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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE REQUIRED] X
For the Fiscal Year Ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 33-72646
USA MOBILE COMMUNICATIONS, INC. II
(Exact name of Registrant as specified in its Charter)
DELAWARE 31-1236804
(State of incorporation) (I.R.S.Employer Identification No.)
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH,MASSACHUSETTS 01581
(address of principal executive offices) (Zip Code)
(508) 870-6700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934: None
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I)(1)(A)
AND (B) OF FORM 10-K AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: Not applicable
The aggregate market value of the voting stock held by non-affiliates of the
Registrant: Not applicable
The number of shares of Registrant's Common Stock outstanding on March 27, 1998
was 748.7501.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. BUSINESS
General
On September 7, 1995, Arch Communications Group, Inc. ("Old Arch")
completed its acquisition of USA Mobile Communications Holdings, Inc. ("USA
Mobile") through the merger (the "Merger") of Old Arch with and into USA Mobile,
which simultaneously changed its name to Arch Communications Group, Inc.
("Arch"). USA Mobile Communications, Inc. II ("USA Mobile II"), which had been a
wholly-owned subsidiary of USA Mobile, became a wholly-owned subsidiary of Arch
after the Merger.
USA Mobile II is a provider of wireless messaging services, primarily
paging services. USA Mobile II provides paging services in 10 states.
For the year ended December 31, 1997, USA Mobile II's total revenues were
$161.1 million, representing an increase of 13.9% over the year ended December
31, 1996, and its earnings before interest, taxes, depreciation and amortization
("EBITDA") was $62.1 million, representing an increase of 19.4% over the year
ended December 31, 1996.
EBITDA is a standard measure of financial performance in the paging
industry and is also one of the financial measures used to calculate whether USA
Mobile II is in compliance with the covenants under its indebtedness, but should
not be construed as an alternative to operating income or cash flows from
operating activities as determined in accordance with generally accepted
accounting principles. EBITDA does not reflect non-operating expenses. USA
Mobile II's financial objective 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.
Paging Operations
USA Mobile II currently provides four basic types of paging services:
digital display, alphanumeric display, tone-only and tone-plus-voice. Paging
services are provided to subscribers for a fixed monthly fee. Subscribers either
lease the pager from USA Mobile II for an additional fixed monthly fee or they
own the pager, having purchased it from USA Mobile II or another vendor. The
monthly service fee is generally based on 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 USA Mobile II's capital investment than pagers owned and
maintained by USA Mobile II, but may generate less recurring revenue. USA Mobile
II also sells pagers to third-party resellers who lease or resell pagers to
their own subscribers and resell USA Mobile II's paging services under marketing
agreements.
USA Mobile II also provides enhancements and ancillary services such as
voice mail, personalized greetings, message storage and retrieval, pager loss
protection (which protects the customer against the risk of losing the pager)
and pager maintenance services (under which USA Mobile will repair or replace
pagers with no charge to the customer other than payment of applicable
deductibles). Voice mail allows a caller to leave a recorded message that is
stored in USA Mobile II'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 USA Mobile II'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 USA Mobile II'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 the pager. Pager
maintenance services are offered to subscribers who own their own equipment.
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Subscribers And Marketing
USA Mobile II's paging accounts are generally businesses with employees who
travel frequently but must be immediately accessible to their offices or
customers. USA Mobile II'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. In addition, USA Mobile II believes that pager use among
consumers will increase significantly in the future, although consumers do not
currently account for a substantial portion of USA Mobile II's subscriber base.
In addition to marketing its services through a direct marketing and sales
organization, USA Mobile II also markets its paging services indirectly through
independent resellers, agents and retailers. USA Mobile II 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.
USA Mobile II's costs of administering and billing resellers are lower than the
costs of direct end-users on a per pager basis.
In addition to marketing its own paging services, USA Mobile II acts as a
reseller of other paging carriers' services when existing or potential USA
Mobile customers have travel patterns that require paging service beyond the
coverage of USA Mobile II's own networks. USA Mobile II believes that it is not
dependent on any other carrier and can obtain alternative service for most or
all of its customers on other carriers' systems.
ITEM 2. PROPERTIES
At December 31, 1997, USA Mobile II owned the building in Cincinnati, Ohio,
in which Arch's Data Center is located, as well as several other parcels of real
property which are used as transmitter sites, and leased office space in 72
localities in 7 states. In addition, USA Mobile II leases transmitter sites on
commercial broadcast towers, buildings, and other fixed structures in
approximately 1,260 locations in 20 states. USA Mobile II's leases are for
various terms and provide for monthly rental payments at various rates.
USA Mobile II is obligated to make total lease payments of $5.6 million
under its office facility and tower site leases for the year ending December 31,
1998. USA Mobile II believes that it will be able to obtain additional space as
needed at an acceptable cost.
ITEM 3. LEGAL PROCEEDINGS
USA Mobile II, from time to time, is involved in lawsuits arising in the
normal course of business. USA Mobile II believes that its currently pending
lawsuits will not have a material adverse effect on USA Mobile II.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the common stock of USA Mobile II is held by Arch and is not
publicly traded.
USA Mobile II has never declared or paid cash dividends on the common stock
and does not intend to declare or pay cash dividends on the common stock in the
foreseeable future. Certain covenants in USA Mobile II's credit facility and the
two indentures, pursuant to which senior debt securities of USA Mobile II were
issued will, in effect, prohibit the declaration or payment of cash dividends by
USA Mobile II for the foreseeable future. See Note 3 to USA Mobile II's
Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause USA Mobile II's actual results to differ materially
from those indicated or suggested by such forwarding-looking statements. These
factors include, without limitation, those set forth below under the caption
"Factors Affecting Future Operating Results".
SHIFT IN OPERATING FOCUS
In April 1997, Arch announced it was shifting its operating focus to put a
higher priority on leverage reduction than subscriber unit growth. Arch's
deleveraging efforts are focusing on, but are not limited to, slowing capital
expenditures, implementing across-the-board efficiencies and the possible sale
of non-strategic assets.
RESULTS OF OPERATIONS
The following table presents certain items from USA Mobile II'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:
Year Ended December 31,
-----------------------
1997 1996
---- ----
Total revenues ..................... 109.0% 107.4%
Cost of products sold .............. (9.0) (7.4)
----- -----
Net revenues ....................... 100.0 100.0
Operating expenses:
Service, rental and maintenance .. 21.0 21.6
Selling .......................... 13.9 14.5
General and administrative ....... 23.0 24.4
Depreciation and amortization ...... 72.7 74.6
----- -----
Operating income (loss) ............ (30.6)% (35.1)%
===== =====
Net income (loss) .................. (37.7)% (43.0)%
===== =====
EBITDA ............................. 42.1% 39.5%
===== =====
Total revenues increased to $161.1 million (a 13.9% increase) for the year
ended December 31, 1997, as compared to $141.5 million for the corresponding
1996 period. Service, rental and maintenance revenues, which consist primarily
of recurring revenues associated with the sale or lease of pagers, increased
12.2% to $141.9 million for the year ended December 31, 1997, from $126.5
million for the year ended December 31, 1996. These increases in revenues were
primarily due to the increase in the number of pagers in service in 1997.
Maintenance revenues represented less than 10% of total service, rental and
maintenance revenues in the years ended December 31, 1997 and 1996. USA Mobile
II does not differentiate between service and rental revenues. Product sales,
less cost of products sold, increased to $5.8 million in 1997 from $5.2 million
in 1996 as a result of a greater number of pager unit sales.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $31.0 million in the year
ended December 31, 1997 from $28.4 million in 1996. The
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increase was due primarily to increased expenses associated with system
expansions and the provision of paging services to a greater number of
subscribers.
Selling expenses increased to $20.5 million in 1997 from $19.0 million in
1996. The increase in selling expenses was due to the addition of sales
personnel to support continued growth in the subscriber base. Selling expenses
are directly related to the number of net new subscribers added. Therefore, such
expenses may increase in the future if pagers in service are added at a more
rapid rate than in the past.
General and administrative expenses increased to $34.1 million in 1997 from
$32.2 million in 1996. The increase was due primarily to increased expenses
associated with supporting more pagers in service.
Depreciation and amortization expenses increased to $107.4 million in 1997
from $98.3 million in 1996. These expenses reflect USA Mobile II's continued
investment in pagers and other system expansion capital to support continued
growth.
Operating loss decreased to $45.2 million in the year ended December 31,
1997 from $46.3 million in the year ended December 31, 1996 as a result of the
factors outlined above.
Net interest expense increased to $31.7 million in the year ended December
31, 1997 from $30.1 million in the corresponding 1996 period due primarily to an
increase in USA Mobile II's average outstanding debt.
During the years ended December 31, 1997 and 1996, USA Mobile II recognized
an income tax benefit of $21.2 million and $19.8 million, respectively,
representing the tax benefit of operating losses which were available to offset
deferred tax liabilities arising from Arch's acquisition of USA Mobile.
USA Mobile II's net loss was $55.7 million for the year ended December 31,
1997 as compared to $56.6 million for the year ended December 31, 1996 as a
result of factors outlined above.
Earnings Before Interest, Taxes, Depreciation and Amortization, "EBITDA,"
increased 19.4% to $62.1 million (42.1% of revenues) in 1997 from $52.0 million
(39.5% of revenues) in 1996 as a result of the factors outlined above.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among others, could cause USA Mobile II's
actual operating results to differ materially from those indicated or suggested
by forward-looking statements made in this Form 10-K or presented elsewhere by
USA Mobile II's management from time to time.
Indebtedness And High Degree Of Leverage
USA Mobile II is highly leveraged. USA Mobile II had total debt and total
assets of $288 million and $493 million, respectively, at December 31, 1997.
Many factors, some of which will be beyond USA Mobile II's control, such as
prevailing economic conditions, will affect the performance of USA Mobile II. In
addition, covenants imposed by the current and future credit facilities and
other indebtedness of USA Mobile II will restrict the ability of USA Mobile II
to incur additional indebtedness and prohibit certain activities and may limit
other aspects of USA Mobile II's operations. There can be no assurance that USA
Mobile II will be able to generate sufficient cash flow to cover required
interest and principal payments on its indebtedness. If USA Mobile II 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 USA Mobile II, that USA Mobile
II will be able to refinance its existing indebtedness or that sufficient funds
could be raised through asset sales. USA Mobile II's high degree of leverage may
have important consequences for USA Mobile II, including: (i) the ability of USA
Mobile to obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary,
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may be impaired or such financing may not be on favorable terms; (ii) a
substantial portion of the cash flow of USA Mobile II will be used to pay
interest expense, which will reduce the funds which would otherwise be available
for operations and future business opportunities; (iii) USA Mobile II may be
more highly leveraged than its competitors which may place it at a competitive
disadvantage; and (iv) USA Mobile II's high degree of leverage will make it more
vulnerable to a downturn in its business or the economy generally.
Future Capital Needs
USA Mobile II's business strategy requires the availability of substantial
funds to service debt and finance the continued development and future growth
and expansion of its operations. The amount of capital required by USA Mobile II
will depend upon a number of factors, including subscriber growth, technological
developments, marketing and sales expenses, competitive conditions, acquisition
strategy and acquisition opportunities. No assurance can be given that
additional equity or debt financing will be available to USA Mobile II on
acceptable terms, if at all. The unavailability of sufficient financing when
needed would have a material adverse effect on USA Mobile II.
History Of Losses
USA Mobile II has not reported any net income since its inception, except
that USA Mobile II reported net income of $17.6 million in the year ended
December 31, 1991 resulting from an extraordinary gain of $42.2 million
attributable to the restructuring of its debt. USA Mobile II's historical net
losses have resulted principally from (i) substantial depreciation and
amortization expenses, primarily related to intangible assets and pager
depreciation, and (ii) interest expense on debt incurred primarily to finance
acquisitions of paging operations 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 substantial negative impact on USA Mobile II. USA Mobile II expects to
continue to report net losses for the foreseeable future.
Growth And Acquisition Strategy
USA Mobile II has pursued and intends to continue to pursue acquisitions of
paging businesses as well as the continued internal growth of USA Mobile II's
paging business. The process of integrating acquired paging businesses may
involve unforeseen difficulties and may require a disproportionate amount of the
time and attention of USA Mobile II's management and the financial and other
resources of USA Mobile II. No assurance can be given that suitable additional
acquisitions can be identified, financed and completed on acceptable terms, or
that USA Mobile II's future acquisitions will be successful. Implementation of
USA Mobile II's growth strategies will be subject to numerous other
contingencies beyond the control of USA Mobile II, including general and
regional economic conditions, interest rates, competition, changes in regulation
or technology and the ability to attract and retain skilled employees.
Accordingly, no assurance can be given that USA Mobile II's growth strategies
will prove effective or that the goals of USA Mobile II will be achieved.
Dependence On Key Personnel
The success of USA Mobile II will be dependent, to a significant extent,
upon the continued services of a relatively small group of executive personnel.
USA Mobile II does not have employment agreements with any of its current
executive officers, although all current executive officers have entered into
non-competition and 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 an adverse effect upon USA Mobile II's
operations.
Competition And Technological Change
USA Mobile II faces competition from other paging service providers in all
markets in which it operates as well as from certain competitors who hold
nationwide licenses. USA Mobile II believes that competition for paging
subscribers is based on quality of service, geographic coverage and price and
that USA Mobile II generally competes effectively based on these factors.
Monthly fees for basic paging services have, in general, declined since
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USA Mobile II commenced operations, due in part to competitive conditions, and
USA Mobile II may face significant price-based competition in the future which
could adversely affect USA Mobile II. Some of USA Mobile II's competitors
possess greater financial, technical and other resources than USA Mobile II. 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 USA Mobile II's markets, USA Mobile II's results of
operations could be adversely affected. A variety of wireless two-way
communication technologies currently are in use or under development. Although
such technologies generally are higher priced than paging services or not widely
available, technological improvements could result in increased capacity and
efficiency for wireless two-way communication and, accordingly, could result in
increased competition for USA Mobile II. Two-way service providers also could
elect to provide paging service as an adjunct to their primary services. Future
technological advances in the telecommunications industry could increase new
services or products competitive with the paging services provided by USA Mobile
II or could require USA Mobile II 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. For example, the FCC created potential
sources of competition by opening up a new spectrum for such services as the
General Wireless Communications Services (GWCS) and the Wireless Communications
Service (WCS) as well as speeding up licensing of other services through
auctions, including the Local Multipoint Distribution Service (LMDS), 220-222
MHz and broadband PCS services. Entities offering service on wireless two-way
communications technology, including cellular telephones and specialized mobile
radio services, also compete with the paging services that USA Mobile II
provides. There can be no assurance that USA Mobile II will be able to compete
successfully with its current and future competitors in the paging business or
with competitors offering alternative communication technologies.
Subscriber Turnover
The results of operations of wireless messaging service providers, such as
USA Mobile II, 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, disconnections
directly and adversely affect operating cash flow. An increase in its subscriber
cancellation rate may adversely affect USA Mobile II's results of operations.
Dependence On Suppliers
USA Mobile II does not manufacture any of the pagers used in its paging
operations. USA Mobile II buys pagers primarily from Motorola, Inc. ("Motorola")
and NEC America, Inc. ("NEC") and therefore is dependent on such manufacturers
to obtain sufficient pager inventory for new subscriber and replacement needs.
In addition, USA Mobile II purchases terminals and transmitters primarily from
Glenayre Technologies, Inc. ("Glenayre") and Motorola and thus is dependent on
such manufacturers for sufficient terminals and transmitters to meet its
expansion and replacement requirements. To date, USA Mobile II has not
experienced significant delays in obtaining pagers, terminals or transmitters,
but there can be no assurance that USA Mobile II will not experience such delays
in the future. USA Mobile II has never had a purchase agreement with Glenayre or
NEC. USA Mobile II's most recent one-year purchase agreement with Motorola
expired in December 1997, with a provision for automatic renewal for a one-year
term. Although USA Mobile II believes that sufficient alternative sources of
pagers, terminals and transmitters exist, there can be no assurance that USA
Mobile II would not be adversely affected if it were unable to obtain these
items from current supply sources or on terms comparable to existing terms.
Government Regulation, Foreign Ownership And Possible Redemption Of Capital
Stock
The paging operations of USA Mobile II are subject to regulation by the FCC
and various state regulatory agencies. There can be no assurance that those
agencies will not propose or adopt regulations or take actions that would have a
material adverse effect on USA Mobile II's business. Changes in regulation of
USA Mobile II's paging business or the allocation of radio spectrum for services
that compete with USA Mobile II's business could
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adversely affect USA Mobile II's results of operations. Indeed, the FCC has
created potential sources of competition by opening up new spectrum for such
services as GWCS and WCS as well as speeding up licensing of other services
through auctions, including LMDS, 220-222 MHz and broadband PCS. Further, the
FCC has recently adopted rules implementing a market area licensing scheme. In
addition, some aspects of the recently enacted Telecommunications Act of 1996
could have a beneficial effect on USA Mobile II's business, but other provisions
may place additional burdens upon USA Mobile II or subject USA Mobile II to
increased competition.
Impact Of The Year 2000 Issue
USA Mobile II is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by USA Mobile II's
computerized systems and transmission equipment. 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 USA Mobile II'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. Based on preliminary information, costs of addressing
potential problems are not currently expected to have a material adverse impact
on USA Mobile II's financial position, results of operations or cash flows in
future periods. However, if USA Mobile II, its customers or vendors are unable
to resolve such processing issues in a timely manner, it could result in a
material financial risk. Accordingly, USA Mobile II plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statement of Operations for the Years Ended December 31,
1997 and 1996 and the Period from September 8, 1995 to December 31,
1995
Predecessor Consolidated Statements of Operations for the Period from
January 1, 1995 to September 7, 1995
Consolidated Statements of Stockholder's Equity (Deficit) for the Years
Ended December 31, 1997 and 1996 and for the Period from September 8,
1995 to December 31, 1995
Predecessor Consolidated Statements of Stockholder's Equity (Deficit)
for the Period from January 1, 1995 to September 7, 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1996 and for the Period from September 8, 1995 to December
31, 1995
Predecessor Consolidated Statements of Cash Flows for the Period from
January 1, 1995 to September 7, 1995
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed on the accompanying index to exhibits are filed as
part of this Annual Report on Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
USA MOBILE COMMUNICATIONS, INC. II
By: /S/ C. EDWARD BAKER, JR.
---------------------------
C. Edward Baker, Jr.
Chairman of the Board and Chief
Executive Officer
March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
on the dates indicated.
/S/ C. EDWARD BAKER, JR. Chairman of the Board and March 27, 1998
- -------------------------- Chief Executive Officer
(principal executive officer)
/S/ JOHN B. SAYNOR Executive Vice President, March 27, 1998
- ------------------------- Director
/S/ J. ROY POTTLE Executive Vice President March 27, 1998
- ------------------------- and Chief Financial Officer
(principal financial officer and
principal accounting officer)
/S/ R. SCHORR BERMAN Director March 27, 1998
- -------------------------
/S/ JAMES S. HUGHES Director March 27, 1998
- -------------------------
/S/ ALLAN L. RAYFIELD Director March 27, 1998
- -------------------------
/S/ JOHN A. SHANE Director March 27, 1998
- -------------------------
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Public Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996........ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 and for the Period from
September 8, 1995 to December 31, 1995 .......................... 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 (Deficit) for
the Years Ended December 31, 1997 and 1996 and for the Period
from September 8, 1995 to December 31, 1995....................... F-6
Predecessor Consolidated Statement of Stockholder's Equity (Deficit)
for the Period from January 1, 1995 to September 7, 1995 .......... F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 and for the Period from September 8,
1995 to December 31, 1995......................................... F-8
Predecessor Consolidated Statement of Cash Flows for the Period
from January 1, 1995 to September 7, 1995 ........................ F-9
Notes to Consolidated Financial Statements.......................... F-10
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To USA Mobile Communications, Inc. II:
We have audited the accompanying consolidated balance sheets of USA Mobile
Communications, Inc. II (a Delaware Corporation and a wholly-owned subsidiary of
Arch Communications Group, Inc.) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholder's
equity (deficit) and cash flows for the years ended December 31, 1997 and 1996,
for the period from September 8, 1995 to December 31, 1995 and for the period
from January 1, 1995 to September 7, 1995 (predecessor basis). These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of USA Mobile Communications,
Inc. II and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years ended December 31, 1997 and
1996, for the period from September 8, 1995 to December 31, 1995 and for the
period from January 1, 1995 to September 7, 1995 (predecessor basis), in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Part IV, Item
14(a)(2) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 9, 1998
F-2
<PAGE> 13
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except share amounts)
ASSETS
1997 1996
---- ----
Current assets:
Cash and cash equivalents ....................... $ 1,291 $ 891
Accounts receivable (less reserves of $1,280 and
$1,071 in 1997 and 1996, respectively) ......... 8,353 8,034
Inventories ..................................... 10,591 8,807
Prepaid expenses and other ...................... 390 962
Due from (to) Arch Communications Group, Inc. ... 5,232 (2,950)
--------- ---------
Total current assets ......................... 25,857 15,744
--------- ---------
Property and equipment, at cost:
Land, buildings and improvements ................ 3,409 3,196
Paging and computer equipment ................... 139,338 137,803
Furniture, fixtures and vehicles ................ 7,499 3,449
--------- ---------
150,246 144,448
Less accumulated depreciation and amortization .. 51,569 33,127
--------- ---------
Property and equipment, net ..................... 98,677 111,321
--------- ---------
Intangible and other assets (less accumulated
amortization of $141,513 and $82,273 in 1997
and 1996, respectively) ........................... 368,912 428,839
--------- ---------
$ 493,446 $ 555,904
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ................................ $ 9,882 $ 4,850
Accrued expenses ................................ 4,537 7,497
Accrued interest ................................ 7,537 7,736
Customer deposits ............................... 4,480 4,983
Deferred revenue ................................ 3,216 2,215
Due to Arch Communications Enterprises, Inc. .... 2,079 27
--------- ---------
Total current liabilities .................... 31,731 27,308
--------- ---------
Long-term debt ..................................... 288,000 278,000
--------- ---------
Deferred income taxes .............................. 19,559 40,731
--------- ---------
Commitments and Contingencies
Stockholder's equity:
Common stock - $.01 par value, authorized 1,000
shares, issued and outstanding: 749 shares ..... -- --
Additional paid-in capital ...................... 283,353 283,353
Accumulated deficit ............................. (129,197) (73,488)
--------- ---------
Total stockholder's equity ................... 154,156 209,865
--------- ---------
$ 493,446 $ 555,904
========= =========
The accompanying notes are an integral part of these
consolidated financial statements
F-3
<PAGE> 14
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Period From
Year Ended Year Ended September 8,
December 31, December 31, 1995 to December
1997 1996 31, 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service, rental and maintenance revenues .. $ 141,854 $ 126,480 $ 36,171
Product sales ............................. 19,212 14,980 5,353
--------- --------- ---------
Total revenues ....................... 161,066 141,460 41,524
Cost of products sold ..................... (13,365) (9,755) (4,683)
--------- --------- ---------
147,701 131,705 36,841
--------- --------- ---------
Operating expenses:
Service, rental and maintenance ......... 30,981 28,443 7,744
Selling ................................. 20,522 19,040 6,200
General and administrative .............. 34,053 32,174 7,942
Depreciation and amortization ........... 107,361 98,299 25,137
--------- --------- ---------
Total operating expenses ............. 192,917 177,956 47,023
--------- --------- ---------
Operating income (loss) ................... (45,216) (46,251) (10,182)
Interest expense .......................... (31,665) (30,135) (9,589)
--------- --------- ---------
Income (loss) before income tax benefit ... (76,881) (76,386) (19,771)
Benefit from income taxes ................. 21,172 19,791 2,878
--------- --------- ---------
Net income (loss) ......................... $ (55,709) $ (56,595) $ (16,893)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-4
<PAGE> 15
USA MOBILE COMMUNICATIONS, INC. II
PREDECESSOR CONSOLIDATED STATEMENT OF OPERATIONS
Period from January 1, 1995 to September 7, 1995
(in thousands)
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)
========
The accompanying notes are an integral part of these
consolidated financial statements
F-5
<PAGE> 16
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON STOCK PAID-IN CAPITAL DEFICIT TOTAL
------------ --------------- ------- -----
<S> <C> <C> <C> <C>
Balance, September 8, 1995 ........ $ -- $ 268,353 $ -- $ 268,353
Net loss .......................... -- -- (16,893) (16,893)
------------ ------------ ------------ ------------
Balance, December 31, 1995 ........ -- 268,353 (16,893) 251,460
Capital Contribution from Arch
Communications Group, Inc ....... -- 15,000 -- 15,000
Net loss .......................... -- -- (56,595) (56,595)
------------ ------------ ------------ ------------
Balance, December 31, 1996 ........ -- 283,353 (73,488) 209,865
Net loss .......................... -- -- (55,709) (55,709)
------------ ------------ ------------ ------------
Balance, December 31, 1997 ........ $ -- $ 283,353 $ (129,197) $ 154,156
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-6
<PAGE> 17
USA MOBILE COMMUNICATIONS, INC. II
PREDECESSOR CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON STOCK PAID-IN CAPITAL DEFICIT TOTAL
------------ --------------- ------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ........ $ -- $ 112,328 $ (116,379) $ (4,051)
Net loss ........................ -- -- (22,533) (22,533)
Capital contributions from USA
Mobile Communications
Holdings, Inc.:
Acquisition of Premiere
Page, Inc. ................ -- 1,332 -- 1,332
Other ...................... -- 54 -- 54
------------ ------------ ------------ ------------
Balance, September 7, 1995 ........ $ -- $ 113,714 $ (138,912) $ (25,198)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-7
<PAGE> 18
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8,
YEAR ENDED YEAR ENDED 1995 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................... $ (55,709) $ (56,595) $ (16,893)
Adjustments to reconcile net income(loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization ............................... 107,361 98,299 25,137
Deferred tax benefit ........................................ (21,172) (19,791) (2,878)
Accounts receivable loss provision .......................... 2,784 2,906 587
Changes in assets and liabilities, net of effect of merger:
Accounts receivable ...................................... (3,103) (5,512) (2,923)
Inventories .............................................. (1,784) 2,644 (2,956)
Prepaid expenses and other ............................... 572 833 511
Accounts payable and accrued expenses .................... 1,873 (6,867) (3,534)
Customer deposits and deferred revenue ................... 498 2,035 (231)
Due from (to) Arch Communications Group, Inc. ................. (8,182) 2,625 --
Due to Arch Communications Enterprises, Inc. .................. 2,052 (145) --
--------- --------- ---------
Net cash provided by (used for) operating activities .......... 25,190 20,432 (3,180)
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net .................... (33,041) (58,939) (10,146)
Additions to intangible and other assets .................... (1,749) (1,045) (2,231)
Sale of paging assets to Arch Communications
Enterprises, Inc. .......................................... -- 10,400 --
Merger-related costs ........................................ -- -- (10,383)
--------- --------- ---------
Net cash used for investing activities ........................ (34,790) (49,584) (22,760)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt .................................. 66,000 61,000 39,500
Repayment of long-term debt ................................. (56,000) (47,500) (16,214)
Proceeds from Arch Communications Enterprises, Inc.
demand loan ............................................... -- 32,500 --
Repayment of demand loan to Arch Communications
Enterprises, Inc. ......................................... -- (32,500) --
Capital contribution from Arch Communications Group, Inc. ... -- 15,000 --
--------- --------- ---------
Net cash provided by financing activities ..................... 10,000 28,500 23,286
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .......... 400 (652) (2,654)
Cash and cash equivalents, beginning of period ................ 891 1,543 4,197
--------- --------- ---------
Cash and cash equivalents, end of period ...................... $ 1,291 $ 891 $ 1,543
========= ========= =========
Supplemental disclosure:
Interest paid ............................................... $ 31,470 $ 28,947 $ 8,373
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-8
<PAGE> 19
USA MOBILE COMMUNICATIONS, INC. II
PREDECESSOR CONSOLIDATED STATEMENT OF CASH FLOWS
Period from January 1, 1995 to September 7, 1995
(in thousands)
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:
(Investment) sale of investment in repurchase agreements .. 37,000
Acquisitions of paging companies, net of cash acquired .... (28,684)
(Payment) 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
========
The accompanying notes are an integral part of these
consolidated financial statements
F-9
<PAGE> 20
USA MOBILE COMMUNICATIONS, INC. II
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization -- USA Mobile Communications, Inc. II (USA Mobile II) is a
provider of wireless messaging services, primarily paging services, in 9 states.
On September 7, 1995, Arch Communications Group, Inc. (Arch) completed its
acquisition of USA Mobile Communications Holdings, Inc. (USA Mobile) and its
wholly-owned subsidiary USA Mobile II. The acquisition was completed in two
steps. First, in May 1995, Arch acquired approximately 37%, or 5,450,000 shares,
of USA Mobile's then outstanding common stock for $83.9 million in cash, funded
by borrowings under Arch's credit agreements. Second, on September 7, 1995, the
acquisition was completed through the merger of Arch with and into USA Mobile
(the Merger). Upon consummation of the Merger, USA Mobile was renamed Arch
Communications Group, Inc. In the Merger, each share of USA Mobile's outstanding
common stock was exchanged for Arch common stock on a .8020-for-one basis (an
aggregate of 7,599,493 shares of Arch common stock), and the 5,450,000 USA
Mobile shares purchased by Arch in May 1995 were retired.
The Merger has been accounted for using the purchase method of accounting.
Arch is treated as the acquirer in the Merger for accounting and financial
reporting purposes. The fair values of USA Mobile II's assets and liabilities at
the effective time of the Merger represent a new cost basis for those assets and
liabilities that have been pushed down to the accompanying separate financial
statements of USA Mobile II 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 USA Mobile II on the Merger date.
Pro forma information is included in Note 2.
The aggregate consideration paid or exchanged in the Merger was $582.2
million, consisting of cash paid of $88.9 million (including direct transaction
costs), 7,599,493 shares of Arch 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, stockholder's equity (deficit) and cash flows for the period January
1, 1995 to September 7, 1995 are collectively referred to herein as "Predecessor
Financial Statements". Application of the purchase method of accounting at the
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, Predecessor Financial Statements are not comparable to the
financial statements of USA Mobile II subsequent to the Merger date. Certain
amounts in the Predecessor Financial Statements, however, were reclassified to
conform with the current period presentation.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of USA Mobile II and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition -- USA Mobile II 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.
F-10
<PAGE> 21
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. USA
Mobile II provides for depreciation and amortization using the straight-line
method over the following estimated useful lives:
Estimated
Asset Classification Useful Life
-------------------- -----------
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
Depreciation and amortization expense related to property and equipment
totaled $45,685,000, $34,972,000, $5,421,000 and $17,297,000 for the years ended
December 31, 1997 and 1996, the period from September 8, 1995 to December 31,
1995 and the period from January 1, 1995 to September 7, 1995.
Intangible and Other Assets -- Intangible and other assets, net of
accumulated amortization, are composed of the following at December 31, 1997 and
1996 (in thousands):
1997 1996
---- ----
Goodwill ................................ $214,286 $242,769
Purchased FCC licenses .................. 103,580 117,183
Purchased subscriber lists .............. 47,552 65,256
Non-competition agreements .............. 2,133 2,615
Deferred financing costs................. 525 248
Other ................................... 836 768
-------- --------
$368,912 $428,839
======== ========
Amortization expense related to intangible and other assets totaled
$61,676,000, $63,327,000, $19,716,000 and $11,942,000 for the years ended
December 31, 1997 and 1996, the period from September 7, 1995 to December 31,
1995 and the period from January 1, 1995 to September 7, 1995.
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 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 costs include nonrecurring, direct costs
incurred in the development and expansion of paging systems, and are amortized
over a two-year period. Deferred financing costs incurred in connection with USA
Mobile II's credit agreements (see Note 3) are being amortized over periods not
to exceed the terms of the related agreements.
F-11
<PAGE> 22
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" USA Mobile II 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, USA Mobile II reduces the carrying value of such
impaired assets. To date, USA Mobile II has not had any such impairments.
Fair Value of Financial Instruments -- USA Mobile II's financial
instruments, as defined under Statement of Financial Accounting Standards (SFAS)
No. 107 "Discounted above Fair Value of Financial Instruments", include its cash
and its debt financing. The fair value of cash is equal to the carrying value at
December 31, 1997 and 1996.
As discussed in Note 3, USA Mobile II's debt financing consists of (1)
senior bank debt and (2) fixed rate Senior Notes. USA Mobile II considers the
fair value of the senior bank debt to be equal to the carrying value since this
facility bears a current market rate of interest.
USA Mobile II's fixed rate Senior Notes are traded publicly. The following
table depicts the fair value of this debt based on the current market quotes as
of December 31, 1997 and 1996 (in thousands):
December 31, 1997 December 31, 1996
-------------------- -------------------
Carrying Fair Carrying Fair
Description Value Value Value Value
----------- ----- ----- ----- -----
91/2% Senior Notes due 2004 ... $125,000 $122,488 $125,000 $117,000
14% Senior Notes due 2004 ..... 100,000 112,540 100,000 115,000
Reclassifications -- Certain amounts of prior periods were reclassified to
conform to the 1997 presentation.
2. ACQUISITIONS
The Merger has been accounted for as a purchase, and the results of the
operations have been included in the consolidated financial statements from the
dates of the Merger. The following unaudited pro forma summary presents the
consolidated results of operations as if the push-down accounting effect of the
Merger had occurred on January 1, 1995, 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 Merger been completed on January 1, 1995, or of the
results that may occur in the future. Net income (loss) per share is not
presented because it is not considered meaningful.
Year Ended December 31, 1995
----------------------------
(Unaudited and in thousands)
Total Revenues ..................... $ 125,014
Net income (loss) .................. (57,158)
On May 23, 1995, USA Mobile II concluded a settlement of a class action
suit brought against it by certain investors in Premiere Page. The settlement
released USA Mobile from certain claims by certain former shareholders of
Premiere Page in return for the issuance of an additional 139,300 shares of USA
Mobile's common stock valued at $1,332,000 and payment of plaintiffs counsel
fees and expenses.
F-12
<PAGE> 23
3. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997 and 1996
(in thousands):
1997 1996
---- ----
Senior bank debt ....................... $ 63,000 $ 53,000
91/2% Senior Notes due 2004 ............ 125,000 125,000
14% Senior Notes due 2004 .............. 100,000 100,000
-------- --------
Long-term debt ......................... $288,000 $278,000
======== ========
Senior Bank Debt - USA Mobile II and the direct subsidiaries of USA Mobile
II (the "USA Mobile II 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 "USA Mobile II Credit Facility").
Upon the closing of the USA Mobile II Credit Facility, the banks did not
require the contemporaneous grant of a security interest in the assets of USA
Mobile II and its subsidiaries but they have reserved the right to require such
a security interest upon the occurrence of certain triggering events. Arch and
USA Mobile II have guaranteed the obligations of the USA Mobile II Borrowing
Subsidiaries under the USA Mobile II Credit Facility. Arch's guarantee is
secured by the pledge of the stock of Arch Communications Enterprises, Inc.
("Arch Enterprises"), a wholly-owned subsidiary of Arch, and USA Mobile II.
Obligations under the USA Mobile II 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 USA Mobile II's total indebtedness to annualized operating cash
flow. A commitment fee of .375% per annum is also payable on the average daily
unused portion of the USA Mobile II Credit Facility.
The USA Mobile II Credit Facility contains restrictive and financial
covenants which, among other things, limit the ability of USA Mobile II 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 USA
Mobile II Credit Facility. As of December 31, 1997, USA Mobile II and the USA
Mobile Borrowing Subsidiaries were in compliance with the covenants of the USA
Mobile II Credit Facility.
As of December 31, 1997, $63.0 million was outstanding and $4.6 million was
available under the USA Mobile II Credit Facility. At December 31, 1997, such
advances bore interest at an average annual rate of 8.55%.
Senior Notes -- The USA Mobile II 9 1/2% Notes and the USA Mobile II 14%
Notes (collectively, the Senior Notes) contain certain restrictive and financial
covenants which, among other things, limit the ability of USA Mobile II 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. Interest on the Senior Notes is payable
semi-annually.
Maturities of Debt -- Scheduled long-term debt maturities at December 31,
1997, are as follows (in thousands):
Year Ending December 31,
------------------------
2001.................... $ 13,000
2002.................... 50,000
Thereafter.............. 225,000
---------
$ 288,000
=========
F-13
<PAGE> 24
4. INCOME TAXES
USA Mobile II 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 tax laws.
The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets at December 31, 1997 and 1996 are as
follows (in thousands):
1997 1996
---- ----
Deferred tax assets............... $ 36,062 $ 29,496
Deferred tax liabilities.......... (55,621) (70,227)
-------- --------
$(19,559) $(40,731)
======== ========
The approximate effect of each type of temporary difference and
carryforward at December 31, 1997 and 1996 is summarized as follows (in
thousands):
1997 1996
---- ----
Net operating losses................ $ 30,828 $ 29,199
Intangible and other assets......... (55,234) (67,508)
Depreciation of property & equipment 2,983 (2,719)
Accruals and reserves............... 1,864 297
-------- --------
$(19,559) $(40,731)
======== ========
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.
5. COMMITMENTS
USA Mobile II has operating leases for office and transmitting sites with
lease terms ranging from one month to approximately ten years. In most cases,
USA Mobile II 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):
Year Ending December 31,
------------------------
1998.................. $ 5,570
1999.................. 3,195
2000.................. 1,889
2001.................. 954
2002.................. 419
Thereafter............ 1,586
--------
Total................. $ 13,613
========
Total rent expense under operating leases for the years ended December 31,
1997 and 1996, for the period September 8, 1995 to December 31, 1995 and for the
period January 1, 1995 to September 7, 1995 approximated $6,258,000, $5,856,000,
$1,640,000, and $3,346,000 respectively.
F-14
<PAGE> 25
6. EMPLOYEE BENEFIT PLAN
In 1994, USA Mobile II established 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 USA Mobile II
matching contributions. Matching contributions for the year ended December 31,
1996, the period from September 8, 1995 to December 31, 1995 and the period from
January 1, 1995 to September 7, 1995 approximated $106,000, $27,000 and $58,000
respectively.
On December 31, 1996, the USA Mobile II retirement savings plan was merged
into the Arch retirement savings plan. The Arch plan is qualified under section
401(k) of the Internal Revenue Code and covers eligible employees of Arch and
its subsidiaries.
7. RELATED PARTY TRANSACTIONS
Intercompany transactions with Arch Communications Group, Inc. and
Subsidiaries - In March 1996, Arch completed a public offering of 10 7/8% Senior
Discount Notes due March 2008 generating net proceeds of $266.1 million. Arch
used $47.5 million of the net proceeds (of which $15.0 million was a capital
contribution from Arch to USA Mobile II and $32.5 million was an intercompany
demand loan from Arch Enterprises to USA Mobile II) to repay all the then
outstanding indebtedness under USA Mobile II's credit facility. The demand
intercompany loan was repaid to Arch Enterprises in May 1996, through borrowings
under USA Mobile II's credit facility.
In 1996, USA Mobile II sold certain paging assets to Arch Enterprises for
$10.4 million. The fair values of asset and liabilities transferred ($10.7
million and $0.3 million, respectively) approximated the net book values of
those assets and liabilities; hence, no gain or loss was recognized.
8. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the years ended December 31, 1997 and
1996 is summarized below (in thousands):
Year Ended December 31, 1997:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues................. $ 39,058 $ 40,220 $40,955 $40,833
Operating income (loss).. (12,837) (13,130) (11,933) (7,316)
Net income (loss) ....... (15,325) (15,694) (14,652) (10,038)
Year Ended December 31, 1996:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues................. $ 32,864 $ 34,776 $36,299 $37,521
Operating income (loss).. (9,582) (10,864) (12,231) (13,574)
Net income (loss) ....... (12,832) (13,765) (14,604) (15,394)
F-15
<PAGE> 26
SCHEDULE II
USA MOBILE COMMUNICATIONS, INC. II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997 And 1996
Period From September 8, 1995 to December 31, 1995
Period From January 1, 1995 to September 7, 1995 (Predecessor)
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning Charged at End
Allowance For Doubtful Accounts of Period to Expense Write-offs of Period
- ------------------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1997 $1,071 $2,784 $(2,575) $1,280
====== ====== ======= ======
Year ended December 31, 1996 $ 798 $2,906 $(2,633) $1,071
====== ====== ======= ======
Period from September 8, 1995 to December 31, 1995 $ 982 $ 587 $ (771) $ 798
====== ====== ======= ======
Period from January 1, 1995 to September 7, 1995 $ 350 $2,149 $(1,517) $ 982
====== ====== ======= ======
</TABLE>
S-1
<PAGE> 27
INDEX
Exhibit Description
3.1 - Restated Certificate of Incorporation. (1)
3.2 - By-laws, as amended.(1)
4.1 - Indenture, dated February 1, 1994, between USA Mobile
Communications, Inc. II ("USA Mobile II") and United States
Trust Company of New York, as Trustee, relating to the 91/2%
Senior Notes due 2004 of USA Mobile II. (1)
4.2 - Indenture, dated December 15, 1994, between USA Mobile II and
United States Trust Company of New York, as Trustee, relating
to the 14% Senior Notes due 2004 of USA Mobile II. (2)
10.1 - Credit Agreement, dated March 19, 1997 (the "USA Mobile II
Credit Agreement"), by and among Premiere Page of Kansas,
Inc., Q Media Paging-Alabama, Inc., USA Mobile Communications,
Inc. III, Q Media Company-Paging, Inc., W.Q. Communications,
Inc., USA Mobile Communications, Inc. II, the Lenders Party
hereto and The Bank of New York, as Administrative Agent. (3)
10.2 - Amendment No. 3 to the USA Mobile II Credit Agreement. (4)
10.3 - Letter Agreement dated January 7, 1997 and Amendment 1 dated
May 1, 1997 between the Company and Motorola, Inc. (3)
27.1 - Financial data schedule
+ Identifies exhibits constituting a management contract or compensatory plan
(1) Incorporated by reference from the Registration Statement on Form S-1 (File
no. 33-72646) of USA Mobile II.
(2) Incorporated by reference from the Registration Statement on Form S-1 (File
no. 33-85580) of USA Mobile II.
(3) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
for the quarter ended March 31, 1997. Confidential treatment previously
granted with respect to portions of this exhibit.
(4) Incorporated by reference from the Annual Report on Form 10-K of Arch for
the Year ended December 31, 1997. Confidential treatment requested with
respect to portions of this exhibit.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916122
<NAME> USA MOBILE COMMUNICATIONS, INC. II
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,291
<SECURITIES> 0
<RECEIVABLES> 9,633
<ALLOWANCES> 1,280
<INVENTORY> 10,591
<CURRENT-ASSETS> 25,857
<PP&E> 150,246
<DEPRECIATION> 51,569
<TOTAL-ASSETS> 493,446
<CURRENT-LIABILITIES> 31,731
<BONDS> 288,000
0
0
<COMMON> 283,353
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 493,446
<SALES> 19,212
<TOTAL-REVENUES> 161,066
<CGS> 13,365
<TOTAL-COSTS> 51,503
<OTHER-EXPENSES> 141,414
<LOSS-PROVISION> 2,784
<INTEREST-EXPENSE> 31,665
<INCOME-PRETAX> (76,881)
<INCOME-TAX> (21,172)
<INCOME-CONTINUING> (55,709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,709)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
