to $20.00 in the nine months
ended September 30, 1998 from $22.00 in the nine months ended September 30,
1997.
43
<PAGE>
Selling expenses decreased to $36.9 million (12.8% of net revenues) in the
nine months ended September 30, 1998 from $39.0 million (14.3% of net
revenues) in the nine months ended September 30, 1997. The decrease was due
primarily to a decrease in the number of net new subscriber additions and
nonrecurring marketing costs incurred in 1997 to promote Arch's new Arch
Paging brand identity. The number of net new pagers in service resulting from
internal growth decreased by 34.0% in the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997. Most selling expenses
are directly related to the number of net new subscribers added.
General and administrative expenses increased to $84.5 million (29.4% of net
revenues) in the nine months ended September 30, 1998 from $78.9 million
(28.8% of net revenues) in the nine months ended September 30, 1997. The
increase was due primarily to administrative and facility costs associated
with supporting more pagers in service.
Depreciation and amortization expenses decreased to $164.3 million in the
nine months ended September 30, 1998 from $179.2 million in the nine months
ended September 30, 1997. These expenses 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 $74.9 million in the nine months ended September
30, 1998 from $82.8 million in the nine months ended September 30, 1997 as a
result of the factors outlined above.
Net interest expense increased to $50.3 million in the nine months ended
September 30, 1998 from $47.0 million in the nine months ended September 30,
1997. The increase was attributable to an increase in Arch's average
outstanding debt.
Arch recognized an income tax benefit of $15.9 million in the nine months
ended September 30, 1997 representing the tax benefit of operating losses
incurred subsequent to the acquisitions of USA Mobile and Westlink which were
available to offset deferred tax liabilities arising from Arch's acquisition
of USA Mobile in September 1995 and Westlink in May 1996. The tax benefit of
these operating losses was fully recognized during 1997. Accordingly, Arch has
established a valuation reserve against its deferred tax asset which reduced
the income tax benefit to zero. Arch does not expect to recover, in the
foreseeable future, its deferred tax asset and will continue to increase its
valuation reserve accordingly.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $129.1 million in the nine months ended September 30,
1998 from $116.7 million in the nine months ended September 30, 1997 as a
result of the factors outlined above.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues increased $65.5 million, or 19.8%, to $396.8 million in the
year ended December 31, 1997 from $331.4 million in the year ended December
31, 1996 and net revenues increased $63.8 million, or 21.0%, from $303.9
million to $367.7 million over the same period. Service, rental and
maintenance revenues increased $60.5 million, or 20.8%, to $351.9 million in
the year ended December 31, 1997 from $291.4 million in the year ended
December 31, 1996. These increases in revenues were due primarily to the
increase in the number of pagers in service from 3.3 million at December 31,
1996 to 3.9 million at December 31, 1997 and the full year impact of the
Westlink acquisition which was completed in May 1996. Maintenance revenues
represented less than 10% of total service, rental and maintenance revenues in
the years ended December 31, 1996 and 1997. Product sales, less cost of
products sold, increased 25.9% to $15.7 million in the year ended December 31,
1997 from $12.5 million in the year ended December 31, 1996 as a result of a
greater number of pager unit sales.
44
<PAGE>
Service, rental and maintenance expenses increased to $79.8 million (21.7%
of net revenues) in the year ended December 31, 1997 from $65.0 million (21.4%
of net revenues) in the year ended December 31, 1996. The increase was due
primarily to increased expenses associated with system expansions and the
provision of paging services to a greater number of subscribers. Annual
service, rental and maintenance expenses per subscriber decreased to $22.00 in
the year ended December 31, 1997 from $25.00 in the year ended December 31,
1996.
Selling expenses increased to $51.5 million (14.0% of net revenues) in the
year ended December 31, 1997 from $47.0 million (15.4% of net revenues) in the
year ended December 31, 1996. The increase in selling expenses was due to the
full year impact of the Westlink acquisition and the marketing costs incurred
to promote Arch's Arch Paging brand identity. Arch's selling cost per net new
pager in service increased to $87.00 in the year ended December 31, 1997 from
$58.00 in the year ended December 31, 1996, primarily due to fixed selling
costs and increased marketing costs being spread over fewer net new pagers put
into service.
General and administrative expenses increased to $106.0 million (28.9% of
net revenues) in the year ended December 31, 1997 from $86.2 million (28.4% of
net revenues) in the year ended December 31, 1996. The increase in absolute
dollars was due primarily to increased expenses associated with supporting
more pagers in service, including the full year impact of Westlink, as well as
expenses associated with the establishment of Arch's National Services
Division. See "Business--Subscribers and Marketing".
Depreciation and amortization expenses increased to $231.4 million (62.9% of
net revenues) in the year ended December 31, 1997 from $191.1 million (62.9%
of net revenues) in the year ended December 31, 1996. These expenses reflect
Arch's acquisitions of paging businesses, accounted for as purchases, and
continued investment in pagers and other system expansion equipment to support
continued growth.
Operating loss increased to $101.0 million in the year ended December 31,
1997 from $85.3 million in the year ended December 31, 1996 as a result of the
factors outlined above.
Net interest expense increased to $62.9 million in the year ended December
31, 1997 from $49.1 million in the year ended December 31, 1996. The increase
was attributable to an increase in Arch's average outstanding debt. See Note 3
to Arch's Consolidated Financial Statements.
During the years ended December 31, 1997 and 1996, Arch recognized income
tax benefits of $21.2 million and $51.2 million, respectively, representing
the tax benefit of operating losses subsequent to the acquisitions of USA
Mobile in September 1995 and Westlink in May 1996 which were available to
offset deferred tax liabilities arising from Arch's acquisitions of USA Mobile
and Westlink.
During 1996, Arch recognized an extraordinary charge of $1.9 million,
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under a prior credit facility.
Net loss increased to $146.6 million in the year ended December 31, 1997
from $87.0 million in the year ended December 31, 1996 as a result of the
factors outlined above. Included in the net loss for the years ended December
31, 1997 and 1996 were charges of $3.9 million and $2.0 million, respectively,
representing Arch's pro rata share of Benbow's losses since the Westlink
acquisition in May 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Total revenues increased $168.8 million, or 103.8%, to $331.4 million in the
year ended December 31, 1996 from $162.6 million in the year ended December
31, 1995 and net revenues increased $162.1 million, or 114.3%, from $141.8
million to $303.9 million over the same period. Service, rental and
maintenance revenues increased $152.9 million, or 110.4%, to $291.4 million in
the year ended December 31, 1996 from $138.5 million in the year ended
December 31, 1995. These increases in revenues were due primarily to the
increase in the number of pagers in service from 2.0 million at December 31,
1995 to 3.3 million at December 31, 1996. Acquisitions of paging companies
added 0.5 million pagers in service during 1996, with the remaining 0.8
million pagers added
45
<PAGE>
through internal growth. Maintenance revenues represented less than 10% of
total service, rental and maintenance revenues in the years ended December 31,
1995 and 1996. Product sales, less cost of products sold, increased 274.0% to
$12.5 million in the year ended December 31, 1996 from $3.3 million in the
year ended December 31, 1995 as a result of a greater number of pager unit
sales.
Service, rental and maintenance expenses increased to $65.0 million (21.4%
of net revenues) in the year ended December 31, 1996 from $29.7 million (20.9%
of net revenues) in the year ended December 31, 1995. The increase was due
primarily to increased expenses associated with system expansions and the
provision of paging services to a greater number of subscribers. Annual
service, rental and maintenance expenses per subscriber decreased to $25 in
the year ended December 31, 1996 from $28 in the year ended December 31, 1995.
Selling expenses increased to $47.0 million (15.4% of net revenues) in the
year ended December 31, 1996 from $24.5 million (17.3% of net revenues) in the
year ended December 31, 1995. The increase in selling expenses was due to the
addition of sales personnel to support continued growth in the subscriber
base, as the number of net new pagers in service resulting from internal
growth increased by 122.7% from the year ended December 31, 1995 to the year
ended December 31, 1996. Arch's selling cost per net new pager in service
decreased to $58.00 in the year ended December 31, 1996 from $67.00 in the
year ended December 31, 1995, primarily due to increased sales through
indirect distribution channels.
General and administrative expenses increased to $86.2 million (28.4% of net
revenues) in the year ended December 31, 1996 from $40.4 million (28.5% of net
revenues) in the year ended December 31, 1995. The increase was due primarily
to increased expenses associated with supporting more pagers in service.
Depreciation and amortization expenses increased to $191.1 million (62.9% of
net revenues) in the year ended December 31, 1996 from $60.0 million (42.4% of
net revenues) in the year ended December 31, 1995. These expenses reflect
Arch's acquisitions of paging businesses, accounted for as purchases, and
continued investment in pagers and other system expansion equipment to support
continued growth.
Operating loss increased to $85.3 million in the year ended December 31,
1996 from $12.9 million in the year ended December 31, 1995 as a result of the
factors outlined above.
Net interest expense increased to $49.1 million in the year ended December
31, 1996 from $20.4 million in the year ended December 31, 1995. The increase
was attributable to an increase in Arch's average outstanding debt.
During the years ended December 31, 1996 and 1995, Arch recognized income
tax benefits of $51.2 million and $4.6 million, respectively, representing the
tax benefit of operating losses subsequent to the acquisitions of USA Mobile
and Westlink which were available to offset deferred tax liabilities arising
from Arch's acquisitions of USA Mobile and Westlink.
During 1996 and 1995, Arch recognized an extraordinary charge of $1.9
million and $1.7 million, respectively, representing the write-off of
unamortized deferred financing costs associated with the prepayment of
indebtedness under separate prior credit facilities.
Net loss increased to $87.0 million in the year ended December 31, 1996 from
$30.3 million in the year ended December 31, 1995 as a result of the factors
outlined above. Included in the net loss for the year ended December 31, 1996
was a charge of $2.0 million representing Arch's pro rata share of Benbow's
losses since the Westlink acquisition in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
pagers and paging system equipment, to service debt and to finance
acquisitions.
46
<PAGE>
Capital Expenditures and Commitments
Excluding acquisitions of paging businesses, Arch's capital expenditures
were $60.5 million in the year ended December 31, 1995, $155.6 million in the
year ended December 31, 1996, $102.8 million in the year ended December 31,
1997 and $85.8 million in the nine months ended September 30, 1998. To date,
Arch has funded its capital expenditures with net cash provided by operating
activities, the incurrence of debt and advances from Parent.
Arch currently anticipates capital expenditures (excluding deferred
financing costs) of approximately $85.0 million to $90.0 million for the year
ending December 31, 1998, primarily for the purchase of pagers, paging system
equipment and transmission equipment, as well as expenditures for information
systems and advances to Benbow (as described below). Such amounts are subject
to change based on Arch's internal growth rate and acquisition activity, if
any, during 1998. Included in Arch's anticipated capital expenditures for 1998
is funding to upgrade hardware and to internally develop software for a
centralized billing and management information system which is expected to
offer the back office capability to support significant future growth. See
"Risk Factors--Impact of the Year 2000 Issue". Arch believes that it will have
sufficient cash available from operations and credit facilities to fund these
expenditures.
Parent is obligated, to the extent such funds are not available to Benbow
from other sources and subject to the approval of Arch's designee on Benbow's
Board of Directors, to advance to Benbow sufficient funds to service its FCC
license-related debt obligations incurred by Benbow in connection with its
acquisition of its N-PCS licenses and to finance construction of an N-PCS
system. Arch estimates that the total cost to Benbow of servicing its debt
obligations and constructing an N-PCS system (including the effect of Benbow's
acquisition of Page Call, Inc. ("Page Call")) will be approximately $100.0
million over the next five years. Arch currently anticipates that
approximately $40.0 million (approximately $10.0 million in each of the next
four years) of such amount will be funded by Arch and the balance will be
funded through vendor financing and other sources. Arch is also funding
ongoing obligations in connection with Benbow's recent acquisition of Page
Call. See "Business--Investments in Narrowband PCS Licenses".
The amount of capital required by Parent if the MobileMedia Transaction is
consummated will depend upon a number of factors, including 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 Parent's N-PCS strategy,
acquisition strategies and opportunities.
Other Commitments and Contingencies
Commencing January 1, 1999, interest payments on the Notes equal to $8.3
million will be payable semi-annually in arrears on January 1 and July 1 of
each year until scheduled maturity on July 1, 2007. Arch expects to service
the interest payments on the Notes out of cash made available to it by its
subsidiaries. The ability of Arch to make payments of principal and interest
on the Notes will be dependent upon Arch's subsidiaries achieving and
sustaining levels of performance in the future that would permit such
subsidiaries to pay dividends, distributions or fees to Arch which are
sufficient to permit such payments on the Notes. Many factors, some of which
will be beyond Arch's control, such as prevailing economic conditions, will
affect the performance of Arch's subsidiaries. There can be no assurance that
Arch's subsidiaries will be able to generate sufficient cash flow to cover
required interest and principal payments on their current and future
indebtedness or the Notes. If Arch is unable to meet interest and principal
payments in the future, it may, depending upon the circumstances which then
exist, seek additional equity or debt financing, attempt to refinance its
existing indebtedness or sell all or part of its business or assets to raise
funds to repay its indebtedness. There can be no assurance that sufficient
equity or debt financing will be available or, if available, that it will be
on terms acceptable to Arch, that Arch will be able to refinance its existing
indebtedness or that sufficient funds could be raised through asset sales. See
"Risk Factors--Debt Service; Limitations on Access to Cash Flow of Operating
Subsidiaries".
Interest payments on the $467.4 million principal amount at maturity of
Parent Discount Notes commence September 15, 2001. Parent expects to service
such interest payments out of cash made available to it by Arch
47
<PAGE>
and Arch's subsidiaries. Based on the principal amount of Parent Discount
Notes presently outstanding, such interest payments will equal $25.4 million
on March 15 and September 15 of each year until scheduled maturity on March
15, 2008. Limitations contained in the Credit Facility, the Indenture and the
indentures under which the 9 1/2% Notes and the 14% Notes are outstanding
would not currently permit Arch and its subsidiaries to make sufficient
payments to Parent to enable Parent to pay interest on the Parent Discount
Notes. Arch may need to modify the Credit Facility, amend the indentures under
which the USAM Notes are outstanding or redeem the USAM Notes in order to make
payments to enable Parent to pay interest on the Parent Discount Notes. No
assurance can be given that, if necessary, Arch would be able to modify the
Credit Facility, amend such indentures or redeem the USAM Notes. A default by
Parent in its payment obligations under the Parent Discount Notes could have a
material adverse effect on the business, financial condition, results of
operations or prospects of Parent or Arch or Arch's ability to make payments
with respect to the Notes when due. See "Risk Factors--Holding Company
Structure and Structural Subordination of the Notes".
If the MobileMedia Transaction is consummated, Parent will be obligated to
pay $479.0 million to creditors of MobileMedia, pay approximately $85.0
million of administrative, transactional and related costs, raise $217.0
million through a rights offering of its stock, cause Arch and API to borrow
an estimated total of $350.0 to $355.0 million, and issue certain stock,
warrants and stock purchase rights.
If MobileMedia terminates the MobileMedia Transaction as the result of
Parent being in material breach of its representations, warranties and
covenants, the failure of Parent's Board of Directors to recommend the
MobileMedia Transaction for stockholder approval or the failure of the
MobileMedia Transaction to be approved by Parent's stockholders, or if MMC
Parent or MobileMedia terminates the MobileMedia Transaction as a result of
Parent's failure to obtain the financing necessary to effect the MobileMedia
Transaction (when all other conditions to Parent's obligations to close have
been satisfied), and at the time of such termination MobileMedia is not in
material breach of any material covenant or obligation required to be
performed by MobileMedia thereunder at or before such time and is not in
breach of its representations and warranties (except where the matters in
respect of which such representations and warranties are in breach would not
in the aggregate have a material adverse effect on MobileMedia), then Parent
will be required to pay to MobileMedia as promptly as practicable after demand
therefor (but in no event later than the third business day thereafter) the
$32.5 million MobileMedia Breakup Fee. Parent would also be solely responsible
for its own fees and expenses in connection with the MobileMedia Transaction,
which are estimated at between $15.0 million and $30.0 million (depending on
the date of termination). If the MobileMedia Transaction is terminated for
reasons that do not require payment of a MobileMedia Breakup Fee by Parent,
Parent would be responsible for its own fees and expenses, subject in certain
specified circumstances to payment by MobileMedia of a breakup fee to Parent
in the amount of $25.0 million.
Credit Facility
On June 29, 1998, the Credit Facility was amended and restated to establish
a $400.0 million 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 which was available in a single drawing on
June 29, 1998 (the "Tranche C Facility").
The Tranche A Facility will be subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term
loan portion of the Tranche B Facility will be amortized in quarterly
installments commencing September 30, 2000, with an ultimate maturity date of
June 30, 2005. The Tranche C Facility will be amortized in annual installments
commencing December 31, 1999, with an ultimate maturity date of June 30, 2006.
See "Description of Certain Indebtedness--Credit Facility".
On November 16, 1998, all API lenders approved an increase to the Credit
Facility which will result in up to a $25.0 million increase in the Tranche A
Facility, up to a $25.0 million increase in the Tranche B Facility and
48
<PAGE>
up to a $200.0 million increase in the Tranche C Facility, for a total
increase of up to $250.0 million. See "Description of Certain Indebtedness--
Credit Facility" and "Risk Factors--Credit Facility and Indenture
Restrictions".
Planned Arch Notes
Arch intends to seek to issue approximately $200.0 million of unsecured
Planned Arch Notes to institutional investors in one or more private
placements to be effected prior to consummation of the MobileMedia Transaction
during the first quarter of 1999. The interest rate, maturity, redemption
rights (if any) and other financial terms of such Notes would be negotiated
with prospective investors prior to issuance in light of then prevailing
market conditions. No assurance can be given that Arch will be able to issue
such Notes on satisfactory terms, if at all.
Bridge Facility
Effective as of August 8, 1998, ACI and the Bridge Lenders executed a
commitment letter for the Bridge Facility pursuant to which a $120.0 million
term loan will be available for a single drawing on the closing date of the
MobileMedia transaction. See "Description of Certain Indebtedness--Bridge
Facility" and "Risk Factors--Credit Facility and Indenture Restrictions".
Sources of Funds
Arch's net cash provided by operating activities was $16.9 million, $40.5
million and $64.6 million in the years ended December 31, 1995, 1996 and 1997,
respectively, and $91.8 million in the nine months ended September 30, 1998.
Arch believes that its capital needs for the foreseeable future will be
funded with borrowings under current and future credit facilities, net cash
provided by operations and, depending on Arch's needs and market conditions,
possible sales of equity or debt securities. For additional information, see
Note 3 of Notes to Arch's Consolidated Financial Statements. Arch's ability to
access future borrowings will be dependent, in part, on its ability to
continue to grow its EBITDA. After giving effect to the Private Note Offering
and application of the net proceeds therefrom as described under "Use of
Proceeds", borrowings pursuant to the Credit Facility and the completion of
the Equity Investment and application of the net proceeds therefrom, Arch had
$287.0 million outstanding, and approximately $67.3 million in immediately
available borrowing capacity, under the $400.0 million Credit Facility. See
"Risk Factors--Indebtedness and High Degree of Leverage".
After giving pro forma effect to the MobileMedia Transaction and assuming an
offering of the Planned Arch Notes, Arch estimates it will have $415.0 million
outstanding under the Credit Facility, and approximately $185.0 million in
available borrowing capacity under the Credit Facility. If Arch is unable to
complete the Planned Arch Notes offering and therefore borrows under the
Bridge Facility, Arch estimates that the principal amount outstanding under
the Credit Facility would increase to $495.0 million and available borrowing
capacity would be reduced to approximately $105.0 million.
Equity Investment
On June 29, 1998, two partnerships managed by Sandler Capital Management
Company, an investment management firm ("Sandler"), together with certain
other private investors, made an equity investment of $25.0 million in Parent
in the form of Series C Preferred Stock. Simultaneously, Parent contributed to
Arch as the Equity Investment $24.0 million of the net proceeds from the sale
of Series C Preferred Stock, Arch contributed such amount to API as an equity
investment and API used such amount to repay indebtedness under ACE's former
credit facility as part of the establishment of the Credit Facility.
The Series C Preferred Stock: (i) is convertible into Common Stock of Parent
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
49
<PAGE>
quarterly in cash or, at Parent's option, through the issuance of shares of
Parent'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 Parent; (iii) permits the
holders after seven years to require Parent, at Parent's option, to redeem the
Series C Preferred Stock for cash or convert such shares into Parent's Common
Stock valued at 95% of the then prevailing market price of Parent's Common
Stock; (iv) is subject to redemption for cash or conversion into Parent'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 the Parent Discount
Notes (the "Parent Discount Notes Indenture"), requires Parent, at its option,
to redeem the Series C Preferred Stock for cash or convert such shares into
Parent's Common Stock valued at 95% of the then prevailing market price of
Parent'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 Parent; (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 Parent Discount Notes Indenture; and (viii) has certain
voting and preemptive rights. The holders of the Series C Preferred Stock also
received customary registration and information rights. See "Description of
Certain Indebtedness--Parent Discount Notes".
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 Parent
and Arch, and such director will have the right to be a member of any
committee of such Boards of Directors. See "Business--Arch Management--
Directors and Executive Officers".
Immediately prior to the Series C Preferred Stock financing, partnerships
managed by Sandler owned 4.3% of Parent's outstanding Common Stock. After
giving effect to the issuance of the Series C Preferred Stock, the holders of
the Series C Preferred Stock beneficially owned (including the Common Stock
owned by partnerships managed by Sandler) 21.3% of Parent's Common Stock. The
investors in the Series C Preferred Stock financing agreed to certain
"standstill" provisions limiting their beneficial ownership in Parent to
24.99% (provided that the receipt of Parent's Common Stock in payment of
dividends on the Series C Preferred Stock does not constitute a breach of this
limitation).
Acquisitions
In May 1996, Arch completed its acquisition of Westlink for aggregate
consideration of $325.4 million in cash (including direct transaction costs).
In September 1995, Parent completed its acquisition of USA Mobile (USAM's
former parent) for an aggregate consideration of $582.2 million, consisting of
$88.9 million in cash (including direct transaction costs), 7,599,493 shares
of Parent's Common Stock valued at $209.0 million on the date of completion
and the assumption of liabilities of $284.3 million, including $241.2 million
of long-term debt. During 1995, Arch also completed five additional
acquisitions for aggregate consideration of $36.1 million in cash plus the
issuance of 395,000 shares of Parent's Common Stock valued at $6.9 million on
the date of completion. See Note 2 of Notes to Arch's Consolidated Financial
Statements.
Arch believes that the paging industry will undergo further consolidation,
and Arch expects to participate in such consolidation, either as an acquiror
or an acquiree. Arch has evaluated and expects to continue to evaluate
possible acquisition transactions on an ongoing basis and, at the present time
is, and at any given time may be, engaged in discussions with respect to
possible acquisitions or other business combinations. See "Prospectus
Summary--Recent Developments--Anticipated MobileMedia Transaction" and "Risk
Factors--Possible Acquisition Transactions".
For a description of the proposed MobileMedia Transaction and certain of its
anticipated effects on Parent and Arch, see "--Other Commitments and
Contingencies", "Prospectus Summary--Anticipated MobileMedia Transaction" and
"Risk Factors--Possible Acquisition Transactions" and "Risk Factors--Possible
Non-Consummation of the MobileMedia Transaction".
50
<PAGE>
INFLATION
Inflation has not had a material effect on Arch's operations to date. Paging
systems equipment and operating costs have not increased in price and Arch's
pager costs have declined substantially in recent years. This reduction in
costs has generally been reflected in lower pager prices charged to
subscribers who purchase their pagers. Arch's general operating expenses, such
as salaries, employee benefits and occupancy costs, are subject to normal
inflationary pressures.
RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a set of general-purpose financial statements. Arch adopted SFAS No. 130 in
1998. The adoption of this standard did not have an effect on its reporting of
income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS
No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial reports. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Arch intends to adopt SFAS No. 131 for
its year ending December 31, 1998. Arch has not completed its review of SFAS
No. 131 but adoption of this standard is not expected to have a significant
impact on its reporting.
In March 1998, the Accounting Standards Committee of the Financial
Accounting Standards Board issued Statement of Position 98-1 ("SOP 98-1")
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 establishes criteria for capitalizing costs of
computer software developed or obtained for internal use. Arch adopted SOP 98-
1 in 1998. The adoption of SOP 98-1 has not had a material effect on Arch's
financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 ("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. Arch intends to adopt SOP 98-5 effective January 1,
1999. The adoption of SOP 98-5 is not expected to have a material effect on
Arch's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in
the derivative's fair value be recognized currently in earnings. Arch intends
to adopt this standard effective January 1, 2000. Arch has not yet quantified
the impact of adopting SFAS No. 133 on its financial statements, however,
adopting SFAS No. 133 could increase volatility in earnings and other
comprehensive income.
51
<PAGE>
BUSINESS
GENERAL
Arch is a leading provider of wireless messaging services, primarily paging
services, and is the third largest paging company in the United States (based
on pagers in service). Arch had 4.2 million pagers in service at September 30,
1998. Arch operates in 41 states and more than 180 of the 200 largest markets
in the United States. Arch offers local, regional and nationwide paging
services employing digital networks covering approximately 85% of the United
States population. Arch offers four types of paging services through its
networks: digital display, alphanumeric display, tone-only and tone-plus-
voice. Arch also offers enhanced and complementary services, including voice
mail, personalized greeting, message storage and retrieval, pager loss
protection and pager maintenance.
Arch has achieved significant growth in pagers in service and operating cash
flow through a combination of internal growth and acquisitions. From January
1, 1995 through September 30, 1998, Arch's total number of subscribers grew at
a compound rate on an annualized basis of 73.1%. For the same period on an
annualized basis, Arch's compound rate of internal subscriber growth
(excluding pagers added through acquisitions) was 52.8%. From commencement of
operations in September 1986, Arch has completed 33 acquisitions representing
an aggregate of 1.7 million pagers in service at the time of purchase.
The following table sets forth certain information regarding the approximate
number of pagers in service with Company subscribers and net increases in
number of pagers through internal growth and acquisitions during the periods
indicated:
<TABLE>
<CAPTION>
PAGERS IN SERVICE NET INCREASE IN
AT BEGINNING OF PAGERS THROUGH INCREASE IN PAGERS PAGERS IN SERVICE
YEAR ENDED AUGUST 31, PERIOD INTERNAL GROWTH (1) THROUGH ACQUISITIONS (2) AT END OF PERIOD
- --------------------- ----------------- -------------------- ------------------------- -----------------
<S> <C> <C> <C> <C>
1987.................... 4,000 3,000 12,000 19,000
1988.................... 19,000 8,000 3,000 30,000
1989.................... 30,000 14,000 34,000 78,000
1990.................... 78,000 20,000 4,000 102,000
1991.................... 102,000 24,000 1,000 127,000
1992.................... 127,000 33,000 -- 160,000
1993.................... 160,000 70,000 24,000 254,000
1994.................... 254,000 138,000 18,000 410,000
<CAPTION>
FOUR MONTHS ENDED
DECEMBER 31,
- -----------------
<S> <C> <C> <C> <C>
1994.................... 410,000 64,000 64,000 538,000
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C> <C> <C> <C>
1995.................... 538,000 366,000 1,102,000 2,006,000
1996.................... 2,006,000 815,000 474,000 3,295,000
1997.................... 3,295,000 595,000 -- 3,890,000
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
- -----------------
<S> <C> <C> <C> <C>
1998.................... 3,890,000 321,000 -- 4,211,000
</TABLE>
- ---------------------
(1) Includes internal growth in acquired paging businesses after their
acquisition by Arch. Increases in pagers through internal growth are net
of subscriber cancellations during each applicable period.
(2) Based on pagers in service of acquired paging businesses at the time of
their acquisition by Arch.
Old Parent was incorporated in January 1986 in Delaware and conducted its
operations through wholly-owned direct and indirect subsidiaries. In September
1995, Old Parent completed the USA Mobile Merger. In accordance with GAAP, Old
Parent was treated as the acquirer in the USA Mobile Merger for accounting and
financial reporting purposes, and Parent reports the historical financial
statements of Old Parent as the historical financial statements of Parent.
52
<PAGE>
On June 29, 1998, Arch effected the Subsidiary Restructuring involving
certain of its direct and indirect wholly owned subsidiaries. In the ACE/USAM
Merger, ACE was merged with API, which was then a subsidiary of USAM. In
connection with the ACE/USAM Merger, USAM changed its name to Arch
Communications, Inc. and issued 100 shares of its common stock to Parent.
Immediately prior to and in connection with the ACE/USAM Merger, (i) USAM
contributed its operating assets and liabilities to an existing subsidiary of
USAM, (ii) The Westlink Company, which held ACE's 49.9% equity interest in
Benbow, distributed its Benbow assets and liabilities to a new subsidiary of
ACE, The Westlink Company II, (iii) ACE contributed its operating assets and
liabilities to an existing subsidiary of ACE, (iv) all of USAM's subsidiaries
were merged into API, and (v) The Westlink Company II was merged into a new
API subsidiary, Benbow Investments, Inc.
PAGING 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 broadcast of
a one-way radio signal. To contact a subscriber, a message is usually sent by
placing a telephone call to the subscriber's designated telephone number. The
telephone call is received by an electronic paging switch which generates a
signal that is sent to radio transmitters in the service area. Depending upon
the topography of the service area, the operating radius of a radio
transmitter typically ranges from three to 20 miles. The transmitters
broadcast a signal that is received by the pager a subscriber carries, which
alerts the subscriber by a tone or vibration that there is a voice, tone,
digital or alphanumeric message.
The paging industry has been in existence since 1969 when the FCC allocated
a group of radio frequencies for use in providing one-way and two-way types of
mobile communications services. Throughout its history, the paging industry
has been characterized by consolidation, substantial growth and technological
change. Historically, the paging industry has been highly fragmented, with a
large number of small, local operators. Since the 1980s, concentration in the
paging industry has increased as paging companies continue to grow rapidly
either internally or through acquisitions.
Arch believes that paging is the most cost-effective form of mobile wireless
communications. Paging has an advantage over conventional telephone service
because a pager's reception is not restricted to a single location, and over a
cellular telephone or broadband PCS handset because a pager is smaller, has a
longer battery life and, most importantly, because pagers and air time
required to transmit an average message cost less than equipment and air time
for cellular telephones or broadband PCS handsets. Paging subscribers
generally pay a flat monthly service fee for pager services, regardless of the
number of messages, unlike cellular telephone or broadband PCS subscribers,
whose bills typically have a significant variable usage component. For these
reasons, some cellular subscribers use a pager in conjunction with their
cellular telephone to screen incoming calls and thus lower the expense of
cellular telephone service, and to a lesser extent, some broadband PCS
subscribers use a pager in conjunction with their broadband PCS handsets,
which often incorporate messaging functions, but have a much shorter battery
life.
Industry sources estimate that, since 1992, the number of pagers in service
in the United States has grown at an annual rate of approximately 25% and will
continue to grow at an annual rate of approximately 8% through the year 2001.
Based on industry sources, Arch believes that there were in excess of 49.0
million pagers in service in the United States at December 31, 1997. Factors
contributing to this growth include: (i) a continuing shift towards a service-
based economy; (ii) increasing mobility of workers and the population at
large; (iii) increasing awareness of the benefits of mobile communications
among the population at large; (iv) the relatively high cost of two-way mobile
communications, such as cellular telephone services; (v) introduction of new
or enhanced paging services, including nationwide paging capability; (vi)
continuing improvements in the performance of paging equipment; and (vii)
significant price/performance improvements in paging services. The paging
industry has undergone substantial consolidation over the past ten years, and
Arch believes that the top five paging carriers represent approximately 50% of
the pagers in service. Nonetheless, Arch believes that the paging industry
remains fragmented, with more than 300 licensed carriers in the United States,
and will continue to undergo consolidation.
53
<PAGE>
The paging industry has benefited from technological advances resulting from
research and development conducted by vendors of pagers and transmission
equipment. Such advances include microcircuitry, liquid crystal display
technology and standard digital encoding formats, which have enhanced the
capability and capacity of paging services while lowering equipment and air
time costs. Technological improvements have enabled Arch to provide better
quality services at lower prices to its subscribers and have generally
contributed to strong growth in the market for paging services.
The paging industry has traditionally distributed its services through
direct marketing and sales activities. In recent years, additional channels of
distribution have evolved, including: (i) carrier-operated stores; (ii)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; (iii) agents
who solicit customers for carriers and are compensated on a commission basis;
(iv) retail outlets that often sell a variety of merchandise, including pagers
and other telecommunications equipment; and (v) most recently, the Internet.
While most paging subscribers traditionally have been business users, industry
observers believe that pager use among consumers has increased significantly
in recent years. In addition, paging subscribers have increasingly chosen to
purchase rather than lease their pagers. These trends are expected to
continue.
BUSINESS STRATEGY
Arch's strategic objective is to strengthen its position as one of the
leading nationwide paging companies in the United States. Arch believes that
larger, multi-market paging companies enjoy a number of competitive
advantages, including: (i) operating efficiencies resulting from more
intensive utilization of existing paging systems; (ii) economies of scale in
purchasing and administration; (iii) broader geographic coverage of paging
systems; (iv) greater access to capital markets and lower costs of capital;
(v) the ability to obtain additional radio spectrum; (vi) the ability to offer
high-quality services at competitive prices; and (vii) enhanced ability to
attract and retain management personnel. Arch believes that the current size
and scope of its operations afford it many of these advantages, and that it
has the scope and presence to effectively compete on a national level. In
addition, Arch believes that the paging industry will undergo further
consolidation, and Arch expects to participate in such consolidation. See
"Prospectus Summary--Recent Developments--Anticipated MobileMedia Transaction"
and "Risk Factors--Possible Acquisition Transactions".
Arch's operating objectives are to increase its EBITDA, deploy its capital
efficiently, reduce its financial leverage and expand its customer
relationships. Arch pursues the following strategies to achieve its operating
objectives:
Low-Cost Operating Structure
Arch has selected a low-cost operating strategy as its principal competitive
tactic. Arch believes that a low-cost operating structure, compared to the
other two fundamental competitive tactics in the paging industry
(differentiated premium pricing and niche positioning), maximizes its
flexibility to offer competitive prices while still achieving target margins
and EBITDA. Arch maintains a low-cost operating structure through a
combination of (i) the consolidation of certain operating functions, including
centralized purchases from key vendors, to achieve economies of scale, and
(ii) the installation of technologically advanced and reliable transmission
systems. In June 1998, Parent's Board of Directors approved the Divisional
Reorganization, as part of which Parent plans, over a period of 18 to 24
months, to consolidate its seven operating divisions into four operating
divisions and consolidate certain regional administrative support functions,
resulting in various operating efficiencies. Arch estimates that the
Divisional Reorganization, once fully implemented, will result in annual cost
savings of approximately $15.0 million (approximately $11.5 million for salary
and employee benefits and $3.5 million for lease obligations). See "Prospectus
Summary--Recent Developments--Divisional Reorganization".
Efficient Capital Deployment
Arch's principal financial objective is to reduce its financial leverage by
reducing capital requirements and increasing EBITDA. To reduce capital
expenditures, Arch has implemented a company-wide focus on the sale,
54
<PAGE>
rather than lease, of pagers, since subscriber-owned units require a lower
level of capital investment than Company-owned units. As a result of these
efforts, the number of subscriber-owned pagers, as a percentage of net new
pagers in service, increased from 53.7% in the nine months ended September 30,
1997 to 70.1% in the nine months ended September 30, 1998. In addition, Arch
has modified its incentive compensation programs for line managers so that
bonuses are based, in part, on capital efficiency.
Fast Follower on N-PCS Opportunities
Consistent with its low-cost provider competitive tactic, Arch has focused
its capital and marketing resources on one-way paging and other enhanced
services rather than N-PCS services. However, Arch recognizes the potential
benefits to current and prospective customers and the associated market
opportunities from certain N-PCS applications, such as two-way text and voice
messaging services. Arch has taken steps to position itself to participate in
new and emerging N-PCS services and applications, including marketing N-PCS
services as a reseller and its 49.9% equity interest in Benbow. See"--
Investments in Narrowband PCS Licenses".
Exploit Revenue Enhancement Opportunities
Arch believes there are a number of new revenue opportunities associated
with its 4.2 million pagers in service, including increasing the proportion of
subscribers utilizing alphanumeric display services, which generate higher
revenue, and selling value-added, non-facilities based enhanced services such
as voicemail, resale of long-distance service and fax storage and retrieval.
See "--Paging Operations".
PAGING OPERATIONS
Arch currently provides four basic types of paging services: digital
display, alphanumeric display, tone-only and tone-plus-voice. Depending upon
the type of pager used, a subscriber may receive information displayed or
broadcast by the pager or may receive a signal from the pager indicating that
the subscriber should call a prearranged number or a company operator to
retrieve a message.
A digital display pager permits a caller to transmit to the subscriber a
numeric message that may consist of a telephone number, an account number or
coded information, and has the capability to store several such numeric
messages in memory for later recall by the subscriber. An alphanumeric display
pager allows subscribers to receive and store messages consisting of both
numbers and letters. A tone-only pager notifies the subscriber that a call has
been received by emitting an audible beeping sound or vibration. A tone-plus-
voice pager emits a beeping sound followed by a brief voice message. Arch
provides digital display, alphanumeric display and tone-only service in all of
its markets and tone-plus-voice service in only a few markets.
Digital display paging service, which was introduced by the paging industry
nearly 20 years ago, has in recent years grown at a faster rate than tone-only
or tone-plus-voice service and currently represents a majority of all pagers
in service. The growth of alphanumeric display service, which was introduced
in the mid-1980s, has been constrained by its difficult data-input and
specialized equipment requirements and its relatively high use of system
capacity during transmission. The following table summarizes the types of
Arch's pagers in service at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
------------- ------------- ------------- -------------
UNITS % UNITS % UNITS % UNITS %
--------- --- --------- --- --------- --- --------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Digital display......... 1,755,000 87% 2,796,000 85% 3,284,000 85% 3,536,000 84%
Alphanumeric display.... 171,000 9 395,000 12 524,000 13 603,000 14
Tone-only............... 37,000 2 54,000 2 43,000 1 38,000 1
Tone-plus-voice......... 43,000 2 50,000 1 39,000 1 34,000 1
--------- --- --------- --- --------- --- --------- ---
Total.................. 2,006,000 100% 3,295,000 100% 3,890,000 100% 4,211,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
55
<PAGE>
Arch provides paging service to subscribers for a monthly fee. Subscribers
either lease the pager from Arch for an additional fixed monthly fee or they
own the pager, having purchased it either from Arch or from another vendor.
The monthly service fee is generally based upon the type of service provided,
the geographic area covered, the number of pagers provided to the customer and
the period of the subscriber's commitment. Subscriber-owned pagers provide a
more rapid recovery of Arch's capital investment than pagers owned and
maintained by Arch, but may generate less recurring revenue. Arch also sells
pagers to third-party resellers who lease or resell pagers to their own
subscribers and resell Arch's paging services under marketing agreements. The
following table summarizes the number of Arch-owned and leased, subscriber-
owned and reseller-owned pagers in service at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
------------- ------------- ------------- -------------
UNITS % UNITS % UNITS % UNITS %
--------- --- --------- --- --------- --- --------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arch-owned and leased... 902,000 45% 1,533,000 47% 1,740,000 45% 1,836,000 44%
Subscriber-owned........ 596,000 30 914,000 28 1,087,000 28 1,130,000 27
Reseller-owned.......... 508,000 25 848,000 25 1,063,000 27 1,245,000 29
--------- --- --------- --- --------- --- --------- ---
Total.................. 2,006,000 100% 3,295,000 100% 3,890,000 100% 4,211,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides enhancements and ancillary services such as voice mail,
personalized greetings, message storage and retrieval, pager loss protection
and pager maintenance services. Voice mail allows a caller to leave a recorded
message that is stored in Arch's computerized message retrieval center. When a
message is left, the subscriber can be automatically alerted through the
subscriber's pager and can retrieve the stored message by calling Arch's
paging terminal. Personalized greetings allow the subscriber to record a
message to greet callers 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 non-facilities-based
value-added services that can be integrated with existing paging services.
These include, among other services, voicemail, resale of long distance
service and fax storage and retrieval.
INVESTMENTS IN NARROWBAND PCS LICENSES
Arch has taken the following steps to position itself to participate in new
and emerging N-PCS services and applications.
Benbow PCS Ventures, Inc.
In connection with Arch's May 1996 acquisition of Westlink, Arch acquired a
49.9% equity interest in Benbow. Benbow holds exclusive rights to a 50 KHz
outbound/12.5 KHz inbound N-PCS license in each of the five regions of the
United States directly or through Page Call, which Benbow acquired on June 29,
1998 for certain preferred stock and a promissory note in the aggregate
principal amount of $17.2 million with a 12% annual return. 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 veto rights with respect to
specified major business decisions by Benbow. Parent is obligated, to the
extent such funds are not available to Benbow from other sources and subject
to the approval of Arch's designee on Benbow's Board of Directors, to advance
to Benbow sufficient funds to service debt obligations incurred by Benbow in
connection with the acquisition of its N-PCS licenses and to finance
construction of an N-PCS system. The total purchase price for Benbow's
licenses (together with the purchase price of licenses acquired from Page
Call), net of the discounts, was $42.5 million. Arch estimates that the total
cost to Benbow of servicing its license related debt obligations and
constructing such N-PCS system (including the effect of the Page Call
acquisition) will be approximately $100.0 million over the next five years.
Arch's advances to Benbow are secured by Benbow's assets, bear interest at an
interest rate equal to that paid by Arch on its senior debt, are due on demand
and must be repaid prior to any distribution of profits
56
<PAGE>
by Benbow. With certain exceptions, Arch has agreed not to exercise its right
to demand repayment of such advances prior to the occurrence of a default (as
defined therein). As of September 30, 1998, Arch had advanced $20.4 million to
Benbow.
Pursuant to a five-year agreement with Benbow expiring on October 1, 2000,
Arch provides, subject to Benbow's ultimate control, management services and
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 June Walsh,
who holds the remaining 50.1% equity interest in Benbow, and Ms. Walsh has the
right to require Parent, commencing January 23, 2000 (or sooner under certain
circumstances), to repurchase her Benbow shares for an amount equal to the
greater of (i) 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 (ii) the fair market value of her shares (as determined by arbitration
absent agreement of the parties). If Arch exercises its right of first refusal
or Ms. Walsh exercises her put option, Benbow could lose some of the benefits
of the discounts and installment payment schedules for its FCC payments unless
another "designated entity" acquired control of Benbow under FCC rules. See
Note 1 of Notes to Arch's Consolidated Financial Statements.
Benbow needs to construct its N-PCS system (or make other arrangements)
before it can offer N-PCS services. Benbow has indicated that it plans to roll
out its services over time to reach approximately one-third of the population
in the licensed areas by the end of 1999. Benbow's network will use a Reflex
25 paging protocol. Arch believes that Benbow will provide Arch with a
platform for a new generation of wireless messaging services, including two-
way messaging and other enhanced services, and that the value of its Benbow
relationship will be significantly enhanced by the completion of the Page Call
acquisition.
On June 29, 1998, Benbow acquired Page Call's outstanding stock by issuing
to Page Call's former stockholders preferred stock and a promissory note in
the aggregate face amount of $17.2 million with a 12% annual return. Upon the
closing, Benbow entered into a five-year consulting agreement with one of Page
Call's stockholders requiring consulting payments in the aggregate amount of
$911,000. Benbow's preferred stock and promissory note are exchangeable for
Common Stock of Parent (i) at any time at the option of the holders thereof,
at an exchange price equal to the higher of (A) $13.00 per share or (B) the
market price of Parent's Common Stock, (ii) mandatorily on April 8, 2000, at
the then prevailing market price of Parent's Common Stock, or (iii)
automatically at an exchange price of $13.00 per share, if the market price of
Parent's Common Stock equals or exceeds $13.00 for 20 consecutive trading
days. Parent is permitted to require Benbow to redeem its preferred stock and
promissory note at any time for cash. Parent entered into guarantees (payable
in Parent's Common Stock or cash, at Parent's election) of all obligations of
Benbow under the Benbow preferred stock, promissory note and consulting
agreement described above. Benbow's redemption of its preferred stock and
promissory note for cash, or Parent's payment of cash pursuant to its
guarantees of Benbow's preferred stock and promissory note, would be subject
to the availability of capital and any restrictions contained in applicable
debt instruments and under applicable law (which currently would not permit
any such cash redemptions or payments). If Parent issues Common Stock or pays
cash pursuant to its guarantees, Parent 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 with respect to any shares of Parent's
Common Stock issued in exchange for Benbow's preferred stock and promissory
note or pursuant to Parent's guarantees thereof.
CONXUS Communications, Inc.
Arch currently holds a 10.5% equity interest in CONXUS Communications, Inc.
("Conxus"), formerly known as PCS Development Corporation, which holds
exclusive rights to a 50 KHz outbound/50 KHz inbound two-way messaging license
throughout the United States. Conxus, like Benbow, is a "designated entity"
under FCC rules and is entitled to discounts and installment payment
schedules.
57
<PAGE>
Each stockholder of Conxus is entitled to purchase services from Conxus at
"most favored customer" rates, based on like services. Conxus and Arch have
agreed to negotiate in good faith to enter into "mutually acceptable
intercarrier, network access and similar agreements". If Arch wishes to
purchase N-PCS services of the kind offered by Conxus, Arch has agreed to
contract exclusively with Conxus for such services so long as such services
are competitive in price and quality with comparable services offered by
others. Arch is currently acting as a reseller of voice messaging services
through Conxus in a limited number of markets.
SUBSCRIBERS AND MARKETING
Arch's paging accounts are generally businesses with employees who travel
frequently but must be immediately accessible to their offices or customers.
Arch's subscribers include proprietors of small businesses, professionals,
management and medical personnel, field sales personnel and service forces,
members of the construction industry and trades, and real estate brokers and
developers. Arch believes that pager use among consumers will increase
significantly in the future, although consumers do not currently account for a
substantial portion of Arch's subscriber base.
Although today Arch operates in more than 180 of the 200 largest U.S.
markets, Arch historically has focused on medium-sized and small market areas
with lower rates of pager penetration and attractive demographics. Arch
believes that such 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, as of September 30, 1998, operated approximately 200
retail stores. Arch also markets its paging services indirectly through
independent resellers, agents and retailers. Arch typically offers resellers
paging services in large quantities at wholesale rates that are lower than
retail rates, and resellers offer the services to end-users at a mark-up.
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, announced 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 will give the Arch name national exposure
for the first time and result in significant economic leverage in its
marketing and communications efforts.
COMPETITION
The paging industry is highly competitive with price being the primary means
of differentiation among providers of numeric display paging services.
Companies in the industry also compete on the basis of coverage area offered
to subscribers, available services offered in addition to basic numeric or
tone paging, transmission quality, system reliability and customer service.
Arch competes by maintaining competitive pricing of its products and service
offerings, by providing high-quality, reliable transmission networks and by
furnishing subscribers a superior level of customer service. Several hundred
licensed paging companies provide only local basic numeric or tone paging
service. Compared to these companies, Arch offers wireless messaging services
on a local, regional and nationwide basis. In addition, Arch offers enhanced
services such as alphanumeric paging, voice mail and voice mail notifications,
news, sports, weather reports and stock quotes.
Arch competes with one or more competitors in all markets in which it
operates. Although some of Arch's competitors are small, privately owned
companies serving one market area, others are large diversified
58
<PAGE>
telecommunications companies serving numerous markets. Some of Arch's
competitors possess financial, technical and other resources greater than
those of Arch. Major paging carriers that currently compete in one or more of
Arch's markets include MobileMedia, Paging Network, Inc., Metrocall, Inc., and
AirTouch Communications, Inc.
As paging services become increasingly interactive, and as two-way services
become increasingly competitive, the scope of competition for communications
service customers in Arch's markets may broaden. For example, the FCC has
created potential sources of competition by auctioning new spectrum for
Wireless Communications Services and Local Multipoint Distribution Service and
holding an auction in the 220-222 MHZ service. Further, the FCC has announced
plans to auction licenses in the General Wireless Communications Services, a
service created from spectrum reallocated from federal government use in 1995.
Moreover, entities offering service on wireless two-way communications
technology, including cellular, broadband PCS and specialized mobile radio
services, as well as mobile satellite service providers, also compete with the
paging services that Arch provides. See "Risk Factors--Competition and
Technological Change."
Arch believes that competition for paging subscribers is based on quality of
service, geographic coverage and price. Arch believes it generally competes
effectively based on these factors.
SOURCES OF EQUIPMENT
Arch does not manufacture any of the pagers or other equipment used in its
paging operations. The equipment used in Arch's paging operations is generally
available for purchase from multiple sources. Arch centralizes price and
quantity negotiations for all of its operating subsidiaries in order to
achieve cost savings from volume purchases. Arch buys pagers primarily from
Motorola and NEC and purchases terminals and transmitters primarily from
Glenayre and Motorola. Arch anticipates that equipment and pagers will
continue to be available in the foreseeable future, consistent with normal
manufacturing and delivery lead times. See "Risk Factors--Dependence on Third
Parties".
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.
REGULATION
Paging companies historically have been subject to different federal
regulatory requirements depending upon whether they were providing service as
a Radio Common Carrier ("RCC"), a Private Carrier Paging Operator ("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), and the FCC has taken, and
continues to take, actions to implement this legislation. Under the new
regulatory structure, all of Arch's and MobileMedia's paging services are
classified as CMRS. As CMRS providers, Arch and MobileMedia are regulated as
common carriers, except that the FCC has exempted paging services, which have
been found to be highly competitive, from some typical common carrier
regulations, such as tariff filing and resale requirements.
The classification of Arch's and MobileMedia's paging operations as CMRS
affects the level of permissible foreign ownership, as discussed below, and
the nature and extent of the state regulation to which both may be subject. In
addition, the FCC now is required to resolve competing requests for CMRS
spectrum by conducting auctions, which may have the effect of increasing the
costs of acquiring additional spectrum in markets in which Arch and
MobileMedia operate. Also, Arch and MobileMedia are obligated to pay certain
regulatory fees in connection with their paging operations.
59
<PAGE>
FCC Regulatory Approvals and Authorizations
The Communications Act requires radio licensees such as Arch and MobileMedia
to obtain prior approval from the FCC for the assignment or transfer of
control of any construction permit or station license or authorization or any
rights thereunder. 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 any rights thereunder. To date, the FCC has
approved each assignment and transfer of control for which Arch and
MobileMedia have sought approval. Although there can be no assurance that any
future requests for approval of transfers of control and/or assignments of
license will be acted upon in a timely manner by the FCC, or that the FCC will
grant the approval requested, with the exception of the pending FCC
investigation into MobileMedia's qualification to continue to be an FCC
licensee, neither Arch nor MobileMedia knows of any reason that any such
applications will not be approved or granted.
Effective April 2, 1998, the FCC's Wireless Telecommunications Bureau, which
directly regulates Arch's and MobileMedia's paging activities, announced that
it will forbear from enforcing its filing requirements with respect to pro
forma assignments and transfers of control of certain wireless authorizations,
such as Arch's and MobileMedia's RCC and PCP licenses. Pursuant to this
decision, wireless telecommunications carriers now only have to file a written
notification of a pro forma transaction within 30 days after the transaction
is completed. This decision will expedite the process and reduce the costs
related to corporate reorganizations; however, Arch and MobileMedia may still
be required to obtain prior FCC approval for the pro forma assignment or
transfer of control of some of their licenses not covered by the forbearance
decision, such as certain business radio authorizations.
The FCC paging licenses granted to Arch and MobileMedia are for varying
terms of up to 10 years, at the end of which renewal applications must be
approved by the FCC. In the past, paging license renewal applications
generally have been granted by the FCC upon a showing of compliance with FCC
regulations and of adequate service to the public. With the exception of the
pending FCC proceeding regarding MobileMedia's qualifications to remain an FCC
licensee, Arch and MobileMedia are unaware of any circumstances which would
prevent the grant of any pending or future renewal applications; 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, thereby increasing the chances of third-party
interventions in the renewal proceedings. Other than those renewal
applications still pending, the FCC has thus far granted each license renewal
application that Arch or MobileMedia have filed.
On February 13, 1997, in connection with its filing for protection under the
Bankruptcy Code, MobileMedia sought a grant of permission from the FCC to
execute an involuntary, pro forma assignment of its licenses to MobileMedia as
debtors-in-possession. On March 3, 1997, the FCC granted such permission with
respect to MobileMedia's earth stations, on April 3, 1997, the FCC granted
such permission for the assignment of MobileMedia's microwave licenses and on
May 26, 1998 and July 17, 1998, the FCC granted such permission with respect
to MobileMedia's paging, air-to-ground and narrowband PCS licenses. In
addition, as noted above, FCC approval of the transfer of MobileMedia's
licenses pursuant to the Merger Agreement and the Amended Plan (on terms that
do not impair the feasibility of the Amended Plan and permit it to be
implemented and consummated) is a condition to consummation of the MobileMedia
Transaction.
The FCC's review and revision of rules affecting paging companies is ongoing
and 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 (for example, a Major Trading Area as defined by Rand McNally)
rather than being licensed on a site-by-site basis. These geographic area
licenses will be awarded pursuant to auction. Incumbent paging licensees that
do not acquire licenses at auction will be entitled to interference protection
from the market area licensee. Arch and MobileMedia are 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.
60
<PAGE>
Currently, however, the Communications Act requires that Arch and
MobileMedia obtain licenses from the FCC to use radio frequencies to conduct
their paging operations at specified locations. FCC licenses issued to Arch
and MobileMedia set forth the technical parameters, such as power strength and
tower height, under which Arch and MobileMedia are authorized to use those
frequencies. In many instances, Arch and MobileMedia require the prior
approval of the FCC before they can implement any significant changes to their
radio systems. Once the FCC's market area licensing rules are implemented,
however, these site-specific licensing obligations will be eliminated, with
the exception of 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, whether it should impose coverage
requirements on licensees with nationwide exclusivity (such as Arch and
MobileMedia), whether these coverage requirements should be imposed on a
nationwide or regional basis, and 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, Arch and MobileMedia might have to accelerate the build-out of
their 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
each of Arch and MobileMedia or subject them 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, which makes their
services more expensive and which could affect the attraction or retention of
customers; however, there can be no assurance that Arch or MobileMedia 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 largely were met by
local telephone companies, supplemented by long-distance telephone companies.
Under the new rules, all telecommunications carriers, including paging
companies, will be required to contribute to the Universal Service Fund. In
addition, certain state regulatory authorities have enacted, or have indicated
that they intend to enact, similar contribution requirements based on
intrastate revenues. Neither Arch nor MobileMedia can yet know the impact of
these state contribution requirements, if enacted and applied to Arch and
MobileMedia. Moreover, Arch and MobileMedia are unable at this time to
estimate the amount of any such payments that it will be able to bill to their
subscribers; however, payments into the Universal Service Fund will likely
increase the cost of doing business.
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 and CMRS providers such as MobileMedia and Arch, 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.
61
<PAGE>
Future Regulation
From time to time, legislation which could potentially affect Arch and
MobileMedia, either beneficially or adversely, is proposed by federal or state
legislators. There can be no assurance that legislation will not be enacted by
the federal or state governments, or that regulations will not 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--Risks Common to Arch
and MobileMedia--Government Regulation, Foreign Ownership and Possible
Redemption."
Depending on further FCC disposition of these issues, Arch and MobileMedia
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 Arch believes that it and
MobileMedia would pursue relief through settlement negotiations,
administrative complaint procedures or both. If these issues are ultimately
decided in favor of the LECs, Arch and MobileMedia likely would be required to
pay all past due contested charges and may also be assessed interest and late
charges for amounts withheld.
Foreign Ownership
The Communications Act limits foreign investment in and ownership of
entities that are licensed as radio common carriers by the FCC. Arch and
MobileMedia own or control several radio common carriers and are accordingly
subject to these foreign investment restrictions. Because Arch and MobileMedia
are each individually parents of radio common carriers (but are not radio
common carriers themselves), Arch and MobileMedia may not have more than 25%
of their 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 and
MobileMedia'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 "--Paging--Industry Overview". The Arch Certificate
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 General Corporation Law ("DGCL"), 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 (including
MobileMedia following the Merger). See "--Competition", "--Regulation" and
"Risk Factors--Anticipated Effects of the MobileMedia Transaction".
STATE REGULATION
In addition to regulation by the FCC, certain states impose various
regulations on the common carrier paging operations of Arch and MobileMedia.
Regulation in some states historically required Arch and MobileMedia to obtain
certificates of public convenience and necessity before constructing,
modifying or expanding paging facilities or offering or abandoning paging
services. Rates, terms and conditions under which Arch and MobileMedia
provided services, or any changes to those rates, have also been subject to
state regulation. However, as a general rule, states are preempted from
exercising rate and entry regulation of CMRS, but may choose to regulate other
terms and conditions of service (for example, requiring the identification of
an agent to receive complaints). States also are accorded an opportunity to
petition the FCC for authority to continue to regulate CMRS rates if certain
conditions are met. State filings seeking rate authority have all been denied
by the FCC, although new petitions seeking such authority may be filed in the
future. The preemption of state entry regulation was confirmed in the
Telecommunications Act. In certain instances, the construction and operation
of radio transmitters also will be subject to zoning, land use, public health
and safety, consumer protection and other state and local taxes, levies and
62
<PAGE>
ordinances. Further, some states and localities continue to exert jurisdiction
over (i) approval of acquisitions and transfers of wireless systems; and (ii)
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.
TRADEMARKS
Arch owns the service marks "Arch" and "Arch Paging", and holds a federal
registration for the service mark "Arch Nationwide Paging" as well as various
other trademarks.
PROPERTIES
At September 30, 1998, Arch owned five office buildings and leased office
space (including its executive offices) in over 200 localities in 35 states
for use in conjunction with its paging operations. Arch leases transmitter
sites and/or owns transmitters on commercial broadcast towers, buildings and
other fixed structures in approximately 3,200 locations in 45 states. Arch's
leases are for various terms and provide for monthly lease payments at various
rates. Arch believes that it will be able to obtain additional space as needed
at acceptable cost. In April 1998, Parent announced an agreement for the Tower
Site Sale for approximately $38.0 million in cash (subject to adjustment). 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 renting space on the towers on which it currently operates
communications equipment to service its own paging network. Arch is using its
net proceeds from the Tower Site Sale (estimated to be $36.0 million) to repay
indebtedness. Arch held the initial closing of the Tower Site Sale on June 26,
1998 with gross proceeds to Arch of approximately $12.0 million (excluding
$1.3 million which was paid to entities affiliated with Benbow for certain
assets owned by such entities and sold as part of the initial closing), held a
second closing on September 29, 1998 with gross proceeds to Arch of $20.4
million and currently expects to hold the final closing for the balance of the
transaction in the fourth quarter of 1998, although no assurance can be given
that the final closing will be held as expected. The final closing of the
Tower Site Sale is subject to receipt of customary regulatory approvals and
other conditions. As part of the Divisional Reorganization, Arch will close
certain office locations and redeploy other real estate assets. See
"Prospectus Summary--Recent Developments--Tower Site Sale" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Divisional Reorganization".
EMPLOYEES
At September 30, 1998, Arch employed approximately 2,700 persons. None of
Arch's employees is represented by a labor union. Arch believes that its
employee relations are good. As part of the Divisional Reorganization, Arch
anticipates a net reduction of approximately 10% of its workforce. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Divisional Reorganization".
LEGAL PROCEEDINGS
Arch, from time to time, is involved in lawsuits arising in the normal
course of business. Arch believes that its currently pending lawsuits will not
have a material adverse effect on Arch.
THE COMBINED COMPANY
After giving effect to the MobileMedia Transaction, the Combined Company
would be the second largest paging operator in the United States as measured
by pagers in service, net revenues (total revenues less cost of products sold)
and EBITDA. On a pro forma basis (but excluding the impact of expected
operational cost synergies), at and for the nine months ended September 30,
1998, the Combined Company would have had approximately 7.1 million pagers in
service and net revenues of $605.3 million.
Arch believes that the Combined Company will be 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 will significantly
63
<PAGE>
broaden the geographic scope of Arch's marketing presence and should position
the Combined Company to compete more effectively for large corporate customers
with diverse geographic operations. With a significantly larger subscriber
base, the Combined Company should be better able to serve strategic
distribution arrangements, as well as amortize marketing investments over a
larger revenue base. In addition, MobileMedia's third party retail
distribution agreements, which serve the more rapidly growing consumer market,
should complement Arch's over 200 company-owned retail outlets. Similarly,
MobileMedia's two nationwide paging networks (and the potential for higher
revenue nationwide services) should enhance Arch's local coverage and provide
the opportunity to take advantage of Arch's distribution platforms.
MobileMedia's plan to deploy its nationwide N-PCS spectrum over its existing
network infrastructure should permit Arch to market enhanced N-PCS services
(primarily multi-market alphanumeric and text messaging services) sooner than
it would otherwise be able to, and these services are expected to provide
higher revenue and more growth potential than basic paging services. Finally,
MobileMedia's investments to date in two national call centers should
supplement Arch's own call center and complement Arch's strategy of evolving
to "scalable" regional customer service centers. See "The Combined Company."
Each of Parent, MobileMedia and Arch is, and after giving the consummation
of the MobileMedia Transaction Parent expects the Combined Company will
continue to be, highly leveraged. At September 30, 1998, Parent and its
subsidiaries had total consolidated debt of $992.8 million compared with total
assets of $942.4 million and latest nine-month annualized Adjusted EBITDA of
$140.7 million. MobileMedia's total debt was $905.7 million compared with
total assets of $577.3 million and latest nine-month annualized Adjusted
MobileMedia EBITDA (as defined below) of $124.1 million at September 30, 1998.
After giving effect to the MobileMedia Transaction, the contemplated
elimination of indebtedness of MobileMedia and the incurrence of additional
indebtedness by Arch and API on a pro forma basis (but excluding the impact of
expected operational cost synergies), the Combined Company would have had
long-term debt of $1.3 billion compared with total assets of $1.6 billion, and
latest nine-month annualized Adjusted Pro Forma EBITDA (as defined below) at
September 30, 1998 of $254.6 million. Arch itself would continue to have no
assets or EBITDA of its own, apart from the assets and EBITDA of its
subsidiaries, and its long-term debt (exclusive of the long-term debt of its
subsidiaries) would increase from $0.4 billion to $0.6 billion as a result of
the MobileMedia Transaction. MobileMedia Adjusted EBITDA represents earnings
before other income (expense), taxes, depreciation, amortization, amortization
of deferred gain on tower sale and restructuring costs. Adjusted Pro Forma
EBITDA represents the net of restructuring charges and bankruptcy related
expenses, equity in loss of affiliates, income tax benefit, interest and non-
operating expenses (net), extraordinary items and amortization of deferred
gain on the Tower Site Sale.
Additional information about the Combined Company, including pro forma
financial statements and financial projections for Arch following the
MobileMedia Transaction, together with historical financial statements for
MobileMedia, is contained in Annex A.
THERE CAN BE NO ASSURANCE THAT PARENT WILL ACQUIRE MOBILEMEDIA OR THAT, IF
PARENT ACQUIRES MOBILEMEDIA, PARENT WOULD REALIZE ITS ANTICIPATED IMPROVEMENTS
IN FINANCIAL LEVERAGE, OPERATING SYNERGIES OR COST SAVINGS. SEE "RISK
FACTORS--POSSIBLE ACQUISITION TRANSACTIONS".
64
<PAGE>
ARCH MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
individuals who are the directors and executive officers of Arch.
<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....... 45 President and Chief Operating Officer
John B. Saynor.......... 58 Executive Vice President and Director
J. Roy Pottle........... 39 Executive Vice President and Chief Financial Officer
Paul H. Kuzia........... 56 Executive Vice President/Technology and Regulatory Affairs
R. Schorr Berman(1)(2).. 50 Director
James S. Hughes(1)...... 56 Director
Allan L. Rayfield(2).... 63 Director
John A. Shane(1)(2)..... 65 Director
John Kornreich.......... 52 Director
</TABLE>
- --------
(1) Member of the Audit Committee of Parent.
(2) Member of the Executive Compensation and Stock Option Committee of Parent.
C. EDWARD BAKER, JR. has served as Chief Executive Officer and a director of
Parent since 1988 and of Arch since 1995. Mr. Baker became Chairman of the
Board of Parent in 1989 and of Arch in 1995. He also served as President of
Parent from 1988 to January 1998 and of Arch from 1995 to January 1998. From
1986 until joining Arch in March 1988, Mr. Baker was President and Chief
Executive Officer of US West Paging.
LYNDON R. DANIELS joined Parent and 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 Parent since 1988 and of Arch
since 1995. Mr. Saynor has served as Executive Vice President of Arch since
1995 and of Parent since 1990. Mr. Saynor is a founder of Parent and served as
President and Chief Executive Officer of Parent from 1986 to March 1988 and as
Chairman of the Board from 1986 until May 1989.
J. ROY POTTLE joined Parent and 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 Parent and Arch since September 1996. He served as Vice
President/Engineering and Regulatory Affairs of Parent from 1988 to September
1996 and of Arch from 1995 to September 1996. Prior to 1988, Mr. Kuzia was
director of operations at Message Center Inc.
R. SCHORR BERMAN has been a director of Parent since 1986 and of Arch since
1995. Since 1987, he has been the President and Chief Executive Officer of MDT
Advisers, Inc., an investment adviser. He is a director of Mercury Computer
Systems, Inc. as well as a number of private companies.
JAMES S. HUGHES has been a director of Parent since 1986 and of Arch since
1995. Since 1987, he has been President and Chief Executive Officer of Norwich
Corporation, a real estate investment and service firm, and, since 1992, he
has served as President and Managing Director of Inventa Corporation, an
international business development firm.
65
<PAGE>
ALLAN L. RAYFIELD has been a director of Parent since 1997 and of Arch since
1998. He has been a consultant since 1995. From November 1993 until December
1994, Mr. Rayfield served as Chief Executive Officer of M/A Com Inc., a
microwave electrical manufacturing company. From April 1991 until November
1993, he served as Chief Operating Officer of M/A Com Inc. He is a director of
Parker Hannifin Corporation and Acme Metals Incorporated.
JOHN A. SHANE has been a director of Parent since 1988 and of Arch since
1995. He has been the President of Palmer Service Corporation since 1972. He
has been a general partner of Palmer Partners L.P., a venture capital firm,
since 1981. He serves as a director of Overland Data, Inc., Summa Four, Inc.,
United Asset Management Corporation and Gensym Corporation and as a trustee of
Nvest Funds.
JOHN KORNREICH has been a director of Parent and Arch since June 1998. Mr.
Kornreich has served as a Managing Director of Sandler Capital Management Co.,
Inc. since 1988.
Arch's directors are elected by Parent, its sole stockholder, and hold
office until their successors are elected or their earlier death, resignation
or removal. Arch and Parent currently have the same directors. Parent's
Restated Certificate of Incorporation and By-Laws provide that Parent has a
classified Board of Directors composed of three classes, each of which serves
for three years, with one class being elected each year. The term of Messrs.
Hughes and Rayfield will expire at Parent's annual meeting of stockholders to
be held in 1999, the term of Messrs. Saynor and Shane will expire at Parent's
annual meeting of stockholders to be held in 2000 and the term of Messrs.
Baker, Berman and Kornreich will expire at Parent's annual meeting of
stockholders to be held in 2001.
So long as at least 50% of Parent's Series C Preferred Stock remains
outstanding, the holders thereof have the right, voting as a separate class,
to elect one member of the Boards of Directors of Parent and Arch, and such
director has the right to be a member of any committee of such Boards of
Directors. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Equity
Investment". In June 1998, John Kornreich was elected a director of Parent and
Arch pursuant to these arrangements.
In connection with the MobileMedia Transaction, designees of W.R. Huff
Management Co., L.L.C. and Whippoorwill Associates, Inc. are expected to be
elected to the Boards of Directors of Parent and Arch. The expected nominees
are:
EDWIN M. BANKS has been employed by W.R. Huff since 1988 and currently
serves as a portfolio manager. From 1985 until he joined W.R. Huff, Mr. Banks
was employed by Merrill Lynch & Company. Mr. Banks received his B.A. degree
from Rutgers College and his MBA degree from Rutgers University. Mr. Banks
also serves as a director of Magellan Health Services (formerly Charter
Medical Corporation) and e.SPIRE Corporation (formerly American Communications
Services, Inc.)
H. SEAN MATHIS has been Chairman of the Board and Chief Executive Officer of
Allis Chalmers, Inc. since January 1996 and previously served as a Vice
President of such company since 1989. From July 1996 to September 1997, Mr.
Mathis was Chairman of the Board of Universal Gym Equipment Inc., a privately
owned company which filed for protection under the Bankruptcy Code in July
1997. From 1991 to 1993, Mr. Mathis was President of RCL Acquisition Corp.,
and from 1993 to 1995 he was President and a director of RCL Capital
Corporation, which was merged into DISC Graphics in November 1995. Previously,
Mr. Mathis was a director and Chief Operating Officer of Ameriscribe
Corporation. Mr. Mathis was the President of a predecessor to, and currently
is a director of, Allied Digital Technologies. He is also a director of
Thousand Trails, Inc.
Arch's executive officers are elected by its Board of Directors and hold
office until their successors are elected or until their earlier death,
resignation or removal.
66
<PAGE>
Certain of Arch's executive officers have entered into non-competition
agreements with Arch which provide that, for a minimum period of one year
following termination, they will not compete with Arch nor, for a period of
three years following termination, recruit or hire any other Arch employee.
See "--Executive Retention Agreements."
CERTAIN TRANSACTIONS
Parent and three other entities have co-founded an offshore corporation to
pursue wireless messaging opportunities in Latin America. Parent and Mr.
Hughes each contributed $250,000 to this offshore corporation and each owns
13.3% of its equity.
Between August 6, 1998 and October 28, 1998 the Parent's Board of Directors
approved three full recourse, unsecured demand loans totaling $279,500 from
the Parent to C. Edward Baker, Jr., Chief Executive Officer and director of
the Parent and of Arch. The loans bear interest at approximately 5% annually.
BOARD COMMITTEES
Arch's Board of Directors has no standing committees. Parent's Board of
Directors has an Audit Committee and an Executive Compensation and Stock
Option Committee. There is no standing nominating committee of Parent's Board
of Directors. The Audit Committee reviews the annual consolidated financial
statements of Parent and its subsidiaries (including Arch) prior to their
submission to the Board of Directors and consults with Parent'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 Parent's Board of Directors the compensation of executive officers, key
managers and directors and administers Parent's stock option plans.
INDEMNIFICATION AND DIRECTOR LIABILITY
Arch's Restated Certificate of Incorporation provides that Arch will, to the
fullest extent permitted by the DGCL, 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.
Arch's Restated Certificate of Incorporation 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 DGCL (relating to
illegal dividends or stock redemptions) or (iv) for any transaction from which
the director derived an improper personal benefit. If the DGCL 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 DGCL as so amended.
67
<PAGE>
ARCH EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the annual
and long-term compensation of Arch's Chief Executive Officer and other
executive officers (the "Named Executive Officers") for the years ended
December 31, 1995, 1996 and 1997:
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...... 1997 $353,317 $227,500 $600 459,324(4)
Chairman, President and 1996 329,050 36,833 600 268,860(5)(6)
Chief Executive Officer 1995 281,650 106,000 600 40,000(7)
Lyndon R. Daniels........ 1997 -- -- -- --
President and Chief
Operating Officer
(joined Arch in January
1998)
J. Roy Pottle............ 1997 -- -- -- --
Executive Vice President
and Chief Financial
Officer (joined Arch in
February 1998)
John B. Saynor........... 1997 153,188 72,900 600 51,810(8)
Executive Vice President 1996 146,867 15,300 600 20,000(6)
1995 131,870 50,000 600 20,000(7)
Paul H. Kuzia............ 1997 157,633 77,400 600 86,574(9)
Executive Vice
President/Technology 1996 133,800 14,620 600 8,000(6)
and Regulatory Affairs 1995 123,300 46,000 600 8,000(7)
William A. Wilson........ 1997 133,599 150,500 600 32,836
Former Executive Vice
President and 1996 203,133 19,833 600 170,000(10)
Chief Financial
Officer(11) 1995 157,300 58,000 600 20,000(7)
</TABLE>
- --------
(1) Represents bonus paid in such fiscal year with respect to prior year.
(2) Represents Parent's matching contributions paid under Parent's 401(k)
plan.
(3) No restricted stock awards or stock appreciation rights ("SARs") were
granted to any of the Named Executive Officers during the years ended
December 31, 1995, 1996 or 1997.
(4) Includes options to purchase 409,688 shares granted as part of Parent's
January 16, 1998 option repricing program.
(5) Includes options to purchase 106,860 shares replaced in connection with
Parent's October 23, 1996 option repricing program.
(6) Option replaced in connection with Parent's January 16, 1998 option
repricing program.
(7) Option replaced in connection with Parent's October 23, 1996 option
repricing program.
(8) Includes options to purchase 35,905 shares granted as part of Parent's
January 16, 1998 option repricing program.
(9) Includes options to purchase 69,687 shares granted as part of Parent's
January 16, 1998 option repricing program.
(10) Includes options to purchase 75,000 shares replaced in connection with
Parent's October 23, 1996 option repricing program.
(11) Mr. Wilson resigned on June 30, 1997.
68
<PAGE>
EXECUTIVE RETENTION AGREEMENTS
Arch is a party to Executive Retention Agreements (the "Retention
Agreements") for a total of 16 executives (the "Arch Executives"), including
Messrs. Baker, Daniels, Kuzia, Pottle and Saynor.
The purpose of the Retention Agreements is to assure the continued
employment and dedication of the Arch Executives without distraction from the
possibility of a Change in Control (as defined in the Retention Agreements) of
Arch. In the event of a Change in Control, and the termination of the Arch
Executive's employment by Arch at any time within the 12-month period
thereafter (other than for cause, disability or death) or by the Arch
Executive for Good Reason (as defined in the Retention Agreements), the Arch
Executive shall be eligible to receive (i) a cash severance payment equal to
the Arch Executive's base salary plus any other amounts earned through the
date of termination (to the extent not previously paid), (ii) an additional
lump sum cash payment equal to a specified multiple of the sum of (a) the Arch
Executive's annual base salary in effect at the time of the Change in Control
and (b) the average bonus paid for the three calendar years immediately
preceding the calendar year during which the Change in Control occurs, and
(iii) any amounts or benefits required to be paid or provided to the Arch
Executive or which the Arch Executive is eligible to receive following the
Arch Executive's termination under any plan, program, policy, practice,
contract or agreement of Arch. In addition, until the earlier of (a) 12 months
after termination or (b) the Arch Executive becomes reemployed with another
employer and is eligible to receive substantially equivalent benefits, to
arrange to provide the Arch Executive with life, disability, accident and
health insurance benefits similar to those previously maintained. The multiple
for Messrs. Baker, Daniels, Kuzia, Pottle and Saynor is three, and the
multiple for the other Arch Executives is one or two. Good Reason is defined
to include, among other things, a material reduction in employment
responsibilities, compensation or benefits or, in the case of Mr. Baker, the
failure to become the Chief Executive Officer of any entity succeeding or
controlling Arch.
STOCK OPTION GRANTS
The following table summarizes certain information regarding options granted
to the Named Executive Officers during the year ended December 31, 1997. No
SAR's were granted during the year ended December 31, 1997.
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. ... 49,636(4) 2.89 $6.875 03/05/07 $214,609 $ 543,861
409,688(5) 23.89 5.0625 01/16/08 553,600 2,110,041
Lyndon R. Daniels....... -- -- -- -- -- --
J. Roy Pottle........... -- -- -- -- -- --
John B. Saynor.......... 15,905(4) 0.93 6.875 03/05/07 68,768 174,271
35,905(5) 2.09 5.0625 01/16/08 48,517 184,924
Paul H. Kuzia........... 16,887(4) 0.98 6.875 03/05/07 73,013 185,031
69,687(5) 4.06 5.0625 01/16/08 94,166 358,913
William A. Wilson....... 32,836 1.92 6.875 03/05/07 141,971 359,783
</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 Parent's Common
Stock on the date of grant.
69
<PAGE>
(3) Amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the option terms. These gains are
based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted and are not
intended to forecast future appreciation of the price of the Common
Stock. The Named Executive Officers will realize no gain upon the
exercise of these options without an increase in the price of Parent's
Common Stock, which increase will benefit all stockholders of Parent
proportionately.
(4) Option replaced as part of Parent's January 16, 1998 option repricing
program.
(5) Option granted as part of Parent's January 16, 1998 option repricing
program.
OPTION EXERCISES AND YEAR-END OPTION TABLE
The following table sets forth certain information regarding the exercise of
stock options during the year ended December 31, 1997 and stock options held
as of December 31, 1997 by the Named Executive Officers. All stock options
have been granted by Parent.
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 OPTIONS 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 .... -- -- 314,904(3) 188,816 $ 188,064 --
Lyndon R. Daniels....... -- -- -- -- -- --
John B. Saynor.......... -- -- 4,000 31,905 -- --
J. Roy Pottle........... -- -- -- -- -- --
Paul H. Kuzia........... -- -- 46,400 23,287 -- --
William A. Wilson....... -- -- -- -- -- --
</TABLE>
- --------
(1) Represents the difference between the exercise price and the fair market
value of Parent's Common Stock on the date of exercise.
(2) Based on the fair market value of Parent's Common Stock on December 31,
1997 ($5.125 per share) less the option exercise price.
(3) Subsequent to December 31, 1997, Mr. Baker exercised an option for 94,032
shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of Parent's Compensation Committee are R. Schorr Berman,
Allan L. Rayfield and John A. Shane. Messrs. Berman and Shane served on the
Compensation Committee throughout 1997, and Mr. Rayfield joined the
Compensation Committee upon his election as a director in July 1997.
C. Edward Baker, Jr., the Chairman and Chief Executive Officer of Parent,
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 Parent has served as a
director or member of the Compensation Committee (or other committee serving
an equivalent function) of any other entity, any of whose executive officers
has served as a director of Parent or as a member of the Compensation
Committee of Parent.
70
<PAGE>
PRINCIPAL STOCKHOLDERS
All of the outstanding capital stock of Arch is beneficially owned by
Parent. The following table sets forth certain information with respect to the
beneficial ownership of Parent's Common Stock, as of September 30, 1998, by
(i) each person who is known by Arch to beneficially own more than 5% of its
outstanding shares of Parent's Common Stock, (ii) each current director of
Parent and Arch, (iii) Parent's and Arch's Chief Executive Officer and the
other Named Executive Officers and (iv) all current directors and executive
officers of Parent and Arch as a group.
PRE-MERGER BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES(1) PERCENTAGE(2)
--------------------------------------------------- --------- -------------
<S> <C> <C>
Sandler Capital Management (3) .................... 4,674,433 18.2%
Franklin Resources, Inc. (4)....................... 2,514,080 9.8
Memorial Drive Trust (5)........................... 1,947,990 7.6
State of Wisconsin Investment Board (6)............ 1,388,000 5.4
Dimensional Fund Advisors Inc. (7)................. 1,304,900 5.1
Goldman, Sachs & Co. (8)........................... 1,225,500 4.8
C. Edward Baker, Jr. .............................. 220,679 0.9
Lyndon R. Daniels.................................. 12,000 *
John B. Saynor..................................... 197,924 0.8
J. Roy Pottle...................................... -- --
Paul H. Kuzia...................................... 20,840 *
R. Schorr Berman (9)............................... 1,962,140 7.6
James S. Hughes.................................... 81,837 *
John Kornreich (10) ............................... 4,911,574 19.1
Allan L. Rayfield.................................. 3,250 *
John A. Shane (11)................................. 39,188 *
William A. Wilson (12)............................. 600 *
All current directors and executive officers of
Arch as a group (10 persons) (13)................. 7,449,432 28.8
</TABLE>
- ---------------------
* Less than 0.5%
(1) Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares such power with his
spouse) with respect to all shares of capital stock listed as owned by
such person or entity.
(2) Assumes the conversion of Series C Preferred Stock into Parent's Common
Stock at the initial conversion price of $5.50 per share. See "--
Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources".
(3) The business address of Sandler is 767 Fifth Avenue, 45th Floor, New
York, New York 10153. Sandler has sole voting and investment power over
348,000 of such shares and shared voting and investment power over
4,326,433 of such shares.
(4) The business address of Franklin Resources, Inc. is 777 Mariners Island
Boulevard, San Mateo, California 94404. Franklin Advisers, Inc., a
subsidiary of Franklin Resources, Inc., has sole voting power and sole
investment power with respect to 2,493,700 shares. Franklin Management,
Inc., a subsidiary of Franklin Resources, Inc., has sole investment power
with respect to 20,380 shares. Franklin Resources, Inc., the principal
shareholders thereof, Franklin Advisers, Inc. and Franklin Management,
Inc. disclaim beneficial ownership of these securities. This information
is based on Amendment No. 1 to Schedule 13G filed by Franklin Resources,
Inc. with the SEC on January 26, 1998.
(5) The business address of Memorial Drive Trust is 125 Cambridge Park Drive,
Cambridge, Massachusetts 02140. All shares listed in the above table as
held by Memorial Drive Trust are held by MD Co. as nominee for Memorial
Drive Trust, a trust holding assets of a qualified profit sharing plan
for employees
71
<PAGE>
of Arthur D. Little, Inc., over which Mr. Berman may be deemed to share
voting and investment power. See footnote (10).
(6) The business address of the State of Wisconsin Investment Board is P.O.
Box 7842, Madison, Wisconsin 53707. This information is based on the
Schedule 13G filed by the State of Wisconsin Investment Board with the
SEC on January 27, 1998.
(7) The business address of Dimensional Fund Advisors Inc. is 1299 Ocean
Avenue, 11th Floor, Santa Monica, California 90401. Dimensional Fund
Advisors Inc. has sole voting power with respect to 860,800 shares and
sole investment power with respect to all 1,304,900 shares. Officers of
Dimensional Fund Advisors Inc. also serve as officers of DFA Investment
Dimensions Group Inc. and The DFA Investment Trust Company, each an open-
end management investment company. These officers have sole voting power
with respect to 139,100 shares owned by DFA Investment Dimensions Group
Inc. and 305,000 shares owned by The DFA Investment Trust Company. All of
these securities are owned by advisory clients of Dimensional Fund
Advisors Inc., none of which, to the knowledge of Dimensional Fund
Advisors Inc., owns more than 5% of the class. Dimensional Fund Advisors
Inc. disclaims beneficial ownership of such securities. This information
is based on the Schedule 13G filed by Dimensional Fund Advisors Inc. with
the SEC on February 10, 1998.
(8) The business address of Goldman, Sachs & Co. and its parent holding
company, The Goldman Sachs Group, L.P. (collectively "Goldman Sachs"), is
85 Broad Street, New York, New York 10004. Goldman Sachs has shared
voting power with respect to 854,100 shares and shared investment power
with respect to all 1,225,500 shares. Goldman Sachs disclaims beneficial
ownership of the shares beneficially owned by (i) managed accounts and
(ii) certain investment limited partnerships, of which a subsidiary of
Goldman Sachs is the general partner or managing general partner, to the
extent partnership interests in such partnerships are held by persons
other than Goldman Sachs or their affiliates. This information is based
on the Schedule 13G filed by Goldman Sachs with the SEC on February 17,
1998.
(9) Includes 1,947,990 shares held by Memorial Drive Trust, over which Mr.
Berman may be deemed to share voting and investment power as
Administrator and Chief Executive Officer of Memorial Drive Trust. Mr.
Berman disclaims beneficial ownership of such shares held by Memorial
Drive Trust.
(10) Includes 4,674,433 shares beneficially owned by Sandler, over which Mr.
Kornreich may be deemed to have voting and investment power as Managing
Director, and 190,000 shares beneficially owned by two 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.
(11) Includes 1,051 shares owned by Palmer Service Corporation, over which Mr.
Shane may be deemed to have voting and investment power as President and
sole stockholder of Palmer Service Corporation, and 3,104 shares issuable
upon conversion of $52,000 principal amount of Arch's 6 3/4% Convertible
Subordinated Debentures due 2003 held by Palmer Partners, L.P., of which
Mr. Shane is the general partner. See "Description of Certain
Indebtedness--Parent Convertible Debentures".
(12) Consists of 600 shares held by or jointly with Mr. Wilson's children.
(13) Includes (i) 4,674,433 shares beneficially owned by Sandler and 190,000
shares beneficially owned by two limited partnerships of which Mr.
Kornreich is a general partner, (ii) 1,947,990 shares held by Memorial
Drive Trust, (iii) 1,051 shares held by Palmer Service Corporation, (iv)
3,104 shares issuable upon conversion of $52,000 principal amount of
Arch's 6 3/4% Convertible Subordinated Debentures due 2003 held by Palmer
Partners, L.P. and (v) 108,379, 4,000, 19,520, 11,250, 11,250, 750,
2,250, 11,250, and 168,649 shares issuable upon the exercise of
outstanding stock options held by Messrs. Baker, Saynor, Kuzia, Berman,
Hughes, Kornreich, Rayfield, Shane and all current directors and
executive officers of Arch as a group, respectively, exercisable within
60 days after September 30, 1998.
See also "Summary of Terms of MobileMedia Transaction -- Stockholdings
Before and After the Merger" in Annex A.
72
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
Contemporaneously with the Subsidiary Restructuring, ACE's former credit
facility was amended and restated to establish the $400.0 million Credit
Facility with API, as borrower, and The Bank of New York, Royal Bank of Canada
and Toronto Dominion (Texas), Inc., as managing agents, consisting of (i) the
Tranche A Facility, a $175.0 million reducing revolving credit facility (ii)
the Tranche B Facility, 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 (iii) the Tranche C Facility, a $125.0 million term loan which
was available in a single drawing on June 29, 1998.
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 Credit Facility are secured by its pledge of the
capital stock of the former ACE operating subsidiaries. The Credit Facility is
guaranteed by Parent, Arch and the former ACE operating subsidiaries. Parent's
guarantee is secured by a pledge of Parent's stock and notes in Arch, and the
guarantees of the former ACE operating subsidiaries are secured by a security
interest in those assets of such subsidiaries which were pledged under ACE's
former credit facility. See "Prospectus Summary--Corporate Structure". Lenders
representing 40% of the Credit Facility have the right to require Arch and its
subsidiaries to grant security interests in certain additional assets not
currently pledged thereunder, subject to granting a ratable security interest
to holders of the 9 1/2% Notes and the 14% Notes.
Borrowings under the Credit Facility bear interest based on a reference rate
equal to either the Bank's Alternate Base Rate or LIBOR rate, in each case
plus a margin based on Arch's or API's ratio of total debt to annualized
operating cash flow.
The 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 Arch's or API's ratio of total debt to
annualized operating cash flow.
The 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 Credit Facility. In addition,
the Credit Facility requires Arch and its subsidiaries to meet certain
financial covenants, including covenants with respect to ratios of operating
cash flow to fixed charges, operating cash flow to debt service, operating
cash flow to interest service and total indebtedness to operating cash flow.
See "Risk Factors--Credit Facility and Indenture Restrictions".
On November 16, 1998, all API Lenders approved an increase to the Credit
Facility from $400.0 million to $600.0 million. The $200.0 million increase
will be allocated among the senior credit facilities as follows: (i) the
Tranche A Facility will increase by up to $25.0 million to a maximum of $200.0
million, (ii) the Tranche B Facility will increase by up to $25.0 million to a
maximum of $125.0 million and (iii) the Tranche C Facility will increase by up
to $200.0 million to a maximum of $325.0 million. API's new MobileMedia
subsidiaries will guarantee API's obligations under the Credit Facility. All
other terms and conditions of the Credit Facility will remain unchanged except
for minor changes to Arch's permitted ratio of total debt to annualized EBITDA
and the margins on which the interest rates on borrowings are based. See "Risk
Factors--Anticipated Effects of the MobileMedia Transaction".
73
<PAGE>
BRIDGE FACILITY
Arch and the Bridge Lenders (consisting of The Bear Stearns Companies, Inc.,
the Bank, TD Securities (USA) Inc. and Royal Bank of Canada) have executed a
commitment letter for the Bridge Facility on the following terms. Under the
Bridge Facility, the Bridge Loan will be available to Arch as a $120.0 million
term loan in a single drawing upon the closing of the MobileMedia Transaction.
The Bridge Loan will bear interest equal to the LIBOR rate plus 500 basis
points (currently a total of 10.19%), increasing by 50 basis points each
quarter after funding to a maximum rate of 18%. If not paid on or before
maturity 180 days after the closing of the MobileMedia Transaction, the Bridge
Loan will convert into a term loan (the "Term Loan") due in December 2006. The
Term Loan will bear interest at the interest rate under the Bridge Facility at
the maturity of the Bridge Loan plus 50 basis points increasing by 50 basis
points each quarter after funding to a maximum rate of 18%. Parent will be
required to grant warrants (the "Bridge Warrants") to the Bridge Lenders for
the purchase of 5.0% of Parent's common stock on a fully diluted basis if the
Bridge Loan has not been repaid prior to the Bridge Loan maturity date. Upon
notice from the Bridge Lenders given (a) prior to the MobileMedia Transaction
but subsequent to the earlier to occur of (i) January 29, 1999 and (ii) the
30th day prior to the targeted date of the MobileMedia Transaction or (b) at
any time after the funding of the Bridge Loan and prior to the Bridge Loan
maturity date, Arch must issue and sell Planned Arch Notes in an amount at
least sufficient to substitute for or refinance the Bridge Loans on such terms
and conditions as may be specified by the Bridge Lenders, provided however
that the interest rate on the Planned Arch Notes shall be determined by the
Bridge Lenders in light of the then prevailing market conditions, but in no
event shall the yield on the Planned Arch Notes exceed a rate equal to an
agreed upon margin over the yield to worst on the Arch 12 3/4% Notes. In the
event that Planned Arch Notes are issued after the MobileMedia Transaction,
the Bridge Lenders may direct Arch to issue all or a portion of the Bridge
Warrants to the purchasers of the Planned Arch Notes rather than the Bridge
Lenders. The Bridge Facility requires payment of certain fees to the Bridge
Lenders. The fees will vary based on the amount and timing of the Bridge
Facility and the Bridge Loan. The Bridge Lenders have agreed to refund a
portion of the fees if the Bridge Loan is repaid prior to maturity. In
addition, Arch has agreed to permit the Bridge Lenders to act as placement
agents for the conversion of the Bridge Loan into the Term Loan or the
issuance of the Planned Arch Notes for a fee equal to 3.0% of the principal
amount so converted or issued.
The Bridge Facility contains restrictions that are substantially similar to
those contained in the Credit Facility, including without limitation
restrictions that, among other things limit 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 and mergers; and transactions with affiliates or between Arch and
its subsidiaries. In addition, the Bridge Facility requires Arch and its
subsidiaries to meet certain financial covenants, including covenants with
respect to ratios of EBITDA to fixed charges, EBITDA to debt service, EBITDA
to interest expense and total indebtedness to EBITDA.
9 1/2% NOTES
Arch has outstanding $125.0 million in aggregate principal amount of 9 1/2%
Notes. The 9 1/2% Notes accrue interest at the rate of 9.5% per annum, payable
semi-annually on February 1 and August 1. The 9 1/2% Notes are scheduled to
mature on February 1, 2004.
Arch, at its option, may redeem the 9 1/2% Notes as a whole, or from time to
time in part, on or after February 1, 1999 at the following redemption prices
(expressed as percentages of the principal amount thereof) if redeemed during
the twelve-month period beginning February 1 of the years indicated below (in
each case together with accrued and unpaid interest to the redemption date):
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
1999........................................................ 104.750%
2000........................................................ 103.167%
2001........................................................ 101.583%
2002 and thereafter......................................... 100.000%
</TABLE>
74
<PAGE>
The covenants in the indenture under which the 9 1/2% Notes are outstanding
(the "9 1/2% Notes Indenture") limit the ability of Arch and its subsidiaries
to pay dividends to Parent. Additionally, the 9 1/2% Notes Indenture imposes
limitations on the incurrence of indebtedness, whether secured or unsecured,
by Arch and its subsidiaries, on the disposition of assets, on transactions
with affiliates, on guarantees of the obligations of Arch by any of its
subsidiaries, on the sale or issuance of stock by the subsidiaries of Arch and
on the merger, consolidation or sale of substantially all of the assets of
Arch.
Upon the occurrence of a "Change of Control", as defined in the 9 1/2% Notes
Indenture, each holder of 9 1/2% Notes has the right to require that Arch
repurchase such holder's 9 1/2% Notes at a repurchase price in cash equal to
101% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of repurchase. The following constitute a Change of Control under
the 9 1/2% Notes Indenture: (i) the acquisition by a person or group of
beneficial ownership of the majority of the securities of Arch or Parent
having the right to vote in the election of directors; (ii) certain changes in
the boards of directors of Arch or Parent; (iii) the sale or transfer of all
or substantially all of the assets of Arch; or (iv) the merger or
consolidation of Arch or Parent with or into another corporation with the
effect that a person or group shall have become the beneficial owner of a
majority of the securities of the surviving corporation having the right to
vote in the election of directors. The Subsidiary Restructuring did not
constitute a Change of Control under the 9 1/2% Notes Indenture. Parent
expects to issue securities constituting a majority of Parent's equity to
certain of MobileMedia's creditors in connection with the MobileMedia
Transaction. However, Parent does not intend to issue equity securities in a
manner that would constitute a Change in Control. Parent's present management
and Board of Directors would continue to control Parent if Parent acquires
MobileMedia.
The following constitute "Events of Default" under the 9 1/2% Notes
Indenture: (i) a default in the payment of any installment of interest upon
any of the 9 1/2% Notes as and when the same shall become due and payable, and
continuance of such default for a period of 30 days; (ii) a default in the
payment of all or any part of the principal of, or premium, if any, on any of
the 9 1/2% Notes as and when the same shall become due and payable either at
maturity, upon redemption or repurchase, by declaration or otherwise; (iii)
the failure on the part of Arch duly to observe or perform any other of the
covenants or agreements on the part of Arch in the 9 1/2% Notes or in the 9
1/2% Notes Indenture for a period of 60 days after the date on which written
notice specifying such failure, stating that such notice is a "Notice of
Default" and demanding that Arch remedy the same, shall have been given by
registered or certified mail, return receipt requested, to Arch by the Trustee
(as defined in the 9 1/2% Notes Indenture), or to Arch and the Trustee by the
holders of at least 25% in aggregate principal amount of the 9 1/2% Notes at
the time outstanding; (iv) certain events of bankruptcy, insolvency or
reorganization in respect of Arch or any of its restricted subsidiaries; (v)
(A) a default in payment of the principal of, premium, if any, or interest on
any indebtedness for borrowed money of Arch or any restricted subsidiary in
principal amount aggregating $5.0 million or more, whether such indebtedness
now exists or is hereafter created, when the same shall become due and payable
and continuation of such default after any applicable period of grace or (B)
an event of default as defined in any indenture or instrument evidencing or
under which Arch or any restricted subsidiary has at the date of the indenture
or shall thereafter have outstanding at least $5.0 million aggregate principal
amount of indebtedness for borrowed money shall happen and be continuing and
such indebtedness shall have been accelerated so that the same shall be or
become due and payable, and in any case referred to in the foregoing clause
(A) or (B) such non-payment or acceleration shall not be rescinded or annulled
within 10 days after notice of such default in payment or event of default
shall have been given to Arch by the Trustee (if such event is known to it),
or to Arch and the Trustee by the holders of at least 25% in aggregate
principal amount of the 9 1/2% Notes at the time outstanding; (vi) one or more
judgments, orders or decrees for the payment of money (provided that the
amount of such money judgment shall be calculated net of any insurance
coverage that the insurer has irrevocably acknowledged to Arch as covering
such money judgment in whole or in part) in excess of $5.0 million, whether
individually or in an aggregate amount, shall be entered against Arch or any
restricted subsidiary of Arch or any of their respective properties and shall
not be discharged and there shall have been a period of 60 days during which a
stay of enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or (vii) the holder of any indebtedness of
Arch or any restricted subsidiary aggregating at least $5.0 million in
principal amount that is secured by a lien on the property
75
<PAGE>
or assets of Arch or any restricted subsidiary (or any agent of such holder of
such debt or the trustee or other representative then acting under any
indenture or other instrument under which such debt is outstanding) shall
commence any proceeding, or take any action (including by way of set-off) to
retain in satisfaction of such debt or to collect on, seize, dispose of or
apply in satisfaction of such debt, property or assets of Arch or any of its
restricted subsidiaries having a fair market value in excess of $5.0 million
individually or in the aggregate (including funds on deposit or held pursuant
to lock-box or other similar arrangements).
14% NOTES
Arch has outstanding $100.0 million in aggregate principal amount of 14%
Notes. The 14% Notes accrue interest at the rate of 14% per annum, payable
semi-annually on May 1 and November 1. The 14% Notes are scheduled to mature
on November 1, 2004.
Arch may, at its option, redeem the 14% Notes as a whole, or from time to
time in part, at the redemption prices (expressed as percentages of the
principal amount thereof) if redeemed during the twelve-month period beginning
November 1 of the years indicated below (in each case together with accrued
and unpaid interest to the redemption date):
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
1999........................................................ 107.000%
2000........................................................ 104.625%
2001........................................................ 102.375%
2002 and thereafter......................................... 100.000%
</TABLE>
The covenants in the indenture under which the 14% Notes are outstanding
(the "14% Notes Indenture") limit the ability of Arch and its subsidiaries to
pay dividends to Parent. Additionally, the 14% Notes Indenture imposes
limitations on the incurrence of indebtedness, whether secured or unsecured,
by Arch and its subsidiaries, on the disposition of assets, on transactions
with affiliates, on guarantees of the obligations of Arch by any of its
subsidiaries, on the sale or issuance of stock by the subsidiaries of Arch and
on the merger, consolidation or sale of substantially all of the assets of
Arch.
Upon the occurrence of a "Change of Control", as defined in the 14% Notes
Indenture, each holder of 14% Notes has the right to require that Arch
repurchase such holder's 14% Notes at a repurchase price in cash equal to 102%
of the principal amount thereof plus accrued and unpaid interest, if any, to
the date of repurchase. The following constitute a Change of Control under the
14% Notes Indenture: (i) the acquisition by a person or group of beneficial
ownership of the majority of the securities of Arch or Parent having the right
to vote in the election of directors; (ii) certain changes in the boards of
directors of Arch or Parent; (iii) the sale or transfer of all or
substantially all of the assets of Arch; or (iv) the merger or consolidation
of Arch or Parent with or into another corporation with the effect that (A) a
person or group shall have become the beneficial owner of a majority of the
securities of the surviving corporation having the right to vote in the
election of directors or (B) the securities of Parent or Arch outstanding
immediately prior to such transaction and which represent 100% of the voting
securities having the right to vote in the election of directors are exchanged
for cash, securities or property unless such securities are changed into or
exchanged for securities of the surviving corporation representing a majority
of the voting securities having the right to vote in the election of
directors. The Subsidiary Restructuring did not constitute a Change of Control
under the 14% Notes Indenture. Parent expects to issue securities constituting
a majority of Parent's equity to certain of MobileMedia's creditors in
connection with the MobileMedia Transaction. However, Parent does not intend
to issue equity securities in a manner that would constitute a Change in
Control. Parent's present management and Board of Directors would continue to
control Parent if Parent acquires MobileMedia.
The following constitute "Events of Default" under the 14% Notes Indenture:
(i) a default in the payment of any installment of interest upon any of the
14% Notes as and when the same shall become due and payable, and continuance
of such default for a period of 30 days; (ii) a default in the payment of all
or any part of the principal of, or premium, if any, on any of the 14% Notes
as and when the same shall become due and payable either at maturity, upon any
redemption or repurchase, by declaration or otherwise; (iii) the failure of
Arch to comply with the covenants limiting mergers and sales of assets; (iv)
the failure of Arch to comply with certain
76
<PAGE>
other covenants limiting its ability to incur debt, make restricted payments,
impose dividend restrictions on its subsidiaries, dispose of assets, transact
with affiliates, grant liens, obtain guarantees from its subsidiaries, permit
its subsidiaries to issue stock or suffer a change of control, for a period of
30 days after notice; (v) the failure on the part of Arch duly to observe or
perform any other of the covenants or agreements on the part of Arch in the
14% Notes or in the 14% Notes Indenture for a period of 60 days after the date
on which written notice specifying such failure, stating that such notice is a
"Notice of Default" and demanding that Arch remedy the same, shall have been
given by registered or certified mail, return receipt requested, to Arch by
the Trustee, or Arch and the Trustee by the holders of at least 25% in
aggregate principal amount of the 14% Notes at the time outstanding; (vi)
certain events of bankruptcy, insolvency or reorganization in respect of Arch
or any of its restricted subsidiaries; (vii) (A) a default in payment of the
principal of, premium if any, or interest on any indebtedness for borrowed
money of Arch or any restricted subsidiary in principal amount aggregating
$5.0 million or more, whether such indebtedness now exists or is hereafter
created, when the same shall become due and payable and continuation of such
default after any applicable period of grace or (B) an event of default as
defined in any indenture or instrument evidencing or under which Arch or any
restricted subsidiary has at the date of the indenture of shall thereafter
have outstanding at least $5.0 million aggregate principal amount of
indebtedness for borrowed money shall happen and be continuing and such
indebtedness shall have been accelerated so that the same shall be or become
due and payable, and in any case referred to in the foregoing clause (A) or
(B) such non-payment or acceleration shall not be rescinded or annulled within
10 days after notice of such default in payment or event of default shall have
been given to Arch by the Trustee (if such event is known to it), or to Arch
and the Trustee by the holders of at least 25% in aggregate principal amount
of the Arch 14% Notes at the time outstanding; (viii) one or more judgments,
orders or decrees for the payment of money (provided that the amount of such
money judgment shall be calculated net of any insurance coverage that the
insurer has irrevocably acknowledged to Arch as covering such money judgment
in whole or in part) in excess of $5.0 million, whether individually or in an
aggregate amount, shall be entered against Arch or any restricted subsidiary
of Arch or any of their respective properties and shall not be discharged and
there shall have been a period of 60 days during which a stay of enforcement
of such judgment or order, by reason of pending appeal or otherwise, shall not
be in effect; or (ix) the holder of any indebtedness of Arch or any restricted
subsidiary aggregating at least $5.0 million in principal amount that is
secured by a lien on the property or assets of Arch or any restricted
subsidiary (or any agent of such holder of such debt or the trustee or other
representative then acting under any indenture or other instrument under which
such debt is outstanding) shall commence any proceeding, or take any action
(including by way of set-off) to retain in satisfaction of such debt or to
collect on, seize, dispose of or apply in satisfaction of such debt, property
or assets of Arch or any of its restricted subsidiaries having a fair market
value in excess of $5.0 million individually or in the aggregate (including
funds on deposit or held pursuant to lock-box or other similar arrangements).
PARENT DISCOUNT NOTES
In March 1996, Parent issued $467.4 million in aggregate principal amount at
maturity of Parent Discount Notes. The Parent Discount Notes are scheduled to
mature on March 15, 2008. The Parent Discount Notes were issued at a
substantial discount from the principal amount due at maturity. Interest does
not accrue on the Parent Discount Notes prior to March 15, 2001. Thereafter,
interest on the Parent Discount Notes will accrue at the rate of 10 7/8% per
annum, payable semi-annually on March 15 and September 15, commencing
September 15, 2001.
Parent, at its option, may redeem the Parent Discount Notes as a whole or
from time to time in part at any time on or after March 15, 2001 at the
following redemption prices (expressed as percentages of principal amount) if
redeemed during the twelve month period beginning on March 15 of the years
indicated below (in each case together with accrued and unpaid interest to the
redemption date):
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2001........................................................ 104.078%
2002........................................................ 102.719%
2003........................................................ 101.359%
2004 and thereafter......................................... 100.000%
</TABLE>
77
<PAGE>
In addition, on or prior to March 15, 1999, Parent, at its option, may redeem
the Parent Discount Notes, in part, with the proceeds of a qualifying equity
offering at a redemption price equal to 110.875% of the accreted value (as
defined therein) to the date of redemption provided that, immediately after
giving effect to such redemption, Parent Discount Notes with an aggregate
principal amount at maturity at least equal to 66 2/3% of the original
principal amount at maturity of the Parent Discount Notes remain outstanding.
Parent is not, however, obligated to redeem any Parent Discount Notes with the
proceeds of any equity offering.
The covenants in the Parent Discount Notes Indenture under which the Parent
Discount Notes were issued limit the ability of Parent to pay dividends to its
stockholders. Additionally, the Parent Discount Notes Indenture imposes
limitations on the incurrence of indebtedness, whether secured or unsecured, by
Parent and its subsidiaries, on the disposition of assets, on the incurrence of
liens, on transactions with affiliates, on the sale or issuance of stock by the
subsidiaries of Parent and on the merger or consolidation of Parent and its
subsidiaries or sale of substantially all of the assets of Parent.
Upon the occurrence of a "Change of Control", as defined in the Parent
Discount Notes Indenture, each holder of Parent Discount Notes has the right to
require Parent to repurchase such holder's Parent Discount Notes at a
repurchase price in cash equal to 101% of the accrued principal amount thereof
plus accrued and unpaid interest, if any, to the date of repurchase. The
following constitute a Change of Control under the Parent Discount Notes
Indenture: (i) the acquisition by a person or group of beneficial ownership of
a majority of the securities of Parent having the right to vote in the election
of directors; (ii) certain changes in the Board of Directors of Parent; (iii)
the sale or transfer of all or substantially all of the assets of Parent or the
merger or consolidation of Parent with or into another corporation with the
effect that the outstanding voting stock of Parent is converted into or
exchanged for cash, securities or other property other than certain
transactions in which (i) the voting stock of Parent is exchanged for or
converted into either capital stock of the transferee or survivor entity or,
under limited circumstances, cash, securities or other property and (ii) no
person or group shall have become the beneficial owner of a majority of the
securities of the surviving corporation having the right to vote in the
election of directors. The Subsidiary Restructuring did not constitute a Change
of Control under the Parent Discount Notes Indenture. Parent expects to issue
securities constituting a majority of Parent's equity to certain of
MobileMedia's creditors in connection with the MobileMedia Transaction.
However, Parent does not intend to issue equity securities in a manner that
would constitute a Change in Control. Parent's present management and Board of
Directors would continue to control Parent if Parent acquires MobileMedia.
The following constitute "Events of Default" under the Parent Discount Notes
Indenture: (i) a default in the payment of any installment of interest upon any
of the Parent Discount Notes as and when the same shall become due and payable,
and continuance of such default for a period of 30 days; (ii) a default in the
payment of all or any part of the principal of, or premium, if any, on any of
the Parent Discount Notes as and when the same shall become due and payable
either at maturity, upon any redemption or repurchase, by declaration or
otherwise; (iii) the failure of Parent to comply with the covenants limiting
mergers and sales of assets; (iv) the failure of the part of Parent duly to
observe or perform any other of the covenants or agreements on the part of
Parent in the Parent Discount Notes or in the Parent Discount Notes Indenture
for a period of 60 days after the date on which written notice specifying such
failure shall have been given by registered or certified mail, return receipt
requested, to Parent by the Trustee, or Parent and the Trustee by the holders
of at least 25% in aggregate principal amount of the Parent Discount Notes at
the time outstanding; (v) certain events of bankruptcy, insolvency or
reorganization in respect of Parent or any of its restricted subsidiaries;
(vii) (A) a default in any payment when due at final maturity on any
indebtedness for borrowed money of Parent or any restricted subsidiary in
principal amount aggregating $5.0 million or (B) an event of default as defined
in any indenture or instrument evidencing or under which Parent or any
restricted subsidiary has outstanding at least $5.0 million aggregate principal
amount of indebtedness for borrowed money shall happen and such indebtedness
shall have been accelerated so that the same shall be or become due and payable
prior to the date on which it would otherwise become due and payable; (viii)
one or more judgments, orders or decrees for the payment of money in excess of
$5.0 million, whether individually or in an aggregate amount, shall be entered
against Parent or any restricted subsidiary of Parent and shall not be
discharged and there shall have been a period of 60 days during
78
<PAGE>
which a stay of enforcement of such judgment or order, by reason of pending
appeal or otherwise, shall not be in effect; or (ix) the holder of any
indebtedness of Parent or any restricted subsidiary aggregating at least $5.0
million in principal amount that is secured by a lien on the property or
assets of Parent or any restricted subsidiary shall notify the Trustee of the
intended sale or disposition of any assets of Parent of any restricted
subsidiary that have been pledged to or for the benefit of such holder or
shall commence any proceeding, or take any action to retain in satisfaction of
such debt or to collect on, seize, dispose of or apply in satisfaction of such
debt, property or assets of Parent or any of its restricted subsidiaries
pursuant to the terms of any agreement or instrument evidencing any such debt
of Parent or any restricted subsidiary or in accordance with applicable law.
PARENT CONVERTIBLE DEBENTURES
As of September 30, 1998, there was outstanding $13.4 million in principal
amount of 6 3/4% Convertible Subordinated Debentures due 2003 of Parent (the
"Parent Convertible Debentures"). The Parent Convertible Debentures accrue
interest at the rate of 6.75% per annum, payable semi-annually on June 1 and
December 1. The Parent Convertible Debentures are scheduled to mature on
December 1, 2003. The principal amount of the Parent Convertible Debentures is
convertible into Common Stock at a conversion price of $16.75 per share at any
time prior to redemption or maturity.
The Parent Convertible Debentures may be redeemed at any time at the option
of Parent, in whole or from time to time in part, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period beginning December 1 of the years indicated
below (in each case together with accrued and unpaid interest to the
redemption date):
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
1997........................................................ 104.050%
1998........................................................ 103.375%
1999........................................................ 102.700%
2000........................................................ 102.025%
2001........................................................ 101.350%
2002........................................................ 100.675%
2003 and thereafter......................................... 100.000%
</TABLE>
Upon the occurrence of a "Fundamental Change", as defined in the indenture
under which the Parent Convertible Debentures were issued (the "Parent
Debenture Indenture"), each holder of Parent Convertible Debentures has the
right, at the holder's option, to require Parent to repurchase all of such
holder's Parent Convertible Debentures, or any portion thereof, at a price
equal to 100% of the principal amount of the Parent Convertible Debentures,
plus accrued interest to the repurchase date. The following constitute a
Fundamental Change under the Parent Debenture Indenture: (i) the acquisition
by a person or group of beneficial ownership of capital stock of Parent
entitled to exercise more than 50% of the total voting power of all capital
stock (unless such beneficial ownership is approved by the Board of Directors
of Parent prior to such person or group acquiring such beneficial ownership);
(ii) certain changes in Parent's Board of Directors; (iii) a share exchange of
Parent with, or the merger of Parent into, any other person, any merger of
another person into Parent, or any sale or transfer of all or substantially
all of the assets of Parent to another person (subject in each case to certain
exceptions); (iv) the purchase by Parent of beneficial ownership in shares of
its Common Stock if such purchase would result in a default under any senior
debt agreements to which Parent is a party; or (v) certain distributions by
Parent of its Common Stock. The Subsidiary Restructuring did not, and the
MobileMedia Transaction is not intended to, constitute a Fundamental Change
under the Parent Debenture Indenture.
The Parent Convertible Debentures represent senior unsecured obligations of
Parent and are subordinated to "Senior Indebtedness" of Parent, as defined in
the Parent Debenture Indenture. The Parent Debenture Indenture does not
contain any limitation or restriction on the incurrence of Senior Indebtedness
or other indebtedness or securities of Parent or its subsidiaries.
79
<PAGE>
The following constitute "Events of Default" under the Parent Debenture
Indenture: (i) a default in the payment of any interest on the Parent
Convertible Debentures that continues for 30 days after the date when due;
(ii) a default in the payment of principal of or premium, if any, on any
Parent Convertible Debenture when due and payable, whether at maturity, upon
redemption or otherwise; (iii) a default in the performance of any other
covenant or agreement of Parent that continues for 30 days after written
notice of such default, requiring Parent to remedy the same; (iv) a default
under any indebtedness for money borrowed by Parent, which default results in
such indebtedness in an amount exceeding $5.0 million becoming or being
declared due any payable prior to the date on which it would otherwise have
become due and payable, if such indebtedness is not discharged, or such
acceleration is not annulled, within 30 days after written notice of such
default, requiring Parent to remedy the same; or (v) the occurrence of certain
events of bankruptcy, insolvency or reorganization with respect to Parent.
80
<PAGE>
DESCRIPTION OF NOTES
The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions". Capitalized terms not otherwise defined
below or elsewhere in this Prospectus have the meanings given them in the
Indenture.
GENERAL
The Notes were issued pursuant to the Indenture, dated as of June 29, 1998
between Arch and U.S. Bank Trust National Association, as trustee (the
"Trustee"). The Exchange Notes will be issued under the same Indenture. The
Exchange Notes will be issued solely in exchange for an equal principal amount
of Private Notes pursuant to the Exchange Offer. The form and terms of the
Exchange Notes will be identical in all material respects to the form and
terms of the Private Notes except that (i) of the Exchange Notes have been
registered under the Securities Act, (ii) the Exchange Notes will not be
subject to transfer restrictions and (iii) certain provisions relating to an
increase in the stated interest rate on the Private Notes provided for under
certain circumstances will be eliminated.
The Private Notes and the Exchange Notes will constitute a single series of
debt securities under the Indenture. Upon consummation of the Exchange Offer,
Holders of Private Notes who do not exchange their Private Notes for Exchange
Notes will vote together with holders of the Exchange Notes for all relevant
purposes under the Indenture. In that regard, the Indenture requires that
certain actions by the Holders thereunder (including acceleration following an
Event of Default) must be taken, and certain rights must be exercised, by
specified minimum percentages of the aggregate principal amount of the
outstanding securities issued under the Indenture. In determining whether
holders of the requisite percentage in principal amount have given any notice,
consent or waiver or taken any other action permitted under the Indenture, any
Private Notes that remain outstanding after the Exchange Offer will be
aggregated with the Exchange Notes, and the holders of such Private Notes and
the Exchange Notes will vote together as a single series for all such
purposes. Accordingly, all references herein to specified percentages in
aggregate principal amount of the outstanding Notes shall be deemed to mean,
at any time after the Exchange Offer is consummated, such percentages in
aggregate principal amount of the Private Notes and the Exchange Notes then
outstanding.
The terms of the Notes include those stated in the Indenture and those made
a part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of the Notes are referred to the Indenture and the Trust Indenture
Act for a statement thereof. The following summary of the material provisions
of the Indenture does not purport to be complete and is qualified in its
entirety by reference to the Indenture, including the definitions of certain
terms used below. Copies of the Indenture and the Exchange and Registration
Rights Agreement have been filed as exhibits to the Registration Statement.
See "Additional Information". All references to the "Company" in this
"Description of Notes" refer only to Arch Communications, Inc. and do not
include its subsidiaries (as defined in the Indenture) or Parent.
Arch is an intermediate holding company with no material assets other than
the stock of its Subsidiaries. Because the operations of Arch are conducted
entirely through its Subsidiaries, Arch's cash flow and consequent ability to
service its Debt, including the Notes, is dependent upon the earnings of such
Subsidiaries and the distribution of those earnings to Arch or upon loans or
other payments of funds by such Subsidiaries to Arch. The Subsidiaries are
separate and distinct legal entities and will have no obligation, contingent
or otherwise, to pay any amounts due with respect to the Notes or to make any
funds available therefor, whether by dividends, loans or other payments.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited to an aggregate principal amount of $130.0 million
and will mature on July 1, 2007. Interest on the Notes will accrue at the rate
of 12 3/4% per annum, payable in cash semi-annually in arrears on each January
1 and July 1 commencing January 1, 1999, to the persons in whose names the
Notes are registered at the close of business on the preceding June 15 or
December 15, as the case may be. Interest will accrue from the most recent
Interest Payment Date to which interest has been paid or duly provided for or,
if no
81
<PAGE>
interest has been paid or duly provided for, from the date of original
issuance of the Notes. Interest will be computed on the basis of a 360-day
year of twelve 30-day months. See "Certain Federal Income Tax Considerations".
The Notes are issuable only in registered form, without coupons, in
denominations of $1,000 or any integral multiple thereof. Principal of and
interest, premium and Liquidated Damages, if any, on each Note will be payable
and the Notes may be presented for transfer or exchange at the office or
agency of Arch maintained for such purpose. Unless otherwise designated by
Arch, Arch's office or agency for such purpose will be the principal corporate
trust office of the Trustee. At Arch's option, payment of interest may be made
by check mailed to registered holders of the Notes at the addresses set forth
on the registry books maintained by the Trustee, who will initially act as
registrar and transfer agent for the Notes. No service charge will be made for
any exchange or registration of transfer of Notes, but Arch may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
As of the date of the initial issuance of the Notes, all of Arch's
Subsidiaries will be Restricted Subsidiaries for purposes of the Indenture.
However, under certain circumstances, Arch will be able to designate current
or future Subsidiaries as Unrestricted Subsidiaries (as defined in the
Indenture). Unrestricted Subsidiaries will not be subject to any of the
restrictive covenants set forth in the Indenture.
SENIORITY; RANKING
The Notes will be senior unsecured obligations of Arch, ranking pari passu
with all unsubordinated Debt of Arch and senior to all subordinated Debt of
Arch. However, the Notes will be structurally subordinated to all liabilities
of Arch's Subsidiaries, including trade payables, capitalized lease
obligations and Debt that may be incurred by Arch's Subsidiaries under the
Bank Credit Facilities or other current or future financing arrangements. Any
right of Arch to receive assets of any Subsidiary upon such Subsidiary's
liquidation or reorganization (and the consequent right of the holders of the
Notes to participate in any distribution of those assets) will be structurally
subordinated to the claims of that Subsidiary's creditors, except to the
extent that Arch is itself recognized as a creditor of such Subsidiary, in
which case the claims of Arch would still be subject to any security interests
in the assets of such Subsidiary and any liabilities of such Subsidiary senior
to that held by Arch and may otherwise be challenged in a liquidation or
reorganization proceeding. At September 30, 1998, the Notes were structurally
subordinated to $329.8 million of liabilities of Arch's Subsidiaries. In
addition, Parent will not have any obligation to pay any amounts due with
respect to the Notes or to make any funds available therefor. At September 30,
1998, Parent had $373.6 million of liabilities (excluding liabilities of its
Subsidiaries and Parent's guarantees thereof). The MobileMedia Transaction, if
consummated, is expected to increase Arch's indebtedness by approximately
$200.0 million and API's indebtedness by approximately $150.0 million and will
cause API to own additional subsidiaries having liabilities of their own. The
debt-to-equity ratio and the ratio of total debt to EBITDA for Arch (without
regard to its subsidiaries) is expected to increase (and the ratio of EBITDA
to interest is expected to decrease), although the debt-to-equity ratio and
ratio of total debt to annualized EBITDA for Parent and for Arch, each on a
consolidated basis, are expected to decrease (and the ratio of EBITDA to
interest expense is expected to increase).
OPTIONAL REDEMPTION
The Notes will be redeemable at the election of Arch, as a whole or from
time to time in part, at any time on or after July 1, 2003 on not less than 30
nor more than 60 days' prior notice at the redemption prices (expressed as
percentages of principal amount) set forth below, together with accrued and
unpaid interest and Liquidated Damages, if any, to the redemption date, if
redeemed during the 12-month period beginning on July 1 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003..................................................... 106.375%
2004..................................................... 104.250%
2005..................................................... 102.125%
2006 and thereafter...................................... 100.000%
</TABLE>
82
<PAGE>
In addition, at any time or from time to time prior to July 1, 2001, Arch
may redeem up to an aggregate of 35% of the original aggregate principal
amount of the Notes within 75 days of an Equity Offering with the net proceeds
of such offering at a redemption price equal to 112 3/4% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, to but excluding the date of redemption; provided that, immediately after
giving effect to such redemption, Notes with an aggregate principal amount of
at least $84.5 million remain outstanding.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 principal amount or less shall be redeemed in
part. Notices of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each holder of Notes
to be redeemed at its registered address. Notices of redemption may not be
conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
and Liquidated Damages, if any, cease to accrue on Notes or portions of them
called for redemption.
MANDATORY REDEMPTION
The Notes will not have the benefit of any sinking fund obligations.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs at any time, then each holder of Notes will
have the right to require that Arch purchase such holder's Notes, in whole or
in part in integral multiples of $1,000, at a purchase price (the "Change of
Control Purchase Price") in cash in an amount equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase (the "Change of Control Purchase Date"), pursuant
to the offer described below (the "Change of Control Offer") and the other
procedures set forth in the Indenture.
Within 30 days following any Change of Control, Arch will notify the Trustee
thereof and give written notice of such Change of Control to each holder of
Notes by first class mail, postage prepaid, at its registered address,
stating, among other things: (i) the Change of Control Purchase Price and the
Change of Control Purchase Date, which will be a Business Day no earlier than
30 days nor later than 60 days from the date such notice is mailed or such
later date as is necessary to comply with requirements under the Exchange Act;
(ii) that any Note not tendered will continue to accrue interest and
Liquidated Damages, if any; (iii) that, unless Arch defaults in the payment of
the Change of Control Purchase Price, any Notes accepted for payment pursuant
to the Change of Control Offer will cease to accrue interest and Liquidated
Damages, if any, after the Change of Control Purchase Date; and (iv) other
procedures that a holder of Notes must follow to accept a Change of Control
Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that Arch
will have available, or be able to obtain, funds sufficient to pay the Change
of Control Purchase Price for all of the Notes that might be tendered by
holders of the Notes seeking to accept the Change of Control Offer. The Bank
Credit Facilities will limit the purchase of the Notes by Arch prior to full
repayment of indebtedness under such Bank Credit Facilities. There can be no
assurance that in the event of a Change of Control Arch will be able to obtain
the necessary consents
83
<PAGE>
from the lenders under the Bank Credit Facilities or from any other debt
holders to consummate a Change of Control Offer. The failure of Arch to make
or consummate the Change of Control Offer or pay the Change of Control
Purchase Price when due would result in an Event of Default and would give the
Trustee and the holders of the Notes the rights described under "Events of
Default and Remedies".
In addition to the obligations of Arch under the Indenture with respect to
the Notes in the event of a Change of Control, the Bank Credit Facilities
contain a provision designating as an event of default a change of control as
described therein, the occurrence of which will obligate Arch to repay amounts
outstanding under the Bank Credit Facilities upon an acceleration of the
indebtedness issued thereunder.
One of the events which constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of Arch's assets. This term
has not been interpreted under New York law (which is the governing law of the
Indenture) to represent a specific quantitative test. As a consequence, in the
event holders of the Notes elect to require Arch to purchase the Notes and
Arch elects to contest such election, there can be no assurance as to how a
court interpreting New York law would interpret the phrase.
The definition of Change of Control in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require Arch to repurchase such Notes in the event of a highly leveraged
transaction or certain transactions with Arch's management or its affiliates,
including a reorganization, restructuring, merger or similar transaction
involving Arch (including, in certain circumstances, an acquisition of Arch by
management or its affiliates) that may adversely affect holders of the Notes,
if such transaction is not a transaction defined as a Change of Control. See
"--Certain Definitions" for the definition of Change of Control under the
Indenture. A transaction involving Arch's management or its affiliates, or a
transaction involving a recapitalization of Arch, would result in a Change of
Control only if it is the type of transaction specified in such definition.
Any proposed highly leveraged transaction, whether or not constituting a
Change of Control, would be required to comply with the other covenants in the
Indenture, including those described under "Incurrence of Indebtedness " and
"Liens". Parent expects to issue securities constituting a majority of
Parent's equity to certain of MobileMedia's creditors in connection with the
MobileMedia Transaction. However, Parent does not intend to issue equity
securities in a manner that would constitute a Change in Control under the
Indenture. Parent's present management and Board of Directors would continue
to control Parent if Parent acquires MobileMedia.
Arch will comply with the applicable tender offer rules, including Rule 14e-
1 under the Exchange Act, and any other applicable securities laws and
regulations, in connection with a Change of Control Offer.
Asset Sales
(a) Arch will not, and will not permit any Restricted Subsidiary to, engage
in any Asset Sale unless (i) the consideration received by Arch or such
Restricted Subsidiary for such Asset Sale is not less than the fair market
value of the assets sold (as determined by the Board of Directors of Arch,
whose good faith determination will be conclusive) and (ii) the consideration
received by Arch or the relevant Restricted Subsidiary in respect of such
Asset Sale consists of at least 85% (A) cash or cash equivalents and/or (B)
the assumption by the transferee of Pari Passu Debt of Arch or any Debt of a
Restricted Subsidiary and release of Arch or such Restricted Subsidiary from
all liability on such Debt.
(b) If Arch or any Restricted Subsidiary engages in an Asset Sale, Arch may
use the Net Cash Proceeds thereof, within 12 months after such Asset Sale, to
(i) make a permanent reduction of amounts outstanding under the Bank Credit
Facilities or repay or prepay any then outstanding Pari Passu Debt of Arch or
any Debt of a Restricted Subsidiary or (ii) invest (or enter into a legally
binding agreement to invest (within 90 days)) in (A) properties and assets to
replace the properties and assets that were the subject of the Asset Sale, or
(B) properties and assets that will be used in the telecommunications
businesses of Arch or its Restricted Subsidiaries, as the case may be. If any
such legally binding agreement to invest such Net Cash Proceeds is terminated,
then Arch may, within 90 days of such termination or within 12 months of such
Asset Sale, whichever is later, invest such
84
<PAGE>
Net Cash Proceeds as provided in clause (i) or (ii) (without regard to the
parenthetical in such clause (ii)) above. Pending application of the Net Cash
Proceeds of an Asset Sale pursuant to clause (ii) above, Arch may use such Net
Cash Proceeds to reduce temporarily borrowings under the Bank Credit
Facilities. The amount of such Net Cash Proceeds not so used as set forth in
this paragraph (b) constitutes "Excess Proceeds".
(c) When the aggregate amount of Excess Proceeds exceeds $5.0 million, Arch
will, within 30 days, make an offer to purchase from all holders of Notes, on
a pro rata basis, in accordance with the procedures set forth in the
Indenture, the maximum principal amount (expressed as a multiple of $1,000) of
Notes that may be purchased with the Excess Proceeds. The offer price for each
Note will be payable in cash in an amount equal to 100% of the principal
amount of such Note, plus accrued and unpaid interest and Liquidated Damages,
if any, to the date such offer to purchase is consummated. To the extent that
the aggregate principal amount of Notes tendered pursuant to such offer to
purchase is less than the Excess Proceeds, Arch may use the then remaining
Excess Proceeds for other general corporate purposes not prohibited by the
Indenture. If the aggregate principal amount of Notes validly tendered and not
withdrawn by holders thereof exceeds the Excess Proceeds, Notes to be
purchased will be selected on a pro rata basis. Upon completion of such offer
to purchase, the amount of Excess Proceeds will be reset to zero.
CERTAIN COVENANTS
Restricted Payments
Arch will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, take any of the following actions:
(a) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Capital Stock of Arch or any Restricted Subsidiary
(other than dividends or distributions payable solely in Qualified Equity
Interests of Arch and other than dividends or distributions by a Restricted
Subsidiary payable to Arch or another Restricted Subsidiary);
(b) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of Capital Stock (other than Disqualified Stock)
of Arch, any Restricted Subsidiary or any Affiliate of Arch, or any
options, warrants or other rights to acquire such shares of Capital Stock
(other than any such Capital Stock owned by Arch or any of its Restricted
Subsidiaries);
(c) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Debt (including
Disqualified Stock);
(d) make any loan, advance, capital contribution to or other Investment
in, or guarantee any obligation of, any Affiliate of Arch, other than a
Permitted Investment; and
(e) make any other Investment (other than a Permitted Investment) in any
Person;
(such payments or any other actions described in (but not excluded from)
clauses (a) through (e) being referred to as "Restricted Payments"), unless at
the time of, and immediately after giving effect to, the proposed Restricted
Payment:
(i) no Default or Event of Default has occurred and is continuing;
(ii) Arch could Incur at least $1.00 of additional Debt (other than
Permitted Debt) in accordance with the provisions described under the
"Incurrence of Indebtedness" covenant; and
(iii) the aggregate amount of all Restricted Payments declared or made
after the issue date of the Notes does not exceed the sum of:
(A) the remainder of (x) 100% of the aggregate Consolidated Cash Flow of
Arch (excluding, for purposes other than determining whether Arch may, or
may permit a Restricted Subsidiary to, make
85
<PAGE>
Investments in any Person, the net income (but not the net loss) of any
Restricted Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary is at the
date of determination restricted, directly or indirectly, except to the
extent that such net income could be paid to Arch or a Restricted
Subsidiary thereof by loans, advances, intercompany transfers, principal
repayments or otherwise) measured on a cumulative basis during the period
beginning on the first day of Arch's fiscal quarter during which the Notes
are originally issued and ending on the last day of Arch's most recent
fiscal quarter for which internal financial statements are available ending
prior to the date of such proposed Restricted Payment, minus (y) the
product of 2.0 times Consolidated Interest Expense accrued on a cumulative
basis during the period beginning on the first day of Arch's fiscal quarter
during which the Notes are originally issued and ending on the last day of
Arch's most recent fiscal quarter for which internal financial statements
are available ending prior to the date of such proposed Restricted Payment;
plus
(B) the aggregate net proceeds received by Arch after the initial
issuance of the Notes (including the fair market value of property other
than cash as determined by Arch's Board of Directors, whose good faith
determination will be conclusive) from the issuance or sale (other than to
a Restricted Subsidiary) of Qualified Equity Interests of Arch; plus
(C) the aggregate net proceeds received by Arch after the initial
issuance of the Notes (including the fair market value of property other
than cash as determined by Arch's Board of Directors, whose good faith
determination will be conclusive) from the issuance or sale (other than to
a Restricted Subsidiary) of debt securities or Disqualified Stock that have
been converted into or exchanged for Qualified Stock of Arch, together with
the aggregate net cash proceeds received by Arch at the time of such
conversion or exchange; plus
(D) without duplication, the lesser of (x) Net Cash Proceeds received by
Arch or a wholly owned Restricted Subsidiary of Arch upon the sale of any
Unrestricted Subsidiary or (y) the amount of Arch's or such Restricted
Subsidiary's Investment in such Unrestricted Subsidiary.
Notwithstanding the foregoing, Arch and its Restricted Subsidiaries may take
any one or more of the following actions, whether singly or in combination, so
long as (with respect to clauses (e) through (k) below) no Default or Event of
Default has occurred and is continuing:
(a) the payment of any dividend within 60 days after the date of
declaration thereof if at the declaration date such payment would not have
been prohibited by the foregoing provisions;
(b) the repurchase, redemption, defeasance or other acquisition or
retirement for value of any shares of Capital Stock of Arch, in exchange
for, or out of the net cash proceeds of, a substantially concurrent
issuance and sale (other than to a Restricted Subsidiary) of Qualified
Equity Interests of Arch;
(c) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Debt in exchange for, or out of the
net cash proceeds of, a substantially concurrent issuance and sale (other
than to a Restricted Subsidiary) of shares of Qualified Stock of Arch;
(d) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Debt (plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the
terms of the Debt refinanced or the amount of any premium reasonably
determined by Arch as necessary to accomplish such refinancing by means of
a tender offer or privately negotiated repurchase) in exchange for, or out
of the net cash proceeds of, a substantially concurrent Incurrence or sale
(other than to a Restricted Subsidiary) of Subordinated Debt of Arch, so
long as (i) such new Subordinated Debt is subordinated to the Notes to the
same extent as such Subordinated Debt so purchased, redeemed, acquired or
retired and (ii) such new Subordinated Debt has an Average Life longer than
the Average Life of the Notes and a final Stated Maturity of principal
later than the final Stated Maturity of the Notes;
(e) payments (whether made in cash, property or securities) by Arch or
any Subsidiary of Arch to any employee of Arch or any Subsidiary of Arch in
connection with the issuance or redemption of stock of any such company
pursuant to any employee stock option plan or board resolution to the
extent that such
86
<PAGE>
payments do not exceed $500,000 in the aggregate during any fiscal year or
$2.0 million in the aggregate during the term of the Notes;
(f) the repurchase of any Subordinated Debt at a purchase price not
greater than 101% of the principal amount of such Subordinated Debt in the
event of a Change of Control in accordance with provisions similar to the
"Repurchase at the Option of Holders--Change of Control" covenant; provided
that prior to such repurchase Arch has made the Change of Control Offer as
provided in such covenant with respect to the Notes and has repurchased all
Notes validly tendered for payment in connection with such Change of
Control Offer;
(g) Investments in Persons made with, or out of the net cash proceeds of
a substantially concurrent issuance and sale (other than to a Restricted
Subsidiary) of, shares of Qualified Stock of Arch;
(h) Investments in Persons all or substantially all of whose operations
are in the telecommunications business; provided that the aggregate amount
of Investments pursuant to this clause (h) in all such Persons does not
exceed $20.0 million;
(i) payments to Parent on or after September 14, 2001 to enable Parent to
pay when due accrued but unpaid interest on Parent's 10 7/8% Senior
Discount Notes due 2008; provided that such amounts are promptly used by
Parent to pay such interest and, provided further, that at the time of such
payment and giving pro forma effect thereto Arch's Consolidated Cash Flow
ratio would be less than 5.0 to 1.0;
(j) Investments in Benbow PCS Ventures, Inc. of up to $50.0 million in
the aggregate; and
(k) make any other payment or payments of up to $5.0 million in the
aggregate which would otherwise constitute a Restricted Payment.
The Restricted Payments described in clauses (b), (c), (e), (f), (g), (h),
(i), (j) and (k) of this paragraph will be Restricted Payments that will be
permitted to be taken in accordance with the preceding paragraph but will
reduce the amount that would otherwise be available for Restricted Payments
under clause (iii) of the first paragraph of this section and the Restricted
Payments described in clauses (a) and (d) of the preceding paragraph will be
Restricted Payments that will be permitted to be taken in accordance with the
preceding paragraph and will not reduce the amount that would otherwise be
available for Restricted Payments under clause (iii) of the first paragraph of
this section.
For the purpose of making any calculations under the Indenture, (i) an
Investment will include the fair market value of the net assets of any
Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary and will, for the purpose of this
covenant, exclude the fair market value of the net assets of any Unrestricted
Subsidiary that is designated as a Restricted Subsidiary, (ii) any property
transferred to or from an Unrestricted Subsidiary will be valued at fair
market value at the time of such transfer; provided that, in each case, the
fair market value of an asset or property is as determined by the Board of
Directors of Arch in good faith and (iii) subject to the foregoing, the amount
of any Restricted Payment, if other than cash, will be determined by the Board
of Directors of Arch, whose good faith determination will be conclusive.
If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment in an Unrestricted Subsidiary or
other Person that thereafter becomes a Restricted Subsidiary, such Investment
will no longer be counted as a Restricted Payment for purposes of calculating
the aggregate amount of Restricted Payments.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such
Investment (resulting from the payment of interest or dividend, loan
repayment, transfer of assets or otherwise) to the extent such net reduction
is not included in Arch's Consolidated Adjusted Net Income; provided that the
total amount by which the aggregate amount of all Restricted Payments may be
reduced may not exceed the
87
<PAGE>
lesser of (x) the cash proceeds received by Arch and its Restricted
Subsidiaries in connection with such net reduction and (y) the initial amount
of such Investment.
In computing Consolidated Cash Flow of Arch under the first paragraph of
this section, (i) Arch may use audited financial statements for the portions
of the relevant period for which audited financial statements are available on
the date of determination and unaudited financial statements and other current
financial data based on the books and records of Arch for the remaining
portion of such period and (ii) Arch will be permitted to rely in good faith
on the financial statements and other financial data derived from the books
and records of Arch that are available on the date of determination. If Arch
makes a Restricted Payment which, at the time of the making of such Restricted
Payment, would in the good faith determination of the Board of Directors of
Arch be permitted under the requirements of the Indenture, such Restricted
Payment will be deemed to have been made in compliance with the Indenture
notwithstanding any subsequent adjustments made in good faith to Arch's
financial statements affecting Consolidated Adjusted Net Income of Arch for
any period.
Incurrence of Indebtedness
Arch will not, and will not permit any Restricted Subsidiary to, Incur any
Debt; provided, however, that Arch may Incur Debt and may permit a Restricted
Subsidiary to Incur Debt if at the time of such Incurrence and after giving
effect thereto the Consolidated Cash Flow Ratio would be less than 5.5 to 1.0.
In making the foregoing calculation, there shall be excluded from Debt for
purposes of calculating the Consolidated Cash Flow Ratio all Debt of Arch and
its Restricted Subsidiaries incurred pursuant to clause (i) of the definition
of Permitted Debt, and pro forma effect will be given to (i) the Incurrence of
the Debt to be incurred and the application of the net proceeds therefrom to
refinance other Debt and (ii) the acquisition (whether by purchase, merger or
otherwise) or disposition (whether by sale, merger or otherwise) of any
company, entity or business acquired or disposed of by Arch or its Restricted
Subsidiaries, as the case may be, since the first day of the most recent full
fiscal quarter, as if such acquisition or disposition occurred at the
beginning of the most recent full fiscal quarter.
Notwithstanding the foregoing limitation, Arch may, and may permit its
Restricted Subsidiaries to, Incur the following additional Debt ("Permitted
Debt"):
(i) Debt under the Bank Credit Facilities in an aggregate amount not to
exceed $100.0 million at any one time outstanding, less any amounts by
which the commitments thereunder are permanently reduced pursuant to the
provisions thereof as described under "Repurchase at the Option of
Holders--Asset Sales";
(ii) other Debt of Arch or any Restricted Subsidiary outstanding on the
date of the Indenture;
(iii) Debt owed by Arch to any wholly owned Restricted Subsidiary or owed
by any wholly owned Restricted Subsidiary to Arch or any other wholly owned
Restricted Subsidiary (provided that such Debt is held by Arch or such
wholly owned Restricted Subsidiary and provided further that in the case of
Debt owed by Arch, such Debt is Subordinated Debt);
(iv) Debt represented by the Notes;
(v) Debt Incurred or Incurrable in respect of letters of credit, bankers'
acceptances or similar facilities not to exceed $5.0 million at any one
time outstanding;
(vi) Capital Lease Obligations whose Attributable Value does not exceed
$5.0 million at any one time outstanding;
(vii) Debt of Arch or any Restricted Subsidiary consisting of guarantees,
indemnities or obligations in respect of purchase price adjustments in
connection with the acquisition or disposition of assets, including,
without limitation, shares of Capital Stock;
88
<PAGE>
(viii) Debt of Arch or any Restricted Subsidiary (including trade letters
of credit) in respect of purchase money obligations; provided that the
aggregate amount of such Debt outstanding at any time does not exceed $5.0
million;
(ix) Debt arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business, provided that such
Debt is extinguished within two Business Days of its Incurrence; and
(x) any renewals, extensions, substitutions, refinancings or replacements
(each, for purposes of this clause, a "refinancing") of any outstanding
Debt, other than Debt Incurred pursuant to clause (i), (vii) or (ix) of
this definition, including any successive refinancings thereof, so long as
(A) any such new Debt is in a principal amount that does not exceed the
principal amount (or, if such Debt being refinanced provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced, plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the Debt
refinanced or the amount of any premium reasonably determined by Arch as
necessary to accomplish such refinancing by means of a tender offer or
privately negotiated repurchase, plus the amount of reasonable expenses
Incurred by Arch in connection with such refinancing, (B) in the case of
any refinancing of Subordinated Debt, such new Debt is made subordinate to
the Notes at least to the same extent as the Debt being refinanced, (C) in
the case of any refinancing of the Notes or any Pari Passu Debt, such new
Debt is made pari passu or subordinated to the Notes, and (D) such
refinancing Debt does not have an Average Life less than the Average Life
of the Debt being refinanced and does not have a final scheduled maturity
earlier than the final scheduled maturity of the Debt being refinanced, or
permit redemption at the option of the holder earlier than the earliest
date of redemption at the option of the holder of the Debt being
refinanced.
Liens
Arch will not, and will not permit any Restricted Subsidiary to, Incur any
Debt which is secured, directly or indirectly, with a Lien on the Property,
assets or any income or profits therefrom, of Arch or any Restricted
Subsidiary, except for Permitted Liens, unless contemporaneously therewith or
prior thereto, the Notes, including all payments of principal of, and premium,
interest and Liquidated Damages, if any, thereon, are secured equally and
ratably with (or prior to) the obligation or liability secured by such Lien
for so long as such obligation or liability is so secured.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
Arch will not, and will not permit any Restricted Subsidiary to, create,
assume or otherwise cause or suffer to exist or to become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay any dividends or make any other distributions on its
Capital Stock; (b) make payments in respect of any Debt owed to Arch or any
Restricted Subsidiary; (c) make loans or advances to Arch or any Restricted
Subsidiary; or (d) transfer any of its property or assets to Arch or any
Restricted Subsidiary, other than (i) those under the Bank Credit Facilities
existing as of the date of issuance of the Notes, (ii) those under other Debt
of Arch, Parent or any Restricted Subsidiary existing as of the date of
issuance of the Notes, (iii) those as may be contained in future agreements
provided that they are no more restrictive than those referred to in the
immediately preceding clauses (i) and (ii), (iv) those required by the Notes,
(v) customary non-assignment or sublease provisions of any lease governing a
leasehold interest of Arch or any Restricted Subsidiary, (vi) consensual
encumbrances or restrictions binding upon any Person at the time such Person
becomes a Subsidiary of Arch; provided, however, that such encumbrances or
restrictions were not incurred in anticipation of such Person becoming a
Subsidiary of Arch, (vii) encumbrances and restrictions imposed by applicable
law or (viii) any restrictions with respect to a Restricted Subsidiary imposed
pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary pending
89
<PAGE>
the closing of such sale or disposition. Nothing contained in this covenant
shall prevent Arch from entering into any agreement permitted by the "Liens"
covenant; provided, however, that the encumbrance or restriction in any such
agreement is limited to the transfer of the property or assets which is
subject to such agreement.
Consolidation, Merger or Sale of Assets
Arch will not consolidate with or merge with or into any other Person or
convey, transfer or lease its properties and assets as an entirety to any
Person or Persons, and Arch will not permit any Restricted Subsidiary to enter
into any such transaction or series of transactions, if such transaction or
series of transactions, in the aggregate, would result in the conveyance,
transfer or lease of all or substantially all of the properties and assets of
Arch and its Restricted Subsidiaries on a consolidated basis to any Person,
unless:
(a) either (i) Arch is the surviving corporation or (ii) the Person (if
other than Arch) formed by such consolidation or into which Arch or such
Restricted Subsidiary is merged or the Person which acquires, by
conveyance, transfer or lease, the properties and assets of Arch or such
Restricted Subsidiary, as the case may be, substantially as an entirety
(the "Surviving Entity") (A) shall be a corporation, partnership or trust
organized and validly existing under the laws of the United States of
America, any state thereof or the District of Columbia and (B) shall
expressly assume, by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, Arch's obligation for the due
and punctual payment of the principal (and premium, if any, on) and
interest on all the Notes and the performance and observance of every
covenant of the Indenture on the part of Arch to be performed or observed;
(b) immediately after giving effect to such transaction or series of
transactions and treating any obligation of Arch or a Subsidiary in
connection with or as a result of such transaction as having been Incurred
as of the time of such transaction, no Default or Event of Default shall
have occurred and be continuing;
(c) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis (on the
assumption that the transaction or series of transactions occurred on the
first day of the last full fiscal quarter immediately prior to the
consummation of such transaction or series of transactions with the
appropriate adjustments with respect to the transaction or series of
transactions being included in such pro forma calculation), Arch (or the
Surviving Entity if Arch is not the continuing obligor under the Indenture)
could Incur at least $1.00 of additional Debt (other than Permitted Debt)
under the provisions of the "Incurrence of Indebtedness" covenant; and
(d) if any of the property or assets of Arch or any of its Restricted
Subsidiaries would thereupon become subject to any Lien, the provisions of
the "Liens" covenant are complied with.
In connection with any such consolidation, merger, conveyance, transfer or
lease, Arch or the Surviving Entity shall have delivered to the Trustee, in
form and substance reasonably satisfactory to the Trustee, an Officer's
Certificate (attaching the computations to demonstrate compliance with clause
(c) above) and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease, and if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
complies with the requirements of the covenant described under "Consolidation,
Merger or Sale of Assets", and that all conditions precedent therein provided
for relating to such transaction have been complied with.
Upon any transaction or series of transactions that are of the type
described in, and are effected in accordance with, conditions described in the
immediately preceding paragraphs, the Surviving Entity shall succeed to, and
be substituted for, and may exercise every right and power of, Arch under the
Indenture with the same effect as if such Surviving Entity had been named as
Arch therein; and when a Surviving Entity duly assumes all of the obligations
and covenants of Arch pursuant to the Indenture and the Notes, except in the
case of a lease, the predecessor Person shall be relieved of all such
obligations.
90
<PAGE>
Transactions with Affiliates and Related Persons
Arch will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into any transaction or series of transactions after the
date of the Indenture with any Affiliate of Arch or any Related Person (other
than Arch or a wholly owned Restricted Subsidiary), unless (i) such
transaction or series of transactions is on terms no less favorable to Arch or
such Restricted Subsidiary than those that could be obtained in a comparable
arm's-length transaction with an entity that is not an Affiliate or a Related
Person; and (ii) if such transaction or series of transactions involves
aggregate consideration in excess of $1.0 million, then such transaction or
series of transactions is approved by a majority of the Board of Directors of
Arch, including the approval of a majority of the Disinterested Directors, and
is evidenced by a resolution of the Board of Directors of Arch. Any such
transaction or series of transactions shall be conclusively deemed to be on
terms no less favorable to Arch or such Restricted Subsidiary than those that
could be obtained in an arm's-length transaction if such transaction or
transactions are approved by a majority of the Board of Directors of Arch,
including a majority of the Disinterested Directors, and are evidenced by a
resolution of the Board of Directors of Arch.
This covenant will not apply to (i) transactions between Arch or any of its
Restricted Subsidiaries and any employee of Arch or any of its Restricted
Subsidiaries that are entered into in the ordinary course of business, (ii)
the payment of reasonable and customary regular fees and expenses to directors
of Arch, (iii) the making of indemnification, contribution or similar payments
to any director or officer of Arch or any Restricted Subsidiary of Arch under
Arch's or such Restricted Subsidiary's charter or by-laws (as each may be
amended after the date of the Indenture) or any indemnification or similar
agreement between Arch or any such Restricted Subsidiary and any of its
directors or officers (collectively, the "Indemnification Agreements") or (iv)
the entering into of any Indemnification Agreements with any current or future
directors or officers of Arch or any Restricted Subsidiary of Arch.
Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries
Arch (a) will not permit any Restricted Subsidiary to issue any Capital
Stock (other than to Arch or a Restricted Subsidiary) and (b) will not permit
any Person (other than Arch or a Restricted Subsidiary) to own any Capital
Stock of any Restricted Subsidiary; provided, however, that this covenant will
not prohibit (i) the issuance and sale of all, but not less than all, of the
issued and outstanding Capital Stock of any Restricted Subsidiary owned by
Arch or any Restricted Subsidiary in compliance with the other provisions of
the Indenture or (ii) the acquisition by Arch of less than all of the equity
ownership or Voting Stock of a Person that, upon the consummation of such
acquisition, will be a Subsidiary.
Subsidiary Guarantees
Arch will not (i) permit any of its Restricted Subsidiaries, directly or
indirectly, to Guarantee or secure through the granting of Liens the payment
of any Debt of Arch (other than Debt under or with respect to the Bank Credit
Facilities and Permitted Liens in respect thereof) or (ii) pledge any
intercompany notes representing obligations of any of its Restricted
Subsidiaries to secure the payment of any Debt of Arch (other than Debt under
or with respect to the Bank Credit Facilities and Permitted Liens in respect
thereof), unless such Subsidiary (A) executes a supplemental indenture
evidencing its Guarantee of the Notes or (B) in the case of a grant of a
security interest or the pledge of an intercompany note in a situation which
does not comply with clause (A) above, the holders of the Notes receive a
security interest in the asset to which such security interest relates or such
intercompany note; provided, however, that this provision will not apply to
Guarantees of, or Liens granted to secure, the USAM Notes which Guarantees or
Liens are required to be granted solely and as a direct result of the granting
of Guarantees or Liens with respect to the Bank Credit Facilities.
Unrestricted Subsidiaries
(a) The Board of Directors of Arch may designate any Subsidiary (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary so long as (i) neither Arch nor any Restricted Subsidiary is
directly or indirectly liable for any Debt of such Subsidiary, (ii) no default
with respect to any Debt of such
91
<PAGE>
Subsidiary would permit (upon notice, lapse of time or otherwise) any holder
of any other Debt of Arch or any Restricted Subsidiary to declare a default on
such other Debt or cause the payment thereof to be accelerated or payable
prior to its stated maturity, (iii) any Investment in such Subsidiary made as
a result of designating such Subsidiary an Unrestricted Subsidiary will not
violate the provisions of the "Restricted Payments" covenant, (iv) neither
Arch nor any Restricted Subsidiary has a contract, agreement, arrangement,
understanding or obligation of any kind, whether written or oral, with such
Subsidiary on terms other than those that might be obtained at the time from
Persons who are not Affiliates of Arch and (v) neither Arch nor any Restricted
Subsidiary has any obligation to subscribe for additional shares of Capital
Stock or other equity interest in such Subsidiary, or to maintain or preserve
such Subsidiary's financial condition or to cause such Subsidiary to achieve
certain levels of operating results. Notwithstanding the foregoing, Arch may
not designate as an Unrestricted Subsidiary any Subsidiary which, on the date
of the Indenture, is a Significant Subsidiary, and may not sell, transfer or
otherwise dispose of any properties or assets of any such Significant
Subsidiary to an Unrestricted Subsidiary, other than in the ordinary course of
business.
(b) The Board of Directors of Arch may designate any Unrestricted Subsidiary
as a Restricted Subsidiary; provided that such designation will be deemed to
be an Incurrence of Debt by a Restricted Subsidiary of any outstanding Debt of
such Unrestricted Subsidiary and such designation will only be permitted if
(i) such Debt is permitted under the "Incurrence of Indebtedness" covenant and
(ii) no Default or Event of Default would be in existence following such
designation.
Payments for Consent
Neither Arch nor any of its Subsidiaries will, directly or indirectly, pay
or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any holder of any Notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Indenture or the
Notes unless such consideration is offered to be paid or is paid to all
holders of Notes that consent, waive or agree to amend in the time frame set
forth in the solicitation documents relating to such consent, waiver or
agreement.
Reports
Arch will file on a timely basis with the Commission, to the extent such
filings are accepted by the Commission and whether or not Arch has a class of
securities registered under the Exchange Act, the annual reports, quarterly
reports and other documents that Arch would be required to file if it were
subject to Section 13 or 15 of the Exchange Act. Arch will also (a) file with
the Trustee, and upon written request, provide to each holder of Notes,
without cost to such holder, copies of such reports and documents within 15
days after the date on which Arch files such reports and documents with the
Commission or the date on which Arch would be required to file such reports
and documents if Arch were so required, and (b) if filing such reports and
documents with the Commission is not accepted by the Commission or is
prohibited under the Exchange Act, supply at Arch's cost copies of such
reports and documents to any prospective holder of Notes promptly upon written
request.
EVENTS OF DEFAULT AND REMEDIES
The following are "Events of Default" under the Indenture:
(a) default in the payment of any interest, or Liquidated Damages, if
any, on any Note when it becomes due and payable and continuance of such
default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any Note at its Maturity;
(c) failure to perform or comply with the Indenture provisions described
under "Repurchase at the Option of Holders--Change of Control" or
"Consolidation, Merger or Sale of Assets";
92
<PAGE>
(d) default in the performance, or breach, of any covenant or agreement
of Arch contained in the Indenture (other than a default in the
performance, or breach, of a covenant or warranty which is specifically
dealt with elsewhere in "Events of Default") and continuance of such
default or breach for a period of 60 days after written notice shall have
been given to Arch by the Trustee or to Arch and the Trustee by the holders
of at least 25% in aggregate principal amount of the Notes then
outstanding;
(e) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of Debt of
Arch or a Restricted Subsidiary (other than Benbow Investments, Inc. for so
long as either issue of the USAM Notes remains outstanding), which issue
has an aggregate outstanding principal amount of not less than $5.0
million, and such default has resulted in such Debt becoming, whether by
declaration or otherwise, due and payable prior to the date on which it
would otherwise become due and payable or (ii) a default in any payment
when due at final maturity of any such Debt;
(f) any Person entitled to take the actions described in this clause (f),
after the occurrence of any event of default under any agreement or
instrument evidencing any Debt in excess of $5.0 million in the aggregate
of Arch or any Restricted Subsidiary, shall notify the Trustee of the
intended sale or disposition of any assets of Arch or any Restricted
Subsidiary that have been pledged to or for the benefit of such Person to
secure such Debt or shall commence proceedings, or take action to retain in
satisfaction of any Debt, or to collect on, seize, dispose of or apply, any
such assets of Arch or any Restricted Subsidiary, pursuant to the terms of
any agreement or instrument evidencing any such Debt of Arch or any
Restricted Subsidiary or in accordance with applicable law;
(g) one or more final judgments or orders shall have been rendered
against Arch or any Restricted Subsidiary which require the payment of
money, either individually or in an aggregate amount, in excess of $5.0
million and shall not be discharged and there shall have been a period of
60 days during which a stay of enforcement of such judgment or order, by
reason of a pending appeal or otherwise, was not in effect; or
(h) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to Arch, any Significant Subsidiary or any two
or more Restricted Subsidiaries, which if considered as a single Person,
would constitute a Significant Subsidiary.
If an Event of Default (other than as specified in clause (h) above) occurs
and is continuing, then and in every such case, the Trustee or the holders of
not less than 25% in aggregate principal amount of the Notes then outstanding
may declare the principal of and accrued and unpaid interest on (and premium
and Liquidated Damages, if any, on), in each case as of such date of
declaration, all of the outstanding Notes to be due and payable immediately by
a notice in writing to Arch (and to the Trustee if given by the holders); and
upon any such declaration all amounts payable in respect of the Notes shall
become immediately due and payable. If an Event of Default specified in clause
(h) above occurs, then all of the outstanding Notes shall ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any holder of Notes.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
Notes then outstanding, by written notice to Arch and the Trustee, may rescind
and annul such declaration and its consequences if: (i) Arch has paid or
deposited with the Trustee a sum sufficient to pay (A) all overdue interest on
all Notes, (B) all unpaid principal of (and premium and Liquidated Damages, if
any, on) any outstanding Notes which has become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the
Notes, (C) to the extent that payment of such interest is lawful, interest
upon overdue interest, premium and Liquidated Damages, if any, and overdue
principal at the rate borne by the Notes and (D) all sums paid or advanced by
the Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel; and (ii)
all Events of Default, other than the non-payment of amounts of principal of
(and premium and Liquidated Damages, if any, on) or interest
93
<PAGE>
on the Notes which have become due solely by such declaration of acceleration,
have been cured or waived. No such rescission shall affect any subsequent
default or impair any right consequent thereon.
The holders of not less than a majority in aggregate principal amount of the
Notes then outstanding may, on behalf of the holders of all the Notes, waive
any past defaults under the Indenture, except a default in the payment of the
principal of (and premium and Liquidated Damages, if any) or interest on any
Note, or in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of the holder of each Note
outstanding affected thereby.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee shall mail to each holder of the Notes notice of the
Default or Event of Default within 30 days after the occurrence thereof, or,
if later, promptly upon the Trustee obtaining knowledge thereof. Except in the
case of a Default or an Event of Default in payment of principal of (and
premium and Liquidated Damages, if any, on) or interest on any Notes, the
Trustee may withhold the notice to the holders of such Notes if its Board of
Directors, executive committee or a committee of its trust officers determines
in good faith that withholding the notice is in the interest of the holders of
the Notes.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder
shall have previously given to the Trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the Notes then outstanding shall have made written
request, and offered reasonable indemnity, to the Trustee to institute such
proceeding as trustee, and the Trustee shall not have received from the
holders of a majority in aggregate principal amount of the Notes then
outstanding a direction inconsistent with such request and shall have failed
to institute such proceeding within 60 days. However, such limitations do not
apply to a suit instituted by a holder of a Note for enforcement of payment of
the principal of (and premium and Liquidated Damages, if any, on) or interest
on such Note on or after the respective due dates expressed in such Note.
Arch is required to furnish to the Trustee annual statements as to the
performance by Arch of its obligations under the Indenture and as to any
default in such performance. Arch is also required to notify the Trustee
within five days of becoming aware of any Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Arch or any
Restricted Subsidiary (other than Arch and its Restricted Subsidiaries), as
such, shall have any liability for any obligations of Arch or such Restricted
Subsidiary under the Notes, the Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder
of Notes by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE
Arch may, at its option and at any time, terminate the obligations of Arch
with respect to the outstanding Notes ("defeasance"). Such defeasance means
that Arch shall be deemed to have paid and discharged the entire Debt
represented by the outstanding Notes, except for (i) the rights of holders of
outstanding Notes to receive, solely from the trust fund described below,
payments in respect of the principal of (and premium and Liquidated Damages,
if any, on) and interest on such Notes when such payments are due, (ii) Arch's
obligations to issue temporary Notes, register the transfer or exchange of any
Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office
or agency for payments in respect of the Notes and segregate and hold such
payments in trust, (iii) the rights, powers, trusts, duties and immunities of
the Trustee and (iv) the defeasance provisions of the Indenture. In addition,
Arch may, at its option and at any time, elect to terminate the obligations of
Arch with respect to certain covenants set forth in the Indenture described
under "--Certain Covenants" above, and
94
<PAGE>
any omission to comply with such obligations shall not constitute a Default or
an Event of Default with respect to the Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance: (a) Arch must
irrevocably deposit or cause to be deposited with the Trustee, as trust funds
in trust, specifically pledged as security for, and dedicated solely to the
benefit of the holders of, the Notes, money in an amount, or Government
Securities which through the scheduled payment of principal and interest
thereon will provide money in an amount, or a combination thereof, sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay and discharge the principal of (and premium and Liquidated
Damages, if any, on) and interest on the outstanding Notes at maturity (or
upon redemption, if applicable) of such principal (and premium and Liquidated
Damages, if any) or installment of interest; (b) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or,
insofar as an event of bankruptcy under clause (h) of "Events of Default"
above is concerned, at any time during the period ending on the 91st day after
the date of such deposit; (c) such defeasance or covenant defeasance shall not
cause the Trustee to have a conflicting interest (as defined in the
Indenture), and for purposes of the Trust Indenture Act with respect to any
securities of Arch; (d) such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a default under, any
material agreement or instrument to which Arch is a party or by which it is
bound or cause the Trustee or the trust so created to be subject to the
Investment Company Act of 1940; (e) in the case of defeasance, Arch shall have
delivered to the Trustee an Opinion of Counsel stating that (x) Arch has
received a ruling from the Internal Revenue Service or (y) since the date of
the Indenture, there has been a change in applicable federal income tax law or
there has been published by the Internal Revenue Service a document that may
be used or cited as precedent, in either case to the effect, and based thereon
such opinion shall confirm, that the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred; (f) in the case of covenant defeasance, Arch
shall have delivered to the Trustee an Opinion of Counsel to the effect that
the holders of the Notes outstanding will not recognize income, gain or loss
for federal income tax purposes as a result of such covenant defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such covenant defeasance
had not occurred; and (g) Arch shall have delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
Upon the request of Arch, the Indenture will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) and the Trustee, at the
expense of Arch, will execute proper instruments acknowledging satisfaction
and discharge of the Indenture when: (a) either (i) all the Notes theretofore
authenticated and delivered (other than destroyed, lost or stolen Notes which
have been replaced or paid and Notes which have been subject to defeasance as
described under "--Legal Defeasance or Covenant Defeasance") have been
delivered to the Trustee for cancellation or (ii) all Notes not theretofore
delivered to the Trustee for cancellation (A) have become due and payable, (B)
will become due and payable at Stated Maturity within one year or (C) are to
be called for redemption within one year under arrangements satisfactory to
the Trustee for the giving of notice of redemption by the Trustee in the name,
and at the expense, of Arch, and Arch has irrevocably deposited or caused to
be deposited with the Trustee funds in trust for the purpose in an amount
sufficient to pay and discharge the entire Debt on such Notes not theretofore
delivered to the Trustee for cancellation, for principal (and premium and
Liquidated Damages, if any, on) and interest to the date of such deposit (in
the case of Notes which have come due and payable) or to the Stated Maturity
or Redemption Date, as the case may be; (b) Arch has paid or caused to be paid
all other sums payable under the Indenture by Arch; and (c) Arch has delivered
to the Trustee an Officer's Certificate and an Opinion of Counsel, each
stating that all conditions precedent provided in the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
95
<PAGE>
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. Arch is not required to transfer or exchange any Note selected for
redemption. Also, Arch is not required to transfer or exchange any Note for a
period of 15 days before a selection of Notes to be redeemed.
AMENDMENT, SUPPLEMENT AND WAIVER
Modifications and amendments of the Indenture may be made by Arch and the
Trustee with the consent of the holders of a majority in aggregate principal
amount of the Notes then outstanding; provided, however, that no such
modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby:
(a) change the Stated Maturity of the principal of, or any installment of
interest or Liquidated Damages, if any, on, any Note, or reduce the
principal amount thereof or the rate of interest or Liquidated Damages, if
any, thereon or any premium payable upon the redemption thereof, or change
the place of payment where, or the coin or currency in which, any Note or
any premium or interest or Liquidated Damages, if any, thereon is payable,
or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity thereof (or, in the case of redemption,
on or after the Redemption Date);
(b) reduce the percentage in aggregate principal amount of the Notes then
outstanding, the consent of whose holders is required for any such
amendment or for any waiver of compliance with certain provisions of, or
certain defaults and their consequences provided for under, the Indenture;
or
(c) modify any provisions relating to "Amendment, Supplement and Waiver"
or the fourth full paragraph under "Events of Default" above, except to
increase the percentage of outstanding Notes required for such actions or
to provide that certain other provisions of the Indenture cannot be
modified or waived without the consent of the holder of each outstanding
Note affected thereby.
The holders of a majority in aggregate principal amount of the Notes then
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture except as set forth above.
CONCERNING THE TRUSTEE
U.S. Bank Trust National Association, the Trustee under the Indenture, will
be the initial paying agent and registrar for the Notes.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. Under the Indenture, the holders of a majority in
aggregate principal amount of the Notes then outstanding will have the right
to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee, subject to certain exceptions.
If an Event of Default has occurred and is continuing, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
holder of Notes, unless such holder shall have offered to the Trustee
indemnity reasonably satisfactory to it against any loss, liability or
expense.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of Arch, to obtain payment of claims in certain
cases or to realize on certain property received by it in respect of any such
claims, as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest
(as defined in the Indenture) it must eliminate such conflict upon the
occurrence of an Event of Default or else resign.
96
<PAGE>
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
the Exchange and Registration Rights Agreement without charge by writing to
Arch Communications, Inc., 1800 West Park Drive, Suite 250, Westborough, MA
01581 Attention: Treasurer.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will be represented by a single, permanent Global Note (which may
be subdivided) in definitive, fully-registered form without interest coupons
in minimum denominations of $1,000 and integral multiples in excess thereof.
The Global Note will be deposited with the Trustee as custodian for DTC and
registered in the name of a nominee of DTC for credit to the respective
accounts of the purchasers at DTC.
Notes that are (i) transferred subsequent to the consummation of the Private
Note Offering to institutional "accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) who are
not QIBs as defined in Rule 144A ("IAIs"); (ii) issued in the limited
circumstances described below; or (iii) issued as provided in the Indenture in
reliance upon Rule 144 under the Securities Act, will be issued in definitive,
fully-registered form without interest coupons in minimum denominations of
$1,000 and integral multiples in excess thereof (the "Certificated
Securities"). Upon the purchase of a Note, each IAI will be required to
execute and deliver to Arch and the Trustee a letter containing certain
representations and agreements relating to the transfer of the Notes (the form
of which letter can be obtained from the Trustee) and an opinion of counsel,
if Arch or the Trustee so requests. If Certificated Securities initially
issued to an IAI are transferred to a QIB in reliance on Rule 144A or to non-
U.S. persons in compliance with Regulation S, such Certificated Securities
will, unless the Global Note has previously been exchanged in whole for
Certificated Securities, be exchanged for an interest in the Global Note.
The Notes are not issuable in bearer form. The Global Note may be
transferred, in whole or in part, only to another nominee of DTC.
The Global Note and any Certificated Securities will be subject to certain
restrictions on transfer set forth therein and in the Indenture and will bear
legends regarding such restrictions as described under "Notice to Investors".
The Global Note
Upon the issuance of the Global Note, DTC or its custodian will credit, on
its internal system, the respective principal amount of the individual
beneficial interests represented by the Global Note to the accounts of persons
who have accounts with DTC. Such accounts initially will be designated by or
on behalf of the Initial Purchasers. Ownership of beneficial interests in the
Global Note will be limited to persons who have accounts with DTC (including
participants of other securities clearance organizations, "participants") or
persons who hold interests through participants. Ownership of beneficial
interests in the Global Note will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominees, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Note for all
purposes under the Indenture and the Notes. Owners of beneficial interests in
the Global Note will not be considered to be the owners or holders of any
Notes under the Indenture. In addition, no beneficial owner of an interest in
the Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures (in addition to those under the Indenture
referred to herein and, if applicable, those of Euroclear and Cedel Bank).
Investors may hold their interests in the Global Note directly through DTC
if they are participants in DTC, or indirectly through organizations which are
participants in DTC, including Cedel Bank and Euroclear. Cedel
97
<PAGE>
Bank and Euroclear will hold interests in the Global Note on behalf of their
participants through their respective depositaries, which in turn will hold
such interests in the Global Note in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A., New York, will
initially act as depositary for Cedel Bank and Morgan Guaranty Trust Company
of New York, Brussels office, will initially act as depositary for Euroclear.
Payments of the principal, interest, premium and Liquidated Damages, if any,
on the Global Note will be made to DTC or its nominee, as the registered owner
thereof. Neither Arch, the Trustee, nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Arch expects that DTC or its nominee, upon receipt of any payment of
principal, interest, premium or Liquidated Damages, if any, in respect of the
Global Note, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the
principal amount of the Global Note as shown on the records of DTC or its
nominee. Arch also expects that payments by participants to owners of
beneficial interests in the Global Note held through such participants
including Cedel Bank and Euroclear, will be governed by standing instructions
and customary practices and, in the case of Cedel Bank and Euroclear, in
accordance with the relevant system's rules and procedures. Such payments will
be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. The laws
of some states require that certain persons take physical delivery of
securities in definitive form. Consequently, the ability to transfer
beneficial interests in the Global Note to such persons may be limited.
Because DTC can only act on behalf of participants, who in turn act on behalf
of indirect participants and certain banks, the ability of a person having a
beneficial interest in the Global Note to pledge such interest to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of such interest, may be affected by the lack of a physical
certificate evidencing such interest. Transfers between participants in
Euroclear and Cedel Bank will be effected in the ordinary way in accordance
with their respective rules and operating procedures.
Cross-market transfers between DTC participants, on the one hand, and
directly or indirectly through Euroclear or Cedel Bank participants, on the
other, will be effected in DTC in accordance with DTC rules on behalf of
Euroclear or Cedel Bank, as the case may be, by its respective depositary;
however, such cross-market transactions will require delivery of instructions
to Euroclear or Cedel Bank, as the case may be, by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (Brussels time). Euroclear or Cedel Bank, as the case may be, will,
if the transaction meets its settlement requirements deliver instructions to
its respective depositary to take action to effect final settlement on its
behalf by delivery or receiving interest in the Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Cedel Bank participants and Euroclear
participants may not deliver instructions directly to the depositaries for
Cedel Bank or Euroclear.
Arch expects that DTC will take any action permitted to be taken by a holder
of Notes (including the presentation of Notes for exchange as described below)
only at the direction of one or more participants to whose account with DTC
interest in the Global Note are credited and only in respect of such portion
of the aggregate principal amount of the Notes as to which such participant or
participants has or have given such direction. However, if an Event of Default
has occurred and in continuing or in the limited circumstances described
below, DTC will surrender the Global Note and certificated notes in definitive
form will be distributed to its participants and will be legended as set forth
under "Notice to Investors" below. The giving of notices and other
communications by DTC to participants in DTC, by participants in DTC to
persons who hold accounts with them and by such persons to holders of
beneficial interests in the Global Note will be governed by arrangements
between them, subject to any statutory or regulatory requirements as may exist
from time to time.
98
<PAGE>
Arch understands that DTC is a limited-purpose trust company organized under
the New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC holds securities for its participants and facilitates the
clearance and settlement of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Participants include securities brokers
and delivers, banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. The rules applicable to DTC and
its participants are on file with the Commission.
Although DTC, Cedel Bank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Global Note
among participants of DTC, Cedel Bank and Euroclear, they are under no
obligation to perform or continue to perform such procedures may be changed or
discontinued at any time. Neither Arch nor the Trustee will have any
responsibility for the performance by DTC, Cedel Bank or Euroclear or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
ADDITIONAL INFORMATION CONCERNING EUROCLEAR AND CEDEL BANK
Euroclear and Cedel Bank hold securities for participating organizations and
facilitate the clearance and settlement of securities transactions between
their respective participants through electronic book-entry changes in
accounts of such participants. Euroclear and Cedel Bank provide to their
participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Euroclear and Cedel Bank interface with U.S. securities
markets. Euroclear and Cedel Bank participants are financial institutions such
as underwriters, securities brokers and dealers, banks, trust companies and
certain other organizations. Indirect access to Euroclear and Cedel Bank is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodian relationship with a Euroclear or
Cedel Bank participant, either directly or indirectly.
When beneficial interests are to be transferred from the account of a
participant (other than Morgan Guaranty Trust Company of New York and
Citibank, N.A., as depositaries for Euroclear and Cedel Bank, respectively) to
the account of a Euroclear participant or a Cedel Bank participant, the
purchaser must send instructions to Euroclear or Cedel Bank through a
participant at least one business day prior to settlement. Euroclear or Cedel
Bank, as the case may be, will instruct Morgan Guaranty Trust Company of New
York or Citibank, N.A., to receive the beneficial interests against payment.
Payment will include interest attributable to the beneficial interest from and
including the last payment date to and excluding the settlement date, on the
basis of a calendar year consisting of twelve 30-day calendar months. For
transactions settling on the 31st day of the month, payment will include
interest accrued to and excluding the first day of the following month.
Payment will then be made by Morgan Guaranty Trust Company of New York or
Citibank, N.A., as the case may be, to the participant's account against
delivery of the beneficial interests. After settlement has been completed, the
beneficial interests will be credited to the respective clearing systems and
by the clearing system, in accordance with its usual procedures, to the
Euroclear participants' or Cedel Bank participants' account. Credit for the
beneficial interests will appear on the next business day (European time) and
the cash debit will be back-valued to, and interest attributable to the
beneficial interests will accrue from, the value date (which would be the
preceding business day when settlement occurs in New York). If settlement is
not completed on the intended value date (i.e., the trade fails), the
Euroclear or Cedel Bank cash debit will instead be valued as of the actual
settlement date.
99
<PAGE>
Euroclear participants and Cedel Bank participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Euroclear or Cedel Bank. Under
this approach, they may take on credit exposure to Euroclear or Cedel Bank
until the beneficial interests are credited to their accounts one day later.
Finally, day traders that use Euroclear or Cedel Bank and that purchase
beneficial interests from participants for credit to Euroclear participants or
Cedel Bank participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken to avoid these potential
problems.
Due to time zone differences in their favor, Euroclear participants and
Cedel Bank participants may employ their customary procedures for transactions
in which beneficial interests are to be transferred by the respective clearing
system, through Morgan Guaranty Trust Company of New York or Citibank, N.A.,
to another participant. The seller must send instructions to Euroclear or
Cedel Bank through a participant at least one business day prior to
settlement. In these cases, Euroclear or Cedel Bank will instruct Morgan
Guaranty Trust Company of New York or Citibank, N.A., as the case may be, to
credit the beneficial interests to the participant's account against payment.
Payment will include interest attributable to the beneficial interest from and
including the last payment date to and excluding the settlement date on the
basis of a calendar year consisting of twelve 30-day calendar months. For
transactions settling on the 31st day of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Euroclear participant or
Cedel Bank participant the following business day, and receipt of the cash
proceeds in the Euroclear or Cedel Bank participant's account will be back-
valued to the value date (which would be the preceding business day, when
settlement occurs in New York). If the Euroclear participant or Cedel Bank
participant has a line of credit with its representative clearing system and
elects to draw on such line of credit in anticipation of receipt of the sale
proceeds in its account, the back-valuation may substantially reduce or offset
any overdraft charges incurred over that one-day period. If settlement is not
completed on the intended value date (i.e., if the trade fails), receipt of
the cash proceeds in the Euroclear or Cedel Bank participant's account would
instead be valued as of the actual settlement date.
CERTIFICATED SECURITIES
The Global Note is exchangeable for Certificated Securities only (i) if the
Depositary notifies Arch that it is unwilling or unable to continue as
depositary for the Global Note and Arch thereupon fails to appoint a successor
depositary; (ii) if Arch, at its option, notifies the Trustee in writing that
it elects to cause the issuance of the Notes in definitive registered form; or
(iii) if there shall have occurred and be continuing an Event of Default or
any event which after notice or lapse of time or both would be an Event of
Default with respect to the Notes. Such Certificated Securities shall be
registered in the names of the owners of the beneficial interests in the
Global Note as provided by the participants. Upon issuance of the Notes in
definitive form, the Trustee is required to register the Notes in the name of,
and cause the Notes to be delivered to, the person or persons (or the nominee
thereof) identified as the beneficial owners, as the Depositary shall direct.
In all cases described herein, such Certificated Securities will bear the
restrictive legend referred to in "Notice to Investors", unless Arch
determines otherwise in compliance with applicable law.
Neither Arch nor the Trustee will be liable for any delay by the holder of a
Global Note or the Depositary in identifying the beneficial owners of Notes
and Arch and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the holder of a Global Note or the Depositary
for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available funds to
the accounts specified by the holder of a Global Note. With respect to
Certificated Securities, Arch will
100
<PAGE>
make all payments of principal, premium, interest and Liquidated Damages, if
any, by wire transfer of immediately available funds to the accounts specified
by the holders thereof or, if no such account is specified, by mailing a check
to each such holder's registered address.
The Notes represented by the Global Note are expected to be eligible to
trade in the PORTAL market and to trade in the Depositary's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
Notes will, therefore, be required by the Depositary to be settled in
immediately available funds. Arch expects that secondary trading in the
Certificated Securities will also be settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Arch and the Initial Purchasers entered into the Exchange and Registration
Rights Agreement on June 24, 1998. Arch has filed with the SEC the
Registration Statement pursuant to the requirements of the Exchange and
Registration Rights Agreement. Upon the effectiveness of the Registration
Statement, Arch is required to offer (as defined below) pursuant to the
Exchange Offer to the holders of Transfer Restricted Securities who are able
to make certain representations the opportunity to exchange their Transfer
Restricted Securities for Exchange Notes. If (i) Arch is not permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or SEC policy or (ii) any holder of Transfer Restricted
Securities notifies Arch prior to the 20th day following consummation of the
Exchange Offer that (a) it is prohibited by law or SEC policy from
participating in the Exchange Offer or (b) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (c) that it is a
broker-dealer and owns Notes acquired directly from Arch or an affiliate of
Arch, Arch will file with the SEC a Shelf Registration Statement to cover
resales of the Notes by the holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. Arch will use its best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
SEC.
The Exchange and Registration Rights Agreement provides that (i) Arch must
have filed the Registration Statement with the SEC on or prior to July 29,
1998, (ii) Arch must have used its best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to
October 27, 1998, (iii) unless the Exchange Offer would not be permitted by
applicable law or SEC policy, Arch will commence the Exchange Offer and use
its best efforts to issue, on or prior to 30 business days after the date on
which the Registration Statement was declared effective by the SEC, Exchange
Notes in exchange for all Private Notes tendered prior thereto in the Exchange
Offer and (iv) if obligated to file the Shelf Registration Statement, Arch
shall file the Shelf Registration Statement with the Commission on or prior to
30 days after such filing obligation arises and use its best efforts to cause
the Shelf Registration to be declared effective by the Commission on or prior
to 90 days after such obligation arises. If (a) Arch fails to file any
registration statement required by the Exchange and Registration Rights
Agreement on or before the date specified for such filing, (b) any such
registration statement is not declared effective by the Commission on or prior
to the Effectiveness Target Date, (c) Arch fails to consummate the Exchange
Offer within 30 business days of the Effectiveness Target Date or (d) any such
registration statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Exchange and Registration
Rights Agreement, then Arch will pay Liquidated Damages to each holder of
Notes, with respect to the first 90-day period, or any portion thereof,
immediately following the occurrence of such a Registration Default, in an
amount equal to 25 basis points per annum of the principal amount of Notes
held by such holder. The amount of the Liquidated Damages will increase by an
additional 25 basis points per annum of the principal amount of Notes with
respect to each subsequent 90-day period, or any portion thereof, until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of 100 basis points per annum of the principal amount of Notes. All
accrued and unpaid Liquidated Damages will be paid by Arch on each Interest
Payment Date to the Global Note holder by wire transfer of immediately
available funds or by federal funds check and to holders of Certificated
Securities by wire transfer to the accounts specified by them or by mailing
101
<PAGE>
checks to their registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Pursuant to the foregoing provisions, Liquidated Damages totalling $ per
$1,000 of principal accrued on the Notes between October 27, 1998 and December
, 1998 due to delays in the effectiveness of the Registration Statement. Such
amount will be paid in the same manner as accrued interest on the Private
Notes.
Holders of Notes will be required to make certain representations to Arch
(as described in the Exchange and Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Exchange and Registration Rights Agreement in order to have their Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as
any other capitalized term used herein for which no definition is provided:
"Acquired Debt" means Debt of a Person (a) existing at the time such Person
is merged with or into Arch or becomes a Subsidiary, (b) assumed in connection
with the acquisition of assets from such Person or (c) secured by a Lien
encumbering assets acquired from such Person.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control," when used with respect to any specified Person, means
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, to any Person of: (a)
any Capital Stock of any Restricted Subsidiary; (b) all or substantially all
of the properties and assets of Arch and its Restricted Subsidiaries
representing a division or line of business; or (c) any other properties or
assets of Arch or any Restricted Subsidiary, other than in the ordinary course
of business. For the purposes of this definition, the term "Asset Sale" shall
not include any transfer of properties or assets (i) that is governed by the
provisions of the Indenture described under "Consolidation, Merger or Sale of
Assets", (ii) between or among Arch and its Restricted Subsidiaries, (iii)
constituting an Investment in a telecommunications business, if permitted
under the "Restricted Payments" covenant, (iv) representing obsolete or
permanently retired equipment and facilities or (v) the gross proceeds of
which (exclusive of indemnities) do not exceed $1.0 million for any particular
item or $2.0 million in the aggregate for any fiscal year of Arch.
"Attributable Value" means, with respect to any lease at the time of
determination, the present value (discounted at the interest rate implicit in
the lease, or, if not known, at Arch's incremental borrowing rate) of the
obligations of the lessee of the property subject to such lease for rental
payments during the lesser of (i) the remaining term of the lease included in
such transaction, including any period for which such lease has been extended
or may, at the option of the lessor, be extended, or (ii) until any date on
which the lessee may terminate such lease without penalty or upon payment of
penalty (in which case the rental payments shall include such penalty);
provided that on the date of determination it is the lessee's intention to
terminate such lease on such date, after excluding from such rental payments
all amounts required to be paid on account of maintenance and repairs,
insurance, taxes, assessments, water, utilities and similar charges.
102
<PAGE>
"Average Life" means, as of the date of determination with respect to any
Debt or Disqualified Stock, the quotient obtained by dividing (a) the sum of
the products of (i) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund requirements) of such Debt or
Disqualified Stock, respectively, multiplied by (ii) the amount of each such
principal payment by (b) the sum of all such principal payments.
"Bank Credit Facilities" means one or more credit or loan agreements or
facilities (which may include revolving credit facilities or working capital
facilities or term loans), whether now existing or created after the date of
the Indenture, with a bank or other financial institution or group of banks or
other financial institutions, as such agreements or facilities may be amended
(including any amendments and restatements thereof), modified, supplemented,
increased, restated or replaced from time to time, and includes without
limitation (i) the Second Amended and Restated Credit Agreement (Tranche A and
Tranche C Facilities), dated as of June 29, 1998, among API, the lenders and
agents party thereto, and The Bank of New York, as administrative agent,
together with all such Loan Documents under and as defined therein, as each
such agreement and document may be amended, restated, supplemented,
refinanced, increased or otherwise modified from time to time, and (ii) the
Second Amended and Restated Credit Agreement (Tranche B Facility), dated as of
June 29, 1998, among API, the lenders and agents party thereto, and The Bank
of New York, as administrative agent, together with all such Loan Documents
under and as defined therein, as each such agreement and document may be
amended, restated, supplemented, refinanced, increased or otherwise modified
from time to time.
"Capital Lease Obligation" means, with respect to any Person, an obligation
Incurred in the ordinary course of business under or in connection with any
capital lease of real or personal property which, in accordance with GAAP, has
been recorded as a capitalized lease.
"Capital Stock" of any Person means any and all shares, interests,
partnership interests, participation, rights in or other equivalents (however
designated) of such Person's equity interest (however designated) and any
rights (other than debt securities convertible into capital stock), warrants
or options exchangeable for or convertible into such capital stock, whether
now outstanding or issued after the date of the Indenture.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such Person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than a
majority of the voting power of all classes of Voting Stock of Arch or
Parent;
(b) Arch or Parent consolidates with, or merges with or into, another
Person or conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, Arch or Parent, in any such event pursuant to
a transaction in which the outstanding Voting Stock of Arch or Parent is
converted into or exchanged for cash, securities or other property, other
than any such transaction where (i) the outstanding Voting Stock of Arch or
Parent is not converted or exchanged at all (except to the extent necessary
to reflect a change in the jurisdiction of incorporation) or is converted
into or exchanged for (A) Capital Stock (other than Disqualified Stock) of
the surviving or transferee Person or (B) cash, securities or other
property (other than Capital Stock described in the foregoing clause (A))
of the surviving or transferee Person in an amount that could be paid as a
Restricted Payment as described under the "Restricted Payments" covenant
and (ii) immediately after such transaction, no "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a Person shall be deemed to have "beneficial ownership" of
all securities that such Person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than a majority of the total outstanding
Voting Stock of the surviving or transferee Person;
103
<PAGE>
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of Arch or
Parent (together with any new directors whose election to such Board of
Directors, or whose nomination for election by the stockholders of Arch or
Parent, was approved by a vote of 66-2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of Arch or
Parent then in office; or
(d) Arch is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under "--Consolidation, Merger or Sale of Assets" below.
"Consolidated Adjusted Net Income" means, for any period, the net income (or
net loss) of Arch and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any
net after-tax extraordinary gains or losses (less all fees and expenses
relating thereto), (b) any net after-tax gains or losses (less all fees and
expenses relating thereto) attributable to Asset Sales, (c) the portion of net
income (or loss) of any Person (other than Arch or a Restricted Subsidiary),
including Unrestricted Subsidiaries, in which Arch or any Restricted
Subsidiary has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to Arch or any Restricted
Subsidiary in cash dividends or distributions by such Person during such
period, and (d) the net income (or loss) of any Person combined with Arch or
any Restricted Subsidiary on a "pooling of interests" basis attributable to
any period prior to the date of combination.
"Consolidated Cash Flow" means for any period Consolidated Adjusted Net
Income for such period increased, without duplication, by (i) Consolidated
Interest Expense for such period, plus (ii) Consolidated Income Tax Expense
for such period, plus (iii) Consolidated Non-Cash Charges for such period.
"Consolidated Cash Flow Ratio" means, at any date, the ratio of (a) the
aggregate principal amount of Debt of Arch and its Restricted Subsidiaries on
a consolidated basis outstanding as of such date to (b) Consolidated Cash Flow
for the most recently ended full fiscal quarter multiplied by four.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes of Arch and its Restricted
Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (a) the amount which, in conformity with GAAP, would be set forth
opposite the caption "interest expense" (or any like caption) on a
consolidated statement of operations of Arch and its Restricted Subsidiaries
for such period, including, without limitation, (i) amortization of debt
discount, (ii) the net cost of interest rate contracts (including amortization
of discounts), (iii) the interest portion of any deferred payment obligation,
(iv) amortization of debt issuance costs, (v) the interest component of
Capital Lease Obligations of Arch and its Restricted Subsidiaries, and (vi)
the portion of any rental obligation of Arch and its Restricted Subsidiaries
in respect of any Sale and Leaseback Transaction allocable during such period
to interest expense (determined as if it were treated as a Capital Lease
Obligation) plus (b) all interest on any Debt of any other Person guaranteed
and paid by Arch or any of its Restricted Subsidiaries; provided, however,
that Consolidated Interest Expense will not include any gain or loss from
extinguishment of debt, including write-off of debt issuance costs.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization and other non-cash expenses of Arch and its
Restricted Subsidiaries reducing Consolidated Adjusted Net Income for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such non-cash charge that requires an accrual of or reserve for cash
charges for any future period).
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person, and whether or
not contingent, (a) every obligation of such Person for money
104
<PAGE>
borrowed, (b) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, (c) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (d) every obligation of such
Person issued or assumed as the deferred purchase price of property or
services, (e) the Attributable Value of every Capital Lease Obligation and
Sale and Leaseback Transaction of such Person, (f) all Disqualified Stock of
such Person valued at its maximum fixed repurchase price, plus accrued and
unpaid dividends and (g) every obligation of the type referred to in clauses
(a) through (f) of another Person and dividends of another Person the payment
of which, in either case, such Person has guaranteed. For purposes of this
definition, the "maximum fixed repurchase price" of any Disqualified Stock
that does not have a fixed repurchase price will be calculated in accordance
with the terms of such Disqualified Stock as if such Disqualified Stock were
repurchased on any date on which Debt is required to be determined pursuant to
the Indenture, and if such price is based upon, or measured by, the fair
market value of such Disqualified Stock, such fair market value will be
determined in good faith by the board of directors of the issuer of such
Disqualified Stock. Notwithstanding the foregoing, trade accounts payable and
accrued liabilities arising in the ordinary course of business and any
liability for federal, state or local taxes or other taxes owed by such Person
shall not be considered Debt for purposes of this definition. The amount
outstanding at any time of any Debt issued with original issue discount is the
aggregate principal amount of such Debt, less the remaining unamortized
portion of the original issue discount of such Debt at such time, as
determined in accordance with GAAP.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver
a resolution of the Board of Directors under the Indenture, a member of the
Board of Directors who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions
(other than solely by virtue of such person's ownership of Capital Stock or
other securities of Arch).
"Disqualified Stock" means any class or series of Capital Stock that, either
by its terms, by the terms of any security into which it is convertible or
exchangeable at the option of the holder thereof or by contract or otherwise,
is, or upon the happening of an event or passage of time would be, required to
be redeemed prior to the final Stated Maturity of the Notes or is redeemable
at the option of the holder thereof at any time prior to such final Stated
Maturity, or is convertible into or exchangeable at the option of the holder
thereof for debt securities at any time prior to such final Stated Maturity.
"Equity Offering" means an offering of equity securities of Arch or Parent
for cash to Persons other than Arch or Subsidiaries of Arch.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States,
consistently applied, that are in effect on the date of the Indenture.
"Government Securities" means direct obligations of, obligations fully
guaranteed by, or participation in pools consisting solely of obligations of
or obligations guaranteed by, the United States of America for the payment of
which guarantee or obligations the full faith and credit of the United States
of America is pledged and which are not callable or redeemable at the option
of the issuer thereof.
"Guarantee" means, as applied to any obligation, (a) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (b) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
obligation to reimburse amounts drawn down under letters of credit securing
such obligations.
105
<PAGE>
"Incur" means, with respect to any Debt, to incur, create, issue, assume,
Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Debt;
provided that neither the accrual of interest nor the accretion of original
issue discount shall be considered an Incurrence of Debt.
"Indemnification Agreements" means the indemnification or similar agreement
between Arch or any Restricted Subsidiary and any of its directors or
officers.
"Investment" means, (a) directly or indirectly, any advance, loan or capital
contribution to, the purchase of any stock, bonds, notes, debentures or other
securities of, the acquisition, by purchase or otherwise, of all or
substantially all of the business or assets or stock or other evidence of
beneficial ownership of, or the Guarantee of any obligation of, any Person or
making of any investment in any Person, (b) the designation of any Restricted
Subsidiary as an Unrestricted Subsidiary and (c) the transfer of any assets or
properties from Arch or a Restricted Subsidiary to any Unrestricted
Subsidiary, other than the transfer of assets or properties in the ordinary
course of business. Investments will not include extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim,
preference, priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as provided therein or in the Indenture,
whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption, purchase or otherwise.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or
other assets when disposed for, cash or cash equivalents (except to the extent
that such obligations are financed or sold by Arch or any Restricted
Subsidiary with recourse to Arch or any Restricted Subsidiary), net of (a)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel and investment banks) related to such Asset Sale, (b)
provisions for all taxes payable as a result of such Asset Sale, (c) payments
made to retire Debt where payment of such Debt is secured by the assets that
are the subject of such Asset Sale, (d) amounts required to be paid to any
Person (other than Arch or any Restricted Subsidiary) owning a beneficial
interest in the assets that are subject to the Asset Sale and (e) appropriate
amounts to be provided by Arch or any Restricted Subsidiary, as the case may
be, as a reserve required in accordance with GAAP against any liabilities
associated with such Asset Sale and retained by the seller after such Asset
Sale, including pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale.
"Parent" means Arch Communications Group, Inc., a Delaware corporation.
"Pari Passu Debt" means Debt of Arch which ranks pari passu in right of
payment with the Notes.
"Permitted Debt" means certain indebtedness which Arch is permitted to incur
under the terms of the Indenture.
"Permitted Investments" means any of the following:
(a) Investments in (i) any evidence of Debt consisting of Government
Securities with a maturity of 180 days or less; (ii) certificates of
deposit or acceptances with a maturity of 180 days or less of any financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500,000,000;
and (iii) commercial paper with a maturity of 180 days or less issued by a
corporation that is not an Affiliate of Arch and is organized under the
laws of any state of the United States or the District of Columbia and
having the highest rating obtainable from Moody's Investors Service or
Standard & Poor's Corporation;
106
<PAGE>
(b) Investments by Arch or any Restricted Subsidiary in another Person,
if as result of such Investment such other Person (i) becomes a Restricted
Subsidiary or (ii) is merged or consolidated with or into, or transfers or
conveys all or substantially all of its assets to, Arch or a Restricted
Subsidiary;
(c) Investments by Arch or any Restricted Subsidiary in another Person
made pursuant to the terms of a definitive merger, stock purchase or
similar agreement providing for a business combination transaction between
Arch or a Restricted Subsidiary and such Person if, (i) within 365 days of
the date of such Investment, such other Person, pursuant to the terms of
such agreement, (A) becomes a Restricted Subsidiary or (B) is merged or
consolidated with or into, or transfers or conveys all or substantially all
of its assets to, Arch or a Restricted Subsidiary, or (ii) in the event
such agreement is terminated prior to the consummation of the transactions
contemplated thereunder, within 365 days of such termination Arch or such
Restricted Subsidiary liquidates such Investment.
(d) Investments by Arch or any of the Restricted Subsidiaries in any one
of the other of them;
(e) Investments in assets owned or used in the ordinary course of
business;
(f) Investments in existence on the date of initial issuance of the
Notes; and
(g) promissory notes received as a result of Asset Sales permitted under
the "Asset Sales" covenant.
"Permitted Liens" means any of the following:
(a) Liens (other than Liens securing Debt under the Bank Credit
Facilities) existing as of the date of issuance of the Notes;
(b) Liens on Property or assets of Arch or a Restricted Subsidiary of
Arch securing Debt under or with respect to the Bank Credit Facilities or
which are required to secure the USAM Notes solely and as a direct result
of the granting of Liens with respect to the Bank Credit Facilities;
(c) Liens securing the Notes;
(d) Liens on Property or assets of a Restricted Subsidiary securing Debt
of such Restricted Subsidiary other than Guarantees with respect to Debt of
Arch;
(e) any interest or title of a lessor under any Capital Lease Obligation
or Sale and Leaseback Transaction under which Arch is lessee so long as the
Attributable Value secured by such Lien does not exceed the principal
amount of Debt permitted under the "Incurrence of Indebtedness" covenant;
(f) Liens securing Acquired Debt created prior to (and not in connection
with or in contemplation of) the Incurrence of such Debt by Arch; provided
that such Lien does not extend to any Property or assets of Arch other than
the assets acquired in connection with the Incurrence of such Acquired
Debt;
(g) Liens arising from purchase money mortgages and purchase security
interests Incurred in the ordinary course of the business of Arch; provided
that (i) the related Debt is not secured by any Property or assets of Arch
other than the Property and assets so acquired and (ii) the Lien securing
such Debt is created within 60 days of such acquisition;
(h) statutory Liens or landlords' and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceedings,
if a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made therefor;
(i) Liens for taxes, assessments, government charges or claims that are
being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted, if a reserve or other appropriate
provision, if any, as is required in conformity with GAAP has been made
therefor;
(j) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security;
107
<PAGE>
(k) rights of banks to set off deposits against debts owed to said banks;
(l) other Liens incidental to the conduct of the business of Arch or any
of its Subsidiaries, as the case may be, or the ownership of their assets
that do not materially detract from the value of the Property subject
thereto;
(m) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance bonds and other obligations of a like nature
incurred in the ordinary course of business (other than contracts for the
payment of money);
(n) easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the business of
Arch and the Restricted Subsidiaries, taken as a whole, incurred in the
ordinary course of business;
(o) Liens arising by reason of any judgment, decree or order of any court
so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; and
(p) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (a) through (o); provided that any
such extension, renewal or replacement shall not extend to any additional
Property or assets.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in
the most recent consolidated balance sheet of such Person under GAAP.
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any Person means any and all Capital Stock of such
Person other than Disqualified Stock.
"Related Person" means any beneficial owner of 10% or more of Arch's Voting
Stock.
"Restricted Payments" means certain payments and other actions prohibited to
Arch under the terms of the Indenture.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which a Person sells or transfers any property or
asset in connection with the leasing, or the resale against installment
payments, of such property or asset to the seller or transferor.
"Significant Subsidiary" means any Restricted Subsidiary of Arch that,
together with its Subsidiaries, (a) for the most recent fiscal year of Arch,
accounted for more than 10% of the consolidated revenues of Arch and its
Restricted Subsidiaries or (b) as of the end of such fiscal year, was the
owner of more than 10% of the consolidated assets of Arch and its Restricted
Subsidiaries, all as set forth on the most recently available consolidated
financial statements of Arch for such fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable and, when used with respect to any other Debt, means the date
specified in the instrument governing such Debt as the fixed date on which the
principal of such Debt or any installment of interest thereon is due and
payable.
108
<PAGE>
"Subordinated Debt" means Debt of Arch that is subordinated in right of
payment to the Notes.
"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by Arch and/or
one or more other Subsidiaries of Arch.
"Surviving Entity" means Arch or a Restricted Subsidiary which is the
surviving entity in a merger or other consolidation.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
Arch's Board of Directors as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted
Subsidiary.
"USAM Notes" means the 9 1/2% Senior Notes due 2004 and 14% Senior Notes due
2004 issued by USA Mobile Communications, Inc. II (renamed Arch
Communications, Inc. upon consummation of the USA Mobile Merger).
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
GOVERNING LAW
The Indenture, the Notes, the Exchange Notes and the Exchange and
Registration Rights Agreement are governed by, and are to be construed in
accordance with, the laws of the State of New York, without regard to
conflicts of laws principles thereof.
109
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion addresses the material United States federal income
tax considerations relating to the Exchange Offer. This discussion is based on
provisions of the Internal Revenue Code of 1986, as amended (the "Tax Code"),
applicable Treasury Regulations promulgated or proposed thereunder ("Treasury
Regulations"), judicial authority and current administrative rulings and
practice, all of which are subject to change without notice, possibly on a
retroactive basis. This summary deals only with holders that hold Notes as
"capital assets" (within the meaning of Section 1221 of the Tax Code) and does
not address tax considerations applicable to investors that may be subject to
special tax rules, such as banks and other financial institutions; tax-exempt
organizations; insurance companies; traders or dealers in securities or
currencies; custodians, nominees or similar financial intermediaries holding
Notes for others; persons that hold Notes 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.
Arch has not sought any ruling from the Internal Revenue Service (the "IRS")
with respect to the statements made and the conclusions reached in the
following summary and in the Exhibit Opinion (as defined below), and there can
be no assurance that the IRS will agree with such statements and conclusions.
INVESTORS IN THE EXCHANGE NOTES 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.
Hale and Dorr LLP, counsel to Arch, has rendered an opinion to Arch,
attached as Exhibit 8.1 to the Registration Statement of which this Prospectus
is a part (the "Exhibit Opinion"), that the exchange of Private Notes for
Exchange Notes pursuant to the Exchange Offer will not be taxable to an
exchanging holder for federal income tax purposes. As a result, an exchanging
holder (i) will not recognize taxable gain or loss as a result of exchanging
Private Notes for Exchange Notes pursuant to the Exchange Offer; (ii) the
holding period of the Exchange Notes will include the holding period of the
Private Notes exchanged therefor and (iii) the adjusted tax basis of the
Exchange Notes will be the same as the adjusted tax basis of the Private Notes
exchanged therefor immediately before the exchange. The Exchange Offer will
result in no federal income tax consequences to a Holder of Notes who does not
participate in the Exchange Offer.
UNITED STATES HOLDERS
As used herein, the term "United States Holder" means the beneficial owner
of a Note that for United States federal income tax purposes is (i) a citizen
or resident of the United States, (ii) a corporation created or organized in
or under the laws of the United States or any state thereof, (iii) a
partnership or other business entity created or organized in or under the laws
of the United States or any state thereof and that is properly treated as a
United States person for tax purposes, (iv) an estate the income of which is
includible in gross income for United States federal income tax purposes
regardless of its source, or (v) a trust the administration of which is
subject to the primary supervision of a United States court and with respect
to which one or more United States persons have the authority to control all
substantial decisions.
An individual may, subject to certain exceptions, be deemed to be a United
States resident (as opposed to a non-resident alien) by virtue of being
present in the United States on at least 31 days in the calendar year and for
an aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in
the current year, one-third of the days present in the immediately preceding
year, and one-sixth of the days present in the second preceding year).
Resident aliens are subject to United States federal income tax as if they
were United States citizens. As used herein, a "Non-United States Holder" is a
holder that is not a United States Holder.
Payment of Interest
Interest on a Note generally will be includable in the income of a United
States Holder as ordinary income at the time such interest is received or
accrued, in accordance with such Holder's method of accounting for United
States federal income tax purposes.
110
<PAGE>
Original Issue Discount
The Notes were issued at a discount from their stated principal amount.
Under the de minimis exception to the original discount rules, the amount of
the discount (the "Discount") is not treated as original issue discount for
federal income tax purposes. Rather, Discount with respect to a Note must be
included in income by a Holder when stated principal payments are made on the
Note or upon the sale or exchange of the Note. See "Sale, Exchange or
Redemption of Notes," below.
Market Discount
United States Holders should be aware that the resale of a Note may be
affected by the "market discount" rules of the Tax Code under which a
subsequent purchaser of a Note acquiring the Note at a market discount
generally would be required to include as ordinary income a portion of the
gain realized upon the disposition or retirement of such Note to the extent of
the market discount that has accrued while the debt instrument was held by
such holder.
A purchase at a market discount includes the purchase of a Note after its
original issuance at a price less than the Note's stated redemption price at
maturity ("SRPM"). The amount of market discount, if any, will generally equal
the excess of the SRPM over the purchase price. Gain recognized on the
disposition (including a redemption) by a United States Holder of a Note that
has accrued market discount will be treated as ordinary income, and not
capital gain, to the extent of the accrued market discount, provided that the
amount of market discount exceeds a statutorily-defined de minimis amount.
Under the de minimis exception, there is no market discount on a Note if the
excess of the SRPM of the Note over the holder's tax basis in such Note is
less than 0.25% of the SRPM multiplied by the number of complete years after
the acquisition date to the Note's date of maturity. Unless the holder elects
otherwise, the accrued market discount would be the amount calculated by
multiplying the market discount by a fraction, the numerator of which is the
number of days the obligation has been held by the holder and the denominator
of which is the number of days after the holder's acquisition of the
obligation up to and including its maturity date.
If a United States Holder of a Note acquired at market discount disposes of
such Note in certain transactions other than a sale, exchange or involuntary
conversion, even though otherwise non-taxable (e.g., a gift), such United
States Holder will be deemed to have realized an amount equal to the fair
market value of the Note and will be required to recognize as ordinary income
any accrued market discount to the extent of the deemed gain. A holder of a
Note acquired at a market discount also may be required to defer the deduction
of all or a portion of the interest on any indebtedness incurred or maintained
to purchase or carry the Note until it is disposed of in a taxable
transaction.
A United States Holder of a Note acquired at market discount may elect to
include the market discount in income as it accrues. This election would apply
to all market discount obligations acquired by the electing United States
Holder on or after the first day of the first taxable year to which the
election applies. The election may be revoked only with the consent of the
IRS. If a United States Holder of a Note so elects to include market discount
in income currently, the rules discussed above with respect to ordinary income
recognition resulting from sales and certain other dispositions and to
deferral of interest deductions would not apply.
Bond Premium
A Note may also be acquired at a "bond premium", generally equal to the
excess, if any, of its tax basis over the amount payable at maturity or, if a
smaller premium would result, on an earlier call date. A United States Holder
may elect to amortize such bond premium, in which case amortizable bond
premium is allocated to payments of interest and treated as an offset to
interest income.
If an election to amortize bond premium is not made, a United States Holder
must include the full amount of each interest payment in income in accordance
with its regular method of tax accounting and will generally receive a tax
benefit from the bond premium only upon computing its gain or loss upon the
sale or other disposition or payment of the principal amount of the Note.
111
<PAGE>
Sale, Exchange or Redemption of Notes
Upon the sale, exchange or redemption of a Note, a United States Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such amount
is attributable to accrued interest income, which is taxable as ordinary
income) and (ii) such Holder's adjusted tax basis in the Note. A United States
Holder's adjusted tax basis in a Note generally will equal the cost of the
Note to such Holder, less any principal payments received by such Holder. In
addition, a portion of each principal payment on a Note will be attributable
to the Discount and will be treated as realized gain rather than as a return
of principal (which would reduce the Holder's tax basis in the Note). If a
Holder realizes gain upon the sale or exchange of a Note, the amount of such
gain attributable to the Discount generally will be treated as capital gain.
Such capital gain or loss will be long-term if the United States Holder's
holding period is more than 12 months and will be short-term if the holding
period is equal to or less than 12 months. Long-term capital gains recognized
by individuals are generally taxed at a maximum federal tax rate of 20%, if
the capital asset disposed of was held for more than 12 months, and short-term
capital gains are generally taxed at a maximum federal tax rate of 39.6%.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
noncorporate United States Holders with respect to payments of principal,
premium, and interest on a Note, and to payments of the proceeds of the sale
of a Note. The receipt of such payments may be subject, under certain
circumstances, to "backup withholding" at a 31% rate. Backup withholding
generally applies only if the Holder (i) fails to furnish his or her Social
Security or other taxpayer identification number ("TIN") within a reasonable
time after the request therefor, (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that he or she has failed to report properly interest,
dividends or original issue discount, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalties of
perjury, that the TIN provided is the correct number and that he or she is not
subject to backup withholding. Any amounts withheld under the backup
withholding rules from a payment to a United States Holder will be allowed as
a credit against such Holder's United States federal income tax and may
entitle the Holder to a refund, provided that the required information is
furnished to the IRS.
NON-UNITED STATES HOLDERS
Payment of Interest
Generally, interest income of a Non-United States Holder that is not
effectively connected with a United States trade or business will be subject
to a withholding tax at a 30% rate (or, if applicable, such lower rate as is
prescribed by an income tax treaty between the United States and the holder's
country of residence). However, interest paid on a Note by the Company or any
Paying Agent to a Non-United States Holder will qualify for the "portfolio
interest exemption" and, therefore, will not be subject to United States
federal income tax or withholding tax, provided that such interest income is
not effectively connected with a United States trade or business of the Non-
United States Holder and provided that the Non-United States Holder (i) does
not actually or constructively own 10% or more of the combined voting power of
all classes of stock of the Company entitled to vote, (ii) is not a controlled
foreign corporation related to the Company actually or constructively through
stock ownership under Section 864(d)(4) of the Tax Code, (iii) is not a bank
which acquired the Note in consideration for an extension of credit made
pursuant to a loan agreement entered into in the ordinary course of business,
and (iv) either (a) provides to the Company or its agent a Form W-8 (or a
suitable substitute form) signed under penalties of perjury that includes its
name and address and certifies as to the Holder's non-United States status, or
(b) is a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business and provides a statement to the Company or its agent under penalties
of perjury in which it certifies that a Form W-8 (or a suitable substitute)
has been received by it from the Non-United States Holder or qualifying
intermediary and furnishes the Company or its agent with a copy thereof.
112
<PAGE>
New Treasury Regulations (the "New Treasury Regulations") effective for
payments made after December 31, 1999, provide alternative methods for
satisfying the certification requirements described in clause (iv) above.
Generally, any certification provided on a Form W-8 that is validly in effect
prior to January 1, 2000 will be treated as a valid certification until it
expires under the New Treasury Regulations, or, if earlier, until December 31,
2000. Prospective investors should consult their tax advisors regarding the
effect, if any, of the provisions of these New Treasury Regulations on an
investment in the Notes.
Except to the extent that an applicable treaty otherwise provides, a Non-
United States Holder generally will be taxed in the same manner as a United
States Holder with respect to interest if the interest income is effectively
connected with a United States trade or business of the Non-United States
Holder. Effectively connected interest received by a corporate Non-United
States Holder may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate (or, if applicable, a lower
treaty rate). Even though such effectively connected interest is subject to
income tax, and may be subject to the branch profits tax, it is not subject to
withholding if the Non-United States Holder delivers a properly executed IRS
Form 4224 to the Company or its agent.
The Notes were issued at a discount from their stated principal amount.
Under an exception to the original discount rules, the receipt of the Discount
is not treated as interest income for United States federal income tax
purposes. Rather, upon the receipt of a principal payment on a Note or upon
the sale or exchange of a Note, a Holder will be required to treat the amount
attributable to the Discount as gain from the sale or exchange of a Note. See
"Sale, Exchange or Redemption of Notes," below.
Sale, Exchange or Redemption of Notes
A Non-United States Holder of a Note will generally not be subject to United
States federal income tax or withholding on any gain realized on the sale,
exchange or redemption of the Note (other than gain attributable to accrued
interest) unless (1) the gain is effectively connected with a United States
trade or business of the Non-United States Holder, (2) in the case of a Non-
United States Holder who is an individual, such Holder is present in the
United States for a period or periods aggregating 183 days or more during the
taxable year of the disposition or (3) the Holder is subject to tax pursuant
to the provisions of the Tax Code applicable to certain United States
expatriates. The amount of gain realized upon the sale, exchange, or
redemption of a Note may include amounts attributable to accrued interest and
the Discount. Gain attributable to accrued interest will be taxable, if at
all, as described above under "--Non-United States Holders--Payment of
Interest". Gain attributable to the Discount will not be subject to United
States federal income tax except as described above.
Information Reporting and Backup Withholding
United States information reporting requirements and backup withholding will
not apply to payments of principal or interest on a Note to a Non-United
States Holder made outside the United States. United States information
reporting requirements and backup withholding will not apply to payments of
principal or interest on a Note to a Non-United States Holder made within the
United States if the Form W-8 described in "--Non-United States Holders--
Payment of Interest" is duly provided by such Holder, provided that the
Company or its agent does not have actual knowledge that the Holder is a
United States person.
Information reporting requirements and backup withholding will not apply to
any payment of the proceeds of the sale of a Note effected outside the United
States by a foreign office of a "broker" (as defined in applicable Treasury
Regulations) if such broker is neither (i) a foreign office of a United States
broker, nor (ii) a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, nor (iii) a controlled foreign corporation within the meaning of
Section 957(a) of the Tax Code, and the broker has documentary evidence of the
holder's foreign status, has no actual knowledge that the evidence is false,
and meets certain other conditions. Payment of the proceeds of any such sale
effected outside the United States by a foreign office of a United States
broker or by a foreign office of a foreign broker that is
113
<PAGE>
described in (ii) or (iii) of the preceding sentence will not be subject to
backup withholding, but will be subject to information reporting requirements
unless such broker has documentary evidence in its records that the beneficial
owner is a Non-United States Holder and certain other conditions are met, or
the beneficial owner otherwise establishes an exemption. Payment of the
proceeds of any such sale to or through the United States office of a broker
is subject to information reporting and backup withholding requirements,
unless the beneficial owner of the Note provides the Form W-8 described in "--
Non-United States Holders--Payment of Interest" or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that such
owner is a United States Holder or that the conditions of an exemption are not
in fact satisfied.
Tax consequences may differ from those described above for a Non-United
States Holder who provides a Form W-8 or acceptable substitute therefor but
fails to renew such form, after its expiration, in accordance with applicable
Treasury regulations.
As noted above, the New Treasury Regulations will make certain changes to
the certification rules with respect to payments made after December 31, 1999.
Accordingly, application of those rules to the Notes including the form of
certification needed to avoid information reporting or backup withholding
could be changed. Prospective investors should consult their tax advisors
regarding the effect, if any, of the provisions of these New Treasury
Regulations on the treatment of payments received with respect to a Note.
Any amounts withheld under the backup withholding rules from a payment to a
Non-United States Holder would be allowed as a refund or a credit against such
Holder's United States federal income tax liability, provided the required
information is timely furnished to the IRS.
114
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resale of Exchange Notes received in exchange for
market-making activities or other trading activities. Arch has agreed that for
a period not less than one year after the Expiration Date (or such shorter
period as will terminate when all Exchange Notes acquired by Participating
Broker-Dealers (as defined in the Exchange and Registration Rights Agreement)
have been resold by such broker-dealers), it will make this Prospectus, as
amended or supplemented, available to any broker-dealer that requests such
document in the Letter of Transmittal for use in connection with any such
resale. In addition, until March , 1999 all dealers effecting transactions
in Exchange Notes may be required to deliver a prospectus.
Arch will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of one year after the Expiration Date (or such shorter period
as will terminate when all Exchange Notes acquired by Participating Broker-
Dealers (as defined in the Exchange and Registration Rights Agreement) have
been resold by such broker-dealers), Arch will promptly send additional copies
of this Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. Arch
has agreed to pay all expenses incident to Arch's performance of, or
compliance with, the Exchange and Registration Rights Agreement (including the
expenses of one counsel for the holders of the Private Notes) and will
indemnify the holders or Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities,
including liabilities under the Securities Act.
115
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
Arch by Hale and Dorr LLP, 60 State Street, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Arch Communications, Inc. as of
December 31, 1996 and 1997 and the three years in the period ended December
31, 1997 appearing in this Prospectus and the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as set forth
in their report thereon appearing elsewhere herein, and are included in
reliance upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of MobileMedia at December 31, 1997
and 1996, and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph describing conditions
that raise substantial doubt about MobileMedia's ability to continue as a
going concern as described in Note 1 of MobileMedia's Notes to Consolidated
Financial Statements) appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
With the exception of matters unique to MobileMedia, the descriptions of the
regulatory requirements under the Communications Act and the regulations
thereunder set forth under "Risk Factors--Government Regulation, Foreign
Ownership and Possible Redemption" and "Business--Regulation" have been
included under the authority of Wilkinson, Barker, Knauer & Quinn, LLP, as
experts in telecommunications law. FCC matters unique to MobileMedia included
in the description of the regulatory requirements under the Communications Act
and the regulations thereunder set forth under "Risk Factors--Government
Regulation, Foreign Ownership and Possible Redemption" and "Business--
Regulation" have been included under the authority of Wiley, Rein & Fielding
as experts in telecommunications law. Stockholders of Arch should not rely on
Wilkinson, Barker, Knauer & Quinn, LLP or Wiley, Rein & Fielding with respect
to any other matters.
116
<PAGE>
GLOSSARY OF DEFINED TERMS
Certain defined terms used in the Indenture are set forth beginning on page
102.
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
ACE........................................ Arch Communications Enterprises, Inc.
ACE Credit Facility........................ ACE's credit facility which was retired on
June 29, 1998.
ACE Revolver............................... A revolving credit component of the ACE
Credit Facility.
ACE/USAM Merger............................ Merger by which ACE was merged into API.
Adjusted EBITDA............................ EBITDA (net of restructuring charges,
equity in loss of affiliates, income tax
benefit, interest and non-operating
expenses (net) and extraordinary items).
Adjusted Pro Forma EBITDA.................. EBITDA (net of restructuring charges and
bankruptcy related expenses, equity in loss
of affiliates, income tax benefit, interest
and non-operating expenses (net),
extraordinary items and amortization of
deferred gain on tower sale).
Agent...................................... The Chase Manhattan Bank, as agent to the
DIP Credit Agreement.
ALJ........................................ Administrative law judge.
Amended Plan............................... Third Amended Joint Plan of Reorganization
of Parent and MobileMedia under Chapter 11,
dated as of December 1, 1998.
Antitrust Division......................... Antitrust Division of the Department of
Justice
API........................................ Arch Paging, Inc., a wholly owned
subsidiary of Arch.
Arch....................................... Arch Communications, Inc., a Delaware
Corporation.
Arch Executives............................ 16 executive officers of Arch and Parent.
ARPU....................................... Average revenues per unit.
Bankruptcy Code............................ United States Bankruptcy Code.
Bankruptcy Court........................... U.S. Bankruptcy Court for the District of
Delaware.
Bankruptcy Filing.......................... Voluntary petitions for relief filed under
Bankruptcy Code by MMC Parent and
MobileMedia on January 30, 1997 to
implement an operational and financial
restructuring.
Bankruptcy Related Requirements............ Operation and information requirements of
the Office of United States Trustee and any
orders entered or approvals or
authorizations granted by the Bankruptcy
Court in the Insolvency Preceedings during
the period prior to the Effective Time.
</TABLE>
117
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
Benbow..................................... Benbow PCS Ventures, Inc.
Benbow Investments......................... Benbow Investments, Inc.
Bond Premium............................... The excess, if any of a Notes tax basis
over the amount payable at maturity, or if
a smaller premium would result, on an
earlier call date.
Book-Entry Confirmation.................... A timely confirmation of a book-entry
transfer of Private Notes into the Exchange
Agent's account at the depositary.
Bridge Facility............................ $120.0 million bridge facility commitment
executed by Arch and the Bear Stearns
Companies, Inc., TD Securities (USA), Inc.,
the Bank of New York and the Royal Bank of
Canada which would be available to Parent
and Arch in the absence of an offering of
the Planned Arch Notes.
Bridge Lenders............................. The Bear Sterns Companies, Inc., The Bank
of New York, TD Securities, (USA) Inc. and
Royal Bank of Canada.
Bridge Warrants............................ The warrants to be issued by Parent to the
Bridge Lenders.
Cedel Bank................................. Cedel Bank, Societe Anonyme.
Change of Control Offer.................... The offer to purchase the Notes required to
be made by Arch in the event of a Change of
Control under the Indenture.
Change of Control Purchase Date............ The proposed purchase date set forth in the
Change of Control Offer.
Change of Control Purchase Price........... The purchase price to be paid by Arch for
the Notes in the event of a Change of
Control under the Indenture.
Class Period............................... Period between June 29, 1995 and September
27, 1996 during which certain former
officers of MobileMedia allegedly deceived
the investing public by making false
statements or omissions in press releases
and public filings.
Closing Conditions......................... The conditions precedent to effecting the
Merger, as set forth in the Merger
Agreement.
Closing Date............................... June 29, 1998.
CMRS....................................... Commercial mobile radio services.
COAM....................................... Customer-owned and -maintained.
Combined Company........................... Parent and its subsidiaries on a
consolidated basis, after giving effect to
the acquisition of MobileMedia.
Company.................................... Arch Communications, Inc.
Commission................................. Securities and Exchange Commission.
Common Stock............................... Common Stock, par value $.01 per share, of
Parent.
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
Communications Act......................... Communications Act of 1934, as amended.
Compensation Committee..................... Executive Compensation Committee of the
Parent's Board of Directors.
Complaint.................................. Consolidated amended complaint filed in the
New Jersey Actions.
Confirmation Date.......................... The date on which the Bankruptcy Court
enters an order confirming the Amended
Plan.
Confirmation Order......................... Order of the Bankruptcy Court confirming
the Amended Plan.
Conxus..................................... CONXUS Communications, Inc.
Credit Facility............................ Bank credit facility of Arch Paging, Inc.
Credit Facility Increase................... $200.0 million increase to the Credit
Facility.
Debtors.................................... MMC Parent, MMC and all of MMC's
subsidiaries.
Depositor.................................. A Holder who has submitted Private Notes
for exchange.
<CAPTION>
DGCL....................................... Delaware General Corporation Law.
<S> <C>
Dial Page.................................. Dial Page Inc.
Dial Page Acquisition...................... Acquisition of Dial Page by Mobile Media.
Dial Page Notes............................ Dial Page 12 1/4% Senior Notes due 2000.
<CAPTION>
DIP........................................ Debtor in possession.
DIP Agreement Lenders...................... Agent and certain other financial
institutions.
DIP Credit Agreement....................... Revolving Credit and Guarantee Agreement
dated as of January 30, 1997 among MMC, The
Chase Manhattan Bank and other lenders who
are a party thereto.
Discount................................... The discount at which the Notes were issued
from their stated principal amount.
<S> <C>
Divisional Reorganization.................. Reorganization of Arch's operations.
DTC........................................ The Depository Trust Company.
<CAPTION>
EBITDA..................................... Earnings before interest, taxes,
depreciation and amortization.
<S> <C>
Effective Date............................. Date Amended Plan becomes effective.
Effective Time............................. The Effective Time of the Merger, occurring
upon filing of the Certificate of Merger or
such later time as may be specified in the
Certificate of Merger.
Effectiveness Target Date.................. Date specified in the Exchange and
Registration Rights Agreement for the
effectiveness of the Exchange Registration
Statement and the Shelf Registration
Statement.
Eligible Institution....................... A member firm of a registered national
securities exchange or of the National
Association of Securities Dealers, Inc., a
commercial bank or trust company having an
office or correspondent in the United
States or an "eligible guarantor
institution" within the meaning of Rule
17Ad-15 under the Exchange Act which is a
member of one of the recognized signature
guarantee programs identified in the Letter
of Transmittal.
</TABLE>
119
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
Equity Investment.......................... Parent's contribution of $24.0 million to
Arch's equity, effected on June 29, 1998.
Euroclear.................................. Euroclear System.
Exchange Act............................... Securities Exchange Act of 1934, as
amended.
Exchange Agent............................. U.S. Bank & Trust National Association as
Exchange Agent for the Exchange Offer.
Exchange and Registration Rights Exchange and Registration Rights Agreement
Agreement................................. dated July 24, 1998 among Arch and the
Initial Purchasers setting forth provisions
relating to the Exchange Offer and related
matters.
Exchange Notes............................. 12 3/4% Senior Notes due 2007 offered
pursuant to this Prospectus.
Exchange Offer............................. Offer made by this Prospectus to exchange
Exchange Notes for Private Notes.
Exchange Offer Registration Statement...... The Registration Statement, which was
required by the Exchange and Registration
Rights Agreement to be filed.
Exhibit Opinion............................ Tax Opinion of Hale and Dorr LLP, counsel
to Arch.
Expiration Date............................ 5:00 p.m., New York City time on January ,
1999.
FCC........................................ Federal Communications Commission.
FCC Grant.................................. FCC order consenting to requests in FCC
Applications.
FCC Order.................................. FCC order, issued April 8, 1997, commencing
an administrative hearing to inquire into
the qualification of MobileMedia to remain
an FCC licensee.
Fort Lee Lease............................. Lease between MobileMedia and Miller
Freeman, Inc. for MobileMedia's office
headquarters in Fort Lee, New Jersey.
14% Notes.................................. Arch's 14% Senior Notes due 2004.
14% Notes Indenture........................ Indenture under which the 14% Notes are
outstanding.
GAAP....................................... Generally accepted accounting principles.
Glenayre................................... Glenayre Electronics, Inc.
Goldman Sachs.............................. Goldman, Sachs & Co. and its parent holding
company, The Goldman Sachs Group, L.P.
Goodwill................................... Excess of the purchase price paid by Parent
to acquire MobileMedia over the net fair
market value allocated to the indentifiable
assets and liabilities of MobileMedia.
Hearing.................................... Hearing in WT Docket No. 97-115, In the
matter of MobileMedia Corporation, et al.
</TABLE>
120
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
Holder..................................... A holder of Notes.
HSR Act.................................... Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
Indenture.................................. The Indenture dated July 29, 1998 for the
Notes.
Initial Purchasers......................... Bear Stearns, Barclays Capital Inc., RBC
Dominion Securities Corporation, BNY
Capital Markets, Inc. and TD Securities
(USA) Inc.
IRS........................................ Internal Revenue Service.
Key Suppliers.............................. Panasonic, Motorola, Glenayre and NEC.
LECs....................................... Local exchange carriers.
Letter of Transmittal...................... Form of letter, appended to this
Prospectus, for accepting the Exchange
Offer.
LIBOR...................................... A bank's reserved-adjusted London Interbank
Offered Rate.
Liquidated Damages......................... Additional interest which accrues on the
Private Notes while certain defaults are
occurring under the Exchange and
Registration Rights Agreements.
LQA........................................ Latest quarter annualized.
Merger..................................... The proposed Merger of MMC with and into
Merger Subsidiary pursuant to the Merger
Agreement.
Merger Agreement........................... Agreement and Plan of Merger dated as of
August 18, 1998, and amended as of
September 3, 1998 and as of December 1,
1998, by and among MMC Parent, MMC, the
Merger Subsidiary and Parent.
Merger Benefits............................ Certain estimates of anticipated cost
savings, capital expenditure avoidance and
other benefits.
Merger Subsidiary.......................... Farm Team Corp., a wholly-owned subsidiary
of Parent.
Metrocall.................................. Metrocall, Inc.
MMC........................................ MobileMedia Communications, Inc., a wholly-
owned subsidiary of MMC Parent and
currently operating as a debtor-in-
possession under Chapter 11.
MMC Parent................................. MobileMedia Corporation, a Delaware
corporation currently operating as a
debtor-in-possession under Chapter 11.
MobileComm................................. Mobile Communications Corporation of
America.
MobileComm Acquisition..................... Acquisition of MobileComm by MobileMedia.
MobileMedia................................ MMC and its subsidiaries.
MobileMedia Adjusted EBITDA................ Earnings before other income (expense),
taxes, depreciation, amortization,
impairment of long-lived assets,
amortization of deferred gain on tower sale
and restructuring costs.
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
MobileMedia Breakup Fee.................... Liability of Arch to MMC of $32.5 million
for Arch's failure, not otherwise excused,
to perform its obligation under the Merger
Agreement.
MobileMedia Deferred Coupon Notes.......... $210.0 million of Senior Subordinated
Deferred Coupon Notes issued by
MobileMedia.
MobileMedia 9 3/8% Notes.................. MMC's 9 3/8% Senior Subordinated Notes due
2007.
MobileMedia 1995 Credit Agreement.......... MMC's $750.0 million senior secured credit
agreement.
MobileMedia Notes.......................... MobileMedia 9 3/8% Notes and certain other
outstanding notes of MobileMedia
MobileMedia Tower Site Sale................ Sale of MMC's transmission towers and
related real property.
MobileMedia Tower Sites.................... Certain transmission towers and associated
assets of MobileMedia.
MobileMedia Tower Site Sale Agreement...... Purchase Agreement between MobileMedia and
Pinnacle in connection with the MobileMedia
Tower Site Sale.
MobileMedia Transaction.................... The Merger and the Related Transactions.
Motorola................................... Motorola, Inc.
Named Executive Officers................... Arch's and Parent's Chief Executive Officer
and other executive officers.
NASD....................................... National Association of Securities Dealers,
Inc.
NEC........................................ NEC America Inc.
New Jersey Actions......................... Five actions filed against MobileMedia and
certain of its officers, directors and
underwriters in the United States District
Court for the District of New Jersey.
New Treasury Regulations................... The New Treasury Regulations described in
"Material Income Tax Considerations--Non
United States Holders--Payment of
Interest."
Non-United States Holders--Payment of
Interest..................................
9 1/2% Notes.............................. Arch's 9 1/2% Senior Notes due 2004.
</TABLE>
<TABLE>
<S> <C>
9 1/2% Notes Indenture.................... Indenture under which the 9 1/2% Notes are
outstanding.
NOL........................................ Net operating loss.
Notes...................................... The Private Notes and the Exchange Notes.
N-PCS...................................... Narrowband personal communications
services.
N-PCS Construction......................... N-PCS network construction.
Old Parent................................. A predecessor to Parent, also named Arch
Communications Group, Inc. On September 7,
1995 Old Parent acquired USA Mobile
Communications Holdings, Inc. by merging
with and into USA Mobile Communications
Holdings, Inc., which simultaneously
changed its name to Arch Communications
Group, Inc.
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
Page Call.................................. Page Call, Inc.
Page Net................................... Paging Network, Inc.
Paging revenue............................. Services, rents and maintenance revenues
for MobileMedia's paging and related
services.
Panasonic.................................. Panasonic Communications & Systems Company.
Parent..................................... Arch Communications Group Inc., a Delaware
Corporation which owns all of Arch's
outstanding capital stock.
Parent Convertible Debentures.............. Parent's 6 3/4% Convertible Subordinated
Debentures due 2003.
Parent Debenture Indenture................. Indenture under which the Parent
Convertible Debentures were issued.
Parent Discount Notes...................... Parent's 10 7/8% Senior Discount Notes due
2008.
Parent Discount Notes Indenture............ Indenture under which the Parent Discount
Notes were issued.
PCP........................................ Private Carrier Paging Operator.
PCS........................................ Broadband personal communications services.
Petition Date.............................. January 30, 1997, the date the Debtors
filed voluntary petitions for
reorganization under Chapter 11.
Pinnacle................................... Pinnacle Towers, Inc.
Plan....................................... Third Amended Joint Plan of Reorganization
of Parent and MobileMedia under Chapter 11,
dated as of December 1, 1998.
Planned Arch Notes......................... Arch's issuance of $200.0 million of new
Senior Notes.
Pre-Petition Lenders....................... Lenders under the MobileMedia 1995 Credit
Agreement.
Private Note Offering...................... Offering and sale of the Private Notes,
effected on June 29, 1998.
Private Notes.............................. 12 3/4% Senior Notes due 2007 issued in a
private placement on June 29, 1998.
Projections................................ The unaudited projections for Arch
following the Merger, set forth in Annex A.
Purchase Agreement......................... Purchase Agreement dated June 29, 1998
among Arch and the Initial Purchasers
relating to the issuance and sale of the
Notes.
QIB........................................ Qualified institutional buyers within the
meaning of Rule 144A.
RCC........................................ Radio Common Carrier.
Registration Default....................... Certain failures on the part of Arch to
have the Registration Statement which
includes this Prospectus to be declared
effective by the SEC. See "Liquidated
Damages."
</TABLE>
123
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
Registration Statement..................... Registration Statement filed by Arch to
effect the Exchange Offer, of which this
Prospectus is a part.
Related Transactions....................... The completion of rights offerings of
Parent's Common Stock; issuance and sale of
Planned Arch Notes (or borrowings under the
Bridge Facility); additional borrowings
under Credit Facility; issuance of Parent's
Common Stock in accordance with the Amended
Plan; and payment by Parent of $479.0
million in cash in accordance with the
Amended Plan.
Retention Agreements....................... The Executive Retention Agreements executed
by and between Arch and the Arch
Executives.
Sandler.................................... Sandler Capital Management Company.
SARs....................................... Stock appreciation rights.
SEC........................................ Securities and Exchange Commission.
Section 382 Limitation..................... Restrictions on a corporation's utilization
of its NOL carryforwards and other tax
attributes imposed by Section 382 of the
Tax Code.
Securities Act............................. Securities Act of 1933, as amended.
Series C Preferred Stock................... Series C Convertible Preferred Stock, par
value $.01 per share, of Parent.
SFAS....................................... Statement of Financial Accounting
Standards.
SFAS No. 130............................... Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income".
SFAS No. 131............................... Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an
Enterprise and Related Information".
SFAS No. 133............................... Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative
Investments and Hedging Activities."
Shelf Registration Statement............... A registration statement for certain
Private Notes required in certain
circumstances and to be filed pursuant to
the Exchange and Registration Statement.
SkyTel..................................... SkyTel Communications, Inc.
SOP 98-1................................... Statement of Position 98-1.
SOP 98-5................................... Statement of Position 98-5.
SPRM....................................... Stated redemption price at maturity.
Standby Purchase Agreements................ Certain separate commitment letters, dated
as of August 18, 1998 and amended as of
September 3, 1998 and as of December 1,
1998, among Parent, MMC and the Standby
Purchasers whereby the Standby Purchasers
will purchase certain shares as well as any
and all other shares not purchased by other
unsecured creditors for an aggregate
purchase price of up to $217.0 million.
</TABLE>
124
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
Standby Purchasers......................... Certain unsecured creditors of Parent and
MobileMedia comprised of W.R. Huff Asset
Management Co., L.L.C., Northwestern Mutual
Life Insurance Company Mutual (for itself
and for certain managed accounts), Credit
Suisse First Boston Corporation and
Whippoorwill Associates, Inc.
Standby Purchasers' Warrants............... Warrants issued to the Standby Purchasers
to acquire shares of Parent's Common Stock
at the Warrant Exercise Price.
Subsidiary Restructuring................... A restructuring of certain of Parent's
subsidiaries through mergers and other
transactions effected on June 29, 1998.
Surviving Corporation...................... Merger Subsidiary.
Tax Code................................... Internal Revenue Code of 1986, as amended.
Telecommunications Act..................... Telecommunications Act of 1996.
TIN........................................ Taxpayer Identification Number.
</TABLE>
<TABLE>
<S> <C>
Tower Site Sale............................ Sale of certain tower sites owned by Arch.
Tranche A Facility......................... $175.0 million reducing revolving credit
facility amendment to Arch's existing
credit facility.
Tranche B Facility......................... $100.0 million 364-day revolving credit
facility under which the principal amount
outstanding on June 27, 1999 will convert
to a term loan.
Tranche C Facility......................... $125.0 million term loan.
Transfer Restricted Securities............. The Private Notes until disposed of in a
public offering or public distribution as
specified in the Exchange and Registration
Rights Agreement.
Trustee.................................... U.S. Bank Trust National Association, as
Trustee under the Indenture for the Notes.
Trust Indenture Act........................ The Trust Indenture Act of 1939, as
amended.
United States Holder....................... The beneficial owner of a Note that for
United States federal income tax purposes
is (i) a citizen or resident of the United
States, (ii) a corporation created or
organized in or under the laws of the
United States or any state thereof, (iii) a
partnership or other business entity
created or organized in or under the laws
of the United States or any state thereof
and that is properly treated as a United
States person for tax purposes, (iv) an
estate the income of which is includible in
gross income for United States federal
income tax purposes regardless of its
source, or (v) a trust the administration
of which is subject to the primary
supervision of a United States court and
with respect to which one or more United
States persons have the authority to
control all substantial decisions.
</TABLE>
125
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM DEFINITION
- ------------ ----------
<S> <C>
Universal Service.......................... Widespread availability of
telecommunications services (including to
low income consumers).
Universal Service Fund..................... Fund created for Universal Service.
Unsecured Creditors........................ The unsecured creditors of MMC Parent and
MobileMedia.
USAM....................................... USA Mobile Communications, Inc. II.
USAM Credit Facility....................... A former credit facility in favor of USAM.
USAM Notes................................. The 9 1/2% Notes and the 14% Notes.
USA Mobile................................. USA Mobile Communications Holdings, Inc.
USA Mobile Merger.......................... Merger of Old Arch with and into USA
Mobile.
WTO Agreement.............................. World Trade Organization Agreement.
Y2K Project Group.......................... Arch's cross-functional project group to
work on the Year 2000 problem.
</TABLE>
126
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September
30, 1998 (unaudited)...................................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September 30,
1997 and 1998 (unaudited)................................................. F-4
Predecessor Consolidated Statement of Operations for the Period from
January 1, 1995 to September 7, 1995...................................... F-5
Consolidated Statements of Stockholder's Equity for Each of the Three Years
in the Period Ended December 31, 1997 and for the Nine Months Ended
September 30, 1998 (unaudited)............................................ F-6
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September 30,
1997 and 1998 (unaudited)................................................. F-7
Predecessor Consolidated Statement of Cash Flows for the Period from
January 1, 1995 to September 7, 1995 ..................................... F-8
Notes to Consolidated Financial Statements................................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Arch
Communications, Inc. (a Delaware corporation and a wholly-owned subsidiary of
Arch Communications Group, Inc.) (the "Company") and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1997 and the statements of operations and cash
flows for the period from January 1, 1995 to September 7, 1995 (predecessor
basis). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arch
Communications, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 and for the period from January 1,
1995 to September 7, 1995 (predecessor basis), in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
Item 21 (b) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated
financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
February 9, 1998 (except
with respect to the matters
discussed in Notes 3 and 4,
as to which the date is June
29, 1998)
F-2
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 1,271 $ 1,887 $ 4,534
Accounts receivable (less reserves of
$4,111, $5,744 and $7,375 in 1996,
1997 and 1998, respectively).......... 25,344 30,147 34,496
Inventories............................ 10,239 12,633 10,578
Prepaid expenses and other............. 4,531 4,917 4,170
---------- ---------- ---------
Total current assets................. 41,385 49,584 53,778
---------- ---------- ---------
Property and equipment, at cost:
Land, buildings and improvements....... 8,780 10,089 10,382
Paging and computer equipment.......... 339,391 361,713 393,808
Furniture, fixtures and vehicles....... 9,921 16,233 17,115
---------- ---------- ---------
358,092 388,035 421,305
Less accumulated depreciation and
amortization.......................... 96,448 146,542 197,416
---------- ---------- ---------
Property and equipment, net............ 261,644 241,493 223,889
---------- ---------- ---------
Intangible and other assets (less
accumulated amortization of $140,605,
$258,856 and $339,325 in 1996, 1997 and
1998, respectively)..................... 831,299 718,969 654,129
---------- ---------- ---------
$1,134,328 $1,010,046 $ 931,796
========== ========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt... $ 46 $ 24,513 $ --
Accounts payable....................... 17,395 22,486 23,571
Accrued restructuring.................. -- -- 14,810
Accrued expenses....................... 14,287 11,894 12,523
Accrued interest....................... 10,189 11,174 18,466
Customer deposits...................... 6,698 6,150 5,340
Deferred revenue....................... 7,181 8,787 11,349
---------- ---------- ---------
Total current liabilities............ 55,796 85,004 86,059
---------- ---------- ---------
Long-term debt, less current maturities.. 605,513 623,000 619,534
---------- ---------- ---------
Other long-term liabilities.............. 21,172 -- 28,639
---------- ---------- ---------
Commitments and contingencies
Stockholder's equity:
Common Stock - $.01 par value,
authorized 1,000 shares, issued and
outstanding 849 shares................ -- -- --
Additional paid-in capital............. 620,740 617,563 642,225
Accumulated deficit.................... (168,893) (315,521) (444,661)
---------- ---------- ---------
Total stockholder's equity........... 451,847 302,042 197,564
---------- ---------- ---------
$1,134,328 $1,010,046 $ 931,796
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------- -------
1995 1996 1997 1997 1998
-------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $138,466 $ 291,399 $ 351,944 $ 261,570 $ 277,826
Product sales........... 24,132 39,971 44,897 34,029 31,811
-------- --------- --------- --------- ---------
Total revenues...... 162,598 331,370 396,841 295,599 309,637
Cost of products sold... (20,789) (27,469) (29,158) (22,044) (21,863)
-------- --------- --------- --------- ---------
141,809 303,901 367,683 273,555 287,774
-------- --------- --------- --------- ---------
Operating expenses:
Service, rental and
maintenance.......... 29,673 64,957 79,836 59,227 60,812
Selling............... 24,502 46,962 51,474 39,019 36,902
General and
administrative....... 40,448 86,181 106,041 78,878 84,527
Depreciation and
amortization......... 60,037 191,101 231,376 179,188 164,290
Restructuring charge.. -- -- -- -- 16,100
-------- --------- --------- --------- ---------
Total operating
expenses........... 154,660 389,201 468,727 356,312 362,631
-------- --------- --------- --------- ---------
Operating income
(loss)................. (12,851) (85,300) (101,044) (82,757) (74,857)
Interest expense........ (20,435) (50,330) (63,680) (47,554) (51,546)
Interest income......... 38 1,270 796 539 1,202
Equity in loss of
affiliate.............. -- (1,968) (3,872) (2,828) (2,219)
-------- --------- --------- --------- ---------
Income (loss) before
income tax benefit and
extraordinary item..... (33,248) (136,328) (167,800) (132,600) (127,420)
Benefit from income
taxes.................. 4,600 51,207 21,172 15,900 --
-------- --------- --------- --------- ---------
Income (loss) before
extraordinary item..... (28,648) (85,121) (146,628) (116,700) (127,420)
Extraordinary charge
from early
extinguishment of
debt................... (1,684) (1,904) -- -- (1,720)
-------- --------- --------- --------- ---------
Net income (loss)....... $(30,332) $ (87,025) $(146,628) $(116,700) $(129,140)
======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
USA MOBILE COMMUNICATIONS, INC. II
PREDECESSOR CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 7, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Service, rental and maintenance revenues.............................. $ 72,185
Product sales......................................................... 9,996
--------
Total revenues.................................................... 82,181
Cost of products sold................................................. (6,726)
--------
75,455
--------
Operating expenses:
Service, rental and maintenance..................................... 13,875
Selling............................................................. 11,916
General and administrative.......................................... 19,267
Depreciation and amortization....................................... 29,239
--------
Total operating expenses.......................................... 74,297
--------
Operating income...................................................... 1,158
Interest expense, net................................................. (18,522)
Non-operating expenses................................................ (7,844)
--------
Income (loss) before income tax benefit............................... (25,208)
Benefit from income taxes............................................. 2,675
--------
Net income (loss)..................................................... $(22,533)
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994........ $-- $309,357 $ (51,536) $ 257,821
Capital Contribution from Arch
Communications Group, Inc........ -- 49,054 -- 49,054
Net loss.......................... -- -- (30,332) (30,332)
---- -------- --------- ---------
BALANCE, DECEMBER 31, 1995........ -- 358,411 (81,868) 276,543
Capital Contribution from Arch
Communications Group, Inc........ -- 262,329 -- 262,329
Net loss.......................... -- -- (87,025) (87,025)
---- -------- --------- ---------
BALANCE, DECEMBER 31, 1996........ -- 620,740 (168,893) 451,847
Distribution to Arch
Communications Group, Inc. ...... -- (3,177) -- (3,177)
Net loss.......................... -- -- (146,628) (146,628)
---- -------- --------- ---------
BALANCE, DECEMBER 31, 1997........ -- 617,563 (315,521) 302,042
Capital Contribution from Arch
Communications Group, Inc.
(unaudited)...................... -- 24,662 -- 24,662
Net loss (unaudited).............. -- -- (129,140) (129,140)
---- -------- --------- ---------
BALANCE, SEPTEMBER 30, 1998
(UNAUDITED)...................... $-- $642,225 $(444,661) $ 197,564
==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ (30,332) $ (87,025) $(146,628) $(116,700) $(129,140)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 60,037 191,101 231,376 179,188 164,290
Deferred income tax
benefit.............. (4,600) (51,207) (21,172) (15,900) --
Extraordinary charge
from early
extinguishment of
debt................. 1,684 1,904 -- -- 1,720
Equity in loss of
affiliate............ -- 1,968 3,872 2,828 2,219
Accretion of discount
on senior notes...... -- -- -- -- 70
Accounts receivable
loss provision....... 3,915 8,198 7,181 5,585 6,313
Changes in assets and
liabilities, net of
effect from
acquisitions of
paging companies:
Accounts
receivable......... (9,582) (15,513) (11,984) (8,481) (10,662)
Inventories......... (3,176) 1,845 (2,394) (3,677) 2,055
Prepaid expenses and
other.............. (511) 89 (386) 679 747
Accounts payable and
accrued expenses... (551) (12,440) 3,683 649 23,816
Customer deposits
and
deferred revenue... (10) 1,556 1,058 964 1,752
Other long-term
liabilities........ -- -- -- -- 28,639
--------- --------- --------- --------- ---------
Net cash provided by
operating activities... 16,874 40,476 64,606 45,135 91,819
--------- --------- --------- --------- ---------
Cash flows from
investing activities:
Additions to property
and equipment, net... (45,331) (138,899) (87,868) (63,694) (58,029)
Additions to
intangible and other
assets............... (15,137) (16,676) (14,899) (10,978) (27,756)
Acquisition of paging
companies, net of
cash acquired........ (132,081) (325,420) -- -- --
--------- --------- --------- --------- ---------
Net cash used for
investing activities... (192,549) (480,995) (102,767) (74,672) (85,785)
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
Issuance of long-term
debt................. 191,617 401,000 91,000 91,000 455,964
Repayment of long-term
debt................. (63,705) (225,166) (49,046) (56,035) (484,013)
Capital contribution
from (distribution
to) Arch
Communications Group,
Inc.................. 49,054 262,329 (3,177) (3,535) 24,662
--------- --------- --------- --------- ---------
Net cash provided by
(used for) financing
activities............. 176,966 438,163 38,777 31,430 (3,387)
--------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 1,291 (2,356) 616 1,893 2,647
Cash and cash
equivalents, beginning
of period.............. 2,336 3,627 1,271 1,271 1,887
--------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
period................. $ 3,627 $ 1,271 $ 1,887 $ 3,164 $ 4,534
========= ========= ========= ========= =========
Supplemental disclosure:
Interest paid......... $ 18,769 $ 46,448 $ 61,322 $ 44,915 $ 42,511
========= ========= ========= ========= =========
Liabilities assumed in
acquisition of paging
companies............ $ 312,833 $ 58,233 $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
USA MOBILE COMMUNICATIONS, INC. II
PREDECESSOR CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 7, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income (loss).................................................. $(22,533)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization...................................... 29,239
Amortization of debt issuance costs................................ 720
Deferred tax benefit............................................... (2,675)
Accounts receivable loss provision................................. 2,149
Changes in assets and liabilities, net of effect from acquisitions
of paging companies:
Accounts receivable.............................................. (3,122)
Inventories...................................................... 418
Prepaid expenses and other....................................... (198)
Accounts payable................................................. (3,969)
Accrued expenses................................................. 972
Accrued acquisition costs........................................ 2,553
Accrued interest................................................. 1,375
Customer deposits................................................ 950
Deferred revenue................................................. (39)
--------
Net cash provided by operating activities............................ 5,840
--------
Cash flows from investing activities:
Sale of investment in repurchase agreements........................ 37,000
Acquisitions of paging companies, net of cash acquired............. (28,684)
Release of pending acquisition escrow deposits..................... 14,234
Additions to property and equipment, net........................... (34,044)
Additions to intangible and other assets........................... (2,812)
--------
Net cash used for investing activities............................... (14,306)
--------
Cash flows from financing activities:
Issuance of long-term debt......................................... 12,840
Repayment of long-term debt........................................ (651)
Capital contributions.............................................. 54
--------
Net cash provided by financing activities............................ 12,243
--------
Net increase in cash................................................. 3,777
Cash, beginning of period............................................ 420
--------
Cash, end of period.................................................. $ 4,197
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization--Arch Communications, 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 pagers
in service). The Company had 4.2 million pagers in service at September 30,
1998. The financial statements for the Company represents the merger of Arch
Communications Enterprises, Inc. ("ACE") with and into a subsidiary of USA
Mobile Communications, Inc. II ("USAM"). ACE, USAM and the Company are wholly-
owned subsidiaries of Arch Communications Group, Inc. ("Parent").
Arch Communications Group, Inc. ("Old Parent") was incorporated in January
1986 in Delaware and conducted its operations through wholly-owned direct and
indirect subsidiaries. On September 7, 1995, Old Parent completed its
acquisition of USA Mobile Communications Holdings, Inc. ("USA Mobile") through
the merger (the "USA Mobile Merger") of Old Parent 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 generally
accepted accounting principles, Old Parent was treated as the acquirer in the
USA Mobile Merger for accounting and financial reporting purposes, and Parent
reports the historical financial statements of Old Parent as the historical
financial statements of Parent.
The USA Mobile Merger has been accounted for using the purchase method of
accounting. Parent is treated as the acquirer in the USA Mobile Merger for
accounting and financial reporting purposes. The fair values of USAM's assets
and liabilities at the effective time of the USA Mobile Merger represent a new
cost basis for those assets and liabilities that have been pushed down to the
accompanying financial statements of Arch dated subsequent to September 7,
1995. The principal effect of push down accounting was to increase the
carrying values of intangible assets by $374.1 million and to decrease the
carrying values of property and equipment by $9.2 million. Substantially all
USA Mobile's assets and liabilities were composed of the assets and
liabilities of USAM on the USA Mobile Merger date. Pro forma information is
included in Note 2.
The aggregate consideration paid or exchanged in the USA Mobile Merger was
$582.2 million, consisting of cash paid of $88.9 million (including direct
transaction costs), 7,599,493 shares of Parent common stock valued at $209.0
million and the assumption of liabilities of $284.3 million, including $241.2
million of long-term debt. Resulting goodwill is being amortized over a ten-
year period using the straight-line method. The accompanying consolidated
statements of operations and cash flows for the period January 1, 1995 to
September 7, 1995 are collectively referred to herein as "USAM Financial
Statements". Application of the purchase method of accounting at the USA
Mobile Merger date primarily resulted in higher values assigned to intangible
assets which will have the effect of increased amortization expense charged in
future periods. Accordingly, USAM Financial Statements are not comparable to
the financial statements of USAM subsequent to the USA Mobile Merger. Certain
amounts in the USAM Financial Statements, however, were reclassified to
conform with the current period presentation.
Unaudited Interim Consolidated Financial Statements--The consolidated
balance sheet as of September 30, 1998, the consolidated statements of
operations and cash flows for the nine months ended September 30, 1997 and
1998 and the consolidated statements of stockholder's equity for the nine
months ended September 30, 1998 are unaudited and, in the opinion of the
Company's management, include all adjustments and accruals, consisting only of
normal recurring accrual adjustments, which are necessary for a fair
presentation of the Company's consolidated financial position, results of
operations and cash flows. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the full year.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company, and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
F-9
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition--Arch recognizes revenue under rental and service
agreements with customers as the related services are performed. Maintenance
revenues and related costs are recognized ratably over the respective terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions
are recognized as an expense when incurred.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less. The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
Inventories--Inventories consist of new pagers which are held specifically
for resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
Property and Equipment--Pagers sold or otherwise retired are removed from
the accounts at their net book value using the first-in, first-out method.
Property and equipment is stated at cost and is depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Buildings and improvements......................... 20 Years
Leasehold improvements............................. Lease Term
Pagers............................................. 3 Years
Paging and computer equipment...................... 5-8 Years
Furniture and fixtures............................. 5-8 Years
Vehicles........................................... 3 Years
</TABLE>
Effective October 1, 1995, Arch changed its estimate of the useful life of
pagers from four years to three years. This change was made to better reflect
the estimated period during which pagers will produce equipment rental
revenue. The change did not have a material effect on depreciation expense or
net loss in the quarter ended December 31, 1995.
Depreciation and amortization expense related to property and equipment
totaled $25.0 million, $87.5 million and $108.0 million for the years ended
December 31, 1995, 1996 and 1997, respectively.
Intangible and Other Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill....................................... $351,969 $312,017 $281,847
Purchased FCC licenses......................... 330,483 293,922 265,873
Purchased subscriber lists..................... 120,981 87,281 64,341
Investment in CONXUS Communications, Inc....... 6,500 6,500 6,500
Investment in Benbow PCS Ventures, Inc......... 3,642 6,189 12,362
Non-competition agreements..................... 3,594 2,783 2,026
Deferred financing costs....................... 3,420 526 13,352
Other.......................................... 10,710 9,751 7,828
-------- -------- --------
$831,299 $718,969 $654,129
======== ======== ========
</TABLE>
F-10
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amortization expense related to intangible and other assets totaled $35.0
million, $103.7 million and $123.4 million for the years ended December 31,
1995, 1996 and 1997, respectively.
Subscriber lists, Federal Communications Commission ("FCC") licenses and
goodwill are amortized over their estimated useful lives, ranging from five to
ten years using the straight-line method. Non-competition agreements are
amortized over the terms of the agreements using the straight-line method.
Other assets consist of contract rights, organizational and FCC application
and development costs which are amortized using the straight-line method over
their estimated useful lives not exceeding ten years. Development and start up
costs include nonrecurring, direct costs incurred in the development and
expansion of paging systems, and are amortized over a two-year period.
On November 8, 1994, CONXUS Communications, Inc. ("CONXUS"), formerly PCS
Development Corporation, was successful in acquiring the rights to a two-way
paging license in five designated regions in the United States in the FCC
narrowband wireless spectrum auction. As of December 31, 1997 Arch's
investment in CONXUS totaled $6.5 million representing an equity interest of
10.5% accounted for under the cost method.
In connection with Arch's May 1996 acquisition of Westlink Holdings, Inc.
("Westlink") (see Note 2), Arch acquired Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. ("Benbow"). Benbow has exclusive rights to
a 50kHz outbound/12.5kHz inbound narrowband personal communications license in
each of the central and western regions of the United States. Arch is
obligated, to the extent such funds are not available to Benbow from other
sources and subject to the approval of Arch's designee on Benbow's Board of
Directors, to advance Benbow sufficient funds to service debt obligations
incurred by Benbow in connection with its acquisition of its narrowband PCS
licenses and to finance the build out of a regional narrowband PCS system.
Arch's investment in Benbow is accounted for under the equity method whereby
Arch's share of Benbow's losses since the acquisition date of Westlink are
recognized in Arch's accompanying consolidated statements of operations under
the caption equity in loss of affiliate.
Deferred financing costs incurred in connection with Arch's credit
agreements (see Note 3) are being amortized over periods not to exceed the
terms of the related agreements. As credit agreements are amended or
renegotiated, unamortized deferred financing costs are written-off as an
extraordinary charge. During 1995, 1996 and the nine months ended September
30, 1998, charges of $1.7 million, $1.9 million and $1.7 million respectively,
were recognized in connection with the closing of new credit facilities.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of" Arch evaluates the recoverability of its carrying value of
the Company's long-lived assets and certain intangible assets based on
estimated undiscounted cash flows to be generated from each of such assets as
compared to the original estimates used in measuring the assets. To the extent
impairment is identified, Arch reduces the carrying value of such impaired
assets. To date, Arch has not had any such impairments.
Fair Value of Financial Instruments--Arch's financial instruments, as
defined under SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", include its cash, its debt financing and interest rate
protection agreements. The fair value of cash is equal to the carrying value
at December 31, 1996 and 1997.
As discussed in Note 3, Arch's debt financing primarily consists of senior
bank debt and fixed rate senior notes. 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
F-11
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
table depicts the fair value of this debt based on the current market quote as
of December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
CARRYING FAIR CARRYING FAIR
DESCRIPTION VALUE VALUE VALUE VALUE
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
9 1/2% Senior Notes due 2004............... $125,000 $117,500 $125,000 $122,488
14% Senior Notes due 2004.................. 100,000 115,000 100,000 112,540
</TABLE>
Arch had off balance sheet interest rate protection agreements consisting of
interest rate swaps and interest rate caps with notional amounts of $165.0
million and $55.0 million, respectively, at December 31, 1996 and $140.0
million and $80.0 million, respectively, at December 31, 1997. The fair values
of the interest rate swaps and interest rate caps were $361,000 and $10,000,
respectively, at December 31, 1996 and $47,000 and $9,000, respectively, at
December 31, 1997. See Note 3.
Reclassifications--Certain amounts of prior periods were reclassified to
conform with the 1997 presentation.
2. ACQUISITIONS
In May 1996, Arch completed its acquisition of all the outstanding capital
stock of Westlink for $325.4 million in cash, including direct transaction
costs. The purchase price was allocated based on the fair values of assets
acquired and liabilities assumed (including deferred income taxes arising in
purchase accounting), which amounted to $383.6 million and $58.2 million,
respectively.
During the year ended December 31, 1995, Arch completed five acquisitions of
paging companies, in addition to the USA Mobile Merger, for purchase prices
aggregating approximately $43.0 million, consisting of cash of $36.1 million
and 395,000 shares of Parent common stock valued at $6.9 million. Goodwill
resulting from the acquisitions and the USAM Merger is being amortized over a
ten-year period using the straight-line method.
These acquisitions (including the USA Mobile Merger) have been accounted for
as purchases, and the results of their operations have been included in the
consolidated financial statements from the dates of the respective
acquisitions. The following unaudited pro forma summary presents the
consolidated results of operations as if the acquisitions had occurred at the
beginning of the periods presented, after giving effect to certain
adjustments, including depreciation and amortization of acquired assets and
interest expense on acquisition debt. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisitions been made at the beginning of
the period presented, or of results that may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996
-------------- --------------
(UNAUDITED AND IN THOUSANDS)
<S> <C> <C>
Revenues..................................... $ 321,963 $ 358,900
Income (loss) before extraordinary item...... (86,125) (100,807)
Net income (loss)............................ (87,809) (102,711)
</TABLE>
F-12
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ACE Credit Facility......................... $327,500 $359,500 $ --
USAM Credit Facility........................ 53,000 63,000 --
Amended Credit Facility..................... -- -- 267,000
9 1/2% Senior Notes due 2004................ 125,000 125,000 125,000
14% Senior Notes due 2004................... 100,000 100,000 100,000
12 3/4% Senior Notes due 2007............... -- -- 127,534
Other....................................... 59 13 --
-------- -------- --------
605,559 647,513 619,534
Less-current maturities..................... 46 24,513 --
-------- -------- --------
Long-term debt.............................. $605,513 $623,000 $619,534
======== ======== ========
</TABLE>
Senior Bank Debt--The Company, through its operating subsidiaries, entered
into two credit agreements. ACE entered into a credit facility dated May 5,
1995, as amended, with a group of banks and financial institutions who agreed,
subject to certain terms and conditions, to provide (i) a $250 million, seven-
year reducing revolver facility (the "ACE Revolver"), (ii) a $150 million,
seven-year term loan (the "Tranche A Term Loan"), and (iii) a $100 million,
eight-year term loan (the "Tranche B Term Loan"). The ACE Revolver, which is
available for working capital and other purposes, the Tranche A Term Loan and
the Tranche B Term Loan are collectively referred to as the ACE Credit
Facility. The ACE Credit Facility is secured by all assets of the operating
subsidiaries of ACE and a pledge of all the stock of Arch's direct and
indirect subsidiaries. In addition, Parent and the operating subsidiaries of
ACE have guaranteed all obligations under the ACE Credit Facility.
The ACE Revolver was subject to scheduled mandatory reductions commencing on
December 31, 1999. The Tranche A Term Loan and Tranche B Term Loan will be
amortized in quarterly installments commencing on March 31, 1998.
Except for the Tranche B Term Loan, borrowings under the ACE Credit Facility
bear interest based on a reference rate equal to either (i) the agent bank's
Alternate Base Rate, or (ii) the agent bank's LIBOR rate, in each case plus a
margin which is based on the ratio of total debt to annualized EBITDA.
Borrowings under the Tranche B Term Loan bear interest at either the agent
bank's Alternate Base Rate or LIBOR rate, in each case plus a margin based on
the ratio of total debt to annualized EBITDA. Interest is payable quarterly in
arrears. In addition, an annual commitment fee is payable based on the average
daily unused portion of the ACE Revolver.
ACE is also required to maintain interest rate protection on at least 50% of
outstanding borrowings under the ACE Credit Facility, and has therefore
entered into interest rate swap and interest rate cap agreements. Entering
into interest rate cap and swap agreements involves both the credit risk of
dealing with counterparties and their ability to meet the terms of the
contracts and interest rate risk. In the event of non-performance by the
counterparty to these interest rate protection agreements, ACE would be
subject to the prevailing interest rates specified in the ACE Credit Facility.
Under the interest rate swap agreements, the Company will pay the difference
between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR, and the
Company will receive the difference between LIBOR and the fixed swap rate if
LIBOR exceeds the swap rate. Settlement occurs on the quarterly reset dates
specified by the terms of the contracts. The notional principal amount of the
interest rate swaps outstanding was $140 million at
F-13
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1997. The weighted average fixed payment rate was 5.818% while
the weighted average rate of variable interest payments under the ACE Credit
Facility was 5.872% at December 31, 1997. At December 31, 1996 and 1997, the
Company had a net payable of $124,000 and a net receivable of $18,000,
respectively, on the interest rate swaps.
The interest rate cap agreements will pay the Company the difference between
LIBOR and the cap level if LIBOR exceeds the cap levels at any of the
quarterly reset dates. If LIBOR remains below the cap level, no payment is
made to the Company. The total notional amount of the interest rate cap
agreements was $80 million with cap levels between 7.5% and 8% at December 31,
1997. The transaction fees for these instruments are being amortized over the
terms of the agreements.
The ACE Credit Facility contains restrictive and financial covenants which,
among other things, limit the ability of ACE to: incur additional
indebtedness, advance funds to Benbow (see Note 1), pay dividends, grant liens
on its assets, merge, sell or acquire assets; repurchase or redeem capital
stock; incur capital expenditures; and prepay indebtedness other than
indebtedness under the ACE Credit Facility. As of December 31, 1997, ACE and
its operating subsidiaries were in compliance with the covenants of the ACE
Credit Facility.
As of December 31, 1997, $359.5 million was outstanding and $28.7 million
was available under the ACE Credit Facility. At December 31, 1997, such
advances bore interest at an average annual rate of 8.76%.
USAM and the direct subsidiaries of USAM (the "USAM Borrowing Subsidiaries")
are parties to a $110 million reducing revolving credit facility dated March
19, 1997, as amended, with a group of banks pursuant to which the banks have
agreed to make advances for working capital and other purposes (the "USAM
Credit Facility").
Upon the closing of the USAM Credit Facility, the banks did not require the
contemporaneous grant of a security interest in the assets of USAM and its
subsidiaries but they have reserved the right to require such a security
interest upon the occurrence of certain triggering events. Parent and USAM
have guaranteed the obligations of the USAM Borrowing Subsidiaries under the
USAM Credit Facility. Parent's guarantee is secured by the pledge of the stock
of ACE and USAM.
Obligations under the USAM Credit Facility bear interest based on a
reference rate equal to either (i) the agent bank's Alternate Base Rate or
(ii) the agent bank's LIBOR rate, in each case plus a margin based on the
ratio of USAM's total indebtedness to annualized EBITDA. The annual commitment
fee is payable based on the average daily unused portion of the USAM Credit
Facility.
The USAM Credit Facility contains restrictive and financial covenants which,
among other things, limit the ability of USAM to: incur additional
indebtedness, pay dividends, grant liens on its assets, merge, sell or acquire
assets; repurchase or redeem capital stock; incur capital expenditures; and
prepay indebtedness other than indebtedness under the USAM Credit Facility. As
of December 31, 1997, USAM and the USAM Borrowing Subsidiaries were in
compliance with the covenants of the USAM Credit Facility.
As of December 31, 1997, $63.0 million was outstanding and $4.6 million was
available under the USAM Credit Facility. At December 31, 1997, such advances
bore interest at an average annual rate of 8.55%.
On June 29, 1998, ACE was merged (the "ACI Merger") into a subsidiary of
USAM named Arch Paging, Inc. ("API") to form the Company. In connection with
the Merger, USAM changed its name to Arch Communications, Inc.
Contemporaneously with the ACI Merger, ACE's existing credit facility was
amended and restated to establish senior secured revolving credit and term
loan facilities with API, as borrower, in the aggregate amount of $400.0
million (collectively, the "Amended 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
F-14
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
credit facility under which the principal amount outstanding on the 364th day
following the closing will convert to a term loan (the "Tranche B Facility")
and (iii) a $125.0 million term loan which was available in a single drawing
on the closing date (the "Tranche C Facility").
The Tranche A Facility will be subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term
loan portion of the Tranche B Facility will be amortized in quarterly
installments commencing September 30, 2000, with an ultimate maturity date of
June 30, 2005. The Tranche C Facility will be amortized in annual installments
commencing December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the Amended Credit Facility are secured by its
pledge of the capital stock of the former ACE operating subsidiaries. The
Amended Credit Facility is guaranteed by Arch, Parent and the former ACE
operating subsidiaries. Arch's guarantee is secured by a pledge of Parent's
stock and notes in Arch, and the guarantees of the former ACE operating
subsidiaries are secured by a security interest in those assets of such
subsidiaries which were pledged under ACE's previous credit facility.
Borrowings under the Amended Credit Facility bear interest based on a
reference rate equal to either the Bank's Alternate Base Rate or LIBOR rate,
in each case plus a margin based on Arch's or API's ratio of total debt to
annualized EBITDA.
The Amended 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 Arch's or API's ratio of total debt to
annualized EBITDA.
The Amended 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 Amended Credit Facility. In
addition, the Amended 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.
Interest on the USAM 14% Notes and the USAM 9 1/2% Notes (collectively, the
"Senior Notes") is payable semiannually. The Senior Notes contain certain
restrictive and financial covenants which, among other things, limit the
ability of Parent or USAM 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.
On June 29, 1998, Arch issued and sold $130.0 million principal amount of 12
3/4% Senior Notes due 2007 (the "Notes") for net proceeds of $122.6 million
(after deducting the discount to the initial purchasers of such Notes and
estimated offering expenses payable by Arch) in a private placement (the "Note
Offering") under Rule 144A under the Securities Act of 1933. The Notes were
sold at an initial price to investors of 98.049%. The Notes mature on July 1,
2007 and bear interest at a rate of 12 3/4% per annum, payable semi-annually
in arrears on January 1 and July 1 of each year, commencing January 1, 1999.
The covenants in the indenture under which the 12 3/4% Notes were issued
("the Indenture") contain certain covenants that, among other things, limit
the ability of Arch 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 Arch's Restricted Subsidiaries (as defined in the Indenture) or enter
into certain mergers and consolidations.
F-15
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of Debt--Scheduled long-term debt maturities at December 31, 1997
and at September 30, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C>
1998...................... $ 24,513 $ --
1999...................... 37,750 1,250
2000...................... 83,000 15,450
2001...................... 74,750 29,650
2002...................... 122,500 29,650
Thereafter................ 305,000 543,534
-------- --------
$647,513 $619,534
======== ========
</TABLE>
4. INCOME TAXES
Arch accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities given the provisions of enacted laws.
The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets at December 31, 1996 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Deferred tax assets..................................... $ 94,597 $134,944
Deferred tax liabilities................................ (115,769) (90,122)
--------- --------
(21,172) 44,822
Valuation allowance..................................... -- (44,822)
--------- --------
$ (21,172) $ --
========= ========
</TABLE>
The approximate effect of each type of temporary difference and carryforward
at December 31, 1996 and 1997 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Net operating losses.................................... $ 89,764 $106,214
Intangibles and other assets............................ (115,769) (87,444)
Depreciation of property & equipment.................... 3,692 24,388
Accruals and reserves................................... 1,141 1,664
--------- --------
(21,172) 44,822
Valuation allowance..................................... -- (44,822)
--------- --------
$ (21,172) $ --
========= ========
</TABLE>
The effective income tax rate differs from the statutory federal tax rate
primarily due to the nondeductibility of goodwill amortization. The net
operating loss (NOL) carryforwards expire at various dates through 2012. The
Internal Revenue Code contains provisions that may limit the NOL carryforwards
available to be used in any given year if certain events occur, including
significant changes in ownership, as defined.
The Company has established a valuation reserve against its net deferred tax
asset until it becomes more likely than not that this asset will be realized
in the foreseeable future.
F-16
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
In March 1996, Parent completed a public offering of 10 7/8% Senior Discount
Notes ("Parent Discount Notes") in aggregate principal amount at maturity of
$467.4 million ($275.0 million initial accreted value). Parent Discount Notes
mature on March 15, 2008. Interest does not accrue on the Parent Discount
Notes prior to March 15, 2001. Thereafter, interest on the Parent Discount
Notes will accrue at the rate of 10 7/8% per annum (approximately $50.8
million), payable semi-annually. Parent has no significant business operations
and its primary asset represents its investment in Arch. The ability of Parent
to make payments of principal and interest on the Parent Discount Notes will
be dependent upon Arch's achieving and sustaining levels of performance in the
future that would permit the Company to pay dividends, distributions or fees
to Parent which are sufficient to permit such payments on the Notes.
In the ordinary course of business, the Company and its subsidiaries are
defendants in a variety of judicial proceedings. In the opinion of management,
there is no proceeding pending, or to the knowledge of management threatened,
which in the event of an adverse decision, would result in a material adverse
change in the financial condition of the Company.
Arch has operating leases for office and transmitting sites with lease terms
ranging from one month to approximately ten years. In most cases, Arch expects
that, in the normal course of business, leases will be renewed or replaced by
other leases.
Future minimum lease payments under noncancellable operating leases at
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998............................. $16,909
1999............................. 7,706
2000............................. 4,546
2001............................. 2,689
2002............................. 950
Thereafter....................... 1,680
-------
Total.......................... $34,480
=======
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1995, 1996 and 1997 approximated $6.4 million, $14.7 million, and $19.8
million, respectively.
6. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan--Arch has a retirement savings plan, qualifying
under Section 401(k) of the Internal Revenue Code covering eligible employees,
as defined. Under the plan, a participant may elect to defer receipt of a
stated percentage of the compensation which would otherwise be payable to the
participant for any plan year (the deferred amount) provided, however, that
the deferred amount shall not exceed the maximum amount permitted under
Section 401(k) of the Internal Revenue Code. The plan provides for employer
matching contributions. Matching contributions for the years ended December
31, 1995, 1996 and 1997 approximated $124,000, $217,000 and $302,000
respectively.
Stock Option Plans--Employees of Arch are eligible to be granted options
under Parent's stock option plans. Parent 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 of its
subsidiaries ("employees"), directors and consultants to purchase Parent'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
F-17
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 ten years. The 1989 Plan provides for the granting of
options to purchase a total of 1,128,944 shares of common stock. All options
outstanding on September 7, 1995 under the 1989 Plan became fully exercisable
and vested as a result of the USA Mobile Merger. The 1997 Plan provides for
the granting of options to purchase a total of 1,500,000 shares of Parent's
common stock.
Effective October 23, 1996, the Compensation Committee of the Board of
Directors of Parent authorized the grant of new options to each employee who
had an outstanding option at a price greater then $12.50 (the fair market
value of Parent'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 USA Mobile Merger, Parent 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 options to
purchase up to 601,500 shares of Parent'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 Merger.
On December 16, 1997, the Compensation Committee of the Board of Directors
of Parent 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, Parent 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.
The following table summarizes the activity under Parent's stock option
plans (including Parent's outside director plans) for the periods presented:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options Outstanding at December 31, 1994..... 642,484 $ 7.95
Granted .................................... 278,750 23.46
Assumed in Merger .......................... 571,024 11.59
Exercised .................................. (475,903) 10.80
Terminated ................................. (10,600) 17.57
--------- ------
Options Outstanding at December 31, 1995 .... 1,005,755 13.02
Granted .................................... 695,206 15.46
Exercised .................................. (169,308) 8.69
Terminated ................................. (484,456) 21.60
--------- ------
Options Outstanding at December 31, 1996 .... 1,047,197 11.37
Granted .................................... 500,394 6.68
Exercised .................................. -- --
Terminated ................................. (190,636) 10.58
--------- ------
Options Outstanding at December 31, 1997 .... 1,356,955 $ 9.75
========= ======
Options Exercisable at December 31, 1997 .... 639,439 $ 9.64
========= ======
</TABLE>
F-18
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Outside directors' options outstanding and options exercisable were 57,000
and 30,000, respectively, at December 1997.
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 1997:
<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>
$3.13 - $ 5.94 186,284 1.58 $ 4.39 169,784 $ 4.36
6.25 - 8.25 617,654 7.45 7.09 195,010 7.77
10.29 - 14.10 410,377 8.08 12.34 209,853 12.19
15.85 - 20.63 124,640 8.10 20.12 51,292 19.66
23.50 - 27.56 18,000 7.84 25.53 13,500 25.53
-------------- --------- ---- ------ ------- ------
$3.13 - $27.56 1,356,955 6.90 $ 9.75 639,439 $ 9.64
============== ========= ==== ====== ======= ======
</TABLE>
Employee Stock Purchase Plan--Employees of Arch may also participate in
Parent's stock purchase plan. On May 28, 1996, Parent's stockholders approved
the 1996 Employee Stock Purchase Plan (the "ESPP"). The ESPP allows eligible
employees the right to purchase common stock, through payroll deductions not
exceeding 10% of their compensation, at the lower of 85% of the market price
at the beginning or the end of each six-month offering period. During 1996 and
1997, 46,842 and 151,343 shares, respectively, were issued at an average price
per share of $7.97 and $5.29, respectively. At December 31, 1997, 51,815
shares were available for future issuance.
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 Company's
Combined 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) would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss), as reported.................. $(30,332) $(87,025) $(146,628)
Net income (loss), pro forma.................... (30,470) (88,149) (148,224)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to the
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. In computing these pro forma amounts Arch
has assumed a risk-free interest rate of 6%, an expected life of five years,
an expected dividend yield of zero and an expected volatility of 50% to 60%.
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1995, 1996 and 1997, were $11.89, $4.95 and
$3.37, respectively. The weighted average fair value of shares sold under the
ESPP in 1996 and 1997 was $5.46 and $2.83, respectively.
F-19
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY TRANSACTIONS
Intercompany transactions with Arch Communications Group, Inc.--In February
1995, Parent completed a public offering of 2,701,296 shares of common stock
generating net proceeds of approximately $46.2 million. Parent invested the
proceeds as a capital contribution to Arch. Arch used the funds to repay
outstanding indebtedness under its credit facilities. In March 1996, Parent
completed a public offering of 10 7/8% Senior Discount Notes due 2008
generating net proceeds of $266.1 million. Parent invested $263.8 million of
the net proceeds as a capital contribution to Arch. Arch used the funds to
repay all the then outstanding indebtedness under its credit facilities. 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 Parent of $25.0 million in the
form of Series C Convertible Preferred Stock of Parent ("Series C Preferred
Stock"). Simultaneously, Parent contributed to Arch as an equity investment
(the "Equity Investment") $24.0 million of the net proceeds from the sale of
Series C Preferred Stock, Arch contributed such amount to API as an equity
investment and API used such amount to repay indebtedness under ACE's existing
credit facility as part of the establishment of the Amended Credit Facility.
8. TOWER SITE SALE (UNAUDITED)
In April 1998, Parent announced an agreement to sell certain of Arch's tower
site assets (the "Tower Site Sale") for approximately $38.0 million in cash
(subject to adjustment), of which $1.3 million was paid to entities affiliated
with Benbow, in payment for certain assets owned by such entities and included
in the Tower Site Sale. In the Tower Site Sale, Arch is selling communications
towers, real estate, site management contracts and/or leasehold interests
involving 133 sites in 22 states, and will rent space on the towers on which
it currently operates communications equipment to service its own paging
network. Arch will use its net proceeds from the Tower Site Sale (estimated to
be $36.0 million) to repay indebtedness under the Amended 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 (excluding the $1.3 million
which was paid to entities affiliated with Benbow for the assets such entities
sold) and held a second closing on September 29, 1998 with gross proceeds to
Arch of approximately $20.4 million. The final closing for the balance of the
transaction is expected to be completed in the fourth quarter of 1998,
although no assurance can be given that the final closing will be held as
expected.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain is deferred and included in other long-term
liabilities. At September 30, 1998, Arch had sold 117 of the 133 sites which
resulted in a total gain of approximately $23.5 million and through September
30, 1998 approximately $1.5 million of this gain has been recognized in the
statement of operations and is included in operating income.
9. DIVISIONAL REORGANIZATION (UNAUDITED)
In June 1998, Parent'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,
Parent has consolidated Arch's former Midwest, Western and Northern divisions
into four existing operating divisions and is in the process of consolidating
certain regional administrative support functions, such as customer service,
collections, inventory and billing to reduce redundancy and take advantage of
various operating efficiencies. In connection with the Divisional
Reorganization, Arch (i) anticipates a net reduction of approximately 10% of
its workforce, (ii) plans to close certain office locations and redeploy other
assets and (iii) has recorded a restructuring charge of $16.1 million during
the second quarter of 1998. The restructuring charge consisted of
approximately (i) $9.7 million for employee severance, (ii) $3.5 million for
lease obligations and terminations (iii) $1.4 million for the writedown of
fixed assets and (iv) $1.5 million of other costs.
F-20
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 terminate up to 900 personnel. The majority
of the positions to be eliminated will be related to customer service,
collections, inventory and billing functions in local and regional offices
which will be closed as a result of the Divisional Reorganization. As of
September 30, 1998, 114 employees had been terminated due to the Divisional
Reorganization. The majority of the severance and benefits costs to be paid by
the Company will be paid during the remainder of 1998 and in 1999.
The Company's restructuring activity as of September 30, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
UTILIZATION OF RESERVE
RESERVE
INITIALLY REMAINING
ESTABLISHED CASH NON-CASH RESERVE
----------- ------------ --------------------
<S> <C> <C> <C> <C>
Severance costs............... $ 9,700 $ 1,105 $ -- $ 8,595
Lease obligation costs........ 3,500 34 -- 3,466
Write-down of fixed assets.... 1,400 -- -- 1,400
Other costs................... 1,500 151 -- 1,349
-------- ------------ ---------- --------
Total....................... $ 16,100 $ 1,290 $ -- $ 14,810
======== ============ ========== ========
</TABLE>
10. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the years ended December 31, 1996 and
1997 is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Revenues........................... $ 67,171 $ 78,983 $ 90,886 $ 94,330
Operating income (loss)............ (12,907) (18,578) (23,404) (30,411)
Income (loss) before extraordinary
item.............................. (15,895) (17,793) (24,150) (27,283)
Extraordinary charge............... -- (1,904) -- --
Net income (loss).................. (15,895) (19,697) (24,150) (27,283)
YEAR ENDED DECEMBER 31, 1997:
Revenues........................... $ 95,539 $ 98,729 $101,331 $101,242
Operating income (loss)............ (26,389) (29,403) (26,965) (18,287)
Net income (loss).................. (37,337) (40,680) (38,683) (29,928)
</TABLE>
F-21
<PAGE>
ANNEX A
ADDITIONAL INFORMATION ABOUT MOBILEMEDIA AND ABOUT ARCH FOLLOWING THE
MOBILEMEDIA TRANSACTION
The following narrative and historical financial information about
MobileMedia and pro forma financial information and financial projections
about Arch following consummation of the MobileMedia Transaction should be
considered by Holders of Notes as such information relates to their position
as creditors of Arch. If the MobileMedia transaction is consummated,
MobileMedia will become an indirect wholly owned subsidiary of Arch and Arch
will continue to be a wholly owned subsidiary of Parent. See the chart which
appears on Page 14 of the Prospectus. The fact that the Notes are obligations
of Arch, and not of Parent or Arch's subsidiaries, affects the rights of
holders of the Notes. See "Risk Factors--Holding Company Structure and
Structural Subordination of the Notes" and "--Debt Service; Limitations on
Access to Cash Flow of Operating Subsidiaries". Among other things, (1) the
cash flow and assets of MobileMedia will first need to be used to service
required payments under the Credit Facility and any other obligations of
Arch's subsidiaries before they can be used to service the Notes, (2) Arch,
excluding its subsidiaries will have no significant assets and will have
approximately $352.5 to $552.5 million of indebtedness following consummation
of the MobileMedia Transaction (depending on whether borrowings are made under
the Credit Facility or The Bridge Facility) and (3) Parent will have no
significant assets and will have substantial amounts of debt ($373.6 million)
at September 30, 1998.
The pro forma financial statements and financial projections should be read
in conjunction with the assumptions and cautionary language that appears with
them below. See also "Risk Factors--Anticipated Effects of The MobileMedia
Transaction".
There can be no assurance that the MobileMedia Transaction will be
consummated as contemplated herein, if at all. See "Risk Factors--Possible
Non-Consummation of the MobileMedia Transaction".
Certain terms used in this Annex A are defined in the Glossary which appears
in the Prospectus. Such phrases as "Arch on a pro forma basis" (not otherwise
defined) and "Arch following the MobileMedia Transaction" refer to Arch and
its subsidiaries, including MobileMedia, after consummation of the MobileMedia
Transaction. The term "Combined Company" refers to Parent and its
subsidiaries, including Arch and MobileMedia, after consummation of the
MobileMedia Transaction.
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORWARD-LOOKING STATEMENTS................................................ A-3
RISK FACTORS.............................................................. A-4
Risks Related to MobileMedia............................................ A-4
Disruption of Operations Prior to and Following Bankruptcy Filing...... A-4
Subscriber Turnover.................................................... A-4
Risks Related to the MobileMedia Transaction............................ A-4
Assumptions Regarding Value of MobileMedia Assets...................... A-4
Substantial Amortization Charges....................................... A-4
Use of Pro Forma Assumptions........................................... A-5
Risks Relating to the Unaudited Projections............................ A-5
Material Federal Income Tax Considerations; Possible Loss of Corporate
Tax Benefits.......................................................... A-5
SUMMARY OF TERMS OF THE MOBILEMEDIA TRANSACTION........................... A-6
The Merger..............................................................
Consideration to be Paid................................................ A-6
Stockholdings Before and After the Merger............................... A-7
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA........................ A-8
BUSINESS OF MOBILEMEDIA................................................... A-11
Business Strategy....................................................... A-11
Paging and Messaging Services Products and Operations................... A-11
Networks and Licenses................................................... A-12
Sales and Marketing..................................................... A-13
Competitions............................................................ A-14
Regulation.............................................................. A-14
Sources of Equipment.................................................... A-14
Employees............................................................... A-15
Trade Marks............................................................. A-15
Properties.............................................................. A-15
Sale of MobileMedia Tower Site.......................................... A-16
Events Leading up to MobileMedia Bankruptcy Filing...................... A-16
Litigation.............................................................. A-17
MOBILEMEDIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ A-20
Presentation of Financial Condition and Results of Operations........... A-20
Overview................................................................ A-20
Pending FCC Action Against MobileMedia.................................. A-21
Results of Operations................................................... A-23
Liquidity and Capital Resources ........................................ A-30
New Authoritative Accounting Pronouncements............................. A-35
INFORMATION ABOUT ARCH ON A PRO FORMA BASIS............................... A-36
Unaudited Financial Projections and Operational Cost Synergies.......... A-36
Assumptions Used in the Unaudited Financial Projections................. A-36
UNAUDITED PROJECTED BALANCE SHEETS........................................ A-39
UNAUDITED PROJECTED STATEMENT OF OPERATIONS............................... A-40
UNAUDITED PROJECTED STATEMENT OF CASH FLOW................................ A-41
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........... A-43
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET ................. A-44
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS........ A-45
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.. A-47
INDEX TO FINANCIAL STATEMENTS............................................. A-49
FINANCIAL STATEMENTS OF MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Auditors.......................................... A-50
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998 (unaudited)......................................... A-51
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (unaudited).......................................... A-52
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
Each of the Three Years in the Period Ended December 31, 1997 and for
the Nine Months Ended September 30, 1998 (unaudited)................... A-53
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (unaudited).......................................... A-54
Notes to Consolidated Financial Statements.............................. A-55
</TABLE>
A-2
<PAGE>
FORWARD-LOOKING STATEMENTS
This Annex A to the Prospectus contains forward-looking statements that are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Any statements contained herein (including,
without limitation, statements to the effect that Arch, Parent, MMC Parent or
MMC or their respective managements or boards of directors "believe",
"expect", "anticipate", "plan" and similar expressions) that are not
statements of historical fact should be considered forward-looking statements.
A number of important factors could cause actual results to differ materially
from those expressed in any forward-looking statements made by, or on behalf
of, Arch, Parent, MMC Parent or MMC or their respective managements or boards
of directors. Achieving the anticipated benefits of the MobileMedia
Transaction will depend in significant part upon whether the integration of
the two companies' businesses is accomplished in an efficient manner, and
there can be no assurance that this will occur. The combination of the two
companies will require, among other things, coordination of administrative,
sales and marketing, distribution, and accounting and finance functions and
expansion of information and management systems. The integration process could
divert the attention of management, and any difficulties or problems
encountered in the transition process could have a material adverse effect on
Arch following the MobileMedia Transaction. In addition, the process of
combining the companies could cause the interruption of, or a loss of momentum
in, the activities of the respective businesses, which could also have a
material adverse effect on Arch following the MobileMedia Transaction. The
difficulty of combining the businesses may be increased by the need to
integrate personnel and the geographic distance separating the organizations.
There can be no assurance that Arch will retain key employees or that Arch
will realize any of the other anticipated benefits of the MobileMedia
Transaction. See "Risk Factors".
The unaudited Projections (the "Projections") contained in this Annex A have
been prepared jointly by Arch and MobileMedia as a projection of possible
future results based upon the assumptions set forth therein, and are dependent
on many factors over which neither Arch nor MobileMedia has any control. No
assurance can be given that any of the assumptions on which the Projections
are based will prove to be correct. THE LAST REPORTED SALE PRICE OF PARENT'S
COMMON STOCK WAS $1.4375 PER SHARE ON DECEMBER 21, 1998. FOR PURPOSES OF
PREPARING THE PROJECTIONS, ARCH HAS ASSUMED THE MARKET VALUE OF SUCH COMMON
STOCK TO BE $2.00. SEE "RISK FACTORS--UNCERTAINTIES RELATED TO THE MERGER AND
THE REORGANIZATION--USE OF PRO FORMA ASSUMPTIONS" AND "INFORMATION ABOUT ARCH
ON A PRO FORMA BASIS--UNAUDITED FINANCIAL PROJECTIONS AND OPERATIONAL COST
SYNERGIES". PARENT, ARCH AND MOBILEMEDIA DO NOT AS A MATTER OF COURSE MAKE
PUBLIC ANY PROJECTIONS AS TO FUTURE PERFORMANCE OR EARNINGS. THE PROJECTIONS
CONTAINED HEREIN WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR
COMPLIANCE WITH (I) PUBLISHED GUIDELINES OF THE SEC, (II) THE GUIDELINES
ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
REGARDING PROJECTIONS OR (III) GAAP. ARTHUR ANDERSEN LLP, THE INDEPENDENT
PUBLIC ACCOUNTANTS FOR ARCH, HAS NEITHER COMPILED NOR EXAMINED SUCH
PROJECTIONS AND, ACCORDINGLY, DOES NOT EXPRESS ANY OPINION OR ANY OTHER FORM
OF ASSURANCE WITH RESPECT TO, ASSUMES NO RESPONSIBILITY FOR AND DISCLAIMS ANY
ASSOCIATION WITH, SUCH PROJECTIONS. ERNST & YOUNG LLP, THE INDEPENDENT
AUDITORS FOR MOBILEMEDIA, HAS NEITHER COMPILED NOR EXAMINED SUCH PROJECTIONS
AND, ACCORDINGLY, DOES NOT EXPRESS ANY OPINION OR ANY OTHER FORM OF ASSURANCE
WITH RESPECT TO, ASSUMES NO RESPONSIBILITY FOR AND DISCLAIMS ANY ASSOCIATION
WITH, SUCH PROJECTIONS. WHILE PRESENTED WITH NUMERICAL SPECIFICITY, SUCH
PROJECTIONS ARE BASED UPON A VARIETY OF ASSUMPTIONS, WHICH MAY NOT BE
REALIZED, RELATING TO THE FUTURE BUSINESS AND OPERATIONS OF ARCH AND
MOBILEMEDIA AND THE INTEGRATION OF THEIR OPERATIONS AND ARE SUBJECT TO
SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO
PREDICT AND MANY OF WHICH ARE BEYOND THE CONTROL OF ARCH AND MOBILEMEDIA.
NEITHER ARCH OR PARENT, ON THE ONE HAND, NOR MOBILEMEDIA OR MMC PARENT, ON THE
OTHER HAND, MAKES ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY AS TO THE
ATTAINABILITY OF THE PROJECTED FINANCIAL INFORMATION SET FORTH IN THE
PROJECTIONS OR AS TO THE ACCURACY OR COMPLETENESS OF THE ASSUMPTIONS FROM
WHICH THAT PROJECTED INFORMATION IS DERIVED.
FOR A DISCUSSION OF SOME OF THE FACTORS WHICH COULD CAUSE FUTURE RESULTS TO
VARY, SEE "RISK FACTORS" IN THE PROSPECTUS AND IN THIS ANNEX A.
A-3
<PAGE>
RISK FACTORS
The following risk factors supplement the risk factors set forth in the
Prospectus under "Risk Factors". Certain of those risk factors pertain to the
MobileMedia Transaction, such as "Risk Factors--Anticipated Effects of the
MobileMedia Transaction", "--Possible Acquisition Transactions", "--Possible
Non-Consummation of the MobileMedia Transaction" and "--Impact of the Year
2000 Issue".
MobileMedia's business operations involve many of the same types of risks as
are discussed in the Prospectus under "Risk Factors--Future Capital Needs",
"--History of Losses", "--Dependance on Key Personnel", "--Competition and
Technological Change", "--Dependence on Third Parties" and "--Government
Regulations, Foreign Ownership and Possible Redemption".
The following risk factors pertain particularly to MobileMedia or to the
MobileMedia Transaction:
RISKS RELATED TO MOBILEMEDIA
DISRUPTION OF OPERATIONS PRIOR TO AND FOLLOWING BANKRUPTCY FILING
MobileMedia's business operations have been adversely affected by
integration difficulties following its acquisition of MobileComm and Dial
Page, 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 operates under Chapter 11. In addition, one
of MobileMedia's primary assets is its experienced employees, who have the
ability to leave MobileMedia and to deprive it of the skill and knowledge
essential for executing its business strategy. Any further deterioration of
MobileMedia's business, or the loss of significant numbers of key employees,
could have a material adverse effect on MobileMedia and, as a result, on Arch
if the MobileMedia Transaction is consummated.
SUBSCRIBER TURNOVER
The results of operations of wireless messaging service providers, such as
MobileMedia, can be significantly affected by subscriber cancellations. Since
filing for bankruptcy protection on January 30, 1997, MobileMedia has
experienced a significant decline in subscribers. While MobileMedia once had
over 4.0 million units in service, only 3.2 million units were in service at
December 31, 1997. The sales and marketing costs associated with attracting
new subscribers are substantial relative 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. An increase in the
subscriber cancellation rate could have a material adverse effect on
MobileMedia, and as a result, on Arch if the MobileMedia Transaction is
consummated. See "Business--MobileMedia--Sales and Marketing".
RISKS RELATED TO THE MOBILEMEDIA TRANSACTION
ASSUMPTIONS REGARDING VALUE OF MOBILEMEDIA ASSETS
For financial reporting purposes, the fair value of the assets of
MobileMedia must be determined as of the consummation of the MobileMedia
Transaction. Although such valuation is not presently expected to result in
values that are materially greater or less than the values assumed in the
preparation of the unaudited pro forma condensed consolidated financial
statements and the Projections, there can be no assurance with respect
thereto. See "Unaudited Pro Forma Condensed Consolidated Financial Statements"
and "Information about Arch on a Pro Forma Basis-- Unaudited Financial
Projections and Operational Cost Synergies".
SUBSTANTIAL AMORTIZATION CHARGES
A significant effect of using purchase accounting treatment for the Merger
will be to record a substantial amount of goodwill and other intangible assets
which will result in substantial amortization charges to the consolidated
income of Arch over the useful lives of such assets. The incremental amount of
such charges is
A-4
<PAGE>
estimated to be approximately $26.0 million per year for ten years; however,
actual charges could vary significantly in the event the underlying assets are
impaired or the related useful lives of such assets are less than currently
estimated. See "Unaudited Selected Pro Forma Consolidated Financial Data".
USE OF PRO FORMA ASSUMPTIONS
For purposes of presenting the pro forma condensed consolidated financial
statements included in this Annex A, Arch has assumed the market value of the
Parent's Common Stock issued pursuant to the Merger Agreement and the Amended
Plan will be $2.00. On December 21, 1998, the closing market price of Parent's
Common Stock was $1.4375. See "Unaudited Pro Forma Condensed Consolidated
Financial Statements".
RISKS RELATING TO THE UNAUDITED PROJECTIONS
The managements of Parent, Arch and MobileMedia have jointly prepared the
Projections contained herein for Arch on a pro forma basis on the basis of
projections for the Combined Company prepared in connection with the
development of the Amended Plan (as defined herein) to present the projected
effects of the Amended Plan and the transactions contemplated thereby if the
MobileMedia Transaction is consummated. The Projections assume the Merger, the
Amended Plan and the transactions contemplated thereby will be implemented in
accordance with their terms. The assumptions and estimates underlying such
Projections are inherently uncertain and are subject to significant business,
economic and competitive risks and uncertainties that could cause actual
results to differ materially from those projected, including, among others,
those enumerated therein or herein. Accordingly, the Projections are not
necessarily indicative of the future financial condition or results of
operations of Arch following the Merger, which may vary significantly from
those set forth in the Projections. Consequently, the projected financial
information contained herein should not be regarded as a representation by
Parent, Arch, the advisors of Parent and Arch, MMC Parent, MobileMedia, the
advisors of MMC Parent and MobileMedia or any other person that the
Projections can or will be achieved. See "Forward-Looking Statements".
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS; POSSIBLE LOSS OF CORPORATE TAX
BENEFITS
It is anticipated that (S)382 of the Tax Code will limit the amount of
income earned by Arch after the Merger that may be offset by Arch's net
operating loss carryforwards and other tax attributes. It is also anticipated
that the net operating loss carryforwards and possibly other tax attributes of
MMC will be substantially reduced as a result of consummation of the Amended
Plan pursuant to (S)382 and (S)108 of the Tax Code.
A-5
<PAGE>
SUMMARY OF TERMS OF MOBILEMEDIA TRANSACTION
The MobileMedia Transaction will consist of (i) the acquisition of
MobileMedia through the merger of MMC into a wholly owned subsidiary of Parent
(the "Merger"), (ii) the transfer of all of the stock of the surviving
corporation in the Merger from Parent to API and (iii) the sale of shares of
Parent's Common Stock and Class B Common Stock in rights offerings for minimum
proceeds of $217.0 million, the issuance of shares of Parent's Common Stock to
creditors of MobileMedia and MMC Parent, the payment by Parent of $479.0
million in cash to creditors of MobileMedia and MMC Parent, plus additional
amounts as described below, additional borrowings under the Credit Facility
and either the issuance of the Planned Arch Notes or borrowings under the
Bridge Facility (collectively, the "Related Transactions").
The MobileMedia Transaction will be effected in accordance with the terms of
(x) an Agreement and Plan of Merger, dated as of August 18, 1998, amended as
of September 3, 1998 and as of December 1, 1998 (as amended, the "Merger
Agreement"), among Parent, MMC Parent and Farm Team Corp., a Delaware
corporation and a wholly owned subsidiary of Parent (the "Merger Subsidiary"),
(y) a related Third Amended Joint Plan of Reorganization of MMC Parent and
MobileMedia under Chapter 11 dated December 1, 1998 (the "Amended Plan") and
(z) certain standby commitment letters, dated as of August 18, 1998, amended
as of September 3, 1998 and as of December 1, 1998 (as amended, the "Standby
Purchase Agreements"), among Parent, MMC and certain unsecured creditors of
MMC Parent and MobileMedia (the "Standby Purchasers");
THE MERGER
Pursuant to the Merger Agreement, upon the satisfaction or, if legally
permissible, waiver of the Closing Conditions set forth therein and in the
Amended Plan, MMC will be merged with and into the Merger Subsidiary (the
"Surviving Corporation"). Immediately prior to the Merger, MMC Parent will
contribute all of its assets to MMC, and in connection with the Merger MMC's
subsidiaries will be consolidated into a single subsidiary which will become
an indirect wholly owned subsidiary of Parent as a result of the Merger.
Immediately after the Merger, the Surviving Corporation will become a wholly
owned subsidiary of API.
CONSIDERATION TO BE PAID
Pursuant to the Merger Agreement and the Amended Plan, Parent will acquire
MobileMedia for a combination of cash and Parent securities, as follows:
.Parent will pay approximately $479.0 million in cash to (and reimburse up
to $1.0 million in attorneys and other fees paid by) certain secured
creditors of MMC Parent and MobileMedia under the MobileMedia 1995 Credit
Agreement (as defined herein) and the claims of such creditors will be
discharged;
.Parent will pay all borrowings outstanding under MobileMedia's post-
petition credit facility (subject to certain limitations);
.Parent will pay or assume pre-petition priority claims and post-petition
claims incurred by MobileMedia and MMC Parent in the ordinary course of
business or authorized by the Bankruptcy Court;
.Parent will pay principal and accrued interest plus certain indenture
trustee fees outstanding under approximately $2.1 million of senior notes
and the claims under such notes will be discharged; and
.Parent will issue 14,344,969 shares of Parent's Common Stock (subject to
reduction in certain circumstances) and transferable rights to acquire up
to an additional 108,500,000 shares of Common Stock and Class B Common
Stock to unsecured creditors of MMC Parent and MobileMedia in consideration
of the discharge of their claims classified as Class 6 claims under the
Amended Plan.
Pursuant to the Merger Agreement and Amended Plan, Parent will also issue to
the holders of its Common Stock and Series C Preferred Stock on a record date
to be determined non-transferable rights and warrants to acquire up to
44,893,166 shares of Common Stock and will issue warrants to acquire up to
3,675,659 shares of Arch Common Stock to the Standby Purchasers, who have
agreed to purchase shares of Common Stock and Class B Common Stock to the
extent such rights are not exercised.
A-6
<PAGE>
STOCKHOLDINGS BEFORE AND AFTER THE MERGER
The following table sets forth certain information with respect to the
ownership of Parent's Common Stock, including shares issuable upon the
exercise of rights and warrants, after the Merger.
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP OF STOCK OUTSTANDING(1)
--------------------------------------------
ASSUMING MINIMUM
EXERCISE OF ASSUMING EXERCISE OF ALL
RIGHTS AND WARRANTS RIGHTS AND WARRANTS
------------------- ------------------------
<S> <C> <C>
Unsecured Creditors of
MobileMedia(2).................. 82.7% 64.2%
Holders of 100% of Parent's Stock
prior to the Merger............. 17.3 35.8
----- -----
Total.......................... 100.0% 100.0%
===== =====
</TABLE>
- --------
(1) Assuming in all cases the conversion of all convertible securities.
(2) Includes Standby Purchasers. Depending on the amounts of Parent's Common
Stock which other unsecured creditors elect to purchase, the Standby
Purchasers might hold, in the aggregate, a majority of the outstanding
shares of Parent's Common Stock. However, the Standby Purchasers would not
hold, in the aggregate, shares representing more than 49.0% of securities
of Arch generally entitled to vote in the election of directors or 49.0%
of the total voting power of the outstanding securities of Arch at such
time, because a portion of their holdings would be Class B Common Stock
having lesser voting power than Common Stock.
A-7
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical consolidated financial
and operating data of MobileMedia and Metromedia Paging Services
("Predecessor") for each of the five years ended December 31, 1997 and the
nine months ended September 30, 1997 and 1998. The historical financial and
operating data presented under consolidated statements of operations data and
consolidated balance sheet data for each of the five years ended December 31,
1997 have been derived from MobileMedia's and the Predecessor's audited
consolidated financial statements and notes thereto. The selected financial
and operating data as of September 30, 1998 and for the nine months ended
September 30, 1997 and 1998 have been derived from MobileMedia's unaudited
consolidated financial statements and notes thereto. The following
consolidated financial information should be read in conjunction with "--
MobileMedia Management's Discussion and Analysis of Financial Condition and
Results of Operations" and MobileMedia's Consolidated Financial Statements and
Notes thereto included elsewhere in this Annex A.
<TABLE>
<CAPTION>
(UNAUDITED)
ELEVEN NINE MONTHS
MONTHS ONE MONTH ENDED
ENDED ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,(9)
NOVEMBER 30, DECEMBER 31, ----------------------------------------------- ----------------------
1993 1993(1) 1994 1995(2) 1996(3) 1997 1997 1998
------------ ------------ ---------- ---------- ----------- ---------- ---------- ----------
PREDECESSOR MOBILEMEDIA
------------ ------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Total revenues....... $ 173,761 $ 15,058 $ 203,149 $ 252,996 $ 640,710 $ 527,392 $ 407,157 $ 340,369
Cost of products
sold................ (20,170) (522) (18,705) (26,885) (72,595) (35,843) (27,524) (16,531)
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
153,591 14,536 184,444 226,111 568,115 491,549 379,633 323,838
Services, rents and
maintenance,
selling, and general
and administrative
expenses(4)......... 123,727 11,125 136,672 164,037 459,474 388,476 309,299 230,737
Impairment of long-
lived assets(5)..... -- -- -- -- 792,478 -- -- --
Restructuring
costs(6)............ -- -- -- -- 4,256 19,811 15,577 13,831
Depreciation and
amortization........ 47,919 4,880 67,651 71,408 348,698 140,238 104,368 88,312
Amortization of
deferred gain on
tower sale.......... -- -- -- -- -- -- -- (389)
Parent company cost
allocations......... 7,267 -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Operating loss....... (25,322) (1,469) (19,879) (9,334) (1,036,791) (56,976) (49,611) (8,653)
Other income
(expense)
Interest expense..... (4,914) (1,461) (18,237) (31,745) (92,663) (67,611) (51,531) (42,449)
(Loss) gain on
sale of assets...... -- -- 1,049 -- 68 3 3 94,085
Other................ (405) -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Total other income
(expense).......... (5,319) (1,461) (17,188) (31,745) (92,595) (67,608) (51,528) (51,636)
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Income (loss) before
income tax provision
(benefit)........... (30,641) (2,930) (37,067) (41,079) (1,129,386) (124,584) (101,139) 42,983
Income tax benefit
(provision)......... 7,328 -- -- -- 69,442 -- -- (678)
---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Net income (loss).... $ (23,313) $ (2,930) $ (37,067) $ (41,079) $(1,059,944) $ (124,584) $ (101,139) $ 42,305
========== ========== ========== ========== =========== ========== ========== ==========
OTHER DATA
Adjusted EBITDA(7)... $ 22,597 $ 3,411 $ 47,772 $ 62,074 $ 108,641 $ 103,073 $ 70,334 $ 93,101
Adjusted EBITDA
margin(8)........... 14.7% 23.5% 25.9% 27.5% 19.1% 21.0% 18.5% 28.7%
Unit in service (at
end of period)...... 1,196,079 1,205,233 1,447,352 2,369,101 4,424,107 3,440,342 3,681,069 3,182,207
Capital
expenditures........ $ 31,480 $ 3,250 $ 65,574 $ 86,163 $ 161,861 $ 40,556 $ 32,321 $ 32,394
Cash flows provided
by (used in)
operating
activities.......... $ 27,737 $ 8,381 $ 53,781 $ 43,849 $ 57,194 $ 14,920 $ (2,847) $ 41,585
Cash flows provided
by (used in)
investing
activities.......... $ (31,773) $ (320,753) $ (50,878) $ (312,698) $(1,028,321) $ (40,556) $ (32,321) $ 137,309
Cash flows provided
by (used in)
financing
activities.......... $ 4,036 $ 314,700 -- $ 671,794 $ 586,111 $ 13,396 $ 20,396 $ (180,000)
</TABLE>
A-8
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------
AS OF
SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
-------- -------- ---------- --------- --------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA
Total assets............ $356,744 $353,703 $1,128,546 $ 790,230 $ 655,134 $577,306
Debt.................... 181,992 195,677 476,156 1,074,196 1,075,681 905,681
Total stockholders'
equity (deficit)....... 138,567 101,500 578,753 (468,391) (589,579) (547,274)
</TABLE>
- --------
(1) MMC Parent completed the acquisition of Predecessor on November 30, 1993
for a purchase price of $308.1 million.
(2) MobileMedia completed its acquisition of the paging and wireless
messaging business of Dial Page 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 of
MobileMedia--Events Leading Up to MobileMedia's Bankruptcy Filings".)
(3) MobileMedia completed the MobileComm Acquisition 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 of MobileMedia--Events Leading Up to MobileMedia's Bankruptcy
Filings").
(4) Includes non-recurring adjustments to record executive separation
expenses of $2.5 million in 1994 and $0.7 million in 1995.
(5) Includes non-recurring adjustment to record, effective December 31, 1996,
a $792.5 million write-down of intangible assets based upon MobileMedia's
determination that an impairment of long-lived assets existed pursuant to
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (See Note 2 to MobileMedia's Consolidated Financial Statements).
(6) Includes non-recurring adjustments to record restructuring costs related
to MobileMedia's bankruptcy filing on January 30, 1997.
(7) MobileMedia Adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, amortization of deferred
gain on tower sale and restructuring costs. MobileMedia Adjusted EBITDA
for the Predecessor includes parent company cost allocations. EBITDA is a
financial measure commonly used in MobileMedia's industry and should not
be construed as an alternative to operating income (as determined in
accordance with GAAP), as an alternative to cash flows from operating
activities (as determined in accordance with GAAP) or as a measure of
liquidity. MobileMedia 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
Adjusted EBITDA in 1996 excludes the impact of the $792.5 million
writedown of intangible assets. MobileMedia Adjusted EBITDA may not
necessarily be comparable to similarly titled data of other paging
companies. The following table reconciles net income to the presentation
of MobileMedia Adjusted EBITDA.
<TABLE>
<CAPTION>
ONE MONTH
ENDED NINE MONTHS ENDED
ELEVEN MONTHS ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30,
NOVEMBER, 30 ------------ ------------------------------------------ ------------------
1993 1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ---- ----
PREDECESSOR MOBILEMEDIA
------------------- ---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)...... $(23,313) $(2,930) $(37,067) $(41,079) $(1,059,944) $(124,584) $(101,139) $42,305
Interest expense....... 4,914 1,461 18,237 31,745 92,663 67,611 51,531 42,449
Income tax provision
(benefit).. (7,328) -- -- -- (69,442) -- -- 678
Depreciation and
amortization.......... 47,919 4,880 67,651 71,408 348,698 140,238 104,368 88,312
Amortization of
deferred gain on tower
sale.................. -- -- -- -- -- -- -- (389)
Restructuring costs.... -- -- -- -- 4,256 19,811 15,577 13,831
Impairment of long
lived assets.......... -- -- -- -- 792,478 -- -- --
Gain/loss on sale of
assets................ -- -- (1,049) -- (68) (3) (3) (94,085)
Other income/expense... 405 -- -- -- -- -- -- --
-------- ------- -------- -------- ----------- --------- --------- -------
Adjusted EBITDA........ $ 22,597 $ 3,411 $ 47,772 $ 62,074 $ 108,641 $ 103,073 $ 70,334 $93,101
======== ======= ======== ======== =========== ========= ========= =======
</TABLE>
A-9
<PAGE>
(8) Calculated by dividing MobileMedia 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 Adjusted EBITDA margin in 1996
excludes the impact of the $792.5 million writedown of intangible assets.
(9) The interim financial information as of September 30, 1998 and for the
nine months ended September 30, 1997 and 1998 contained herein is
unaudited but, in the opinion of MobileMedia management, includes all
adjustments of a normal recurring nature that are necessary for a fair
presentation of the financial position, results of operations, and cash
flows for the periods presented. Results of operations for the interim
periods presented are not necessarily indicative of results of operations
for the entire year or any future period.
A-10
<PAGE>
BUSINESS OF MOBILEMEDIA
MMC Parent, through MobileMedia, operates one of the largest paging
companies in the United States, with approximately 3.2 million units in
service as of September 30, 1998. Through its sales offices, nationwide retail
distribution network, company-operated retail stores and resellers,
MobileMedia offers local, regional and national coverage to subscribers in all
50 states and the District of Columbia, including local coverage to each of
the 100 most populated metropolitan markets in the United States. MobileMedia
markets its services primarily under the MobileComm brand name. MMC Parent's
business is conducted primarily through MobileMedia, and MMC and various
subsidiaries of MMC hold MobileMedia's FCC licenses and, where applicable,
state public utility commission authorizations that grant MobileMedia the
authority to operate its paging systems. MobileMedia was incorporated in
September 1993.
MobileMedia distributes its paging services using three primary distribution
channels: direct, reseller and retail, as described below. MobileMedia's
paging and wireless messaging services consist principally of numeric and
alphanumeric paging services offering local, regional and national coverage.
As of September 30, 1998, MobileMedia had approximately 2.6 million numeric
units in service, representing approximately 80% of its subscriber base,
approximately .6 million alphanumeric units in service, representing
approximately 19% of its subscriber base, with other types of units in service
representing the remaining approximately 1% of its subscriber base.
BUSINESS STRATEGY
Since the Petition Date, MobileMedia has been engaged in restructuring its
operations with the objective of improving performance, principally in the
areas of order entry, billing and collections, inventory controls, management
information systems conversion and customer service. MobileMedia has also
undertaken cost reduction analyses and has taken actions that have the
objective of reducing telecommunications, subcontracting and lease expenses,
among others. In addition, MobileMedia has sought to refocus its marketing and
sales efforts in an attempt to achieve unit additions consistent with positive
cash flow, and is continuing to change its management structure with the
objective of establishing profit and loss accountability in each market.
PAGING AND MESSAGING SERVICES PRODUCTS AND OPERATIONS
Paging and Messaging Services.
MobileMedia currently offers a variety of paging and messaging services. To
send a page to a MobileMedia subscriber, a party must initiate contact with a
paging terminal. This is typically accomplished, depending on the type of
paging service, by use of a touch-tone telephone, with the assistance of an
operator employed by or working on behalf of MobileMedia or through software
loaded onto the sender's personal computer, an input device or the Internet.
The paging terminal then sends an encoded message to MobileMedia's transmitter
network, which broadcasts the call to its geographic service area. This
broadcast signal is received by the subscriber's pager, which decodes the
information, alerts the subscriber and displays the message received. The main
paging services offered by MobileMedia are:
Numeric (Digital Display) Paging Service. Numeric paging service permits
a caller, using a touch-tone telephone, to transmit to a subscriber a
numeric message consisting of a telephone number, an account number or
coded information. Numeric pagers have memory capability to store several
such numeric messages which can be recalled by a subscriber when desired.
As of September 30, 1998, MobileMedia had approximately 2.6 million numeric
units in service.
Alphanumeric Paging Service. Alphanumeric paging service allows
subscribers to receive and store messages consisting of both letters and
numbers. Alphanumeric pagers have sufficient memory to store numerous
messages. This service has the capability to tie into computer-based
networks to provide advanced messaging services. Callers may send messages
either by using an operator dispatch center, a personal
A-11
<PAGE>
computer equipped with a modem and MessageSoft software or a portable
alphanumeric input device, such as the AlphaMate manufactured by Motorola.
Internet and WorldWide Web access is also possible for many alphanumeric
paging customers. As of September 30, 1998, MobileMedia had approximately
.6 million alphanumeric units in service.
Other Services. In addition to local, regional and nationwide paging
service--both numeric and alphanumeric--MobileMedia offers a variety of
enhanced services such as voice mail and voice mail notification, e-mail
notification and news, sports reports and stock quotes.
The following table sets forth the number of MobileMedia customers by
service type as of the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
TYPE OF SERVICE NUMBER % NUMBER % NUMBER % NUMBER % NUMBER %
--------------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Numeric Display......... 1,934,774 81.7% 3,713,579 83.9% 2,820,443 82.0% 3,033,939 82.4% 2,553,261 80.2%
Alphanumeric............ 384,843 16.2% 658,769 14.9% 593,280 17.2% 614,909 16.7% 613,195 19.3%
Other................... 49,484 2.1% 51,759 1.2% 26,619 0.8% 32,221 0.9% 15,751 0.5%
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 2,369,101 100.0% 4,424,107 100.0% 3,440,342 100.0% 3,681,069 100.0% 3,182,207 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
Customers with
nationwide services
(included above)....... 63,101 325,924 330,254 336,818 334,498
</TABLE>
Products and Services
Subscribers for paging services enter into a service contract with
MobileMedia that provides for either the purchase or lease of pagers and the
payment of airtime and other charges. As of September 30, 1998, approximately
49% of units in service were purchased either by subscribers or by resellers,
and approximately 51% were owned by MobileMedia and leased to subscribers.
Customer-owned and -maintained ("COAM") pagers and those owned by resellers do
not require capital investment by MobileMedia, unlike MobileMedia-owned pagers
leased to subscribers. MobileMedia also sells its services in bulk quantities
to resellers, who subsequently sell MobileMedia's services to end-users.
Resellers are responsible for sales, billing, collection and equipment
maintenance costs. MobileMedia sells other products and services, including
pagers and accessories and pager replacement and maintenance contracts. The
following table sets forth MobileMedia's units in service by ownership as of
the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
OWNERSHIP NUMBER % NUMBER % NUMBER % NUMBER % NUMBER %
--------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company owned and rented
to subscribers......... 1,087,183 45.9% 1,996,141 45.2% 1,712,941 49.8% 1,808,134 49.1% 1,630,340 51.2%
COAM.................... 514,068 21.7% 1,112,194 25.1% 861,250 25.0% 940,302 25.6% 759,229 23.9%
Resellers............... 767,850 32.4% 1,315,772 29.7% 866,151 25.2% 932,633 25.3% 792,638 24.9%
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 2,369,101 100.0% 4,424,107 100.0% 3,440,342 100.0% 3,681,069 100.0% 3,182,207 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
NETWORKS AND LICENSES
MobileMedia operates local, regional and national paging networks which
enable its customers to receive pages over a broad geographical area. The
extensive coverage provided by this network infrastructure provides
MobileMedia with an advantage over certain competitors whose networks lack
comparable coverage in securing accounts with large corporate clients and
retail chains, who frequently demand national network coverage from their
paging service provider.
Although MobileMedia's networks provide local, regional and national
coverage, its networks operate over numerous frequencies and are subject to
capacity constraints in certain geographic markets. Although the capacity of
MobileMedia's networks varies significantly market by market, almost all of
MobileMedia's markets have adequate capacity to meet the demands of projected
growth for the next several years. In addition,
A-12
<PAGE>
MobileMedia is in the process of adding additional capacity to its network
infrastructure through its Narrowband PCS buildout described below. The use of
multiple frequencies adds complexity to inventory management, customer service
and order fulfillment processes. Certain of MobileMedia's networks utilize
older technologies and are comparatively costlier to operate.
MobileMedia is seeking to improve overall network efficiency through the
deployment of new paging terminals, the consolidation of subscribers on fewer,
higher capacity networks and increasing the transmission speed (baud rate) of
certain of its existing networks. MobileMedia believes its investments in its
network infrastructure will facilitate and improve the delivery of high
quality paging services while at the same time reducing associated costs of
such services.
Nationwide wireless networks. MobileMedia operates two nationwide 900 MHz
networks. As part of the MobileComm Acquisition, MobileMedia acquired
MobileComm's fully operational nationwide wireless "8875" network, which
was upgraded in 1996 to incorporate high-speed FLEX technology developed by
Motorola. In addition, in 1996, MobileMedia completed the construction of a
second nationwide "5375" network that uses FLEX technology. The use of FLEX
technology significantly increases transmission capacity and represents a
marked improvement over other systems that use older paging protocols.
Nationwide two-way narrowband PCS networks. Narrowband PCS networks
enable paging companies to offer two-way paging services and to make more
efficient use of radio spectrum than do non-PCS networks. MobileMedia
purchased five regional licenses through the FCC's 1994 auction of
narrowband PCS licenses, providing the equivalent of a nationwide 50 kHz
outbound/12.5 kHz inbound PCS system. In addition, as part of the
MobileComm Acquisition, MobileMedia acquired a second two-way narrowband
PCS license for a nationwide 50 kHz outbound/12.5 kHz inbound system.
In order to retain its narrowband PCS licenses, MobileMedia must comply with
certain minimum buildout requirements. With respect to each of the regional
PCS licenses purchased at the FCC's 1994 auction, MobileMedia would be
required to build out the related PCS system to cover 150,000 sq. km. or 37.5%
of each of the five regional populations by April 27, 2000 and 300,000 sq. km.
or 75% of each of the five regional populations by April 27, 2005. With
respect to the nationwide PCS license acquired as part of the MobileComm
Acquisition, MobileMedia would be required to build out the related PCS system
to cover 750,000 sq. km. or 37.5% of the U.S. population by September 29, 1999
and 1,500,000 sq. km. or 75% of the U.S. population by September 29, 2004. In
each instance, the population percentage will be determined by reference to
population figures at the time of the applicable deadline. MobileMedia
estimates that the costs of these minimum build-outs (which would not be
sufficient for MobileMedia to provide significant narrowband PCS applications)
could be as much as approximately $9.0 million. MobileMedia has concluded
that, given the expected high demand for nationwide alphanumeric services, the
potential demand for guaranteed receipt services and MobileMedia's high fixed
costs for maintaining and building out its existing networks, the most
economical means for satisfying projected demand is for MobileMedia to
construct a fully operational narrowband PCS network with ReFLEX 25
capability. MobileMedia estimates that the cost for this construction will be
approximately $40.0 million over the next two years, and that it will be able
to complete the construction relatively economically using its existing
nationwide network infrastructure and supplementing it with additional
transmitters and receivers. On May 12, 1998, the Bankruptcy Court authorized
MobileMedia to enter into contracts during 1998 up to the amount of $16.0
million in connection with the buildout of the network necessary to support
narrowband PCS services.
SALES AND MARKETING
MobileMedia's sales and marketing efforts are directed toward adding
additional units with existing subscribers and identifying new potential
subscribers. Subscribers to MobileMedia's paging and wireless communications
services generally have been individuals and organizations whose employees are
highly mobile or whose business involves multiple work locations and who are
required to remain in contact at all times. Traditional subscribers include
medical personnel, sales and service organizations, specialty trade
A-13
<PAGE>
organizations, manufacturing organizations and governmental agencies. However,
paging services are increasingly appealing to mass market consumers for
private, non-business uses such as communicating with family and friends.
Sales Channels
MobileMedia markets its paging services through three primary sales
channels: direct, reseller and retail.
Direct. In the direct channel, MobileMedia leases or sells pagers
directly to its customers and bills and services such customers.
MobileMedia's direct customers range from individuals and small- and
medium-sized businesses to Fortune 500 accounts and government agencies.
Business and government accounts typically exhibit lower churn rates than
consumer accounts. The direct channel will continue to have the highest
priority among MobileMedia's marketing and sales efforts, given its
critical contribution to recurring revenue and projected growth.
MobileMedia is engaged in efforts to improve sales productivity and
strengthen its direct channel sales force, which suffered from high
turnover and open positions during much of 1997. In addition, MobileMedia
has commenced implementing consumer direct marketing techniques in 1998. As
of September 30, 1998, the direct channel accounted for approximately 79%
of recurring revenue.
Reseller. In the reseller channel, MobileMedia sells access to its
transmission networks in bulk to a third party, who then resells such
services to the end users (usually consumers or small businesses).
MobileMedia offers paging services to resellers at bulk discounted rates.
The third party reseller provides customer service, is responsible for
pager maintenance and repair costs, invoices the end user and retains the
credit risk of the end user, although MobileMedia retains the credit risk
of the reseller. Because resellers are responsible for customer equipment,
the capital costs that would otherwise be borne by MobileMedia are reduced.
MobileMedia's resellers generally are not exclusive distributors of
MobileMedia's services and often resell paging services of more than one
provider. Competition among service providers to attract and maintain
reseller distribution is based primarily upon price, including the sale of
pagers to resellers at discounted rates. MobileMedia intends to be an
active participant in the reseller channels and to concentrate on accounts
that are profitable and where longer term partnerships can be established
with selected resellers. As of September 30, 1998, the reseller channel
accounted for approximately 11% of recurring revenue.
Retail. In the retail channel, MobileMedia sells pagers to retailers and,
after the consumer purchases the pager from the retailer, the consumer
contacts MobileMedia to activate service. The retail channel is targeted at
the consumer market and consists primarily of national retail chains.
Consumers served by the retail channel typically purchase (as opposed to
lease) paging units, reducing MobileMedia's capital investment
requirements. Subscribers obtained through retailers are billed and
serviced directly by MobileMedia. Retail distribution permits MobileMedia
to penetrate the consumer market by supplementing direct sales efforts. As
of September 30, 1998, the retail channel accounted for approximately 10%
of recurring revenue.
COMPETITION
MobileMedia is subject to the same competition factors as Arch. See
"Business--Competition" in the Prospectus.
REGULATION
MobileMedia is subject to the same regulatory considerations as Arch. See
"Business--Regulation" in the Prospectus.
SOURCES OF EQUIPMENT
MobileMedia does not manufacture any of the pagers or related transmitting
and paging terminal equipment used in its paging operations. MobileMedia
currently purchases pagers from a limited number of suppliers and in turn
sells or leases the pagers to its subscribers. Motorola is the primary
supplier of pagers to MobileMedia.
A-14
<PAGE>
Glenayre is MobileMedia's primary supplier of paging terminals, paging
transmitters and voice mail system equipment. On February 6, 1997, MobileMedia
obtained Bankruptcy Court approval to pay the pre-petition outstanding
accounts payable owing to Motorola, Glenayre, NEC and Panasonic Communications
& Systems Company (together with Motorola, Glenayre and NEC, the "Key
Suppliers"), in exchange for which each of Motorola, NEC, Panasonic and
Glenayre entered into post-petition supply agreements with MobileMedia.
EMPLOYEES
At September 30, 1998, MobileMedia employed 3,072 people in various
capacities, with 161 in MobileMedia's corporate headquarters in Fort Lee, New
Jersey and the balance in its five regions. None of such employees is covered
by collective bargaining agreements. MobileMedia believes its employee
relations are good.
TRADEMARKS
MobileMedia markets its services primarily under the trade name MobileComm
and the federally registered mark MOBILECOMM, except in the Greater
Metropolitan Cincinnati area and in certain parts of Western Pennsylvania and
Western New York, in which it markets its services under the federally
registered mark MOBILEMEDIA. MobileMedia markets its messaging services under
the federally registered mark VOICESTAR, and other services under the
federally registered mark SPORTSCASTER and the unregistered mark MOBILECOMM
CITYLINK. MobileMedia also owns other federally registered marks including:
DIAL PAGE, DMC DIGITAL MOBILE COMMUNICATIONS, EZ ALERT, MEMORY MANAGER,
MESSAGESOFT, MOBILEMEDIA (and design) MOBILEMEDIA (and Globe Design),
MOBILEMEDIA PAGING & PERSONALCOM and PAGERXTRA. In addition, MobileMedia has
applications on file for federal registration of the marks MMS and MOBILECOMM
(and design.)
PROPERTIES
In addition to its FCC licenses and network infrastructure (which includes
radio transmission and satellite uplink equipment), MobileMedia has the
following categories of assets: (i) pagers (including both pagers held as
fixed assets for lease and pager inventory for sale), pager parts and
accessories; (ii) its subscriber base and related accounts receivable; (iii)
intellectual property; (iv) real estate and improvements; (vi) leased assets;
(vii) computer and telephone systems and equipment; (viii) furniture, fixtures
and equipment; (ix) ownership of one-third of the equity of Abacus
Communications Partners, L.P.; (x) goodwill and other intangibles; and (xi)
cash and cash equivalents.
On January 22, 1998, the Bankruptcy Court approved MobileMedia's entry into
a lease with Miller Freeman, Inc. (the "Fort Lee Lease"). Pursuant to the Fort
Lee Lease, MobileMedia relocated its headquarters to Fort Lee, New Jersey as
of March 23, 1998, resulting in cost savings to MobileMedia of approximately
$3.0 million over the term of the Fort Lee Lease. On March 18, 1998, the
Bankruptcy Court approved the assignment of the lease for the premises that
previously served as MobileMedia's headquarters. The Bankruptcy Court has also
extended the period during which MobileMedia can decide whether to assume or
reject non-residential real property leases to the confirmation date of the
Plan. As of September 30, 1998, 121 leases had been rejected with Bankruptcy
Court approval. On April 14, 1998, the Bankruptcy Court approved MobileMedia's
motion to assume the lease for the premises that serves as its Dallas, Texas
customer service center.
At September 1, 1998, MobileMedia leased office space (including its
executive offices) in approximately 33 states for use in conjunction with its
paging operations. MobileMedia leases transmitter sites and/or owns
transmitters on commercial broadcast towers, buildings and other fixed
structures. MobileMedia's leases are for various terms and provide for monthly
lease payments at various rates. MobileMedia believes that it will be able to
obtain additional space as needed at acceptable cost.
A-15
<PAGE>
Sale of MobileMedia Tower Sites
On July 7, 1998, MobileMedia and Pinnacle executed an agreement, subject to
Bankruptcy Court approval, to sell the MobileMedia Tower Sites and to rent
from Pinnacle transmitter space on the MobileMedia Tower Sites. The
MobileMedia Tower Site Sale was completed on September 3, 1998. MobileMedia
recognized proceeds from such sale of $170.0 million, and the annual rental
expense is approximately $10.7 million. The proceeds of the MobileMedia Tower
Site Sale were paid to the Pre-Petition Lenders, which Lenders had liens on
all of the assets being sold.
The MobileMedia Tower Site Sale was the product of an extensive bidding
process. Prior to executing this agreement, MobileMedia's financial advisor
contacted approximately 40 potential MobileMedia Tower Sites buyers and
executed confidentiality agreements with, and distributed MobileMedia Tower
Sites information to, approximately 30 of these potential buyers. After
permitting certain potential purchasers to conduct due diligence, MobileMedia
and Blackstone determined that Pinnacle's offer represented the highest and
best offer.
In connection with the agreement to sell the MobileMedia Tower Sites to
Pinnacle, MobileMedia filed two motions on July 14, 1998. One motion sought to
establish procedures for bidding on the MobileMedia Tower Sites and provides
for liquidated damages and the reimbursement of expenses to Pinnacle under
certain circumstances. This relief was granted on July 23, 1998. The second
motion sought Bankruptcy Court approval of the sale of the MobileMedia Tower
Sites to Pinnacle, and the rental of transmitter sites from Pinnacle and the
payment of the sale proceeds to the Pre-Petition Lenders. The relief requested
in this motion was granted on August 10, 1998.
EVENTS LEADING UP TO MOBILEMEDIA'S BANKRUPTCY FILINGS
Beginning in 1995, MobileMedia grew its business primarily through
acquisitions. In August 1995, MobileMedia completed the acquisition of the
paging and wireless messaging business of Dial Page (the "Dial Page
Acquisition"). The purchase price of the Dial Page Acquisition was largely
financed through an initial public offering of 8,800,000 shares of MMC
Parent's Class A Common Stock which, at a price to the public of $18.50 per
share, generated net proceeds of approximately $151.9 million, which proceeds
were contributed to MMC. The total purchase price of the Dial Page Acquisition
was $187.4 million, which included the assumption of $85.0 million outstanding
principal amount of the 12 1/4% Dial Page Notes. Concurrently with the
transaction, MMC repurchased all but approximately $1.6 million of the Dial
Page Notes. The Dial Page Acquisition added approximately 0.4 million units in
service in the southeastern United States to MMC's subscriber base.
In January 1996, MMC completed the acquisition of MobileComm, the paging and
wireless messaging unit of BellSouth Corporation and an associated nationwide
two-way narrowband 50/12.5 kHz PCS license (the "MobileComm Acquisition"). The
purchase price for the MobileComm Acquisition was $928.7 million which was
financed by (i) MMC Parent's public offering of 15,525,000 shares of Class A
Common Stock which, at a price to the public of $23.75 per share, generated
net proceeds of approximately $354.9 million, of which $340.0 million was
contributed by MMC Parent to MMC, (ii) a concurrent public offering by MMC of
$250.0 million aggregate principal amount at maturity of 9 3/8% Notes (the
"MobileMedia 9 3/8% Notes") and (iii) loan facilities aggregating $750.0
million, consisting of a $550.0 million secured term loan facility and a
$200.0 million secured revolving loan facility (the "MobileMedia 1995 Credit
Facility"), evidenced by the MobileMedia 1995 Credit Agreement. $500.0 million
of the secured term loan facility was used as consideration for the MobileComm
Acquisition. $50.0 million dollars of the MobileMedia 1995 Credit Facility was
used to repay MMC's former credit facility. The MobileComm Acquisition added
approximately 1.7 million units in service to MobileMedia's subscriber base.
During 1996, MobileMedia experienced difficulties executing its post-
acquisition business strategy. These difficulties related largely to the
process of integration of the operations of Dial Page and MobileComm into
those of MobileMedia. As a result, MobileMedia did not achieve expected growth
in its subscriber base and
A-16
<PAGE>
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, MMC was in violation of certain financial covenants under the $750.0
million MobileMedia 1995 Credit Agreement, which resulted in the occurrence of
"Events of Default" under that agreement and precluded MMC from borrowing
additional funds thereunder. MMC's obligations under the MobileMedia 1995
Credit Agreement are guaranteed by Parent and by all the subsidiaries of MMC.
In the fall of 1996, MobileMedia commenced negotiations with The Chase
Manhattan Bank, the agent for the lenders under the MobileMedia 1995 Credit
Agreement, regarding the terms of a possible financial restructuring.
In press releases issued on September 27 and October 21, 1996, MobileMedia
disclosed that misrepresentations had been made to the FCC and that other
violations had occurred during the licensing process for as many as 400 to 500
authorizations, 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 on October 15, 1996. The results of an
expanded investigation were submitted to the FCC on November 8, 1996.
MobileMedia is still in the process of resolving these issues with the FCC.
See "--MobileMedia Management's Discussion and Analysis of Financial Condition
and Results of Operations--Pending FCC Action Against MobileMedia".
In November and December of 1996, MobileMedia sought to modify payment terms
with certain of its larger vendors, some of which had not been paid in
accordance with their scheduled payment terms. In the fall of 1996, Motorola,
MobileMedia's largest supplier of pagers and pager repair parts, informed
MobileMedia that it would require credit support to assure payment of
approximately $35.0 million past due accounts payable and would refuse to
accept orders for products or services from, and refuse to make shipments to,
MobileMedia pending resolution of the matter. Subsequently, Glenayre,
MobileMedia's primary supplier of paging terminals, transmitters and related
parts, and NEC and Panasonic, MobileMedia's secondary suppliers of pagers,
also made demands on MobileMedia for payment of their past due accounts in the
aggregate amount of $11.8 million.
On November 1, 1996, MobileMedia failed to make a scheduled interest payment
of approximately $11.8 million on the MobileMedia 9 3/8% Notes, which failure
was not cured during the 30-day grace period ending November 30, 1996. In
addition, in December 1996 and January 1997, MobileMedia failed to make
scheduled interest payments in the aggregate amount of approximately $13.4
million under the MobileMedia 1995 Credit Agreement.
Negotiations between MobileMedia and the Pre-Petition Lenders, the holders
of the MobileMedia 9 3/8% Notes and certain other outstanding notes
(collectively, the "MobileMedia Notes") and with the 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 the
Pre-Petition Lenders and the holders of the MobileMedia Notes 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 with the Bankruptcy Court.
LITIGATION
MobileMedia is attempting to resolve issues with the FCC surrounding
misrepresentations and violations that occurred during the licensing process.
In addition, MobileMedia is involved in the following litigation, potential
litigation or claims.
A-17
<PAGE>
Securities Class Actions
Prior to the Petition Date, five actions allegedly arising under the federal
securities laws were filed against MobileMedia and certain of its officers,
directors and underwriters in the United States District Court for the
District of New Jersey. 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, but
alleges that (i) certain former officers of MobileMedia deceived the investing
public in violation of section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder and section 20(b) of the Exchange Act by making false
statements or omissions in press releases and public filings between June 29,
1995 and September 27, 1996 (the "Class Period"), and (ii) certain officers,
directors and underwriters of MobileMedia violated sections 11, 12(a)(2) and
15 of the Securities Act by failing to disclose information in offering
documents filed with the SEC on or around November 7, 1995 in connection with
the secondary offering of MobileMedia common stock and MobileMedia 9 3/8%
Notes.
The plaintiffs in the New Jersey Actions allege that, as a result of alleged
misrepresentations, purchasers of Parent's common stock and MobileMedia 9 3/8%
Notes suffered hundreds of millions of dollars in damages as the truth
concerning, among other things, the severe problems with MobileMedia's growth
strategy and its submission of false license applications to the FCC began to
emerge and the price of MobileMedia securities dropped.
In June 1997, MobileMedia initiated an adversary proceeding in the
Bankruptcy Court to stay the prosecution of the New Jersey Actions. The basis
of MobileMedia's motion for a stay was, inter alia, that the continued
prosecution of the New Jersey Actions would interfere with MobileMedia's
efforts to reorganize and would deplete the assets of the estate.
Pursuant to a stipulation entered into among MobileMedia 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 the Plan. On October 21, 1998, a
motion to dismiss the New Jersey Actions filed by the defendents therein was
denied.
In addition to the New Jersey Actions, two lawsuits 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 Ernst & Young LLP. MobileMedia is not named as
a defendant in these two actions. The actions are styled Allen T. Gilliland
Trust v. Hellman & Friedman Capital Partners II, L.P., Civil Action No. 97-
3543 (N.D. Cal. 1997), and Allen T. Gilliland Trust v. Hellman & Friedman
MobileMedia Partners, L.L.C., Case No. 989891 (Cal. Super. Ct. 1997)
(together, the "California Actions" and, together with the New Jersey Actions,
the "Securities Actions"). The plaintiffs in the California Actions are or
were shareholders of Parent who purchased stock during 1995 and 1996 and
allege that Parent, through the actions of the named defendants, violated
federal securities laws, various provisions of the California Corporations
Code and California state law in connection with the sale of Parent's
securities and in various public filings.
On November 4, 1997, MobileMedia commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At a hearing held on December 10, 1997, the
Bankruptcy Court enjoined the plaintiffs in the California Actions until May
31, 1998 from prosecuting the California Actions, except that the Bankruptcy
Court permitted the plaintiffs in the California Actions to prosecute and
respond to certain legal motions and to request documents of defendants and
non-parties who do not currently serve on the Board of MobileMedia.
On May 15, 1998, MobileMedia filed a motion with the Bankruptcy Court
seeking an extension of the stay in connection with the California Actions.
Subsequent to negotiations with the plaintiffs in the California
A-18
<PAGE>
Actions, MobileMedia submitted an agreed form of order that barred certain
types of discovery until September 15, 1998. This order was signed by the
Bankruptcy Court on May 29, 1998.
Neither the New Jersey Actions nor the California Actions names MobileMedia
or any of its subsidiaries as a defendant. However, proofs of claim have been
filed against MobileMedia by the plaintiffs in the New Jersey Actions, and
both the New Jersey Actions and the California Actions may give rise to claims
against MobileMedia's Directors, Officers and Corporate Liability Insurance
Policy. As to MobileMedia, however, these Claims are classified in Classes 7
and 8, and will receive no distributions under the Amended Plan.
Bankruptcy Claims
Since the June 16, 1997 bar date established by the Bankruptcy Court for
filing proofs of claim in the Insolvency Proceedings, MobileMedia has been
actively involved in resolving the claims filed against its estates. As of
September 30, 1998, approximately 2,400 proofs of claim had been filed in the
Insolvency Proceedings. Approximately 1,292 of these claims, filed in an
aggregate amount of approximately $110.8 million, have already been resolved
by order of the Bankruptcy Court at an aggregate allowed amount of
approximately $5.51 million. As of September 30, 1998, MobileMedia had also
analyzed and resolved an additional 860 proofs of claim, representing an
aggregate allowed amount of $6.7 million. Excluding claims filed by or on
behalf of the Pre-Petition Lenders, the holders of the MobleMedia Notes and
taxing authorities, there are fewer than 30 unresolved filed claims over
$100,000, which claims have an aggregate filed value of less than $25.0
million. MobileMedia has already filed objections with the Bankruptcy Court to
certain of these claims and is currently in the process of reconciling and
resolving those remaining. MobileMedia believes that, once resolved, the
aggregate allowed amount of these remaining claims will be substantially less
than $25.0 million.
MobileMedia is also in the process of reconciling and resolving the tax
claims filed against its estates. These tax claims were filed in an aggregate
amount of approximately $30 million. MobileMedia anticipates that these claims
will be allowed in an amount substantially less than the filed amount.
Potential Unsecured Creditors Committee Litigation
At a hearing held before the Bankruptcy Court on January 27, 1998, counsel
to the Unsecured Creditors Committee indicated its intention immediately to
serve discovery demands in connection with a potential objection to the Plan
as filed on January 27, 1998. The Committee's ex parte order authorizing
discovery under Bankruptcy Rule 2004 was approved by the Bankruptcy Court on
February 5, 1998, and the Committee subsequently served subpoenas for the
production of documents on MobileMedia and other parties. The production of
documents by the respondents was largely completed during March, although
issues pertaining to the production of certain privileged documents have yet
to be resolved. On April 1, the Unsecured Creditors Committee also served
requests to conduct the depositions of numerous individuals, including members
of MobileMedia's management, board of directors, professionals involved in the
reorganization proceedings, and members of the steering committee for
MobileMedia's pre- and post-petition secured lenders. Because the Unsecured
Creditors Committee supports the Amended Plan in its present form, it is not
expected that this litigation will continue.
A-19
<PAGE>
MOBILEMEDIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRESENTATION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following definitions are relevant to a review and discussion of
MobileMedia's operating results.
Services, rents and maintenance revenues ("paging revenue"): includes
primarily monthly, quarterly, semi-annually and annually billed recurring
revenue, not dependent on usage, charged to subscribers for paging and
related services such as voice mail and pager repair and replacement.
Net revenues: includes primarily paging revenues and sales of customer
owned and maintained pagers less cost of pagers sold.
Services, rents and maintenance expenses: includes costs related to the
management, operation and maintenance of MobileMedia's network systems.
Selling expenses: includes salaries, commissions and administrative costs
for MobileMedia's sales force and related marketing and advertising
expenses.
General and administrative expenses: includes primarily customer service
expense, executive management, accounting, office telephone, rents and
maintenance and information services.
Average revenues per Unit ("ARPU"): calculated by dividing (i) the average
monthly services, rents and maintenance revenues for the period by (ii) the
weighted average number of units in service for the period. ARPU, as
determined by MobileMedia, may not necessarily be comparable to similarly
titled data of other paging companies.
Average monthly operating expense per unit : calculated by dividing (i) the
average monthly services, rents and maintenance, selling and general and
administrative expenses for the period by (ii) the weighted average number
of units in service for the period.
As used herein, MobileMedia Adjusted EBITDA represents earnings before other
income (expense), taxes, depreciation, amortization, impairment of long-lived
assets (see Note 2 of MobileMedia's Notes to Consolidated Financial Statements
included elsewhere herein), amortization of deferred gain on the tower sale
(see Note 3 of MobileMedia's Notes to Consolidated Financial Statements
included elsewhere herein) and restructuring costs. EBITDA is a financial
measure commonly used in the paging industry and should not be construed as an
alternative to operating income (as determined in accordance with GAAP), as an
alternative to cash flows from operating activities (as determined in
accordance with GAAP) or as a measure of liquidity. EBITDA is, however, the
primary financial measure by which MobileMedia's covenants are calculated
under the agreements governing MobileMedia's indebtedness.
As used herein, 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 thereto included
elsewhere in this Annex A.
MobileMedia builds and operates wireless messaging and communications
systems, and generates revenues from the provision of paging and other
wireless communications services. MobileMedia's strategy is to strengthen its
industry leadership position by providing superior paging and messaging
services at competitive prices.
MobileMedia's revenues are derived primarily from fixed periodic recurring
fees, not dependent on usage, charged to MobileMedia's subscribers for paging
services. While a subscriber remains in MobileMedia's service, future
operating results benefit from this recurring revenue stream with minimal
requirements for incremental selling expenses or other costs.
A-20
<PAGE>
On January 4, 1996, MobileMedia completed its acquisition of MobileComm and
on August 31, 1995, MMC purchased the paging business of Dial Page, Inc.
MobileMedia has incurred integration related costs in excess of those
originally anticipated to (i) transfer units-in-service between paging
networks to rationalize capacity, (ii) temporarily operate duplicative
functions, primarily customer service, and (iii) hire additional employees and
consultants to focus on the integration. Additionally, MobileMedia has
experienced increased loss of subscribers related to the integration
difficulties. Accordingly, MobileMedia's financial results have been
negatively impacted by the higher than anticipated integration costs and
increased loss of subscribers.
On January 30, 1997, Parent and MobileMedia filed voluntary petitions for
relief under the Bankruptcy Code in order to implement an operational and
financial restructuring ("Bankruptcy Filing"). Parent and MobileMedia are
presently operating their business as debtors-in-possession subject to the
jurisdiction of the Bankruptcy Court. Pursuant to the requirements of the
Bankruptcy Code, Parent and MobileMedia are required to file monthly operating
reports with the United States Trustee. Such reports are publicly available
through the office of the United States Trustee, and copies of such reports to
date have been 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, 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 herein reflect
adjustments from the unaudited statements, including but not limited to, an
impairment adjustment of approximately $792.5 million recorded as of December
31, 1996.
On December 11, 1998 the Bankruptcy Court approved MobileMedia's Disclosure
Statement to its creditors as containing adequate information with respect to
the Amended Plan in accordance with Section 1125 of the Bankruptcy Code.
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers and related equipment to Pinnacle for $170.0 million in cash. Under the
terms of a lease with Pinnacle, 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.
Subsequent to the sale, MobileMedia distributed the $170.0 million in proceeds
to its secured creditors, who had a lien on such assets.
PENDING FCC ACTION AGAINST MOBILEMEDIA
MobileMedia disclosed in press releases dated September 27, 1996 and October
21, 1996 that misrepresentations and other violations occurred during the
licensing process for as many as 400 to 500, or approximately 6% to 7%, of its
approximately 8,000 local transmission one-way paging stations. MobileMedia
caused an investigation to be conducted by outside counsel, and a
comprehensive report regarding these matters was provided to the FCC in the
fall of 1996. In cooperation with the FCC, outside counsel's investigation was
expanded to examine all of MobileMedia's paging licenses, and the results of
that investigation were submitted to the FCC on November 8, 1996. As part of
the cooperative process, MobileMedia also proposed to the FCC that a consent
order be entered which would result, among other things, in the return of
certain local paging authorizations then held by MobileMedia, the dismissal of
certain pending applications for paging authorizations, and the voluntary
acceptance of a substantial monetary forfeiture.
On January 13, 1997, the FCC issued a Public Notice relating to the status
of certain FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (i) automatically terminated
approximately 185 authorizations for paging facilities that were not
constructed by the expiration date of their construction permits and remained
unconstructed, (ii) dismissed approximately 94 applications for fill-in sites
A-21
<PAGE>
around existing paging stations (which had been filed under the so-called "40-
mile rule") as defective because they were predicated upon unconstructed
facilities and (iii) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the
expiration date of their construction permits. With respect to each of the
approximately 99 authorizations where the underlying station was untimely
constructed, the FCC granted MobileMedia interim operating authority subject
to further action by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an ALJ to take evidence and develop a full factual record on directed
issues concerning MobileMedia's filing of false forms and applications.
MobileMedia was permitted to operate its licensed facilities and provide
service to the public during the pendency of the hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible
transfer of MobileMedia's FCC licenses. The order was originally granted for
ten months and was extended by the FCC through October 6, 1998. The order,
which is based on an FCC doctrine known as Second Thursday, provides that if
there is a change of control that meets the conditions of Second Thursday, the
regulatory issues designated for administrative hearing will be resolved by
the transfer of MobileMedia's FCC licenses to the new owners of MobileMedia
and the hearing will not proceed. MobileMedia believes that a reorganization
plan that provides for either a conversion of certain existing debt to equity,
in which case existing MobileMedia shares will be eliminated, or a sale or
merger of MobileMedia will result in a change of control that will satisfy the
Second Thursday doctrine. On September 2, 1998, MobileMedia and Arch filed a
joint Second Thursday application. MobileMedia believes the plan of
reorganization contemplated by the Merger Agreement and the Amended Plan
satisfies the conditions of Second Thursday. On October 5, 1998, a supplement
was filed to notify the FCC of certain modifications to the proposed
transaction. The application was accepted for filing by public notice dated
October 15, 1998. On October 16, 1998, MobileMedia and Arch filed a joint
supplement of data requested by the staff of the Wireless Telecommunications
Bureau to assist in their evaluation of the application. MobileMedia submitted
additional information to the Wireless Telecommunications Bureau on November
13, 1998. Public comments on the Second Thursday application were due on
November 16, 1998. On that date, the FCC's Wireless Telecommunications Bureau
and the Pre-Petition Lenders filed comments generally supporting grant of the
application and Orbital Communications Corporation submitted brief informal
comments opposing the application's request to terminate the hearing and to
waive the application fees. MobleMedia, Arch and the Pre-Petition Lenders each
submitted timely reply comments on or before November 27, 1998 and David A.
Bayer submitted a brief informal response to Orbital's letter. The designated
pleading cycle on the Second Thursday application is now closed.
In the event that Arch and MobileMedia are unable to consummate the
transactions contemplated by the Merger Agreement and the Amended Plan or any
other plan of reorganization that satisfies the conditions of Second Thursday,
MobileMedia may be required to proceed with the hearing, which, if adversely
determined, could result in the loss of MobileMedia's FCC licenses or
substantial monetary fines, or both. Such an outcome would have a material
adverse effect on MobileMedia's financial condition and results of operations.
A-22
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared With Nine Months Ended
September 30, 1997
The following table presents certain items from MobileMedia's Consolidated
Statement of Operations and certain other information for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1998
-------------------------- --------------------------
(IN THOUSANDS, EXCEPT PERCENTAGE AND UNIT DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues
Services, rents and
maintenance........... $ 378,922 99.8% $ 320,002 98.8%
Equipment sales and ac-
tivation fees......... 28,235 7.4% 20,367 6.3%
------------- --------- ------------- ---------
Total revenues........... 407,157 107.2% 340,369 105.1%
Cost of products sold.... (27,524) (7.2)% (16,531) (5.1)%
------------- --------- ------------- ---------
Net revenues............. 379,633 100.0% 323,838 100.0%
Operating expenses
Services, rents and
maintenance........... 110,146 29.0% 83,506 25.8%
Selling................ 53,816 14.2% 45,848 14.2%
General and administra-
tive.................. 145,337 38.3% 101,383 31.3%
Restructuring costs.... 15,577 4.1% 13,831 4.2%
Depreciation and amor-
tization.............. 104,368 27.5% 88,312 27.3%
Amortization of de-
ferred gain on tower
sale.................. -- -- (389) (0.1)%
------------- --------- ------------- ---------
Total operating ex-
penses.................. 429,244 113.1% 332,491 102.7%
------------- --------- ------------- ---------
Operating loss: (49,611) (13.1)% (8,653) (2.7)%
Other income (expense)...
Interest expense (net)... (51,531) (13.5)% (42,449) (13.1)%
Gain on sale of assets... 3 0.0% 94,085 29.1%
------------- --------- ------------- ---------
Total other income (ex-
pense).................. (51,528) (13.5)% 51,636 15.9%
------------- --------- ------------- ---------
Income (loss) from con-
tinuing operations be-
fore income tax provi-
sion ................... (101,139) (26.6)% 42,983 13.3%
Income tax provision..... -- -- 678 0.2%
------------- --------- ------------- ---------
Income (loss) from con-
tinuing operations...... $(101,139) (26.6)% $ 42,305 13.1%
============= ========= ============= =========
OTHER DATA
MobileMedia Adjusted
EBITDA.................. $ 70,334 18.5% $ 93,101 28.7%
Cash flows provided by
(used in) operating ac-
tivities................ $ (2,847) $ 41,585
Cash flows provided by
(used in) investing ac-
tivities................ $ (32,321) $ 137,309
Cash flows provided by
(used in) financing ac-
tivities................ $ 20,396 $(180,000)
ARPU..................... $ 10.39 $ 10.74
Average monthly operating
expense per unit........ $ 8.48 $ 7.73
Units in service (at end
of period).............. 3,681,069 3,182,207
</TABLE>
Units in service decreased 498,862 from 3,681,069 as of September 30, 1997
to 3,182,207 as of September 30, 1998, a decrease of 13.6% of which 240,727
units decreased between October 1, 1997 and December 31, 1997. The decrease
with respect to the fourth quarter of 1997 was attributable to continued
increases in unit cancellations due to acquisition integration difficulties,
billing system clean up to remove non-revenue producing units and cancellation
of units for non-payment. In 1998 the decrease was primarily attributable to
gross additions which were below expectations.
Services, rents and maintenance revenues decreased 15.5% to $320.0 million
for the nine months ended September 30, 1998 compared to $378.9 million for
the nine months ended September 30, 1997. The decrease
A-23
<PAGE>
was attributable to fewer units in service and partially offset by a $0.35
increase in ARPU from $10.39 for the nine months ended September 30, 1997 to
$10.74 for the nine months ended September 30, 1998. The increase in ARPU was
largely due to a greater percentage of units in service in the direct
distribution channel and a smaller percentage in the reseller distribution
channel. Units sold through the direct distribution channel generally are sold
at higher ARPU.
Equipment sales and activation fees decreased 27.9% to $20.4 million for the
nine months ended September 30, 1998 compared to $28.2 million for the nine
months ended September 30, 1997. The decrease in equipment sales was primarily
due to a $3.1 million decrease in equipment sold through the retail
distribution channel and a $4.4 million decrease in billings for non-returned
equipment. Equipment sales and activation fees, less cost of products sold,
increased 439.5% to $3.8 million for the nine months ended September 30, 1998
from $0.7 million for the nine months ended September 30, 1997. This increase
was primarily attributable to sales of used pagers with lower net book values
resulting from a change in pager depreciation from a four-year life to a
three-year life as of October 1, 1997.
Net revenues decreased 14.7% to $323.8 million for the nine months ended
September 30, 1998 compared to $379.6 million for the nine months ended
September 30, 1997.
Services, rents and maintenance expenses decreased 24.2% to $83.5 million
for the nine months ended September 30, 1998 compared to $110.1 million for
the nine months ended September 30, 1997. This decrease resulted primarily
from lower subcontracted paging expenses of approximately $12.4 million
resulting from billing reconciliations, increased unit cancellations and
customer migration to company-owned networks and reduced paging related
telecommunications expenses of approximately $12.0 million. The decline in
paging-related telecommunications expenses resulted primarily from the FCC
clarification of its interconnection rules pursuant to the Telecommunications
Act, which prohibit local exchange carriers from charging paging carriers for
the cost of dedicated facilities used to deliver local telecommunications
traffic to paging networks. The FCC clarification, however, noted that the FCC
is considering requests for reconsideration of these rules. In addition,
paging-related telecommunications expense declined as a result of a
reconfiguration of MobileComm's network to maximize usage of lower cost
facilities. As a percentage of net revenue, services, rents and maintenance
expenses decreased from 29.0% to 25.8%.
Selling expenses for the nine months ended September 30, 1998 decreased
14.8% to $45.8 million compared to $53.8 million for the nine months ended
September 30, 1997. The decrease resulted primarily from lower sales personnel
costs and lower commissions attributable to lower sales headcount and lower
gross additions. Selling expenses as a percentage of net revenue were constant
at 14.2%.
General and administrative expenses decreased 30.2% to $101.4 million for
the nine months ended September 30, 1998 compared to $145.3 million for the
nine months ended September 30, 1997 and decreased as a percentage of net
revenues to 31.3% for the nine months ended September 30, 1998 from 38.3% for
the nine months ended September 30, 1997. The decrease primarily resulted from
reduced bad debt expense due to improvements in MobileMedia's billing and
collections functions and lower administrative telephone expenses resulting
from lower call volume and lower long distance rates as of October 1, 1997 and
lower customer service and retail activation expenses of $7.2 million
primarily resulting from lower headcount.
Restructuring costs decreased from $15.6 million for the nine months ended
September 30, 1997 to $13.8 million for the nine months ended September 30,
1998 due to a decline in professional fees incurred by MobileMedia as a result
of the bankruptcy filing on January 30, 1997.
Depreciation and amortization decreased 15.4% to $88.3 million for the nine
months ended September 30, 1998 compared to $104.4 million for the nine months
ended September 30, 1997. The decrease was primarily due to lower pager
depreciation attributable to a reduced depreciable base of pager assets
resulting from the change in useful life from four to three years on October
1, 1997 and decreased pager purchases. As a percentage of net revenues,
depreciation and amortization expense increased to 27.3% for the nine months
ended September 30, 1998 from 27.5% for the nine months ended September 30,
1997.
A-24
<PAGE>
Amortization of deferred gain on tower sale was $0.4 million for the nine
months ended September 30, 1998. (See Note 3 to MobileMedia's Consolidated
Financial Statements).
Operating loss decreased 82.6% to $8.7 million for the nine months ended
September 30, 1998 from $49.6 million for the nine months ended September 30,
1997. The decrease was primarily due to decreased operating expenses.
Interest expense decreased 17.6% to $42.4 million for the nine months ended
September 30, 1998 compared to $51.5 million for the nine months ended
September 30, 1997. The decrease was primarily due to lower interest expense
on MobileMedia's DIP facility resulting from lower outstanding borrowings in
1998.
Gain on sale of assets increased to $94.1 million for the nine months ended
September 30, 1998 primarily as a result of the sale of transmission towers
and related equipment to Pinnacle (See Note 3 to MobileMedia's Consolidated
Financial Statements).
Income (loss) from continuing operations before income tax provision, as a
result of the above factors, increased to income of $42.9 million for the nine
months ended September 30, 1998 compared to a loss of $101.1 million for the
nine months ended September 30, 1997.
Income tax provision increased to $0.7 million for the nine months ended
September 30, 1998 primarily as a result of the sale of transmission towers to
Pinnacle.
A-25
<PAGE>
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
The following table presents certain items from MobileMedia's Consolidated
Statement of Operations and certain other information for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997
---------------------------- --------------------------
(IN THOUSANDS, EXCEPT PERCENTAGE AND UNIT DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA
Revenues
Services, rents and
maintenance.......... $ 568,892 100.1% $ 491,174 99.9%
Equipment sales and
activation fees...... 71,818 12.7 36,218 7.4
--------------- ---------- ------------- ---------
Total revenues.......... 640,710 112.8 527,392 107.3
Cost of products
sold................. (72,595) (12.8) (35,843) (7.3)
--------------- ---------- ------------- ---------
568,115 100.0 491,549 100.0
Operating expenses
Services, rents and
maintenance.......... 144,050 25.4 139,333 28.3
Selling............... 96,817 17.0 69,544 14.2
General and adminis-
trative.............. 218,607 38.5 179,599 36.5
Impairment of long-
lived assets......... 792,478 139.5 -- --
Restructuring costs... 4,256 0.7 19,811 4.0
Depreciation and amor-
tization............. 348,698 61.4 140,238 28.6
--------------- ---------- ------------- ---------
Total operating ex-
penses................. 1,604,906 282.5 548,525 111.6
--------------- ---------- ------------- ---------
Operating loss.......... (1,036,791) (182.5) (56,976) (11.6)
Total other expense..... (92,595) (16.2) (67,608) (13.7)
--------------- ---------- ------------- ---------
Loss before income tax
benefit................ (1,129,386) (198.7) (124,584) (25.3)
Income tax benefit...... (69,442) 12.2 -- --
--------------- ---------- ------------- ---------
Net loss................ $ (1,059,944) (186.5)% $ (124,584) (25.3)%
=============== ========== ============= =========
OTHER DATA
MobileMedia Adjusted
EBITDA................. $ 108,641 19.1% $ 103,073 21.0%
Cash flows provided by
operating activities... $ 57,194 $ 14,920
Cash flows used in in-
vesting activities..... $ (1,028,321) $ (40,556)
Cash flows provided by
financing activities... $ 586,111 $ 13,396
ARPU.................... $ 11.08 $ 10.41
Average monthly operat-
ing expense per unit
(1).................... $ 8.95 $ 8.23
Units in service (at end
of period)............. 4,424,107 3,440,342
</TABLE>
- --------
(1) Does not include impact of $792.5 million asset impairment writedown in
1996.
Units in service decreased from 4,424,107 as of December 31, 1996 to
3,440,342 as of December 31, 1997, a decrease of 22.2%. The decrease was
attributable to a decrease in gross unit additions and an increase in unit
cancellations primarily resulting from acquisition integration difficulties,
billing system clean up to remove non-revenue generating units and
cancellation of units for non-payment.
Services, rents and maintenance revenues decreased 13.7% to $491.2 million
for the year ended December 31, 1997 compared to $568.9 million for the year
ended December 31, 1996 due to fewer units in service and lower ARPU. ARPU
decreased to $10.41 for the year ended December 31, 1997 from $11.08 for the
year ended December 31, 1996 largely due to continued competitive market
conditions.
Equipment sales and activation fees decreased 49.6% to $36.2 million for the
year ended December 31, 1997 compared to $71.8 million for the year ended
December 31, 1996. The decrease in equipment sales was
A-26
<PAGE>
primarily attributable to less equipment sold through the retail distribution
channel. Equipment sales and activation fees, less cost of products sold,
increased from $(0.8) million for the year ended December 31,1996 to $0.4
million for the year ended December 31, 1997 primarily as a result of lower
retail sales of equipment sold at a discount. Cost of products sold for the
year ended December 31, 1996 includes a writedown of $3.2 million, reflecting
the establishment of a lower of cost or market reserve for pagers held for
resale through MobileMedia's retail and reseller distribution channels.
Net revenues decreased 13.5% to $491.5 million for the year ended December
31, 1997 compared to $568.1 million for the year ended December 31, 1996.
Services, rents and maintenance expenses decreased 3.3% to $139.3 million
for the year ended December 31, 1997 compared to $144.1 million for the year
ended December 31, 1996, primarily due to billing reconciliation and lower
nationwide subcontracted paging expenses resulting from cancellations and
customer migration from networks not owned by MobileMedia to company-owned
networks.
Selling expenses for the year ended December 31, 1997 decreased 28.2% to
$69.5 million from $96.8 million for the year ended December 31, 1996
primarily due to lower sales personnel costs and lower sales commissions
attributable to lower sales headcount and lower gross additions. In addition,
reseller and retail distribution channel selling expenses declined as a result
of lower sales volume. Selling expenses as a percentage of net revenue
decreased to 14.2% for the year ended December 31, 1997 from 17.0% for the
year ended December 31, 1996.
General and administrative expenses decreased 17.8% to $179.6 million for
the year ended December 31, 1997 compared to $218.6 million for the year ended
December 31, 1996. General and administrative expenses decreased as a
percentage of net revenues to 36.5% for the year ended December 31, 1997 from
38.5% for the year ended December 31, 1996 primarily due to decreased bad debt
expense, customer service expenses related to the assimilation of MobileComm's
customer service functions, and consulting fees related to the integration of
the acquisitions. Bad debt expense decreased as a result of increased
collections resulting from improvements in MobileMedia's billing and
collection functions.
Restructuring costs increased from $4.2 million for the year ended December
31, 1996 to $19.8 million for the year ended December 31, 1997 due to
professional fees constituting administrative expenses incurred by MobileMedia
as a result of the bankruptcy filing on January 30, 1997 as compared to the
1996 expenses incurred in connection with MobileMedia's attempt to restructure
its debt.
Depreciation and amortization decreased 59.8% to $140.2 million for the year
ended December 31, 1997 compared to $348.7 million for the year ended December
31, 1996. The decrease was primarily due to a writedown of impaired assets by
$792.5 million pursuant to Statement of Financial Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of" effective December 31, 1996 (See Note 2 of MobileMedia's Notes
to Consolidated Financial Statements included elsewhere herein), amortization
of a non-competition agreement related to the MobileComm Acquisition which was
fully amortized in 1996 and decreased pager depreciation resulting from a
decrease in expenses related to unrecoverable subscriber equipment and a
reserve established to lower book values of certain pager models to current
market values in 1996. As a percentage of net revenues, depreciation and
amortization expense decreased to 28.6% for the year ended December 31, 1997
from 61.4% for the year ended December 31, 1996.
Operating loss decreased to $57.0 million for the year ended December 31,
1997 from $1,036.8 million for the year ended December 31, 1996. The decrease
was primarily due to the $792.5 million asset impairment writedown effective
December 31, 1996 and other factors indicated above.
Total other expense, principally interest expense, decreased 27.0% to $67.6
million for the year ended December 31, 1997 compared to $92.6 million for the
year ended December 31, 1996. The decrease was primarily due to interest
expense related to MobileMedia's $250.0 million Senior Subordinated Notes due
A-27
<PAGE>
November 1, 2007 and $210.0 million Senior Subordinated Deferred Coupon Notes
not being recognized subsequent to the Bankruptcy filing on January 30, 1997.
Loss before income tax benefit, as a result of the above factors, decreased
to $124.6 million for the year ended December 31, 1997 from $1,129.4 million
for the year ended December 31, 1996.
Income tax benefit of $69.4 million resulted from the deferred tax
adjustment attributable to the $792.5 asset impairment writedown effective
December 31, 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
The following table presents certain items from MobileMedia's Consolidated
Statement of Operations and certain other information for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996
-------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PERCENTAGE AND UNIT DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA
Revenues
Services, rents and
maintenance.......... $ 220,745 97.6% $ 568,892 100.1%
Equipment sales and
activation fees...... 32,251 14.3 71,818 12.7
------------- --------- --------------- ----------
Total revenues.......... 252,996 111.9 640,710 112.8
Cost of products
sold................. (26,885) (11.9) (72,595) (12.8)
------------- --------- --------------- ----------
226,111 100.0 568,115 100.0
Operating expenses
Services, rents and
maintenance.......... 59,800 26.4 144,050 25.4
Selling............... 45,203 20.0 96,817 17.0
General and adminis-
trative.............. 59,034 26.1 218,607 38.5
Impairment of long-
lived assets......... -- -- 792,478 139.5
Restructuring costs... -- -- 4,256 0.7
Depreciation and amor-
tization............. 71,408 31.6 348,698 61.4
------------- --------- --------------- ----------
Total operating ex-
penses................. 235,445 104.1 1,604,906 282.5
------------- --------- --------------- ----------
Operating loss.......... (9,334) (4.1) (1,036,791) (182.5)
Total other expense..... (31,745) (14.0) (92,595) (16.2)
------------- --------- --------------- ----------
Loss before income tax
benefit................ (41,079) (18.1) (1,129,386) (198.7)
Income tax benefit...... -- -- (69,442) 12.2
------------- --------- --------------- ----------
Net loss................ $ (41,079) (18.1)% $ (1,059,944) (186.5)%
============= ========= =============== ==========
OTHER DATA
MobileMedia Adjusted
EBITDA................. $ 62,074 27.5% $ 108,641 19.1%
Cash flows provided by
operating activities... $ 43,849 $ 57,194
Cash flows used in in-
vesting activities..... $(312,698) $(1,028,321)
Cash flows provided by
financing activities... $ 671,794 $ 586,111
ARPU.................... $ 9.64 $ 11.08
Average monthly operat-
ing expense per unit
(1).................... $ 7.17 $ 8.95
Units in service (at end
of period)............. 2,369,101 4,424,107
</TABLE>
- --------
(1)Does not include impact of $792.5 million asset impairment writedown in
1996.
Units in service increased by 2,055,006 to 4,424,107 as of December 31, 1996
when compared to December 31, 1995. The increase was attributable to 1,764,752
units acquired from the MobileComm Acquisition and 290,254 net units acquired
from internal growth through MobileMedia's various sales distribution
channels.
A-28
<PAGE>
Services, rents and maintenance revenues increased 157.7% to $568.9 million
for the year ended December 31, 1996 compared to $220.7 million for the year
ended December 31, 1995 due to additional revenues associated with the
acquisitions and continued growth in the number of units in service. ARPU
increased to $11.08 for the year ended December 31, 1996 from $9.64 for the
year ended December 31, 1995 largely due to the impact of the acquired
subscribers from MobileComm and Dial Page. The ARPU impact of the acquisitions
was partly offset by net units added in 1996 through the reseller distribution
channel at lower ARPU. ARPU also declined as a result of continued competitive
market conditions.
Equipment sales and activation fees increased 122.7% to $71.8 million for
the year ended December 31, 1996 compared to $32.3 million for the year ended
December 31, 1995. The increase in equipment sales is attributable to
MobileMedia's significant presence in retail distribution as a result of the
MobileComm Acquisition. Equipment sales and activation fees, less cost of
products sold, decreased 114.5% to $(0.8) million for the year ended December
31,1996. The decrease is attributable to discounting of equipment selling
prices to large retailers as a means of generating subscriber additions
through the retail distribution channel. Cost of products sold also includes
an writedown of $3.2 million in 1996, reflecting the establishment of a lower
of cost or market reserve for pagers held for resale through MobileMedia's
retail and reseller distribution channels.
Net revenues increased 151.3% to $568.1 million for the year ended December
31, 1996 compared to $226.1 million for the year ended December 31, 1995.
Services, rents and maintenance expenses increased 140.9% to $144.1 million
for the year ended December 31, 1996 compared to $59.8 million for the year
ended December 31, 1995, primarily due to increased expense levels related to
the acquisitions and increased transmitter site lease expenses related to
MobileMedia's nationwide paging network which commenced service on April 1,
1996. The balance of the increase resulted primarily from an increase in
subcontracted paging expense by approximately $6.3 million primarily
associated with the increase in nationwide paging units serviced by networks
other than those owned by MobileMedia and $1.6 million in research and
development expenses related to the development of a two-way wireless
subscriber device. Services, rents and maintenance expenses decreased as a
percentage of net revenues to 25.4% for the year ended December 31, 1996 from
26.4% for the year ended December 31, 1995.
Selling expenses for the year ended December 31, 1996 increased 114.2% to
$96.8 million from $45.2 million for the year ended December 31, 1995
primarily due to the increased expense levels related to the acquisitions.
Selling expenses as a percentage of net revenue decreased to 17.0% for the
year ended December 31, 1996 from 20.0% for the year ended December 31, 1995.
General and administrative expenses increased 270.3% to $218.6 million for
the year ended December 31, 1996 compared to $59.0 million for the year ended
December 31, 1995 primarily due to the increased expense levels related to the
acquisitions. General and administrative expenses increased as a percentage of
net revenues to 38.5% for the year ended December 31, 1996 from 26.1% for the
year ended December 31, 1995. The balance of the increase resulted primarily
from increased bad debt expense, customer service expenses related to the
assimilation of MobileComm's customer service functions, and consulting fees
related to the integration of the acquisitions. During the third and fourth
quarters of 1996, MobileMedia experienced significant difficulty in collecting
outstanding accounts receivable. These difficulties resulted primarily from
inaccurate billing and inadequate resolutions of customer problems largely
caused by difficulties of integrating acquisitions. In addition, MobileMedia
paid $2.1 million in separation expenses in the second half of 1996 due to the
departure of several senior executives of MobileMedia and $0.7 million in
separation expenses in the first quarter of 1995 due to the departure of the
Chairman of the Board of Directors of MobileMedia.
Impairment of long-lived assets of $792.5 million included a writedown of
long-lived assets effective December 31, 1996, pursuant to Statement of
Financial Accounting Standards No. 121. (See Note 2 of MobileMedia's Notes to
Consolidated Financial Statements included elsewhere herein).
Restructuring costs of $4.3 million for the year ended December 31, 1996
included legal and professional fees related to various restructuring
activities by MobileMedia prior to the Bankruptcy Filing.
A-29
<PAGE>
Depreciation and amortization increased 388.3% to $348.7 million for the
year ended December 31, 1996 compared to $71.4 million for the year ended
December 31, 1995. The increase was primarily due to additional amortization
expenses related to the acquisitions and increased pager depreciation
resulting from a decrease to the depreciable pager base resulting from
unrecoverable subscriber equipment and a reserve established to lower book
values of certain pager models to current market values. As a percentage of
net revenues, depreciation and amortization expense increased to 61.4% for the
year ended December 31, 1996 compared to 31.6% for the year ended December 31,
1995.
Operating loss increased to $1,036.8 million for the year ended December 31,
1996 from $9.3 million for the year ended December 31, 1995. The increase was
primarily due to the impairment writedown of certain long-lived assets and
increased amortization expenses relating to the acquisitions offset by the
increase in net revenues.
Total other expense, principally interest expense, increased 191.7% to $92.6
million for the year ended December 31, 1996 compared to $31.7 million for the
year ended December 31, 1996. The increase was primarily due to additional
debt incurred to finance the acquisitions and capital expenditures.
Loss before income tax benefit, as a result of the above factors, increased
to $1,129.4 million for the year ended December 31, 1996 compared to $41.1
million for the year ended December 31, 1995.
Income tax benefit of $69.4 million resulted from the deferred tax
adjustment attributable to the $792.5 asset impairment writedown effective
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
MobileMedia's operations and strategy require the availability of
substantial funds to finance the development and installation of wireless
communications systems, to procure subscriber equipment and to service debt.
Historically, these requirements have been funded by net cash from operating
activities, additional borrowings and capital contributions.
Chapter 11 Filing
On January 30, 1997, MMC Parent and MobileMedia filed voluntary petitions
for relief under the Bankruptcy Code in order to implement an operational and
financial restructuring. MMC Parent and MobileMedia are currently operating
their businesses as debtors-in-possession subject to the jurisdiction of the
Bankruptcy Court. Pursuant to the requirements of the Bankruptcy Code, MMC
Parent and MobileMedia are required to file monthly operating reports with the
appointed United States Trustee. Such reports are publicly available through
the office of the United States Trustee, and copies of such reports to date
have been filed as Current Reports on Form 8-K with the SEC. Financial
statements included in MMC Parent's periodic reports for the months of
February, 1997 through June, 1998 were not prepared in accordance with GAAP
due to MMC Parent'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, 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 herein reflect
adjustments from the unaudited statements, including but not limited to, an
impairment adjustment of $792.5 million recorded as of December 31, 1996.
Agreement with Key Suppliers
In January 1997, MobileMedia sought approval of the Bankruptcy Court to pay
the pre-petition claims of its Key Suppliers (Motorola, Glenayre, NEC and
Panasonic) in the aggregate amount of $47.4 million, which approval was
granted by the Bankruptcy Court on February 6, 1997. Upon entry of the
Bankruptcy Court's order approving the payments, MobileMedia paid the pre-
petition claims of and entered into supply agreements with each of the Key
Suppliers. Each of the Key Suppliers has been shipping product to MobileMedia
in accordance with its respective supply agreement.
A-30
<PAGE>
DIP Credit Agreement
In connection with the Bankruptcy Filings, MobileMedia entered into the DIP
Credit Agreement with The Chase Manhattan Bank, as agent (the "Agent"), and
certain other financial institutions (collectively, the "DIP Agreement
Lenders") that initially provided MobileMedia with up to $200.0 million of
post-petition, debtor-in-possession ("DIP") financing. At a hearing on January
30, 1997, the Bankruptcy Court entered an interim order approving the DIP
facility, as a result of which MobileMedia gained access to $70.0 million of
such DIP funds, subject to MobileMedia entering into agreements with its Key
Suppliers to sell equipment and provide services. This condition was satisfied
when MobileMedia entered into such agreements with the Key Suppliers.
MobileMedia used $47.4 million of the available $70.0 million of DIP funds to
pay the pre-petition claims of their Key Suppliers, among other things. On
February 19, 1997, the Bankruptcy Court entered a final order approving
MobileMedia's DIP facility, as a result of which MobileMedia gained access to
an additional $30.0 million of DIP funds for a total of $100.0 million. The
remaining $100.0 million of DIP funds became available on May 1, 1997, as a
result of MobileMedia's delivery of a business plan to the Agent by April 15,
1997, which was found to be satisfactory by the financial advisor to the DIP
Agreement Lenders. Under the terms of the DIP Credit Agreement and the order
of the Bankruptcy Court related thereto, MobileMedia is required to make
monthly interest payments to the DIP Agreement Lenders, and monthly "adequate
protection" payments to the pre-petition secured lenders of MobileMedia.
During 1997, MobileMedia drew down $47.0 million of borrowings and repaid
$37.0 million under the DIP facility. During January and February, 1998
MobileMedia repaid an additional $10.0 million. As of September 30, 1998 there
were no funded borrowings under the DIP facility. On January 27, 1998, the DIP
facility was amended and, at the request of MobileMedia, reduced from $200.0
million to $100.0 million. On August 12, 1998 the Debtors received approval
from the Bankruptcy Court to extend the DIP facility to March 31, 1999 and to
reduce availability thereunder further, at the request of MobileMedia, from
$100.0 million to $75.0 million.
Capital Expenditures and Commitments
Capital expenditures were $32.4 million for the nine months ended September
30, 1998 compared to $32.3 million for the nine months ended September 30,
1997 and $40.6 million for the year ended December 31, 1997 compared to $161.9
million for the year ended December 31, 1996. Capital expenditures increased
$0.1 million for the nine months ended September 30, 1998 compared to the
nine-month period ended September 30, 1997 and $121.3 million for the year
ended December 31, 1997 compared to the corresponding period in 1996
principally as a result of lower pager purchases resulting from fewer gross
additions and increased utilization of existing pager inventory stock. The
Merger Agreement contains certain restrictions on MobileMedia's ability to
make certain capital expenditures without the consent of Parent. See "The
Merger Agreement--Certain Covenants and Agreements".
MobileMedia anticipates capital spending for the calendar years 1998 and
1999 to be approximately $60.0 million and $95.0 million, respectively.
Capital spending includes approximately $10.0 million in 1998 and
$24.0 million in 1999 for construction of a nationwide N-PCS network providing
frequency reuse and guaranteed message delivery capabilities. The remaining
expenditures are primarily for subscriber equipment and improvements to
MobileMedia's one-way network.
Sources of Funds
MobileMedia's net cash provided by operating activities was $41.6 million
for the nine months ended September 30, 1998 compared to a use of cash of $2.8
million for the nine months ended September 30, 1997. Inventories increased
$0.3 million from December 31, 1996 to September 30, 1998 compared to a
decrease of $9.2 million from December 31, 1996 to September 30, 1997 as a
result of utilizing pager inventory stock and lower sales volume in the retail
sales distribution channel. Accounts payable, accrued expenses and other
liabilities decreased $10.7 million from December 31, 1997 to September 30,
1998 compared to a decrease of $19.4 million from December 31, 1996 to
September 30, 1997. Net accounts receivable decreased $17.3 million from
December 31, 1997 to September 30, 1998 compared to a decrease of $1.1 million
from December 31, 1996 to September 30, 1997 due to improved billing and
collections functions and lower sales volume.
A-31
<PAGE>
MobileMedia's net cash provided by operating activities was $14.9 million
for the year ended December 31, 1997 compared to $57.2 million for the year
ended December 31, 1996. Inventories decreased $12.5 million from December 31,
1996 to December 31, 1997 as a result of utilizing pager inventory stock and
lower sales volume in the retail sales distribution channel. Accounts payable,
accrued expenses and other liabilities decreased $25.4 million from $181.8
million as of December 31, 1996 to $156.4 million as of December 31, 1997
primarily due to payments to Key Suppliers during 1997. Net accounts
receivable decreased $11.3 million from $66.7 million as of December 31, 1996
to $55.4 million as of December 31, 1997 due to improved billing and
collections functions.
Tower Sale
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers to Pinnacle for $170.0 million in cash. Under the terms of a lease with
Pinnacle, 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. Subsequent to the sale, MobileMedia
distributed the $170.0 million in proceeds to its secured creditors, who had a
lien on such assets.
Debt Obligations
As of September 30, 1998, the debt obligations of MobileMedia included a DIP
credit facility. See "--DIP Credit Agreement". MobileMedia is subject to
certain financial and operating restrictions contained in the DIP Credit
Agreement that are customary in 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 Agreement Lenders.
Amounts outstanding under the DIP Credit Agreement bear interest at a rate of
LIBOR plus 250 basis points or Base Rate plus 150 basis points, at the option
of MobileMedia. During 1997, MobileMedia drew down $47.0 million of borrowings
and repaid $37.0 million under the DIP Credit Agreement. During January and
February, 1998 MobileMedia repaid an additional $10.0 million. As of September
30, 1998 there were no funded borrowings under the DIP Credit Agreement.
In addition to the DIP Credit Agreement, the debt obligations of MobileMedia
also include the following:
The MobileMedia 1995 Credit Agreement, a $750.0 million senior secured and
guaranteed credit agreement 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 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.
MobileMedia's obligations under the MobileMedia 1995 Credit Agreement are
secured by substantially all of the assets of MobileMedia and all of its
subsidiaries, including the capital stock of the subsidiaries, and MMC Parent
and the subsidiaries of MobileMedia have guaranteed all of MobileMedia's
borrowings, including principal and interest. Performance of Parent's
obligations as a guarantor is secured by a pledge of the capital stock of MMC.
Since the petition date, MobileMedia brought current its interest payments and
has been making monthly adequate protection payments to the lenders under the
Pre-Petition 1995 Credit Agreement equal to the amount of interest accruing
under such agreement. On September 3, 1998, MobleMedia repaid $170.0 million
of borrowings under MobleMedia's 1995 Credit Agreement using proceeds from the
sale of 166 transmission towers to Pinnacle.
MobleMedia issued $250.0 million Senior Subordinated MobileMedia 9 3/8%
Notes in November 1995, concurrent with MobileMedia's second offering of Class
A Common Stock (See Note 11 to MobileMedia's Notes to Consolidated Financial
Statements included elsewhere herein). These notes bear interest at a rate of
9 3/8%
A-32
<PAGE>
payable semiannually on May 1 and November 1 of each year. On November 1,
1996, MobileMedia did not make its scheduled interest payment on the
MobileMedia 9 3/8% Notes which constituted an event of default under this
indenture. The noteholders 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 and no
interest has accrued on the notes.
MobleMedia issued $210.0 million of Senior Subordinated Deferred Coupon
Notes (the "MobileMedia Deferred Coupon Notes"), at a discount, in November
1993. The MobileMedia Deferred Coupon Notes accrete at a rate of 10.5%,
compounded semiannually, to an aggregate principal amount of $210.0 million by
December 1, 1998 after which interest is paid in cash at a rate of 10.5% and
is payable semiannually. By virtue of the missed interest payments on the
MobileMedia 9 3/8% Notes and the MobileMedia 1995 Credit Agreement, an event
of default has occurred under this indenture. The noteholders 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 and no interest has accrued on the notes.
Other Matters
Prior to the Bankruptcy Filing, 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. These actions were subsequently
consolidated as In re MobileMedia Securities Litigation, No. 96-5723 (AJL).
The consolidated amended 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 MobileMedia 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 or the effective date pursuant to a plan of reorganization. On October
21, 1998, defendants' motion to dismiss The New Jersey Actions filed with the
New Jersey District Court on January 16, 1998 was denied.
In addition to the New Jersey Actions, the two California 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 MobileMedia's independent
auditors. MobileMedia is not named as defendant in the California Actions.
On November 4, 1997, MobileMedia 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.
Neither the New Jersey Actions nor the California Actions name MobileMedia
as a defendant. However, proofs of claim have been filed against MobileMedia
by the plaintiffs in the New Jersey Actions, and both the New Jersey Actions
and the California Actions may give rise to claims against MobileMedia's
Directors, Officers and Corporate Liability Insurance Policy. Under the
Amended Plan, these claims will receive no distributions.
RISKS RELATING TO YEAR 2000
Computer systems were originally designed to recognize calendar years by the
last two digits in the date code field. Beginning in the year 2000, these date
code fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates. Any of MobileMedia's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system
A-33
<PAGE>
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, within the next
year, the computerized systems (including both information and non-information
technology systems) and applications used by MobileMedia will need to be
reviewed, evaluated and, if and where necessary, modified or replaced to
ensure that all financial, information and operating systems are Year 2000
compliant.
State of Readiness
MobileMedia has formed an internal task force comprised of representatives
of its various relevant departments to address Year 2000 compliance matters.
The task force has undertaken a preliminary review of internal and external
areas that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or non-
critical/non-important. MobileMedia also expects to hire outside consultants
to review MobileMedia's testing methodology and test results, to assess its
contingency planning and to provide general oversight relating to Year 2000
compliance matters.
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be year
2000 compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain
business-related files were created and run to identify any Year 2000
compliance issues. While the results of the tests are still being analyzed,
relatively few Year 2000 problems were identified. Additional testing is
scheduled for the first quarter of 1999, including testing of MobileMedia's
financial and human resource software packages. There can be no assurance,
however, that such testing has, or will, detect all compliance issues related
to the Year 2000 problem.
With respect to external matters, MobileMedia has distributed questionnaires
and requests for certification to its mission critical vendors and is in the
process of obtaining and reviewing the responses thereto. The questionnaires
have requested information concerning embedded technologies of such vendors,
the hardware and software applications used by such vendors and the Year 2000
compliance efforts of such vendors relating thereto.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to the Year 2000 compliance
matters. To date, MobileMedia has incurred approximately $50,000 in costs
(excluding in-house labor and hardware) in connection with Year 2000
compliance matters. In addition, MobileMedia has purchased upgraded hardware
at a cost of approximately $150,000 for use as redundant equipment in testing
for Year 2000 problems in an isolated production environment. MobileMedia
estimates that it will expend approximately $200,000 on additional software
and other items related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200,000
in costs relating to Year 2000 remediation efforts for its paging network
hardware. MobileMedia has also upgraded its paging network hardware over the
fiscal year 1998 and plans further upgrades in fiscal year 1999. Such upgrades
have not been and are not expected to be purchased solely for remediation of
the Year 2000 compliance problems; such upgrades are not themselves expected
to have Year 2000 compliance problems.
Risks relating to Year 2000 Compliance Matters
MobileMedia has a goal to become Year 2000 compliant with respect to
internal matters during calendar year 1999. Although MobileMedia has begun and
is undertaking testing of its internal business-related hardware and software
applications, there can be no assurances that such testing will detect all
applications that may be affected by Year 2000 compliance problems. With
respect to external matters, due to the multi-dependent and interdependent
issues raised by Year 2000 compliance, including many factors beyond its
control, MobileMedia
A-34
<PAGE>
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 in respect of application of
contingency plans on a department-by-department basis and on a company-wide
basis. MobileMedia intends to complete its contingency planning in respect of
Year 2000 compliance during calendar year 1999.
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"), which is effective for years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 is effective for financial statements for fiscal years beginning after
December 15, 1997. MobileMedia's management does not anticipate that the
adoption of SFAS No. 130 will have any effect on MobileMedia's reporting.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131") which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December
15, 1997, and therefore MobileMedia will adopt the new requirements
retroactively in 1998. MobileMedia's management has not completed its review
of SFAS No. 131, but does not anticipate that the adoption of this statement
will have a significant effect on MobileMedia's reporting.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued SOP 98-5, "Reporting Costs of Start-Up
Activities", which requires costs of start-up activities and organization
costs to be expensed as incurred. Initial application of SOP 98-5 will be
reported as the cumulative effect of a change in accounting principle.
MobileMedia intends to adopt SOP 98-5 effective January 1, 1999. The adoption
of SOP 98-5 is not expected to have a material effect on MobileMedia's
financial position or results of operation.
A-35
<PAGE>
INFORMATION ABOUT ARCH ON A PRO FORMA BASIS
UNAUDITED FINANCIAL PROJECTIONS AND OPERATIONAL COST SYNERGIES
Parent, Arch and MobileMedia have developed the unaudited Projections for
Arch following the Merger, consisting of projected operating and financial
results for the three-month period ending December 31, 1998 and the twelve-
month period ending December 31, 1999. These Projections are based upon
similar projections for the Combined Company that were prepared in connection
with the Amended Plan. The Projections assume confirmation of the Amended Plan
and consummation of the Merger Agreement and the Amended Plan as of December
31, 1998.
The Projections, which were developed by management of each of Parent, Arch
and MobileMedia, with the assistance of their respective financial advisors,
are based on:
. Arch's projected financial results, as developed by the management of
Arch, taking into account anticipated cost reductions associated with the
recently announced Divisional Reorganization;
. MobileMedia's projected financial results, as developed by the management
of MobileMedia, taking into account the sale of tower assets and the
related rental by MobileMedia of certain transmitter space and equipment
on such towers;
. Certain adjustments to MobileMedia's projected results made by the
management of Arch to reflect more conservative assumptions with regard
to expected subscriber additions, subscriber turnover and net revenues.
Such adjustments were intended to reflect the continuing potential impact
from the effects of MobileMedia's Chapter 11 filing and the integration
of Arch's and MobileMedia's operations.
THE PROJECTIONS COMBINE THE OPERATIONS, ASSETS AND LIABILITIES OF ARCH AND
MOBILEMEDIA AND DO NOT REFLECT THE OPERATIONS, ASSETS OR LIABILITIES OF PARENT
(INCLUDING APPROXIMATELY $382.8 AND 423.9 MILLION OF PARENT'S LONG-TERM DEBT)
AT DECEMBER 31, 1998 AND 1999, RESPECTIVELY.
ASSUMPTIONS USED IN THE UNAUDITED FINANCIAL PROJECTIONS
Additional information relating to the principal assumptions used in
preparing the Projections is set forth below. No assurances can be given that
such assumptions will be realized. See "Risk Factors" both in the Prospectus
and this Annex A for a discussion of various factors that could materially
affect the financial condition, results of operations, businesses, prospects
and securities of Arch following the MobileMedia Transaction.
(i) The Projections were prepared assuming an Effective Date of
December 31, 1998.
(ii) General economic conditions and their potential impact on capital
spending and revenues within each of Arch's operating regions after
consummation of the MobileMedia Transaction were assumed to continue
unchanged throughout the projection period.
(iii) The financial projections assume $25.0 million in operating cost
reductions annually after the consummation of the Merger. However, due to
the time involved in implementing these cost savings, the financial
projections assume that Arch would recognize only $12.5 million in
operating cost reductions in 1999. The amounts and timing of these
operating cost reductions were estimated during multiple meetings of the
management teams of Arch and MobileMedia. During these meetings a market-
by-market analysis was performed to identify redundant costs. The
Projections for the three months ended December 31, 1998 do not include
the financial benefits of potential operational expense reductions and
capital expenditure efficiencies expected to result from the Merger.
(iv) Service revenues for Arch have been projected based on Arch
management's estimates for subscriber growth and average revenue per
unit. Based on these estimates, Arch's 1999 service revenues were
projected to increase by approximately 10.5% from 1998 estimates, while
MobileMedia's revenues were projected to decrease by approximately 3.9%
from 1998 estimates. In addition, the projections assume no immediate
incremental revenues resulting from the business combination. Pro forma
combined
A-36
<PAGE>
service revenues for the three-month period ending December 31, 1998 are
based upon each company's ongoing financial budgets employing a similar
methodology as stated above.
(v) Projected operating costs for 1999 are based on historical cost
margins for both companies individually and the expected decrease in cost
margins as Arch achieves further cost reductions resulting from the
Divisional Reorganization. Arch's projected operating costs for 1999 are
based on the 1998 business plans for the individual companies, which
included two quarters of historical costs at the time the projections
were created. The cost margins used for 1999 assume only a small
reduction in the historical cost margins (approximately 0.5% of net
revenue) for Arch's base business and assume an increase in the
historical cost margins (approximately 3.0% of net revenue) for
MobileMedia's base business. Projected costs are based upon historical
experience, expected market conditions, historical decreases in Arch's
costs as Arch increased its operating leverage. These cost assumptions
were then adjusted to reflect the impact of the assumed synergies. Arch
assumed approximately $12.5 million in recognized synergy savings
throughout 1999 with $5.9 million in savings from service, rent and
maintenance costs, $0.8 million in savings from selling costs, and $5.8
million in savings from general administrative costs.
(vi) The Projections assume that Arch will utilize proceeds from the
anticipated increase in the API Credit Facility and the offering proceeds
from the sale of Planned Arch Notes to fully repay all amounts owed to
MobileMedia's secured creditors, any amounts outstanding under the DIP
Credit Agreement, all administrative claims and transaction expenses and
provide for working capital throughout the projection period.
(vii) Interest expense is calculated using the assumed capital
structure of the Related Transactions, as described in "Unaudited
Selected Pro Forma Consolidated Financial Data", during the projection
period and includes the amortization of any original issue discounts. New
debt issued as a result of the Merger is assumed to be issued as of
December 31, 1998; however pro forma interest expense has been included
in the projections for the three-month period ending December 31, 1998.
(viii) The Projections have been prepared in accordance with the
applicable principles of purchase accounting. Under purchase accounting
principles, Arch will record an intangible asset equal to the excess, if
any, of the purchase price paid by Parent to acquire MobileMedia over the
net fair market value allocated to the identifiable assets and
liabilities of MobileMedia (such excess, if any, being referred to herein
as "Goodwill"). The Projections assume that such amount will be amortized
on a straight-line basis (i.e., ratably) over a period of 10 years. The
actual calculation of goodwill will depend upon the actual price of
Parent's Common Stock at the time of the Merger. For illustrative
purposes, the Projections assume a value of $2.00 per share of Parent's
Common Stock price to calculate the purchase accounting adjustment and an
assumption that the historical, restated book value of MobileMedia assets
and liabilities generally approximates the fair value thereof. See Note 9
to the "Unaudited Pro Forma Condensed Consolidated Financial Statements"
for additional financial data at an assumed price for Parent's Common
Stock at the Effective Time.
These assumptions and resultant computations were made solely for the
purposes of preparing the Projections. Arch will be required to determine
the actual amount of Goodwill and the appropriate amortization period as
of the Effective Date. Such determinations will be based on the fair
values of MobileMedia's net assets and other relevant information as of
the Effective Date. Although such determinations are not presently
expected to result in the actual amount of Goodwill and related
amortization being materially greater or less than the amounts thereof
assumed for purposes of the Projections, there can be no assurance with
respect thereto. Any increase in the amount of amortization of Goodwill
would reduce periodic income before taxes and net income.
(ix) Projections of changes in certain balance sheet accounts such as
accounts receivable and accounts payable are based on historic ratios of
such accounts to other accounts such as revenue and are modified, where
deemed appropriate, to recognize any adjustment or balance sheet item
changes necessary to reflect the business combination. For the 1999
projections, Arch assumed approximately 30 days sales
A-37
<PAGE>
outstanding to estimate the accounts receivable balance and approximately
44 days costs outstanding to estimate the accounts payable balance. These
assumptions were based on the historical ratios for both companies and
the resulting balances of the pro forma company. The projected long-term
debt reflects the draw-down of the API Credit Facility to fund working
capital requirements throughout 1999.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO COMPLYING WITH THE
GUIDELINES FOR PROSPECTIVE FINANCIAL STATEMENTS PUBLISHED BY THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. NEITHER THE INDEPENDENT ACCOUNTANTS
FOR ARCH NOR THE INDEPENDENT AUDITORS FOR MOBILEMEDIA HAVE EXAMINED OR
COMPILED THE ACCOMPANYING PROJECTIONS AND ACCORDINGLY DO NOT EXPRESS AN
OPINION OR ANY OTHER FORM OF ASSURANCE WITH RESPECT THERETO.
PARENT, ARCH AND MOBILEMEDIA DO NOT PUBLISH THEIR RESPECTIVE BUSINESS PLANS
AND STRATEGIES OR PROJECTIONS OF THEIR RESPECTIVE ANTICIPATED FINANCIAL
POSITION OR RESULTS OF OPERATIONS. PROJECTIONS FOR THE COMBINED COMPANY
(INCLUDING PARENT) WERE PREPARED FOR, AND ARE CONTAINED IN, THE DISCLOSURE
STATEMENT BEING DISTRIBUTED TO MOBILEMEDIA'S CREDITORS IN CONNECTION WITH THE
APPROVAL OF THE AMENDED PLAN. THEY WERE INCLUDED THEREIN IN ORDER TO SATISFY
APPLICABLE REQUIREMENTS FOR INFORMATION REQUIRED TO BE INCLUDED IN A
BANKRUPTCY COURT APPROVED DISCLOSURE STATEMENT. THE PROJECTIONS ARE PROVIDED
HEREBY SO THAT HOLDERS OF THE NOTES WILL HAVE THE SAME INFORMATION BEING
PROVIDED TO MOBILEMEDIA'S CREDITORS (EXCEPT THAT THE PROJECTIONS BEING
PROVIDED TO THE HOLDERS OF NOTES PRESENT ARCH, THE ISSUER OF THE NOTES, ON A
PRO FORMA BASIS, RATHER THAN PRESENTING PARENT ON SUCH BASIS). ACCORDINGLY,
ARCH AND MOBILEMEDIA DO NOT INTEND, AND DISCLAIM ANY OBLIGATION TO, (A)
FURNISH UPDATED PROJECTIONS, (B) INCLUDE SUCH UPDATED INFORMATION IN ANY
DOCUMENTS WHICH MAY BE REQUIRED TO BE FILED WITH THE SEC, OR (C) OTHERWISE
MAKE SUCH UPDATED INFORMATION PUBLICLY AVAILABLE.
ARTHUR ANDERSEN LLP, THE INDEPENDENT PUBLIC ACCOUNTANTS FOR ARCH, HAS
NEITHER COMPILED NOR EXAMINED SUCH PROJECTIONS AND, ACCORDINGLY, DOES NOT
EXPRESS ANY OPINION OR ANY OTHER FORM OF ASSURANCE WITH RESPECT TO, ASSUMES NO
RESPONSIBILITY FOR AND DISCLAIMS ANY ASSOCIATION WITH, SUCH PROJECTIONS. ERNST
& YOUNG LLP, THE INDEPENDENT AUDITORS FOR MOBILEMEDIA, HAS NEITHER COMPILED
NOR EXAMINED SUCH PROJECTIONS AND, ACCORDINGLY, DOES NOT EXPRESS ANY OPINION
OR ANY OTHER FORM OF ASSURANCE WITH RESPECT TO, ASSUMES NO RESPONSIBILITY FOR
AND DISCLAIMS ANY ASSOCIATION WITH, SUCH PROJECTIONS.
THE PROJECTIONS PROVIDED HEREIN HAVE BEEN PREPARED BY ARCH AND MOBILEMEDIA.
THE PROJECTIONS, ALTHOUGH PRESENTED WITH NUMERICAL SPECIFICITY, ARE BASED UPON
A SERIES OF ESTIMATES AND ASSUMPTIONS WHICH, ALTHOUGH CONSIDERED REASONABLE BY
ARCH AND MOBILEMEDIA, MAY NOT BE REALIZED, AND ARE INHERENTLY SUBJECT TO
SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF ARCH AND MOBILEMEDIA.
NO REPRESENTATIONS CAN BE OR ARE MADE AS TO THE ACCURACY OF THE PROJECTIONS.
SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE, AND EVENTS AND CIRCUMSTANCES
OCCURRING SUBSEQUENT TO THE DATE ON WHICH THE PROJECTIONS WERE PREPARED MAY BE
DIFFERENT FROM THOSE ASSUMED OR MAY BE UNANTICIPATED AND, ACCORDINGLY, MAY
AFFECT FINANCIAL RESULTS IN A MATERIAL AND POSSIBLY ADVERSE MANNER. THE
PROJECTIONS, THEREFORE, MAY NOT BE RELIED UPON AS A GUARANTY OR OTHER
ASSURANCE OF THE ACTUAL RESULTS THAT WILL OCCUR. THE FOREGOING ASSUMPTIONS AND
RESULTANT COMPUTATIONS WERE MADE SOLELY FOR PURPOSES OF PREPARING THE
PROJECTIONS. SEE "FORWARD LOOKING STATEMENTS".
A-38
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED PROJECTED BALANCE SHEETS(1)
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 9.7 $ 3.0
Accounts receivable, net................................... 72.1 76.5
Inventories................................................ 11.7 12.4
Prepaid expenses and other................................. 16.0 10.6
-------- --------
Total current assets..................................... 109.5 102.5
-------- --------
Property and equipment, net................................ 444.7 413.8
Intangible and other assets................................ 1,071.1 895.6
-------- --------
$1,625.3 $1,411.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt....................... $ -- $ 1.2
Accounts payable........................................... 79.3 83.4
Accrued expenses........................................... 12.5 12.6
Accrued interest........................................... 18.8 18.8
Customer deposits and deferred revenue..................... 44.9 44.9
Accrued restructuring charges.............................. 21.8 --
-------- --------
Total current liabilities................................ 177.3 160.9
-------- --------
Long-term debt, less current maturities.................... 942.3 972.1
-------- --------
Other long-term liabilities................................ 31.3 31.3
-------- --------
Stockholders' equity (deficit)............................... 474.4 247.6
-------- --------
$1,625.3 $1,411.9
======== ========
</TABLE>
- --------
(1) The assets and liabilities of Parent have been omitted, including
approximately $382.8 and $423.9 million of long-term debt at December 31,
1998 and 1999, respectively.
A-39
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED PROJECTED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, 1998 (1) DECEMBER 31, 1999 (2)
--------------------- ---------------------
<S> <C> <C>
Service, rental and maintenance
revenues......................... $198.0 $ 819.6
Product sales..................... 24.8 102.7
------ -------
Total revenues................ 222.8 922.3
Cost of products sold........... (19.4) (81.1)
------ -------
203.4 841.2
Operating expenses:
Service, rental and
maintenance.................... 51.3 206.4
Selling......................... 28.5 114.7
General and administrative...... 63.7 252.6
Depreciation and amortization
(3)............................ 89.2 387.4
------ -------
Total operating expenses...... 232.7 961.1
------ -------
Operating income (loss)........... (29.3) (119.9)
Interest expense, net............. (25.8) (101.9)
Other expenses.................... (2.0) (5.0)
------ -------
Net income (loss)................. $(57.1) $(226.8)
====== =======
</TABLE>
- --------
(1) Does not include the financial impact of potential operational expense
reductions and capital expenditure efficiencies that may be achieved
following the Merger.
(2) Based upon annualized $25.0 million in projected operational cost
synergies (see "Unaudited Combined Company Projected Statement of Cash
Flow--Potential Operational Cost Savings") expected to be realized by
December 31, 1999 (assuming closing on January 1, 1999). One-half of the
annualized savings, or $12.5 million, is projected to be recognized
throughout 1999.
(3) Projected depreciation and amortization expense for the year ended
December 31, 1999 is less than the historical amounts for the Combined
Company due to a decline in the price of pagers purchased by Arch and MMC
in 1997 and 1998 and a reduction in the number of pagers purchased by MMC.
A-40
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED COMBINED COMPANY PROJECTED STATEMENT OF CASH FLOW
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Net cash provided by operating activities.......................... $ 148.7
-------
Cash flows from investing activities:
Additions to property and equipment, net......................... (178.0)
Additions to intangible and other assets......................... (8.0)
-------
Net cash used for investing activities............................. (186.0)
-------
Cash flows from financing activities:
Issuance of long-term debt....................................... 30.6
-------
Net cash provided by financing activities.......................... 30.6
-------
Net decrease in cash and cash equivalents.......................... (6.7)
Cash and cash equivalents, beginning of period..................... 9.7
-------
Cash and cash equivalents, end of period........................... $ 3.0
-------
EBITDA............................................................. $ 267.5
=======
</TABLE>
POTENTIAL OPERATIONAL COST SAVINGS
During the negotiations leading up to the execution of the Merger Agreement,
management of Arch and MobileMedia estimated operational expense reductions
and capital expenditure efficiencies they believed could be achieved in
connection with the Merger. Senior management from Arch and MobileMedia,
together with their respective financial advisors, attended multiple meetings
during April and July 1998 to discuss, review and compare organizational
structures and staffing arrangements in order to identify potential
opportunities to eliminate redundant costs and estimate the resulting
financial impact. Three primary areas of estimated expense reductions
included: (i) redundant managerial and administrative overhead at both Arch
and MobileMedia; (ii) duplicative purchased services, including subcontracted
paging services; and (iii) duplicative capital expenditures.
Potential personnel redundancies and associated estimated financial impact
were identified following a comparison of staffing levels at corporate,
divisional and regional offices and on a market-by-market basis. No personnel
reductions were identified in information services, call center operations,
local market-level customer service, and most other "customer facing"
activities.
Purchased services identified include operations-related services, such as
telecommunications and network services, subcontracted paging network
services, third party dispatch services, and advertising and promotion
expenditures, as well as professional services, including legal and
accounting. These purchased services were reviewed to identify potential cost
savings achievable through volume discounts, conversion to company-owned
networks, replacement with lower cost service providers, and elimination of
redundant expenditures.
The two companies' planned capital expenditures were reviewed and savings
opportunities identified for negotiating greater volume discounts on the
purchase of pagers, avoiding network expenditures by utilizing complementary
existing infrastructure, and eliminating duplicative expenditures related to
each company's current N-PCS strategy.
The following table presents the range of estimated annual ongoing expense
reductions and annual capital expenditure savings that management of Arch and
MobileMedia believe might be achieved based upon the foregoing review. Such
estimates are based on current operating run-rates and the existing cost
structures of Arch and MobileMedia, respectively. The potential cost savings
shown below represent expense reduction
A-41
<PAGE>
opportunities and efficiencies that Arch believes will be implemented during
the first twelve months following the Effective Time of the Merger, based on
current expense run-rates. The estimated expense reductions as shown represent
annualized savings. This table does not reflect additional unidentified
savings opportunities or costs and timing risks associated with achieving the
potential cost savings described.
ESTIMATED RANGE OF ANNUAL OPERATIONAL EXPENSE REDUCTIONS BASED ON CURRENT
COSTS
(IN MILLIONS)
<TABLE>
<CAPTION>
LOW HIGH
----- -----
<S> <C> <C>
Operating expense reductions:
Market level personnel overlap................................... $ 6.6 $ 8.0
Regional/divisional level management overlap..................... 3.6 4.4
Corporate administrative overlap................................. 5.8 7.6
Purchased services............................................... 7.5 12.5
----- -----
Potential annual expense reductions............................ $23.5 $32.5
===== =====
Capital expenditure efficiencies:
Pager purchases.................................................. $ 1.7 $ 4.2
Network and N-PCS implementation................................. 8.0 10.0
----- -----
Potential annual capital expenditure efficiencies.............. $ 9.7 $14.2
===== =====
</TABLE>
A-42
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has
been prepared to reflect the Merger (using the purchase method of accounting),
assuming the Merger and the Related Transactions had occurred on September 30,
1998. Under the purchase method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the Effective Time. Income of Arch will not include income (or
loss) of MobileMedia prior to the Effective Time. The unaudited pro forma
condensed consolidated statements of operations for the year ended December
31, 1997 and the nine months ended September 30, 1998 present the results of
operations of Arch and MobileMedia assuming the Merger and the Related
Transactions had been effected on January 1, 1997. The unaudited pro forma
financial data should be read in conjunction with the notes thereto and the
consolidated historical financial statements of Arch and MobileMedia,
including the respective notes thereto, which are included elsewhere in the
Prospectus.
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 Arch or the actual results that would have been achieved had
the Merger and the Related Transactions been consummated during the periods
indicated. Moreover, the pro forma condensed consolidated financial statements
reflect preliminary pro forma adjustments made to combine Arch with
MobileMedia utilizing the purchase method of accounting. The actual
adjustments will be made as of the Effective Time of the Merger and the
Related Transactions and may differ from those reflected in the pro forma
financial statements.
For purposes of presenting the pro forma condensed consolidated financial
statements included herein, Arch has assumed the issuance of 122,845,000
shares of Parent's Common Stock at an aggregate market value of $245.7 million
and that none of the Arch Stockholder Rights are exercised. In the event the
market price of Parent's Common Stock is greater than $2.00 per share,
stockholders' equity will increase. In the event the market price of Arch
Common Stock is less than $2.00 per share, stockholders' equity will decrease.
See Note 9 to the Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements below. See "Risk Factors--Uncertainties Related to the
Merger and the Reorganization--Use of Pro Forma Assumptions".
A-43
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
ARCH MOBILEMEDIA PRO FORMA
(HISTORICAL) (HISTORICAL) DEBITS CREDITS CONSOLIDATED
------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 4,534 $ 9,814 $ 14,348
Accounts receivable
net................... 34,496 38,127 72,623
Inventories............ 10,578 1,167 11,745
Prepaid expenses and
other................. 4,170 11,790 15,960
-------- ----------- ----------
Total current
assets.............. 53,778 60,898 114,676
-------- ----------- ----------
Property and
equipment, net........ 223,889 218,873 442,762
Intangible and other
assets (9)............ 654,129 297,535 103,416 (1) 21,117 (1) 1,033,963
-------- ----------- ----------
$931,796 $577,306 $1,591,401
======== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of
long-term debt........ $ -- $ 905,681 479,000 (1) $ --
426,681 (2)
Accounts payable....... 23,571 14,579 12,473 (2) 25,677
Accrued expenses....... 12,523 71,967 23,498 (2) 60,992
Accrued interest....... 18,466 21,746 21,746 (2) 18,466
Customer deposits and
deferred revenue...... 16,689 31,340 48,029
Accrued
restructuring......... 14,810 7,001 7,001 (2) 10,000 (1) 24,810
-------- ----------- ----------
Total current
liabilities......... 86,059 1,052,314 177,974
-------- ----------- ----------
Long-term debt, less
current maturities.... 619,534 -- 322,000 (1) 941,534
-------- ----------- ----------
Deferred income
taxes................. -- 2,655 2,655 (2) --
-------- ----------- ----------
Other long-term
liabilities........... 28,639 69,611 69,611 (2) 28,639
-------- ----------- ----------
Stockholders' equity
(deficit) (9):
Additional paid-in
capital............... 642,225 676,025 676,025 (3) 245,690 (1) 887,915
Accumulated deficit.... (444,661) (1,223,299) 21,117 (1) 563,665 (2) (444,661)
676,025 (3)
4,726 (1)
-------- ----------- ----------
Total stockholders'
equity (deficit).... 197,564 (547,274) 443,254
-------- ----------- ----------
$931,796 $ 577,306 $1,591,401
======== =========== ==========
</TABLE>
- --------
Note: The assets and liabilities of Parent have been omitted including
approximately $373.6 million of long-term debt.
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
A-44
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ARCH MOBILEMEDIA PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 351,944 $ 491,174 $(9,333)(4) $ 833,785
Products sales.......... 44,897 36,218 -- 81,115
--------- --------- ------- ----------
Total revenues...... 396,841 527,392 (9,333) 914,900
Cost of products sold... (29,158) (35,843) -- (65,001)
--------- --------- ------- ----------
367,683 491,549 (9,333) 849,899
--------- --------- ------- ----------
Operating expenses:
Service, rental and
maintenance.......... 79,836 139,333 10,800 (5) 220,636
(9,333)(4)
Selling............... 51,474 69,544 -- 121,018
General and
administrative....... 106,041 179,599 -- 285,640
Depreciation and
amortization......... 231,376 140,238 10,342 (6) 397,635
15,679 (6)
Bankruptcy related
expense.............. -- 19,811 (7) 19,811
--------- --------- ------- ----------
Total operating
expenses........... 468,727 548,525 27,488 1,044,740
--------- --------- ------- ----------
Operating income
(loss)................. (101,044) (56,976) (36,821) (194,841)
Interest expense, net... (62,884) (67,611) 67,611 (8) (100,474)
(37,590)(8)
Other (expenses)
income................. (3,872) 3 -- (3,869)
--------- --------- ------- ----------
Income (loss) before
income tax benefit and
extraordinary item..... (167,800) (124,584) (6,800) (299,184)
Benefit from income
taxes.................. 21,172 -- -- 21,172
--------- --------- ------- ----------
Income (loss) before
extraordinary item..... $(146,628) $(124,584) $(6,800) $ (278,012)
========= ========= ======= ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
A-45
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ARCH MOBILEMEDIA PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $ 277,826 $320,002 $ (6,341)(4) $ 591,487
Products sales.......... 31,811 20,367 -- 52,178
--------- -------- -------- ---------
Total revenues...... 309,637 340,369 (6,341) 643,665
Cost of products sold... (21,863) (16,531) -- (38,394)
--------- -------- -------- ---------
287,774 323,838 (6,341) 605,271
--------- -------- -------- ---------
Operating expenses:
Service, rental and
maintenance.......... 60,812 83,117 8,100 (5) 145,688
(6,341)(4)
Selling............... 36,902 45,848 -- 82,750
General and
administrative....... 84,527 101,383 -- 185,910
Depreciation and
amortization......... 164,290 88,312 7,756 (6) 272,118
11,760 (6)
Restructuring
expense.............. 16,100 -- -- 16,100
Bankruptcy related
expense.............. -- 13,831 (7) 13,831
--------- -------- -------- ---------
Total operating
expenses........... 362,631 332,491 21,275 716,397
--------- -------- -------- ---------
Operating income
(loss)................. (74,857) (8,653) (27,616) (111,126)
Interest expense, net... (50,344) (42,449) 42,449 (8) (78,537)
(28,193)(8)
Gain on sale of assets.. -- 94,085 -- 94,085
Other expenses.......... (2,219) -- -- (2,219)
--------- -------- -------- ---------
Income (loss) before
provision for income
taxes and extraordinary
item................... (127,420) 42,983 (13,360) (97,797)
Provision for income
taxes.................. -- 678 -- 678
--------- -------- -------- ---------
Income (loss) before
extraordinary item..... $(127,420) $ 42,305 $(13,360) $ (98,475)
========= ======== ======== =========
</TABLE>
See accompanying notes to unaudited proforma condensed consolidated financial
statements
A-46
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) To record (i) $322 million of additional Arch borrowings necessary to fund
obligations of the Merger, (ii) the issuance of 122,845,000 shares of
Parent's Common Stock in the MobileMedia Transaction, having an aggregate
value of $245.7 million, (iii) the writeoff of $21.1 million of deferred
financing costs associated with the former MobileMedia credit facility and
(iv) the excess of purchase price over the assumed fair value of the
identifiable assets acquired. The historical book value of the tangible
and intangible assets of MobileMedia was assumed to approximate fair
value. The excess of purchase price over the assumed fair value of
identifiable assets acquired is calculated as follows:
<TABLE>
<S> <C>
Consideration exchanged:
Payments to secured creditors............................... $479,000
Assumed fair value of shares issued to unsecured creditors.. 28,690
--------
507,690
Liabilities assumed:
Administrative costs...................................... 35,000(a)
Other..................................................... 81,915(b)
--------
Total consideration exchanged............................... 624,605
Transaction costs........................................... 25,000(c)
Restructuring reserve....................................... 10,000(d)
--------
Total purchase price........................................ 659,605
Less fair value of tangible and intangible net assets
acquired..................................................... 556,189
--------
Excess of purchase price over tangible and intangible net
assets acquired.............................................. 103,416
========
</TABLE>
--------
(a) Consists of payments to certain of MobileMedia's creditors.
(b) This amount relates to operating liabilities such as accounts payable,
accrued expenses and advance billings which Arch will assume in the
Merger.
(c) This amount includes legal, investment banking, financing, accounting
and other costs incurred by Arch and Parent to consummate the Merger.
(d) Consists of severance costs related primarily to duplicative general
and administrative functions at the corporate, regional and market
levels of MobileMedia, such as technical, marketing, finance and other
support functions. These terminations will occur as the operations of
MobileMedia are integrated into those of Arch and are based on
management's preliminary review of synergies that exist between the
companies. This analysis will be finalized after consummation of the
Merger and may result in additional amounts to be reserved.
(2) To eliminate liabilities of MobileMedia which (i) Arch will not assume,
(ii) will be satisfied in cash or (iii) will be exchanged for Parent's
Common Stock.
(3) To eliminate MobileMedia equity balances.
(4) To eliminate revenues and expenses between Arch and MobileMedia.
(5) This entry records the incremental rental expense for the use of
transmitter space on the towers that were sold and leased back in
MobileMedia's tower sale transaction.
(6) To record the amortization on the excess of purchase price over the
tangible and intangible assets acquired, calculated on a straight-line
basis over 10 years in the amounts of $10,342 and $7,756 for the year
ended December 31, 1997 and the nine months ended September 30, 1998,
respectively. The actual amortization recorded upon consummation of the
Merger may differ from these amounts due to changes in the price of
Parent's Common Stock at the Effective Time as well as full allocation of
purchase price to assets and liabilities assumed pursuant to APB No. 16.
The amortization related to the $276.4 million assumed fair value of
intangible assets, consisting primarily of FCC licenses and customer lists
with assumed fair values of $246.4 million and $26.8 million, respectively
has already been provided in the historical financial statements of
MobileMedia. The MobileMedia historical amortization was adjusted by
$15,679 and $11,760 for the year ended December 31, 1997 and the nine
months ended September 30, 1998,
A-47
<PAGE>
respectively, to conform MobileMedia's 25 year estimated useful life of
FCC licenses to Arch's 10 year estimated useful life. The estimated useful
life of the customer lists was assumed to be 3 years.
(7) These costs represent incremental third-party legal, accounting and
financial advisory fees and expenses incurred by MobileMedia related to
its administration of bankruptcy proceedings which are non-recurring.
(8) To remove the interest expense associated with the various MobileMedia
credit facilities and notes eliminated pursuant to the Amended Plan and to
record the interest associated with the additional Arch borrowings used to
fund the Merger. Interest was calculated assuming a 9.5% rate on $122.0
million of additional bank borrowings and a 13% rate on $200.0 million of
senior notes. Interest expense would be $27,891 and $28,494 and $37,188
and $37,993 for the nine months ended September 30, 1998 and the year
ended December 31, 1997, respectively if interest rates were to decrease
or increase 1/8 of a percent, respectively.
(9) The following unaudited pro forma consolidated financial information is
provided to illustrate certain financial measurements if the shares were
valued at the approximate current market price of $1.50. In the following
example the purchase price is $7.2 million lower than the amount disclosed
in Note 1 due to the decrease in the assumed market value of Parent's
Common Stock from $2.00 to $1.50 per share for the shares issued pursuant
to the Merger Agreement and the Amended Plan.
<TABLE>
<CAPTION>
APPROXIMATE CURRENT
MARKET PRICE
-------------------
$1.50
-------------------
<S> <C>
Parent shares exchanged (000s)....................... 122,845
Excess of purchase price over tangible and intangible
net assets acquired................................. $ 96,244
Total assets......................................... 1,584,229
Stockholders' equity................................. 436,082
Operating income (loss):
For the year ended December 31, 1997............... (194,124)
For the nine months ended September 30, 1998....... (110,588)
Income (loss) before extraordinary item:
For the year ended December 31, 1997............... (277,295)
For the nine months ended September 30, 1998....... (97,937)
</TABLE>
A-48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MobileMedia Communications, Inc. and Subsidiaries
Report of Independent Public Auditors................................... A-50
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
September 30, 1998 (unaudited)......................................... A-51
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (unaudited).......................................... A-52
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
Each of the Three Years in the Period Ended December 31, 1997 and for
the Nine Months Ended September 30, 1998 (unaudited)................... A-53
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1997 and for the Nine Months Ended September
30, 1997 and 1998 (unaudited).......................................... A-54
Notes to Consolidated Financial Statements.............................. A-55
</TABLE>
A-49
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MobileMedia Communications, Inc.
We have audited the accompanying consolidated balance sheets of MobileMedia
Communications, Inc. and Subsidiaries ("MobileMedia") as of December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MobileMedia Communications, Inc. and Subsidiaries at December 31, 1996 and
1997 and the consolidated results of their operations and cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
MobileMedia will continue as a going concern. As more fully described in Note
1, on January 30, 1997, MobileMedia Corporation and substantially all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware (the Bankruptcy Court). Additionally, as more fully
described in Note 12, on April 8, 1997, the Federal Communications Commission
("FCC") issued a Public Notice commencing an administrative hearing into the
qualification of MobileMedia to remain a licensee, which hearing has been
stayed by the FCC until October 6, 1998. These events, and circumstances
relating to the Chapter 11 filing with the Bankruptcy Court, including
MobileMedia's highly leveraged financial structure, non-compliance with
certain covenants of loan agreements with banks and note indentures, net
working capital deficiency and recurring losses from operations, raise
substantial doubt about MobileMedia's ability to continue as a going concern.
Although MobileMedia is currently operating the business as debtors-in-
possession under the jurisdiction of the Bankruptcy Court, the continuation of
the business as a going concern is contingent upon, among other things, the
ability to (a) formulate a plan of reorganization which will gain approval of
the creditors and confirmation by the Bankruptcy Court, (b) maintain
compliance with all covenants under the debtor-in-possession financing
agreement, (c) achieve satisfactory levels of future operating profit and (d)
retain FCC qualification as a licensee. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of these uncertainties.
Ernst & Young LLP
MetroPark, New Jersey
July 31, 1998
A-50
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1996 1997 1998
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............. $ 23,160 $ 10,920 $ 9,814
Accounts receivable (less allowance
for uncollectible accounts of
$56,189, $26,497 and $17,424 in
1996, 1997 and 1998, respectively)... 66,709 55,432 38,127
Inventories........................... 13,382 868 1,167
Prepaid expense....................... 1,118 5,108 6,391
Other................................. 1,583 2,783 5,399
----------- ----------- -----------
Total current assets................ 105,952 75,111 60,898
----------- ----------- -----------
Investment in net assets of equity
affiliate............................. 1,857 1,788 1,691
Property and equipment, net............ 327,757 257,937 218,873
Intangible assets, net................. 325,753 295,358 273,287
Other assets........................... 28,911 24,940 22,557
----------- ----------- -----------
Total assets........................ $ 790,230 $ 655,134 $ 577,306
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit
facility............................. $ -- $ 10,000 $ --
Accrued restructuring costs........... -- 4,897 7,001
Accrued wages, benefits and payroll... -- 11,894 12,398
Accounts payable--post petition....... -- 2,362 2,106
Accrued interest...................... -- 4,777 4,145
Accrued expenses and other current
liabilities.......................... 6,703 35,959 36,071
Advance billing and customer
deposits............................. 37,022 34,252 31,340
Deferred gain on tower sale........... -- -- 69,611
----------- ----------- -----------
Total liabilities not subject to
compromise......................... 43,725 104,141 162,672
----------- ----------- -----------
Liabilities subject to compromise
Accrued wages, benefits and payroll
taxes................................ 9,443 562 555
Accrued interest...................... 31,443 18,450 17,601
Accounts payable--pre petition........ 45,484 19,646 12,473
Accrued expenses and other current
liabilities.......................... 48,215 20,663 20,121
Debt.................................. 1,074,196 1,075,681 905,681
Other................................. 3,460 2,915 2,822
----------- ----------- -----------
Total liabilities subject to
compromise......................... 1,212,241 1,137,917 959,253
----------- ----------- -----------
Deferred tax liabilities.............. 2,655 2,655 2,655
Stockholders' equity (deficit)
Common stock (1 share, no par value,
issued and outstanding at December
31, 1996 and 1997 and September 30,
1998)................................ -- -- --
Additional paid-in-capital............ 672,629 676,025 676,025
Accumulated deficit--pre petition..... (1,141,020) (1,154,420) (1,154,420)
Accumulated deficit--post petition.... -- (111,184) (68,879)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (468,391) (589,579) (547,274)
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)................... $ 790,230 $ 655,134 $ 577,306
=========== =========== ===========
</TABLE>
See accompanying notes.
A-51
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- ---------------------
1995 1996 1997 1997 1998
-------- ----------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Services, rents and
maintenance.......... $220,745 $ 568,892 $ 491,174 $ 378,922 $ 320,002
Product sales......... 32,251 71,818 36,218 28,235 20,367
-------- ----------- --------- ---------- ---------
Total revenues...... 252,996 640,710 527,392 407,157 340,369
Cost of products sold... (26,885) (72,595) (35,843) (27,524) (16,531)
-------- ----------- --------- ---------- ---------
226,111 568,115 491,549 379,633 323,838
Operating expenses
Services, rents and
maintenance.......... 59,800 144,050 139,333 110,146 83,506
Selling............... 45,203 96,817 69,544 53,816 45,848
General and
administrative....... 59,034 218,607 179,599 145,337 101,383
Impairment of long-
lived assets......... -- 792,478 -- -- --
Restructuring costs... -- 4,256 19,811 15,577 13,831
Depreciation.......... 50,399 136,434 110,376 81,988 65,919
Amortization.......... 21,009 212,264 29,862 22,380 22,393
Amortization of
deferred gain on
tower sale........... -- -- -- -- (389)
-------- ----------- --------- ---------- ---------
Total operating
expenses........... 235,445 1,604,906 548,525 429,244 332,491
-------- ----------- --------- ---------- ---------
Operating (loss)........ (9,334) (1,036,791) (56,976) (49,611) (8,653)
Other income (expense)
Interest expense, net
..................... (31,745) (92,663) (67,611) (51,531) (42,449)
Gain (loss) on sale of
assets............... -- 68 3 3 94,085
-------- ----------- --------- ---------- ---------
Total other ex-
pense.............. (31,745) (92,595) (67,608) (51,528) 51,636
-------- ----------- --------- ---------- ---------
Income (loss) before
income taxes
(benefit).............. (41,079) (1,129,386) (124,584) (101,139) 42,983
Income taxes (benefit).. -- (69,442) -- -- 678
-------- ----------- --------- ---------- ---------
Net income (loss)....... $(41,079) $(1,059,944) $(124,584) $ (101,139) $ 42,305
======== =========== ========= ========== =========
</TABLE>
See accompanying notes.
A-52
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED
ADDITIONAL DEFICIT DEFICIT
PAID IN PRE- POST-
CAPITAL PETITION PETITION TOTAL
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31,
1994........................ $141,497 $ (39,997) $ 0 $ 101,500
Capital contribution from
MobileMedia................. 518,332 -- -- 518,332
Net loss..................... -- (41,079) -- (41,079)
-------- ----------- --------- -----------
Balance at December 31,
1995........................ 659,829 (81,076) 0 578,753
Capital contribution from
MobileMedia................. 12,800 -- -- 12,800
Net loss..................... -- (1,059,944) -- (1,059,944)
-------- ----------- --------- -----------
Balance at December 31,
1996........................ 672,629 (1,141,020) 0 (468,391)
Capital contribution from
MobileMedia................. 3,396 -- -- 3,396
Net loss..................... -- (13,400) (111,184) (124,584)
-------- ----------- --------- -----------
Balance at December 31,
1997........................ 676,025 (1,154,420) (111,184) (589,579)
Net income (unaudited)....... -- -- 42,305 42,305
-------- ----------- --------- -----------
Balance at September 30, 1998
(unaudited)................. $676,025 $(1,154,420) $ (68,879) $ (547,274)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
A-53
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -------------------
1995 1996 1997 1997 1998
----------- ----------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)...... $ (41,079) $(1,059,944) $(124,584) $(101,139) $ 42,305
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 71,408 348,698 140,238 104,368 88,312
Amortization of
deferred gain on tower
sale.................. (389)
Income tax provision
(benefit)............. -- (69,442) -- -- 678
Accretion of note
payable discount...... 15,159 16,792 1,485 1,485
Provision for
uncollectible
accounts.............. 4,259 56,556 65,181 57,965 13,011
Write-off of
unamortized debt
issuance costs........ 5,391 -- -- -- --
Recognized gain on sale
of tower assets....... -- -- -- -- (94,165)
Impairment of long-
lived assets.......... -- 792,478 -- -- --
Undistributed earnings
of affiliate, net..... (303) 160 69 (54) 97
Change in operating
assets and liabilities:
Accounts receivable.... (17,595) (55,965) (53,904) (56,888) 4,294
Inventories............ (3,353) 2,433 12,514 9,239 (299)
Prepaid expenses and
other assets.......... 133 12,145 (686) 1,555 (1,541)
Accounts payable,
accrued expenses and
other liabilities..... 9,829 13,283 (25,393) (19,378) (10,718)
----------- ----------- --------- --------- --------
Net cash provided by
(used in) operating
activities............ 43,849 57,194 14,920 (2,847) 41,585
----------- ----------- --------- --------- --------
Investing activities:
Construction and
capital expenditures,
including net changes
in pager assets....... (86,163) (161,861) (40,556) (32,321) (32,394)
Net proceeds from the
sale of tower assets.. -- -- -- -- 169,703
Investment in net
assets of equity
affiliates............ (1,641) -- -- -- --
Acquisition of
businesses............ (171,223) (866,460) -- -- --
MAP Mobile channel
exchange agreement.... (10,175) -- -- -- --
Cash paid to FCC for
PCS license........... (42,935) -- -- -- --
Other.................. (561) -- -- -- --
----------- ----------- --------- --------- --------
Net cash provided by
(used in) investing
activities............. (312,698) (1,028,321) (40,556) (32,321) 137,309
----------- ----------- --------- --------- --------
Financing activities:
Capital contribution by
MobileMedia
Corporation........... 518,332 12,800 3,396 3,396 --
Proceeds from sale of
notes, net............ 245,863 -- -- -- --
Repayment of Dial
Page.................. (83,430) -- -- -- --
Payment of debt issue
costs................. (22,721) (6,939) -- -- --
Borrowing from
revolving credit
facilities............ 1,071,000 580,250 -- -- --
Repayments on revolving
credit facilities..... (1,057,250) -- -- -- (170,000)
Borrowing from DIP
credit facilities..... -- -- 47,000 17,000 --
Repayments on DIP
credit facilities..... -- -- (37,000) -- (10,000)
----------- ----------- --------- --------- --------
Net cash provided by
(used in) financing
activities............. 671,794 586,111 13,396 20,396 (180,000)
----------- ----------- --------- --------- --------
Net (decrease) increase
in cash, cash
equivalents designated
and cash designated for
the MobileComm
acquisition............ 402,945 (385,016) (12,240) (14,772) (1,106)
Cash and cash
equivalents at
beginning of period.... 5,231 408,176 23,160 23,160 10,920
----------- ----------- --------- --------- --------
Cash and cash
equivalents at end of
period................. $ 408,176 $ 23,160 $ 10,920 $ 8,388 $ 9,814
=========== =========== ========= ========= ========
</TABLE>
See accompanying notes.
A-54
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CHAPTER 11 REORGANIZATION AND BASIS OF PRESENTATION
On January 30, 1997 (the "Petition Date"), MobileMedia Corporation
("Parent"), its wholly owned subsidiary MobileMedia Communications, Inc., and
all seventeen of MobileMedia Communication's Inc.'s subsidiaries
("MobileMedia") (collectively with MMC Parent and MobileMedia, the "Debtors"),
filed for protection under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code"). The Debtors are operating as debtors-in-possession
and are subject to the jurisdiction of the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). Chapter 11 is the principal
business reorganization chapter of the Bankruptcy Code. Under Chapter 11 of
the Bankruptcy Code, a debtor is authorized to reorganize its business for the
benefit of its creditors and stockholders. In addition to permitting
rehabilitation of the debtor, another goal of Chapter 11 is to promote
equality of treatment of creditors and equity security holders of equal rank
with respect to the restructuring of debt. In furtherance of these two goals,
upon the filing of a petition for reorganization under Chapter 11, section
362(a) of the Bankruptcy Code generally provides for an automatic stay of
substantially all acts and proceedings against the debtor and its property,
including all attempts to collect claims or enforce liens that arose prior to
the commencement of the debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations of
the Debtors with respect to the employment of attorneys, investment bankers
and other professionals, and transactions out of the Debtors' ordinary course
of business or otherwise requiring bankruptcy court approval under the
Bankruptcy Code. The Debtors have been paying undisputed obligations that have
arisen subsequent to the Petition date on a timely basis.
Since the Petition date, the Bankruptcy Court has entered orders allowing
the Debtors (i) to pay certain customer refunds and deposits in the ordinary
course of business, (ii) to pay wages, salaries and benefits owing to
employees, and (iii) to pay specified pre-petition taxes owing to various
governmental entities. On February 6, 1997, the Bankruptcy Court entered an
order authorizing the Debtors to pay approximately $46 million in pre-petition
amounts owing to certain essential vendors.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts and other unexpired executory pre-petition leases and contracts,
subject to Bankruptcy Court approval. Assumption of a contract requires the
Debtors, among other things, to cure all defaults under the contract,
including payment of all pre-petition liabilities. Rejection of a contract
constitutes a breach of that contract as of the moment immediately preceding
the Chapter 11 filing and the other party has the right to assert a general,
unsecured claim against the bankruptcy estate for damages arising out of such
breach. These parties may also seek to assert post-petition administrative
claims against the Debtors to the extent that the Debtors utilize the
collateral or services of such parties subsequent to the commencement of the
Chapter 11 proceedings. The Debtors cannot presently determine or reasonably
estimate the ultimate liability which may result from payments required to
cure defaults under assumed leases and contracts or from the filing of claims
for all leases and contracts which may be rejected.
In connection with the Chapter 11 filing, the Debtors notified all known
claimants that pursuant to an order of the Court, all proofs of claims, on
account of pre-petition obligations, other than for certain governmental
entities, were required to be filed by June 16, 1997 (the "Bar Date"). As of
September 30, 1998, approximately 2,400 proofs of claim have been filed
against the Debtors. Included among the claims filed are claims of unspecified
and undeterminable amounts. The Debtors consider the amounts set forth in
certain proofs of claim to be inaccurate estimates of the Debtors'
liabilities. As of September 30, 1998, the Debtors had secured orders of the
Bankruptcy Court reducing approximately 1,292 claims filed in an aggregate
amount of approximately $110.8 million to an allowed amount of $5.51 million.
The Debtors expect the objection process to continue.
A-55
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Confirmation and consummation of a plan of reorganization are the principal
objectives of a Chapter 11 reorganization case. A plan of reorganization sets
forth the means for satisfying claims against, and interests in, a debtor.
Confirmation of a plan requires, among other things, the affirmative vote of
creditors holding at least two-thirds in total dollar amount and more than
one-half in number of the allowed claims in each impaired class of claims that
have voted on the plan, and two-thirds in amount of equity interests in each
impaired class of interests that voted on the plan. Section 1129(b) of the
Bankruptcy Code--commonly referred to as the "cramdown" provision--permits
confirmation of a plan over the objection of an impaired class under certain
circumstances. Confirmation of a plan of reorganization by a bankruptcy court
makes the plan binding upon the debtor, any issuer of securities under the
plan, any person acquiring property under the plan and any creditor or equity
security holder of the debtor. Subject to certain limited exceptions, the
confirmation order discharges the debtor from any debt that arose prior to the
date of confirmation of the plan and substitutes therefore the obligations
specified under the confirmed plan.
On August 20, 1998, MobileMedia announced that it had executed a merger
agreement with Arch Communications Group, Inc. ("Arch Parent"), pursuant to
which MobileMedia Communications, Inc. will be merged with and into a wholly-
owned subsidiary of Arch Parent. Immediately prior to the Merger, MMC Parent
will contribute all of its assets to MobileMedia Communications, Inc.
Concurrently, Debtors filed a First Amended Joint Plan of Reorganization that
reflects the proposed merger with Arch Parent. (On September 3, 1998, Arch
Parent and MobileMedia executed an amendment to the merger agreement and the
Debtors filed a subsequent Second Amended Joint Plan of Reorganization (the
"Plan").) Under the Plan, Debtors' secured creditors will receive cash in an
amount equal to their allowed pre-petition claims and Debtors' unsecured
creditors will receive cash or equity securities of Arch Parent 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 Parent, there can be no assurance that the transactions
contemplated thereby will be consummated.
The consolidated financial statements at December 31, 1996 and 1997 and
September 30, 1998 (unaudited) have been prepared on a going concern basis
which assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. As discussed
herein, there are significant uncertainties relating to the ability of
MobileMedia to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts, or the amounts and classification of
liabilities that might be necessary as a result of the outcome of the
uncertainties discussed herein.
2. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
MobileMedia provides paging and wireless messaging services in the United
States, including the 100 largest metropolitan areas.
Consolidation
The consolidated financial statements include the accounts of MobileMedia
and it's wholly-owned subsidiaries (MobileMedia Communications of California,
Inc., MobileMedia Paging, Inc., MobileMedia DP Properties, Inc., Dial Page
Southeast, Inc., RadioCall Company of Virginia, Inc., MobileMedia PCS, Inc.,
Mobile Communications Corporation of America, MobileComm of Florida, Inc.,
MobileComm of Tennessee, Inc., MobileComm of the Midsouth, Inc., MobileComm
Nationwide Operations, Inc., MobileComm of the West, Inc., MobileComm of the
Northeast, Inc., MobileComm of the Southeast, Inc., MobileComm of the
Southeast Private Carrier Operations, Inc., MobileComm of the Southwest, Inc.
and FWS Radio, Inc.). All significant intercompany accounts and transactions
have been eliminated.
A-56
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash Equivalents
MobileMedia considers all highly-liquid securities with an original maturity
of less than three months to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject MobileMedia to concentrations
of credit risk consist principally of temporary cash investments and accounts
receivable. MobileMedia places its temporary cash investments with high-
quality institutions and, by policy, limits its credit exposure to any one
institution. Although MobileMedia faces significant credit risk from its
customers, which has been aggravated due to MobileMedia's operating problems,
such risk does not result from a concentration of credit risk as a result of
the large number of customers which comprise MobileMedia's customer base.
MobileMedia generally does not require collateral or other security to support
customer receivables.
Inventories
MobileMedia values inventories at the lower of specific cost or market
value. Inventories consist of pagers held specifically for resale by
MobileMedia.
Revenue Recognition
MobileMedia recognizes revenue under service, rent and maintenance
agreements with customers at the time the related services are performed.
Advance billings for services are deferred and recognized as revenue when
earned. MobileMedia leases (as lessor) certain pagers under operating leases.
Sales of pagers are recognized upon delivery.
Reclassifications
Certain 1995 financial statement items have been reclassified to conform to
the 1996 and 1997 presentation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Property and Equipment
Effective October 1, 1997, MobileMedia shortened the estimated useful life
of pagers from four to three years. This change resulted in additional
depreciation expense of approximately $2,500 in 1997.
Property and equipment are stated at cost, less accumulated depreciation.
While several companies manufacture pagers, MobileMedia purchases a
significant percentage of its pagers from one supplier. Any disruption of such
supply could have a material impact on MobileMedia's operations.
Expenditures for maintenance are charged to expense as incurred.
Upon retirement of pagers, the cost and related accumulated depreciation are
removed from the accounts and the net book value, if any, is charged to
depreciation expense. Upon the sale of pagers, the net book value is charged
to cost of products sold.
A-57
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Pagers............................................................ 3 years
Radio transmission equipment...................................... 10 years
Computer equipment................................................ 4 years
Furniture and fixtures............................................ 5 years
Leasehold improvements............................................ 1-10 years
Buildings......................................................... 30 years
</TABLE>
Intangible Assets
Intangible assets consist primarily of customer lists, FCC licenses, a non-
competition agreement, software and the excess of consideration paid over fair
values of net assets acquired and are being amortized principally using the
straight-line method over periods ranging from 1 to 40 years. In connection
with the impairment writedown discussed below, MobileMedia revised the lives
of FCC licenses and customer lists to 25 years and 3 years, respectively.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", MobileMedia records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the net book value of those assets. In 1997,
MobileMedia determined impairment existed with respect to its long-lived
assets as of December 31, 1996. Such determination was based upon the
existence of adverse business circumstances, such as MobileMedia's bankruptcy,
its 1996 operating results and the uncertainty associated with the pending FCC
proceeding. In July 1998, MobileMedia evaluated the ongoing value of its long-
lived assets effective December 31, 1996 and, based on this evaluation,
MobileMedia determined that intangible assets with a net book value of
$1,118,231 were impaired and wrote them down by $792,478 to their estimated
fair value. Fair value was determined through the application of generally
accepted valuation methods to MobileMedia's projected cash flows, discounted
at an estimated market rate of interest. The remaining carrying amount of
long-lived assets are expected to be recovered based on MobileMedia's
estimates of cash flows. However, it is possible that such estimates could
change based upon the uncertainties of the bankruptcy process and because
future operating and financial results may differ from those projected which
may require further writedowns to fair value.
Debt Issue Costs
Debt issue costs, which relate to the long term debt discussed in Note 6,
are reported as "Other assets" in the accompanying balance sheets. Such costs
amounted to $26,582 at December 31, 1996, $22,939 at December 31, 1997 and
$20,206 at September 30, 1998 (unaudited) and are being amortized on a
straight line basis over the term of the related debt.
Restructuring Costs
Restructuring costs are primarily comprised of professional fees
constituting administrative expenses incurred by MobileMedia as a result of
reorganization under Chapter 11 of the Bankruptcy Code.
Income Taxes
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
A-58
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unaudited Interim Financial Statements
The interim financial information as of September 30, 1998 and the nine
months ended September 30, 1997 and 1998 contained herein is unaudited but, in
the opinion of management, includes all adjustments of a normal recurring
nature that are necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. Results of
operations for the interim periods presented are not necessarily indicative of
results of operations for the entire year.
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"), which is effective for years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 is effective for financial statements for fiscal years beginning after
December 15, 1997, and therefore MobileMedia will adopt the new requirements
retroactively in 1998. Management does not anticipate that the adoption of
SFAS No. 130 will have a significant effect on MobileMedia's reporting.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December
15, 1997. Management has not completed its review of SFAS No. 131, but does
not anticipate that the adoption of this statement will have any effect on
MobileMedia's reporting.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 ("SOP 98-5")
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of SOP 98-5 will be reported as the cumulative effect of a change
in accounting principle. MobileMedia intends to adopt SOP 98-5 effective
January 1, 1999. The adoption of SOP 98-5 is not expected to have a material
effect on MobileMedia's financial position or results of operations.
3. ACQUISITIONS AND DIVESTITURES
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers to Pinnacle Towers, Inc. ("Pinnacle") for $170.0 million in cash (the
"Tower Sale"). Under the terms of a lease with Pinnacle, MobileMedia will
lease antenna sites located on these towers for an initial period of 15 years
at an aggregate annual rental of $10.7 million. The sale was accounted for in
accordance with Statement of Financial Accounting Standards No. 28, Accounting
for Sales with Leasebacks, and resulted in a recognized gain of $94.2 million
and a deferred gain of $70.0 million. The deferred gain will be amortized on a
straight-line basis over the initial lease period of 15 years. Subsequent to
the sale, MobileMedia distributed the $170.0 million in proceeds to its
secured creditors, who had a lien on such assets.
On January 4, 1996, MobileMedia completed its acquisition of MobileComm,
BellSouth's paging and wireless messaging unit, and an associated nationwide
two-way narrowband 50/12.5 kHz PCS license, and
A-59
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
<S> <C>
Current assets................................................... $ 55,301
Property and equipment........................................... 112,986
Intangible assets................................................ 934,269
Other assets..................................................... 143
Liabilities assumed.............................................. (149,662)
---------
$ 953,037
=========
</TABLE>
On August 31, 1995, MobileMedia purchased the paging assets and messaging
services business (the "Paging Business") of Dial Page, Inc. ("Dial Page"),
including the capital stock of two wholly-owned Dial Page subsidiaries, and
assumed certain liabilities of the Paging Business (the "Dial Page
Acquisition"). The purchase price for the Paging Business was $187,396,
comprised of cash and the assumption by MobileMedia of the aggregate principal
amount of and accrued interest on certain indebtedness of Dial Page.
The Dial Page Acquisition has been accounted for as a purchase transaction
in accordance with Accounting Principles Board Opinion No. 16 and,
accordingly, the financial statements for the periods subsequent to August 31,
1995 reflect the purchase price, including bond tender premium and consent,
and fees of $7,444 and transaction costs of $5,339, allocated to tangible and
intangible assets acquired and liabilities assumed based on their estimated
fair values as of August 31, 1995.
The allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Current assets.................................................... $ 3,441
Property and equipment............................................ 37,406
Intangible assets................................................. 167,101
Other assets...................................................... 74
Liabilities assumed............................................... (7,843)
--------
$200,179
========
</TABLE>
Results of operations for the year ended December 31, 1995 include results
of Dial Page subsequent to August 31, 1995. The following unaudited pro forma
information reflects the results of operations of MobileMedia assuming the
Dial Page and MobileComm acquisitions had occurred as of January 1, 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Net revenue................................................ $ 559,236
Net loss................................................... $(213,173)
</TABLE>
On October 23, 1995, MobileMedia completed the purchase of additional
capacity for its nationwide Private Carrier Paging channel for $10,175 from
MAP Mobile Communications, Inc.
A-60
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Pagers.......................................... $228,924 $196,791 $175,994
Radio transmission equipment.................... 191,952 202,296 201,822
Computer equipment.............................. 25,641 30,896 32,215
Furniture and fixtures.......................... 19,435 20,918 21,890
Leasehold improvements.......................... 14,943 14,652 16,022
Construction in progress........................ 1,494 1,128 4,664
Land, buildings and other....................... 12,947 7,911 6,476
-------- -------- --------
495,336 474,592 459,083
Accumulated depreciation........................ 167,579 216,655 240,210
-------- -------- --------
Property and equipment, net..................... $327,757 $257,937 $218,873
======== ======== ========
</TABLE>
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1996 1997 SEPTEMBER 30, 1998 (UNAUDITED)
-------------------------------------------- ------------------------------ ------------------------------
FAS 121
ACCUMULATED IMPAIRMENT ADJUSTED ACCUMULATED ADJUSTED ACCUMULATED
COST AMORTIZATION CHARGE NET COST AMORTIZATION NET COST AMORTIZATION NET
---------- ------------ ---------- -------- -------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FCC Licenses.... $ 774,731 $ (22,757) $(490,651) $261,323 $261,323 $ (8,918) $252,405 $261,323 $(14,882) $246,441
Customer lists.. 288,137 (102,735) (120,972) 64,430 64,430 (21,477) 42,953 64,430 (37,584) 26,846
Software........ 3,500 (1,167) (2,333) -- -- -- -- -- -- --
Non-competition
agreement...... 125,999 (114,029) (11,970) -- -- -- -- -- -- --
Excess of
consideration
paid over fair
value of net
assets
acquired....... 176,646 (10,094) (166,552) -- -- -- -- -- -- --
---------- --------- --------- -------- -------- -------- -------- -------- -------- --------
$1,369,013 $(250,782) $(792,478) $325,753 $325,753 $(30,395) $295,358 $325,753 $(52,466) $273,287
========== ========= ========= ======== ======== ======== ======== ======== ======== ========
</TABLE>
MobileMedia is not amortizing the cost of two nationwide Personal
Communications Services ("PCS") licenses, one acquired directly from the FCC
and the other as a result of the MobileComm acquisition, since the
construction of paging networks related to such licenses has not been
completed.
A-61
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
DIP credit facility....................... $ -- $ 10,000 $ --
Revolving loan............................ 99,000 99,000 72,900
Term loan................................. 550,000 550,000 406,100
10 1/2% Senior Subordinated Deferred
Coupon Notes due December 1, 2003........ 172,628 174,125 174,125
9 3/8% Senior Subordinated Notes due
November 1, 2007......................... 250,000 250,000 250,000
Dial Page Notes........................... 1,570 1,570 1,570
Note Payable.............................. 998 986 986
---------- ---------- --------
Total debt.............................. $1,074,196 $1,085,681 $905,681
========== ========== ========
</TABLE>
The debt obligations of MobileMedia include:
1) A debtor-in-possession credit facility ("DIP Facility") with a
syndicate of lenders including The Chase Manhattan Bank, as Agent (the "DIP
Lenders"). As of September 30, 1998 there were no funded borrowings and as
of December 31, 1997, there was $10,000 of borrowings outstanding under
this facility. MobileMedia is subject to certain financial and operating
restrictions customary to credit facilities of this type including a
limitation on periodic capital expenditures, minimum allowable periodic
EBITDA and retention of a turnaround professional. Additionally,
MobileMedia is required to make monthly interest payments to the DIP
Lenders. The DIP Facility bears interest at a rate of LIBOR plus 250 basis
points or Base Rate plus 150 basis points, at the option of MobileMedia.
During 1997, the debtors drew down $47 million of borrowings and repaid $37
million under the DIP Facility. During January and February, 1998 the
Debtors repaid an additional $10 million. On January 27, 1998, the DIP
Facility was amended and reduced from $200,000 to $100,000. On August 12,
1998, MobileMedia received approval from the Bankruptcy Court to extend the
DIP Facility to March 31, 1999 and further reduce it from $100,000 to
$75,000.
2) A $750,000 senior secured and guaranteed credit agreement (the "Pre-
Petition Credit Agreement") with a syndicate of lenders including The Chase
Manhattan Bank, as Agent. As of September 30, 1998 there was $479,000
outstanding under this facility consisting of term loans of $101,500 and
$304,600 and loans under a revolving credit facility totaling $72,900. This
agreement was entered into on December 4, 1995, in connection with the
financing of the MobileComm Acquisition. Commencing in 1996 MobileMedia was
in default under this agreement. As a result of such default and the
bankruptcy filing, MobileMedia has no borrowing capacity under this
agreement. Since the Petition date, MobileMedia has brought current its
interest payments and has been making monthly payments to the lenders under
the Pre-Petition Credit Agreement equal to the amount of interest accruing
under such agreement. On September 3, 1998, MobileMedia repaid $170,000 of
borrowings under the Pre-Petition Credit Agreement with proceeds from the
Tower Sale (see Note 3).
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the "9 3/8%
Notes") issued in November 1995, concurrent with MobileMedia's second
offering of Class A Common Stock (See Note 11). These notes bear interest
at a rate of 9 3/8% payable semiannually on May 1 and November 1 of each
year. On November 1, 1996, MobileMedia did not make its scheduled interest
payment on its 9 3/8% Notes which constituted an event of default. The note
holders have not exercised any rights or remedies afforded such
A-62
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 semiannually, to an
aggregate principal amount of $210,000 by December 1, 1998 after which
interest is paid in cash at a rate of 10 1/2% and is payable semiannually.
By virtue of the missed interest payments on the 9 3/8% Notes and the Pre-
Petition Credit Agreement an event of default has occurred. The note
holders have not exercised any rights or remedies afforded such holders
(which rights include, but are not limited to, acceleration of the stated
maturity of the notes). Since the Petition date, any such right or remedy
is subject to the automatic stay created by the Bankruptcy Code.
Interest Expense on Debt
Interest paid during the years ended December 31, 1995, 1996 and 1997, and
the nine months ended September 30, 1997 and 1998 (unaudited) was $9,828,
$65,978, $76,624, $58,114 and $41,321, respectively. Total interest cost
incurred for the years ended December 31, 1995, 1996 and 1997 was $31,952,
$94,231 and $68,409, respectively of which $176, $1,292 and $1,249 was
capitalized. Total interest cost incurred for the nine months ended September
30, 1997 and 1998 was $51,661 and $42,573, respectively of which $130 and $124
was capitalized.
Subsequent to the Petition date, interest was accrued and paid only on the
Pre-Petition Credit Agreement and the DIP Facility. If not for the filing,
interest expense for the year ended December 31, 1997 and the nine months
ended September 30, 1997 and 1998 (unaudited) would have been approximately
$104,152, $78,067 and $75,994 respectively.
7. RELATED PARTY TRANSACTIONS
On February 8, 1995 MMC Parent called upon certain investors for an
additional $25,000 of capital which was required to be contributed to
MobileMedia in exchange for 137,095 shares of Class A and 2,362,900 shares of
Class B common stock at $10 per share and warrants to purchase 51,014 shares
of Class A Common Stock. On June 13, 1995, MobileMedia received the $25,000
from the exercise of such call.
8. INCOME TAXES
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- --------- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $ --
State and local.................................. -- -- --
------- --------- -------
Deferred:
Federal.......................................... -- 52,081 --
State and local.................................. -- 17,361 --
------- --------- -------
Total.......................................... $ -- $ 69,442 $ --
======= ========= =======
</TABLE>
MobileMedia is included in the MMC Parent's consolidated federal income tax
return. Income taxes are presented in the accompanying financial statements as
if MobileMedia filed tax returns as a separate consolidated entity.
A-63
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of income tax benefit and the amount computed by applying
the statutory federal income tax rate to loss before income taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Tax benefit at federal statutory rate....... $ 14,377 $ 395,285 $ 43,604
Goodwill and intangible amortization and
writedown.................................. -- (95,362) --
Valuation allowance on federal deferred tax
assets..................................... (14,377) (230,481) (43,604)
-------- --------- --------
Total..................................... $ -- $ 69,442 $ --
======== ========= ========
</TABLE>
The effect of the valuation allowance shown above represents federal tax
effects on income from continuing operations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for federal and state income tax purposes. The
components of deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Difference in book and tax basis of fixed assets... $ -- $ 10,206
Other.............................................. -- 68
--------- ---------
Net deferred tax liabilities..................... -- 10,274
Deferred tax assets:
Accounts receivable reserves....................... 22,476 10,578
Differences between the book and tax basis of
intangible assets................................. 136,492 128,462
Difference between book and tax basis of accrued
liabilities....................................... 3,425 5,089
Net operating loss carryforward.................... 80,440 161,840
Difference between book and tax basis of fixed
assets............................................ 2,208 --
Other.............................................. 1,357 --
--------- ---------
Total deferred assets............................ 246,398 305,969
Valuation allowances for deferred tax assets..... (249,053) (298,350)
--------- ---------
Net deferred tax assets.......................... (2,655) 7,619
========= =========
Net deferred tax liabilities..................... $ 2,655 $ 2,655
========= =========
</TABLE>
As of December 31, 1997, MobileMedia has available net operating loss
carryforwards for tax purposes of approximately $400,000 which expire in years
2008 through 2012. Utilization of these losses may be limited under Section
382 of the Internal Revenue Code.
MobileMedia believes consummation of the public offering of 15,525,000
shares of Class A Common Stock on November 7, 1995 caused an ownership change
for MobileMedia for purposes of Section 382 of the Code. As a result, the use
of MobileMedia's pre-ownership change net operating loss carryforwards will be
limited annually by the Section 382 Limitation, which is estimated to be
approximately $40.0 million. If a second ownership change occurred subsequent
to November 7, 1995, which has not been determined, use of MobileMedia's net
operating losses would be severely limited. It is also anticipated that the
net operating loss carryforwards and possibly other tax attributes will be
substantially reduced as a result of consummation of the Plan.
A-64
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LEASES
Certain facilities and equipment used in operations are held under operating
leases. In accordance with the Bankruptcy Code, all lease contracts will be
reviewed, and subject to Court approval, are subject to rejection. Rental
expenses under operating leases were $14,983, $44,574, $43,453, $32,891 and
$30,847 for the years ended December 31, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998 (unaudited), respectively. At
December 31, 1997, the aggregate minimum rental commitments under leases were
as follows:
<TABLE>
<S> <C>
1998................................................................ $ 23,566
1999................................................................ 18,953
2000................................................................ 14,037
2001................................................................ 7,625
2002................................................................ 4,788
Thereafter.......................................................... 7,707
--------
$ 76,676
========
</TABLE>
On March 23, 1998, MobileMedia moved into a new headquarters facility
pursuant to a lease with Miller Freeman, Inc. entered into with Bankruptcy
Court approval. On April 1, 1998, MobileMedia, with Bankruptcy Court approval,
assigned its prior lease of rental property used for its Headquarters office
to Southwestern Bell Yellow Pages, Inc. The lease expires in June, 2001. The
estimated annual savings related to this lease assignment and the lease with
Miller Freeman, Inc. is approximately $1,400. The cost savings is not
reflected in the above minimum rental commitments.
10. EMPLOYEE BENEFIT PLANS
MobileMedia has adopted a retirement savings plan that allows all employees
who have been employed for one year and have at least 1,000 hours of credited
service to contribute and defer up to 15% of their compensation. Effective
February 1, 1996, MobileMedia began a matching contribution of 50% of the
first 2% of the elected deferral plus an additional 25% of the next 4% of the
elected deferral. MobileMedia's matching contribution was $700 in 1996, $730
in 1997 and $555 and $506 for the nine months ended September 30, 1997 and
1998 (unaudited), respectively.
Employees of MobileComm and Dial Page who were hired by MobileMedia were
eligible to participate in MobileMedia's retirement savings plan based on
their recognized MobileComm and Dial Page service date. As of the date of the
MobileComm and Dial Page Acquisitions employees with one year and at least
1,000 hours of credited service were eligible to participate.
11. COMMON STOCK, STOCK OPTION PLANS AND STOCK WARRANTS
On July 6, 1995, MMC Parent issued an aggregate of 8,000,000 shares of Class
A Common Stock in a public offering at a price of $18.50 per share. MMC Parent
received net proceeds from the sale of approximately $137,975. In addition, on
July 25, 1995, the underwriters exercised their over-allotment option to
purchase an additional 800,000 shares of Class A Common Stock at the initial
public offering price. Accordingly, MMC Parent received additional net
proceeds of $13,910 for the over-allotment shares. On November 13, 1995, MMC
Parent issued an aggregate of 13,500,000 shares of Class A Common Stock at a
public offering price of $23.75 resulting in net proceeds of approximately
$308,755. In addition, the underwriters exercised their over-allotment option
to purchase an additional 2,025,000 shares of Class A Common Stock at the
public offering price resulting in additional net proceeds of approximately
$46,170.
A-65
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Non-Employee Directors
MobileMedia adopted a stock option plan under which options to purchase
MobileMedia's Class A Common Stock would be granted to the Company's non-
employee directors. Options for a total of 121,800 shares of Class A Common
Stock were issued under the Plan since the beginning of the Plan. All exercise
prices per share were considered to be the fair market value at the date of
grant. The plan was amended in 1997 to provide that no additional options may
be granted. Accordingly, no additional options were granted after 1996 under
the Plan. At December 31, 1996, options for a total of 92,040 shares of Class
A Common Stock, at exercise prices ranging from $10.00 to $26.38, were
outstanding. At December 31, 1997, options for a total of 90,290 shares of
Class A Common Stock were outstanding.
Employees
MobileMedia has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of MobileMedia's employee stock option equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. In light of MobileMedia's current circumstances, the pro forma
effect of stock compensation expense pursuant to SFAS No. 123 has not been
calculated. MobileMedia adopted the 1993 MobileMedia Corporation Stock Option
Plan (the "Option Plan") under which options to purchase shares of
MobileMedia's Class A Common Stock may be granted to officers and key
employees of MobileMedia.
Two types of options may be granted under the Option Plan: options intended
to qualify as incentive stock options under Section 422 of the Code, and "non-
qualified" stock options not specifically authorized or qualified for
favorable federal income tax treatment under the Code. The option exercise
price for incentive stock options granted under the Option Plan may not be
less than the fair market value (as defined in the Option Plan) of Parent's
Class A Common Stock on the date the option is granted. The exercise price of
non-qualified stock options may be set by the Board of Directors at a discount
from fair market value. Prior to the Petition date, qualified and non-
qualified options issued to certain current and former officers and key
employees of MobileMedia to purchase up to 1,618,740, 1,414,893 and 1,276,515,
shares of Class A Common Stock at December 31, 1996 and 1997 and September 30,
1998, respectively, at exercise prices ranging from $6.81 to $10.00 per share,
were outstanding.
12. COMMITMENTS AND CONTINGENCIES
MobileMedia is party to a number of lawsuits and other matters arising in
the ordinary course of business.
As announced on September 27, 1996 and October 21, 1996, MobileMedia
discovered misrepresentations and other violations that occurred during the
licensing process for as many as 400 to 500, or approximately 6% to 7%, of its
approximately 8,000 local transmission one-way paging stations. MobileMedia
caused an investigation to be conducted by its outside counsel, and a
comprehensive report regarding these matters was provided to the FCC in the
fall of 1996. In cooperation with the FCC, outside counsel's investigation was
expanded to examine all MobileMedia's paging licenses, and the results of that
investigation were submitted to the FCC on November 8, 1996.
On January 13, 1997, the FCC issued a Public Notice relating to the status
of certain FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (i) automatically terminated
approximately 185 authorizations for paging facilities that were not
constructed by the expiration date of their construction permits and remained
unconstructed, (ii) dismissed approximately 93 applications for fill-in sites
A-66
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
around existing paging stations (which had been filed under the so-called "40-
mile rule") as defective because they were predicated upon unconstructed
facilities and (iii) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the
expiration date of their construction permits. With respect to the
approximately 99 authorizations where the underlying station was untimely
constructed, the FCC granted MobileMedia interim operating authority subject
to further action by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an Administrative Law Judge to take evidence and develop a full
factual record on directed issues concerning MobileMedia's filing of false
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the
hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible
transfer of MobileMedia's FCC licenses. The order was originally granted for
ten months and was extended by the FCC through October 6, 1998. The order,
which is based on an FCC doctrine known as Second Thursday, provides that, if
there is a change of control that meets the conditions of Second Thursday, the
regulatory issues designated for administrative hearing will be resolved by
the transfer of MobileMedia's FCC licenses to the new owners of MobileMedia
and the hearing will not proceed. MobileMedia believes that a reorganization
plan that provides for either a conversion of certain existing debt to equity,
in which case existing MobileMedia shares will be eliminated, or a sale or
merger of MobileMedia will result in a change of control that will satisfy the
Second Thursday doctrine. On September 2, 1998, MobileMedia and Arch
Communications Group, Inc. filed a joint Second Thursday application.
MobileMedia believes the plan of reorganization referenced in the application
satisfies the conditions of Second Thursday. On October 5, 1998, a supplement
was filed to notify the FCC of certain modifications to the proposed
transaction. The application was accepted for filing by public notice dated
October 15, 1998. On October 16, 1998, MobileMedia and Arch filed a joint
supplement of data requested by the staff of the Wireless Telecommunications
Bureau to assist in their evaluation of the application.
In the event that MobileMedia was unable to consummate a plan of
reorganization that satisfies the conditions of Second Thursday, MobileMedia
would be required to proceed with the hearing, which, if adversely determined,
could result in the loss of MobileMedia's licenses or substantial monetary
fines, or both. Such an outcome would have a material adverse effect on
MobileMedia's financial condition and results of operations.
Prior to the Petition date, five actions allegedly arising under the federal
securities laws were filed against MobileMedia and certain of its present and
former officers, directors and underwriters in the United States District
Court for the District of New Jersey (the "New Jersey District Court"). These
actions were subsequently consolidated as In re MobileMedia Securities
Litigation, No. 96-5723 (AJL) (the "New Jersey Actions"). A consolidated
amended complaint (the "Complaint") was filed on November 21, 1997. The
Complaint does not name MobileMedia as a defendant.
In June 1997, the Debtors initiated an Adversary Proceeding in the
Bankruptcy Court to stay the prosecution of the New Jersey Actions. Pursuant
to a Stipulation entered into among the Debtors and the plaintiffs in the New
Jersey Actions and "So Ordered" by the Bankruptcy Court on October 31, 1997,
the plaintiffs in the New Jersey Actions could conduct only limited discovery
in connection with the New Jersey Actions and could not file any pleadings,
except responses to motions to dismiss, until the earlier of September 30,
1998 and the effective date of a plan of reorganization. On October 21, 1998,
the defendents' motion to dismiss the New Jersey Actions filed with the New
Jersey District Court on January 16, 1998 was denied.
A-67
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the New Jersey Actions, two lawsuits (together, the
"California Actions" and, together with the New Jersey Actions, the
"Securities Actions") were filed in September 1997 in the United States
District Court for the Northern District of California and the Superior Court
of California naming as defendants certain former officers and certain present
and former directors of MobileMedia, certain investment entities and the
Debtors' independent auditors. None of the Debtors is named as defendant in
the California Actions.
On November 4, 1997, the Debtors commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At hearings held on December 10, 1997 and May
29, 1998, the Bankruptcy Court enjoined the plaintiffs in the California
Actions until September 15, 1998 from taking certain actions in connection
with the California Actions, with certain exceptions.
Neither the New Jersey Actions nor the California Actions name any of the
Debtors as a defendant. However, proofs of claim have been filed against the
Debtors by the plaintiffs in the New Jersey Actions, and both the New Jersey
Actions and the California Actions may give rise to claims against the
Debtors' Directors, Officers and Corporate Liability Insurance Policy. It is
anticipated that under any plan of reorganization for MobileMedia these Claims
will receive no distributions.
Three former employees have pre-petition agreements which provide an
incentive payment of up to $300 to each of them if the EBITDA for 1996 of an
entity specified in such agreements equals or exceeds $82,000, subject to
certain adjustments (the "1996 Target"), and of up to $1,000 to each of them
if the EBITDA for 1998 of an entity specified in such agreements equals or
exceeds $125,100, subject to certain adjustments (the "1998 Target"). One
current and four former employees have pre-petition agreements which provide
for incentive payments of up to $150 to each of them if the specified entity
meets the 1996 Target and of up to $300 to each of them if the specified
entity meets the 1998 Target. Several former employees have submitted proofs
of claim with the Bankruptcy Court with respect to these incentive payments.
MobileMedia intends to object to these unsecured claims.
13. OTHER INVESTMENTS
On March 21, 1995, MobileMedia purchased a 33% interest in Abacus
Communications Partners, L.P., a Delaware limited partnership, from Abacus
Business Services, Inc. for $1,641. Abacus Communications Partners, L.P. is
one of MobileMedia's alphanumeric dispatch services providers. The investment
has been accounted for under the equity method in accordance with Accounting
Principles Board Opinion No. 18. Under the equity method, original investments
are recorded at cost and adjusted by MobileMedia's share of undistributed
earnings or losses of the purchased company. MobileMedia's share of income
(loss) of affiliate, net of distribution, for the years ended December 31,
1995, 1996 and 1997 and for the nine months ended September 30, 1997 and 1998
(unaudited), was $(303), $162, $69, $(54) and $97, respectively.
14. IMPACT OF YEAR 2000 (UNAUDITED)
GENERAL
Computer systems were originally designed to recognize calendar years by the
last two digits in the date code field. Beginning in the year 2000, these date
code fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates. Any of MobileMedia's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, in less than two
years, the computerized systems (including both information and non-
information
A-68
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 run to identify any Year 2000
compliance issues. While the results of the tests are still being analyzed,
relatively few Year 2000 problems were identified. Additional testing is
scheduled for the first quarter of 1999, including testing of MobileMedia's
financial and human resource software packages. There can be no assurance,
however, that such testing has, or will, detect all compliance issues related
to the Year 2000 problem.
With respect to external matters, MobileMedia has distributed questionnaires
and requests for certification to its mission critical vendors and is in the
process of obtaining and reviewing the responses thereto. The questionnaires
have requested information concerning embedded technologies of such vendors,
the hardware and software applications used by such vendors and the Year 2000
compliance efforts of such vendors relating thereto.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to the Year 2000 compliance
matters. To date, MobileMedia has incurred approximately $50,000 in costs
(excluding in-house labor and hardware) in connection with Year 2000
compliance matters. In addition, MobileMedia has purchased upgraded hardware
at a cost of approximately $150,000 for use as redundant equipment in testing
for Year 2000 problems in an isolated production environment. MobileMedia
estimates that it will expend approximately $200,000 on additional software
and other items related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200,000
in costs relating to Year 2000 remediation efforts for its paging network
hardware. MobileMedia has also upgraded its paging network hardware over the
fiscal year 1998 and plans further upgrades in fiscal year 1999. Such upgrades
have not been and are not expected to be purchased solely for remediation of
the Year 2000 compliance problems; such upgrades are not themselves expected
to have Year 2000 compliance problems.
Risks relating to Year 2000 Compliance Matters
MobileMedia has a goal to become Year 2000 compliant with respect to
internal matters during calendar year 1999. Although MobileMedia has begun and
is undertaking testing of its internal business-related hardware
A-69
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 in respect of application of
contingency plans on a department-by-department basis and on a company-wide
basis. MobileMedia intends to complete its contingency planning in respect of
Year 2000 compliance during calendar year 1999.
A-70
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF ARCH SINCE THE DATE HEREOF OR THAT ANY INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 15
The Exchange Offer....................................................... 27
Use of Proceeds.......................................................... 35
Capitalization........................................................... 36
Selected Consolidated Financial and Operating Data....................... 37
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Business................................................................. 52
Management............................................................... 65
Principal Stockholders................................................... 71
Description of Certain Indebtedness...................................... 73
Description of Notes..................................................... 81
Certain Federal Income Tax Considerations................................ 110
Plan of Distribution..................................................... 115
Legal Matters............................................................ 116
Experts.................................................................. 116
Glossary of Defined Terms................................................ 117
Index to Financial Statements............................................ F-1
Annex A.................................................................. A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$130,000,000
[LOGO OF ARCH APPEARS HERE]
ARCH COMMUNICATIONS, INC.
OFFER TO EXCHANGE
12 3/4% SENIOR NOTES DUE 2007
FOR ALL OUTSTANDING 12 3/4%
SENIOR NOTES DUE 2007
------------------------
PROSPECTUS
------------------------
DECEMBER , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Arch's Restated Certificate of Incorporation provides that Arch will, to the
fullest extent permitted by the DGCL, 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.
Arch's Restated Certificate of Incorporation 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 DGCL (relating to
illegal dividends or stock redemptions) or (iv) for any transaction from which
the director derived an improper personal benefit. If the DGCL 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 DGCL 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. (1)
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., MobileMedia Corporation and MobileMedia
Communications, Inc. (1)
3.1 Restated Certificate of Incorporation. (2)
3.2 By-laws, as amended. (2)
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. (2)
4.2 Indenture, dated December 15, 1994, between Arch Communications,
Inc. and United States Trust Company of New York, as Trustee,
relating to the 14% Senior Notes due 2004 of Arch Communications,
Inc. (3)
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. (4)
5.1** Opinion of Hale and Dorr LLP.
8.1** Tax Opinion of Hale and Dorr LLP.
10.1 Exchange and Registration Rights Agreement, dated June 24, 1998,
among Arch Communications Group, Inc. and the Initial Purchasers.
10.2 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. (4)
10.3 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. (4)
10.4 Asset Purchase and Sale Agreement, dated April 10, 1998, among
OmniAmerica, Inc. and certain subsidiaries of Arch Communications
Group, Inc. (4)
10.5 Letter agreement, dated June 10, 1998, between Arch Communications
Group, Inc. and Motorola, Inc. (4)(5)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.6 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). (1)
10.7 Bridge Commitment Letter, dated as of August 20, 1998, among Arch
Communications, Inc., Arch Communications Group, Inc., The Bear
Stearns Companies, Inc., The Bank of New York, TD Securities (USA)
Inc., and the Royal Bank of Canada. (1)
10.8 Purchase Agreement, dated June 24, 1998, among Arch Communications
Group, Inc. and the Initial Purchasers.
10.9 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. (7)
10.10 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. (7)
10.11 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. (7)
10.12 Debtors' Third Amended Joint Plan of Reorganization, dated as of
December 1, 1998, included as Annex C to the Proxy
Statement/Prospectus which is a part of this Registration Statement.
(7)
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 of the Registration
Statement).
25.1 Statement of Eligibility and Qualification (Form T-1) under the
Trust Indenture Act of 1939 from U.S. Bank Trust National
Association.
27.1 Financial Data Schedule. (6)
99.1 Form of Letter of Transmittal and related documents. (8)
99.2 Forms of Notices of Guaranteed Delivery. (8)
</TABLE>
- --------
** Filed herewith.
(1) Incorporated by reference from the Registration Statement on Form S-4
(File No. 333-62211) of Arch Communications Group, Inc.
(2) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-72646) of Arch Communications, Inc.
(3) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-85580) of Arch Communications, Inc.
(4) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998.
(5) Portions of this exhibit so incorporated by reference have been accorded
confidential treatment.
(6) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
Communications, Inc. for the quarter ended September 30, 1998.
(7) Incorporated by reference from the Registration Statement on Form S-4
(File No. 333-63519) of Arch Communications Group, Inc.
(8) Previously filed.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
II-2
<PAGE>
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 of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the 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 Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(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 or Form S-8, 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
Commission by the registrant pursuant to Sections 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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.
(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 the paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a post-
effective amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Securities Act or Rule 3-19
of this chapter if such financial statements and information are contained
in periodic reports filed with or furnished to the Commission 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 reoffering 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.
II-3
<PAGE>
(c) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the 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 of 1933, 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) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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 Act
and will be governed by the final adjudication of such issue.
(e) The undersigned registrants hereby undertake to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under Section 305(b)(2)
of the Act.
(f) The undersigned registrant hereby 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 the registration statement through
the date of responding to the request.
(g) The undersigned registrant hereby 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-4
<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 December 21, 1998.
ARCH COMMUNICATIONS, INC.
/s/ C. Edward Baker, Jr.
By: _________________________________
C. Edward Baker, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ C. Edward Baker, Jr. Chairman of the Board and December 21,
- ------------------------- Chief Executive Officer 1998
Director (principal executive officer)
/s/ J. Roy Pottle Executive Vice President and December 21,
- ------------------------- Chief Financial Officer 1998
(principal financial officer and
principal accounting officer)
/s/ * John B. Saynor Director December 21,
- ------------------------- 1998
/s/ * R. Schorr Berman Director December 21,
- ------------------------- 1998
/s/ * James S. Hughes Director December 21,
- ------------------------- 1998
/s/ * Allan L. Rayfield Director December 21,
- ------------------------- 1998
/s/ * John A. Shane Director December 21,
- ------------------------- 1998
/s/ * John Kornreich Director December 21,
- ------------------------- 1998
/s/ Gerald J. Cimmino
*By:
- -------------------------
Gerald J. Cimmino
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
SCHEDULE II
ARCH COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT OTHER BALANCE
ALLOWANCE FOR DOUBTFUL BEGINNING CHARGED ADDITIONS TO AT END
ACCOUNTS OF PERIOD TO EXPENSE ALLOWANCE(1) WRITE-OFFS OF PERIOD
---------------------- ---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997................... $ 4,111 $ 7,181 $ -- $ (5,548) $ 5,744
======= ======= ======= ======== =======
Year ended December 31,
1996................... $ 2,125 $ 8,198 $ 1,757 $ (7,969) $ 4,111
======= ======= ======= ======== =======
Year ended December 31,
1995................... $ 707 $ 3,915 $ 1,251 $ (3,748) $ 2,125
======= ======= ======= ======== =======
</TABLE>
(1)Additions arising through acquisitions of paging companies
<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. (1)
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., MobileMedia Corporation and MobileMedia
Communications, Inc. (1)
3.1 Restated Certificate of Incorporation. (2)
3.2 By-laws, as amended. (2)
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. (2)
4.2 Indenture, dated December 15, 1994, between Arch Communications,
Inc. and United States Trust Company of New York, as Trustee,
relating to the 14% Senior Notes due 2004 of Arch Communications,
Inc. (3)
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. (4)
5.1** Opinion of Hale and Dorr LLP.
8.1** Tax Opinion of Hale and Dorr LLP.
10.1 Exchange and Registration Rights Agreement, dated June 24, 1998,
among Arch Communications Group, Inc. and the Initial Purchasers.
10.2 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. (4)
10.3 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. (4)
10.4 Asset Purchase and Sale Agreement, dated April 10, 1998, among
OmniAmerica, Inc. and certain subsidiaries of Arch Communications
Group, Inc. (4)
10.5 Letter agreement, dated June 10, 1998, between Arch Communications
Group, Inc. and Motorola, Inc. (4)(5)
10.6 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). (1)
10.7 Bridge Commitment Letter, dated as of August 20, 1998, among Arch
Communications, Inc., Arch Communications Group, Inc., The Bear
Stearns Companies, Inc., The Bank of New York, TD Securities (USA)
Inc., and the Royal Bank of Canada. (1)
10.8 Purchase Agreement, dated June 24, 1998, among Arch Communications
Group, Inc. and the Initial Purchasers.
10.9 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.(7)
10.10 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.(7)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.11 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.(7)
10.12 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.(7)
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 of the Registration
Statement).
25.1 Statement of Eligibility and Qualification (Form T-1) under the
Trust Indenture Act of 1939 from U.S. Bank Trust National
Association.
27.1 Financial Data Schedule.(6)
99.1 Form of Letter of Transmittal and related documents.(8)
99.2 Forms of Notices of Guaranteed Delivery.(8)
</TABLE>
- --------
** Filed herewith.
(1) Incorporated by reference from the Registration Statement on Form S-4
(File No. 333-62211) of Arch Communications Group, Inc.
(2) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-72646) of Arch Communications, Inc.
(3) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-85580) of Arch Communications, Inc.
(4) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998.
(5) Portions of this exhibit so incorporated by reference have been accorded
confidential treatment.
(6) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
Communications, Inc. for the quarter ended September 30, 1998.
(7) Incorporated by reference from the Registration Statement on Form S-4
(File No. 333-63519) of Arch Communications Group, Inc.
(8) Previously filed.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF HALE AND DORR LLP]
December 22, 1998
Arch Communications, Inc.
1800 West Park Drive, Suite 250
Westborough, MA 01581
Ladies and Gentlemen:
We have assisted in the preparation of the Registration Statement on Form S-
4 (the "Registration Statement") filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the
registration of $130,000,000 in the aggregate principal amount of 12 3/4%
Senior Notes due 2007 (the "Notes") of Arch Communications, Inc., a Delaware
corporation (the "Company").
We have examined the form of the Notes, the Certificate of Incorporation and
By-Laws of the Company and all amendments thereto and have examined and relied
on the originals, or copies certified to our satisfaction, of such records of
meetings, written actions in lieu of meetings, or resolutions adopted at
meetings, of the directors of the Company and such other documents and
instruments as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below.
We have not made an independent review of the laws of any state or
jurisdiction other than the state laws of the Commonwealth of Massachusetts,
the federal laws of the United States and the General Corporation Law statute
of the State of Delaware. Accordingly, we express no opinion herein with
respect to the laws of any state or jurisdiction other than the state laws of
the Commonwealth of Massachusetts, the federal laws of the United States and
the General Corporation Law statute of the State of Delaware. To the extent
that the laws of any other jurisdiction govern the transactions as to which we
are opining herein, we have assumed, with your permission, that such laws are
identical to state laws of the Commonwealth of Massachusetts, and we are
expressing no opinion herein as to whether such assumption is reasonable or
correct. For the purposes of this opinion, we have assumed that the facts and
law governing the performance by the respective parties of their respective
obligations under the Notes will be identical to the facts and law governing
such performance as of the date of this opinion.
The opinion hereinafter expressed is qualified to the extent that it may be
subject to or affected by (i) applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
the rights of creditors generally, (ii) statutory or decisional law concerning
recourse by creditors to security in the absence of notice or hearing and
(iii) duties and standards imposed on creditors and parties to contracts,
including, without limitation, requirements of good faith, reasonableness and
fair dealing. Furthermore, we express no opinion as to the availability of any
equitable or specific remedy, or as to the successful assertion of any
equitable defense, upon any breach of the documents as to which we are opining
herein or any of the documents or obligations referred to therein, inasmuch as
the availability of such remedies or defenses may be subject to the discretion
of a court.
We are expressing no opinion as to compliance by the Company with the so-
called "blue sky" or state securities laws (other than those of the
Commonwealth of Massachusetts) or as to any state or federal anti-fraud laws,
in connection with the issuance and sale of the Notes.
<PAGE>
Based upon and subject to the foregoing, we are of the opinion that the
Notes, when issued against tender of the consideration therefor as
contemplated in the prospectus which forms part of the Registration Statement
(the "Prospectus"), will be valid and binding obligations of the Company and
enforceable against the Company in accordance with their terms.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions and is rendered as of the date hereof, and we disclaim
any obligation to advise you of any change in any of the foregoing sources of
law or subsequent developments in law or changes in facts or circumstances
which might affect any matters or opinions set forth herein. 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 delivered to the Company solely for the benefit of the
Company, and may not be relied upon for any other purpose, or furnished to,
quoted to or relied upon by any other party without our prior written consent.
We hereby consent to the use of our name in the Registration Statement and
in the Prospectus under the caption "Legal Matters" and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF HALE AND DORR LLP]
December 21, 1998
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Re:Registration Statement on Form S-4 and
Prospectus of Arch Communications, Inc.
Ladies and Gentlemen:
We are counsel to Arch Communications, Inc., a Delaware Corporation
("Arch"), and have acted as such in connection with the filing of a
Registration Statement on Form S-4 (File No. 333-59807) (the "Registration
Statement") under the Securities Act of 1933, as amended, which includes the
Prospectus relating to Arch's offer to exchange $1,000 principal amount of its
12 3/4% Senior Notes due 2007 (the "Exchange Notes") for each $1,000 principal
amount of its outstanding 12 3/4% Senior Notes due 2007 (the "Private Notes"),
of which $130,000,000 in aggregate principal amount are outstanding as of the
date hereof (the "Exchange Offer"). Except as otherwise provided, capitalized
terms not defined herein have the meanings set forth in the Registration
Statement. All section references, unless otherwise indicated, are to the
United States Internal Revenue Code of 1986, as amended (the "Tax Code").
We have examined the Registration Statement and the exhibits thereto, and
such other documents as we considered relevant to our analysis. In our
examination of documents, we have assumed the authenticity of original
documents, the accuracy of copies, the genuineness of signatures, and the
legal capacity of signatories.
The conclusions expressed herein represent our judgment as to the proper
treatment of certain aspects of the Exchange Offer under the income tax laws
of the United States based upon the Tax Code, Treasury Regulations, case law,
and rulings and other pronouncements of the Internal Revenue Service (the
"IRS") as in effect on the date of this opinion. No assurances can be given
that such laws will not be amended or otherwise changed prior to the
Expiration Date, or at any other time, or that such changes will not affect
the conclusions expressed herein. Nevertheless, we undertake no responsibility
to advise you of any developments after the date hereof in the application or
interpretation of the income tax laws of the United States.
Our opinion represents our best judgment of how a court would decide if
presented with the issues addressed herein and is not binding upon either the
IRS or any court. Thus no assurances can be given that a position taken in
reliance on our opinion will not be challenged by the IRS or rejected by a
court.
This opinion addresses only the specific United States federal income tax
consequences of the Exchange Offer set forth below, and does not address any
other federal, state, local, or foreign income, estate, gift, transfer, sales,
use, or other tax consequences that may result from the Exchange Offer, or any
other transaction (including any transaction undertaken in connection with the
Exchange Offer). We express no opinion regarding the tax consequences of the
Exchange Offer to certain taxpayers that are subject to special tax rules such
as banks and other financial institutions, tax-exempt organizations, insurance
companies, traders or dealers in securities or currencies, custodians,
nominees or similar financial intermediaries holding Notes for others,
persons, that hold Notes 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.
<PAGE>
Based upon and subject to the foregoing, and subject to the qualifications
and limitations stated herein, we are of the opinion that the exchange of
Private Notes for Exchange Notes pursuant to the Exchange Offer will not be
taxable to an exchanging holder for federal income tax purposes.
No opinion is expressed as to any federal income tax consequences of the
transactions described in the Registration Statement except as specifically
set forth herein. This opinion is intended solely for the purpose of inclusion
as an exhibit to the Registration Statement. It may not be relied upon for any
other purpose or by any other person or entity other than you and the holders
of Private Notes on or before the Expiration Date, and may not be made
available to any other person or entity without our prior written consent. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name therein and in the related Prospectus
under the caption "Material Federal Income Tax Considerations". In giving this
consent, however, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended.
Very truly yours,
/s/ Hale and Dorr LLP
Hale and Dorr LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated February 9, 1998 (except with
respect to the matters discussed in Notes 3 and 4, as to which the date is
June 29, 1998) included herein and to all references to our Firm included in
this registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 18, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 31, 1998 with respect to the financial statements
of MobileMedia Communications, Inc. as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, included in
Amendment No. 2 to the Registration Statement (Form S-4 No. 333-59807) and
related Prospectus of Arch Communications, Inc. for the registration of its
12 3/4% Senior Notes due 2007.
/s/ Ernst & Young LLP
MetroPark, New Jersey
December 21, 1998
<PAGE>
EXHIBIT 23.4
CONSENT
We hereby consent to the reference to our firm under the heading "Experts"
in the Prospectus constituting part of the Registration Statement on Form S-4
(File Number 333-59807) of Arch Communications, Inc. As noted therein, our
review and input only pertains to FCC matters unique to Arch included in the
description of the regulatory requirements under the Communications Act and
the Telecommunications Act of 1996, and the regulations thereunder, set forth
under "Risk Factors--Government Regulation, Foreign Ownership and Possible
Redemption" and "Business--Regulation." Stockholders of Arch should not rely
on Wilkinson, Barker, Knauer & Quinn with respect to any other matters or any
other matters or any other sections of the document.
Wilkinson, Barker, Knauer & Quinn,
LLP
By: /s/ Kenneth D. Patrich
Kenneth D. Patrich
Date: December 21, 1998
<PAGE>
EXHIBIT 23.5
CONSENT
We hereby consent to the reference to our firm under the heading "Experts"
in the Prospectus constituting part of Amendment No. 2 to the Registration
Statement on Form S-4 (File Number 333-59807) of Arch Communications, Inc. As
noted therein, our review and input has only pertained to FCC matters unique
to MobileMedia included in the description of the regulatory requirements
under the Communications Act and the regulations thereunder set forth under
"Risk Factors--Government Regulation, Foreign Ownership and Possible
Redemption" and "Business--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
Date: December 21, 1998
