<PAGE>
Filed pursuant to Rule 424(b)(3)
Registration No. 333-83027
PROSPECTUS $147,000,000
[ARCH LOGO APPEARS HERE]
Note Exchange Offer
ARCH COMMUNICATIONS, INC.
We are offering to exchange $147,000,000 principal amount of
our new 13 3/4% senior notes due 2008, which have been
registered under the Securities Act of 1933, for $147,000,000
principal amount of our outstanding 13 3/4% senior notes due
2008 that were issued in a private placement on June 3, 1999.
The new notes are substantially identical to the old notes
except that their transfer is not restricted as are the old
notes.
The exchange offer will expire at 5:00 p.m., New York City
time, on September 23, 1999 unless extended.
We do not expect the new notes to trade on Nasdaq or on any
securities exchange. The note exchange should be non-taxable
for federal income tax purposes.
To learn how to exchange your old notes for new notes, see
"Prospectus Summary--The Exchange Offer" beginning on page 4,
"The Exchange Offer" beginning on page 20 and "Plan of
Distribution" beginning on page 131.
- ----------------------------------- --------------------------------------
Neither the SEC nor any state We urge you to carefully read the
securities regulators have "Risk Factors" section,
approved or disapproved the beginning on page 9, before you
notes or the exchange offer or make any investment decision.
determined if this prospectus is
accurate or adequate. Anyone who
tells you otherwise is
committing a crime.
- ----------------------------------- --------------------------------------
The date of this prospectus is August 26, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................... 1
Our Business............................................................ 1
Arch.................................................................. 1
MobileMedia........................................................... 2
The MobileMedia Acquisition........................................... 2
The Combined Company.................................................. 2
Other Information About Arch.......................................... 3
The Exchange Offer...................................................... 4
The Notes............................................................... 6
Risk Factors.............................................................. 9
Risks Related to the Notes and Outstanding Indebtedness................. 9
Uncertainties Related to the MobileMedia Acquisition ................... 13
Business and Financial Risks............................................ 14
Forward-Looking Statements................................................ 18
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
The Exchange Offer........................................................ 20
Selected Historical Consolidated Financial and Operating Data--Arch....... 28
Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 30
Selected Historical Consolidated Financial and Operating Data--
MobileMedia.............................................................. 40
MobileMedia Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 42
Unaudited Selected Pro Forma Consolidated Financial Data.................. 54
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Statements .......... 55
Industry Overview......................................................... 61
Business.................................................................. 66
Business Strategy....................................................... 66
Arch's Paging and Messaging Services, Products and Operations........... 67
MobileMedia's Paging and Messaging Services, Products and Operations.... 69
Networks and Licenses................................................... 70
Subscribers and Marketing............................................... 72
Sources of Equipment.................................................... 74
Employees............................................................... 74
Trademarks.............................................................. 75
Properties.............................................................. 75
Litigation.............................................................. 75
Predecessors to the Combined Company; Events Leading up to MobileMedia's
Bankruptcy Filings..................................................... 76
The MobileMedia Acquisition............................................. 77
Management................................................................ 79
Principal Stockholders.................................................... 85
Description of Outstanding Indebtedness................................... 88
Description of Notes...................................................... 92
Material Federal Income Tax Considerations................................ 125
Plan of Distribution...................................................... 131
Legal Matters............................................................. 132
Experts................................................................... 132
Index to Financial Statements............................................. F-1
</TABLE>
i
<PAGE>
SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. It may not contain all of the information that is important to you.
We urge you to read the entire prospectus, including financial statements and
"Risk Factors". We--Arch Communications, Inc.--are a wholly owned subsidiary of
Arch Communications Group, Inc., which we refer to in this prospectus as our
parent company. We use the name "Arch" to refer to ourselves--Arch
Communications, Inc.--and our consolidated subsidiaries both before and after
the MobileMedia acquisition described below, unless we indicate otherwise.
Sometimes we use the phrase "combined company" when we wish to emphasize that
we are referring specifically to Arch after the MobileMedia acquisition.
Our Business
Arch is now the second largest provider of wireless messaging services,
primarily paging services, in the United States based on its net revenues and
its approximately 7.1 million units in service. This reflects Arch's
acquisition of MobileMedia Communications, Inc. and its subsidiaries on June 3,
1999. Before the MobileMedia acquisition, Arch and MobileMedia separately
conducted two of the largest paging operations in the country. Arch believes
that the MobileMedia acquisition will benefit Arch through operating synergies,
cost savings and a reduction in Arch's financial leverage. However, the
integration of the companies' businesses may present difficulties. See "Risk
Factors--Integrating the two companies presents challenges".
Arch's operating objectives are to increase its EBITDA, or earnings before
interest, taxes, depreciation and amortization; deploy its capital efficiently;
reduce its financial leverage; and expand its customer relationships. To
achieve its operating objectives, Arch:
. has selected a low-cost operating strategy as its principal competitive
tactic;
. is seeking to reduce its financial leverage by reducing capital
requirements and increasing EBITDA;
. is distributing its products and services through several different
channels; and
. is pursuing new revenue opportunities associated with its units in
service, including applications in narrowband personal communications
services, which are commonly referred to as N-PCS.
Arch
Arch has been a leading provider of wireless messaging services, primarily
paging services. At March 31, 1999, Arch was the third largest paging company
in the United States based on its 4.3 million units then in service. Arch has:
. operated in 41 states and more than 180 of the 200 largest markets in the
United States;
. offered local, regional and nationwide paging services employing digital
networks covering approximately 85% of the United States population;
. offered four types of paging services through its networks: digital
display, alphanumeric display, tone-only and tone-plus-voice. These types
of services are described in detail under "Business--Arch's Paging and
Messaging Services, Products and Operations" beginning on page 69; and
. offered enhanced and complementary services, including voice mail,
personalized greeting, message storage and retrieval, pager loss
protection and pager maintenance.
Prior to the MobileMedia acquisition, Arch achieved significant growth in units
in service through a combination of internal growth and acquisitions. From
January 1, 1996 through March 31, 1999, Arch's total number of units in service
grew at a compound rate on an annualized basis of 26.7%. For the same period on
an annualized basis, Arch's compound rate of internal growth in units in
service was 22.3%, excluding units added through acquisitions. From
commencement of operations in September 1986 through March 31, 1999, Arch
1
<PAGE>
completed 33 acquisitions involving an aggregate of 1.7 million units in
service at the time of purchase. The MobileMedia acquisition has added
approximately 2.8 million additional units, net of intercompany units and
adjustments to conform the definitions of units in service used by Arch and
MobileMedia.
Arch had revenues of $413.6 million and a net loss of $167.1 million for the
year ended December 31, 1998 and revenues of $100.9 million and a net loss of
$38.7 million for the three months ended March 31, 1999.
MobileMedia
Prior to its acquisition by Arch, MobileMedia operated one of the largest
paging companies in the United States, with approximately 3.1 million units in
service as of March 31, 1999. Through its sales offices, nationwide retail
distribution network, company-operated retail stores and resellers, MobileMedia
has offered local, regional and national coverage to subscribers in all 50
states and the District of Columbia. This has included local coverage to each
of the 100 most populated metropolitan markets in the United States.
MobileMedia has marketed its services primarily under the MobileComm brand
name. MobileMedia's paging and wireless messaging services have consisted
principally of numeric and alphanumeric paging services. See "Business--
MobileMedia's Paging and Messaging Services, Products and Operations".
Between January 30, 1997 and June 3, 1999, MobileMedia and several affiliated
companies operated as debtors-in-possession under Chapter 11 of the Bankruptcy
Code. MobileMedia's insolvency proceedings are described under "Business--
Predecessors to the Combined Company; Events Leading Up to MobileMedia's
Bankruptcy Filings" and "MobileMedia Management's Discussion and Analysis of
Financial Condition and Results of Operations".
MobileMedia had revenues of $449.7 million and net income of $35.6 million for
the year ended December 31, 1998 and revenues of $105.8 million and a net loss
of $7.7 million for the three months ended March 31, 1999.
The MobileMedia Acquisition
Arch's parent company acquired MobileMedia on June 3, 1999 and MobileMedia is
now a wholly owned subsidiary of Arch.
Arch's parent company paid approximately $537.0 million in cash, including fees
and expenses and elimination of certain debt. Arch's parent company also issued
a total of 35.6 million shares of its common stock and 5.4 million shares of
its Class B common stock to creditors of MobileMedia and stockholders of Arch's
parent company. Arch's parent company issued some of these shares in exchange
for cancellation of creditors' claims and received cash proceeds of
approximately $217.2 million for the other shares. Arch's parent company also
borrowed approximately $320.0 million to help fund the acquisition. See
"Business--The MobileMedia Acquisition".
The Combined Company
The combined company is the second largest paging operator in the United States
as measured by units in service and net revenues. On a pro forma basis, but
excluding the impact of expected operational cost synergies, at and for the
year ended December 31, 1998, the combined company would have had:
. approximately 7.2 million units in service;
. net revenues of $802.7 million;
. adjusted pro forma EBITDA, as described below, of $252.6 million;
. net loss before extraordinary items of $154.2 million; and
. total debt of $933.9 million.
For the year ended December 31, 1998, on a similar pro forma basis, cash flows
provided by operating activities would have been $139.1 million, cash flows
used in investing activities would have been $506.0 million and cash flows
provided by financing activities would have been $358.1 million.
For the three months ended March 31, 1999, the combined company would have had:
. net revenues of $194.2 million;
. adjusted pro forma EBITDA of $64.6 million;
. net loss before extraordinary items of $49.6 million;
2
<PAGE>
. total debt of $957.0 million; and
. cash flows of $30.2 million provided by operating activities, $588.9
million used in investing activities and $568.1 million provided by
financing activities.
This adjusted pro forma information assumes that the MobileMedia acquisition
had been effected as of January 1, 1998.
The combined company's leverage on a pro forma basis, as measured by the ratio
of total debt to annualized adjusted pro forma EBITDA, would have been 3.7 to 1
for the year ended December 31, 1998 and 3.7 to 1 for the three months ended
March 31, 1999. Adjusted pro forma EBITDA is EBITDA net of restructuring
charges and bankruptcy related expenses, equity in loss of affiliates,
extraordinary items, amortization of deferred gain on tower sale, impairment of
long-lived assets and reduction of liabilities subject to compromise. See
"Business" and "Unaudited Pro Forma Condensed Consolidated Financial
Statements".
This financial data for the combined company excludes financial data for Arch's
parent company. The parent company has no material assets except for the stock
of its subsidiaries, but it has approximately $393.0 million of its own
indebtedness which is not included in Arch's indebtedness above. The parent
company incurred interest expenses and other expenses of approximately $37.8
million during the year ended December 31, 1998 and approximately $10.2 million
during the three months ended March 31, 1999. These expenses are not included
in the calculation of Arch's net losses above. See "--Corporate Structure" on
page 8.
Other Information About Arch
Arch is an intermediate level holding company with no material assets except
the stock of its subsidiaries, which now include MobileMedia as well as Arch's
historical subsidiaries.
Our principal office is located at 1800 West Park Drive, Suite 250,
Westborough, Massachusetts 01581. Our telephone number is (508) 870-6700.
Arch was incorporated in Delaware in 1988 as USA Mobile Communications, Inc. II
and changed its name to Arch Communications, in June 1998.
"Arch" and "Arch Paging" are service marks of Arch. "MobileComm" is a
registered service mark of MobileMedia, which is not associated with MobilComm
Inc. of Cincinnati, Ohio. Additional trademarks, service marks and trade names
of Arch and MobileMedia also appear in this prospectus. See "Business--
Trademarks". Other trademarks, service marks and trade names used in this
prospectus are owned by persons who are not associated with Arch.
Our web site is not part of this prospectus.
3
<PAGE>
The Exchange Offer
The Exchange Offer.......... Arch is offering to exchange $1,000 principal
amount of new notes for each $1,000 principal
amount of old notes that are properly tendered
and accepted. Arch will issue new notes on or
promptly after the expiration date. There is
$147.0 million aggregate principal amount of
notes outstanding.
Resales of New Notes........ Based on an interpretation by the staff of the
SEC expressed in no-action letters issued to
other companies, Arch believes that the new notes
issued in the exchange offer in exchange for old
notes may generally be offered for resale, resold
and otherwise transferred by a holder who is not
an affiliate of Arch or a broker-dealer without
compliance with the registration and prospectus
delivery provisions of the Securities Act if the
holder is acquiring new notes in the ordinary
course of its business and is not participating
in a distribution of the new notes and had no
arrangement or understanding with any person to
do so. For information pertinent to affiliates
and broker-dealers, see "The Exchange Offer--
Resale of New Notes".
Exchange and Registration
Rights Agreement............ Arch and the initial purchasers of the notes
entered into an exchange and registration rights
agreement which grants the holders of the old
notes various exchange rights and registration
rights. The exchange offer is intended to satisfy
those rights, and those rights will terminate
upon the effectiveness of the exchange offer. See
"The Exchange Offer--Termination of Certain
Rights".
Expiration Date............. The exchange offer will expire at 5:00 p.m., New
York City time, on September 23, 1999, unless
Arch extends the expiration date of the exchange
offer in its sole discretion. See "The Exchange
Offer--Expiration Date; Extensions; Amendments".
Accrued Interest on the
Notes....................... Interest accrued through the expiration date of
the exchange offer on old notes that are
exchanged will be paid to holders of record of
the new notes on the next regular payment date.
See "The Exchange Offer--Interest on the New
Notes".
Conditions to the Exchange
Offer....................... Arch may at any time:
. delay the acceptance of old notes for
exchange;
. terminate the exchange offer if specified
conditions have not been satisfied;
. extend the expiration date of the exchange
offer and retain all old notes tendered,
subject, however, to the right of noteholders
to withdraw their tendered notes; or
. waive any condition or otherwise amend the
terms of the exchange offer in any way.
4
<PAGE>
See "The Exchange Offer--Terms of the Exchange
Offer". The exchange offer is subject to
customary conditions that may be waived by Arch.
The exchange offer is not conditioned upon any
minimum amount of notes being tendered for
exchange. See "The Exchange Offer--Conditions".
Exchange Agent.............. IBJ Whitehall Bank & Trust Company. For
assistance and requests for additional copies of
this prospectus or the appended letter of
transmittal or notice of guaranteed delivery,
contact Customer Service by telephone at (212)
858-2103, or by facsimile at (212) 858-2611.
How to Tender Notes......... If you wish to accept the exchange offer, you
must do one of the following:
. if your notes are represented by physical
certificates, you must complete, sign and
date a letter of transmittal, following all
the instructions, and mail or deliver the
letter of transmittal, together with your
tendered notes and any other required
documentation, to the exchange agent; or
. if you hold your old notes through the
Depository Trust Company, you must tender
notes through DTC's Automated Tender Offer
Program. See "The Exchange Offer--Procedures
for Tendering".
Special Procedures for
Beneficial Owners........... If you are a beneficial owner whose notes are
registered in the name of a financial institution
or other nominee and you wish to tender your
notes in the exchange offer, you should contact
the registered holder promptly and instruct it to
tender for you. If you wish to tender on your own
behalf, you must, before completing and executing
the letter of transmittal and delivering your
notes, either make appropriate arrangements to
register ownership of the notes in your own name
or obtain a properly completed bond power from
the registered holder. Transfer of registered
ownership may take considerable time and it may
not be possible to complete it before the
expiration date. See "The Exchange Offer--
Procedures for Tendering".
Guaranteed Delivery
Procedures.................. If you wish to tender your notes but your notes
are not immediately available or you cannot
deliver your notes, the letter of transmittal or
any other documentation required by the letter of
transmittal to the exchange agent before the
expiration date, you must tender your notes by
using the guaranteed delivery procedures
described under "The Exchange Offer--Guaranteed
Delivery Procedures".
Acceptance of Tenders and
Delivery of New Notes ...... Subject to the satisfaction or waiver of the
conditions to the exchange offer, Arch will
accept for exchange any and all notes that are
properly tendered in the exchange offer before
the expiration date. New notes issued in exchange
for old notes will be delivered as soon as
practicable after the expiration date. See "The
Exchange Offer--Terms of the Exchange Offer".
5
<PAGE>
Withdrawal Rights........... Tenders of old notes may be withdrawn at any time
before the expiration date. See "The Exchange
Offer--Withdrawal of Tenders".
Material Federal Income Tax
Considerations ............. The exchange of old notes for new notes should be
non-taxable for federal income tax purposes. As a
result, no material federal income tax
consequences should result if you exchange old
notes for new notes. See "Material Federal Income
Tax Considerations".
The Notes
On June 3, 1999, Arch received the proceeds of the offering of $147.0
million principal amount of 13 3/4% senior notes due 2008 to qualified
institutional buyers under Rule 144A. The notes were sold at 95.091% of the
face amount for proceeds of $139.8 million, before selling discounts and
expenses.
Issuer...................... Arch Communications, Inc.
Notes Offered............... $147.0 million aggregate principal amount of 13
3/4% senior notes due 2008.
Maturity.................... April 15, 2008
Interest Rate............... 13 3/4% per year, payable twice a year in arrears
on April 15 and October 15, beginning October 15,
1999, and also upon maturity or redemption.
Ranking..................... Senior obligations of Arch ranking equal in right
of payment to our existing and future senior
debt. We are an intermediate holding company and
neither our parent company nor any of our
subsidiaries has guaranteed the notes. See "Risk
Factors--Payments on the notes are structurally
subordinated to other debt under Arch's holding
company structure".
Security.................... Not secured by any collateral.
Optional Redemption......... Beginning on April 15, 2004, we can redeem any of
the notes at prices ranging from 106.875% to
100.0% of their principal amount. Before April
15, 2004 we can redeem up to 35% of the notes at
113.75% of their principal amount out of the
proceeds of an equity offering so long as at
least $95.6 million aggregate principal amount of
notes remains outstanding.
Change of Control........... Upon a change in control, as defined on page 119,
we must offer to repurchase all of the notes at
101% of their principal amount. We cannot be
sure, however, that we will have sufficient
financial resources to make the repurchases.
Covenants................... The indenture for the notes restricts our ability
to incur more debt, issue preferred stock, pay
dividends or make distributions, repurchase
capital stock, repay subordinated debt or make
other restricted payments, as defined, create
liens, enter into transactions with affiliates,
sell assets, issue or sell capital stock of our
subsidiaries or merge or consolidate.
6
<PAGE>
Special Offer to Purchase... The indenture for our parent company's
outstanding discount notes permits us to take
some actions that would not otherwise be
permissible under the indenture for your notes.
We will be obligated to make a special offer to
purchase all of your notes if
. the indenture for the discount notes ceases
to apply to us and
. either
. our 12 3/4% notes and other qualified
public debt, as defined on page 125, are
no longer outstanding or
. we seek specified types of waivers from
the holders of the 12 3/4% notes and
other qualified public debt.
Original Issue Discount..... The notes were issued at a discount from their
stated principal amount. A holder must include
this discount in gross income as ordinary income
on an economic accrual basis, before receiving
the associated cash. See "Material Federal Income
Tax Considerations".
The Exchange Notes
The exchange offer applies to all the old notes. The form and terms of the
new notes will be the same as the form and terms of the old notes except that:
. the new notes will have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer;
. the new notes will not entitle their holders to have the notes
registered again; and
. provisions increasing the stated interest rate on the notes if they are
not registered will be eliminated.
The new notes will evidence the same debt as the old notes which they
replace. They will be issued under the indenture that governs the old notes and
will be entitled to the benefits of the indenture. For further information, see
"Description of Notes".
7
<PAGE>
Corporate Structure
The following chart summarizes the organizational structure of Arch, its
parent company and their principal operating subsidiaries. It also shows their
principal debt obligations and guarantees of those obligations. See
"Capitalization", "Description of Notes" and Arch's consolidated financial
statements and notes.
Arch Communications Group, Inc.
(Arch's parent company)
10 7/8% senior discount notes due 2008
6 3/4% convertible subordinated debentures due 2003
Guarantee of secured credit facility(1)
Arch Communications, Inc.
(Arch)
13 3/4% senior notes due 2008
12 3/4% senior notes due 2007(2)
9 1/2% senior notes due 2004(2)
14% senior notes due 2004(2)
Guarantee of secured credit facility(2)
Arch Paging, Inc.
Secured credit facility(3)
--------------------
Arch Communications Enterprises MobileMedia Communications, Inc.
LLC(4) (MobileMedia)
Guarantee of secured credit facility(5) Guarantee of secured credit facility
Mobile Communications Corporation of
America
Guarantee of secured credit facility
- --------------------
(1) This obligation is secured by the parent company's pledge of the capital
stock and notes of Arch.
(2) The notes being exchanged in the exchange offer rank equal in right of
payment with this obligation.
(3) The notes being exchanged in the exchange offer are structurally
subordinated in right of payment to this obligation. This obligation is
secured by a pledge of Arch's membership interests in Arch Communications
Enterprises LLC, also known as Arch LLC.
(4) On December 31, 1998, Arch consolidated most of the former operating
subsidiaries of Arch Communications Enterprises, Inc., also known as ACE,
into Arch LLC. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations--Subsidiary Restructuring".
(5) Arch LLC, together with Arch Connecticut Valley, Inc., provides a guarantee
that is secured by a security interest in those assets that were pledged
under ACE's former credit facility.
8
<PAGE>
RISK FACTORS
You should consider carefully the following risks in making an investment
decision about Arch. If any of these possible developments occur, Arch's
business, financial condition and/or results of operations would likely suffer.
Risks Related to the Notes and Outstanding Indebtedness
High degree of leverage burdens operations
Each of Arch and MobileMedia has been highly leveraged, and the combined
company expects to continue to be highly leveraged. The following table
compares the total debt, total assets and latest three-month annualized
adjusted EBITDA of Arch, MobileMedia and the combined company at or as of March
31, 1999.
<TABLE>
<CAPTION>
Pro Forma
Combined
Arch MobileMedia Company
------ ----------- ---------
(dollars in millions)
<S> <C> <C> <C>
Total debt.................................. $645.0 $910.7 $ 957.0
Total assets................................ $874.0 $554.0 $1,523.9
Annualized adjusted EBITDA.................. $140.1 $118.5 $ 258.6
</TABLE>
Adjusted EBITDA is not a measure defined in GAAP and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with GAAP. Adjusted EBITDA, as determined by Arch and MobileMedia,
may not necessarily be comparable to similarly titled data of other paging
companies. See "Selected Historical Consolidated Financial and Operating Data--
Arch".
Arch's high degree of leverage may have adverse consequences for Arch. These
include the following:
. High leverage may impair or extinguish Arch's ability to obtain
additional financing necessary for acquisitions, working capital,
capital expenditures or other purposes on acceptable terms, if at all.
. A substantial portion of Arch's cash flow will be required to pay
interest expense; this will reduce the funds which would otherwise be
available for operations and future business opportunities.
. Arch's credit facilities and indentures contain financial and
restrictive covenants; the failure to comply with these covenants may
result in an event of default which could have a material adverse
effect on Arch if not cured or waived.
. Arch may be more highly leveraged than its competitors which may place
it at a competitive disadvantage.
. Arch's high degree of leverage will make it more vulnerable to a
downturn in its business or the economy generally.
. Arch's high degree of leverage may impair its ability to participate in
the future consolidation of the paging industry.
There can be no assurance that Arch will be able to reduce its financial
leverage as it intends, nor that Arch will achieve an appropriate balance
between growth which it considers acceptable and future reductions in financial
leverage. If Arch is not able to achieve continued growth in EBITDA, it may be
precluded from incurring additional indebtedness due to cash flow coverage
requirements under existing debt instruments. See "Arch Management's Discussion
and Analysis of Financial Condition and Results of Operations", "Description of
Outstanding Indebtedness" and the consolidated financial statements and notes
of Arch and MobileMedia.
Payments on the notes are structurally subordinated to other debt under Arch's
holding company structure
Arch is an intermediate level holding company with no material assets except
the capital stock of its subsidiaries. Arch's subsidiaries have no obligation
to pay any amounts due on the notes or to make any funds
9
<PAGE>
available to facilitate payment. The notes are structurally subordinated to all
current or future liabilities of Arch's subsidiaries. This includes trade
payables and indebtedness for money borrowed. If Arch sought to repay the notes
using assets of any subsidiary upon the subsidiary's liquidation or
reorganization, Arch's right to obtain the subsidiary's assets would be
structurally subordinated to the claims of that subsidiary's creditors. Even if
Arch was itself recognized as a creditor of a subsidiary, Arch's claims would
still be subject to any security interests in the assets of the subsidiary and
to any liabilities of such subsidiary senior to Arch's claims and could be
challenged in a liquidation or reorganization proceeding. At March 31, 1999,
after giving pro forma effect to the MobileMedia acquisition, the notes would
have been structurally subordinated to $574.6 million of liabilities of Arch's
subsidiaries. In addition, the notes will be effectively subordinated to
indebtedness outstanding under the subsidiaries' secured credit facility to the
extent of the assets that secure borrowings under that facility. Arch has two
other issues of unsecured senior subordinated notes which have the right to
receive security interests in some of Arch's assets in specified circumstances
and become effectively senior to the notes in respect of those assets. See
"Description of Notes--Certain Covenants--Liens".
Arch's parent company has no obligation to pay any amounts due on the notes
or to make any funds available to facilitate payment. At March 31, 1999, the
parent company had $393.0 million of liabilities, excluding liabilities of its
subsidiaries and its guarantees of these liabilities. Commencing September 15,
2001, the parent company will need to pay $50.8 million annually on discount
notes which have a $467.4 million principal amount at maturity. The parent
company expects to service these interest payments out of cash made available
to it by Arch and Arch's subsidiaries, but there can be no assurance that Arch
and Arch's subsidiaries will be able to generate sufficient cash flow to
service the interest payments. In addition, limitations contained in the
indentures for other issues of Arch's senior subordinated notes and in the
subsidiaries' secured credit facility would not currently permit Arch and its
subsidiaries to make sufficient payments to Arch's parent company to enable it
to pay interest on its discount notes. Arch may need to modify the
subsidiaries' secured credit facility, amend the indentures or redeem its other
senior subordinated notes in order to make payments to enable Arch's parent
company to pay interest on the discount notes. No assurance can be given that,
if necessary, Arch would be able to modify the subsidiaries' secured credit
facility, amend the indentures or redeem the senior subordinated notes. A
default by Arch's parent company in its payment obligations under its discount
notes could have a material adverse effect on the business, financial
condition, results of operations or prospects of Arch and its parent company,
or Arch's ability to make payments with respect to the notes when due, and
would cause a default under the subsidiaries' secured credit facility. See
"Capitalization", "Arch's Selected Consolidated Financial and Operating Data",
"Description of Outstanding Indebtedness" and "Description of Notes".
The assets and adjusted EBITDA of Arch's new MobileMedia subsidiaries will
primarily benefit the creditors of Arch's subsidiaries and only indirectly
benefit the holders of the notes or other creditors of Arch, if at all. See
"Prospectus Summary--Corporate Structure".
Cash flow of operating subsidiaries may not be available to service the notes
Arch expects to service the interest payments on the notes out of cash made
available to it by its subsidiaries. Arch's ability to make payments of
principal and interest on the notes will depend upon Arch's subsidiaries
achieving and sustaining levels of performance in the future that would permit
such subsidiaries to pay dividends, distributions or fees to Arch in amounts
sufficient to permit such payments on the notes. Many factors will affect the
performance of Arch's subsidiaries. Some of them will be beyond Arch's control,
such as prevailing economic conditions. Arch's subsidiaries may not be able to
generate sufficient cash flow to cover required interest and principal payments
on their current and future indebtedness or the notes. If Arch is unable to
meet interest and principal payments in the future, it may, depending upon the
circumstances which then exist, seek additional equity or debt financing,
attempt to refinance its existing indebtedness or sell all or part of its
business or assets to raise funds to repay its indebtedness. However,
sufficient equity or debt financing may not be available or, if available, it
may not be available on terms acceptable to Arch; Arch may not be able to
refinance its existing indebtedness; and it may be impossible to raise
sufficient funds through asset sales. See
10
<PAGE>
"Use of Proceeds", "Arch's Selected Consolidated Financial and Operating Data",
"Arch Management's Discussion and Analysis of Financial Condition and Results
of Operations", "Description of Outstanding Indebtedness" and Arch's
consolidated financial statements and notes.
Holders must pay taxes on the original issue discount on the notes long before
receiving the associated cash payments
The notes will be issued at a discount from their stated principal amount. A
holder subject to United States federal income tax with respect to a note will
be required to include the discount in gross income as ordinary interest income
on an economic accrual basis, without regard to the holder's regular method of
accounting. Consequently, a holder will be required to include the discount in
taxable income long before receiving the cash representing that income at
maturity. See "Material Federal Income Tax Considerations".
Arch may be unable to repurchase notes upon a change of control
The subsidiaries' secured credit facility limits Arch's ability to repurchase
any of the notes. The facility also provides that certain change of control
events involving Arch or Arch's parent company will constitute a default. Any
future credit agreements or other agreements relating to indebtedness may
contain similar restrictions and provisions. If a change of control event
occurs at a time when Arch is prohibited from repurchasing the notes, Arch
could seek the consent of its lenders to repurchase the notes or could attempt
to refinance the borrowings that contain the prohibition. If Arch does not
obtain the required consent or repay the borrowings, Arch will remain
prohibited from repurchasing the notes. In such case, Arch's failure to
repurchase the tendered notes would constitute an event of default under the
indenture governing the notes. This, in turn, would constitute a default under
the secured credit facility and could constitute a default under other
indebtedness. Furthermore, no assurance can be given that Arch will have
sufficient funds available to satisfy its obligation to repurchase the notes
following such a change of control event. See "Description of Notes".
Arch may be unable to make a special offer to purchase
The secured credit facility may limit Arch's ability to make a special offer
to purchase. Any future credit agreements or other agreements relating to
indebtedness may contain similar restrictions and provisions. If Arch becomes
obligated to make a special offer to purchase at a time when it is prohibited
from making such an offer, Arch could seek the consent of its lenders to make
such an offer or could attempt to refinance the borrowings that contain the
prohibition. If Arch does not obtain the required consent or repay the
borrowings, Arch will remain prohibited from making such special offer to
purchase. In such case, Arch's failure to make a special offer to purchase
would constitute an event of default under the indenture for the notes which
would, in turn, constitute a default under the secured credit facility and
could constitute a default under other indebtedness. Furthermore, no assurance
can be given that Arch will have sufficient funds available to satisfy its
obligations to make a special offer to purchase. See "Description of
Outstanding Indebtedness" and "Description of Notes--Repurchase at the Option
of Holders--Special Offer to Purchase".
Debt instruments restrict operations
Various debt instruments impose operating and financial restrictions on Arch.
The subsidiaries' secured credit facility requires Arch's operating
subsidiaries to maintain specified financial ratios, including a maximum
leverage ratio and a minimum fixed charge coverage ratio. In specified
circumstances Arch itself would have to meet these requirements. In addition,
the secured credit facility limits or restricts, among other things, the
operating subsidiaries' ability to:
. declare dividends or redeem or repurchase capital stock;
. prepay, redeem or purchase debt;
. incur liens and engage in sale/leaseback transactions;
. make loans and investments;
11
<PAGE>
. incur indebtedness and contingent obligations;
. amend or otherwise alter debt instruments and other material agreements;
. engage in mergers, consolidations, acquisitions and asset sales;
. engage in transactions with affiliates; and
. alter its lines of business or accounting methods.
The indentures for the notes and for Arch's other issues of senior
subordinated notes limit, among other things:
. the incurrence of additional indebtedness by Arch and most of its
subsidiaries;
. the payment of dividends and other restricted payments by Arch and most
of its subsidiaries;
. asset sales;
. transactions with affiliates;
. the incurrence of liens; and
. 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 secured credit
facility and/or other debt instruments. Upon the occurrence of an event of
default, the creditors could elect to declare all amounts outstanding to be
immediately due and payable, together with accrued and unpaid interest. If Arch
were unable to repay any such amounts, the secured creditors could proceed
against the collateral securing a portion of the indebtedness. If the lenders
under the secured credit facility or other debt instruments accelerated the
payment of such indebtedness, we cannot assure you that the assets of Arch
would be sufficient to repay in full such indebtedness and other indebtedness
of Arch. In addition, because the secured credit facility and other debt
instruments limit Arch's ability to engage in various types of transactions
except under specified circumstances, Arch may be prohibited from entering into
transactions that could be beneficial to Arch. See "Description of Outstanding
Indebtedness".
No public market for the notes is likely to develop
The notes are not expected to trade on Nasdaq or any securities exchange, and
we cannot predict how much interest or sales volume there will be in private
transactions. Purchases and sales of notes may be very sporadic. Any degree of
liquidity of the notes will depend upon the number of holders of the notes, the
interest of securities dealers in making a market in the notes and other
factors. Unless an active trading market for the notes develops, the market
price and liquidity of the notes may be adversely affected. If the notes are
traded, they may trade at a discount from their face value, depending upon
prevailing interest rates, the market for similar securities, our performance
and various other factors. Although the new notes will be registered under the
Securities Act, holders who are affiliates, as defined under Rule 405 of the
Securities Act, of Arch may publicly offer and resell the new notes only in
compliance with the provisions of Rule 144 under the Securities Act. In order
to do so, the notes would have to trade on Nasdaq or a securities exchange.
Failure to exchange private notes will impair liquidity
New notes will be issued in exchange for old notes only after timely receipt
by the exchange agent of all required documentation. Therefore, if you wish to
tender your old notes in exchange for new notes, you should allow sufficient
time to ensure timely delivery. Neither we nor the exchange agent is under any
duty to give notification of defects or irregularities in your documentation.
Notes that are not tendered or are tendered but not accepted will continue to
be subject to existing restrictions on transfer. To the extent that notes are
tendered and accepted in the exchange offer, the trading market for unexchanged
notes could be adversely affected due to the limited amount, or "float", of the
old notes that are expected to remain outstanding following the
12
<PAGE>
exchange offer. Generally, a lower "float" of a security could result in less
demand to purchase such security and could, therefore, result in lower prices
for such security. For the same reason, to the extent that a large amount of
notes are not exchanged in the exchange offer, the trading market for the new
notes could be adversely affected. See "The Exchange Offer" and "Plan of
Distribution".
Uncertainties Related to the MobileMedia Acquisition
Integrating the two companies presents challenges
Arch may not be able to successfully integrate MobileMedia's operations. Any
difficulties or problems encountered in the integration process could have a
material adverse effect on the combined company. Even if integrated in a timely
manner, there can be no assurance that Arch's operating performance after the
MobileMedia acquisition will be successful or will fulfill management's
objectives described in "Business--Business Strategy". Until integration is
complete, the two companies will continue to operate with some autonomy. This
degree of autonomy may blunt the implementation of the combined company's
operating strategy.
The combination of the two companies will require, among other things,
coordination of administrative, sales and marketing, distribution and
accounting and finance functions and expansion of information and management
systems. The integration process could cause the interruption of the activities
of the two businesses, or a loss of momentum. The difficulties of such
integration may initially be increased by the necessity of coordinating
geographically separate organizations and integrating personnel with disparate
business backgrounds and corporate cultures. Arch may not be able to retain key
employees. The process of integrating the businesses of Arch and MobileMedia
may require a disproportionate amount of time and attention of Arch's
management and financial and other resources of Arch and may involve other,
unforeseen difficulties.
Similar risks will attend future acquisition opportunities which Arch intends
to pursue. Furthermore, no assurance can be given that suitable acquisition
transactions can be identified, financed and completed on acceptable terms, or
that Arch will participate in any future consolidation of the paging industry.
Disruption of MobileMedia's operations that occurred during insolvency
proceedings may continue
MobileMedia's business operations were adversely affected by difficulties in
integrating the operations of businesses acquired in 1995 and 1996, by
liquidity problems arising before its January 30, 1997 bankruptcy filing and by
the reluctance of some customers and potential customers to do business with
MobileMedia while it operated under Chapter 11. Any continued deterioration of
MobileMedia's business following MobileMedia's acquisition by Arch, including
the loss of significant numbers of key employees could have material adverse
effects. See "Business".
Downturn in MobileMedia's units in service may continue
Cancellation of units in service can significantly affect the results of
operations of wireless messaging service providers. The sales and marketing
costs associated with attracting new subscribers are substantial compared to
the costs of providing service to existing customers. Because the paging
business is characterized by high fixed costs, cancellations directly and
adversely affect EBITDA.
After filing for bankruptcy protection on January 30, 1997, MobileMedia
experienced a significant decline in units in service. At March 31, 1999,
MobileMedia had 3,106,775 units in service compared to 3,440,342 units in
service at December 31, 1997. A failure to correct this cancellation trend
could have a material adverse effect on the combined company. See "Business--
MobileMedia's Paging and Messaging Services, Products and Operations".
Amortization charges may affect earnings sooner than expected
Under purchase accounting treatment for the MobileMedia acquisition, Arch
must record a substantial amount of goodwill and other intangible assets. This
will result in substantial amortization charges to the
13
<PAGE>
consolidated income of Arch over the useful lives of such assets. Arch
estimates the incremental amount of such charges to be approximately $26.0
million per year for ten years. However, actual charges could vary
significantly if the underlying assets are impaired or if the useful lives of
such assets are less than currently estimated. See "Unaudited Selected Pro
Forma Consolidated Financial Data".
Creditors may allege defaults
It is possible that holders of some of Arch's outstanding indebtedness may
allege that the MobileMedia acquisition constituted either a breach or a
default or a change in control of Arch entitling them to immediate repayment of
their indebtedness. See "Description of Outstanding Indebtedness". The
magnitude of any resulting adverse consequences would depend upon, among other
factors, the diligence and vigor with which debt holders may seek to assert any
such rights and pursue any such remedies, and Arch's ability to prevail in its
interpretation of the loan documents or otherwise resolve matters on acceptable
terms.
Business and Financial Risks
Continued losses are likely
The combined company expects to continue to report net losses for the
foreseeable future and cannot predict when, if ever, it is likely to attain
profitability. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations", "MobileMedia Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the
consolidated financial statements and notes of Arch and MobileMedia.
Arch and MobileMedia have reported losses in all but one of the periods shown
in the table below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
Three Months
Ended
March 31,
1996 1997 1998 1999
--------- ------- ------- ------------
<S> <C> <C> <C> <C>
Net income (loss): (dollars in millions)
Arch.......................... $ (87.0) $(146.6) $(167.1) $(38.7)
MobileMedia................... $(1,059.9) $(124.6) $ 35.6 $ (7.7)
</TABLE>
Furthermore, MobileMedia had net income during the year ended December 31,
1998 solely because of a $94.2 million gain on the sale of transmission towers
and related equipment. After giving effect to the MobileMedia acquisition, Arch
would have incurred, on a pro forma basis, losses before extraordinary item of
$154.2 million for the year ended December 31, 1998 and $49.6 million for the
three months ended March 31, 1999. See the consolidated financial statements
and notes of Arch and MobileMedia and "Unaudited Pro Forma Condensed
Consolidated Statement of Operations".
For both Arch and MobileMedia, these historical net losses have resulted
principally from substantial depreciation and amortization expense, primarily
related to intangible assets and pager depreciation, interest expense, the
impairment of long-lived assets in the case of MobileMedia and other costs of
growth. Substantial and increased amounts of debt are expected to be
outstanding for the foreseeable future. This will result in significant
additional interest expense which could have a material adverse effect on
Arch's future income or loss. See "--Funding for future capital needs is not
assured" and "--High degree of leverage burdens operations".
Revenues and operating results may fluctuate
Arch believes that future fluctuations in its revenues and operating results
may occur due to many factors, including competition, subscriber turnover, new
service developments and technological change. Arch's current and planned debt
repayment levels are, to a large extent, fixed in the short term, and are based
in part on its expectations as to future revenues and cash flow growth. Arch
may be unable to adjust spending in a timely manner to compensate for any
revenue or cash flow shortfall. It is possible that, due to future
fluctuations, Arch's revenue, cash flow or operating results may not meet the
expectations of securities analysts or investors.
14
<PAGE>
This may have a material adverse effect on the amount of cash flow available
for debt service. If shortfalls were to cause Arch not to meet the financial
covenants contained in its debt instruments, the debtholders could declare a
default and seek immediate repayment. See "--Payments on the notes are
structurally subordinated to other debt under Arch's holding company
structure".
Funding for future capital needs is not assured
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including possible acquisitions. Future amounts of capital required
by Arch will depend upon a number of factors. These factors include subscriber
growth, the type of paging devices and services demanded by customers, service
revenues, technological developments, marketing and sales expenses, competitive
conditions, the nature and timing of Arch's N-PCS strategy and acquisition
strategies and opportunities. No assurance can be given that additional equity
or debt financing will be available to Arch when needed on acceptable terms, if
at all. If sufficient financing is unavailable when needed, Arch may experience
material adverse effects. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Description of Outstanding Indebtedness".
Competition and technological change may undermine Arch's business
There can be no assurance that the combined company will be able to compete
successfully with current and future competitors in the paging business or with
competitors offering alternative communication technologies. See "Industry
Overview--Competition".
Competition may intensify and may adversely affect margins
Arch and MobileMedia have each faced competition from other paging service
providers in all markets in which they operate, including some competitors who
hold nationwide licenses. Due in part to competitive conditions, monthly fees
for basic paging services have generally declined in recent years. The combined
company may face significant price-based competition in the future which could
have a material adverse effect on its revenues and EBITDA. Some competitors
possess greater financial, technical and other resources than the combined
company. A trend towards increasing consolidation in the paging industry in
particular and the wireless communications industry in general in recent years
has led to competition from increasingly larger and better capitalized
competitors. If any of such competitors were to devote additional resources to
the paging business or focus on Arch's or MobileMedia's historical markets,
there could be a material adverse effect on the combined company.
New two-way paging technology may adversely affect Arch's competitive position
Competitors are currently using and developing a variety of two-way paging
technologies. Neither Arch nor MobileMedia currently provides such two-way
services, other than as a reseller. Although these services generally are
higher priced than traditional one-way paging services, this situation may
change. Technological improvements could result in increased capacity and
efficiency for two-way paging technologies and this could result in increased
competition for the combined company. Future technological advances in the
telecommunications industry could increase new services or products competitive
with the paging services historically provided by Arch and MobileMedia. Future
technological advances could also require the combined company to reduce the
price of its paging services or incur additional capital expenditures to meet
competitive requirements. Recent and proposed regulatory changes by the FCC are
aimed at encouraging such technological advances and new services. Other forms
of wireless two-way communications technology also compete with the paging
services that the combined company provides. These include cellular and
broadband personal communications services, which are commonly referred to as
PCS, as well as specialized mobile radio services. Although these services are
primarily focused on two-way voice communications, many service providers are
electing to provide paging services as an adjunct to their primary services.
15
<PAGE>
Obsolescence in company-owned units may impose additional costs on Arch
Technological change may also adversely affect the value of the paging units
owned by Arch and MobileMedia that are leased to their subscribers. If Arch's
or MobileMedia's current subscribers request more technologically advanced
units, including two-way units, the combined company could incur additional
inventory costs and capital expenditures if required to replace units leased to
its subscribers within a short period of time. Such additional investment or
capital expenditures could have a material adverse effect on the combined
company.
Government regulation may burden operations
Licenses may not be automatically renewed
The combined company's FCC paging licenses are for varying terms of up to 10
years. When the licenses expire, renewal applications must receive approval
from the FCC. To date, the FCC has approved each assignment and transfer of
control for which Arch and MobileMedia have sought approval; however, no
assurance can be given that any of the combined company's renewal applications
will be free of challenge or will be granted by the FCC.
Regulatory changes could add burdens or benefit competing technologies
The FCC continually reviews and revises its rules affecting paging companies.
Therefore, regulatory requirements that apply to the combined company may
change significantly over time. Specific examples of regulatory changes that
could impose additional administrative and/or economic burdens on the combined
company, or that could benefit competing technologies, are discussed under
"Industry Overview--FCC Regulatory Approval and Authorizations", "--
Telecommunications Act of 1996", "--Future Regulation", "--State Regulation",
and "--Competition".
Acquisitions of stock of Arch's parent company by foreigners could jeopordize
Arch's licenses
The Communications Act limits foreign investment in and ownership of radio
common carriers licensed by the FCC, as well as their parent companies. Arch's
parent company may not have more than 25% of its stock owned or voted by aliens
or their representatives, a foreign government or its representatives or a
foreign corporation if the FCC finds that the public interest would be served
by denying such ownership. Arch's subsidiaries that are radio common carrier
licensees are subject to more stringent requirements and may have only up to
20% of their stock owned or voted by aliens or their representatives, a foreign
government or their representatives or a foreign corporation. This ownership
restriction is not subject to waiver. See "Industry Overview--Regulation". The
certificate of incorporation of Arch's parent company permits the redemption of
shares of its capital stock from foreign stockholders where necessary to
protect FCC licenses held by Arch or its subsidiaries, but such a redemption
would be subject to the availability of capital to the parent company and any
restrictions contained in applicable debt instruments and under the Delaware
corporations statute. These restrictions currently would not permit any such
redemptions. The failure to redeem shares promptly could jeopardize the FCC
licenses held by Arch or its subsidiaries. See "--High degree of leverage
burdens operations", "--Competition and technological change may undermine
Arch's business" and "Industry Overview--Regulation".
Arch cannot control third parties on whom Arch depends for products and
services
The combined company does not manufacture any of the paging units used in its
paging operations. It is dependent primarily on Motorola and NEC America Inc.
to obtain sufficient pager inventory for new subscriber and replacement needs
and on Glenayre Electronics, Inc. and Motorola for sufficient terminals and
transmitters to meet its expansion and replacement requirements. Significant
delays in obtaining paging units, terminals or transmitters, such as
MobileMedia experienced before its bankruptcy filing, could lead to disruptions
in operations and adverse financial consequences. Purchase agreements with
Motorola expire on March 17, 2000,
16
<PAGE>
and February 6, 2000. There can be no assurance that the agreements with
Motorola will be renewed or, if renewed, that such agreements will be on terms
and conditions as favorable to the combined company as those under the current
agreements. See "Business--Sources of Equipment".
The combined company relies on third parties to provide satellite
transmission for some aspects of its paging services. To the extent there are
satellite outages or if satellite coverage is impaired in other ways, the
combined company may experience a loss of service until such time as satellite
coverage is restored, which could have a material adverse effect.
Loss of key personnel could adversely impact operations
Arch's success will depend, to a significant extent, upon the continued
services of a relatively small group of executive personnel. Arch does not have
employment agreements with any of its current executive officers, or maintain
life insurance on their lives, although all executive officers have entered
into executive retention agreements with Arch. The loss or unavailability of
one or more of its executive officers or the inability to attract or retain key
employees in the future could have a material adverse effect on Arch. See
"Management".
Divisional reorganization may not achieve objectives
Arch is currently reorganizing its operating divisions. Once fully
implemented, this divisional reorganization is expected to result in annual
cost savings of approximately $15.0 million. Arch recorded a restructuring
charge of $14.7 million in 1998. There can be no assurance that the expected
cost savings will be achieved or that the reorganization of Arch's business
will be accomplished smoothly, expeditiously or successfully. The difficulties
of the divisional reorganization may be increased by the need to integrate
MobileMedia's operations in many locations and to combine two corporate
cultures. See "Arch Management's Discussion and Analysis of Financial Condition
and Results of Operations--Divisional Reorganization".
Impact of the Year 2000 issue is not fully known
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
combined company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The combined company is in the process of reviewing, evaluating and, where
necessary, modifying or replacing its computerized systems and applications to
enable it to be Year 2000 ready. This includes both information and non-
information technology systems. Any failure of systems or products to be Year
2000 ready could have a material adverse effect on the combined company's
business, financial condition, results of operations or prospects.
Although Arch and MobileMedia each began testing its internal business-
related hardware and software applications in 1998, there can be no assurance
that such testing has detected or will detect all applications that may be
affected by Year 2000 compliance problems. The combined company's objective is
to make its internal computer systems Year 2000 ready by end of year 1999 but
there can be no assurance that this objective will be met. Furthermore, it is
possible that one or more mission critical vendors, such as utility providers,
telephone carriers, other paging carriers, satellite carriers or other
telecommunication providers, may not be Year 2000 compliant. Because of the
unique nature of those vendors, alternative providers of these services may not
be available. Furthermore, all pagers and paging-related equipment used by the
combined company and its customers are manufactured by third parties. Although
the combined company has initiated testing of such equipment, it has relied to
a large extent on the representations of its vendors with respect to their
readiness and cannot offer any assurance about the accuracy of its vendors'
representations. See "Arch Management's Discussion of Financial Condition and
Results of Operations--Year 2000 Compliance" and "MobileMedia Management's
Discussion of Financial Condition and Results of Operations--Year 2000
Compliance".
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are made under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
You should consider any statements that are not statements of historical fact
to be forward-looking statements. These include statements to the effect that
Arch or its management or board of directors "believe", "expect", "anticipate",
"plan" and similar expressions. A number of important factors could cause
actual results to differ materially from those expressed in any forward-looking
statements. See "Risk Factors". Arch undertakes no obligation to update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. We will issue new,
registered notes in exchange for old, unregistered notes having an identical
principal amount. The old notes surrendered in exchange for new notes will be
retired and cancelled and cannot be reissued. Accordingly, issuance of the new
notes will not result in a change in the outstanding indebtedness of Arch. See
"The Exchange Offer". The terms of the new notes will be identical in all
material respects to the old notes except that
. the new notes have been registered under the Securities Act and,
therefore, they are not subject to transfer restrictions and
. the provisions relating to registration rights and liquidated damages
through an increase in the stated interest rate on the old notes will be
eliminated.
The net cash proceeds of the old notes, after deducting the discount to the
initial purchasers and offering expenses paid by Arch, were $134.6 million. The
table below sets forth how the net proceeds of the notes and other sources of
cash were used to consummate the MobileMedia acquisition:
(dollars in millions)
<TABLE>
<CAPTION>
Sources
-------
<S> <C>
Rights offerings.............. $217.2
Notes (net of discounts and
expenses)................... 134.6
Secured credit facility....... 181.0
------
$532.8
======
</TABLE>
<TABLE>
<CAPTION>
Uses
----
<S> <C>
Cash to secured creditors....... $479.0
Administrative claims........... 34.6
Transaction fees and expenses... 19.2
------
$532.8
======
</TABLE>
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Arch at March 31, 1999
(1) on an actual basis and (2) pro forma as adjusted to reflect the
consummation of the MobileMedia acquisition and related transactions. See "Use
of Proceeds", "Description of Outstanding Indebtedness" and "Description of
Notes". This table should be read together with the other financial information
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------
Pro Forma
Actual As Adjusted
---------- -------------
(dollars in thousands)
<S> <C> <C>
Current maturities of long-term debt.................. $ 1,250 $ 1,250
========== ============
Long-term debt, less current maturities:
Amended Credit Facility(1).......................... $ 288,750 $ 469,750
13 3/4% Senior Notes due 2008....................... -- 139,784
12 3/4% Senior Notes due 2007(2).................... 127,675 127,675
9 1/2% Senior Notes due 2004(2) .................... 125,000 125,000
14% Senior Notes due 2004(2) ....................... 100,000 100,000
Other............................................... 2,275 2,275
---------- ------------
Total long-term debt.............................. 643,700 964,484
Stockholder's equity:
Common stock--$.01 par value,
authorized 1,000 shares, issued and
outstanding 849 shares............................. -- --
Additional paid-in capital.......................... 642,266 887,956
Accumulated deficit................................. (521,282) (521,282)
---------- ------------
120,984 366,674
---------- ------------
Total capitalization.............................. $ 765,934 $1,332,408
========== ============
</TABLE>
- --------
(1) The new notes offered by this prospectus will be structurally subordinated
in right of payment to this obligation. This obligation is secured by
various assets and pledges of capital stock and benefits from guarantees.
See "Prospectus Summary--Corporate Structure".
(2) The new notes will rank equal in right of payment with this obligation.
19
<PAGE>
THE EXCHANGE OFFER
Purpose of the Exchange Offer
As a condition to the sale of the old notes, Arch agreed to make an exchange
offer of new notes registered under the Securities Act for old notes. This will
remove most of the transfer restrictions originally imposed on the notes by
federal securities laws. In the exchange and registration rights agreement,
Arch further agreed to take the following actions, unless the exchange offer is
not permitted by applicable law or SEC policy:
. file a registration statement under the Securities Act with respect to
the new notes by July 18, 1999;
. use its best efforts to cause the registration statement to become
effective under the Securities Act by October 31, 1999; and
. use its best efforts to complete the exchange offer within 30 business
days after the registration statement is declared effective.
Resale of New Notes
Based upon an interpretation by the staff of the SEC contained in no-action
letters issued to other companies, Arch believes that a noteholder will be
allowed to resell new notes to the public without further registration under
the Securities Act and without delivering a prospectus to the purchasers of the
new notes if the noteholder
. is not an affiliate of Arch within the meaning of Rule 405 under the
Securities Act;
. is not a broker-dealer who purchases such new notes directly from Arch
to resell pursuant to Rule 144A or any other available exemption under
the Securities Act; and
. exchanges old notes for new notes in the ordinary course of business and
is not participating, does not intend to participate, and has no
arrangement with any person to participate, in a distribution of the new
notes.
However, any holder who acquires new notes in the exchange offer for the
purpose of distributing or participating in the distribution of the new notes
or is a broker-dealer cannot rely on the position of the staff of the
Commission enumerated in these no-action letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Each broker-dealer that receives new notes for its own
account in exchange for old notes, where such old notes were acquired by it as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
new notes. The letter of transmittal to be used in the exchange offer states
that by doing this, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of new notes received in exchange for old
notes where the old notes were acquired by the broker-dealer as a result of
market-making or other trading activities. In the exchange and registration
rights agreement, Arch has agreed to make this prospectus, including any
amendments or supplements, available to broker-dealers for use in connection
with any resale for a period of one year after the expiration date of the
exchange offer. See "Plan of Distribution".
Terms of the Exchange Offer
Arch will accept any and all old notes validly tendered and not withdrawn
before the expiration date, upon the terms and subject to the conditions set
forth in this prospectus and in the letter of transmittal which accompanies
this prospectus. Arch will issue $1,000 principal amount of new notes in
exchange for each $1,000 principal amount of old notes surrendered pursuant to
the exchange offer. Old notes may be tendered only in whole multiples of
$1,000.
20
<PAGE>
The form and terms of the new notes are the same as the form and terms of the
old notes except that
. the new notes have been registered under the Securities Act and,
therefore, the new notes will not bear legends restricting their
transfer; and
. holders of the new notes will not be entitled to any of the rights of
holders of the old notes under the exchange and registration rights
agreement including registration rights and the right to receive
additional interest as liquidated damages if registration of their notes
is delayed past specified deadlines.
The new notes will evidence the same indebtedness as the old notes which they
replace and will be issued under the indenture governing the notes, which also
authorized the issuance of the old notes. The new notes, like the old notes,
will be entitled to the benefits of the indenture. Both series of notes will be
treated as a single class of debt securities under the indenture.
As of the date of this prospectus, $147.0 million in aggregate principal
amount of old notes are outstanding. Only a registered holder of old notes, or
such holder's legal representative or attorney-in-fact, as reflected on the
records of the trustee under the indenture, may participate in the exchange
offer. There will be no fixed record date for determining registered holders of
the old notes entitled to participate in the exchange offer.
Holders of old notes do not have any appraisal or dissenters' rights under
the indenture in connection with the exchange offer. Arch intends to conduct
the exchange offer in accordance with the provisions of the exchange and
registration rights agreement and the applicable requirements of the Securities
Act, the Exchange Act of 1934, and the rules and regulations of the SEC.
Arch will be deemed to have accepted validly tendered old notes only when, as
and if Arch gives oral or written notice of acceptance to the exchange agent.
The exchange agent will act as agent for the tendering holders of old notes for
the purposes of receiving the new notes from Arch.
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees with respect to the exchange of old notes
pursuant to the exchange offer and will be required to pay transfer taxes only
as provided in the instructions in the letter of transmittal. Arch will pay all
charges and expenses in connection with the exchange offer, other than
applicable taxes described below. See "--Fees and Expenses".
Expiration Date; Extensions; Amendments
The expiration date will be 5:00 p.m., New York City time on September 23,
1999, unless Arch, in its sole discretion, extends the exchange offer. In that
case, the term expiration date will mean the latest date and time to which the
exchange offer is extended.
In order to extend the exchange offer, Arch must
. notify the exchange agent of any extension by oral or written notice;
and
. mail to the registered holders an announcement disclosing the
approximate number of old notes already deposited, before 9:00 a.m., New
York City time, on the next business day after the previously scheduled
expiration date.
Arch reserves the right, in its reasonable discretion,
. to delay accepting any old notes;
. to extend the exchange offer; or
. if any conditions set forth below under "--Conditions" is not satisfied,
to terminate the exchange offer
by giving oral or written notice of such delay, extension or termination to the
exchange agent. Any delay in acceptance, extension, termination or amendment
will be followed as promptly as practicable by oral or written notice to the
registered holders. If the exchange offer is amended in a manner that Arch
determines to
21
<PAGE>
constitute a material change, Arch will promptly disclose the amendment in a
prospectus supplement that will be distributed to the registered holders. Arch
will also extend the exchange offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure
to the registered holders, if the exchange offer would otherwise expire during
such five to ten business day period.
Interest on the New Notes
The new notes will bear interest at 13 3/4% per year from and including April
6, 1999. Interest on the new notes will be payable twice a year, on each April
15 and October 15, beginning October 15, 1999. In order to avoid duplicative
payment of interest, all interest accrued on old notes that are accepted for
exchange before October 15, 1999 will be superseded by the interest that is
deemed to have accrued on the new notes from April 6, 1999 through the date of
the exchange.
Procedures for Tendering
Only a registered holder of old notes may tender old notes in the exchange
offer. To tender in the exchange offer, a holder must either
. follow DTC's Automated Tender Offer Program procedures; or
. do the following:
. complete, sign and date the letter of transmittal, or a facsimile;
. have the signatures guaranteed if required by the letter of
transmittal; and
. mail or otherwise deliver the letter of transmittal or facsimile to
the exchange agent at the address set forth below under "--Exchange
Agent" for receipt prior to the expiration date.
In addition, either
. the exchange agent must receive certificates for the old notes along
with the letter of transmittal;
. prior to the expiration date, the exchange agent must receive a timely
confirmation of a book-entry transfer of the old notes, if such
procedure is available, into the exchange agent's account at its
depositary, DTC, pursuant to the procedure for book-entry transfer
described below; or
. the holder must comply with the guaranteed delivery procedures described
below.
A tender by a holder that is not withdrawn prior to the expiration date will
constitute an agreement between such holder and Arch in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at your choice and your risk.
Instead of delivery by mail, it is recommended that you use an overnight or
hand delivery service, properly insured. In all cases, sufficient time should
be allowed to assure delivery to the exchange agent before the expiration date.
No letter of transmittal or old notes should be sent to Arch. You may request
your broker, dealer, commercial bank, trust company or nominee to effect these
transactions for you.
If you are the beneficial owner of old notes that are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee and you
wish to tender, you should contact the registered holder promptly and instruct
the registered holder to tender on your behalf. Holders who intend to tender
old notes through DTC's ATOP procedures need not submit a letter of
transmittal. If you are a beneficial owner and you wish to tender on your own
behalf, you must, prior to completing and executing the letter of transmittal
and delivering your old notes, either make appropriate arrangements to register
ownership of the old notes in your own name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time and may therefore be impractical.
22
<PAGE>
Signatures on a letter of transmittal or a notice of withdrawal described
below under "--Withdrawal of Tenders" must be guaranteed by an eligible
institution, as defined below, unless the old notes are tendered
. by a registered holder who has not completed the box titled "Special
Delivery Instructions" on the letter of transmittal; or
. for the account of an eligible institution, as defined below.
Where signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be made by an eligible
institution that is a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank
or trust company having an office or correspondent in the United States or an
eligible guarantor institution as described in Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the letter of transmittal.
If the letter of transmittal is signed by a person other than the registered
holder of the old notes being tendered, the old notes must be endorsed or
accompanied by a properly completed bond power, signed by the registered holder
as the registered holder's name appears on the old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should indicate that fact when signing, and should submit evidence
satisfactory to Arch of their authority to act in that capacity with the letter
of transmittal, unless Arch waives the requirement.
The exchange agent and the depositary have confirmed that any financial
institution that is a participant in DTC's system may use DTC's ATOP procedures
to tender old notes. All questions as to the validity, form, eligibility,
including time of receipt, acceptance and withdrawal of tendered old notes will
be determined by Arch in its sole discretion. Arch's determination will be
final and binding. Arch reserves the absolute right to reject any and all old
notes not properly tendered or any old notes if Arch's acceptance of those
notes would be unlawful, in the opinion of Arch's legal counsel. Arch also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular old notes. Arch's interpretation of the terms and conditions
of the exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Any defects or irregularities in
connection with tenders of old notes must be cured by the deadline set by Arch,
unless Arch waives them. Although Arch intends to notify holders of defects or
irregularities with respect to tenders of old notes, neither Arch, the exchange
agent nor any other person shall incur any liability for failure to give that
kind of notification. Tenders of old notes will not be deemed to have been made
until such defects or irregularities have been cured or waived.
Although Arch has no present plan to acquire any old notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any old notes that are not tendered pursuant to the exchange offer,
Arch reserves the right in its sole discretion to purchase or make offers for
any old notes that remain outstanding after the expiration date or, as set
forth below under "--Conditions", to terminate the exchange offer and purchase
old notes in the open market, in privately negotiated transactions or
otherwise, to the extent permitted by applicable law. The terms of any such
purchases or offers could differ from the terms of the exchange offer.
By tendering, each holder of old notes will represent to Arch that, among
other things,
. it is acquiring new notes in the exchange offer in the ordinary course
of its business;
. it has no arrangement or understanding with any person to participate in
the distribution of the new notes;
23
<PAGE>
. it agrees that any person who is a broker-dealer registered under the
Exchange Act or is participating in the exchange offer for the purpose
of distributing the new notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection
with a secondary resale transaction of the new notes acquired by such
holder and cannot rely on the position of the staff of the SEC set forth
in various no-action letters;
. it understands that any secondary resale transaction as described in the
third clause above and any resales of new notes obtained by it in
exchange for old notes acquired by it directly from Arch should be
covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508 of the SEC's
Regulation S-K;
. it is not a broker-dealer that owns old notes acquired directly from
Arch or an affiliate of Arch; and
. it is not an affiliate, as defined in Rule 405, of Arch.
Return of Old Notes
If any tendered notes are not accepted for any reason set forth in the terms
and conditions of the exchange offer or if old notes are withdrawn or are
submitted for a greater principal amount than the holders desire to exchange,
Arch will return the unaccepted, withdrawn or non-exchanged notes without
expense to their holder as promptly as practicable. Old notes tendered by book-
entry transfer into the exchange agent's account at the depositary pursuant to
the book-entry transfer procedures described below will be credited to an
account maintained with the depositary.
Book-Entry Transfer
The exchange agent will seek to establish an account with respect to the old
notes at the depositary for purposes of the exchange offer within two business
days after the date of this prospectus. Any financial institution that is a
participant in the depositary's systems may make book-entry delivery of old
notes by causing the depositary to transfer them into the exchange agent's
account at the depositary in accordance with the depositary's procedures for
transfer. However, although a holder may effect delivery of old notes through
book-entry transfer at the depositary, it must also either follow the
depositary's ATOP procedures, submit the letter of transmittal or facsimile,
with any required signature guarantees and any other required documents, to the
exchange agent on or before the expiration date or follow the guaranteed
delivery procedures described below.
Guaranteed Delivery Procedures
Holders whose old notes are not immediately available or who cannot deliver
their old notes, the letter of transmittal or any other required documents to
the exchange agent before the expiration date, may effect a tender if:
. the tender is made through an eligible institution;
. before the expiration date, the exchange agent receives from the
eligible institution, by facsimile transmission, mail or hand delivery,
a properly completed and duly executed notice of guaranteed delivery
substantially in the form provided by Arch
. setting forth the name and address of the holder, the certificate
number(s) of the old notes and the principal amount of old notes
tendered;
. stating that the tender is being made; and
. guaranteeing that it will deposit with the exchange agent, within
five New York Stock Exchange trading days after the expiration date,
the letter of transmittal or a facsimile, together with the
certificate(s) representing the old notes in proper form for
transfer or a book-entry confirmation and any other documents
required by the letter of transmittal; and
24
<PAGE>
. the properly executed letter of transmittal or facsimile, as well as the
certificate(s) representing all tendered notes in proper form for
transfer and all other documents required by the letter of transmittal
are received by the exchange agent within five New York Stock Exchange
trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to all holders who wish to tender their old notes according to the
guaranteed delivery procedures described above.
Withdrawal of Tenders
You may withdraw tenders of old notes at any time before 5:00 p.m. on the
expiration date, except as otherwise provided below.
To withdraw a tender of old notes, a written or facsimile transmission notice
of withdrawal must be received by the exchange agent at its address set forth
in this prospectus before 5:00 p.m., New York City time, on the expiration
date. Any such notice of withdrawal must
. specify the name of the holder who deposited the notes to be withdrawn,
. identify the notes to be withdrawn, including the certificate number or
numbers and principal amount of such notes, and
. be signed by such holder in the same manner as the original signature on
the letter of transmittal by which the notes were tendered, including
any required signature guarantees.
Arch will determine, in its sole discretion, all questions as to the
validity, form and eligibility of withdrawal notices including time of receipt.
Arch's determination will be final and binding on all parties. Any old notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
exchange offer and no new notes will be issued in exchange for them unless the
old notes that are withdrawn are later validly retendered. Properly withdrawn
old notes may be retendered by following one of the procedures described above
under "--Procedures for Tendering" at any time before the expiration date.
Conditions
Regardless of any other term of the exchange offer, Arch will not be required
to exchange new notes for any old notes if it reasonably believes that the
exchange offer violates applicable law, rules or regulations or an applicable
interpretation of the staff of the SEC. In that case, Arch may
. refuse to accept any old notes and return all tendered old notes to
their holders; or
. extend the exchange offer and retain all old notes tendered before the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw those notes as described under "--Withdrawal of
Tenders".
Liquidated Damages
The old notes will accrue liquidated damages if specified deadlines are not
met in connection with the exchange offer. See "Description of Notes--
Registration Rights; Liquidated Damages".
Termination of Certain Rights
After the exchange offer is consummated, all rights of noteholders under the
exchange and registration rights agreement, including registration rights, will
terminate except with respect to Arch's continuing obligations
. to indemnify the holders, including any broker-dealers and specified
parties related to the holders against certain liabilities, including
liabilities under the Securities Act,
25
<PAGE>
. to provide, upon the request of any holder of an old note, the
information required by Rule 144A(d)(4) under the Securities Act in
order to permit resales of the note pursuant to Rule 144A,
. use its best efforts to keep the registration statement effective and to
amend and supplement this prospectus in order to permit this prospectus
to be lawfully delivered by all persons subject to the prospectus
delivery requirements of the Securities Act for so long as those persons
must comply with that requirement in order to resell the new notes, and
. to provide copies of the latest version of this prospectus to broker-
dealers upon their request for a period of not less than one year after
the expiration date.
Exchange Agent
IBJ Whitehall Bank & Trust Company has been appointed as exchange agent for
the exchange offer. You should direct questions and requests for assistance,
requests for additional copies of this prospectus or of the letter of
transmittal and requests for notice of guaranteed delivery, to the exchange
agent addressed as follows:
By Registered or Certified By Facsimile: 212-858-2611
Mail or
Overnight Delivery: Attn: Customer Service
IBJ Whitehall Bank & Trust
Company
1 State Street New York, New
York 10004
Confirm by Telephone: 212-858-
2103
Delivery of the letter of transmittal to a different address or transmission
of instructions to a different facsimile address does not constitute a valid
delivery of such letter of transmittal.
Fees and Expenses
Arch will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, by telephone or in person by officers and regular employees
of Arch and its affiliates.
Arch has not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. Arch, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
The cash expenses to be incurred in connection with the exchange offer will
be paid by Arch and are estimated in the aggregate to be approximately
$125,000. These expenses include registration fees, fees and expenses of the
exchange agent and the trustee, accounting and legal fees and printing costs,
among others.
Arch will pay all transfer taxes, if any, applicable to the exchange of old
notes pursuant to the exchange offer. If, however, a transfer tax is imposed
for any reason other than the exchange of the old notes pursuant to the
exchange offer, then the amount of any such transfer taxes, whether imposed on
the registered holder or any other persons, will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or any exemption
from having to pay is not submitted with the letter of transmittal, the amount
of the transfer taxes will be billed directly to the tendering holder.
Consequence of Failure to Exchange
Participation in the exchange offer is voluntary. Holders of old notes are
urged to consult their financial and tax advisors in making their own
decisions on what action to take.
26
<PAGE>
The old notes that are not exchanged for new notes in the exchange offer will
remain restricted securities. Accordingly, such old notes may be resold only
. to an entity which the seller reasonably believes is a qualified
institutional buyer in a transaction meeting the requirements of Rule
144A under the Securities Act,
. in a transaction meeting the requirements of Rule 144 under the
Securities Act,
. outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act,
. in accordance with another exemption from the registration requirements
of the Securities Act and based upon an opinion of counsel if Arch so
requests,
. to Arch, or
. pursuant to an effective registration statement,
and, in each case, in accordance with any applicable securities laws of any
state of the United States or any other applicable jurisdiction.
Accounting Treatment
For accounting purposes, Arch will recognize no gain or loss as a result of
the exchange offer. The expenses of the exchange offer will be amortized over
the term of the new notes.
27
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--ARCH
The following table sets forth selected historical consolidated financial and
operating data of Arch for the year ended August 31, 1994, the four months
ended December 31, 1993 and 1994, each of the five years ended December 31,
1998 and the three months ended March 31, 1998 and 1999. The selected financial
and operating data as of December 31, 1996, 1997 and 1998 and for each of the
three years ended December 31, 1998 have been derived from Arch's audited
consolidated financial statements and notes. The selected financial and
operating data as of March 31, 1999 and for the three months ended March 31,
1998 and 1999 have been derived from Arch's unaudited consolidated financial
statements and notes. The following summary financial information and operating
data as of and for the four months ended December 31, 1993 and 1994 and the
year ended December 31, 1994 and the year ended August 31, 1994 have been
derived from the parent company's consolidated financial statements which are
not included in this prospectus. You should read the following consolidated
financial information in conjunction with "Arch Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Arch's
consolidated financial statements and notes.
Effective January 1, 1995, the parent company changed its fiscal year end
from August 31 to December 31. Arch has elected to include in the following
table, for comparative purposes, unaudited financial statements for the periods
September 1, 1993 through December 31, 1993 and January 1, 1994 through
December 31, 1994.
In the following table, equity in loss of affiliate represents Arch's share
of net losses of Benbow PCS Ventures, Inc. since Arch's acquisition of Westlink
Holdings, Inc. in May 1996. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
The extraordinary item is an extraordinary charge resulting from prepayment
of indebtedness. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations".
Adjusted EBITDA, as determined by Arch, does not reflect restructuring
charge, equity in loss of affiliate, and extraordinary items; consequently
adjusted EBITDA may not necessarily be comparable to similarly titled data of
other paging companies. EBITDA is commonly used by analysts and investors as a
principal measure of financial performance in the paging industry. EBITDA is
also one of the primary financial measures used to calculate whether Arch and
its subsidiaries are in compliance with financial covenants under their debt
agreements. These covenants, among other things, limit the ability of Arch and
its subsidiaries to: incur additional indebtedness, advance funds to Benbow,
pay dividends, grant liens on its assets, merge, sell or acquire assets,
repurchase or redeem capital stock, incur capital expenditures and prepay
certain indebtedness. EBITDA is also one of the financial measures used by
analysts to value Arch. Therefore Arch management believes that the
presentation of EBITDA provides relevant information to investors. EBITDA
should not be construed as an alternative to operating income or cash flows
from operating activities as determined in accordance with GAAP or as a measure
of liquidity. Amounts reflected as EBITDA or adjusted EBITDA are not
necessarily available for discretionary use as a result of restrictions imposed
by the terms of existing indebtedness and limitations imposed by applicable law
upon the payment of dividends or distributions, among other things. See "Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of net income (loss) before income taxes, restructuring
charges and fixed charges. Fixed charges consist of interest expense and
amortization of debt discount and related expenses believed by management to be
representative of the interest factor thereon. Earnings were insufficient to
cover fixed charges for the year ended August 31, 1994, the four months ended
December 31, 1993 and 1994, the years ended December 31, 1994, 1995, 1996, 1997
and 1998 and the three months ended March 31, 1998 and 1999 by $5.1 million,
$1.9 million, $3.3 million, $6.5 million, $34.9 million, $138.2 million, $167.8
million, $167.1 million, $36.5 million and $38.7 million, respectively.
28
<PAGE>
Adjusted EBITDA margin is calculated by dividing Arch's adjusted EBITDA by
total revenues less cost of products sold. EBITDA margin is a measure commonly
used in the paging industry to evaluate a company's EBITDA relative to total
revenues less cost of products sold as an indicator of the efficiency of a
company's operating structure.
<TABLE>
<CAPTION>
Year Ended Four Months Ended
August 31, December 31, Year Ended December 31,
---------- ------------------- --------------------------------------------------------
1994 1993 1994 1994 1995 1996 1997 1998
---------- -------- -------- -------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Service, rental
and maintenance
revenues........ $ 55,139 $ 16,457 $ 22,847 $ 61,529 $ 138,466 $ 291,399 $ 351,944 $ 371,154
Product sales.... 12,108 2,912 5,178 14,374 24,132 39,971 44,897 42,481
-------- -------- -------- -------- --------- --------- --------- ---------
Total revenues... 67,247 19,369 28,025 75,903 162,598 331,370 396,841 413,635
Cost of products
sold............ (10,124) (2,027) (4,690) (12,787) (20,789) (27,469) (29,158) (29,953)
-------- -------- -------- -------- --------- --------- --------- ---------
57,123 17,342 23,335 63,116 141,809 303,901 367,683 383,682
Operating
expenses:
Service, rental
and
maintenance.... 13,123 3,959 5,231 14,395 29,673 64,957 79,836 80,782
Selling......... 10,243 3,058 4,338 11,523 24,502 46,962 51,474 49,132
General and
administrative. 17,717 5,510 7,022 19,229 40,448 86,181 106,041 112,181
Depreciation and
amortization... 16,997 5,549 6,873 18,321 60,037 191,101 231,376 220,172
Restructuring
charge......... -- -- -- -- -- -- -- 14,700
-------- -------- -------- -------- --------- --------- --------- ---------
Operating income
(loss).......... (957) (734) (129) (352) (12,851) (85,300) (101,044) (93,285)
Interest and non-
operating
expenses, net... (4,112) (1,132) (1,993) (4,973) (20,397) (49,060) (62,884) (66,409)
Equity in loss of
affiliate....... -- -- -- -- -- (1,968) (3,872) (5,689)
-------- -------- -------- -------- --------- --------- --------- ---------
Income (loss)
before income
tax benefit,
extraordinary
item and
accounting
change.......... (5,069) (1,866) (2,122) (5,325) (33,248) (136,328) (167,800) (165,383)
Income tax
benefit......... -- -- -- -- 4,600 51,207 21,172 --
-------- -------- -------- -------- --------- --------- --------- ---------
Income (loss)
before
extraordinary
item and
accounting
change.......... (5,069) (1,866) (2,122) (5,325) (28,648) (85,121) (146,628) (165,383)
Extraordinary
item............ -- -- (1,137) (1,137) (1,684) (1,904) -- (1,720)
Cumulative effect
of accounting
change.......... -- -- -- -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------- ---------
Net income
(loss).......... $ (5,069) $ (1,866) $ (3,259) $ (6,462) $ (30,332) $ (87,025) $(146,628) $(167,103)
======== ======== ======== ======== ========= ========= ========= =========
Other Operating
Data:
Adjusted EBITDA.. $ 16,040 $ 4,815 $ 6,744 $ 17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587
Adjusted EBITDA
margin.......... 28 % 28 % 29 % 28 % 33 % 35 % 35 % 37 %
Capital
expenditures,
excluding
acquisitions.... $ 25,657 $ 7,486 $ 15,279 $ 33,450 $ 60,468 $ 155,575 $ 102,767 $ 113,184
Cash flows
provided by
operating
activities...... 14,781 5,306 4,680 14,155 16,874 40,476 64,606 81,935
Cash flows used
in investing
activities...... (28,982) (7,486) (30,364) (51,860) (192,549) (480,995) (102,767) (82,868)
Cash flows
provided by
(used in)
financing
activities...... 14,636 11,290 26,108 29,454 176,966 438,163 38,777 (932)
Units in service
at end of
period.......... 410,000 288,000 538,000 538,000 2,006,000 3,295,000 3,890,000 4,276,000
Ratio of earnings
to fixed
<CAPTION>charges......... -- -- -- -- -- -- -- --
Three Months Ended
March 31,
-----------------------
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Statements of Operations
Data:
Service, rental
and maintenance
revenues........ $ 91,397 $ 90,529
Product sales.... 10,642 10,359
----------- -----------
Total revenues... 102,039 100,888
Cost of products
sold............ (7,366) (6,926)
----------- -----------
94,673 93,962
Operating
expenses:
Service, rental
and
maintenance.... 20,189 20,293
Selling......... 11,870 13,011
General and
administrative. 28,318 25,626
Depreciation and
amortization... 53,471 50,876
Restructuring
charge......... -- --
----------- -----------
Operating income
(loss).......... (19,175) (15,844)
Interest and non-
operating
expenses, net... (16,270) (16,253)
Equity in loss of
affiliate....... (1,055) (3,200)
----------- -----------
Income (loss)
before income
tax benefit,
extraordinary
item and
accounting
change.......... (36,500) (35,297)
Income tax
benefit......... -- --
----------- -----------
Income (loss)
before
extraordinary
item and
accounting
change.......... (36,500) (35,297)
Extraordinary
item............ -- --
Cumulative effect
of accounting
change.......... -- (3,361)
----------- -----------
Net income
(loss).......... $ (36,500) $ (38,658)
=========== ===========
Other Operating
Data:
Adjusted EBITDA.. $ 34,296 $ 35,032
Adjusted EBITDA
margin.......... 36 % 37 %
Capital
expenditures,
excluding
acquisitions.... $ 21,319 $ 25,528
Cash flows
provided by
operating
activities...... $ 9,982 $ 12,506
Cash flows used
in investing
activities...... $ (21,319) $ (24,910)
Cash flows
provided by
(used in)
financing
activities...... $ 12,539 $ 22,860
Units in service
at end of
period.......... 4,016,000 4,329,000
Ratio of earnings
to fixed
charges......... -- --
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
As of
August 31, As of December 31, March 31,
---------- ---------------------------------------------- -----------
1994 1994 1995 1996 1997 1998 1999
---------- -------- -------- --------- --------- -------- -----------
(dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets.......... $ 6,751 $ 8,483 $ 33,655 $ 41,385 $ 49,584 $ 49,101 $ 60,386
Total assets............ 76,255 117,858 784,019 1,134,328 1,010,046 894,585 873,961
Long-term debt, less
current maturities..... 67,328 93,420 429,559 605,513 623,000 620,629 643,700
Stockholder's equity
(deficit).............. (3,304) 9,368 276,543 451,847 302,042 159,782 120,984
</TABLE>
The following table reconciles net income to the presentation of Arch's
adjusted EBITDA:
<TABLE>
<CAPTION>
Four Months
Year Ended Ended Three Months
August 31, December 31, Year Ended December 31, Ended March 31,
---------- ---------------- ------------------------------------------------- ------------------
1994 1993 1994 1994 1995 1996 1997 1998 1998 1999
---------- ------- ------- ------- -------- -------- --------- --------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss).. $(5,069) $(1,866) $(3,259) $(6,462) $(30,332) $(87,025) $(146,628) $(167,103) $(36,500) $(38,658)
Interest and non-
operating
expenses, net..... 4,112 1,132 1,993 4,973 20,397 49,060 62,884 66,409 16,270 16,253
Income tax benefit. -- -- -- -- (4,600) (51,207) (21,172) -- -- --
Depreciation and
amortization...... 16,997 5,549 6,873 18,321 60,037 191,101 231,376 220,172 53,471 50,876
Restructuring
charge............ -- -- -- -- -- -- -- 14,700 -- --
Equity in loss of
affiliate......... -- -- -- -- -- 1,968 3,872 5,689 1,055 3,200
Extraordinary Item. -- -- 1,137 1,137 1,684 1,904 -- 1,720 -- --
Cumulative effect
of accounting
change............ -- -- -- -- -- -- -- -- -- 3,361
------- ------- ------- ------- -------- -------- --------- --------- -------- --------
Adjusted EBITDA.... $16,040 $ 4,815 $ 6,744 $17,969 $ 47,186 $105,801 $ 130,332 $ 141,587 $ 34,296 $ 35,032
======= ======= ======= ======= ======== ======== ========= ========= ======== ========
</TABLE>
ARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
You should read the following discussion and analysis in conjunction with
Arch's consolidated financial statements and notes.
Arch derives most of its revenues from fixed monthly or other periodic fees
charged to subscribers for paging services. Such fees are not dependent on
usage. As long as a subscriber remains on service, operating results benefit
from the recurring payments of the fixed periodic fees without incurrence of
additional selling expenses by Arch. Arch's service, rental and maintenance
revenues and the related expenses exhibit substantially similar growth trends.
Arch's average revenue per subscriber has declined over the last three years
for two principal reasons:
. an increase in the number of subscriber owned and reseller owned units
for which Arch receives no recurring equipment revenue and
. an increase in the number of reseller customers who purchase airtime at
wholesale rates.
The reduction in average paging revenue per subscriber resulting from these
trends has been more than offset by the elimination of associated expenses so
that Arch's margins have improved over this period. Furthermore, recent data
indicates that the rate of decline in revenue per customer has slowed.
Arch has achieved significant growth in units in service and adjusted EBITDA
through a combination of internal growth and acquisitions. From January 1, 1996
through March 31, 1999, Arch's total number of units in service grew at a
compound rate on an annualized basis of 26.7%. For the same period on an
annualized basis, Arch's compound rate of internal growth in units in service
was 22.3%, excluding units added through acquisitions. Arch's total
30
<PAGE>
revenues have increased from $331.4 million in the year ended December 31, 1996
to $396.8 million in the year ended December 31, 1997 and to $413.6 million in
the year ended December 31, 1998. Over the same periods, through operating
efficiencies and economies of scale, Arch has been able to reduce its per pager
operating costs to enhance its competitive position in its markets. Due to the
rapid growth in its subscriber base, Arch has incurred significant selling
expenses, which are charged to operations in the period incurred. Arch had net
losses of $87.0 million in the year ended December 31, 1996, $146.6 million in
the year ended December 31, 1997 and $167.1 million in the year ended December
31, 1998, as a result of significant depreciation and amortization expenses
related to acquired and developed assets and interest charges associated with
indebtedness. However, as its subscriber base has grown, Arch's operating
results have improved, as evidenced by an increase in Arch Adjusted EBITDA from
$105.8 million in the year ended December 31, 1996 to $130.3 million in the
year ended December 31, 1997 and to $141.6 million in the year ended December
31, 1998.
EBITDA is a commonly used measure of financial performance in the paging
industry. Adjusted EBITDA is also one of the financial measures used to
calculate whether Arch and its subsidiaries are in compliance with the
financial covenants under their debt agreements. Adjusted EBITDA should not be
construed as an alternative to operating income or cash flows from operating
activities as determined in accordance with GAAP. One of Arch's financial
objectives is to increase its adjusted EBITDA, since this is a significant
source of funds for servicing indebtedness and for investment in continued
growth, including purchase of units and paging system equipment, construction
and expansion of paging systems, and possible acquisitions. Adjusted EBITDA, as
determined by Arch, may not necessarily be comparable to similarly titled data
of other paging companies. Amounts reflected as adjusted EBITDA are not
necessarily available for discretionary use as a result of restrictions imposed
by the terms of existing or future indebtedness, including the repayment of
such indebtedness or the payment of associated interest, limitations imposed by
applicable law upon the payment of dividends or distributions or capital
expenditure requirements.
The potential effects of the MobileMedia acquisition on Arch are described
under "Business--Business Strategy".
Divisional Reorganization
To reduce redundancy and take advantage of various operating efficiencies,
Arch is reorganizing its operating divisions over a period of 18 to 24 months.
Arch has consolidated its former Midwest, Western, and Northern divisions into
four existing operating divisions, and is in the process of consolidating
regional administrative support functions, such as customer service,
collections, inventory and billing. Arch expects to complete the divisional
reorganization in mid to late 2000.
Arch estimates that the divisional reorganization, once fully implemented,
will result in annual cost savings of approximately $15.0 million. These cost
savings will consist primarily of a reduction in compensation expense of
approximately $11.5 million and a reduction in rental expense of facilities and
general and administrative costs of approximately $3.5 million. Arch expects to
reinvest a portion of these cost savings to expand its sales activities,
although to date the extent and cost of this reinvestment has not yet been
determined.
In connection with the divisional reorganization, Arch (1) anticipates a net
reduction of approximately 10% of its workforce, (2) is closing certain office
locations and redeploying other real estate assets and (3) recorded a
restructuring charge of $14.7 million during 1998. The restructuring charge
consisted of approximately (1) $9.7 million for employee severance, (2) $3.5
million for lease obligations and terminations and (3) $1.5 million of other
costs. The severance costs and lease obligations will require cash outlays
throughout the 18 to 24 month restructuring period. Arch will fund these cash
outlays from operations or its secured credit facility. Due to the MobileMedia
acquisition, Arch's management is reassessing the size and scope of the
divisional reorganization. Arch is also determining the size and scope of
additional restructuring reserves required as a direct result of the
MobileMedia acquisition. There can be no assurance that the desired
31
<PAGE>
cost savings will be achieved or that the anticipated reorganization of Arch's
business will be accomplished smoothly, expeditiously or successfully. The
difficulties of such reorganization may be increased by the need to integrate
MobileMedia's operations in multiple locations and to combine two corporate
cultures. The inability to successfully integrate the operations of MobileMedia
could have a material adverse effect on Arch. See Note 9 to Arch's consolidated
financial statements.
Results of Operations
The following table presents selected items from Arch's consolidated
statements of operations as a percentage of net revenues and certain other
information for the periods indicated. Net revenues are total revenues less
cost of products sold.
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
-------------------------------- -------------------
1996 1997 1998 1998 1999
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues.......... 109.0 % 107.9 % 107.8 % 107.8 % 107.4 %
Cost of products sold... (9.0) (7.9) (7.8) (7.8) (7.4)
--------- --------- -------- -------- --------
Net revenues............ 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Service, rental and
maintenance............ 21.4 21.7 21.1 21.3 21.6
Selling................. 15.4 14.0 12.8 12.6 13.8
General and
administrative......... 28.4 28.9 29.2 29.9 27.3
Depreciation and
amortization........... 62.9 62.9 57.4 56.5 54.1
Restructuring charge.... -- -- 3.8 -- --
--------- --------- -------- -------- --------
Operating income (loss). (28.1)% (27.5)% (24.3)% (20.3)% (16.8)%
========= ========= ======== ======== ========
Net income (loss)....... (28.6)% (39.9)% (43.6)% (38.6)% (41.1)%
========= ========= ======== ======== ========
Arch adjusted EBITDA.... 34.8 % 35.4 % 36.9 % 36.2 % 37.3 %
========= ========= ======== ======== ========
Cash flows provided by
operating activities... $ 40,476 $ 64,606 $ 81,935 $ 9,982 $ 12,506
Cash flows used in in-
vesting activities..... $(480,995) $(102,767) $(82,868) $(21,319) $(24,910)
Cash flows provided by
financing activities... $ 438,163 $ 38,777 $ (932) $ 12,539 $ 22,860
Annual service, rental
and maintenance
expenses per pager..... $ 25 $ 22 $ 20 $ 20 $ 19
</TABLE>
Results of Operations
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Total revenues decreased $1.2 million, or 1.1%, to $100.9 million in the
three months ended March 31, 1999 from $102.0 million in the three months ended
March 31, 1998, and net revenues decreased $0.7 million or 0.8% from $94.7
million to $94.0 million over the same period. Total revenues and net revenues
in the 1999 period were adversely affected by a general slowing of paging
industry growth, compared to prior years. Revenues were also adversely affected
by: (1) Arch's decision in the fourth quarter of 1998, in anticipation of the
MobileMedia acquisition, not to replace normal attrition among direct sales
personnel; (2) the reduced effectiveness of the reseller channel of
distribution; and (3) reduced sales through Arch's company-owned stores.
Service, rental and maintenance revenues, which consist primarily of recurring
revenues associated with the sale or lease of pagers, decreased $0.9 million or
1.0% to $90.5 million in the three months ended March 31, 1999 from $91.4
million in the three months ended March 31, 1998. Maintenance revenues
represented less than 10% of total service, rental and maintenance revenues in
the three months ended March 31, 1999 and 1998. Arch does not differentiate
between service and rental revenues. Product sales, less cost of products sold,
increased 4.8% to $3.4 million in the three months ended March 31, 1999 from
$3.3 million in the three months ended March 31, 1998.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $20.3 million, or 21.6%
of net revenues, in the three months ended March 31, 1999 from $20.2 million,
or 21.3% of net revenues, in the three months ended March 31, 1998. The
increase was due
32
<PAGE>
primarily to increased expenses associated with system expansions and the
provision of paging services to a greater number of subscribers. As existing
paging systems become more populated through the addition of new subscribers,
the fixed costs of operating these paging systems are spread over a greater
subscriber base. Annualized service, rental and maintenance expenses per
subscriber decreased to $19 in the three months ended March 31, 1999 from $20
in the three months ended March 31, 1998.
Selling expenses increased to $13.0 million, or 13.8% of net revenues, in the
three months ended March 31, 1999 from $11.9 million, or 12.6% of net revenues,
in the three months ended March 31, 1998 due primarily to increased hiring of
direct sales personnel.
General and administrative expenses decreased to $25.6 million, or 27.3% of
net revenues, in the three months ended March 31, 1999 from $28.3 million, or
29.9% of net revenues, in the three months ended March 31, 1998. The decrease
was due primarily to reduction of headcount as a result of the divisional
reorganization which began in June 1998.
Depreciation and amortization expenses decreased to $50.9 million, or 54.1%
of net revenues, in the three months ended March 31, 1999 from $53.5 million,
or 56.5% of net revenues, in the three months ended March 31, 1998. These
expenses principally reflect Arch's acquisitions of paging businesses in prior
periods accounted for as purchases, and investment in pagers and other system
expansion equipment to support growth.
Operating loss decreased to $15.8 million in the three months ended March 31,
1999 from $19.2 million in the three months ended March 31, 1998 as a result of
the factors outlined above.
Initial application of SOP 98-5 resulted in a $3.4 million charge which was
reported as the cumulative effect of a change in accounting principle. See "--
Recent and Pending Accounting Pronouncements".
Net losses increased to $38.7 million in the three months ended March 31,
1999 from $36.5 million in the three months ended March 31, 1998 as a result of
the factors outlined above.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Total revenues increased to $413.6 million, a 4.2% increase, in 1998 from
$396.8 million in 1997. Net revenues increased to $383.7 million, a 4.4%
increase, in 1998 from $367.7 million in 1997. Total revenues and net revenues
in 1998 were adversely affected by a general slowing of industry growth,
compared to prior years. Although industry sources estimate that the number of
paging units in service grew at an annual rate of approximately 25% between
1992 and 1997, growth in basic paging services has slowed considerably since
1997. Revenues were also adversely affected in the fourth quarter of 1998 by:
. Arch's decision, in anticipation of the MobileMedia acquisition, not to
replace normal attrition among direct sales personnel
. the reduced effectiveness of Arch's reseller channel of distribution
. reduced sales through Arch-operated retail stores.
Arch expects revenue to continue to be adversely affected in 1999 due to
these factors.
Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of units, increased to
$371.2 million, a 5.5% increase, in 1998 from $351.9 million in 1997. These
increases in revenues were due primarily to the increase, through internal
growth, in the number of units in service from 3.9 million at December 31, 1997
to 4.3 million at December 31, 1998. Maintenance revenues represented less than
10% of total service, rental and maintenance revenues in 1998 and 1997. Arch
does not differentiate between service and rental revenues. Product sales, less
cost of products sold, decreased to $12.5 million, a 20.4% decrease, in 1998
from $15.7 million in 1997, as a result of a decline in the average revenue per
pager sold.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, increased to $80.8 million, or 21.1%
of net revenues, in 1998 from $79.8 million, or 21.7% of net revenues, in 1997.
The increase was due primarily to increased expenses associated with system
expansions and an increase in the number of units in service. As existing
paging systems became more populated through
33
<PAGE>
the addition of new subscribers, the fixed costs of operating these paging
systems are spread over a greater subscriber base. Annualized service, rental
and maintenance expenses per subscriber were $20.00 in 1998 compared to $22.00
in 1997.
Selling expenses decreased to $49.1 million, or 12.8% of net revenues, in
1998 from $51.5 million, or 14.0% of net revenues, in 1997. The decrease was
due primarily to a decrease in the number of net new units in service and to
nonrecurring marketing costs incurred in 1997 to promote Arch's new Arch Paging
brand identity. The number of net new units in service resulting from internal
growth decreased by 35.1% in 1998 compared to 1997 primarily due to the factors
set forth above that adversely affect revenues. Arch expects its selling
expenses to increase in 1999 due to increased hiring of direct sales personnel.
General and administrative expenses increased to $112.2 million, or 29.2% of
net revenues, in 1998, from $106.0 million, or 28.9% of net revenues, in 1997.
The increase was due primarily to administrative and facility costs associated
with supporting more units in service.
Depreciation and amortization expenses decreased to $220.2 million in 1998
from $231.4 million in 1997. These expenses principally reflect Arch's
acquisitions of paging businesses in prior periods accounted for as purchases.
They also reflect investment in units and other system expansion equipment to
support growth.
Operating losses were $93.3 million in 1998 compared to $101.0 million in
1997, as a result of the factors outlined above.
Net interest expense increased to $66.4 million in 1998 from $62.9 million in
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 1997. This benefit
represented the tax benefit of operating losses incurred after the acquisitions
of USA Mobile and Westlink which were available to offset deferred tax
liabilities arising from those acquisitions. The tax benefit of these operating
losses was fully recognized during 1997. Accordingly, Arch has established a
valuation reserve against its deferred tax assets which reduced the income tax
benefit to zero as of December 31, 1998. Arch does not expect to recover its
deferred tax asset in the foreseeable future and will continue to increase its
valuation reserve accordingly. See Note 5 to Arch's consolidated financial
statements.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $167.1 million in 1998 from $146.6 million in 1997, as
a result of the factors outlined above.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues increased $65.5 million, or 19.8%, to $396.8 million in 1997
from $331.4 million in 1996 and net revenues increased $63.8 million, or 21.0%,
from $303.9 million to $367.7 million over the same period. Service, rental and
maintenance revenues increased $60.5 million, or 20.8%, to $351.9 million in
1997 from $291.4 million in 1996. These increases in revenues were due
primarily to the increase in the number of units in service from 3.3 million at
December 31, 1996 to 3.9 million at December 31, 1997 and the full year impact
of the Westlink acquisition which was completed in May 1996. Maintenance
revenues represented less than 10% of total service, rental and maintenance
revenues in 1996 and 1997. Product sales, less cost of products sold, increased
25.9% to $15.7 million in 1997 from $12.5 million in 1996 as a result of a
greater number of pager unit sales.
Service, rental and maintenance expenses increased to $79.8 million, or 21.7%
of net revenues, in 1997 from $65.0 million, or 21.4% of net revenues, in 1996.
The increase was due primarily to increased expenses
34
<PAGE>
associated with system expansions and the provision of paging services to a
greater number of subscribers. Annual service, rental and maintenance expenses
per subscriber decreased to $22.00 in 1997 from $25.00 in 1996.
Selling expenses increased to $51.5 million, or 14.0% of net revenues, in
1997 from $47.0 million, or 15.4% of net revenues, in 1996. The increase in
selling expenses was due to the full year impact of the Westlink acquisition
and the marketing costs incurred to promote Arch's Arch Paging brand identity.
Arch's selling cost per net new pager in service increased to $87.00 in 1997
from $58.00 in 1996, primarily due to fixed selling costs and increased
marketing costs being spread over fewer net new units put into service.
General and administrative expenses increased to $106.0 million, or 28.9% of
net revenues, in 1997 from $86.2 million, or 28.4% of net revenues, in 1996.
The increase in absolute dollars was due primarily to increased expenses
associated with supporting more units in service, including the full year
impact of Westlink, as well as expenses associated with the establishment of
Arch's national services division. See "Business-- Subscribers and Marketing--
Arch".
Depreciation and amortization expenses increased to $231.4 million, or 62.9%
of net revenues, in 1997 from $191.1 million, or 62.9% of net revenues, in
1996. These expenses reflect Arch's acquisitions of paging businesses,
accounted for as purchases, and continued investment in units and other system
expansion equipment to support continued growth.
Operating loss increased to $101.0 million in 1997 from $85.3 million in 1996
as a result of the factors outlined above.
Net interest expense increased to $62.9 million in 1997 from $49.1 million in
1996. The increase was attributable to an increase in Arch's average
outstanding debt.
Arch recognized income tax benefits of $21.2 million in 1997 and $51.2
million in 1996, representing the tax benefit of operating losses subsequent to
the acquisitions of USA Mobile in September 1995 and Westlink in May 1996 which
were available to offset deferred tax liabilities arising from Arch's
acquisitions of USA Mobile and Westlink.
During 1996, Arch recognized an extraordinary charge of $1.9 million,
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under a prior credit facility.
Net loss increased to $146.6 million in 1997 from $87.0 million in 1996 as a
result of the factors outlined above. Included in the net loss were charges of
$3.9 million for 1997 and $2.0 million for 1996, representing Arch's pro rata
share of Benbow's losses since the Westlink acquisition in May 1996.
Liquidity and Capital Resources
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
paging units and paging system equipment, to service debt and to finance
acquisitions.
Capital Expenditures and Commitments
Excluding acquisitions of paging businesses, Arch's capital expenditures were
$155.6 million in 1996, $102.8 million in 1997 and $113.2 million in 1998. To
date, Arch has funded its capital expenditures with net cash provided by
operating activities, the incurrence of debt and advances from its parent
company.
Arch's 1998 capital expenditures primarily involved the purchase of paging
units, paging system equipment and transmission equipment, information systems,
advances to Benbow, as described below, and capitalized financing costs.
35
<PAGE>
Arch estimates the amount of capital that will be required to fund capital
expenditures by the combined company for 1999 will be approximately $140.0
million. Such expenditures will be used primarily for subscriber equipment,
network infrastructure, information systems and the construction of certain
markets for a nationwide N-PCS network. However, the actual amount of capital
to be required by the combined company will depend upon a number of factors.
These include subscriber growth, the type of paging devices and services
demanded by customers, service revenues, technological developments, marketing
and sales expenses, competitive conditions, the nature and timing of Arch's N-
PCS strategy, and acquisition strategies and opportunities. Arch believes it
will have sufficient cash available from operations and from borrowings under
the secured credit facility to fund anticipated capital expenditures of the
combined company for 1999.
Arch's parent company was formerly obligated to advance to Benbow sufficient
funds to service debt obligations incurred by Benbow in connection with its
acquisition of its N-PCS licenses and to finance construction of an N-PCS
system unless funds were available to Benbow from other sources. This
obligation was subject to the approval of the parent company's designee on
Benbow's board of directors. As of March 31, 1999, Arch's parent company had
advanced approximately $23.7 million to Benbow. In June 1999, Arch's parent
company, Benbow and Ms. Walsh agreed that:
. the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated
. Benbow will not make any further FCC payments and will not pursue
construction of an N-PCS system
. Arch's parent company will not be obligated to fund FCC payments or
construction of an N-PCS system by Benbow
. the parties will seek FCC approval of the forgiveness of Benbow's
remaining payment obligations and the transfer of Ms. Walsh's Benbow
shares to Arch's parent company
. the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of FCC approval
. Arch's parent company will pay Ms. Walsh, in installments, $3.5 million
(if the transaction closes before January 23, 2001) or $3.8 million (if
the transaction closes on January 23, 2001)
As a result of these arrangements, Benbow will not have any meaningful business
operations and is unlikely to retain its N-PCS licenses. The closing of the
transaction will not affect the funding obligations of Arch's parent company in
connection with Benbow's acquisition of Page Call in June 1998. See "Business--
Arch's Investments in N-PCS Licenses".
Other Commitments and Contingencies
Commencing October 15, 1999, payments of $10.1 million, representing six
months' interest on the notes, will be payable on April 15 and October 15 of
each year until scheduled maturity on April 15, 2008. On January 1, 1999,
payments of $8.3 million, representing six months' interest on Arch's 12 3/4%
notes, became payable on January 1 and July 1 of each year until scheduled
maturity on July 1, 2007. Arch expects to service these interest payments out
of cash made available to it by its subsidiaries. Arch's ability to make
payments of principal and interest on the notes and the 12 3/4% notes will be
dependent upon Arch's subsidiaries achieving and sustaining levels of
performance in the future that would permit such subsidiaries to pay dividends,
distributions or fees to Arch which are sufficient to permit such payments.
Many factors will affect the performance of Arch's subsidiaries. Some of them
will be beyond Arch's control, such as prevailing economic conditions. We
cannot assure you that Arch's subsidiaries will be able to generate sufficient
cash flow to cover required interest and principal payments on their current
and future indebtedness or the notes and the 12 3/4% notes. If Arch is unable
to meet interest and principal payments in the future, it may, depending upon
the circumstances which then exist, seek additional equity or debt financing,
attempt to refinance its existing indebtedness or sell all or part of its
business or assets to raise funds to repay its indebtedness. However,
sufficient equity or debt financing may not
36
<PAGE>
be available or, if available, it may not be on terms acceptable to Arch; Arch
may not be able to refinance its existing indebtedness; and it may not be
possible to raise sufficient funds through asset sales. See "Risk Factors--Cash
flow of operating subsidiaries may not be available to service the notes".
Interest payments on the $467.4 million principal amount at maturity of the
parent company's discount notes commence September 15, 2001. The parent company
expects to service such interest payments out of cash made available to it by
Arch and Arch's subsidiaries. Based on the principal amount of discount notes
now outstanding, these semi-annual interest payments will equal $25.4 million
on March 15 and September 15 of each year until scheduled maturity on March 15,
2008. Limitations contained in the indentures for other issues of Arch's senior
subordinated notes and in the subsidiaries' credit facility would not currently
permit Arch and its subsidiaries to make sufficient payments to Arch's parent
company to enable it to pay interest on its discount notes. Arch may need to
modify the subsidiaries' credit facility, amend the indentures or redeem its
other senior subordinated notes in order to make payments to enable Arch's
parent company to pay interest on the discount notes. No assurance can be given
that, if necessary, Arch would be able to modify the subsidiaries' secured
credit facility, amend the indentures or redeem the senior subordinated notes.
A default by the parent company in its payment obligations under the discount
notes could have a material adverse effect on the business, financial
condition, results of operations or prospects of the parent company and Arch or
on Arch's ability to make payments on the notes when due. See "Risk Factors--
High degree of leverage burdens operations".
On June 29, 1998, Benbow acquired Page Call's outstanding stock by issuing to
Page Call's former stockholders preferred stock and a 12% promissory note for
$17.2 million. Benbow also agreed to pay one of Page Call's stockholders
$911,000 over five years for consulting services. Benbow's preferred stock and
promissory note are exchangeable for common stock
. at any time at the holders' option, at an exchange price equal to the
higher of (1) $13.00 per share or (2) the market price of common stock,
. mandatorily on April 8, 2000, at the then prevailing market price of
common stock, or
. automatically at an exchange price of $13.00 per share, if the market
price of common stock equals or exceeds $13.00 for 20 consecutive
trading days.
Arch's parent company is permitted to require Benbow to redeem its preferred
stock and promissory note at any time for cash. The parent company guaranteed
all obligations of Benbow under the Benbow preferred stock, promissory note and
consulting agreement described above. The parent company may elect to make
payments under its guarantee in common stock or cash. Benbow's redemption of
its preferred stock and promissory note for cash, or the parent company's
payment of cash pursuant to its guarantees of Benbow's preferred stock and
promissory note, would depend upon the availability of capital and any
restrictions contained in applicable debt instruments and under the Delaware
corporations statute, which currently would not permit any such cash
redemptions or payments. If the parent company issues common stock or pays cash
pursuant to its guarantees, the parent company will receive from Benbow a
promissory note and non-voting, non-convertible preferred stock of Benbow with
an annual yield of 14.5% payable upon an acquisition of Benbow or earlier to
the extent that available cash and applicable law permit. Page Call's
stockholders received customary registration rights for any shares of common
stock issued in exchange for Benbow's preferred stock and promissory note or
pursuant to the parent company's guarantees.
Sources of Funds
Arch's net cash provided by operating activities was $40.5 million in 1996,
$64.6 million in 1997, $81.9 million in 1998 and $12.5 million in the three
months ended March 31, 1999. Arch expects to fund its capital needs for the
foreseeable future with borrowings under current and future credit facilities,
net cash provided by operations and, depending on Arch's needs and market
conditions, possible sales of equity or debt securities by Arch or the parent
company. For additional information, see Note 3 to Arch's consolidated
financial statements. Arch's ability to access future borrowings will depend,
in part, on its ability to continue to grow its EBITDA. At June 3, 1999, after
giving effect to the MobileMedia acquisition and the associated drawdown of
funds, Arch's operating subsidiaries had approximately $100.0 million in
available borrowing capacity under the secured credit facility.
37
<PAGE>
Secured Credit Facility
In June 1998 and March 1999, Arch amended an existing credit facility to
establish senior secured revolving credit and term loan facilities with a
wholly owned subsidiary as borrower in the aggregate amount of $581.0 million
consisting of:
. Tranche A: a $175.0 million reducing revolving credit facility;
. Tranche B: a $100.0 million 364-day revolving credit facility under
which the principal amount outstanding on June 27, 1999 was converted
into a term loan; and
. Tranche C: a $306.0 million term loan of which $125.0 million was made
available in a single drawing on June 29, 1998 and $181.0 million was
made available in a single drawing on June 3, 1999.
The amount of these facilities will reduce as time passes. See "Description
of Outstanding Indebtedness--Secured Credit Facility".
Recent Issuances of Notes
Arch raised $139.8 million, before deducting selling discounts and expenses,
through the issuance of the 13 3/4% notes during the second quarter of 1999. In
June 1998, Arch issued $130.0 million principal amount of 12 3/4% senior notes
due 2007 for net proceeds of $127.5 million, before deducting selling discounts
and expenses, in a private placement made pursuant to Rule 144A under the
Securities Act. These notes were sold at an initial price to investors of
98.049% of the face amount of their investment. See "Description of Outstanding
Indebtedness--Arch's Senior Notes".
Sandler Equity Investment
On June 29, 1998, two partnerships managed by Sandler Capital Management
Company, Inc., an investment management firm, together with certain other
private investors, made an equity investment in Arch's parent company of $25.0
million in the form of Series C preferred stock. Simultaneously, the parent
company contributed to Arch $24.0 million of the net proceeds from the sale of
the Series C preferred stock. Arch contributed this amount to a subsidiary as
an equity investment and the subsidiary used such amount to repay indebtedness
under a former credit facility as part of the establishment of the current
secured credit facility. During 1999 the parent company will accrue dividends
of $2.1 million on the Series C preferred stock, payable upon redemption or
conversion of the Series C preferred stock or liquidation of the parent
company.
Inflation
Inflation has not had a material effect on Arch's operations to date. Paging
systems equipment and operating costs have not increased in price and Arch's
pager costs have declined substantially in recent years. This reduction in
costs has generally been reflected in lower pager prices charged to subscribers
who purchase their units. Arch's general operating expenses, such as salaries,
employee benefits and occupancy costs, are subject to normal inflationary
pressures.
Year 2000 Compliance
Arch has created a cross-functional Y2K project group to work on the Year
2000 problem. The Y2K project group is continuing its analysis of external and
internal areas likely to be affected by the Year 2000 problem and classifying
the identified areas of concern into either a mission critical or non-mission
critical status. For external areas, Arch has distributed, and continues to
distribute, surveys requesting information about the Year 2000 readiness of
certain vendors. As part of its evaluation of Year 2000 vulnerability related
to its pager and paging equipment vendors, Arch has discussed their efforts
with them to identify potential issues associated with their equipment and/or
software. Internally, Arch is completing an inventory audit of hardware and
software testing for both its corporate and divisional operations.
38
<PAGE>
The costs associated with the replacement of existing hardware, software and
paging equipment will be capitalized and amortized in accordance with Arch's
existing accounting policies and any future costs relating thereto are expected
to be capitalized and amortized in a similar manner. Maintenance or
modification costs will be expensed as incurred. Based on Arch's costs incurred
to date, as well as estimated costs to be incurred later in 1999, Arch does not
expect that resolution of the Year 2000 problem will have a material adverse
effect on its results of operations and financial condition. Costs of the Year
2000 project are based on current estimates and actual results may vary
significantly from such estimates once plans are further developed and
implemented.
For a discussion of risks associated with the Year 2000 problem, see "Risk
Factors--Impact of the Year 2000 issue is not fully known".
Arch is designing and implementing contingency plans relating to the Year
2000 problem, identifying the likely risks and determining commercially
reasonable solutions. Arch intends to complete its Year 2000 contingency
planning during calendar year 1999.
Recent and Pending Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Arch adopted SFAS No. 130 in 1998. The
adoption of this standard did not have an effect on its reporting of income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Arch adopted SFAS No. 131 for its year ending December 31, 1998.
Adoption of this standard did not have a significant impact on Arch's
reporting.
In March 1998, the Accounting Standards Committee of the Financial Accounting
Standards Board issued Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes
criteria for capitalizing costs of computer software developed or obtained for
internal use. Arch adopted SOP 98-1 in 1998. The adoption of SOP 98-1 has not
had a material effect on Arch's financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities". SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. Arch adopted SOP 98-5
effective January 1, 1999. The initial application of SOP 98-5 resulted in a
$3.4 million charge which was reported as the cumulative effect of a change in
accounting principle. The charge represents the unamortized portion of start-up
and organization costs which had been deferred in prior years. The adoption of
SOP 98-5 is not expected to have a material effect on Arch's financial position
or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings. Arch intends to
adopt this standard effective January 1, 2001. 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.
39
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA--MOBILEMEDIA
The following table sets forth selected historical consolidated financial and
operating data of MobileMedia for each of the five years in the period ended
December 31, 1998 and the three months ended March 31, 1998 and 1999. The
historical financial and operating data presented under consolidated statements
of operations data and consolidated balance sheet data for each of the five
years in the period ended December 31, 1998 have been derived from
MobileMedia's audited consolidated financial statements and notes. The selected
financial and operating data as of March 31, 1998 and for the three months
ended March 31, 1998 and 1999 have been derived from MobileMedia's unaudited
consolidated financial statements and notes. You should read the following
consolidated financial information in conjunction with "MobileMedia
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and MobileMedia's consolidated financial statements and notes.
MobileMedia completed its acquisition of the paging and wireless messaging
business of Dial Page, Inc. on August 31, 1995 for a purchase price of $187.4
million. The consolidated statement of operations data includes Dial Page's
results of operations from that date. See Note 3 to MobileMedia's consolidated
financial statements and "Business--Predecessors to the Combined Company;
Events Leading Up to MobileMedia's Bankruptcy Filings". MobileMedia completed
the acquisition of Mobile Communications Corporation of America, commonly known
as MobileComm, on January 4, 1996 for a purchase price of $928.7 million. The
consolidated statement of operations data includes MobileComm results of
operations from that date. See Note 3 to MobileMedia's consolidated financial
statements and "Business--Predecessors to the Combined Company; Events Leading
Up to MobileMedia's Bankruptcy Filings".
In the following table, services, rents and maintenance, selling, general and
administrative expenses includes non-recurring adjustments to record executive
separation expenses of $2.5 million in 1994 and $0.7 million in 1995.
Impairment of long-lived assets includes a non-recurring adjustment to
record, effective December 31, 1996, a $792.5 million write-down of intangible
assets based upon MobileMedia's determination that an impairment of long-lived
assets existed pursuant to Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". See Note 2 to MobileMedia's consolidated financial
statements.
Restructuring costs includes non-recurring adjustments to record
restructuring costs related to MobileMedia's bankruptcy filing on January 30,
1997.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, amortization of deferred gain on
tower sale, impairment of long-lived assets and restructuring costs. EBITDA is
a financial measure commonly used in MobileMedia's industry and should not be
construed as an alternative to operating income, as determined in accordance
with GAAP, as an alternative to cash flows from operating activities, as
determined in accordance with GAAP, or as a measure of liquidity. MobileMedia's
adjusted EBITDA is, however, the primary financial measure by which
MobileMedia's covenants are calculated under the agreements governing
MobileMedia's indebtedness. EBITDA is also one of the financial measures used
by analysts to value MobileMedia. MobileMedia's adjusted EBITDA in 1996
excludes the impact of the $792.5 million writedown of intangible assets.
MobileMedia's adjusted EBITDA may not necessarily be comparable to similarly
titled data of other paging companies.
Adjusted EBITDA margin is calculated by dividing MobileMedia's adjusted
EBITDA by total revenues less cost of products sold. EBITDA margin is a measure
commonly used in the paging industry to evaluate a company's EBITDA relative to
total revenues less cost of products sold as an indicator of the efficiency of
a company's operating structure. MobileMedia's adjusted EBITDA margin in 1996
excludes the impact of the $792.5 million writedown of intangible assets.
The interim financial information as of March 31, 1999 and for the three
months ended March, 1998 and 1999 contained in this prospectus is unaudited.
However, in the opinion of MobileMedia management, it includes all
40
<PAGE>
adjustments of a normal recurring nature that are necessary for a fair
presentation of the financial position, results of operations and cash flows
for the periods presented. Results of operations for the interim periods
presented are not necessarily indicative of results of operations for the
entire year or any future period.
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended
Year Ended December 31, March 31,
--------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ---------- ---------- ----------
MobileMedia
-----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Total revenues.......... $ 203,149 $ 252,996 $ 640,710 $ 527,392 $ 449,681 $ 115,163 $ 105,824
Cost of products sold... (18,705) (26,885) (72,595) (35,843) (22,162) (5,513) (3,516)
---------- ---------- ----------- ---------- ---------- ---------- ----------
184,444 226,111 568,115 491,549 427,519 109,650 102,308
Services, rents and
maintenance, selling,
and general and
administrative
expenses............... 136,672 164,037 459,474 388,476 305,698 79,510 72,694
Reduction of liabilities
subject to compromise . -- -- -- -- (10,461) -- (3,050)
Impairment of long-lived
assets................. -- -- 792,478 -- -- -- --
Restructuring costs..... -- -- 4,256 19,811 18,624 4,558 5,067
Depreciation and
amortization........... 67,651 71,408 348,698 140,238 116,459 31,671 27,969
Amortization of deferred
gain on tower sale..... -- -- -- -- (1,556) -- (1,167)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Operating (loss) income. (19,879) (9,334) (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense)
Interest expense........ (18,237) (31,745) (92,663) (67,611) (53,043) (14,626) (10,018)
(Loss) gain on sale of
assets................. 1,049 -- 68 3 94,165 1 (323)
Other................... -- -- -- -- (338) -- 2,063
---------- ---------- ----------- ---------- ---------- ---------- ----------
Total other income
(expense)............. (17,188) (31,745) (92,595) (67,608) 40,784 (14,625) (8,278)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Income (loss) before
income tax provision
(benefit).............. (37,067) (41,079) (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income tax benefit
(provision)............ -- -- 69,442 -- (3,958) -- (209)
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (37,067) $ (41,079) $(1,059,944) $ (124,584) $ 35,581 $ (20,714) $ (7,692)
========== ========== =========== ========== ========== ========== ==========
Other Data
Adjusted EBITDA......... $ 47,772 $ 62,074 $ 108,641 $ 103,073 $ 121,821 $ 30,140 $ 29,614
Adjusted EBITDA margin.. 25.9 % 27.5 % 19.1 % 21.0 % 28.5 % 27.5 % 28.9 %
Units in service (at end
of period)............. 1,447,352 2,369,101 4,424,107 3,440,342 3,143,968 3,319,553 3,106,775
Capital expenditures.... $ 65,574 $ 86,163 $ 161,861 $ 40,556 $ 53,867 $ 4,854 $ 26,806
Cash flows provided by
operating activities... $ 53,781 $ 43,849 $ 57,194 $ 14,920 $ 54,462 $ 19,542 $ 17,552
Cash flows provided by
(used in) investing
activities............. $ (50,878) $ (312,698) $(1,028,321) $ (40,556) $ 115,836 $ (4,854) $ (25,025)
Cash flows provided by
(used in) financing
activities............. -- $ 671,794 $ 586,111 $ 13,396 $ (180,000) $ (10,000) $ 6,255
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------
As of
March 31,
1994 1995 1996 1997 1998 1999
-------- ---------- ---------- ---------- --------- -----------
(dollars in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data
Total assets............ $353,703 $1,128,546 $ 790,230 $ 655,134 $ 561,454 $ 554,009
Debt.................... 195,677 476,156 1,074,196 1,075,681 905,681 910,681
Total stockholders'
equity (deficit)....... 101,500 578,753 (468,391) (589,579) (553,998) (561,690)
</TABLE>
The following table reconciles net income to the presentation of MobileMedia's
adjusted EBITDA.
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Year Ended December 31, Ended March 31,
----------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
--------- -------- ----------- --------- -------- -------- -------
MobileMedia
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $(37,067) $(41,079) $(1,059,944) $(124,584) $ 35,581 $(20,714) $(7,692)
Interest expense........ 18,237 31,745 92,663 67,611 53,043 14,626 10,018
Income tax provision
(benefit).............. -- -- (69,442) -- 3,958 -- 209
Depreciation and
amortization........... 67,651 71,408 348,698 140,238 116,459 31,671 27,969
Amortization of deferred
gain on tower sale..... -- -- -- -- (1,556) -- (1,167)
Restructuring costs..... -- -- 4,256 19,811 18,624 4,558 5,067
Impairment of long lived
assets................. -- -- 792,478 -- -- -- --
Reduction of liabilities
subject to compromise.. -- -- -- -- (10,461) -- (3,050)
Gain/loss on sale of
assets................. (1,049) -- (68) (3) (94,165) (1) 323
Other income/expense.... -- -- -- -- 338 -- (2,063)
--------- -------- ----------- --------- -------- -------- -------
Adjusted EBITDA......... $ 47,772 $ 62,074 $ 108,641 $ 103,073 $121,821 $ 30,140 $29,614
========= ======== =========== ========= ======== ======== =======
</TABLE>
41
<PAGE>
MOBILEMEDIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Presentation of Financial Condition and Results of Operations
The following are principal components of MobileMedia's operating results:
. Services, rents and maintenance revenues, also referred to as paging
revenue: includes primarily monthly, quarterly, semi-annually and
annually billed recurring revenue, not dependent on usage, charged to
subscribers for paging and related services such as voice mail and pager
repair and replacement.
. Net revenues: includes primarily paging revenues and sales of customer
owned and maintained units less cost of units sold.
. Services, rents and maintenance expenses: includes costs related to the
management, operation and maintenance of MobileMedia's network systems.
. Selling expenses: includes salaries, commissions and administrative
costs for MobileMedia's sales force and related marketing and
advertising expenses.
. General and administrative expenses: includes primarily customer service
expense, executive management, accounting, office telephone, rents and
maintenance and information services.
. Average revenues per unit, or ARPU: calculated by dividing (1) the
average monthly services, rents and maintenance revenues for the period
by (2) the weighted average number of units in service for the period.
ARPU, as determined by MobileMedia, may not necessarily be comparable to
similarly titled data of other paging companies.
. Average monthly operating expense per unit: calculated by dividing (1)
the average monthly services, rents and maintenance, selling and general
and administrative expenses for the period by (2) the weighted average
number of units in service for the period.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, impairment of long-lived assets,
amortization of deferred gain on the tower sale and restructuring costs. See
Notes 2 and 3 to MobileMedia's consolidated financial statements. EBITDA is a
financial measure commonly used in the paging industry and should not be
construed as an alternative to operating income as determined in accordance
with GAAP, as an alternative to cash flows from operating activities as
determined in accordance with GAAP or as a measure of liquidity. EBITDA is,
however, the primary financial measure by which MobileMedia's covenants are
calculated under the agreements governing MobileMedia's indebtedness.
As used below, the term "acquisitions" refers to both the MobileComm
acquisition and the Dial Page acquisition.
Overview
The following discussion and analysis should be read in conjunction with
MobileMedia's consolidated financial statements and notes.
MobileMedia builds and operates wireless messaging and communications systems
and generates revenues from the provision of paging and other wireless
communications services. MobileMedia's strategy is to strengthen its industry
leadership position by providing superior paging and messaging services at
competitive prices.
MobileMedia's revenues are derived primarily from fixed periodic recurring
fees charged to MobileMedia's subscribers for paging services. These fees are
not dependent on usage. While a subscriber remains in MobileMedia's service,
future operating results benefit from this recurring revenue stream with
minimal requirements for incremental selling expenses or other costs.
42
<PAGE>
MobileMedia completed its acquisition of MobileComm in January 1996 and
MobileMedia purchased the paging business of Dial Page in August 1995.
MobileMedia incurred integration related costs in excess of those originally
anticipated to (1) transfer units-in-service between paging networks to
rationalize capacity, (2) temporarily operate duplicative functions, primarily
customer service, and (3) hire additional employees and consultants to focus on
the integration. MobileMedia also experienced increased loss of subscribers
related to the integration difficulties. MobileMedia's financial results have
been negatively impacted by the higher than anticipated integration costs and
increased loss of subscribers.
On January 30, 1997, MobileMedia and its parent company filed voluntary
petitions for relief under the Bankruptcy Code in order to implement an
operational and financial restructuring. Until Arch's acquisition of
MobileMedia on June 3, 1999, MobileMedia and its parent company operated their
business as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court. The Bankruptcy Code required MobileMedia Communications, Inc. and its
parent company to file monthly operating reports with the United States
Trustee. Copies of the reports were filed as Current Reports on Form 8-K with
the SEC. Financial statements included in MobileMedia's periodic reports for
the months of February 1997 through June 1998 were not prepared in accordance
with GAAP due to MobileMedia's inability at the time of such filings to
determine the amount of an impairment loss related to long-lived assets
pursuant to Financial Accounting Standard No. 121. Such financial statements
are unaudited and have been revised periodically based on subsequent
determination of changes in facts and circumstances impacting previously filed
unaudited financial statements. The audited financial statements of MobileMedia
included in this prospectus reflect adjustments from the unaudited statements,
including an impairment adjustment of approximately $792.5 million recorded as
of December 31, 1996.
43
<PAGE>
Results of Operations
The following table presents selected items from MobileMedia's consolidated
statement of operations and selected other information for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1998 1999
--------------- ---------------
(in thousands, except
percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenues
Services, rents and maintenance.......... $108,542 99.0 % $100,631 98.4 %
Equipment sales and activation fees...... 6,621 6.0 5,193 5.1
-------- ----- -------- -----
Total revenues............................. 115,163 105.0 105,824 103.4
Cost of products sold...................... (5,513) (5.0) (3,516) (3.4)
-------- ----- -------- -----
Net revenues............................... 109,650 100.0 102,308 100.0
Operating expenses
Services, rents and maintenance.......... 28,899 26.4 27,077 26.5
Selling.................................. 15,703 14.3 14,136 13.8
General and administrative............... 34,908 31.8 31,481 30.8
Reduction of liabilities subject to
compromise.............................. -- -- (3,050) (3.0)
Restructuring costs...................... 4,558 4.2 5,067 5.0
Depreciation and amortization............ 31,671 28.9 27,969 27.3
Amortization of deferred gain on tower
sale.................................... -- -- (1,167) (1.1)
-------- ----- -------- -----
Total operating expenses................... 115,739 105.6 101,513 99.2
-------- ----- -------- -----
Operating income (loss).................... (6,089) (5.6) 795 0.8
Other income (expense)
Interest expense (net)................... (14,626) (13.3) (10,018) (9.8)
Gain (loss) on sale of assets............ 1 0.0 (323) (0.3)
Other income ............................ -- -- 2,063 2.0
-------- ----- -------- -----
Total other income (expense)............... (14,625) (13.3) (8,278) (8.1)
-------- ----- -------- -----
Income from continuing operations before
income tax provision...................... (20,714) (18.9) (7,483) (7.3)
Income tax provision....................... -- -- 209 0.2
-------- ----- -------- -----
Income from continuing operations.......... $(20,714) (18.9)% $ (7,692) (7.5)%
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1999
-------------- --------------
(in thousands, except
percentage and unit data)
<S> <C> <C>
Other Data
Adjusted EBITDA................................ $ 30,140 $ 29,614
Cash flows provided by operating activities.... $ 19,542 $ 17,552
Cash flows used in investing activities........ $ (4,854) $ (25,025)
Cash flows provided by (used in) financing
activities.................................... $ (10,000) $ 6,255
ARPU........................................... $ 10.70 $ 10.73
Average monthly operating expense per unit..... $ 7.84 $ 7.75
Units in service (at end of period)............ 3,319,553 3,106,775
</TABLE>
44
<PAGE>
Three Months Ended March 31, 1999 Compared With Three Months Ended March 31,
1998
Units in service decreased 212,778 from 3,319,553 as of March 31, 1998 to
3,106,775 as of March 31, 1999, a decrease of 6.4%. The decrease was primarily
attributable to gross additions which were below expectations.
Services, rents and maintenance revenues decreased 7.3% to $100.6 million for
the three months ended March 31, 1999 compared to $108.5 million for the three
months ended March 31, 1998. The decrease was attributable to fewer units in
service and partially offset by a $0.03 increase in ARPU from $10.70 for the
three months ended March 31, 1998 to $10.73 for the three months ended March
31, 1999. The increase in ARPU was largely due to a greater percentage of
alphanumeric units in service and a smaller percentage in the reseller
distribution channel. Alphanumeric units generally are sold at higher ARPU and
units sold through the reseller distribution channel generally are sold at
lower ARPU.
Equipment sales and activation fees decreased 21.6% to $5.2 million for the
three months ended March 31, 1999 compared to $6.6 million for the three months
ended March 31, 1998. The decrease in equipment sales was primarily due to a
$0.7 million decrease in equipment sold through the direct distribution channel
and a $0.6 million decrease in billings for non-returned equipment. Equipment
sales and activation fees, less cost of products sold, increased to $1.7
million for the three months ended March 31, 1999 from $1.1 million for the
three months ended March 31, 1998. This increase was primarily attributable to
improved equipment sales margins on units sold through the retail distribution
channel.
Net revenues decreased 6.7% to $102.3 million for the three months ended
March 31, 1999 compared to $109.7 million for the three months ended March 31,
1998.
Services, rents and maintenance expenses decreased 6.3% to $27.1 million for
the three months ended March 31, 1999 compared to $28.9 million for the three
months ended March 31, 1998. This decrease resulted primarily from lower
subcontracted paging expenses of approximately $3.2 million arising from
billing reconciliations, increased unit cancellations and customer migration to
company-owned networks, lower paging-related telecommunications expenses of
approximately $0.6 million as a result of continued usage of lower cost
facilities and lower pager repair expenses of $0.4 million. These expense
reductions were offset by an increase in antenna site lease expense of $2.7
million primarily resulting from the leaseback of antenna sites on transmission
towers sold to Pinnacle Towers, Inc. See Note 3 to MobileMedia's consolidated
financial statements. As a percentage of net revenue, services, rents and
maintenance expenses were constant at approximately 26.5%.
Selling expenses for the three months ended March 31, 1999 decreased 10.0% to
$14.1 million compared to $15.7 million for the three months ended March 31,
1998. The decrease resulted primarily from lower sales personnel costs of
approximately $0.8 million attributable to lower sales headcount, lower
advertising expenses of approximately $0.6 million and lower retail
distribution channel selling expenses of approximately $0.2 million resulting
from lower retail sales. Selling expenses as a percentage of net revenue
decreased from 14.3% to 13.8%.
General and administrative expenses decreased 9.8% to $31.5 million for the
three months ended March 31, 1999 compared to $34.9 million for the three
months ended March 31, 1998 and decreased as a percentage of net revenues to
30.8% for the three months ended March 31, 1999 from 31.8% for the three months
ended March 31, 1998. The decrease primarily resulted from reduced bad debt
expense of $1.3 million due to improvements in MobileMedia's billing and
collections functions, lower administrative telephone expenses of $1.0 million
resulting from lower call volume and lower customer service expenses of $1.4
million primarily resulting from lower headcount.
Reduction of liabilities subject to compromise was $3.1 million for the three
months ended March 31, 1999. See Note 2 to MobileMedia's consolidated financial
statements.
45
<PAGE>
Restructuring costs increased 11.2% from $4.6 million for the three months
ended March 31, 1998 to $5.1 million for the three months ended March 31, 1999
due to an increase in professional fees incurred by MobileMedia resulting from
its confirmed plan of reorganization on April 12, 1999 (see Note 1 to
MobileMedia's consolidated financial statements).
Depreciation and amortization decreased 11.7% to $28.0 million for the three
months ended March 31, 1999 compared to $31.7 million for the three months
ended March 31, 1998. The decrease was primarily due to lower pager
depreciation attributable to a reduced depreciable base of pager assets and
decreased pager purchases. As a percentage of net revenues, depreciation and
amortization expense decreased to 27.3% for the three months ended March 31,
1999 from 28.9% for the three months ended March 31, 1998.
Amortization of deferred gain on tower sale was $1.2 million for the three
months ended March 31, 1999. See Note 3 to MobileMedia's consolidated financial
statements.
Operating income (loss) increased 113.1% to income of $0.8 million for the
three months ended March 31, 1999 from a loss of $6.1 million for the three
months ended March 31, 1998. The increase was primarily due to decreased
operating expenses.
Interest expense decreased 31.5% to $10.0 million for the three months ended
March 31, 1999 compared to $14.7 million for the three months ended March 31,
1998. The decrease was primarily due to lower interest expense on MobileMedia's
pre-petition credit facility resulting from lower outstanding borrowings in the
three months ended March 31, 1999.
Gain (loss) on sale of assets of $0.3 million for the three months ended
March 31, 1999 is primarily due to the write off of equipment related to the
resolution of a legal dispute with an equipment provider.
Other income was $2.1 million for the three months ended March 31, 1999 and
primarily resulted from a legal settlement due to MobileMedia as a result of
the resolution of a dispute with an equipment provider.
Loss from continuing operations before income tax provision, as a result of
the above factors, decreased to $7.5 million for the three months ended March
31, 1999 compared to $20.7 million for the three months ended March 31, 1998
Income tax provision increased to $0.2 million for the three months ended
March 31, 1999 primarily as a result of state income tax expense.
46
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1998
---------------- ---------------
(in thousands, except
percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenues
Services, rents and maintenance......... $ 491,174 99.9 % $423,059 99.0 %
Equipment sales and activation fees..... 36,218 7.4 26,622 6.2
--------- ----- -------- -----
Total revenues............................ 527,392 107.3 449,681 105.2
Cost of products sold..................... (35,843) (7.3) (22,162) (5.2)
--------- ----- -------- -----
Net revenues.............................. 491,549 100.0 427,519 100.0
Operating expenses
Services, rents and maintenance......... 139,333 28.3 111,589 26.1
Selling................................. 69,544 14.2 61,106 14.3
General and administrative.............. 179,599 36.5 133,003 31.1
Reduction of liabilities subject to
compromise............................. -- -- (10,461) (2.4)
Restructuring costs..................... 19,811 4.0 18,624 4.4
Depreciation and amortization........... 140,238 28.6 116,459 27.2
Amortization of deferred gain on tower
sale................................... -- -- (1,556) (0.4)
--------- ----- -------- -----
Total operating expenses.................. 548,525 111.6 428,764 100.3
--------- ----- -------- -----
Operating loss............................ (56,976) (11.6) (1,245) (0.3)
Other income (expense)
Interest expense (net).................. (67,611) (13.7) (53,043) (12.4)
Gain on sale of assets.................. 3 0.0 93,827 21.9
--------- ----- -------- -----
Total other income (expense).............. (67,608) (13.7) 40,784 9.5
--------- ----- -------- -----
Income (loss) from continuing operations
before income tax provision.............. (124,584) (25.3) 39,539 9.2
Income tax provision...................... -- -- 3,958 0.9
--------- ----- -------- -----
Income (loss) from continuing operations.. $(124,584) (25.3)% $ 35,581 8.3 %
========= ===== ======== =====
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Other Data
Adjusted EBITDA........................... $ 103,073 21.0 % $ 121,821 28.5 %
Cash flows provided by operating
activities............................... 14,920 54,462
Cash flows provided by (used in) investing
activities............................... (40,556) 115,836
Cash flows provided by (used in) financing
activities............................... 13,396 (180,000)
ARPU...................................... 10.41 10.71
Average monthly operating expense per
unit..................................... 8.23 7.74
Units in service (at end of period)....... 3,440,342 3,143,968
</TABLE>
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Units in service decreased 296,374 from 3,440,342 as of December 31, 1997 to
3,143,968 as of December 31, 1998, a decrease of 8.6%. The decrease was
primarily attributable to gross additions which were below expectations.
47
<PAGE>
Services, rents and maintenance revenues decreased 13.9% to $423.1 million
for 1998 compared to $491.2 million for 1997. The decrease was attributable to
fewer units in service and was partially offset by a $0.30 increase in ARPU
from $10.41 for 1997 to $10.71 for 1998. The increase in ARPU was largely due
to a greater percentage of alphanumeric units in service, increased units in
service in the direct distribution channel and a smaller percentage in the
reseller distribution channel. Alphanumeric units and units sold through the
direct distribution channel generally are sold at higher ARPU.
Equipment sales and activation fees decreased 26.5% to $26.6 million for 1998
compared to $36.2 million for 1997. The decrease in equipment sales was
primarily due to a $2.7 million decrease in equipment sold through the retail
distribution channel and a $5.7 million decrease in billings for non-returned
equipment. Equipment sales and activation fees, less cost of products sold,
increased to $4.5 million for 1998 from $0.4 million for 1997. This increase
was primarily attributable to sales of used pagers with lower net book values
resulting from a change in pager depreciation from a four-year life to a three-
year life as of October 1, 1997.
Net revenues decreased 13.0% to $427.5 million for 1998 compared to $491.5
million for 1997.
Services, rents and maintenance expenses decreased 19.9% to $111.6 million
for 1998 compared to $139.3 million for 1997. This decrease resulted primarily
from lower subcontracted paging expenses of approximately $15.9 million arising
from billing reconciliations, increased unit cancellations, increased movement
of customers to company-owned networks and a reduction of approximately $10.4
million in paging-related telecommunications expenses. The decline in paging-
related telecommunications expenses resulted primarily from the FCC's
clarification of its interconnection rules pursuant to the Telecommunications
Act. These rules prohibit local exchange carriers from charging paging carriers
for the cost of dedicated facilities used to deliver local telecommunications
traffic to paging networks. The FCC clarification, however, noted that the FCC
is considering requests for reconsideration of these rules. In addition,
paging-related telecommunications expense declined as a result of a
reconfiguration of MobileMedia's network to maximize usage of lower cost
facilities. As a percentage of net revenue, services, rents and maintenance
expenses decreased from 28.3% to 26.1%.
Selling expenses for 1998 decreased 12.1% to $61.1 million compared to $69.5
million for 1997. The decrease resulted primarily from lower sales personnel
costs of approximately $6.4 million attributable to lower sales headcount and
lower retail distribution channel selling expenses of approximately $2.2
million resulting from lower retail sales. Selling expenses as a percentage of
net revenues were constant at approximately 14.3%.
General and administrative expenses decreased 25.9% to $133.0 million for
1998 compared to $179.6 million for 1997 and decreased as a percentage of net
revenues to 31.1% for 1998 from 36.5% for 1997. The decrease primarily resulted
from reduced bad debt expense of $27.8 million due to improvements in
MobileMedia's billing and collections functions, lower administrative telephone
expenses of $7.0 million resulting from lower call volume and lower long
distance rates as of October 1, 1997 and lower customer service and retail
activation expenses of $9.7 million primarily resulting from lower headcount.
Reduction of liabilities subject to compromise was $10.5 million for the year
ended December 31, 1998. See Note 2 to MobileMedia's consolidated financial
statements.
Restructuring costs decreased from $19.8 million for 1997 to $18.6 million
for 1998 due to a decline in professional fees incurred by MobileMedia as a
result of the bankruptcy filing on January 30, 1997.
Depreciation and amortization decreased 17.0% to $116.5 million for 1998
compared to $140.2 million for 1997. The decrease was primarily due to lower
pager depreciation attributable to a reduced depreciable base of pager assets
resulting from the change in useful life from four to three years on October 1,
1997 and decreased pager purchases. As a percentage of net revenues,
depreciation and amortization expense decreased to 27.2% for 1998 from 28.5%
for 1997.
Amortization of deferred gain on tower sale was $1.6 million for 1998. See
Note 3 to MobileMedia's consolidated financial statements.
48
<PAGE>
Operating loss decreased 97.8% to $1.2 million for 1998 from $57.0 million
for 1997. The decrease was primarily due to decreased operating expenses.
Interest expense decreased 21.5% to $53.0 million for 1998 compared to $67.6
million for 1997. The decrease was primarily due to lower interest expense on
MobileMedia's debtor-in-possession credit facility resulting from lower
outstanding borrowings in 1998.
Gain on sale of assets increased to $93.8 million for 1998 primarily as a
result of the sale of transmission towers and related equipment. See Note 3 to
MobileMedia's consolidated financial statements.
Income (loss) from continuing operations before income tax provision, as a
result of the above factors, increased to income of $39.5 million for 1998
compared to a loss of $124.6 million for 1997.
Income tax provision increased to $4.0 million for 1998 primarily as a result
of the sale of transmission towers.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
The following table presents selected items from MobileMedia's Consolidated
Statement of Operations and selected other information for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1997
--------------------------- --------------------------
(in thousands, except percentage and unit data)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data
Revenues
Services, rents and
maintenance........... $ 568,892 100.1 % $ 491,174 99.9 %
Equipment sales and ac-
tivation fees......... 71,818 12.7 36,218 7.4
-------------- --------- ------------- --------
Total revenues........... 640,710 112.8 527,392 107.3
Cost of products sold.. (72,595) (12.8) (35,843) (7.3)
-------------- --------- ------------- --------
568,115 100.0 491,549 100.0
Operating expenses
Services, rents and
maintenance........... 144,050 25.4 139,333 28.3
Selling................ 96,817 17.0 69,544 14.2
General and administra-
tive.................. 218,607 38.5 179,599 36.5
Impairment of long-
lived assets.......... 792,478 139.5 -- --
Restructuring costs.... 4,256 0.7 19,811 4.0
Depreciation and amor-
tization.............. 348,698 61.4 140,238 28.6
-------------- --------- ------------- --------
Total operating expenses. 1,604,906 282.5 548,525 111.6
-------------- --------- ------------- --------
Operating loss........... (1,036,791) (182.5) (56,976) (11.6)
Total other expense...... (92,595) (16.2) (67,608) (13.7)
-------------- --------- ------------- --------
Loss before income tax
benefit................. (1,129,386) (198.7) (124,584) (25.3)
Income tax benefit....... (69,442) 12.2 -- --
-------------- --------- ------------- --------
Net loss................. $ (1,059,944) (186.5)% $ (124,584) (25.3)%
============== ========= ============= ========
Other Data
MobileMedia adjusted
EBITDA.................. $ 108,641 19.1 % $ 103,073 21.0 %
Cash flows provided by
operating activities.... $ 57,194 $ 14,920
Cash flows used in in-
vesting activities...... $ (1,028,321) $ (40,556)
Cash flows provided by
financing activities.... $ 586,111 $ 13,396
ARPU..................... $ 11.08 $ 10.41
Average monthly operating
expense per unit (1).... $ 8.95 $ 8.23
Units in service (at end
of period).............. 4,424,107 3,440,342
</TABLE>
- --------
(1) Does not include impact of $792.5 million asset impairment writedown in
1996.
49
<PAGE>
Units in service decreased from 4,424,107 as of December 31, 1996 to
3,440,342 as of December 31, 1997, a decrease of 22.2%. The decrease was
attributable to a decrease in gross unit additions and an increase in unit
cancellations primarily resulting from acquisition integration difficulties,
billing system clean up to remove non-revenue generating units and cancellation
of units for non-payment.
Services, rents and maintenance revenues decreased 13.7% to $491.2 million
for 1997 compared to $568.9 million for 1996 due to fewer units in service and
lower ARPU. ARPU decreased to $10.41 for 1997 from $11.08 for 1996 largely due
to continued competitive market conditions.
Equipment sales and activation fees decreased 49.6% to $36.2 million for 1997
compared to $71.8 million for 1996. The decrease in equipment sales was
primarily attributable to less equipment sold through the retail distribution
channel. Equipment sales and activation fees, less cost of products sold,
increased from $(0.8) million for 1996 to $0.4 million for 1997 primarily as a
result of lower retail sales of equipment sold at a discount. Cost of products
sold for 1996 includes a writedown of $3.2 million, reflecting the
establishment of a lower of cost or market reserve for units held for resale
through MobileMedia's retail and reseller distribution channels.
Net revenues decreased 13.5% to $491.5 million for 1997 compared to $568.1
million for 1996.
Services, rents and maintenance expenses decreased 3.3% to $139.3 million for
1997 compared to $144.1 million for 1996, primarily due to billing
reconciliation and lower nationwide subcontracted paging expenses resulting
from cancellations and customer migration from networks not owned by
MobileMedia to company-owned networks.
Selling expenses for 1997 decreased 28.2% to $69.5 million from $96.8 million
for 1996 primarily due to lower sales personnel costs and lower sales
commissions attributable to lower sales headcount and lower gross additions. In
addition, reseller and retail distribution channel selling expenses declined as
a result of lower sales volume. Selling expenses as a percentage of net revenue
decreased to 14.2% for 1997 from 17.0% for 1996.
General and administrative expenses decreased 17.8% to $179.6 million for
1997 compared to $218.6 million for 1996. General and administrative expenses
decreased as a percentage of net revenues to 36.5% for 1997 from 38.5% for 1996
primarily due to decreased bad debt expense, customer service expenses related
to the assimilation of MobileComm's customer service functions, and consulting
fees related to the integration of the acquisitions. Bad debt expense decreased
as a result of increased collections resulting from improvements in
MobileMedia's billing and collection functions.
Restructuring costs increased from $4.2 million for 1996 to $19.8 million for
1997 due to professional fees constituting administrative expenses incurred by
MobileMedia as a result of the bankruptcy filing on January 30, 1997 as
compared to the 1996 expenses incurred in connection with MobileMedia's attempt
to restructure its debt.
Depreciation and amortization decreased 59.8% to $140.2 million for 1997
compared to $348.7 million for 1996. The decrease was primarily due to a
writedown of impaired assets by $792.5 million pursuant to Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" effective December 31, 1996, as
described in Note 2 to MobileMedia's consolidated financial statements,
amortization of a non-competition agreement related to the MobileComm
Acquisition which was fully amortized in 1996 and decreased pager depreciation
resulting from a decrease in expenses related to unrecoverable subscriber
equipment and a reserve established to lower book values of certain pager
models to current market values in 1996. As a percentage of net revenues,
depreciation and amortization expense decreased to 28.6% for 1997 from 61.4%
for 1996.
Operating loss decreased to $57.0 million for 1997 from $1,036.8 million for
1996. The decrease was primarily due to the $792.5 million asset impairment
writedown effective December 31, 1996 and other factors indicated above.
50
<PAGE>
Total other expense, principally interest expense, decreased 27.0% to $67.6
million for 1997 compared to $92.6 million for 1996. The decrease was primarily
due to interest expense related to MobileMedia's $250.0 million senior
subordinated notes due November 1, 2007 and $210.0 million senior subordinated
deferred coupon notes not being recognized subsequent to the bankruptcy filing
on January 30, 1997.
Loss before income tax benefit, as a result of the above factors, decreased
to $124.6 million for 1997 from $1,129.4 million for 1996.
Income tax benefit of $69.4 million resulted from the deferred tax adjustment
attributable to the $792.5 asset impairment writedown effective December 31,
1996.
Liquidity and Capital Resources
MobileMedia's operations and strategy require the availability of substantial
funds to finance the development and installation of wireless communications
systems, to procure subscriber equipment and to service debt. Historically,
these requirements have been funded by net cash from operating activities,
additional borrowings and capital contributions from its former parent company.
Following the MobileMedia acquisition, Arch will need to supply these
requirements for MobileMedia. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
Chapter 11 Filing
On January 30, 1997, MobileMedia Communications, Inc. and affiliates filed
voluntary petitions for relief under the Bankruptcy Code in order to implement
an operational and financial restructuring. Until consummation of the
MobileMedia acquisition, they operated their businesses as debtors-in-
possession subject to the jurisdiction of the bankruptcy court.
Agreement with Key Suppliers
In January 1997, the bankruptcy court approved payment of a total of $47.4
million of the pre-petition claims of MobileMedia's key suppliers, Motorola,
Glenayre, NEC and Panasonic. MobileMedia also entered into supply agreements
with each of the key suppliers.
Debtor-in-Possession Credit Agreement
Chase Manhattan Bank and certain other financial institutions initially
provided MobileMedia with up to $200.0 million of debtor-in-possession
financing during its Chapter 11 proceedings. During 1997, MobileMedia drew down
$47.0 million of borrowings to pay the pre-petition claims of key suppliers,
and later repaid $37.0 million. During January and February, 1998 MobileMedia
repaid an additional $10.0 million. Through subsequent extensions the debtor-
in-possession facility was reduced. Currently, the facility is at $75.0 million
and expires on December 31, 1999. As of March 31, 1999 there was $5.0 million
of funded borrowings under the debtor-in-possession facility.
Capital Expenditures and Commitments
Capital expenditures were $26.8 million for the three months ended March 31,
1999 compared to $4.9 million for the three months ended March 31, 1998 and
$53.9 million for the year ended December 31, 1998 compared to $40.6 million
for the year ended December 31, 1997. Capital expenditures increased $21.9
million for the three months ended March 31, 1999 compared to the three-month
period ended March 31, 1998 primarily as a result of increased pager purchases,
and $13.3 million for the 1998 year compared to the 1997 year principally as a
result of capital spending for the construction of a nationwide NPCS network.
51
<PAGE>
Sources of Funds
MobileMedia's net cash provided by operating activities was $17.6 million for
the three months ended March 31, 1999 compared to $19.5 million for the three
months ended March 31, 1998. Inventories decreased $0.6 million from December
31, 1998 to March 31, 1999 compared to a decrease of $0.4 million from December
31, 1997 to March 31, 1998 as a result of utilizing pager inventory stock and
lower sales volume in the retail sales distribution channel. Accounts payable,
accrued expenses and other liabilities decreased $2.0 million from December 31,
1998 to March 31, 1999 compared to a increase of $1.4 million from December 31,
1997 to March 31, 1998. Net accounts receivable decreased $1.7 million from
December 31, 1998 to March 31, 1999 compared to a decrease of $7.8 million from
December 31, 1997 to March 31, 1998, primarily due to collections of past due
accounts receivable in the first quarter of 1998 and lower sales volume.
MobileMedia's net cash provided by operating activities was $54.5 million for
the year ended December 31, 1998 compared to $14.9 million for the year ended
December 31, 1997. Inventories increased $1.3 million from December 31, 1997 to
December 31, 1998 as a result of additional pagers purchased for sale through
the retail sales distribution channel. Accounts payable, accrued expenses and
other liabilities decreased $7.1 million from $156.4 million as of December 31,
1997 to $149.3 million as of December 31, 1998. Net accounts receivable
decreased $16.5 million from $55.4 million as of December 31, 1997 to $38.9
million as of December 31, 1998 due to improved billing and collections
functions.
Tower Sale
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers for $170.0 million in cash. Under the terms of a lease with the buyer,
MobileMedia will continue to own and utilize transmitters, antennas and other
equipment located on these towers for an initial period of 15 years at an
aggregate annual rental of $10.7 million. The sale was accounted for in
accordance with Statement of Financial Accounting Standards No. 28, Accounting
for Sales with Leasebacks, and resulted in a recognized gain of $94.2 million
and a deferred gain of $70.0 million. The deferred gain will be amortized over
the initial lease period of 15 years. After the sale, MobileMedia distributed
the $170.0 million in proceeds to its secured creditors, who had a lien on such
assets.
Debt Obligations
In addition to the debtor-in-possession credit facility, the debt obligations
of MobileMedia during the periods described above also included the following:
MobileMedia's 1995 credit facility provided for $750.0 million senior secured
and guaranteed credit facility with a syndicate of lenders including The Chase
Manhattan Bank. As of September 30, 1998 there was $479.0 million outstanding
under this facility consisting of term loans of $101.5 million and $304.6
million and loans under a revolving credit facility totaling $72.9 million.
This became available on December 4, 1995, in connection with the financing of
the MobileComm acquisition. Commencing in 1996, MobileMedia was in default
under this facility. As a result of such default and the bankruptcy filing,
MobileMedia had no borrowing capacity under this facility. After filing under
Chapter 11, MobileMedia brought current its interest payments and made monthly
adequate protection payments to the lenders under the 1995 credit facility
equal to the amount of interest accruing under such agreement. On September 3,
1998, MobleMedia repaid $170.0 million of borrowings under its 1995 credit
facility using proceeds from the sale of 166 transmission towers.
MobleMedia issued $250.0 million senior subordinated 9 3/8% notes in November
1995, concurrent with MobileMedia's second offering of Class A common stock.
See Note 11 to MobileMedia's consolidated financial statements. These notes
bore interest at a rate of 9 3/8% payable semiannually on May 1 and November 1
of each year. On November 1, 1996, MobileMedia did not make its scheduled
interest payment on the 9 3/8% notes which constituted an event of default
under the indenture.
52
<PAGE>
MobleMedia issued $210.0 million of senior subordinated deferred coupon
notes, at a discount, in November 1993. These deferred coupon notes accreted at
a rate of 10.5%, compounded semiannually, to an aggregate principal amount of
$210.0 million by December 1, 1998 after which interest was payable in cash at
a rate of 10.5% and was payable semiannually.
Year 2000 Compliance
State of Readiness
Prior to the merger, MobileMedia had formed an internal task force comprised
of representatives of several departments to address Year 2000 compliance
matters. The task force conducted a preliminary review of internal and external
areas that are likely to be affected by Year 2000 compliance matters and
classified the various areas as mission critical, important or non-
critical/non-important.
With respect to internal matters, MobileMedia had completed a review of its
hardware and software to determine whether its business-related application
will be Year 2000 ready. Tests revealed relatively few Year 2000-related
problems, which were addressed and retested, and the implemented solutions
appear to have been successful. There can be no assurance, however, that such
testing detected all compliance issues related to the Year 2000 problem.
With respect to external matters, MobileMedia distributed questionnaires
requesting information concerning the Year 2000 readiness of certain vendors.
The combined company continues to distribute such questionnaires and are in the
process of evaluating vendor responses and preparing contingency plans based on
the responses.
Estimated Year 2000 Compliance Costs
MobileMedia's information and technology staff addressed technical issues
relating to the Year 2000 compliance matters. Based on costs incurred to date,
as well as estimated costs to be incurred later in 1999, Arch does not expect
the resolution of Year 2000 related problems to have a material adverse effect
on its results of operation and financial condition. Costs of the Year 2000
project are based on current estimates and actual results may vary
significantly from such estimates once plans are further developed and
implemented.
Risks Relating to Year 2000 Compliance Matters
See "Risk Factors--Impact of the Year 2000 issue is not fully known".
Contingency Planning
MobileMedia began the process, and Arch has continued the process, of
assessing contingency plans in the event of either internal or external Year
2000 compliance problems, Arch intends to complete the contingency planning for
Year 2000 compliance during calendar year 1999.
New Authoritative Accounting Pronouncements
See "Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of new accounting pronouncements.
Management does not believe that MobileMedia's adoption of SFAS No. 130, SFAS
No. 131 and SOP 98-5 has had or will have any material effects.
53
<PAGE>
UNAUDITED SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma financial information gives effect
to the MobileMedia acquisition as if such transaction had been consummated on
March 31, 1999 in the case of the balance sheet and on January 1, 1998 in the
case of the statement of operations data and the other operating data. The
assumptions on which the selected pro forma financial information was prepared
differed in certain respects from the definitive terms of the MobileMedia
acquisition, but Arch does not believe that these differences are of material
significance.
The following selected pro forma financial information should be read in
conjunction with the unaudited pro forma condensed consolidated financial
statements and notes. The financial impact of expected operational cost
synergies resulting from the MobileMedia acquisition is excluded from this
presentation.
The pro forma information is presented for illustrative purposes only and
does not necessarily predict the operating results or financial position that
would have occurred if the MobileMedia acquisition had been consummated as of
the dates indicated above. Nor does it predict the future operating results or
financial position of Arch following the MobileMedia acquisition.
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended
1998 March 31, 1999
------------ --------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Service, rental and maintenance revenues........... $ 785,759 $ 189,046
Product sales...................................... 69,103 15,552
---------- ----------
Total revenues..................................... 854,862 204,598
Cost of products sold.............................. (52,115) (10,442)
---------- ----------
802,747 194,156
Operating expenses:
Service rental and maintenance.................... 194,717 45,256
Selling........................................... 110,238 27,147
General and administrative........................ 245,184 57,107
Depreciation and amortization..................... 362,186 84,456
Restructuring charge.............................. 14,700 --
Bankruptcy and related expense.................... 8,163 2,017
---------- ----------
Operating income (loss)............................ (132,441) (21,827)
Interest and non-operating expenses, net........... (17,804) (27,596)
---------- ----------
Income (loss) before income tax benefit and ex-
traordinary item.................................. (150,245) (49,423)
Income tax benefit (provision)..................... (3,958) (209)
---------- ----------
Income (loss) before extraordinary item............ $ (154,203) $ (49,632)
========== ==========
Other Operating Data:
Capital expenditures, excluding acquisitions....... $ 167,051 $ 49,935
Units in service at end of period(1)............... 7,170,000 7,186,000
</TABLE>
<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Balance Sheet Data:
Current assets........................................................ 109,426
Total assets.......................................................... 1,523,903
Long-term debt, less current maturities............................... 955,700
Stockholder's equity.................................................. 366,674
</TABLE>
- --------
(1) Consolidated units in service is calculated by adding the Arch and
MobileMedia amounts less an elimination for intercompany units in service.
54
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has
been prepared to reflect the MobileMedia acquisition, assuming it had occurred
on March 31, 1999 and using the purchase method of accounting. Under the
purchase method of accounting, the purchase price is allocated to assets
acquired and liabilities assumed based on their estimated fair values at the
time of the acquisition. Income of the combined company will not include income
or loss of MobileMedia prior to the acquisition. The unaudited pro forma
condensed consolidated statements of operations for the year ended December 31,
1998 and the three months ended March 31, 1999 present the results of
operations of Arch and MobileMedia assuming the MobileMedia acquisition had
been effected on January 1, 1998. You should read the unaudited pro forma
financial data in conjunction with the consolidated historical financial
statements of Arch and MobileMedia, including the notes to both sets of
financial statements.
The pro forma condensed consolidated financial data is for information
purposes only and is not necessarily indicative of the results of future
operations of the combined company or the actual results that would have been
achieved had the MobileMedia acquisition been consummated during the period
indicated. Moreover, the pro forma condensed consolidated financial statements
reflect preliminary pro forma adjustments made to combine Arch with MobileMedia
using the purchase method of accounting. The actual adjustments will be made
after the closing and may differ from those reflected in the pro forma
financial statements.
For purposes of presenting the pro forma condensed consolidated financial
statements, Arch has assumed the issuance of 40,948,333 shares of the parent
company's common stock at an aggregate market value of $245.7 million and has
assumed that none of the non-transferable rights issued to Arch stockholders
are exercised.
55
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments
Arch MobileMedia Pro Forma
(Historical) (Historical) Debits Credits Consolidated
------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 10,478 -- $ 10,478
Accounts receivable
net................... 30,757 $ 37,270 68,027
Inventories............ 9,803 1,609 11,412
Prepaid expenses and
other................. 9,348 10,161 19,509
-------- ----------- ----------
Total current assets. 60,386 49,040 109,426
-------- ----------- ----------
Property and
equipment, net........ 218,608 225,566 444,174
Intangible and other
assets................ 594,967 279,403 114,317(1) 18,384(1) 970,303
-------- ----------- ----------
$873,961 $ 554,009 $1,523,903
======== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of
long-term debt........ $ 1,250 $ 910,681 479,000(1) $ 1,250
431,681(2)
Accounts payable....... 26,564 23,940 15,351(2) 35,153
Accrued expenses....... 10,068 53,912 12,707(2) 51,273
Accrued interest....... 16,886 21,144 17,578(2) 20,452
Customer deposits and
deferred revenue...... 16,633 28,892 45,525
Accrued restructuring.. 11,032 7,197 7,197(2) 10,000(1) 21,032
-------- ----------- ----------
Total current
liabilities......... 82,433 1,045,766 174,685
-------- ----------- ----------
Long-term debt, less
current maturities.... 643,700 -- 312,000(1) 955,700
-------- ----------- ----------
Deferred income taxes.. -- 2,655 2,655(2) --
-------- ----------- ----------
Other long-term
liabilities........... 26,844 67,278 67,278(2) 26,844
-------- ----------- ----------
Stockholders' equity
(deficit) (9):
Common stock........... -- -- --
Additional paid-in
capital............... 642,266 676,025 676,025(3) 245,690(1) 887,956
Accumulated deficit.... (521,282) (1,237,715) 554,447(2) (521,282)
18,384(1) 676,025(3)
25,627(1)
-------- ----------- ----------
Total stockholder's
equity.............. 120,984 (561,690) 366,674
-------- ----------- ----------
$873,961 $ 554,009 $1,523,903
======== =========== ==========
</TABLE>
Note: The assets and liabilities of the parent company have been omitted,
including approximately $393.0 million of long-term debt and accrued interest.
See accompanying notes to unaudited pro forma condensed consolidated financial
statements
56
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Arch MobileMedia Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues... $371,154 $423,059 $ (8,454)(4) $ 785,759
Products sales.......... 42,481 26,622 -- 69,103
-------- -------- -------- ---------
Total revenues...... 413,635 449,681 (8,454) 854,862
Cost of products sold... (29,953) (22,162) -- (52,115)
-------- -------- -------- ---------
383,682 427,519 (8,454) 802,747
-------- -------- -------- ---------
Operating expenses:
Service, rental and
maintenance.......... 80,782 111,589 10,800 (5) 194,717
(8,454)(4)
Selling............... 49,132 61,106 -- 110,238
General and
administrative....... 112,181 133,003 -- 245,184
Depreciation and
amortization......... 220,172 114,903 11,432 (6) 362,186
15,679 (6)
Restructuring expense
..................... 14,700 -- -- 14,700
Bankruptcy related
expense ............. -- 8,163 (7) 8,163
-------- -------- -------- ---------
Total operating
expenses........... 476,967 428,764 29,457 935,188
-------- -------- -------- ---------
Operating income (loss). (93,285) (1,245) (37,911) (132,441)
Interest expense, net... (66,409) (53,043) 53,043 (8) (105,942)
(39,533)(8)
Gain on sale of assests
....................... -- 94,165 -- 94,165
Other expenses ......... (5,689) (338) -- (6,027)
-------- -------- -------- ---------
Income (loss) before
provision for income
taxes and extraordinary
item................... (165,383) 39,539 (24,401) (150,245)
Provision for income
taxes.................. -- 3,958 -- 3,958
-------- -------- -------- ---------
Income (loss) before
extraordinary item..... (165,383) $ 35,581 $(24,401) $(154,203)
======== ======== ======== =========
</TABLE>
Note: Interest expense, net of the parent company has been omitted. The parent
company's interest expense for the year ended December 31, 1998 was $37.8
million.
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
57
<PAGE>
ARCH COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Arch MobileMedia Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Service, rental and
maintenance revenues..... $ 90,529 $100,631 $(2,114)(4) $189,046
Products sales............ 10,359 5,193 15,552
-------- -------- ------- --------
Total revenues........ 100,888 105,824 (2,114) 204,598
Cost of products sold..... (6,926) (3,516) (10,442)
-------- -------- ------- --------
93,962 102,308 (2,114) 194,156
-------- -------- ------- --------
Operating expenses:
Service, rental and
maintenance............ 20,293 27,077 (2,114)(5) 45,256
Selling................. 13,011 14,136 27,147
General and
administrative......... 25,626 31,481 57,107
Depreciation and
amortization........... 50,876 26,802 2,858 (6) 84,456
3,920 (6)
Bankruptcy related
expense................ -- 2,017 2,017
-------- -------- ------- --------
Total operating
expenses............. 109,806 101,513 4,664 215,983
-------- -------- ------- --------
Operating income (loss)... (15,844) 795 (6,778) (21,827)
Interest expense, net..... (16,253) (10,018) (9,883)(8) (26,136)
10,018 (8)
Gain on sale of assets.... -- 1,740 -- 1,740
Other expenses............ (3,200) -- (3,200)
-------- -------- ------- --------
Income (loss) before
provision for income
taxes and extraordinary
item..................... (35,297) (7,483) (6,643) (49,423)
Provision for income
taxes.................... -- 209 -- 209
-------- -------- ------- --------
Income (loss) before
extraordinary item....... $(35,297) $ (7,692) $(6,643) $(49,632)
======== ======== ======= ========
</TABLE>
Note: Interest expense, net of the parent company has been omitted. The parent
company's interest expense for the three months ended March 31, 1999 was $10.2
million.
See accompanying notes to unaudited proforma condensed consolidated financial
statements
58
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) To record
. $312.0 million of additional Arch borrowings necessary to fund its
obligations in connection with the MobileMedia acquisition
. the issuance of 40,948,333 shares of common stock, having an aggregate
value of $245.7 million, to unsecured creditors and standby purchasers
. the writeoff of $18.4 million of deferred financing costs associated
with the former MobileMedia credit facility and
. the excess of purchase price over the assumed fair value of the
identifiable assets acquired.
The historical book value of the tangible and intangible assets of
MobileMedia was assumed to approximate fair value. The excess of purchase
price over the assumed fair value of identifiable assets acquired was
calculated as follows:
<TABLE>
<S> <C>
Consideration exchanged:
Payments to secured creditors................................... $479,000
Assumed fair value of shares issued to unsecured creditors...... 28,690
--------
507,690
Liabilities assumed:
Administrative costs.......................................... 25,000
Other......................................................... 82,252
--------
Total consideration exchanged................................... 614,942
Transaction costs............................................... 25,000
Restructuring reserve........................................... 10,000
--------
Total purchase price............................................ 649,942
Less fair value of tangible and intangible net assets acquired.... 535,625
--------
Excess of purchase price over tangible and intangible net assets
acquired......................................................... 114,317
========
</TABLE>
--------
(a) Administrative costs consist of payments to some of MobileMedia's
creditors.
(b) Other liabilities assumed include operating liabilities such as accounts
payable, accrued expenses and advance billings which Arch assumed in
connection with the MobileMedia acquisition.
(c) Transaction costs include legal, investment banking, financing,
accounting and other costs incurred by Arch to consummate the MobileMedia
acquisition.
(d) Restructuring reserve consists of severance costs related primarily to
duplicative general and administrative functions at the corporate,
regional and market levels of MobileMedia, such as technical, marketing,
finance and other support functions. These terminations will occur as the
operations of MobileMedia are integrated into those of Arch and are based
on management's preliminary review of synergies that exist between the
companies. This analysis is expected to be finalized after consummation
of the MobileMedia acquisition and may result in additional amounts to be
reserved.
(2) To eliminate liabilities of MobileMedia not assumed by Arch, satisfied in
cash or exchanged for common stock.
(3) To eliminate MobileMedia equity balances.
(4) To eliminate revenues and expenses between Arch and MobileMedia.
(5) This entry records the incremental rental expense for the use of
transmitter space on the towers that were sold and leased back in
MobileMedia's tower sale transaction.
59
<PAGE>
(6) To record the amortization on the excess of purchase price over the
tangible and intangible assets acquired, calculated on a straight-line
basis over 10 years in the amounts of $11,432 for the year ended
December 31, 1998 and $2,858 for the three months ended March 31, 1999. The
actual amortization recorded after consummation of the MobileMedia
acquisition may differ from these amounts due to changes in the price of
common stock upon closing of the MobileMedia acquisition as well as full
allocation of purchase price to assets and liabilities assumed pursuant to
APB No. 16. The amortization relates to the $258.8 million assumed fair
value of intangible assets, consisting primarily of FCC licenses with an
assumed fair value of $242.7 million and customer lists with an assumed
fair value of $16.7 million. This amortization has already been provided in
the historical financial statements of MobileMedia. The MobileMedia
historical amortization was adjusted by $15,679 for the year ended December
31, 1998 and by $3,920 for the three months ended March 31, 1999 to conform
MobileMedia's 25 year estimated useful life of FCC licenses to Arch's 10
year estimated useful life. The estimated useful life of the customer lists
was assumed to be 3 years.
(7) These costs represent incremental and non-recurring third-party legal,
accounting and financial advisory fees and expenses incurred by MobileMedia
related to its administration of its insolvency proceedings.
(8) To remove the interest expense associated with the various MobileMedia
credit facilities and notes eliminated as a result of the insolvency
proceedings and to record the interest associated with Arch's additional
borrowings used to fund the MobileMedia acquisition. Interest was
calculated assuming an 11% rate on $173.0 million of additional bank
borrowings and a 14.75% rate on $139.0 million of senior notes. Interest
expense would be as follows if interest rates on the bank borrowings were
to decrease or increase 1/8 of a percent:
<TABLE>
<CAPTION>
Assumed Change in Interest Rate Assumed Interest Expense
------------------------------- ------------------------------------
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
<S> <C> <C>
Increase of 1/8%.................... $39,923 $9,981
Decrease of 1/8%.................... $39,143 $9,786
</TABLE>
60
<PAGE>
INDUSTRY OVERVIEW
Paging is a method of wireless communication which uses an assigned radio
frequency to contact a paging subscriber anywhere within a designated service
area. A subscriber carries a pager which receives messages by the transmission
of a one-way radio signal. To contact a subscriber, a message is usually sent
by placing a telephone call to the subscriber's designated telephone number.
The telephone call is received by an electronic paging switch which generates a
signal that is sent to radio transmitters in the service area. Depending upon
the topography of the service area, the operating radius of a radio transmitter
typically ranges from three to 20 miles. The transmitters broadcast a signal
that is received by the pager a subscriber carries, which alerts the subscriber
by a tone or vibration that there is a voice, tone, digital or alphanumeric
message. See "Business--Arch's Paging and Messaging Services, Products and
Operations".
The paging industry has been in existence since 1969 when the FCC allocated a
group of radio frequencies for use in providing one-way and two-way types of
mobile communications services. Throughout its history, the paging industry has
been characterized by consolidation, substantial growth and technological
change. Historically, the paging industry has been highly fragmented, with a
large number of small, local operators. Since the 1980s, concentration in the
paging industry has increased as paging companies continue to grow rapidly
either internally or through acquisitions.
Arch believes that paging is the most cost-effective form of mobile wireless
communications. Paging has an advantage over conventional telephone service
because a pager's reception is not restricted to a single location. Paging has
an advantage over a cellular telephone or broadband PCS handset because a pager
is smaller, has a longer battery life and, most importantly, because paging
units and air time required to transmit an average message cost less than
equipment and air time for cellular telephones or broadband PCS handsets.
Paging subscribers generally pay a flat monthly service fee for pager services,
regardless of the number of messages, unlike cellular telephone or broadband
PCS subscribers, whose bills typically have a significant variable usage
component. For these reasons, some cellular subscribers use a pager in
conjunction with their cellular telephone to screen incoming calls and thus
lower the expense of cellular telephone service, and to a lesser extent, some
broadband PCS subscribers use a pager in conjunction with their broadband PCS
handsets, which often incorporate messaging functions, but have a much shorter
battery life.
The paging industry has benefited from technological advances resulting from
research and development conducted by vendors of paging units and transmission
equipment. These advances include microcircuitry, liquid crystal display
technology and standard digital encoding formats. These advances have enhanced
the capability and capacity of paging services while lowering equipment and air
time costs. Technological improvements have generally contributed to strong
growth in the market for paging services and enable the combined company to
provide better quality services at lower prices to its subscribers.
The paging industry has traditionally distributed its services through direct
marketing and sales activities. In recent years, additional channels of
distribution have evolved. These include: (1) carrier-operated stores; (2)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; (3) agents who
solicit customers for carriers and are compensated on a commission basis; (4)
retail outlets that often sell a variety of merchandise, including paging units
and other telecommunications equipment; and (5) most recently, the Internet.
While most paging subscribers traditionally have been business users, industry
observers believe that retail consumers have significantly increased their use
of paging units in recent years. In addition, paging subscribers have
increasingly chosen to purchase rather than lease their paging units. Arch
expects these trends to continue.
Competition
The paging industry is highly competitive. Providers of numeric display
paging services compete primarily on the basis of price. Companies in the
industry also compete on the basis of coverage area offered to subscribers,
available services offered in addition to basic numeric or tone paging,
transmission quality, system reliability and customer service. The combined
company believes that it will generally compete effectively based on these
factors.
61
<PAGE>
Arch and MobileMedia have competed by maintaining competitive pricing of
their products and services, by providing high-quality, reliable transmission
networks and by furnishing subscribers a superior level of customer service.
Several hundred licensed paging companies provide only local basic numeric or
tone paging service. Compared to these companies, the combined company offers
wireless messaging services on a local, regional and nationwide basis. It also
offers enhanced services such as alphanumeric paging, voice mail and voice mail
notifications, news, sports, weather reports and stock quotes.
The combined company competes with one or more competitors in all markets in
which it operates. Some competitors are small, privately owned companies
serving one market area but others are large diversified telecommunications
companies serving many markets. Some competitors possess financial, technical
and other resources greater than those of the combined company. Major paging
carriers that currently compete in one or more of the combined company's
markets include Paging Network, Inc., Metrocall, Inc. and AirTouch Paging Inc.
The scope of competition for communications service customers in the combined
company's markets will broaden as paging services become increasingly
interactive and as two-way services become increasingly competitive. For
example, the FCC has created potential sources of competition by auctioning new
spectrum for wireless communications services, local multipoint distribution
service and the 220-222 MHZ service. Furthermore, the FCC has announced plans
to auction licenses in the general wireless communications service, a service
created from spectrum reallocated from federal government use in 1995.
Moreover, entities offering service on wireless two-way communications
technology, including cellular, broadband PCS, N-PCS and specialized mobile
radio services, as well as mobile satellite service providers, also compete
with the paging services that the combined company provides. See "Risk
Factors--Competition and technological change may undermine Arch's business".
The combined company holds one nationwide and four regional N-PCS licenses.
Competitors of the combined company also hold PCS licenses. Some of these
competitors have substantially greater resources than the combined company. One
of the combined company's competitors, SkyTel, recently introduced a two-way N-
PCS wireless data service. Although the combined company cannot predict the
types of N-PCS services which will be offered by those companies, the combined
company expects that those services will compete with the N-PCS and paging
services to be offered by the combined company.
Regulation
Paging operations and the construction, modification, ownership and
acquisition of paging systems are subject to extensive regulation by the FCC
under The Communications Act of 1934 and, to a much more limited extent, by
public utility or public service commissions in certain states. Each of Arch
and MobileMedia is separately licensed to conduct various types of paging
operations. Although the following description is intended to address all
material aspects of governmental regulation, it does not purport to be a
complete discussion of all present and proposed legislation and regulations
relating to the paging operations of the combined company.
Federal Regulation
Regulatory Classification
Paging companies historically have been subject to different federal
regulatory requirements depending upon whether they were providing service as a
radio common carrier, or RCC, as a private carrier paging operator, or PCP, or
as a reseller. The combined company's paging operations encompass RCC, PCP and
resale operations. However, federal legislation enacted in 1993 required the
FCC to reduce the disparities in the regulatory treatment of similar mobile
services such as RCC and PCP services. The FCC has taken, and continues to
take, actions to implement this legislation. As CMRS providers, Arch and
MobileMedia are regulated as common carriers, except that the FCC has exempted
paging services from some typical common carrier regulations, such as tariff
filing and resale requirements, because paging services have been found to be
highly competitive.
62
<PAGE>
The classification of Arch's and MobileMedia's paging operations as CMRS
affects the level of permissible foreign ownership in the combined company, as
discussed below, and the nature and extent of state regulation. In addition,
the FCC now is required to resolve competing requests for CMRS spectrum by
conducting auctions. This may have the effect of increasing the costs of
acquiring additional spectrum in markets in which the combined company
operates. Also, the combined company is obligated to pay certain regulatory
fees in connection with their paging operations.
FCC Regulatory Approvals and Authorizations
The Communications Act requires radio licensees such as the combined company
to obtain prior approval from the FCC for the assignment or transfer of control
of any construction permit or station license or authorization or any related
rights. This statutory requirement attaches to acquisitions of other paging
companies (or other radio licensees) by the combined company as well as
transfers of a controlling interest in any of Arch's or MobileMedia's licenses,
construction permits or related rights; however the FCC's Wireless
Telecommunications Bureau, which directly regulates Arch's and MobileMedia's
paging activities, has decided to forbear from enforcing its filing
requirements with respect to pro forma assignments and transfers of control of
certain wireless authorizations, such as Arch's and MobileMedia's RCC and PCP
licenses. Pursuant to this decision, wireless telecommunications carriers now
only have to file a written notification of a pro forma transaction within 30
days after the transaction is completed. Note, however, that Arch and
MobileMedia may still be required to obtain prior FCC approval for the pro
forma assignment or transfer of control of some of their licenses not covered
by the forbearance decision, such as certain business radio authorizations.
To date, the FCC has approved each assignment and transfer of control for
which Arch and MobileMedia have sought approval, including the transfer of
MobileMedia's licenses in connection with Arch's acquisition of MobileMedia.
Although there can be no assurance that any future requests for approval of
transfers of control and/or assignments of license will be acted upon in a
timely manner by the FCC, or that the FCC will grant the approval requested,
neither Arch nor MobileMedia knows of any reason that any such applications
will not be approved or granted.
The FCC paging licenses granted to Arch and MobileMedia are for varying terms
of up to 10 years, at the end of which renewal applications must be approved by
the FCC. The combined company is unaware of any circumstances which would
prevent the grant of any pending or future renewal applications made by Arch or
MobileMedia. However, no assurance can be given that any of Arch's or
MobileMedia's renewal applications will be free of challenge or will be granted
by the FCC. It is possible that there may be competition for radio spectrum
associated with licenses as they expire. This would increase the chances of
third-party interventions in the renewal proceedings. The FCC has so far
granted each license renewal application that Arch or MobileMedia have filed,
other than those renewal applications still pending.
The FCC's review and revision of rules affecting paging companies is ongoing.
The regulatory requirements to which the combined company is are subject may
change significantly over time. For example, the FCC has decided to adopt a
market area licensing scheme for all paging channels under which carriers would
be licensed to operate on a particular channel throughout a broad geographic
area (such as a major economic area as defined by The Bureau of Economic
Affairs of the U.S. Department of Commerce) rather than being licensed on a
site-by-site basis. These geographic area licenses will be awarded through an
auction. Incumbent paging licensees that do not acquire licenses at auction
will be entitled to interference protection from the market area licensee. Arch
and MobileMedia have each been participating actively in this proceeding in
order to protect their existing operations and retain flexibility, on an
interim and long-term basis, to modify systems as necessary to meet subscriber
demands.
Currently, however, the Communications Act requires that Arch and MobileMedia
obtain licenses from the FCC to use radio frequencies to conduct their paging
operations at specified locations. FCC licenses issued to Arch and MobileMedia
set forth the technical parameters, such as power strength and tower height,
under which Arch and MobileMedia are authorized to use those frequencies. In
many instances, Arch and
63
<PAGE>
MobileMedia require the prior approval of the FCC before they can implement any
significant changes to their radio systems. Once the FCC's market area
licensing rules are implemented, however, these site-specific licensing
obligations will be eliminated, except for applications still required by
Section 22.369 of the FCC rules (request for authority to operate in a
designated Quiet Zone), Section 90.77 (request for authority to operate in a
protected radio receiving location) and Section 1.1301 et seq.
(construction/modification that may have a significant environmental impact) or
for coordination with Canada or Mexico.
The FCC has issued a Further Notice of Proposed Rulemaking in which the FCC
seeks comments on, among other matters, (1) whether it should impose coverage
requirements on licensees with nationwide exclusivity (such as Arch and
MobileMedia), (2) whether these coverage requirements should be imposed on a
nationwide or regional basis, and (3) whether--if such requirements are
imposed--failure to meet the requirements should result in a revocation of the
entire nationwide license or merely a portion of the license. If the FCC were
to impose stringent coverage requirements on licensees with nationwide
exclusivity, the combined company might have to accelerate the build-out of its
systems in certain areas.
Telecommunications Act of 1996
The Telecommunications Act directly affects the combined company. Some
aspects of the Telecommunications Act place financial obligations upon the
combined company and may subject it to increased competition. For example, the
FCC has adopted new rules that govern compensation to be paid to pay phone
providers which has resulted in increased costs for certain paging services
including toll-free 1-800 number paging. Arch and MobileMedia have generally
passed these costs on to their subscribers. This makes their services more
expensive and could affect the attraction or retention of customers. However,
there can be no assurance that the combined company will be able to continue to
pass on these costs. These rules are the subject of several judicial appeals.
In addition, the FCC also has adopted new rules regarding payments by
telecommunications companies into a revamped fund that will provide for the
widespread availability of telecommunications services including universal
service. Prior to the implementation of the Telecommunications Act, universal
service obligations were largely met by local telephone companies, supplemented
by long-distance telephone companies. Under the new rules, all
telecommunications carriers, including paging companies, are required to
contribute to the universal service fund. In addition, certain state regulatory
authorities have enacted, or have indicated that they intend to enact, similar
contribution requirements based on intrastate revenues. The combined company
cannot yet know the impact of these state contribution requirements, if enacted
and applied to it. Moreover, neither Arch nor MobileMedia has been able to
estimate the amount of any such payments that it will be able to bill to its
subscribers; however, payments into the universal service fund will likely
increase the cost of doing business.
Some aspects of the Telecommunications Act could have a beneficial effect on
the combined company's business. For example, proposed federal guidelines
regarding antenna siting issues may remove local and state barriers to the
construction of communications facilities, although states and municipalities
continue to exercise significant control with regard to such siting issues.
Moreover, in a rulemaking proceeding pertaining to interconnection between
LECs (local exchange carriers) and CMRS providers such as the combined company,
the FCC has concluded that LECs are required to compensate CMRS providers for
the reasonable costs incurred by such providers in terminating traffic that
originates on LEC facilities, and vice versa. Consistent with this ruling, the
FCC has determined that LECs may not charge a CMRS provider or other carrier
for terminating LEC-originated traffic or for dedicated facilities used to
deliver LEC-originated traffic to one-way paging networks. Nor may LECs charge
CMRS providers for number activation and use fees. These interconnection issues
are still in dispute, and it is unclear whether the FCC will maintain its
current position.
Depending on further FCC disposition of these issues, the combined company
may or may not be successful in securing refunds, future relief or both, with
respect to charges for termination of LEC-originated local traffic. If the FCC
ultimately reaches an unfavorable resolution, then the combined company
believes that it would pursue relief through settlement negotiations,
administrative complaint procedures or both. If these
64
<PAGE>
issues are ultimately decided in favor of the LECs, each of Arch and
MobileMedia likely would be required to pay all past due contested charges and
may also be assessed interest and late charges for amounts withheld.
Future Regulation
From time to time, federal or state legislators propose legislation which
could potentially affect the combined company either beneficially or adversely.
It is possible that legislation will be enacted by the federal or state
governments, or that regulations will be adopted or actions taken by the FCC or
state regulatory authorities, which might materially adversely affect the
business of Arch and/or MobileMedia. Changes such as the allocation by the FCC
of radio spectrum for services that compete with Arch's and MobileMedia's
business could adversely affect Arch's and MobileMedia's results of operations.
See "Risk Factors--Government regulation burdens operations".
Foreign Ownership
The Communications Act limits foreign investment in and ownership of
entities that are licensed as radio common carriers by the FCC. The combined
company owns or controls several radio common carriers and is accordingly
subject to these foreign investment restrictions. Because Arch's parent
company is the parent of radio common carriers (but is not a radio common
carrier itself), it may not have more than 25% of its stock owned or voted
by aliens or their representatives, a foreign government or its
representatives or a foreign corporation if the FCC finds that the public
interest would be served by denying such ownership. In connection with the
WTO Agreement--agreed to by 69 countries--the FCC adopted rules effective
February 9, 1998 that create a very strong presumption in favor of
permitting a foreign interest in excess of 25% if the foreign
investor's home market country signed the WTO Agreement. Arch's subsidiaries
that are radio common carrier licensees are subject to more stringent
requirements and may have only up to 20% of their stock owned or voted by
aliens or their representatives, a foreign government or their
representatives or a foreign corporation. This ownership restriction is not
subject to waiver. See""Industry Overview-- Regulation". The certificate of
incorporation of Arch's parent company permits the redemption of shares of
its 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's parent company and any
restrictions contained in applicable debt instruments and under the Delaware
corporations statute, which currently would not permit any such redemptions.
The failure to redeem such shares promptly could jeopardize the FCC licenses
held by Arch or its subsidiaries. See "--Competition", "-- Regulation" and
"Risk Factors--High degree of leverage burdens operations".
State Regulation
In addition to regulation by the FCC, certain states impose various
regulations on the common carrier paging operations of Arch and MobileMedia.
Rates, terms and conditions under which Arch and MobileMedia provided services,
or any changes to those rates, have also been subject to state regulation. In
certain instances, the construction and operation of radio transmitters also
will be subject to zoning, land use, public health and safety, consumer
protection and other state and local taxes, levies and ordinances. However, as
a general rule, states are preempted from exercising rate and entry regulation
of CMRS, but may choose to regulate other terms and conditions of service: for
example, requiring the identification of an agent to receive complaints. States
may also petition the FCC for authority to continue to regulate CMRS rates if
certain conditions are met. State filings seeking rate authority have all been
denied by the FCC, although new petitions seeking such authority may be filed
in the future. Furthermore, some states and localities continue to exert
jurisdiction over (1) approval of acquisitions and transfers of wireless
systems and (2) resolution of consumer complaints. Arch and MobileMedia believe
that to date all required filings for Arch's and MobileMedia's paging
operations have been made.
65
<PAGE>
BUSINESS
The combined company is the second largest paging operator in the United
States as measured by units in service and net revenues.
The combined company believes that it is well positioned to compete
effectively in the highly competitive paging industry for the following
reasons. The combination of MobileMedia's market presence in major metropolitan
markets with Arch's historical emphasis on middle and small markets has
significantly broadened the geographic scope of Arch's marketing presence and
should position the combined company to compete more effectively for large
corporate customers with diverse geographic operations. With a significantly
larger subscriber base, the combined company should be better able to obtain
strategic distribution arrangements, as well as amortize marketing investments
over a larger revenue base. In addition, MobileMedia's third-party retail
distribution agreements, which serve the more rapidly growing consumer market,
should complement the more than 175 Arch-operated retail outlets. Similarly,
MobileMedia's two nationwide paging networks and the associated potential for
higher revenue nationwide services should enhance Arch's local coverage and
provide an opportunity to take advantage of Arch's distribution networks.
MobileMedia's plan to deploy its nationwide N-PCS spectrum using its existing
network infrastructure, together with Arch's recent agreement with PageMart
Wireless described below, should permit Arch to market N-PCS services, such as
multi-market alphanumeric and text messaging services, sooner than it would
otherwise be able to, and these services are expected to offer higher revenue
and more growth potential than basic paging services. Finally, MobileMedia's
investments to date in two national call centers should supplement Arch's own
call center and complement Arch's strategy of evolving to regional customer
service centers. Achieving these intended benefits, however, will depend on a
number of factors and no assurance can be given that the benefits will be
realized, in whole or in part. See "Risk Factors--Integrating the two companies
presents challenges" and "--Arch's Investments in N-PCS Licenses".
Business Strategy
The combined company's strategic objective is to strengthen its position as
one of the leading nationwide paging companies in the United States. It
believes that larger, multi-market paging companies enjoy a number of
competitive advantages, including:
. operating efficiencies resulting from more intensive use of existing
paging systems;
. economies of scale in purchasing and administration;
. broader geographic coverage of paging systems;
. greater access to capital markets and lower costs of capital;
. the ability to obtain additional radio spectrum;
. the ability to offer high-quality services at competitive prices; and
. enhanced ability to attract and retain management personnel.
The combined company believes that the current size and scope of its
operations afford it many of these advantages, and that it has the scope and
presence to effectively compete on a national level. It also believes that the
paging industry will undergo further consolidation, and it intends to
participate in such consolidation. See "Risk Factors--Integrating the two
companies presents challenges".
Operating Strategy. The combined company's operating objectives are to
increase its adjusted EBITDA, deploy its capital efficiently, reduce its
financial leverage and expand its customer relationships. The combined company
will pursue the following strategies to achieve its operating objectives:
. Low-Cost Operating Structure. The combined company has selected a low-
cost operating strategy as its principal competitive tactic. Management
believes that a low-cost operating structure, compared
66
<PAGE>
to differentiated premium pricing and niche positioning, the other two
fundamental competitive tactics in the paging industry, will maximize
its flexibility to offer competitive prices while still achieving target
margins and adjusted EBITDA. Arch's management has worked closely with
MobileMedia's management to identify redundant managerial and
administrative functions that Arch's management believes can be
eliminated without material impact to customer related activities. The
combined company will continue to improve its low-cost operating
structure by consolidating some operating functions, including
centralized purchases from key vendors, to achieve economies of scale,
and installing technologically advanced and reliable transmission
systems.
. Efficient Capital Deployment. The combined company's principal financial
objective is to reduce financial leverage by reducing capital
requirements and increasing adjusted EBITDA. To reduce capital
expenditures, Arch has already implemented a company-wide focus on the
sale, rather than lease, of pagers. This is because subscriber-owned
units require a lower level of capital investment than company-owned
units. As a result of these efforts to date, the number of subscriber-
owned units in service, as a percentage of net new units in service,
increased from 65.2% in the year ended December 31, 1997 to 69.7% in the
year ended December 31, 1998. In addition, Arch has modified its
incentive compensation programs for line managers so that bonuses are
based, in part, on capital efficiency.
. Balanced Distribution. Arch's combination of direct sales, company-owned
stores and third-party resellers will be supplemented by MobileMedia's
local market direct sales force and its distribution agreements with
third-party regional and national retailers. In addition, MobileMedia's
national accounts sales force should significantly enhance Arch's
efforts to improve distribution to nationwide customers.
. Capitalize on Revenue Enhancement Opportunities. The combined company
will have one of the broadest product offerings in the paging industry,
including traditional paging services as well as new services such as
assured message delivery and acknowledgement, wireless e-mail and
content delivery services. Arch intends to deliver these new services
through a strategic alliance with PageMart Wireless, Inc. pursuant to
which Arch will utilize and share certain costs of PageMart's N-PCS
network. This will provide the combined company with more economical and
broader access to higher ARPU nationwide, regional or text messaging
services. To date, Arch has marketed these services only on a limited
basis through the resale of other carriers' services on less attractive
terms. Arch believes there will be a number of new revenue opportunities
associated with its approximately 7.2 million units in service,
including selling enhanced services which add value such as voice mail,
resale of long-distance service and fax storage and retrieval. See
"Business--Arch's Paging and Messaging Services, Products and
Operations" and "--Arch's Investments in NPCS Licenses".
Arch's Paging and Messaging Services, Products and Operations
Arch has been a leading provider of wireless messaging services, primarily
paging services. Prior to the MobileMedia acquisition, Arch was the third
largest paging company in the United States, based on its 4.3 million units in
service at March 31, 1999. Arch has operated in 41 states and more than 180 of
the 200 largest markets in the United States. Arch has offered local, regional
and nationwide paging services employing digital networks covering
approximately 85% of the United States population.
67
<PAGE>
The following table sets forth information about the approximate number of
units in service with Arch subscribers and net increases in number of units
through internal growth and acquisitions:
<TABLE>
<CAPTION>
Units in Service Net Increase in
at Beginning of Units through Increase in Units Units in Service
Year Ended August 31, Period Internal Growth(1) through Acquisitions(2) at End of Period
- --------------------- ---------------- ------------------ ----------------------- ----------------
<S> <C> <C> <C> <C>
1987.................... 4,000 3,000 12,000 19,000
1988.................... 19,000 8,000 3,000 30,000
1989.................... 30,000 14,000 34,000 78,000
1990.................... 78,000 20,000 4,000 102,000
1991.................... 102,000 24,000 1,000 127,000
1992.................... 127,000 33,000 -- 160,000
1993.................... 160,000 70,000 24,000 254,000
1994.................... 254,000 138,000 18,000 410,000
<CAPTION>
Four Months Ended December 31,
- ------------------------------
<S> <C> <C> <C> <C>
1994.................... 410,000 64,000 64,000 538,000
<CAPTION>
Year Ended December 31,
- -----------------------
<S> <C> <C> <C> <C>
1995.................... 538,000 366,000 1,102,000 2,006,000
1996.................... 2,006,000 815,000 474,000 3,295,000
1997.................... 3,295,000 595,000 -- 3,890,000
1998.................... 3,890,000 386,000 -- 4,276,000
<CAPTION>
Three Months Ended March 31,
- ----------------------------
<S> <C> <C> <C> <C>
1999.................... 4,276,000 53,000 -- 4,329,000
</TABLE>
Net increase in units through internal growth includes internal growth in
acquired paging businesses after their acquisition by Arch and is net of
subscriber cancellations during each applicable period. Increase in units
through acquisitions is based on units in service of acquired paging businesses
at the time of their acquisition by Arch.
Arch has provided four basic types of paging services: digital display,
alphanumeric display, tone-only and tone-plus-voice. Arch provides digital
display, alphanumeric display and tone-only service in all of its markets and
tone-plus-voice service in only a few markets.
A digital display pager permits a caller to transmit to the subscriber a
numeric message that may consist of a telephone number, an account number or
coded information, and has the capability to store several such numeric
messages in memory for later recall by the subscriber. An alphanumeric display
pager allows subscribers to receive and store messages consisting of both
numbers and letters. A tone-only pager notifies the subscriber that a call has
been received by emitting an audible beeping sound or vibration. A tone-plus-
voice pager emits a beeping sound followed by a brief voice message.
Digital display paging service, which was introduced by the paging industry
nearly 20 years ago, has in recent years grown at a faster rate than tone-only
or tone-plus-voice service and currently represents a majority of all units in
service. The growth of alphanumeric display service, which was introduced in
the mid-1980s, has been constrained by its difficulty in inputting data, its
requirements of specialized equipment and its relatively high use of system
capacity during transmission.
68
<PAGE>
The following table summarizes the types of Arch's units in service at
specified dates:
<TABLE>
<CAPTION>
December 31,
------------------------------------------- March 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
Units % Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Digital display......... 2,796,000 85% 3,284,000 85% 3,586,000 84% 3,635,000 84%
Alphanumeric display.... 395,000 12 524,000 13 621,000 14 631,000 14
Tone-only............... 54,000 2 43,000 1 35,000 1 32,000 1
Tone-plus-voice......... 50,000 1 39,000 1 34,000 1 31,000 1
--------- --- --------- --- --------- --- --------- ---
Total.................. 3,295,000 100% 3,890,000 100% 4,276,000 100% 4,329,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides paging service to subscribers for a monthly fee. Subscribers
either lease the pager from Arch for an additional fixed monthly fee or they
own the pager, having purchased it either from Arch or from another vendor. The
monthly service fee is generally based upon the type of service provided, the
geographic area covered, the number of units provided to the customer and the
period of the subscriber's commitment. Subscriber-owned units provide a more
rapid recovery of Arch's capital investment than units owned and maintained by
Arch, but may generate less recurring revenue. Arch also sells units to third-
party resellers who lease or resell units to their own subscribers and resell
Arch's paging services under marketing agreements. The following table
summarizes the number of Arch-owned and leased, subscriber-owned and reseller-
owned units in service at specified dates:
<TABLE>
<CAPTION>
December 31,
------------------------------------------- March 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
Units % Units % Units % Units %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arch-owned and leased... 1,533,000 47% 1,740,000 45% 1,857,000 43% 1,875,000 43%
Subscriber-owned........ 914,000 28 1,087,000 28 1,135,000 27 1,128,000 26
Reseller-owned.......... 848,000 25 1,063,000 27 1,284,000 30 1,326,000 31
--------- --- --------- --- --------- --- --------- ---
Total.................. 3,295,000 100% 3,890,000 100% 4,276,000 100% 4,329,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides enhancements and ancillary services such as voice mail,
personalized greetings, message storage and retrieval, pager loss protection
and pager maintenance services. Voice mail allows a caller to leave a recorded
message that is stored in Arch's computerized message retrieval center. When a
message is left, the subscriber can be automatically alerted through the
subscriber's pager and can retrieve the stored message by calling Arch's paging
terminal. Personalized greetings allow the subscriber to record a message to
greet callers who reach the subscriber's pager or voice mail box. Message
storage and retrieval allows a subscriber who leaves Arch's service area to
retrieve calls that arrived during the subscriber's absence from the service
area. Pager loss protection allows subscribers who lease pagers to limit their
costs of replacement upon loss or destruction of a pager. Pager maintenance
services are offered to subscribers who own their own equipment. Arch is also
in the process of test marketing various other services that add value, and can
be integrated with existing paging services. These include, among other
services, voice mail, resale of long distance service and fax storage and
retrieval.
MobileMedia's Paging and Messaging Services, Products and Operations
MobileMedia has operated one of the largest paging businesses in the United
States, with approximately 3.1 million units in service as of March 31, 1999.
Through its sales offices, nationwide retail distribution network, company-
operated retail stores and resellers, MobileMedia has offered local, regional
and national coverage to subscribers in all 50 states and the District of
Columbia, including local coverage to each of the 100 most populated
metropolitan markets in the United States. MobileMedia's paging and wireless
messaging services consist principally of digital display and alphanumeric
display paging services.
Recent Business Strategy
After making its bankruptcy filing, MobileMedia restructured its operations
with the objective of improving performance, principally in the areas of order
entry, billing and collections, inventory controls,
69
<PAGE>
management information systems conversion and customer service. MobileMedia
also undertook cost reduction analyses and took actions to reduce
telecommunications, subcontracting and lease expenses, among others.
MobileMedia also sought to refocus its marketing and sales efforts in an
attempt to achieve unit additions consistent with positive cash flow, and
changed its management structure with the objective of establishing profit and
loss accountability in each market.
Paging and Messaging Services
MobileMedia currently offers a variety of paging and messaging services. The
main paging services offered by MobileMedia are digital display, with
approximately 2,448,800 units in service at March 31, 1999 and alphanumeric
display, with approximately 645,583 units in service at March 31, 1999.
MobileMedia also offers a variety of enhanced services such as voice mail and
voice mail notification, e-mail notification and news, sports reports and stock
quotes.
The following table sets forth the number of MobileMedia customers by service
type as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
Type of Service Number % Number % Number % Number % Number %
--------------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Numeric Display......... 3,713,579 83.9% 2,820,443 82.0% 2,499,735 79.5% 2,707,363 81.6% 2,448,800 78.8%
Alphanumeric............ 658,769 14.9 593,280 17.2 630,448 20.0 590,076 17.8 645,583 20.8
Other................... 51,759 1.2 26,619 0.8 13,785 0.5 22,114 0.6 12,392 0.4
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 4,424,107 100.0% 3,440,342 100.0% 3,143,968 100.0% 3,319,553 100.0% 3,106,775 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
Customers with
nationwide services
(included above)....... 325,924 330,254 291,427 328,724 341,316
</TABLE>
Products and Services
Subscribers for paging services enter into a service contract with
MobileMedia that provides for either the purchase or lease of units and the
payment of airtime and other charges. As of March 31, 1999, approximately 46.4%
of units in service were purchased either by subscribers or by resellers, and
approximately 53.6% were owned by MobileMedia and leased to subscribers.
MobileMedia-owned units leased to subscribers require capital investment by
MobileMedia, while customer-owned and -maintained units, commonly referred to
as COAM units, and those owned by resellers do not. MobileMedia also sells its
services in bulk quantities to resellers, who subsequently sell MobileMedia's
services to end-users. Resellers are responsible for sales, billing, collection
and equipment maintenance costs. MobileMedia sells other products and services,
including units and accessories and pager replacement and maintenance
contracts. The following table sets forth MobileMedia's units in service by
ownership as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
Ownership Number % Number % Number % Number % Number %
--------- --------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company owned and rented
to subscribers......... 1,996,141 45.2% 1,712,941 49.8% 1,645,869 52.4% 1,658,463 50.0% 1,666,348 53.6%
COAM.................... 1,112,194 25.1 861,250 25.0 728,297 23.2 825,842 24.8 705,108 22.7
Resellers............... 1,315,772 29.7 866,151 25.2 769,802 24.4 835,248 25.2 735,319 23.7
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................... 4,424,107 100.0% 3,440,342 100.0% 3,143,968 100.0% 3,319,553 100.0% 3,106,775 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
Networks and Licenses
MobileMedia's Networks and Licenses, Including N-PCS
MobileMedia operates local, regional and national paging networks which
enable its customers to receive pages over a broad geographical area. The
extensive coverage provided by this network infrastructure provides
70
<PAGE>
MobileMedia with an advantage over some of its competitors whose networks lack
comparable coverage in securing accounts with large corporate clients and
retail chains, which frequently demand national network coverage from their
paging service provider.
Although MobileMedia's networks provide local, regional and national
coverage, its networks operate over numerous frequencies and are subject to
capacity constraints in certain geographic markets. Although the
capacity of MobileMedia's networks varies significantly market by market,
almost all of MobileMedia's markets have adequate capacity to meet the demands
of projected growth for the next several years. The use of multiple frequencies
adds complexity to inventory management, customer service and order fulfillment
processes. Some of MobileMedia's networks use older technologies and are
comparatively costlier to operate.
MobileMedia is seeking to improve overall network efficiency by deploying new
paging terminals, consolidating subscribers on fewer, higher capacity networks
and increasing the transmission speed, or baud rate, of certain of its existing
networks. MobileMedia believes its investments in its network infrastructure
will facilitate and improve the delivery of high quality paging services while
at the same time reducing associated costs of such services.
Nationwide wireless networks. MobileMedia operates two nationwide 900 MHz
networks. As part of its MobileComm acquisition, MobileMedia acquired
MobileComm's fully operational nationwide wireless "8875" network, which
was upgraded in 1996 to incorporate high-speed FLEX(TM) technology
developed by Motorola. In addition, in 1996, MobileMedia completed the
construction of a second nationwide "5375" network that uses FLEX(TM)
technology. The use of FLEX(TM) technology significantly increases
transmission capacity and represents a marked improvement over other
systems that use older paging protocols.
Nationwide two-way N-PCS networks. N-PCS networks enable paging companies
to offer two-way paging services and to make more efficient use of radio
spectrum than do non-PCS networks. MobileMedia purchased five regional
licenses through the FCC's 1994 auction of N-PCS licenses, providing the
equivalent of a nationwide 50 kHz outbound/12.5 kHz inbound PCS system. In
addition, as part of the MobileComm acquisition, MobileMedia acquired a
second two-way N-PCS license for a nationwide 50 kHz outbound/12.5 kHz
inbound system.
In order to retain its N-PCS licenses, MobileMedia must comply with certain
minimum buildout requirements. With respect to each of the regional PCS
licenses purchased at the FCC's 1994 auction, MobileMedia would be required to
build out the related PCS system to cover 150,000 sq. km. or 37.5% of each of
the five regional populations by April 27, 2000 and 300,000 sq. km. or 75% of
each of the five regional populations by April 27, 2005. With respect to the
nationwide PCS license acquired as part of the MobileComm acquisition,
MobileMedia would be required to build out the related PCS system to cover
750,000 sq. km. or 37.5% of the U.S. population by September 29, 1999 and
1,500,000 sq. km. or 75% of the U.S. population by September 29, 2004. In each
instance, the population percentage will be determined by reference to
population figures at the time of the applicable deadline. MobileMedia
estimates that the costs of these minimum build-outs would be approximately
$9.0 million. Although these minimum build-outs would be sufficient to satisfy
regulatory requirements, they would not be sufficient for MobileMedia to
provide significant N-PCS applications of the types which the combined company
intends to provide.
Arch's Investments in N-PCS Licenses
Arch has taken the following steps to position itself to participate in new
and emerging N-PCS services and applications.
PageMart Wireless, Inc. In May 1999, Arch and PageMart Wireless, Inc. signed
a five-year agreement for the provision of N-PCS services. The agreement calls
for Arch and PageMart to share certain capital and operating expenses. Under
the agreement, Arch plans to market N-PCS advanced messaging services,
including assured message delivery and full two-way messaging, using PageMart's
Internet Protocol-based network. Arch
71
<PAGE>
expects to begin marketing these services nationwide during the third quarter
of 1999. As demand for advanced messaging increases over time, Arch plans to
construct its own N-PCS network, leveraging PageMart's infrastructure and
receiver sites. Arch believes its arrangements with PageMart will provide it
with more economical and broader access to N-PCS services than its prior
arrangements with Benbow PCS Ventures, Inc. and CONXUS Communications, Inc.
PageMart previously announced similar agreements with each of Metrocall, Inc.
and Airtouch Communications, Inc.
Benbow PCS Ventures, Inc. Through Arch's May 1996 acquisition of Westlink,
Arch acquired a 49.9% equity interest in Benbow. Benbow holds exclusive rights
to a 50 KHz outbound/12.5 KHz inbound N-PCS license in each of the five regions
of the United States. Benbow is a "designated entity" (a small, minority-
controlled or female-controlled business) under FCC rules and is entitled to
discounts and installment payment schedules in the payment of its N-PCS
licenses. Arch has the right to designate one of Benbow's three directors and
has veto rights with respect to specified major business decisions by Benbow.
Arch provides management services to Benbow, subject to Benbow's ultimate
control, under a five-year agreement expiring on October 1, 2000. Arch is paid
a management fee and is reimbursed for its expenses. Arch has a right of first
refusal with respect to any transfer of shares held by Ms. June Walsh, who
holds the remaining 50.1% equity interest in Benbow.
In June 1999, Arch's parent company, Benbow and Ms. Walsh agreed that:
. the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated
. Benbow will not make any further FCC payments and will not pursue
construction of an N-PCS system
. Arch's parent company will not be obligated to fund FCC payments or
construction of an N-PCS system by Benbow
. the parties will seek FCC approval of the forgiveness of Benbow's
remaining payment obligations and the transfer of Ms. Walsh's Benbow
shares to Arch's parent company
. the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of FCC approval
. Arch's parent company will pay Ms. Walsh, in installments, $3.5 million
(if the transaction closes before January 23, 2001) or $3.8 million (if
the transaction closes on January 23, 2001).
As a result of these arrangements, Benbow will not have any meaningful business
operations and is unlikely to retain its N-PCS licenses.
CONXUS Communications, Inc. Arch currently holds a 6.6% equity interest in
CONXUS, which holds exclusive rights to a 50 KHz outbound/50 KHz inbound two-
way messaging license throughout the United States. CONXUS, like Benbow, is a
"designated entity" under FCC rules. If Arch wishes to purchase N-PCS services
of the kind offered by CONXUS, Arch has agreed to contract exclusively with
CONXUS for such services so long as such services are competitive in price and
quality with comparable services offered by others. Arch is currently acting as
a reseller of voice messaging services through CONXUS in a limited number of
markets under an agreement which is renewable from year to year unless
terminated by either party. On May 18, 1999, CONXUS filed for Chapter 11
protection in the U.S. Bankruptcy Court in Delaware. Arch is unable to predict
the effect of CONXUS' bankruptcy filing on Arch's equity interest in CONXUS or
the existing agreements between Arch and CONXUS.
Subscribers and Marketing
The combined company's paging accounts are generally businesses with
employees who travel frequently but must be immediately accessible to their
offices or customers. Arch's subscribers have historicaly included proprietors
of small businesses, professionals, management and medical personnel, field
sales personnel and service forces, members of the construction industry and
trades, and real estate brokers and developers.
72
<PAGE>
MobileMedia's traditional subscribers include medical personnel, sales and
service organizations, specialty trade organizations, manufacturing
organizations and governmental agencies. The combined company believes that
pager use among retail consumers will increase significantly in the future,
although consumers do not currently account for a substantial portion of Arch's
subscriber base.
Arch
Although today Arch operates in more than 180 of the 200 largest U.S.
markets, Arch historically has focused on medium-sized and small market areas
with lower rates of pager penetration and attractive demographics. Arch
believes that these markets will continue to offer significant opportunities
for growth, and that its national scope and presence will also provide Arch
with growth opportunities in larger markets.
Arch markets its paging services through a direct marketing and sales
organization which operated approximately 175 retail stores as of March 31,
1998. Arch also markets its paging services indirectly through independent
resellers, agents and retailers. Arch typically offers resellers paging
services in large quantities at wholesale rates that are lower than retail
rates, and resellers offer the services to end-users at a markup. Arch's costs
of administering and billing resellers are lower than the costs of direct end-
users on a per pager basis.
Arch also acts as a reseller of other paging carriers' services when existing
or potential Arch customers have travel patterns that require paging service
beyond the coverage of Arch's own networks.
In May 1997, Arch established a single national identity, Arch Paging, for
its paging services which previously had been marketed under various
trademarks. As part of this branding initiative, Arch adopted a new corporate
logo, developed a corporate-wide positioning strategy tied to customer service
delivery, and launched its Internet Web site at www.arch.com. Arch believes
that its unified branding identity has given the Arch name national exposure
for the first time and should result in significant economic leverage in its
marketing and communications efforts.
MobileMedia
MobileMedia's sales and marketing efforts are directed toward adding further
units with existing subscribers and identifying new potential subscribers.
MobileMedia markets its paging services through three primary sales channels:
direct, reseller and retail.
Direct. In the direct channel, MobileMedia leases or sells paging units
directly to its customers and bills and services such customers.
MobileMedia's direct customers range from individuals and small- and
medium-sized businesses to Fortune 500 accounts and government agencies.
Business and government accounts typically experience less turnover than
consumer accounts. The direct channel will continue to have the highest
priority among MobileMedia's marketing and sales efforts, because of its
critical contribution to recurring revenue and projected growth.
MobileMedia has been engaged in efforts to improve sales productivity and
strengthen its direct channel sales force, which suffered from high
turnover and open positions during much of 1997. In addition, MobileMedia
commenced implementing consumer direct marketing techniques in 1998. As of
March 31, 1999, the direct channel accounted for approximately 80.5% of
recurring revenue.
Reseller. In the reseller channel, MobileMedia sells access to its
transmission networks in bulk to a third party, who then resells such
services to consumers or small businesses or other end users. MobileMedia
offers paging services to resellers at bulk discounted rates. The third-
party reseller provides customer service, is responsible for pager
maintenance and repair costs, invoices the end user and retains the credit
risk of the end user, although MobileMedia retains the credit risk of the
reseller. Because resellers are responsible for customer equipment, the
capital costs that would otherwise be borne by MobileMedia are reduced.
MobileMedia's resellers generally are not exclusive distributors of
MobileMedia's services and often resell paging services of more than one
provider. Competition among service providers to attract and maintain
73
<PAGE>
reseller distribution is based primarily upon price, including the sale of
paging units to resellers at discounted rates. MobileMedia intends to be an
active participant in the reseller channels and to concentrate on accounts
that are profitable and where longer term partnerships can be established
with selected resellers. As of March 31, 1999, the reseller channel
accounted for approximately 10.3% of recurring revenue.
Retail. In the retail channel, MobileMedia sells units to retailers and,
after the consumer purchases the pager from the retailer, the consumer
contacts MobileMedia to activate service. The retail channel is targeted at
the consumer market and consists primarily of national retail chains.
Consumers served by the retail channel typically purchase, rather than
lease, paging units. This reduces MobileMedia's capital investment
requirements. Subscribers obtained through retailers are billed and
serviced directly by MobileMedia. Retail distribution permits MobileMedia
to penetrate the consumer market by supplementing direct sales efforts. As
of March 31, 1999, the retail channel accounted for approximately 9.2% of
recurring revenue.
Sources of Equipment
Arch does not manufacture any of the pagers or other equipment used in its
paging operations. The equipment used in Arch's paging operations is generally
available for purchase from multiple sources. Arch centralizes price and
quantity negotiations for all of its operating subsidiaries to achieve cost
savings from volume purchases. Arch buys pagers primarily from Motorola and
NEC and purchases terminals and transmitters primarily from Glenayre and
Motorola. Arch anticipates that equipment and pagers will continue to be
available in the foreseeable future, consistent with normal manufacturing and
delivery lead times. See "Risk Factors--Arch cannot control third parties on
whom Arch depends for products and services".
Because of the high degree of compatibility among different models of
transmitters, computers and other paging equipment manufactured by suppliers,
Arch is able to design its systems without being dependent upon any single
source of such equipment. Arch routinely evaluates new developments in paging
technology in connection with the design and enhancement of its paging systems
and selection of products to be offered to subscribers. Arch believes that its
paging system equipment is among the most technologically sophisticated in the
paging industry.
MobileMedia does not manufacture any of the units or related transmitting
and paging terminal equipment used in its paging operations. MobileMedia
currently purchases units from a limited number of suppliers and in turn sells
or leases the units to its subscribers. Motorola is the primary supplier of
units to MobileMedia. Glenayre is MobileMedia's primary supplier of paging
terminals, paging transmitters and voice mail system equipment. NEC and
Panasonic also supply paging units.
Employees
At March 31, 1999, Arch employed approximately 2,600 persons. None of Arch's
employees is represented by a labor union. Arch believes that its employee
relations are good. As part of its divisional reorganization, Arch anticipates
a net reduction of approximately 10% of its workforce. See "Arch Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Divisional Reorganization".
At March 31, 1999, MobileMedia employed 2,885 people in various capacities,
with 156 in MobileMedia's corporate headquarters in Fort Lee, New Jersey and
the balance in its five regions. None of such employees is covered by
collective bargaining agreements. MobileMedia believes its employee relations
are good.
Trademarks
Arch owns the service marks "Arch" and "Arch Paging", and holds a federal
registration for the service mark "Arch Nationwide Paging" as well as various
other trademarks.
74
<PAGE>
MobileMedia markets its services primarily under the trade name MobileComm
and the federally registered mark MOBILECOMM, except in the Greater
Metropolitan Cincinnati area and in certain parts of Western Pennsylvania and
Western New York, in which it markets its services under the federally
registered mark MOBILEMEDIA. MobileMedia markets its messaging services under
the federally registered mark VOICESTAR, and other services under the federally
registered mark SPORTSCASTER and the unregistered mark MOBILECOMM CITYLINK.
MobileMedia also owns other federally registered marks including: DIAL PAGE,
DMC DIGITAL MOBILE COMMUNICATIONS, EZ ALERT, MEMORY MANAGER, MESSAGESOFT,
MOBILEMEDIA (and design), MOBILEMEDIA (and Globe Design), MOBILEMEDIA PAGING &
PERSONALCOM and PAGERXTRA. In addition, MobileMedia has applications on file
for federal registration of the marks MMS and MOBILECOMM (and design.)
Properties
At March 31, 1999, Arch owned four office buildings and leased office space,
including its executive offices, in approximately 175 localities in 35 states
for use in its paging operations. Arch leases transmitter sites and/or owns
transmitters on commercial broadcast towers, buildings and other fixed
structures in approximately 3,400 locations in 45 states. Arch's leases are for
various terms and provide for monthly lease payments at various rates. Arch
believes that it will be able to obtain additional space as needed at
acceptable cost. Arch sold off substantially all of its tower sites during 1998
and 1999 and currently rents transmitter space. As part of its divisional
reorganization, Arch is closing some office locations and redeploying other
real estate assets. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations --Effects of Tower Site Sale" and "--
Divisional Reorganization".
In addition to its FCC licenses and network infrastructure, which includes
radio transmission and satellite uplink equipment, MobileMedia has the
following categories of assets: (1) pagers, including both pagers held as fixed
assets for lease and pager inventory for sale, pager parts and accessories; (2)
its subscriber base and related accounts receivable; (3) intellectual property;
(4) real estate and improvements; (5) leased assets; (6) computer and telephone
systems and equipment; (7) furniture, fixtures and equipment; (8) goodwill and
other intangibles; and (9) cash and cash equivalents.
MobileMedia relocated its headquarters to Fort Lee, New Jersey in March 1998.
At March 31, 1999, MobileMedia leased office space, including its executive
offices, in approximately 33 states for use in its paging operations.
MobileMedia leases transmitter sites and/or owns transmitters on commercial
broadcast towers, buildings and other fixed structures. MobileMedia's leases
are for various terms and provide for monthly lease payments at various rates.
MobileMedia believes that it will be able to obtain additional space as needed
at acceptable cost.
On September 3, 1998, MobileMedia sold certain transmission towers and
associated assets to an unrelated third party and currently rents transmitter
space on these towers. MobileMedia recognized proceeds of $170.0 million from
the sale and the annual rental expense is approximately $10.7 million.
Litigation
Arch and its affiliated companies, from time to time, are involved in
lawsuits arising in the normal course of business. Arch believes that these
currently pending lawsuits will not have a material adverse effect on its
financial condition or results of operations.
MobileMedia disclosed in 1996 that misrepresentations and other violations
had occurred during the licensing process for as many as 400 to 500, or
approximately 6% to 7%, of its approximately 8,000 local transmission one-way
paging stations. MobileMedia caused an investigation to be conducted by outside
counsel, and a comprehensive report regarding these matters was provided to the
FCC in the fall of 1996. In cooperation with the FCC, outside counsel's
investigation was expanded to examine all of MobileMedia's paging licenses, and
the results of that investigation were submitted to the FCC on November 8,
1996.
75
<PAGE>
On January 13, 1997, the FCC issued a Public Notice relating to the status of
some of the FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (1) automatically terminated
approximately 185 authorizations for paging facilities that were not
constructed by the expiration date of their construction permits and remained
unconstructed, (2) dismissed approximately 94 applications for fill-in sites
around existing paging stations (which had been filed under the so-called "40-
mile rule") as defective because they were predicated upon unconstructed
facilities and (3) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. With respect to each of the approximately
99 authorizations where the underlying station was untimely constructed, the
FCC granted MobileMedia interim operating authority subject to further action
by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an administrative law judge to take evidence and develop a full
factual record on directed issues concerning MobileMedia's filing of false
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the
hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
providing for a change of control of MobileMedia and a permissible transfer of
MobileMedia's FCC licenses.
On September 2, 1998, MobileMedia and Arch's parent company filed a joint
application to transfer control of MobileMedia to Arch's parent company. On
February 5, 1999, the FCC released an order granting the transfer and
terminating the hearing into MobileMedia's qualifications to remain an FCC
licensee, subject to certain conditions which have since been satisfied. The
order also required divestiture, within six months after the closing of the
MobileMedia acquisition, of certain N-PCS interests and those MobileMedia
facilities operating under special temporary authority.
Predecessors to the Combined Company; Events Leading up to MobileMedia's
Bankruptcy Filings
Arch was incorporated in Delaware in 1988 as USA Mobile Communications, Inc.
II and changed its name to Arch Communications, Inc. in June 1998. Arch has
conducted its operations through wholly owned direct and indirect subsidiaries.
MobileMedia Communications, Inc. and its publicly traded parent company were
each incorporated in Delaware in 1993. In this prospectus, references to
MobileMedia refer to MobileMedia Communications, Inc. and its consolidated
subsidiaries, but not to the parent company unless we indicate otherwise. In
1995 and 1996, MobileMedia Communications, Inc. acquired the paging and
wireless messaging business of Dial Page Inc. and Mobile Communications
Corporation of America for approximately $1.1 billion in the aggregate. During
1996, MobileMedia experienced difficulties executing its post-acquisition
business strategy. These difficulties related largely to the process of
integration of the operations of Dial Page and MobileComm into those of
MobileMedia. As a result, MobileMedia did not achieve expected growth in its
subscriber base and revenues, nor did it realize anticipated efficiencies and
cost reductions from the elimination of duplicative functions. During 1996,
MobileMedia's financial position deteriorated. As of September 30, 1996,
MobileMedia Communications, Inc. was in violation of certain financial
covenants under its $750.0 million 1995 credit agreement, which resulted in the
occurrence of events of default under that agreement and precluded MobileMedia
from borrowing additional funds. In the fall of 1996, MobileMedia commenced
negotiations with The Chase Manhattan Bank, the agent for the lenders under the
1995 credit agreement, regarding the terms of a possible financial
restructuring.
In November and December of 1996, MobileMedia sought to modify payment terms
with certain of its larger vendors, some of which had not been paid in
accordance with their scheduled payment terms. In the fall of 1996, Motorola,
MobileMedia's largest supplier of units and pager repair parts, informed
MobileMedia that
76
<PAGE>
it would require credit support to assure payment of approximately $35.0
million past due accounts payable and would refuse to accept orders for
products or services from and refuse to make shipments to MobileMedia pending
resolution of the matter. Subsequently, other key suppliers also made demands
on MobileMedia for payment of their past due accounts in the aggregate amount
of $11.8 million.
Between November 1996 and January 1997, MobileMedia failed to make scheduled
interest payments of approximately $25.2 million on MobileMedia's 9 3/8% notes
and under MobileMedia's 1995 credit agreement.
Negotiations between MobileMedia and the holders of the MobileMedia 9 3/8%
notes and certain other outstanding notes and with MobileMedia's key suppliers
continued through late 1996. When it became apparent that MobileMedia would be
unable, among other things, to reach agreements with the key suppliers to
resume shipments of critical inventory and equipment or to reach agreement with
its lenders and on the terms of a restructuring of its indebtedness outside of
Chapter 11 of the Bankruptcy Code, MobileMedia concluded that it had no
practical alternative other than to seek protection under Chapter 11.
On January 30, 1997, MobileMedia filed a voluntary petition for
reorganization under Chapter 11. For subsequent developments, see "MobileMedia
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview".
The MobileMedia Acquisition
The Merger
To consummate the MobileMedia acquisition in June 1999, MobileMedia
Communications, Inc. was merged with and into a wholly owned subsidiary of
Arch's parent company. Immediately following this merger, Arch's parent company
contributed all of the outstanding stock of the surviving corporation to a
wholly owned subsidiary of Arch. Immediately prior to the merger, MobileMedia's
parent company had contributed all of its assets to MobileMedia Communications,
Inc. In connection with the merger, MobileMedia Communications, Inc.'s
subsidiaries were consolidated into a single subsidiary of MobileMedia
Communications, Inc. which became an indirect wholly owned subsidiary of Arch
as a result of the merger.
Purchase Price
Arch's parent company acquired MobileMedia for a combination of cash and
parent company securities. The parent company:
. paid approximately $479.0 million in cash to certain secured creditors of
the MobileMedia debtors-in-possession;
. paid a total of $58.0 million to pay fees and expenses, repay all
borrowings outstanding under MobileMedia's post-petition credit facility,
pay pre-petition priority claims and post-petition claims incurred by the
debtors-in-possession in the ordinary course of business or authorized by
the bankruptcy court, and pay principal and accrued interest plus certain
indenture trustee fees outstanding under certain senior notes assumed by
MobileMedia in the acquisition of the paging and wireless business of Dial
Page in 1995;
. issued 4,781,656 shares of its common stock to unsecured creditors of
MobileMedia and MobileMedia's parent company;
. issued and sold additional shares of its common stock upon exercise of
transferable rights issued to unsecured creditors and issued and sold
shares of its common stock and sold shares of Class B common stock to four
unsecured creditors who agreed to act as standby purchasers and to
purchase shares in case transferable rights to purchase those shares were
not exercised. The holders of transferable rights and the standby
purchasers paid a price of $6.00 per share for a total of 36,207,265
shares and a total purchase price of $217.2 million; and
77
<PAGE>
. issued to the standby purchasers warrants to acquire up to 1,225,219
shares of its common stock on or before September 1, 2001 at a warrant
exercise price of $9.03 per share.
Accounting Treatment
The merger is being accounted for under the purchase method of accounting;
the purchase price will be allocated based on the fair value of the assets
acquired and the liabilities assumed. In accordance with GAAP, Arch will be
treated as the acquiror in the merger for accounting and financial reporting
purposes, and Arch will continue to report its historical financial statements
as the historical financial statements of the combined company.
78
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of Arch and its parent company are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Edward Baker, Jr..... 48 Chairman of the Board, Chief Executive Officer and Director
Lyndon R. Daniels....... 46 President and Chief Operating Officer
John B. Saynor.......... 58 Executive Vice President and Director
J. Roy Pottle........... 40 Executive Vice President and Chief Financial Officer
Paul H. Kuzia........... 57 Executive Vice President/Technology and Regulatory Affairs
R. Schorr Berman (1)(2). 50 Director
James S. Hughes (1)..... 56 Director
Allan L. Rayfield (2)... 64 Director
John A. Shane (1)(2).... 66 Director
John Kornreich.......... 53 Director
Edwin M. Banks.......... 36 Director
H. Sean Mathis.......... 51 Director
</TABLE>
- --------
(1) Member of the audit committee of the parent company
(2) Member of the executive compensation and stock option committee of the
parent company
C. Edward Baker, Jr. has served as Chief Executive Officer and a director of
the parent company since 1988 and of Arch since 1995. Mr. Baker became Chairman
of the Board of the parent company in 1989 and of Arch in 1995. He also served
as President of the parent company from 1988 to January 1998 and of Arch from
1995 to January 1998. From 1986 until joining the parent company in March 1988,
Mr. Baker was President and Chief Executive Officer of US West Paging.
Lyndon R. Daniels joined Arch and the parent company in January 1998 as
President and Chief Operating Officer. From November 1993 to January 1998, Mr.
Daniels was the President and Chief Executive Officer of Pacific Bell Mobile
Services, a subsidiary of SBC Communications Inc. From May 1988 until November
1993, Mr. Daniels was the Chief Financial Officer of Pactel Corp., a mobile
telephone company.
John B. Saynor has served as a director of the parent company since 1988 and of
Arch since 1995. Mr. Saynor has served as Executive Vice President of the
parent company since 1990 and of Arch since 1995. Mr. Saynor is a founder of
the parent company and served as President and Chief Executive Officer of the
parent company from 1986 to March 1988 and as Chairman of the Board from 1986
until May 1989.
J. Roy Pottle joined Arch and the parent company in February 1998 as Executive
Vice President and Chief Financial Officer. From October 1994 to February 1998,
Mr. Pottle was Vice President/Treasurer of Jones Intercable, Inc., a cable
television operator. From September 1989 to October 1994, he served as Vice
President and Relationship Manager at The Bank of Nova Scotia, New York Agency.
Paul H. Kuzia has served as Executive Vice President/Technology and Regulatory
Affairs of Arch and the parent company since September 1996. He served as Vice
President/Engineering and Regulatory Affairs of the parent company from 1988 to
September 1996 and of Arch from 1995 to September 1996. Prior to 1988,
Mr. Kuzia was director of operations at Message Center Inc.
R. Schorr Berman has been a director of the parent company since 1986 and of
Arch since 1995. Since 1987, he has been the President and Chief Executive
Officer of MDT Advisers, Inc., an investment adviser. He is a director of
Mercury Computer Systems, Inc. as well as a number of private companies.
James S. Hughes has been a director of the parent company since 1986 and of
Arch since 1995. Since 1987, he has been President and Chief Executive Officer
of Norwich Corporation, a real estate investment and service firm, and, since
1992, he has served as President and Managing Director of Inventa Corporation,
an international business development firm.
79
<PAGE>
Allan L. Rayfield has been a director of the parent company since 1997 and of
Arch since 1998. He has been a consultant since 1995. From November 1993 until
December 1994, Mr. Rayfield served as Chief Executive Officer of M/A Com Inc.,
a microwave electrical manufacturing company. From April 1991 until November
1993, he served as Chief Operating Officer of M/A Com Inc. He is a director of
Parker Hannifin Corporation and Acme Metals Incorporated.
John A. Shane has been a director of the parent company since 1988 and of Arch
since 1995. He has been the President of Palmer Service Corporation since 1972.
He has been a general partner of Palmer Partners L.P., a venture capital firm,
since 1981. He serves as a director of Overland Data, Inc., United Asset
Management Corporation and Gensym Corporation and as a trustee of Nvest Funds.
John Kornreich has been a director of Arch and the parent company since June
1998. Mr. Kornreich has served as a Managing Director of Sandler Capital
Management Co., Inc. since 1988.
Edwin M. Banks has been a director of Arch and the parent company since June
1999. He has been employed by W.R. Huff Asset Management since 1988 and
currently serves as a portfolio manager. From 1985 until he joined W.R. Huff,
Mr. Banks was employed by Merrill Lynch & Company. Mr. Banks also serves as a
director of Magellan Health Services, formerly Charter Medical Corporation, and
e.spire Corporation, formerly American Communications Services, Inc.
H. Sean Mathis has been a director of Arch and the parent company since June
1999. He has been Chairman of the Board and Chief Executive Officer of Allis
Chalmers, Inc. since January 1996 and previously served as a Vice President of
that company since 1989. From July 1996 to September 1997, Mr. Mathis was
Chairman of the Board of Universal Gym Equipment Inc., a privately owned
company which filed for protection under the Bankruptcy Code in July 1997. From
1991 to 1993, Mr. Mathis was President of RCL Acquisition Corp., and from 1993
to 1995 he was President and a director of RCL Capital Corporation, which was
merged into DISC Graphics in November 1995. Previously, Mr. Mathis was
a director and Chief Operating Officer of Ameriscribe Corporation. Mr. Mathis
is a director of Thousand Trails, Inc.
Arch's directors are elected by its parent company its sole stockholder. They
hold office until their successors are elected or their earlier death,
resignation or removal. Arch and the parent company currently have the same
directors. The parent company's certificate of incorporation and by-laws
provide that Arch has a classified board of directors composed of three
classes, each of which serves for three years, with one class being elected
each year. The term of Messrs. Saynor, Shane and Mathis will expire at the
parent company's annual meeting of stockholders to be held in 2000. The term of
Messrs. Baker, Berman and Kornreich will expire at the annual meeting of
stockholders to be held in 2001. The term of Messrs. Hughes, Rayfield and Banks
will expire at the annual meeting of stockholders to be held in 2002.
Two of the standby purchasers for the MobileMedia acquisition, W.R. Huff and
Whippoorwill, have the right to designate one member each for election to
Arch's and the parent company's boards of directors. This right of designation
will continue through 2002 for W.R. Huff and 2003 for Whippoorwill if the
designating stockholder is still entitled to cast at least 5% of all votes at a
stockholders' meeting, and will continue afterwards if the designating
stockholder is still entitled to cast at least 10% of all such votes. Under
this arrangement, Mr. Banks has been elected to Arch's and the parent company's
boards of directors on behalf of W.R. Huff and Mr. Mathis has been elected on
behalf of Whippoorwill.
The holders of the parent company's Series C preferred stock have the right,
voting as a separate class, to elect one member of its board of directors, and
such director has the right to be a member of any committee of the board.
Mr. Kornreich is currently the director elected by the holders of Series C
preferred stock. This right of designation will terminate if less than 50% of
the Series C preferred stock remains outstanding.
Executive officers are elected by the board of directors and hold office
until their successors are elected or until their earlier death, resignation or
removal.
80
<PAGE>
Most of the executive officers have entered into non-competition agreements
with Arch and its parent company which provide that they will not compete with
Arch and its parent company for one year following termination, or recruit or
hire any other Arch or parent company employee for three years following
termination. See "--Executive Retention Agreements".
Certain Relationships and Related Transactions
Arch's parent company and three other entities have co-founded an offshore
corporation to pursue wireless messaging opportunities in Latin America. Arch's
parent company and Mr. Hughes each contributed $250,000 to this offshore
corporation and each owns approximately 12% of its equity. Parent's Board of
Directors has approved an additional investment of $200,000 by Parent, subject
to certain conditions.
Between August 6, 1998 and October 28, 1998, Arch's board of directors
approved three full recourse, unsecured demand loans totaling $279,500 from
Arch to Mr. Baker. The loans bear interest at approximately 5% annually.
Board Committees
Arch's board of directors has an audit committee and an executive
compensation and stock option committee. The parent company's board of
directors has an audit committee and an executive compensation and stock option
committee. The audit committee reviews the annual consolidated financial
statements of the parent company and its subsidiaries before their submission
to the parent company's board of directors and consults with the parent
company's independent public accountants to review financial results, internal
financial controls and procedures, audit plans and recommendations. The audit
committee also recommends the selection, retention or termination of
independent public accountants and approves services provided by independent
public accountants prior to the provision of such services. The compensation
committee recommends to the parent company's board the compensation of
executive officers, key managers and directors and administers the parent
company's stock option plans. The parent company's board of directors has no
standing nominating committee.
Indemnification and Director Liability
Arch's certificate of incorporation eliminates the liability of its directors
for monetary damages for breaches of fiduciary duties, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions that involve intentional misconduct or a
knowing violation of law. The certificate of incorporation also requires Arch
to indemnify its directors and officers to the fullest extent permitted by the
Delaware corporations statute.
81
<PAGE>
Executive Compensation
Summary Compensation Table
The annual and long-term compensation of Arch's Chief Executive Officer and
other executive officers named below was as follows for the years ended
December 31, 1996, 1997 and 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------- --------------
Other Annual
Name and Principal Position During 1997 Year Salary ($) Bonus ($)(1) Compensation ($)(2) Options (#)(3)
- --------------------------------------- ---- ---------- ------------ ------------------- --------------
<S> <C> <C> <C> <C> <C>
C. Edward Baker, Jr..... 1998 $373,742 $135,000 $ 600 454,655(4)
Chairman, President and 1997 353,317 227,500 600 459,324(4)
Chief Executive Officer 1996 329,050 36,833 600 268,860(5)(6)
Lyndon R. Daniels....... 1998 295,416 -- 113,905(7) 140,000
President and Chief 1997 -- -- -- --
Operating Officer
(joined Arch in January
1998)
J. Roy Pottle........... 1998 179,200 -- 99,304(7) 90,000
Executive Vice 1997 -- -- -- --
President and Chief
Financial Officer
(joined Arch in
February 1998)
John B. Saynor.......... 1998 157,646 41,770 600 51,739(8)
Executive Vice 1997 153,188 72,900 600 15,905(9)
President 1996 146,867 15,300 600 20,000(6)
Paul H. Kuzia........... 1998 165,489 58,435 600 88,848(9)
Executive Vice 1997 157,633 77,400 600 16,887(9)
President/Technology 1996 133,800 14,620 600 8,000(6)
and Regulatory Affairs
</TABLE>
- --------
(1) Represents bonus paid in such fiscal year with respect to prior year.
(2) Represents Arch's matching contributions paid under the parent company's
401(k) plan.
(3) No restricted stock awards or SARs were granted to any of the named
executive officers during the years ended December 31, 1996, 1997 or 1998.
(4) Includes options to purchase 409,688 shares granted as part of the parent
company's January 16, 1998 option repricing program.
(5) Includes options to purchase 106,860 shares replaced in connection with
the parent company'sOctober 23, 1996 option repricing program.
(6) Option replaced in connection with the parent company's January 16, 1998
option repricing program.
(7) Represents reimbursement for certain relocation costs and associated
taxes.
(8) Includes options to purchase 35,905 shares granted as part of the parent
company's January 16, 1998 option repricing program.
(9) Includes options to purchase 69,687 shares granted as part of the parent
company's January 16, 1998 option repricing program.
Executive Retention Agreements
Arch's parent company is a party to executive retention agreements for a
total of 16 executives, including Messrs. Baker, Daniels, Kuzia, Pottle and
Saynor.
The purpose of the executive retention agreements is to assure the continued
employment and dedication of the executives without distraction from the
possibility of a change in control of the parent company as defined in the
executive retention agreements. The executive will be eligible to receive
benefits if a change in control occurs, and the parent company terminates the
executive's employment at any time within the following
82
<PAGE>
12 months except for cause, disability or death, or the executive terminates
employment for good reason, as defined in the executive retention agreements.
Such benefits will include (1) a lump sum cash severance payment equal to a
specified multiple of the executive's annual base salary in effect at the time
of the change in control plus a specified multiple of the executive's average
annual bonus paid during the previous three full calendar years, (2) payment of
any accrued but unpaid base salary plus any other amounts earned but unpaid
through the date of termination and (3) any amounts or benefits required to be
paid or provided to the executive or which the executive is eligible to receive
following the executive's termination under any plan, program, policy,
practice, contract or agreement of the parent company. In addition, for up to
12 months after termination, the parent company must provide the executive with
life, disability, accident and health insurance benefits similar to those
previously maintained until the executive becomes reemployed with another
employer and is eligible to receive substantially equivalent benefits. The
specified multiple of salary and bonus for Messrs. Baker, Daniels, Kuzia,
Pottle and Saynor is three, and the specified multiple for the other executives
is one or two. Good reason is defined to include, among other things, a
material reduction in employment responsibilities, compensation or benefits. In
the case of Mr. Baker, good reason includes his not becoming the chief
executive officer of any entity succeeding or controlling the parent company.
Stock Option Grants
The following options were granted to the five executive officers named in
the summary compensation table during 1998. No SARs were granted during 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Options Term(3)
-------------------------------------------------- -------------------
Percent of
Total
Options/SARs
Options/SARs Granted to Exercise or
Granted Employee in Base Price Expiration
(#)(1) Fiscal Year ($/Share)(2) Date 5% ($) 10% ($)
------------ ------------ ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. ... 44,967 2.31% $4.5313 03/04/08 $128,143 $ 324,739
409,688(4) 21.00 5.0625 01/16/08 553,600 2,110,041
Lyndon R. Daniels....... 140,000 7.18 4.9375 01/02/08 434,723 1,101,674
J. Roy Pottle........... 90,000 4.61 3.5625 02/17/08 201,639 510,994
John B. Saynor.......... 15,834 0.81 4.5313 03/04/08 45,122 114,349
35,905(4) 1.84 5.0625 01/16/08 48,517 184,924
Paul H. Kuzia........... 19,161 0.98 4.5313 03/04/08 54,603 138,375
69,687(4) 3.57 5.0625 01/16/08 94,166 358,913
</TABLE>
- --------
(1) Options generally become exercisable at a rate of 20% of the shares subject
to the option on the first anniversary of the date of grant and 5% of the
shares subject to the option per calendar quarter thereafter.
(2) The exercise price is equal to the fair market value of the parent
company's common stock on the date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option terms. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the options were granted and are not intended to forecast future
appreciation of the price of the common stock. The named executive officers
will realize gain upon the exercise of these options only if there is an
increase in the price of common stock which benefits all stockholders of
the parent company proportionately.
(4) Option granted as part of the parent company's January 16, 1998 option
repricing program.
83
<PAGE>
Option Exercises and Year-End Option Table
The named executive officers exercised no stock options or SARs during 1998.
They held the following stock options as of December 31, 1998:
Aggregated Options/SAR Exercises in Last Fiscal Year
And Fiscal Year-end Options Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Options In-the-Money Options
Acquired on Value at Fiscal Year-End at Fiscal Year-End
Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
Name (#) ($)(1) (#) ($)(2)
---- ----------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr .... 94,032 $270,342 113,722 340,933 -- --
Lyndon R. Daniels....... -- -- -- 140,000 -- --
John B. Saynor.......... -- -- 5,000 46,739 -- --
J. Roy Pottle........... -- -- -- 90,000 -- --
Paul H. Kuzia........... -- -- 19,920 68,928 -- --
</TABLE>
- --------
(1) Represents the difference between the exercise price and the fair market
value of the parent company's common stock on the date of exercise.
(2) Based on the fair market value of the parent company's common stock on
December 31, 1998 ($1.4375 per share) less the option exercise price.
Compensation Committee Interlocks and Insider Participation
The current members of the parent company's compensation committee are R.
Schorr Berman, Allan L. Rayfield and John A. Shane. Messrs. Berman, Rayfield
and Shane served on the compensation committee throughout 1998, and
Mr. Rayfield joined the compensation committee upon his election as a director
in July 1998.
C. Edward Baker, Jr., the chairman and chief executive officer of the parent
company, makes recommendations and participates in discussions regarding
executive compensation, but he does not participate directly in discussions
regarding his own compensation. No current executive officer of the parent
company has served as a director or member of the compensation committee (or
other committee serving an equivalent function) of any other entity that has an
executive officer who serves as a director of the parent company or as a member
of the compensation committee of the parent company.
84
<PAGE>
PRINCIPAL STOCKHOLDERS
All of Arch's outstanding common stock is beneficially owned by its parent
company. The following table sets forth certain information about the
beneficial ownership of the parent company's common stock as of June 30, 1999,
by
. each person who is known by the parent company to beneficially own more
than 5% of its outstanding shares of common stock;
. each current director of the parent company;
. the parent company's chief executive officer and the other named
executive officers; and
. all current directors and executive officers of the parent company as a
group.
Beneficial ownership is determined in accordance with the rules of the SEC
based upon voting or investment power over the securities. The number of shares
of common stock outstanding that is used in calculating the percentage for each
listed person includes any shares that that person has the right to acquire
through exercise of warrants or options within 60 days after June 30, 1999.
These shares, however, are not deemed to be outstanding for the purpose of
calculating the percentage beneficially owned by any other person.
Unless otherwise indicated, each person or entity listed in the table has
sole voting power and investment power, or shares such power with his spouse,
with respect to all shares of capital stock listed as owned by such person or
entity. The inclusion of shares in the table does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of the
shares.
The table reflects the following transactions which occurred during June
1999:
. the issuance of a total of 40,988,921 shares of common stock and Class B
common stock to the unsecured creditors of MobileMedia and to the
stockholders of Arch's parent company;
. the distribution of warrants to acquire 1,225,219 shares of common stock
to the standby purchasers and warrants to acquire 14,861,424 shares of
common stock to stockholders of Arch's parent company who did not
exercise their nontransferable subscription rights; and
. a one-for-three reverse stock split. All numbers of shares in this
prospectus have been adjusted to reflect this reverse stock split.
The table assumes
. the conversion of Series C preferred stock into common stock at the
current conversion price of $16.38 per share; and
. the conversion of Class B common stock into common stock at a one-for-
one conversion ratio.
Because Class B common stock is not entitled to vote in the election of
directors, the voting power of its holders is less than their percentages of
beneficial ownership shown in the table. Thus, the four standby purchasers
listed in the table would be entitled to cast a maximum of 49.0% of the votes
in the election of directors, assuming that they --and only they-- exercised
outstanding options and warrants. This contrasts with the more than 54.9% of
beneficial ownership which is obtained by adding their individual beneficial
ownership percentages in the table.
85
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------
Shares Options and Warrants
Outstanding at Exercisable Prior to
Name June 30, 1999 August 29, 1999 Total Percentage
---- -------------- -------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sandler Capital Management (1)........ 1,649,121 2,751,495 4,400,616 8.8%
C. Edward Baker, Jr................... 37,433 127,552 164,985 *
Lyndon R. Daniels..................... 4,000 20,915 24,915 *
John B. Saynor........................ 64,641 116,975 181,616 *
J. Roy Pottle......................... -- 9,000 9,000 *
Paul H. Kuzia......................... 1,319 14,717 16,036 *
R. Schorr Berman (2).................. 655,663 1,139,282 1,794,945 3.6%
James S. Hughes....................... 40,196 46,670 86,866 *
John Kornreich (3).................... 1,728,982 2,890,124 4,619,106 9.3%
Allan L. Rayfield..................... 333 3,076 3,409 *
John A. Shane (4)..................... 6,855 16,852 23,707 *
Edwin M. Banks (5).................... 8,834,357 569,002 9,403,359 18.9%
H. Sean Mathis ....................... -- 1,000 1,000 *
W.R. Huff Asset Management Co., L.L.C.
(6).................................. 8,834,357 568,002 9,402,359 18.9%
The Northwestern Mutual Life Insurance
Company (7).......................... 3,243,630 207,543 3,451,173 6.9%
Credit Suisse First Boston
Corporation.......................... 4,504,319 9,770 4,514,089 9.1%
Whippoorwill Associates, Inc. (8)..... 7,706,045 439,904 8,145,949 16.4%
Resurgence Asset Management L.L.C. (9)
Resurgence Asset Management
International L.L.C. (9)
Re/Enterprise Asset Management, L.L.C.
(9)................................... 8,919,361 -- 8,919,361 17.9%
All current directors and executive
officers of Arch as a group (12
persons)............................. 11,373,779 4,955,165 16,328,944 32.7%
</TABLE>
- --------
*Less than 1%
(1) Sandler has sole voting and investment power over 116,000 of such shares
and 200,500 of the shares issuable upon exercise of warrants and shared
voting and investment power over the remaining shares and warrants.
(2) Includes 649,330 shares and 1,122,334 shares issuable upon exercise of
warrants held by Memorial Drive Trust, over which Mr. Berman may be deemed
to share voting and investment power as administrator and chief executive
officer of Memorial Drive Trust. Mr. Berman disclaims beneficial ownership
of such shares held by Memorial Drive Trust.
(3) Includes 1,649,121 shares and 2,751,495 shares issuable upon exercise of
warrants beneficially owned by Sandler, over which Mr. Kornreich may be
deemed to have voting and investment power as managing director, and
63,333 shares beneficially owned by two limited partnerships, over which
Mr. Kornreich may be deemed to have voting and investment power as a
general partner. Mr. Kornreich disclaims beneficial ownership of all such
shares.
(4) Includes 350 shares and 606 shares issuable upon exercise of warrants
owned by Palmer Service Corporation, over which Mr. Shane may be deemed to
have voting and investment power as president and sole stockholder of
Palmer Service Corporation, 159 shares issuable upon conversion of $8,000
principal amount of Arch's 6 3/4% convertible subordinated debentures due
2003 held by Palmer Service Corporation, and 418 shares issuable upon
conversion of Arch's 6 3/4% convertible subordinated debentures held by
Mr. Shane. See "Description of Outstanding Indebtedness--Arch Convertible
Debentures".
(5) Includes 7,528,218 shares and 568,002 shares issuable upon exercise of
warrants W.R. Huff manages on behalf of various discretionary accounts and
1,306,139 shares held by The Huff Alternative Income Fund, L.P., an
affiliate of W.R. Huff. This director is a portfolio manager of W.R. Huff.
This director disclaims beneficial ownership of all such shares.
(6) Consists of 7,528,218 shares and 568,002 shares issuable upon exercise of
warrants W.R. Huff manages on behalf of various discretionary accounts and
1,306,139 shares held by The Huff Alternative Income Fund, L.P., an
affiliate of W.R. Huff. This standby purchaser disclaims beneficial
ownership of these shares.
(7) Consists of 2,632,048 shares held by The Northwestern Mutual Life
Insurance Company, 158,287 of which are issuable upon exercise of
warrants, 638,686 shares held in The Northwestern Mutual Life Insurance
Company Group Annuity Separate Account (as to which The Northwestern
Mutual Life Insurance Company has shared voting and investment power),
38,361 of which are issuable upon exercise of warrants, and 180,439 shares
held by the High Yield Bond Portfolio of Northwestern Mutual Series Fund,
Inc., a wholly-owned subsidiary of The Northwestern Mutual Life Insurance
Company and a registered investment company, 10,895 shares of which are
issuable upon exercise of warrants. Northwestern Mutual Investment
Services, LLC, a wholly-owned subsidiary of The Northwestern Mutual Life
Insurance Company and a registered investment advisor, serves as
investment adviser to the High Yield Bond Portfolio of Northwestern Mutual
Series Fund, Inc.
86
<PAGE>
(8) All of such shares are owned by various limited partnerships, a limited
liability company, a trust and third party accounts for which
Whippoorwill Associates, Inc. has discretionary authority and acts as
general partner or investment manager.
(9) Resurgence Asset Management, L.L.C., Resurgence Asset Management
International L.L.C. and Re/Enterprise Asset Management, L.L.C. exercise
voting power and investment power over these shares on behalf of certain
client accounts and accounts managed by their affiliates with which such
powers are shared. Additionally, employees of Resurgence Asset
Management, L.L.C., Resurgence Asset Management International L.L.C. and
Re/Enterprise Asset Management, L.L.C. and their affiliates have an
indirect beneficial interest in certain of the client entities which own
these shares. Each of Resurgence Asset Management, L.L.C., Resurgence
Asset Management International L.L.C. and Re/Enterprise Asset Management,
L.L.C. disclaims beneficial ownership of shares owned by their clients.
James B. Rubin shares voting and investment power in the above shares as
Chief Investment Officer and a Manager of each of Resurgence Asset
Management, L.L.C., Resurgence Asset Management International L.L.C. and
Re/Enterprise Asset Management, L.L.C. Mr. Rubin disclaims beneficial
ownership of these shares.
Each person or entity listed in the table has an address c/o Arch's parent
company except for:
. Sandler Capital Management, 767 Fifth Avenue, 45th Floor, New York, New
York 10153
. W.R. Huff Asset Management Co., L.L.C., 67 Park Place, Ninth Floor,
Morristown, NJ 07960
. The Northwestern Mutual Life Insurance Company, 720 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202
. Credit Suisse First Boston Corporation, 11 Madison Avenue, New York, New
York 10010
. Whippoorwill Associates, Inc., 11 Martine Avenue, White Plains, New York
10606
. Resurgence Asset Management L.L.C., 10 New King Street, 1st Floor, White
Plains, New York 10604.
87
<PAGE>
DESCRIPTION OF OUTSTANDING INDEBTEDNESS
Arch, its parent company and its principal operating subsidiaries each have
substantial amounts of outstanding indebtedness that provide necessary funding
and impose various limitations on the operations of the combined company. See
"Risk Factors--High degree of leverage burdens operations". See also
"Prospectus Summary--Corporate Structure" and "Risk Factors--Payments on the
notes are structurally subordinated to other debt under Arch's holding company
structure".
Secured Credit Facility
A principal operating subsidiary of Arch has a secured credit facility in the
current total amount of $581.0 million with The Bank of New York, Royal Bank of
Canada, Toronto Dominion (Texas), Inc., Barclays Bank, PLC and other financial
institutions.
The facility consists of a $175.0 million reducing revolving Tranche A
facility, a $100.0 million 364-day revolving credit Tranche B facility and a
$306.0 million Tranche C facility. The Tranche A Facility will be reduced on a
quarterly basis commencing on September 30, 2000 and will mature on June 30,
2005. The Tranche B Facility converted into a term loan on June 27, 1999 and
will be amortized in quarterly installments commencing September 30, 2000, with
an ultimate maturity date of June 30, 2005. The Tranche C Facility will be
amortized in annual installments commencing December 31, 1999, with an ultimate
maturity date of June 30, 2006.
Arch, its parent company and substantially all of its operating subsidiaries
are either borrowers or guarantors under the secured credit facility. Direct
obligations and guarantees under the facility are secured by a pledge of the
capital stock of Arch and all principal operating subsidiaries and by security
interests in various assets.
Borrowings under the secured credit facility bear interest based on a
reference rate equal to either The Bank of New York's alternate base rate or
The Bank of New York's LIBOR rate, in each case plus a margin determined by
specified ratios of total debt to annualized EBITDA.
The secured credit facility requires payment of fees on the daily average
amount available to be borrowed under the Tranche A facility. These fees vary
depending on specified ratios of total debt to annualized EBITDA.
The secured credit facility contains restrictions that limit, among other
things: additional indebtedness and encumbrances on assets; cash dividends and
other distributions; mergers and sales of assets; the repurchase or redemption
of capital stock; investments; acquisitions that exceed certain dollar
limitations without the lenders' prior approval; and prepayment of indebtedness
other than indebtedness under the secured credit facility. In addition, the
secured credit facility requires Arch, its parent company and its subsidiaries
to meet certain financial covenants, including ratios of EBITDA to fixed
charges, EBITDA to debt service, EBITDA to interest service and total
indebtedness to EBITDA.
Arch's Senior Notes
Arch has the following issues of unsecured senior notes outstanding,
excluding the old notes and the new notes to which the exchange offer applies:
<TABLE>
<CAPTION>
Interest Maturity Interest Payment
Principal Amount Rate Date Dates
---------------- -------- ---------------- --------------------
<S> <C> <C> <C>
$125.0 million .......... 9 1/2% February 1, 2004 February 1, August 1
$100.0 million .......... 14% November 1, 2004 May 1, November 1
$127.5 million .......... 12 3/4% July 1, 2007 January 1, July 1
</TABLE>
88
<PAGE>
These senior notes rank equal in right of payment to the old notes and the
new notes.
Redemption
Arch may choose to redeem any amounts of these senior notes during the
periods indicated in the following table. The redemption prices will equal the
indicated percentages of the principal amount of the notes, together with
accrued and unpaid interest to the redemption date:
9 1/2% Senior Notes
----------------------------------------------
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------
<S> <C>
February 1, 1999 to January 31,
2000............................ 104.750%
February 1, 2000 to January 31,
2001............................ 103.167%
February 1, 2001 to January 31,
2002............................ 101.583%
On or after February 1, 2002..... 100.000%
</TABLE>
14% Senior Notes
----------------------------------------------
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------
<S> <C>
November 1, 1999 to October 31,
2000............................ 107.000%
November 1, 2000 to October 31,
2001............................ 104.625%
November 1, 2001 to October 31,
2002............................ 102.375%
On or after November 1, 2002..... 100.000%
</TABLE>
12 3/4% Senior Notes
----------------------------------------------
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------
<S> <C>
July 1, 2003 to June 30, 2004 ... 106.375%
July 1, 2004 to June 30, 2005 ... 104.250%
July 1, 2005 to June 30, 2006 ... 102.125%
On or after July 1, 2006 ........ 100.000%
</TABLE>
In addition, until July 1, 2001, Arch may elect to use the proceeds of a
qualifying equity offering to redeem up to 35% in principal amount of the 12
3/4% senior notes, at a redemption price equal to 112.75% of the principal
amount of the 12 3/4 senior notes together with accrued interest. Arch may make
such a redemption, however, only if 12 3/4% senior notes with an aggregate
principal amount of at least $84.5 million remain outstanding immediately after
giving effect to any such redemption of 12 3/4% senior notes. Arch is not,
however, obligated to redeem any 12 3/4% senior notes with the proceeds of any
equity offering.
Restrictive Covenants
The indentures for the senior notes limit the ability of specified
subsidiaries to pay dividends, incur secured or unsecured indebtedness, incur
liens, dispose of assets, enter into transactions with affiliates, guarantee
parent company obligations, sell or issue stock and engage in any merger,
consolidation or sale of substantially all of their assets.
Changes in Control
Upon the occurrence of a change of control of Arch or its parent company,
each holder of senior notes has the right to require repurchase of its senior
notes for cash. The repurchase prices for the three series of senior notes vary
from 101% to 102% of the principal amount of such notes plus accrued and unpaid
interest to the date of repurchase. A change of control of a corporation, as
defined in the indentures, includes:
. the acquisition by a person or group of beneficial ownership of the
majority of securities having the right to vote in the election of
directors;
89
<PAGE>
. specified types of changes in the board of directors;
. the sale or transfer of all or substantially all of the corporation's
assets or
. merger or consolidation with another corporation which results in a
person or group becoming the beneficial owner of a majority of the
securities of the surviving corporation having the right to vote in the
election of directors.
Events of Default
The following constitute events of default under the indentures:
. a default in the timely payment of interest on the senior notes if such
default continues for 30 days;
. a default in the timely payment of principal of, or premium, if any, on
any of the senior notes either at maturity, upon redemption or
repurchase, by declaration or otherwise;
. the borrowers' failure to observe or perform any of their other
covenants or agreements in the senior notes or in the indenture, but
generally only if the failure continues for a period of 30 or 60 days
after written notice of default;
. specified events of bankruptcy, insolvency or reorganization involving
the borrowers;
. a default in timely payment of principal, premium or interest on any
indebtedness for borrowed money aggregating $5.0 million or more in
principal amount;
. the occurrence of an event of default as defined in any indenture or
instrument involving at least $5.0 million aggregate principal amount of
indebtedness for borrowed money that gives rise to the acceleration of
such indebtedness;
. the entry of one or more judgments, orders or decrees for the payment of
more than a total of $5.0 million, net of any applicable insurance
coverage, against the borrowers or any of their properties; or
. the holder of any secured indebtedness aggregating at least $5.0 million
in principal amount seeks foreclosure, set-off or other recourse against
assets of the borrowers having an aggregate fair market value of more
than $5.0 million.
Parent Company's Discount Notes
In March 1996, Arch's parent company issued discount notes representing
$467.4 million in aggregate principal amount at maturity. The discount notes
are scheduled to mature on March 15, 2008. The discount notes were issued at a
substantial discount from the principal amount due at maturity. Interest does
not accrue on the discount notes prior to March 15, 2001. After that date,
interest will accrue at the rate of 10 7/8% per year, payable semi-annually on
March 15 and September 15, commencing September 15, 2001.
The parent company may choose to redeem any amount of discount notes on or
after March 15, 2001 at the following redemption prices, together with accrued
and unpaid interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
March 15, 2001 to March 14,
2002....................... 104.078% of principal amount
March 15, 2002 to March 14,
2003....................... 102.719% of principal amount
March 15, 2003 to March 14,
2004....................... 101.359% of principal amount
On or after March 15, 2004 . 100.000% of principal amount
</TABLE>
The indenture for the discount notes contains restrictive covenants, change
in control provisions and events of default that are generally comparable to
those of Arch's senior notes described above.
90
<PAGE>
Parent Company's Convertible Debentures
Arch's parent company has outstanding $13.4 million in principal amount of 6
3/4% convertible subordinated debentures due 2003. Interest is payable twice a
year on June 1 and December 1. The convertible debentures are scheduled to
mature on December 1, 2003. The principal amount of the convertible debentures
is currently convertible into common stock of the parent company at a
conversion price of $16.38 per share at any time prior to redemption or
maturity.
The parent company may choose to redeem any amount of the convertible
debentures at any time, at the following redemption prices, together with
accrued and unpaid interest to the redemption date:
<TABLE>
<CAPTION>
Redemption Date Redemption Price
--------------- ----------------------------
<S> <C>
December 1, 1997 to November 30, 1998....... 104.050% of principal amount
December 1, 1998 to November 30, 1999....... 103.375% of principal amount
December 1, 1999 to November 30, 2000....... 102.700% of principal amount
December 1, 2000 to November 30, 2001....... 102.025% of principal amount
December 1, 2001 to November 30, 2002....... 101.350% of principal amount
December 1, 2002 to November 30, 2003....... 100.675% of principal amount
On or after December 1, 2003................ 100.000% of principal amount
</TABLE>
The convertible debentures represent senior unsecured obligations of the
parent company and are subordinated to senior indebtedness of the parent
company, as defined in the indenture. The indenture does not contain any
limitation or restriction on the incurrence of senior indebtedness or other
indebtedness or securities of the parent company or its subsidiaries.
Upon the occurrence of a fundamental change, as defined in the indenture,
each holder of convertible debentures has the right to require the parent
company to repurchase its convertible debentures for cash, at a repurchase
price of 100% of the principal amount of the convertible debentures, plus
accrued interest to the repurchase date. The following constitute fundamental
changes:
. acquisition by a person or a group of beneficial ownership of stock of
the parent company entitled to exercise a majority of the total voting
power of all capital stock, unless such beneficial ownership is approved
by the parent company's board of directors;
. specified types of changes in the parent company's board of directors;
. any merger, share exchange, or sale or transfer of all or substantially
all of the assets of the parent company to another person, with
specified exceptions;
. the purchase by the parent company of beneficial ownership of shares of
its common stock if the purchase would result in a default under any of
the parent company's senior debt agreements; or
. distributions of common stock by the parent company to its stockholders
in specified circumstances.
The following constitute events of default under the indenture:
. a default in the timely payment of any interest on the convertible
debentures if such default continues for 30 days;
. a default in the timely payment of principal or premium on any
convertible debenture at maturity, upon redemption or otherwise;
. a default in the performance of any other covenant or agreement of the
parent company that continues for 30 days after written notice of
default;
. a default under any indebtedness for money borrowed by the parent
company that results in more than $5.0 million of indebtedness being
accelerated; or
. the occurrence of specified events of bankruptcy, insolvency or
reorganization with respect to the parent company.
91
<PAGE>
DESCRIPTION OF NOTES
We have issued the notes under an indenture, dated as of April 9, 1999,
between us and IBJ Whitehall Bank & Trust Company, as trustee. The terms of
the notes include those stated in the indenture and those made a part of the
indenture by reference to the Trust Indenture Act of 1939. The following
description is a summary of the material provisions of the indenture and of
the related exchange and registration rights agreement. The summary does not
restate those agreements in their entirety. We urge you to read the indenture,
the exchange and registration rights agreement and the Trust Indenture Act
because they, and not this description, define your rights as holders of the
notes. To obtain copies of the indenture and the exchange and registration
rights agreement, see "Where You Can Find Additional Information". The precise
definitions of some of the terms used in the following summary are set forth
below under "--Definitions". All references to "Arch" or "us" in this
"Description of Notes" refer only to Arch Communications, Inc. and do not
include its subsidiaries or its parent company.
Arch is an intermediate holding company with no material assets except the
stock of its subsidiaries. Because the operations of Arch are conducted
entirely through its subsidiaries, Arch's cash flow and consequent ability to
service its debt, including the notes, depend upon the earnings of the
subsidiaries and the distribution of those earnings to Arch or upon loans or
other payments of funds by the subsidiaries to Arch. Arch's subsidiaries and
its parent company have no obligation, contingent or otherwise, to pay any
amounts due on the notes or to make any funds available for that purpose,
whether by dividends, loans or other payments.
At present, all of Arch's subsidiaries are restricted subsidiaries, as
defined in the indenture. However, under certain circumstances, we will be
able to designate current or future subsidiaries as unrestricted subsidiaries.
Unrestricted subsidiaries will not be limited by any of the restrictive
covenants contained in the indenture.
Principal, Maturity and Interest
The notes have an aggregate principal amount of $147,000,000 and will mature
on April 15, 2008. Interest on the notes will accrue at the rate of 13 3/4%
per year, payable in cash twice a year in arrears on each April 15 and October
15, beginning October 15, 1999. We will pay interest to the persons in whose
names the notes are registered at the close of business on the immediately
preceding March 31 or September 30. Interest will initially accrue from April
6, 1999. After interest has been paid at least once, interest will continue to
accrue from the date it was most recently paid or duly provided for. We will
compute interest on the basis of a 360-day year of twelve 30-day months. See
"Material Federal Income Tax Considerations".
The notes are issuable only in registered form, without coupons, in
denominations of $1,000 or any whole multiple of $1,000. Principal, interest,
premium and any liquidated damages will be payable at the office or agency of
Arch maintained for that purpose and the notes may be presented for transfer
or exchange there also. Our office or agency for this purpose will be the
principal corporate trust office of the trustee unless we designate otherwise.
At our option, we may pay interest by check mailed to registered holders of
the notes at the addresses set forth on the registry books maintained by the
trustee, which will initially act as registrar and transfer agent for the
notes. No service charge will be made for any exchange or registration of
transfer of notes, but we may require payment of an amount sufficient to cover
any associated tax or other governmental charge.
Seniority; Ranking
The notes are senior unsecured obligations of Arch, ranking equally in right
of payment with all unsubordinated debt of Arch and senior to all subordinated
debt of Arch. See "--Definitions". However, the notes will be structurally
subordinated to all liabilities of Arch's subsidiaries. This includes trade
payables, capitalized lease obligations and debt that may be incurred by
Arch's subsidiaries under their bank credit facilities or other current or
future financing arrangements. Any right of Arch to receive assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be
structurally subordinated to the claims of that subsidiary's creditors. If
Arch is itself recognized as a creditor of the subsidiary Arch's claims would
still
92
<PAGE>
be subject to any security interests in the assets of the subsidiary and to any
liabilities of the subsidiary senior to Arch's claims, and may otherwise be
challenged in a liquidation or reorganization proceeding. At March 31, 1999,
after giving pro forma effect to the consummation of the MobileMedia
acquisition, the notes would have been structurally subordinated to
approximately $574.6 million of liabilities of Arch's subsidiaries.
In addition, Arch's parent company will not have any obligation to pay any
amounts due on the notes or to make any funds available for that purpose. At
March 31, 1999, the parent company had approximately $393.0 million of
liabilities, excluding liabilities of its subsidiaries and the parent company's
guarantees of those liabilities.
The notes will not be secured by any collateral.
Optional Redemption
We may elect to redeem the notes as a whole or from time to time in part, at
any time beginning April 15, 2004 on between 30 and 60 days' prior notice. The
redemption prices will equal the following percentages of principal amount,
plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date:
<TABLE>
<CAPTION>
Redemption
Redemption Date Price
--------------- ----------
<S> <C>
April 15, 2004 through April 14, 2005.. 106.875%
April 15, 2005 through April 14, 2006.. 104.583%
April 15, 2006 through April 14, 2007.. 102.291%
After April 14, 2007................... 100.000%
</TABLE>
In addition, before April 15, 2002 we may elect to redeem up to 35% of the
original aggregate principal amount of the notes at a redemption price equal to
113.75% of the principal amount of the notes being redeemed, plus accrued and
unpaid interest and liquidated damages, if any, to the day before redemption,
if
. we pay the redemption price using the net proceeds of an equity offering
and we make payment within 75 days after the closing of the offering;
and
. immediately after giving effect to the redemption, notes with an
aggregate principal amount of at least $95.6 million remain outstanding.
Selection and Notice
If we optionally redeem only part of the notes at any time, the trustee will
select notes for redemption on a pro rata basis unless the notes are listed on
a national securities exchange. In that case, the trustee will follow the
requirements of the principal national securities exchange on which the notes
are listed. However, notes of $1,000 principal amount or less may be redeemed
only as a whole and not in part. We must mail notices of any optional
redemption by first class mail between 30 and 60 days before the redemption
date to each holder of notes to be redeemed at its registered address. Notices
of any optional redemption may not be made subject to conditions. If any note
is to be redeemed in part only, the notice of optional redemption that relates
to that note will state the portion of the principal amount to be redeemed. We
will cancel the original note and issue a new note in a principal amount equal
to the unredeemed portion, registered in the name of the holder of the original
note. Notes called for optional redemption become due on the date fixed for
redemption. Beginning on the redemption date, interest and liquidated damages,
if any, will cease to accrue on notes or portions of notes called for
redemption.
Sinking Funds
The notes will not have the benefit of any sinking fund obligations.
93
<PAGE>
Repurchase at the Option of Holders
Change of Control
If a change of control, as defined on page 119, occurs at any time, then each
holder of notes will have the right to require us to purchase all or any
portion of its notes, in whole multiples of $1,000, for cash at a purchase
price equal to 101% of the principal amount of its notes, plus accrued and
unpaid interest and liquidated damages, if any, to the date of purchase,
pursuant to the offer described below and the other procedures required by the
indenture.
Within 30 days following any change of control, we will notify the trustee
and give written notice of the change of control to each holder of notes by
first class mail, postage prepaid, at its registered address. The notice must
state, among other things:
. the change of control purchase price;
. the change of control purchase date, which will be a business day
between 30 days and 60 days from the date the notice is mailed or any
later date that is necessary to comply with requirements under the
Exchange Act;
. that any note not tendered will continue to accrue interest and
liquidated damages, if any;
. that any notes accepted for payment pursuant to the change of control
offer will cease to accrue interest and liquidated damages, if any,
after the change of control purchase date, unless we default in the
payment of the change of control purchase price; and
. other procedures that a holder of notes must follow to accept a change
of control offer or to withdraw an acceptance once it has been made.
If a change of control offer is made, there can be no assurance that we will
have available, or be able to obtain, funds sufficient to pay the change of
control purchase price for all of the notes that might be tendered by holders
of the notes seeking to accept the change of control offer. Our bank credit
facilities will limit any purchases of the notes by us unless the indebtedness
under the bank credit facilities is fully repaid. We cannot be sure that, after
a change of control, we will be able to obtain the necessary consents from the
lenders under the bank credit facilities or from any other debt holders to
consummate a change of control offer. If we fail to make or consummate the
change of control offer or pay the change of control purchase price when due,
an event of default would result under the indenture and the trustee and the
holders of the notes would then have the rights described under "Events of
Default and Remedies".
In addition to our obligations under the indenture with respect to the notes
if a change of control occurs, the bank credit facilities contain a provision
defining what constitutes a change of control and designating it as an event of
default which will obligate us to immediately repay amounts outstanding under
the bank credit facilities.
One of the events which constitutes a change of control under the indenture
is the disposition of "all or substantially all" of our assets or the assets of
our parent company. The phrase "all or substantially all" has not been
interpreted to represent a specific quantitative test under New York law, which
governs the indenture. As a consequence, if holders of the notes elect to
require us to purchase the notes and we choose to contest such election, we
cannot be sure how a court interpreting New York law would interpret the
phrase.
The definition of change of control in the indenture is limited in scope. The
provisions of the indenture will not afford you, as noteholders, the right to
require us to repurchase your notes following a transaction which is not
defined as a change of control, even if the transaction may adversely affect
you as noteholders. Such transactions may include a highly leveraged
transaction; various transactions with our management or our affiliates; a
reorganization, restructuring, merger or similar transaction involving our
company; or an acquisition of our company by management or its affiliates. A
transaction involving our management or its affiliates, or a transaction
involving a recapitalization of our company, would result in a change of
control only if it is the
94
<PAGE>
type of transaction specified in the definition. See "--Definitions". Any
proposed highly leveraged transaction, whether or not constituting a change of
control, would be required to comply with the other covenants in the indenture,
including those described under "Incurrence of Indebtedness" and "Liens".
In connection with a change of control offer, the Company must comply with
the applicable tender offer rules under the Exchange Act, including Rule 14e-1,
and any other applicable securities laws and regulations.
Asset Sales
Arch will not engage in any asset sale and will not permit any restricted
subsidiary to do so, unless
. the consideration received by Arch or the restricted subsidiary from the
asset sale equals or exceeds the fair market value of the assets sold,
as determined by the board of directors of Arch, whose good faith
determination will be conclusive;
. at least 85% of the consideration received by Arch or the relevant
restricted subsidiary from the asset sale consists of
. cash or cash equivalents; and/or
. the assumption by the recipient of debt of Arch that ranks equal in
right of payment with the notes, or any debt of a restricted
subsidiary, and the release of Arch or the restricted subsidiary
from all liability on the debt that is assumed.
If Arch or any restricted subsidiary engages in an asset sale, Arch may use
the net cash proceeds of the asset sale, within 12 months after the asset sale,
to
. make a permanent reduction of amounts outstanding under the bank credit
facilities or repay or prepay any then outstanding debt of Arch that
ranks equal in right of payment with the notes, or any debt of a
restricted subsidiary; or
. invest, or enter into a legally binding agreement to invest, within 90
days, in
. properties and assets to replace the properties and assets that were
the subject of the asset sale, or
. properties and assets that will be used in the telecommunications
businesses of Arch or its restricted subsidiaries.
If a legally binding agreement to invest net cash proceeds is terminated, then
Arch may, within 90 days of such termination or within 12 months of such asset
sale, whichever is later, actually invest the net cash proceeds as provided in
the first or second clause above. Before applying the net cash proceeds of an
asset sale pursuant to the second clause above, Arch may use the net cash
proceeds to temporarily reduce borrowings under the bank credit facilities. We
refer to the amount of any net cash proceeds not used in the way described in
this paragraph as excess proceeds.
When the aggregate amount of excess proceeds exceeds $5.0 million, Arch will
make an offer to purchase the maximum principal amount of notes that may be
purchased with the excess proceeds. Arch will extend the offer to all
noteholders, on a pro rata basis, in accordance with the procedures set forth
in the indenture. The offer price for each note will be payable in cash. The
price will equal 100% of the principal amount of the note, plus accrued and
unpaid interest and liquidated damages, if any, to the date the offer to
purchase is closed. To the extent that the aggregate principal amount of notes
tendered in response to our offer to purchase is less than the excess proceeds,
Arch may use the remaining excess proceeds for other general corporate purposes
not prohibited by the indenture. If the aggregate principal amount of notes
validly tendered and not withdrawn by their holders exceeds the excess
proceeds, notes to be purchased will be selected on a pro rata basis. Upon
completion of our offer to purchase, the amount of excess proceeds will be
reset to zero.
95
<PAGE>
Special Offer to Purchase
If at any time before the release date, as defined on page 107 under
"Restrictive Covenants--Limitations on Specified Covenants", occurs,
. Arch does not have qualified public debt outstanding or
. Arch seeks a qualified waiver, as defined,
then, before the date on which there is no longer any qualified public debt
outstanding or the qualified waiver becomes effective, Arch must complete a
special offer to purchase any and all outstanding notes. The cash redemption
price will depend on the date of purchase:
. Before April 15, 2004, the redemption price will be 100% of the
principal amount of the note plus premium, accrued and unpaid interest
and liquidated damages, if any, to the date of purchase.
. After April 15, 2004, the redemption price will be the same as the
optional redemption price then in effect for optional redemptions of
notes as described under "Optional Redemption".
Restrictive Covenants
Restricted Payments
Arch will not, directly or indirectly, take any of the following actions and
will not permit any restricted subsidiary to do so:
. declare or pay any dividend on any shares of the capital stock of Arch
or any restricted subsidiary, or make any distribution to stockholders,
other than
. dividends or distributions payable solely in qualified equity
interests of Arch and
. dividends or distributions by a restricted subsidiary payable to
Arch or another restricted subsidiary;
. purchase, redeem or otherwise acquire or retire for value, directly or
indirectly, any shares of capital stock of Arch, any restricted
subsidiary or any affiliate of Arch, or any options, warrants or other
rights to acquire shares of capital stock other than
. disqualified stock or
. capital stock owned by Arch or any of its restricted subsidiaries;
. make any principal payment on any subordinated debt, including
disqualified stock;
. make any loan, advance, capital contribution to or other investment in
any affiliate of Arch or guarantee any of any affiliate's obligations,
except for a permitted investment; and
. make any other investment in any person, other than a permitted
investment;
unless at the time of, and immediately after giving effect to, the proposed
action:
. no default or event of default has occurred and is continuing;
. Arch could incur at least $1.00 of additional debt, other than permitted
debt, in accordance with the provisions described under the "Incurrence
of Indebtedness" covenant; and
. the aggregate amount of all restricted payments of the types listed
above, declared or made after the issue date of the notes, does not
exceed the sum of:
. the excess of 100% of the aggregate consolidated cash flow of Arch
. measured on a cumulative basis during the period beginning on
April 1, 1999 and ending on the last day of Arch's most recent
fiscal quarter for which internal financial statements are
available ending before the date of the proposed restricted
payment, and
96
<PAGE>
. excluding from consolidated cash flow for all purposes other than
determining whether Arch may make, or may permit a restricted
subsidiary to, make investments in any person, the net income,
but not the net loss, of any restricted subsidiary to the extent
that the declaration or payment of dividends or similar
distributions by such restricted subsidiary is restricted,
directly or indirectly, except to the extent that such net income
could be paid to Arch or one of its restricted subsidiaries by
loans, advances, intercompany transfers, principal repayments or
otherwise,
. over the product of 2.0 times consolidated interest expense accrued
on a cumulative basis during the same period; plus
. the aggregate net proceeds received by Arch from the issuance or
sale of qualified equity interests of Arch,
. other than issuances or sales to a restricted subsidiary or in
connection with the MobileMedia acquisition, and
. including the fair market value of property other than cash as
determined by Arch's board of directors, whose good faith
determination will be conclusive; plus
. the aggregate net proceeds received by Arch from the issuance or
sale of debt securities or disqualified stock that have been
converted into or exchanged for qualified stock of Arch,
. other than issuances or sales to a restricted subsidiary or in
connection with the MobileMedia acquisition, and
. including the fair market value of property other than cash as
determined by Arch's board of directors, whose good faith
determination will be conclusive,
. together with the aggregate net cash proceeds received by Arch
at the time of such conversion or exchange; plus
. without duplication, the lesser of
. the net cash proceeds received by Arch or a wholly owned
restricted subsidiary upon the sale of any unrestricted
subsidiary or
. the amount of Arch's or such restricted subsidiary's investment
in the unrestricted subsidiary that is sold.
The sum of all these amounts is referred to as the permitted amount of
restricted payments.
However, Arch and its restricted subsidiaries may take any one or more of the
following actions, whether singly or in combination:
1. the payment of any dividend within 60 days after it is declared if
on the day it is declared the payment would not have been prohibited by
the provisions described above;
2. the repurchase, redemption, defeasance or other acquisition or
retirement for value of any shares of capital stock of Arch, in
exchange for, or out of the net cash proceeds of, a substantially
concurrent issuance and sale of qualified equity interests of Arch,
except for a sale to a restricted subsidiary;
3. the purchase, redemption, defeasance or other acquisition or
retirement for value of subordinated debt in exchange for, or out of
the net cash proceeds of, a substantially concurrent issuance and sale
of shares of qualified stock of Arch, except for a sale to a restricted
subsidiary;
4. the purchase, redemption, defeasance or other acquisition or
retirement for value of subordinated debt, plus the amount of any
premium required to be paid in connection with the refinancing under
the terms of the debt being refinanced or the amount of any premium
reasonably determined by Arch as necessary to accomplish the
refinancing through a tender offer or privately
97
<PAGE>
negotiated repurchase, in exchange for, or out of the net cash proceeds
of, a substantially concurrent incurrence or sale of subordinated debt
of Arch, except for a sale to a restricted subsidiary, so long as
. the new subordinated debt is subordinated to the notes to the
same extent as the subordinated debt that is purchased, redeemed,
acquired or retired;
. the new subordinated debt has an average life longer than the
average life of the notes and a final stated maturity of
principal later than the final stated maturity of the notes; and
. no default or event of default has occurred and is continuing;
5. payments, whether made in cash, property or securities, by Arch or
any subsidiary to any employee of Arch or any subsidiary in connection
with the issuance or redemption of stock of any such company pursuant
to any employee stock option plan or board resolution to the extent
that such payments do not exceed $500,000 in the aggregate during any
fiscal year or $2.0 million in the aggregate during the term of the
notes;
6. the repurchase of any subordinated debt at a purchase price that
does not exceed 101% of its principal amount following a change of
control in accordance with provisions similar to the "Repurchase at the
Option of Holders--Change of Control" covenant, if before the
repurchase Arch has made a change of control offer as provided in that
covenant with respect to the notes and has repurchased all notes
validly tendered for payment in connection with the change of control
offer;
7. investments in persons made with, or out of the net cash proceeds
of a substantially concurrent issuance and sale of, shares of qualified
stock of Arch, except for a sale to a restricted subsidiary;
8. investments which do not exceed $20.0 million in the aggregate in
persons which have all or substantially all of their operations in the
telecommunications business;
9. payments to Arch's parent company on or after September 14, 2001
to enable the parent company to pay when due accrued but unpaid
interest on the parent company's 10 7/8% senior discount notes due
2008, if
. such amounts are promptly used by the parent company to pay such
interest; and
. at the time of such payment and giving pro forma effect to such
payment, Arch's consolidated cash flow ratio would be less than
5.0 to 1.0;
10. investments in Benbow PCS Ventures, Inc. of up to $50.0 million
in the aggregate; and
11. any other payment or payments of up to $5.0 million in the
aggregate which would otherwise constitute a restricted payment.
The restricted payments described in clauses 2, 3, 5, 6, 7, 8, 9, 10 and 11
above will reduce the permitted amount of restricted payments that would
otherwise be available under the provisions summarized in the first paragraph
of this section. The restricted payments described in clauses 1 and 4 above
will not reduce the amount that would otherwise be available for restricted
payments.
For the purpose of making any calculations under the indenture,
. an investment will include the fair market value of the net assets of
any restricted subsidiary at the time that the restricted subsidiary is
designated an unrestricted subsidiary and will, for the purpose of this
covenant, exclude the fair market value of the net assets of any
unrestricted subsidiary that is designated as a restricted subsidiary;
. any property transferred to or from an unrestricted subsidiary will be
valued at fair market value at the time of such transfer; provided that,
in each case, the fair market value of an asset or property is as
determined by the board of directors of Arch in good faith; and
98
<PAGE>
. subject to what we have just said, the amount of any restricted payment
not made in cash will be determined by the board of directors of Arch,
whose good faith determination will be conclusive.
If the aggregate amount of all restricted payments calculated under these
provisions includes an investment in an unrestricted subsidiary or other person
that later becomes a restricted subsidiary, the investment will no longer be
counted as a restricted payment for purposes of calculating the aggregate
amount of restricted payments.
If an investment resulted in the making of a restricted payment, the
aggregate amount of all restricted payments calculated under these provisions
will be reduced by the amount of any net reduction in that investment that
results from the payment of interest or dividends, loan repayment, transfer of
assets or otherwise, to the extent the net reduction is not included in Arch's
consolidated adjusted net income; provided that the aggregate amount of all
restricted payments may not be reduced by more than the lesser of (1) the cash
proceeds received by Arch and its restricted subsidiaries in connection with
the net reduction and (2) the initial amount of the investment.
In computing Arch's consolidated cash flow under the second paragraph of this
section,
. Arch may use audited financial statements for the portions of the
relevant period for which audited financial statements are available on
the date of determination and unaudited financial statements and other
current financial data based on the books and records of Arch for the
remaining portion of the revelant period; and
. Arch will be permitted to rely in good faith on the financial statements
and other financial data derived from its books and records that are
available on the date of determination. If Arch makes a restricted
payment which, when made, would be permitted under the requirements of
the indenture, in the good faith determination of the board of directors
of Arch that restricted payment will be deemed to have been made in
compliance with the indenture even though later adjustments may be made
in good faith to Arch's financial statements affecting its consolidated
adjusted net income for any period.
Incurrence of Indebtedness
Arch will incur debt, and will permit any restricted subsidiary to do so,
only if, at the time of the incurrence and after giving effect to the
incurrence, Arch's consolidated cash flow ratio would be less than 5.5 to 1.0.
In making this calculation, there shall be excluded from debt for purposes of
calculating the consolidated cash flow ratio all debt of Arch and its
restricted subsidiaries incurred pursuant to clause 1 of the definition of
permitted debt which appears below, and pro forma effect will be given to
. the incurrence of the debt to be incurred and the application of the net
proceeds from the debt to refinance other debt; and
. the acquisition by purchase, merger or otherwise or the disposition by
sale, merger or otherwise of any company, entity or business acquired or
disposed of by Arch or its restricted subsidiaries since the first day
of the most recent full fiscal quarter, as if such acquisition or
disposition occurred at the beginning of the most recent full fiscal
quarter.
Despite the limitation just described, Arch may incur the following
additional debt, known as permitted debt, and may permit its restricted
subsidiaries to do so:
1. debt under the bank credit facilities in an aggregate amount not to
exceed $100.0 million at any one time outstanding, less any amounts by
which the commitments under those facilities are permanently reduced
pursuant to the provisions of those facilities as described under
"Repurchase at the Option of Holders--Asset Sales";
2. other debt of Arch or any restricted subsidiary outstanding on the
date of the indenture;
99
<PAGE>
3. debt owed by Arch to any wholly owned restricted subsidiary or owed by
any wholly owned restricted subsidiary to Arch or any other wholly owned
restricted subsidiary, if such debt is held by Arch or a wholly owned
restricted subsidiary and any debt owed by Arch is subordinated debt;
4. debt represented by the notes;
5. debt incurred or incurrable in respect of letters of credit, bankers'
acceptances or similar facilities not to exceed $5.0 million at any one
time outstanding;
6. capital lease obligations whose attributable value does not exceed
$5.0 million at any one time outstanding;
7. debt of Arch or any restricted subsidiary consisting of guarantees,
indemnities or obligations in respect of purchase price adjustments in
connection with the acquisition or disposition of assets, including shares
of capital stock;
8. debt of Arch or any restricted subsidiary, including trade letters of
credit, in respect of purchase money obligations not to exceed $5.0 million
at any time outstanding;
9. debt arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business, if such debt is
extinguished within two business days of its incurrence; and
10. any renewals, extensions, substitutions, replacements or other
refinancings of any outstanding debt, other than debt incurred pursuant to
clause 1, 7 or 9 of this definition, including any successive refinancings,
so long as
. the principal amount of any such new debt does not exceed the
principal amount being refinanced; or
. if the debt being refinanced provides for less than its principal
amount to be due and payable upon a declaration of acceleration, the
principal does not exceed
. such lesser amount so refinanced, plus
. the amount of any premium required to be paid in connection with
such refinancing pursuant to the terms of the debt refinanced or
the amount of any premium reasonably determined by Arch as
necessary to accomplish such refinancing by means of a tender
offer or privately negotiated repurchase, plus
. the amount of reasonable expenses incurred by Arch in connection
with such refinancing;
. in the case of any refinancing of subordinated debt, such new debt
is made subordinate to the notes at least to the same extent as the
debt being refinanced;
. in the case of any refinancing of the notes or any debt that ranks
equal in right of payment with the notes, such new debt is made
equal in right of payment or subordinated to the notes; and
. such refinancing debt
. does not have an average life less than the average life of the
debt being refinanced;
. does not have a final scheduled maturity earlier than the final
scheduled maturity of the debt being refinanced; and
. does not permit redemption at the option of the holder earlier
than the earliest permissible date of redemption at the option of
the holder of the debt being refinanced.
Liens
Arch will not incur any debt, and will not permit any restricted subsidiary
to incur any debt, which is secured, directly or indirectly, with a lien on the
property, assets or any income or profits from such property or assets of Arch
or any restricted subsidiary
. except for permitted liens; or
100
<PAGE>
. unless at the same time, or earlier, the notes, including all payments
of principal, premium, interest and liquidated damages, if any, are
secured equally and ratably with or prior to the obligation or liability
secured by the lien for so long as the obligation or liability is
secured in that manner.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
Arch will not, and will not permit any restricted subsidiary to, create,
assume or otherwise cause or suffer to exist or to become effective any
consensual encumbrance or restriction on the ability of any restricted
subsidiary to
. pay any dividends or make any other distributions on its capital stock;
. make payments in respect of any debt owed to Arch or any restricted
subsidiary;
. make loans or advances to Arch or any restricted subsidiary; or
. transfer any of its property or assets to Arch or any restricted
subsidiary,
other than
. those under the bank credit facilities existing as of the date of
issuance of the notes;
. those under other debt of Arch, its parent company or any restricted
subsidiary existing as of the date of issuance of the notes; or
. those that may be contained in future agreements if they are no more
restrictive than those referred to in the immediately preceding two
clauses;
. those required by the notes;
. customary non-assignment or sublease provisions of any lease governing a
leasehold interest of Arch or any restricted subsidiary;
. consensual encumbrances or restrictions binding upon any person at the
time that person becomes a subsidiary of Arch, if the encumbrances or
restrictions were not incurred in anticipation of that person becoming a
subsidiary of Arch;
. encumbrances and restrictions imposed by applicable law; or
. any restrictions with respect to a restricted subsidiary imposed by an
agreement which has been entered into for the sale or disposition of all
or substantially all of the capital stock or assets of that subsidiary
pending the closing of the sale or disposition.
Nothing contained in this covenant shall prevent Arch from entering into any
agreement permitted by the "Liens" covenant, if the encumbrance or restriction
in any such agreement is limited to the transfer of the property or assets
which is subject to the agreement.
Consolidation, Merger or Sale of Assets
Arch will not
. consolidate with or merge with or into any other person, or
. convey, transfer or lease its properties and assets as an entirety to
any person or persons, or
. permit any restricted subsidiary to enter into any such transaction or
series of transactions, if such transaction or series of transactions,
in the aggregate, would result in the conveyance, transfer or lease of
all or substantially all of the properties and assets of Arch and its
restricted subsidiaries on a consolidated basis to any person,
unless:
. either
. Arch is the surviving corporation; or
101
<PAGE>
. the person formed by such consolidation or into which Arch or a
restricted subsidiary is merged or the person which acquires, by
conveyance, transfer or lease, the properties and assets of Arch or
such restricted subsidiary substantially as an entirety
. is a corporation, partnership or trust organized and validly
existing under the laws of the United States of America, any
state or the District of Columbia; and
. expressly assumes, by a supplemental indenture executed and
delivered to the trustee, in form satisfactory to the trustee,
Arch's obligation for the due and punctual payment of the
principal, premium, if any, and interest on all the notes and the
performance and observance of every covenant of the indenture to
be performed or observed on the part of Arch;
. immediately after giving effect to such transaction or series of
transactions and treating any obligation of Arch or a subsidiary in
connection with or as a result of such transaction as having been
incurred as of the time of such transaction, no default or event of
default has occurred and is continuing;
. immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis, Arch, or the
surviving entity if Arch is not the continuing obligor under the
indenture, could incur at least $1.00 of additional debt, other than
permitted debt, under the provisions of the "Incurrence of Indebtedness"
covenant
. on the assumption that the transaction or series of transactions
occurred on the first day of the last full fiscal quarter
immediately prior to the actual consummation of such transaction or
series of transactions,
. with the appropriate adjustments with respect to the transaction or
series of transactions being included in such pro forma calculation;
and
. if any of the property or assets of Arch or any of its restricted
subsidiaries would become subject to any lien, the provisions of the
"Liens" covenant are complied with.
In connection with any such consolidation, merger, conveyance, transfer or
lease, Arch or the surviving entity shall deliver to the trustee, in form and
substance reasonably satisfactory to the trustee, an officer's certificate,
attaching the computations to demonstrate compliance with the third clause
above, and an opinion of counsel, each stating that
. the consolidation, merger, conveyance, transfer or lease complies with
the requirements of the covenant described under "Consolidation, Merger
or Sale of Assets",
. any supplemental indenture required in connection with such transaction
complies with that covenant; and
. all conditions precedent relating to such transaction provided for in
that covenant have been complied with.
Upon any transaction or series of transactions that are of the type described
in the immediately preceding paragraphs, and that are effected in accordance
with the conditions described above, the surviving entity shall succeed to
Arch, shall be substituted for Arch, and may exercise every right and power of
Arch under the indenture with the same effect as if the surviving entity had
been named as Arch in the indenture. When a surviving entity duly assumes all
of the obligations and covenants of Arch pursuant to the indenture and the
notes, the predecessor person shall be relieved of all such obligations, except
in the case of a lease.
Transactions with Affiliates and Related Persons
Arch will not, and will not permit any restricted subsidiary to, directly or
indirectly, enter into any transaction or series of transactions with any
affiliate of Arch or any related person other than Arch or a wholly owned
restricted subsidiary, unless
. the transaction or series of transactions is on terms no less favorable
to Arch or such restricted subsidiary than those that could be obtained
in a comparable arm's-length transaction with an entity that is not an
affiliate or a related person; and
102
<PAGE>
. if the transaction or series of transactions involves aggregate
consideration in excess of $1.0 million, then such transaction or series
of transactions is approved by a resolution adopted by a majority of
Arch's board of directors, including the approval of a majority of the
disinterested directors. Any such transaction or series of transactions
approved in that manner shall be conclusively deemed to be on terms no
less favorable to Arch or such restricted subsidiary than those that
could be obtained in an arm's-length transaction.
This restriction will not apply, however, to
. transactions between Arch or any of its restricted subsidiaries and any
employee of Arch or any of its restricted subsidiaries that are entered
into in the ordinary course of business;
. the payment of reasonable and customary regular fees and expenses to
directors of Arch;
. the making of indemnification, contribution or similar payments to any
director or officer of Arch or any restricted subsidiary under charter
or by-law provisions, whether now in effect or subsequently amended, or
any indemnification or similar agreement with any director or officer;
or
. the entering into of any such indemnification agreements with any
current or future directors or officers of Arch or any restricted
subsidiary.
Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries
Arch
. will not permit any restricted subsidiary to issue any capital stock,
except to Arch or a restricted subsidiary; and
. will not permit any person other than Arch or a restricted subsidiary to
own any capital stock of any restricted subsidiary;
except that
. Arch or any restricted subsidiary may issue and sell all, but not less
than all, of the issued and outstanding capital stock of any restricted
subsidiary owned by it in compliance with the other provisions of the
indenture; or
. Arch may acquire less than all of the equity ownership or voting stock
of a person that will be a subsidiary upon the consummation of the
acquisition.
Subsidiary Guarantees
Arch will not
. permit any of its restricted subsidiaries, directly or indirectly, to
guarantee or secure through the granting of liens the payment of any
debt of Arch, other than debt under or with respect to the bank credit
facilities and associated permitted liens; or
. pledge any intercompany notes representing obligations of any of its
restricted subsidiaries to secure the payment of any debt of Arch, other
than debt under or with respect to the bank credit facilities and
associated permitted liens, unless such subsidiary
.executes a supplemental indenture evidencing its guarantee of the
notes; or
. in the case of a grant of a security interest or the pledge of an
intercompany note, the holders of the notes receive a security
interest in the intercompany note or in the asset to which such
security interest relates; except that this provision will not apply
to guarantees of, or liens granted to secure, Arch's 9 1/2% notes
and 14% notes if those guarantees or liens are required to be
granted solely and as a direct result of the granting of guarantees
or liens with respect to the bank credit facilities.
103
<PAGE>
Unrestricted Subsidiaries
Arch's board of directors may designate any subsidiary, including any newly
acquired or newly formed subsidiary, to be an unrestricted subsidiary so long
as
. neither Arch nor any restricted subsidiary is directly or indirectly
liable for any debt of such subsidiary;
. no default with respect to any debt of such subsidiary would permit,
upon notice, lapse of time or otherwise, any holder of any other debt of
Arch or any restricted subsidiary to declare a default on such other
debt or cause the payment of such other debt to be accelerated or
payable prior to its stated maturity;
. any investment in such subsidiary made as a result of designating such
subsidiary an unrestricted subsidiary will not violate the provisions of
the "Restricted Payments" covenant;
. every contract, agreement, arrangement, understanding or obligation of
any kind, whether written or oral, between such subsidiary and Arch or
any restricted subsidiary is on terms that might be obtained at the time
from persons who are not affiliates of Arch; and
. neither Arch nor any restricted subsidiary has any obligation to
subscribe for additional shares of capital stock or other equity
interest in such subsidiary, or to maintain or preserve such
subsidiary's financial condition or to cause such subsidiary to achieve
certain levels of operating results. However, Arch may not designate as
an unrestricted subsidiary any subsidiary which is a significant
subsidiary on the date of the indenture, and may not sell, transfer or
otherwise dispose of any properties or assets of any significant
subsidiary to an unrestricted subsidiary, except in the ordinary course
of business.
Arch's board of directors may designate any unrestricted subsidiary as a
restricted subsidiary. However, such designation will be deemed to be an
incurrence of debt by a restricted subsidiary of any outstanding debt of such
unrestricted subsidiary and such designation will only be permitted if
. such debt is permitted under the "Incurrence of Indebtedness" covenant
and
. no default or event of default would be in existence following such
designation.
Payments for Consent
Neither Arch nor any of its subsidiaries will, directly or indirectly, pay or
cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any holder of any notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the indenture or the
notes unless the same consideration is offered to be paid or is paid to all
holders of notes that consent, waive or agree to amend during the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
Reports
Arch will file on a timely basis with the SEC the annual reports, quarterly
reports and other documents that it would be required to file if it were
subject to Section 13 or 15 of the Exchange Act, whether or not Arch has a
class of securities registered under the Exchange Act, to the extent such
filings are accepted by the SEC. Arch will also
. file with the trustee, and upon written request, provide to each
noteholder at Arch's cost, copies of such reports and documents within
15 days after the date on which Arch files the reports and documents
with the SEC or the date on which Arch would be required to file the
reports and documents if Arch were required to do so; and
. if filing such reports and documents with the SEC is not accepted by the
SEC or is prohibited under the Exchange Act, supply at Arch's cost
copies of such reports and documents to any prospective noteholder
promptly upon written request.
104
<PAGE>
Limitations on Specified Covenants
For so long as Arch or any of its restricted subsidiaries constitutes a
restricted subsidiary of Arch's parent company under the terms of the indenture
for the parent company's discount notes, with respect to any such restricted
subsidiary of the parent company, each of the covenants described under "--
Incurrence of Indebtedness", "--Liens", "--Consolidation, Merger or Sale of
Assets", "--Restricted Payments", "--Transactions with Affiliates and Related
Persons", "--Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries", "--Subsidiary Guarantees", and the first clause of "Repurchase
at the Option of Holders--Asset Sales" shall not create or cause to become
effective any encumbrance or restriction of any kind on the ability of any
restricted subsidiary of the parent company to:
. pay dividends, in cash or otherwise, or make any other distributions on
or in respect of its capital stock;
. pay any debt owed to the parent company or any other restricted
subsidiary of the parent company;
. make loans or advances to the parent company or any other restricted
subsidiary of the parent company;
. transfer any of its properties or assets to the parent company or any
other restricted subsidiary of the parent company; or
. guarantee any debt of the parent company or any other restricted
subsidiary of the parent company; provided that
. after any restricted subsidiary of the parent company ceases to
constitute a restricted subsidiary under the indenture for the
parent company's discount notes, the provisions of this sentence
shall cease to apply with respect to it; and
. after any or all of restrictions described in Section 1010 of the
indenture for the parent company's discount notes ("Limitations on
Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries") cease to be in effect in whole or in part, whether
due to purchase, redemption, defeasance, conversion, exchange,
repurchase, any other acquisition or retirement or maturity of the
indenture for the parent company's discount notes, or due to an
amendment, consent, waiver or agreement in respect of such
restrictions, or otherwise, then, in spite of any other restrictions
or limitations contained in any other agreement which may then be in
effect, the provisions of this sentence shall cease to apply, in
whole or in part, to the extent the termination of such provisions
does not cause a breach of the covenant described in Section 1010 of
the indenture for the parent company's discount notes. The date on
which all of the provisions of this sentence cease to apply is
referred to as the release date.
Events of Default and Remedies
The following are events of default under the indenture:
1. default in the payment of any interest or liquidated damages on any
note when it becomes due and payable if the default continues for 30 days;
2. default in the payment of the principal of or premium, if any, on any
note at its maturity;
3. failure to perform or comply with the indenture provisions described
under "Repurchase at the Option of Holders--Change of Control", "Repurchase
at the Option of Holders--Special Offer to Purchase" or "Certain
Covenants--Consolidation, Merger or Sale of Assets";
4. default in the performance, or breach, of any covenant or agreement
contained in the indenture, other than a default in the performance, or
breach, of a covenant or warranty which is specifically dealt with
elsewhere in "Events of Default", and if the default or breach continues
for 60 days after written notice is given to Arch by the trustee or to Arch
and the trustee by the holders of at least 25% in aggregate principal
amount of the notes then outstanding;
105
<PAGE>
5. either:
. an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of
debt of Arch or a restricted subsidiary, other than Benbow
Investments, Inc., for so long as the 9 1/2% notes and the 14% notes
remain outstanding, if
. the other issue has an aggregate outstanding principal amount of
at least $5.0 million; and
. the default has resulted in such debt becoming due and payable
prior to the date on which it would otherwise become due and
payable, whether by declaration or otherwise; or
. a default has occurred in any payment when due at final maturity of
any such debt;
6. any person entitled to take the actions described in this clause,
after the occurrence of any event of default under any agreement or
instrument evidencing any debt in excess of $5.0 million in the aggregate
of Arch or any restricted subsidiary,
. notifies the trustee of the intended sale or disposition of any
assets of Arch or any restricted subsidiary that have been pledged
to or for the benefit of the person to secure the debt, or
. commences proceedings, or
. takes action to retain in satisfaction of any debt, or
. to collect on, seize, dispose of or apply, any assets of Arch or any
restricted subsidiary, pursuant to the terms of any agreement or
instrument evidencing any such debt of Arch or any restricted
subsidiary or in accordance with applicable law;
7. one or more final judgments or orders
. are rendered against Arch or any restricted subsidiary which require
the payment of money, either individually or in an aggregate amount,
in excess of $5.0 million;
. are not discharged; and
. 60 days elapse without a stay of enforcement being in effect for
such judgment or order, by reason of a pending appeal or otherwise;
8. the occurrence of specified events of bankruptcy, insolvency or
reorganization with respect to Arch, any significant subsidiary or any two
or more restricted subsidiaries, which if considered as a single person,
would constitute a significant subsidiary; or
9. the pledged collateral becomes subject to any lien other than the lien
under the security agreement that secures the notes or Arch challenges the
lien on the pledged collateral before the pledged collateral is to be
released to Arch.
If an event of default specified in clauses 1 through 7 or 9 above occurs and
is continuing, then the trustee or the holders of at least 25% in aggregate
principal amount of the notes then outstanding may declare all amounts payable
on all of the outstanding notes to be due and payable immediately. This
includes principal, accrued and unpaid interest and premium and liquidated
damages, if any, as of such date of declaration. The trustee must give a notice
in writing to Arch and the holders must give notice to Arch and the trustee.
Upon any such declaration of acceleration all amounts payable in respect of the
notes will become immediately due and payable. If an event of default specified
in clause 8 above occurs, then all of the outstanding notes will automatically
become and be immediately due and payable without any declaration or other act
on the part of the trustee or any holder of notes.
After a declaration of acceleration under the indenture, the holders of a
majority in aggregate principal amount of the notes then outstanding, by
written notice to Arch and the trustee, may rescind such declaration and its
consequences if:
. a judgment or decree for payment of the money due has not been obtained
by the trustee,
106
<PAGE>
. Arch has paid or deposited with the trustee a sum sufficient to pay:
. all overdue interest on all notes,
. any unpaid principal, premium and liquidated damages, if any, which
has become due on any outstanding notes independently from such
declaration of acceleration and interest on such amount at the rate
borne by the notes,
. interest upon overdue interest, premium and liquidated damages, if
any, and overdue principal at the rate borne by the notes to the
extent that payment of such interest is lawful, and
. all sums paid or advanced by the trustee under the indenture and the
reasonable compensation, expenses, disbursements and advances of the
trustee, its agents and counsel; and
. all events of default, other than the non-payment of amounts of
principal, premium, liquidated damages, if any, or interest which became
due solely because of such declaration of acceleration, have been cured
or waived.
Rescinding a declaration of acceleration will not affect or impair the rights
of the holders if another default occurs later.
The holders of a majority in aggregate principal amount of the notes then
outstanding may waive any past defaults under the indenture, on behalf of the
holders of all the notes, except that they cannot waive a default
. in the payment of the principal, premium, liquidated damages, if any or
interest on any note, or
. in respect of a covenant or provision which under the indenture requires
unanimous consent for modification or waiver.
If the trustee knows that a default or an event of default is continuing, the
trustee must mail a notice to each holder of the notes within 30 days after it
first occurs, or if the trustee only learns of it later, promptly upon learning
of it. If the default or event of default does not involve non-payment, the
trustee may withhold the notice to the holders of the notes if its board of
directors, executive committee or a committee of its trust officers determines
in good faith that withholding the notice is in the interest of the holders.
A noteholder may institute any proceeding with respect to the indenture or
for any remedy under the indenture only if the holder has previously given the
trustee written notice of a continuing event of default and the holders of at
least 25% in aggregate principal amount of the notes then outstanding have made
written request, and offered reasonable indemnity, to the trustee to institute
the proceeding as trustee, and the trustee
. has not received contrary directions from the holders of a majority
in aggregate principal amount of the notes then outstanding, and
. has failed to institute such proceeding within 60 days. However,
these limitations do not apply to a suit instituted by a holder of a
note for enforcement of payment of any amounts then due.
Arch must furnish to the trustee annual statements as to its performance of
its obligations under the indenture and as to any default in such performance.
Arch must also notify the trustee within five days of becoming aware of any
default or event of default.
No Personal Liability of Directors, Officers, Employees, Incorporators and
Stockholders
No individual who is a director, officer, employee, incorporator or
stockholder of Arch or any restricted subsidiary will have any liability in
that capacity for any obligations of Arch or such restricted subsidiary under
the notes, the indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each noteholder waives and releases all
such liability when it accepts a note. The waiver and release are part of the
consideration for issuance of the notes. However, this waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the SEC that a waiver of that type is against public policy.
107
<PAGE>
Legal Defeasance or Covenant Defeasance
Arch may terminate its obligations with respect to the outstanding notes at
its option and at any time. This is known as defeasing the notes. Defeasance
means that Arch will be deemed to have paid and discharged the entire debt
represented by the outstanding notes, except for
. the rights of holders of outstanding notes to receive payments due on
the notes when such payments are due, solely from the trust fund
described below,
. the defeasance provisions of the indenture,
. the rights, powers, trusts, duties and immunities of the trustee and
. Arch's obligations to issue temporary notes, register the transfer or
exchange of any notes, replace mutilated, destroyed, lost or stolen
notes, maintain an office or agency for payments in respect of the notes
and segregate and hold such payments in trust.
In addition, Arch may, at its option and at any time, elect to terminate the
obligations of Arch with respect to particular covenants specified in the
indenture described under "--Restrictive Covenants" above. This is referred to
as covenant defeasance. Any omission to comply with obligations that have been
defeased shall not constitute a default or an event of default.
In order to exercise either defeasance or covenant defeasance:
. Arch must irrevocably deposit with the trustee, as trust funds in trust,
specifically pledged as security for the noteholders, and dedicated
solely to the benefit of the noteholders, an amount sufficient, in the
opinion of a nationally recognized firm of independent public
accountants, to pay and discharge all amounts due on the outstanding
notes at maturity or upon redemption; this amount may take the form of
money, government securities which through the scheduled payment of
principal and interest on such securities will provide a sufficient
amount of money, or a combination of money and government securities;
. no default or event of default is continuing when the deposit is made
and no event of bankruptcy under clause 8 of "Events of Default" above
occurs at any time within 91 days after the deposit is made;
. such defeasance or covenant defeasance does not cause the trustee to
have a conflicting interest, as defined in the indenture and for
purposes of the Trust Indenture Act, with respect to any securities of
Arch;
. such defeasance or covenant defeasance does not breach, violate or
constitute a default under, any material agreement or instrument to
which Arch is a party or by which it is bound or cause the trust or the
trustee to be subject to the Investment Company Act of 1940;
. in the case of defeasance, Arch has delivered to the trustee an opinion
of counsel
. stating that Arch has received a ruling from the Internal Revenue
Service stating that the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance had not occurred; or
. confirming that the tax consequences are as described above due to a
change in applicable federal income tax law since the date of the
indenture, or the publication by the Internal Revenue Service of a
document that may be used or cited as precedent to the same effect;
. in the case of covenant defeasance, Arch has delivered to the trustee an
opinion of counsel to the effect that the holders of the notes
outstanding will not recognize income, gain or loss for federal income
tax purposes as a result of the covenant defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had
not occurred; and
108
<PAGE>
. Arch has delivered to the trustee an officer's certificate and an
opinion of counsel, each stating that all conditions precedent to the
defeasance or the covenant defeasance have been complied with.
Satisfaction and Discharge
At Arch's request, the indenture will cease to be of further effect, except
as to surviving rights of registration of transfer or exchange of the notes, as
expressly provided for in the indenture, and the trustee, at Arch's expense,
will execute proper instruments acknowledging satisfaction and discharge of the
indenture when:
. either
. all the notes previously authenticated and delivered have been
delivered to the trustee for cancellation, other than destroyed,
lost or stolen notes which have been replaced or paid and notes
which have been subject to defeasance as described under "--Legal
Defeasance or Covenant Defeasance", or
. all notes not previously delivered to the trustee for cancellation
. have become due and payable,
. will become due and payable at stated maturity within one year or
. are to be called for redemption within one year under
arrangements satisfactory to the trustee for the giving of notice
of redemption by the trustee in Arch's name, and at Arch's
expense, and Arch has irrevocably deposited or caused to be
deposited with the trustee funds in trust for the purpose in an
amount sufficient to pay and discharge the entire debt on such
notes not previously delivered to the trustee for cancellation,
for principal, premium, liquidated damages, if any, and interest
to the date of such deposit, in the case of notes which have come
due and payable, or to the stated maturity or redemption date, as
the case may be;
. Arch has paid or caused to be paid all other sums payable by it under
the indenture; and
. Arch has delivered to the trustee an officer's certificate and an
opinion of counsel, each stating that all conditions precedent provided
in the indenture relating to the satisfaction and discharge of the
indenture have been complied with.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the indenture. The
registrar and the trustee may require a holder, among other things, to furnish
appropriate endorsements and transfer documents and Arch may require a holder
to pay any taxes and fees required by law or permitted by the indenture. Arch
is not required to transfer or exchange any note selected for redemption.
Neither Arch nor the registrar will be required to
. issue, exchange or register the transfer of notes between the opening of
business on a business day 15 days before the day of mailing of any
notice of redemption of notes and ending at the close of business on the
day of the mailing or
. exchange or register the transfer of any note selected for redemption in
whole or in part, except the unredeemed portion of any note that is
being redeemed in part.
Amendment, Supplement and Waiver
Modifications and amendments of the indenture may be made by Arch and the
trustee with the consent of the holders of a majority in aggregate principal
amount of the notes then outstanding, except that the consent of the holder of
every outstanding note affected by the modification or change is required if
the modification or amendment may:
. change the stated maturity of the principal of any note, or any
installment of interest or liquidated damages, if any, on, any note, or
reduce the principal amount of any note or the rate of interest or
109
<PAGE>
liquidated damages, if any, on any note or any premium payable upon the
redemption of any note, or change the place of payment, or the coin or
currency of payment for amounts due under any note, or impair the right
to institute suit for the enforcement of any payment after the stated
maturity of such payment or, in the case of redemption, on or after the
redemption date;
. reduce the premium payable upon a special offer to purchase or alter the
provisions, including the definitions, set forth under "Repurchase at
the Option of Holders--Special Offer to Purchase" above in a manner
adverse to the holders;
. reduce the percentage in aggregate principal amount of the notes then
outstanding whose holders must consent to any such amendment or any
waiver of compliance with specified provisions of the indenture or
specified defaults and their consequences provided for under the
indenture; or
. modify any provisions relating to "Amendment, Supplement and Waiver" or
the fourth full paragraph under "Events of Default" above, except to
increase the percentage of outstanding notes required to consent to such
actions or to provide that certain other provisions of the indenture
cannot be modified or waived without the consent of the holder of every
outstanding note affected by the modification or waiver.
The holders of a majority in aggregate principal amount of the notes then
outstanding may waive compliance with certain restrictive covenants and
provisions of the indenture except as set forth above.
Concerning the Trustee
IBJ Whitehall Bank & Trust Company, the trustee under the indenture, will be
the initial paying agent and registrar for the notes.
The indenture provides that, except while an event of default is continuing,
the trustee will perform only those duties that are specifically set forth in
the indenture. Under the indenture, the holders of a majority in aggregate
principal amount of the notes then outstanding will have the right to direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the trustee, subject to certain exceptions. If an event of
default is continuing, the trustee will exercise such rights and powers vested
in it under the indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs. Subject to these provisions, the trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request of any holder of notes, unless such holder shall have
offered to the trustee indemnity reasonably satisfactory to it against any
loss, liability or expense.
The indenture and provisions of the Trust Indenture Act incorporated by
reference into the indenture contain limitations on the rights of the trustee,
should it become a creditor of Arch, to obtain payment of claims in various
circumstances or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The trustee is permitted to engage
in other transactions, except that if it acquires any conflicting interest, as
defined in the indenture, it must eliminate the conflict upon the occurrence
of an event of default or else resign.
Book-Entry, Delivery and Form
The notes will be represented by a single, permanent global note, which may
be subdivided, in definitive, fully-registered form without interest coupons
in minimum denominations of $1,000 and whole multiples of $1,000. The global
note will be deposited with the trustee as custodian for DTC. It will be
registered in the name of a nominee of DTC for credit to the separate accounts
of the purchasers at DTC.
Notes will be issued in definitive, fully-registered form without interest
coupons in minimum denominations of $1,000 and whole multiples of $1,000 if
they are transferred before registration under the Securities Act in
accordance with the provisions of the indenture, or after registration.
110
<PAGE>
The Notes are not issuable in bearer form. The global note may be
transferred, in whole or in part, only to another nominee of DTC.
The global note and any certificated securities will be subject to certain
restrictions on transfer set forth in the notes and in the indenture and old
notes will bear legends regarding such restrictions.
The Global Note
DTC or its custodian will credit, on its internal system, the principal
amounts of the individual beneficial interests represented by the global note
to the accounts of persons who have accounts with DTC. Ownership of beneficial
interests in the global note will be limited to participants in DTC's system
having accounts with DTC and participants in other securities clearance
organizations or persons who hold interests through participants. Ownership of
beneficial interests in the global note by participants will be shown on
records maintained by DTC or its nominee. Ownership by persons other than
participants will be shown on the records of participants. Transfer of
ownership will be effected only through these records.
So long as DTC or its nominee is the registered owner or holder of the
global note DTC or its nominee will be considered the sole owner or holder of
the notes represented by the global note for all purposes under the indenture
and the notes. Owners of beneficial interests in the global note will not be
considered to be the owners or holders of any notes under the indenture. Also,
any beneficial owner of an interest in the global note will be able to
transfer that interest only in accordance with DTC's applicable procedures in
addition to the procedures under the indenture and, if applicable, those of
Euroclear and Cedel Bank.
Investors may hold their interests in the global note directly through DTC
if they are participants in DTC, or indirectly through organizations which are
participants in DTC, including Cedel Bank and Euroclear. Cedel Bank and
Euroclear will hold interests in the global note on behalf of their
participants through their depositaries, which in turn will hold such
interests in the global note in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A., New York, will
initially act as depositary for Cedel Bank and Morgan Guaranty Trust Company
of New York, Brussels office, will initially act as depositary for Euroclear.
Payments of principal, interest, premium and liquidated damages, if any, on
the global note will be made to DTC or its nominee, as the registered owner of
the global note. Arch, the trustee, and any paying agent will have no
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global note
or for maintaining, supervising or reviewing any records relating to those
beneficial ownership interests.
Arch expects that DTC or its nominee, upon receipt of any payment of
principal, interest, premium or liquidated damages, if any, in respect of the
global note, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the
principal amount of the global note as shown on the records of DTC or its
nominee. Arch also expects that payments by participants to owners of
beneficial interests in the global note held through such participants,
including Cedel Bank and Euroclear, will be governed by standing instructions
and customary practices and, in the case of Cedel Bank and Euroclear, in
accordance with the rules and procedures of Cedel Bank and Euroclear. Such
payments will be the responsibility of the participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. The laws
of some states require that certain persons take physical delivery of
securities in definitive form. Consequently, the ability to transfer
beneficial interests in the global note to such persons may be limited.
Because DTC can only act on behalf of participants, who in turn act on behalf
of indirect participants and various banks, the ability of a person having a
beneficial interest in the global note to pledge such interest to persons or
entities that do not participate in the DTC system, or otherwise take actions
relating to such interest, may be affected by the lack of a physical
certificate evidencing such interest. Transfers between participants in
Euroclear and Cedel Bank will be effected in the ordinary way in accordance
with their respective rules and operating procedures.
111
<PAGE>
Cross-market transfers between DTC participants, on the one hand, and
directly or indirectly through Euroclear or Cedel Bank participants, on the
other, will be effected in DTC in accordance with DTC rules on behalf of
Euroclear or Cedel Bank, by the appropriate depositary. However, such cross-
market transactions will require delivery of instructions to Euroclear or Cedel
Bank, by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (Brussels time). Euroclear or
Cedel Bank will, if the transaction meets its settlement requirements, deliver
instructions to its respective depositary to take action to effect final
settlement on its behalf by delivery or receiving interests in the global note
in DTC, and making or receiving payment in accordance with normal procedures
for same-day funds settlement applicable to DTC. Cedel Bank participants and
Euroclear participants may not deliver instructions directly to the
depositaries for Cedel Bank or Euroclear.
Arch expects that DTC will take any action permitted to be taken by a holder
of notes, including the presentation of notes for exchange as described below,
only at the direction of a participant and only as it relates to that
participant's interest in the global note. However, if an event of default is
continuing, or in the limited circumstances described below, DTC will surrender
the global note; in that case, certificated notes in definitive form will be
distributed to DTC's participants. The giving of notices and other
communications by DTC to participants in DTC, by participants in DTC to persons
who hold accounts with them and by such persons to holders of beneficial
interests in the global note will be governed by arrangements between them,
subject to any statutory or regulatory requirements as may exist from time to
time.
Arch understands that DTC is a limited-purpose trust company organized under
the New York Banking Law, a banking organization within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a clearing
corporation within the meaning of the New York Uniform Commercial Code, and a
clearing agency registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC holds securities for its participants. It facilitates the
clearance and settlement of transactions in these securities, such as transfers
and pledges, through electronic computerized book-entry changes in
participants' accounts. This eliminates the need for physical movement of
securities certificates. Participants in DTC include securities brokers and
dealers, banks, trust companies, clearing corporations and other organizations.
DTC is owned by a number of its participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., and the NASD. Access to the
DTC system is also available to other persons such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. The rules
applicable to DTC and its participants are on file with the SEC.
Although DTC, Cedel Bank and Euroclear have agreed to procedures described
above in order to facilitate transfers of interests in the global note among
participants in DTC, Cedel Bank and Euroclear, they are under no obligation to
continue to perform those procedures. The procedures may be changed or
discontinued at any time. Arch and the trustee will have no responsibility for
any other person's performance obligations under the rules and procedures
governing those operations. This includes the obligations of DTC, Cedel Bank
and Euroclear and their participants and indirect participants.
Additional Information Concerning Euroclear and Cedel Bank
Euroclear and Cedel Bank hold securities for participating organizations.
They facilitate the clearance and settlement of transactions in those
securities between their participants through electronic book-entry changes in
the participants' accounts. Euroclear and Cedel Bank provide to their
participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Euroclear and Cedel Bank interface with U.S. securities
markets. Euroclear and Cedel Bank participants are financial institutions such
as underwriters, securities brokers and dealers, banks, trust companies and
other organizations. Indirect access to Euroclear and Cedel Bank is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodian relationship with a Euroclear or Cedel
Bank participant, either directly or indirectly.
112
<PAGE>
Morgan Guaranty Trust Company of New York serves as Euroclear's depositary
and Citibank, N.A., serves as Cedel's depositary. When beneficial interests are
to be transferred from the account of a participant to the account of a
Euroclear participant or a Cedel Bank participant, the purchaser must send
instructions to Euroclear or Cedel Bank through a participant at least one
business day before settlement. Euroclear or Cedel Bank will instruct its
depositary to receive the beneficial interests against payment. Payment will
include interest attributable to the beneficial interests from and including
the last payment date to and including the day before the settlement date, on
the basis of a calendar year consisting of twelve 30-day calendar months. For
transactions settling on the 31st day of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the depositary to the participant's account against
delivery of the beneficial interests. After settlement has been completed, the
beneficial interests will be credited to the appropriate clearing systems and
will be credited by the clearing system, in accordance with its usual
procedures, to the account of the Euroclear participants or Cedel Bank
participants. Credit for the beneficial interests will appear on the next
business day (Brussels time) and the cash debit will be back-valued to, and
interest attributable to the beneficial interests will accrue from, the value
date, which would be the preceding business day when settlement occurs in New
York. If the trade fails and settlement is not completed on the intended value
date, the Euroclear or Cedel Bank cash debit will instead be valued as of the
actual settlement date.
Euroclear participants and Cedel Bank participants will need to make
available to their clearing system the funds necessary to process same-day
funds settlement. The most direct means of doing this is to preposition funds
for settlement, either from cash on hand or existing lines of credit, as the
participant would for any settlement occurring within Euroclear or Cedel Bank.
Under this approach, they may take on credit exposure to Euroclear or Cedel
Bank until the beneficial interests are credited to their accounts one day
later. Finally, day traders that use Euroclear or Cedel Bank and that purchase
beneficial interests from participants for credit to Euroclear participants or
Cedel Bank participants should note that these trades will automatically fail
on the sale side unless affirmative action is taken to avoid these potential
problems.
Due to time zone differences in their favor, Euroclear participants and Cedel
Bank participants may employ their customary procedures for transactions in
which beneficial interests are to be transferred by their clearing system,
through Morgan Guaranty Trust Company of New York or Citibank, N.A., to another
participant. The seller must send instructions to Euroclear or Cedel Bank
through a participant at least one business day prior to settlement. In these
cases, Euroclear or Cedel Bank will instruct its depositary to credit the
beneficial interests to the participant's account against payment. Payment will
include interest attributable to the beneficial interests from and including
the last payment date to and including the day before the settlement date on
the basis of a calendar year consisting of twelve 30-day calendar months. For
transactions settling on the 31st day of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Euroclear participant or
Cedel Bank participant the following business day, and receipt of the cash
proceeds in the Euroclear or Cedel Bank participant's account will be back-
valued to the value date, which would be the preceding business day, when
settlement occurs in New York. If the Euroclear participant or Cedel Bank
participant has a line of credit with its clearing system and elects to draw on
such line of credit in anticipation of receipt of the sale proceeds in its
account, the back-valuation may substantially reduce or offset any overdraft
charges incurred over that one-day period. If the trade fails and settlement is
not completed on the intended value date, receipt of the cash proceeds in the
Euroclear or Cedel Bank participant's account will instead be valued as of the
actual settlement date.
Certificated Securities
The global note is exchangeable for certificated securities only
. if Arch notifies the trustee that it elects to have notes issued in
definitive registered form;
113
<PAGE>
. if the depositary
. notifies Arch that it is unwilling or unable to continue as
depositary for the global note or
. ceases to be a clearing agency registered under the Exchange Act; or
. if an event of default is continuing or any event which would be an
event of default after notice or lapse of time or both is continuing.
Such certificated securities shall be registered in the names of the owners of
the beneficial interests in the global note as provided by the participants.
Upon issuance of notes in definitive form, the trustee is required to register
the notes in the name of the person or persons identified as the beneficial
owners, or their nominee, as the depositary shall direct, and cause the notes
to be delivered to the registered owner.
Arch and the trustee will not be liable for any delay by the holder of a
global note or the depositary in identifying the beneficial owners of notes.
Arch and the trustee may conclusively rely on instructions from the holder of a
global note or the depositary for all purposes and will be relying on those
instructions.
Same-Day Settlement and Payment
The indenture requires that payments of principal, premium, interest and
liquidated damages, if any on the notes represented by the global note be made
by wire transfer of immediately available funds to the accounts specified by
the holder of a global note. With respect to certificated securities, Arch will
make all payments of principal, premium, interest and liquidated damages, if
any, by wire transfer of immediately available funds to the accounts specified
by the holders of the certificated securities. If no such account is specified,
Arch will mail a check to the holder's registered address.
Registration Rights; Liquidated Damages
The exchange and registration rights agreement required Arch to file a
registration statement with the SEC on the appropriate form under the
Securities Act registering the new notes that are to be exchanged for old
notes. After this registration statement is declared effective, Arch will offer
to the holders of old notes who are able to make required representations the
opportunity to exchange their old notes for new notes. Arch will also file with
the SEC a second registration statement, known as a shelf registration
statement, to cover resales of the notes by holders who satisfy specified
conditions relating to the provision of information in connection with the
shelf registration statement, if
. Arch is not permitted to consummate the exchange offer because the
exchange offer is not permitted by applicable law or SEC policy or
. any holder of old notes notifies Arch within 19 days after consummation
of the exchange offer that
. it is prohibited by law or SEC policy from participating in the
exchange offer or
. it may not resell the new notes acquired by it in the exchange offer
to the public without delivering a prospectus and the prospectus
contained in the registration statement for the exchange offer is
not appropriate or available for such resales or
. it is a broker-dealer and owns notes acquired directly from Arch or an
affiliate of Arch.
Arch will use its best efforts to cause each required registration statement to
be declared effective as promptly as possible by the SEC. These requirements do
not apply to notes after
. the note has been exchanged for a new note in the exchange offer by a
person other than a broker-dealer,
. the resale of a new note, acquired in the exchange offer by a broker-
dealer, to a purchaser who has received from the broker-dealer a copy of
the prospectus contained in the registration statement for the exchange
offer,
. effective registration of the note under the Securities Act and disposal
of the note in accordance with the shelf registration statement or
114
<PAGE>
. distribution of a note to the public pursuant to Rule 144 under the
Securities Act.
The exchange and registration rights agreement further provides that
. Arch must use its best efforts to have the registration statement for
the exchange offer declared effective by the SEC by October 31, 1999,
. unless the exchange offer would violate applicable law or SEC policy,
Arch must commence the exchange offer and use its best efforts to issue
new notes, in exchange for all old notes that are tendered, within 30
business days after the registration statement is declared effective by
the SEC, and
. if obligated to file a shelf registration statement, Arch must use its
best efforts to file the shelf registration statement with the SEC
within 30 days after the filing obligation arises and in any event
before August 3, 1999 and to cause the shelf registration statement to
be declared effective by the SEC within 90 days after the obligation
arises.
Arch must pay liquidated damages to each noteholder if
. Arch fails to file either registration statement required by the
exchange and registration rights agreement by the date specified for
such filing,
. a registration statement is not declared effective by the SEC by the
target date specified for effectiveness,
. Arch fails to complete the exchange offer within 30 business days of the
target date for effectiveness or
. a registration statement is declared effective but then ceases to be
effective or usable for resales of notes during the periods specified in
the exchange and registration rights agreement.
Liquidated damages will accrue from the day that one of the defaults described
above first occurs until all defaults have been cured. During the first 90 days
immediately after a default first occurs, liquidated damages will be at a rate
of 25 basis points per year on the principal amount of the notes. The rate of
the liquidated damages will increase by an additional 25 basis points per year
on the principal amount of notes at the beginning of each subsequent 90-day
period, up to a maximum rate of liquidated damages of 100 basis points per year
on the principal amount of the notes. Arch will pay all accrued and unpaid
liquidated damages on each regular interest payment date to the global note
holder by wire transfer of immediately available funds or by federal funds
check and to holders of certificated securities by wire transfer to the
accounts specified by them or by mailing checks to their registered addresses
if no wire transfer accounts have been specified. Following the cure of all
defaults under the exchange and registration rights agreement, the accrual of
liquidated damages will cease.
Noteholders will be required to make specified representations to Arch, as
described in the exchange and registration rights agreement, in order to
participate in the exchange offer and will be required to deliver information
to be used in connection with the shelf registration statement and to provide
comments on the shelf registration statement within the time periods set forth
in the exchange and registration rights agreement in order to have their notes
included in the shelf registration statement and benefit from the provisions
about liquidated damages set forth above.
Certain Definitions
There are certain defined terms used in the indenture. You should read the
indenture for a full definition of all these terms, as well as other terms used
in this prospectus for which no definition is provided in this prospectus:
115
<PAGE>
Acquired debt means debt of a person
. existing at the time the person is merged with or into Arch or becomes a
subsidiary,
. assumed in connection with the acquisition of assets from the person or
. secured by a lien encumbering assets acquired from the person.
Affiliate means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the specified person. For the purposes of this definition,
control means the power to direct the management and policies of a person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise.
Applicable premium means, with respect to the notes on the day they are
repurchased pursuant to a special purchase offer, the greater of
. 1% of the then outstanding principal amount of such note, and
. the amount by which
. the present value at such time of the redemption price of such note
at April 15, 2004, as described under "Optional Redemption", plus
all required interest payments excluding accrued but unpaid interest
due on the note through April 15, 2004, computed using a discount
rate equal to the treasury rate plus 50 basis points, exceeds
. the then outstanding principal amount of such note.
Asset sale means any kind of transfer to any person, whether through sale,
issuance, conveyance, transfer, lease or other disposition, including
disposition by way of merger, consolidation or sale and leaseback transaction,
directly or indirectly, in one transaction or a series of related transactions,
of:
. any capital stock of any restricted subsidiary;
. all or substantially all of the properties and assets of Arch and its
restricted subsidiaries representing a division or line of business; or
. any other properties or assets of Arch or any restricted subsidiary,
other than in the ordinary course of business.
The term asset sale shall not include any transfer of properties or assets
. that is governed by the provisions of the indenture described under
"Consolidation, Merger or Sale of Assets",
. between or among Arch and its restricted subsidiaries,
. constituting an investment in a telecommunications business, if
permitted under the "Restricted Payments" covenant,
. representing obsolete or permanently retired equipment and
facilities or
. the gross proceeds of which, exclusive of indemnities, do not exceed
$1.0 million for any particular item or $2.0 million in the
aggregate for any fiscal year of Arch.
Attributable value means, with respect to any lease, the present value of the
obligations of the lessee of the property subject to the lease for rental
payments during the shorter of
. the remaining term of the lease, including any period for which the
lease has been extended or may be extended at the option of the lessor,
or
. the period during which the lessee is not entitled to terminate the
lease without penalty or upon payment of penalty if on the date of
determination it is the lessee's intention to terminate the lease when
it becomes entitled to do so. If the first event to occur is the
lessee's becoming eligible to terminate the lease upon payment of a
penalty, the rental payments shall include the penalty. In calculating
the present value of the rental payments, all amounts required to be
paid on account of
116
<PAGE>
maintenance and repairs, insurance, taxes, assessments, water, utilities
and similar charges shall be excluded. The present value should be
discounted at the interest rate implicit in the lease, or, if not known,
at Arch's incremental borrowing rate.
Average life means, with respect to amounts payable under any debt or
disqualified stock,
. the sum of the products of
. the number of years from the date of determination to the date or
dates of each principal payment times
. the amount of each such successive scheduled principal payment,
divided by
. the sum of all such principal payments.
Bank credit facilities means one or more credit or loan agreements or
facilities, including revolving credit facilities or working capital facilities
or term loans, whether now existing or created after the date of the indenture,
with a bank or other financial institution or group of banks or other financial
institutions, as such agreements or facilities may be amended, modified,
supplemented, increased, restated or replaced from time to time, and includes
without limitation the second amended and restated credit agreement (tranche A,
tranche B and tranche C facilities), dated as of June 29, 1998, among a
subsidiary of Arch, various lenders and agents, and The Bank of New York, as
administrative agent, together with all associated loan documents, as amended
as of September 14, 1998, December 8, 1998 and February 22, 1999, and as each
such agreement and document may be amended, restated, supplemented, refinanced,
increased or otherwise modified from time to time.
Capital lease obligation means, with respect to any person, an obligation
incurred in the ordinary course of business under or in connection with any
capital lease of real or personal property which has been recorded as a
capitalized lease in accordance with GAAP.
Capital stock of any person means
. any and all shares, interests, partnership interests, participation,
rights in or other equivalents, however designated, of such person's
equity interest, however designated, and
. any rights, other than debt securities convertible into capital stock,
warrants or options exchangeable for or convertible into such capital
stock, whether now outstanding or issued after the date of the
indenture.
Change of control means the occurrence of any of the following events:
. any person or group, as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act, becomes the beneficial owner, directly or
indirectly, of more than a majority of the voting power of all classes
of voting stock of Arch or its parent company; the term beneficial owner
is as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person shall be deemed to have beneficial ownership of all
securities that such person has the right to acquire, whether such right
is exercisable immediately or only after the passage of time;
. Arch or its parent company consolidates with, or merges with or into,
another person or conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any person, or any person
consolidates with, or merges with or into, Arch or its parent company,
in any such event pursuant to a transaction in which the outstanding
voting stock of Arch or its parent company is converted into or
exchanged for cash, securities or other property, except any transaction
where
. the outstanding voting stock of Arch or its parent company is not
converted or exchanged at all, except to the extent necessary to
reflect a change in the jurisdiction of incorporation, or is
converted into or exchanged for
. capital stock, other than disqualified stock, of the surviving or
transferee person or
117
<PAGE>
. cash, securities or other property, other than capital stock
described in the foregoing clause of the surviving or transferee
person in an amount that could be paid as a restricted payment as
described under the "Restricted Payments" covenant and
immediately after such transaction, no person or group, as such
terms are used in Sections 13(d) and 14(d) of the Exchange Act,
is the beneficial owner, as defined above, directly or
indirectly, of more than a majority of the total outstanding
voting stock of the surviving or transferee person;
. during any consecutive two-year period, individuals who at the beginning
of such period constituted the board of directors of Arch or its parent
company, together with any new directors whose election to the board of
directors, or whose nomination for election by the stockholders of Arch
or its parent company was approved by a vote of two thirds of the
directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority of the board of directors of Arch or its parent company then in
office; or
. Arch or its parent company is liquidated or dissolved or adopts a plan
of liquidation or dissolution other than in a transaction which complies
with the provisions described under "--Consolidation, Merger or Sale of
Assets" below.
Consolidated adjusted net income means, for any period, the net income or net
loss of Arch and its restricted subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP, adjusted to the extent included in
calculating such net income or loss by excluding
. any net after-tax extraordinary gains or losses, less all related fees
and expenses,
. any net after-tax gains or losses, less all related fees and expenses,
attributable to asset sales,
. the portion of net income or loss of any unrestricted subsidiary or
other person except for Arch or a restricted subsidiary, in which Arch
or any restricted subsidiary has an ownership interest, except to the
extent of the amount of dividends or other distributions actually paid
to Arch or any restricted subsidiary in cash dividends or distributions
by such person during such period, and
. the net income or loss of any person combined with Arch or any
restricted subsidiary on a "pooling of interests" basis attributable to
any period prior to the date of combination.
Consolidated cash flow means consolidated adjusted net income increased,
without duplication, by
. consolidated interest expense, plus
. consolidated income tax expense, plus
. consolidated non-cash charges.
Consolidated cash flow ratio means the ratio of
. the aggregate principal amount of debt of Arch and its restricted
subsidiaries on a consolidated basis outstanding as of the date of
calculation to
. consolidated cash flow for the most recently ended full fiscal quarter
multiplied by four.
Consolidated income tax expense means the provision for federal, state, local
and foreign income taxes of Arch and its restricted subsidiaries as determined
on a consolidated basis in accordance with GAAP.
Consolidated interest expense means, without duplication, the sum of
. the amount which would be set forth opposite the caption "interest
expense", or any like caption, on a consolidated statement of operations
of Arch and its restricted subsidiaries, in conformity with GAAP
including,
. amortization of debt discount,
. the net cost of interest rate contracts including amortization of
discounts,
118
<PAGE>
. the interest portion of any deferred payment obligation,
. amortization of debt issuance costs,
. the interest component of capital lease obligations of Arch and its
restricted subsidiaries, and
. the portion of any rental obligation of Arch and its restricted
subsidiaries in respect of any sale and leaseback transaction
allocable during such period to interest expense, determined as if
it were treated as a capital lease obligation, plus
. all interest on any debt of any other person guaranteed and paid by Arch
or any of its restricted subsidiaries.
Consolidated interest expense will not, however, include any gain or loss from
extinguishment of debt, including write-off of debt issuance costs.
Consolidated non-cash charges means, the aggregate depreciation, amortization
and other non-cash expenses of Arch and its restricted subsidiaries reducing
consolidated adjusted net income, determined on a consolidated basis in
accordance with GAAP, excluding any non-cash charge that requires an accrual of
or reserve for cash charges for any future period.
The debt of a person means, without duplication,
. every obligation of that person for money borrowed,
. every obligation of that person evidenced by bonds, debentures, notes or
other similar instruments,
. every reimbursement obligation of that person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of that person,
. every obligation of that person issued or assumed as the deferred
purchase price of property or services,
. the attributable value of every capital lease obligation and sale and
leaseback transaction of that person,
. all disqualified stock of that person valued at its maximum fixed
repurchase price, plus accrued and unpaid dividends and
. every guarantee by that person of an obligation of the type referred to
in the previous six clauses, of another person and dividends of another
person.
An obligation constitutes debt of a person whether recourse is to all or a
portion of that person's assets, and whether or not contingent. For purposes of
this definition, the "maximum fixed repurchase price" of any disqualified stock
that does not have a fixed repurchase price will be calculated in accordance
with the terms of such disqualified stock as if such disqualified stock were
repurchased on any date on which debt is required to be determined pursuant to
the indenture, and if the price is based upon, or measured by, the fair market
value of such disqualified stock, the fair market value will be determined in
good faith by the board of directors of the issuer of such disqualified stock.
In no case, however, will trade accounts payable and accrued liabilities
arising in the ordinary course of business and any liability for federal, state
or local taxes or other taxes owed by a person be considered debt for purposes
of this definition. The amount outstanding at any time of any debt issued with
original issue discount is the aggregate principal amount of such debt, less
the remaining unamortized portion of the original issue discount of such debt
at such time, as determined in accordance with GAAP.
Default means any event that is, or after notice or passage of time or both
would be, an event of default.
Disinterested director means, when Arch's board of directors is required to
deliver a resolution under the indenture regarding any transaction or series of
transactions, a director who does not have any material direct or indirect
financial interest in or with respect to the transaction or series of
transactions, other than solely because of that director's ownership of capital
stock or other securities of Arch.
119
<PAGE>
Disqualified stock means any class or series of capital stock that
. is, or upon the happening of an event or passage of time would be,
required to be redeemed before the final stated maturity of the notes or
. is redeemable at the option of its holder at any time before final
stated maturity of the notes, or
. is convertible into or exchangeable at the option of its holder for debt
securities at any time before final stated maturity of the notes,
either by its terms, by the terms of any security into which it is convertible
or exchangeable at the option of the holder thereof or by contract or
otherwise.
Equity offering means an offering of equity securities of Arch or its parent
company for cash to persons other than Arch or its subsidiaries.
GAAP means generally accepted accounting principles in the United States,
consistently applied, that are in effect on the date of the indenture.
Government securities means direct obligations of the United States of
America, obligations fully guaranteed by the United States of America, or
participation in pools consisting solely of obligations of or obligations
guaranteed by the United States of America, if
. the full faith and credit of the United States of America is pledged to
back payment of the guarantee or obligations and
. the securities are not callable or redeemable at the option of their
issuer.
Guarantee means
. a guarantee, direct or indirect, in any manner, of any part or all of an
obligation except by endorsement of negotiable instruments for
collection in the ordinary course of business and
. an agreement, direct or indirect, contingent or otherwise, whose
practical effect is to assure in any way the payment or performance of
all or any part of an obligation or payment of damages in the event of
non-performance, including the obligation to reimburse amounts drawn
down under letters of credit securing such obligations.
Incur means, to incur, create, issue, assume, guarantee or otherwise become
liable for or with respect to, or become responsible for, the payment of,
contingently or otherwise, a debt. However, the accrual of interest or the
accretion of original issue discount shall not be considered an incurrence of
debt.
Investment means, directly or indirectly,
. any advance, loan or capital contribution to any person, the purchase of
any stock, bonds, notes, debentures or other securities of any person,
the acquisition, by purchase or otherwise, of all or substantially all
of the business or assets or stock or other evidence of beneficial
ownership of any person, the guarantee of any obligation of, any person
or the making of any investment in any person,
. the designation of any restricted subsidiary as an unrestricted
subsidiary and
. the transfer of any assets or properties from Arch or a restricted
subsidiary to any unrestricted subsidiary, other than the transfer of
assets or properties in the ordinary course of business.
However, investments will not include extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
Lien means any mortgage, charge, pledge, statutory lien, other lien,
privilege, security interest, hypothecation, assignment for security, claim,
preference, priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. The
120
<PAGE>
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement will be considered to be a lien on the
assets sold or leased.
Maturity means the date on which any principal of a note becomes due and
payable as provided in the note or in the indenture, whether at the stated
maturity of the principal of the note or by declaration of acceleration, call
for redemption, purchase or otherwise.
The term MobileMedia acquisition includes the merger of MobileMedia into a
subsidiary of Arch's parent company, the related rights offerings of the parent
company's stock, and additional borrowings under the bank credit facilities.
The net cash proceeds of any asset sale are the proceeds of such sale in the
form of cash or cash equivalents, including payments in respect of deferred
payment obligations when received in the form of cash or cash equivalents, or
stock or other assets when disposed for cash or cash equivalents, except to the
extent that such obligations are financed or sold by Arch or any restricted
subsidiary with recourse to Arch or any restricted subsidiary, net of
. brokerage commissions, legal and investment banking fees and expenses
and other fees and expenses related to the asset sale,
. provisions for all taxes payable as a result of the asset sale,
. payments made to retire debt that is secured by the assets that are
sold,
. amounts required to be paid to any person other than Arch or any
restricted subsidiary owning a beneficial interest in the assets that
are sold and
. appropriate amounts to be provided by Arch or any restricted subsidiary
as a reserve required in accordance with GAAP against any liabilities
associated with the asset sale and retained by the seller after the
asset sale, including pension and other post-employment benefit
liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with the
asset sale.
Permitted investments means any of the following:
. investments in
. any evidence of debt consisting of government securities with a
maturity of 180 days or less;
. certificates of deposit or acceptances with a maturity of 180
days or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and
undivided profits of not less than $500,000,000; and
. commercial paper with a maturity of 180 days or less issued by a
corporation that is not an affiliate of Arch and is organized
under the laws of any state of the United States or the District
of Columbia and having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services;
. investments by Arch or any restricted subsidiary in another person,
if as result of such investment the other person
. becomes a restricted subsidiary or
. is merged or consolidated with or into Arch or a restricted
subsidiary or transfers or conveys all or substantially all of
its assets to, Arch or a restricted subsidiary;
. investments by Arch or any restricted subsidiary in another person
made pursuant to the terms of a definitive merger, stock purchase or
similar agreement providing for a business combination transaction
between Arch or a restricted subsidiary and such person if
121
<PAGE>
. within 365 days of the date of the investment, such other person,
pursuant to the terms of such agreement, becomes a restricted
subsidiary or is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to,
Arch or a restricted subsidiary, or
. if the agreement is terminated before the transactions it
contemplates are closed, Arch or such restricted subsidiary
liquidates such Investment within 365 days of such termination.
. investments by Arch or any of the restricted subsidiaries in one
another;
. investments in assets owned or used in the ordinary course of
business;
. investments in existence on June 3, 1999; and
. promissory notes received as a result of asset sales permitted under
the "Asset Sales" covenant.
Permitted liens means any of the following:
. liens on property or assets of Arch or a restricted subsidiary
securing debt under or with respect to the bank credit facilities or
which are required to secure Arch's 9 1/2% senior notes and 14%
senior notes solely and as a direct result of the granting of liens
with respect to the bank credit facilities;
. liens in existence on the issuance date of the notes, except for
liens securing debt under the bank credit facilities existing on the
issuance date of the notes;
. liens securing the notes;
. liens on property or assets of a restricted subsidiary securing debt
of the restricted subsidiary other than guarantees with respect to
debt of Arch;
. any interest or title of a lessor under any capital lease obligation
or sale and leaseback transaction under which Arch is lessee so long
as the attributable value secured by the lien does not exceed the
principal amount of debt permitted under the "Incurrence of
Indebtedness" covenant;
. liens securing acquired debt created before the incurrence of such
debt by Arch and not in connection with or in contemplation of
incurring such debt if the lien does not extend to any property or
assets of Arch other than the assets acquired in connection with the
incurrence of the acquired debt;
. liens arising from purchase money mortgages and purchase security
interests incurred in the ordinary course of the business of Arch,
if
. the related debt is not secured by any property or assets of Arch
other than the property and assets that are acquired and
. the lien securing the debt is created within 60 days of the
acquisition;
. statutory liens or landlords' and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other similar
liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by
appropriate proceedings, if Arch has made whatever reserve or other
appropriate provision may be required in conformity with GAAP;
. liens for taxes, assessments, government charges or claims that are
being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted, if Arch has made whatever
reserve or other appropriate provision may be required in conformity
with GAAP;
. liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and
other types of social security;
. rights of banks to set off deposits against debts owed to them;
122
<PAGE>
. other liens incidental to the conduct of the business of Arch or any
of its subsidiaries, or the ownership of their assets that do not
materially detract from the value of the property subject to the
liens;
. liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal
bonds, government contracts, performance bonds and other obligations
of a similar nature incurred in the ordinary course of business,
other than contracts for the payment of money;
. easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the
business of Arch and the restricted subsidiaries, taken as a whole,
incurred in the ordinary course of business;
. liens arising by reason of any judgment, decree or order of any
court so long as such lien is adequately bonded and any appropriate
legal proceedings that may have been duly initiated for the review
of the judgment, decree or order have not been finally terminated or
the period within which such proceedings may be initiated has not
expired; and
. any extension, renewal or replacement, in whole or in part, of any
lien described in the previous 15 clauses if any such extension,
renewal or replacement does not extend to any additional property or
assets.
Person means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision of a government.
Property of any person means all types of real, personal, tangible,
intangible or mixed property owned by that person whether or not included in
the most recent consolidated balance sheet of that person under GAAP.
Public debt means any debt represented by debt securities issued by Arch in
connection with a public offering, whether or not underwritten, or a private
placement if such private placement is underwritten for resale pursuant to Rule
144A, Regulation S or otherwise under the Securities Act or sold on an agency
basis by a broker-dealer or one of its affiliates. However, the term public
debt does not include any debt under the bank credit facilities or any other
commercial bank borrowings or similar borrowings, recourse transfers of
financial assets, capital leases or other types of borrowings incurred in a
manner not customarily viewed as a securities offering.
Qualified equity interest means any qualified stock and all warrants, options
or other rights to acquire qualified stock but excludes any debt security that
is convertible into or exchangeable for capital stock.
Qualified public debt means Arch's 12 3/4% senior notes and any other public
debt with covenants applicable to Arch and its subsidiaries that correspond to
the parent limited covenants and that are no less restrictive on Arch and its
subsidiaries than the covenants contained in the indenture for the 12 3/4%
notes, as reasonably determined in good faith by the boards of directors of
Arch and its parent company and evidenced in a resolution of those boards.
Qualified stock of any person means any and all capital stock of such person
other than disqualified stock.
Qualified waiver means an amendment, waiver, consent or other agreement, or
series of related amendments, waivers, consents or other agreements, in respect
of the terms of any or all of the covenants under the terms of outstanding
qualified public debt that correspond with the parent limited covenants, where
the effect of such amendment, waiver, consent or agreement, or series of
related amendments, waivers, consents or other agreements, is that any or all
of such covenants are less restrictive to Arch and its subsidiaries than the
covenants set forth in the indenture for Arch's 12 3/4% senior notes as in
effect upon issuance of the notes, as reasonably determined in good faith by
the boards of directors of Arch and its parent company, and evidenced in a
resolution of those boards.
123
<PAGE>
Related person means any beneficial owner of 10% or more of Arch's voting
stock.
Restricted subsidiary means any subsidiary other than an unrestricted
subsidiary.
Rights offerings means the offerings of rights to purchase common stock of
Arch's parent company in connection with the MobileMedia acquisition.
Sale and leaseback transaction means any transaction or series of related
transactions pursuant to which a person sells or transfers any property or
asset in connection with the leasing of the property or asset to the seller or
transferor or the resale of the property or asset against installment payments.
Significant subsidiary means any restricted subsidiary that, together with
its subsidiaries,
. accounted for more than 10% of the consolidated revenues of Arch and
its restricted subsidiaries during Arch's most recent fiscal year or
. as of the end of that fiscal year, was the owner of more than 10% of
the consolidated assets of Arch and its restricted subsidiaries, all
as set forth on the most recently available consolidated financial
statements of Arch for that fiscal year.
Stated maturity means
. when used with respect to any note or any installment of interest on
a note, the date specified in such note as the fixed date on which
the principal of the note or such installment of interest is due and
payable and
. when used with respect to any other debt, means the date specified
in the instrument governing the debt as the fixed date on which the
principal of the debt or any installment of interest on the debt is
due and payable.
Subordinated debt means debt of Arch that is subordinated in right of payment
to the notes.
Subsidiary means a person if a majority of the equity ownership or voting
stock of that person is owned, directly or indirectly, by Arch and/or one or
more other subsidiaries of Arch.
Treasury rate means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity most nearly equal to
the period from the special purchase date to April 15, 2004. However, if the
period from the special purchase date to April 15, 2004 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the treasury rate shall be obtained by linear
interpolation, calculated to the nearest one-twelfth of a year, from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the special purchase date to
April 15, 2004 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of one
year shall be used. United States Treasury securities will be selected on the
basis of information compiled and published in the most recent Federal Reserve
Statistical Release H.15(519) which has become publicly available at least two
business days before the special purchase date, or, if such Statistical Release
is no longer published, any publicly available source or similar market data.
Unrestricted subsidiary means
. any subsidiary that is designated by Arch's board of directors as an
unrestricted subsidiary in accordance with the "Unrestricted
Subsidiaries" covenant and
. any subsidiary of an unrestricted subsidiary.
Voting stock means any class or classes of capital stock whose holders have
the general voting power under ordinary circumstances to elect at least a
majority of the board of directors, managers or trustees of any person,
irrespective of whether or not, at the time, stock of any other class or
classes shall have, or might have, voting power if any contingency happens.
Governing Law
The indenture, the notes, the security agreement and the exchange and
registration rights agreement are governed by the laws of the State of New
York, without regard to conflicts of laws principles recognized in New York,
and are to be construed in accordance with those laws.
124
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion addresses the material United States federal income
tax considerations relating to the exchange offer and the purchase, ownership
and disposition of the notes. This discussion is based on the provisions of the
Internal Revenue Code, the applicable treasury regulations promulgated or
proposed under the tax code, judicial authority and current administrative
rulings and practice. All of these authorities may change without notice,
possibly on a retroactive basis. This summary deals only with holders that will
hold notes as capital assets within the meaning of Section 1221 of the tax
code. It does not address tax considerations applicable to investors that may
be subject to special tax rules, such as banks and other financial
institutions; tax-exempt organizations; insurance companies; traders or dealers
in securities or currencies; custodians, nominees or similar financial
intermediaries holding notes for others; or persons that will hold notes as a
position in a hedging transaction, straddle or conversion transaction for tax
purposes. This summary does not discuss the tax consequences of any conversion
of currency into or out of the United States dollar as such a conversion
relates to the purchase, ownership or disposition of the notes. Arch has not
sought any ruling from the Internal Revenue Service with respect to the
statements made and the conclusions reached in the following summary. There can
be no assurance that the IRS will agree with such statements and conclusions.
INVESTORS IN THE NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF
ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX
TREATY.
Consequences of the Exchange Offer to Holders
Hale and Dorr LLP, counsel to Arch, has rendered an opinion to Arch that the
exchange of old notes for new notes pursuant to the exchange offer will not be
taxable to an exchanging holder for federal income tax purposes. As a result,
an exchanging holder
. will not recognize taxable gain or loss as a result of exchanging old
notes for new notes pursuant to the exchange offer;
. the holding period of the new notes will include the holding period of
the old notes exchanged for them; and
. the adjusted tax basis of the new notes will be the same as the adjusted
tax basis of the old notes exchanged for them immediately before the
exchange.
The exchange offer will result in no federal income tax consequences to a
holder of notes who does not participate in the exchange offer. A copy of the
opinion is attached as Exhibit 8.1 to the registration statement of which this
prospectus is a part.
United States Holders
A United States holder is the beneficial owner of a note that for United
States federal income tax purposes is
. a citizen or resident of the United States;
. a corporation created or organized in or under the laws of the United
States or any state;
. a partnership or other business entity created or organized in or under
the laws of the United States or any state and that is properly treated
as a United States person for tax purposes;
. an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source; or
125
<PAGE>
. a trust whose administration is subject to the primary supervision of a
United States court and with respect to which one or more United States
persons have the authority to control all substantial decisions.
An individual may, subject to certain exceptions, be deemed to be a United
States resident, as opposed to a non-resident alien, because he or she is
present in the United States on at least 31 days in the calendar year and for
an aggregate of at least 183 days during a three-year period ending in the
current calendar year, counting for such purposes all of the days present in
the current year, one-third of the days present in the immediately preceding
year, and one-sixth of the days present in the second preceding year. Resident
aliens are subject to United States federal income tax as if they were United
States citizens. A holder that is not a United States holder is referred to as
a non-United States holder.
Payment of Interest
Stated interest on a note generally will be includible in the income of a
United States holder as ordinary income at the time such interest is received
or accrued, in accordance with the holder's method of accounting for United
States federal income tax purposes.
The notes were issued at a discount from their stated principal amount. The
amount of the discount is equal to the difference between the stated redemption
price at maturity of a note and its issue price. In addition to stated
interest, a holder must include the discount in gross income as ordinary
interest income on an economic accrual basis, without regard to the holder's
regular method of accounting. The discount must, therefore, be included in
income before the receipt of the cash representing that income, and the
discount will not be includible in income again when actually received. The
amount includible in gross income is the sum of the daily portions of the
discount generally calculated under a constant yield method for all days during
a taxable year in which a holder owns a note.
The issue price of a note is generally the initial offering price at which a
substantial amount of the notes is sold. The stated redemption price at
maturity is the sum of all payments on the note other than any qualified stated
interest payments. Qualified stated interest is defined as any one of a series
of payments equal to the product of
. the outstanding principal balance of the note times
. a single fixed rate, or certain variable rates of interest, that is
unconditionally payable at least annually.
United States holders should consult their own tax advisors regarding tax
considerations relating to the discount.
Market Discount
United States holders should be aware that the resale of a note may be
affected by the market discount rules of the tax code. Under these rules, a
subsequent purchaser of a note acquiring the note at a market discount
generally would be required to include as ordinary income a portion of the gain
realized upon the disposition or retirement of the note to the extent of the
market discount that has accrued while the debt instrument was held by the
purchaser.
A purchaser at a market discount includes the purchase of a note after its
original issuance at a price less than the note's stated redemption price at
maturity. The amount of market discount, if any, will generally equal the
excess of:
. the sum of the issue price of the note and the aggregate amount of the
original issue discount includible in the gross income of all United
States holders, over
. the purchase price.
126
<PAGE>
Gain recognized on the disposition, including a redemption, by a United States
holder of a note that has accrued market discount will be treated as ordinary
income, and not capital gain, to the extent of the accrued market discount, but
only if the amount of market discount exceeds a statutorily-defined de minimus
amount.
Under the de minimis exception, there is no market discount on a note if the
excess of the stated redemption price at maturity of the note over the
holders's tax basis in the note is less than 0.25% of the stated redemption
price at maturity multiplied by the number of complete years after the
acquisition date to the note's date of maturity. Unless the holder elects
otherwise, as described below, the accrued market discount would be the amount
calculated by multiplying the market discount by a fraction;
. the numerator of which is the number of days the obligation has been
held by the holder; and
. the denominator of which is the number of days after the holder
acquisition of the obligation up to and including its maturity date.
A United States holder of a note acquired at market discount will be deemed
to have realized an amount equal to the fair market value of the note if the
holder disposes of the note in specified transactions other than a sale,
exchange or involuntary conversion, even though the transaction is otherwise
non-taxable (for example, a gift). The United States holder will be required to
recognize as ordinary income any accrued market discount to the extent of the
deemed gain. A holder of a note acquired at a market discount also may be
required to defer the deduction of all or a portion of the interest on any
indebtedness incurred or maintained to purchase or carry the note until it is
disposed of in a taxable transaction.
A United States holder of a note acquired at market discount may elect to
include the market discount in income as it accrues. This election would apply
to all market discount obligations acquired by the electing United States
holder on or after the first day of the first taxable year to which the
election applies. The election may be revoked only with the consent of the IRS.
If a United States holder of a note elects to include market discount in income
currently, the rules discussed above with respect to ordinary income
recognition resulting from sales and certain other dispositions and to deferral
of interest deductions would not apply.
Market Premium
A note may also be acquired at a bond premium, generally equal to the excess,
if any, of its tax basis over the amount payable at maturity or, if a smaller
premium would result, on an earlier call date. A United States holder may elect
to amortize the bond premium, in which case amortizable bond premium is
allocated to payments of interest and treated as an offset to interest income.
If an election to amortize bond premium is not made, a United States holder
must include the full amount of each interest payment in income in accordance
with its regular method of tax accounting and will generally receive a tax
benefit from the bond premium only upon computing its gain or loss upon the
sale or other disposition or payment of the principal amount of the note.
Sale, Exchange or Redemption of Notes
Upon the sale, exchange or redemption of a note, a United States holder
generally will recognize capital gain or loss equal to the difference between
. the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption, except to the extent such
amount is attributable to accrued interest income, which is taxable as
ordinary income; and
. such holder's adjusted tax basis in the note.
A United States holder's adjusted tax basis in a note generally will equal the
cost of the note to such holder, less any principal payments received by such
holder plus the discount previously included in income. Such capital gain or
loss will be long-term if the United States holder's holding period is more
than 12 months and
127
<PAGE>
will be short-term if the holding period is 12 months or less. Long-term
capital gains recognized by individuals are generally taxed at a maximum
federal tax rate of 20%, and short-term capital gains are generally taxed at a
maximum federal tax rate of 39.6%.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
noncorporate United States holders with respect to payments of principal,
premium, interest and original issue discount on a note, and to payments of
the proceeds of the sale of a note. The receipt of such payments may be
subject to "backup withholding" at a 31% rate under certain circumstances.
Backup withholding generally applies only if the holder
. fails to furnish his or her Social Security or other taxpayer
identification number within a reasonable time after the request for it;
. furnishes an incorrect taxpayer identification number;
. is notified by the IRS that he or she has failed to report properly
interest, dividends or original issue discount; or
. fails, under specified circumstances, to provide a certified statement,
signed under penalties of perjury, that the taxpayer identification
number provided is the correct number and that he or she is not subject
to backup withholding.
Any amounts withheld under the backup withholding rules from a payment to a
United States holder will be allowed as a credit against such holder's United
States federal income tax and may entitle the holder to a refund, provided
that the required information is furnished to the IRS.
Non-United States Holders
Payment of Interest
Generally, interest income of a non-United States holder that is not
effectively connected with a United States trade or business will be subject
to a withholding tax at a 30% rate or any lower rate that may be prescribed by
an income tax treaty between the United States and the holder's country of
residence. However, interest paid on a note to a non-United States holder will
qualify for the portfolio interest exemption and, therefore, will not be
subject to United States federal income tax or withholding tax if
. such interest income is not effectively connected with a United States
trade or business of the non-United States holder and
. the non-United States holder
. does not actually or constructively own 10% or more of the combined
voting power of all classes of stock of Arch entitled to vote,
. is not a controlled foreign corporation related to Arch, actually or
constructively through stock ownership under section 864(d)(4) of
the tax code,
. is not a bank which acquired the note in consideration for an
extension of credit made pursuant to a loan agreement entered into
in the ordinary course of business, and
. either
. provides to Arch or its agent a Form W-8BEN or a suitable
substitute form signed under penalties of perjury that includes
its name and address and certifies as to the holder's non-United
States status, or
. provides a Form W-8BEN or a suitable substitute form or other
appropriate documentation signed under the penalties of perjury
to a qualified intermediary such as a securities clearing
organization, bank or other financial institution, which in turn
provides to Arch or its agent a Form W-8IMY.
128
<PAGE>
Under an exception to the original issue discount rules described above, the
discount which accrues to the benefit of a non-United States holder will not be
taxed currently as interest income for United States federal income tax
purposes. Rather, the non-United States holder will be subject to United States
tax at the time of payment, sale, or exchange of a note at a 30% rate, or, if
applicable, a lower treaty rate, on the discount which accrued while the note
was held by the non-United States holder. The discount will qualify for the
portfolio interest exemption under the same conditions described in the
preceding paragraph.
A non-United States holder which does not qualify for the "portfolio interest
exemption" may nevertheless be entitled to an exemption from, or reduction on
the rate of, the United States withholding tax on the interest and discount if
such holder
. resides in a jurisdiction which has a favorable income tax treaty with
the United States,
. satisfies the conditions for the application of such treaty, and
. provides to Arch or its agent a Form W-8BEN or a suitable substitute
form.
Except to the extent that an applicable treaty otherwise provides, a non-
United States holder generally will be taxed in the same manner as a United
States holder with respect to interest and discount if the interest and
discount is effectively connected with a United States trade or business of the
non-United States holder. Effectively connected interest and discount received
by a corporate non-United States holder may also, under certain circumstances,
be subject to an additional branch profits tax at a 30% rate or, if applicable,
a lower treaty rate. Even though such effectively connected interest and
discount is subject to income tax, and may be subject to the branch profits
tax, it is not subject to withholding if the non-United States holder delivers
a properly executed IRS Form W-8ECI to Arch or its agent.
Sale, Exchange or Redemption of Notes
A non-United States holder of a note will generally not be subject to United
States federal income tax or withholding tax on any gain realized on the sale,
exchange or redemption of the note, other than gain attributable to accrued
interest or discount, unless
. the gain is effectively connected with a United States trade or business
of the non-United States holder,
. in the case of a non-United States holder who is an individual, the
holder is present in the United States for a period or periods
aggregating 183 days or more during the taxable year of the disposition,
or
. the holder is subject to tax pursuant to the provisions of the tax code
applicable to certain United States expatriates.
The amount of gain realized upon the sale, exchange, or redemption of a note
may include amounts attributable to accrued interest and the discount. Gain
attributable to accrued interest and discount will be taxable, if at all, as
described above under "--Non-United States Holders--Payment of Interest".
Information Reporting and Backup Withholding
United States information reporting requirements and backup withholding will
not apply to payments of principal or interest on a note to a non-United States
holder made outside the United States. United States information reporting
requirements and backup withholding will not apply to payments of principal or
interest on a note to a non-United States holder made within the United States
if the Form W-8BEN described in "--Non-United States Holders--Payment of
Interest" is duly provided by such holder, provided that Arch or its agent does
not have actual knowledge that the holder is a United States person.
Information reporting requirements and backup withholding will not apply to
any payment of the proceeds of the sale of a note effected outside the United
States by a foreign office of a broker, as that term is defined in applicable
treasury regulations, if such broker is neither
129
<PAGE>
. a foreign office of a United States broker, nor
. a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United
States, nor
. a controlled foreign corporation within the meaning of section 957(a) of
the tax code, and the broker has documentary evidence of the holder's
foreign status, has no actual knowledge that the evidence is false, and
meets certain other conditions.
Payment of the proceeds of any such sale effected outside the United States by
a foreign office of a United States broker or by a foreign office of a foreign
broker that is described in the second or third clauses of the preceding
sentence will not be subject to backup withholding, but will be subject to
information reporting requirements unless such broker has documentary evidence
in its records that the beneficial owner is a non-United States holder and
certain other conditions are met, or the beneficial owner otherwise establishes
an exemption. Payment of the proceeds of any such sale to or through the United
States office of a broker is subject to information reporting and backup
withholding requirements, unless the beneficial owner of the note provides the
Form W-8BEN described in "--Non-United States Holders--Payment of Interest" or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that such owner is a United States holder or that the
conditions of an exemption are not in fact satisfied.
Tax consequences may differ from those described above for a non-United
States holder who provides a Form W-8BEN or acceptable substitute therefor but
fails to renew such form, after its expiration, in accordance with applicable
treasury regulations.
Any amounts withheld under the backup withholding rules from a payment to a
non-United States holder would be allowed as a refund or a credit against the
holder's United States federal income tax liability, provided the required
information is timely furnished to the IRS.
130
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with the resale of new notes received in exchange for market-making
activities or other trading activities. Arch has agreed that for a period not
less than one year after the expiration date of the exchange offer, or such
shorter period as will terminate when all new notes acquired by participating
broker-dealers, as that term is defined in the exchange and registration rights
agreement, have been resold by such broker-dealers, it will make this
prospectus, as amended or supplemented, available to any broker-dealer that
requests it in the letter of transmittal for use in connection with any such
resale. In addition, until October 4, 1999 all dealers effecting transactions
in new notes may be required to deliver a prospectus.
Arch will not receive any proceeds from any sale of new notes by broker-
dealers or any other persons. New notes received by broker-dealers for their
own account pursuant to the exchange offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the new notes or a combination
of such methods of resale, at market prices prevailing at the time of resale,
at prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such new notes. Any
broker-dealer that resells new notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any profit on any such
resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act
because it acknowledges that it will deliver a prospectus or because it
delivers a prospectus,
Arch has agreed to pay all expenses incident to Arch's performance and
compliance with the exchange and registration rights agreement, including the
expenses of one counsel for the holders of the old notes and will indemnify the
holders of old notes, including any broker-dealers, and various parties related
to such holders, against certain liabilities, including liabilities under the
Securities Act.
131
<PAGE>
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for Arch by Hale
and Dorr LLP, 60 State Street, Boston, Massachusetts.
EXPERTS
The financial statements of Arch included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports which are included in this prospectus in reliance upon their
authority as experts in accounting and auditing in giving those reports.
Ernst & Young LLP, independent auditors, have audited MobileMedia's
consolidated financial statements at December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, as set forth in their
report. Their report contains an explanatory paragraph describing conditions
that raise substantial doubt about MobileMedia's ability to continue as a going
concern as described in Note 1 of MobileMedia's notes to consolidated financial
statements. We have included MobileMedia's financial statements in the
prospectus and registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
The descriptions of the regulatory requirements under the Communications Act
and associated regulations set forth under "Risk Factors--Government regulation
may burden operations" and "Industry Overview--Regulation", except for matters
that are unique to MobileMedia, have been included under the authority of
Wilkinson, Barker, Knauer LLP, as experts in telecommunications law. FCC
matters unique to MobileMedia included in the description of these regulatory
requirements have been included under the authority of Wiley, Rein & Fielding
as experts in telecommunications law. Stockholders of Arch should not rely on
Wilkinson, Barker, Knauer LLP or Wiley, Rein & Fielding with respect to any
other matters.
132
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Arch Communications, Inc. and Subsidiaries
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited).................................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-4
Consolidated Statements of Stockholder's Equity for Each of the Three
Years in the Period Ended December 31, 1998 and for the Three Months
Ended March 31, 1999 (unaudited)........................................ F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-6
Notes to Consolidated Financial Statements............................... F-7
MobileMedia Communications, Inc. and Subsidiaries
Report of Independent Auditors........................................... F-19
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited).................................................... F-20
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-21
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
Each of the Three Years in the Period Ended December 31, 1998 and for
the Three Months Ended March 31, 1999 (unaudited)....................... F-22
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998 and for the Three Months Ended March 31,
1998 and 1999 (unaudited)............................................... F-23
Notes to Consolidated Financial Statements............................... F-24
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To Arch Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Arch
Communications, Inc., a 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
21(b)(a) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 24, 1999 (except with respect to the matters discussed in Note 12, as
to which the date is June 28, 1999)
F-2
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
--------------------- -----------
1997 1998 1999
---------- --------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 1,887 $ 22 $ 10,478
Accounts receivable (less reserves of
$5,744, $6,583 and $6,173 in 1997, 1998
and 1999, respectively).................. 30,147 30,753 30,757
Inventories............................... 12,633 10,319 9,803
Prepaid expenses and other................ 4,917 8,007 9,348
---------- --------- --------
Total current assets.................... 49,584 49,101 60,386
---------- --------- --------
Property and equipment, at cost:
Land, buildings and improvements.......... 10,089 10,480 10,539
Paging and computer equipment............. 361,713 400,312 411,351
Furniture, fixtures and vehicles.......... 16,233 17,381 17,673
---------- --------- --------
388,035 428,173 439,563
Less accumulated depreciation and
amortization............................. 146,542 209,128 220,955
---------- --------- --------
Property and equipment, net............... 241,493 219,045 218,608
---------- --------- --------
Intangible and other assets (less accumu-
lated amortization of $258,856,
$368,903 and $383,039 in 1997, 1998 and
1999, respectively)........................ 718,969 626,439 594,967
---------- --------- --------
$1,010,046 $ 894,585 $873,961
========== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt...... $ 24,513 $ 1,250 $ 1,250
Accounts payable.......................... 22,486 25,683 26,564
Accrued restructuring charge.............. -- 11,909 11,032
Accrued expenses.......................... 11,894 11,689 10,068
Accrued interest.......................... 11,174 20,922 16,886
Customer deposits......................... 6,150 4,528 4,380
Deferred revenue.......................... 8,787 10,958 12,253
---------- --------- --------
Total current liabilities............... 85,004 86,939 82,433
---------- --------- --------
Long-term debt, less current maturities..... 623,000 620,629 643,700
---------- --------- --------
Other long-term liabilities................. -- 27,235 26,844
---------- --------- --------
Commitments and contingencies
Stockholder's equity:
Common stock--$.01 par value, authorized
1,000 shares, issued and
outstanding 849 shares................... -- -- --
Additional paid-in capital................ 617,563 642,406 642,266
Accumulated deficit....................... (315,521) (482,624) (521,282)
---------- --------- --------
Total stockholder's equity.............. 302,042 159,782 120,984
---------- --------- --------
$1,010,046 $ 894,585 $873,961
========== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------ --------------------
1996 1997 1998 1998 1999
-------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues.... $291,399 $ 351,944 $ 371,154 $ 91,397 $ 90,529
Product sales............ 39,971 44,897 42,481 10,642 10,359
-------- --------- --------- --------- ---------
Total revenues....... 331,370 396,841 413,635 102,039 100,888
Cost of products sold.... (27,469) (29,158) (29,953) (7,366) (6,926)
-------- --------- --------- --------- ---------
303,901 367,683 383,682 94,673 93,962
-------- --------- --------- --------- ---------
Operating expenses:
Service, rental and
maintenance........... 64,957 79,836 80,782 20,189 20,293
Selling................ 46,962 51,474 49,132 11,870 13,011
General and
administrative........ 86,181 106,041 112,181 28,318 25,626
Depreciation and
amortization.......... 191,101 231,376 220,172 53,471 50,876
Restructuring charge... -- -- 14,700 -- --
-------- --------- --------- --------- ---------
Total operating
expenses............ 389,201 468,727 476,967 113,848 109,806
-------- --------- --------- --------- ---------
Operating income (loss).. (85,300) (101,044) (93,285) (19,175) (15,844)
Interest expense......... (50,330) (63,680) (68,094) (16,396) (16,773)
Interest income.......... 1,270 796 1,685 126 520
Equity in loss of
affiliate............... (1,968) (3,872) (5,689) (1,055) (3,200)
-------- --------- --------- --------- ---------
Income (loss) before in-
come tax benefit, ex-
traordinary item and ac-
counting change......... (136,328) (167,800) (165,383) (36,500) (35,297)
Benefit from income
taxes................... 51,207 21,172 -- -- --
-------- --------- --------- --------- ---------
Income (loss) before ex-
traordinary item and ac-
counting change......... (85,121) (146,628) (165,383) (36,500) (35,297)
Extraordinary charge from
early extinguishment of
debt.................... (1,904) -- (1,720) -- --
Cumulative effect of
accounting change....... -- -- -- -- (3,361)
-------- --------- --------- --------- ---------
Net income (loss)........ $(87,025) $(146,628) $(167,103) $ (36,500) $ (38,658)
======== ========= ========= ========= =========
</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
Distribution to Arch
Communications Group, Inc.
(unaudited)..................... -- (140) -- (140)
Net loss (unaudited)............. -- -- (38,658) (38,658)
---- -------- --------- ---------
Balance, March 31, 1999
(unaudited)....................... $-- $642,266 $(521,282) $ 120,984
==== ======== ========= =========
</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
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------ --------------------
1996 1997 1998 1998 1999
-------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) ..... $(87,025) $(146,628) $(167,103) $ (36,500) $ (38,658)
Adjustments to recon-
cile net income (loss)
to net cash
provided by operating
activities:
Depreciation and
amortization.......... 191,101 231,376 220,172 53,471 50,876
Deferred income tax
benefit............... (51,207) (21,172) -- -- --
Extraordinary charge
from early
extinguishment of
debt.................. 1,904 -- 1,720 -- --
Cumulative effect of
accounting change..... -- -- -- -- 3,361
Equity in loss of
affiliate............. 1,968 3,872 5,689 1,055 3,200
Accretion of discount
on senior notes....... -- -- 141 -- 71
Gain on Tower Site
Sale.................. -- -- (2,500) -- (507)
Accounts receivable
loss provision........ 8,198 7,181 8,545 1,831 2,335
Changes in assets and
liabilities, net of
effect from
acquisitions of paging
companies:
Accounts receivable.. (15,513) (11,984) (9,151) (3,108) (2,339)
Inventories.......... 1,845 (2,394) 2,314 (5,569) 516
Prepaid expenses and
other............... 89 (386) (3,090) 1,351 (1,341)
Accounts payable and
accrued expenses.... (12,440) 3,683 24,649 (4,222) (5,653)
Customer deposits and
deferred revenue.... 1,556 1,058 549 1,673 1,147
Other long-term
liabilities......... -- -- -- -- (502)
-------- --------- --------- --------- ---------
Net cash provided by
operating activities.... 40,476 64,606 81,935 9,982 12,506
-------- --------- --------- --------- ---------
Cash flows from investing
activities:
Additions to property
and equipment, net.... (138,899) (87,868) (79,249) (15,915) (21,125)
Additions to intangible
and other assets...... (16,676) (14,899) (33,935) (5,404) (4,403)
Net proceeds from Tower
Site Sale............. -- -- 30,316 -- 618
Acquisition of paging
companies, net of cash
acquired.............. (325,420) -- -- -- --
-------- --------- --------- --------- ---------
Net cash used for
investing activities.... (480,995) (102,767) (82,868) (21,319) (24,910)
-------- --------- --------- --------- ---------
Cash flows from financing
activities:
Issuance of long-term
debt.................. 401,000 91,000 463,239 24,500 23,000
Repayment of long-term
debt.................. (225,166) (49,046) (489,014) (12,259) --
Capital contribution
from (distribution to)
Arch
Communications Group,
Inc. ................. 262,329 (3,177) 24,843 298 (140)
-------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities.............. 438,163 38,777 (932) 12,539 22,860
-------- --------- --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents............. (2,356) 616 (1,865) 1,202 10,456
Cash and cash
equivalents, beginning
of period............... 3,627 1,271 1,887 1,887 22
-------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
period.................. $ 1,271 $ 1,887 $ 22 $ 3,089 $ 10,478
======== ========= ========= ========= =========
Supplemental disclosure:
Interest paid.......... $ 46,448 $ 61,322 $ 56,249 $ 15,289 $ 20,212
======== ========= ========= ========= =========
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").
Unaudited Interim Consolidated Financial Statements--The consolidated balance
sheets as of March 31, 1999, the consolidated statements of operations and cash
flows for the three months ended March 31, 1998 and 1999 and the consolidated
statement of stockholders' equity (deficit) for the three months ended March
31, 1999 are unaudited and, in the opinion of the Company's management, include
all adjustments and accruals, consisting only of normal recurring accrual
adjustments, which are necessary for a fair presentation of the Company's
consolidated financial position, results of operations and cash flows. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full year.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company, and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition--Arch recognizes revenue under rental and service
agreements with customers as the related services are performed. Maintenance
revenues and related costs are recognized ratably over the respective terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions
are recognized as an expense when incurred.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less. The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
Inventories--Inventories consist of new pagers which are held primarily for
resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
Property and Equipment--Pagers sold or otherwise retired are removed from the
accounts at their net book value using the first-in, first-out method. Property
and equipment is stated at cost and is depreciated using the straight-line
method over the following estimated useful lives:
<TABLE>
<CAPTION>
Estimated
Useful
Asset Classification Life
-------------------- ----------
<S> <C>
Buildings and improvements..................................... 20 Years
Leasehold improvements......................................... Lease Term
Pagers......................................................... 3 Years
Paging and computer equipment.................................. 5-8 Years
Furniture and fixtures......................................... 5-8 Years
Vehicles....................................................... 3 Years
</TABLE>
F-7
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Intangible and Other Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
----------------- -----------
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Goodwill.................................... $312,017 $271,808 $261,782
Purchased FCC licenses...................... 293,922 256,519 247,193
Purchased subscriber lists.................. 87,281 56,825 49,456
Deferred financing costs.................... 526 13,983 14,616
Investment in Benbow PCS Ventures, Inc...... 6,189 11,347 8,953
Investment in CONXUS Communications, Inc.... 6,500 6,500 6,500
Non-competition agreements.................. 2,783 1,790 1,525
Other....................................... 9,751 7,667 4,942
-------- -------- --------
$718,969 $626,439 $594,967
======== ======== ========
</TABLE>
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 was reported as the cumulative
effect of a change in accounting principle.
Deferred financing costs incurred in connection with Arch's credit agreements
(see Note 3) are being amortized over periods not to exceed the terms of the
related agreements. As credit agreements are amended and restated, unamortized
deferred financing costs are written off as an extraordinary charge. During
1996 and 1998, charges of $1.9 million and $1.7 million, respectively, were
recognized in connection with the closing of new credit facilities.
In connection with Arch's May 1996 acquisition of Westlink Holdings, Inc.
("Westlink") (see Note 2), Arch acquired Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. ("Benbow"). Benbow has exclusive rights to a
50kHz outbound/12.5kHz inbound narrowband personal communications license in
each of the central and western regions of the United States. Arch is
obligated, to the extent such funds are not available to Benbow from other
sources, and subject to the approval of Arch's designee on Benbow's Board of
Directors, to advance Benbow sufficient funds to service debt obligations
incurred by Benbow in connection with its acquisition of its narrowband PCS
licenses and to finance the build out of a regional narrowband PCS system.
Arch's investment in Benbow is accounted for under the equity method
whereby Arch's share of Benbow's losses, since the acquisition date of
Westlink, are recognized in Arch's accompanying consolidated statements of
operations under the caption equity in loss of affiliate.
F-8
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 Fair Carrying Fair
Description Value Value Value 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.
F-9
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the period
presented, after giving effect to certain adjustments, including depreciation
and amortization of acquired assets and interest expense on acquisition debt.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made at the beginning of the period presented, or of results that may
occur in the future.
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
(unaudited and
in thousands)
<S> <C>
Revenues................................................ $358,900
Income (loss) before extraordinary item................. (100,807)
Net income (loss)....................................... (102,711)
</TABLE>
3. Long-term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
----------------- -----------
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Senior Bank Debt............................ $422,500 $267,000 $290,000
9 1/2% Senior Notes due 2004................ 125,000 125,000 125,000
14% Senior Notes due 2004................... 100,000 100,000 100,000
12 3/4% Senior Notes due 2007............... -- 127,604 127,675
Other....................................... 13 2,275 2,275
-------- -------- --------
647,513 621,879 644,950
Less--Current maturities.................... 24,513 1,250 1,250
-------- -------- --------
Long-term debt.............................. $623,000 $620,629 $643,700
======== ======== ========
</TABLE>
Senior Bank Debt--The Company, through its operating subsidiary, Arch Paging,
Inc. ("API") entered into senior secured revolving credit and term loan
facilities in the aggregate amount of $400.0 million (collectively, the "API
Credit Facility") consisting of (i) a $175.0 million reducing revolving credit
facility (the "Tranche A Facility"), (ii) a $100.0 million 364-day revolving
credit facility under which the principal amount outstanding on June 27, 1999
will convert to a term loan (the "Tranche B Facility") and (iii) a $125.0
million term loan (the "Tranche C Facility").
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.
F-10
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Borrowings under the API Credit Facility bear interest based on a reference
rate equal to either the agent Bank's Alternate Base Rate or LIBOR, in each
case plus a margin based on 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
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 API's
existing credit facility from $400.0 million to $600.0 million. The increase
of $200.0 million (the "API Credit Facility Increase") was to fund a portion
of the cash necessary for Parent to complete the MobileMedia Merger. The API
Credit Facility Increase was available by its terms only through March 31,
1999. In March 1999, API amended its existing credit facility to increase the
credit facility from $400.0 million to $581.0 million.
F-11
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
semi-annually. The Senior Notes contain certain restrictive and financial
covenants, which 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 Arch and its
Restricted Subsidiaries; (iii) asset sales; (iv) transactions with affiliates;
(v) the incurrence of liens; and (vi) mergers and consolidations.
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.
Maturities of Debt--Scheduled long-term debt maturities at December 31, 1998
and at March 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
Year Ending December 31, 1998 1999
------------------------ ------------ -----------
(unaudited)
<S> <C> <C>
1999........................................... $ 1,250 $ 1,250
2000........................................... 17,725 20,025
2001........................................... 29,650 34,250
2002........................................... 29,650 34,250
2003........................................... 29,650 34,250
Thereafter..................................... 513,954 520,925
-------- --------
$621,879 $644,950
======== ========
</TABLE>
4. Income Taxes
Arch accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities, given the provisions of enacted laws.
F-12
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets at December 31, 1997 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Deferred tax assets ................................. $134,944 $ 179,484
Deferred tax liabilities ............................ (90,122) (67,652)
-------- ---------
44,822 111,832
Valuation allowance ................................. (44,822) (111,832)
-------- ---------
$ -- $ --
======== =========
</TABLE>
The approximate effect of each type of temporary difference and carryforward
at December 31, 1997 and 1998 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Net operating losses ................................ $106,214 $ 128,213
Intangibles and other assets ........................ (87,444) (62,084)
Depreciation of property and equipment .............. 24,388 39,941
Accruals and reserves ............................... 1,664 5,762
-------- ---------
44,822 111,832
Valuation allowance ................................. (44,822) (111,832)
-------- ---------
$ -- $ --
======== =========
</TABLE>
The effective income tax rate differs from the statutory federal tax rate
primarily due to the nondeductibility of goodwill amortization and the
inability to recognize the benefit of current net operating loss ("NOL")
carryforwards. The NOL carryforwards expire at various dates through 2013. The
Internal Revenue Code contains provisions that may limit the NOL carryforwards
available to be used in any given year if certain events occur, including
significant changes in ownership, as defined.
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 10 7/8 Senior Discount
Notes ("Parent Discount Notes") in aggregate principal amount at maturity of
$467.4 million ($275.0 million initial accreted value). 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 10 7/8% per annum (approximately $50.8
million), payable semi-annually. Parent has no significant business operations
and its primary asset represents its investment in Arch. The ability of Parent
to make payments of principal and interest on the Parent Discount Notes will be
dependent upon Arch's achieving and sustaining levels of performance in the
future that would permit the Company to pay dividends, distributions or fees to
Parent which are sufficient to permit such payments on the 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.
F-13
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Arch has operating leases for office and transmitting sites with lease terms
ranging from one month to approximately ten years. In most cases, Arch expects
that, in the normal course of business, leases will be renewed or replaced by
other leases.
Future minimum lease payments under noncancellable operating leases at
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999.............................................................. $21,372
2000.............................................................. 13,826
2001.............................................................. 8,853
2002.............................................................. 6,026
2003.............................................................. 2,495
Thereafter........................................................ 1,516
-------
Total........................................................... $54,088
=======
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1996, 1997 and 1998 approximated $14.7 million, $19.8 million and $19.6
million, respectively.
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 376,315 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 2,000,000 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 $37.50 (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 141,402
options were terminated and regranted at a price of $37.50. The Company treated
this as a cancellation and reissuance under APB opinion No. 25, "Accounting for
Stock Issued to Employees".
F-14
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 200,500 options to purchase
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 $15.19 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 361,072 options with
exercise prices ranging from $17.82 to $61.88 and granted the same number of
new options with an exercise price of $15.19 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:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
--------- --------
<S> <C> <C>
Options Outstanding at December 31, 1995 ................ 335,250 $39.06
Granted ............................................... 231,738 46.37
Exercised ............................................. (56,436) 26.07
Terminated ............................................ (161,487) 64.79
-------- ------
Options Outstanding at December 31, 1996 ................ 349,065 34.11
Granted ............................................... 166,785 20.03
Exercised ............................................. -- --
Terminated ............................................ (62,207) 31.97
-------- ------
Options Outstanding at December 31, 1997 ................ 453,643 29.22
Granted ............................................... 656,096 14.27
Exercised ............................................. (31,344) 9.38
Terminated ............................................ (430,127) 28.52
-------- ------
Options Outstanding at December 31, 1998 ................ 648,268 $15.51
======== ======
Options Exercisable at December 31, 1998 ................ 111,249 $20.77
======== ======
</TABLE>
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 4.31 -- $12.38 54,178 9.38 $10.08 1,500 $ 5.66
13.59 -- 13.59 170,389 9.17 13.59 -- --
13.69 -- 14.81 50,875 9.00 14.72 2,209 13.78
15.19 -- 15.19 323,018 9.04 15.19 77,321 15.19
18.75 -- 82.68 49,808 7.02 30.86 30,219 36.32
---------------- ------- ---- ------ ------- ------
$ 4.31 -- $82.68 648,268 8.94 $15.51 111,249 $20.77
================ ======= ==== ====== ======= ======
</TABLE>
F-15
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 15,614, 50,447 and 85,996 shares were issued at an average price per
share of $23.91, $15.87 and $6.39, respectively. At December 31, 1998, 14,609
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
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Net income (loss), as reported ........... $(87,025) $(146,628) $(167,103)
Net income (loss), pro forma ............. (88,149) (148,224) (169,117)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to the
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model. In computing these pro forma amounts, Arch has
assumed risk-free interest rates of 4.5%--6%, an expected life of 5 years, an
expected dividend yield of zero and an expected volatility of 50%--85%.
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1996, 1997 and 1998 were $14.85, $10.11 and
$8.34, respectively. The weighted average fair value of shares sold under the
ESPP in 1996, 1997 and 1998 was $16.38, $8.49 and $5.64, respectively.
7. 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.
F-16
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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. Due to the MobileMedia acquisition (see Note 12),
Arch's management is reassessing the size and scope of the divisional
reorganization. Arch is also determining the size and scope of additional
restructuring reserves required as a direct result of the MobileMedia
acquisition.
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.
F-17
<PAGE>
ARCH COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's restructuring activity as of December 31, 1998 and March 31,
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
(unaudited)
Remaining Remaining
Reserve Utilization of Reserve Utilization Reserve
Initially Reserve December 31, of Reserve at March
Established in 1998 1998 in 1999 31, 1999
----------- -------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Severance costs ........ $ 9,700 $2,165 $ 7,535 $710 $ 6,825
Lease obligation costs.. 3,500 366 3,134 142 2,992
Other costs ............ 1,500 260 1,240 25 1,215
------- ------ -------- ---- -------
Total ................ $14,700 $2,791 $ 11,909 $877 $11,032
======= ====== ======== ==== =======
</TABLE>
10. Segment Reporting
The Company operates in one industry: providing wireless messaging services.
On December 31, 1998, the Company operated approximately 175 retail stores in
35 states of the United States.
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>
12. Subsequent Event
On June 3, 1999, Parent acquire MobileMedia Communications, Inc. for a $479.0
million in cash and approximately 4.8 million shares of Parent's common stock.
Parent financed the acquisition through the issuance of approximately 36.2
million shares of Parent's common stock in a rights offering at $6.00 per
share, $134.6 million through the issuance of $147.0 million principal amount
of 13 3/4% senior notes due 2008 by Arch and $181.0 additional borrowings under
the API Credit Facility.
On June 28, 1999, Parent effected a one for three reverse stock split.
Parent's share data included in Note 6 for all periods presented have been
adjusted to give effect to this reverse stock split.
F-18
<PAGE>
Report of Independent Auditors
The Board of Directors
MobileMedia Communications, Inc.
We have audited the accompanying consolidated balance sheets of MobileMedia
Communications, Inc. and Subsidiaries ("MobileMedia") as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MobileMedia Communications, Inc. and Subsidiaries at December 31, 1997 and
1998 and the consolidated results of their operations and cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
MobileMedia will continue as a going concern. As more fully described in Note
1, on January 30, 1997, MobileMedia Corporation and substantially all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court). Additionally, as more fully
described in Note 11, on April 8, 1997, the Federal Communications Commission
("FCC") issued a Public Notice commencing an administrative hearing into the
qualification of MobileMedia to remain a licensee. These events, and
circumstances relating to the Chapter 11 filing with the Bankruptcy Court,
including MobileMedia's highly leveraged financial structure, non-compliance
with certain covenants of loan agreements with banks and note indentures, net
working capital deficiency and recurring losses from operations, raise
substantial doubt about MobileMedia's ability to continue as a going concern.
Although MobileMedia is currently operating the business as a debtor-in-
possession under the jurisdiction of the Bankruptcy Court, the continuation of
the business as a going concern is contingent upon, among other things, the
ability to (a) gain approval of the creditors and confirmation by the
Bankruptcy Court of a plan of reorganization, (b) maintain compliance with all
covenants under the debtor-in-possession financing agreement, (c) achieve
satisfactory levels of future operating profit and (d) retain FCC qualification
as a licensee. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
the outcome of these uncertainties.
/s/ Ernst & Young LLP
MetroPark, New Jersey
February 12, 1999, except for the eighth paragraph of Note 1 and
the second paragraph of Note 6, as to which the date is March 26, 1999
and the ninth paragraph of Note 1, as to which the date is April 12, 1999
F-19
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets
Cash and cash equivalents............. $ 10,920 $ 1,218 $ --
Accounts receivable (less allowance
for uncollectible accounts of
$26,500, $15,000 and $14,893 in 1997,
1998 and 1999, respectively) ........ 55,432 38,942 37,270
Inventories........................... 868 2,192 1,609
Prepaid expense....................... 5,108 5,523 5,261
Other current assets.................. 2,783 4,855 4,900
----------- ----------- -----------
Total current assets................ 75,111 52,730 49,040
----------- ----------- -----------
Investment in net assets of equity
affiliate.............................. 1,788 1,400 --
Property and equipment, net............. 257,937 219,642 225,566
Intangible assets, net.................. 295,358 266,109 258,793
Other assets............................ 24,940 21,573 20,610
----------- ----------- -----------
Total assets........................ $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit
facility............................. $ 10,000 $ -- $ 5,000
Accrued restructuring costs........... 4,897 5,163 7,197
Accrued wages, benefits and payroll... 11,894 12,033 9,944
Book cash overdraft................... -- -- 1,255
Accounts payable--post petition....... 2,362 1,703 7,334
Accrued interest...................... 4,777 3,692 3,566
Accrued expenses and other current
liabilities.......................... 35,959 35,735 30,061
Current income taxes payable.......... -- 2,871 1,200
Advance billing and customer
deposits............................. 34,252 28,554 28,892
Deferred gain on tower sale........... -- 68,444 67,278
----------- ----------- -----------
Total liabilities not subject to
compromise......................... 104,141 158,195 161,727
----------- ----------- -----------
Liabilities subject to compromise
Accrued wages, benefits and payroll
taxes................................ 562 647 476
Accrued interest...................... 18,450 17,579 17,578
Accounts payable--pre petition........ 19,646 15,410 15,351
Accrued expenses and other current
liabilities.......................... 20,663 15,285 12,231
Debt.................................. 1,075,681 905,681 905,681
Other liabilities..................... 2,915 -- --
----------- ----------- -----------
Total liabilities subject to
compromise......................... 1,137,917 954,602 951,317
----------- ----------- -----------
Deferred tax liabilities.............. 2,655 2,655 2,655
Stockholders' deficit
Common stock (1 share, no par value,
issued and outstanding at
December 31, 1997 and 1998 and March
31, 1999)............................ -- -- --
Additional paid-in-capital............ 676,025 676,025 676,025
Accumulated deficit--pre petition..... (1,154,420) (1,154,420) (1,154,420)
Accumulated deficit--post petition.... (111,184) (75,603) (83,295)
----------- ----------- -----------
Total stockholders' deficit......... (589,579) (553,998) (561,690)
----------- ----------- -----------
Total liabilities and stockholders'
deficit............................ $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
</TABLE>
See accompanying notes.
F-20
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------- ------------------
1996 1997 1998 1998 1999
----------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue (unaudited)
Services, rents and
maintenance........... $ 568,892 $ 491,174 $423,059 $108,542 $100,631
Product sales.......... 71,818 36,218 26,622 6,621 5,193
----------- --------- -------- -------- --------
Total revenues....... 640,710 527,392 449,681 115,163 105,824
Cost of products sold.... (72,595) (35,843) (22,162) (5,513) (3,516)
----------- --------- -------- -------- --------
568,115 491,549 427,519 109,650 102,308
Operating expenses
Services, rents and
maintenance........... 144,050 139,333 111,589 28,899 27,077
Selling................ 96,817 69,544 61,106 15,703 14,136
General and
administrative........ 218,607 179,599 133,003 34,908 31,481
Reduction of
liabilities subject to
compromise............ -- -- (10,461) -- (3,050)
Impairment of long-
lived assets.......... 792,478 -- -- -- --
Restructuring costs.... 4,256 19,811 18,624 4,558 5,067
Depreciation........... 136,434 110,376 86,624 24,193 20,501
Amortization........... 212,264 29,862 29,835 7,478 7,468
Amortization of
deferred gain on tower
sale.................. -- -- (1,556) -- (1,167)
----------- --------- -------- -------- --------
Total operating
expenses............ 1,604,906 548,525 428,764 115,739 101,513
----------- --------- -------- -------- --------
Operating Income (loss).. (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense)
Interest expense, net.. (92,663) (67,611) (53,043) (14,626) (10,018)
Gain (loss) on
sale/disposal of
assets................ 68 3 94,165 1 (323)
Other.................. -- -- (338) -- 2,063
----------- --------- -------- -------- --------
Total other expense.. (92,595) (67,608) 40,784 (14,625) (8,278)
----------- --------- -------- -------- --------
Income (loss) before
income taxes (benefit).. (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income taxes (benefit)... (69,442) -- 3,958 -- 209
----------- --------- -------- -------- --------
Net income (loss)........ $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
=========== ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-21
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Accumulated Accumulated
Additional Deficit Deficit
Paid in Pre- Post-
Capital Petition Petition Total
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.. $659,829 $ (81,076) $ 0 $ 578,753
Capital contribution from
MobileMedia.................. 12,800 -- -- 12,800
Net loss...................... -- (1,059,944) -- (1,059,944)
-------- ----------- --------- -----------
Balance at December 31, 1996.. 672,629 (1,141,020) 0 (468,391)
Capital contribution from
MobileMedia.................. 3,396 -- -- 3,396
Net loss...................... -- (13,400) (111,184) (124,584)
-------- ----------- --------- -----------
Balance at December 31, 1997.. 676,025 (1,154,420) (111,184) (589,579)
Net income.................... -- -- 35,581 35,581
-------- ----------- --------- -----------
Balance at December 31, 1998
............................. 676,025 (1,154,420) (75,603) (553,998)
Net loss (unaudited).......... -- -- (7,692) (7,692)
-------- ----------- --------- -----------
Balance at March 31, 1999
(unaudited).................. $676,025 $(1,154,420) $ (83,295) $ (561,690)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------- --------------------
1996 1997 1998 1998 1999
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating activities (unaudited)
Net income (loss)..... $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
Adjustments to reconcile
net loss to net cash
provided by (used in)
Operating activities:
Depreciation and amor-
tization............. 348,698 140,238 116,459 31,672 27,969
Amortization of de-
ferred gain on tower
sale................. -- -- (1,556) -- (1,167)
Income tax benefit.... (69,442) -- -- -- --
Accretion of note pay-
able discount........ 16,792 1,485 -- -- --
Provision for uncol-
lectible accounts.... 56,556 65,181 14,841 4,981 2,131
Reduction of liabili-
ties subject to com-
promise.............. -- -- (10,461) -- (3,050)
Recognized gain on
sale of tower as-
sets................. -- -- (94,165) -- --
Impairment of long-
lived assets......... 792,478 -- -- -- --
Undistributed earnings
of affiliate, net.... 160 69 (87) 22 --
Change in operating as-
sets and liabilities:
Accounts receivable... (55,965) (53,904) 1,649 2,813 (459)
Inventories........... 2,433 12,514 (1,324) 407 583
Prepaid expenses and
other assets......... 12,145 (686) 590 (1,052) 1,028
Accounts payable, ac-
crued expenses and
other liabilities.... 13,283 (25,393) (7,065) 1,413 (1,791)
----------- --------- --------- --------- ---------
Net cash provided by
(used in) operating
activities........... 57,194 14,920 54,462 19,542 17,552
----------- --------- --------- --------- ---------
Investing activities:
Construction and capi-
tal expenditures, in-
cluding net changes
in pager assets...... (161,861) (40,556) (53,867) (4,854) (26,806)
Net proceeds from the
sale of tower as-
sets................. -- -- 169,703 -- --
Net proceeds from the
sale of investment
in Abacus............ -- -- -- -- 1,400
Net loss on the dis-
posal of fixed as-
sets................. -- -- -- -- 381
Acquisition of busi-
nesses............... (866,460) -- -- -- --
----------- --------- --------- --------- ---------
Net cash provided by
(used in) investing ac-
tivities............... (1,028,321) (40,556) 115,836 (4,854) (25,025)
----------- --------- --------- --------- ---------
Financing activities:
Book cash overdraft... -- -- -- -- 1,255
Capital contribution
by MobileMedia Corpo-
ration............... 12,800 3,396 -- -- --
Payment of debt issue
costs................ (6,939) -- -- -- --
Borrowing from revolv-
ing credit facili-
ties................. 580,250 -- -- -- --
Repayments on revolv-
ing credit facili-
ties................. -- -- (170,000) -- --
Borrowing from DIP
credit facilities.... -- 47,000 -- -- 5,000
Repayments on DIP
credit facilities.... -- (37,000) (10,000) (10,000) --
----------- --------- --------- --------- ---------
Net cash provided by
(used in) financing ac-
tivities............... 586,111 13,396 (180,000) (10,000) 6,255
----------- --------- --------- --------- ---------
Net (decrease) increase
in cash, cash equiva-
lents designated and
cash designated for the
MobileComm acquisi-
tion................... (385,016) (12,240) (9,702) 4,688 (1,218)
Cash and cash equiva-
lents at beginning of
period................. 408,176 23,160 10,920 10,920 1,218
----------- --------- --------- --------- ---------
Cash and cash equiva-
lents at end of peri-
od..................... $ 23,160 $ 10,920 $ 1,218 $ 15,608 $ 0
=========== ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-23
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Chapter 11 Reorganization and Basis of Presentation
On January 30, 1997 (the "Petition date"), MobileMedia Corporation
("Parent"), its wholly owned subsidiary MobileMedia Communications, Inc., and
all seventeen of MobileMedia Communications, Inc.'s subsidiaries
("MobileMedia") (collectively with Parent, the "Debtors"), filed for protection
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
The Debtors are operating as debtors-in-possession and are subject to the
jurisdiction of the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). Chapter 11 is the principal business reorganization
chapter of the Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a
debtor is authorized to reorganize its business for the benefit of its
creditors and stockholders. In addition to permitting rehabilitation of the
debtor, another goal of Chapter 11 is to promote equality of treatment of
creditors and equity security holders of equal rank with respect to the
restructuring of debt. In furtherance of these two goals, upon the filing of a
petition for reorganization under Chapter 11, section 362(a) of the Bankruptcy
Code generally provides for an automatic stay of substantially all acts and
proceedings against the debtor and its property, including all attempts to
collect claims or enforce liens that arose prior to the commencement of the
debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations of
the Debtors with respect to the employment of attorneys, investment bankers and
other professionals, and transactions out of the Debtors' ordinary course of
business or otherwise requiring bankruptcy court approval under the Bankruptcy
Code. The Debtors have been paying undisputed obligations that have arisen
subsequent to the Petition date on a timely basis.
Since the Petition date, the Bankruptcy Court has entered orders, among other
things, allowing the Debtors (i) to pay certain customer refunds and deposits
in the ordinary course of business, (ii) to pay wages, salaries and benefits
owing to employees, and (iii) to pay specified pre-petition taxes owing to
various governmental entities. On February 6, 1997, the Bankruptcy Court
entered an order authorizing the Debtors to pay approximately $46,000 in pre-
petition amounts owing to certain essential vendors.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts and other unexpired executory pre-petition leases and contracts,
subject to Bankruptcy Court approval. Assumption of a contract requires the
Debtors, among other things, to cure all defaults under the contract, including
payment of all pre-petition liabilities. Rejection of a contract constitutes a
breach of that contract as of the moment immediately preceding the Chapter 11
filing and the other party has the right to assert a general, unsecured claim
against the bankruptcy estate for damages arising out of such breach. These
parties may also seek to assert post-petition administrative claims against the
Debtors to the extent that the Debtors utilize the collateral or services of
such parties subsequent to the commencement of the Chapter 11 proceedings. The
Debtors cannot presently determine or reasonably estimate the ultimate
liability that may result from payments required to cure defaults under assumed
leases and contracts or from the filing of claims for all leases and contracts
which may be rejected.
In connection with the Chapter 11 filing, the Debtors notified all known
claimants that pursuant to an order of the Bankruptcy Court, all proofs of
claims, on account of pre-petition obligations, other than for certain
governmental entities, were required to be filed by June 16, 1997 (the "Bar
Date"). As of March 31, 1999, approximately 2,581 proofs of claim had been
filed against the Debtors. Included among the claims filed are claims of
unspecified and undeterminable amounts. The Debtors consider the amounts set
forth in certain proofs of claim to be inaccurate estimates of the Debtors'
liabilities. As of March 31, 1999, the Debtors had secured orders of the
Bankruptcy Court reducing approximately 1,607 claims filed in an aggregate
amount of approximately $143,362 to an allowed amount of $10,239. As of March
31, 1999, the Debtors had also analyzed and resolved an additional 876 proofs
of claim, representing an aggregate allowed amount of $8,389. The Debtors
expect the objection process to continue.
F-24
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On August 20, 1998, MobileMedia announced that it had executed a merger
agreement with Arch Communications Group, Inc. ("Arch"), pursuant to which
MobileMedia Communications, Inc. will be merged with and into a wholly-owned
subsidiary of Arch. Immediately prior to the Merger, Parent will contribute all
of its assets to MobileMedia Communications, Inc. Also on August 20, 1998, the
Debtors filed a First Amended Joint Plan of Reorganization that reflects the
proposed merger with Arch. On September 3, 1998, Arch and MobileMedia executed
an amendment to the merger agreement and the Debtors filed a subsequent Second
Amended Joint Plan of Reorganization. On December 1, 1998 Arch and MobileMedia
executed a second amendment to the merger agreement and on December 2, 1998,
the Debtors filed a Third Amended Joint Plan of Reorganization (the "Plan"). As
of February 9, 1999, Arch and MobileMedia executed a third amendment to the
merger agreement. Under the Plan, the Debtors' secured creditors will receive
cash in an amount equal to their allowed pre-petition claims and the Debtors'
unsecured creditors will receive cash or equity securities of Arch in
satisfaction of their pre-petition claims against the Debtors. Because there
are a variety of conditions precedent to the consummation of the Plan and the
merger with Arch, there can be no assurance that the transactions contemplated
thereby will be consummated.
In December 1998 and January 1999, MobileMedia solicited the votes of its
creditors on the Plan. 100% of the voting creditors in Class 4 voted to accept
the Plan. As to Allowed Claims in Class 5, 83% in number and 91% in amount of
those voting voted to accept the Plan. Of the Allowed Claims in Class 6 that
voted on the Plan, 968 of such holders (approximately 94% in number and 69% in
amount) voted to accept the Plan, and 61 of such holders (approximately 6% in
number and 31% in amount) voted to reject the Plan.
Objections to confirmation were filed by New Generation Advisors, Inc. ("New
Generation"), Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc.--High Income Portfolio and State Street Research High Income Fund
(the "Objectors"). On February 12, 1999, at a continued hearing on confirmation
of the Plan, the Bankruptcy Court ordered MobileMedia to provide due diligence
to a nominee of New Generation, to prepare supplemental disclosure to the
holders of Allowed Claims in Class 6, and to resolicit the votes of such
holders on the Plan. At a hearing held before the Bankruptcy Court on February
18, 1999, the Bankruptcy Court entered an order approving a form of Notice and
Supplemental Disclosure, directing MobileMedia to resolicit the votes of all
holders of Allowed Class 6 Claims and establishing March 23, 1999 as (a) the
Supplemental Voting Deadline for Class 6 and (b) the deadline for any further
objections to confirmation of the Plan arising out of the matters set forth in
the Notice of Supplemental Disclosure. No further objections to the Plan were
received by March 23, 1999. Taking into account the resolicitation of Class 6,
the Plan was accepted by 59.6% in number and 69.3% in dollar amount of voting
Class 6 creditors.
On March 22, 1999, the Debtors and various other parties (including the
Objectors, Arch, the Committee and the Agent for the Company's pre-petition
secured lenders) executed a stipulation (the "Stipulation") that was approved
by the Bankruptcy Court, effective as of March 23, 1999. The Stipulation
resolved the pending objections to the Plan by providing for the withdrawal of
the Objectors' objections and the waiver of all appeal rights of the Objectors.
The Plan was confirmed by the Bankruptcy Court on April 12, 1999.
The consolidated financial statements at December 31, 1997, 1998 and March
31, 1999 (unaudited) have been prepared on a going concern basis which assumes
continuity of operations and realization of assets and liquidation of
liabilities in the ordinary course of business. As discussed herein, there are
significant uncertainties relating to the ability of MobileMedia to continue as
a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or the amounts and classification of liabilities that might be
necessary as a result of the outcome of the uncertainties discussed herein.
F-25
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
2. The Company and Summary of Significant Accounting Policies
The Company
MobileMedia provides paging and wireless messaging services in the United
States, including the 100 largest metropolitan areas.
Consolidation
The consolidated financial statements include the accounts of MobileMedia and
its wholly-owned subsidiaries (MobileMedia Communications, Inc. (California),
MobileMedia Paging, Inc., MobileMedia DP Properties, Inc., Dial Page Southeast,
Inc., Radio Call Company of Va., Inc., MobileMedia PCS, Inc., Mobile
Communications Corporation of America, MobileComm of Florida, Inc., MobileComm
of Tennessee, Inc., MobileComm of the Midsouth, Inc., MobileComm Nationwide
Operations, Inc., MobileComm of the West, Inc., MobileComm of the Northeast,
Inc., MobileComm of the Southeast, Inc., MobileComm of the Southeast Private
Carrier Operations, Inc., MobileComm of the Southwest, Inc. and FWS Radio,
Inc.). All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents
MobileMedia considers all highly-liquid securities with an original maturity
of less than three months to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject MobileMedia to concentrations
of credit risk consist principally of temporary cash investments and accounts
receivable. MobileMedia places its cash with high-quality institutions and, by
policy, limits its credit exposure to any one institution. Although MobileMedia
faces significant credit risk from its customers, such risk does not result
from a concentration of credit risk as a result of the large number of
customers which comprise MobileMedia's customer base. MobileMedia generally
does not require collateral or other security to support customer receivables.
Inventories
MobileMedia values inventories at the lower of specific cost or market value.
Inventories consist of pagers held specifically for resale by MobileMedia.
Revenue Recognition
MobileMedia recognizes revenue under service, rent and maintenance agreements
with customers at the time the related services are performed. Advance billings
for services are deferred and recognized as revenue when earned. MobileMedia
leases (as lessor) certain pagers under operating leases. Sales of pagers are
recognized upon delivery.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
F-26
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Property and Equipment
Effective October 1, 1997, MobileMedia shortened the estimated useful life of
pagers from four to three years. This change resulted in additional
depreciation expense of approximately $2,500 in 1997.
Property and equipment are stated at cost, less accumulated depreciation.
MobileMedia purchases a significant percentage of its pagers from one
supplier. Any disruption of such supply could have a material impact on
MobileMedia's operations.
Expenditures for maintenance are charged to expense as incurred.
Upon retirement of pagers, the cost and related accumulated depreciation are
removed from the accounts and the net book value, if any, is charged to
depreciation expense. Upon the sale of pagers, the net book value is charged to
cost of products sold.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Pagers......................................................... 3 years
Radio transmission equipment................................... 10 years
Computer equipment............................................. 4 years
Furniture and fixtures......................................... 5 years
Leasehold improvements......................................... 1-10 years
Buildings...................................................... 30 years
</TABLE>
Intangible Assets
Intangible assets consist primarily of customer lists and FCC licenses which
are being amortized principally using the straight-line method over periods
ranging from 3 to 25 years. In connection with the impairment writedown
discussed below, MobileMedia revised the useful lives of FCC licenses and
customer lists to 25 years and 3 years, respectively.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", MobileMedia records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the net book value of those assets. In 1997, MobileMedia
determined impairment existed with respect to its long-lived assets as of
December 31, 1996. Such determination was based upon the existence of adverse
business circumstances, such as MobileMedia's bankruptcy, its 1996 operating
results and the uncertainty associated with the pending FCC proceeding. In July
1998, MobileMedia evaluated the ongoing value of its long-lived assets
effective December 31, 1996 and, based on this evaluation, MobileMedia
determined that intangible assets with a net book value of $1,118,231 were
impaired and wrote them down by $792,478 to their
estimated fair value. Fair value was determined through the application of
generally accepted valuation methods to MobileMedia's projected cash flows,
discounted at an estimated market rate of interest. The remaining carrying
amount of long-lived assets are expected to be recovered based on MobileMedia's
estimates of cash flows. However, it is possible that such estimates could
change based upon the uncertainties of the bankruptcy process and because
future operating and financial results may differ from those projected which
may require further writedowns to fair value.
F-27
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Debt Issue Costs
Debt issue costs, which relate to the long term debt discussed in Note 6, are
reported as "Other assets" in the accompanying balance sheets. Such costs
amounted to $22,939 at December 31, 1997 and $19,295 at December 31, 1998 and
$18,384 at March 31, 1999 (unaudited) and are being amortized on a straight
line basis over the term of the related debt.
Book Cash Overdraft
Under MobileMedia's cash management system, checks issued but not presented
to banks occasionally result in overdraft balances for accounting purposes and
are classified as "Book cash overdraft" in the balance sheet.
Liabilities Subject to Compromise
Liabilities subject to compromise consists of pre-petition liabilities that
may be affected by a plan of reorganization. In accordance with AICPA Statement
of Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", MobileMedia records liabilities subject to compromise based
on the expected amount of the allowed claims related to these liabilities.
Accordingly, in December 1998 and March 1999 MobileMedia reduced such
liabilities by approximately $10,461 and $3,050 (unaudited), respectively, to
reflect changes in estimated allowed claims.
Restructuring Costs
Restructuring costs are primarily comprised of professional fees constituting
administrative expenses incurred by MobileMedia as a result of reorganization
under Chapter 11 of the Bankruptcy Code.
Income Taxes
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 15, 1997.
MobileMedia has adopted SFAS No. 131 as of December 31, 1998. Such adoption did
not have an impact on MobileMedia's financial reporting.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position 98-5 ("SOP 98-5")
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of SOP 98-5 will be reported as the cumulative effect of a change
in accounting principle. MobileMedia has adopted SOP 98-5 effective January 1,
1999. Such adoption did not have any effect on MobileMedia's financial position
or results of operations.
F-28
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
3. Acquisitions and Divestitures
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers to Pinnacle Towers, Inc. ("Pinnacle") for $170,000 in cash (the "Tower
Sale"). Under the terms of a lease with Pinnacle, MobileMedia will lease
antenna sites located on these towers for an initial period of 15 years at an
aggregate annual rental of $10,700. The sale was accounted for in accordance
with Statement of Financial Accounting Standards No. 28, Accounting for Sales
with Leasebacks, and resulted in a recognized gain of $94,200 and a deferred
gain of $70,000. The deferred gain will be amortized on a straight-line basis
over the initial lease period of 15 years. Subsequent to the sale, MobileMedia
distributed the $170,000 in proceeds to its secured creditors, who had a lien
on such assets.
On January 4, 1996, MobileMedia completed its acquisition of MobileComm,
BellSouth's paging and wireless messaging unit, and an associated nationwide
two-way narrowband 50/12.5 kHz PCS license, and BellSouth agreed to enter into
a two-year non-compete agreement and a five-year reseller agreement with
MobileMedia (the "MobileComm Acquisition"). The aggregate consideration paid
for the MobileComm Acquisition (excluding fees and expenses and related
financing costs) was approximately $928,709.
The MobileComm Acquisition has been accounted for as a purchase transaction
in accordance with Accounting Principles Board Opinion No. 16 and, accordingly,
the financial statements for the periods subsequent to January 4, 1996 reflect
the purchase price and transaction costs of $24,328, allocated to tangible and
intangible assets acquired and liabilities assumed based on their estimated
fair values as of January 4, 1996. The allocation of the purchase price is
summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Current assets............................................. $ 55,301
Property and equipment..................................... 112,986
Intangible assets.......................................... 934,269
Other assets............................................... 143
Liabilities assumed........................................ (149,662)
---------
$ 953,037
=========
</TABLE>
F-29
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
4. Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31, March
----------------- 31,
1997 1998 1999
-------- -------- --------
(in thousands) (unaudited)
<S> <C> <C> <C> <C>
Pagers................................... $196,791 $176,610 $190,903
Radio transmission equipment............. 202,296 203,048 204,054
Computer equipment....................... 30,896 32,679 32,866
Furniture and fixtures................... 20,918 22,019 21,187
Leasehold improvements................... 14,652 16,516 16,745
Construction in progress................. 1,128 11,624 13,140
Land, buildings and other................ 7,911 6,697 6,591
-------- -------- --------
474,592 469,193 485,486
Accumulated depreciation................. 216,655 249,551 259,920
-------- -------- --------
Property and equipment, net.............. $257,937 $219,642 $225,566
======== ======== ========
</TABLE>
5. Intangible Assets
<TABLE>
<CAPTION>
December 31, March 31, 1999 (unaudited)
-------------------------------------------------------------- ------------------------------
1997 1998
------------------------------- ------------------------------
Accumulated Accumulated Accumulated
Cost Amortization Net Cost Amortization Net Cost Amortization Net
--------- ------------ -------- -------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FCC Licenses............ $ 261,323 $ (8,918) $252,405 $261,523 $(16,891) $244,632 $261,623 $(18,937) $242,686
Customer lists.......... 64,430 (21,477) 42,953 64,430 (42,953) 21,477 64,430 (48,323) 16,107
--------- -------- -------- -------- -------- -------- -------- -------- --------
$ 325,753 $(30,395) $295,358 $325,953 $(59,844) $266,109 $326,053 $(67,260) $258,793
========= ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
MobileMedia is not amortizing the cost of two nationwide Personal
Communications Services ("PCS") licenses, one acquired directly from the FCC
and the other as a result of the MobileComm acquisition, because the
construction of paging networks related to such licenses has not been
completed. These networks are expected to begin commercial operation in 1999
and, accordingly, amortization of these licenses will begin at such time.
F-30
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
6. Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
------------------- -----------
1997 1998 1999
---------- -------- -----------
(unaudited)
<S> <C> <C> <C>
DIP credit facility...................... $ 10,000 $ -- $ 5,000
Revolving loan........................... 99,000 72,900 72,900
Term loan................................ 550,000 406,100 406,100
10 1/2% Senior Subordinated Deferred
Coupon Notes due December 1, 2003....... 174,125 174,125 174,125
9 3/8% Senior Subordinated Notes due
November 1, 2007........................ 250,000 250,000 250,000
Dial Page Notes.......................... 1,570 1,570 1,570
Note Payable............................. 986 986 986
---------- -------- --------
Total debt............................. $1,085,681 $905,681 $910,681
========== ======== ========
</TABLE>
The debt obligations of MobileMedia include:
1) A debtor-in-possession credit facility ("DIP Facility") with a
syndicate of lenders including The Chase Manhattan Bank, as Agent (the "DIP
Lenders"). As of March 31, 1999 there was $5,000 of borrowings outstanding
under this facility, as of December 31, 1998 there were no funded
borrowings and as of December 31, 1997, there was $10,000 of borrowings
outstanding under this facility. MobileMedia is subject to certain
financial and operating restrictions customary to credit facilities of this
type including a limitation on periodic capital expenditures, minimum
allowable periodic EBITDA and retention of a turnaround professional.
Additionally, MobileMedia is required to make monthly interest payments to
the DIP Lenders and pay a commitment fee of 0.5% on any unused portion of
the DIP Facility. The DIP Facility bears interest at a rate of LIBOR plus
250 basis points or Base Rate plus 150 basis points, at the option of
MobileMedia. During 1997, the Debtors drew down $47,000 of borrowings and
repaid $37,000 under the DIP Facility. During January and February, 1998
the Debtors repaid an additional $10,000. On January 27, 1998, the DIP
Facility was amended and reduced from $200,000 to $100,000. On August 12,
1998, MobileMedia received approval from the Bankruptcy Court to extend the
DIP Facility to March 31, 1999 and further reduce it from $100,000 to
$75,000. MobileMedia has negotiated an extension of the DIP Facility
through and including December 31, 1999.
2) A $750,000 senior secured and guaranteed credit agreement (the "Pre-
Petition Credit Agreement") with a syndicate of lenders including The Chase
Manhattan Bank, as Agent. As of March 31, 1999 and December 31, 1998 there
was $479,000 outstanding under this facility consisting of term loans of
$101,500 and $304,600 and loans under a revolving credit facility totaling
$72,900. This agreement was entered into on December 4, 1995, in connection
with the financing of the MobileComm Acquisition. Commencing in 1996
MobileMedia was in default under this agreement. As a result of such
default and the bankruptcy filing, MobileMedia has no borrowing capacity
under this agreement. Since the Petition date, MobileMedia has brought
current its interest payments and has been making monthly payments to the
lenders under the Pre-Petition Credit Agreement equal to the amount of
interest accruing under such agreement. On September 3, 1998, MobileMedia
repaid $170,000 of borrowings under the Pre-Petition Credit Agreement with
proceeds from the Tower Sale (see Note 3).
F-31
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the "9 3/8%
Notes") issued in November 1995. These notes bear interest at a rate of 9
3/8% payable semi-annually on May 1 and November 1 of each year. On
November 1, 1996, MobileMedia did not make its scheduled interest payment
on its 9 3/8% Notes which constituted an event of default. The note holders
have not exercised any rights or remedies afforded holders (which rights
include, but are not limited to, acceleration of the stated maturity of the
notes). Since the Petition date, any such right or remedy is subject to the
automatic stay created by the Bankruptcy Code.
4) $210,000 of Senior Subordinated Deferred Coupon Notes (the "Deferred
Coupon Notes") issued, at a discount, in November 1993. The Deferred Coupon
Notes accrete at a rate of 10 1/2%, compounded semi-annually, to an
aggregate principal amount of $210,000 by December 1, 1998 after which
interest is paid in cash at a rate of 10 1/2% and is payable semi-annually.
By virtue of the missed interest payments on the 9 3/8% Notes and the Pre-
Petition Credit Agreement an event of default has occurred. The note
holders have not exercised any rights or remedies afforded such holders
(which rights include, but are not limited to, acceleration of the stated
maturity of the notes). Since the Petition date, any such right or remedy
is subject to the automatic stay created by the Bankruptcy Code.
Interest Expense on Debt
Interest paid during the years ended December 31, 1996, 1997 and 1998, and
the three months ended March 31, 1998 and 1999 (unaudited) was $65,978,
$70,817, $51,560, $13,915 and $9,383 respectively. Total interest cost incurred
for the years ended December 31, 1996, 1997 and 1998 was $94,231, $68,409 and
$53,982, respectively of which $1,292, $176 and $228 was capitalized. Total
interest cost incurred for the three months ended March 31, 1998 and 1999
(unaudited), was $14,793 and $10,248, respectively, of which $21 and $149 was
capitalized.
Subsequent to the Petition date, interest was accrued and paid only on the
Pre-Petition Credit Agreement and the DIP Facility. If not for the filing,
interest expense for the year ended December 31, 1997 and 1998 and March 31,
1998 and 1999 (unaudited), would have been approximately $104,152, $97,776,
$25,724 and $21,187, respectively.
7. Income Taxes
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1996 1997 1998
------- ----- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $(1,757)
State and local.................................. -- -- (2,201)
------- ----- -------
-- -- (3,958)
Deferred:
Federal.......................................... 52,081 -- --
State and local.................................. 17,361 -- --
------- ----- -------
Total.......................................... $69,442 $ -- $(3,958)
======= ===== =======
</TABLE>
F-32
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
MobileMedia is included in the Parent's consolidated federal income tax
return. Income taxes are presented in the accompanying financial statements as
if MobileMedia filed tax returns as a separate consolidated entity.
A reconciliation of income tax benefit (expense) and the amount computed by
applying the statutory federal income tax rate to loss before income taxes is
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Tax benefit (expense) at federal statutory rate... $395,285 $43,604 $(13,838)
Goodwill and intangible amortization and
writedown........................................ (95,362) -- --
State income taxes................................ -- -- (1,783)
Nondeductible expenses............................ -- -- (4,765)
Valuation allowance on federal deferred tax
assets........................................... (230,481) (43,604) 16,428
-------- ------- --------
Total........................................... $ 69,442 $ -- $ (3,958)
======== ======= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for federal and state income tax purposes. The
components of deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Difference in book and tax basis of fixed assets......... $ 10,206 $ 19,974
Other.................................................... 68 27
-------- --------
Deferred tax liabilities............................... 10,274 20,001
Deferred tax assets:
Tax credit carryforwards................................. -- 1,757
Accounts receivable reserves............................. 10,578 6,000
Differences between the book and tax basis of intangible
assets.................................................. 128,462 121,526
Difference between book and tax basis of accrued
liabilities............................................. 5,089 4,794
Net operating loss carryforward.......................... 161,840 135,458
Deferred gain on tower sale.............................. -- 27,378
-------- --------
Total deferred assets.................................. 305,969 296,913
Valuation allowances for deferred tax assets........... (298,350) (279,567)
-------- --------
Deferred tax assets.................................... 7,619 17,346
======== ========
Net deferred tax liabilities........................... $ 2,655 $ 2,655
======== ========
</TABLE>
As of December 31, 1998, MobileMedia has available net operating loss
carryforwards for tax purposes of approximately $330,000 which expire in years
2008 through 2012. Utilization of these losses may be limited under Section 382
of the Internal Revenue Code.
MobileMedia believes consummation of the public offering of 15,525,000 shares
of Parent's Class A Common Stock on November 7, 1995 caused an ownership change
for MobileMedia for purposes of Section 382 of the Code. As a result, the use
of MobileMedia's pre-ownership change net operating loss
F-33
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
carryforwards will be limited annually by the Section 382 Limitation, which is
estimated to be approximately $40,000. In addition, if a second ownership
change has occurred subsequent to November 7, 1995, which has not yet been
determined, use of MobileMedia's net operating losses would be severely
limited. It is also anticipated that the net operating loss carryforwards and
certain other tax attributes of MobileMedia will be substantially reduced and
their utilization signifantly limited as a result of consummation of the Plan.
8. Leases
Certain facilities and equipment used in operations are held under operating
leases. Rental expenses under operating leases were $44,574, 43,453, $40,936,
$10,423 and $12,989 for the years ended December 31, 1996, 1997 and 1998 and
the three months ended March 31, 1998 and 1999 (unaudited), respectively. At
December 31, 1998, the aggregate minimum rental commitments under leases were
as follows:
<TABLE>
<S> <C>
1999............................................................. $ 48,951
2000............................................................. 25,457
2001............................................................. 19,250
2002............................................................. 15,726
2003............................................................. 13,327
Thereafter....................................................... 15,783
--------
$138,494
========
</TABLE>
9. Employee Benefit Plans
MobileMedia has adopted a retirement savings plan that allows all employees
who have been employed for one year and have at least 1,000 hours of credited
service to contribute and defer up to 15% of their compensation. Effective
February 1, 1996, MobileMedia began a matching contribution of 50% of the first
2% of the elected deferral plus an additional 25% of the next 4% of the elected
deferral. MobileMedia's matching contribution was $700 in 1996, $730 in 1997
and $692 in 1998 and $160 and $178 for the three months ended March 31, 1998
and 1999 (unaudited), respectively.
10. Stock Option Plans
MobileMedia has two stock option plans under which approximately 1.3 million
options are currently outstanding. Under the proposed Plan of Reorganization,
MobileMedia's equity holders will receive no value for their ownership
interests in the Company, and accordingly, the options are also deemed to have
no value.
11. Commitments and Contingencies
MobileMedia is party to a number of lawsuits and other matters arising in the
ordinary course of business.
As announced on September 27, 1996 and October 21, 1996, MobileMedia
disclosed that misrepresentations and other violations had occurred during the
licensing process for as many as 400 to 500, or approximately 6% to 7%, of its
approximately 8,000 local transmission one-way paging stations. MobileMedia
caused an investigation to be conducted by its outside counsel, and a
comprehensive report regarding these matters was provided to the FCC in the
fall of 1996.
F-34
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On January 13, 1997, the FCC issued a Public Notice relating to the status of
certain FCC authorizations held by MobileMedia. Pursuant to the Public Notice,
the FCC announced that it had (i) automatically terminated approximately 185
authorizations for paging facilities that were not constructed by the
expiration date of their construction permits and remained unconstructed, (ii)
dismissed as defective approximately 94 applications for fill-in sites around
existing paging stations because they were predicated upon unconstructed
facilities and (iii) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. However, the FCC granted MobileMedia
interim operating authority to operate transmitters in this last category
subject to further action by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an Administrative Law Judge to take evidence and develop a full
factual record on directed issues concerning MobileMedia's filing of false
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the
hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible transfer
of MobileMedia's FCC licenses. The grant of the stay was premised on the
availability of an FCC doctrine known as Second Thursday, which provides that,
if there is a change of control that meets certain conditions, the regulatory
issues designated for administrative hearing will be resolved by the transfer
of MobileMedia's FCC licenses to the new owners of MobileMedia and the hearing
will not proceed. The stay was originally granted for ten months and was
extended by the FCC through October 6, 1998.
On September 2, 1998, MobileMedia and Arch Communications Group, Inc.
("Arch") filed a joint Second Thursday application. The FCC released an order
granting the application on February 5, 1999. The order, which is conditioned
on confirmation of the plan and consummation thereof within nine months,
expressly terminated the administrative hearing and resolved the issues
designated therein. The order denied the parties' request for permanent
authority to operate transmitters for which MobileMedia was granted interim
authority on January 13, 1997. If the Merger is consummated, Arch must cease
operating these facilities within 6 months after the merger. The order also
denied the parties' request for a waiver of the spectrum cap (which prohibits
narrowband PCS licensees from having ownership interest in more than three
channels in any geographic area). Arch must divest any excess channels within 6
months after the merger.
Prior to the Petition date, five actions allegedly arising under the federal
securities laws were filed against MobileMedia and certain of its present and
former officers, directors and underwriters in the United States District Court
for the District of New Jersey (the "New Jersey District Court"). These actions
were subsequently consolidated as In re MobileMedia Securities Litigation, No.
96-5723 (AJL) (the "New Jersey Actions"). A consolidated amended complaint (the
"Complaint") was filed on November 21, 1997. The Complaint does not name
MobileMedia as a defendant.
In June 1997, the Debtors initiated an Adversary Proceeding in the Bankruptcy
Court to stay the prosecution of the New Jersey Actions. Pursuant to a
Stipulation entered into among the Debtors and the plaintiffs in the New Jersey
Actions and "So Ordered" by the Bankruptcy Court on October 31, 1997, the
plaintiffs in the New Jersey Actions could conduct only limited discovery in
connection with the New Jersey Actions and could not file any pleadings, except
responses to motions to dismiss, until the earlier of September 30, 1998 and
the effective date of a plan of reorganization. On October 21, 1998, the
defendents' motion to dismiss the New Jersey Actions filed with the New Jersey
District Court on January 16, 1998 was denied.
F-35
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
In addition to the New Jersey Actions, two lawsuits (together, the
"California Actions" and, together with the New Jersey Actions, the "Securities
Actions") were filed in September 1997 in the United States District Court for
the Northern District of California and the Superior Court of California naming
as defendants certain former officers and certain present and former directors
of MobileMedia, certain investment entities and the Debtors' independent
auditors. None of the Debtors is named as defendant in the California Actions.
On November 4, 1997, the Debtors commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At hearings held on December 10, 1997 and May 29,
1998, the Bankruptcy Court enjoined the plaintiffs in the California Actions
until September 15, 1998 from taking certain actions in connection with the
California Actions, with certain exceptions.
The plaintiffs in both the New Jersey Actions and California Actions are
currently conducting discovery of MobileMedia in connection with their
prosecution of the actions against the named defendants. Following consummation
of the Plan of Reorganization, the Company may be subject to further discovery
in these proceedings.
Neither the New Jersey Actions nor the California Actions name any of the
Debtors as a defendant. However, proofs of claim have been filed against the
Debtors by the plaintiffs in the New Jersey Actions, and both the New Jersey
Actions and the California Actions may give rise to claims against the Debtors'
Directors, Officers and Corporate Liability Insurance Policy. It is anticipated
that under any plan of reorganization for MobileMedia these Claims will receive
no distributions.
12. Other Investments
On March 21, 1995, MobileMedia purchased a 33% interest in Abacus
Communications Partners, L.P., ("Abacus") a Delaware limited partnership, from
Abacus Business Services, Inc. for $1,641. Abacus Communications Partners, L.P.
is one of MobileMedia's alphanumeric dispatch services providers. The
investment has been accounted for under the equity method in accordance with
Accounting Principles Board Opinion No. 18. Under the equity method, original
investments are recorded at cost and adjusted by MobileMedia's share of
undistributed earnings or losses of the purchased company. MobileMedia's share
of income (loss) of affiliate, net of distribution, for the years ended
December 31, 1996, 1997 and 1998, was $160, $69, and $(87), respectively. On
December 30, 1998 MobileMedia reached an agreement to sell its interest in
Abacus to Abacus Exchange Inc. for $1,400 and subsequently completed the sale
on January 25, 1999. Accordingly, MobileMedia wrote down its investment in
Abacus from $1,612 to $1,400 as of December 31, 1998.
13. Impact of Year 2000 (unaudited)
General
Computer systems were originally designed to recognize calendar years by the
last two digits in the date code field. Beginning in the year 2000, these date
code fields will need to accept four digit entries to distinguish twenty-first
century dates from twentieth century dates. Any of MobileMedia's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. As a result, in less than two years, the
computerized systems (including both information and
F-36
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
non-information technology systems) and applications used by MobileMedia will
need to be reviewed, evaluated and, if and where necessary, modified or
replaced to ensure that all financial, information and operating systems are
Year 2000 compliant.
State of Readiness
MobileMedia has formed an internal task force comprised of representatives of
its various relevant departments to address Year 2000 compliance matters. The
task force has undertaken a preliminary review of internal and external areas
that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or non-
critical/non-important.
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be Year 2000
compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain business-
related files were created and executed to identify any Year 2000 compliance
issues. The testing unearthed a few Year 2000 problems all of which have been
addressed and retested for Year 2000 readiness. Additional testing took place
the first quarter of 1999, which included testing of MobileMedia's financial
and human resource software packages. Although the results of these tests are
still being analyzed, relatively few Year 2000 problems were identified. There
can be no assurance, however, that such testing has detected, or will detect,
all compliance issues related to the Year 2000 problem.
With respect to external matters, MobileMedia has distributed questionnaires
and requests for certification to its mission-critical vendors and is in the
process of obtaining and reviewing the responses. The questionnaires have
requested information concerning embedded technologies of such vendors, the
hardware and software applications used by such vendors and the Year 2000
compliance efforts of such vendors. MobileMedia is in the process of evaluating
vendor responses and preparing contingency plans based on the responses.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to Year 2000 compliance matters.
Through December 31, 1998, MobileMedia has incurred approximately $50 in costs
(excluding in-house labor and hardware) in connection with Year 2000 compliance
matters. In addition, MobileMedia has purchased upgraded hardware at a cost of
approximately $175 for use as redundant equipment in testing for Year 2000
problems in an isolated production environment. MobileMedia estimates that it
will expend approximately $500 on additional hardware, software and other items
related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200 in
costs relating to Year 2000 remediation efforts for its paging network
hardware. MobileMedia also upgraded its paging network hardware during 1998 and
plans further upgrades in fiscal year 1999. Such upgrades have not been and are
not expected to be purchased solely for remediation of the Year 2000 compliance
problems; such upgrades are not themselves expected to have Year 2000
compliance problems.
F-37
<PAGE>
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Risks Relating to Year 2000 Compliance Matters
MobileMedia has a goal to become Year 2000 compliant with respect to internal
matters during 1999. Although MobileMedia has begun testing of its internal
business-related hardware and software applications, there can be no assurances
that such testing will detect all applications that may be affected by Year
2000 compliance problems. With respect to external matters, due to the multi-
dependent and interdependent issues raised by Year 2000 compliance, including
many factors beyond its control, MobileMedia may face the possibility that one
or more of its mission-critical vendors, such as its utilities, telephone
carriers, equipment manufacturers or satellite carriers, may not be Year 2000
compliant on a timely basis. Because of the unique nature of such vendors,
alternate providers may not be available. Finally, MobileMedia does not
manufacture any of the pagers, paging-related hardware or network equipment
used by MobileMedia or its customers in connection with MobileMedia's paging
operations. Although MobileMedia has tested such equipment, it has also relied
upon the representations of its vendors with respect to their Year 2000
readiness. MobileMedia can give no assurance as to the accuracy of such
vendors' representations.
Contingency Planning
MobileMedia has begun the process of assessing contingency plans that might
be available in the event of either internal or external Year 2000 compliance
problems. To this end, MobileMedia's various internal departments have begun to
prepare assessments of potential contingency alternatives. The task force will
undertake a review of these assessments in respect of application of
contingency plans on a department-by-department basis and on a company-wide
basis. MobileMedia intends to complete its contingency planning for Year 2000
compliance during calendar year 1999.
F-38
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
We have not authorized any person to make a statement that differs from what
is in this prospectus. If any person does make a statement that differs from
what is in this prospectus, you should not rely on it. This prospectus is not
an offer to sell, nor is it seeking an offer to buy, these securities in any
state in which the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of its date, but the information may
change after that date.
----------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 9
Forward-Looking Statements................................................ 18
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
The Exchange Offer........................................................ 20
Selected Historical Consolidated Financial and Operating Data--Arch....... 28
Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 30
Selected Historical Consolidated Financial and Operating Data--MobileMedia
......................................................................... 40
MobileMedia Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 42
Unaudited Selected Pro Forma Consolidated Financial Data.................. 54
Unaudited Pro Forma Condensed Consolidated Financial Statements........... 55
Industry Overview......................................................... 61
Business.................................................................. 66
Management................................................................ 79
Principal Stockholders.................................................... 85
Description of Outstanding Indebtedness................................... 88
Description of Notes...................................................... 92
Material Federal Income Tax Considerations................................ 125
Plan of Distribution...................................................... 131
Legal Matters............................................................. 132
Experts................................................................... 132
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$147,000,000
[LOGO OF ARCH COMMUNICATIONS, INC. APPEARS HERE]
Arch Communications, Inc.
Offer to Exchange
13 3/4% Senior Notes due 2008
For All Outstanding 13 3/4%
Senior Notes due 2008
------------------------
PROSPECTUS
------------------------
August 26, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
