<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
DATE OF REPORT: JANUARY 31, 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>
GENERAL EXPLANATION
The purpose of this Report is to amend the Current Report on Form 8-K
of Aquis Communications Group, Inc. (the "Company") dated January 31, 2000
regarding the acquisition of Source One Wireless, Inc. This report amends the
information provided under Item 7(a) and 7(b).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Acquired Business
See the index at Page F-1 of this report for the historical financial
statements of Source One Wireless, Inc. for the three years ended December 31,
1999.
(b) Pro Forma Financial Information
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
DECEMBER 31, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL NET ASSETS
AQUIS SOURCEONE NOT ACQUIRED ADJUSTMENTS
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 973 $ 119 $ - $ 12
Accounts receivable, net of allowance 4,933 758 -
Inventory 228 36 -
Acquisition escrow deposits 200 - - (200)
Prepaid expenses and other current assets 1,072 205 - (205)
----------------------------- --------------- ---------------
Total current assets 7,406 1,118 - (393)
Property and equipment, net 10,461 3,602 (20) 974
Intangible assets, net 20,092 459 - 53
Deferred charges and other assets 1,365 - - 140
(501)
----------------------------- --------------- ---------------
TOTAL ASSETS $ 39,324 $ 5,179 $ (20) $ 273
============================= =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long term debt $ 508 $ - $ - $ 25
Accounts payable and accrued expenses 9,285 1,477 (350) (60)
87
(393)
Deferred revenue 930 721 -
Customer deposits 577 - -
----------------------------- --------------- ---------------
Total current liabilities 11,300 2,198 (350) (341)
Liabilities subject to compromise - 2,981 (2,981)
Long term debt 25,963 - - 2,425
----------------------------- --------------- ---------------
TOTAL LIABILITIES 37,263 5,179 (3,331) 2,084
----------------------------- --------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock - - - 150
Common stock 166 5,330 5,330
Additional paid-in capital 13,195 - 3,311 (1,961)
Accumulated deficit (11,175) (5,330) (5,330)
Note receivable from stockholder (125) - -
----------------------------- --------------- ---------------
TOTAL STOCKOLDERS' EQUITY 2,061 - 3,311 (1,811)
----------------------------- --------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 39,324 $ 5,179 $ (20) $ 273
============================= =============== ===============
Book value per share $ 2.38
===============
Shares outstanding 16,551,000
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,104
Accounts receivable, net of allowance 5,691
Inventory 264
Acquisition escrow deposits -
-
Prepaid expenses and other current assets 1,072
---------------
Total current assets 8,131
Property and equipment, net 15,017
Intangible assets, net 20,604
Deferred charges and other assets 1,004
---------------
TOTAL ASSETS $ 44,756
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long term debt $ 533
Accounts payable and accrued expenses 10,046
Deferred revenue 1,651
Customer deposits 577
---------------
Total current liabilities 12,807
Liabilities subject to compromise -
Long term debt 28,388
---------------
TOTAL LIABILITIES 41,195
---------------
STOCKHOLDERS' EQUITY:
Preferred stock 150
Common stock 10,826
Additional paid-in capital 14,545
Accumulated deficit (21,835)
Note receivable from stockholder (125)
---------------
TOTAL STOCKOLDERS' EQUITY 3,561
---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 44,756
===============
Book value per share $ 2.70
===============
Shares outstanding 16,551,000
===============
</TABLE>
2
<PAGE>
AQUIS COMMUNICATIONS GROUP, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
AQUIS SOURCEONE ADJUSTMENTS
------------- ------------- --------------
<S> <C> <C> <C>
REVENUES
Paging services $ 30,368 $ 7,203 $ (70)
Equipment sales 791 1,182
--------------- --------------- ----------------
Total revenues 31,159 8,385 (70)
--------------- --------------- ----------------
OPERATING EXPENSES
Paging services and technical expenses 13,070 4,717 148
(52)
Cost of equipment sold 947 1,311
Selling and marketing 3,881 1,156 58
(4)
General and administrative 7,676 6,175 (1,806)
(42)
(122)
(107)
Depreciation and amortization 10,878 83 690
Provision for doubtful accounts 919 643 (7)
Costs of abandoned acquisitions 1,692 -
--------------- --------------- ----------------
Total operating expenses 39,063 14,085 (1,244)
--------------- --------------- ----------------
Operating (loss) income (7,904) (5,700) 1,174
Interest expense, net (3,004) (7,567) 7,567
(354)
Gain on sales of equipment 29
Other income (expense) (897) 897
Adjust liabilities to estimated settlement amounts - 78,612 (78,612)
--------------- --------------- ----------------
(Loss) income before income taxes (10,879) 64,448 (69,328)
(Provision for) benefit from income taxes - - -
--------------- --------------- ----------------
NET (LOSS) INCOME (10,879) 64,448 (69,328)
Dividend requirements for preferred stock - - (113)
--------------- --------------- ----------------
NET (LOSS) INCOME applicable to common stock $ (10,879) $ 64,448 $ (69,441)
=============== =============== ================
Shares outstanding
===============
Basic and dilutive net loss per common share $ (0.66)
===============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
---------------
<S> <C>
REVENUES
Paging services $ 37,501
Equipment sales 1,973
------------------
Total revenues 39,474
------------------
OPERATING EXPENSES
Paging services and technical expenses 17,883
Cost of equipment sold 2,258
Selling and marketing 5,091
General and administrative 11,774
11,774
Depreciation and amortization 11,651
Provision for doubtful accounts 1,555
Costs of abandoned acquisitions 1,692
------------------
Total operating expenses 63,678
------------------
Operating (loss) income (24,204)
Interest expense, net (3,358)
Gain on sales of equipment 29
Other income (expense) -
Adjust liabilities to estimated settlement amounts -
------------------
(Loss) income before income taxes (27,533)
(Provision for) benefit from income taxes -
------------------
NET (LOSS) INCOME (27,533)
Dividend requirements for preferred stock (113)
------------------
NET (LOSS) INCOME applicable to common stock $ (27,646)
==================
Shares outstanding #
==================
Basic and dilutive net loss per common share $ (1.67)
==================
</TABLE>
3
<PAGE>
(c) Exhibits
23.1 Consent of Arthur Andersen LLP.
5
<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: April 17, 2000
6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Source One Wireless, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of SOURCE ONE WIRELESS, INC. (an Illinois
corporation) and subsidiaries, as of December 31, 1999 and 1998, and the related
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the management of the company. Our responsibility is to
express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Source One
Wireless, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
consolidated 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.
On April 29, 1999, the Company filed for reorganization under Chapter 11 of the
Bankruptcy Code. On September 16, 1999, an auction was held to sell any and all
of the Company's assets. As a result of the Chapter 11 filing, the Company's
assets as of December 31, 1998 were reduced to estimated realizable value at
that time. While the majority of its liabilities were subject to compromise
under the bankruptcy proceeding, all obligations were presented on a going
concern basis, as there was significant uncertainty in the settlement amounts.
In February, 2000 the Company's case was converted to a Chapter 7 case under the
Bankruptcy Code, subject to liquidation of the remaining assets of the business.
As a result of the Chapter 7 conversion, the Company's assets as of December 31,
1999 have been further reduced to the revised estimated realizable value, the
majority of its liabilities are subject to compromise under the bankruptcy
proceeding and have been reflected at their estimated settlement amounts, with
the exception of those liabilities presented as current liabilities on the
balance sheet, which management expects to settle at the amounts incurred. See
notes 1, 3(f) and 3(m) for additional information.
Arthur Andersen LLP
Chicago, Illinois
March 31, 2000
F-1
<PAGE>
SOURCE ONE WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ -----------
<S> <C> <C>
ASSETS
- -------------------------------------------------
Current assets:
Cash $ 260,967 $ 119,065
Accounts Receivable, less allowance of
$1,323,321 for 1998 and $453,000 for 1,145,514 757,692
1999
Inventory, less allowance of $300,000 758,987 35,500
for 1998
Prepaid expenses and other current
assets 21,539 205,472
------------ -----------
Total current assets 2,187,007 1,117,729
------------ -----------
Property and equipment 17,290,854 17,259,109
Less accumulated depreciation and amortization (13,615,102) (13,657,098)
------------ -----------
Net property and equipment 3,675,752 3,602,011
Intangible assets, net 468,700 459,297
Other assets 29,990 -
------------ -----------
Total Assets $ 6,361,449 $ 5,179,037
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-2
<PAGE>
SOURCE ONE WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1998 1999
- -------------------------------------------------- ------------ -----------
<S> <C> <C>
Current liabilities:
Notes payable to bank $ 23,126,659 $ -
Promissory notes payable 19,749,087 -
Notes payable to stockholder and related parties 9,257,561 -
Accounts payable 6,906,753 1,228,371
Accrued expenses 761,573 231,346
Accrued taxes 818,986 17,473
Accrued interest 6,333,694 -
Deferred revenue 1,068,037 720,958
Capital lease obligations 2,787,314 -
------------ -----------
Total current liabilities 70,809,664 2,198,148
------------ -----------
Liabilities subject to compromise - 2,980,889
------------ -----------
Stockholders' equity/deficit:
Source One Wireless, Inc. common stock
of no par value: 80 voting and 9,920
nonvoting shares authorized; 80 voting and
1024.52 nonvoting shares issued
and outstanding 5,330,000 5,330,000
Accumulated deficit (69,778,215) (5,330,000)
------------ -----------
Total Liabilities and Stockholders' deficit $ 6,361,449 $ 5,179,037
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
SOURCE ONE WIRELESS, INC.
CONSOLIDATED INCOME STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
<S> <C> <C> <C>
Revenues:
Service revenue $ 16,887,953 $ 10,463,269 $ 7,203,803
Product sales 2,012,755 1,704,656 1,181,519
------------- ------------ ------------
Total Revenues 18,900,708 12,167,925 8,385,322
Cost of products sold 2,639,673 1,652,856 1,311,727
------------- ------------ ------------
Net revenues 16,261,035 10,515,069 7,073,595
Operating expenses:
Service, rent and maintenance 5,266,749 6,885,602 4,716,769
Selling and marketing 3,437,495 3,131,438 1,155,583
General and administrative 10,220,399 9,306,342 6,817,491
------------- ------------ ------------
Loss before interest, depreciation
amortization, and other (2,663,608) (8,808,313) (5,616,248)
Depreciation and amortization (3,448,326) (14,411,754) (83,144)
Interest expense (4,357,402) (6,237,053) (7,567,278)
Other income / (expense) - 95,515 (897,028)
------------- ------------ ------------
Net loss from continuing operations (10,469,336) (29,361,605) (14,163,698)
Net income from discontinued
operations 154,559 1,598,530 -
Adjustment to Present Liabilities at
Estimated Settlement Amounts - - 78,611,913
------------- ------------ ------------
Net Income / (Loss) $ (10,314,777) $(27,763,075) $ 64,448,215
============= ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SOURCE ONE
WIRELESS, INC. ACCUMULATED
DESCRIPTION COMMON STOCK DEFICIT
- --------------------------------------------- -------------- --------------
<S> <C> <C>
Balance at December 31, 1996 $ 5,330,000 $(31,700,363)
Net loss - (10,314,777)
----------- ------------
Balance at December 31, 1997 5,330,000 (42,015,140)
Net loss - (27,763,075)
----------- ------------
Balance at December 31, 1998 5,330,000 (69,778,215)
Net income - 64,448,215
----------- ------------
Balance at December 31, 1999 $ 5,330,000 $ (5,330,000)
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income / (loss) $(10,314,777) $(27,763,075) $64,448,215
Adjustments to reconcile net cash used in
operating activities:
Depreciation and amortization 3,448,326 14,411,754 83,144
Changes in assets and liabilities:
Accounts receivable, net 898,462 707,946 387,822
Inventory (498,654) 1,878,853 723,487
Prepaid expenses and other current assets (103,943) 126,239 (183,933)
Other assets and liabilities (237,230) (515,011) 29,990
Accounts payable and other payables (636,583) 1,733,146 1,228,371
Accrued expenses (878,447) 270,390 231,346
Accrued taxes (293,454) 56,962 17,473
Accrued interest 1,408,824 2,509,889 -
Deferred revenue (955,044) (640,723) (347,079)
Other non-cash - liabilities subject to
compromise - - (69,251,413)
------------ ------------ -----------
Net cash used in operating activities (8,162,520) (7,223,630) (2,632,577)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,742,069) (369,104) (20,626)
Purchases of intangible assets (3,578,255) (511,571) -
Purchase / sale of discontinued operations (11,575,000) 800,000 -
------------ ------------ -----------
Net cash used in investing activities (16,895,324) (80,675) (20,626)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable to banks 29,306,175 6,221,674 3,278,028
Repayment of notes payable to bank (16,498,351) - -
Proceeds from issuance of promissory notes payable 17,922,897 2,000,000 -
Repayment of promissory notes payable (1,294,730) (1,000,000) (262,057)
Deposit for potential merger 1,200,000 -
Proceeds from notes payable to stockholder and 294,000 850,000 -
related party
Payment of capital lease obligations (5,663,739) (775,715) (504,670)
------------ ------------ -----------
Net cash provided in financing activities 25,266,252 7,295,959 2,511,301
------------ ------------ -----------
Net increase / (decrease) in cash 208,408 (8,346) (141,902)
Cash at beginning of period 60,905 269,313 260,967
------------ ------------ -----------
Cash at end of period $ 269,313 $ 260,967 $ 119,065
============ ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
On April 29, 1999, the Company filed in the United States Bankruptcy Court (the
"Court") in the Northern District of Illinois for reorganization under Chapter
11 of the United States Code ("Bankruptcy Code"), case number 99-B-13841. The
Company continued in possession of its properties and operated and managed its
business as debtor-in-possession subject to Court approval for certain actions
until February 1, 2000. On February 1, 2000 the Company's case was converted to
a Chapter 7 case under the Bankruptcy Code, subject to liquidation of the
remaining assets of the business.
Source One Wireless, Inc. ("Inc." or the "Company") was formed and commenced
operations in 1993. Inc. provided paging services in a number of states,
primarily in the Midwest. The Company operated as a FCC licensed radio common
carrier providing regional paging services. The Company's geographic coverage
included thirty-five states; however, its active markets included nine
midwestern states and two states in other U.S. regions.
Subsequent to April 29, 1999, the Company marketed itself to be acquired in a
business combination transaction. On September 16, 1999, an auction was held to
sell any or all of the Company's assets. Related to the auction, the Company
entered into a sale agreement for its Midwest assets, which was a significant
portion of its total operations. Consideration received for the Midwest assets,
which consisted of the subscriber base, towers site leases, transmitters and
related equipment, of $2.25 million in cash and 15,000 shares ($1.5 million
stated value per the purchase agreement) of Aquis Communications, Inc. (Aquis)
7.5% preferred stock, will be used to pay outstanding creditors, with Foothill
being the senior secured creditor. Aquis also assumed certain post-petition
liabilities totaling approximately $1.4 million related to the transaction.
Various transmitters and other equipment outside of the Midwest were sold to
another third party for approximately $20,000.
A number of costs of administration of the estate, including repayment of the
debtor-in-possession loan extended by Foothill, will be paid out of the cash
proceeds of the sale. Out of the remaining proceeds, certain other creditors
will receive approximately $350,000 in cash and approximately 15,000 shares of
Aquis 7.5% preferred stock. Foothill will receive the remainder of the purchase
price consideration.
As a result of the Chapter 11 filing and the subsequent auction of its assets,
the Company's assets as of December 31, 1998 were reduced to their estimated
realizable value at that time. Significant uncertainty existed surrounding the
settlement amount of the outstanding liabilities at that time, thus the
liabilities were presented on a going concern basis as opposed to estimated
settlement value.
As a result of the Company entering Chapter 7 bankruptcy in February, 2000, the
Company's assets at December 31, 1999 are presented as their estimated net
realizable value of approximately $5.2 million, which is primarily the
consideration paid by Aquis, including liabilities assumed as noted below. The
preferred stock was valued using the $1.5 million value stated in the purchase
agreement between the Company and Aquis. Total liabilities outstanding
significantly exceed proceeds received for the business. Those liabilities
presented as current liabilities in the Balance Sheet, which were incurred
post-petition and approximately $1.4 million of which will be assumed by Aquis,
are presented on a going concern basis, as management expects to settle those at
the amounts incurred. Other liabilities, primarily incurred pre-petition, are
subject to compromise and are presented at their estimated settlement amounts.
Actual settlement amounts may vary from the estimated amounts presented.
2. AREAWIDE DISCONTINUED OPERATION
On March 4, 1998, Areawide Cellular, Inc. ("Areawide") acquired all of the
membership interests of Areawide LLC from Inc. in exchange for 80% of Areawide's
stock, 14,794,188 common shares, $800,000 of cash and forgiveness of a $1.2
million note payable related to this transaction. Areawide is a Florida
corporation, which was incorporated in September 1972 under the name Mandor,
Inc. and changed its name to Community Redevelopment Corporation ("CRC") in
August 1990. It was a home improvement contractor until March 1998 when it
disposed of the assets and liabilities of its home improvement operations. The
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 4, 1998 transaction was accounted for as a reverse acquisition whereby
Areawide LLC was treated as the acquiror and Areawide the acquiree. Subsequent
to the transaction Areawide LLC was the operating unit and Areawide only a
holding entity. Upon such acquisition, the then officers and directors resigned
and new directors and officers were selected and the corporate name of CRC was
changed to Areawide Cellular, Inc.
On October 22, 1998, Harris Family Areawide, LLC ("Harris") acquired all of the
common shares of Areawide held by Inc. (approximately 82.5%). As consideration,
Harris assumed approximately $11.5 million of Inc.'s total obligation.
Inc.'s portion of Areawide's net income for the year ended December 31, 1997 and
the period from January 1998 through October 1998 and the net gain on the
transactions described above are recorded as Net Gain from Discontinued
Operations in the financial statements in the respective years. In total, Inc.
recorded income from Areawide and a net gain of approximately $1.6 million from
these transactions. As the Company sold the remaining 80% of its ownership in
Areawide in October 1998, there are no assets or liabilities recorded on the
Balance Sheet as of December 31, 1998.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
These financial statements present the consolidated results of
Source One Wireless, Inc. for the three years ended December 31,
1999. The consolidated group for the year ended December 31, 1999
includes Source One Wireless, Inc. and its wholly owned subsidiary
Source One Wireless II, LLC. The consolidated group for the years
ended December 31, 1998 and 1997 includes Source One Wireless, Inc.,
its wholly owned subsidiary, Source One Wireless, LLC, and its
wholly owned subsidiary Source One Wireless II, LLC. The only asset
held by Source One Wireless, LLC is its investment in Source One
Wireless II, LLC, which only has assets of the remaining FCC
licenses. The results of its Areawide Cellular, Inc. subsidiary have
been shown as discontinued operations for the years ended December
31, 1998 and 1997, since it was sold on October 22, 1998.
(b) ACCOUNTS RECEIVABLE
Accounts receivable includes amounts owed by customers for airtime
services and equipment. A related provision for uncollectible
amounts is calculated based on management's estimates of amounts
which, based upon the credit risk associated with the various
classifications of customer accounts, are subject to substantial
collection risk.
(c) INVENTORY
Inventory consists primarily of pagers and related accessories held
for resale. Inventory is stated at the lower of cost or market. Cost
is determined on a specific identification basis. The Company
recorded a valuation reserve of $300,000 at December 31, 1998.
(d) PROPERTY AND EQUIPMENT
Property and equipment was recorded at historical cost, however at
December 31, 1999 management determined that amount exceeded fair
value and thus balances have been adjusted for impairment and are
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
recorded in the financial statements at their estimated fair
values. See note 3(f). Depreciation and amortization is provided
using the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
---------------
<S> <C>
Tower and ground equipment 5-10 years
Technical testing equipment 5-10 years
Office and computer equipment 5-10 years
</TABLE>
During 1999, the Company's property and equipment was held for
disposal, and in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," the
Company has not recorded depreciation expense during this period.
(e) INTANGIBLE ASSETS
Intangible assets are stated at cost. Licenses represent costs
incurred for FCC-issued licenses ("FCC licenses") and are amortized
on a straight-line basis over an estimated useful life of 20 years.
Charges were recorded in 1999 and 1998 to reduce the carrying value
of intangible assets, which consisted primarily of goodwill, FCC
licenses and loan fees, to estimated fair value. See note 3(f).
(f) REALIZATION OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangible assets to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts should be
evaluated. Impairment is measured by comparing the carrying value to
the estimated undiscounted future cash flows expected to result from
the use of the assets and their eventual disposition. During each of
the years ended December 31, 1999 and 1998, the Company determined
an impairment in long lived assets had occurred. This decision was a
result of continued operating losses, the inability to obtain
additional financing or refinance existing obligations to continue
operations and the inability of the Calling Party Pays ("CPP")
platform for cellular service to produce the projected improvements
in operating results management expected in prior periods.
In 1999 and 1998, the Company reviewed its property and equipment
carrying values and determined the carrying value of these assets
has been impaired and accordingly recorded charges of approximately
$75,000 and $4.4 million in 1999 and 1998, respectively, to reduce
the carrying value to estimated fair value. The Company continued to
incur significant negative cash flow and operating losses during
1999 and the future undiscounted cash inflows are significantly less
than the outflows necessary to operate the business. Therefore, the
fair values of property and equipment and intangible assets are
based on management's estimates of the likely sales proceeds if the
entire property and equipment base and intangible assets were sold
to third parties.
The Company also reviewed the carrying value of its intangible
assets as of December 31, 1999 and 1998 and determined it was
probable the Company would not derive future value associated any of
the intangible assets, with the exception of FCC licenses.
Additionally, the carrying value of the FCC licenses has been
reduced to fair value. Therefore, the Company recorded charges of
approximately $10,000 and $4.0 million in 1999 and 1998,
respectively, to write-down the carrying amount of intangible assets
to estimated fair value.
The impairment adjustments to property and equipment and intangible
assets has been recorded as depreciation and amortization expense in
the Income Statement.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(g) DEFERRED REVENUE
Deferred revenue consists of billings to customers in advance of
airtime usage and is recorded as a liability until airtime usage
occurs.
(h) REVENUE RECOGNITION
Airtime services are provided to customers through reseller
arrangements, dealer agreements, and direct sales channels.
Customers in certain midwestern states can receive service through
traditional service plans or through a calling-party-pays plan.
Under the calling-party-pays plan, the party transmitting the
message is responsible for the related charges, with billing and
collection activities provided through a service agreement with the
local telecommunications carrier. Equipment is provided to customers
through dealers, resellers, and direct channels.
Revenues are recognized under service agreements with customers over
the period in which related services are provided. Sales of
equipment are recognized upon delivery. An allowance for doubtful
accounts is established at the balance sheet date representing the
estimated amount of accounts receivable that will be written off as
uncollectible. The related provision for doubtful accounts is
recognized as a general and administrative expense.
Revenues recognized under calling-party-pays agreements are reported
at the gross amount of airtime charges earned. Charges incurred for
the provision of services by the local telecommunications carrier
and in administering the related billing and collections process are
reflected as operating expenses.
(i) ADVERTISING
The Company recognizes the production costs of advertising
activities as an operating expense the first time the advertising
takes place. Advertising expenses for continuing operations amounted
to $114,628, $798,731 and $1,411,489 for the years ended December
31, 1999, 1998 and 1997, respectively.
(j) INCOME TAXES
Inc. has elected to be treated under Subchapter S of the Internal
Revenue Code. Therefore, federal and certain state income tax
liabilities are the responsibility of the individual stockholders.
(k) USE OF ESTIMATES
Management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities in connection with the preparation
of these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(l) CREDIT CONCENTRATIONS AND FINANCIAL INSTRUMENTS
The Company's customers are comprised of subscribers that utilize
airtime services and purchase related equipment. Financial
instruments which potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable. As of
December 31, 1999 or 1998, no account receivable from any customer
exceeded 5% of total assets. Accounts receivable from the Company's
telecommunications providers under the calling-party-pays program
amounts to 16% and 21%of gross accounts receivable at December 31,
1999 and 1998, respectively.
Accounts receivable are generally unsecured; management believes the
allowance for doubtful accounts is adequate to cover any exposure to
loss. Other financial instruments include notes payable to bank,
promissory notes payable, notes payable to stockholder and related
party, accounts payable, accrued
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
expenses, accrued taxes, payable to affiliate, accrued interest, and
lease obligations. The fair values of all financial instruments were
not materially different from their carrying or contract values.
The Company maintains a significant portion of its total borrowings
with banks, under agreements, described in note 6. This
concentration encompasses 44% of total borrowings at December 31,
1998. The equivalent of this amount is subject to compromise in the
1999 financial statements and has been included in the "liabilities
subject to compromise" amount on the balance sheet. Related parties
and equipment vendors have historically provided other sources of
credit.
(m) LIABILITIES SUBJECT TO COMPROMISE
There were approximately $78.0 million of liabilities outstanding at
December 31, 1999 that were incurred pre-petition, the majority of
which were subject to compromise. From the total proceeds, certain
senior creditors will receive approximately $2.98 million of the
total $3.77 million consideration, which consisted of $2.27 million
in cash and $1.5 million in Aquis 7.5% preferred stock. Therefore,
the estimated settlement amount of all liabilities subject to
compromise is $2.98 million, primarily based on the total
consideration paid by Aquis for the Company's Midwest assets less
other obligations disbursed from the total proceeds. Approximately a
$78.6 million gain was recorded in the consolidated income statement
to reflect these certain liabilities at their estimated settlement
amounts. Actual settlement amounts may vary from estimates.
4. BUSINESS CONCENTRATION
Revenues are significantly impacted by sales through the Company's
telecommunications providers under the CPP program. Such revenues
accounted for 56%, 44% and 40% of the Company's total service revenues for
the years ended December 31, 1999, 1998 and 1997, respectively. An
alteration of the present relationship could significantly affect
management's estimates and the Company's performance.
5. PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment, revalued at estimated fair value, as of December
31, 1999 and 1998, consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Tower and ground equipment $ 11,751,886 $ 11,787,756
Technical testing equipment 364,319 364,319
Leasehold Improvements 388,161 384,036
Office and computer equipment 4,754,743 4,754,743
------------ ------------
17,259,109 17,290,854
Less accumulated depreciation (13,657,098) (13,615,102)
------------ ------------
$ 3,602,011 $ 3,675,752
============ ============
</TABLE>
Intangible assets, at estimated fair value, as of December 31, 1999 and 1998
consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
FCC licenses $ 2,375,168 $ 2,375,168
Less accumulated amortization (1,915,871) (1,906,468)
----------- -----------
$ 459,297 $ 468,700
=========== ===========
</TABLE>
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1999 and 1998, the fair value of property and equipment
and intangible assets was determined to approximate $4.1 million,
respectively. The amounts relate to tower and ground assets, technical
testing equipment, office and computer equipment and FCC licenses.
In 1998, management determined that any leasehold improvements recorded through
that time would likely not provide future value to the Company and also would
likely not be able to be sold to a third party. The Company also reviewed the
carrying value of its intangible assets as of December 31, 1998 and determined
it was probable the Company would not derive future value associated any of the
intangible assets, with the exception of FCC licenses. The Company recorded a
charge of $8.4 million in 1998 to depreciation and amortization expense as a
result of impairment of property and equipment and intangible assets.
In 1999, management reassessed the carrying value of its property and equipment
and intangible assets. The Company recorded an additional $83,144 charge to
depreciation and amortization expense in 1999 as a result of further impairment
of property and equipment and intangible assets. See note 3(f).
6. NOTES PAYABLE AND CREDIT AGREEMENTS
1997 ACQUISITION LOANS
In November 1997, Inc. purchased Areawide Cellular LLC, a chain of retail
cellular stores, for $11,575,000.
In November 1997, Inc. raised approximately $13.5 million pursuant to a private
placement of promissory notes. The notes bear interest at 10.5% in the first two
years, 12% in year three, 14% in year four, and 16% in year five, after which
the notes will mature. Noteholders also received certain detachable warrants
with antidilution rights. The notes all contain various covenants, including
restrictions on distributions.
In December 1997, Inc. issued promissory notes in the amount of $1.0 million via
a private placement. These notes bear interest at 10.5% and were to mature on
March 16, 1998. The notes were repaid in January 1998 including accrued
interest.
1997 CREDIT FACILITY
Inc. secured a revolving credit facility in September 1997, from Foothill in the
amount of $25.0 million. The revolving credit facility was increased to $27.7
million in January 1998. Borrowings are secured by substantially all owned
assets of Inc., bear interest at prime plus 1.5% (11.75% at December 31, 1998),
and will mature at the end of three years. Revolving availability was to be
reduced by $300,000 each month and advance criteria are defined for term
availability, beginning in April 1998. The loan agreement contains various
covenants that, among others things, require Inc. to maintain certain financial
ratios, prohibit the incurrence of certain additional debt, restrict dividends,
required additional subordinated debt in an amount not less than $10.0 million
to be raised within 90 days of closing, and require operation in conformity with
a business plan. As of December 31, 1999 and 1998, Inc. was not in compliance
with one or more of the covenants of the agreement. As of December 31, 1999, the
obligations under these agreements were subject to compromise and have been
reported as such in the financial statements at their estimated settlement
values and at December 31, 1998 the Company has classified the outstanding
borrowings of $18,568,327 as a current liability. The Company's outstanding
liability to Foothill was reduced by the assumption of approximately $9.5
million of the total balance by Harris, upon the sale of Areawide LLC.
1998 HARRIS FINANCING
In connection with the October 22, 1998 transaction, Harris loaned $2.0 million
to Areawide, which in turn was paid to Inc. in repayment of a portion of the
approximate intercompany loan balance of $11,575,000 between Areawide LLC and
Inc. The loan from Harris bears interest at a rate of 12% per annum. In
addition, Areawide assumed $9.5 million of Inc.'s existing senior indebtedness.
Such $9.5 million indebtedness ("Foothill Debt") bears interest at an annual
rate equal to the sum of its reference rate plus 4%. All remaining
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
intercompany liabilities were forgiven. Prior to that date, all of the
Company's assets were pledged to secure the Foothill Debt and the Company
guaranteed repayment of the Foothill Debt. The $2.0 million was also used to
reduce the outstanding Foothill Debt. In addition to the $11.5 million
consideration for Areawide, Harris loaned Inc. an additional $2.0 million in
October 1998. The obligation matures in October 2000 and bears interest at
12%per annum. As of December 31, 1999, the obligation under this agreement
was subject to compromise and has been reported as such in the financial
statements at its estimated settlement value and at December 31, 1998 the
Company classified the outstanding borrowing as a current liability.
7. NOTES PAYABLE TO STOCKHOLDER AND RELATED PARTIES
In 1993, Inc. entered into a loan agreement with a stockholder which provided
for stated borrowings under the agreement of up to $5,674,590 or such greater
amount as may be advanced at the stockholder's discretion. Borrowings are
secured by substantially all of the owned assets of Inc., and the stockholder's
interest in this collateral is subordinate to the interests of the bank and the
investment group under the credit agreements described in note 6. Borrowings
under the agreement bear interest at 10% and mature on July 30, 2003. Inc. had
$8,247,561 principal outstanding under this agreement at December 31, 1999 and
1998.
The agreement contains various covenants that, among other things, require Inc.
to maintain its corporate standing, maintain title to related collateral,
maintain its capital structure, restrict dividend payments and other
distributions, limit certain executive salaries and not be in default with
respect to other borrowings. As of December 31, 1999 and 1998, Inc. was not in
compliance with one or more of the covenants stipulated in the loan agreement.
The Company has classified the borrowing as a current liability in the
accompanying financial statements for 1998. As of December 31, 1999, the
obligation under this agreement was subject to compromise and have been reported
as such in the financial statements at its estimated settlement value.
From 1996 through 1998, the Company obtained various loans totaling $1,010,000
from other related parties. These borrowings bear interest rates from 10 - 12%
and are due on demand. As of December 31, 1999, the obligations under these
agreements were subject to compromise and have been reported as such in the
financial statements at their estimated settlement values. As of December 31,
1998, the Company had the outstanding borrowings of $1,010,0000 classified as a
current liability.
8. RELATED-PARTY TRANSACTIONS
Inc. leased its principal operating facility from a stockholder under a
noncancellable operating lease which had an original expiration date of June 30,
2004, and which contained rent escalations commencing on January 1, 1997. In May
1996, the lease term was amended to expire on December 31, 1996. The Company
continued to lease the facility under month-to-month terms through 1997, 1998
and 1999. Related rent expense is described in note 9.
Inc. maintains significant borrowings from a stockholder under a loan agreement
which matures on July 30, 2003. Inc. also maintains several additional smaller
loans other related parties. Related terms and outstanding amounts are described
in note 7.
9. COMMITMENTS AND CONTINGENCIES/VIOLATIONS OF REGULATIONS AND LAWS
CAPITAL LEASES
The Company is obligated under various capital leases for equipment and
inventories that expire at various dates in the future. The amounts of property
and equipment under capital leases, adjusted for impairment, are included in the
amounts presented in note 5.
Amortization and the impairment charge for assets held under capital leases are
included in depreciation and amortization expense. The carrying values of the
capital leases have been reduced to reflect management's estimate of fair value
at December 31, 1999 and 1998. See note 3(f).
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1999 and 1998, the Company was not in compliance with the
payment terms in certain lease agreements, and therefore was subject to
acceleration of these obligations. Accordingly, such amounts have been
reflected as liabilities subject to compromise in the accompanying balance
sheet as of December 31, 1999 and as current liabilities as of December 31,
1998.
OPERATING LEASES
The Company leases one of its facilities from a stockholder under a
noncancellable lease agreement which expired on December 31, 1996, and continues
on a month-to-month basis subsequent to that date. Under the lease agreement,
the Company is required to pay for utilities, taxes, insurance, and maintenance
expenses. Related rental expenses were $139,000, $377,678 and $216,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Rent expense under all lease agreements classified as operating leases amounted
to $883,620, $2,114,469 and $1,776,687 for the years ended December 31, 1999,
1998 and 1997, respectively.
ALL CAPITAL AND OPERATING LEASES
The Company leases office space, certain vehicles, and antenna sites under
noncancellable lease agreements that expire at various dates in the future. The
Company filed under the Bankruptcy Code on April 29, 1999. Under the Bankruptcy
Code, the Company had the ability to accept, reject or assign leases. Management
has rejected the majority of the Company's outstanding leases. Of the remaining
leases management has not made a final determination as to which will be
permanently accepted.
SALES AND USE TAXES
During portions of 1996 and 1995, the Company did not remit to the applicable
taxing authorities all or a portion of the taxes collected under the sales and
use tax regulations of certain of the states in which the Company conducts
business. The ramifications of the situation regarding sales taxes may include,
but are not limited to, penalties for failure to remit amounts collected and
interest applied to the unremitted principal amounts at the then-current
interest rate on all unpaid amounts through the date of payment.
As of December 31, 1999 and 1998, the Company had accrued sales and use tax
liabilities to taxing authorities, which represented principal, interest and
penalties. Accrued sales tax liabilities amounted to $707,521 at December 31,
1998. The equivalent of this amount is subject to compromise in the 1999
financial statements and has been included in the "liabilities subject to
compromise" amount on the balance sheet.
LITIGATION
The Company is party to various legal proceedings in the ordinary course of its
business which management does not expect to have a material adverse impact on
its financial position.
F-14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
23.1 Consent of Arthur Andersen LLP.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated March 31, 2000, on the consolidated financial
statements of Source One Wireless, Inc. and Subsidiaries included in
Amendment No. 1 to the Current Report of Aquis Communications Group, Inc.
(Commission File No. 1-13002), dated January 31, 2000, into Aquis
Communications Group, Inc.'s (formerly known as Paging Partners Corporation)
previously filed S-3 Registration Statements, File No. 333-07737 and File
No. 333-24355, and into the Company's previously filed S-8 Registration
Statement, File No. 333-11141.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 17, 2000
