UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 X
For the Fiscal Year Ended December 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 33-72646
ARCH COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 31-1236804
(State of incorporation) (I.R.S. Employer Identification No.)
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
(address of principal executive offices) (Zip Code)
(508) 870-6700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934: None
The Registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is filing this Form with the reduced disclosure format.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: Not applicable
The aggregate market value of the voting stock held by non-affiliates of the
Registrant: Not applicable
The number of shares of Registrant's Common Stock outstanding on March 28, 2000
was 848.7501.
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Arch is a leading provider of wireless communications services in the United
States. Arch has established a market presence in major metropolitan markets as
well as in middle and small markets. Arch's third-party retail distribution
agreements complement the more than 375 Arch-operated retail outlets. Similarly,
Arch's nationwide coverage utilizing two paging frequencies enables Arch to
provide higher-revenue nationwide services to more subscribers. Arch's
nationwide coverage also enhances Arch's local coverage and provides an
opportunity for Arch to take advantage of Arch's distribution networks. Arch is
a wholly-owned subsidiary of Arch Communications Group, Inc. ("Parent"). On June
29, 1998, Arch changed its name from USA Mobile Communications Inc. II to Arch
Communications, Inc.
Arch's plan to deploy its nationwide narrowband personal communications
services spectrum using its existing network infrastructure, together with its
strategic alliances, should permit Arch to market narrowband personal
communications services, such as multi-market alphanumeric and other advanced
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. Arch's investments to date in two national call centers
and additional regional call centers should supplement its previously developed
call center and complement its 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.
PENDING PAGENET MERGER
In November 1999, Parent signed a definitive agreement with Paging Network,
Inc. (PageNet) pursuant to which PageNet will merge with a wholly-owned
subsidiary of Arch. Each outstanding share of PageNet common stock will be
converted into 0.1247 share of Parent common stock in the merger.
Under the merger agreement, PageNet is required to make an exchange offer of
PageNet common stock to holders of its outstanding 8.875% senior subordinated
notes due 2006, its 10.125% senior subordinated notes due 2007 and its 10%
senior subordinated notes due 2008 (collectively, the "PageNet Notes"), having
an aggregate outstanding principal amount of $1.2 billion. Under the PageNet
exchange offer, an aggregate of 616,830,757 shares of PageNet common stock,
together with 68.9% of the equity interest in PageNet's subsidiary, Vast
Solutions, Inc. would be exchanged for all of the PageNet Notes, in the
aggregate. In connection with the merger, PageNet would distribute to its
stockholders (other than holders who received shares in the PageNet exchange
offer), 11.6% of the equity interests in Vast Solutions. After the merger, the
combined company would retain a 19.5% equity interest in Vast Solutions.
Under the merger agreement Parent is required to make an exchange offer of up
to 29,651,984 shares of its common stock (in the aggregate) for all of its 10
7/8% senior discount notes due 2008.
Under the merger agreement, Parent's board of directors at the closing would
consist of 12 individuals, at least six of whom would be designated by Parent's
existing board of directors. The PageNet board of directors would designate
three members, and the three largest holders of PageNet Notes would each be
entitled to designate one member. To the extent any such holder of PageNet Notes
did not elect to designate a director, the number of directors designated by
Parent's board of directors would increase.
Arch expects the merger, which has been approved by the boards of directors
of Parent and PageNet, but is subject to regulatory review, shareholder
approval, other third-party consents and the completion of the exchange offers,
to be completed in the second or third quarter of 2000. Each of the PageNet
exchange offer and Parent's exchange offer is conditioned upon acceptance by the
holders of 97.5% of the PageNet Notes and Parent's senior discount notes,
respectively subject to reduction in specified circumstances.
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Under the merger agreement, PageNet is required to include a "prepackaged"
plan of reorganization under Chapter 11 of the Bankruptcy Code in the materials
relating to the PageNet exchange offer, and to solicit consents for this
prepackaged plan from holders of the PageNet Notes and its senior creditors. In
certain circumstances PageNet has agreed either to file the prepackaged plan in
lieu of completing the PageNet exchange offer or to pay Parent a termination
fee.
WIRELESS COMMUNICATIONS SERVICES, PRODUCTS AND OPERATIONS
Arch provides wireless messaging services, including numeric, alphanumeric,
guaranteed messaging and send and receive messaging. Arch operates in all 50
states and the District of Columbia and in each of the 100 largest markets in
the United States. Arch offers these services on a local, regional and
nationwide basis employing digital networks covering more than 90% of the United
States population.
A numeric 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.
Numeric paging service, which was introduced by the paging industry nearly 20
years ago, currently represents a majority of all units in service. The growth
of alphanumeric paging service has been constrained by certain difficulties,
such as inputting data, specialized equipment requirements and its relatively
high use of system capacity during transmission, which has, to some extent, been
relieved by deploying alternate communications pathways, such as the Internet.
Arch provides messaging service to subscribers for a monthly fee. Subscribers
either lease the unit from Arch for an additional fixed monthly fee or they own
the unit, having purchased it either from Arch or from another vendor.
Arch-owned units leased to subscribers require capital investment by Arch, while
customer-owned and maintained units, commonly referred to as COAM units, and
those owned by resellers do not. 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 wireless messaging
services under marketing agreements. Resellers are responsible for sales,
billing, collection and equipment maintenance costs. Arch sells other products
and services, including units and accessories and unit replacement and
maintenance contracts.
Arch provides enhancements and ancillary services such as voice mail,
wireless information delivery services, 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. Wireless information delivery allows subscribers to
receive stock quotes, news and weather through their Arch service. Arch is also
in the process of test marketing various other services that add value, and can
be integrated with existing paging services.
SUBSCRIBERS AND MARKETING
Arch's wireless communications accounts are generally businesses with
employees who travel frequently but must be immediately accessible to their
offices or customers. Arch's subscribers include proprietors of small
businesses, professionals, management personnel, field sales personnel and
service forces, members of the construction industry and construction trades,
real estate brokers and developers, medical personnel, sales and service
organizations, specialty trade organizations, manufacturing organizations and
governmental agencies.
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Arch markets its services through three primary sales channels: direct,
reseller and retail.
Direct. In the direct channel, Arch leases or sells equipment directly to its
customers and bills and services such customers. Arch markets its services
through a direct marketing and sales organization which operated approximately
375 retail stores as of December 31, 1999. Arch'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 Arch's marketing and sales efforts, because of its
critical contribution to recurring revenue and projected growth. Arch has been
engaged in efforts to improve sales productivity and strengthen its direct
channel sales force, segments of which had previously suffered from high
turnover and open positions under MobileMedia's ownership and management. In
addition, Arch commenced implementing consumer direct marketing techniques in
1998. As of December 31, 1999, the direct channel accounted for approximately
86.6% of recurring revenue.
Reseller. In the reseller channel, Arch 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. Arch offers access to its network 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 Arch retains the
credit risk of the reseller. Because resellers are responsible for customer
equipment, the capital costs that would otherwise be borne by Arch are reduced.
Arch's resellers generally are not exclusive distributors of Arch's services
and often have access to networks of more than one provider. Competition among
service providers to attract and maintain reseller distribution is based
primarily upon price, including the sale of equipment to resellers at discounted
rates. Arch intends to be an active participant in the reseller channel and to
concentrate on accounts that are profitable and where longer term partnerships
can be established with selected resellers. As of December 31, 1999, the
reseller channel accounted for approximately 8.4% of recurring revenue.
Retail. In the retail channel, Arch sells equipment to retailers and, after
the consumer purchases the pager from the retailer, the consumer contacts Arch
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, equipment. This reduces Arch's
capital investment requirements. Subscribers obtained through retailers are
billed and serviced directly by Arch. Retail distribution permits Arch to
penetrate the consumer market by supplementing direct sales efforts. As of
December 31, 1999, the retail channel accounted for approximately 5.0% of
recurring revenue.
The wireless communications industry is highly competitive. Companies in this
industry compete on the basis of price, coverage area, available services,
transmission quality, system reliability and customer service.
Arch competes by maintaining competitive pricing of its products and
services, by providing broad coverage options through high-quality, reliable
transmission networks and by furnishing subscribers a superior level of customer
service. Arch, the second largest paging carrier in the United States, also
offers enhanced services such as alphanumeric messaging, guaranteed messaging
and send and receive messaging, voice mail and voice mail notifications, news,
sports, weather reports and stock quotes and other information delivery
services. Arch's primary competitors in the paging market, including Metrocall,
the third largest paging carrier in the United States, and each of
Vodafone/AirTouch and Weblink Wireless, both of which are among the top eight
largest paging carriers in the United States offer similar services. The
products and services Arch offers also compete with a broad array of wireless
communications services provided by broadband service providers. Some of these
broadband service providers possess financial, technical and other resources
greater than those of Arch. Such providers currently competing with Arch in one
or more markets include MCI/WorldCom, Sprint PCS, AirTouch/Vodafone, Nextel, and
Bell Atlantic.
The provision of broadband wireless services is currently dominated by
providers using three types of Federal Communication Commission licenses:
cellular radiotelephone, broadband personal communications services, and digital
specialized mobile radio services. While all three of these broadband services
were created at different times and utilize different technologies, they are
used to offer two-way voice as well as short messaging services. The short
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messaging services are identical to numeric and alphanumeric paging services and
thus broadband services can serve as a replacement to paging services.
Insofar as broadband services provide short messaging service together with
two-way voice service, they are more sophisticated than basic paging services
and command a greater price. The price of broadband services, however, has
fallen dramatically. The decline in price of these services is reflected in the
decline of the average monthly bill for broadband services from $42.78 in
December 1997 to $39.43 in December 1998. Moreover, today many broadband
providers offer basic service packages for approximately $20 per month. By
contrast, the average revenue per unit for pagers was estimated to be $10.17 per
month.
While broadband services are more expensive than basic paging, broadband
service providers typically provide short messaging service as an element of
their basic service package without additional charges. In other words,
subscribers that purchase broadband service no longer need to subscribe to a
separate paging service as well. As a result, a large fraction of paging
customers can readily switch from paging to broadband services. The dramatic
decrease in prices for broadband services has led many consumers to select
broadband services as an alternative to paging services. Indeed, survey data
indicates that roughly 20 percent of paging customers that drop their service do
so in favor of broadband services.
The intensity of competition for customers will continue to increase as
wireless communications products continue to be developed. For example, Arch
holds one nationwide and five regional narrowband personal communications
services licenses. Competitors of Arch also hold narrowband personal
communications services licenses. Some of these competitors have substantially
greater resources than Arch. Some competitors currently offer a 2-way narrowband
personal communications wireless data service from its own network. Although
Arch cannot predict the types of narrowband personal communications services
which will be offered by those companies, Arch expects that those services will
compete with the narrowband personal communications services and paging services
offered by Arch.
ITEM 2. PROPERTIES
At December 31, 1999, Arch owned 10 office buildings and leased office space,
including its executive offices, in approximately 375 locations in 42 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 4,800 locations in all 50 states, the U.S. Virgin
Islands and Puerto Rico. 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. Substantially all of
Arch's and MobileMedia's tower sites were sold during 1998 and 1999 and Arch
currently rents transmitter space.
ITEM 3. LEGAL PROCEEDINGS
Arch, from time to time, is involved in lawsuits arising in the normal course
of business. Arch believes that its currently pending lawsuits will not have a
material adverse effect on its financial condition or results of operations.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the common stock, $0.01 par value per share of Arch is held by Parent
and is not publicly traded.
Arch has never declared or paid cash dividends on the common stock and does
not intend to declare or pay cash dividends on its common stock in the
foreseeable future. Covenants in the credit facility and debt obligations of
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Arch and its subsidiaries effectively prohibit the declaration or payment of
cash dividends by Arch for the foreseeable future. See Note 3.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements and information
relating to Arch and its subsidiaries that are based on the beliefs of Arch's
management as well as assumptions made by and information currently available to
Arch's management. These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. When used
herein, words such as "anticipate", "believe", "estimate", "expect", "intend"
and similar expressions, as they relate to Arch or its management, identify
forward-looking statements. Such statements reflect the current views of Arch
with respect to future events and are subject to certain risks, uncertainties
and assumptions, including but not limited to those factors set forth below
under the caption "Factors Affecting Future Operating Results". Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their respective dates. Arch
undertakes no obligation to update or revise any forward-looking statements. All
subsequent written or oral forward-looking statements attributable to Arch or
persons acting on behalf of Arch are expressly qualified in their entirety by
the discussion under "Factors Affecting Future Operating Results".
OVERVIEW
The following discussion and analysis should be read in conjunction with
Arch's consolidated financial statements and notes thereto included elsewhere in
this annual report.
Adjusted EBITDA, as determined by Arch, consists of EBITDA (earnings before
interest, taxes, depreciation and amortization) net of restructuring charges,
equity in loss of affiliate and extraordinary items; 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 wireless communications
industry. Adjusted EBITDA is also one of the primary financial measures used to
calculate whether Arch and its subsidiaries are in compliance with covenants
under their debt agreements. These covenants, among other things, limit the
ability of Arch and its subsidiaries to: incur additional indebtedness, make
investments, 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 or limitations imposed by applicable law upon the
payment of dividends or distributions.
MOBILEMEDIA MERGER
In June 1999, Parent acquired MobileMedia Communications, Inc., which is now
a wholly-owned subsidiary of Arch. MobileMedia had been operating as a
debtor-in-possession under chapter 11 of the Bankruptcy Code.
Parent acquired MobileMedia for a combination of cash and Parent securities,
as follows:
o Parent paid approximately $479.0 million in cash to secured creditors of
MobileMedia;
o Parent paid a total of $37.6 million to pay fees, expenses and other
debts;
o Parent issued 4,781,656 shares of its common stock to unsecured creditors
of MobileMedia;
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o Parent issued and sold 36,207,265 additional shares of its common stock to
unsecured creditors of MobileMedia and Parent stockholders for a total
purchase price of $217.2 million; and
o Parent issued to four unsecured creditors, who had agreed to act as
standby purchasers and to purchase shares not purchased by other unsecured
creditors, warrants to acquire 1,225,219 shares of its common stock on or
before September 1, 2001 for $9.03 per share.
Arch borrowed a total of $320.8 million to help fund the MobileMedia
acquisition.
During the third quarter of 1999, Arch's board of directors approved plans
covering the elimination of redundant headcount and facilities in connection
with the overall integration of operations. It is expected that integration will
be completed by December 31, 2000. Because Arch anticipates a net reduction of
approximately 10% of MobileMedia's workforce and the closing of some facilities
and tower sites, it established a $14.5 million acquisition reserve which is
included as part of the purchase price of MobileMedia. The initial acquisition
reserve consisted of approximately:
o $6.1 million for employee severance;
o $7.9 million for lease obligations and terminations; and
o $0.5 million of other costs.
There can be no assurance that the desired cost savings will be achieved or that
the integration of the two companies will be accomplished smoothly,
expeditiously or successfully. See Note 9 to the Notes to Arch's consolidated
financial statements.
RESULTS OF OPERATIONS
The following table presents certain items from Arch's consolidated
statements of operations as a percentage of net revenues and certain other
information for the periods indicated (dollars in thousands except per unit
data):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1999
---- ----
<S> <C> <C>
Total revenues ................................ 107.8 % 105.8 %
Cost of products sold ......................... (7.8) (5.8)
--------- ----------
Net revenues .................................. 100.0 100.0
Operating expenses:
Service, rental and maintenance ............. 21.1 21.8
Selling ..................................... 12.8 13.9
General and administrative .................. 29.2 29.8
Depreciation and amortization ............... 57.4 50.8
Restructuring charge ........................ 3.8 (0.4)
--------- ----------
Operating income (loss) ....................... (24.3)% (15.9)%
========= ==========
Net income (loss) ............................. (43.6)% (40.7)%
========= ==========
Adjusted EBITDA ............................... 36.9 % 34.5 %
========= ==========
Cash flows provided by operating activities ... $ 84,210 $ 100,505
Cash flows used in investing activities ....... $ (82,868) $ (627,166)
Cash flows provided by (used in) financing
activities .................................. $ (3,207) $ 529,020
Annual service, rental and maintenance expenses
per unit in service ......................... $ 20 $ 23
</TABLE>
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YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Total revenues increased to $641.8 million, a 55.2% increase, in 1999 from
$413.6 million in 1998 as the number of units in service increased from 4.3
million at December 31, 1998 to 6.9 million at December 31,1999 primarily due to
the MobileMedia acquisition in June 1999. Net revenues increased to $606.9
million, a 58.2% increase, in 1999 from $383.7 million in 1998. Total revenues
and net revenues in 1999 were adversely affected by (1) the lack of industry
growth for basic numeric and alphanumeric paging services and (2) Arch
subscriber cancellations which led to a decrease of 89,000 units in service,
excluding the addition of subscribers from the MobileMedia acquisition. Revenues
were also adversely affected in the fourth quarter of 1998 and in 1999 by:
o Arch's decision, in anticipation of the MobileMedia acquisition, not to
replace normal attrition among direct sales personnel;
o the reduced effectiveness of Arch's reseller channels of distribution; and
o reduced sales through Arch-operated retail stores.
Arch expects revenue to continue to be adversely affected in 2000 by
declining demand for basic numeric and alphanumeric paging services. Arch
believes that the basic paging industry did not grow during 1999, that demand
for basic paging services will decline in 2000 and the following years and that
any significant future growth in the paging industry will be attributable to
advanced messaging services, such as send and receive and guaranteed receipt
paging services. As a result, Arch believes that it will experience a net
decline in the number of its units in service in 2000, excluding the addition of
subscribers from the PageNet acquisition, as Arch's addition of advanced
messaging subscribers is exceeded by its loss of basic paging subscribers.
Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of units, increased to
$591.4 million, a 59.3% increase, in 1999 from $371.2 million in 1998. These
increases in revenues were due primarily to the net increase in the number of
units in service from 4.3 million at December 31, 1998 to 6.9 million at
December 31, 1999. This net increase in units was due to the acquisition of
MobileMedia on June 3, 1999, offset by a net decrease of 89,000 units in
service. Maintenance revenues represented less than 10% of total service, rental
and maintenance revenues in 1999 and 1998. Arch does not differentiate between
service and rental revenues. Product sales, less cost of products sold,
increased to $15.5 million, a 23.6% increase, in 1999 from $12.5 million in
1998, respectively, as a result of the MobileMedia acquisition.
Service, rental and maintenance expenses, which consist primarily of
telephone, third party carrier fees and site rental expenses, increased to
$132.4 million, 21.8% of net revenues, in 1999 from $80.8 million, 21.1% of net
revenues, in 1998. The increase was due primarily to increased expenses
associated with the provision of wireless communications services to a greater
number of units due to the MobileMedia acquisition. Annualized service, rental
and maintenance expenses per unit increased to $23 in 1999 from $20 in 1998.
This increase was due primarily to the increase in wireless messaging systems
and associated expenses as a result of the MobileMedia merger. However, the per
unit costs should decrease in the future if expected synergies are achieved and
as existing systems become more populated through the addition of new units and
the fixed costs of operating these systems are spread over a larger unit base.
Selling expenses increased to $84.2 million, 13.9% of net revenues, in 1999
from $49.1 million, 12.8% of net revenues, in 1998. The increase in absolute
dollars was primarily due to increased headcount and the increase as a
percentage of net revenues was primarily due to redundant headcount as a result
of the MobileMedia merger.
General and administrative expenses increased to $180.7 million, 29.8% of net
revenues, in 1999 from $112.2 million, 29.2% of net revenues, in 1998. The
increase in absolute dollars was due primarily to increased headcount,
administrative and facility costs and the increase as a percentage of net
revenues was primarily due to the redundant headcount, administrative and
facility costs associated with MobileMedia.
Depreciation and amortization expenses increased to $308.5 million in 1999
from $220.2 million in 1998. The increase in these expenses principally
reflected the acquisition of MobileMedia. Additionally, depreciation expense in
1999 included the write-off of approximately $7.1 million of costs associated
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with the development of an integrated billing and management system. Arch
decided to discontinue further development of that system due to the
capabilities of the system acquired through the MobileMedia merger.
Operating losses were $96.8 million in 1999 compared to $93.3 million in
1998, as a result of the factors outlined above.
Net interest expense increased to $98.6 million in 1999 from $64.5 million in
1998. The increase was principally attributable to an increase in Arch's
outstanding debt due to the MobileMedia acquisition.
Other expense increased to $45.1 million in 1999 from $2.0 million in 1998.
Other expense in 1999 included:
o $6.5 million for a write-off of Arch's entire investment in CONXUS
Communications, Inc., a holder of send and receive messaging licenses.
CONXUS filed for bankruptcy protection in May 1999.
o a $35.8 million write-off of Arch's investment in Benbow PCS Ventures,
Inc. another holder of send and receive messaging licenses. In June 1999,
Arch, Benbow and Benbow's controlling shareholder agreed to terminate
their business relationship and wind-up Benbow's business.
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.
On January 1, 1999, Arch adopted the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants Statement of Position
98-5 (SOP 98-5). SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. 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. This charge represents the unamortized portion of start-up
and organization costs which had been deferred in prior years.
Net loss increased to $247.1 million in 1999 from $167.1 million in 1998, as
a result of the factors outlined above.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Continued losses are likely
Arch has reported net losses in the past, as has MobileMedia. Arch expects
that it will continue to report net losses and cannot give any assurance about
when, if ever, it is likely to attain profitability.
Arch has reported net losses in all of the periods shown in the table below:
Year Ended December 31,
-----------------------------
1997 1998 1999
---- ---- ----
(dollars in millions)
Net income (loss):
Arch.................. $(146.6) $(167.1) $(247.1)
MobileMedia........... $(124.6) $ 35.6 $ 387.3 (1)
(1) Through Arch's acquisition of MobileMedia on June 3, 1999
These historical net losses have resulted principally from substantial
depreciation and amortization expense, primarily related to intangible assets
and messaging device depreciation, interest expense, the impairment of
long-lived assets, other costs of growth. MobileMedia had net income of $35.6
million during the year ended December 31, 1998 solely because of a $94.2
million gain on the sale of transmission towers and related equipment and net
income of $387.3 million for the period ended June 3, 1999 due to the
forgiveness of debt arising out of MobileMedia's bankruptcy proceedings. After
giving effect to the MobileMedia acquisition, Arch would have incurred, on a pro
forma basis, losses before extraordinary items and cumulative effect of
accounting change of $154.2 million for the year ended December 31, 1998 and
$271.1 million for the year ended December 31, 1999.
9
<PAGE>
Declines in units in service are likely
Cancellation of units in service can significantly affect the results of
operations of wireless communications 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 wireless
communications business is characterized by high fixed costs, cancellations
directly and adversely affect earnings before interest, taxes, depreciation and
amortization. In 1999, Arch experienced a decrease of 89,000 units in service,
excluding the addition of subscribers from the MobileMedia acquisition. Arch
believes that the basic paging industry did not grow during 1999, that demand
for basic paging services will decline in 2000 and the following years and that
any significant future growth in the paging industry will be attributable to
advanced messaging services, such as send and receive and guaranteed receipt
paging services. As a result, Arch believes that it will experience a net
decline in the number of its units in service in 2000, excluding the addition of
subscribers from the PageNet acquisition, as Arch's addition of advanced
messaging subscribers is exceeded by its loss of basic paging subscribers.
Revenues and operating results may fluctuate, leading to fluctuations in trading
prices and possible liquidity problems
Arch believes that future fluctuations in its revenues and operating results
may occur due to many factors. Arch's current and planned expenses and debt
repayment levels are, to a large extent, fixed in the short term, and are based
in part on its expectations as to future revenues and cash flow growth. Arch may
be unable to adjust spending in a timely manner to compensate for any revenue or
cash flow shortfall. It is possible that, due to future fluctuations, Arch's
revenue, cash flow or operating results may not meet the expectations of
securities analysts or investors. This may have a material adverse effect on the
price of Arch's common stock. 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. In the worst case, if Arch
lacked funds to repay its debt, it could file for bankruptcy protection.
High degree of leverage may continue to burden operations
Arch has been highly leveraged, and will remain substantially leveraged
following the PageNet merger. The following table compares the total debt, total
assets and latest three-month annualized adjusted earnings before interest,
taxes, depreciation and amortization (EBITDA) of Arch at or as of December 31,
1999.
(dollars in millions)
Total debt.......................... $ 932.2
Total assets........................ $ 1,345.1
Annualized adjusted EBITDA.......... $ 266.3
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, may not
necessarily be comparable to similarly titled data of other wireless messaging
companies.
Substantial leverage may have the following adverse consequences for Arch:
o This leverage may impair Arch's ability to obtain additional financing
necessary for acquisitions, working capital, capital expenditures or other
purposes on acceptable terms, if at all.
o 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.
o 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.
o Arch may be more highly leveraged than some of its competitors in the
wireless communications industry, and this may place it at a competitive
disadvantage.
o Any degree of leverage will make Arch more vulnerable to a downturn in its
business or the economy generally than if it were not as leveraged.
10
<PAGE>
Arch may not be able to reduce its financial leverage as it intends, and may not
be able to 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 adjusted EBITDA, it may be precluded from incurring
additional indebtedness due to cash flow coverage requirements under existing or
future debt instruments.
Growth and acquisition strategy
Arch believes that the wireless communications industry has experienced, and
will continue to experience, consolidation due to factors that favor larger,
multi-market companies, including: o the ability to obtain additional radio
spectrum; o greater access to capital markets and lower costs of capital; o
broader geographic coverage of wireless messaging systems; o economies of scale
in the purchase of capital equipment; o operating efficiencies; and o enhanced
access to executive personnel.
Arch has pursued, and intends to continue to pursue, acquisitions of wireless
communications businesses as a key component of its growth strategy. However,
the process of integrating acquired businesses may involve unforeseen
difficulties and may require a disproportionate amount of the time and attention
of Arch's management. No assurance can be given that suitable acquisitions can
be identified, financed and completed on acceptable terms, or that any future
acquisitions by Arch will be successful.
Implementation of Arch's growth strategy will be subject to numerous other
contingencies beyond the control of its management. These contingencies include
national and regional economic conditions, interest rates, competition, changes
in regulation or technology and the ability to attract and retain skilled
employees. Accordingly, no assurance can be given that Arch's growth strategy
will prove effective or that its goals will be achieved.
Amortization charges from the PageNet merger and the earlier MobileMedia
acquisition may reduce Arch's earnings sooner than management expects
Under purchase accounting treatment for the pending PageNet merger and the
acquisition of MobileMedia Communications, Inc. in June 1999, Arch must record a
substantial amount of goodwill and other intangible assets. This will result in
substantial amortization charges to the consolidated income of Arch over the
useful lives of those assets. Arch estimates the amount of those charges will
total approximately $57.0 million per year for ten years. However, actual
charges in the early years could adversely affect reported results of operations
more than is currently anticipated if the underlying assets are impaired or if
the useful lives of the assets are less than currently estimated.
The PageNet merger may not take place. If it does not take place, Arch will
incur substantial costs and its investors will not enjoy the anticipated
benefits of the merger
The PageNet merger will not take place unless many conditions are satisfied
or waived. These conditions include stockholder and noteholder approvals,
governmental approvals and the availability of senior credit facilities. If the
PageNet merger does not take place, the contemplated benefits of the merger will
not be realized, and Arch will not enjoy the anticipated benefits of the merger
despite incurring substantial transaction costs. If the PageNet merger agreement
is terminated after Arch pursues an alternative offer, Arch may be required to
pay a termination fee of $40.0 million.
Arch may need additional capital to expand its business which could be difficult
to obtain
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. Arch's future capital requirements
will depend on factors that include:
11
<PAGE>
o subscriber growth;
o the type of wireless communications devices and services demanded by
customers;
o technological developments;
o marketing and sales expenses;
o competitive conditions;
o the nature and timing of Arch's narrowband personal communications service
strategy; and
o acquisition strategies and opportunities.
Arch cannot be certain 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 be unable to develop or enhance
its products, take advantage of future opportunities, grow its business or
respond to competitive pressures or unanticipated needs.
Competition and technological change may undermine Arch's market position and
adversely affect its results of operations
Arch may not be able to compete successfully with current and future
competitors in the wireless communications business or with competitors offering
alternative communication technologies. In particular:
Competition may intensify from large companies and may reduce Arch's revenues
and operating margins
Arch may face significant additional competition in the future. This could
have a material adverse effect on its revenues and earnings before interest,
taxes, depreciation and amortization. Some competitors possess greater
financial, technical and other resources than those of Arch. Increased
competition from broadband personal communications service providers,
cellular providers, digital specialized mobile radio providers, dedicated
data networks and wireless information delivery service providers has led to
competition from increasingly larger and better capitalized competitors. In
addition, Arch competes with the many other providers of paging and advanced
messaging services. If any of such competitors were to devote additional
resources to the wireless communications business or focus on Arch's
historical business segments, they could secure Arch's customers and reduce
demand for its products. This could materially reduce Arch's revenue and
operating margins.
New send and receive wireless messaging technology may adversely affect
Arch's competitive position
Competitors are currently using and developing a variety of send and
receive wireless messaging technologies. Arch currently resells such send and
receive services over the network of a competitor. Due to the relatively
recent availability of send and receive messaging products and services,
there have not yet been sales which would be sufficient to fully indicate a
proven demand for such services among business or consumer subscribers. Such
services will compete with other available methods of telecommunications,
including cellular and broadband personal communications services, which are
commonly referred to as PCS, as well as specialized mobile radio, services
and services provided over dedicated data networks which use hand-held
devices to send and receive data. Although these services are primarily
focused on send and receive voice communications, they may include wireless
messaging as an adjunct service or may replace the need for send and receive
messaging entirely. It is less expensive for an end user to obtain a cellular
or PCS unit with data capability than the send and receive messaging units
currently available. This is because the nationwide cellular and PCS carriers
have subsidized the purchase of these units and because prices for broadband
services have been declining rapidly, making the two types of services and
product offerings more comparable.
Future technological advances in the telecommunications industry,
including these send and receive messaging technologies, as well as wireless
information and machine to machine and machine to person messaging, among
others, could increase the number and type of new services or products which
compete with the wireless messaging services historically offered by Arch.
Firms seeking to provide wireless communications through these and other
technologies may bring their products to market faster or in packages of
products that consumers find more valuable than those which Arch proposes to
provide.
12
<PAGE>
All of these factors could reduce Arch's market share and adversely affect
its revenues and operating margins.
Obsolescence in company-owned units may impose additional costs on Arch
Technological change may also adversely affect the value of the units owned
by Arch that are leased to its subscribers. If Arch's current subscribers
request more technologically advanced units, including send and receive units,
Arch 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 costs or capital expenditures could have a material adverse effect on
Arch's results of operations.
Government regulation may burden operations
Licenses may not be automatically renewed
Arch's Federal Communications Commission paging licenses are for varying
terms of up to 10 years. When the licenses expire, renewal applications must
be approved by the Federal Communications Commission. To date, the Federal
Communications Commission has approved each assignment and transfer of
control for which Arch has sought approval but, no assurance can be given
that any future renewal applications will be free of challenge or will be
granted by the Federal Communications Commission. Loss of licenses would
impair Arch's operations.
Regulatory changes could add burdens or benefit competing technologies
The Federal Communications Commission continually reviews and revises its
rules affecting wireless communications companies. Therefore, regulatory
requirements that apply to Arch may change significantly over time.
Because Arch depends on third parties, that it does not control, for products
and services, Arch's operations may be disrupted
Arch does not manufacture any of the equipment customers need to take
advantage of its services. It is dependent primarily on Motorola, Inc. and NEC
America Inc. to obtain sufficient equipment inventory for new subscribers 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 equipment, terminals or transmitters, such as
MobileMedia experienced before its bankruptcy filing, could lead to disruptions
in operations and adverse financial consequences. Motorola has announced its
intention to discontinue manufacturing transmitters and other paging
infrastructure during 2000, although it will continue to maintain and service
existing infrastructure into the future. Arch's purchase agreement with Motorola
expires on March 17, 2001. There can be no assurance that the agreement with
Motorola will be renewed or, if renewed, that the renewed agreement will be on
terms and conditions as favorable to the combined company as those under the
current agreement.
Arch relies on third parties to provide satellite transmission for some
aspects of its wireless communications services. To the extent there are
satellite outages or if satellite coverage is impaired in other ways, Arch may
experience a loss of service until such time as satellite coverage is restored,
which could have a material adverse effect due to customer complaints.
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.
13
<PAGE>
Restrictions under debt instruments may prevent Arch from taking actions which
its board considers beneficial
Various debt instruments impose operating and financial restrictions on Arch.
Arch's senior credit facility requires various Arch operating subsidiaries to
maintain specified financial ratios, including a maximum leverage ratio, a
minimum interest coverage ratio, a minimum debt service coverage ratio and a
minimum fixed charge coverage ratio. The senior credit facility was amended and
restated on March 23, 2000 to permit the PageNet merger and includes a
restriction on capital expenditures and a minimum revenue test. In addition, the
senior credit facility limits or restricts, among other things, Arch's operating
subsidiaries' ability to:
o declare dividends or repurchase capital stock;
o incur or pay back indebtedness;
o engage in mergers, consolidations, acquisitions and asset sales; or
o alter its lines of business or accounting methods.
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 senior 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 senior creditors could proceed
against any collateral securing the indebtedness. If the lenders under the
senior credit facility or other debt instruments accelerated the payment of such
indebtedness, there can be no assurance that the assets of Arch would be
sufficient to repay in full such indebtedness and other indebtedness of Arch. In
addition, because the senior credit facility and other debt instruments limit
Arch's ability to engage in some types of transactions, Arch may be prohibited
from entering into transactions that could be beneficial to Arch.
RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 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.
The Securities and Exchange Commission released Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements", on December 3,
1999. This SAB provides additional guidance on the accounting for revenue
recognition, including both broad conceptual discussions as well as certain
industry-specific guidance. The guidance is effective for the second quarter of
fiscal 2000. Arch does not expect SAB 101 to have a material impact on its
results of operations upon adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of Arch's long-term debt is subject to fixed rates of interest
or interest rate protection. In the event that the interest rate on Arch's
non-fixed rate debt fluctuates by 10% in either direction, Arch believes the
impact on its results of operations would be immaterial. Arch transacts
infrequently in foreign currency and therefore is not exposed to significant
foreign currency market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page F-1.
14
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Operations for Each of the Three Years in
the Period Ended December 31, 1999
Consolidated Statements of Stockholder's Equity for Each of the Three
Years in the Period Ended December 31, 1999
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period Ended December 31, 1999
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1999.
(c) Exhibits
The exhibits listed in the accompanying index to exhibits are
filed as part of this annual report on Form 10-K.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARCH COMMUNICATIONS, INC.
By: /s/ C. Edward Baker, Jr.
-------------------------
C. Edward Baker, Jr.
Chairman of the Board and Chief
Executive Officer
March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ C. Edward Baker, Jr. Chairman of the Board and Chief March 29, 2000
- ------------------------- Executive Officer (principal
C. Edward Baker, Jr. executive officer)
/s/ John B. Saynor Executive Vice President, Director March 29, 2000
- -------------------------
John B. Saynor
/s/ J. Roy Pottle Executive Vice President and March 29, 2000
- ------------------------- Chief Financial Officer (principal
J. Roy Pottle financial officer and principal
accounting officer)
/s/ R. Schorr Berman Director March 29, 2000
- -------------------------
R. Schorr Berman
/s/ Edwin M. Banks Director March 29, 2000
- -------------------------
Edwin M. Banks
/s/ James S. Hughes Director March 29, 2000
- -------------------------
James S. Hughes
/s/ John Kornreich Director March 29, 2000
- -------------------------
John Kornreich
/s/ H. Sean Mathis Director March 29, 2000
- -------------------------
H. Sean Mathis
/s/ Allan L. Rayfield Director March 29, 2000
- -------------------------
Allan L. Rayfield
/s/ John A. Shane Director March 29, 2000
- -------------------------
John A. Shane
16
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 ............ F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1999.............................. F-4
Consolidated Statements of Stockholder's Equity for Each of
the Three Years in the Period Ended December 31, 1999.................... F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1999.............................. F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Arch
Communications, Inc., a wholly-owned subsidiary of Arch Communications Group,
Inc. (a Delaware corporation) (the "Company") and subsidiaries as of December
31, 1998 and 1999, 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, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 16, 2000
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,
---------------------------
1998 1999
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 22 $ 2,381
Accounts receivable (less reserves of $6,583 and $16,473 in 1998 and
1999, respectively) .............................................. 30,753 61,167
Inventories ........................................................ 10,319 9,101
Prepaid expenses and other ......................................... 8,007 11,874
----------- -----------
Total current assets ............................................. 49,101 84,523
----------- -----------
Property and equipment, at cost:
Land, buildings and improvements ................................... 10,480 20,503
Messaging and computer equipment ................................... 400,312 667,820
Furniture, fixtures and vehicles ................................... 17,381 26,321
----------- -----------
428,173 714,644
Less accumulated depreciation and amortization ..................... 209,128 314,445
----------- -----------
Property and equipment, net ........................................ 219,045 400,199
----------- -----------
Intangible and other assets (less accumulated amortization of
$368,903 and $511,006 in 1998 and 1999, respectively) ............ 626,439 860,424
----------- -----------
$ 894,585 $ 1,345,146
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt ............................... $ 1,250 $ 8,060
Accounts payable ................................................... 25,683 30,016
Accrued restructuring charges ...................................... 11,909 17,111
Accrued expenses ................................................... 11,689 43,629
Accrued interest ................................................... 20,922 30,267
Customer deposits .................................................. 4,528 7,526
Deferred revenue ................................................... 10,958 28,175
----------- -----------
Total current liabilities ........................................ 86,939 164,784
----------- -----------
Long-term debt, less current maturities ............................... 618,354 924,132
----------- -----------
Other long-term liabilities ........................................... 29,510 83,285
----------- -----------
Commitments and contingencies
Stockholder's equity:
Common stock--$.01 par value, authorized 1,000 shares, issued and
outstanding: 849 shares in 1998 and 1999 ......................... -- --
Additional paid-in capital ......................................... 642,406 902,621
Accumulated deficit ................................................ (482,624) (729,676)
----------- -----------
Total stockholder's equity ....................................... 159,782 172,945
----------- -----------
$ 894,585 $ 1,345,146
=========== ===========
</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, except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Service, rental and maintenance revenues .......... $ 351,944 $ 371,154 $ 591,389
Product sales ..................................... 44,897 42,481 50,435
--------- --------- ---------
Total revenues ............................... 396,841 413,635 641,824
Cost of products sold ............................. (29,158) (29,953) (34,954)
--------- --------- ---------
367,683 383,682 606,870
--------- --------- ---------
Operating expenses:
Service, rental and maintenance ................. 79,836 80,782 132,400
Selling ......................................... 51,474 49,132 84,249
General and administrative ...................... 106,041 112,181 180,726
Depreciation and amortization ................... 231,376 220,172 308,464
Restructuring charge ............................ -- 14,700 (2,200)
--------- --------- ---------
Total operating expenses ..................... 468,727 476,967 703,639
--------- --------- ---------
Operating income (loss) ........................... (101,044) (93,285) (96,769)
Interest expense .................................. (62,099) (66,143) (100,466)
Interest income ................................... 796 1,685 1,825
Other expense ..................................... (1,581) (1,951) (45,081)
Equity in loss of affiliate ....................... (3,872) (5,689) (3,200)
--------- --------- ---------
Income (loss) before income tax benefit,
extraordinary items and accounting change ....... (167,800) (165,383) (243,691)
Benefit from income taxes ......................... 21,172 -- --
--------- --------- ---------
Income (loss) before extraordinary items and
accounting change ............................... (146,628) (165,383) (243,691)
Extraordinary gain (loss) from early extinguishment
of debt ......................................... -- (1,720) --
Cumulative effect of accounting change ............ -- -- (3,361)
--------------------------------------------------- --------- --------- ---------
Net income (loss) ................................. $(146,628) $(167,103) $(247,052)
========= ========= =========
</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, except share amounts)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Equity
----- ------- ------- ------
<S> <C> <C> <C> <C>
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
Capital contribution from Arch Communications
Group, Inc........................................ -- 260,215 -- 260,215
Net loss............................................ -- -- (247,052) (247,052)
---- --------- --------- ---------
Balance, December 31, 1999............................. $ -- $ 902,621 $(729,676) $ 172,945
==== ========= ========= =========
</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>
Years Ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $(146,628) $(167,103) $(247,052)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ..................... 231,376 220,172 308,464
Deferred income tax benefit ....................... (21,172) -- --
Extraordinary loss from early extinguishment of debt -- 1,720 --
Cumulative effect of accounting change ............ -- -- 3,361
Equity in loss of affiliate ....................... 3,872 5,689 3,200
Accretion of discount on senior notes ............. -- 141 864
Gain on Tower Site Sale ........................... -- (1,859) (1,871)
Write-off of N-PCS investments .................... -- -- 37,498
Accounts receivable loss provision ................ 7,181 8,545 15,265
Changes in assets and liabilities, net of effect
from acquisition of company:
Accounts receivable ............................ (11,984) (9,151) (18,369)
Inventories .................................... (2,394) 2,314 1,728
Prepaid expenses and other ..................... (386) (3,090) 7,000
Accounts payable and accrued expenses .......... 3,683 24,649 (2,938)
Customer deposits and deferred revenue ......... 1,058 549 (7,554)
Other long-term liabilities .................... -- 1,634 909
--------- --------- ---------
Net cash provided by operating activities .............. 64,606 84,210 100,505
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net ............. (87,868) (79,249) (95,208)
Additions to intangible and other assets ............. (14,899) (33,935) (18,443)
Net proceeds from tower site sale .................... -- 30,316 3,046
Acquisition of company, net of cash acquired ......... -- -- (516,561)
--------- --------- ---------
Net cash used for investing activities ................. (102,767) (82,868) (627,166)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt ........................... 91,000 460,964 473,783
Repayment of long-term debt .......................... (49,046) (489,014) (162,059)
Capital contribution from (distribution to) Arch
Communications Group, Inc. ........................ (3,177) 24,843 217,296
--------- --------- ---------
Net cash provided by (used in) financing activities .... 38,777 (3,207) 529,020
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ... 616 (1,865) 2,359
Cash and cash equivalents, beginning of period ......... 1,271 1,887 22
--------- --------- ---------
Cash and cash equivalents, end of period ............... $ 1,887 $ 22 $ 2,381
========= ========= =========
Supplemental disclosure:
Interest paid ........................................ $ 61,322 $ 56,249 $ 90,249
========= ========= =========
Liabilities assumed in acquisition of company ........ $ -- $ -- $ 134,429
========= ========= =========
</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. Arch is a wholly-owned
subsidiary of Arch Communications Group, Inc. ("Parent"). On June 29, 1998, Arch
changed its name from USA Mobile Communications Inc. II to Arch Communications,
Inc.
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. The Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements", on December 3, 1999. This SAB provides additional
guidance on the accounting for revenue recognition, including both broad
conceptual discussions as well as certain industry-specific guidance. The
guidance is effective for the second quarter of fiscal 2000. Arch does not
expect SAB 101 to have a material impact on its results of operations upon
adoption.
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 messaging devices 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--Leased messaging devices 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:
Estimated
Asset Classification Useful Life
-------------------- -----------
Buildings and improvements.......................... 20 Years
Leasehold improvements.............................. Lease Term
Messaging devices................................... 3 Years
Messaging and computer equipment.................... 5-8 Years
Furniture and fixtures.............................. 5-8 Years
Vehicles............................................ 3 Years
Depreciation and amortization expense related to property and equipment
totaled $108.0 million, $101.1 million and $144.9 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
F-7
<PAGE>
Intangible and Other Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):
December 31,
1998 1999
---- ----
Purchased Federal Communications Commission licenses $256,519 $354,246
Goodwill............................................ 271,808 249,010
Purchased subscriber lists.......................... 56,825 239,114
Deferred financing costs............................ 13,983 12,796
N-PCS investments................................... 17,847 --
Other............................................... 9,457 5,258
-------- --------
$626,439 $860,424
======== ========
Amortization expense related to intangible and other assets totaled $123.4
million, $119.1 million and $163.6 million for the years ended December 31,
1997, 1998 and 1999, respectively.
Subscriber lists, Federal Communications Commission 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 Federal Communications Commission
application and development costs which are amortized using the straight-line
method over their estimated useful lives, not exceeding ten years.
In April 1998, the Accounting Standards Executive Committee of the Financial
Accounting Standards Board issued Statement of Position (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. Development and
start up costs include nonrecurring, direct costs incurred in the development
and expansion of messaging systems. Arch adopted SOP 98-5 effective January 1,
1999. 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. This
charge represents the unamortized portion of start-up and organization costs,
which had been deferred in prior years.
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
1998, a charge of $1.7 million was recognized in connection with the closing of
a new credit facility.
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 except as described below.
N-PCS Investments--In connection with Arch's May 1996 acquisition of Westlink
Holdings, Inc., Arch acquired Westlink's 49.9% share of the capital stock of
Benbow PCS Ventures, Inc. Benbow holds exclusive rights to a 50kHz
outbound/12.5kHz inbound narrowband personal communications services license in
each of the five regions of the United States. Arch was formerly obligated to
advance Benbow sufficient funds to service debt obligations incurred by Benbow
in connection with its acquisition of its narrowband personal communications
services licenses and to finance construction of a narrowband personal
communications services system unless funds were available to Benbow from other
sources. This obligation was subject to the approval of Arch's designee on
Benbow's board of directors. Arch's investment in Benbow was 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.
In June 1999, Arch, Benbow and Benbow's controlling stockholder, agreed that:
F-8
<PAGE>
o the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated;
o Benbow will not make any further Federal Communications Commission
payments and will not pursue construction of an narrowband personal
communications services system;
o Arch will not be obligated to fund Federal Communications Commission
payments or construction of a narrowband personal communications services
system by Benbow;
o the parties will seek Federal Communications Commission approval of the
forgiveness of Benbow's remaining payment obligations and the transfer of
the controlling stockholder's equity interest in Benbow to Arch;
o the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of Federal Communications Commission approval;
o Arch will pay the controlling stockholder, in installments, an aggregate
amount of $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 narrowband personal
communications services licenses. Therefore, Arch has written off substantially
all of its investment in Benbow in the amount of $8.2 million. Arch has also
accrued the payment to the controlling stockholder of $3.8 million and legal and
other expenses of approximately $1.0 million which is included in accrued
expenses. In addition, Parent guaranteed Benbow's obligations in conjunction
with Benbow's June 1998 purchase of the stock of PageCall. Since it is unlikely
that Benbow will be able to meet these obligations and Parent is currently
required to settle the obligation in its stock, Arch has recorded the issuance
of $22.8 million of Parent's common stock as a capital contribution from Parent
and as a charge to operations, to satisfy the obligation in April 2000.
On November 8, 1994, CONXUS Communications, Inc. was successful in acquiring
the rights to an interactive messaging license in five designated regions in the
United States in the Federal Communications Commission narrowband wireless
spectrum auction. On May 18, 1999, CONXUS filed for Chapter 11 protection in the
U.S. Bankruptcy Court in Delaware, which case was converted to a case under
Chapter 7 on August 17, 1999. In June 1999, Arch wrote-off its $6.5 million
investment in CONXUS. On November 3, 1999, in order to document its disposition
of any interest it has, if any, in CONXUS, Arch offered to transfer to CONXUS
its shares in CONXUS for no consideration. Which was accepted by the Chapter 7
trustee on December 9, 1999.
All of the above charges, totaling $42.3 million, are included in other
expense in 1999 in the accompanying statement of operations.
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, 1998 and
1999.
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, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
------------------- -------------------
Carrying Fair Carrying Fair
Description Value Value Value Value
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
9 1/2% Senior Notes due 2004 ...................... 125,000 112,500 125,000 95,000
14% Senior Notes due 2004 ......................... 100,000 103,000 100,000 83,000
12 3/4% Senior Notes due 2007 ..................... 127,604 127,604 127,887 101,030
13 3/4% Senior Notes due 2008 ..................... -- -- 140,365 113,685
</TABLE>
F-9
<PAGE>
Arch had off-balance-sheet interest rate protection agreements consisting of
interest rate swaps and interest rate caps with notional amounts of $265.0
million and $40.0 million, respectively, at December 31, 1998 and $107.0 million
and $10.0 million, respectively, at December 31, 1999. The cost to terminate the
outstanding interest rate swaps and interest rate caps at December 31, 1998 and
1999 would have been $6.4 million and $4.5 million, respectively. See Note 3.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 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.
Reclassifications--Certain amounts of prior periods were reclassified to
conform with the 1999 presentation.
2. ACQUISITIONS
On June 3, 1999 Arch completed its acquisition of MobileMedia Communications,
Inc. for $671.1 million, consisting of cash paid of $516.6 million, including
direct transaction costs, 4,781,656 shares of Parent common stock valued at
$20.1 million and the assumption of liabilities of $134.4 million. The cash
payments were financed through the issuance of approximately 36.2 million shares
of Parent common stock in a rights offering for $6.00 per share, the issuance of
$147.0 million principal amount of 13 3/4% senior notes due 2008 (see Note 3)
and additional borrowings under the Company's credit facility.
Parent issued to four unsecured creditors, who had agreed to act as standby
purchasers and to purchase shares not purchased by other unsecured creditors in
the rights offering, warrants to acquire 1,225,219 shares of its common stock on
or before September 1, 2001 for $9.03 per share. The fair value of these
warrants was determined to be immaterial.
The purchase price was allocated based on the fair values of assets acquired
and liabilities assumed. The acquisition has been accounted for as a purchase,
and the results of MobileMedia's operations have been included in the
consolidated financial statements from the date of the acquisition. Goodwill
resulting from the acquisition is being amortized over a ten-year period using
the straight-line method.
The liabilities assumed, referred to above, include an unfavorable lease
accrual related to MobileMedia's rentals on communications towers which were in
excess of market rental rates. This accrual amounted to approximately $52.9
million and is included in other long-term liabilities. This accrual will be
amortized over the remaining lease term of 13 3/4 years. Concurrent with the
consummation of the acquisition, Arch commenced the development of a plan to
integrate the operations of MobileMedia. The liabilities assumed, referred to
above, also includes a $14.5 million restructuring accrual to cover the costs to
eliminate redundant headcount and facilities in connection with the overall
integration of operations (see Note 9).
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 completed at the beginning of the period presented, or of results that may
occur in the future.
Year Ended December 31,
----------------------
1998 1999
--------- ---------
(unaudited and in thousands)
Revenues.................................. $ 854,862 $ 817,686
Income (loss) before extraordinary item... (154,203) (271,093)
Net income (loss)......................... (155,923) (271,093)
Pending Acquisition -- In November 1999, Parent signed a definitive agreement
with Paging Network, Inc. (PageNet) pursuant to which PageNet will merge with a
wholly-owned subsidiary of Arch. Each outstanding share of PageNet common stock
will be converted into 0.1247 share of Parent common stock in the merger.
Under the merger agreement, PageNet is required to make an exchange offer of
PageNet common stock to holders of its outstanding 8.875% senior subordinated
notes due 2006, its 10.125% senior subordinated notes due 2007 and its 10%
senior subordinated notes due 2008 (collectively, the "PageNet Notes"), having
F-10
<PAGE>
an aggregate outstanding principal amount of $1.2 billion. Under the PageNet
exchange offer, an aggregate of 616,830,757 shares of PageNet common stock,
together with 68.9% of the equity interest in PageNet's subsidiary, Vast
Solutions, would be exchanged for all of the PageNet Notes, in the aggregate. In
connection with the Merger, PageNet would distribute to its stockholders (other
than holders who received shares in the PageNet exchange offer), 11.6% of the
equity interests in Vast Solutions. After the merger, PageNet would retain a
19.5% equity interest in Vast Solutions.
Under the merger agreement Parent is required to make an exchange offer of up
to 29,651,984 shares of its common stock (in the aggregate) for all of its
107/8% senior discount notes due 2008.
Arch expects the merger, which has been approved by the boards of directors
of Parent and PageNet, but is subject to regulatory review, shareholder
approval, other third-party consents and the completion of the exchange offers
and preferred stock conversion, to be completed in the second or third quarter
of 2000. Each of the PageNet exchange offer and the Parent exchange offer is
conditioned upon acceptance by the holders of 97.5% of the PageNet Notes and the
Parent senior discount notes, respectively, subject to reduction under specified
circumstances.
The merger agreement provides that under certain circumstances a fee may be
payable by Arch or PageNet upon termination of the agreement. These
circumstances include withdrawal of the recommendation or approval of the merger
agreement or the merger by the Parent or PageNet board of directors, the failure
of shareholders or noteholders to approve the transaction or exchange followed
by the making of an alternative proposal and Parent or PageNet entering into an
agreement with a third party within 12 months of such termination, and PageNet's
failure to file a prepackaged bankruptcy plan in certain circumstances. The
termination fee payable by Arch or PageNet under the merger agreement is $40.0
million.
The merger agreement provides that either party may terminate the agreement,
without paying the above fee, if the merger is not consummated by June 30, 2000.
This termination date is subject to extension for 90 days for regulatory
approval and is subject to extension to as late as December 31, 2000 under
certain circumstances where PageNet files for protection under the U.S.
Bankruptcy Code.
3. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31,
1998 1999
---- ----
(in thousands)
Senior Bank Debt..................... $ 267,000 $ 438,940
9 1/2% Senior Notes due 2004......... 125,000 125,000
14% Senior Notes due 2004............ 100,000 100,000
12 3/4% Senior Notes due 2007........ 127,604 127,887
13 3/4% Senior Notes due 2008........ -- 140,365
--------- ---------
619,604 932,192
Less--Current maturities............. 1,250 8,060
--------- ---------
Long-term debt....................... $ 618,354 $ 924,132
========= =========
Senior Bank Debt--The Company, through its operating subsidiary, Arch Paging,
Inc. (API) has a senior credit facility in the current amount of $577.9 million
consisting of (i) a $175.0 million reducing revolving tranche A facility, (ii) a
$100.0 million tranche B term loan and (iii) a $302.9 million tranche C term
loan.
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 term loan
will be amortized in quarterly installments commencing September 30, 2000, with
an ultimate maturity date of June 30, 2005. The tranche C term loan began
amortizing in annual installments on December 31, 1999, with an ultimate
maturity date of June 30, 2006.
F-11
<PAGE>
API's obligations under the senior credit facility are secured by its pledge
of its interests in certain of its operating subsidiaries. The senior credit
facility is guaranteed by Parent and certain of Arch's operating subsidiaries.
Parent's guarantee is secured by a pledge of Parent's stock and notes in Arch,
and the guarantees of the operating subsidiaries are secured by a security
interest in certain assets of those operating subsidiaries.
Borrowings under the senior 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 specified ratios of debt to annualized earnings
before interest, taxes, depreciation and amortization (EBITDA).
The senior 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 senior credit facility requires that at least 50% of total Arch debt,
including outstanding borrowings under the senior credit facility, be subject to
a fixed interest rate or interest rate protection agreements. Entering into
interest rate protection 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, Arch would be subject to the prevailing
interest rates specified in the senior 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. No interest rate swaps on the senior
credit facility were outstanding at December 31, 1999. At December 31, 1998, the
Company had a net payable of $47,000, 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 $10.0
million with a cap level of 8% at December 31, 1999. The transaction fees for
these instruments are being amortized over the terms of the agreements.
The senior credit facility contains restrictions that limit, among other
things, Arch's operating subsidiaries' ability to:
o declare dividends or redeem or repurchase capital stock;
o prepay, redeem or purchase debt;
o incur liens and engage in sale/leaseback transactions;
o make loans and investments;
o incur indebtedness and contingent obligations;
o amend or otherwise alter debt instruments and other material agreements;
o engage in mergers, consolidations, acquisitions and asset sales;
o alter its lines of business or accounting methods.
In addition, the senior credit facility requires Arch and its subsidiaries to
meet certain financial covenants, including ratios of EBITDA to fixed charges,
EBITDA to debt service, EBITDA to interest service and total indebtedness to
EBITDA. As of December 31, 1999, Arch and its operating subsidiaries were in
compliance with the covenants of the senior credit facility.
As of December 31, 1999, $438.9 million was outstanding and $139.0 million
was available under the senior credit facility. At December 31, 1999, such
advances bore interest at an average annual rate of 11.62%.
Senior Notes--On June 3, 1999, Arch received the proceeds of an offering of
$147.0 million principal amount at maturity of 13 3/4% senior notes due 2008.
The 13 3/4% notes were sold at an initial price to investors of 95.091% for
proceeds of $139.8 million less offering expenses of $5.2 million. The 13 3/4%
notes mature on April 15, 2008 and bear interest at a rate of 13 3/4% per annum,
payable semi-annually in arrears on April 15 and October 15 of each year,
commencing October 15, 1999.
F-12
<PAGE>
Interest on the 13 3/4% notes, the 12 3/4% senior notes due 2007, the 14%
senior notes due 2004 and the 9 1/2% senior notes due 2004 (collectively, the
"Senior Notes") is payable semiannually. The Senior Notes contain certain
restrictive and financial covenants, which, among other things, limit the
ability of Parent or Arch to:
o incur additional indebtedness;
o pay dividends;
o grant liens on its assets;
o sell assets; o enter into transactions with related parties;
o merge, consolidate or transfer substantially all of its assets;
o redeem capital stock or subordinated debt;
o make certain investments.
Arch has entered into interest rate swap agreements in connection with the
14% Notes. Under the interest rate swap agreements, Arch 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, Arch would be subject to the 14% interest rate specified
on the notes. As of December 31, 1999, Arch had received $6.8 million in excess
of the amounts paid under the swap agreements, which is included in other
long-term liabilities in the accompanying balance sheet.
Maturities of Debt--Scheduled long-term debt maturities at December 31, 1999
are as follows (in thousands):
Year Ending December 31,
------------------------
2000............................. $ 8,060
2001............................. 15,560
2002............................. 20,560
2003............................. 25,560
2004............................. 274,060
Thereafter....................... 588,392
-----------
$ 932,192
===========
4. INCOME TAXES
Arch accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities, given the provisions of enacted laws
The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets at December 31, 1998 and 1999 are as
follows (in thousands):
1998 1999
---- ----
Deferred tax assets..................... $ 179,484 $ 312,527
Deferred tax liabilities................ (67,652) (41,617)
--------- ---------
111,832 270,910
Valuation allowance..................... (111,832) (270,910)
--------- ---------
$ -- $ --
========= =========
F-13
<PAGE>
The approximate effect of each type of temporary difference and carryforward
at December 31, 1998 and 1999 is summarized as follows (in thousands):
1998 1999
---- ----
Net operating losses.................... $ 128,213 $ 174,588
Intangibles and other assets............ (62,084) 36,029
Depreciation of property and equipment.. 39,941 42,703
Accruals and reserves................... 5,762 17,590
--------- ---------
111,832 270,910
Valuation allowance..................... (111,832) (270,910)
--------- ---------
$ -- $ --
========= =========
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 2014. 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. Of the valuation allowance at December 31, 1999,
approximately $60.3 million will be recorded to goodwill when realized.
5. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company and its subsidiaries are
defendants in a variety of judicial proceedings. In the opinion of management,
there is no proceeding pending, or to the knowledge of management threatened,
which, in the event of an adverse decision, would result in a material adverse
change in the financial condition of the Company.
Arch has operating leases for office and transmitting sites with lease
terms ranging from one month to approximately fifty 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, 1999 are as follows (in thousands):
Year Ending December 31,
------------------------
2000...................................................... $ 51,091
2001...................................................... 42,611
2002...................................................... 35,957
2003...................................................... 29,457
2004...................................................... 22,969
Thereafter................................................ 143,426
----------
Total................................................. $ 325,511
==========
Total rent expense under operating leases for the years ended December 31,
1997, 1998 and 1999 approximated $19.8 million, $19.6 million and $48.3 million,
respectively.
6. EMPLOYEE BENEFIT PLANS
Retirement Savings Plans--Arch has retirement savings plans, qualifying under
Section 401(k) of the Internal Revenue Code covering eligible employees, as
defined. Under the plans, 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 plans provide for employer matching
contributions. Matching contributions for the years ended December 31, 1997,
F-14
<PAGE>
1998 and 1999 approximated $302,000, $278,000 and $960,000, respectively.
Stock Options--Employees of Arch are eligible to be granted options under
Parent's stock option plans which provide for the grant of incentive and
nonqualified stock options to key employees, directors and consultants to
purchase Parent 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. However, in
certain circumstances, options may be immediately exercisable in full. Options
generally have a duration of 10 years. The plans provide for the granting of
options to purchase a total of 2,304,135 shares of common stock.
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:
Weighted
Number Average
of Exercise
Options Price
---------- ------
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 ........................... (429,627) 28.54
---------- ------
Options Outstanding at December 31, 1998 648,768 15.51
Granted .............................. 1,295,666 7.80
Exercised ............................ -- --
Terminated ........................... (109,672) 13.89
---------- ------
Options Outstanding at December 31, 1999 1,834,762 10.16
========== ======
Options Exercisable at December 31, 1999 255,264 $17.00
========== ======
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 1999:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
$ 4.31 - $ 6.31 26,400 9.58 $ 5.70 7,900 $ 5.46
7.83 - 7.83 1,263,266 9.42 7.83 2,000 7.83
10.69 - 15.19 500,954 8.09 14.33 210,996 14.49
18.75 - 23.63 32,974 5.99 20.76 23,516 21.03
37.50 - 82.68 11,168 5.52 66.56 10,852 66.99
------ ------ --------- ---- ------ --------- ------
$ 4.31 - $82.68 1,834,762 8.98 $10.16 255,264 $17.00
====== ====== ========= ==== ====== ========= ======
Employee Stock Purchase Plans--Employees of Arch may participate in Parent's
stock purchase plans which allow eligible employees the right to purchase Parent
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 1997, 1998 and 1999, 50,447,
85,996 and 34,217 shares were issued at an average price per share of $15.87,
F-15
<PAGE>
$6.39 and $5.60, respectively. At December 31, 1999, 465,783 shares are
available for future issuance.
Accounting for Stock-Based Compensation--Arch accounts for its stock option
and stock purchase plans under APB Opinion No. 25 "Accounting for Stock Issued
to Employees". Since all options have been issued at a grant price equal to fair
market value, no compensation cost has been recognized in the statements of
operations. Had compensation cost for these plans been determined consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation", Arch's net income
(loss) and income (loss) per share would have been increased to the following
pro forma amounts:
Years Ended December 31,
1997 1998 1999
---- ---- ----
(in thousands)
Net income (loss), as reported...... $(146,628) $(167,103) $(247,052)
Net income (loss), pro forma........ (148,224) (169,117) (249,536)
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%--87%.
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1997, 1998 and 1999 were $10.11, $8.34 and
$5.56, respectively. The weighted average fair value of shares sold under the
employee stock purchase plans in 1997, 1998 and 1999 was $8.49, $5.64 and $3.13,
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. 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 senior credit facility.
8. LONG-TERM LIABILITIES
During 1998 and 1999, Arch sold communications towers, real estate, site
management contracts and/or leasehold interests involving 133 sites in 22 states
and leased space on the towers on which it currently operates communications
equipment to service its own messaging network. Net proceeds from the sales were
approximately $33.4 million, Arch used the net proceeds to repay indebtedness
under its credit facility.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain on the sale of the tower sites is deferred and
included in other long-term liabilities. At December 31, 1999, approximately
$24.9 million of the gain is deferred and approximately $1.9 million of this
gain has been recognized in the statement of operations and is included in
operating income for each of the years ended December 31, 1998 and 1999,
respectively.
Also included in other long-term liabilities is an unfavorable lease accrual
related to MobileMedia's rentals on communications towers which were in excess
of market rental rates (see Note 2). At December 31, 1999, the remaining balance
of this accrual was approximately $51.5 million. This accrual is being amortized
over the term of the leases with approximately 13 3/4 years remaining at
December 31, 1999.
F-16
<PAGE>
9. RESTRUCTURING RESERVES
Divisional reorganization -- In June 1998, Arch's board of directors approved
a reorganization of Arch's operations. As part of the divisional reorganization,
Arch 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:
o anticipates a net reduction of approximately 10% of its workforce;
o is closing certain office locations and redeploying other assets; and
o recorded a restructuring charge of $14.7 million in 1998.
In conjunction with the completion of the MobileMedia merger in June 1999,
the timing and implementation of the divisional reorganization announced in June
1998 was reviewed by Arch management. The plan was reviewed within the context
of the combined company integration plan which was approved by the Company in
the third quarter of 1999. After this review it was determined that significant
changes needed to be made to the divisional reorganization plan. In the quarter
ended September 30, 1999, the Company identified certain of its facilities and
network leases that will not be utilized following the integration of the
Company and MobileMedia, resulting in an additional charge of $2.6 million. This
charge was offset by reductions to previously provided severance and other costs
of $4.8 million.
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 this 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 approximately 900 employees will be effected. The majority of the
positions which have been or will be eliminated are related to customer service,
collections, inventory and billing functions in local and regional offices which
will be closed. As of December 31, 1998 and 1999, 217 employees and 414
employees, respectively, had been terminated due to the divisional
reorganization. The remaining severance and benefits costs will be paid during
2000.
The Company's restructuring activity as of December 31, 1999 is as follows
(in thousands):
Reserve
Initially Reserve Remaining
Established Adjustment Amounts Paid Reserve
----------- ---------- ------------ -------
Severance costs......... $ 9,700 $ (3,547) $ 5,123 $ 1,030
Lease obligation costs.. 3,500 2,570 872 5,198
Other costs............. 1,500 (1,223) 277 --
-------- -------- -------- --------
Total................... $ 14,700 $ (2,200) $ 6,272 $ 6,228
======== ========= ======== ========
MobileMedia Acquisition Reserve -- On June 3,1999, Arch completed its
acquisition of MobileMedia and commenced the development of plans to integrate
the operations of MobileMedia. During the third quarter of 1999, Arch's board of
directors approved plans covering the elimination of redundant headcount and
facilities in connection with the overall integration of operations. It is
expected that the integration activity relating to the MobileMedia merger, will
be completed by December 31, 2000.
In connection with the MobileMedia acquisition, Arch anticipates a net
reduction of approximately 10% of MobileMedia's workforce and the closing of
certain facilities and tower sites. This resulted in the establishment a $14.5
million acquisition reserve which is included as part of the purchase price of
MobileMedia. The initial acquisition reserve consisted of approximately (i) $6.1
million for employee severance, (ii) $7.9 million for lease obligations and
terminations and (iii) $0.5 million of other costs.
F-17
<PAGE>
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 this 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
2003.
Through the elimination of redundant management, administrative, customer
service, collections and inventory functions, the Company will eliminate
approximately 500 positions. As of December 31, 1999, 174 former MobileMedia
employees had been terminated.
The MobileMedia acquisition reserve activity as of December 31, 1999 was as
follows (in thousands):
Reserve
Initially Remaining
Established Amounts Paid Reserve
----------- ------------ -------
Severance costs................... $ 6,058 $ 3,380 $ 2,678
Lease obligation costs............ 7,950 122 7,828
Other costs....................... 500 123 377
-------- -------- --------
Total............................. $ 14,508 $ 3,625 $ 10,883
======== ======== ========
10.SEGMENT REPORTING
The Company operates in one industry: providing wireless messaging services.
On December 31, 1999, the Company operated approximately 375 retail stores in
the United States.
11.QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the years ended December 31, 1998 and
1999 is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Revenues........................................ $ 102,039 $ 103,546 $ 104,052 $ 103,998
Operating income (loss)......................... (19,175) (33,714) (20,568) (19,828)
Income (loss) before extraordinary item......... (36,500) (51,311) (38,209) (39,363)
Extraordinary charge............................ -- (1,720) -- --
Net income (loss)............................... (36,500) (53,031) (38,209) (39,363)
YEAR ENDED DECEMBER 31, 1999:
Revenues........................................ 100,888 133,493 206,189 201,254
Operating income (loss)......................... (15,844) (34,304) (26,832) (19,789)
Income (loss) before accounting change.......... (35,297) (100,155) (56,872) (51,367)
Cumulative effect of accounting change.......... (3,361) -- -- --
Net income (loss)............................... (38,658) (100,155) (56,872) (51,367)
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Arch Communications, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Arch Communications,
Inc. included in this Form 10-K and have issued our report thereon dated
February 16, 2000. Our audit was made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. Schedule II is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 16, 2000
S-1
<PAGE>
SCHEDULE II
ARCH COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Balance at Other Balance
Beginning Charged to Additions to at End of
Allowance for Doubtful Accounts of Period Expense Allowance(1) Write-Offs Period
- ------------------------------- --------- ------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997.... $ 4,111 $ 7,181 $ -- $ (5,548) $ 5,744
========= ========= ========== ========= ========
Year ended December 31, 1998.... $ 5,744 $ 8,545 $ -- $ (7,706) $ 6,583
========= ========= ========== ========= ========
Year ended December 31, 1999.... $ 6,583 $ 15,265 $ 13,243 $ (18,618) $ 16,473
========= ========= ========== ========= ========
</TABLE>
(1) Additions arising through acquisitions of messaging companies
<TABLE>
<CAPTION>
Balance at Balance
Beginning Charged to Other at End of
Accrued Restructuring Charge of Period Expense Additions Deductions Period
- ---------------------------- --------- ------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998.... $ -- $ 14,700 $ -- $ (2,791) $ 11,909
========= ========== ========== ========= ========
Year ended December 31, 1999.... $ 11,909 $ (2,200) $ 14,508 $ (7,106) $ 17,111
========= ========== ========== ========= ========
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of November 7, 1999, among Paging
Network, Inc., Arch Communications Group, Inc. and St. Louis Acquisition
Corp. (1)
2.2 Amendment to Agreement and Plan of Merger, dated as of January 7, 2000,
between Paging Network, Inc., Arch Communications Group, Inc. and St.
Louis Acquisition Corp. (2)
3.1 Restated Certificate of Incorporation. (3)
3.2 By-laws, as amended. (3)
4.1 Indenture, dated February 1, 1994, between Arch Communications, Inc.
(formerly known as USA Mobile Communications, Inc. II) and United States
Trust Company of New York, as Trustee, relating to the 9 1/2% Senior Notes
due 2004 of Arch Communications, Inc. (5)
4.2 Indenture, dated December 15, 1994, between Arch Communications, Inc. and
United States Trust Company of New York, as Trustee, relating to the 14%
Senior Notes due 2004 of Arch Communications, Inc. (3)
4.3 Indenture, dated June 29, 1998, between Arch Communications, Inc. and
U.S. Bank Trust National Association, as Trustee, relating to the 12 3/4%
Senior Notes due 2007 of Arch Communications, Inc. (4)
4.4 Indenture, dated April 9, 1999, between Arch Communications, Inc. and IBJ
Whitehall Bank & Trust Company, as Trustee, relating to the 13 3/4% Senior
Notes due 2008. (6)
10.1 Second Amended and Restated Credit Agreement (Tranche A and Tranche C
Facilities), dated June 29, 1998, among Arch Paging, Inc., the Lenders
party thereto, The Bank of New York, Royal Bank of Canada and Toronto
Dominion (Texas), Inc. (4)
10.2 Second Amended and Restated Credit Agreement (Tranche B Facility), dated
June 29, 1998, among Arch Paging, Inc., the Lenders party thereto. The
Bank of New York, Royal Bank of Canada and Toronto Dominion (Texas), Inc.
(4)
10.3 Amendment No. 1 and Amendment No. 2 to the Second Amended and Restated
Credit Agreement (Tranche A and Tranche C Facilities). (7)
10.4 Amendment No. 1 and Amendment No. 2 to the Second Amended and Restated
Credit Agreement (Tranche B Facility). (7)
10.5 Amendment No. 4 to the Second Amended and Restated Credit Agreement
(Tranche A and Tranche C Facilities). (8)
10.6 Amendment No. 4 to the Second Amended and Restated Credit Agreement
(Tranche B Facility). (8)
10.7 Preferred Distributor Agreement dated June 1, 1998 by and between Arch
Communications Group, Inc. and NEC America, Inc. (7)(9)
10.8 Paging Products Sales Agreement, dated March 17, 1999, by and between
Motorola, Inc. and the Company. (8) (9)
10.9 Satellite Services Agreement, dated September 1, 1998, between AvData
Systems, Inc. and MobileMedia Communications, Inc. (8) (9)
10.10 Master Lease For Transmitter Systems Space by and between Pinnacle
Towers, Inc. and MobileMedia Communications, Inc. (8)
27.1* Financial Data Schedule.
- ----------------
* Filed herewith.
+ Identifies exhibits constituting a management contract or compensation
plan.
(1) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated November 7, 1999 and filed November 19,
1999.
(2) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated January 7, 2000 and filed January 21,
2000.
(3) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-85580) of Arch Communications, Inc.
(4) Incorporated by referenced from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998.
(5) Incorporated by reference from the Registration Statement on Form S-1
(File No. 33-72646) of Arch Communications, Inc.
(6) Incorporated by reference from the Registration Statement on Form S-4
(File No. 333-83027) of Arch Communications, Inc.
(7) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1998.
(8) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
Communications Group, Inc. for the quarter ended June 30, 1999.
(9) A Confidential Treatment Request has been filed with respect to portions
of this exhibit so incorporated by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916122
<NAME> Arch Communications, Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,381
<SECURITIES> 0
<RECEIVABLES> 61,167
<ALLOWANCES> 16,473
<INVENTORY> 9,101
<CURRENT-ASSETS> 84,523
<PP&E> 714,644
<DEPRECIATION> 314,445
<TOTAL-ASSETS> 1,345,146
<CURRENT-LIABILITIES> 164,784
<BONDS> 924,132
0
0
<COMMON> 0
<OTHER-SE> 172,945
<TOTAL-LIABILITY-AND-EQUITY> 1,345,146
<SALES> 50,435
<TOTAL-REVENUES> 641,824
<CGS> 34,954
<TOTAL-COSTS> 34,954
<OTHER-EXPENSES> 132,400
<LOSS-PROVISION> 15,265
<INTEREST-EXPENSE> 100,466
<INCOME-PRETAX> (243,691)
<INCOME-TAX> 0
<INCOME-CONTINUING> (243,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,361)
<NET-INCOME> (247,052)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
