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 X
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For the Fiscal Year Ended December 31, 1998
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 33-72646
Arch Communications, Inc.
(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
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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 18, 1999
was 848.7501.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. BUSINESS
GENERAL
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 units in service). Arch had 4.3
million units in service at December 31, 1998. Arch is a wholly-owned subsidiary
of Arch Communications Group, Inc. ("Parent"). On June 29, 1998, the Company
changed its name from USA Mobile Communications Inc. II to Arch Communications,
Inc.
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 units in service through a
combination of internal growth and acquisitions. From January 1, 1996 through
December 31, 1998, Arch's total number of units in service grew at a compound
rate on an annualized basis of 28.7%. For the same period on an annualized
basis, Arch's compound rate of internal units in service growth (excluding units
added through acquisitions) was 23.8%. From commencement of operations in
September 1986, Arch has completed 33 acquisitions representing an aggregate of
1.7 million units in service at the time of purchase.
PENDING MOBILEMEDIA MERGER
On August 18, 1998, Parent entered into an Agreement and Plan of Merger (as
amended as of September 3, 1998, December 1, 1998 and February 8, 1999, the
"MobileMedia Merger Agreement") providing for a merger (the "MobileMedia
Merger") of MobileMedia Communications, Inc. ("MobileMedia") with and into a
subsidiary of Arch. The MobileMedia Merger is part of MobileMedia's Plan of
Reorganization to emerge from Chapter 11 bankruptcy (as amended, the
"Reorganization Plan"). Parent's stockholders approved the MobileMedia Merger on
January 26, 1999. On February 5, 1999, the Federal Communications Commission
(the "FCC") released an order approving the transfer of MobileMedia's FCC
licenses to Parent in connection with the MobileMedia Merger, subject to
approval and confirmation of the Reorganization Plan. The order granting the
transfer became a final order, no longer subject to reconsideration or judicial
review, on March 7, 1999. Consummation of the MobileMedia Merger and the
associated debt and equity financings (described below) (collectively, the
"MobileMedia Transactions") is subject to the confirmation of the Reorganization
Plan by the U.S. Bankruptcy Court for the District of Delaware, the occurrence
or waiver of the conditions to the consummation of the Reorganization Plan,
performance by third parties of their contractual obligations, the availability
of sufficient financing and other conditions. There can be no assurance the
MobileMedia Merger will be consummated.
Pursuant to the MobileMedia Merger, Parent will: (i) issue certain stock and
warrants; (ii) pay $479.0 million in cash to certain creditors of MobileMedia;
(iii) pay approximately $85.0 million of administrative expenses, amounts to be
outstanding at the Effective Time under the DIP Credit Agreement and
transactional and related costs; (iv) raise $217.0 million in cash through
rights offerings of its common stock (the "Rights Offering"); and (v) cause Arch
and Arch's principal operating subsidiary, Arch Paging Inc. ("API"), to borrow a
total of approximately $347.0 million. After consummation of the MobileMedia
Transactions, which is expected to occur during the second quarter of 1999,
MobileMedia will become a wholly owned subsidiary of API.
Following the consummation of the MobileMedia Merger, Arch will be the second
largest paging operator in the United States as measured by units in service and
net revenues (total revenues less cost of products sold).
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.
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
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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.
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.
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 retail 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 December 31, 1998, operated approximately 175 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 markup. Arch's costs of
administering and billing resellers are lower than the costs of direct end-users
on a per pager basis.
Arch also acts as a reseller of other paging carriers' services when existing
or potential Arch customers have travel patterns that require paging service
beyond the coverage of Arch's own networks.
ITEM 2. PROPERTIES
At December 31, 1998, Arch owned four office buildings and leased office
space (including its executive offices) in over 175 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 3,400 locations in 45 states. Arch's leases
are for various terms and provide for monthly lease payments at various rates.
Arch believes that it will be able to obtain additional space as needed at
acceptable cost. In April 1998, Parent announced an agreement to sell certain
tower site assets (the "Tower Site Sale") pursuant to which Arch sold
communications towers, real estate, site management contracts and/or leasehold
interests involving 133 sites (including one site acquired from entities
affiliated with Benbow PCS Ventures, Inc. ("Benbow")) in 22 states, and is
renting space on the towers on which it currently operates communications
equipment to service its own paging network. As of February 28, 1999, the
Company completed the sale of substantially all of the tower sites. As part of
the Divisional Reorganization, (as defined below) the Company has closed certain
office and retail locations and it will continue to evaluate its remaining real
estate assets during 1999.
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ITEM 3. 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Common Stock, $0.01 par value per share (the "Common Stock") of
Arch is held by Parent and is not publicly traded.
Arch 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 Arch's indentures, pursuant to which
senior debt securities of Arch were issued will, in effect, prohibit the
declaration or payment of cash dividends by Arch for the foreseeable future. See
Note 3 to Arch's Consolidated Financial Statements and "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Factors Affecting Future Operating Results --API Credit Facility, Bridge
Facility and Indenture Restrictions".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements and information
relating to Arch and its subsidiaries 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 or its 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 "Factors Affecting Future Operating Results". 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 "Factors Affecting Future Operating Results".
OVERVIEW
The following discussion and analysis should be read in conjunction with
Arch's Consolidated Financial Statements and Notes thereto included elsewhere in
this Annual Report.
Adjusted EBITDA, as determined by Arch, consists of EBITDA (earnings before
interest, taxes, depreciation and amortization) net of restructuring charges,
equity in loss of affiliate and extraordinary items. EBITDA is a commonly used
measure of financial performance in the paging industry. Adjusted EBITDA is also
one of the financial measures used to calculate whether Arch and its
subsidiaries are in compliance with the covenants under their respective debt
agreements, but should not be construed as an alternative to operating income or
cash flows from operating activities as determined in accordance with GAAP. One
of Arch's financial objectives is to increase its Adjusted EBITDA, 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. Adjusted EBITDA, as determined by Arch, may not necessarily be
comparable to similarly titled data of other paging companies. Amounts reflected
as Adjusted EBITDA are not necessarily available for discretionary use as a
result of restrictions imposed by the terms of existing or future indebtedness
(including the repayment of such indebtedness or the payment of interest
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thereon), limitations imposed by applicable law upon the payment of dividends or
distributions or capital expenditure requirements.
DIVISIONAL REORGANIZATION
In June 1998, Parent's Board of Directors approved a divisional
reorganization ("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, 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, Arch (i) anticipates a net
reduction of approximately 10% of its workforce, (ii) is closing certain office
locations and redeploying other real estate assets and (iii) recorded a
restructuring charge of $14.7 million during 1998. The restructuring charge
consisted of approximately (i) $9.7 million for employee severance, (ii) $3.5
million for lease obligations and terminations, and (iii) $1.5 million of other
costs. The severance costs and lease obligations will require cash outlays
throughout the 18 to 24 month restructuring period. Arch's 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 Company's 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. See Note 9 to Arch's Consolidated Financial
Statements.
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
(dollars in thousands except per pager data):
Year Ended December 31,
1997 1998
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Total revenues................................. 107.9 % 107.8 %
Cost of products sold.......................... (7.9) (7.8)
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Net revenues................................... 100.0 100.0
Operating expenses:
Service, rental and maintenance.............. 21.7 21.1
Selling...................................... 14.0 12.8
General and administrative................... 28.9 29.2
Depreciation and amortization................ 62.9 57.4
Restructuring charge......................... -- 3.8
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Operating income (loss)........................ (27.5)% (24.3)%
======== ========
Net income (loss).............................. (39.9)% (43.6)%
======== ========
Adjusted EBITDA................................ 35.4 % 36.9 %
======== ========
Cash flows provided by operating activities.... $ 64,606 $ 81,935
Cash flows used in investing activities........ $(102,767) $ (82,868)
Cash flows provided by (used in) financing
activities.................................... $ 38,777 $ (932)
Annual service, rental and maintenance expenses
per pager..................................... $ 22 $ 20
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YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Total revenues increased to $413.6 million (a 4.2% increase) in the year
ended December 31, 1998, from $396.8 million in the year ended December 31,
1997. Net revenues (total revenues less cost of products sold) increased to
$383.7 million (a 4.4% increase) in the year ended December 31, 1998 from $367.7
million in the year ended December 31, 1997. Total revenues and net revenues in
the year ended December 31, 1998 were adversely affected by a general slowing of
industry growth, compared to prior years; revenues were also adversely affected
in the fourth quarter of 1998 by Arch's conscious decision, in anticipation of
the MobileMedia Merger, not to replace normal attrition among direct sales
personnel and by the reduced effectiveness of certain reseller channels of
distribution. Arch expects revenue to continue to be adversely affected in 1999
due to its fourth quarter 1998 decision not to replace normal attrition among
direct sales personnel and the reduced effectiveness of certain reseller
channels of distribution. Service, rental and maintenance revenues, which
consist primarily of recurring revenues associated with the sale or lease of
pagers, increased to $371.2 million (a 5.5% increase) in the year ended December
31, 1998 from $351.9 million in the year ended December 31, 1997. These
increases in revenues were due primarily to the increase, through internal
growth, in the number of units in service from 3.9 million at December 31, 1997
to 4.3 million at December 31, 1998. Maintenance revenues represented less than
10% of total service, rental and maintenance revenues in the years ended
December 31, 1998 and 1997. Arch does not differentiate between service and
rental revenues. Product sales, less cost of products sold, decreased to $12.5
million (a 20.4% decrease) in the year ended December 31, 1998 from $15.7
million in the year ended December 31, 1997, respectively, as a result of a
decline in the average revenue per pager sold.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $80.8 million (21.1% of
net revenues) in the year ended December 31, 1998 from $79.8 million (21.7% of
net revenues) in the year ended December 31, 1997. The increase was due
primarily to increased expenses associated with system expansions and an
increase in the number of units in service. As existing paging systems become
more populated through the addition of new subscribers, the fixed costs of
operating these paging systems are spread over a greater subscriber base.
Annualized service, rental and maintenance expenses per subscriber were $20.00
in the year ended December 31, 1998 compared to $22.00 in the corresponding 1997
period.
Selling expenses decreased to $49.1 million (12.8% of net revenues) in the
year ended December 31, 1998 from $51.5 million (14.0% of net revenues) in the
year ended December 31, 1997. The decrease was due primarily to a decrease in
the number of net new subscriber additions and nonrecurring marketing costs
incurred in 1997 to promote Arch's new Arch Paging brand identity. The number of
net new subscriber additions resulting from internal growth decreased by 35.1%
in the year ended December 31, 1998 compared to the year ended December 31,
1997, primarily due to a general slowing of industry growth, compared to prior
years; net new subscriber additions were also adversely affected in the fourth
quarter of 1998 by Arch's conscious decision, in anticipation of the MobileMedia
Merger, not to replace normal attrition among direct sales personnel and by the
reduced effectiveness of certain reseller channels. Arch expects its selling
expenses to increase in 1999 due to increased hiring of direct sales personnel.
General and administrative expenses increased to $112.2 million (29.2% of net
revenues) in the year ended December 31, 1998, from $106.0 million (28.9% of net
revenues) in the year ended December 31, 1997. The increase was due primarily to
administrative and facility costs associated with supporting more units in
service.
Depreciation and amortization expenses decreased to $220.2 million in the
year ended December 31, 1998 from $231.4 million in the year ended December 31,
1997. These expenses principally reflect Arch's acquisitions of paging
businesses in prior periods accounted for as purchases, and investment in pagers
and other system expansion equipment to support growth.
Operating losses were $93.3 million in the year ended December 31, 1998
compared to $101.0 million in the year ended December 31, 1997, as a result of
the factors outlined above.
Net interest expense increased to $66.4 million in the year ended December
31, 1998 from $62.9 million in the year ended December 31, 1997. The increase is
principally attributable to an increase in Arch's outstanding debt.
Arch recognized an income tax benefit of $21.2 million in the year ended
December 31, 1997. This benefit represented the tax benefit of operating losses
incurred subsequent to the acquisitions of USA Mobile Communications Holdings,
Inc. ("USA Mobile") and Westlink Holdings, Inc. ("Westlink") which were
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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 assets which as of
December 31, 1998 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. See Note 4 to Arch's Consolidated
Financial Statements.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $167.1 million in the year ended December 31, 1998 from
$146.6 million in the year ended December 31, 1997, as a result of the factors
outlined above.
FACTORS AFFECTING FUTURE OPERATING RESULTS
GROWTH AND ACQUISITION STRATEGY
Arch believes that the paging industry has experienced, and will continue to
experience, consolidation due to factors that favor larger, multi-market paging
companies, including (i) the ability to obtain additional radio spectrum, (ii)
greater access to capital markets and lower costs of capital, (iii) broader
geographic coverage of paging systems, (iv) economies of scale in the purchase
of capital equipment, (v) operating efficiencies and (vi) enhanced access to
executive personnel.
Arch has pursued, and intends to continue to pursue, acquisitions of paging
businesses as a key component of its growth strategy. However, 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. No assurance can be given that suitable acquisitions can be
identified, financed and completed on acceptable terms, or that any future
acquisitions by Arch will be successful.
Implementation of Arch's growth strategy will be subject to numerous other
contingencies beyond the control of its management. These contingencies include
national 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 Arch's growth strategy
will prove effective or that its goals will be achieved.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Arch's business strategy requires the availability of substantial funds to
finance the continued development and future growth and expansion of its
operations, including possible acquisitions. The amount of capital required by
Arch following the MobileMedia Merger 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 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 Arch.
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 competitors of Arch 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
on Arch's particular markets, there could be a material adverse effect on Arch.
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 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
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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 currently 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
request more technologically advanced pagers, including, but not limited to,
two-way pagers, Arch could incur additional inventory costs and capital
expenditures if 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 Arch. There can be no assurance that Arch will
be able to compete successfully with current and future competitors in the
paging business or with competitors offering alternative communication
technologies. Pursuant to the 1994 Communications Assistance for Law Enforcement
Act ("CALEA"), all telecommunications carriers, including Arch, are subject to
certain law enforcement assistance capability requirements. These capability
requirements will likely necessitate equipment modifications. Although CALEA
requires the federal government to reimburse carriers for certain equipment
modifications, it is unclear whether Arch will be entitled to such a
reimbursement and if so, how much Arch will receive.
GOVERNMENT REGULATION, FOREIGN OWNERSHIP AND POSSIBLE REDEMPTION
The paging operations of Arch are subject to regulation by the FCC and
various state regulatory agencies. The FCC paging licenses granted to Arch 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. Arch is 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 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 has 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.
The FCC's review and revision of rules affecting paging companies is ongoing
and the regulatory requirements to which Arch is 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 is participating actively in this proceeding in order to protect
its 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 sought comments
on, among other matters, whether it should impose coverage requirements on
licensees with nationwide exclusivity (such as Arch), 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 might have to
accelerate the build-out of its systems in certain areas.
Changes in regulation of Arch's paging businesses or the allocation of radio
spectrum for services that compete with Arch's business could adversely affect
its results of operations. In addition, some aspects of the Telecommunications
Act of 1996 (the "Telecommunications Act") may place additional burdens upon
Arch or subject Arch to increased competition. For example, the FCC has adopted
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 has generally passed these costs on to its
subscribers, which makes Arch's services more expensive and which could affect
the attraction or retention of customers; however, there can be no assurance
that Arch will be able to continue to pass on these costs. In addition, the FCC
also has adopted 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
8
<PAGE>
by long-distance telephone companies. Under the new rules, certain
telecommunications carriers, including Arch, 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. Arch can not yet know the full impact of these state contribution
requirements. Moreover, Arch is not 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 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. Depending on further FCC disposition of
these issues, Arch 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 will pursue relief through settlement negotiations,
administrative complaint procedures or both. If these issues are ultimately
decided in favor of the LECs, Arch 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, these or similar requirements could in the future have a
material adverse effect on Arch.
The Communications Act of 1934, as amended also limits foreign investment in
and ownership of entities that are licensed as radio common carriers by the FCC.
Arch owns or controls several radio common carriers and is accordingly subject
to these foreign investment restrictions. Because Arch is a parent of radio
common carriers (but is not a radio common carrier itself), Arch may not have
more than 25% of its stock owned or voted by aliens or their representatives, a
foreign government or its representatives or a foreign corporation if the FCC
finds that the public interest would be served by denying such ownership. In
connection with the 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 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. Parent's Restated Certificate of Incorporation, as
amended permits the redemption of shares of Parent'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 (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.
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 Arch.
DEPENDENCE ON THIRD PARTIES
Arch does not manufacture any of the pagers used in its paging operations.
Arch buys pagers primarily from Motorola, Inc. ("Motorola"), NEC America Inc.
and Panasonic Communications & Systems Company 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 Electronics, Inc. and Motorola and thus is dependent on
such manufacturers for sufficient terminals and transmitters to meet their
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 renewals for one-year terms. There can be no assurance that
9
<PAGE>
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 agreements. 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. Finally, Arch 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 a material adverse effect on Arch.
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 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.
DEPENDENCE ON KEY PERSONNEL
The success of Arch will depend, to a significant extent, upon the continued
services of a relatively small group of executive personnel. Arch does not have
employment agreements with, or maintain life insurance on the lives of, 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 Arch.
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 Arch'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, the computerized systems
(including both information and non-information technology systems) and
applications used by Arch are being reviewed, evaluated and, if and where
necessary, modified or replaced to ensure that all financial, information and
operating systems are Year 2000 compliant.
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 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 is completing an
inventory audit of hardware and software testing for both its corporate and
divisional operations. These areas of operation include: information systems,
finance, operations, inventory, billing, pager activation and purchasing.
Additional testing is scheduled to conclude in the second quarter of 1999.
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 nine 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
10
<PAGE>
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 is in the
process of testing of such equipment it has relied to a large extent on the
representations and assessments of its vendors with respect to their readiness.
Arch can offer no assurances as to the accuracy of such vendors' representations
and assessments.
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.
HISTORY OF LOSSES
Since its inception, Arch has not reported any net income. Arch reported net
losses of $87.0 million, $146.6 million, $167.1 million in the fiscal years
ended December 31, 1996, 1997 and 1998, respectively. These historical net
losses have 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 Arch. Arch expects to continue to report net losses for the
foreseeable future, whether or not the MobileMedia Merger is consummated. See
Arch's Consolidated Financial Statements included elsewhere herein.
INDEBTEDNESS AND HIGH DEGREE OF LEVERAGE
Arch is highly leveraged. At December 31, 1998, Arch and its subsidiaries had
outstanding $621.9 million of total debt, including (i) $125.0 million principal
amount of Arch's 9 1/2% Senior Notes due 2004 (the "9 1/2% Notes"), (ii) $100.0
million principal amount of Arch's 14% Senior Notes due 2004 (the "14% Notes"),
(iii) $127.6 million accreted value of Arch's 12 3/4% Senior Notes due 2007 (the
"12 3/4% Notes" and, together with the 9 1/2% Notes and the 14% Notes, the
"Notes") and (iv) $267.0 million of borrowings under the API Credit Facility.
Arch's high degree of leverage may have adverse consequences for Arch,
including: (i) the ability of Arch to obtain additional financing for
acquisitions, working capital, capital expenditures or other purposes, may be
impaired or extinguished or such financing may not be available on acceptable
terms, if at all; (ii) a substantial portion of Adjusted EBITDA 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 API Credit
Facility and the indentures (the "Arch Indentures") under which the 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 the future consolidation of the paging
industry. Arch has implemented various initiatives to reduce capital costs while
sustaining acceptable levels of unit and revenue growth. As a result, Arch's
rate of internal growth in units in service has slowed and is expected to remain
below the rates of internal growth previously achieved by Arch, but Arch has not
yet reduced 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. 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 may not necessarily be comparable to
similarly titled data of other paging companies. See Arch's Consolidated
Financial Statements and Notes thereto included elsewhere herein.
11
<PAGE>
MOBILEMEDIA MERGER CASH REQUIREMENTS
To fund the estimated cash payments required by the MobileMedia Merger of
approximately $347.0 million (consisting of $262.0 million to fund a portion of
the cash payments to MobileMedia's secured creditors and $85.0 million to fund
estimated administrative expenses, amounts to be outstanding at the Effective
Time under the DIP Credit Agreement and transaction expenses), 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
API Credit Facility (the "API Credit Facility Increase"). The API Credit
Facility Increase was approved on November 16, 1998 by all API lenders, provided
the MobileMedia Transactions were completed prior to March 31, 1999. The four
API lenders that were to fund the API Credit Facility Increase have indicated
their willingness to seek approval to extend $135.0 million of the API Credit
Facility Increase through June 30, 1999, subject to formal approval, definitive
documentation and negotiation of certain terms. In addition, Arch intends to
issue $200.0 million of new senior notes (the "Planned Notes"). There can be no
assurance that Arch will complete an offering of the Planned Notes on terms
satisfactory to it, if 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
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 Notes. The Bridge Facility was scheduled to expire on
February 28, 1999 but Arch elected to extend it to June 30, 1999. The Planned
Notes, the Bridge Facility and the MobileMedia Merger each require approval by
the Required Lenders (as defined in the API Credit Facility), and there can be
no assurance such approval will be granted. If API's lenders do not grant the
foregoing approvals, and Arch is not able to arrange alternative financing to
make the cash payments required by the MobileMedia Merger and therefore could
not consummate the MobileMedia Merger, and Arch's failure to perform its
obligations under the MobileMedia Merger Agreement is not otherwise excused,
Arch will be liable to pay the MobileMedia Breakup Fee of $32.5 million to
MobileMedia.
API CREDIT FACILITY, BRIDGE FACILITY AND INDENTURE RESTRICTIONS
The API Credit Facility, the Bridge Facility and the Arch Indentures impose
(or will impose) certain operating and financial restrictions on Arch. The API
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 API Credit
Facility. In addition, the API 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
instruments 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 Bridge Facility and the Arch Indentures limit, 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 Parent 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 API Credit Facility, the Bridge Facility and/or the Arch
Indentures. Upon the occurrence of an event of default under the API Credit
Facility, the Bridge Facility or the Arch Indentures, the creditors could elect
to declare all amounts outstanding, together with accrued and unpaid interest,
to be immediately due and payable. If Arch were unable to repay any such
amounts, the creditors could proceed against the collateral securing certain of
such indebtedness. If the lenders under the API 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 and any borrowings under the Bridge
Facility. In addition, because the API Credit Facility, the Bridge Facility and
the Arch Indentures limit (or will 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 including the
MobileMedia Merger, which is subject to the approval of the Required Lenders (as
defined under the API Credit Facility). Arch will be incurring additional
indebtedness in connection with the MobileMedia Merger and the Reorganization.
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,
12
<PAGE>
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.
DIVISIONAL REORGANIZATION
In June 1998, Parent's Board of Directors approved the Divisional
Reorganization. As part of such reorganization, which is expected to be
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 to take advantage of various operating efficiencies. Once
fully implemented, the Divisional Reorganization is expected to result in annual
cost savings of approximately $15.0 million. Arch expects to reinvest a portion
of these cost savings to expand its sales activities. 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 real estate assets and (iii) recorded a restructuring charge of $14.7
million in 1998. The restructuring charge consisted of approximately (i) $9.7
million for employee severance, (ii) $3.5 million for lease obligations and
terminations and (iii) $1.5 million of other costs. There can be no assurance
that the expected cost savings will be achieved or that the reorganization of
Arch's business will be accomplished smoothly, expeditiously or successfully.
The difficulties of 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 would have a material adverse effect on Arch.
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 full set of general-purpose financial statements. Arch adopted SFAS No. 130
in 1998. The adoption of this standard did not have an effect on its reporting
of income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Arch adopted SFAS No. 131 for its year ended December 31, 1998.
Adoption of this standard did not 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. Arch
adopted SOP 98-5 effective January 1, 1999. Initial application of SOP 98-5 will
be reported as the cumulative effect of a change in accounting principle. 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.
13
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of the Company's long-term debt is subject to fixed rates of
interest or interest rate protection. In the event that the interest rate on the
Company's non-fixed rate debt fluctuates by 10% in either direction, the Company
believes the impact on its results of operations would be immaterial. The
Company transacts infrequently in foreign currency and therefore is not exposed
to significant foreign currency market risk.
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 1998
Consolidated Statements of Operations for Each of the Three Years in
the Period Ended December 31, 1998
Consolidated Statements of Stockholder's Equity for Each of the Three
Years in the Period Ended December 31, 1998
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period Ended December 31, 1998
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1998.
(c) Exhibits
The exhibits listed in the accompanying index to exhibits are filed as
part of this Annual Report on Form 10-K.
14
<PAGE>
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.
ARCH COMMUNICATIONS, INC.
By: /s/ C. Edward Baker, Jr.
------------------------------------
C. Edward Baker, Jr.
Chairman of the Board and Chief
Executive Officer
March 18, 1999
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
in the capacities and on the dates indicated.
/s/ C. Edward Baker, Jr. Chairman of the Board and March 18, 1999
- --------------------------- Chief Executive Officer
C. Edward Baker, Jr. (principal executive officer)
/s/ John B. Saynor Executive Vice President, March 18, 1999
- --------------------------- Director
John B. Saynor
/s/ J. Roy Pottle Executive Vice President March 18, 1999
- --------------------------- and Chief Financial Officer
J. Roy Pottle (principal financial officer and
principal accounting officer)
/s/ R. Schorr Berman Director March 18, 1999
- ---------------------------
R. Schorr Berman
Director
- ---------------------------
James S. Hughes
/s/ John Kornreich Director March 18, 1999
- ---------------------------
John Kornreich
/s/ Allan L. Rayfield Director March 18, 1999
- ---------------------------
Allan L. Rayfield
/s/ John A. Shane Director March 18, 1999
- ---------------------------
John A. Shane
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants..... ........................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.......... F-3
Consolidated Statements of Operations for Each of the Three Years in
the Period Ended December 31, 1998.................................. F-4
Consolidated Statements of Stockholder's Equity for Each of the Three
Years in the Period Ended December 31, 1998......................... F-5
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period Ended December 31, 1998.................................. F-6
Notes to Consolidated Financial Statements............................ F-7
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 wholly owned subsidiary of Arch Communications Group,
Inc. (a Delaware corporation) (the "Company") and subsidiaries as of December
31, 1997 and 1998, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Arch Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a)(2) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 24, 1999
F-2
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1997 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 1,887 $ 22
Accounts receivable (less reserves of $5,744 and $6,583 in 1997 and
1998, respectively)............................................. 30,147 30,753
Inventories....................................................... 12,633 10,319
Prepaid expenses and other........................................ 4,917 8,007
----------- -----------
Total current assets.......................................... 49,584 49,101
----------- -----------
Property and equipment, at cost:
Land, buildings and improvements.................................. 10,089 10,480
Paging and computer equipment..................................... 361,713 400,312
Furniture, fixtures and vehicles.................................. 16,233 17,381
----------- -----------
388,035 428,173
Less accumulated depreciation and amortization.................... 146,542 209,128
------------ -----------
Property and equipment, net....................................... 241,493 219,045
------------ -----------
Intangible and other assets (less accumulated amortization of $258,856
and $368,903 in 1997 and 1998, respectively)........................ 718,969 626,439
----------- -----------
$ 1,010,046 $ 894,585
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt.............................. $ 24,513 $ 1,250
Accounts payable.................................................. 22,486 25,683
Accrued restructuring charge...................................... -- 11,909
Accrued expenses.................................................. 11,894 11,689
Accrued interest.................................................. 11,174 20,922
Customer deposits................................................. 6,150 4,528
Deferred revenue.................................................. 8,787 10,958
----------- -----------
Total current liabilities..................................... 85,004 86,939
----------- -----------
Long-term debt, less current maturities............................... 623,000 620,629
----------- -----------
Other long-term liabilities........................................... -- 27,235
----------- -----------
Commitments and contingencies
Stockholder's equity:
Common stock--$.01 par value, authorized 1,000 shares, issued and
outstanding 849 shares.......................................... -- --
Additional paid-in capital........................................ 617,563 642,406
Accumulated deficit............................................... (315,521) (482,624)
----------- -----------
Total stockholder's equity ................................... 302,042 159,782
----------- -----------
$ 1,010,046 $ 894,585
=========== ===========
</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
Years Ended December 31,
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Service, rental and maintenance revenues........ $ 291,399 $ 351,944 $ 371,154
Product sales................................... 39,971 44,897 42,481
---------- ---------- ----------
Total revenues............................. 331,370 396,841 413,635
Cost of products sold........................... (27,469) (29,158) (29,953)
---------- ---------- ----------
303,901 367,683 383,682
---------- ---------- ----------
Operating expenses:
Service, rental and maintenance.............. 64,957 79,836 80,782
Selling...................................... 46,962 51,474 49,132
General and administrative................... 86,181 106,041 112,181
Depreciation and amortization................ 191,101 231,376 220,172
Restructuring charge......................... -- -- 14,700
---------- ---------- ----------
Total operating expenses................... 389,201 468,727 476,967
---------- ---------- ----------
Operating income (loss)......................... (85,300) (101,044) (93,285)
Interest expense................................ (50,330) (63,680) (68,094)
Interest income................................. 1,270 796 1,685
Equity in loss of affiliate..................... (1,968) (3,872) (5,689)
---------- ---------- ----------
Income (loss) before income tax benefit and
extraordinary item........................... (136,328) (167,800) (165,383)
Benefit from income taxes....................... 51,207 21,172 --
---------- ---------- ----------
Income (loss) before extraordinary item......... (85,121) (146,628) (165,383)
Extraordinary charge from early
extinguishment of debt....................... (1,904) -- (1,720)
---------- ---------- ----------
Net income (loss)............................... $ (87,025) $ (146,628) $ (167,103)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<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, 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. ............. -- 24,843 -- 24,843
Net loss ................................. -- -- (167,103) (167,103)
------- --------- --------- ---------
Balance, December 31, 1998 .................. $ -- $ 642,406 $(482,624) $ 159,782
======= ========= ========= =========
</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 CASH FLOWS
Years Ended December 31,
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ (87,025) $(146,628) $(167,103)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................ 191,101 231,376 220,172
Deferred income tax benefit .............................. (51,207) (21,172) --
Extraordinary charge from early extinguishment of debt ... 1,904 -- 1,720
Equity in loss of affiliate .............................. 1,968 3,872 5,689
Accretion of discount on senior notes .................... -- -- 141
Gain on Tower Site Sale ................................. -- -- (2,500)
Accounts receivable loss provision ....................... 8,198 7,181 8,545
Changes in assets and liabilities, net of effect from
acquisitions of paging companies:
Accounts receivable .................................... (15,513) (11,984) (9,151)
Inventories ............................................ 1,845 (2,394) 2,314
Prepaid expenses and other ............................. 89 (386) (3,090)
Accounts payable and accrued expenses .................. (12,440) 3,683 24,649
Customer deposits and deferred revenue ................. 1,556 1,058 549
--------- --------- ---------
Net cash provided by operating activities .................. 40,476 64,606 81,935
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net ................. (138,899) (87,868) (79,249)
Additions to intangible and other assets ................. (16,676) (14,899) (33,935)
Net proceeds from Tower Site Sale ........................ -- -- 30,316
Acquisition of paging companies, net of cash acquired .... (325,420) -- --
--------- --------- ---------
Net cash used for investing activities ..................... (480,995) (102,767) (82,868)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt ............................... 401,000 91,000 463,239
Repayment of long-term debt .............................. (225,166) (49,046) (489,014)
Capital contribution from (distribution to) Arch
Communications Group, Inc. ............................. 262,329 (3,177) 24,843
--------- --------- ---------
Net cash provided by (used in) financing activities ........ 438,163 38,777 (932)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ....... (2,356) 616 (1,865)
Cash and cash equivalents, beginning of period ............. 3,627 1,271 1,887
--------- --------- ---------
Cash and cash equivalents, end of period ................... $ 1,271 $ 1,887 $ 22
========= ========= =========
Supplemental disclosure:
Interest paid ............................................ $ 46,448 $ 61,322 $ 56,249
========= ========= =========
Liabilities assumed in acquisition of paging companies ... $ 58,233 $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
ARCH COMMUNICATIONS, 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 units in
service). The financial statements for the Company represent 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").
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company, and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition--Arch recognizes revenue under rental and service
agreements with customers as the related services are performed. Maintenance
revenues and related costs are recognized ratably over the respective terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions are
recognized as an expense when incurred.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less. The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
Inventories--Inventories consist of new pagers which are held primarily for
resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
Property and Equipment--Pagers sold or otherwise retired are removed from the
accounts at their net book value using the first-in, first-out method. Property
and equipment is stated at cost and is depreciated using the straight-line
method over the following estimated useful lives:
Asset Classification Estimated 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 $87.5 million, $108.0 million and $101.1 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-7
<PAGE>
Intangible and Other Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):
December 31,
1997 1998
---- ----
Goodwill..................................... $ 312,017 $ 271,808
Purchased FCC licenses....................... 293,922 256,519
Purchased subscriber lists................... 87,281 56,825
Deferred financing costs..................... 526 13,983
Investment in Benbow PCS Ventures, Inc....... 6,189 11,347
Investment in CONXUS Communications, Inc..... 6,500 6,500
Non-competition agreements................... 2,783 1,790
Other........................................ 9,751 7,667
--------- ---------
$ 718,969 $ 626,439
========= =========
Amortization expense related to intangible and other assets totaled $103.7
million, $123.4 million and $119.1 million for the years ended December 31,
1996, 1997 and 1998, respectively.
Subscriber lists, Federal Communications Commission ("FCC") licenses and
goodwill are amortized over their estimated useful lives, ranging from five to
ten years using the straight-line method. Non-competition agreements are
amortized over the terms of the agreements using the straight-line method. Other
assets consist of contract rights, organizational and FCC application and
development costs which are amortized using the straight-line method over their
estimated useful lives not exceeding ten years. Development and start up costs
include nonrecurring, direct costs incurred in the development and expansion of
paging systems, and are amortized over a two-year period. In April 1998, the
Accounting Standards Executive Committee of the Financial Accounting Standards
Board issued Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of
Start-Up Activities". SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Arch adopted SOP 98-5 effective
January 1, 1999. Initial application of SOP 98-5 will be reported as the
cumulative effect of a change in accounting principle.
Deferred financing costs incurred in connection with Arch's credit agreements
(see Note 3) are being amortized over periods not to exceed the terms of the
related agreements. As credit agreements are amended and restated, unamortized
deferred financing costs are written off as an extraordinary charge. During 1996
and 1998, charges of $1.9 million and $1.7 million, respectively, were
recognized in connection with the closing of new credit facilities.
In connection with Arch's May 1996 acquisition of Westlink Holdings, Inc.
("Westlink") (see Note 2), Arch acquired Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. ("Benbow"). Benbow has exclusive rights to a
50kHz outbound/12.5kHz inbound narrowband personal communications license in
each of the central and western regions of the United States. Arch is obligated,
to the extent such funds are not available to Benbow from other sources, and
subject to the approval of Arch's designee on Benbow's Board of Directors, to
advance Benbow sufficient funds to service debt obligations incurred by Benbow
in connection with its acquisition of its narrowband PCS licenses and to finance
the build out of a regional narrowband PCS system. Arch's investment in Benbow
is accounted for under the equity method whereby Arch's share of Benbow's
losses, since the acquisition date of Westlink, are recognized in Arch's
accompanying consolidated statements of operations under the caption equity in
loss of affiliate.
On November 8, 1994, CONXUS Communications, Inc. ("CONXUS"), formerly PCS
Development Corporation, was successful in acquiring the rights to a two-way
paging license in five designated regions in the United States in the FCC
narrowband wireless spectrum auction. As of December 31, 1998, Arch's investment
in CONXUS totaled $6.5 million and is accounted for under the cost method.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To
Be Disposed Of" Arch evaluates the recoverability of its carrying value of the
Company's long-lived assets and certain intangible assets based on estimated
undiscounted cash flows to be generated from each of such assets as compared to
the original estimates used in measuring the assets. To the extent impairment is
identified, Arch reduces the carrying value of such impaired assets. To date,
Arch has not had any such impairments.
F-8
<PAGE>
Fair Value of Financial Instruments--Arch's financial instruments, as defined
under SFAS No. 107 "Disclosures about Fair Value of Financial Instruments",
include its cash, its debt financing and interest rate protection agreements.
The fair value of cash is equal to the carrying value at December 31, 1997 and
1998.
As discussed in Note 3, Arch's debt financing primarily consists of 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 table depicts the fair value of the fixed rate senior
notes based on the current market quote as of December 31, 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
--------------------- ---------------------
Carrying Carrying
Description Value Fair Value Value Fair Value
----------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
9 1/2% Senior Notes due 2004................ $ 125,000 $ 122,488 $ 125,000 $ 112,500
14% Senior Notes due 2004................... 100,000 112,540 100,000 103,000
12 3/4% Senior Notes due 2007............... -- -- 127,604 127,604
</TABLE>
Arch had off-balance-sheet interest rate protection agreements consisting of
interest rate swaps and interest rate caps with notional amounts of $140.0
million and $80.0 million, respectively, at December 31, 1997 and $265.0 million
and $40.0 million, respectively, at December 31, 1998. The fair values of the
interest rate swaps and interest rate caps were $47,000 and $9,000,
respectively, at December 31, 1997. The cost to terminate the outstanding
interest rate swaps and interest rate caps at December 31, 1998 would have been
$6.4 million. See Note 3.
Reclassifications--Certain amounts of prior periods were reclassified to
conform with the 1998 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.
This acquisition has been accounted for as a purchase, and the results of its
operations have been included in the consolidated financial statements from the
date of the acquisition. Goodwill resulting from the acquisition is being
amortized over a ten-year period using the straight-line method.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the period
presented, after giving effect to certain adjustments, including depreciation
and amortization of acquired assets and interest expense on acquisition debt.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made at the beginning of the period presented, or of results that may occur
in the future.
Year Ended
December 31, 1996
(unaudited and in thousands)
Revenues................................... $ 358,900
Income (loss) before extraordinary item.... (100,807)
Net income (loss).......................... (102,711)
F-9
<PAGE>
3. Long-term Debt
Long-term debt consisted of the following (in thousands):
December 31,
1997 1998
---------- ----------
Senior Bank Debt...................... $ 422,500 $ 267,000
9 1/2% Senior Notes due 2004.......... 125,000 125,000
14% Senior Notes due 2004............. 100,000 100,000
12 3/4% Senior Notes due 2007......... -- 127,604
Other................................. 13 2,275
---------- ----------
647,513 621,879
Less-- Current maturities............. 24,513 1,250
---------- ----------
Long-term debt........................ $ 623,000 $ 620,629
========== ==========
Senior Bank Debt-- The Company, through its operating subsidiary, Arch
Paging, Inc. ("API") entered into senior secured revolving credit and term loan
facilities in the aggregate amount of $400.0 million (collectively, the "API
Credit Facility") consisting of (i) a $175.0 million reducing revolving credit
facility (the "Tranche A Facility"), (ii) a $100.0 million 364-day revolving
credit facility under which the principal amount outstanding on June 27, 1999
will convert to a term loan (the "Tranche B Facility") and (iii) a $125.0
million term loan (the "Tranche C Facility").
The Tranche A Facility will be subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term loan
portion of the Tranche B Facility will be amortized in quarterly installments
commencing September 30, 2000, with an ultimate maturity date of June 30, 2005.
The Tranche C Facility will be amortized in annual installments commencing
December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the API Credit Facility are secured by its pledge of
its interests in Arch LLC and Arch Connecticut Valley, Inc. The API Credit
Facility is guaranteed by Parent, Arch and Arch LLC and Arch Connecticut Valley,
Inc. Parent's guarantee is secured by a pledge of Parent's stock and notes in
Arch, and the guarantees of Arch LLC and Arch Connecticut Valley, Inc. are
secured by a security interest in those assets that were pledged under ACE's
former credit facility.
Borrowings under the API Credit Facility bear interest based on a reference
rate equal to either the Bank's Alternate Base Rate or LIBOR, in each case plus
a margin based on Arch's or API's ratio of total debt to annualized Adjusted
EBITDA.
The API Credit Facility requires payment of fees on the daily average amount
available to be borrowed under the Tranche A Facility and the Tranche B
Facility, which fees vary depending on Arch's or API's ratio of total debt to
annualized Adjusted EBITDA.
The API Credit Facility requires that at least 50% of Arch's total debt,
including the outstanding borrowings under the API Credit Facility, be subject
to a fixed interest rate or interest rate protection agreements. Entering into
interest rate cap and swap agreements involves both the credit risk of dealing
with counterparties and their ability to meet the terms of the contracts and
interest rate risk. In the event of nonperformance by the counterparty to these
interest rate protection agreements, API would be subject to the prevailing
interest rates specified in the API Credit Facility.
Under the interest rate swap agreements, the Company will pay the difference
between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR, and the
Company will receive the difference between LIBOR and the fixed swap rate if
LIBOR exceeds the swap rate. Settlement occurs on the quarterly reset dates
specified by the terms of the contracts. The notional principal amount of the
interest rate swaps outstanding was $65.0 million at December 31, 1998. The
weighted average fixed payment rate was 5.93%, while the weighted average rate
of variable interest payments under the API Credit Facility was 5.30% at
F-10
<PAGE>
December 31, 1998. At December 31, 1997 and 1998, the Company had a net
receivable of $18,000 and a net payable of $47,000, respectively, on the
interest rate swaps.
The interest rate cap agreements will pay the Company the difference between
LIBOR and the cap level if LIBOR exceeds the cap levels at any of the quarterly
reset dates. If LIBOR remains below the cap level, no payment is made to the
Company. The total notional amount of the interest rate cap agreements was $40.0
million with cap levels between 7.5% and 8% at December 31, 1998. The
transaction fees for these instruments are being amortized over the terms of the
agreements.
The API Credit Facility contains restrictions that limit, among other things:
additional indebtedness and encumbrances on assets; cash dividends and other
distributions; mergers and sales of assets; the repurchase or redemption of
capital stock; investments; acquisitions that exceed certain dollar limitations
without the lenders' prior approval; and prepayment of indebtedness other than
indebtedness under the API Credit Facility. In addition, the API Credit Facility
requires API and its subsidiaries to meet certain financial covenants, including
covenants with respect to ratios of EBITDA to fixed charges, EBITDA to debt
service, EBITDA to interest service and total indebtedness to EBITDA. As of
December 31, 1998, API and its operating subsidiaries were in compliance with
the covenants of the API Credit Facility.
As of December 31, 1998, $267.0 million was outstanding and $93.5 million was
available under the API Credit Facility. At December 31, 1998, such advances
bore interest at an average annual rate of 8.45%.
On November 16, 1998, the lenders to API approved an increase in the API
Credit Facility from $400.0 million to $600.0 million, subject to completing the
MobileMedia Merger and certain other conditions. The increase of $200.0 million
(the "API Credit Facility Increase") was to fund a portion of the cash necessary
for Parent to complete the MobileMedia Merger. The API Credit Facility Increase
was to be provided by four of API's existing lenders, provided the MobileMedia
Transactions were completed prior to March 31, 1999. The four API lenders that
were to fund the API Credit Facility Increase have indicated their willingness
to seek approval to extend $135.0 million of the API Credit Facility Increase
through June 30, 1999, subject to formal approval, definitive documentation and
negotiation of certain terms.
Senior Notes--Interest on the 14% Senior Notes due 2004 (the "14% Notes") and
the 9 1/2% Senior Notes due 2004 (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 Arch to:
incur additional indebtedness; pay dividends; grant liens on its assets; sell
assets; enter into transactions with related parties; merge, consolidate or
transfer substantially all of its assets; redeem capital stock or subordinated
debt; and make certain investments.
Arch has entered into interest rate swap agreements in connection with the
14% Notes. Under the interest rate swap agreements, the Company has effectively
reduced the interest rate on the 14% Notes from 14% to the fixed swap rate of
9.45%. In the event of nonperformance by the counterparty to these interest rate
protection agreements, the Company would be subject to the 14% interest rate
specified on the notes. As of December 31, 1998, the Company had received
$2,275,000 in excess of the amounts paid under the swap agreements, which is
included in long-term debt in the accompanying balance sheet. At December 31,
1998, the Company had a net receivable of $733,500 on these interest rate swaps.
On June 29, 1998, Arch issued and sold $130.0 million principal amount of 12
3/4% Senior Notes due 2007 (the "12 3/4% Notes") for net proceeds of $122.6
million (after deducting the discount to the initial purchasers and estimated
offering expenses payable by Arch). The 12 3/4% Notes were sold at an initial
price to investors of 98.049%. The 12 3/4% Notes mature on July 1, 2007 and bear
interest at a rate of 12 3/4% per annum, payable semi-annually in arrears on
January 1 and July 1 of each year, commencing January 1, 1999.
The indenture under which the 12 3/4% Notes were issued ("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 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-11
<PAGE>
Maturities of Debt--Scheduled long-term debt maturities at December 31, 1998,
are as follows (in thousands):
Year Ending December 31,
------------------------
1999 ......................... $ 1,250
2000 ......................... 17,725
2001 ......................... 29,650
2002 ......................... 29,650
2003 ......................... 29,650
Thereafter ................... 513,954
--------
$621,879
========
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, 1997 and 1998 are as
follows (in thousands):
1997 1998
---- ----
Deferred tax assets ............... $ 134,944 $ 179,484
Deferred tax liabilities .......... (90,122) (67,652)
--------- ---------
44,822 111,832
Valuation allowance ............... (44,822) (111,832)
--------- ---------
$ -- $ --
========= =========
The approximate effect of each type of temporary difference and carryforward
at December 31, 1997 and 1998 is summarized as follows (in thousands):
1997 1998
---- ----
Net operating losses ................... $ 106,214 $ 128,213
Intangibles and other assets ........... (87,444) (62,084)
Depreciation of property and equipment . 24,388 39,941
Accruals and reserves .................. 1,664 5,762
--------- ---------
44,822 111,832
Valuation allowance .................... (44,822) (111,832)
--------- ---------
$ -- $ --
========= =========
The effective income tax rate differs from the statutory federal tax rate
primarily due to the nondeductibility of goodwill amortization and the inability
to recognize the benefit of current net operating loss ("NOL") carryforwards.
The NOL carryforwards expire at various dates through 2013. The Internal Revenue
Code contains provisions that may limit the NOL carryforwards available to be
used in any given year if certain events occur, including significant changes in
ownership, as defined.
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.
5. Commitments and Contingencies
In March 1996, Parent completed a public offering of 107/8% Senior Discount
Notes ("Parent Discount Notes") in aggregate principal amount at maturity of
$467.4 million ($275.0 million initial accreted value). The 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 107/8% per annum (approximately $50.8 million),
payable semi-annually. Parent has no significant business operations and its
F-12
<PAGE>
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 Parent Discount
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, 1998 are as follows (in thousands):
Year Ending December 31,
------------------------
1999 ......................... $21,372
2000 ......................... 13,826
2001 ......................... 8,853
2002 ......................... 6,026
2003 ......................... 2,495
Thereafter ................... 1,516
-------
Total ................... $54,088
=======
Total rent expense under operating leases for the years ended December 31,
1996, 1997 and 1998 approximated $14.7 million, $19.8 million and $19.6 million,
respectively.
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, 1996,
1997 and 1998 approximated $217,000, $302,000 and $278,000, respectively.
Stock Options--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, 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 five-year period from the date of grant
with the first such vesting (20% of granted options) occurring one year from the
date of grant and continuing ratably at 5% on a quarterly basis thereafter.
However, in certain circumstances, options may be immediately exercised in full.
Options generally have a duration of 10 years. The 1989 Plan provides for the
granting of options to purchase a total of 1,128,944 shares of common stock. All
outstanding options on September 7, 1995, under the 1989 Plan, became fully
exercisable and vested as a result of the USAM Merger. The 1997 Plan provides
for the granting of options to purchase a total of 6,000,000 shares of common
stock.
Effective October 23, 1996, the Compensation Committee of the Board of
Directors of Parent authorized the grant of new options to each employee who had
an outstanding option at a price greater than $12.50 (the fair market value of
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 USAM 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 up to 601,500 options to purchase
F-13
<PAGE>
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 USAM
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, the Company canceled 1,083,216 options
with exercise prices ranging from $5.94 to $20.63 and granted the same number of
new options with an exercise price of $5.06 per share, the fair market value of
the stock on December 16, 1997.
The following table summarizes the activity under Parent's stock option plans
for the periods presented:
Weighted
Average
Number of Exercise
Options Price
------- -----
Options Outstanding at December 31, 1995 ......... 1,005,755 $13.02
Granted .................................. 695,206 15.46
Exercised ................................ (169,308) 8.69
Terminated ............................... (484,456) 21.60
---------- ------
Options Outstanding at December 31, 1996 ......... 1,047,197 11.37
Granted .................................. 500,394 6.68
Exercised ................................ -- --
Terminated ............................... (186,636) 10.65
---------- ------
Options Outstanding at December 31, 1997 ......... 1,360,955 9.74
Granted .................................. 1,968,337 4.76
Exercised ................................ (94,032) 3.13
Terminated ............................... (1,290,407) 9.51
---------- ------
Options Outstanding at December 31, 1998 ......... 1,944,853 $ 5.17
========== ======
Options Exercisable at December 31, 1998 ......... 333,541 $ 6.92
========== ======
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 1998:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
$1.44 - $ 4.13 162,533 9.38 $ 3.36 4,500 $ 1.89
4.53 - 4.53 511,201 9.17 4.53 -- --
4.56 - 4.94 152,625 9.00 4.91 6,625 4.59
5.06 - 5.06 969,057 9.04 5.06 231,827 5.06
6.25 - 27.56 149,437 7.02 10.29 90,589 12.11
-------------- --------- ---- ------ ------- ------
$1.44 - $27.56 1,944,853 8.94 $ 5.17 333,541 $ 6.92
============== ========= ==== ====== ======= ======
Employee Stock Purchase Plans--Employees of Arch may participate in Parent's
stock purchase plans. On May 28, 1996, Parent's stockholders approved the 1996
Employee Stock Purchase Plan (the "1996 ESPP"). The 1996 ESPP allows eligible
employees the right to purchase common stock, through payroll deductions not
exceeding 10% of their compensation, at the lower of 85% of the market price at
the beginning or the end of each six-month offering period. During 1996, 1997
and 1998, 46,842, 151,343 and 257,988 shares were issued at an average price per
F-14
<PAGE>
share of $7.97, $5.29 and $2.13, respectively. At December 31, 1998, 43,827
shares are available for future issuance.
On January 26, 1999, Parent's stockholders approved the 1999 Employee Stock
Purchase Plan ( the "1999 ESPP"). The 1999 ESPP allows eligible employees the
right to purchase common stock, through payroll deductions not exceeding 10% of
their compensation, at the lower of 85% of the market price at the beginning or
the end of each six-month offering period. Parent's stockholders authorized
1,500,000 shares for future issuance under this plan.
Accounting for Stock-Based Compensation--Arch accounts for its stock option
and stock purchase plans under APB Opinion No. 25 "Accounting for Stock Issued
to Employees". Since all options have been issued at a grant price equal to fair
market value, no compensation cost has been recognized in the Statement of
Operations. Had compensation cost for these plans been determined consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation", Arch's net income
(loss) would have been increased to the following pro forma amounts:
Year Ended December 31,
1996 1997 1998
---------- --------- ---------
(in thousands)
Net income (loss), as reported .... $ (87,025) $(146,628) $(167,103)
Net income (loss), pro forma ...... (88,149) (148,224) (169,117)
Because the SFAS No. 123 method of accounting has not been applied to the
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. In computing these pro forma amounts, Arch
has assumed risk-free interest rates of 4.5% - 6%, an expected life of 5 years,
an expected dividend yield of zero and an expected volatility of 50% - 85%.
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1996, 1997 and 1998 were $4.95, $3.37 and
$2.78, respectively. The weighted average fair value of shares sold under the
ESPP in 1996, 1997 and 1998 was $5.46, $2.83 and $1.88, respectively.
10. Related Party Transactions
Intercompany Transactions with Arch Communications Group, Inc.-- On June 29,
1998, two partnerships managed by Sandler Capital Management Company, Inc., an
investment management firm, together with certain other private investors, made
an equity investment in 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 $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
In April 1998, Arch announced an agreement to sell certain of its tower site
assets (the "Tower Site Sale") for approximately $38.0 million in cash (subject
to adjustment), of which $1.3 million was paid to entities affiliated with
Benbow in payment for certain assets owned by such entities and included in the
Tower Site Sale. In the Tower Site Sale, Arch is selling communications towers,
real estate, site management contracts and/or leasehold interests involving 133
sites in 22 states and will rent space on the towers on which it currently
operates communications equipment to service its own paging network. Arch used
its net proceeds from the Tower Site Sale to repay indebtedness under the API
Credit Facility. Arch held the initial closing of the Tower Site Sale on June
26, 1998 with gross proceeds to Arch of approximately $12.0 million (excluding
$1.3 million which was paid to entities affiliated with Benbow for certain
assets which such entities sold as part of this transaction) and held a second
closing on September 29, 1998 with gross proceeds to Arch of approximately $20.4
million.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain is deferred and included in other long-term
liabilities. At December 31, 1998, Arch had sold 117 of the 133 sites, which
resulted in a total gain of approximately $23.5 million and through December 31,
1998 approximately $2.5 million of this gain had been recognized in the
statement of operations and is included in operating income.
F-15
<PAGE>
9. 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. In connection with the Divisional
Reorganization, Arch (i) anticipates a net reduction of approximately 10% of its
workforce, (ii) is closing certain office locations and redeploying other assets
and (iii) recorded a restructuring charge of $14.7 million in 1998. The
restructuring charge consisted of approximately (i) $9.7 million for employee
severance, (ii) $3.5 million for lease obligations and terminations and (iii)
$1.5 million of other costs.
The provision for lease obligations and terminations relates primarily to
future lease commitments on local, regional and divisional office facilities
that will be closed as part of the Divisional Reorganization. The charge
represents future lease obligations, on such leases past the dates the offices
will be closed by the Company, or for certain leases, the cost of terminating
the leases prior to their scheduled expiration. Cash payments on the leases and
lease terminations will occur over the remaining lease terms, the majority of
which expire prior to 2001.
Through the elimination of certain local and regional administrative
operations and the consolidation of certain support functions, the Company will
eliminate approximately 280 net positions. As a result of eliminating these
positions, the Company will involuntarily terminate an estimated 900 personnel.
The majority of the positions to be eliminated will be related to customer
service, collections, inventory and billing functions in local and regional
offices which will be closed as a result of the Divisional Reorganization. As of
December 31, 1998, 217 employees had been terminated due to the Divisional
Reorganization. The majority of the remaining severance and benefits costs to be
paid by the Company will be paid during 1999.
The Company's restructuring activity as of December 31, 1998 is as follows
(in thousands):
Reserve
Initially Utilization of Remaining
Established Reserve Reserve
----------- ------- -------
Severance costs ........ $ 9,700 $ 2,165 $ 7,535
Lease obligation costs.. 3,500 366 3,134
Other costs ............ 1,500 260 1,240
------- ------- -------
Total ............ $14,700 $ 2,791 $11,909
======= ======= =======
10. Segment Reporting
The Company operates in one industry: providing wireless messaging services.
On December 31, 1998, the Company operated approximately 175 retail stores in 35
states of the United States.
F-16
<PAGE>
11. Quarterly Financial Results (Unaudited)
Quarterly financial information for the years ended December 31, 1997 and
1998 is summarized below (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Revenues........................................ $ 95,539 $ 98,729 $ 101,331 $ 101,242
Operating income (loss)......................... (26,389) (29,403) (26,965) (18,287)
Net income (loss)............................... (37,337) (40,680) (38,683) (29,928)
Year Ended December 31, 1998:
Revenues........................................ $ 102,039 $ 103,546 $ 104,052 $ 103,998
Operating income (loss)......................... (19,175) (35,114) (20,568) (18,428)
Income (loss) before extraordinary item......... (36,500) (52,711) (38,209) (37,963)
Extraordinary charge............................ -- (1,720) -- --
Net income (loss)............................... (36,500) (54,431) (38,209) (37,963)
</TABLE>
F-17
<PAGE>
ARCH COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Other Balance
Beginning Charged to Additions to at End of
Allowance for Doubtful Accounts of Period Expense Allowance(1) Write-Offs Period
------------------------------- --------- ------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996............. $ 2,125 $ 8,198 $ 1,757 $ (7,969) $ 4,111
======== ======= ======= ======== =======
Year ended December 31, 1997............. $ 4,111 $ 7,181 $ -- $ (5,548) $ 5,744
======== ======= ======= ======== =======
Year ended December 31, 1998............. $ 5,744 $ 8,545 $ -- $ (7,706) $ 6,583
======== ======= ======= ======== =======
<FN>
(1) Additions arising through acquisitions of paging companies
</FN>
</TABLE>
<TABLE>
<CAPTION>
Balance at Balance
Beginning Charged to Other at End of
Accrued Restructuring Charge of Period Expense Additions Deductions Period
---------------------------- --------- ------- --------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998............. $ -- $14,700 $ -- $ (2,791) $11,909
======== ======= ======= ======== =======
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
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.
and MobileMedia Communications, Inc. (1)
2.3 Second Amendment to Agreement and Plan of Merger, dated as of December
1, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
and MobileMedia Communications, Inc. (1)
2.4 Third Amendment to Agreement and Plan of Merger, dated as of February
8, 1999 by and among Arch Communications Group, Inc., Farm Team Corp.,
MobileMedia Corporation and MobileMedia communications, Inc. (7)
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)
10.1 Second Amended and Restated Credit Agreement (Tranche A and Tranche C
Facilities), dated June 29, 1998, among Arch Paging, Inc., the Lenders
party thereto, The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (4)
10.2 Second Amended and Restated Credit Agreement (Tranche B Facility),
dated June 29, 1998, among Arch Paging, Inc., the Lenders party
thereto. The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (4)
10.3 Amendment No. 1 and Amendment No. 2 to the Second Amended and Restated
Credit Agreement (Tranche A and Tranche C Facilities). (6)
10.4 Amendment No. 1 and Amendment No. 2 to the Second Amended and Restated
Credit Agreement (Tranche B Facility). (6)
10.5 Asset Purchase and Sale Agreement, dated April 10, 1998, among
OmniAmerica, Inc. and certain subsidiaries of Arch Communications
Group, Inc. (4)
10.6 Letter Agreement, dated June 10, 1998, between Arch Communications
Group, Inc. and Motorola, Inc. (4) (5)
10.7 Debtors' Third Amended Joint Plan of Reorganization, dated as of
December 1, 1998. (1)
10.8 Disclosure Statement of Debtors' Third Amended Joint Plan of
Reorganization, dated December 3, 1998. (1)
10.9 Bridge Commitment Letter, dated as of August 18, 1998, among Arch
Communications, Inc., Arch Communications Group, Inc. and The Bear
Stearns Companies, Inc., The Bank of New York, TD Securities (USA)
Inc. and the Royal Bank of Canada.(1)
10.10 Preferred Distributor Agreement dated June 1, 1998 by and between
Arch Communications Group, Inc. and NEC America, Inc. (5)(6)
27.1* Financial Data Schedule.
- ----------------
* Filed herewith.
+ Identifies exhibits constituting a management contract or compensation
plan.
(1) Incorporated by reference from the Registration Statement on Form S-4
(file No. 333-63519) of Arch Communications Group, Inc.
(2) Incorporated by reference from the Registration Statement on Form S-1
<PAGE>
(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 referenced from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998.
(5) A Confidential Treatment Request has been filed with respect to
portions of this exhibit so incorporated by reference.
(6) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the year ended December 31, 1998.
(7) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc., dated March 2, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916122
<NAME> Arch Communications, Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 22
<SECURITIES> 0
<RECEIVABLES> 30,753
<ALLOWANCES> 6,583
<INVENTORY> 10,319
<CURRENT-ASSETS> 49,101
<PP&E> 428,173
<DEPRECIATION> 209,128
<TOTAL-ASSETS> 894,585
<CURRENT-LIABILITIES> 86,939
<BONDS> 620,629
0
0
<COMMON> 0
<OTHER-SE> 159,782
<TOTAL-LIABILITY-AND-EQUITY> 894,585
<SALES> 42,481
<TOTAL-REVENUES> 413,635
<CGS> 29,953
<TOTAL-COSTS> 29,953
<OTHER-EXPENSES> 80,782
<LOSS-PROVISION> 8,545
<INTEREST-EXPENSE> 68,094
<INCOME-PRETAX> (165,383)
<INCOME-TAX> 0
<INCOME-CONTINUING> (165,383)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,720)
<CHANGES> 0
<NET-INCOME> (167,103)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
