<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
DATE OF REPORT: OCTOBER 4, 2000
---------------------
AQUIS COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in charter)
DELAWARE 1-13002 22-3281446
(State or other (Commission (IRS Employer
jurisdiction of File Number) identification no.)
incorporation)
1719A ROUTE 10
SUITE 300
PARSIPPANY, NJ 07054
(Address of principal executive offices)
(973) 560-8000
(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. OTHER EVENTS
In conjunction with the preparation of a Registration Statement on Form S-1
for Aquis Communications Group, Inc. (the "Company"), the company updated Note
22, "Subsequent Events", to its financial statements for the year ended December
31, 1999.
The Company hereby files with the Commission its financial statements for
the year ended December 31, 1999 as updated.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See the index at Page F-1 of this report for the financial statements of
Aquis Communications Group, Inc. for the year ended December 31, 1999.
(c) Exhibits
23.1 Consent of PricewaterhouseCoopers LLP.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
AQUIS COMMUNICATIONS GROUP, INC.
By: /s/ D. BRIAN PLUNKETT
------------------------------
D. Brian Plunkett
Chief Financial Officer
Date: October 4, 2000
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
INDEX
Reports of Independent Accountants.......................... F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1999, 1998 and 1997.................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999 and 1998............ F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999, 1998 and 1997.................... F-6
Notes to Consolidated Financial Statements.................. F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Aquis Communications Group, Inc:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows of
Aquis Communications Group, Inc. and Subsidiaries ("Company") present fairly, in
all material respects, the financial position of the Company at December 31,
1999 and December 31, 1998, and the results of its operations and cash flows for
the year ended December 31, 1999 and the changes in stockholders' equity for the
years ended December 31, 1999 and 1998 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 28, 2000, except for
Note 22 for which the date is
September 27, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Aquis Communications Group, Inc:
In our opinion, the accompanying statements of operations and cash flows of
Bell Atlantic Paging, Inc. (the "Predecessor Company") present fairly, in all
material respects, the results of its operations and cash flows for the two
years in the period ended December 31, 1998 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 12, 1999
F-2
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
DECEMBER 31,
------------------
1999 1998
-------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 973 $ --
Accounts receivable (net of allowances of $939 and $490,
respectively)........................................... 4,933 2,061
Inventory, net............................................ 228 2,076
Acquisition escrow deposits............................... 200 --
Prepaid expenses and other current assets................. 1,072 1,012
-------- -------
Total current assets.................................... 7,406 5,149
Property and equipment, net................................. 10,461 10,107
Intangible assets, net...................................... 20,092 16,749
Deferred charges and other assets........................... 1,365 330
-------- -------
Total assets............................................ $ 39,324 $32,335
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt...................... $ 508 $ --
Accounts payable.......................................... 6,750 1,769
Accrued expenses.......................................... 2,535 236
Deferred revenue.......................................... 930 1,033
Customer deposits......................................... 577 577
Notes payable to stockholders............................. -- 520
-------- -------
Total current liabilities............................... 11,300 4,135
Long term debt.............................................. 25,963 --
Note payable................................................ -- 4,150
Payable to Bell Atlantic Corp. and affiliates............... -- 18,535
-------- -------
Total liabilities....................................... 37,263 26,820
-------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 and 80,000
shares authorized in 1999 and 1998, respectively; none
issued 1999, 78,000 issued and outstanding at December
31, 1998................................................ -- 5,830
Common stock, $0.01 par value, 75,000,000 shares
authorized, 16,551,000 and 22,000 issued and outstanding
at December 31, 1999 and 1998, respectively............. 166 --
Additional paid-in capital................................ 13,195 221
Accumulated deficit....................................... (11,175) (296)
Note receivable from stockholder.......................... (125) (240)
-------- -------
Total stockholders' equity.............................. 2,061 5,515
-------- -------
Total liabilities and stockholders' equity.............. $ 39,324 $32,335
======== =======
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ----------- -----------
PREDECESSOR PREDECESSOR
<S> <C> <C> <C>
Revenues:
Paging services.......................................... $ 30,368 $23,309 $17,894
Equipment sales.......................................... 791 3,123 2,795
---------- ------- -------
Total revenues......................................... 31,159 26,432 20,689
---------- ------- -------
Operating expenses:
Paging services.......................................... 7,753 4,968 4,401
Technical................................................ 5,317 3,482 2,023
Cost of equipment sold................................... 947 2,709 2,873
Selling and marketing.................................... 3,881 3,394 2,844
General and administrative............................... 7,676 5,657 4,211
Depreciation and amortization............................ 10,878 4,323 3,378
Provision for doubtful accounts.......................... 919 1,154 538
Costs of abandoned acquisitions.......................... 1,692 -- --
---------- ------- -------
Total operating expenses............................... 39,063 25,687 20,268
---------- ------- -------
Operating (loss) income.................................... (7,904) 745 421
Interest expense, net...................................... (3,004) -- --
Gain on sale of equipment.................................. 29 -- --
---------- ------- -------
(Loss) Income before income taxes and
extraordinary item....................................... (10,879) 745 421
Provision for income taxes................................. -- (296) (168)
---------- ------- -------
Income before extraordinary item........................... (10,879) 449 253
Extraordinary item, net of income taxes of $454............ -- 682 --
---------- ------- -------
NET (LOSS) INCOME.......................................... $ (10,879) $ 1,131 $ 253
========== ======= =======
NET LOSS PER COMMON SHARE:
Basic and diluted........................................ $ (.76)
==========
Weighted average common shares outstanding. 14,233,000
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL NOTES TOTAL
---------------------- ------------------- PAID-IN ACCUMULATED RECEIVABLE- STOCKHOLDERS'
SHARES AMOUNTS SHARES AMOUNTS CAPITAL DEFICIT STOCKHOLDER EQUITY
----------- -------- -------- -------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1,
1998 (date
capitalized)............ 99 $ -- -- $ -- $ -- $ -- $-- $ --
Issuance of shares to the
Founders of Aquis in
connection with their
individual stock
subscriptions in January
1998.................... 7,991 -- -- -- -- -- -- --
Value ascribed to the
issuance of shares to
the Founders of Aquis In
July 1998............... 2,910 -- -- -- 39 -- -- 39
Value ascribed to the
issuance of shares in
connection with the
issuance of promissory
notes in July 1998...... 7,500 -- -- -- 108 -- -- 108
Value ascribed to the
issuance of shares to
one of the purchasers of
preferred stock in
November 1998........... 2,000 -- -- (54) 54 -- -- --
Value ascribed to the
issuance of shares to
one of the note holders
in July 1998............ 1,500 -- -- -- 20 -- -- 20
Issuance of preferred
stock................... -- -- 78,000 5,884 -- -- -- 5,884
Net loss.................. -- -- -- -- -- (296) -- (296)
Notes received from
stockholder in
connection with the
purchase of preferred
stock................... -- -- -- -- -- -- (240) (240)
----------- ---- -------- ------- ------- -------- ----- --------
Balance as of December 31,
1998.................... 22,000 -- 78,000 5,830 221 (296) (240) 5,515
Recapitalization completed
in connection with the
merger with Paging
Partners March 31,
1999.................... 15,199,000 152 (78,000) (5,830) 11,313 -- -- 5,635
Shares issued in SunStar
acquisition............. 1,150,000 12 -- -- 1,550 -- -- 1,562
Reduction of note due from
stockholder in
connection with
settlement of claim..... -- -- -- -- -- -- 115 115
Shares issued to Directors
on December 15, 1999.... 180,000 2 -- -- 111 -- -- 113
Net loss.................. -- -- -- -- -- (10,879) -- (10,879)
----------- ---- -------- ------- ------- -------- ----- --------
Balance as of December 31,
1999.................... $16,551,000 $166 $ -- $ -- $13,195 $(11,175) $(125) $ 2,061
=========== ==== ======== ======= ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- ----------- -----------
PREDECESSOR PREDECESSOR
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $(10,879) $ 1,131 $ 253
Adjustments to reconcile net loss to net cash provided by
operating activities:
Gain on sale of business................................ -- (1,136) --
Depreciation and amortization........................... 10,878 4,323 3,378
Costs of abandoned business combinations................ 1,692 -- --
Amortization of deferred financing costs................ 141 -- --
Stock-based compensation................................ 113 -- --
Reduction of note due from stockholder.................. 115 -- --
Deferred income taxes................................... -- (590) (552)
Provision for doubtful accounts......................... 919 1,154 538
Provision for inventory obsolescence.................... -- (136) 316
(Gain) loss on sale of property and equipment........... (29) 232 49
Changes in operating assets and liabilities, before
effects of business acquisitions:
Accounts receivable................................... (3,479) (1,238) (699)
Due from affiliates for trade......................... -- (1,821) (793)
Inventory............................................. (135) (394) 1,416
Prepaid expenses and other current assets............. 15 (543) (5)
Other assets.......................................... -- -- 7
Accounts payable and accrued expenses................. 5,579 1,160 (11)
Income taxes payable.................................. -- 848 247
Intercompany payable.................................. -- (569) (581)
Deferred revenues and customer deposits............... (287) 35 (186)
-------- ------- -------
Net cash provided by operating activities........... 4,643 2,456 3,377
-------- ------- -------
Cash flows from investing activities:
Business acquisitions..................................... (18,940) -- --
Acquisition of property, equipment and licenses........... (2,275) (4,217) (4,930)
Deferred business acquisition costs....................... (2,230) -- --
Acquisition escrow deposits............................... (200) -- --
Sale of property and equipment............................ 345 236 200
-------- ------- -------
Net cash used by investing activities............... (23,300) (3,981) (4,730)
-------- ------- -------
Cash flows from financing activities:
Issuance of long term debt................................ 26,615 -- --
Repayment of notes payable to stockholders................ (520) -- --
Repayment of notes payable................................ (4,150) -- --
Repayment of long term debt............................... (144) -- --
Repayment of capital lease obligation..................... (1,506) -- --
Deferred financing costs.................................. (665) -- --
Due to affiliates......................................... -- 1,564 1,339
-------- ------- -------
Net cash provided by financing activities........... 19,630 1,564 1,339
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 973 39 (14)
Cash and cash equivalents--beginning of year................ -- 31 45
-------- ------- -------
Cash and cash equivalents--end of year...................... $ 973 $ 70 $ 31
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS:
Aquis Communications Group, Inc. (the "Company") is a holding company,
incorporated in the State of Delaware. Through its operating companies, it
operates two regional paging systems providing one-way wireless alpha and
numeric messaging services in portions of thirteen states principally in the
Northeast and Mid-Atlantic regions of the United States, as well as the District
of Columbia. The Company has recently entered the Midwestern region through a
purchase of certain assets completed on January 31, 2000, the Company has
expanded its geographical reach to six additional states in the mid-west. The
Company, resells nationwide and regional services, offers alpha dispatch, news
and other messaging enhancements, and sells internet access services through a
wholly-owned subsidiary. Its customers include individuals, businesses,
government agencies, hospitals and resellers.
On March 31, 1999, a wholly owned subsidiary of Paging Partners Corporation
("Paging Partners"), merged with Aquis Communications, Inc. ("ACI") in a
transaction accounted for as a reverse acquisition with ACI as the accounting
acquirer. At that time, Paging Partners changed its name to Aquis Communications
Group, Inc. (the "Company"). The historical financial statements prior to March
31, 1999, are those of ACI. ACI had no operating activities prior to the
acquisition of BAPCO on December 31, 1998. The statements of operations and of
cash flows for the years ended December 31, 1998 and 1997 represent the
financial statements of the Predecessor Company for such periods. The
Predecessor Company financial statements include allocations of certain Bell
Atlantic Corporation ("Bell Atlantic") revenues and expenses. Management
believes that these allocations are reasonable. However, the revenues and
expenses allocated are not necessarily indicative of the revenues and expenses
that would have been earned or incurred if the Predecessor Company had performed
or procured these functions as a separate entity.
On June 15, 1999, a wholly-owned subsidiary of the Company entered into a
stock purchase agreement with SunStar Communications, Inc. in a transaction that
was accounted for as a purchase.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, and reflect the merger with Paging Partners,
as well as the acquisition of SunStar Communications, Inc., and the acquisition
of the net assets of Bell Atlantic Paging, Inc. ("BAPCO" or the "Predecessor
Company") on December 31, 1998. All material intercompany accounts and
transactions have been eliminated in consolidation.
The Company's principal source of liquidity at December 31, 1999 included
cash and cash equivalents of about $1,000 and its ability to generate cash from
operations, which totaled $4,643 during 1999. The Company believes that its
current cash and equivalents and the cash it expects to generate from operations
will be sufficient to meet its anticipated working capital and capital
expenditure requirements through at least the end of 2000. However, if cash from
operations is not sufficient to fund the planned growth of the core business and
the internet business or if the Company experiences further deterioration of its
average revenue per unit ("ARPU") or if certain contingencies are resolved
unfavorably, the Company is prepared to implement an alternative business plan
(the "Alternative Plan"). The Alternative Plan calls for the sale of the
internet subsidiary and other assets and for a reduction of planned marketing
expenditures and capital expenditures. Cash requirements of the paging business
may vary materially from those now planned as a result of unforeseen changes
that
F-7
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS: (CONTINUED)
could consume a significant portion of available resources or as a result
of an increased rate of attrition of the customer base.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Paging service revenues include airtime for paging services, rental fees for
leased paging equipment, and various other fees for such enhanced features as
alpha dispatch services, loss protection and maintenance, and voice mail. These
revenues are recognized as the services are performed or ratably over time in
the case of rental fees. Revenues related to pre-billed services are deferred
until earned. Equipment revenue is recognized when the equipment is delivered to
the customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities. These
estimates and assumptions also affect the 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. Estimates are used for such
reported amounts as the allowance for doubtful accounts, allowances for asset
obsolescence or impairment, the tax benefit valuation allowance, and useful
lives of fixed assets or amortization periods for intangible assets. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of 90 days or less
are considered to be cash equivalents.
INVENTORY
Inventory consists primarily of new pagers held for sale or lease.
Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of depreciation and
amortization. The property and equipment acquired through merger or business
combination is recorded at estimated fair value. Included are the Company's
rental pagers, paging network assets, data processing equipment, office
furniture and equipment, and leasehold improvements. These assets are
depreciated over their estimated useful lives using the straight-line method.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the term of the related lease. Costs to repair or maintain assets
without adding to their lives or improving their value are expensed as incurred.
Upon the sale or other disposal of property or equipment, the cost and related
accumulated depreciation or amortization
F-8
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
is eliminated from the accounts and any related gain or loss is reflected in the
Company's results of operations.
DEFERRED CHARGES
Certain costs directly related to pending business acquisitions are deferred
until the acquisition is completed or abandoned. If completed, such costs are
considered part of the cost to acquire the business. Costs associated with
abandoned acquisition efforts are written off. Costs and fees related to
financing activities are amortized over the term of the related loan.
CAPITALIZED SOFTWARE
The cost to acquire computer software used in the Company's operations is
capitalized and amortized over three years. Accumulated amortization totaled $45
at December 31, 1999.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". Accordingly, the balance sheet will reflect
anticipated tax impacts of future taxable income or deductions implicit in the
balance sheet in the form of temporary differences. These temporary differences
will reflect the difference between the basis in assets and liabilities as
measured in the financial statements and as measured by tax laws using enacted
tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Aquis' financial instruments include cash and cash equivalents, accounts and
notes receivable. The fair value of these instruments approximate their carrying
values due to their short-term nature. Because the Company has floating rate
debt, the carrying amount of long-term borrowings also approximates fair value.
CONCENTRATION OF RISK
The Company utilizes one provider of nationwide paging services to fulfill
the majority of its requirements for this service. Although there are a limited
number of other nationwide carriers, Management believes that other carriers
could provide similar services under comparable terms. However, a change in
vendor or carrier could cause a delay in service provisioning or a possible loss
of revenue, which could adversely effect operating results. The Company
maintains its cash and cash equivalents in one commercial bank and one money
market fund that invests primarily in high quality money market instruments,
including securities issued by the US government. No single customer is large
enough to present a significant financial risk to Aquis.
F-9
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ADVERTISING COSTS
Costs associated with advertising in Yellow Pages or similar directories are
amortized ratably over the periods during which the directories are in current
circulation. Other costs for such items as direct mail ads or promotional items
are expensed as incurred. Total advertising expenses totaled $118, $71, and $82
in 1999, 1998 and 1997, respectively.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the
estimated fair value and the carrying value of the asset.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock plans. Accordingly, no compensation expense has been recognized for
its stock-based compensation plans other than for performance-based awards
issued to non-employees. Compensation costs charged against earnings totaled
$127 in 1999. Further, Aquis has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation."
RECENT ACCOUNTING PRONOUNCEMENT
In December, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS", amended in March, 2000, which provides guidance on the application
of generally accepted accounting principles to revenue recognition in financial
statements. The Company will adopt SAB 101 in the second quarter of 2000 and
believes that adoption will not have a significant effect on its consolidated
results of operations or its financial position.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. MERGER AND RECAPITALIZATION:
On November 6, 1998, ACI entered into a merger agreement with Paging
Partners and its wholly-owned subsidiary whereby each share of ACI common stock
was exchanged for 88.92076 shares of Paging Partners' common stock (the
"Merger"). The Merger was consummated on March 31, 1999, and has been accounted
for as a recapitalization of Paging Partners with ACI as the acquirer (reverse
acquisition) under the purchase method of accounting in accordance with
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations."
F-10
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
3. MERGER AND RECAPITALIZATION: (CONTINUED)
The aggregate purchase price of $6,124, which includes transaction costs,
has been allocated to the net assets acquired based upon their estimated fair
market values. The purchase price was determined by using the average quoted
stock price of Paging Partners a few days before and after the date of the
Merger. The assets and liabilities recorded in connection with the purchase
price allocation are based on estimated fair value. Intangible assets of
approximately $5,038 (principally customer lists and FCC licenses are being
amortized over three to ten years on a straight-line basis.
The following unaudited pro forma information presents a summary of the
results of operations as if the Paging Partners merger occurred on January 1,
1998.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1999 1998
-------- -----------
PREDECESSOR
Revenue................................................ $ 33,433 $36,334
Net loss............................................... $(11,309) $(7,427)
Net loss per common share.............................. $ (0.72)
The pro forma results are based on various assumptions and are not
necessarily indicative of what would have occurred had these transactions been
consummated on January 1, 1998.
4. PREDECESSOR COMPANY ACQUISITION:
On December 31, 1998, ACI acquired the net assets of BAPCO and the paging
frequencies and the paging network infrastructure owned by various Bell Atlantic
operating telephone companies for approximately $29,200, including transaction
costs. The acquisition was accounted for as a purchase in accordance with APB
Opinion No. 16. The aggregate purchase price was allocated to the net assets
acquired based on their estimated fair market values.
Subsequent to the acquisition and during the quarter ended June 30, 1999,
Bell Atlantic and ACI completed negotiations and settled certain post-closing
disputes. These negotiations pertained to the reimbursement to BAPCO and
assumption by ACI of certain liabilities in excess of amounts originally
acknowledged by ACI, and resulted in ACI's assumption of certain additional
current liabilities. On June 30, 1999, the Company paid the settlement amount in
full and, in addition, exercised its negotiated right to prepay the outstanding
balance of the purchase price at a significantly discounted amount. Funding for
retirement of this debt was provided through the credit facility described in
note 11. This settlement did not have a material effect on the Company's
financial position or the results of its operations or cash flows.
5. MERGERS AND ACQUISITIONS:
SUNSTAR COMMUNICATIONS, INC.:
On June 15, 1999, a wholly-owned subsidiary of the Company, entered into a
Stock Purchase Agreement (the "Agreement") with SunStar Communications, Inc.
("SunStar"), an Arizona corporation
F-11
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
5. MERGERS AND ACQUISITIONS: (CONTINUED)
and SunStar One, LLC., an Arizona limited liability company. SunStar sells
secure internet services over an intelligent private network, provides dial-up
internet access services to corporate and individual subscribers and can provide
enhanced security standards for user authentication. Total consideration paid
for all of the outstanding stock of SunStar was $275 cash and 1,150,000 shares
of the Company's common stock. The aggregate purchase price, including
transaction costs, has been allocated to the net assets acquired based on their
estimated fair market values. Intangible assets of approximately $2,066 are
being amortized on a straight-line basis over three to 10 years.
6. BUSINESS DEVELOPMENTS:
SOURCEONE WIRELESS:
On January 31, 2000, the Company completed the acquisition of certain assets
of SouceOne Wireless, a facilities-based provider of one-way paging services to
subscribers in certain Midwestern states. Previously, on August 2, 1999, the
Company entered into an Asset Purchase Agreement (the "Purchase Agreement") and
Agreement Pending Purchase Closing (the "Agreement") with SourceOne Wireless,
Inc. and two of its affiliates ("SOWI"). SOWI and its affiliates filed voluntary
petitions for relief under Chapter 11 with the United States Bankruptcy Court in
the Northern District of Illinois between April 29 and July 2, 1999. Pursuant to
the Agreement, the Company managed the day-to-day operations of certain SOWI
businesses pending the closing of the associated Purchase Agreement. This
closing was subject to various approvals, including that of the Bankruptcy Court
and the FCC. During the management period, a reduction of the purchase price was
negotiated, and resulted in a reduced price of $2,250 in cash and 15,000 shares
of the Company's 7.5% cumulative preferred stock valued at $1,500. Acquisition
costs totaling about $502 were deferred at December 31, 1999, and will be
treated as a cost of the assets acquired on January 31, 2000. Costs to acquire
the assets of SourceOne Wireless were capitalized at December 31, 1999,
including an escrow deposit of $200, since this transaction was closed on
January 31, 2000.
The Company had entered into various negotiations and agreements related to
potential value-driven acquisitions or mergers in 1999 with candidates including
ABC Paging, Inc, Francis Communications Texas, Inc. Intelispan, Inc., COMAV
Corporation, SourceOne Wireless, Inc. and related entities holding economic
interests in these entities. Several of these negotiations were terminated as
the business development requirements or the underlying businesses of the
potential acquiree and the Company changed during the course of the discussions.
Acquisition costs and deposits totaling $1,692 related to uncompleted
transactions were charged against earnings in 1999.
F-12
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
7. PROPERTY AND EQUIPMENT:
As of December 31, 1999 and 1998, property and equipment consists of the
following:
DECEMBER 31,
-------------------
1999 1998
-------- --------
Rental pagers (3 years)................................... $ 7,605 $ 4,847
Paging network equipment (7 years)........................ 8,082 4,441
Data processing equipment (2-5 years)..................... 1,096 508
Furniture, fixtures and office equipment (5 years)........ 326 --
Leasehold improvements (various).......................... 435 311
Other..................................................... 17 --
------- -------
17,561 10,107
Less accumulated depreciation............................. 7,100 --
------- -------
$10,461 $10,107
======= =======
8. INTANGIBLE ASSETS:
Intangible assets consist of the following as of December 31, 1999 and 1998:
DECEMBER 31,
-------------------
1999 1998
-------- --------
FCC licenses and State certificates (10 years)............ $15,854 $12,238
Customer lists (3 years).................................. 5,681 4,511
Goodwill (10 years)....................................... 1,996 --
------- -------
23,531 16,749
Less accumulated amortization............................. 3,439 --
------- -------
$20,092 $16,749
======= =======
9. DEFERRED CHARGES:
At December 31, 1999 and 1998, deferred charges consisted of the following:
DECEMBER 31,
------------------
1999 1998
-------- -------
Deferred financing costs.................................... $ 633 $110
Deferred acquisition costs.................................. 502 220
Unamortized software and other costs........................ 230 --
------ ----
$1,365 $330
====== ====
F-13
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
10. COMMITMENTS AND CONTINGENCIES:
The Company leases facilities and equipment used in its operations. Many
lease agreements include renewal options with Consumer Price Index related rent
escalations. At December 31, 1999, the aggregate future minimum rental
commitments under non-cancelable operating leases were as follows:
YEARS
-----
2000........................................................ $2,013
2001........................................................ 1,137
2002........................................................ 780
2003........................................................ 352
2004........................................................ 152
Thereafter.................................................. 97
------
$4,531
======
Rent expense was $2,874, $551 and $515 for 1999, 1998, and 1997,
respectively.
Pursuant to a certain obligation assumed through the Paging Partners merger,
the Company is committed to a significant supplier of telephony services for a
minimum annual usage and services volume valued at $240. Thereunder, and subject
to attainment of the minimum volume, the Company receives certain significant
discount pricing from this provider. The Company has historically exceeded, and
is currently exceeding, that minimum commitment level. Commitments under this
contract expire during the third quarter of 2000.
The Company has also provisioned some of its communications circuits and
other facilities from another provider. Under terms of this agreement, the
Company has obtained certain volume pricing discounts in exchange for an
agreement to utilize these facilities for a minimum period of three years
beginning on December 31, 1998. Monthly fees incurred under this agreement
totaled about $48 as of December 31, 1999.
Various legal proceedings, claims and investigations related to services,
contracts and other matters are pending against the Company. The most
significant of these are discussed below:
FRANCIS COMMUNICATIONS
The Company has retained local counsel in Texas to represent it in a suit
brought by Francis Communications Texas, Inc. and related interests ("Francis")
in the U.S. District Court for the Western District of Texas. Francis alleges a
breach of agreement to purchase its radio paging business and is seeking the
original purchase price of $4,000 and additional monetary relief. Aquis
terminated this agreement due to the failure of Francis to comply with certain
conditions precedent to closing. Discovery is proceeding at this time. The
Company believes that its termination of this agreement was within the terms of
the purchase agreement and that the allegations made by Francis are without
merit. Management does not expect the outcome of this lawsuit to have a material
effect on its results of operations, cash flows or financial position.
F-14
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
10. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
FONE ZONE COMMUNICATION CORP
On February 18, 2000, Fone Zone Communication Corp. ("Fone") filed a lawsuit
in the Supreme Court of the State of New York in Queens County. Aquis, on March
23, 2000, had the venue of this action moved to the U.S. District Court for the
Eastern District of New York. Fone, a former reseller of Aquis paging services
and of the service of Paging Partners before its merger with Aquis, is seeking
$1,000 in alleged damages as a result of the termination of its service and
solicitation of its customers by Aquis. The Company discontinued service to Fone
as the result of Fone's severe delinquency and ultimate failure to pay for such
services. Management believes it will be able to recover the fully-reserved
unpaid charges from Fone through its counterclaim and that the claims initiated
by Fone are without sufficient grounds to support its claims. Management does
not expect the outcome of this lawsuit to have a material effect on its results
of operations, cash flows or financial position.
ARBITRATION OF EMPLOYMENT AND OTHER CLAIMS
On December 23, 1999, the Company's former President, who was also a
Director and a Founder of the Company, filed for arbitration under the Rules of
the American Arbitration Association. This former officer's claims were related
to an alleged breach of an employment agreement, to wrongful discharge and to
wrongful termination of health and welfare benefits including incentive stock
options. A claim was filed for an amount to be proven at trial but in no event
less than $1,762 plus compensatory and punitive damages. On April 4, 2000, the
parties settled these claims before this matter proceeded to arbitration.
Accordingly, Aquis has agreed provide this individual a payment of $25, a credit
of $75 against his existing indebtedness to the Company, shares of the Company's
common stock valued at $400, forgiveness of $115 of a note receivable from him,
and agreed to replace 55,000 of the 485,000 options previously held by him,
valued at $127. The Company continues to hold the balance of the note receivable
in the reduced amount of $125, which is expected to be paid in full , net of
applicable credits, during 2000. Accordingly, $742 has been charges against
earning in the accompanying financial statements the period ended December 31,
1999.
11. LONG-TERM DEBT:
On October 23, 1998, ACI entered into a five-year term loan agreement (the
"Senior Loan Agreement") with FINOVA Capital Corporation ("FINOVA") which
provides a $30,000 credit facility. The FINOVA loan has a term of five years,
and requires graduated increasing quarterly principal repayments ranging from
.5% to 3.5% of outstanding principal beginning on July 1, 2000, with the balance
due on December 31, 2003. The loan bears interest at a rate based on Citibank,
N.A.'s corporate base rate plus 175 basis points. The Company may also elect to
have interest on a part of the FINOVA loan based on a London Inter-Bank Official
Overnight Rate plus 450 basis points. This term loan is collateralized by all of
the Company's assets, presently owned and acquired subsequently, and all issued
and outstanding equity interests in the Company's operating subsidiaries. The
loan agreement also contains various covenants, including restrictions on
capital expenditures and compliance with certain financial ratios. At December
31, 1999, the Company was not in compliance with certain ratios under this loan
agreement.
F-15
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
11. LONG-TERM DEBT: (CONTINUED)
In November 1999, in connection with the termination of negotiations related
to various potential mergers, costs that were previously capitalized have been
written off in 1999. During the third quarter of 1999, FINOVA modified certain
financial covenants contained in the loan agreement to exclude the costs written
off in connection with these abandoned business acquisitions and other specified
charges when computing "Net Income" as defined in the amended loan agreement.
On January 26, 2000, the FINOVA loan was amended in connection with the
SourceOne Wireless acquisition. The Company borrowed an additional $2,450 from
FINOVA on January 31, 2000 to consummate the acquisition (the "SourceOne
Portion"). The effect of the amendment was to limit the facility to the amount
outstanding after the SourceOne transaction, or a total of $27,765, to modify
certain financial ratios and to set the interest rate on the SourceOne Portion
to Citibank, N.A.'s corporate base rate plus 400 basis points. Additionally, a
prepayment of principal of $1,250 (the "Special Prepayment") was defined that is
to be applied to the SourceOne Portion. If the Special Prepayment is not made by
June 8, 2000, the interest rate on the balance of the loan, excluding the
SourceOne Portion, increases to Citibank, N.A.'s corporate base rate plus 225
basis points. Similar increases are scheduled for July 8 and August 8, with a
final increase to 375 basis points over that base rate if the payment is not
made by September 8, 2000.
During the second quarter of 1999, the Company refinanced the capital lease
obligations that were assumed as a result of the merger with Paging Partners.
Terms of the new obligation (the "Installment Loan") include a principal amount
of $1,300, a 60-month repayment schedule, an interest rate indexed to the yield
for five year Treasury Notes, and is collateralized by the underlying equipment.
The balance outstanding at December 31, 1999 under borrowings of the Senior
Debt Agreement was $25,315. The remaining balance of long term debt outstanding
consisted principally of borrowings made pursuant to the Installment Loan.
Principal maturities of the senior debt and the Installment Loan are as follows:
2000........................................................ $ 508
2001........................................................ 2,215
2002........................................................ 3,447
2003........................................................ 20,236
2004........................................................ 65
-------
$26,471
=======
The Seller Note in the amount of $4,150 due as a result of the acquisition
of the paging assets from BAPCO was settled and paid in full on June 30, 1999.
12. RELATED PARTY TRANSACTIONS:
The Company was provided with various investment banking services by a firm
with which a certain member of the Board of Directors was affiliated. During
1999, fees incurred under this arrangement totaled approximately $411, of which
$45 was payable at December 31, 1999.
F-16
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
12. RELATED PARTY TRANSACTIONS: (CONTINUED)
The Company was also provided with legal services by a firm in which a
member of the Board of Directors was a partner. During 1999, fees incurred under
this arrangement totaled approximately $1,935, of which $1,052 was payable at
December 31, 1999. In January, 2000, this outstanding amount was settled through
cash payments totaling $205, the issuance of a note payable in the face amount
of $350 payable in 20 equal monthly installments bearing interest at the rate of
8.5%, and the issuance of 275,000 shares of the Company's common stock valued at
$380.
During 1999, Aquis received $500 from a limited liability company in which a
minority member is a partnership whose managing partner is also a member of the
Company's Board of Directors. These funds represent earnest money for a
potential sale of one of the Company's subsidiaries. This advance has been
included as a current liability in the accompanying balance sheet at December
31, 1999.
Three stockholders and members of the Board of Directors were each granted
60,000 shares of the Company's common stock on December 15, 1999 as compensation
for interim management services rendered during the Company's search for a
President and CEO in the later part of 1999. Based on the fair value of the
Company's common stock on the date of grant, current year earnings were charged
$112,500 for these services.
In 1998 and 1997, BAPCO was allocated certain costs from its parent
organization for certain administrative, management and other services. These
allocated costs were based on relative staff size or on relative revenues, and
totaled $215 and $161, respectively. The management of BAPCO believes that these
allocated costs were reasonable. However, the costs for the services provided
are not necessarily indicative of the costs that would have been incurred if the
services had been provided by unaffiliated entities.
Significant transactions with affiliates in 1998 and 1997 are summarized as
follows:
1998 1997
-------- --------
Revenues from affiliates.................................... $3,622 $2,406
Revenues from BAM, a reseller of BAPCO services............. 2,724 2,114
Network charges............................................. 3,933 3,750
Telecommunications expenses................................. 194 247
Data processing charges..................................... 216 181
13. NOTES PAYABLE TO STOCKHOLDERS:
On July 7, 1998, Aquis completed an offering in which it issued $750 face
amount, 15% promissory notes due on December 31, 1998, and 7,500 shares of
common stock at $1 per share to the note holders. Further, one of the note
holders purchased 1,500 shares of common stock at par value ($.001). In addition
to the $7 of cash proceeds received, a value of $121 was ascribed to the
issuance of these shares and was recorded as an original issue discount on the
notes payable, and amortized over the life of the notes. The proceeds from the
offering were used for working capital , acquisitions, and general corporate
purposes. In connection with the acquisition of BAPCO, these notes and related
interest were paid on December 31, 1998 concurrent with the closing of the
acquisition of BAPCO. Pursuant to
F-17
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
13. NOTES PAYABLE TO STOCKHOLDERS: (CONTINUED)
the note agreements, as amended, a 10% premium on the promissory notes was also
paid upon maturity and was recorded as additional interest over the life of the
notes.
Concurrent with the repayment of these notes, Aquis issued an additional
$520 of notes to stockholders for working capital purposes. Those notes provided
interest at 15%, and were paid at the time of closing of the Paging Partners
merger.
14. INCOME TAXES:
At December 31, 1999, the Company had Federal net operating loss
carryforwards for tax purposes of approximately $13,000 that expire between 2009
and 2014. Approximately $8,550 of this total consists of pre-acquisition losses
that are subject to restrictions imposed by Section 382 of the Internal Revenue
Code that limit utilization of such carryforwards to about $300 annually. During
the prior period, the income and expenses of the Predecessor Company were
included in the consolidated Federal and certain combined state income tax
returns of its parent and the prior year provisions for income taxes have been
calculated on a separate return basis herein.
The provision for income taxes is summarized as follows:
1999 1998 1997
-------- -------- --------
Federal:
Current..................................... $ -- $1,235 $ 564
Deferred (benefit), net..................... (3,756) (647) (433)
Valuation allowance......................... 3,756 -- --
------- ------ -----
Total Federal............................. -- 588 131
------- ------ -----
State:
Current..................................... $ -- $ 337 $ 157
Deferred (benefit), net..................... (898) (179) (120)
Valuation allowance......................... 898 -- --
------- ------ -----
Total State............................... -- 158 37
------- ------ -----
Total provision for income taxes.............. $ -- $ 746 $ 168
======= ====== =====
F-18
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
14. INCOME TAXES: (CONTINUED)
Significant components of deferred tax assets and liabilities as of December
31, 1999 are as follows:
1999 1998
-------- --------
Deferred tax assets:
Allowance for doubtful accounts.......................... $ 396 $ --
Seller note.............................................. -- 1,646
Depreciation............................................. 815 --
Net operating loss carryforwards......................... 5,487 --
Settlement reserve....................................... 264 --
Other--net............................................... 33 --
------- ------
Total deferred tax assets.............................. 6,995 1,646
Deferred tax liabilities--amortization of intangibles.... (1,029) --
------- ------
Net deferred tax assets before valuation allowance....... 5,966 1,646
Valuation allowance...................................... (5,966) --
------- ------
Net deferred tax asset..................................... $ -- $1,646
======= ======
A reconciliation from the Federal income tax provision at the statutory rate
to the effective rate is as follows:
1999 1998 1997
------ ------ ------
Tax (benefit) at Federal statutory rate............. (34.0)% 34.0% 34.0%
State income taxes, net of Federal tax benefit...... -- 6.0% 6.0%
Permanent differences............................... 0.4% -- --
Valuation allowance................................. 33.6% -- --
----- ---- ----
Effective tax rate.................................. -- 40.0% 40.0%
===== ==== ====
As of December 31, 1999, the Company recorded no deferred tax asset. The
future expected benefit from the realization of the net operating losses was
fully offset by a related valuation allowance. A full valuation allowance was
recorded due to management's uncertainty about the realizability of the related
tax benefits as of December 31, 1999. However, the amount of the deferred tax
assets considered realizable could be adjusted in the future if estimates of
taxable income are revised.
15. STOCK SUBSCRIPTIONS:
On January 30, 1998, Aquis entered into three stock subscription agreements
with the Founders and issued 7,991 shares of common stock at par value. On July
7, 1998, the Founders purchased 2,910 additional shares at par value. Aquis
recognized a compensation charge of $22 for 1,635 of the shares that were issued
to an officer of Aquis. In addition, a value of $17 was ascribed to the 1,275
shares issued to the other two Founders and was netted against the proceeds from
the issuance of the Series A Convertible Preferred Stock.
F-19
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
16. PREFERRED STOCK:
On October 16, 1998, the Board of Directors authorized up to 80,000 shares
of preferred stock to be designated as Series A Convertible Preferred Stock
("Series A Preferred Stock") at $80 per share ("Original Issue Price"). Each
holder of these shares shall be entitled to the number of votes equal to the
number of whole shares of common stock into which the shares of Series A
Preferred Stock held by each holder are convertible. Each share of Series A
Preferred Stock may be converted at the election of the holder at any time into
a number of shares of common stock determined by dividing the Original Issue
Price by the Applicable Conversion Price ("Applicable Conversion Price"). The
initial Applicable Conversion Price is $80 per share. Adjustments to the
Applicable Conversion Price are based upon a formula noted in the Preferred
Stock Purchase Agreement. A mandatory conversion of the Series A Preferred Stock
into common stock may occur in the event of any one of the following
circumstances: (1) the request of at least two-thirds of the holders of the
outstanding Series A Preferred Stock, (2) the consummation of the Paging
Partners transaction, or (3) the closing of the sale of shares of common stock
in a public offering pursuant to the Securities Act of 1933, at a price in
excess of 200% of the Applicable Conversion Price then in effect and resulting
in at least $20,000 of gross proceeds to Aquis.
In the event of any voluntary or involuntary liquidation of Aquis, the
holders of shares of Series A Preferred Stock shall be entitled to be paid out
of the assets of Aquis available for distribution to its stockholders before any
payment shall be made to the holders of common stock or any other series of
stock. The holders of Series A Preferred Stock are entitled to receive, when and
if declared by the Board of Directors of Aquis, a dividend (the "Accruing
Dividend") at the annual rate of 8% of the Original Issue Price (appropriately
adjusted in the event of any stock dividend, stock split or combination or
similar recapitalization). The Accruing Dividend will accrue, whether or not
earned or declared, on each issued and outstanding share of Series A Preferred
Stock and shall be cumulative.
On November 6, 1998, Aquis approved the sale and issuance of 78,000 shares
of its series A Preferred Stock at a purchase price of $80 per share. An
individual who purchased shares of the Series A Preferred Stock also was issued
2,000 shares of common stock, and a value of $54 was ascribed to these shares
and was netted against the proceeds from the issuance of the Series A Preferred
Stock. As part of a purchase of a portion of the Series A Preferred Stock, an
officer of the Company signed a note for $240 that was to be repaid in four
equal annual installments commencing on May 15, 2000. The note provided interest
at a rate of 8%, and all interest was due with the final payment on May 15,
2003. On April 4, 2000, in connection with the settlement of certain claims made
by this officer in relation to the end of his relationship with the Company, an
agreement was reached under which the face amount of this $240 note was reduced
to $125.
17. STOCK OPTIONS:
Through the merger with Paging Partners, the Company has a stock option plan
(the "Plan") as amended, pursuant to which options to purchase shares of the
Company's common stock, intended to qualify as "incentive stock options". These
options may be granted to employees, directors of the Company and independent
contractors providing services to the Company. A total of 1,500,000 shares of
common stock had been reserved for issuance under the amended Plan. Options are
exercisable for
F-20
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
17. STOCK OPTIONS: (CONTINUED)
terms of six months to ten years from the date granted. Details are as follows
(shares and prices are stated at original amounts before effect of the share
conversion effected through the merger):
NUMBER OPTION
OF SHARES PRICE RANGE
--------- -------------
1997
Outstanding, January 1................................ 260,600 $ 1.38-6.25
Granted............................................... 128,500 $ 0.88-1.38
Exercised............................................. (10,000) $ 0.88
Cancelled............................................. (37,150) $ 1.38-6.25
--------- -----------
Outstanding, December 31.............................. 341,950 $ 0.88-6.25
--------- -----------
Exercisable, December 31.............................. 254,050 $ 0.88-6.25
--------- -----------
1998
Outstanding, January 1................................ 341,950 $ 0.88-6.25
Granted............................................... 216,100 $ 1.38-4.38
Exercised............................................. (25,750) $ 0.88-1.00
Cancelled............................................. (180,150) $ 0.88-6.25
--------- -----------
Outstanding, December 31.............................. 352,150 $ 0.88-4.19
--------- -----------
Exercisable, December 31.............................. 342,150 $ 0.88-4.19
--------- -----------
1999
Outstanding, January 1................................ 352,150 $ 0.88-4.19
Granted............................................... 1,209,946 $ 1.00-1.38
Exercised............................................. (2,500) $ 0.88
Cancelled............................................. (523,683) $ 0.88-1.38
--------- -----------
Outstanding, December 31.............................. 1,035,913 $ 0.88-4.19
--------- -----------
Exercisable, December 31.............................. 460,150 $ 0.88-4.19
--------- -----------
In consideration of the merger, exercisable options as of December 31, 1998
include options that actually become exercisable on February 13, 1999 and
options that become exercisable upon a change in control.
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
Aquis has elected to apply APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for options granted.
Accordingly, no compensation cost has been recognized for the grant of these
options in the accompanying financial statements.
The weighted average fair value of options granted in 1998 was $0 per share.
The fair value is based on the minimum value method with the following
assumptions: the price of the stock at the time of grant, risk free interest
rates ranging from 4.57% to 5.81%, no dividend yield, and a weighted
F-21
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
17. STOCK OPTIONS: (CONTINUED)
average expected life of the options of nine to ten years. Had compensation cost
been determined on the basis of FASB Statement No. 123, net loss and loss per
share would have been reduced as follows:
1999
--------
Net Loss:
As reported............................................... $(10,879)
Pro forma................................................. $(11,679)
Net Loss per Common Share:
As reported............................................... $ (0.76)
Pro Forma................................................. $ (0.82)
In connection with the employment of its President and CEO, and pursuant to
his employment agreement dated January 4, 2000, the Company issued an option to
purchase 900,000 shares of the Company's common stock. The option vests ratably
on, or around, June 30, 2000, January 2, 2002 and January 2, 2003. The exercise
price of the options is $0.75 for the shares initially vested, and is set at the
closing price of the common stock on January 2, 2001 and January 2, 2002 for the
two subsequently vested entitlements. As of December 31, 1999, none of the
options were vested.
18. NET LOSS PER COMMON SHARE:
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", which requires a dual presentation of basic and diluted
earnings per share ("EPS"). Basic EPS is based on the weighted average number of
shares outstanding during the periods presented. Diluted EPS reflects the
potential dilution that could occur if options, warrants, convertible securities
or other contracts requiring the issuance of common stock were converted into
common stock during the periods presented. The Company has not presented diluted
EPS because the effect would be anti-dilutive.
19. SUPPLEMENTAL CASH FLOW DATA:
The tables below provides supplemental information to the consolidated
statements of cash flows:
1999 1998 1997
------ ------ ------
Cash paid for interest............................... $2,586 $ -- $ --
Cash paid for taxes.................................. $ -- $ 570 $492
Note receivable accepted as partial consideration.... $4,150
Receivable from affiliate............................ $4,835
Receivable from Aquis................................ $4,565
F-22
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
19. SUPPLEMENTAL CASH FLOW DATA: (CONTINUED)
BUSINESS ACQUISITIONS
In 1999, the Company used cash of $18,940 for business acquisitions in
connection with the final cash payment made for the December 31,1998 BAPCO
assets purchase and for Paging Partners and SunStar transactions:
PAGING PARTNERS
BAPCO AND SUNSTAR
ACQUISITION TRANSACTIONS
----------- ---------------
BAPCO purchase price, fair values for
Paging Partners and SunStar assets.............. $29,200 $11,420
Note issued to Bell Atlantic Mobile............. (4,150) --
Liabilities assumed............................. -- (3,262)
Exchange of common stock........................ -- (7,197)
Transaction costs paid or accrued............... (1,149) (386)
Cash paid at closing............................ (5,366) --
Cash acquired................................... -- (170)
------- -------
Net cash paid during 1999....................... $18,535 $ 405
======= =======
Excluding cash acquired in the Paging Partners and SunStar transactions,
cash paid in conjunction with those two transactions in 1999 totaled $575.
20. QUARTERLY FINANCIAL RESULTS (UNAUDITED):
Quarterly financial information for the years ended December 31, 1999 and
1998 is summarized below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Total revenues......................... $ 6,294 $ 8,056 $ 8,717 $ 8,092
Operating loss......................... (413) (1,145) (1,970) (4,376)(a)
Net loss............................... (1,342) (1,790) (2,702) (5,045)
Net loss per share (basic and
diluted)............................. (0.15) (0.12) (0.17) (0.31)
Year ended December 31, 1998, Predecessor
Company:
Total revenues......................... $ 6,143 $ 6,636 $ 6,925 $ 6,728
Operating income (loss)................ 207 254 364 (80)
Net income (loss)...................... 125 87 137 782
</TABLE>
---------------
(a) Operating loss for the fourth quarter of 1999 includes a non-recurring
charge of $1,692 for costs incurred in connection with certain abandoned
business acquisitions. The loss also includes the costs incurred to settle a
dispute with a former officer of the Company in the amount of $742.
F-23
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
21. VALUATION AND QUALIFYING ACCOUNTS:
All information for 1999 is that of the Company, as is the balance at the
end of 1998. All other information is that of the Predecessor Company.
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND AND OTHER END
OF YEAR EXPENSES ADJUSTMENTS OF YEAR
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997............................. $386 $ 538 $620 $304
1998............................. 304 1,154 968 490
1999............................. 490 919 470 939
Allowance for inventory
obsolescence:
1997............................. $ 5 $ 316 $ -- $321
1998............................. 321 (136) -- 185
1999............................. 185 -- 185 --
</TABLE>
22. SUBSEQUENT EVENTS:
At December 31, 1999, the Company was not in compliance with a covenant in
the FINOVA Senior Loan. On April 12, 2000, FINOVA waived the non-compliance and
amended the loan agreement to redefine certain financial ratios specified in the
loan covenants for future periods and to ensure that the Special Payment of
$1.250 was paid to FINOVA in April, 2000 as agreed.
On April 10, 2000, Aquis entered into an agreement to obtain a $2 million
bridge loan as interim funding pending completion of additional prospective
financing. The debt is subordinate to the Company's senior debt and is
unsecured. This agreement provides for an interest rate of 11%, a scheduled
maturity date in September, 2001 and also provides for interest to accrue until
the earlier of its maturity date or conversion. At the lender's election not
earlier than 120 days from the date of funding, this loan is convertible into
the Company's common stock at 90% of the then-current market value. At the
Company's election, the loan is redeemable at 105% of face value if such
election is made within the initial 90 days subsequent to funding, or at 110% of
face value if redemption is elected within 91 to 118 days, or, if elected
thereafter, at 115% of face value. Proceeds from this loan will be used to make
the Special Prepayment of $1,250 to FINOVA. The proceeds were used to pay
certain fees incurred in connection with the FINOVA loan modifications arranged
during 2000, to pay certain costs incurred in connection with this bridge loan,
and the balance will provide about $400 to be used for general corporate
purposes.
On August 31, 2000, the Company completed the sale of the assets of its
internet operations for cash totaling $987 and a 10% note in the amount of
$1,330 due on October 31, 2000. The maturity date of the note may be extended at
the purchaser's option for up to two months with the payment of certain fees. In
addition, the purchaser has assumed certain liabilities totaling approximately
$650. These assets were sold to a private investor group led by John V. Hobko,
former President of Aquis IP Communications, and John B. Frieling, a current
director and the CEO of Aquis.
F-24
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
22. SUBSEQUENT EVENTS: (CONTINUED)
On September 21, 2000, an agreement was executed to settle the dispute
between Aquis and Francis (see note 10, above). The settlement provides that the
escrow deposit of $100 plus accrued interest is to be returned to Aquis and
requires Francis to pay to Aquis the sum of $200 no later than September 29,
2000. The escrow deposit was fully reserved as of December 31, 1999.
On September 27, 2000, the Company and its lender executed an agreement to
modify the terms of its Senior Loan Agreement, as amended. These modifications
permit the Company to retain all proceeds from the sale of its internet
operations, give the Company an option to reduce the scheduled principal payment
due on July 1, 2001 from $514 to $200, and relaxes certain financial ratio
covenants through the third quarter of 2001. However, the Company's projections
indicate that unamended financial covenants will not be met during the fourth
quarter of 2001, which could cause the lender to accelerate the maturity date of
the loan. In exchange, the Company has agreed to pay a certain fixed fee.
Further, additional contingent fees of up to $250 per quarter are to be added to
the principal balance due at final maturity if the Company is unable to meet the
financial ratios as amended in April, 2000. Finally, based upon the sale of the
internet operations, a principal payment of $2,000 is required on or before
December 31, 2000 in order to avoid the assessment of a $500 fee and an interest
rate increase of 2%. That fee would also be added to the principal balance
otherwise payable at the maturity date of this loan.
F-25
