<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 2000
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
PAGING NETWORK, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 04-2740516
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
PAGING NETWORK, INC.
14911 QUORUM DRIVE
DALLAS, TEXAS 75240
972-801-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------------
RUTH WILLIAMS
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND ASSISTANT SECRETARY
14911 QUORUM DRIVE
DALLAS, TEXAS 75240
972-801-8000
(Name, address, including zip code and telephone number, including area code, of
agent for service)
-------------------------
Copy to:
JOHN R. SCHMIDT
MAYER, BROWN & PLATT
190 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603-3441
312-701-8597
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
-----------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED(1) REGISTERED PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share....... 616,830,757 Shares $0.565 $348,509,378 $92,007
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</TABLE>
(1) This Registration Statement relates to the shares of common stock of Paging
Network, Inc. ("PageNet") to be issued in exchange for the outstanding
senior subordinated notes of PageNet pursuant to the exchange offer
described in the prospectus included herein.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f), based on the market value of PageNet's outstanding
senior subordinated notes to be received in the exchange as reported by
FactSet Research Systems, Inc. as of January 4, 2000.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 2000
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
VAST SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 75-2852196
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
14131 MIDWAY ROAD, SUITE 500
ADDISON, TEXAS 75001
972-801-8800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-------------------------
MARK A. KNICKREHM
PRESIDENT AND CHIEF OPERATING OFFICER
14131 MIDWAY ROAD, SUITE 500
ADDISON, TEXAS 75001
972-801-8800
(Name, address, including zip code and telephone number,
including area code, of agent for service)
-------------------------
Copies to:
JOHN R. SCHMIDT
DAVID A. SCHUETTE
MAYER, BROWN & PLATT
190 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603-3441
312-701-7363
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B common stock, par value
$0.01
per share.......................... 13,780,000 shares (2) (2) (2)
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Class B common stock, par value
$0.01
per share........................ 2,320,000 shares $2.183(3) $5,064,560(3) $1,338
- ------------------------------------------------------------------------------------------------------------------------------
Total........................ 16,100,000 shares -- -- $1,338
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</TABLE>
(1) Of the 16,100,000 shares of Class B common stock registered hereby,
13,780,000 are being offered by Paging Network, Inc. ("PageNet"), together
with 616,830,757 shares of PageNet common stock, in exchange for all of the
outstanding senior subordinated notes of PageNet. The remaining 2,320,000
shares of Class B common stock registered hereby are being offered to
stockholders of PageNet in connection with the proposed plan of
reorganization of PageNet.
(2) The registration fee paid by PageNet in connection with the exchange offer
was calculated in accordance with Rule 457(f) based on the aggregate market
value of all outstanding PageNet senior subordinated notes to be acquired by
PageNet. Accordingly, no separate fee is being paid herewith.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f), based on the market value of all outstanding shares
of PageNet common stock to be cancelled in connection with the proposed plan
of reorganization, calculated in accordance with Rule 457(c) as of January
4, 2000, reduced by the value of the other consideration, also calculated in
accordance with Rule 457(c) as of January 4, 2000, to be received by PageNet
stockholders in connection therewith.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 3
EXPLANATORY NOTE
The registration statement on Form S-4 being filed herewith by Paging
Network, Inc. includes the S-4 facing page, the prospectus relating to the
exchange offer to Paging Network, Inc.'s senior subordinated noteholders and the
consent solicitation of Paging Network, Inc. stockholders and senior
subordinated noteholders to approve a prepackaged plan of reorganization,
including the Annexes thereto, and Part II to the S-4. The registration
statement on Form S-1 being filed herewith by Vast Solutions, Inc. includes the
S-1 facing page, the prospectus relating to the Class B common stock of Vast
Solutions, Inc., which is also included as Annex A to the Paging Network, Inc.
prospectus, and Part II to the S-1.
<PAGE> 4
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 11, 2000
PROSPECTUS
EXCHANGE OFFER FOR PAGENET NOTEHOLDERS
-------------------------
CONSENT SOLICITATION AND DISCLOSURE STATEMENT FOR PREPACKAGED PLAN
OF REORGANIZATION FOR PAGENET NOTEHOLDERS AND STOCKHOLDERS
PAGENET LOGO
616,830,757 SHARES COMMON STOCK
PAGING NETWORK, INC.
We are offering to exchange 616,830,757 shares of PageNet common stock and
13,780,000 shares of Class B common stock of Vast Solutions, Inc., PageNet's
wholly owned subsidiary, for all of our outstanding:
- 8.875% senior subordinated notes due 2006;
- 10.125% senior subordinated notes due 2007; and
- 10% senior subordinated notes due 2008.
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
, 2000 UNLESS EXTENDED.
The exchange offer is part of a transaction in which PageNet and St. Louis
Acquisition Corp., a direct and wholly owned subsidiary of Arch Communications
Group, Inc. will merge. In the merger, each share of PageNet common stock,
including the shares to be issued in this exchange offer, will be converted into
0.1247 shares of Arch common stock, and PageNet will become a wholly owned
subsidiary of Arch. See "Summary -- The Merger" beginning on page 2 and "The
Merger" beginning on page 32. We will not exchange PageNet and Vast shares for
PageNet senior subordinated notes unless all conditions to the merger and other
specified conditions are satisfied.
We are also asking the holders of our senior subordinated notes and our
stockholders to approve a consensual or "prepackaged" plan of reorganization of
PageNet and its subsidiaries.
Our common stock is traded on the Nasdaq National Market System under the
symbol "PAGE."
WE URGE YOU TO CAREFULLY READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE
19 BEFORE YOU MAKE ANY INVESTMENT DECISION.
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED OR
DISAPPROVED THE SHARES OR THE EXCHANGE OFFER OR DETERMINED IF THIS PROSPECTUS IS
ACCURATE OR ADEQUATE. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
The date of this prospectus is , 2000
<PAGE> 5
This prospectus incorporates by reference important business and financial
information that is not included in or delivered with this prospectus. See
"Incorporation of Documents by Reference."
You can obtain any documents incorporated by reference through PageNet or
from the Securities and Exchange Commission's web site at http://www.sec.gov.
These documents are available from PageNet without charge, excluding any
exhibits to those documents. You can obtain these documents in this prospectus
by requesting them in writing or by telephone from PageNet at the following
address:
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attention: Investor Relations
Telephone (972) 801-8000
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY
_______________________________ (FIVE BUSINESS DAYS BEFORE TERMINATION OF THE
EXCHANGE OFFER). PLEASE BE SURE TO INCLUDE YOUR COMPLETE NAME AND ADDRESS IN
YOUR REQUEST. IF YOU REQUEST ANY DOCUMENTS INCORPORATED BY REFERENCE, WE WILL
MAIL THEM TO YOU BY FIRST CLASS MAIL, OR ANOTHER EQUALLY PROMPT MEANS, WITHIN
ONE BUSINESS DAY AFTER WE RECEIVE YOUR REQUEST.
ii
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
Summary
PageNet and Arch............................................ 1
The Merger................................................ 2
The Exchange Offer........................................ 7
The Spin-Off Distribution................................. 10
The Prepackaged Plan of Reorganization.................... 10
Summary Financial and Operating Data...................... 10
Capitalization............................................ 16
Stock Ownership in Combined Company....................... 17
Noteholder and Stockholder Actions........................ 17
Risk Factors................................................ 19
Risks Related to the Exchange Offer and an Investment in
Arch's Common Stock.................................... 19
Risks Related to the Merger............................... 20
Arch's Business and Financial Risks....................... 22
Risks Related to PageNet.................................. 28
Risks Related to Vast..................................... 29
Certain Bankruptcy Considerations......................... 29
Forward Looking Statements.................................. 32
The Merger.................................................. 32
General................................................... 32
Background of the Merger.................................. 32
PageNet's Reasons for the Merger.......................... 35
Opinions of Financial Advisors to PageNet................. 37
Opinion of Houlihan, Lokey, Howard & Zukin Capital..... 37
Opinion of Goldman, Sachs & Co......................... 39
Opinion of Morgan Stanley Dean Witter.................. 42
Interests of Certain Persons in the Merger................ 44
Treatment of PageNet's Stock.............................. 45
The Exchange Offers....................................... 45
Regulatory Approvals...................................... 47
Material Federal Income Tax Considerations................ 47
Accounting Treatment of the Merger........................ 47
Nasdaq National Market Quotation.......................... 48
Resales of Arch Common Stock Issued in Connection with the
Merger;
Affiliate Agreements................................... 48
No Appraisal Rights....................................... 48
PageNet Bankruptcy Case................................... 48
The Merger Agreement........................................ 50
Structure of the Merger................................... 50
The Exchange Ratio and Treatment of PageNet Common
Stock.................................................. 50
Exchange Procedures....................................... 50
Treatment of PageNet Stock Options........................ 51
Representations and Warranties............................ 52
Certain Covenants......................................... 53
Conditions to Completion of the Merger.................... 57
Termination of the Merger Agreement....................... 59
</TABLE>
iii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
Termination Fee............................................. 60
Modification or Amendment of the Merger Agreement......... 62
The Exchange Offer.......................................... 62
Proposed Amendments......................................... 67
The Spin-Off Distribution................................... 73
The Prepackaged Plan of Reorganization...................... 73
General................................................... 74
Classification of Claims and Equity Interests under the
Plan................................................... 75
Summary of Treatment Under the Plan....................... 77
Summary of Other Provisions of the Plan................... 81
Conditions to Consummation................................ 87
Effect of Consummation of the Plan........................ 88
Modification of the Plan.................................. 88
Intended Actions During the Chapter 11 Cases.............. 89
Confirmation Standards.................................... 90
Confirmation of the Plan Without Acceptance by All Classes
of Impaired Claims..................................... 91
Certain Consequences of Non-Acceptance.................... 93
Voting Procedures......................................... 93
Best Interests Test......................................... 93
Material Federal Income Tax Considerations.................. 95
Capitalization.............................................. 102
Stock Ownership in the Combined Company..................... 103
Unaudited Pro Forma Consolidated Financial Data of the
Combined Company.......................................... 104
Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................ 106
Unaudited Pro Forma Condensed Consolidated Balance Sheet.... 107
Unaudited Pro Forma Condensed Consolidated Statement of
Operations................................................ 108
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements...................................... 110
Selected Historical Consolidated Financial and Operating
Data -- PageNet........................................... 114
PageNet Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 117
Selected Historical Consolidated Financial and Operating
Data -- Arch.............................................. 126
Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 129
Selected Historical Consolidated Financial and Operating
Data -- MobileMedia....................................... 140
MobileMedia Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 143
Market Price Information and Dividend Policy................ 154
PageNet and Arch Common Stock............................. 154
PageNet Notes............................................. 155
Dividend Policy........................................... 156
Comparative Historical and Unaudited Pro Forma Per Share
Data...................................................... 157
Industry Overview........................................... 158
Arch's Business............................................. 162
Arch's Management........................................... 170
Arch's Principal Stockholders............................... 176
PageNet's Business.......................................... 180
PageNet's Management........................................ 185
PageNet's Principal Stockholders............................ 191
</TABLE>
iv
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
The Combined Company........................................ 193
Description of PageNet's Common Stock....................... 196
Description of Arch's Equity Securities..................... 197
Description of Indebtedness................................. 203
Arch...................................................... 203
PageNet................................................... 207
Comparison of Rights of PageNet Stockholders and Arch
Stockholders.............................................. 208
Legal Matters............................................... 219
Experts..................................................... 219
Where You Can Find More Information......................... 219
Incorporation of Documents by Reference..................... 220
Index to Financial Statements............................... F-1
Annex A -- Vast Prospectus.................................. A-1
Annex B -- Agreement and Plan of Merger..................... B-1
Annex C -- The Prepackaged Plan of Reorganization........... C-1
Annex D -- Arch Credit Facility Term Sheet.................. D-1
Annex E -- Unaudited Combined Company Projections........... E-1
Annex F -- Opinion of Houlihan, Lokey Howard & Zukin
Capital................................................... F-1
Annex G -- Opinion of Goldman, Sachs & Co................... G-1
Annex H -- Opinion of Morgan Stanley Dean Witter............ H-1
</TABLE>
"PageNet" is a registered mark of PageNet. "Arch" and "Arch Paging" are
service marks of Arch. "MobileComm" is a registered service mark of Arch, and
the mark is not associated with MobilComm Inc. of Cincinnati, Ohio. Other
trademarks, service marks and trade names used in this prospectus are owned by
persons who are not associated with PageNet or Arch.
v
<PAGE> 9
SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. It may not contain all of the information that is important to you.
We urge you to read the entire prospectus, including "Risk Factors", and
information contained in PageNet's and Arch's public documents that have been
filed with the Securities and Exchange Commission. We use the name "PageNet" to
refer to Paging Network, Inc. and its consolidated subsidiaries. We use the name
"Arch" to refer to Arch Communications Group, Inc. and its consolidated
subsidiaries both before and after the proposed merger. Sometimes we use the
phrase "combined company" when we wish to emphasize that we are referring
specifically to Arch after the proposed merger. We use the name "Vast" to refer
to Vast Solutions, Inc., PageNet's wholly owned subsidiary.
The exchange offer will be completed immediately before the completion of
the merger. Therefore, the PageNet common stock that PageNet senior subordinated
noteholders are entitled to receive in the exchange offer will immediately be
converted into Arch common stock as a result of the merger. Because the PageNet
noteholders whose notes are exchanged will ultimately receive Arch common stock
as a result of the merger, this prospectus contains information about Arch and
Arch common stock that is intended to assist PageNet senior subordinated
noteholders in deciding whether to exchange their notes. PageNet noteholders
will not be entitled to vote the shares of PageNet common stock received by them
in the exchange offer either for or against the merger. Arch has supplied all
information contained in this prospectus relating to Arch and PageNet has
supplied all information in this prospectus relating to PageNet and Vast.
All share information in this prospectus reflects the effects of a 1-for-3
reverse stock split effected by Arch during June 1999.
PAGENET AND ARCH
PAGENET
PageNet is a leading provider of wireless communications services
throughout the United States and the U.S. Virgin Islands, Puerto Rico and
Canada, with approximately 8.8 million units in service. PageNet:
- provides services in all 50 states and the District of Columbia,
including the 100 most populated metropolitan markets in the United
States, and to more than 75% of the population of Canada;
- offers two primary types of wireless communications services which
comprise 99.7% of its business: digital display messaging and
alphanumeric display messaging;
- offers enhanced wireless communications services, such as stock quotes,
news and other wireless information delivery services, voice mail,
personalized greeting, message storage and retrieval and equipment loss
and damage protection; and
- has begun to market and sell "advanced" messaging services, consisting of
1.5-way services, which enable subscribers to receive acknowledgements
that their messages were delivered, 1.75-way services, which enable
subscribers to respond to messages with pre-scripted replies, and 2-way
services, which allow subscribers to initiate messages and to respond to
messages with original or pre-scripted replies.
Through its wholly owned subsidiary Vast, PageNet is commencing operations
that can provide integrated wireless solutions to connect businesses with their
employees, customers and remote assets, such as vending machines, automobiles
and storage tanks. Using an expandable software platform, provisioning and
service and support operations, Vast will be able to provide customers with a
comprehensive end-to-end wireless solution that seamlessly connects their mobile
users with the Internet or corporate data network using wireless devices. Vast's
products and services enable corporations to offer a more personalized and
powerful wireless data solution.
Vast is a development stage company and, since its inception, has been
engaged primarily in product research and development and developing markets for
its products and services. Vast has incurred significant
1
<PAGE> 10
operating losses as a result of its start-up activities. It began to market its
products and services in late 1999, and believes that revenues from sales of
these products and services will grow rapidly.
PageNet's principal office is located at Corporate Centre, 14911 Quorum
Drive, Dallas, Texas 75240. PageNet's telephone number is (972) 801-8000.
PageNet's website, www.pagenet.com, is not part of this prospectus.
ARCH
Arch is a leading provider of wireless communications services, primarily
wireless messaging services, in the United States based on its net revenues and
its approximately 7.0 million units in service. This reflects Arch's acquisition
of MobileMedia Communications, Inc. and its subsidiaries on June 3, 1999. Arch:
- operates in all 50 states and all of the 100 most populated metropolitan
markets in the United States through its sales offices, nationwide retail
distribution network, company-owned retail stores and resellers;
- offers local, regional and nationwide paging services employing digital
networks covering more than 90% of the United States population;
- offers messaging services, including digital display, alphanumeric
display, 2-way messaging and 1.5-way messaging; and
- offers enhanced or complementary wireless communication services, such as
stock quotes, news and other wireless information delivery services,
voice mail, personalized greeting, message storage and retrieval,
equipment loss protection and equipment maintenance.
Arch's operating objectives are to increase its EBITDA, or earnings before
interest, taxes, depreciation and amortization; deploy its capital efficiently;
reduce its financial leverage; and expand its customer relationships. To achieve
its operating objectives, Arch:
- has selected a low-cost operating strategy as its principal competitive
tactic;
- is reducing its financial leverage by reducing capital requirements and
increasing EBITDA;
- is distributing its products and services through several different
channels; and
- is pursuing new revenue opportunities associated with its units in
service, including applications in narrowband personal communications
services, which are commonly referred to as N-PCS.
Arch's principal office is located at 1800 West Park Drive, Suite 250,
Westborough, Massachusetts 01581. Arch's telephone number is (508) 870-6700.
Arch's web site, www.arch.com, is not part of this prospectus.
THE MERGER
PageNet and Arch have agreed to merge on the terms set forth in an
agreement and plan of merger dated November 7, 1999. The merger agreement is
attached to this prospectus as Annex B. We encourage you to read the merger
agreement as it is the legal document that governs the merger.
TERMS OF THE MERGER (PAGE 32)
As a result of the merger, PageNet will become a wholly owned subsidiary of
Arch. The merger will be accompanied by a recapitalization of PageNet and Arch
involving the exchange of debt for common stock in the PageNet and Arch exchange
offers, as described in "The Merger -- The Exchange Offers." Arch also expects
to convert shares of its Series C preferred stock into shares of Arch common
stock in connection with the merger.
The merger agreement provides that each share of PageNet common stock,
including shares issued to PageNet noteholders in the PageNet exchange offer,
will be converted into 0.1247 shares of Arch common stock.
2
<PAGE> 11
STOCK OWNERSHIP AND GOVERNANCE FOLLOWING THE MERGER (PAGES 103 & 194)
If the PageNet and Arch exchange offers are fully subscribed, the merger
and the related exchange offers and the conversion of Arch Series C preferred
shares will result in Arch's outstanding common stock being held
- 29.6% by Arch's existing stockholders;
- 17.2% by the existing holders of Arch's 10 7/8% senior discount notes;
- 1.2% by the existing holders of Arch's Series C preferred shares;
- 44.5% by the existing holders of PageNet's senior subordinated notes; and
- 7.5% by the existing holders of PageNet's common stock.
The capitalization of the combined company following the merger is expected
to be significantly leveraged, although less heavily leveraged than the current
capitalization of Arch and PageNet. See "Summary -- Capitalization" and
"Capitalization."
After the merger, the Arch board of directors will consist of 12 directors.
Six directors will be designated by the current Arch directors and three
directors will be designated by the current PageNet directors. Each of the three
largest holders of PageNet notes being exchanged for shares of PageNet common
stock may designate one director. To the extent any of these three largest
holders do not designate directors, the Arch directors will designate additional
directors.
REQUIRED STOCKHOLDER APPROVALS; STOCKHOLDER MEETINGS (PAGE 54)
Approval of various matters that must be submitted to a vote of
stockholders in order to effect to the merger will require the affirmative vote
of the holders of a majority of Arch's outstanding common stock, a majority of
PageNet's outstanding common stock and, in some cases, a majority of Arch's
outstanding Series C preferred stock. These matters include the authorization
and issuance of the shares of stock to be issued in the merger and the PageNet
and Arch exchange offers. Arch will also need to solicit approval of the
conversion of its outstanding Series C preferred stock into shares of its common
stock. If PageNet files for reorganization under chapter 11 of the United States
Bankruptcy Code, the approvals of the holders of PageNet common stock would no
longer be required.
Stockholder meetings for PageNet and Arch will be held on ,
2000 and , 2000, respectively.
BACKGROUND OF MERGER; RECOMMENDATION TO STOCKHOLDERS (PAGE 32)
The PageNet and Arch boards of directors have unanimously voted to approve
the merger agreement and the merger. Each board of directors believes that the
merger is advisable and in the best interest of its stockholders and recommends
that its stockholders vote to approve the merger agreement and related
transactions.
OPINIONS OF FINANCIAL ADVISORS (PAGE 37)
In deciding to approve the merger, PageNet's board of directors received
the oral opinions of Houlihan, Lokey, Howard & Zukin Capital and Morgan Stanley
Dean Witter, subsequently confirmed in writing that, as of November 7, the
consideration to be received by the holders of PageNet common stock on such date
pursuant to the merger and the spinoff, taken as a whole, was fair from a
financial point of view to such holders and the oral opinion of Goldman, Sachs &
Co., subsequently confirmed in writing, that, as of November 7, the exchange
ratio pursuant to the merger agreement was fair from a financial point of view
to the holders of PageNet common stock as of such date. The full texts of the
opinions of each of Houlihan Lokey, Goldman Sachs and Morgan Stanley to PageNet
are attached as Annexes F, G and H, respectively. Each opinion should be read
carefully in its entirety. Each opinion is addressed to PageNet's board of
directors and does not constitute a recommendation to any stockholders with
respect to matters relating to the merger or any related matter.
3
<PAGE> 12
The engagement letters for all of PageNet's financial advisors provide that
part of their fees will not be paid unless the merger takes place. Regardless of
whether the merger is consummated, all of PageNet's financial advisors will be
reimbursed for reasonable fees and disbursements of counsel and reasonable
travel and other out-of-pocket expenses and indemnified to the full extent of
the law against certain liabilities, including liabilities under the federal
securities laws, arising out of their engagement or the merger.
OTHER REQUIRED APPROVALS; POSSIBLE PREPACKAGED BANKRUPTCY CASE (PAGES 48 AND 74)
In certain circumstances, PageNet and certain of its operating subsidiaries
may commence cases under chapter 11 of the Bankruptcy Code and seek to confirm a
prepackaged plan of reorganization that would bind PageNet's noteholders and
stockholders to the terms of the merger and the exchange offer. Confirmation of
such a plan would be based, in part, on the votes received from PageNet's
noteholders and stockholders pursuant to this solicitation.
Both PageNet and Arch have agreed to solicit consents to the amendment of
the notes being exchanged in the PageNet and Arch exchange offers to eliminate
all covenants that can be modified or eliminated by a majority vote. Holders of
Arch notes are required to consent to the amendment of the notes as a condition
of tendering notes in the Arch exchange offer.
PageNet has agreed to solicit consents from its bank creditors, holders of
its notes to be exchanged in the PageNet exchange offer, and its stockholders to
a consensual or prepackaged plan of reorganization of PageNet and its
subsidiaries consistent with the terms of the merger agreement. Holders of
PageNet notes are required to consent to the prepackaged plan of reorganization
and amendment of the notes as a condition of tendering notes in the PageNet
exchange offer.
If less than 97.5% of the PageNet notes are tendered in the PageNet
exchange offer, or if the stockholders of PageNet fail to approve the merger
agreement, PageNet has agreed that it will either commence bankruptcy cases
under Chapter 11 of the Bankruptcy Code and file the prepackaged plan as a plan
of reorganization under chapter 11 of the Bankruptcy Code or pay Arch a $40.0
million termination fee if:
- Arch stockholders have approved the transaction;
- 97.5% of the Arch notes have been tendered for exchange in the Arch
exchange offer, or 67.0% have been tendered in specified circumstances;
- the holders of less than 97.5% but at least 66 2/3% in principal amount
of the PageNet notes that constitute at least a majority in number of all
such holders have consented to the prepackaged plan;
- sufficient debt financing has been arranged to fund PageNet's operations
until the prepackaged plan is approved; and
- senior credit facilities of at least $1.3 billion have been secured or
can be secured through the prepackaged plan.
If PageNet elects to complete the merger through use of the chapter 11
process, it will commence the chapter 11 cases and also file and seek to confirm
and consummate the prepackaged plan. The merger, if effected pursuant to the
prepackaged plan, will be implemented differently from the way it would be
effected outside of the chapter 11 cases, and creditors and stockholders could
therefore receive different treatment.
CONDITIONS TO THE MERGER (PAGE 57)
Consummating the merger and the related exchange offers is subject to a
number of conditions, including:
- tender and acceptance of at least 97.5% of the PageNet notes and at least
97.5% of the Arch notes for common stock in the exchange offers, unless
PageNet elects to reduce the required minimum percentage of Arch notes to
any amount or Arch elects in specified circumstances to reduce such
percentage to 67.0% or more;
4
<PAGE> 13
- approval of the transaction by Arch's stockholders;
- either:
- approval of the merger agreement and certain related matters by
PageNet's stockholders; or
- entry of a final confirmation order by the Bankruptcy Court confirming
the prepackaged plan;
- receipt of all necessary governmental approval and the expiration or
termination of all applicable waiting periods, and any extensions of
these periods, under the Hart-Scott-Rodino Act;
- the receipt of legal opinions regarding the treatment of the merger as a
tax-free reorganization; and
- other customary contractual conditions specified in the merger agreement.
Some of the conditions to the merger may be waived by the party entitled to
assert such conditions.
NO SOLICITATION OF ALTERNATIVE OFFERS (PAGE 53)
With specified exceptions and subject to their boards of directors'
fiduciary obligations to recommend any superior proposal to their stockholders,
both PageNet and Arch have agreed not to solicit or encourage any proposal from
a third party involving an acquisition, business combination or other similar
proposal, prior to the merger.
TERMINATION OF THE MERGER AGREEMENT (PAGE 59)
PageNet and Arch can mutually agree to terminate the merger agreement and
either PageNet or Arch can terminate the merger agreement upon the occurrence of
a number of events, including if:
- the other party breaches any material representation, warranty or
covenant in the merger agreement and either cannot cure or fails to cure
the breach;
- the merger does not take place by June 30, 2000; or
- the PageNet or Arch stockholders do not approve the transaction.
If the merger agreement is terminated after one party pursues an
alternative offer or under other specified circumstances, either PageNet or Arch
may be required to pay a termination fee of $40.0 million.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF PAGENET IN THE MERGER (PAGE 44)
In considering the recommendation of the PageNet board of directors, you
should be aware of the interests that PageNet executive officers and directors
have in the merger. These include:
- enhanced retention and severance benefits for certain executive officers;
- vesting of stock options, although all of such stock options currently
have no value; and
- customary rights to indemnification against specified liabilities.
These interests are different from and in addition to the interests of
PageNet stockholders. In considering the fairness of the merger to PageNet
stockholders, the PageNet board of directors took these interests into account.
ACCOUNTING TREATMENT (PAGE 47)
Arch will account for the merger using the purchase method of accounting,
which means that the assets and liabilities of PageNet, including intangible
assets, will be recorded at their fair value and the results of operations of
PageNet will be included in Arch's results beginning on the date of acquisition.
5
<PAGE> 14
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS (PAGE 47)
The merger has been structured to qualify as a tax free reorganization
under the Internal Revenue Code. Arch, PageNet, and their stockholders should
not recognize gain or loss in connection with the merger, except that the
distribution and receipt of Class B common stock of Vast is expected to be
taxable to PageNet and its stockholders. See "Material Federal Income Tax
Considerations."
Tax matters are very complicated, and the tax consequences of the merger to
PageNet stockholders will depend on the facts of the stockholder's own
situation. PageNet stockholders should consult their tax advisors for a full
understanding of the tax consequences of the merger to them.
PAGENET STOCKHOLDERS HAVE NO APPRAISAL RIGHTS (PAGE 48)
Under Delaware law, PageNet stockholders do not have appraisal rights.
However, if PageNet's common stock is delisted from the Nasdaq National Market
System, stockholders may have appraisal rights. PageNet has been notified of a
potential delisting of its common stock from the Nasdaq National Market System.
See "Risk Factors -- PageNet may be delisted from the Nasdaq National Market
System and the Chicago Stock Exchange prior to completion of the merger,
resulting in reduced trading liquidity for its shares of common stock."
HOW THE RIGHTS OF PAGENET STOCKHOLDERS WILL DIFFER AFTER THEY BECOME ARCH
STOCKHOLDERS (PAGE 208)
The rights of investors as stockholders of Arch after the merger will be
governed by Arch's charter and by-laws. Those rights differ from the rights of
PageNet stockholders under PageNet's charter and by-laws.
PRICE AND OTHER INFORMATION (PAGE 154)
Shares of PageNet common stock are traded on the Nasdaq National Market
System. On November 5, 1999, the last full trading day prior to the public
announcement of the proposed merger, PageNet common stock closed at $0.9688 per
share. On , 2000, PageNet common stock closed at $ per share.
Shares of Arch common stock are also traded on the Nasdaq National Market
System. On November 5, 1999, the last full trading day prior to the public
announcement of the proposed merger, Arch common stock closed at $6.8125 per
share. On , 2000, Arch common stock closed at $ per share.
REGULATORY MATTERS (PAGE 47)
To complete the merger, PageNet and Arch must make filings and receive
authorizations from various federal and state governmental agencies in the
United States. These filings relate to antitrust matters, transfers of control
of FCC licenses and other regulations. It is possible that some of these
governmental authorities may impose conditions for granting approval. We cannot
predict whether all the required regulatory approvals will be obtained within
the timeframe contemplated by the merger agreement or without burdensome
conditions.
Pursuant to the requirements of the Hart-Scott-Rodino Act, PageNet and Arch
each filed a pre-merger notification and report form with the FTC and the
Antitrust Division of the Department of Justice on November 24, 1999. On
December 23, PageNet and Arch each received a request for additional information
and documents from the Antitrust Division. These requests extend the waiting
period during which the proposed merger may not be consummated until twenty days
after the date that PageNet and Arch substantially comply with those requests.
PageNet and Arch are proceeding to compile the information and documents
requested by the Antitrust Division and intend to submit such information and
documents as soon as reasonably practicable.
6
<PAGE> 15
THE EXCHANGE OFFER
THE EXCHANGE OFFER............ We are offering to exchange a pro rata portion
of 616,830,757 shares of PageNet common stock
and a pro rata portion of 13,780,000 shares of
Class B common stock of Vast for each of our:
- 8.875% senior subordinated notes due 2006;
- 10.125% senior subordinated notes due 2007;
and
- 10% senior subordinated notes due 2008.
The pro rata portion will be computed
immediately prior to the time when the merger
occurs by dividing
- the principal amount, together with all
accrued interest, of each PageNet senior
subordinated note by
- the principal amount, together with all
accrued interest, of all outstanding PageNet
senior subordinated notes.
The following table sets forth an example of
the calculation of the pro rata number of
shares of PageNet common stock and Class B
common stock of Vast that PageNet is offering
to exchange for each $1,000 principal amount of
senior subordinated notes surrendered in the
exchange offer. The calculation shows the
number of PageNet and Vast shares that
noteholders would be entitled to receive if the
exchange offer and merger had occurred on
December 1, 1999. The calculation also shows
the number of Arch shares that the PageNet
common shares would be immediately converted
into at the ratio of 0.1247 Arch shares for
each one PageNet share.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
PER $1000 PRINCIPAL AMOUNT OF PAGENET OF ARCH COMMON OF VAST CLASS B
OF SENIOR SUBORDINATED NOTES COMMON STOCK STOCK COMMON STOCK
- ---------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
8.875% notes due 2006....................... 516.8584 64.4522 11.5466
10.125% notes due 2007...................... 518.9184 64.7091 11.5926
10% notes due 2008.......................... 508.4118 63.3990 11.3579
</TABLE>
EXPIRATION DATE............... The exchange offer will expire at 12:00
midnight, New York City time, on ,
2000 unless we and Arch jointly extend the
expiration date of the exchange offer in our
sole discretion. See "The Exchange
Offer -- Expiration Date; Extensions."
ACCRUED INTEREST
ON THE NOTES................ Interest accrued through the expiration date of
the exchange offer on senior subordinated notes
that are exchanged will be transferred with the
notes and will not be paid separately.
CONDITIONS TO THE EXCHANGE
OFFER......................... The exchange offer is conditioned upon:
- tender and non-withdrawal of at least 97.5%
of the total principal amount of senior
subordinated notes outstanding and at least a
majority of the outstanding principal amount
of each series of senior subordinated notes;
- satisfaction of all conditions to the closing
of the merger, possibly including the
confirmation of a plan of reorganization
under chapter 11 of the Bankruptcy Code which
PageNet may file in specified circumstances;
and
7
<PAGE> 16
- various other customary conditions which, in
specified circumstances, we and Arch may
choose to waive. See "The Exchange
Offer -- Conditions."
We may at any time:
- delay the acceptance of notes for exchange;
- terminate the exchange offer if specified
conditions have not been satisfied;
- extend the expiration date of the exchange
offer and retain all tendered notes, subject,
however, to the right of noteholders to
withdraw their tendered notes; or
- waive any condition or otherwise amend the
terms of the exchange offer in any way.
Some of these actions will require Arch's
approval. See "The Exchange Offer -- Terms of
the Exchange Offer."
PREPACKAGED PLAN OF
REORGANIZATION................ PageNet noteholders will be required, as a
condition to tendering their notes, to give
their consent to the prepackaged plan of
reorganization. See "The Prepackaged Plan of
Reorganization." If PageNet files the chapter
11 cases and the prepackaged plan is confirmed
by the bankruptcy court and consummated, then
100% of the senior subordinated notes will be
converted into shares of Arch common stock and
Class B common stock of Vast and the indentures
for the senior subordinated notes will be
terminated. The number of shares of Arch common
stock and Class B common stock of Vast which
holders of PageNet senior subordinated notes
will receive under the prepackaged plan and if
they accept the exchange offer are the same. If
the prepackaged plan is approved, PageNet
stockholders will also receive the same number
of shares of Arch common stock and Class B
common stock of Vast under the prepackaged plan
as they would receive under the merger.
AMENDMENTS AND WAIVERS........ PageNet noteholders will be required, as a
condition to tendering their notes, to approve
various amendments to the indenture for the
notes. The amendments will remove substantially
all of the rights of those senior subordinated
notes that are not tendered, other than their
right to receive payments of principal and
interest. If any defaults or rescission rights
exist during the exchange offer, PageNet
noteholders will be required to waive them to
the extent legally permissible. See "Proposed
Amendments."
NOTE EXCHANGE AGENT........... . For assistance and requests
for additional copies of this prospectus or the
letter of transmittal that is attached to this
prospectus, contact Customer Service by
telephone at ( ) , or by
facsimile at ( ) .
HOW TO TENDER NOTES........... If you are a holder of PageNet senior
subordinated notes and wish to accept the
exchange offer, you must do one of the
following:
- if your senior subordinated notes are
represented by physical certificates, you
must complete, sign and date a letter of
transmittal, following all the instructions,
and mail or deliver the letter of
transmittal, together with your tendered
notes and any other required documentation,
to the exchange agent; or
- if you hold your senior subordinated notes
through The Depository Trust Company, you
must tender your notes through DTC's
8
<PAGE> 17
Automated Tender Offer Program. See "The
Exchange Offer -- Procedures for Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. If you are a beneficial owner whose notes are
registered in the name of a financial
institution or other nominee and you wish to
tender your notes in the exchange offer, you
should contact the registered holder promptly
and instruct it to tender for you. If you wish
to tender on your own behalf, you must, before
completing and executing the letter of
transmittal and delivering your notes, either
make appropriate arrangements to register
ownership of the notes in your own name or
obtain a properly completed bond power from the
registered holder. Transfer of registered
ownership may take considerable time and it may
not be possible to complete it before the
expiration date. See "The Exchange
Offer -- Procedures for Tendering."
ACCEPTANCE OF TENDERS......... Subject to the satisfaction or waiver of the
conditions to the exchange offer, we will
accept for exchange all notes that are properly
tendered in the exchange offer before the
expiration date. See "The Exchange
Offer -- Terms of the Exchange Offer."
WITHDRAWAL RIGHTS............. Holders may withdraw their tender of notes at
any time before the expiration date. See "The
Exchange Offer -- Withdrawal of Tenders."
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS.............. The exchange by a holder of notes for common
stock generally should be non-taxable for
federal income tax purposes except that gain,
if any, may be recognized, but not in excess of
the value of the shares of Class B common stock
of Vast received by the noteholders in the
exchange offer. See "Material Federal Income
Tax Considerations." However, tax matters are
very complicated, and the tax consequence of
the exchange to PageNet noteholders may depend
on the facts of the noteholder's own situation.
PageNet noteholders should consult their tax
advisors for a full understanding of the
exchange to them.
9
<PAGE> 18
THE SPIN-OFF DISTRIBUTION
The merger agreement provides that PageNet will distribute to its
stockholders up to 11.6% of the total equity of Vast. In accordance with the
merger agreement, the PageNet board of directors will declare a dividend,
payable to the persons who are PageNet stockholders immediately prior to the
acceptance of senior subordinated notes in the exchange offer, consisting of
2,320,000 shares of Class B common stock of Vast. The dividend will not be paid
unless all of the conditions to the merger have been satisfied. Because the
dividend will be declared prior to acceptance of PageNet senior subordinated
notes in the exchange offer, noteholders who become stockholders of PageNet in
the exchange offer will not be entitled to receive any portion of this
distribution.
For a description of Vast and the shares of Class B common stock of Vast,
see the prospectus of Vast attached as Annex A.
THE PREPACKAGED PLAN OF REORGANIZATION
In specified circumstances, Paging Network, Inc. and certain of its
operating subsidiaries may commence cases under chapter 11 of the Bankruptcy
Code and seek to confirm a joint plan of reorganization that would bind
PageNet's noteholders and stockholders to the terms of the Arch merger and the
related exchange offers. See "The Merger -- Conditions to the Merger." The
prepackaged plan of reorganization is referred to in this prospectus as the
"Plan."
The Plan generally divides claims against and equity interests in PageNet
and certain of its subsidiaries into classes and sets forth the treatment of
each class. The Plan also provides how unclassified priority claims will be
treated. The classification and treatment of claims and equity interests and the
distributions to be made under the Plan take into account the relative priority
of those claims and equity interests under the Bankruptcy Code and other
applicable law.
If the Plan is confirmed by the bankruptcy court, each holder of an allowed
claim or equity interest will receive the same treatment as all other holders of
allowed claims or equity interests in the same class, regardless of whether a
particular holder votes to accept or reject the Plan. Moreover, upon
confirmation, the Plan will be binding on all creditors and stockholders
regardless of whether such creditors or stockholders vote on the Plan or vote to
accept or reject the Plan.
The Plan provides for PageNet to complete the intended merger with Arch as
provided in the merger agreement. Under the Plan, all claims arising in the
ordinary course of PageNet's business will be paid in full, in cash and claims
arising under PageNet's senior subordinated notes will be converted to equity
interests in Arch and Vast. Specifically, under the Plan, the holders of allowed
administrative expense claims, priority tax claims, debtor-in-possession
facility claims, priority claims, other secured claims and general unsecured
claims, each as defined under the Plan, will each be paid in full, in cash on
the later of the Plan's effective date or the date such claim becomes due in the
ordinary course of business. The holders of allowed bank secured claims (Class
2) will be paid in full through the issuance of new secured promissory notes
pursuant to the terms of the Arch credit facility term sheet attached to this
disclosure statement as Annex D. Holders of allowed senior subordinated note
claims (Class 5) will receive Arch common stock and Vast Class B common stock in
the amounts provided in the merger agreement. Holders of allowed old stock
related claims (Class 6), if any, and existing PageNet equity interests (Class
7) will receive Arch common stock and Vast Class B common stock in the amounts
specified in the merger agreement for PageNet stockholders. The Plan also
provides that intercompany claims (Class 8) will be eliminated and no
distributions will be made on account of them provided that Paging Network, Inc.
will retain its interest in all of its operating subsidiaries.
SUMMARY FINANCIAL AND OPERATING DATA
The following summary historical financial and operating data for PageNet
for each of the years in the five year period ended December 31, 1998 has been
derived from PageNet's audited consolidated financial statements and notes. The
following summary historical financial and operating data for Arch for each of
the years in the four year period ended December 31, 1998 has been derived from
Arch's audited consolidated
10
<PAGE> 19
financial statements and notes. The summary historical financial information and
operating data for Arch for the year ended December 31, 1994 has been derived
from unaudited financial statements that have been prepared on the same basis as
the audited financial statements and, in the opinion of Arch's management,
contain all adjustments, consisting only of normal recurring accruals, necessary
for the fair presentation of the results of operations for such period. The
selected financial and operating data as of September 30, 1999 and for the nine
months ended September 30, 1998 and 1999 has been derived from PageNet and
Arch's unaudited consolidated financial statements and notes. The following
unaudited pro forma condensed consolidated balance sheet data has been prepared
to reflect the merger assuming it had occurred on September 30, 1999 and using
the purchase method of accounting. Under the purchase method of accounting the
purchase price is allocated to assets acquired and liabilities assumed based on
their estimated fair values at the time of the merger. Income of the combined
company will not include income or loss of PageNet prior to the merger. The
following summary pro forma statement of operations data gives effect to the
merger and the MobileMedia acquisition, which closed on June 3, 1999, as if such
transactions had been consummated on January 1, 1998. The pro forma information
is presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
MobileMedia acquisition and the merger had been consummated as of the dates
mentioned above or of future operating results or financial position of the
combined companies following both transactions. You should read the following
consolidated financial information in conjunction with "PageNet Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Arch Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes of PageNet and
Arch.
Adjusted EBITDA, as determined by PageNet and Arch, does not reflect
restructuring charges, provision for asset impairment, non-recurring charges,
minority interest, equity in loss of affiliate, extraordinary items, and
cumulative effect of changes in accounting principles; consequently adjusted
EBITDA may not necessarily be comparable to similarly titled data of other
wireless communications companies. EBITDA is commonly used by analysts and
investors as a principal measure of financial performance in the wireless
communications industry. EBITDA is also one of the primary financial measures
used to calculate whether PageNet and Arch are in compliance with financial
covenants under their debt agreements. These covenants, among other things,
limit the ability of PageNet and Arch to: incur additional indebtedness, make
investments, pay dividends, grant liens on its assets, merge, sell or acquire
assets, repurchase or redeem capital stock, incur capital expenditures and
prepay certain indebtedness. EBITDA is also one of the financial measures used
by analysts to value PageNet and Arch. Therefore management believes that the
presentation of adjusted EBITDA provides relevant information to investors.
Adjusted EBITDA should not be construed as an alternative to operating income or
cash flows from operating activities as determined in accordance with GAAP or as
a measure of liquidity. Amounts reflected as EBITDA or adjusted EBITDA are not
necessarily available for discretionary use as a result of restrictions imposed
by the terms of existing indebtedness and limitations imposed by applicable law
upon the payment of dividends or distributions, among other things. See "PageNet
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total
revenues less cost of products sold. EBITDA margin in a measure commonly used in
the wireless communications industry to evaluate a company's EBITDA relative to
total revenues less cost of products sold as an indicator of the efficiency of a
company's operating structure.
11
<PAGE> 20
PAGENET
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Services, rent and
maintenance revenues.... $ 389,919 $ 532,079 $ 685,960 $ 818,461 $ 945,524 $ 704,722 $ 696,566
Product sales............. 99,765 113,943 136,527 142,515 100,503 80,600 68,969
---------- ---------- ---------- ----------- ----------- ----------- ----------
Total revenues............ 489,684 646,022 822,487 960,976 1,046,027 785,322 765,535
Cost of products sold..... (78,102) (93,414) (116,647) (121,487) (77,672) (62,540) (43,013)
---------- ---------- ---------- ----------- ----------- ----------- ----------
411,582 522,608 705,840 839,489 968,355 722,782 722,522
Depreciation and
amortization expense.... 107,362 148,997 213,440 289,442 281,259 213,220 268,171
Provision for asset
impairment.............. -- -- -- -- -- -- 17,798
Restructuring charge...... -- -- -- -- 74,000 74,000 --
Non-recurring charges..... -- -- 22,500 12,600 -- -- --
Operating income (loss)... 32,673 52,134 20,897 7,508 (22,320) (18,804) (88,252)
Interest and other income
(expense)............... (50,638) (96,335) (125,217) (148,911) (139,689) (105,615) (108,305)
Loss before extraordinary
item and cumulative
effect of a change in
accounting principle.... (17,965) (44,201) (104,320) (141,403) (162,009) (124,419) (196,557)
Extraordinary item........ -- -- -- (15,544) -- -- --
Cumulative effect of a
change in accounting
principle............... -- -- -- -- -- -- (37,446)
Net loss.................. (17,965) (44,201) (104,320) (156,947) (162,009) (124,419) (234,003)
Per common share data
(basic and diluted):
Loss before
extraordinary item and
cumulative effect of a
change in accounting
principle............. $ (0.18) $ (0.43) $ (1.02) $ (1.38) $ (1.57) $ (1.20) $ (1.89)
Extraordinary item...... -- -- -- (0.15) -- -- --
Cumulative effect of a
change in accounting
principle............. -- -- -- -- -- -- (0.36)
---------- ---------- ---------- ----------- ----------- ----------- ----------
Net loss per share...... $ (0.18) $ (0.43) $ (1.02) $ (1.53) $ (1.57) $ (1.20) $ (2.25)
========== ========== ========== =========== =========== =========== ==========
OTHER OPERATING DATA:
Adjusted EBITDA........... $ 140,035 $ 201,131 $ 256,837 $ 309,550 $ 332,939 $ 268,416 $ 197,717
Adjusted EBITDA margin.... 34.0% 38.5% 36.4% 36.9% 34.4% 37.1% 27.4%
Capital expenditures...... $ 213,308 $ 312,289 $ 437,388 $ 328,365 $ 297,041 $ 171,295 $ 162,830
Cash flows provided by
operating activities.... 107,744 160,629 110,382 150,503 276,959 190,744 89,016
Cash flows used in
investing activities.... (260,839) (589,387) (601,122) (459,929) (314,444) (172,994) (175,712)
Cash flows provided by
(used in) financing
activities.............. 153,055 624,489 296,335 308,573 37,638 (6,590) 186,580
Units in service at end of
period.................. 4,409,000 6,738,000 8,588,000 10,344,000 10,110,000 10,484,000 9,314,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1999
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 203,475
Total assets................................................ 1,520,885
Long-term obligations, less current maturities.............. 1,999,320
Total shareowners' deficit.................................. (724,424)
</TABLE>
12
<PAGE> 21
The following table reconciles net loss to the presentation of PageNet's
adjusted EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss......................... $ (17,965) $ (44,201) $(104,320) $(156,947) $(162,009) $(124,419) $(234,003)
Interest expense................. 53,717 102,846 128,014 151,380 143,762 109,353 111,097
Interest income.................. (3,079) (6,511) (3,679) (3,689) (2,070) (1,564) (1,986)
Depreciation and amortization
expense........................ 107,362 148,997 213,440 289,442 281,259 213,220 268,171
Minority interest................ -- -- (41) (56) (2,003) (2,174) (806)
Equity in loss of an
unconsolidated subsidiary...... -- -- 923 1,276 -- -- --
Provision for asset impairment... -- -- -- -- -- -- 17,798
Restructuring charge............. -- -- -- -- 74,000 74,000 --
Non-recurring charges............ -- -- 22,500 12,600 -- -- --
Extraordinary item............... -- -- -- 15,544 -- -- --
Cumulative effect of a change in
accounting principle........... -- -- -- -- -- -- 37,446
--------- --------- --------- --------- --------- --------- ---------
Adjusted EBITDA.................. $ 140,035 $ 201,131 $ 256,837 $ 309,550 $ 332,939 $ 268,416 $ 197,717
========= ========= ========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 22
ARCH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
PRO FORMA
1994 1995 1996 1997 1998 1998
-------- ---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Service, rental and maintenance
revenue....................... $ 61,529 $ 138,466 $ 291,399 $ 351,944 $ 371,154 $ 1,731,239
Product sales.................. 14,374 24,132 39,971 44,897 42,481 169,606
-------- ---------- ---------- ---------- ---------- -----------
Total revenues................. 75,903 162,598 331,370 396,841 413,635 1,900,845
Cost of products sold.......... (12,787) (20,789) (27,469) (29,158) (29,953) (129,787)
-------- ---------- ---------- ---------- ---------- -----------
63,116 141,809 303,901 367,683 383,682 1,771,058
Depreciation and amortization
expense....................... 18,321 60,205 191,871 232,347 221,316 695,337
Operating income (loss)........ (352) (13,019) (86,070) (102,015) (94,429) (193,223)
Interest and other income
(expense)..................... (4,973) (26,499) (77,895) (101,031) (109,902) (54,429)
Net income (loss).............. (6,462) (36,602) (114,662) (181,874) (206,051) (251,610)
Basic/diluted loss per common
share before extraordinary
item and accounting change.... $ (2.23) $ (7.79) $ (16.59) $ (26.31) $ (29.34) $ (1.46)
Extraordinary item per
basic/diluted common share.... (0.47) (0.37) (0.27) -- (0.24) --
Cumulative effect of accounting
change per basic/diluted
common share.................. -- -- -- -- -- --
-------- ---------- ---------- ---------- ---------- -----------
Basic/diluted net loss per
common share.................. $ (2.70) $ (8.16) $ (16.86) $ (26.31) $ (29.58) $ (1.46)
-------- ---------- ---------- ---------- ---------- -----------
OTHER OPERATING DATA:
Adjusted EBITDA................ $ 17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587 $ 598,977
Adjusted EBITDA margin......... 28% 33% 35% 35% 37% 34%
Capital expenditures, excluding
acquisitions.................. $ 33,450 $ 60,468 $ 165,206 $ 102,769 $ 113,184 $ 477,078
Cash flows provided by
operating activities.......... 14,155 14,749 37,802 63,590 81,105 574,673
Cash flows provided by
investing activities.......... (55,860) (192,549) (490,626) (102,769) (82,868) (820,397)
Cash flows provided by (used
in) financing activities...... 29,454 179,092 452,678 39,010 68 395,706
Units in service at end of
period........................ 538,000 2,006,000 3,295,000 3,890,000 4,276,000 17,030,000
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------------------------
PRO FORMA
1998 1999 1999
---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AND UNIT AMOUNTS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Service, rental and maintenance
revenue....................... $ 277,826 $ 403,607 $ 1,263,226
Product sales.................. 31,811 36,963 115,139
---------- ---------- -----------
Total revenues................. 309,637 440,570 1,378,365
Cost of products sold.......... (21,863) (24,988) (75,689)
---------- ---------- -----------
287,774 415,582 1,302,676
Depreciation and amortization
expense....................... 164,990 222,836 499,982
Operating income (loss)........ (74,157) (77,707) (127,018)
Interest and other income
(expense)..................... (80,553) (146,523) (158,289)
Net income (loss).............. (156,430) (227,591) (285,516)
Basic/diluted loss per common
share before extraordinary
item and accounting change.... $ (22.20) $ (9.00) $ (1.66)
Extraordinary item per
basic/diluted common share.... (0.25) -- --
Cumulative effect of accounting
change per basic/diluted
common share.................. -- (0.13) --
---------- ---------- -----------
Basic/diluted net loss per
common share.................. $ (22.45) $ (9.13) $ (1.66)
---------- ---------- -----------
OTHER OPERATING DATA:
Adjusted EBITDA................ $ 105,533 $ 142,929 $ 403,500
Adjusted EBITDA margin......... 37% 34% 31%
Capital expenditures, excluding
acquisitions.................. $ 85,785 $ 83,186 $ 282,593
Cash flows provided by
operating activities.......... 61,276 76,422 332,563
Cash flows provided by
investing activities.......... (55,646) (598,869) (805,506)
Cash flows provided by (used
in) financing activities...... (2,387) 542,302 698,882
Units in service at end of
period........................ 4,211,000 7,024,000 16,088,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
-----------------------
ACTUAL PRO FORMA
---------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 99,180 $ 272,222
Total assets................................................ 1,424,518 3,021,110
Long-term debt, less current maturities..................... 1,357,743 1,782,141
Stockholders' equity (deficit).............................. (180,892) 755,123
</TABLE>
14
<PAGE> 23
The following table reconciles net loss to the presentation of Arch's
adjusted EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ ---------------------------------
PRO PRO
FORMA FORMA
1994 1995 1996 1997 1998 1998 1998 1999 1999
------- -------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss............. $(6,462) $(36,602) $(114,662) $(181,874) $(206,051) $(251,610) $(156,430) $(227,591) $(285,516)
Interest and other
income (expense)... 4,973 26,499 77,895 101,031 109,902 54,429 80,553 146,523 158,289
Income tax (benefit)
provision.......... -- (4,600) (51,207) (21,172) -- 3,958 -- -- 209
Depreciation and
amortization....... 18,321 60,205 191,871 232,347 221,316 695,337 164,990 222,836 499,982
Provision for asset
impairment......... -- -- -- -- -- -- -- -- 17,798
Restructuring and
bankruptcy
expenses........... -- -- -- -- 14,700 96,863 14,700 (2,200) 12,738
Extraordinary gain... 1,137 1,684 1,904 -- 1,720 -- 1,720 -- --
Cumulative effect on
accounting
charge............. -- -- -- -- -- -- -- 3,361 --
------- -------- --------- --------- --------- --------- --------- --------- ---------
Adjusted EBITDA...... $17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587 $ 598,977 $ 105,533 $ 142,929 $ 403,500
======= ======== ========= ========= ========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 24
CAPITALIZATION
The following table sets forth: (i) the capitalization of PageNet and Arch,
on a consolidated basis, at September 30, 1999; (ii) the capitalization of
PageNet as adjusted to give effect to the PageNet exchange offer, assuming that
100% of the PageNet senior subordinated notes are exchanged, and spinoff
distribution of Vast; and (iii) the capitalization of Arch as adjusted to give
effect to the Arch exchange offer and merger, assuming 100% of the Arch discount
notes are exchanged, and the repurchase of $16.3 million accreted value of
discount notes by Arch during October 1999 in exchange for Arch common stock.
You should read this table together with the other financial information
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED
----------------------- -----------------------
PAGENET ARCH PAGENET ARCH(1)(2)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ARCH CURRENT MATURITIES OF LONG-TERM DEBT................... $ -- $ 3,060 $ -- $ 3,060
---------- ---------- ---------- ----------
PAGENET LONG-TERM DEBT, LESS CURRENT MATURITIES:
Credit agreement.......................................... 745,000 -- 745,000 --
10% Senior Subordinated notes due October 15, 2008........ 500,000 -- -- --
10.125% Senior Subordinated notes due August 1, 2007...... 400,000 -- -- --
8.875% Senior Subordinated notes due February 1, 2006..... 300,000 -- -- --
Other..................................................... 54,320 -- 54,320 --
ARCH LONG-TERM DEBT, LESS CURRENT MATURITIES:
Senior bank debt.......................................... -- 446,940 -- 1,216,940
10 7/8% senior discount notes due in 2008................. -- 399,922 -- --
6 3/4% convertible subordinated debentures due 2003....... -- 13,364 -- 13,364
12 3/4% senior notes due 2007............................. -- 127,816 -- 127,816
13 3/4% senior notes due 2008............................. -- 140,151 -- 140,151
9 1/2% senior notes due 2004.............................. -- 125,000 -- 125,000
14% senior notes due 2004................................. -- 100,000 -- 100,000
Other..................................................... -- 4,550 -- 58,870
---------- ---------- ---------- ----------
Total long-term debt, less current maturities........... 1,999,320 1,357,743 799,320 1,782,141
---------- ---------- ---------- ----------
PAGENET SHAREOWNERS' EQUITY:
Preferred stock -- $.01 par value, authorized 25,000,000
shares, no shares issued or outstanding...................
Common stock -- $.01 par value, authorized 250,000,000
shares ( as adjusted), issued and outstanding
103,960,240 shares (720,340,997 as adjusted).............. 1,040 -- 7,208 --
Additional paid-in capital.................................. 134,161 -- 673,230 --
Accumulated other comprehensive income...................... 1,161 1,161 --
Accumulated deficit......................................... (860,786) -- (219,190) --
ARCH STOCKHOLDERS' EQUITY:
Preferred stock -- $.01 par value, authorized 10,000,000
shares, issued and outstanding 250,000 shares ($27,618
aggregate liquidation preference)......................... -- 3 -- --
Common stock and Class B common stock -- $.01 par value,
authorized 75,000,000 shares (225,000,000 as adjusted),
issued and outstanding 48,060,782 shares (172,026,661 as
adjusted)................................................. -- 481 -- 1,720
Additional paid-in capital.................................. -- 639,559 -- 1,367,249
Accumulated deficit......................................... -- (820,935) -- (613,846)
---------- ---------- ---------- ----------
Total shareholders' equity.............................. (724,424) (180,892) 462,409 755,123
---------- ---------- ---------- ----------
Total capitalization.................................... $1,274,896 $1,179,911 $1,261,729 $2,540,324
========== ========== ========== ==========
</TABLE>
- ---------------
(1) If none of the Arch discount notes are exchanged, total long-term debt, less
current maturities would be $2.2 billion, total stockholders' equity would
be $376.5 million and total capitalization would be $2.5 billion.
(2) If 50% of the Arch discount notes are exchanged, total long-term debt, less
current maturities would be $2.0 billion, total stockholders' equity would
be $565.8 million and total capitalization would be $2.5 billion.
16
<PAGE> 25
STOCK OWNERSHIP IN COMBINED COMPANY
The following table sets forth the expected beneficial ownership of Arch
common stock following the merger, the PageNet exchange offer and the Arch
exchange offer:
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP OF ARCH
PERCENTAGE OWNERSHIP OF ARCH COMMON STOCK, ON
COMMON STOCK OUTSTANDING A FULLY DILUTED BASIS
-------------------------------- --------------------------------
SEPTEMBER 30, 1999 AS ADJUSTED SEPTEMBER 30, 1999 AS ADJUSTED
------------------ ----------- ------------------ -----------
<S> <C> <C> <C> <C>
Arch common stockholders........ 100.0% 29.6% 71.0% 26.7%
Arch Series C preferred
stockholders.................... -- 1.2 2.5 1.1
Holders of Arch discount
notes......................... -- 17.2 -- 15.4
PageNet stockholders............ -- 7.5 -- 6.7
Holders of PageNet senior
subordinated notes............ -- 44.5 -- 40.1
Arch warrantholders............. -- -- 23.8 8.4
Arch and PageNet
optionholders................. -- -- 2.7 1.6
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
All of the foregoing information is based on numerous assumptions. For example,
the table assumes that all of Arch's discount notes, all of PageNet's
outstanding senior subordinated notes and all of Arch's outstanding Series C
preferred stock will be exchanged for common stock. The actual capitalization of
Arch upon closing the merger may vary considerably from the foregoing table. For
example, if 50% of Arch's discount notes were tendered and accepted, holders of
Arch discount notes would own 9.4% of Arch's outstanding common stock and 8.4%
on a fully diluted basis; if 1.0% of the discount notes were tendered and
accepted, holders of Arch discount notes would own 0.2% and 0.2%, respectively.
In either case, the percentage ownership of the Arch stockholders and the
PageNet stockholders and noteholders would increase proportionately. See "The
Merger."
NOTEHOLDER AND STOCKHOLDER ACTIONS
NOTEHOLDER PROCEDURES FOR ACCEPTING THE EXCHANGE OFFER
To accept the exchange offer:
- follow DTC's Automated Tender Offer Program Procedures; or
- do the following:
-- complete, sign and date the enclosed letter of transmittal, or a
facsimile of the letter and enclose it in the YELLOW ENVELOPE;
-- have the signatures guaranteed if required by the enclosed letter of
transmittal;
-- either:
- enclose certificates for the senior subordinates notes in the YELLOW
ENVELOPE; or
- follow the book-entry transfer procedure described in the section
entitled "The Exchange Offer -- Book-Entry Transfer," if such
procedure is available, to transfer the senior subordinated notes into
the exchange agent's account at DTC;
-- enclose a duly executed form of consent and waiver which accompanies
the letter of transmittal in the YELLOW ENVELOPE; and
-- enclose any other documents required by the letter of transmittal in
the YELLOW ENVELOPE; and
17
<PAGE> 26
- return the letter or transmittal or a facsimile of the letter and all
other required documents referred to above in the YELLOW ENVELOPE to the
exchange agent at:
[Identify Exchange Agent and address]
NOTEHOLDER PROCEDURES FOR ACCEPTING OR REJECTING THE PREPACKAGED PLAN OF
REORGANIZATION
To accept or reject the prepackaged plan proposal:
- beneficial owners of senior subordinated notes who are also record
holders should do the following:
-- complete and sign the BLUE ballot and enclose it in the BLUE ENVELOPE;
-- return the BLUE ballot in the BLUE ENVELOPE to the exchange agent at:
[Identify Exchange Agent and Address]
- beneficial owners who are not record holders should follow the
instructions given to them by their broker, bank, dealer, trust company
or other nominee in whose name the beneficial owner's notes are held of
record.
- record owners who are not beneficial owners of senior subordinated notes
should do the following:
-- complete and sign the GREY master ballot; and
-- return the master ballot in the BLUE ENVELOPE to the exchange agent at:
[Identify Exchange Agent and Address]
STOCKHOLDER PROCEDURES FOR ACCEPTING OR REJECTING THE PREPACKAGED PLAN OF
REORGANIZATION
To accept or reject the prepackaged plan proposal:
- beneficial owners who are also record holders should do the following:
-- complete and sign the GREEN ballot; and
-- return the GREEN ballot in the GREEN ENVELOPE to the exchange agent at:
[Identify Exchange Agent and Address]
- beneficial owners who are not record holders should follow the
instructions given to them by their broker, bank, dealer, trust company
or other nominee in whose name the beneficial owner's notes are held of
record.
- record owners who are not beneficial owners should do the following:
-- complete and sign the WHITE master ballot; and
-- return the WHITE master ballot in the GREEN ENVELOPE to the exchange
agent at:
[Identify Exchange Agent and Address]
18
<PAGE> 27
RISK FACTORS
PageNet noteholders should consider carefully the following risks and the
risks described under "Risk Factors" in the Vast prospectus attached to this
prospectus as Annex A before deciding whether to exchange their PageNet senior
subordinated notes for PageNet common stock and Vast Class B common stock and
vote in favor of the prepackaged plan of reorganization. PageNet stockholders
should consider carefully the following risks and the risks described under
"Risk Factors" in the Vast prospectus attached to this prospectus as Annex A
before deciding whether to vote in favor of the prepackaged plan of
reorganization. If PageNet noteholders tender their senior subordinated notes
and the exchange offer is completed or if the prepackaged plan of reorganization
is approved, PageNet noteholders and PageNet stockholders will hold Arch common
stock as a result of the merger. If any of the following developments occur,
Arch's business, financial condition and results of operations would likely
suffer. In that case, the trading price of Arch common stock could decline, and
the value of your Arch shares could be less than the value of the notes that
PageNet noteholders tendered in the exchange offer or the value of the PageNet
shares held by current PageNet stockholders.
RISKS RELATED TO THE EXCHANGE OFFER AND AN INVESTMENT IN ARCH'S COMMON STOCK
Arch common stock is subject to greater risks than are senior subordinated
notes
Because Arch's common stock lacks the senior position of debt securities
and the specific rights granted to holders of PageNet senior subordinated notes,
the value of Arch's common stock will be less able than debt securities to
withstand adverse developments relating to the combined company's financial
condition or results of operations.
The exchange ratio used in the exchange offer may prove to be unfavorable to
PageNet noteholders
The exchange ratio of PageNet common stock for senior subordinated notes
was determined by PageNet, after consultation with Houlihan Lokey, without any
negotiation between PageNet and any of the holders of senior subordinated notes.
The exchange ratio is not necessarily related to trading prices for PageNet's or
Arch's common stock or other recognized criteria of value for common stock such
as assets, net worth or results of operations, or to trading prices for the
notes or the principal amount of the notes. There can be no assurance that the
market value of the shares of Arch common stock ultimately issued in the merger
will not be below their current market value or below whatever valuation may be
implied for them by the exchange ratio, either during the period between the
time PageNet noteholders tender a note and the time PageNet noteholders take
delivery of the Arch common stock, or at any time afterwards.
Trading prices may be volatile
The market price of Arch common stock has fluctuated and has declined
substantially since 1998. Between January 1, 1998 and January 6, 2000, the
reported sale price of common stock on the Nasdaq National Market System has
ranged from a high of $20.8125 per share in June 1998 to a low of $2.0625 per
share in October 1998. The trading price of Arch common stock following the
closing of the exchange offers and the Arch merger will be affected by numerous
factors. These include the risk factors set forth in this prospectus, as well as
prevailing economic and financial trends and conditions in the public securities
markets. Share prices of wireless communications companies such as Arch have
exhibited a high degree of volatility during recent periods. Shortfalls in
revenues or EBITDA from the levels anticipated by the public markets could have
an immediate and significant adverse effect on the trading price of Arch's
common stock in any given period. Shortfalls may result from events that are
beyond Arch's control and can be unpredictable. The trading price of Arch's
shares may also be affected by developments which may not have any direct
relationship with Arch's business or long-term prospects. These include reported
financial results and fluctuations in the trading prices of the shares of other
publicly held companies in the wireless communications industry.
19
<PAGE> 28
Shares eligible for future sale may depress the market price of Arch common
stock
On September 30, 1999, 48.1 million shares of Arch common stock and Class B
common stock were issued and outstanding. In addition, 1.7 million shares of
common stock are issuable upon conversion of convertible securities and 16.1
million shares of common stock are issuable upon exercise of warrants. The
issuance of these shares of common stock, together with the issuance of up to
2.8 million shares of common stock currently authorized for issuance under Arch
compensation plans and the assumption of PageNet options to acquire the
equivalent of 1.2 million shares of Arch common stock, will substantially dilute
the proportionate equity interests of the holders of Arch common stock. No
prediction can be made as to the effect, if any, that future sales of Arch
common stock, or the availability of shares for future sales, will have on the
market price of the Arch common stock prevailing from time to time. Sales of
substantial amounts of Arch common stock, including shares issued upon exercise
of warrants or options, or the perception that such sales could occur, could
depress prevailing market prices of Arch common stock.
Charter provisions may impede takeovers of Arch that might benefit Arch
stockholders
Arch's certificate of incorporation and by-laws provide for a classified
board of directors, the issuance of "blank check" preferred stock whose terms
may be fixed by Arch's board of directors without further stockholder approval,
a prohibition on stockholder action by written consent in lieu of a meeting and
procedural requirements governing stockholder meetings. Arch also has a
stockholders rights plan. In addition, Section 203 of the Delaware corporations
statute will, with some exceptions, prohibit Arch from engaging in any business
combination with any "interested stockholder" for a three-year period after such
stockholder becomes an interested stockholder. Those provisions may have the
effect of delaying, making more difficult or preventing a change in control or
acquisition of Arch even though such a transaction might be beneficial to Arch's
stockholders.
If PageNet noteholders do not tender their notes, the notes that noteholders
retain will have substantially fewer rights than they currently have
We are soliciting the approval of the holders of a majority in principal
amount of the outstanding senior subordinated notes to amendments to the terms
of the notes. These amendments include the elimination of substantially all
rights of the notes other than the right to receive payments of principal and
interest. See "Proposed Amendments." Approval of the amendments is a condition
to our acceptance of each tendered note. Tender of more than a majority of each
series of the notes is a condition to the merger and the exchange offer.
Accordingly, if PageNet noteholders decide not to tender all or some of their
notes, the notes that they retain will no longer have any special rights if the
merger and the exchange offer are completed.
RISKS RELATED TO THE MERGER
Integrating Arch and PageNet will present challenges
Arch may not be able to successfully integrate PageNet's operations. The
fact that Arch is still engaged in the process of integrating MobileMedia's
operations into those of Arch will increase the challenge of integrating
PageNet's operations. Any difficulties or problems encountered in the
integration process could have a material adverse effect on Arch. Even if
integrated in a timely manner, there can be no assurance that Arch's operating
performance will be successful or will fulfill management's objectives. Until
integration is complete, PageNet's business will continue to operate with some
autonomy. This degree of autonomy may blunt the implementation of Arch's
operating strategy.
The combination of the two companies will require, among other things,
coordination of administrative, sales and marketing, distribution and accounting
and finance functions and expansion of information and management systems. The
integration process could cause the interruption of the activities of the two
businesses. The difficulties of such integration will initially be increased by
the necessity of coordinating geographically separate organizations and
integrating personnel with disparate business backgrounds and corporate cultures
and by the fact that PageNet is in the process of a significant restructuring of
its own operations. See "Risks Related to PageNet." Arch may not be able to
retain key employees of PageNet. The
20
<PAGE> 29
process of integrating the businesses of Arch and PageNet may require a
disproportionate amount of time and attention of Arch's management and financial
and other resources of Arch and may involve other, unforeseen difficulties.
Similar risks will attend future acquisition opportunities which Arch may
pursue, and the assimilation of PageNet may add to the difficulty of integrating
other acquisitions.
PageNet's operations may be disrupted prior to and following a bankruptcy
filing
PageNet's business operations may be adversely affected by reluctance of
some customers and potential customers to do business with PageNet if it
commences or proposes to commence a chapter 11 proceeding as described under
"The Prepackaged Plan of Reorganization." Any significant loss of customers or
other deterioration in PageNet's business could have a material adverse effect
on PageNet and, as a result, on Arch if the merger is consummated.
Transaction costs may exceed anticipated levels
Arch estimates that it will incur direct transaction costs of approximately
$25.0 million associated with the merger. This amount is a preliminary estimate
only and is therefore subject to change. There can be no assurance that Arch
will not incur significant additional costs in connection with the merger.
Actual results may differ from unaudited combined company projections
The managements of PageNet and Arch have jointly prepared the combined
company financial projections contained in this prospectus for the cases under
chapter 11 of the United States Bankruptcy Code that PageNet may commence in
order to implement the merger. The projections assume that the merger and
related transactions will be implemented in accordance with their terms. The
assumptions and estimates underlying the projections are inherently uncertain
and are subject to significant business, economic and competitive risks and
uncertainties. Accordingly, future financial condition and results of operations
of the combined company following the merger may vary significantly from those
set forth in the projections. Consequently, the projections should not be
regarded as a representation by PageNet, Arch, their advisors or any other
person that the projections will be achieved. See "Forward-Looking Statements."
Pro forma assumptions may prove to be inaccurate
For purposes of presenting the projections and the pro forma condensed
consolidated financial statements included in this prospectus, Arch and PageNet
have assumed that 100% of Arch discount notes and 100% of the PageNet senior
subordinated notes will be tendered and accepted in the exchange offer. However,
the merger may take place in some circumstances if a smaller amount of PageNet
notes or a smaller amount of Arch notes, or no Arch notes at all, are tendered.
Arch and PageNet also have assumed that the market value of the Arch common
stock to be issued in connection with the merger and the Arch exchange offer
will be $6.02 per share. Trading prices for common stock fluctuate, and no
prediction can be made as to what prices will prevail before or after the merger
takes place. On January 6, 2000, the closing market price of Arch's common stock
was $6.00. See "Unaudited Pro Forma Condensed Consolidated Financial
Statements."
Amortization charges may affect earnings sooner than expected
Under purchase accounting treatment for the MobileMedia acquisition and the
merger, Arch must record a substantial amount of goodwill and other intangible
assets. This will result in substantial amortization charges to the consolidated
income of Arch over the useful lives of those assets. Arch estimates the
incremental amount of those charges will total approximately $57.0 million per
year for ten years. However, actual charges could vary significantly if the
underlying assets are impaired or if the useful lives of the assets are less
than currently estimated.
21
<PAGE> 30
Loss of corporate tax benefits is probable
It is anticipated that the merger and the PageNet and Arch exchange offers
will result in the elimination of substantially all of the tax benefit of net
operating loss carryforwards and certain other tax attributes available to
PageNet and Arch, and also will result in some out-of-pocket tax liability. See
"Material Federal Income Tax Considerations."
Creditors may allege defaults
It is possible that holders of some of Arch's outstanding indebtedness may
allege that the merger constitutes either a breach or a default or a change in
control of Arch under their debt instruments entitling them to immediate
repayment of their indebtedness. See "Description of Indebtedness -- Arch." The
magnitude of any resulting adverse consequences would depend upon, among other
factors, the diligence and vigor with which debt holders seek to assert any such
rights and pursue any such remedies, and Arch's ability to prevail in its
interpretation of the debt instruments or otherwise resolve matters on
acceptable terms.
The merger may not take place
The merger will not take place unless many conditions are satisfied or
waived. These conditions include stockholder and noteholder approvals,
governmental approvals and the availability of senior credit facilities. See
"The Merger Agreement -- Conditions to Obligations to Effect the Merger."
Moreover, PageNet may be required in some circumstances to file prepackaged
chapter 11 cases to implement the merger. There can be no assurance that the
proposed plan of reorganization would be approved by the bankruptcy court if
filed. If the merger does not take place, the contemplated benefits of the
merger will not be realized, and PageNet noteholders and stockholders will
retain their interest as a senior subordinated noteholder or a stockholder in a
company which will not enjoy the anticipated benefits of the merger despite
incurring substantial transaction costs. If the merger does not take place for
certain specified reasons and Arch decides to terminate the merger agreement,
PageNet may be required to pay a $40 million termination fee to Arch. See "The
Merger Agreement -- Termination Fee." Trading prices of senior subordinated
notes and PageNet common stock may fluctuate between now and the closing, due in
part to uncertainty as to whether or when the merger will take place.
ARCH'S BUSINESS AND FINANCIAL RISKS
Continued losses are likely
PageNet and Arch have reported net losses in the past, as has MobileMedia.
Arch expects that the combined company may continue to report net losses and
cannot give any assurance about when, if ever, it is likely to attain
profitability.
PageNet and Arch have reported net losses in all of the periods shown in
the table below and MobileMedia has reported net losses in all but two of the
periods shown in the table below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
--------- ------- ------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net income (loss):
PageNet................................ $ (104.3) $(156.9) $(162.0) $(234.0)
Arch................................. $ (114.7) $(181.9) $(206.1) $(227.6)
MobileMedia.......................... $(1,059.9) $(124.6) $ 35.6 $ 387.3(1)
</TABLE>
- ---------------
(1) Through Arch's acquisition of MobileMedia on June 3, 1999
These historical net losses have resulted principally from substantial
depreciation and amortization expense, primarily related to intangible assets
and pager depreciation, interest expense, the impairment of long-lived assets,
and other costs of growth and, in the case of PageNet, significant restructuring
costs.
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<PAGE> 31
MobileMedia had net income of $35.6 million during the year ended December 31,
1998 solely because of a $94.2 million gain on the sale of transmission towers
and related equipment and net income of $387.3 million for the period ended June
3, 1999 primarily due to the forgiveness of debt arising out of MobileMedia's
bankruptcy proceedings. After giving effect to the merger and the MobileMedia
acquisition, Arch would have incurred, on a pro forma basis, losses before
extraordinary items and cumulative effect of accounting change of $251.6 million
for the year ended December 31, 1998 and $285.5 million for the nine months
ended September 30, 1999.
Revenues and operating results may fluctuate
Arch believes that future fluctuations in its revenues and operating
results may occur due to many factors, including competition, subscriber
turnover, new service developments and technological change, both before and
after the merger. Arch's current and planned expenses and debt repayment levels
are, to a large extent, fixed in the short term, and are based in part on its
expectations as to future revenues and cash flow growth. Arch may be unable to
adjust spending in a timely manner to compensate for any revenue or cash flow
shortfall. It is possible that, due to future fluctuations, Arch's revenue, cash
flow or operating results may not meet the expectations of securities analysts
or investors. This may have a material adverse effect on the price of Arch's
common stock. If shortfalls were to cause Arch not to meet the financial
covenants contained in its debt instruments, the debtholders could declare a
default and seek immediate repayment.
High degree of leverage may continue to burden operations
Arch has been highly leveraged, and expects to remain at least considerably
leveraged following the merger. The following table compares the total debt,
total assets and latest three-month annualized adjusted EBITDA of PageNet and
Arch as of September 30, 1999 and the pro forma total debt, total assets and
nine month annualized adjusted EBITDA of the combined company as of September
30, 1999, assuming the exchange of all PageNet senior subordinated notes.
<TABLE>
<CAPTION>
PRO PRO PRO
FORMA FORMA FORMA
COMBINED COMBINED COMBINED
PAGENET ARCH COMPANY(1) COMPANY(2) COMPANY(3)
-------- -------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total debt....................... $1,999.3 $1,360.8 $2,168.8 $1,977.0 $1,785.2
Total assets..................... $1,520.9 $1,424.5 $3,021.1 $3,021.1 $3,021.1
Annualized adjusted EBITDA....... $ 236.5 $ 262.1 $ 538.0 $ 538.0 $ 538.0
</TABLE>
- ---------------
(1) Assumes no exchange of Arch's discount notes for common stock
(2) Assumes exchange of 50% of Arch's discount notes
(3) Assumes exchange of all of Arch's discount notes
Adjusted EBITDA is not a measure defined in GAAP and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP. Adjusted EBITDA, as determined by PageNet and Arch, may
not necessarily be comparable to similarly titled data of other paging
companies.
Having the kind of leverage illustrated above may have adverse consequences
for Arch. These include the following:
- This leverage may impair Arch's ability to obtain additional financing
necessary for acquisitions, working capital, capital expenditures or
other purposes on acceptable terms, if at all.
- A substantial portion of Arch's cash flow will be required to pay
interest expense; this will reduce the funds which would otherwise be
available for operations and future business opportunities.
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<PAGE> 32
- Arch's credit facilities and indentures contain financial and restrictive
covenants; the failure to comply with these covenants may result in an
event of default which could have a material adverse effect on Arch if
not cured or waived.
- Arch may be more highly leveraged than its competitors in the wireless
communications industry, and this may place it at a competitive
disadvantage.
- Any degree of leverage will make Arch more vulnerable to a downturn in
its business or the economy generally than if it were not as leveraged.
There can be no assurance that Arch will be able to reduce its financial
leverage as it intends, nor that Arch will achieve an appropriate balance
between growth which it considers acceptable and future reductions in financial
leverage. If Arch is not able to achieve continued growth in EBITDA, it may be
precluded from incurring additional indebtedness due to cash flow coverage
requirements under existing or future debt instruments.
Funding for future capital needs is not assured
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including possible acquisitions. Arch's future capital requirements
will depend upon a number of factors. These factors include subscriber growth,
the type of wireless communications devices and services demanded by customers,
technological developments, marketing and sales expenses, competitive
conditions, the nature and timing of Arch's N-PCS strategy and acquisition
strategies and opportunities. No assurance can be given that additional equity
or debt financing will be available to Arch when needed on acceptable terms, if
at all. If sufficient financing is unavailable when needed, Arch may experience
material adverse effects.
Competition and technological change may undermine Arch's business
There can be no assurance that the combined company will be able to compete
successfully with current and future competitors in the wireless communications
business or with competitors offering alternative communication technologies.
Competition may intensify and may adversely affect margins
The combined company may face significant additional competition in the
future. This could have a material adverse effect on its revenues and EBITDA.
Some competitors possess greater financial, technical and other resources than
those of the combined company. Increased competition from broadband personal
communications service, or PCS, providers, cellular providers, digital
specialized mobile radio, or SMR providers, dedicated data networks and wireless
information delivery service providers has led to competition from increasingly
larger and better capitalized competitors. In addition, Arch competes with the
other providers of paging and advanced messaging services. If any of such
competitors were to devote additional resources to the wireless communications
business or focus on PageNet's or Arch's historical business segments, there
could be a material adverse effect on the combined company.
New 2-way wireless messaging technology may adversely affect Arch's
competitive position
Competitors are currently using and developing a variety of 2-way wireless
messaging technologies. Arch and PageNet currently resell such 2-way services
over the network of a competitor, and PageNet is preparing to sell such services
over its own advanced wireless messaging network in January 2000. Due to the
relatively recent availability of 2-way messaging products and services, there
have not yet been sales which would be sufficient to fully indicate a proven
demand for such services among business or consumer subscribers. Such services
will compete with other available methods of telecommunications, including
cellular and broadband PCS, as well as SMR services and services provided over
dedicated data networks which use hand-held devices to send and receive data.
Although these services are primarily focused on 2-way voice communications,
they may include wireless messaging as an adjunct service or may replace the
need for 2-way messaging
24
<PAGE> 33
entirely. It is less expensive for an end user to obtain a cellular or PCS unit
with data capability than the 2-way messaging units currently available, as the
nationwide cellular and PCS carriers have subsidized the purchase of those units
and prices for broadband services have been declining rapidly, making the two
types of services and product offerings more comparable. Future technological
advances in the telecommunications industry, including these 2-way messaging
technologies, as well as wireless information and telemetry, among others, could
increase the number and type of new services or products which compete with the
wireless messaging services historically offered by Arch and PageNet. Firms
seeking to provide wireless communications through these and other technologies
may bring their products to market faster or in packages of products that
consumers find more valuable than those which Arch and PageNet propose to
provide.
Obsolescence in company-owned units may impose additional costs on Arch
Technological change may also adversely affect the value of the units owned
by PageNet and Arch that are leased to their subscribers. If PageNet's or Arch's
current subscribers request more technologically advanced units, including 2-way
units, the combined company could incur additional inventory costs and capital
expenditures if required to replace units leased to its subscribers within a
short period of time. Such additional investment or capital expenditures could
have a material adverse effect on the combined company.
Government regulation may burden operations
Licenses may not be automatically renewed
PageNet's and Arch's FCC paging licenses are for varying terms of up to 10
years. When the licenses expire, renewal applications must be approved by the
FCC. To date, the FCC has approved each assignment and transfer of control for
which PageNet or Arch has sought approval; however, no assurance can be given
that any future renewal applications will be free of challenge or will be
granted by the FCC.
Regulatory changes could add burdens or benefit competing technologies
The FCC continually reviews and revises its rules affecting wireless
communications companies. Therefore, regulatory requirements that apply to the
combined company may change significantly over time.
Acquisitions of Arch's stock by foreigners could jeopardize Arch's licenses
The Communications Act limits foreign investment in and ownership of radio
common carriers licensed by the FCC, as well as their parent companies. The
combined company may not have more than 25% of its stock owned or voted by
aliens or their representatives, a foreign government or its representatives or
a foreign corporation if the FCC finds that the public interest would be served
by denying such ownership. Arch's subsidiaries that are radio common carrier
licensees are subject to more stringent requirements and may have only up to 20%
of their stock owned or voted by aliens or their representatives, a foreign
government or their representatives or a foreign corporation. This ownership
restriction is not subject to waiver. Arch's charter permits the redemption of
shares of Arch's capital stock from foreign stockholders where necessary to
protect FCC licenses held by Arch or its subsidiaries, but such a redemption
would be subject to the availability of capital to Arch and any restrictions
contained in applicable debt instruments and under the Delaware corporation
statute. These restrictions currently would not permit any such redemptions. The
failure to redeem shares promptly could jeopardize the FCC licenses held by Arch
or its subsidiaries.
Arch cannot control third parties on whom Arch depends for products and
services
Arch does not manufacture any of the equipment customers need to take
advantage of its services. It is dependent primarily on Motorola and NEC America
Inc. to obtain sufficient equipment inventory for new subscribers and
replacement needs and on Glenayre Electronics, Inc. and Motorola for sufficient
terminals and transmitters to meet its expansion and replacement requirements.
Significant delays in obtaining equipment, terminals or transmitters, such as
MobileMedia experienced before its bankruptcy filing, could lead to disruptions
in operations and adverse financial consequences. Motorola has announced its
intention to discontinue manufacturing transmitters and other paging
infrastructure during 2000, although it will continue
25
<PAGE> 34
to maintain and service existing infrastructure into the future. Arch's purchase
agreement with Motorola expires on March 17, 2000. There can be no assurance
that the agreement with Motorola will be renewed or, if renewed, that the
renewed agreement will be on terms and conditions as favorable to the combined
company as those under the current agreement.
Arch relies on third parties to provide satellite transmission for some
aspects of its wireless communications services. To the extent there are
satellite outages or if satellite coverage is impaired in other ways, Arch may
experience a loss of service until such time as satellite coverage is restored,
which could have a material adverse effect.
Downturn in Arch's units in service may occur
Cancellation of units in service can significantly affect the results of
operations of wireless communications service providers. The sales and marketing
costs associated with attracting new subscribers are substantial compared to the
costs of providing service to existing customers. Because the wireless
communications business is characterized by high fixed costs, cancellations
directly and adversely affect EBITDA. No prediction can be made about future
cancellation trends.
Loss of key personnel could adversely impact operations
Arch's success will depend, to a significant extent, upon the continued
services of a relatively small group of executive personnel. Arch does not have
employment agreements with any of its current executive officers, or maintain
life insurance on their lives, although all executive officers have entered into
executive retention agreements with Arch. The loss or unavailability of one or
more of its executive officers or the inability to attract or retain key
employees in the future could have a material adverse effect on Arch.
Impact of the Year 2000 issue is not fully known
The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of Arch's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
To address this issue, Arch has created a cross-functional Y2K project
group that has analyzed and identified internal and external areas likely to be
affected by the Year 2000 problem. Arch has requested information from certain
mission critical vendors and has held discussions with equipment and other
mission critical vendors concerning their efforts to identify and address
potential issues associated with their equipment and/or software. While Arch has
made such inquiries, it is possible one or more mission critical vendors, such
as utility providers, telephone carriers, other wireless messaging carriers,
satellite carriers or other telecommunication providers, may not be Year 2000
ready. While Arch has created certain contingency plans as discussed below,
alternative providers may not be available in all cases. Furthermore, all units
and messaging-related equipment used by Arch and its customers are manufactured
by third parties, and although Arch has tested such equipment with generally
favorable results, it has relied to a large extent on the representations of its
vendors with respect to their readiness. Arch cannot offer assurance as to the
accuracy of its vendors' representations or its ability to replicate its testing
results in a real time environment.
Arch has completed appropriate modifications and/or replacements of its
computerized systems and applications to address the issue. The costs associated
with such replacements have been capitalized and amortized in accordance with
Arch's existing accounting policies and future replacement costs, if any, will
be capitalized and amortized in a similar manner. Maintenance or modification
costs have been, and will be, expensed as incurred. Based on Arch's costs
incurred to date and projected estimated costs, Arch does not expect that its
remediation efforts will have a material adverse effect on its results of
operations or its financial condition. Actual costs and results may vary
significantly due to the uncertainties associated with the problem, which may
not be apparent until the second quarter of 2000.
26
<PAGE> 35
Although Arch began testing its applications in 1998, there can be no
assurance that such testing has detected all applications that may be affected
by the problem. While Arch's objective was to be Year 2000 ready by year-end
1999, due to the uncertainties associated with the problem there can be no
assurance that this objective has been met.
Arch has finalized its contingency plans relating to the Year 2000 problem.
Such plans include, among other things, the use of (1) backup power generators
for certain of its operations, (2) certain alternate vendors and (3) various
communication channels to deploy its work force in a timely and efficient manner
to address potential problems that arise. While Arch believes it has used
commercially reasonable efforts in its approach to this issue, any failure of
its systems or products, whether due to internal or external factors, could have
a material adverse effect.
Debt instruments restrict operations
Various debt instruments impose operating and financial restrictions on
Arch. Arch's senior credit facility requires various Arch operating subsidiaries
to maintain specified financial ratios, including a maximum leverage ratio, a
minimum interest coverage ratio, a minimum debt service coverage ratio, a
minimum fixed charge coverage ratio and minimum net revenues. In addition, the
senior credit facility limits or restricts, among other things, Arch's operating
subsidiaries' ability to:
- declare dividends or redeem or repurchase capital stock;
- prepay, redeem or purchase debt;
- incur liens and engage in sale/leaseback transactions;
- make loans, investments and capital expenditures;
- incur indebtedness and contingent obligations;
- amend or otherwise alter debt instruments and other material agreements;
- engage in mergers, consolidations, acquisitions and asset sales;
- engage in transactions with affiliates; and
- alter its lines of business or accounting methods.
Other debt instruments limit, among other things:
- the incurrence of additional indebtedness by Arch and its subsidiaries;
- the payment of dividends and other restricted payments by Arch and its
subsidiaries;
- asset sales;
- transactions with affiliates;
- the incurrence of liens; and
- mergers and consolidations.
Arch's ability to comply with such covenants may be affected by events
beyond its control, including prevailing economic and financial conditions. A
breach of any of these covenants could result in a default under the senior
credit facility and/or other debt instruments. Upon the occurrence of an event
of default, the creditors could elect to declare all amounts outstanding to be
immediately due and payable, together with accrued and unpaid interest. If Arch
were unable to repay any such amounts, the senior creditors could proceed
against any collateral securing the indebtedness. If the lenders under the
senior credit facility or other debt instruments accelerated the payment of such
indebtedness, there can be no assurance that the assets of Arch would be
sufficient to repay in full such indebtedness and other indebtedness of Arch. In
addition, because the senior credit facility and other debt instruments limit
Arch's ability to engage in some types of transactions, Arch may be prohibited
from entering into transactions that could be beneficial to Arch.
27
<PAGE> 36
RISKS RELATED TO PAGENET
PageNet faces many of the same risks that Arch faces. In addition, PageNet
is subject to these particular risks:
PageNet may be required to reduce its operations and/or restructure its
obligations under the Bankruptcy Code
If PageNet is unable to improve its domestic EBITDA, it may not have
sufficient cash or borrowing capacity to meet its obligations through the end of
the first quarter of 2000. While PageNet is currently exploring various
alternatives to ensure that it has sufficient liquidity through the consummation
of the merger, there can be no assurance that such efforts will be timely or
successful. There also can be no assurance that the merger will be completed or
will not be substantially delayed. If PageNet's strategies to obtain additional
liquidity are not timely or successful, or the merger is not completed or is
delayed, PageNet may be required to reduce the level of its operations and/or
commence a proceeding under chapter 11 of the Bankruptcy Code to restructure its
obligations, including its obligations under the PageNet senior subordinated
notes. Such a bankruptcy filing by PageNet would likely have a material impact
on PageNet's results of operations and financial position.
PageNet may not remain in compliance with its financial covenants under its
credit facilities
Although PageNet is currently in compliance with the financial covenants in
its U.S. and Canadian debt agreements, if PageNet is unable to improve its
domestic EBITDA for the fourth quarter of 1999, it will no longer be in
compliance with the interest coverage covenant in its credit facility following
the end of the fourth quarter of 1999. In that event, PageNet would seek to
obtain a waiver of its noncompliance under the credit agreement. If PageNet is
unable to obtain a waiver, the lenders will have various rights, including the
right to accelerate all outstanding indebtedness. Such acceleration would cause
PageNet to be in default under the cross-default provisions of the PageNet
senior subordinated notes.
PageNet's restructuring may not achieve its objectives
PageNet has been restructuring its support functions into centralized
facilities called "centers of excellence" beginning in 1998. While progress has
been made, PageNet's efforts to implement the restructuring have fallen behind
PageNet's original schedule. PageNet's plan called for the conversions to be
substantially complete during early 1999. PageNet recently announced the
suspension of future conversions after January 2000, at which time PageNet
expects to have converted 100% of its customer units placed in service
indirectly through PageNet's resellers, and approximately 50% of its directly
marketed customer units, to the centers of excellence. The suspension of future
conversions, combined with the impact of the contemplated merger on operations,
will make it difficult for PageNet to determine the amount of potential cost
savings resulting from the centers of excellence initiative or to realize the
full benefits intended to be achieved from the restructuring.
Downturn in PageNet's units in service may continue
PageNet had approximately 9,314,000 units in service at September 30, 1999,
down from its high of 10,604,000 units in service at June 30, 1998. PageNet has
had a net reduction in the number of units in service during each of the five
previous quarters ended September 30, 1999, and the amount of such net reduction
has generally increased during each quarter. The net reduction of units in
service with subscribers is mainly due to PageNet's continued rationalization of
its customer base, intensifying price competition in the market for wireless
communications services and the degree to which broadband services, such as
those with short messaging capability built into the units, are being subscribed
to in lieu of one-way messaging services such as those offered by PageNet. The
sales and marketing efforts associated with attracting new subscribers are
substantial compared to the costs of providing service to existing customers.
Because the wireless messaging business is characterized by high fixed costs,
cancellations directly and adversely affect EBITDA. The failure
28
<PAGE> 37
to reverse this trend of accelerating customer cancellations could have a
material adverse effect on PageNet and, as a result, on Arch if the merger is
consummated.
PageNet may be delisted from the Nasdaq National Market System and the Chicago
Stock Exchange prior to the completion of the merger, resulting in reduced
trading liquidity for its shares of common stock.
PageNet has received a notice from Nasdaq informing it that it would be
delisted from the Nasdaq National Market System on December 22, 1999 unless
PageNet requests a hearing prior to that time. On December 16, PageNet requested
a hearing from Nasdaq, which is scheduled to occur on January 27, 2000. At the
hearing, PageNet will request an extension of the time by which it must comply
with the minimum listing requirements. If Nasdaq does not allow an extension of
time and if PageNet's stock does not close above $5.00 for at least ten
consecutive days, then PageNet's stock may be transferred to the Nasdaq Small
Cap Market if its stock remains consistently above $1.00 per share, or to
over-the-counter trading if its stock trades below $1.00 per share. In addition,
PageNet has been notified by the Chicago Stock Exchange that if it is delisted
by Nasdaq, the Chicago Stock Exchange intends to enforce its own minimum listing
requirements. PageNet does not currently comply with these listing requirements,
and the Chicago Stock Exchange has indicated that it would not be willing to
extend the time for PageNet's compliance until after the completion of the
merger. The delisting of PageNet's stock from the Nasdaq National Market System
may result in PageNet appraisal rights becoming available for PageNet
stockholders. This result could add further complications and uncertainty to the
merger.
RISKS RELATED TO VAST
If PageNet completes its merger with Arch, PageNet noteholders who
participate in the exchange offer, as well as all PageNet stockholders, will
receive Class B common stock of Vast, currently a wholly owned subsidiary of
PageNet. If the plan of reorganization is approved, all PageNet noteholders and
all PageNet stockholders will receive Class B common stock of Vast. An
investment in Vast involves numerous risks. These risks are described under
"Risk Factors" in the prospectus relating to Vast attached as Annex A.
CERTAIN BANKRUPTCY CONSIDERATIONS
PageNet may have to resolicit acceptances if this prospectus does not
comply with the requirements of the Bankruptcy Code.
The Bankruptcy Code provides that acceptances by creditors and stockholders
of a plan of reorganization before the commencement of chapter 11 cases are
binding during the cases so long as the solicitation of such acceptances
complied with applicable non-bankruptcy law governing the adequacy of disclosure
in connection with such solicitations, or, if such laws do not exist, such
acceptances were solicited after creditors and shareholders were provided with
adequate information to allow them to make a reasonably informed judgment
whether to accept or reject the plan.
PageNet believes that this prospectus and the forms of ballots which will
be sent to all creditors and stockholders whose claims or equity interests are
adversely affected by the Plan comply with applicable non-bankruptcy law and the
Bankruptcy Code. However, there can be no assurance that the Bankruptcy Court
will decide that the solicitation materials contain adequate information to meet
the requirements of the Bankruptcy Code or that the balloting procedures satisfy
the requirements of the Bankruptcy Code. If the Bankruptcy Court determines that
the solicitation and/or balloting procedures do not comply with the requirements
of the Bankruptcy Code, PageNet may be required to resolicit acceptances. In
such event, confirmation of the Plan and consummation of the merger agreement
could be delayed and potentially jeopardized.
PageNet may have to resolicit acceptances if the Bankruptcy Court finds its
classification scheme improper.
The Plan classifies the claims of all creditors against PageNet and the
equity interests of all stockholders in PageNet. To comply with the
classification requirements of the Bankruptcy Code, claims or equity interests
may be placed in the same class only if such claims or equity interests are
substantially similar to each other.
29
<PAGE> 38
The Plan separately classifies general unsecured claims from claims arising
under or related to the senior subordinated notes despite the fact that both
types of claims are unsecured. Many of the creditors in the general unsecured
creditor class are key suppliers of products and services to PageNet.
Accordingly, any failure to pay those claims in accordance with their original
terms could hurt PageNet's ability to obtain essential trade credit and could
hurt PageNet's ability to do business with trade creditors whose goods and
services are essential to PageNet. The senior subordinated notes contain
subordination provisions. PageNet believes that these subordination provisions
make senior subordinated note claims significantly different from the other
general unsecured claims and, together with the critical importance of the trade
creditors to PageNet's future viability, provides a proper basis on which to
separately classify such claims. The Plan also classifies claims for rescission
or damages related to the purchase or sale of a senior subordinated note with
claims under the senior subordinated notes. Claims for rescission or damages
might be subject to mandatory subordination under the Bankruptcy Code which
could be contrary to the Plans' classification scheme. While PageNet does not
believe that claims for damages or rescission exist, if there are such claims,
the holders of senior subordinated notes might demand that they be separately
classified.
If the Bankruptcy Court finds that the Plan's classification scheme is
improper, PageNet would seek (1) to modify the Plan to provide for whatever
reasonable classification might be required for confirmation and (2) to use the
acceptances received from creditors and stockholders pursuant to this
solicitation to confirm the Plan as so amended. If any reclassification of
claims adversely affects the treatment a holder will receive, it is likely that
PageNet will be required to resolicit creditors adversely affected by such
reclassification. Any requirement to resolicit acceptances will delay
confirmation and could jeopardize consummation of the Plan and the merger.
The Plan may not comply with the "cramdown" provisions of the Bankruptcy Code.
If any class of creditors or stockholders whose claims or interests are
adversely affected by the Plan reject the Plan, the Bankruptcy Court may
nevertheless confirm the Plan at PageNet's request pursuant to the "cramdown"
provisions of the Bankruptcy Code, provided that at least one impaired class has
accepted the Plan, with such acceptance being determined without including the
acceptance of any "insider" in such class. To confirm the Plan through a
"cramdown" the Bankruptcy Court must determine that, as to each impaired class
which has rejected the Plan, the Plan "does not discriminate unfairly" and is
"fair and equitable." See "The Prepackaged Plan of
Reorganization -- Confirmation of the Plan without Acceptance by All Classes of
Impaired Claims." PageNet reserves the right to seek confirmation of the Plan
under the "cramdown" provisions of the Bankruptcy Code in the event the holders
of any class of impaired claims or equity interests fail to accept the Plan.
There can be no assurance that the Bankruptcy Court will make the factual
findings and reach the legal conclusions required to permit confirmation of the
Plan through a cramdown.
The Bankruptcy Court may not confirm the Plan.
Even if the requisite acceptances to the Plan are received, there can be no
assurance that the Bankruptcy Court will confirm the Plan. A non-accepting
creditor or stockholder of PageNet might object to confirmation based on a
variety of factors including by asserting that the disclosure with respect to
the solicitation of acceptances was not adequate, the solicitation procedures
and results were inadequate or improper, or the terms of the Plan do not comply
with any of the confirmation requirements of the Bankruptcy Code. Even if the
Bankruptcy Court were to determine that the disclosure and the balloting
procedures and results were appropriate, the Bankruptcy Court could still
decline to confirm the Plan if it were to find that any statutory condition to
confirmation had not been met. Even if the Plan is accepted by all classes of
claims and equity interests, confirmation standards require, among other things,
a finding by the Bankruptcy Court that the Plan was filed in good faith, that
confirmation of the Plan is not likely to be followed by a liquidation or a need
for further financial reorganization and that the value of distributions to each
holder of a claim or interest will not be less than the value of any
distribution that such holder would receive if PageNet were liquidated under
chapter 7 of the Bankruptcy Code. See "The Prepackaged Plan of
Reorganization -- Confirmation of the Plan Without Acceptances by All Classes of
Impaired Claims" and "The Prepackaged Plan of Reorganization -- Confirmation
Standards." It could be argued that certain provisions of the Plan providing
releases to the
30
<PAGE> 39
holders of bank claims against PageNet, to Arch and to the officers and
directors of PageNet are broader than permitted under certain case law or that
the classification scheme provided for under the Plan violates applicable
classification rules. While there can be no assurance that the Bankruptcy Court
will conclude that the statutory confirmation requirements have been met,
PageNet believes that the Plan satisfies all applicable confirmation
requirements.
The confirmation and consummation of the Plan are also subject to certain
other conditions including satisfaction of all conditions to the merger. See
"The Prepackaged Plan of Reorganization -- Summary of Other Provisions of the
Plan." No assurance can be given that these conditions will be satisfied or that
PageNet would waive such conditions if not satisfied.
The recovery to creditors and stockholders cannot be predicted if the Plan is
not confirmed.
If the Plan, as filed or modified, is not confirmed in a timely manner, the
merger might not be consummated and implemented.
If the merger is not consummated, PageNet will have to pursue other
alternatives which could include (1) liquidation of PageNet under chapter 7 or
chapter 11 of the Bankruptcy Code and (2) confirmation of an alternative plan or
reorganization under chapter 11 of the Bankruptcy Code. The recovery to
creditors and shareholders under such alternative scenarios cannot be predicted.
Creditors may receive a smaller recovery if the Plan is not confirmed.
If a plan of reorganization for PageNet is not confirmed, and in certain
other circumstances, the PageNet chapter 11 cases, if filed, could be converted
to cases under chapter 7 of the Bankruptcy Code. In a chapter 7 case, a trustee
would be elected or appointed to liquidate the assets of PageNet for
distribution to creditors in accordance with the priorities established by the
Bankruptcy Code. A discussion of the potential effects that a chapter 7
liquidation would have on the recovery of creditors and stockholders is set
forth under "Best Interests Test -- The Liquidation Analysis." In a liquidation,
the assets of PageNet would be sold in exchange for cash, securities or other
property, which would then be distributed to creditors and stockholders. PageNet
believes that liquidation under chapter 7 would result in smaller distributions
(and, as to certain classes, no distributions) as compared to those provided for
in the Plan because of, among other things:
- the risk that PageNet's FCC licenses would be revoked by the FCC, thereby
eliminating the greater going concern value of PageNet's assets;
- the general erosion in value of assets in a chapter 7 case due to the
expeditious liquidation required and the "forced sale" atmosphere that
would prevail; and
- additional expenses and claims, some of which would be entitled to
priority, which would be generated during the liquidation and from the
rejection of leases and other executory contracts in connection with a
cessation of the operations of PageNet.
In addition, a chapter 7 liquidation is likely to result in substantial
litigation and delays in ultimate distributions to creditors.
In a liquidation under chapter 11, PageNet's assets could be sold in an
orderly fashion over a more extended period of time than in a liquidation under
chapter 7. However, PageNet would likely continue to incur losses during the
period of liquidation which would likely continue to erode any recovery to
PageNet's creditors. Such a liquidation might result in a somewhat greater but
indeterminate recovery for creditors than the creditors might expect in a
chapter 7 case. Although liquidation under chapter 11 would be preferable to
liquidation under chapter 7, PageNet believes that any liquidation, whether
under chapter 7 or chapter 11, would not realize the full going concern value of
PageNet's business. Rather, PageNet's assets would be sold separately.
Consequently, PageNet believes that a liquidation under chapter 11 is a less
attractive alternative to creditors and stockholders than the Plan because of
the likelihood of a greater recovery provided for by the Plan.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are made under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
You should consider any statements that are not statements of historical fact to
be forward-looking statements. These include statements to the effect that
PageNet or its management or board of directors "believe", "expect",
"anticipate", "plan" and similar expressions. A number of important factors
could cause actual results to differ materially from those expressed in any
forward-looking statements. See "Risk Factors." PageNet undertakes no obligation
to update any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
THE MERGER
PageNet stockholders will receive a proxy statement/prospectus in which
PageNet's board of directors will ask them to approve the merger and the merger
agreement. PageNet stockholders should refer to that proxy statement/prospectus
for a description of Arch's reasons for the merger and other information that
was considered by Arch's board of directors in reaching their decision to
approve the merger.
GENERAL
Arch and PageNet have agreed to merge on the terms set forth in an
agreement and plan of merger dated November 7, 1999. Through the merger, PageNet
will become a wholly owned subsidiary of Arch. The merger will be accompanied by
a recapitalization of PageNet and Arch resulting from the exchange of debt for
common stock in the PageNet and Arch exchange offers.
The merger agreement provides that:
- PageNet will merge with a wholly owned subsidiary of Arch. In the merger,
each share of PageNet common stock, including shares issued to PageNet
senior subordinated noteholders in the PageNet exchange offer, will be
converted into 0.1247 shares of Arch common stock and Arch expects to
issue a total of 89,882,637 shares;
- Arch will conduct the Arch exchange offer, offering to exchange 66.1318
shares of Arch common stock for each $1,000 principal amount at maturity
of its discount notes. If all of the outstanding discount notes are
exchanged, Arch will issue a total of 29,651,984 shares of its common
stock;
- All of Arch's outstanding Series C preferred shares are proposed to be
converted into a total of 2,104,142 shares of Arch's common stock;
- PageNet will conduct the PageNet exchange offer, offering to exchange a
total of 616,830,757 shares of PageNet common stock, which will be
immediately exchanged for Arch common stock in the merger, and up to
68.9% of the equity interest in Vast for all of PageNet's outstanding
senior subordinated notes;
- PageNet will distribute up to 11.6% of the equity interest in Vast to the
holders of PageNet common stock in connection with the merger; and
- The Arch board of directors, after the merger, will consist of 12
directors. Six directors will be designated by the current Arch directors
and three directors will be designated by the current PageNet directors.
Each of the three largest holders of PageNet notes being exchanged for
shares of PageNet common stock may also designate one director. To the
extent any of these three largest holders do not designate directors, the
current Arch directors will designate additional directors.
BACKGROUND OF THE MERGER
At a board of directors meeting on June 10, 1999, the directors of PageNet
discussed the possibility of a combination of PageNet with another major paging
company which had indicated in a discussion between its chief executive officer
and John P. Frazee, Jr., PageNet's chief executive officer, that it was
interested in
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exploring the possibility of a combination with PageNet. Mr. Frazee advised the
directors that he believed such a combination could offer substantial synergies
and cost savings. Mr. Frazee said he had discussed the possible combination with
representatives of Goldman, Sachs & Co. and Morgan Stanley Dean Witter, which
had been acting as PageNet's outside financial advisors with respect to possible
strategic options, and that representatives of both Goldman Sachs and Morgan
Stanley considered such a transaction to be possible. The directors supported
continued discussion with the other paging company about a possible combination.
On June 10, PageNet entered into a confidentiality agreement with the other
paging company permitting the exchange of confidential information. Management
personnel, lawyers and investment bankers from both companies subsequently met
during June and July to conduct mutual due diligence, to further evaluate and
analyze potential synergies and savings and to discuss various aspects of a
possible combination.
At a meeting on July 22, the PageNet directors again discussed the
possibility of a combination with the other paging company. Representatives of
Goldman Sachs and Morgan Stanley reviewed with the PageNet directors the overall
industry trends, PageNet's strategic and financial position and the prospective
combination. The directors concluded that a combination with the other paging
company appeared to be desirable if acceptable financial terms, which had not
yet been discussed, could be negotiated. After that meeting, due diligence and
other discussions with the other paging company continued.
In early August 1999, representatives of Goldman Sachs and Morgan Stanley
met with the financial advisors for the other paging company to discuss possible
financial terms of a combination and reported the outcome of such discussions to
Mr. Frazee. Mr. Frazee then reported the outcome of those discussions to the
directors. The directors concluded, based upon that meeting, that agreement on
acceptable terms would not be possible. Mr. Frazee said that he continued to
believe that a combination of PageNet with another major paging company was
highly desirable and he recommended that PageNet approach Arch about a possible
combination with PageNet. The directors supported such an approach to Arch.
On August 6, Mr. Frazee met with C. Edward Baker, Jr., chief executive
officer of Arch, to discuss the possibility of a business combination between
PageNet and Arch.
At a meeting on August 10, the Arch directors discussed the possibility of
further consolidation within the wireless communications industry and the role
that Arch might play in such consolidation. It was the consensus of the
directors that Mr. Baker should continue discussions with PageNet concerning a
possible business combination.
On August 17, Mr. Frazee, Edward W. Mullinix, Jr., chief operating officer
of PageNet, and Julian B. Castelli, chief financial officer of PageNet, met with
Mr. Baker and J. Roy Pottle, chief financial officer of Arch. Mr. Baker and Mr.
Frazee agreed that the two companies should explore the possibility of a
combination.
On August 26, PageNet and Arch entered into a confidentiality agreement
permitting the mutual exchange of confidential information. On that date
management of PageNet and Arch, together with representatives of Goldman Sachs
and Morgan Stanley and Bear Stearns & Co., Arch's financial advisor, as well as
outside counsel for both companies, met to review potential cost savings and
synergies and to discuss structural and legal aspects of a possible combination.
In early September, Mr. Frazee and Mr. Baker had further conversations about a
possible combination.
During the week of September 6, the chief executive officer of the other
paging company contacted Mr. Frazee and indicated a strong desire to resume
discussions of a possible combination. Mr. Frazee reported that contact to the
PageNet directors at a board meeting on September 13. Mr. Frazee said that
representatives of Goldman Sachs and Morgan Stanley had talked with the other
paging company's financial advisors and believed there was now serious interest
in a possible combination. The directors discussed the possible combination with
the other paging company and also reviewed the discussions which had occurred
with Arch.
At the meeting on September 13, PageNet's directors also discussed
PageNet's financial condition and concluded that PageNet needed additional
outside financial advice because the continued failure to reverse
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continued declining revenues or sufficiently reduce operating costs, based upon
preliminary third quarter results of operations, potentially threatened
PageNet's liquidity and compliance with bank credit agreements and bond
indentures. After that meeting, PageNet engaged Houlihan Lokey Howard & Zukin
Capital as an additional financial advisor to advise PageNet with respect to the
possible need for a recapitalization or other form of debt restructuring on a
standalone basis or on the possibility that PageNet might seek to combine such a
recapitalization with a merger with the other paging company or with Arch.
Goldman Sachs, Morgan Stanley and Houlihan Lokey then resumed discussion with
the other paging company's financial advisors about the possible terms of a
combination.
At a meeting of the Arch directors on September 28, Mr. Baker reported on
the status of discussions with PageNet concerning a possible business
combination, noting that such discussions remained very general. It was the
consensus of the directors that Mr. Baker should continue such discussions.
At a meeting of the PageNet board on October 1, representatives of Houlihan
Lokey, Goldman Sachs and Morgan Stanley reviewed with the PageNet directors
various possible alternatives, including PageNet's going forward without
significant change in capital structure, the possibility of a standalone
recapitalization, a potential merger without a recapitalization and a potential
merger coupled with a recapitalization. The directors discussed the various
options and concluded that a merger coupled with a recapitalization appeared to
be the best alternative for all of PageNet's stakeholders, including its
noteholders and stockholders. The directors discussed with the financial
advisors the possible structure of such a transaction and the risks and other
difficulties associated with its consummation. The advisors indicated that they
had discussed the possibility of such a combined merger and recapitalization
with the other paging company, which was interested in pursuing such a
transaction. The directors authorized management and the advisors to seek to
negotiate such a transaction with the other paging company, recognizing that,
depending on the course of those negotiations, PageNet might also want to
discuss such a transaction with Arch.
Following that board meeting on October 1, PageNet's management, financial
advisors and lawyers met with management, financial advisors and lawyers for the
other paging company. Negotiations toward possible agreement on the terms of a
transaction that would combine a merger with a recapitalization through exchange
offers by both companies continued actively until the week of October 11, 1999.
During that week, the other paging company communicated to PageNet, through its
financial advisors, revised proposed financial terms of the transaction which
were different and less favorable to PageNet than the terms previously
discussed. In light of that change, and because of continuing uncertainty about
whether agreement on financial and other aspects of the transaction could be
reached and whether the transaction could be consummated, the directors decided
that PageNet should contact Arch to determine if a transaction with Arch might
be possible that would be more favorable to PageNet's stakeholders.
On October 15, Mr. Frazee and representatives of Houlihan Lokey met with
Mr. Baker and representatives of Bear Stearns. Mr. Baker indicated a strong
desire to try to negotiate a combination between PageNet and Arch. Following
that meeting, the financial advisors for PageNet and Arch continued to discuss
proposed financial terms of such a combination transaction.
On an October 17 conference call, Mr. Baker provided an update to certain
Arch directors on discussions with PageNet and its financial advisors. Mr. Baker
noted that the financial advisors had discussed a business combination involving
a simultaneous merger and recapitalization of both companies to be accomplished
through exchange offers with certain existing noteholders. Mr. Baker reported
that no consensus as to the allocation of the equity of a combined entity
between the Arch and PageNet stockholders had emerged. Thereafter, Mr. Baker
contacted other Arch directors and provided similar updates.
At a board meeting on October 24, Goldman Sachs, Morgan Stanley and
Houlihan Lokey reviewed with the PageNet directors the proposed terms of a
possible merger with Arch and discussed various factors relating to the
likelihood of successfully consummating such a transaction. The directors
determined that the proposed merger with Arch appeared to be more favorable for
PageNet and all of its stakeholders than the proposed transaction with the other
paging company and also appeared to be more likely to be consummated
successfully. The directors directed management and PageNet's legal and
financial advisors to proceed as rapidly as possible to seek to negotiate an
agreement for such a merger with Arch.
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At a meeting of the Arch directors on October 25, Mr. Baker reported on the
status of the continuing discussions with PageNet, including proposed terms of a
possible merger and recapitalization and the resultant allocation of equity
between the Arch and PageNet stakeholders. The directors determined that
management and Arch's advisors should proceed with due diligence investigations
and negotiation of a merger agreement.
During the following week, management teams from PageNet and Arch met to
review potential cost savings and synergies. In addition, financial advisors,
legal counsel and management personnel from both companies carried out mutual
due diligence investigations. Negotiations by the respective managements,
financial advisors and counsel over the terms of a merger agreement between
PageNet and Arch then proceeded intensively until a proposed definitive
agreement was reached.
At meetings held on November 1 and 2, management, Bear Stearns and Arch's
counsel reviewed with the Arch directors the proposed terms of a business
combination with PageNet, including a draft of a proposed merger agreement.
Management and the financial and legal advisors to Arch were directed to seek to
finalize the terms of a definitive agreement relating to the proposed merger.
The directors of PageNet met on November 7 to consider the proposed merger
agreement. At that meeting the directors reviewed the potential benefits and
risks associated with the merger, the estimated values to be realized by
PageNet's stockholders and bondholders under the merger in comparison to the
possible transaction with the other paging company and standalone alternatives,
the relative contributions of PageNet and Arch in relation to the shares in the
combined enterprise to be received by their respective stakeholders, the
likelihood of consummation of the merger, the future prospects of the combined
company and various other matters. At the meeting, representatives of each of
Houlihan Lokey, Goldman Sachs and Morgan Stanley provided their formal analysis
regarding the proposed transaction. After discussion, each of Houlihan Lokey and
Morgan Stanley gave its oral opinion that as of November 7, the consideration to
be received by the holders of PageNet common stock on such date pursuant to the
merger and the spinoff, taken as a whole, was fair from a financial point of
view and Goldman Sachs gave its oral opinion that as of November 7, 1999, the
exchange ratio pursuant to the merger agreement was fair from a financial point
of view to the holders of PageNet common stock as of such date. Houlihan Lokey,
Goldman Sachs and Morgan Stanley then indicated that they would confirm their
opinion in writing. Representatives of Mayer, Brown & Platt, outside counsel to
PageNet, reviewed with the PageNet directors the terms of the proposed merger
agreement. After receiving advice from their financial and legal advisors and
further deliberations, and taking into account the various factors described
below under "-- PageNet's Reasons for Merger," the directors unanimously
approved the proposed merger on the evening of November 7.
The directors of Arch met on November 7 to consider the proposed merger
agreement. The Arch directors unanimously approved the proposed merger on the
evening of November 7.
Later in the evening of November 7, the merger agreement was executed by
PageNet and Arch.
PAGENET'S REASONS FOR THE MERGER
PageNet's directors believe that the merger represents the most desirable
available alternative to maintain and realize value for PageNet and all of its
stakeholders, including its stockholders and noteholders. In reaching its
decision to approve the merger, the directors consulted with PageNet's financial
and legal advisors and took into account, without limitation, the following
conclusions and factors:
- A combination of PageNet with another major messaging company is highly
desirable, if not essential, to achieve cost savings and other synergies
necessary to remain competitive in the wireless communications industry.
Such savings from the Arch/PageNet combination are estimated at
approximately $80 million annually, beginning approximately 18 months
after the merger.
- A substantial deleveraging of PageNet's capital structure is highly
desirable, if not essential, to enable PageNet to continue to have the
liquidity and other financial resources and flexibility needed to be a
viable enterprise and to compete effectively in the wireless
communications industry. The combined company after the merger will have
a ratio of consolidated total debt to annualized adjusted EBITDA
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of approximately 3.3 to 1 (based on the nine months ended September 30,
1999 and assuming the exchange of 100% of PageNet's senior subordinated
notes and 100% of Arch's discount notes).
- Achieving substantial deleveraging in conjunction with a combination with
another major messaging company, because of the substantially higher
aggregate enterprise value achieved through cost savings and synergies,
is substantially more beneficial to PageNet and all of its stakeholders
than any standalone recapitalization alternative.
- The combination with Arch is the most desirable alternative available to
PageNet and its stakeholders based upon the financial, managerial and
other characteristics of the combined company and based upon the values
expected to be realized by PageNet's noteholders and stockholders under
the Arch transaction in comparison to any alternative.
- While subject to substantial risks and uncertainties, the merger has a
greater likelihood of successful consummation than the possible
combination transaction with the other paging company.
- The merger should achieve greater value for PageNet's noteholders and
stockholders than stand-alone restructuring alternatives, whether
consummated voluntarily or through a reorganization or bankruptcy
proceedings.
- No prospective acquiror or other merger partner, other than Arch and the
other paging company, has expressed interest in discussing a possible
combination transaction with PageNet.
- PageNet's failure to reverse its continued decline in revenues, and its
consequent loss of liquidity, makes it critical for PageNet to move
forward to achieve a more viable capital structure.
- The structure of the transaction enables PageNet's current noteholders
and shareholders to retain an equity ownership in Vast, which may have
future value if its wireless solutions business is successful.
- The merger is structured as a "reorganization" for federal income tax
purposes so that stockholders of PageNet will not recognize gain on the
exchange of their shares for Arch's shares although it is expected that
the receipt of Class B common stock of Vast will be taxable.
- The oral opinions of Houlihan Lokey and Morgan Stanley, subsequently
confirmed in writing that, as of November 7, the consideration to be
received by the holders of PageNet common stock on such date pursuant to
the merger and the spinoff, taken as a whole, was fair from a financial
point of view to such holders and the oral opinion of Goldman Sachs,
subsequently confirmed in writing, that, as of November 7, the exchange
ratio pursuant to the merger agreement was fair from a financial point of
view to the holders of PageNet common stock as of such date.
In approving the merger, the directors also took into account such additional
factors as the relative contributions of PageNet and Arch to the revenues and
EBITDA of the combined company, the historical and current trading prices of the
common stock of PageNet and Arch, valuations of other comparable companies and
overall trends in the paging business and the telecommunications industry.
PageNet's directors also considered various potential risks relating to the
merger, including, without limitation, the following:
- Various conditions of the merger, including the successful consummation
of the exchange offers, the availability of continued bank financing
following the merger, and the receipt of required regulatory approvals,
may not be satisfied, and the merger may therefore not be able to be
consummated.
- It may be impossible to consummate the merger except through a
prepackaged chapter 11 reorganization plan, and such plan may require
consents which cannot be obtained or may not be approved by the
Bankruptcy Court or, even if successful, may cause serious disruption of
PageNet's business.
- PageNet may not have sufficient liquidity to maintain its operations
during the time necessary to consummate the merger.
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- A termination fee of $40.0 million is payable to Arch in certain
circumstances, potentially imposing a substantial financial burden on
PageNet.
- The anticipated cost savings and other synergies may not be achieved, or
management or other aspects of the two companies may not be successfully
integrated, resulting in substantial reduction in the projected value of
the combined enterprise.
- The merger agreement imposes various limitations on the conduct of
PageNet's business prior to the merger, which may make it more difficult
for PageNet to respond to changing competitive or financial
circumstances.
The directors concluded that the foregoing and other risks were outweighed by
the advantages of the merger.
The discussion of the information and factors considered by PageNet's board
of directors is not intended to be exhaustive but includes all material factors
considered by PageNet's board of directors. In reaching its determination to
adopt and recommend the merger, PageNet's board of directors did not assign any
relative or specific weights to these factors, and individual directors may have
given differing weights to differing factors.
OPINIONS OF FINANCIAL ADVISORS TO PAGENET
Opinion of Houlihan, Lokey, Howard & Zukin Capital
Under a letter agreement, dated September 22, 1999, the board of directors
of PageNet retained Houlihan Lokey to assist it in evaluating its strategic
alternatives. As part of this engagement, PageNet requested that Houlihan Lokey
evaluate the fairness of the consideration to be received in the merger and the
related transactions by the holders of shares of PageNet common stock, holding
shares as of the date of the opinion. On November 7, 1999, at a special meeting
of the board of directors of PageNet, Houlihan Lokey presented its financial
analyses and delivered its oral opinion that, as of that date, the shares of
Arch common stock and the equity interest in Vast, taken together as a whole, to
be received by the holders of PageNet common stock, as of that date, in the
merger and related transactions, was fair to such holders from a financial point
of view. Houlihan Lokey confirmed its oral opinion by delivering a written
opinion dated November 7, 1999, which stated the considerations and assumptions
upon which its opinion was based.
Although Houlihan Lokey assisted the PageNet board of directors in
evaluating the terms of the financial restructuring, Houlihan Lokey was not
retained to provide, and Houlihan Lokey did not provide, an opinion as to the
fairness, advisability or relative values to be achieved as a result of the
financial restructuring. In addition, Houlihan Lokey was not retained to
provide, and did not provide, an opinion regarding the underlying business
decision of PageNet to effect the merger or the financial restructuring.
A COPY OF THE HOULIHAN LOKEY OPINION, DATED NOVEMBER 7, 1999, IS ATTACHED
AS ANNEX F TO THIS PROSPECTUS. YOU ARE URGED TO READ THE OPINION IN ITS ENTIRETY
FOR INFORMATION WITH RESPECT TO THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY, HOULIHAN LOKEY IN MAKING ITS
OPINION. REFERENCES IN THIS DOCUMENT TO THE HOULIHAN LOKEY OPINION AND THE
SUMMARY OF THE HOULIHAN LOKEY OPINION SET FORTH BELOW ARE QUALIFIED BY REFERENCE
TO THE FULL TEXT OF THE OPINION, WHICH IS INCORPORATED IN THIS PROSPECTUS BY
REFERENCE. HOULIHAN LOKEY'S WRITTEN OPINION IS FOR THE INFORMATION AND
ASSISTANCE OF THE PAGENET BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A
RECOMMENDATION AS TO HOW ANY HOLDERS OF COMMON STOCK OF PAGENET SHOULD VOTE WITH
RESPECT TO THE MERGER OR HOW ANY HOLDERS OF DEBT SECURITIES OF PAGENET SHOULD
VOTE WITH RESPECT TO THE FINANCIAL RESTRUCTURING.
In arriving at its opinion, Houlihan Lokey, among other things:
- reviewed PageNet's (a) Annual Report to Shareholders and Annual Report on
Form 10-K for the fiscal year ended 1998, (b) Quarterly Reports on Form
10-Q for the two quarters ended March 31, 1999 and June 30, 1999, (c)
company-prepared interim financial statements for the period ended
September 30, 1999, which PageNet's management has identified as being
the most current financial statements available, (d) Proxy Statement
dated April 12, 1999, and (e) certain other documents filed with the
Securities and Exchange Commission;
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- reviewed Arch's Annual Reports to Shareholders and Annual Reports on Form
10-K for the past two fiscal years, certain interim reports to
stockholders on Form 10-Q of Arch, and certain documents filed with the
SEC by Arch regarding its acquisition of MobileMedia;
- reviewed the merger agreement;
- reviewed the Indenture dated July 15, 1995 of the 10% Senior Subordinated
Notes Due October 15, 2008, supplemented by a Second Supplemental
Indenture dated October 15, 1996;
- reviewed the Indenture dated July 15, 1995 of 10.125% Senior Subordinated
Notes Due August 1, 2007, supplemented by a First Supplemental Indenture
dated July 15, 1995;
- reviewed the Indenture dated January 15, 1994 of 8.875% Senior
Subordinated Notes Due February 1, 2006, supplemented by a First
Supplemental Indenture dated January 15, 1994;
- reviewed the Second Amended and Restated Credit Agreement of PageNet and
certain of its Subsidiaries, the Amended and Restated Loan Agreement of
Paging Network of Canada Inc., and certain other documents;
- met with members of senior management of PageNet to discuss the
operations, financial condition, future prospects and projected
operations and performance of PageNet, and met with representatives of
PageNet's independent accounting firm, other investment bankers and
counsel to discuss certain matters;
- visited PageNet's facilities and business offices of PageNet and Arch;
- reviewed forecasts and projections prepared by PageNet's management for
the years ended December 31, 1999 through 2004 and for the quarters ended
September 30, 1999 through December 31, 2000;
- reviewed certain forecasts and projections for Arch prepared by its
management;
- reviewed analyses prepared by and met with management of PageNet and Arch
to discuss expected costs savings and other expected synergies resulting
from the business combination;
- reviewed the historical market prices and trading volume for PageNet's
and Arch's publicly traded securities;
- reviewed other publicly available financial data for companies that
Houlihan Lokey deemed comparable to PageNet, and publicly available
prices and premiums paid in other transactions that Houlihan Lokey
considered similar to the Arch merger;
- reviewed drafts of documents to be delivered at the closing of the
merger; and
- conducted other studies, analyses and inquiries as Houlihan Lokey deemed
appropriate.
In rendering its opinion, Houlihan Lokey assumed and relied upon, without
independent verification, the accuracy and completeness of all of the financial
and other information that was publicly available or supplied to Houlihan Lokey
by PageNet. Houlihan Lokey assumes no responsibility with respect to that
information. Houlihan Lokey also relied upon the advice of management of PageNet
that the financial forecasts and other information that were provided to or
discussed with Houlihan Lokey were reasonably prepared and reflected the best
currently available estimates of the future financial results and condition of
PageNet and that there had been no material change in the assets, financial
condition, business or prospects of PageNet since the date of the most recent
financial statements made available to Houlihan Lokey.
Houlihan Lokey did not make any physical inspection or independent
appraisal of any of the properties or assets of PageNet. Houlihan Lokey's
opinion is necessarily based on business, economic, market and other conditions
as they existed on the date of its opinion. Houlihan Lokey has no duty or
obligation to advise PageNet or any other person of any change in any fact or
matter affecting its opinion of which it becomes aware after the date of its
opinion (except to the extent applicable law would require such disclosure).
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Houlihan Lokey also assumed that the merger would be completed according to
the terms of the merger agreement, without waiver of any condition contained in
that agreement, or any material modification to any of the terms contained in
that agreement.
Houlihan Lokey performed a variety of financial and comparative analyses
solely for the purpose of providing its opinion to the PageNet board of
directors that the shares of Arch common stock and the equity interests in Vast,
taken together, to be received by PageNet stockholders in the merger and related
transactions is fair to them from a financial point of view. Preparing a
fairness opinion is a complex analytical process and is not readily susceptible
to partial analysis or summary description. Houlihan Lokey believes that its
analyses must be considered as a whole. Selecting portions of its analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the processes underlying the analyses and its opinion.
In its analyses, Houlihan Lokey made numerous assumptions with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of PageNet
and Arch. The estimates contained in these analyses and the valuation ranges
resulting from any particular analysis do not necessarily indicate actual values
or predict future results or values, which may be significantly more or less
favorable than those suggested by these analyses. In addition, analyses relating
to the value of the businesses or securities are not appraisals and do not
reflect the prices at which the businesses or securities may actually be sold or
the prices at which their securities may trade. As a result, these analyses and
estimates are inherently subject to substantial uncertainty.
Houlihan Lokey's opinion and financial analyses were not the only factors
considered by the PageNet board of directors in its evaluation of the merger and
should not be viewed as determinative of the views of the PageNet board of
directors or management.
Under the terms of Houlihan Lokey's engagement, PageNet has agreed to pay
Houlihan Lokey an advisory fee customary for the services provided in connection
with the merger and restructuring. Substantially all of this fee will not be
paid unless and until the merger and related transactions are completed. PageNet
has agreed to reimburse Houlihan Lokey for travel and other out-of-pocket
expenses incurred in performing its services, including the fees and expenses of
its legal counsel, and to indemnify Houlihan Lokey and related persons against
liabilities, including liabilities under the federal securities laws, arising
out of Houlihan Lokey's engagement.
Houlihan Lokey is a nationally recognized investment banking firm and was
selected by PageNet based on Houlihan Lokey's experience and expertise with
respect to restructuring and merger and acquisition transactions. Houlihan Lokey
regularly engages in the valuation of businesses and their securities in
connection with restructuring and mergers and acquisitions.
Opinion of Goldman, Sachs & Co.
PageNet retained Goldman Sachs on August 1, 1999, to act as one of its
financial advisors in connection with the merger and the spin-off. Goldman Sachs
is an internationally recognized investment banking firm and was selected by
PageNet based on the firm's reputation and experience in investment banking in
general and its recognized expertise in the valuation of businesses, as well as
its prior investment banking relationship with PageNet. On November 7, 1999, at
the meeting of PageNet's board of directors, Goldman Sachs delivered to
PageNet's board its oral opinion (which was subsequently confirmed in a written
opinion dated as of November 7, 1999) that, as of such date and based on and
subject to the matters set forth therein, the exchange ratio pursuant to the
merger agreement was fair from a financial point of view to the holders of
PageNet common stock as of the date of its opinion.
YOU SHOULD CONSIDER THE FOLLOWING WHEN READING THE DISCUSSION OF GOLDMAN
SACHS OPINION IN THIS DOCUMENT:
- WE URGE YOU TO READ CAREFULLY THE ENTIRE OPINION OF GOLDMAN SACHS, WHICH
IS SET FORTH IN ANNEX G OF THIS PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE.
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- GOLDMAN SACHS' ADVISORY SERVICES AND OPINION WERE PROVIDED TO PAGENET'S
BOARD FOR ITS INFORMATION IN ITS CONSIDERATION OF THE MERGER AND THE
OPINION WAS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A
FINANCIAL POINT OF VIEW TO THE HOLDERS OF PAGENET COMMON STOCK AS OF THE
DATE OF ITS OPINION.
- GOLDMAN SACHS' OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER
OF PAGENET COMMON STOCK AS TO HOW TO VOTE ON THE MERGER OR ANY RELATED
MATTER.
In connection with its opinion, Goldman Sachs reviewed among other things,
the following:
- the merger agreement;
- the Annual Reports to Stockholders and Annual Reports on Form 10-K of
PageNet and Arch for each of the previous five years;
- certain interim reports to stockholders and Quarterly Reports on Form
10-Q of PageNet and Arch;
- certain other communications from PageNet and Arch to their respective
stockholders;
- certain historical financial information and other information for Vast;
and
- certain internal financial analyses and forecasts for PageNet, Vast and
Arch prepared by their respective managements, including certain cost
savings and operating synergies projected by the managements of PageNet
and Arch to result from the transactions contemplated by the merger
agreement (the "Synergies").
Goldman Sachs also held discussions with members of the senior management
of PageNet and Arch regarding their assessment of the strategic rationale for,
and the potential benefits of, the transactions contemplated by the merger
agreement and with those persons and with members of the senior management of
Vast regarding the past and current business operations, financial condition and
future prospects of their respective companies. In addition, Goldman Sachs
reviewed the reported price and trading activity for the PageNet common stock
and the Arch common stock, compared certain financial and stock market
information for PageNet and Arch and certain financial information for Vast with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the paging and communications industry specifically and in other
industries generally and performed such other studies and analyses as it
considered appropriate. At the direction of PageNet's board, Goldman Sachs also
read certain analyses performed on behalf of PageNet by Houlihan Lokey regarding
(i) the proposed financial restructuring (the "Financial Restructuring"), in
which (A) certain outstanding debt securities of PageNet would be exchanged for
616.8 million shares of PageNet common stock and (B) certain outstanding debt
securities and preferred stock of Arch would be exchanged for 31.7 million
shares of Arch common stock and (ii) the possible restructuring of PageNet's
outstanding debt on a stand-alone basis (the "Stand-Alone Restructuring").
Goldman Sachs also reviewed with PageNet and its other financial advisors,
including Houlihan Lokey, certain options available to PageNet, other than
alternative business combinations, for addressing PageNet's liquidity needs. In
addition, Goldman Sachs also reviewed the tax analysis prepared by the
management of PageNet and PageNet's accountants with respect to the transactions
contemplated by the merger agreement, including, without limitation, the
Financial Restructuring and the spin-off.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. In this regard, Goldman
Sachs assumed with the consent of PageNet's board that the financial forecasts,
including the underlying assumptions, provided to it and discussed with it with
respect to PageNet, Vast and Arch after giving effect to the transactions
contemplated by the merger agreement, including, without limitation, the
Synergies, have been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of PageNet, Vast and Arch, as
applicable.
Without making an independent evaluation of the matters contained therein
and with the consent of PageNet's board, Goldman Sachs relied upon the certain
analyses prepared by Houlihan Lokey referenced above for, among other things,
purposes of analyzing the impact of the Stand-Alone Restructuring on the
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<PAGE> 49
holders of the shares of PageNet common stock on the date of its opinion. In
that regard, Goldman Sachs also took into account the view of the management of
PageNet with respect to the likely impact of a Stand-Alone Restructuring on the
holders of the shares of PageNet common stock on the date of its opinion. In
addition, without making an independent evaluation of the matters contained
therein and with the consent of PageNet's board, Goldman Sachs relied upon the
tax analysis prepared by the management of PageNet and PageNet's accountants
referenced above.
Goldman Sachs did not make an independent evaluation or appraisal of the
assets and liabilities of PageNet, Vast or Arch or any of their subsidiaries and
Goldman Sachs was not furnished with any such evaluation or appraisal. Goldman
Sachs opinion does not address the relative merits of the transactions
contemplated pursuant to the merger agreement as compared to any alternative
business transaction that might be available to PageNet. Goldman Sachs opinion
was provided for the information and assistance of PageNet's board in connection
with its consideration of the transactions contemplated by the merger agreement
and such opinion does not constitute a recommendation as to how any holder of
PageNet common stock should vote with respect to such transactions. Goldman
Sachs opinion was necessarily based upon conditions as they existed and could be
evaluated by it on the date of its opinion and Goldman Sachs assumed no
responsibility to update or revise its opinion based upon circumstances and
events occurring after the date of its opinion. Goldman Sachs opinion does not
imply any conclusion as to the likely trading range of Arch common stock or
shares of Vast following consummation of the transactions contemplated by the
merger agreement, which may vary depending upon, among other factors, changes in
interest rates, dividend rates, market conditions, general economic conditions
and other factors that generally influence the price of securities. In rendering
its opinion, Goldman Sachs assumed, with the consent of PageNet's board, that
the Financial Restructuring, the spin-off and the other transactions
contemplated by the merger agreement will be completed in the manner set forth
in the merger agreement, including without limitation, that an aggregate of (1)
616.8 million shares of PageNet common stock will be issued pursuant to the
PageNet Exchange Offer (as defined in the merger agreement) and (2) 29.6 million
shares of Arch common stock will be issued pursuant to the Arch Exchange Offer
(as defined in the merger agreement) and that the outstanding preferred stock of
Arch will be converted into 2.1 million shares of Arch common stock.
Goldman Sachs' opinion related solely to the fairness from a financial
point of view of the exchange ratio to the holders of shares of PageNet common
stock on the date of its opinion. Goldman Sachs did not express any opinion
concerning the consideration to be received by any other security holder of
PageNet pursuant to the Financial Restructuring, the spin-off or any other
transaction contemplated by the merger agreement or the fairness of the
Financial Restructuring to the holders of shares of PageNet common stock on the
date of its opinion.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with PageNet, having acted as its financial advisor from time to time,
including having acted as its managing underwriter in May 1992 in an offering of
approximately 6 million shares of PageNet common stock, as its private placement
agent for an aggregate of approximately $1.2 billion principal amount in senior
subordinated notes in three offerings, one each in 1994, 1995 and 1996, and
having acted as its financial advisor in connection with, and having
participated in certain of the negotiations leading to the merger agreement.
Goldman Sachs provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold securities, including derivative securities,
of PageNet or Arch for its own account and for the accounts of customers.
Pursuant to a letter agreement dated November 7, 1999, PageNet and its
wholly owned subsidiaries, PageNet, Inc. and Silverlake Communications, Inc.
have agreed to pay Goldman Sachs, as compensation for Goldman Sachs' services as
financial advisor to PageNet in connection with the merger, its customary fees.
PageNet, PageNet, Inc. and Silverlake Communications, Inc. have also agreed to
pay Goldman Sachs its reasonable out-of-pocket expenses, including the fees and
disbursements of its attorneys, and to indemnify
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Goldman Sachs and related persons against certain liabilities, including certain
liabilities arising under the federal securities laws.
Opinion of Morgan Stanley Dean Witter
Pursuant to a letter agreement dated August 1, 1999, Morgan Stanley was
retained by PageNet to act as one of its financial advisors in connection with
the merger and the spin-off. Morgan Stanley is an internationally recognized
investment banking firm and was selected by PageNet based on Morgan Stanley's
qualifications, expertise and reputation, as well as its knowledge of the paging
industry. On November 7, 1999, Morgan Stanley delivered to PageNet's board an
oral opinion, subsequently confirmed in writing, to the effect that, as of
November 7, 1999, and based on and subject to certain matters stated in its
opinion (1) the 0.1247 of a share of Arch common stock (the "exchange ratio")
and (2) the pro rata portion of the 11.6% of the equity interest in Vast
("Distributed Interests", together with the exchange ratio, the "consideration")
to be received by the holders of PageNet common stock on such date pursuant to
the merger and the spin-off, taken as a whole, was fair from a financial point
of view to such holders.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION DATED NOVEMBER 7, 1999,
WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX H TO THIS
DOCUMENT. HOLDERS OF PAGENET COMMON STOCK SHOULD READ THIS ENTIRE OPINION
CAREFULLY. MORGAN STANLEY'S OPINION ADDRESSES ONLY THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED BY HOLDERS OF PAGENET COMMON STOCK ON SUCH DATE
PURSUANT TO THE MERGER AND THE SPINOFF, TAKEN AS A WHOLE, FROM A FINANCIAL POINT
OF VIEW TO SUCH HOLDERS, AND IT DOES NOT ADDRESS ANY OTHER ASPECTS OF THE
MERGER, THE SPINOFF OR THE FINANCIAL RESTRUCTURING NOR DOES IT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE ON THE
MERGER OR ANY RELATED MATTER. THE SUMMARY OF THE OPINION OF MORGAN STANLEY SET
FORTH IN THIS DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF MORGAN STANLEY'S OPINION.
In arriving at its opinion, Morgan Stanley, among other things:
- reviewed certain analysis (the "Houlihan Lokey Analysis") prepared by
Houlihan Lokey of the Financial Restructuring and the Stand Alone
Restructuring;
- reviewed certain publicly available financial statements and other
business and financial information of Arch and PageNet, respectively;
- reviewed certain internal financial statements and other financial and
operating data concerning Arch and PageNet, respectively;
- reviewed certain internal financial statements and other financial and
operating data concerning Vast prepared by the managements of PageNet and
Vast;
- analyzed certain financial forecasts prepared by the managements of Arch
and PageNet, respectively;
- analyzed certain financial forecasts for Vast prepared by the managements
of PageNet and Vast;
- discussed the past and current operations and financial condition and the
prospects of Arch with senior executives of Arch;
- discussed the past and current operations and financial condition and the
prospects of PageNet and Vast with senior executives of PageNet and Vast;
- discussed with the senior managements of Arch and PageNet their estimates
of the synergies and cost savings expected to be derived from the merger;
- reviewed and analyzed the pro forma impact of the merger on the
consolidated capitalization and financial ratios of the combined company;
- reviewed the reported prices and trading activity for the Arch common
stock and the PageNet common stock;
- compared the financial performance of Arch and PageNet (excluding Vast)
and the prices and trading activity of the Arch common stock and the
PageNet common stock and their respective debt securities with that of
certain other publicly-traded companies and their securities;
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<PAGE> 51
- compared the financial performance of Vast with that of certain other
companies that are comparable to Vast and have publicly-traded
securities;
- reviewed the tax analysis prepared by the management of PageNet with
respect to the tax treatment of the transactions contemplated by the
merger agreement;
- reviewed with PageNet and its other financial advisors, including
Houlihan Lokey, certain options available to PageNet, other than
alternative business combinations, for addressing PageNet's liquidity
needs;
- reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions deemed relevant;
- participated in discussions and negotiations among representatives of
Arch and PageNet and their financial, restructuring and legal advisors;
- reviewed the draft merger agreement and certain related documents; and
- performed such other analyses and considered such other factors as Morgan
Stanley deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of all information
supplied or otherwise made available to it and reviewed by it for the purposes
of its opinion. Morgan Stanley also relied, without independent verification or
evaluation and with the consent of PageNet's board, on the Houlihan Lokey
Analysis for, among other things, purposes of analyzing the impact of the
Stand-Alone Restructuring on the holders of the PageNet common stock on the date
of its opinion. In addition, Morgan Stanley also relied, without independent
verification or evaluation and with the consent of PageNet's board, on the tax
analysis prepared by the management of PageNet with respect to the tax treatment
of the transactions contemplated by the merger agreement. With respect to the
financial forecasts, future prospects, estimates of synergies and cost savings,
Morgan Stanley assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of Arch, PageNet and Vast. In addition, Morgan Stanley
assumed that the merger will be consummated in accordance with the terms set
forth in the merger agreement, including, among other things, that the merger
will be treated as a tax-free reorganization and/or exchange, each pursuant to
Section 368(a) of the Internal Revenue Code of 1986, as amended. Morgan Stanley
did not make any independent valuation or appraisal of the assets or liabilities
of PageNet, Arch or Vast, nor was it furnished with any such appraisals. Morgan
Stanley's opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of its opinion.
Morgan Stanley's opinion is limited to the fairness, from a financial point
of view, of the consideration to be received by the holders of PageNet common
stock on the date of its opinion pursuant to the merger and the spin-off and
Morgan Stanley is not expressing any opinion concerning the consideration to be
received by any other security holder of PageNet pursuant to the Financial
Restructuring, spin-off or any other transaction contemplated by the merger
agreement or the fairness of the Financial Restructuring to the holders of
PageNet common stock on the date of its opinion. In rendering this opinion,
Morgan Stanley assumed, with the consent of PageNet's board, that the Financial
Restructuring and the spinoff will be completed in the manner set forth in the
merger agreement.
Morgan Stanley also noted that trading in Arch common stock and shares of
Vast for a period of time following completion of the merger and the spin-off
may involve a redistribution of the Arch common stock and the shares of Vast
among the stockholders of the combined entity and other investors and,
accordingly, during such period, Arch common stock and the shares of Vast may
trade at prices below those at which they would trade on a fully distributed
basis after the spin-off . Morgan Stanley's opinion does not in any manner
address the prices at which Arch's common stock or the shares of Vast will trade
following consummation of the merger and the spin-off. In addition, Morgan
Stanley expressed no opinion or recommendation as to how the shareholders of
Arch or PageNet should vote at the shareholders' meetings held in connection
with the merger or any related matter.
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Morgan Stanley is an internationally recognized investment banking advisory
firm. Morgan Stanley, as part of its investment banking business, is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bidding, secondary
distributions of listed and unlisted securities, private placements and
valuation for corporate and other purposes. In the ordinary course of its
business, Morgan Stanley and its affiliates may actively trade the securities of
PageNet and Arch, for Morgan Stanley's account and for the account of customers.
Pursuant to a letter agreement dated August 1, 1999, PageNet, PageNet, Inc.
and Silverlake Communications, Inc. agreed to pay Morgan Stanley its customary
fees in connection with the merger and spinoff. The PageNet Companies have also
agreed to reimburse Morgan Stanley for its expenses incurred in performing its
services. In addition, PageNet, PageNet, Inc. and Silverlake Communications,
Inc. have agreed to reimburse and to indemnify Morgan Stanley and related
persons against any liabilities and expenses arising out of the engagement and
any related transactions, including liabilities under federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of PageNet's board of directors with
respect to the merger, stockholders should be aware that some of the members of
PageNet's board of directors and some of PageNet's officers have interests in
the merger that are different from the interests of the stockholders and senior
subordinated noteholders of PageNet and that could potentially represent
conflicts of interest.
- All outstanding options granted to purchase PageNet common stock,
including those held by officers and directors of PageNet, will fully
vest at the effective time of the merger and, if not exercised at that
time, will be converted into fully vested options to purchase shares of
Arch common stock, subject to adjustment to reflect the exchange ratio.
Based upon the options outstanding as of December 1, 1999, options held
by PageNet's officers and directors relating to 2,154,453 shares of
PageNet common stock, plus any additional options granted prior to the
merger, will vest at the effective time of the merger. However, all of
such options currently have exercise prices which are higher, and in some
cases significantly higher, than PageNet's current stock price, and, as a
result of the exchange ratio and the impact of the merger, PageNet's
officers and directors will hold fewer options to purchase shares at even
higher exercise prices. As a result of these circumstances, the options
which will vest are likely to have minimal value at the time of the
merger.
- Some current officers of PageNet may remain as officers of PageNet or
become officers of Arch after the merger.
- Some officers of PageNet will be entitled to severance payments and
enhanced pension benefits in the event their employment ceases following
the merger as part of a severance plan established January 20, 1999 which
is designed to provide benefits to substantially all of PageNet's
employees upon a "change in control" of PageNet. The severance plan
provides for severance amounts ranging from 50% to 300% of an employee's
annual salary and bonus compensation. The amount an employee will receive
depends upon the employee's position at PageNet. In December 1999,
PageNet's board of directors made changes in the severance plan to
increase the number of employees entitled to severance payments at the
200% level and to increase the severance percentages applicable to John
P. Frazee, Jr., Mark A. Knickrehm, Edward W. Mullinix, Jr., Lynn A. Bace
and up to one other officer from 200% to 300% of their annual salary and
bonus compensation.
- At the effective time of the merger, John P. Frazee, Jr. will, and other
current PageNet directors may, be appointed as additional members of
Arch's board of directors, each to hold office until his successor is
elected and qualified or until his earlier resignation or removal. Mr.
Frazee will also be appointed Chairman of the board of directors of the
combined company. Additional information about Mr. Frazee and the other
current PageNet directors is contained in "PageNet's Management."
Each share of PageNet common stock held by PageNet's directors, officers
and their affiliates at the effective time of the merger will, along with all
other PageNet common stock, be converted into 0.1247 shares of Arch common
stock.
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PageNet's board of directors was aware of these interests and considered
them, among other matters, when adopting the merger.
Indemnification and Insurance
The merger agreement provides that, for six years after the effective time
of the merger, Arch will cause PageNet to indemnify and hold harmless each
present and former PageNet director and officer (solely when acting in such
capacity) determined as of the effective time of the merger, against any costs
or expenses, including reasonable attorney's fees, judgments, fines, losses,
claims, damages or liabilities incurred in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to matters existing or occurring at
or before the effective time of the merger, whether asserted or claimed before,
at or after the effective time of the merger, to the fullest extent that PageNet
would have been permitted under Delaware corporate law and its certificate of
incorporation or bylaws in effect on November 7, 1999, to indemnify those
persons. PageNet after the merger will also advance expenses as incurred to the
fullest extent permitted under applicable law, provided the person to whom
expenses are advanced provides an undertaking to repay any advances if it is
ultimately determined that he or she is not entitled to indemnification.
The merger agreement also provides that, for a period of six years after
the effective time of the merger, Arch will maintain a policy of officers' and
directors' liability insurance for acts and omissions occurring before the
effective time of the merger with coverage in amount and scope at least as
favorable as PageNet's directors' and officers' liability insurance coverage on
November 7, 1999. If PageNet's insurance policy in effect on November 7, 1999,
expires, is terminated or is canceled, or if the annual premium is increased to
an amount in excess of 200% of the last annual premium paid before November 7,
1999, in each case during the six-year period, Arch will use its best efforts to
obtain insurance in an amount and scope as great as can be obtained for the
remainder of the period for a premium not in excess, on an annualized basis, of
200% of the current premium. In the alternative, PageNet can obtain prepaid
policies that provide such directors and officers with coverage for an aggregate
period of six years with respect to claims arising from facts or events that
occurred on or before the effective time of the merger, including, without
limitation, in respect of the transactions contemplated by the merger agreement.
Arch has agreed to guaranty PageNet's obligations under the two previous
paragraphs.
In addition to the provisions of the three previous paragraphs, each
director and many officers of PageNet are entitled to indemnification and
insurance in accordance with the indemnity agreement between such officer or
director and PageNet.
TREATMENT OF PAGENET'S STOCK
In the merger, each issued and outstanding share of PageNet common stock
will be converted into 0.1247 shares of Arch common stock. However, shares held
by Arch or any wholly owned subsidiary of Arch will be canceled without
conversion. The exchange ratio will be adjusted to eliminate the effect of any
stock split, stock dividend, stock distribution, or other similar transaction by
either PageNet or Arch that occurs before the merger.
HOLDERS OF PAGENET COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES
REPRESENTING PAGENET COMMON STOCK. FOLLOWING THE EFFECTIVE TIME OF THE MERGER,
HOLDERS OF PAGENET COMMON STOCK WILL RECEIVE INSTRUCTIONS FOR THE SURRENDER AND
EXCHANGE OF SUCH STOCK CERTIFICATES.
THE EXCHANGE OFFERS
PageNet
PageNet will accept all 8.875%, 10.125% and 10% senior subordinated notes
validly tendered and not withdrawn before the expiration date, upon the terms
and subject to the conditions set forth in this prospectus and in the letter of
transmittal which accompanies this prospectus. PageNet will issue a pro rata
portion of 616,830,757 shares of PageNet common stock (which will then be
immediately convertible into Arch
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common stock at an exchange ratio of 0.1247 shares of Arch common stock for each
share of PageNet common stock) and a pro rata portion of 13,780,000 shares of
Class B common stock of Vast, representing up to 68.9% of the equity ownership
of Vast, in exchange for each of PageNet's outstanding senior subordinated notes
surrendered in the exchange offer.
The pro rata portion is to be computed immediately prior to the time when
the merger occurs by dividing:
- the principal amount, together with all accrued interest, of each PageNet
senior subordinated note; by
- by the principal amount, together with all accrued interest, of all
outstanding PageNet senior subordinated notes.
As of the date of this prospectus, $1.2 billion in aggregate principal amount at
maturity of senior subordinated notes are outstanding. See "The Exchange
Offer -- Terms of the Exchange Offer."
PageNet's obligation to consummate the exchange offer is contingent on the
valid tender of at least 97.5% of the outstanding aggregate principal amount of
the senior subordinated notes and at least a majority of the outstanding
principal amount of each series of PageNet senior subordinated notes in
accordance with the terms of the exchange offer. These tenders must be valid and
not withdrawn prior to the expiration date of the exchange offer.
To validly tender senior subordinated notes, holders must also consent to
the prepackaged plan of reorganization and to:
- amend the indentures, if necessary, to permit completion of the merger or
the prepackaged plan;
- amend the indentures to eliminate:
-- any covenants which may be modified or eliminated by a majority vote
of the senior subordinated notes;
-- any events of default which relate to (1) the non-payment or
acceleration of other indebtedness (2) the failure to discharge
judgments for the payment of money or (3) the bankruptcy or
insolvency of any subsidiaries; and
-- any provisions which condition mergers or consolidations on
compliance with any financial criteria.
In addition, each holder will be required to waive any and all existing
defaults with respect to the senior subordinated notes and any and all rights to
rescind their acceptance of the exchange offer after the expiration date. See
"Proposed Amendments."
The expiration date will be 12:00 midnight, New York City time, on the
business day after the commencement of the exchange offer, or at a later
date which is mutually agreed upon by PageNet and Arch.
Arch
Arch will issue 66.1318 shares of common stock in exchange for each $1,000
principal amount at maturity of 10 7/8% senior discount notes surrendered
pursuant to its exchange offer, together with all accreted interest on such
notes. As of the date of this prospectus, $448.4 million in aggregate principal
amount at maturity of discount notes are outstanding.
Arch's obligation to consummate the exchange offer will be contingent on
the valid tender of 97.5% of the outstanding aggregate principal amount of the
discount notes in accordance with the terms of the exchange offer. These tenders
must be valid and not withdrawn prior to the expiration date of the exchange
offer. PageNet may waive the 97.5% tender requirement and lower it to any level
at its sole discretion and, at any time after PageNet has met the requirements
with respect to its tender, Arch may elect to lower the 97.5% tender requirement
to an amount not less than 67%.
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Holders of the discount notes who tender in connection with the exchange
offer will be required to give their consent to:
- amend the indenture for the notes, if necessary, to permit completion of
the merger;
- amend the indenture to eliminate:
-- any covenants which may be modified or eliminated by a majority vote
of the discount notes;
-- any events of default which relate to (i) the non-payment or
acceleration of other indebtedness, (ii) the failure to discharge
judgments for the payment of money or (iii) the bankruptcy or
insolvency of any subsidiaries; and
-- any provisions which condition the merger on compliance with any
financial criteria.
In addition, each holder of discount notes will be required to waive any and all
existing defaults with respect to the discount notes and any and all rights to
rescind their acceptance of the exchange offer after the expiration date.
The expiration date will be 12:00 midnight, New York City time, on the
business day after the commencement of the exchange offer, or at a
later date which is mutually agreed upon by Arch and PageNet.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, PageNet and
Arch may not merge until notifications have been furnished to the Federal Trade
Commission and the Antitrust Division of the Department of Justice and specified
waiting period requirements have been satisfied. PageNet and Arch each filed a
pre-merger notification and report form with the FTC and Antitrust Division on
November 24, 1999. On December 23, PageNet and Arch each received a request for
additional information and documents from the Antitrust Division. These requests
extend the waiting period during which the proposed merger may not be
consummated until twenty days after the date that PageNet and Arch substantially
comply with those requests. PageNet and Arch are proceeding to compile the
information and documents requested by the Antitrust Division and intend to
submit such information and documents as soon as reasonably practicable.
At any time before the effective time of the merger, the Antitrust
Division, the FTC, state attorneys general or a private person or entity could
seek under antitrust laws, among other things, to enjoin the merger and, any
time after the effective time of the merger, to cause Arch to divest itself, in
whole or in part, of the stock of the surviving corporation in the merger or of
certain businesses conducted by the surviving corporation in the merger. There
can be no assurance that a challenge to the merger will not be made or that, if
such a challenge is made, Arch will prevail. The obligations of Arch and PageNet
to complete the merger are subject to the condition that any applicable waiting
period under the Hart-Scott-Rodino Act shall have expired without any action by
the Antitrust Division or the FTC to prevent consummation of the merger. See
"The Merger Agreement -- Conditions to Completion of the Merger."
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The merger has been structured to qualify as a tax free reorganization
under the Internal Revenue Code. Arch, PageNet and their stockholders should not
recognize gain or loss in connection with the merger, except that the related
distribution and receipt of Class B common stock of Vast is expected to be
taxable to PageNet and its stockholders. See "Material Federal Income Tax
Considerations."
ACCOUNTING TREATMENT OF THE MERGER
Arch will account for the merger using the purchase method of accounting
for a business combination, in accordance with Accounting Principles Board
Opinion No. 16. The assets and liabilities of PageNet, including intangible
assets, will be recorded at their fair market values and included in the
financial statements of Arch. The results of operations and cash flows of
PageNet will be included in Arch's financial statements from the date of merger.
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NASDAQ NATIONAL MARKET QUOTATION
It is a condition to the closing of the merger that the shares of Arch
common stock to be issued in the merger be listed on the Nasdaq National Market
System. Arch filed a notification form for listing of additional shares on
, 2000.
RESALES OF ARCH COMMON STOCK ISSUED IN CONNECTION WITH THE MERGER; AFFILIATE
AGREEMENTS
Arch common stock issued in connection with the merger will be freely
transferable, except that shares of Arch common stock received by persons who
are deemed to be "affiliates", as such term is defined by Rule 144 under the
Securities Act, of PageNet at the effective time of the merger may be resold by
them only in transactions permitted by the resale provisions of Rule 145 under
the Securities Act or as otherwise permitted under the Securities Act. Each
executive officer and director and those who may be an affiliate of PageNet has
executed a written affiliate agreement providing, among other things, that such
person will not offer, sell, transfer or otherwise dispose of any of the shares
of Arch common stock obtained as a result of the merger except in compliance
with the Securities Act and related rules and regulations.
NO APPRAISAL RIGHTS
Appraisal rights under Delaware law are not available to stockholders of a
Delaware corporation if:
- their stock is listed on a national securities exchange or designated as
a national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc.; and
- the stockholders are not required to accept in exchange for their stock
anything other than (1) stock in another corporation listed on a national
securities exchange or designated as a national market system security on
an interdealer quotation system by the NASD and (2) cash in lieu of
fractional shares.
PageNet stockholders will not have appraisal rights under Delaware law with
respect to the merger because:
- PageNet's common stock is traded on the Nasdaq National Market System;
- PageNet's stockholders are being offered shares of Arch common stock,
which is traded on the Nasdaq National Market; and
- PageNet's stockholders are being offered cash in lieu of fractional
shares.
However, if PageNet's stock is delisted from the Nasdaq National Market
System, stockholders may have appraisal rights. PageNet has been notified of a
potential delisting of its common stock from the Nasdaq National Market System.
See "Risk Factors -- PageNet may be delisted from the Nasdaq National Market
System and the Chicago Stock Exchange prior to the completion of the merger,
resulting in reduced trading liquidity for its shares of common stock."
PAGENET BANKRUPTCY CASE
If PageNet's board of directors determines to effect the merger through use
of the chapter 11 process, Paging Network, Inc. and certain of its operating
subsidiaries will commence the chapter 11 cases and also file and seek to
confirm and consummate the Plan. The merger, if effected pursuant to the Plan,
will be implemented differently from the way it would be effected outside of the
chapter 11 cases and creditors and stockholders would therefore receive
different treatment.
The Plan provides for the conversion of the claims held by holders of
PageNet senior subordinated notes directly into Arch common stock upon
consummation of the merger. If the merger is completed outside of a chapter 11
case, the merger will be completed in a two step process. The claims of the
holders of senior subordinated notes will first be converted into PageNet common
stock and then such common stock will be converted to Arch common stock pursuant
to the merger agreement.
If the merger is consummated pursuant to the Plan as confirmed in the
chapter 11 cases, all holders of senior subordinated note claims and PageNet
equity interests will be bound by the Plan and merger agreement
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regardless of whether they voted in favor of the Plan. If the merger is
consummated pursuant to the merger agreement outside of bankruptcy, the terms of
the merger that relate to stockholders will be binding only on those holders of
senior subordinated notes that exchange their notes pursuant to the terms of the
exchange offer. Further, in such event, the holders of senior subordinated notes
that do not exchange their notes pursuant to the terms of the exchange offer
will retain their notes and will be subject to the terms of the indenture
governing their senior subordinated notes as modified pursuant to the terms of
the exchange offer.
Similarly, if in the chapter 11 cases the holders of the senior
subordinated notes do not vote, as a class, to accept the Plan, PageNet will
have the option to seek to confirm the Plan through a "cramdown" which will
impose the terms of the exchange offer and merger on the noteholders
notwithstanding their dissent. This option is not available to PageNet and Arch
outside of a chapter 11 case.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement, a copy of which is attached as Annex B to this prospectus and is
incorporated by reference into this summary. This summary description is not
complete and is qualified in its entirety by reference to the merger agreement.
We urge you to read the merger agreement in its entirety for a more complete
description of the terms and conditions of the merger and related matters.
STRUCTURE OF THE MERGER
Following the completion of the PageNet and Arch exchange offers and Arch
preferred stock conversion and the satisfaction or waiver of all other
conditions to the merger, a wholly owned subsidiary of Arch will merge into
PageNet, and PageNet will thus become a wholly owned subsidiary of Arch. Two
business days after all conditions to the merger are fulfilled or waived, or at
such other time and date as Arch and PageNet agree, we will file a certificate
of merger with the Delaware Secretary of State. The phrase "effective time of
the merger" refers to the time of that filing, or any other time that we agree
upon and specify in the certificate of merger.
Immediately prior to the effective time of the merger, PageNet will
distribute up to 68.9% of the common stock of Vast to its noteholders who
exchange their notes for PageNet common stock. PageNet will also distribute up
to 11.6% of the common stock of Vast to PageNet stockholders as a dividend.
After the merger, Arch will retain up to 19.5% of the common stock of Vast.
These percentages will be diluted proportionately if Vast issues additional
equity before or after the merger. See "The Spinoff Distribution" and "The
Exchange Offer -- Terms of the Exchange Offer."
THE EXCHANGE RATIO AND TREATMENT OF PAGENET COMMON STOCK
At the effective time of the merger each outstanding share of PageNet
common stock will be converted into 0.1247 shares of Arch common stock. Shares
of PageNet common stock owned by Arch or any direct or indirect wholly owned
subsidiary of Arch will be canceled and PageNet will become a wholly owned
subsidiary of Arch. If, before the effective time of the merger, the issued and
outstanding shares of Arch common stock are changed into a different number of
shares as a result of a reclassification, stock split, reverse stock split,
stock dividend or stock distribution, an appropriate adjustment will be made to
the number and kind of shares of Arch common stock that PageNet stockholders are
to receive in the merger.
For a description of Arch's common stock and a description of the
differences between the rights of holders of Arch common stock and PageNet
common stock, see "Comparison of Rights of PageNet Stockholders and Arch
Stockholders."
No fractional shares of Arch common stock will be issued in the merger.
Instead, Arch will pay cash to each holder of PageNet common stock who would
otherwise be entitled to receive a fraction of a share of Arch common stock, in
an amount equal to the fraction, rounded to the nearest one-hundredth of a
share, multiplied by the average closing price per share of Arch common stock as
reported in The Wall Street Journal, New York City edition, during the ten
trading days immediately before the effective time of the merger. No interest
will be paid or accrued on cash to be paid instead of fractional shares.
EXCHANGE PROCEDURES
At the effective time of the merger, Arch will deposit with [the exchange
agent], for distribution to the holders of PageNet common stock, certificates
representing shares of Arch common stock issuable under the merger agreement and
an amount of cash sufficient to pay cash instead of fractional shares. Arch will
make sufficient funds available to the exchange agent from time to time as
needed to pay cash in respect of dividends or other distributions on unexchanged
shares.
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If a PageNet stockholder has a PageNet stock certificate, then promptly
after the merger takes place, the exchange agent will send the stockholder a
letter of transmittal and instructions for exchanging its PageNet common stock
certificates for:
- a certificate representing shares of Arch common stock;
- certificates representing shares of Class B common stock of Vast; and
- cash instead of any fractional shares of Arch common stock.
The surrendered PageNet common stock certificates will be canceled. YOU SHOULD
NOT SEND IN ANY PAGENET COMMON STOCK CERTIFICATES UNTIL YOU RECEIVE THE LETTER
OF TRANSMITTAL.
If a PageNet stockholder owns PageNet common stock through a broker,
PageNet's employee benefit plans or other arrangement where the stockholder does
not hold a PageNet certificate, then the stockholder's stock certificates will
be exchanged for Arch common stock and cash in lieu of fractional shares based
on the exchange ratio without any action by the stockholder.
PageNet noteholders who participate in the exchange offer will receive
certificates for their shares of Arch common stock after the merger instead of
receiving certificates for the shares of PageNet common stock they are entitled
to receive in the exchange offer.
If any certificates for shares of Arch common stock are to be issued in a
name other than that in which the PageNet stock certificate surrendered in
exchange for them is registered, the person requesting such exchange must (1)
pay any associated transfer taxes or other taxes or (2) establish to the
satisfaction of Arch or the exchange agent that all taxes have been paid or are
not applicable.
The exchange agent will deduct and withhold from the consideration
otherwise payable under the merger agreement whatever amounts the exchange agent
is required to deduct and withhold under the Internal Revenue Code, or any
provision of state, local or foreign tax law, with respect to the making of such
payment. To the extent that amounts are withheld by the exchange agent, the
withheld amounts shall be treated for purposes of the merger agreement as having
been paid to the person for whom the deduction and withholding was made by the
exchange agent.
Registered holders of unsurrendered PageNet common stock certificates will
be entitled to vote at any meeting of Arch stockholders with a record date at or
after the effective time of the merger the number of whole shares of Arch common
stock represented by their PageNet common stock certificates, regardless of
whether such holders have exchanged their PageNet common stock certificates. The
time, conditions and manner of the vote will be governed by Arch's certificate
of incorporation and by-laws.
After the effective time of the merger, the PageNet stock transfer books
will not reflect transfers of shares of PageNet common stock. The Arch stock
transfer books will not reflect transfers of shares of Arch Series C convertible
preferred shares.
If a certificate for PageNet common stock has been lost, stolen or
destroyed, the PageNet stockholder must provide an appropriate affidavit of
fact. Arch will also require the PageNet stockholder to deliver a bond as
indemnity against any claim that may be made against Arch with respect to such
certificates alleged to have been lost, stolen or destroyed. Arch and the
exchange agent will then issue the consideration properly payable in accordance
with the merger agreement.
TREATMENT OF PAGENET STOCK OPTIONS
At the effective time of the merger, each unvested option to purchase
PageNet common stock previously granted under PageNet's stock plans will
automatically vest. We will then convert each outstanding PageNet option into an
option to purchase the same number of shares of Arch common stock that the
holder of the option would have received in the merger if the holder had
exercised the option immediately prior to the merger. The number of shares of
Arch common stock calculated in the conversion will be rounded down to the
nearest whole number. The exercise price per share of Arch common stock subject
to each option will equal the aggregate exercise price of the PageNet common
stock which would have been purchasable under the
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PageNet option, divided by the number of shares of Arch common stock the holder
of the option would have received in the merger if the holder had exercised the
option immediately prior to the merger, rounded down to the nearest whole
number.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties of PageNet,
Arch and Arch's subsidiary. These representations and warranties relate to,
among other things:
- their organization, existence, good standing, corporate power,
qualification to do business and similar corporate matters;
- their capital structure;
- the authorization, execution, delivery and performance of the merger
agreement;
- the absence of any required governmental and third-party approvals other
than those specified in the merger agreement;
- the absence of breaches, violations or defaults under their corporate
charters and by-laws and other agreements and documents;
- the accuracy of their financial statements and any filings with the
Securities and Exchange Commission;
- the absence of certain changes in their businesses since the end of the
prior fiscal year;
- the absence of litigation and liabilities, including liabilities
associated with employee benefit plans;
- their compliance with applicable laws, including environmental and
regulatory laws;
- the absence of actions that would prevent the merger from being treated
as a tax-free reorganization under the Internal Revenue Code;
- the timely filing of all tax returns and payment of all taxes;
- the absence of undisclosed brokers and finders;
- the status of their preparedness with respect to Year 2000 compliance;
- the approval by each board of directors of the merger agreement and the
merger;
- the receipt by each board of directors of the opinions of their
respective financial advisors that the consideration for the merger is
fair to holders of PageNet common stock and Arch common stock from a
financial point of view;
- their employee benefits plans;
- the actions taken by each board of directors to make Delaware's
interested stockholder business combination law, other state takeover
statutes, each of their rights agreements and any other anti-takeover
provision in their certificates of incorporation or by-laws inapplicable
to the merger;
- their relationships with employees;
- environmental matters and compliance with environmental laws;
- their significant agreements; and
- their intellectual property.
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CERTAIN COVENANTS
Conduct of Businesses Prior to the Merger
Except as contemplated by the merger agreement, PageNet and Arch have
agreed that they and their subsidiaries will conduct their businesses only in
the ordinary and usual course until the effective time of the merger. The merger
agreement includes other limitations, prohibitions and provisions relating to
the conduct of their businesses before the effective time of the merger
concerning:
- charter and by-law amendments;
- changes in capital stock and payment of dividends;
- actions that would prevent the merger from qualifying as a tax-free
reorganization under the Internal Revenue Code;
- increases in compensation, and amendments to employee benefit or
retirement plans;
- incurrence or repayment of indebtedness;
- capital expenditure levels;
- issuance of capital stock and convertible securities;
- acquisitions and dispositions;
- changes in accounting policies or procedures;
- settlement or release of claims in litigation; and
- tax elections.
Some of these limitations do not apply, however, with respect to Vast.
PageNet may, among other things:
- transfer or encumber shares of capital stock or securities convertible
into shares of capital stock of Vast;
- cause Vast to incur debt, so long as the borrowed funds are used solely
by Vast;
- transfer certain specified assets to Vast;
- establish the terms of the equity interest in Vast to be transferred to
the holders of PageNet common stock and PageNet notes; and
- establish an employee equity incentive plan for Vast.
Non-Solicitation of Competing Proposals
PageNet and Arch have agreed to restrictions concerning an "acquisition
proposal," which the merger agreement defines generally as a proposal of merger,
business combination or acquisition of more than 10% of their assets or 15% of
their stock. Specifically, each company has agreed that neither it nor its
agents will, directly or indirectly:
- initiate, solicit, encourage or otherwise facilitate any inquiries or the
making of any acquisition proposal with a third party;
- have any discussions with or provide any confidential information or data
to a third party in connection with an acquisition proposal; or
- engage in any negotiations concerning an acquisition proposal or
otherwise facilitate any acquisition proposal.
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The merger agreement expressly allows PageNet and Arch to comply with
Securities and Exchange Commission rules regarding the publication of a board of
directors' recommendations with respect to tender offers, and, subject to some
limitations, expressly allows the board of directors of PageNet or Arch to:
- negotiate with, and provide information to, a third party in response to
an unsolicited bona fide written acquisition proposal, if the board of
directors concludes in good faith, after consulting outside counsel, that
doing so is necessary to comply with the board's fiduciary duty to its
stockholders; and
- recommend an unsolicited proposal to its stockholders, if the board of
directors concludes in good faith, after consulting its legal and
financial advisors, that such transaction is reasonably capable of being
completed, and, if completed, would be more favorable to its stockholders
than the proposed transaction between Arch and PageNet.
PageNet and Arch have agreed to terminate all existing discussions and
negotiations with third parties concerning acquisition proposals. Each company
has agreed to notify the other as soon as reasonably practicable if it receives
any acquisition proposal, or if a third party seeks information from it or seeks
to engage it in discussions concerning an acquisition proposal. Each company has
also agreed to keep the other company informed of any such proposals or
inquiries on an ongoing basis.
Stockholders Meetings
The merger agreement requires both companies to convene stockholder
meetings as soon as reasonably practicable after the registration statement
containing a proxy statement/prospectus is declared effective.
PageNet has agreed that its board of directors will recommend that PageNet
stockholders vote to:
- adopt the merger agreement;
- approve the merger;
- approve an amendment to the PageNet certificate of incorporation to
increase the authorized number of PageNet shares to an amount sufficient
to complete the merger;
- approve the other associated transactions; and
- take all lawful actions to solicit such adoptions and approvals.
The PageNet board of directors may withdraw or modify its recommendation if
it determines in good faith, after consultation with outside legal counsel, that
failing to do so would be reasonably likely to be inconsistent with its
fiduciary duties.
Even if the PageNet board of directors withdraws or modifies its
recommendation, it must convene and complete the stockholder meeting which
considers the merger. The PageNet board of directors is not required to convene
the stockholders meeting, however, if PageNet is in bankruptcy or if Arch
terminates the merger agreement.
Arch has agreed that its board of directors will recommend that Arch
stockholders vote to:
- increase the authorized number of shares of Arch common stock to an
amount sufficient to complete the merger and the Arch exchange offer and
approve the issuance of such common stock; and
- approve an amendment to permit the conversion of each share of Arch
Series C preferred stock into shares of Arch common stock.
The Arch board of directors may withdraw or modify its recommendation if it
determines in good faith, after consultation with outside legal counsel, that
failing to do so would be reasonably likely to be inconsistent with its
fiduciary duties.
Even if the Arch board of directors withdraws or modifies its
recommendation, it must convene and complete the stockholder meeting which
considers the transaction. The board of directors is not required to convene the
stockholders meeting, however, if PageNet terminates the merger agreement.
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Filings and Other Actions
Arch and PageNet have agreed to cooperate with each other, and to use their
reasonable best efforts
- to deliver comfort letters from their respective independent public
accountants;
- to take all necessary, proper and advisable actions to complete the
merger, including obtaining opinions from their respective attorneys,
preparing and filing promptly all documentation necessary to complete the
merger, and instituting any court action necessary to obtain approval of
the merger and defending any court action instituted to prevent
completion of the merger;
- to obtain promptly all approvals necessary or advisable to complete the
merger; and
- to share all information reasonably necessary and advisable in connection
with the merger.
Affiliates
All Arch common stock received by PageNet stockholders in the merger will
be freely transferable, except persons who are deemed to be "affiliates" of
PageNet, as defined under the Securities Act, who must resell their Arch common
stock only in transactions permitted by the resale provisions of Rule 145 under
the Securities Act, or Rule 144 in the case of such persons who become
affiliates of Arch, or as otherwise permitted under the Securities Act. Persons
who may be deemed to be affiliates of Arch or PageNet generally include
individuals or entities that control, are controlled by or are under common
control with such company and may include officers and directors of Arch or
PageNet, as well as significant stockholders.
Under the merger agreement, PageNet is required to use all reasonable
efforts to cause each of its affiliates to execute a written agreement
restricting the disposition by the affiliate of the shares of Arch common stock
to be received in the merger. PageNet has agreed not to register the transfer of
any certificate unless such transfer is made in compliance with these
restrictions. Arch is also required to use all reasonable efforts to cause each
of its affiliates to execute a written agreement restricting the disposition by
the affiliate of any shares of Arch common stock.
Indemnification; Director and Officer's Insurance
For a period of six years after the effective time of the merger, Arch has
agreed to indemnify each present and former director and officer of PageNet
against any costs or expenses incurred in connection with any proceeding or
investigation pertaining to matters occurring at or before the effective time of
the merger relating to the services the indemnified party performed for PageNet.
Arch will have the right to assume the defense of any claims. If it elects to
assume the defense, it will only be liable for the legal expenses of its counsel
and not those of any other counsel.
Arch will also, for a period of six years after the effective time of the
merger, maintain a policy of officers' and directors' liability insurance for
acts and omissions occurring prior to the effective time of the merger, with
coverage in amount and scope at least as favorable to the indemnified parties as
PageNet's existing coverage.
Bankruptcy Provisions
If less than 97.5% of the PageNet notes are tendered in the PageNet
exchange offer or if the stockholders of PageNet fail to approve the merger
agreement, Paging Network, Inc. and certain of its operating subsidiaries have
agreed to either commence the chapter 11 cases and file the prepackaged plan as
a plan of reorganization under chapter 11 of the Bankruptcy Code or pay Arch a
$40.0 million termination fee if the following conditions to the filing of the
prepackaged plan are met:
- Arch stockholders have approved the transaction;
- 97.5% of the Arch notes have been tendered for exchange in the Arch
exchange offer, or 67% have been tendered in specified circumstances;
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- the holders of less than 97.5% but at least 66 2/3% in principal amount
of the PageNet notes that constitute at least a majority in number of all
such holders have consented to the prepackaged plan;
- sufficient debt financing has been arranged to fund PageNet's operations
until the prepackaged plan is approved by the Bankruptcy Court; and
- senior credit facilities of at least $1.3 billion have been secured or
can be secured through the prepackaged plan.
If PageNet files the prepackaged plan, then Arch has agreed to be bound by
all of the terms of the merger agreement provided that the prepackaged plan is
confirmed by the Bankruptcy Court within 120 days of the filing of the plan or
such later date as is mutually agreed to in writing by Arch and PageNet. In the
event the chapter 11 cases are commenced and the prepackaged plan is filed, Arch
has agreed to take certain actions to support confirmation of the prepackaged
plan.
At any time, if the board of directors of PageNet determines that the
commencement of the chapter 11 cases and the filing of prepackaged plan is in
the best interests of PageNet then:
- PageNet may commence the chapter 11 cases and file the prepackaged plan
under chapter 11 of the Bankruptcy Code and shall seek to satisfy its
part of the prepackaged plan conditions and otherwise seek confirmation
of the prepackaged plan by the Bankruptcy Court, and
- Arch shall
- seek to satisfy its conditions to PageNet's filing of the prepackaged
plan outlined above; and
- be bound by the terms of the merger agreement and consummate the
merger through the prepackaged plan if such plan is confirmed by the
Bankruptcy Court, provided that such confirmation is entered by no
later than December 31, 2000, or such later date as is mutually agreed
to by Arch and PageNet, and if the other conditions to the merger have
been satisfied.
If an involuntary bankruptcy petition is filed against PageNet or any of
its subsidiaries or a liquidator or trustee is appointed for any of them prior
to a voluntary commencement of PageNet's bankruptcy case and the date of such
involuntary action is prior to the date which is 60 days after the date that the
registration statements relating to the merger and the exchange offers are
declared effective by the SEC, PageNet shall have up to 120 days after such
involuntary action to obtain from the appropriate court an order which dismisses
such action, so that the exchange offers may be completed, and during such
120-day period the merger agreement shall remain in full force and effect and
Arch shall be bound by all of the terms thereof; or
- if such involuntary action is filed more than 60 days after the date that
the registration statements relating to the merger and the exchange
offers are declared effective by the SEC, and as of such date of such
involuntary action:
- at least 97.5% of the aggregate outstanding principal amount of the
PageNet notes and not less than a majority in number of each series of
PageNet notes have been validly tendered and not withdrawn;
- 97.5% of the Arch notes have been tendered for exchange in the Arch
exchange offer, or 67% have been tendered in specified circumstances;
and
- the PageNet and Arch stockholders have approved the transaction;
then PageNet shall have up to 120 days after such involuntary action to
obtain an order which dismisses such action, and the merger agreement shall
remain in full force and effect and Arch shall consummate the merger
(outside of bankruptcy, unless PageNet and Arch mutually consent to file
PageNet's bankruptcy case) provided that such order has been obtained
before the expiration of such 120-day period.
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If on such date of such involuntary action:
- less than 97.5% of the aggregate outstanding principal amount of the
PageNet notes or less than a majority in number of each series of
PageNet notes have been validly tendered and not withdrawn, or the
PageNet stockholders fail to approve the transaction; but
- the conditions to the prepackaged plan have been satisfied,
then PageNet shall stipulate to bankruptcy relief under chapter 11 of the
Bankruptcy Code and Arch will be bound by all of the terms of the merger
agreement provided that the prepackaged plan is confirmed by the Bankruptcy
Court within 120 days of the filing of the plan or such later date as may
be agreed by Arch and PageNet;
If on such date of such involuntary action:
- less than 97.5% of the aggregate outstanding principal amount of the
PageNet notes or less than a majority in number of each series of
PageNet notes have been validly tendered and not withdrawn, or the
PageNet stockholders fail to approve the transaction; and
- the conditions to the prepackaged plan have not been satisfied,
then PageNet may (but shall not be obligated to) stipulate to bankruptcy
relief under chapter 11 of the Bankruptcy Code and the provisions described
above relating to a voluntary filing by PageNet shall apply (including the
provisions therein requiring Arch to be obligated for a period of time to
consummate the merger pursuant to the prepackaged plan).
If PageNet's bankruptcy case is commenced (voluntarily or involuntarily),
PageNet has agreed to file a motion on the date such case commences seeking
expedited approval of certain sections of the merger agreement concerning
nonsolicitation of competing proposals and the payment by Arch and PageNet of
their respective termination fees. The merger agreement provides that Arch may
terminate the agreement if an order approving such motion is not entered within
30 days after the commencement of the Bankruptcy Case.
If PageNet's bankruptcy case commences, Arch may enter into another merger
or acquisition transaction, provided that such transaction would not prevent,
materially impair or materially delay its ability to consummate the merger. If
Arch enters into a merger or acquisition transaction following the commencement
of PageNet's Bankruptcy Case and as a result of such event PageNet is required
to amend its disclosure statement and resolicit the votes of its creditors, then
the time within which the order of the Bankruptcy Court confirming the
prepackaged plan must be obtained shall be extended for an additional 90 days.
CONDITIONS TO COMPLETION OF THE MERGER
We will complete the merger only if the conditions set forth in the merger
agreement are satisfied or waived. The conditions to each of Arch's and
PageNet's obligation to complete the merger include:
- stockholder approval of the transaction by Arch's stockholders;
- either:
- stockholder approval of the transaction by PageNet's stockholders; or
- entry of a confirmation order, not subject to a stay or injunction, by
the Bankruptcy Court confirming the prepackaged plan;
- the approval for listing on the Nasdaq National Market System of the Arch
common stock to be issued in connection with the merger;
- the receipt of specified governmental consents, permits, licenses and
approvals for the merger and the expiration or termination of all
applicable waiting periods, and any extensions of these permits, under
the Hart-Scott-Rodino Act;
- the receipt of material third party consents by Arch and PageNet;
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- the absence of any law or order restraining, enjoining or otherwise
prohibiting completion of the merger, or of any proceeding seeking to
prohibit the completion of the merger;
- the effectiveness of the registration statements related to the merger
and the exchange offers and the absence of any stop order suspending the
effectiveness of the registration statements with the SEC or any
instituted or threatened proceeding seeking a stop order;
- the availability of senior credit facilities in a minimum amount of $1.3
billion to Arch and its subsidiaries, including PageNet, after the
merger;
- Arch's receipt of all required state securities and "blue sky" permits
and approvals;
- that neither PageNet, Arch nor any of their subsidiaries incurring
out-of-pocket income tax liability in their respective taxable periods of
more than $25.0 million in the aggregate as a result of the merger; and
- either:
- the minimum required amount of PageNet and Arch notes has been
tendered and accepted in each of the exchange offers; or
- if the minimum required amount of PageNet notes has not been tendered
and accepted:
- the final confirmation order from the Bankruptcy Court confirming
the prepackaged plan has been entered;
- the Arch minimum condition has been satisfied; and
- all conditions under the prepackaged plan have been satisfied.
With respect to the PageNet exchange offer, the minimum condition is the
valid tender, without withdrawal, of at least 97.5% of the aggregate outstanding
principal amount of the PageNet notes and not less than a majority of the
outstanding principal amount of each series of PageNet notes. With respect to
the Arch exchange offer, the minimum condition is the valid tender, without
withdrawal, of either:
- at least 97.5% of the aggregate outstanding principal amount of Arch
notes;
- any lower percentage of the aggregate outstanding principal amount of
Arch notes, as specified by PageNet in its sole discretion; or
- if the PageNet minimum condition has been satisfied, any percentage of
the aggregate principal amount of Arch notes not less than 67%, as
specified by Arch in its sole discretion.
The conditions to Arch's obligation to complete the merger include:
- the accuracy of PageNet's material representations and warranties, apart
from any representations and warranties which would be breached by
PageNet filing or conducting a bankruptcy case or the filing of an
involuntary bankruptcy petition or similar creditors' rights petition
against PageNet;
- PageNet's performance in all material respects of all its covenants,
agreements and obligations under the merger agreement;
- PageNet's receipt of required material consents or approvals to the
merger;
- Arch's receipt of a favorable tax opinion from Hale and Dorr LLP to the
effect described under "Material Federal Income Tax Considerations;" and
- Arch's receipt of an unqualified certificate from PageNet that each of
the conditions described above has been satisfied, that the PageNet
stockholders meeting has been convened and PageNet stockholders have:
- adopted and approved the merger agreement and the merger;
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- increased the authorized number of shares of PageNet common stock to
an amount sufficient to complete the exchange offer; and
- approved the issuance of such common stock;
except to the extent that stockholder approval is not required due to
the entry of the final confirmation order of a Bankruptcy Court.
The conditions to PageNet's obligation to complete the merger include:
- the accuracy of Arch's material representations and warranties,
- Arch's performance in all material respects of all its covenants,
agreements and obligations under the merger agreement;
- PageNet's receipt of required material consents or approvals to the
merger;
- PageNet's receipt of a favorable tax opinion from Mayer, Brown & Platt to
the effect described under "Material Federal Income Tax Considerations;"
- PageNet's receipt of an unqualified certificate from Arch that each of
the conditions described above has been satisfied, that the Arch
stockholders meeting has been convened and Arch stockholders have:
- increased the authorized number of shares of Arch common stock to an
amount sufficient to complete the merger and the Arch exchange offer;
- approved the issuance of such common stock; and
- approved the conversion of each share of Arch Series C preferred stock
into shares of Arch common stock;
- the agreement with Arch Series C preferred stockholders for the
conversion of their Series C preferred stock to Arch common stock is in
full force and effect; and
- the spin-off dividend of Vast common stock has been declared or the final
confirmation order of a bankruptcy court has been entered confirming the
prepackaged plan.
At any time before the effective time of the merger, to the extent allowed
by law, Arch or PageNet may waive any of these conditions without the approval
of their respective stockholders. As of the date of this prospectus, neither
company expects to waive any condition.
TERMINATION OF THE MERGER AGREEMENT
Arch and PageNet can mutually agree to terminate the merger agreement at
any time without completing the merger.
Also, either Arch or PageNet can, without the consent of the other,
terminate the merger agreement:
- if the merger is not completed:
- before June 30, 2000, if no bankruptcy case has been filed by then, or
- if a bankruptcy case has been filed, 30 days following the date by
which a final confirmation order must be entered;
- if the PageNet and Arch stockholder meetings are held and PageNet's or
Arch's stockholders do not adopt the transaction; or
- if any order permanently restraining, enjoining or otherwise prohibiting
completion of the merger has become final and non-appealable.
Either party can extend the termination date for up to an additional 90
days if such extension is necessary in order to obtain governmental approvals of
the merger under applicable antitrust laws and if all other conditions to
completion of the merger are satisfied or are capable of being satisfied.
Neither party may
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<PAGE> 68
terminate the merger agreement in the event the merger is not completed before
April 30, 2000, if such party has materially breached the terms of the merger
agreement and such breach contributed to the failure of the merger to be
completed.
In addition, PageNet can terminate the merger agreement before the
effective time of the merger if:
- the board of directors of Arch has withdrawn or adversely modified its
approval or recommendation of the merger;
- Arch or the transitory subsidiary has breached any representation,
warranty, covenant or agreement relating to the merger, and the breach is
both material and incurable prior to the date at which either Arch or
PageNet can, without the consent of the other, terminate the merger
agreement;
- PageNet receives an unsolicited proposal for a business combination
transaction with a third party that PageNet's board of directors
concludes is a superior proposal and PageNet provides Arch with all the
material terms of the proposal at least two business days prior to
termination and simultaneously with the termination pays the termination
fee to Arch; or
- PageNet's minimum condition is not satisfied or PageNet's stockholders
have not adopted the merger agreement but the requisite conditions to the
prepackaged plan are satisfied, and PageNet does not file in bankruptcy
seeking confirmation of the prepackaged plan, provided that PageNet
simultaneously pays the termination fee to Arch.
Finally, Arch can terminate the merger agreement if:
- the board of directors of PageNet has withdrawn or adversely modified its
approval or recommendation of the merger;
- PageNet has breached any representation, warranty, covenant or agreement
relating to the merger, and the breach is both material and incurable
prior to the date at which either Arch or PageNet can, without the
consent of the other, terminate the merger agreement, but only if the
breach does not solely result from the filing or conduct of the
bankruptcy case or from the filing of an involuntary bankruptcy petition
against PageNet or any of its subsidiaries;
- an order of a bankruptcy court approving of the nonsolicitation of
competing proposals and the payment by PageNet of the termination fee has
not been entered within 30 days of the commencement of the bankruptcy
case;
- an order of a bankruptcy court confirming the prepackaged plan is not
entered within 120 days of the commencement of the bankruptcy case or a
later date mutually agreeable to Arch and PageNet;
- the prepackaged plan is amended, modified or added to in any material
respect without the written consent of Arch;
- Arch receives an unsolicited proposal for a business combination
transaction with a third party that Arch's board of directors concludes
is a superior proposal and Arch provides PageNet with all the material
terms of the proposal at least two business days prior to termination and
simultaneously with the termination pays the termination fee to PageNet.
TERMINATION FEE
Arch and its subsidiaries, jointly and severally, must pay PageNet a
termination fee of $40.0 million by wire transfer of same day funds if:
- Arch, its stockholders or its noteholders receives an acquisition
proposal from a third party or a third party publicly announces an
intention to make an acquisition proposal and:
- Arch's stockholders subsequently do not approve the transaction or
Arch's noteholders do not satisfy the Arch minimum condition with
respect to the Arch exchange offer;
- the merger agreement is terminated; and
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<PAGE> 69
- Arch either executes and delivers an agreement with a third party
relating to an acquisition proposal or an acquisition with respect
to Arch is completed, in either case, within 12 months of the
termination of the merger agreement;
- PageNet terminates the merger agreement because:
- the Arch board of directors has withdrawn or adversely modified its
approval or recommendation of the merger agreement;
- Arch or the transitory subsidiary has breached any representation,
warranty, covenant or agreement concerning:
- the restrictions on acquisition proposals; or
- Arch's board of directors taking all actions necessary to convene
a stockholders meeting to consider and vote upon and recommend
that the stockholders approve:
- an increase in the authorized number of shares of Arch common
stock to an amount sufficient to complete the merger and the
Arch exchange offer and the issuance such common stock; and
- the conversion of each share of Arch Series C preferred stock
into shares of Arch common stock;
and the breach is both material and incurable prior to the date at
which either Arch or PageNet can, without the consent of the other,
terminate the merger agreement; or
- Arch terminates the merger agreement in response to a superior
acquisition proposal by a third party.
PageNet must pay Arch a fee of $40.0 million by wire transfer of same day
funds if:
- PageNet, its stockholders or its noteholders receives an acquisition
proposal from a third party or a third party publicly announces an
intention to make an acquisition proposal and:
- PageNet's stockholders subsequently do not adopt the merger
agreement or PageNet's noteholders do not satisfy the PageNet
minimum condition with respect to the PageNet exchange offer, and a
Bankruptcy Court fails to enter the final confirmation order;
- the merger agreement is terminated; and
- PageNet either executes and delivers an agreement with a third party
relating to an acquisition proposal or an acquisition with respect
to PageNet is completed, in either case, within 12 months of the
termination of the merger agreement;
- Arch terminates the merger agreement because:
- the PageNet board of directors has withdrawn or adversely modified
its approval or recommendation of the merger agreement;
- PageNet has breached any representation, warranty, covenant or
agreement concerning:
- the restrictions on acquisition proposals; or
- PageNet's board of directors taking all actions necessary to
convene a stockholders meeting to consider and vote upon and
recommend that the stockholders approve (unless a bankruptcy case
has commenced, or PageNet has stipulated to bankruptcy relief
after the filing of an involuntary bankruptcy petition against it
or its subsidiaries):
- the adoption of the merger agreement;
- the merger; and
- an increase in the authorized number of shares of PageNet
common stock to an amount sufficient to complete the exchange
offer and the issuance of such common stock;
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<PAGE> 70
and the breach is both material and incurable prior to the date at
which either Arch or PageNet can, without the consent of the other,
terminate the merger agreement;
- the prepackaged plan is withdrawn without the prior written consent of
Arch, or PageNet files any other plan of reorganization or amends,
modifies or adds to any material provision of the prepackaged plan in
each case without the prior written consent of Arch;
- any other plan of reorganization filed by a person other than PageNet is
confirmed by a Bankruptcy Court;
- PageNet files a motion to sell or otherwise transfer all or substantially
all of its assets as part of a sale under the Bankruptcy Code without the
prior written consent of Arch; or
- PageNet terminates the merger agreement in response to a superior
acquisition proposal by a third party.
Subject to the possible payment of a termination fee, each of Arch and
PageNet will pay all expenses it incurs in connection with the merger and
related transactions, except that they will share fees paid to the SEC, the
Federal Trade Commission, the Federal Communications Commission and other
federal or state agencies, and all printing and mailing costs incurred in
connection with the merger, equally.
MODIFICATION OR AMENDMENT OF THE MERGER AGREEMENT
At any time prior to the effective time, Arch and PageNet can modify or
amend the merger agreement if they both agree to do so. Each can waive its right
to require the other to comply with the merger agreement where the law allows.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
PageNet will accept all senior subordinated notes validly tendered and not
withdrawn before the expiration date, upon the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal which
accompanies this prospectus. PageNet will issue a pro rata portion of
616,830,757 shares of PageNet common stock and a pro rata portion of 13,780,000
shares of Class B common stock of Vast, representing up to 68.9% of the equity
ownership of Vast, in exchange for each of PageNet's outstanding:
- 8.875% senior subordinated notes due 2006;
- 10.125% senior subordinated notes due 2007; and
- 10% senior subordinated notes due 2008.
The pro rata portion is to be computed immediately prior to the time when the
merger occurs by dividing:
- the principal amount, together with all accrued interest, of each PageNet
senior subordinated note; by
- the principal amount, together with all accrued interest, of all
outstanding PageNet senior subordinated notes.
As of the date of this prospectus, $1.2 billion in aggregate principal amount at
maturity of senior subordinated notes are outstanding.
The following table sets forth an example of the calculation of the pro
rata number of shares of PageNet common stock and Class B common stock of Vast
that PageNet is offering to exchange for each $1,000 principal amount of senior
subordinated notes surrendered in the exchange offer. The table shows the number
of PageNet and Vast shares that noteholders would be entitled to receive if the
exchange offer and merger had
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<PAGE> 71
occurred on December 1, 1999. The table also shows the number of Arch shares
that the PageNet common shares would be immediately converted into at the ratio
of 0.1247 Arch shares for each one PageNet share.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF SHARES OF
SHARES OF SHARES OF VAST
PAGENET ARCH CLASS B
PER $1000 PRINCIPAL AMOUNT COMMON COMMON COMMON
OF SENIOR SUBORDINATED NOTES STOCK STOCK STOCK
- ---------------------------- --------- --------- ---------
<S> <C> <C> <C>
8.875% notes due 2006...................................... 516.8584 64.4522 11.5466
10.125% notes due 2007..................................... 518.9184 64.7091 11.5926
10% notes due 2008......................................... 508.4118 63.3990 11.3579
</TABLE>
All accrued interest on the PageNet notes through the expiration date of
the exchange offer will be transferred with the notes and will not be paid
separately. Calculations of share amounts will be rounded down to the nearest
whole share and no fractional shares of common stock will be issued. Senior
subordinated notes may be tendered only in whole multiples of $1,000.
Only a registered holder of senior subordinated notes, or a registered
holder's legal representative or attorney-in-fact, as reflected on the records
of the trustee under the respective indenture, may participate in the exchange
offer. There will be no fixed record date for determining the registered holders
of the senior subordinated notes entitled to participate in the exchange offer.
Holders of senior subordinated notes do not have any appraisal or
dissenters' rights under the indenture in connection with the exchange offer.
PageNet intends to conduct the exchange offer in accordance with the provisions
of the merger agreement and the applicable requirements of the Securities Act of
1933, the Securities Exchange Act of 1934, and the rules and regulations of the
SEC.
Holders who tender senior subordinated notes in the exchange offer will not
be required to pay brokerage commissions or fees with respect to the exchange of
senior subordinated notes pursuant to the exchange offer and will be required to
pay transfer taxes only as provided in the instructions of the letter of
transmittal. PageNet will pay all charges and expenses in connection with the
exchange offer, other than applicable taxes described below. See "-- Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS
The expiration date will be 12:00 midnight, New York City time, on the
business day after the commencement of the exchange offer, or at a later
date which is mutually agreed upon by PageNet and Arch.
CONDITIONS
PageNet's obligation to consummate the exchange offer will be contingent on
the valid tender of at least 97.5% of the outstanding aggregate principal amount
of the senior subordinated notes and at least a majority of the outstanding
principal amount of each series of PageNet senior subordinated notes in
accordance with the terms of the exchange offer. These tenders must be valid and
not withdrawn prior to the expiration date of the exchange offer.
PageNet will be deemed to have accepted validly tendered senior
subordinated notes only when, and if, PageNet gives oral or written notice of
acceptance to the exchange agent. The exchange agent will act as agent for the
tendering holders of senior subordinated notes for the purposes of receiving the
common stock of Arch and Vast from PageNet.
The merger agreement requires that holders of the senior subordinated notes
who tender in connection with the exchange offer must give their consent to the
prepackaged plan of reorganization and to:
- amend the indentures, if necessary, to permit completion of the merger or
the prepackaged plan;
- amend the indentures to eliminate:
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<PAGE> 72
-- any covenants which may be modified or eliminated by a majority vote
of the senior subordinated notes;
-- any events of default which relate to the non-payment or acceleration
of other indebtedness; and
-- any provisions which condition a merger on compliance with any
financial criteria.
In addition, each holder will be required to waive any and all existing defaults
with respect to the senior subordinated notes and any and all rights to rescind
their acceptance of the exchange offer after the expiration date. See "Proposed
Amendments."
Regardless of any other term of the exchange offer, PageNet will not be
required to accept any senior subordinated notes for exchange if it reasonably
believes that the exchange offer violates applicable laws, rules or regulations
or an applicable interpretation of the staff of the SEC. In that case, PageNet
may:
- refuse to accept any senior subordinated notes and return all untendered
senior subordinated notes to their holders; or
- extend the exchange offer and retain all senior subordinated notes
tendered before the expiration of the exchange offer, subject, however,
to the rights of holders to withdraw those notes described under
"-- Withdrawal of Tenders."
PROCEDURES FOR TENDERING
Only a registered holder of senior subordinated notes may tender senior
subordinated notes in the exchange offer. To tender in the exchange offer, a
holder must either:
- follow DTC's Automated Tender Offer Program Procedures; or
- do the following:
-- complete, sign and date the letter of transmittal, or a facsimile of
the letter;
-- have the signatures guaranteed if required by the letter of
transmittal; and
-- mail or otherwise deliver the letter of transmittal or a facsimile of
the letter to the exchange agent at the address set forth below under
"-- Exchange Agent" for receipt prior to the expiration date.
In addition, either:
- the exchange agent must receive certificates for the senior subordinated
notes along with the letter of transmittal; or
- prior to the expiration date, the exchange agent must receive a timely
confirmation of a book-entry transfer of senior subordinated notes, if
such procedure is available, into the exchange agent's account at its
depositary, DTC, pursuant to the procedure for book-entry transfer
described below.
The exchange agent must also receive:
- a duly executed form of consent and waiver which accompanies the letter
of transmittal; and
- any other documents required by the letter of transmittal.
A tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between the holder and PageNet in accordance with
the terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
THE METHOD OF DELIVERY OF SENIOR SUBORDINATED NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
HOLDER'S CHOICE AND YOUR RISK. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SENIOR
SUBORDINATED NOTES SHOULD BE SENT TO PAGENET. HOLDERS MAY REQUEST THEIR BROKER,
DEALER, COMMERCIAL BANK, TRUST COMPANY OR NOMINEE TO EFFECT THESE TRANSACTIONS
FOR THEM.
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<PAGE> 73
If the holder is the beneficial owner of senior subordinated notes that are
registered in the name of a broker, dealer, commercial bank, trust company, or
other nominee and the holder wishes to tender, the holder should contact the
registered holder promptly and instruct the registered holder to tender on the
holder's behalf. Holders who intend to tender senior subordinated notes through
DTC's ATOP procedures need not submit a letter of transmittal. If the holder is
a beneficial owner and wishes to tender on the holder's own behalf, the holder
must, prior to completing and executing the letter of transmittal and delivering
its senior subordinated notes, either make appropriate arrangements to register
ownership of the senior subordinated notes in the holder's own name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time and may therefore be
impractical.
Signatures on a letter of transmittal or notice of withdrawal described
below under "-- Withdrawal of Tenders" must be guaranteed by an eligible
institution, as defined below, unless the senior subordinated notes are
tendered:
- by a registered holder who has not completed the box titled "Special
Delivery Instructions" on the letter of transmittal; or
- for the account of an eligible institution, as defined below.
Where signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be made by an eligible institution
that is a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an eligible
guarantor institution as described in Rule 17Ad-15 under the Exchange Act which
is a member of one of the recognized signature guarantee programs identified in
the letter of transmittal
If the letter of transmittal is signed by a person other than the
registered holder of the senior subordinated notes being tendered, the senior
subordinated notes must be endorsed or accompanied by a properly completed bond
power and signed by a registered holder as the registered holder's name appears
on the senior subordinated notes.
If the letter of transmittal or any senior subordinated notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, those persons should indicate that fact when signing,
and should submit evidence satisfactory to PageNet of their authority to act in
that capacity with the letter of transmittal, unless PageNet waives the
requirement.
The exchange agent and the depositary have confirmed that any financial
institution that is a participant in DTC's system may use DTC's ATOP procedures
to tender senior subordinated notes. All questions as to the validity, form,
eligibility, including time of receipt, acceptance and withdrawal of tendered
senior subordinated notes will be determined by PageNet in its sole discretion.
PageNet's determination will be final and binding. PageNet reserves the absolute
right to reject any and all senior subordinated notes not properly tendered or
if PageNet's acceptance of those notes would be unlawful in the opinion of
PageNet's legal counsel. PageNet also reserves the right to waive any defects,
irregularities or conditions of tender as to particular senior subordinated
notes. PageNet's interpretation of the terms and conditions of the exchange
offer, including the instructions in the letter of transmittal, will be final
and binding on all parties. Any defects or irregularities in connection with
tenders of senior subordinated notes must be cured by the deadline set by
PageNet, unless PageNet waives them. Although PageNet intends to notify holders
of defects or irregularities with respect to tenders of senior subordinated
notes, neither PageNet, the exchange agent nor any other person shall incur any
liability for failure to give that kind of notification. Tenders of senior
subordinated notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
Although PageNet has no present plan to acquire any senior subordinated
notes that are not tendered in the exchange offer, PageNet reserves the right in
its sole discretion to purchase or make offers for any senior subordinated notes
that remain outstanding after the expiration date or, as set forth below under
"-- Conditions", to terminate the exchange offer and purchase senior
subordinated notes on the open market, in
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<PAGE> 74
privately negotiated transactions or otherwise, to the extent permitted by
applicable law. The terms of any such purchases or offers could differ from the
terms of the exchange offer.
RETURN OF TENDERED NOTES
If any tendered notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer or if the senior subordinated notes
are withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, PageNet will return the unaccepted, withdrawn or non-
exchanged notes without expense to their holders as promptly as practicable.
Senior subordinated notes tendered by book-entry transfer into the exchange
agent's account at DTC pursuant to the book-entry transfer procedures described
below will be credited to an account maintained by DTC.
BOOK-ENTRY TRANSFER
The exchange agent will seek to establish an account with respect to the
senior subordinated notes at DTC for the purposes of the exchange offer within
two days after the date of this prospectus. Any financial institution that is a
participant in DTC's systems may make book-entry delivery of senior subordinated
notes by causing DTC to transfer them into the exchange agent's account at DTC
in accordance with DTC's procedures for transfer. However, although a holder may
effect delivery of senior subordinated notes through book-entry transfer at DTC,
it must either follow DTC's ATOP procedures, or submit the letter of transmittal
or facsimile with required signature guarantees and any other documents required
by the letter of transmittal, to the exchange agent on or before the expiration
date.
WITHDRAWAL OF TENDERS
You may withdraw tenders of senior subordinated notes at any time before
12:00 midnight, on the expiration date, except as otherwise provided below.
To withdraw a tender of senior subordinated notes, a written or facsimile
transmission notice of withdrawal must be received by the exchange agent at its
address as set forth in this prospectus before 12:00 midnight, New York City
time, on the expiration date. Any such notice of withdrawal must:
- specify the name of the holder who deposited the notes to be withdrawn;
- identify the notes to be withdrawn, including the certificate number(s)
and principal amount of such notes; and
- be signed by such holder in the same manner as the original signature on
the letter of transmittal by which the notes were tendered, including any
required signature guarantees.
PageNet will determine, in its sole discretion, all questions as to
validity, form and eligibility of withdrawal notices including the time of
receipt. PageNet's determination will be final and binding on all parties. Any
withdrawn senior subordinated notes will be deemed not to have been validly
tendered for purposes of the exchange offer and no shares of common stock will
be issued in exchange for them unless the withdrawn senior subordinated notes
are later validly retendered. Properly withdrawn senior subordinated notes may
be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time before the expiration date.
EXCHANGE AGENT
has been appointed as exchange agent for the exchange offer.
Noteholders should direct questions and requests for assistance, requests for
additional copies of this prospectus or the letter of transmittal and requests
for notice of guaranteed delivery, to the exchange agent addressed as follows:
Delivery of the letter of transmittal to a different address or
transmission of instructions to a different facsimile address does not
constitute a valid delivery of such letter of transmittal.
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<PAGE> 75
FEES AND EXPENSES
PageNet will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, additional solicitations may be
made by telephone or in person by officers and employees of PageNet and
affiliates.
PageNet has not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or other soliciting
acceptances of the exchange offer. PageNet, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
The cash expenses to be incurred in connection with the exchange offer will
be paid by PageNet and are estimated in the aggregate to be approximately
$ . These expenses include registration fees, fees and expenses of the
exchange agent and the trustee, accounting and legal fees and printing costs,
among others.
PageNet will pay all transfer taxes, if any, applicable to the exchange of
senior subordinated notes pursuant to the exchange offer. If, however, a
transfer tax is imposed for any reason other than the exchange of the senior
subordinated notes pursuant to the exchange offer, then the amount of any
transfer taxes, whether imposed on the registered holder or any other persons,
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or any exemption from having to pay is not submitted with the letter
of transmittal, the amount of the transfer taxes will be directly to the
tendering holder.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the exchange offer is voluntary. Holders of senior
subordinated notes are urged to consult their financial and tax advisors in
making their own decisions on what action to take. See "Risk Factors."
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
We expect that an exchanging noteholder generally will not recognize gain
or loss for federal income tax purposes, except that gain, if any, will be
recognized, but not in excess of the value of the shares of Class B common stock
of Vast received by the noteholder in the exchange offer. See "Material Federal
Income Tax Considerations."
ACCOUNTING TREATMENT
Arch will account for the merger using the purchase method of accounting
for a business combination in accordance with Accounting Principles Board
Opinion No. 16. The assets and liabilities of PageNet, including intangible
assets, will be recorded at their fair market value and included in the
financial statements of Arch. The results of operations and cash flows of
PageNet will be included in Arch's financial statements from the date of the
merger.
PROPOSED AMENDMENTS
CONSENT TO PROPOSED AMENDMENTS
To tender senior subordinated notes for exchange in the PageNet exchange
offer, you must consent to the proposed amendments to the indentures for the (i)
8.875% senior subordinated notes due 2006, (ii) 10.125% senior subordinated
notes due 2007, and (iii) 10% senior subordinated notes due 2008. The proposed
amendments constitute a single proposal and a tendering holder must consent to
the proposed amendments as an entirety, and may not consent selectively with
respect to some of the proposed amendments.
The proposed amendments will be included in a supplement to each of the
indentures that will be signed by PageNet and the trustee on or promptly
following PageNet's receipt of the required consents. Accordingly, PageNet
expects to sign the supplemental indentures before the PageNet exchange offer
expires. The proposed amendments will not take effect, however, until PageNet
accepts for exchange PageNet notes issued under the indentures that represent at
least the required consents.
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ELIMINATION OF OPERATING COVENANTS
The following is a brief description of the proposed amendments to the
indentures. Please note that unless otherwise specified, the sections listed
below refer to the 8.875% indenture, the 10.125% indenture and the 10%
indenture. In addition, not all of the indentures contain every section
described below. The summaries are qualified in their entireties by reference to
the full and complete terms of the indentures, as well as the proposed
supplemental indentures, copies of which can be obtained without charge from the
exchange agent. These proposed amendments may have adverse consequences for you
if you do not participate in the PageNet exchange offer.
The proposed amendments would eliminate the following provisions contained
in the indentures.
<TABLE>
<CAPTION>
SECTION OF
INDENTURES TITLE AND DESCRIPTION OF SECTION
- ---------- --------------------------------
<S> <C>
801 Company May Consolidate, Etc., Only on Certain Terms.
Provides that PageNet will not:
- consolidate with or merge with any other person or permit
any other person to consolidate or merge with PageNet or any
restricted subsidiary of PageNet;
- transfer, convey, sell, lease or otherwise dispose of all
or substantially all of its assets;
- acquire, or permit any restricted subsidiary of PageNet to
acquire, capital stock of any other person that results in
such person becoming a restricted subsidiary of PageNet if
the amount of consideration paid and debt incurred plus
the aggregate amount of consideration paid or debt
incurred for all other acquisitions made during the
preceding twelve month period exceeds 5% of the
consolidated tangible assets of PageNet immediately prior
to such acquisitions; or
- purchase, lease or otherwise acquire, or permit any
restricted subsidiary of PageNet to purchase, lease or
otherwise acquire, all or substantially all of the assets
of any person or entity if the amount of consideration
paid and debt incurred plus the aggregate amount of
consideration paid or debt incurred for all other
acquisitions made during the preceding twelve month period
exceeds 5% of the consolidated tangible assets of PageNet
immediately prior to such acquisitions; unless:
- PageNet is the continuing corporation, or the successor
or transferee corporation is organized under the laws of
the United States and expressly assumes the payment of
principal and interest on all PageNet notes and the
performance and observance of all covenants and
conditions of the indenture, by supplemental indenture;
- PageNet or any restricted subsidiary of PageNet is not,
immediately after giving effect to the transaction, in
default in the performance of any of those covenants or
conditions; and
- the ratio of the aggregate principal amount of debt of
PageNet and its restricted subsidiaries immediately
after giving effect to the transaction on the most
recent quarterly or annual balance sheet to four times
the preceding quarter's pro forma consolidated cash flow
is less than 6.5 to 1. Pro forma consolidated cash flow
is calculated by giving effect to any asset dispositions
or acquisitions not made in the ordinary course of
business as if such acquisition or disposition had taken
place on the first day of such period.
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
SECTION OF
INDENTURES TITLE AND DESCRIPTION OF SECTION
- ---------- --------------------------------
<S> <C>
1005 Existence.
Provides that PageNet will do all things necessary to
preserve and keep in full force and effect its existence,
rights (both charter and statutory) and franchises. PageNet
is not required to maintain these rights, however, if the
board of directors determines that such rights are no longer
desirable for the conduct of PageNet's business and that the
loss of these rights is not disadvantageous in any material
respect to the holders of the PageNet notes.
1006 Maintenance of Properties.
Provides that PageNet will maintain and keep in good
condition, repair and working order, and make all necessary
replacements and improvements to all of the properties used
or useful in PageNet's business or any business of a
subsidiary of PageNet. PageNet may, however, discontinue the
operation or maintenance of any such properties if PageNet
determines that such properties are no longer desirable for
the conduct of PageNet's business and that such
discontinuance is not disadvantageous in any material
respect to the holders of the PageNet notes.
1007 Payment of Taxes and Other Claims.
Provides that PageNet will pay or discharge or cause to be
paid or discharged:
- all taxes, assessments and governmental charges levied or
imposed upon PageNet or any of it subsidiaries or upon the
income, profits or property of PageNet or any of its
subsidiaries; and
- all lawful claims for labor, materials and supplies which,
if unpaid, could result in a lien upon the property of
PageNet or any of its subsidiaries.
PageNet is not required to pay or discharge or cause to be
paid or discharged any tax, assessment, charge or claim that
is being contested in good faith.
1008 Limitation on Consolidated Debt.
Provides that PageNet will not, and will not allow any of
its restricted subsidiaries to issue, assume, incur or
guaranty any debt unless, after giving effect to such debt,
the ratio of the aggregate principal amount of debt of
PageNet and its restricted subsidiaries on the most recent
quarterly or annual balance sheet to four times the
preceding quarter's pro forma consolidated cash flow is less
than 6.5 to 1.
1009 Limitation on Certain Debt.
PageNet will not incur any debt that would be subordinate to
any senior debt and senior to any of the PageNet notes.
Senior debt includes:
- any debt outstanding pursuant to the credit facility;
- any obligation for borrowed money;
- any obligation evidenced by bonds, debentures, notes or
other similar instruments;
- any reimbursement obligation under letters of credit,
bankers' acceptances or similar facilities;
- any capital lease obligation;
- any of the foregoing obligations that PageNet has
guaranteed for another person; and
- any payment obligations under interest rate swaps or
foreign currency hedge agreements required by the credit
facility.
</TABLE>
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<PAGE> 78
<TABLE>
<CAPTION>
SECTION OF
INDENTURES TITLE AND DESCRIPTION OF SECTION
- ---------- --------------------------------
<S> <C>
1010 Limitation on Restricted Payments.
Provides that PageNet will not make any restricted payments
if (1) an event of default has occurred and is continuing or
(2) after giving effect to the restricted payment, the total
of all restricted payments made after the date of the
indenture exceeds the sum of: (a) the difference between
100% of the cumulative consolidated cash flow between
December 31, 1993 and the last day of the quarter preceding
the restricted payment for which financial statements are
available and the product of 1.4 times the cumulative
consolidated interest expense between December 31, 1993 and
the last day of the quarter preceding the restricted payment
for which financial statements are available, and (b) 100%
of the net proceeds from the issuance of PageNet capital
stock after the date of the indenture. Restricted payments
include:
- the declaration or payment of dividends on PageNet capital
stock;
- the purchase or redemption by PageNet or any restricted
subsidiary of PageNet of any capital stock, options,
warrants or rights to purchase capital stock of PageNet or
any related person;
- any loans, advances, capital contributions or investments
in, or payment on a guarantee of, any affiliate or a related
person (other than PageNet or a wholly owned restricted
subsidiary of PageNet); and
- the redemption or repurchase by PageNet or any restricted
subsidiary of PageNet of any debt that is subordinate to the
PageNet notes.
1011 Limitations Concerning Distributions by and Transfers to
Restricted Subsidiaries.
Provides that neither PageNet nor any restricted subsidiary
of PageNet will allow any restrictions to be placed on the
ability of a restricted subsidiary to:
- pay dividends or pay any debt owed to PageNet;
- make loans to PageNet or any restricted subsidiary of
PageNet; or
- transfer any of its assets to PageNet.
1012 Limitations on Transactions with Affiliates and Related
Persons.
Provides that neither PageNet nor any restricted subsidiary
of PageNet will enter into any transaction with any
affiliate or related person. This restriction does not apply
if:
- a majority of the board of directors deem the transaction
to be in the best interests of PageNet or such restricted
subsidiary; and
- the terms of the transaction are no less favorable than
those that could have been obtained in an arms length
transaction.
1013 Limitation on Certain Asset Dispositions.
Provides that neither PageNet nor any restricted subsidiary
of PageNet will make an asset disposition unless:
- it receives consideration equal to the fair market value
of the assets disposed of;
- the consideration consists of cash, readily marketable
cash equivalents or the assumption of debt; and
- if the net proceeds from such disposition, after any
investment made in the business of PageNet, exceed $5
million, 100% of such proceeds are used to:
- pay down any debt outstanding under the credit facility to
the extent the terms of the credit facility require such
payments;
- pay down any senior debt to the extent the terms of the
debt require such payments; and
</TABLE>
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<PAGE> 79
<TABLE>
<CAPTION>
SECTION OF
INDENTURES TITLE AND DESCRIPTION OF SECTION
- ---------- --------------------------------
<S> <C>
- make an offer to purchase the 8.875% senior subordinated
notes due 2006, the 10.125% senior subordinated notes due
2007 and all other notes and pari passu debt on a pro rata
basis to the extent the net proceeds available exceed $5
million.
1014 Limitation on Issuances and Sales of Capital Stock of Wholly
Owned Restricted Subsidiaries.
Provides that PageNet will not permit any of its
wholly-owned restricted subsidiaries to transfer any capital
stock unless all of the capital stock is transferred and the
net available proceeds from the transfer are applied in
accordance with Section 1013 which limits PageNet's ability
to make certain asset dispositions. This section also
provides that PageNet will not allow any of its wholly-owned
restricted subsidiaries to issue shares of capital stock,
warrants, rights or options to acquire or securities
convertible into shares of capital stock other than to
PageNet or another wholly-owned restricted subsidiary of
PageNet.
1015 Provision of Financial Statements.
Provides that as long as any of the PageNet notes are
outstanding, PageNet will file with the SEC the annual
reports, quarterly reports and other documents required to
be filed under Sections 13(a) and 15(d) of the Exchange Act
regardless of whether PageNet is required to do so. This
section also provides that PageNet is to mail to each holder
of the PageNet notes and file with the trustee copies of
these reports within fifteen (15) days of the date PageNet
would be required to file these reports if it were subject
to Sections 13(a) and 15(d) of the Exchange Act.
1016 Change of Control.
Provides that each holder of PageNet notes has the right to
have PageNet repurchase their notes upon a change of
control. Within thirty days following the consummation of
the transaction resulting in a change of control, PageNet
must offer to purchase all outstanding PageNet notes at a
price equal to 101% of their aggregate principal amount plus
accrued interest. A "change of control" is defined as the
acquisition by any person or group of at least 50% of the
voting power of all classes of voting stock or any change in
the composition of a majority of the board of directors.
1018 of the 10% Compliance with Rule 144A.
indenture Provides that PageNet will use its best efforts to be
subject to the reporting requirements of Sections 13 or
15(d) of the Exchange Act until the third anniversary of the
later of (1) the date of the original issuance of the
PageNet notes, and (2) the last date any of the PageNet
notes were acquired from an affiliate of PageNet. If at any
time PageNet is not subject to Sections 13 or 15(d) of the
Exchange Act, PageNet will furnish such information as may
be required to be delivered under paragraph (d)(4) of Rule
144A.
1019 of the 10% Resale of Certain Securities.
indenture Provides that until the third anniversary of the last date
of the original issuance of PageNet notes, PageNet will not,
and will use its best efforts not to permit any of its
affiliates, to resell any reacquired PageNet notes to the
extent they constitute "restricted securities" under Rule
144 of the Securities Act.
</TABLE>
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<PAGE> 80
ELIMINATION OF EVENTS OF DEFAULT
The proposed amendments would eliminate the following events of default
from Section 501 of the indentures.
<TABLE>
<CAPTION>
SECTION OF
INDENTURES DESCRIPTION OF THE EVENT OF DEFAULT
- ---------- -----------------------------------
<C> <S>
501(3) PageNet's failure to pay any principal or interest pursuant
to an offer to purchase contemplated by Sections 1013 which
limits PageNet's ability to make certain asset dispositions
or 1016 which specifies PageNet's obligation to repurchase
the PageNet notes upon a changes of control.
501(4) PageNet's breach of Section 801 which limits the ability of
PageNet to consolidate, merge or otherwise dispose of
substantially all of its assets.
501(6) The default by PageNet, or any restricted subsidiary of
PageNet, under any bond, debenture, note or any mortgage,
indenture or instrument with an outstanding principal amount
in excess of $5 million which results in such debt becoming
due prior to the stated maturity or the failure to pay any
principal when due.
501(7) A final judgement in excess of $5 million entered against
PageNet or any restricted subsidiary of PageNet which
remains undischarged or unbonded for 60 consecutive days
after final judgement.
501(8) The entry of a decree or order for relief in respect of
PageNet or any restricted subsidiary of PageNet in an
involuntary case or proceeding under any federal or state
bankruptcy or other similar law, or the entry of any order
or decree that:
- adjudges PageNet or any restricted subsidiary of PageNet a
bankrupt or insolvent;
- approves as properly filed a petition seeking
reorganization of PageNet or any restricted subsidiary of
PageNet under any applicable federal or state law;
- appoints a custodian or other similar official of PageNet
or any restricted subsidiary of PageNet or of any
substantial part of the property of PageNet or any
restricted subsidiary of PageNet; or
- requires the winding up or liquidation of the affairs of
PageNet or any restricted subsidiary of PageNet, where such
order or decree is continued, unstayed or otherwise
remains in effect for sixty consecutive days.
501(9) The commencement by PageNet, or any restricted subsidiary of
PageNet, of a voluntary case or proceeding under any federal
or state bankruptcy or other similar law, or any other case
in which PageNet or any restricted subsidiary of PageNet is
adjudicated to be a bankrupt or insolvent. This section also
includes:
- the consent by PageNet or any restricted subsidiary of
PageNet to the entry of a decree or order for relief in an
involuntary case or proceeding under any federal or state
bankruptcy or other similar law;
- the consent by PageNet or any restricted subsidiary of
PageNet to the commencement of any bankruptcy or insolvency
case against it;
- the filing or consent by PageNet or any restricted
subsidiary of PageNet to a petition or answer or consent
seeking reorganization or relief under any applicable
federal or state law;
- the consent by PageNet to the appointment of a custodian
or other similar official of PageNet or any restricted
subsidiary of PageNet or of any substantial part of the
property of PageNet or any restricted subsidiary of
PageNet;
- the making by PageNet or any restricted subsidiary of
PageNet of an assignment for the benefit of creditors; or
</TABLE>
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<PAGE> 81
<TABLE>
<CAPTION>
SECTION OF
INDENTURES DESCRIPTION OF THE EVENT OF DEFAULT
- ---------- -----------------------------------
<C> <S>
- the admission in writing by PageNet or any restricted
subsidiary of PageNet that it is unable to pay its debts as
they become due.
</TABLE>
The proposed amendments would also eliminate any references in the
indentures and the PageNet notes to the sections specified above, including any
sentences or provisions that refer or give effect exclusively to the sections
specified above. The proposed amendments would also eliminate any defined terms
in the indentures that are used solely in those deleted sentences, provisions,
sections and subsections.
THE SPIN-OFF DISTRIBUTION
GENERAL
The merger agreement provides that PageNet will distribute to its
stockholders interests in its wholly owned subsidiary, Vast Solutions, Inc.,
which represent up to 11.6% of the total equity of Vast. In accordance with the
merger agreement, the PageNet board of directors will declare a dividend payable
to the persons who are PageNet stockholders immediately prior to the acceptance
of senior subordinated notes in the exchange offer, of 2,320,000 shares of Class
B common stock of Vast. The dividend will not be paid unless all of the
conditions to the merger have been satisfied. Because the dividend will be
declared prior to the acceptance of senior subordinated notes in the exchange
offer, noteholders who become stockholders of PageNet in the exchange offer will
not be entitled to receive any portion of this distribution.
MANNER OF EFFECTING THE SPIN-OFF DISTRIBUTION
If all of the conditions to the merger are satisfied, on the closing date
of the Arch merger, PageNet will deliver all 2,320,000 shares of Class B common
stock of Vast to the distribution agent. As soon as practicable after that date,
the distribution agent will mail certificates for such shares to the PageNet
stockholders entitled to receive these shares.
DETERMINATION OF THE DISTRIBUTION RATIO
PageNet estimates that the number of shares of Vast that PageNet
stockholders will receive as a result of the spinoff distribution is 0.0223 of a
share of Vast Class B common stock for each share of PageNet common stock. The
fraction that PageNet stockholders will receive will equal 2,320,000 divided by
the number of shares of PageNet common stock outstanding as of immediately prior
to the acceptance of senior subordinated notes in the exchange offer. The 0.0223
estimate is based on the 103,960,240 shares of PageNet common stock outstanding
on December 1, 1999.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
It is expected that the distribution of shares of Class B common stock of
Vast will generally be treated as a distribution in exchange for PageNet common
stock, although this treatment is not free from doubt. See "Material Federal
Income Tax Considerations."
THE PREPACKAGED PLAN OF REORGANIZATION
In this section, we use the term "PageNet Companies" to refer to Paging
Network, Inc. and certain of its operating subsidiaries.
In certain circumstances, the PageNet Companies may commence cases under
chapter 11 of the Bankruptcy Code and seek to confirm the Plan and thereby bind
the PageNet Companies' noteholders and stockholders to the terms of the merger
and the exchange offer. Confirmation of the Plan would be based, in part, on the
votes received from the PageNet Companies' noteholders and stockholders pursuant
to this solicitation.
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<PAGE> 82
GENERAL
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11, a debtor is authorized to reorganize its
business for the benefit of its creditors and stockholders. In addition to
permitting rehabilitation of the debtor, chapter 11 seeks to promote equality of
treatment of creditors and equity security holders of equal rank in the
distribution of a debtor's assets. In furtherance of these two goals, upon the
filing of a petition for reorganization under chapter 11, the Bankruptcy Code
imposes an automatic stay of substantially all acts and proceedings against the
debtor or its property, including all attempts to collect claims or enforce
liens that arose prior to the commencement of the debtor's chapter 11 case.
The consummation of a plan of reorganization is the principal objective of
a chapter 11 reorganization case. A plan of reorganization sets forth the means
for satisfying claims against and equity interests in a debtor. Upon
confirmation of a plan of reorganization by the Bankruptcy Court, the plan
becomes binding upon the debtor, any issuer of securities under the plan, any
person acquiring property under the plan and any creditor of or equity security
holder in the debtor. Subject to limited exceptions, the confirmation order
discharges the debtor from any debts that arose prior to the date of
confirmation of the plan and substitutes for them the obligations specified
under the confirmed plan.
Under certain circumstances the Bankruptcy Code permits debtors to solicit
acceptances for a plan of reorganization prior to the commencement of the
bankruptcy case and to bind creditors to such prefiling acceptances. If
sufficient votes under the Bankruptcy Code for acceptance of the Plan are
received through this solicitation, but holders of less than 97.5% in principal
amount of the senior subordinated notes accept the Plan, the PageNet Companies
intend to file chapter 11 reorganization cases and promptly seek confirmation of
the Plan by the Bankruptcy Court.
The Plan provides specified treatment to the various classes of claims
against the PageNet Companies and equity interests in the PageNet Companies. The
PageNet Companies believe the Plan provides treatment for all classes of claims
and equity interests that reflects an appropriate resolution of their claims and
interests taking into account the differing nature and priority of such claims
and interests, including applicable contractual subordination. The Bankruptcy
Court must find, however, that a number of statutory tests are met before it may
confirm the Plan. Many of these tests are designed to protect the interests of
holders of claims or equity interests that do not vote to accept the Plan, but
that will nonetheless be bound by the provisions of the Plan if it is confirmed
by the Bankruptcy Court.
The Bankruptcy Code generally provides for the appointment of a committee
of unsecured creditors in a chapter 11 case. The appointment is made by either
the bankruptcy judge or a U.S. Trustee. Ordinarily, the committee will consist
of the seven largest unsecured creditors that are willing to serve although the
Bankruptcy Code does not place a limitation on the size of any particular
committee. Under certain circumstances, additional committees may be appointed
as well, or no committees may be appointed. If appointed, a chapter 11
creditors' committee possesses the authority and the duty to promote and to
protect the interests of its creditor constituency. In this regard, the
Bankruptcy Code provides, among other things, that a duly-appointed committee
may consult with the trustee or debtor in possession concerning the
administration of the case, may investigate the acts, conduct, assets,
liabilities and financial condition of the debtor, the operation of the debtor's
business and the desirability of the continuance of such business, and any other
matter relevant to the case or to the formulation of a plan and may perform such
other services as are in the interest of the creditors it represents. To carry
out these functions, a creditors' committee appointed pursuant to the Bankruptcy
Code may employ professionals (whose fees are paid by the debtor as
administrative expenses of the chapter 11 case), may raise any issue and may
appear and be heard in the case, and may take such other and further actions as
may be necessary and proper to discharge its duties.
THE FOLLOWING IS A SUMMARY OF CERTAIN OF THE MORE SIGNIFICANT MATTERS TO
OCCUR EITHER PURSUANT TO OR IN CONNECTION WITH THE FILING OF THE CHAPTER 11
CASES AND CONFIRMATION OF THE PLAN, A COPY OF WHICH ACCOMPANIES THIS PROSPECTUS
AS ANNEX C AND TO WHICH REFERENCE SHOULD BE MADE FOR A FULL STATEMENT OF ITS
TERMS. THIS SUMMARY ONLY HIGHLIGHTS CERTAIN SUBSTANTIVE PROVISIONS OF THE PLAN
AND IS NOT A COMPLETE DESCRIPTION OF, OR A SUBSTITUTE FOR, A FULL AND COMPLETE
READING OF THE PLAN, WHICH ALL HOLDERS OF CLAIMS AND EQUITY INTERESTS ARE
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<PAGE> 83
URGED TO REVIEW CAREFULLY. THE PLAN, IF CONFIRMED, WILL BE BINDING UPON THE
PAGENET COMPANIES AND ALL HOLDERS OF CLAIMS AND EQUITY INTERESTS. THIS SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN.
The Plan defines two significant dates, the confirmation date and the
effective date. The "confirmation date" is the date on which the Bankruptcy
Court enters an order confirming the Plan on its docket. The "effective date" is
a date selected by the PageNet Companies and Arch that is not more than five
business days after the first date on which all of the following conditions have
been satisfied:
- the Plan is confirmed by the Bankruptcy Court;
- no stay of the confirmation order is in effect and the confirmation order
has not been modified, amended or supplemented; and
- the conditions specified in the merger agreement have been satisfied or
waived pursuant to the terms of the merger agreement.
DURING THE PENDENCY OF THE CHAPTER 11 CASES THAT MAY BE FILED IN CONNECTION
WITH THE RESTRUCTURING, THE PAGENET COMPANIES INTEND TO OPERATE THEIR BUSINESSES
IN THE ORDINARY COURSE AND TO MAKE PAYMENT IN FULL ON A TIMELY BASIS FOR ALL
GOODS AND SERVICES PROVIDED AFTER THE COMMENCEMENT OF THE CHAPTER 11 CASES. THE
PAGENET COMPANIES ALSO WILL SEEK APPROVAL IMMEDIATELY UPON THE FILING OF THEIR
PETITIONS TO PAY IN FULL IN THE ORDINARY COURSE OF BUSINESS THE PRE-PETITION
CLAIMS OWING TO GENERAL UNSECURED CREDITORS THAT WERE INCURRED IN THE ORDINARY
COURSE OF PAGENET'S BUSINESS (NOT INCLUDING CLAIMS UNDER THE SENIOR SUBORDINATED
NOTES OR OLD STOCK RELATED CLAIMS). MANAGEMENT EXPECTS THAT THE PAGENET
COMPANIES WILL HAVE SUFFICIENT FUNDS TO PAY THEIR PREPETITION AND POSTPETITION
GENERAL UNSECURED CREDITORS IN THE ORDINARY COURSE OF BUSINESS THROUGH THE
CONCLUSION OF THE CHAPTER 11 CASES. Under the Plan, only holders of senior
subordinated note related claims, old stock related claims and claims resulting
from the rejection of executory contracts or unexpired leases under the Plan
will be required to file proofs of claim or equity interest with the Bankruptcy
Court. Other creditors and stockholders will not be required to file proofs of
claims or interests and it is not expected that they will be required to take
any other action to receive payment on their claims or equity interests other
than the tender of their senior subordinated notes or stock certificates unless
such claim is disputed.
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS UNDER THE PLAN
The Bankruptcy Code requires that the Plan classify the claims against, and
equity interests in, the PageNet Companies. The Bankruptcy Code also provides
that, except for certain claims classified for administrative convenience, the
Plan may place a claim or equity interest in a particular class only if such
claim or equity interest is substantially similar to the other claims or equity
interests of such class. The PageNet Companies believe that all claims and
equity interests have been appropriately classified in the Plan. The PageNet
Companies have elected to separately classify general unsecured claims from
claims arising under PageNet's senior subordinated notes because this class is
comprised largely of trade creditors. Many of these creditors are key suppliers
of products and services used by the PageNet Companies. Accordingly, any failure
by PageNet to pay these trade creditors in accordance with the terms agreed upon
could be detrimental to the ability of the PageNet Companies to obtain essential
trade credit and could substantially impair the ability of the PageNet Companies
to do business with trade creditors whose goods and services are essential for
the PageNet Companies. The senior subordinated notes contain subordination
provisions which the PageNet Companies believe also makes them significantly
different from other unsecured claims and, therefore, properly classified
separately. The Plan also classifies claims for rescission or damages related to
the purchase or sale of a senior subordinated note with claims under the senior
subordinated notes. Claims for rescission or damages might be subject to
mandatory subordination under the Bankruptcy Code which could be contrary to the
Plan's classification scheme. No such claims have been asserted against the
PageNet Companies and the PageNet Companies do not believe any such claims
exist.
To the extent that the Bankruptcy Court finds that a different
classification of claims or equity interests is required for the Plan to be
confirmed, the PageNet Companies would likely seek (1) to modify the Plan to
provide for whatever reasonable classification might be required for
confirmation and (2) to use the acceptances received from any holder of claims
or equity interests pursuant to this solicitation for the purpose
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<PAGE> 84
of obtaining the approval of the class or classes of which such holder
ultimately is deemed to be a member. Any such reclassification of holders,
although subject to the notice and hearing requirements of the Bankruptcy Code,
could adversely affect the class in which such holder was initially a member, or
the class into which such member is reclassified or any other class under the
Plan, by changing the composition of such class or the consideration available
to distribute to the members of such class and the vote required for approval of
the Plan. There can be no assurance that the Bankruptcy Court, after finding
that a classification was inappropriate and requiring a reclassification, would
approve the Plan based upon such reclassification. Except to the extent that
modification of the classification provided for in the Plan adversely affects
the treatment of a holder of claims or equity interests and requires
resolicitation, the PageNet Companies will, in accordance with the Bankruptcy
Code and the Bankruptcy Rules, seek a determination by the Bankruptcy Court that
acceptance of the Plan by any holder of claims or interests pursuant to this
solicitation will constitute a consent to the Plan's treatment of such holder
regardless of the class as to which such holder is ultimately deemed to be a
member.
The Bankruptcy Code also requires that the Plan provide the same treatment
for each claim or equity interest of a particular class unless the holder of a
particular claim or equity interest agrees to a less favorable treatment of its
claim or equity interest. The PageNet Companies believe that the Plan complies
with this requirement of equal treatment.
Only classes that are impaired, as defined under the Bankruptcy Code, under
the Plan are entitled to vote to accept or reject the Plan, unless the class is
deemed under the Bankruptcy Code to have rejected the Plan. As a general matter,
a class of claims or equity interests is considered to be "unimpaired" under a
plan or reorganization if the plan does not alter the legal, equitable and
contractual rights of the holders of such claims or equity interests. Under the
Bankruptcy Code, holders of unimpaired claims or equity interests are
conclusively presumed to have accepted the Plan. Holders of claims or equity
interests which will not receive or retain anything under the Plan are deemed to
have rejected the Plan.
The Plan classifies the claims of creditors and the interests of
stockholders into the classes listed below for all purposes, including voting,
confirmation, and distribution. A claim is in a particular class only to the
extent that such claim is allowed in that class and has not been paid or
otherwise settled prior to the effective date of the Plan. A claim is "allowed"
if the claim is:
- a claim that has been listed by the PageNet Companies in their respective
schedules of liabilities filed with the Bankruptcy Court as not disputed,
contingent or unliquidated and the PageNet Companies or any other party
in interest has not filed an objection by the effective date;
- a claim that has been timely filed on or before any applicable bar date
set by the Bankruptcy Court or the Plan and either is not disputed by a
timely objection or has been allowed by a final non-appealable order of
the Bankruptcy Court;
- a claim that is allowed:
- in any stipulation of amount and nature of claim executed prior to the
confirmation date and approved by the Bankruptcy Court;
- in any stipulation with the PageNet Companies of amount and nature of
claim executed on or after the confirmation date; or
- in any contract, instrument, indenture or other agreement entered into
or assumed in connection with the Plan;
- a claim relating to a rejected executory contract or unexpired lease that
is timely filed with the Bankruptcy Court and either
- is not subject to a timely objection or
- has been allowed by a final order; or
- a claim that is allowed pursuant to the terms of the Plan.
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<PAGE> 85
A shareholder's interest is "allowed" if it is listed in the appropriate
transfer books and records of Paging Network, Inc. as of the applicable record
date.
The classification of creditor claims and shareholder interests pursuant to
the Plan is as follows:
<TABLE>
<CAPTION>
CLASS STATUS VOTING RIGHTS
- ----- ---------- ----------------------
<S> <C> <C>
Class 1 -- Priority Claims Unimpaired -- not entitled to
vote
Class 2 -- Bank Secured Claims Impaired -- entitled to vote
Class 3 -- Other Secured Claims Unimpaired -- not entitled to
vote
Class 4 -- General Unsecured Claims Unimpaired -- not entitled to
vote
Class 5 -- Senior Subordinated Note Claims Impaired -- entitled to vote
Class 6 -- Old Stock Related Claims Impaired -- entitled to vote
Class 7 -- Old Stock Interests Impaired -- entitled to vote
Class 8 -- Subsidiary Stock Interests and Impaired -- entitled to vote
Subsidiary Claims
</TABLE>
SUMMARY OF TREATMENT UNDER THE PLAN
In addition to the creditor claims classified above, certain other claims
of creditors for expenses of administration, priority tax claims and claims
under the anticipated debtor in possession financing arrangements are not
classified and will be paid on the terms described below.
A. Administrative Expense Claims
Administrative expense claims consist of the claims for the costs and
expenses of administration as specified in the Bankruptcy Code, including:
- the actual and necessary costs and expenses of operating the business and
preserving the estate of the PageNet Companies following the commencement
of the chapter 11 cases (such as wages, salaries or commissions for
services and payments for goods and other services and leased premises);
- compensation for legal, financial advisory, accounting and other services
and reimbursement of expenses incurred by the debtor or any official
committees and awarded or allowed under the Bankruptcy Code; and
- all statutory fees and charges assessed against the estate.
Each holder of an allowed administrative expense claim will be paid the full
unpaid amount of such allowed administrative expense claim in cash on the later
of (1) the effective date or (2) the date such claim becomes an allowed
administrative expense claim, or upon such other terms as may be agreed upon by
such holder and the PageNet Companies or otherwise upon order of the Bankruptcy
Court; provided, however, that allowed administrative expense claims
representing obligations incurred in the ordinary course of business by the
PageNet Companies or otherwise assumed by the PageNet Companies will be paid or
performed by the reorganized PageNet Companies when due (either during the
pendency of the chapter 11 cases or after the effective date) in accordance with
the terms and conditions of the particular agreements governing such
obligations.
B. Priority Tax Claims
The Bankruptcy Code provides for priority payment of governmental units for
specified types of taxes. On the effective date, each holder of a priority tax
claim due and payable on or prior to the effective date will be paid cash in an
amount equal to the amount of such priority tax claim unless it otherwise agrees
with the PageNet Companies. The amount of any priority tax claim that is not an
allowed claim or that is not otherwise
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<PAGE> 86
due and payable on or prior to the effective date, and the rights of the holder
of such claim, if any, to payment shall:
- be determined in the manner in which the amount of such claim and the
rights of the holder of such claim would have been determined if the
chapter 11 cases had not been commenced;
- survive the effective date and consummation of the Plan as if the chapter
11 cases had not been commenced; and
- not be discharged.
C. Debtor-in-Possession (DIP) Facility Claims
DIP facility claims consists of claims for monies to be borrowed by the
PageNet Companies following the commencement of the chapter 11 cases. As of the
date of this prospectus, the PageNet Companies have not received a commitment to
provide them with DIP financing. While the PageNet Companies are presently
negotiating such financing and believe they will obtain any commitments deemed
necessary, there can be no assurance that such a commitment will be received.
Each holder of an allowed DIP facility claim will be paid the full unpaid amount
of such allowed DIP facility claim in cash on the later of (1) the effective
date or (2) the date such claim becomes an allowed DIP facility claim, or upon
such other terms as may be agreed upon by the holder of such claims and the
reorganized PageNet Companies, or otherwise upon order of the Bankruptcy Court.
D. Treatment of Classified Creditor Claims
Class 1 -- Priority Claims
(a) Classification: Priority claims consist of all claims accorded
priority in right of payment under the Bankruptcy Code, other than
administrative expense claims, priority tax claims, and DIP facility claims.
(b) Treatment: The legal, equitable and contractual rights of the holders
of priority claims are unaltered by the Plan. Unless the holder of such claim
and the PageNet Companies agree to a different treatment, each holder of an
allowed priority claim shall receive one of the following alternative
treatments, at the election of the PageNet Companies and Arch:
- to the extent then due and owing on the effective date, such claim will
be paid in full in cash;
- to the extent not due and owing on the effective date, such claim will be
paid in full in cash by the reorganized PageNet Companies when and as
such claim becomes due and owing in the ordinary course of business; or
- such claim will be otherwise treated in any other manner so that such
claim shall otherwise be rendered unimpaired under the Bankruptcy Code.
Any other default with respect to any priority claim that occurred before or
after the commencement of the chapter 11 cases shall be deemed cured upon the
effective date.
(c) Voting: Priority claims are not impaired and the holders of priority
claims are conclusively deemed by the Bankruptcy Code to have accepted the Plan.
Therefore, the holders of priority claims are not entitled to vote to accept or
reject the Plan.
Class 2 -- Bank Secured Claims
(a) Classification: Bank secured claims consist of all claims arising from
or relating to the PageNet Companies' pre-bankruptcy credit agreements.
(b) Treatment: On the later of (1) the effective date or (2) the date on
which a claim becomes an allowed bank secured claim and upon execution and
delivery of a joinder agreement, each holder of an allowed bank secured claim
will receive, in accordance with the terms of the Arch credit facility term
sheet, and in full satisfaction of its allowed bank secured claim, either (x)
Tranche B-1 Arch credit facility notes, or
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(y) amended PageNet notes, in either case in a principal amount equal to the
amount of such holder's allowed bank secured claim. More specifically, the Plan
provides that with the approval of 100% of the existing lenders under the Arch
credit facility, the allowed Class 2 bank secured claims will be assumed by Arch
and will be converted to tranche B-1 loans under the Arch credit facility, as
amended. In such event, the holders of such allowed Class 2 bank secured claims
will receive tranche B-1 Arch credit facility notes in satisfaction of their
allowed Class 2 claims. With the approval of less than 100% of the lenders under
the Arch credit facility, but more than the required lenders under and as
defined in the Arch credit facility, the existing PageNet Companies' credit
agreement will remain in place, but will be amended and restated in connection
with the Arch merger so that its warranties, events of default and other
relevant provisions will be substantially the same as the corresponding
provisions of the Arch credit facility, as amended, and the holders of allowed
Class 2 bank secured claims will receive amended PageNet notes in full
satisfaction of their allowed Class 2 bank secured claims. The specific terms of
the Tranche B-1 notes and amended PageNet notes are described in the Arch credit
facility term sheet attached to this prospectus as Annex D.
(c) Voting: Bank secured claims are impaired and the holders of allowed
bank secured claims are entitled to vote to accept or reject the Plan.
Class 3 -- Other Secured Claims
(a) Classification: Other secured claims consist of all claims against the
PageNet Companies that are secured by assets of any PageNet Company, other than
bank secured claims.
(b) Treatment: The legal, equitable and contractual rights of the holders
of Class 3 claims are unaltered by the Plan. Unless the holder of such claim,
the PageNet Companies and Arch agree to a different treatment, each holder of an
allowed other secured claim shall receive one of the following alternative
treatments, at the election of the PageNet Companies and Arch:
- the legal, equitable and contractual rights to which such claim entitles
the holder shall be reinstated and the holder will be paid in accordance
with such legal, equitable and contractual rights;
- the PageNet Companies shall surrender all collateral securing such claim
to the holder, in full satisfaction of such holder's allowed claim,
without representation or warranty by or recourse against the PageNet
Companies or the reorganized PageNet Companies; or
- such claim will be otherwise treated in any other manner so that such
claims shall otherwise be rendered unimpaired under the Bankruptcy Code.
Any other default with respect to any other secured claim that occurred before
or after the commencement of the chapter 11 cases shall be deemed cured upon the
effective date.
(c) Voting: Other secured claims are not impaired and the holders of other
secured claims are conclusively deemed by the Bankruptcy Code to have accepted
the Plan. Therefore, the holders of other secured claims are not entitled to
vote to accept or reject the Plan.
Class 4 -- General Unsecured Claims
(a) Classification: General unsecured claims consist of all unsecured
claims against the PageNet Companies, other than the claims of holders of the
senior subordinated notes.
(b) Treatment: The legal, equitable and contractual rights of the holders
of general unsecured claims are unaltered by the Plan. Unless the holder of such
claim, the PageNet Companies and Arch agree to a different treatment, each
holder of an allowed general unsecured claim shall receive one of the following
alternative treatments, at the election of the PageNet Companies and Arch:
- to the extent then due and owing on the effective date, such claim will
be paid in full in cash;
- to the extent not due and owing on the effective date, such claim will be
paid in full in cash (1) when and as such claim becomes due and owing in
the ordinary course of business or (2) to the extent such
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claim arises from the rejection of an executory contract or unexpired
lease, when such claim becomes an allowed claim; or
- such claim will be otherwise treated in any other manner so that such
claim shall otherwise be rendered unimpaired under the Bankruptcy Code.
Any other default with respect to any general unsecured claim that occurred
before or after the commencement of the chapter 11 cases shall be deemed cured
upon the effective date.
(c) Voting: General unsecured claims are not impaired and the holders of
general unsecured claims are conclusively deemed by the Bankruptcy Code to have
accepted the Plan. Therefore, the holders of general unsecured claims are not
entitled to vote to accept or reject the Plan.
Class 5 -- Senior Subordinated Note Claims
(a) Classification: Senior subordinated note claims consist of the claims
against the PageNet Companies
- of the holders of:
- the 8.875% senior subordinated notes due 2006.
- the 10.125% senior subordinated notes due 2007; and
- the 10% senior subordinated notes due 2008;
- of the present or former holders of senior subordinated notes which arise
from rescission of or the purchase or sale of any senior subordinated
note.
Claims for principal and accrued interest under any senior subordinated note
will be deemed to be allowed. Any other claim under any senior subordinated note
will be required to be filed on or before a bar date to be set by the bankruptcy
court or such claims will be forever barred and discharged.
(b) Treatment: On the effective date, each holder (excluding Arch and its
subsidiaries) of an allowed senior subordinated note claim will receive a pro
rata share of (1) 76,918,795 shares of Arch common stock and (2) 13,780,000
shares of Class B common stock of Vast. For a breakdown of the number of shares
of Arch common stock and Vast Class B common stock to be distributed per $1,000
in principal amount of senior subordinated notes, see "Summary -- The Exchange
Offer."
(c) Voting: Senior subordinated note claims are impaired under the Plan
and the holders of allowed senior subordinated note claims are entitled to vote
to accept or reject the Plan.
Class 6 -- Old Stock Related Claims
(a) Classification: Old stock related claims consist of the claims, if
any, for rescission of or a purchase or sale of an equity interest in Paging
Network, Inc. for damages arising from the purchase or sale of such an equity
interest, or for reimbursement or contribution on account of such claim. Proofs
of claim with respect to any old stock related claims will be required to be
filed on or before a bar date to be set by the Bankruptcy Court or such claims
will be forever barred and discharged. Any such old stock related claims shall
be deemed to be subordinated to all other creditor claims pursuant to the
Bankruptcy Code and shall have the same priority as Class 7 old stock interests.
(b) Treatment: On the later of (1) the effective date, or (2) the date an
old stock related claim becomes an allowed claim, the holder of such an allowed
old stock related claim will receive, together with the holders of allowed Class
7 old stock interests, a pro rata share of (x) the Arch common stock available
to Paging Network, Inc. stockholders under the merger agreement and (y) the
2,320,000 shares of the Class B common stock of Vast.
(c) Voting: Old stock related claims are impaired and the holders of
allowed stock related claims are entitled to vote to accept or reject the Plan.
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E. Treatment of Stockholder Interests
Class 7 -- Old Stock Interests
(a) Classification: Old stock interests consist of all equity interests in
PageNet.
(b) Treatment: On the effective date each holder of an allowed old stock
interest (excluding Arch and any of its subsidiaries) will receive, together
with the holders of allowed Class 6 old stock related claims, a pro rata share
of (1) Arch common stock available to Paging Network, Inc. stockholders under
the merger agreement, and (2) the 2,320,000 shares of Class B common stock of
Vast. As of December 1, 1999, for each 100 shares of PageNet common stock, there
would have been distributed (i) 12.47 shares of Arch common stock and (ii) 2.23
shares of Vast Class B common stock, assuming there are no Class 6 old stock
related claims.
(c) Voting: Old stock interests are impaired and the holders of allowed
old stock interests are entitled to vote to accept or reject the Plan.
Class 8 -- Subsidiary Stock Interests and Subsidiary Claims
(a) Classification: Subsidiary stock interests consist of all equity
interest of Paging Network, Inc. in each of its operating subsidiaries that
becomes a debtor in the chapter 11 cases and of any such operating subsidiary in
any other operating subsidiary that becomes a debtor in the chapter 11 cases.
Subsidiary claims consist of all inter-company claims by a PageNet Company
against another PageNet Company
(b) Treatment: On the effective date no distributions will be made on
account of subsidiary claims. Paging Network, Inc., as reorganized under the
Plan, will retain its interest in each of its operating subsidiaries that become
a debter in the chapter 11 cases and each such operating subsidiary, as
reorganized under the Plan, will retain its equity interest in each other
operating subsidiary that became a debtor in the chapter 11 cases. Each of the
PageNet Companies, as reorganized under the Plan will retain its equity
interests in any other PageNet Company as reorganized under the Plan.
(c) Voting: Subsidiary stock interests and subsidiary claims are impaired,
and the holders of such claims and interests are entitled to vote to accept or
reject the Plan.
SUMMARY OF OTHER PROVISIONS OF THE PLAN
Releases
The Plan provides for certain releases and exculpation to be granted by the
PageNet Companies and for injunctions in favor of the following classes of
entities and individuals in consideration of the contributions of certain
parties to the chapter 11 cases, including, but not limited to:
- those holders of the PageNet Companies secured bank claims who vote in
favor of the Plan and thereby provide the financial support necessary for
consummation of the Plan;
- Arch, its subsidiaries, and their officers, directors and agents; and
- officers and directors of the PageNet Companies.
The Plan provides an injunction barring the commencement or continuation of any
claims against those entities and individuals on account of claims of the
PageNet Companies which are released pursuant to its terms; provided, however,
that the injunction does not preclude police or regulatory agencies from
fulfilling their statutory duties.
Specifically, the Plan provides that the PageNet Companies will release,
upon the effective date, the foregoing persons and entities from any and all
claims and causes of action, whether known or unknown, foreseen and unforeseen,
existing or hereafter arising, that the PageNet Companies or their subsidiaries
would have been legally entitled to assert against any of them relating to any
event occurring on or before the
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effective date of the Plan, including avoidance actions and recovery actions
under various applicable sections of the Bankruptcy Code. The release by the
PageNet Companies does not affect any liability of:
- Arch resulting from any breach of the merger agreement; or
- any person or entity for:
- any fraud, gross negligence or willful misconduct;
- loans by the PageNet Companies; or
- contractual obligations owed to the PageNet Companies.
The Plan also provides that the PageNet Companies and the persons and
entities receiving releases under the Plan shall be exculpated from any
liability to any person or entity for any act or omission in connection with or
related to the negotiation, formulation, preparation and confirmation of the
Plan, the consummation and administration of the Plan, the disclosure statement,
the chapter 11 cases, or the property distributed under the Plan. The foregoing
exculpation does not affect any liability of (1) the PageNet Companies or Arch
resulting from any breach of the merger agreement or (2) any person or entity
for any fraud, gross negligence or willful misconduct.
Executory Contracts and Unexpired Leases
Under the Bankruptcy Code, the PageNet Companies may assume or reject
executory contracts and unexpired leases. As a general matter, an "executory
contract" is a contract under which material performance (other than solely the
payment of money) remains to be made by each party to the contract. On the
effective date, all executory contracts and unexpired leases of the PageNet
Companies will be deemed assumed in accordance with the provisions and
requirements of the Bankruptcy Code, except those executory contracts and
unexpired leases that:
- have been rejected by order of the Bankruptcy Court;
- are then the subject of a motion to reject pending on the effective date;
- are identified on a list of contracts to be rejected to be filed with the
Bankruptcy Court on or before the confirmation date; or
- are rejected pursuant to the terms of the Plan.
Proofs of claim with respect to any claims arising from rejection of any
executory contract or unexpired lease must be filed with the Bankruptcy Court
within 30 days after the date of entry of an order of the Bankruptcy Court
approving such rejection. Such claims are classified and treated as Class 4
general unsecured claims under the Plan. Any claims not timely filed will be
forever barred from assertion.
On the confirmation date, the PageNet Companies will be deemed to have
assumed the merger agreement unless the merger agreement is assumed by the
PageNet Companies prior to the confirmation date pursuant to an order of the
Bankruptcy Court.
Indemnification of Directors, Officers and Employees
The Plan provides that the obligations of the PageNet Companies to
indemnify any person serving at any time on or prior to the effective date as
one of its directors, officers, or employees by reason of such person's service
in such capacity, to the extent provided in the PageNet Companies's constituent
documents or by written agreement or Delaware law, shall be deemed and treated
as executory contracts that are assumed by the PageNet Companies as of the
effective date. Accordingly, such indemnification obligations shall survive
unimpaired and unaffected by entry of the confirmation order, irrespective of
whether such indemnification becomes owing on account of an act or event
occurring before or after the commencement of the chapter 11 cases.
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Continued Corporate Existence and Vesting of Assets in New PageNet
Each of the PageNet Companies shall continue to exist after the effective
date as separate reorganized corporate entities, with all the powers of a
corporation under Delaware or other applicable law. Except as otherwise provided
in the Plan or the confirmation order, on and after the effective date each
PageNet Company shall retain its equity interest in each other PageNet Company
and all of their respective property and any property acquired by the PageNet
Companies under the Plan shall vest in the respective PageNet Companies as
reorganized under the Plan, free and clear of all claims, liens, charges, or
other encumbrances and equity interests except as provided for in the Plan or
the confirmation order. On and after the effective date, the reorganized PageNet
Companies may operate their businesses and may use, acquire or sell property and
compromise or settle any claims or equity interests, without supervision or
approval by the Bankruptcy Court and free of any restrictions of the Bankruptcy
Code or Bankruptcy Rules, other than those restrictions expressly imposed by the
Plan and the order of the Bankruptcy Court confirming the Plan. The Plan
provides that, except as otherwise provided therein, the reorganized PageNet
Companies will retain the exclusive right to pursue certain causes of action
against third parties (including actions to recover certain payments or
transfers that may have been made to creditors or other parties prior to the
commencement of the chapter 11 cases). The reorganized PageNet Companies will
have the right to pursue such causes of action to the extent they determine that
such pursuit is in their best interest.
Amendments to Certificate of Incorporation and By-Laws
On the effective date, upon consummation of the merger contemplated by the
Plan, (1) the certificate of incorporation of Paging Network, Inc., as amended
and restated in its entirety as set forth in Exhibit A to the merger agreement,
shall be the certificate of incorporation of the reorganized Paging Network,
Inc. and (2) the bylaws of the subsidiary used by Arch to effectuate the merger
as in effect immediately prior to the effective date, shall be the bylaws of the
reorganized Paging Network, Inc.
The Bankruptcy Code requires that upon the confirmation of a plan of
reorganization a debtor's charter documents must contain certain provisions,
including a provision prohibiting the issuance of non-voting equity securities.
To comply with this requirement, the Plan provides that reorganized PageNet
Companies will file an amended certificate of incorporation with the Secretary
of State of the State of Delaware in accordance with law. The amended
certificates of incorporation will prohibit the issuance of nonvoting equity
securities to the extent required by the Bankruptcy Code. After the effective
date, reorganized PageNet Companies reserve the right to amend and restate their
certificates of incorporation and other constituent documents as permitted by
law. At present, the PageNet Companies do not contemplate any such amendments.
Retention of Jurisdiction by the Bankruptcy Court
Under the terms of the Plan, after the effective date the Bankruptcy Court
will retain exclusive jurisdiction over the chapter 11 cases relating to the
PageNet Companies to:
- allow, disallow, determine, liquidate, classify, estimate or establish
the priority or secured or unsecured status of any claim, including the
resolution of any request for payment of any administrative expense claim
and the resolution of any and all objections to the allowance or priority
of claims or equity interests;
- grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or
the Plan, for periods ending on or before the effective date;
- resolve any matters related to the assumption, assumption and assignment
or rejection of any executory contract or unexpired lease to which a
PageNet Company is a party or with respect to which a PageNet Company may
be liable and to hear, determine, and if necessary, liquidate, any claims
arising from such matters, including those matters related to the
amendment after the effective date pursuant to the Plan to add any
executory contracts or unexpired leases to the list of executory
contracts and unexpired leases to be rejected;
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- ensure that distributions to holders of allowed claims and equity
interests are accomplished pursuant to the provisions of the Plan,
including ruling on any motion filed pursuant to the Plan;
- decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any
applications involving the PageNet Companies that may be pending on the
effective date;
- enter such orders as may be necessary or appropriate to implement or
consummate the provisions of the Plan and all contracts, instruments,
releases, indentures and other agreements or documents created in
connection with the Plan, the disclosure statement or the confirmation
order;
- resolve any cases, controversies, suits or disputes that may arise in
connection with the consummation, interpretation or enforcement of the
Plan or any obligations incurred in connection with the Plan;
- issue injunctions, enter and implement other orders or take such other
actions as may be necessary or appropriate to restrain interference with
consummation or enforcement of the Plan;
- resolve any cases, controversies, suits or disputes with respect to the
releases, injunction and other provisions contained in the Plan and enter
such orders as may be necessary or appropriate to implement such
releases, injunction and other provisions;
- enter and implement such orders as are necessary or appropriate if the
confirmation order is for any reason modified, stayed, reversed, revoked
or vacated;
- determine any other matters that may arise in connection with or relate
to the Plan, the disclosure statement, the confirmation order or any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan or the disclosure statement; and
- enter an order and/or final decree concluding the chapter 11 cases.
Cancellation of Instruments and Securities
On the effective date, except as otherwise provided in the Plan, the senior
subordinated notes issued by Paging Network, Inc., the old common stock and the
old stock options will be deemed canceled. In addition, the senior subordinated
note indentures will be canceled and will have no further force or effect except
to the limited extent required to allow for the distributions to be made in
accordance with the mechanics set out in the Plan.
Issuance of New Securities; Execution of Related Documents
On the effective date, the reorganized PageNet Companies or Arch shall
issue or cause to be distributed all securities, notes, instruments,
certificates, and other documents required to be issued pursuant to the Plan,
including, without limitation, the Arch common stock and the Vast Class B common
stock, all of which shall be distributed as provided in the Plan. The
reorganized PageNet Companies shall execute and deliver such other agreements,
documents and instruments as are required to be executed pursuant to the terms
of the Plan.
Management
The Plan provides that (1) the directors of the Arch merger subsidiary
immediately prior to the effective date shall be the initial directors of the
reorganized Paging Network, Inc. and (2) the officers of Paging Network, Inc.
immediately prior to the effective date shall be the initial officers of the
reorganized Paging Network, Inc. The PageNet Companies will disclose, on or
prior to the confirmation date, the identity and affiliations of any person
proposed to serve on the initial board of directors or as an initial officer of
the other reorganized PageNet Companies, and, to the extent such person is an
insider (as defined the Bankruptcy Code), the nature of any compensation for
such person.
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Subordination
The classification and manner of satisfying all claims and equity interests
and the respective distributions and treatments under the Plan takes into
account the relative priority of the claims and equity interests in each class
in connection with any contractual, legal or equitable subordination and any and
all such rights are settled, compromised and released pursuant to the Plan.
Accordingly, without limitation, the confirmation order will permanently enjoin,
effective as of the effective date, all persons and entities from enforcing or
attempting to enforce any related contractual, legal or equitable subordination
rights relating thereto, whether arising under general principles of equitable
subordination rights satisfied, compromised and settled under the Plan.
Resolution of Disputed Claims
After the confirmation date, only the PageNet Companies will have the
authority to file objections to claims or settle, compromise, withdraw or
litigate to judgment objections to claims. On and after the confirmation date,
the PageNet Companies can settle or compromise disputed claims without
Bankruptcy Court approval. The PageNet Companies reserve the right to ask the
Bankruptcy Court to estimate any contingent claim regardless of whether there
has been a previous objection to such claim. The estimated amount will be either
the allowed amount or a maximum limitation on such claim, as determined by the
Bankruptcy Court.
Under the Plan, holders of claims (other than claims arising from the
rejection of executory contracts or unexpired leases, senior subordinated note
related claims and old stock related claims) or equity interests are not
required to file proofs of claim or equity interest with the Bankruptcy Court.
In order to utilize the claims disallowance procedures of the Bankruptcy Code
against a holder of a claim, the PageNet Companies would be required to schedule
as disputed, unliquidated or contingent any claim to which it objects or to file
a separate objection to such claim and to obtain an order from a court
sustaining such objection. Additionally, the PageNet Companies would be
permitted to object to or contest any claim in the Bankruptcy Court or in any
appropriate non-bankruptcy forum, and, if such claim is discharged pursuant to
the Plan, to assert as a defense that such claim has been discharged.
Distributions for Claims Allowed as of the Effective Date
Except as otherwise provided in the Plan or as may be ordered by the
Bankruptcy Court, distributions to be made on the effective date on account of
claims that are allowed as of the effective date and are entitled to receive
distributions under the Plan shall be made on the effective date or as soon
thereafter as is practical. Distributions on account of claims that become
allowed claims after the effective date shall be made 20 days after the end of
the calendar quarter in which such claim was allowed.
Distributions with Respect to the Bank Secured Claims
All Tranche B-1 Arch credit facility notes or Amended PageNet Notes to be
distributed on account of allowed bank secured claims will be delivered by Arch
to the bank group's administrative agent for delivery by the administrative
agent bank to the holders of such claims, provided however, that holders of
allowed bank secured claims shall not receive, or be entitled to receive any
Tranche B-1 Arch credit facility notes or amended PageNet notes or other
distributions provided for in the Plan prior to executing a joinder agreement.
Distributions with Respect to the Senior Subordinated Note Claims, Old Stock
Related Claims and the Old Stock Interests
All distributions provided for in the Plan on account of allowed senior
subordinated note claims, allowed old stock related claims and allowed old stock
interests will be made by Arch and the reorganized PageNet Companies to an
exchange agent for delivery by the exchange agent to the holders of such claims
and interests. Notwithstanding the provisions of the Plan regarding cancellation
of the senior subordinated note indentures, the senior subordinated note
indentures shall continue in effect to the extent necessary to allow the
exchange agent to make distributions to holders of allowed senior subordinated
note claims.
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As soon as practicable after the effective date, the exchange agent will
send a transmittal letter to each holder of an allowed senior subordinated note
claim or an allowed old stock interest advising such holder of the effectiveness
of the Plan and the instructions for delivering any senior subordinated notes
and old common stock in exchange for the Arch common stock and the Vast Class B
common stock distributable pursuant to the Plan.
In the event any senior subordinated notes or old common stock shall have
been lost, stolen or destroyed, then upon the delivery to the exchange agent of
an appropriate affidavit and bond, the exchange agent will issue the shares of
Arch common stock and Vast Class B common stock distributable pursuant to the
Plan.
Any holder of a senior subordinated note claim or old common stock interest
that fails to surrender the applicable senior subordinated note or old common
stock (or loss affidavit and bond) (i) within 180 days after the effective date,
will be entitled to look only to the reorganized PageNet Companies for their
distributions under the Plan or (ii) within 3 years after the effective date
will have its claim or equity interest discharged and shall be forever barred
from asserting any such claim or equity interest.
As of the close of business on the business date immediately preceding the
effective date, the applicable transfer books for the senior subordinated notes
and the old common stock will be closed and any further transfers will be
prohibited. In the event of a transfer of ownership of a senior subordinated
note or old common stock that is not registered in the applicable transfer
books, distributions under the Plan shall be delivered to the holder of record
as indicated by the applicable transfer books unless the transferee of such
holder delivers an appropriate letter of transmittal to the exchange agent and
appropriate documentation to evidence that such transfer was in fact made and
that all applicable transfer taxes have been paid. If any Arch common stock or
Vast Class B common stock is to be issued in a name other than that in which the
senior subordinated note or old common stock surrendered in exchange therefor is
registered, the senior subordinated note or old common stock so surrendered
shall be transferable to the person designated by the registered holder upon
presentation of the note or stock, properly assigned and endorsed, and an
affidavit that the transfer is otherwise proper and the person requesting the
transfer has paid all applicable taxes.
If and when a dividend or other distribution is declared by Arch with
respect to Arch common stock, or Vast with respect to Vast Class B common stock,
the record date for which is on or after the effective date, that declaration
shall include dividends or other distributions with respect to all shares of
Arch common stock or Vast Class B common stock distributable pursuant to the
Plan. Such dividends and other distributions will not be paid to any holder of
any unsurrendered senior subordinated note or old common stock until such note
or stock is surrendered in accordance with the provisions of the Plan. Subject
to the provisions of the Plan, at any meeting of stockholders of Arch or Vast
with a record date on or after the effective date, registered holders of
unsurrendered senior subordinated notes or old common stock shall be entitled to
vote the number of shares of Arch common stock or Vast Class B common stock
represented by such senior subordinated notes or old common stock, regardless of
whether such holders have exchanged their senior subordinated notes or old
common stock; provided, however, that any such vote shall be at the times, upon
the conditions, and in the manner prescribed by the certificate of incorporation
and bylaws of Arch or Vast, respectively.
Notwithstanding any other provision of the Plan, the Arch common stock will
only be issued in whole shares. In lieu of any fractional shares, the exchange
agent will make a cash payment determined by multiplying such fraction (rounded
to the nearest one-hundredth of a share) by the average closing price of a share
of Arch common stock, as reported in The Wall Street Journal, New York City
edition, 10 days immediately prior to the effective date.
Distributions with Respect to the Old Stock Option Interests
As soon as practicable after the effective date, Arch will send appropriate
notices to each stock plan administrator for delivery to holders of allowed old
stock option interests setting forth such holders' rights pursuant to the
substitute options to be issued under the Plan.
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Distributions with Respect to the Other Claims
All distributions provided for in the Plan on account of all other allowed
claims will be made by the reorganized PageNet Companies, or their disbursing
agent.
Undeliverable and Unclaimed Distributions
All distributions under the Plan will be sent by mail to the latest mailing
address filed with the Bankruptcy Court for the party entitled thereto or, if no
such mailing address has been so filed, the mailing address reflected in the
PageNet Companies schedules or, in the case of the holders of allowed senior
subordinated note claims, to the latest mailing address maintained of record by
the pertinent indenture trustee.
If any distribution is returned as undeliverable, no further distributions
shall be made to such holder until the reorganized PageNet Companies are
notified in writing of such holder's then-current address. The reorganized
PageNet Companies will file with the Bankruptcy Court, from time to time, a
listing of the holders of unclaimed distributions. This list will be maintained
until the entry of an order and/or final decree concluding the chapter 11 cases.
Any holder of an allowed claim or allowed equity interest that fails to assert a
claim or interest for an undeliverable distribution within 3 years after the
effective date will have its claim or interest for such undeliverable
distribution discharged and shall be forever barred from asserting any such
claim or interest. Within 20 days after the end of each calendar quarter
following the effective date, the reorganized PageNet Companies or Arch shall
make all distributions provided under the Plan that become deliverable during
the preceding calendar quarter.
In connection with the Plan, to the extent applicable, the PageNet
Companies shall comply with all tax withholding and reporting requirements
imposed on them by any governmental unit, and all distributions pursuant to the
Plan shall be subject to such withholding and reporting requirements.
Setoffs
The reorganized PageNet Companies may, pursuant to the Bankruptcy Code or
any other applicable bankruptcy or non-bankruptcy law, set off against any
allowed claim and the distributions to be made pursuant to the Plan on account
of such claim (before any distribution is made on account of such claim), the
claims, rights and causes of action of any nature that the PageNet Companies or
the reorganized PageNet Companies may hold against the holder of such allowed
claim; provided, however, that neither the failure to effect such a setoff nor
the allowance of any claim hereunder shall constitute a waiver or release by the
PageNet Companies or the reorganized PageNet Companies of any such claims,
rights and causes of action that the PageNet Companies or the reorganized
PageNet Companies may possess against such holder.
CONDITIONS TO CONSUMMATION
It is a condition to consummation of the Plan that the following conditions
have been satisfied or waived pursuant to the Plan:
- the confirmation order has been signed by the Bankruptcy Court and duly
entered on the docket for the chapter 11 cases by the clerk of the
Bankruptcy Court in form and substance acceptable to the PageNet
Companies and Arch;
- the confirmation order shall be a final non-appealable order; and
- all conditions precedent to the closing of the merger shall have been
satisfied or waived.
Waiver of Conditions
The conditions precedent to the closing of the merger may be waived only
pursuant to the terms of the merger agreement. The remaining conditions
precedent to consummation may be waived with the consent of Arch, Arch's merger
subsidiary and the PageNet Companies. The PageNet Companies may waive any such
conditions without leave or order of the Bankruptcy Court, and without any
formal action other than proceeding to consummate the Plan.
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Effect of Vacation of Confirmation Order
If the confirmation order is vacated, the Plan shall be null and void in
all respects, except for the assumption of the merger agreement which will
continue in effect, and nothing contained in the Plan or the disclosure
statement shall:
- constitute a waiver or release of any claims by or against, or any equity
interests in, the PageNet Companies;
- prejudice in any manner the rights of the PageNet Companies; or
- constitute an admission, acknowledgment, offer or undertaking by the
PageNet Companies in any respects.
EFFECT OF CONSUMMATION OF THE PLAN
Vesting of Rights
Except as otherwise provided in the Plan or the confirmation order, on and
after the effective date, all property of the PageNet Companies and any property
acquired by the PageNet Companies under the Plan shall vest in the PageNet
Companies, as reorganized under the Plan, free and clear of all claims, liens,
charges, or other encumbrances and equity interests.
Discharge
Except as provided in the Plan or the confirmation order:
- the rights afforded in the Plan and the treatment of all claims and
equity interests therein, shall be in exchange for and in complete
satisfaction, discharge and release of claims and equity interests of any
nature whatsoever, including any interest accrued on such claims from and
after the date the PageNet Companies file the chapter 11 cases with the
Bankruptcy Court, against the PageNet Companies, or any of their assets
or properties;
- on the effective date, all such claims against the PageNet Companies
shall be satisfied, discharged and released in full; and
- all persons and entities shall be precluded from asserting against the
PageNet Companies, the reorganized PageNet Companies, their successors or
their assets or properties any other or further claims or equity
interests based upon any act or omission, transaction or other activity
of any kind or nature that occurred prior to the confirmation date.
Binding Effect
The provisions of the Plan, if confirmed, will bind all holders of claims
and equity interests regardless of whether they accept the Plan or are entitled
to vote with respect to the Plan. The distributions provided for in the Plan, if
any, will be in exchange for and in complete satisfaction, discharge and release
of all impaired claims against and equity interests in the PageNet Companies or
any of their assets or properties, including any impaired claim or equity
interest accruing after the date of the commencement of the chapter 11 cases and
prior to the confirmation date. All holders of impaired claims and equity
interests will be precluded from asserting any claim against the PageNet
Companies or their assets or properties based on any transaction or other
activity of any kind that occurred prior to the confirmation date.
MODIFICATION OF THE PLAN
Amendments to any material provisions of the Plan may be made by the
PageNet Companies only with the consent of Arch. Any amendments or modifications
to the Plan made after the date the chapter 11 cases are filed and before or
after the confirmation date may be made only in accordance with the provisions
of the Bankruptcy Code and the Bankruptcy Rules. The PageNet Companies reserve
the right to use acceptances obtained with respect to the Plan to confirm any
amendments to the Plan to the extent permitted by law.
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The PageNet Companies will resolicit acceptances of the Plan only if a
modification to the Plan adversely changes the treatment of the claim of any
creditor or the interest of any equity security holder who has not accepted in
writing the modification.
At all times the PageNet Companies reserve the right, subject to their
obligations under the merger agreement, in their sole discretion not to file the
Plan, or, if they file the Plan, to withdraw the Plan at any time prior to
confirmation, in which case the Plan will be deemed to be null and void. In such
an event, nothing contained in the Plan or this prospectus will be deemed to
constitute a waiver or release of any claims by or against the PageNet Companies
or any other person, nor shall the Plan or this prospectus prejudice in any
manner the rights of the PageNet Companies or constitute an admission,
acknowledgment, offer or undertaking by the PageNet Companies in any respects.
INTENDED ACTIONS DURING THE CHAPTER 11 CASES
In addition to seeking confirmation of the Plan, during the pendency of the
chapter 11 cases, the PageNet Companies intend to seek relief from the
Bankruptcy Court as to various matters, certain of which are described below.
While the PageNet Companies believe each of the requests, if granted, would
facilitate the chapter 11 cases, there can be no assurance that the Bankruptcy
Court will grant any such relief or that circumstances will not change in a
manner that causes the PageNet Companies to elect not to request such relief.
Provisions Relating to the Merger Agreement
Under the merger agreement, upon the commencement of the chapter 11 cases
the PageNet Companies are required to seek Bankruptcy Court approval of the
provisions of the merger agreement that restrict the PageNet Companies' ability
to solicit other offers for the PageNet Companies' businesses, and that require
(1) the PageNet Companies to pay a termination fee to Arch upon certain
termination events and (2) Arch to pay a termination fee to the PageNet
Companies upon certain termination events. The PageNet Companies intend to seek
such approval from the Bankruptcy Court pursuant to the terms of the merger
agreement. In the event such approval is not obtained within 30 days of the
commencement of the chapter 11 cases, Arch has the right to terminate the merger
agreement without paying a termination fee to the PageNet Companies.
Payment of Prepetition General Unsecured Claims
During the pendency of the chapter 11 cases that may be filed in connection
with the restructuring, the PageNet Companies intend to operate their businesses
in the ordinary course and to make payment in full on a timely basis for all
goods and services provided after the commencement of the chapter 11 cases. The
PageNet Companies also will seek approval immediately upon the filing of their
petitions to pay in full in the ordinary course of business the pre-petition
claims owing to general unsecured creditors that were incurred in the ordinary
course of PageNet's business (not including claims under the senior subordinated
notes or old stock related claims). Management expects that the PageNet
Companies will have sufficient funds to pay their prepetition and postpetition
general unsecured creditors in the ordinary course of business through the
conclusion of the chapter 11 cases.
Provisions for Employees; Retention Programs; Employment Contracts
The PageNet Companies intend to seek relief from the Bankruptcy Court so
that salaries, wages accrued and unpaid vacation, health benefits, severance
benefits and similar employee benefits will be unaffected by the filing of the
chapter 11 cases. The PageNet Companies intend to seek the approval of the
Bankruptcy Court, immediately upon commencement of the chapter 11 cases, to
honor payroll checks outstanding as of the date of the commencement of the
chapter 11 cases, to permit employees to utilize their paid vacation time which
was accrued prior to the filing and to continue paying medical and other
employee benefits under the applicable health plans. The PageNet Companies also
intend to seek the authority to honor their executive retention program and
employee retention program and assume employee contracts with certain executives
and key managers. There can be no assurance, however, that all or part of such
approval will be obtained.
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Employee claims and benefits not paid or honored, as the case may be, prior to
the consummation of the Plan, will be paid or honored upon consummation or as
soon thereafter as such payment or other obligation becomes due or payable.
Employee benefit claims that accrue prior to the date of the commencement of the
chapter 11 cases, will receive unimpaired treatment under the terms of the Plan.
Cash Management
The PageNet Companies believe it would be disruptive to their operations if
they were forced to significantly change their cash management system upon the
commencement of the chapter 11 cases. The PageNet Companies intend to seek
relief from the Bankruptcy Court immediately upon commencement of the chapter 11
cases (1) to be authorized to maintain their cash management system and (2) to
grant a superpriority claim to any PageNet Company that advances funds to any
other PageNet Company through the consolidated cash management system during the
chapter 11 cases in the amount of such advance, in the borrowing PageNet
Company's chapter 11 case.
Retention of Professionals
The PageNet Companies intend to seek authority to employ Houlihan, Lokey,
Howard & Zukin Capital as their financial advisor and investment banker,
, as their general bankruptcy counsel, Mayer, Brown & Platt as
their special counsel for corporate matters, Ernst & Young LLP as their auditor,
and as their public relations advisors.
Bar Date for Certain Senior Subordinated Note Related Claims and Old Stock
Related Claims
The PageNet Companies intend to seek an order setting a bar date by which
the holders of any and all senior subordinated note claims that intend to assert
a claim for amounts due with respect to any senior subordinated note, other than
for principal and accrued interest which are deemed allowed under the Plan, and
the holders of old stock related claims, will be required to file a proof of
claim setting forth the basis for and evidencing their alleged claims. The
failure of any holder to file their claim on or before the bar date set by the
bankruptcy court will forever bar such holder from asserting such claim against
any PageNet Company.
Insurance Programs
The PageNet Companies intend to seek the authority to maintain and continue
their insurance programs, including workers' compensation, as such programs are
presently administered.
Trade Payables
The PageNet Companies intend to seek the authority to pay all pre-petition
trade payables and to honor all obligations to its trade vendors.
Utility Service
The PageNet Companies intend to seek an order restraining utilities from
discontinuing, altering or refusing service.
CONFIRMATION STANDARDS
The Bankruptcy Code sets forth the requirements that must be satisfied to
confirm a plan of reorganization. A number of the more significant confirmation
requirements are discussed below. The PageNet Companies believe that they have
complied or will comply with each of these requirements.
Good Faith and Compliance with Law
The Bankruptcy Code requires that a plan of reorganization be proposed in
good faith and disclose certain relevant information regarding payments due and
the nature of compensation to insiders. The PageNet
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Companies believe they have satisfied these requirements and will seek a ruling
to that effect from the Bankruptcy Court in connection with confirmation of the
Plan.
Best Interests
The Bankruptcy Code requires that, with respect to each impaired class,
each member of such class either:
- accepts the Plan; or
- will receive or retain under the Plan on account of its claim or equity
interest property of a value, as of the effective date, that is at least
equal to the value of the property that such member of the class would
receive or retain if the PageNet Companies were liquidated under chapter
7 of the Bankruptcy Code.
The PageNet Companies believe that the Plan meets this test and will seek
appropriate findings from the Bankruptcy Court in connection with the
confirmation of the Plan. See "Liquidation Analysis."
Feasibility
The Bankruptcy Court must also determine that the Plan is feasible and is
not likely to be followed by liquidation or further reorganization of the
PageNet Companies. To determine whether the Plan meets this requirement, the
PageNet Companies have analyzed their ability, along with Arch, to meet their
obligations under the Plan. This analysis includes a forecast of financial
performance of Arch and the reorganized PageNet Companies. Such forecast,
together with the underlying assumptions, is set forth in Annex E to this
prospectus under "Unaudited Combined Company Projections." Based upon such
forecast, the PageNet Companies believe that they will have the financial
capability to satisfy their obligations following the effective date.
Accordingly, the PageNet Companies will seek a ruling to that effect in
connection with the confirmation of the Plan.
Plan Acceptance
The Bankruptcy Code requires, subject to certain exceptions, that the Plan
be accepted by all impaired classes of claims and equity interests. Classes of
claims that are not "impaired" under a plan are deemed to have accepted the plan
and are not entitled to vote. A class of claims accepts a plan if the holders of
at least 66 2/3% in dollar amount and more than one-half in number of the
allowed claims in that class that actually vote on the plan, vote to accept the
plan. A class of equity interests accepts a plan if at least 66 2/3% of the
allowed interests in that class that actually vote on the plan vote to accept
the plan. Holders of claims or equity interests who fail to vote or who abstain
will not be counted to determine the acceptance or rejection of the Plan by any
impaired class. The PageNet Companies may, however, request confirmation of the
Plan even though some impaired classes have not accepted the Plan.
The Bankruptcy Code provides that acceptances obtained prior to the filing
of a petition will be effective in a chapter 11 case only if the pre-petition
solicitation of the acceptances complied with applicable non-bankruptcy law
governing the adequacy of disclosure, such as federal securities laws and
regulations. For example, under the Securities Act, no offer to buy or sell a
security may be made except pursuant to an effective registration statement. If
there is no such applicable non-bankruptcy law, "adequate information" as
defined under the Bankruptcy Code requires that information sufficient to enable
a hypothetical reasonable investor to make an informed judgement with respect to
the Plan be furnished in connection with the solicitation. The PageNet Companies
intend to use the ballots received pursuant to this solicitation to confirm the
Plan if they file their chapter 11 cases. The PageNet Companies believe that
this solicitation complies with such applicable non-bankruptcy law and otherwise
contains "adequate information" and will seek appropriate findings from the
Bankruptcy Court in this regard.
CONFIRMATION OF THE PLAN WITHOUT ACCEPTANCE BY ALL CLASSES OF IMPAIRED CLAIMS
The Bankruptcy Code lists 13 individual requirements that must be satisfied
by the PageNet Companies before the Plan can be confirmed. Among these
requirements is that each class has either accepted the Plan or
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is not impaired under the Plan. For purposes of the Plan, this means that the
following classes would be required to accept the Plan:
- Class 2 -- Bank Secured Claims;
- Class 5 -- Senior Subordinated Note Claims;
- Class 6 -- Old Stock Related Claims;
- Class 7 -- Old Stock Interests; and
- Class 8 -- Subsidiary Stock Interests and Subsidiary Claims.
The other classes in the Plan are unimpaired, so they are deemed to have already
accepted the Plan.
The Bankruptcy Code provides an exception to the requirement that every
class must accept a plan of reorganization. This exception is commonly known as
the "cramdown" provision. This provision may allow the PageNet Companies to
confirm the Plan even if one or more, but not all, of the impaired classes
rejects the Plan. If the PageNet Companies can demonstrate to the Bankruptcy
Court that the Plan satisfies the requirements of the "cramdown" provision, each
impaired class that voted to reject the Plan would, nonetheless, be bound to the
treatment afforded to that class under the Plan.
To obtain confirmation of the Plan using the "cramdown" provision, the
PageNet Companies must demonstrate to the Bankruptcy Court that, as to each
class that has rejected the Plan, the treatment afforded to such class under the
Plan "does not discriminate unfairly" and is "fair and equitable."
In general, a plan does not discriminate unfairly if it provides a
treatment to the class that is substantially equivalent in value to the
treatment that is provided to other classes consisting of claims that have equal
rank. In determining whether a plan discriminates unfairly, courts will take
into account a number of factors, including the effect of applicable
subordination agreements between parties. Accordingly, two classes of unsecured
creditors could be treated differently without unfairly discriminating against
either class.
In general, the Bankruptcy Code applies a different test to holders of
secured claims, unsecured claims and equity interests to determine whether the
treatment proposed in a plan of reorganization is "fair and equitable." In
general, a plan of reorganization is "fair and equitable" to a holder of:
- secured claims if the (a) plan provides that the holder (1) will retain
the lien or liens securing its claim and (2) will receive cash payments,
normally evidenced by a note, that total at least the amount of its
claim, with such payments having a present value at least equal to the
value of the collateral securing the claim or (b) the holder of the
secured claim receives property that is the indubitable equivalent of the
claim to be satisfied;
- unsecured claims if the plan provides that (1) the holder will retain
property having a value equal to the amount of its claim or (2) no holder
of a claim or interest that is junior to the creditor receives any value
under the plan of reorganization; and
- equity interest if the plan provides that the holder (1) will retain
property equal to the greatest of the allowed amount of any liquidation
preference to which such holder is entitled, any redemption price to
which such holder is entitled or the value of such interest or (2) no
holder of an interest that is junior to the holder will receive any value
under the plan of reorganization.
Under the Bankruptcy Code, to the extent holders in a class receive no
distribution under the Plan, the class is deemed to reject the Plan. In the
event that any impaired class fails to accept the Plan, the PageNet Companies
reserve the right (1) to request that the Bankruptcy Court confirm the Plan in
accordance with the "cramdown" provision under the Bankruptcy Code and/or (2) to
modify the Plan. Any such confirmation would be subject to judicial approval of
this solicitation and the Plan, including as required under the "cramdown"
provisions of the Bankruptcy Code.
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CERTAIN CONSEQUENCES OF NON-ACCEPTANCE
If the requisite acceptances are not received by the expiration date of the
solicitation period specified herein, the PageNet Companies will be forced to
evaluate options then available to them. Options available to the PageNet
Companies could include extending the solicitation period, seeking
non-consensual confirmation of the Plan on the basis described above or on some
other basis, submission of a revised plan of reorganization to its creditors and
equity interest holders, filing for protection under the Bankruptcy Code without
a preapproved plan of reorganization or pursuing a non-bankruptcy restructuring.
In the event a bankruptcy proceeding is commenced without the prior
acceptance of the Plan, there is a risk that the Plan would not be accepted by
all classes and may be found not to satisfy the "cramdown" standards and would
not be confirmed. PageNet would then be required to evaluate its then available
options which would include submission of a revised plan of reorganization or
liquidation. There can be no assurance that the PageNet Companies would be able
to successfully propose and confirm a different plan of reorganization and the
PageNet Companies might be forced into a liquidation proceeding under chapter 7
of the Bankruptcy Code if another alternative plan was not successfully
proposed. If, on the other hand, the requisite acceptances are obtained and the
Plan is confirmed, the treatment and settlement of claims and equity interests
provided for in the Plan for each class of the PageNet Companies' debt and
equity securities will be made to each holder of a claim or equity interest,
whether or not they have voted to accept the Plan.
VOTING PROCEDURES
Pursuant to this prospectus, votes are being solicited for approval of the
Plan. Following the commencement of the chapter 11 cases, the Plan will, if and
to the extent required, be submitted to creditors and holders of equity
interests for their vote. Those creditors and equity interest holders whose
votes were solicited in accordance with the requirements of the Bankruptcy Code
prior to the filing of the chapter 11 cases will be bound by such votes as
described above. All other creditors, if any, whose claims are impaired under
the Plan and who are not deemed by the Bankruptcy Code to have voted to accept
the Plan or to reject the Plan will be offered the opportunity to vote to accept
or reject the Plan. The Bankruptcy Court will set a deadline by which all
ballots must be received. Holders of claims and equity interests entitled to
vote will receive with the ballots a detailed notice instructing them as to how
to fill out the ballot, to whom to return the ballot and all applicable
deadlines.
BEST INTERESTS TEST
GENERAL
The Bankruptcy Code requires, with respect to each impaired class, that
each holder of an allowed claim or interest in an impaired class either (a)
accept the Plan or (b) will receive or retain under a plan of reorganization on
account of such claim or interest property of a value that is not less than the
amount that such holder would receive or retain if the PageNet Companies were
liquidated under chapter 7 of the Bankruptcy Code. This is the so-called "best
interests test". The test considers hypothetically, the fair salable value of a
debtors assets through liquidation in a chapter 7 bankruptcy proceeding and the
value of distributions to creditors and interest holders that would be
distributed as a result of such liquidation, often taking into account the costs
that would be incurred and the additional liabilities that would arise as a
result of the liquidation in such a proceeding.
If the Plan is not confirmed, and the chapter 11 cases are converted to
cases under chapter 7 of the Bankruptcy Code, a trustee would be elected to
liquidate the PageNet Companies' assets. The proceeds of the liquidation would
be distributed to the respective holders of allowed claims and equity interests
in the PageNet Companies in accordance with the priorities established by the
Bankruptcy Code. The chapter 7 trustee would be entitled to a percentage fee for
the trustee's services which is based upon the total amount of funds disbursed
to parties in interest. Pursuant to the Bankruptcy Code, the trustee would be
entitled to up to a 25% fee of the first $5,000 disbursed, up to a 10% fee of
the amounts disbursed between $5,000 and $50,000, up to a 5% fee of the amount
between $50,000 and $1 million, and reasonable compensation not to exceed 3% of
the
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amount disbursed in excess of $1 million. The trustee is also authorized to
retain professionals, including accountants and attorneys, to liquidate the
chapter 7 estates.
Under chapter 7, a secured creditor whose claim is fully secured would be
entitled to full payment, including, without limitation, interest from the
proceeds of the sale of its collateral. Unless its claim is nonrecourse, a
secured creditor whose collateral is insufficient to pay its claim in full would
be entitled to assert an unsecured claim for its deficiency. Claims entitled to
priority under the Bankruptcy Code would be paid in full before any distribution
to general unsecured creditors, including, without limitation, the chapter 7
trustee's fee and the amounts due to the professionals retained by the chapter 7
trustee. Funds, if any, remaining after payment of secured claims, the costs of
administering the chapter 7 case and liquidation, and priority claims would be
distributed pro rata to general unsecured creditors, and, to the extent of any
remaining funds, to stockholders. If subordination agreements were to be
enforced, senior unsecured claims would be paid in full before any distribution
would be made to subordinated creditors.
The PageNet Companies believe that liquidation under chapter 7 would result
in a substantial diminution of the value of the estate because of:
- failure to realize the greater going-concern value of the PageNet
Companies' assets;
- the erosion in value of the assets of the PageNet Companies in the
context of expeditious liquidation required under chapter 7 and the
"forced sale" atmosphere that would prevail;
- additional administrative expenses that would be incurred by a chapter 7
trustee and its attorneys, accountants and other professionals to assist
such trustees;
- additional expenses and claims, some of which would be entitled to
priority, that would arise by reason of the liquidation and from the
rejection of leases and other executory contracts in connection with a
cessation of the PageNet Companies' operations; and
- the costs attributable to the time value of money resulting from what is
likely to be a more protracted proceeding than if the Plan is confirmed
(because of the time required to liquidate the assets of the PageNet
Companies, resolve claims and related litigation and prepare for
distributions).
THE LIQUIDATION ANALYSIS
The PageNet Companies' management is preparing a hypothetical chapter 7
liquidation analysis to assist holders of impaired claims and equity interests
to reach a determination as to whether to accept or reject the Plan. The
liquidation analysis is being prepared to indicate the estimated net present
asset values which may be allocated to creditors and equity interests if the
PageNet Companies' assets are liquidated, pursuant to chapter 7 of the
Bankruptcy Code, as an alternative to the continued operation of the PageNet
Companies' businesses. The liquidation analysis is provided solely to disclose
the effects of a hypothetical liquidation of the PageNet Companies under chapter
7 of the Bankruptcy Code, subject to the assumptions set forth below.
Underlying the liquidation analysis are a number of estimates and
assumptions that, although developed and considered reasonable by management of
the PageNet Companies, are inherently subject to economic and competitive
uncertainties and contingencies that are beyond the PageNet Companies' control.
Accordingly, there can be no assurance that the values assumed in the
liquidation analysis would be realized if the PageNet Companies were in fact
liquidated. In addition, any liquidation that would be undertaken would
necessarily take place in future circumstances which cannot currently be
predicted. Accordingly, while the liquidation analysis is necessarily presented
with numerical specificity, if the PageNet Companies were in fact liquidated,
the actual liquidation proceeds would likely vary from the amounts set forth
below. Such actual liquidation proceeds could be materially lower, or higher,
than the amounts set forth below and no representation or warranty can be or is
being made with respect to the actual proceeds that could be received in a
chapter 7 liquidation. The liquidation analysis has been prepared solely for
purposes of estimating the proceeds available to creditors and equity interests
and does not represent values that may be appropriate for any other purpose.
Nothing contained in the liquidation analysis is intended or may constitute a
concession or admission of the PageNet Companies for any other purpose.
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The PageNet Companies have approached this liquidation analysis on an asset
liquidation basis because there can be no assurance that the PageNet Companies'
FCC licenses would not be revoked by the FCC upon a conversion of the chapter 11
cases to chapter 7 cases, thereby eliminating the possibility that the PageNet
Companies could continue operating or be sold as a "going concern" or "going
concerns".
The liquidation analysis assumes that the PageNet Companies' assets would
be broken up and sold by a chapter 7 trustee or its duly appointed advisors,
brokers or liquidators irrespective of their current use. Some of the PageNet
Companies' assets when broken up may not be able to be sold or may realize
minimal proceeds.
The PageNet Companies believe, based on the assumptions set forth herein,
that the value of the distributions offered to the members of each class of
impaired claims and equity interests under the Plan will be greater than the
distribution such creditors and stockholders would receive in a liquidation
under chapter 7.
The Bankruptcy Code requires that the Bankruptcy Court confirm a plan of
reorganization only if certain requirements are met, including a requirement
that each holder of an impaired claim of equity interest who does not consent to
the Plan receive or retain property that has a value of at least equal to the
distribution such holder would receive if the PageNet Companies were liquidated
under chapter 7 of the Bankruptcy Code.
STATEMENT OF ASSETS AND LIQUIDATION PROCEEDS
[to be filed by amendment]
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
SCOPE AND LIMITATION
The following general discussion summarizes the principal federal income
tax considerations which are generally applicable to the merger and the PageNet
exchange offer. This discussion is also applicable to the implementation of
these transactions through the consensual plan of reorganization in bankruptcy.
This discussion assumes that the PageNet stockholder or noteholder, as the case
may be, is a citizen or resident of the United States for federal income tax
purposes, and holds the shares of PageNet common stock or PageNet notes as
capital assets. This discussion does not purport to be a complete analysis of
all the potential tax effects that may be relevant to a particular stockholder
or noteholder and does not address the federal income tax consequences relevant
to particular categories of stockholders or noteholders subject to special
treatment under the federal income tax laws, such as broker dealers, financial
institutions, life insurance companies, tax-exempt entities, and foreign
individuals and entities. In addition, it does not describe any tax consequences
arising out of the laws of any state, locality, or foreign jurisdiction.
This discussion is based upon the Internal Revenue Code of 1986, as
amended, temporary and final Treasury Regulations promulgated thereunder,
proposed Treasury Regulations, published rulings, notices and other
administrative pronouncements of the Internal Revenue Service, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial, or administrative action. Any such changes may be
retroactively applied in a manner that could adversely affect a stockholder or
noteholder. No rulings have been requested from the Internal Revenue Service
concerning any of the matters described in this prospectus. In some cases,
particularly those as to which the discussion below is qualified, there is a
risk that the Internal Revenue Service will disagree with the conclusions set
forth.
EACH PAGENET NOTEHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING THE
DECISION TO EXCHANGE NOTES FOR PAGENET COMMON STOCK AND CLASS B COMMON STOCK OF
VAST AND TO CONSENT TO THE CONSENSUAL PLAN OF REORGANIZATION IN BANKRUPTCY AS
WELL AS THE SPECIFIC TAX CONSEQUENCES (FOREIGN, FEDERAL, STATE, AND LOCAL)
APPLICABLE TO IT. EACH PAGENET STOCKHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR
CONCERNING THE DECISION TO CONSENT TO THE CONSENSUAL PLAN OF REORGANIZATION IN
BANKRUPTCY AS WELL AS THE SPECIFIC TAX CONSEQUENCES (FOREIGN, FEDERAL, STATE AND
LOCAL) APPLICABLE TO IT.
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GENERAL
Interdependence of Transactions
The exchange offer, the merger and the distribution of shares of Class B
common stock of Vast are all mutually interdependent transactions, that is, none
will be consummated unless all are consummated. As explained above under "The
Exchange Offer -- Terms of the Exchange Offer," PageNet common stock received by
an exchanging noteholder in the exchange offer will be immediately exchanged for
Arch common stock in the merger. Also, as explained above under "The Spin-off
Distribution," a PageNet stockholder will receive Class B common stock of Vast
if and only if the merger occurs.
For federal income tax purposes, these transactions should be treated as
occurring under a single integrated plan. The discussion below reflects this
treatment. Because both PageNet common stockholders and exchanging noteholders
will participate in the merger, the tax consequences to each of them depend in
substantial part on whether the merger qualifies as a tax free reorganization.
Qualification of the Merger as a Tax-Free Reorganization
The obligations of Arch and PageNet to consummate the merger are
conditioned respectively upon the receipt by Arch of the opinion of Hale and
Dorr LLP, counsel to Arch, and by PageNet of the opinion of Mayer, Brown &
Platt, counsel to PageNet, that on the basis of the facts, representations and
assumptions set forth or referred to therein, for U.S. federal income tax
purposes, the merger will qualify as a tax free reorganization under Section
368(a) of the Internal Revenue Code, and that each of PageNet, the transitory
subsidiary of Arch which will merge into PageNet, and Arch will be a party to
the reorganization within the meaning of Section 368(b) of the Internal Revenue
Code. However, neither PageNet nor Arch has requested or will request an advance
ruling from the Internal Revenue Service as to the tax consequences of the
merger, and there can be no assurance that the Internal Revenue Service will
agree with the conclusions set forth in these opinions. Moreover, the tax
opinions are based upon certain facts, representations and assumptions set forth
or referred to therein, including representations concerning the expected
relative values of Arch common stock to be issued as consideration in the merger
and the value of the Class B common stock of Vast to be distributed, which will
be evidenced by certificates to be delivered to counsel at the effective time of
the merger by the management of each of PageNet and Arch. Investment bankers'
certificates as to the reasonableness of the assumed values for Arch common
stock and the Class B common stock of Vast will be given. If the relative values
of the Arch common stock and the Class B common stock of Vast differ materially
from the assumptions, or if the certificates to be issued by Arch and PageNet
are otherwise incorrect in certain material respects, the conclusions reached by
counsel in their tax opinions would be jeopardized.
FEDERAL INCOME TAX CONSEQUENCES TO EXCHANGING NOTEHOLDERS
The following discussion applies to noteholders who exchange their notes
pursuant to the exchange offer or, in the case of implementation of the
consensual plan of reorganization in bankruptcy, to all noteholders. The
issuance of Arch common stock and Class B common stock of Vast to the
noteholders who exchange their notes will constitute an exchange for federal
income tax purposes. (As noted above, because PageNet common stock initially
received by exchanging noteholders will be exchanged immediately for Arch common
stock, the discussion below refers to the exchanging noteholders as receiving
Arch common stock.) The federal income tax consequences of the exchange will
depend upon a number of factors, including whether such exchange is part of a
tax free reorganization or a taxable transaction, whether the notes held by each
noteholder constitute "securities" for federal income tax purposes, and whether
the noteholder reports on an accrual basis.
The federal income tax consequences to exchanging noteholders will depend
in part upon whether their notes constitute "securities." The term "security" is
not defined in the Internal Revenue Code or applicable regulations and has not
been clearly defined by court decisions. The determination of whether an
instrument constitutes a "security" for federal income tax purposes is based
upon all the facts and circumstances. Although the term of the debt is the most
significant factor, an overall evaluation of the nature of the debt, the degree
of participation and continuing interest in the business, the extent of
proprietary interest compared with
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<PAGE> 105
the similarity of the note to a cash payment, the purpose of the advances and
other factors must be considered. In general, a bona fide debt instrument with a
term of ten years or more is likely to be classified as a "security." The notes
have original terms to maturity of greater than 10 years.
Assuming that (1) the notes constitute "securities" for federal income tax
purposes and (2) consistent with the tax opinion discussed above, that the
merger qualifies as a "reorganization" under Section 368 of the Internal Revenue
Code, the exchange should qualify as an exchange in a "reorganization" under
Section 354 of the Internal Revenue Code of securities for stock and other
property. In such case, the noteholders will not recognize gain on the receipt
of Arch common stock in satisfaction of their notes except to the extent of (a)
amounts allocable to accrued interest, as described below, (b) cash received in
lieu of fractional share interests, if any, and (c) the amount of gain
attributable to the receipt of the Class B common stock of Vast, as described in
the next paragraph. An exchanging noteholder may not recognize a loss on the
exchange (except to the extent that previously accrued unpaid interest is not
satisfied in full or that cash is received in lieu of fractional share
interests).
In general, an exchanging noteholder will "realize" gain only if and to the
extent that the total fair market value of the Class B common stock of Vast and
the Arch common stock received by the exchanging noteholder (other than amounts
attributable to accrued interest) is greater than the noteholder's tax basis in
the notes surrendered. Any gain realized will be recognized and thus included in
taxable income only to the extent of the fair market value of any "boot" (i.e.,
property not qualifying for tax-free exchange treatment) received in the
exchange. The shares of Class B common stock of Vast would be treated as "boot"
for this purpose. Thus, an exchanging noteholder would recognize such holder's
realized gain, if any (determined without regard to amounts attributable to
accrued interest), but not in an amount in excess of the fair market value of
the shares of Class B common stock of Vast received. An exchanging noteholder's
tax basis in the shares of Class B common stock of Vast received in the exchange
will equal the fair market value of the shares of Class B common stock of Vast
at the effective time of the merger, and the holding period for shares of Class
B common stock of Vast will commence on the day after the exchange. An
exchanging noteholder's tax basis in the Arch common stock received in the
exchange (other than amounts attributable to accrued interest) will equal such
holder's tax basis in the notes surrendered in the exchange, immediately prior
to the exchange, decreased by the fair market value of the shares of Class B
common stock of Vast received (other than amounts attributable to accrued
interest) and increased by the amount of gain recognized on the exchange. The
holding period of such Arch common stock will include the exchanging
noteholder's holding period for the notes exchanged.
If the notes do not constitute "securities" or if the merger does not
constitute a "reorganization" under Section 368(a) of the Internal Revenue Code,
the entire amount of the noteholder's gain or loss, measured by the difference
between (1) the fair market value of Arch common stock and the shares of Class B
common stock of Vast received in the exchange (other than amounts attributable
to accrued interest) and (2) the noteholder's tax basis in the notes
surrendered, would be recognized for federal income tax purposes. Tax basis in
the Arch common stock received would equal the fair market value of the Arch
common stock on the date of the exchange, and the holding period for the Arch
stock would begin on the day after the exchange.
In addition, an exchanging noteholder may recognize gain or loss to the
extent that cash is received in lieu of fractional shares of Arch common stock.
See discussion under "-- Federal Income Tax Consequences to PageNet Common
Stockholders -- Receipt of Arch Common Stock Pursuant to the Merger."
Character of Gain or Loss
Except as discussed under "Market Discount" below, any gain or loss
recognized on the exchange will generally be capital gain or loss if the
noteholder held the notes as a capital asset, and such gain or loss will be
long-term capital gain or loss if the noteholder's holding period for the notes
surrendered exceeds one year at the time of the exchange.
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<PAGE> 106
Market Discount
In general, if a holder realizes gain upon disposition of a debt
instrument, the lesser of (1) such gain, or (2) the portion of any market
discount which accrued on a straight-line basis (or, at the election of the
holder, a yield-to-maturity basis) while the instrument was held by such holder,
will be treated as ordinary income at the time of the disposition. However,
where a debt instrument with accrued market discount, otherwise known as a
"market discount bond," is exchanged for other property (including stock) in a
nonrecognition transaction (including a recapitalization or reorganization), if
the basis of the property received in the exchange, otherwise known as the
"exchanged basis property," is determined by reference to the basis of the
market discount bond, any accrued but previously unrecognized market discount
will be treated as ordinary income upon the disposition of the exchanged basis
property, provided the exchanged basis property is not also a market discount
bond. In the case of a debt instrument issued without original issue discount
market discount generally equals the excess of the face amount of the debt
instrument over the basis of such instrument in the hands of the holder
immediately after its acquisition by the holder. In the case of a debt
instrument issued with original issue discount, market discount generally equals
the excess of the adjusted issue price of the debt instrument over the adjusted
basis of such instrument in the hands of the holder immediately after its
acquisition by the holder.
A holder may elect to accrue market discount in income currently rather
than upon disposition of the instrument (in which case the instrument's basis
will be increased by such accrued market discount income). Furthermore, a holder
of any debt instrument who acquired it at a market discount may be required to
defer the deduction of a portion of the interest on any indebtedness incurred or
maintained to purchase or carry the instrument until the market discount is
recognized upon a subsequent disposition of the instrument. Such a deferral is
not required, however, if the holder elects to currently include accrued market
discount in income.
Market discount on the notes, if any, will generally only apply to a
noteholder who did not purchase such notes on their original issuance. In
general, any market discount accrued to a noteholder and not previously taken
into income, as noted above, will be included as ordinary income upon a sale or
other disposition thereof. However, the exchange of notes for Arch common stock
and shares of Class B common stock of Vast by a noteholder should qualify as a
"nonrecognition transaction," and the Arch common stock received in the exchange
would, therefore, constitute exchanged basis property in the hands of an
exchanging noteholder. Thus, to the extent of an exchange of notes for Arch
common stock, any remaining accrued, unrecognized market discount on the notes
would carry over to the Arch common stock, and the noteholder would not
recognize ordinary income to the extent of such accrued, unrecognized market
discount until the noteholder sold or otherwise disposed of the Arch common
stock. However, the Class B common stock of Vast received pursuant to the
exchange does not qualify for nonrecognition treatment (i.e., gain may be
recognized on this portion of the exchange), and the Class B common stock of
Vast would not constitute exchanged basis property. Accordingly, the noteholder
should recognize as ordinary income the lesser of: (1) any gain recognized on
the exchange (determined as described above) and (2) any accrued, unrecognized
market discount on the notes. Presumably, to the extent a noteholder did not
recognize a portion of any accrued, unrecognized market discount as ordinary
income upon its exchange of notes for Class B common stock of Vast (i.e.,
because the amount of the accrued, unrecognized market discount exceeded the
amount of gain recognized on the exchange), this excess amount would carry over
to the Arch common stock on the exchange, and the noteholder would recognize
this carried over amount as ordinary income upon its disposition of the Arch
common stock received in the exchange, to the extent of any gain recognized on
such disposition. If the notes do not constitute "securities" or the exchange
offer does not qualify as a tax-free reorganization, accrued market discount
will be includible in a noteholder's ordinary income at the consummation of the
exchange offer to the extent of any gain recognized by the noteholder on the
exchange. Exchanging noteholders should consult their tax advisors concerning
the effect of the market discount provisions and the associated elections.
Allocation to Accrued Interest
Notwithstanding the foregoing, some of the consideration received may be
treated as allocable to interest. In particular, a noteholder, who, under his
accounting method, was not previously required to include in
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<PAGE> 107
income accrued but unpaid interest attributable to his ownership of notes, and
who exchanges his notes for Arch common stock and Class B common stock of Vast
pursuant to the exchange offer, will be treated as receiving ordinary interest
income to the extent of any consideration so received allocable to such
interest, regardless of whether that noteholder realizes an overall gain or loss
as a result of the exchange. The extent to which consideration received in the
exchange offer is allocable to such interest is uncertain. A noteholder who had
previously included in income accrued but unpaid interest attributable to the
holder's notes will recognize a loss (generally deductible in full against
ordinary income) to the extent such accrued but unpaid interest is not satisfied
in full. For purposes of the above discussion, "accrued" interest means interest
which was accrued while the note was held by the noteholder.
FEDERAL INCOME TAX CONSEQUENCES TO NONTENDERING NOTEHOLDERS
If a noteholder does not participate in the exchange offer, there will be
no change in such noteholder's tax position, assuming the proposed amendments to
the indentures do not cause the notes to be considered materially different in
kind from the notes in their current form. The proposed amendments will be
considered to have caused the notes to be materially different in kind if the
proposed amendments constitute a "significant modification" of the notes. Under
Treasury Regulations, whether a modification of a debt instrument is significant
is determined based on the facts and circumstances. Under these regulations,
PageNet does not believe that the proposed amendments will be considered a
significant modification of the notes. That conclusion, however, is not free
from doubt. If the proposed amendments are considered to cause a significant
modification of the notes there would be a deemed exchange (of the original
notes for the modified notes) for federal income tax purposes.
In general, the deemed exchange of such notes will qualify as a
"recapitalization" for federal tax purposes if the notes (as originally issued
and as modified) constitute "securities" under the explanation above. If the
deemed exchange qualifies as a "recapitalization," a nontendering noteholder
would not recognize gain or loss on the deemed exchange. The modified notes
would have a tax basis equal to the adjusted basis of the notes surrendered and
would have a holding period that includes the nontendering noteholder's holding
period for the exchanged notes. If the deemed exchange does not qualify as a
"recapitalization," the entire amount of the nontendering noteholder's realized
gain or loss would be recognized. In such a case, a holder would also be
required to include in income over the remaining life of the notes the
difference between the face value of its notes and the fair market value of such
notes on the date of the exchange. A nontendering noteholder's tax basis in the
modified notes would equal the fair market value of such note at the time of the
exchange and the nontendering noteholder's holding period in the modified notes
would begin on the day following the deemed exchange.
The foregoing discussion relating to non-tendering noteholders will be
inapplicable if the note exchange occurs pursuant to the consensual plan of
reorganization in bankruptcy.
FEDERAL INCOME TAX CONSEQUENCES TO PAGENET COMMON STOCKHOLDERS
As explained above, because the distribution of Class B common stock of
Vast and the merger are mutually interdependent transactions they should be
considered a single integrated transaction for federal income tax purposes.
Accordingly, counsel is of the view that each PageNet common stockholder should
be considered for federal income tax purposes as exchanging (1) a portion of
each share of PageNet common stock for shares of Class B common stock of Vast
received, and (2) the remaining portion of each share for the Arch common stock
received. The portion of a share of PageNet common stock treated as exchanged
for shares of Class B common stock of Vast would equal the fair market value of
the Class B common stock of Vast received divided by the aggregate fair market
value of the Class B common stock of Vast and the Arch common stock (including
amounts received in lieu of fractional shares) received. The remaining portion
of the share of PageNet common stock would be treated as exchanged for Arch
common stock. The discussion below reflects this treatment.
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Receipt of Arch Common Stock Pursuant to the Merger.
Assuming that the merger qualifies as a "reorganization" under Section
368(a) of the Internal Revenue Code, a PageNet common stockholder will not
recognize any gain or loss as a result of the receipt of Arch common stock
(except for cash received in lieu of fractional share interests). A PageNet
common stockholder's aggregate tax basis for the Arch common stock received,
including any fractional share interest for which cash is received, will equal
such stockholder's aggregate tax basis in the portion of the shares of PageNet
common stock exchanged for Arch common stock (determined as described above)
pursuant to the merger. A PageNet common stockholder's holding period for the
Arch common stock received, including any fractional share interest for which
cash is received, will include the period during which the shares of PageNet
common stock were held.
A holder of PageNet common stock that receives cash in lieu of a fractional
Arch common share in the merger will be treated as having received the cash in
redemption of the fractional share interest. The cash payment will be treated as
a distribution in payment of the fractional interest redeemed under Section 302
of the Internal Revenue Code. A holder of PageNet common stock who is not (1)
involved in directing corporate affairs of PageNet, (2) holds a minimal interest
in PageNet, and (3) does not directly own Arch common stock and is not
considered to own indirectly shares of PageNet common stock or Arch common stock
under the constructive ownership rules of Section 318 of the Internal Revenue
Code, will recognize gain or loss on the deemed redemption in an amount equal to
the difference between the amount of cash received and such holder's adjusted
tax basis allocable to such fractional share. Such gain or loss will be capital
gain or loss. In the case of other holders of Arch common stock, Section 302 of
the Internal Revenue Code sets forth other tests, which, if met, would also
result in similar treatment of the holder. In the event, however, that none of
these tests are met, the cash payment could be taxable as a dividend.
If the merger does not qualify as a "reorganization" under Section 368(a)
of the Internal Revenue Code, a PageNet common stockholder would recognize gain
or loss with respect to the portion of each share of PageNet common stock
surrendered in the merger equal to the difference between the stockholder's tax
basis in that portion of the PageNet common stock held immediately prior to the
merger, and the fair market value, as of the effective time of the merger of the
Arch common stock received in exchange therefor. Any such gain or loss would be
capital gain or loss and would be long-term capital gain or loss if the
shareholder's holding period for the share surrendered exceeds one year at the
time of the merger. The federal income tax rates applicable to capital gains for
taxpayers other than individuals, estates and trusts are currently the same as
those applicable to ordinary income. However, the maximum ordinary income tax
rate for individuals, estates and trusts is generally 39.6%, whereas the maximum
long-term capital gains rate for such taxpayers is 20% for capital assets held
for more than 12 months. Capital losses generally may be used by a corporate
taxpayer only to offset capital gains, and by an individual taxpayer only to the
extent of capital gains plus $3,000 of other income. If this treatment were to
apply, a PageNet common stockholder's aggregate basis in the Arch common stock
received would equal its fair market value at the effective time of the merger,
and the stockholder's holding period for such Arch common stock would begin the
day after the effective time of the merger.
Effect of Receipt of the Shares of Class B Common Stock of Vast
Because, pursuant to the merger, every PageNet common stockholder will
exchange all of his or her PageNet common stock for the Arch common stock and
will also receive Class B common stock of Vast, the receipt of Class B common
stock of Vast should be treated as a redemption of stock to which Section 302 of
the Internal Revenue Code applies. Accordingly, each PageNet common stockholder
should be treated as having redeemed, in exchange for the Class B common stock
of Vast received, the portion of the shares of PageNet common stock held
immediately prior to the merger (determined as described above). Because, as a
result of the merger and the exchange offer each PageNet common stockholder's
interest in the combined company will be substantially reduced, the shares of
Class B common stock of Vast should generally be treated as received by a
PageNet common stockholder in exchange for the amount of such holder's PageNet
common stock treated as redeemed. In this case, the redemption of a holder's
PageNet common stock for shares of Class B common stock of Vast will result in
capital gain or loss equal to the difference between the
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fair market value of the shares of Class B common stock of Vast received (plus
the amount of any cash received in lieu of fractional shares) and the
shareholder's tax basis in the portion of the PageNet common stock treated as
redeemed. Such gain or loss will be long-term capital gain or loss if the
holding period for the PageNet common stock exceeds one year.
The foregoing treatment may not apply to PageNet common stockholders who
hold PageNet or Arch notes or who own Arch common stock, either directly or
constructively under the rules of Section 318 of the Internal Revenue Code. In
some of such cases (such as where a PageNet common stockholder's interest in
PageNet is not sufficiently reduced), the entire amount of value of the shares
of Class B common stock of Vast received could be taxable as a dividend, to the
extent of PageNet's current or accumulated earnings and profits.
Although counsel believes the foregoing treatment is likely, it is possible
that the Internal Revenue Service would seek to characterize the receipt of
Class B common stock of Vast differently. First, the receipt of the Class B
common stock of Vast could be taxed as a dividend (to the extent of PageNet's
current or accumulated earnings and profits) in accordance with its technical
corporate form of the distribution. Second, the value of the Class B common
stock in Vast could possibly be characterized as "boot" distributed pursuant to
the merger. In the latter case, a PageNet common stockholder's gain (determined
as the excess, if any, of the aggregate value of the Arch common stock received
and the shares of Class B common stock of Vast received by a PageNet common
stockholder over such stockholder's tax basis in his or her PageNet common
stock) would be subject to tax, but not in excess of the value of the shares of
Class B common stock of Vast received by the stockholder. In either case, no
loss could be recognized. Basis and holding period consequences would differ
from those set forth above.
FEDERAL INCOME TAX CONSEQUENCES TO ARCH AND PAGENET
While the merger is expected generally to be tax-free to both Arch and
PageNet, both companies are expected to realize cancellation of indebtedness
income resulting from the elimination in the exchange offers of indebtedness in
exchange for consideration having a value less than the adjusted issue price of
the outstanding debt, and in the case of PageNet, to realize income from the
distribution of shares of Class B common stock of Vast. The exact amount of the
tax liability attributable to such income cannot be determined precisely,
because it depends on the values of the Arch common stock and of the shares of
Class B common stock of Vast distributed at the time of the closing, and on
certain other factors. However, under the merger agreement, neither Arch nor
PageNet is obligated to complete the merger if the reasonably expected amount of
"out-of-pocket" tax liability exceeds $25 million. Based on an expected closing
of the transactions in June 2000, and on the values currently expected at that
time for the Arch common stock and the shares of Class B common stock of Vast,
the companies expect that the tax liability will be less than this amount. In
addition, the merger and the exchange offers are expected to result in the
elimination of substantially all of the tax benefit of the net operating loss
carryforwards and certain tax attributes of each of PageNet and Arch which would
otherwise be available to offset future taxable income of the combined
companies.
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CAPITALIZATION
The following table sets forth: (1) the capitalization of PageNet and Arch,
on a consolidated basis, at September 30, 1999; (2) the capitalization of
PageNet as adjusted to give effect to the PageNet exchange offer, assuming that
100% of the PageNet senior subordinated notes are exchanged, and spin-off of
Vast; and (3) the capitalization of Arch as adjusted to give effect to the Arch
exchange offer and merger, assuming 100% of the Arch discount notes are
exchanged, and the repurchase of $16.3 million accreted value of discount notes
by Arch during October 1999 in exchange for Arch common stock. You should read
this table together with the other financial information appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED
----------------------- -----------------------
PAGENET ARCH PAGENET ARCH(1)(2)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ARCH CURRENT MATURITIES OF LONG-TERM DEBT................. $ -- $ 3,060 $ -- $ 3,060
---------- ---------- ---------- ----------
PAGENET LONG-TERM DEBT, LESS CURRENT MATURITIES:
Credit agreement........................................ 745,000 -- 745,000 --
8.875% senior subordinated notes due February 1, 2006... 300,000 -- -- --
10.125% senior subordinated notes due August 1, 2007.... 400,000 -- -- --
10% senior subordinated notes due October 15, 2008...... 500,000 -- -- --
Other................................................... 54,320 -- 54,320 --
ARCH LONG-TERM DEBT, LESS CURRENT MATURITIES:
Senior bank debt........................................ -- 446,940 -- 1,216,940
10 7/8% senior discount notes due in 2008............... -- 399,922 -- --
6 3/4% convertible subordinated debentures due 2003..... -- 13,364 -- 13,364
12 3/4% senior notes due 2007........................... -- 127,816 -- 127,816
13 3/4% senior notes due 2008........................... -- 140,151 -- 140,151
9 1/2% senior notes due 2004............................ -- 125,000 -- 125,000
14% senior notes due 2004............................... -- 100,000 -- 100,000
Other................................................... -- 4,550 -- 58,870
---------- ---------- ---------- ----------
Total long-term debt, less current maturities.... 1,999,320 1,357,743 799,320 1,782,141
---------- ---------- ---------- ----------
PAGENET STOCKOWNERS' EQUITY:
Preferred stock -- $.01 par value, authorized 25,000,000
shares, no shares issued or outstanding................. -- -- -- --
Common stock -- $.01 par value, authorized 250,000,000
shares ( as adjusted), issued and outstanding
103,960,240 shares (720,790,997 as adjusted)............ 1,040 -- 7,208 --
Additional paid-in capital................................ 134,161 -- 673,230 --
Accumulated other comprehensive income.................... 1,161 -- 1,161 --
Accumulated deficit....................................... (860,786) -- (219,190) --
ARCH STOCKHOLDERS' EQUITY:
Preferred stock -- $.01 par value, authorized 10,000,000
shares, issued and outstanding 250,000 shares ($27,618
aggregate liquidation preference)....................... -- 3 -- --
Common stock and Class B common stock.....................
$.01 par value, authorized 75,000,000 shares (225,000,000
as adjusted), issued and outstanding 48,060,782
(172,026,661 as adjusted)............................... -- 481 -- 1,720
Additional paid-in capital................................ -- 639,559 -- 1,367,249
Accumulated deficit....................................... -- (820,935) -- (613,846)
---------- ---------- ---------- ----------
Total shareholders' equity....................... (724,424) (180,892) 462,409 755,123
---------- ---------- ---------- ----------
Total capitalization............................. $1,274,896 $1,179,911 $1,261,729 $2,540,324
========== ========== ========== ==========
</TABLE>
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- ---------------
(1) If none of the Arch discount notes are exchanged, total long-term debt, less
current maturities would be $2.2 billion, total stockholders' equity would
be $376.5 million and total capitalization would be $2.5 billion.
(2) If 50% of the Arch discount notes are exchanged, total long-term debt, less
current maturities would be $2.0 billion, total stockholders' equity would
be $565.8 million and total capitalization would be $2.5 billion.
STOCK OWNERSHIP IN THE COMBINED COMPANY
The following table sets forth the expected beneficial ownership of Arch
common stock following the merger and the PageNet and Arch exchange offers:
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP OF ARCH
PERCENTAGE OWNERSHIP OF ARCH COMMON STOCK, ON
COMMON STOCK OUTSTANDING A FULLY DILUTED BASIS
-------------------------------- --------------------------------
SEPTEMBER 30, 1999 AS ADJUSTED SEPTEMBER 30, 1999 AS ADJUSTED
------------------ ----------- ------------------ -----------
<S> <C> <C> <C> <C>
Arch common stockholders......... 100.0% 29.6% 71.0% 26.7%
Arch Series C preferred
stockholders................... -- 1.2 2.5 1.1
Holders of Arch discount notes... -- 17.2 -- 15.4
PageNet stockholders............. -- 7.5 -- 6.7
Holders of PageNet senior
subordinated notes............. -- 44.5 -- 40.1
Arch warrantholders.............. -- -- 23.8 8.4
Arch and PageNet optionholders... -- -- 2.7 1.6
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
All of the foregoing information is based on numerous assumptions. For example,
the table assumes that all of Arch's discount notes, all of PageNet's
outstanding senior subordinated notes and all of Arch's outstanding Series C
preferred stock will be exchanged for common stock. The actual capitalization of
Arch upon closing the merger may vary considerably from the foregoing table. For
example, if 50% of Arch's discount notes were tendered and accepted, holders of
Arch discount notes would own 9.4% of Arch's outstanding common stock and 8.4%
on a fully diluted basis; if 1% of the discount notes were tendered and
accepted, holders of Arch discount notes would own 0.2% and 0.2%, respectively.
In either case, the percentage ownership of the Arch stockholders and the
PageNet stockholders and noteholders would increase proportionately. See "The
Merger."
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
OF THE COMBINED COMPANY
The following unaudited selected pro forma data of the combined company
gives effect to the following transactions as if they were consummated as of
September 30, 1999 with respect to the unaudited pro forma balance sheet, except
for Arch's acquisition of MobileMedia which closed prior to September 30, 1999,
and on January 1, 1998 with respect to the unaudited pro forma statements of
operations:
- the exchange of $1.2 billion of PageNet senior subordinated notes and
accrued interest thereon for 616.8 million shares of PageNet common stock
and 13.8 million shares of Vast Class B common stock;
- the distribution by PageNet of 2.3 million shares of Vast Class B common
stock to the current PageNet stockholders;
- PageNet's merger with Arch;
- Arch's acquisition of MobileMedia, which closed on June 3, 1999;
- the exchange of $383.6 million (accreted value) of Arch discount notes
for 29.7 million shares of Arch common stock;
- the conversion of 250,000 shares of Arch convertible preferred stock into
2.1 million shares of Arch common stock; and
- the exchange of $16.3 million (accreted value) of Arch discount notes for
2.3 million shares of Arch common stock in October 1999.
The following selected pro forma financial information should be read in
conjunction with the unaudited pro forma condensed consolidated financial
statements and notes. The financial impact of expected operational cost
synergies resulting from the merger of PageNet and Arch and Arch's acquisition
of MobileMedia is excluded from this presentation.
The pro forma information is presented for illustrative purposes only and
does not necessarily predict the operating results or financial position that
would have occurred if the merger of PageNet and Arch and Arch's acquisition of
MobileMedia had been consummated as of the dates indicated above. Nor does it
predict the future operating results or financial position of Arch following the
merger and the MobileMedia acquisition.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Service, rental and maintenance revenues................... $ 1,731,239 $ 1,263,226
Product sales.............................................. 169,606 115,139
----------- -----------
Total revenues................................... 1,900,845 1,378,365
Cost of products sold...................................... (129,787) (75,689)
----------- -----------
1,771,058 1,302,676
Operating Expenses:
Service, rental and maintenance.......................... 394,444 326,201
Selling.................................................. 214,588 150,927
General and administrative............................... 563,049 422,048
Depreciation and amortization............................ 695,337 499,982
Restructuring charge..................................... 88,700 (2,200)
Provision for asset impairment........................... -- 17,798
Bankruptcy and related expenses.......................... 8,163 14,938
----------- -----------
Operating income (loss).................................... (193,223) (127,018)
Interest and other income (expense)........................ (54,429) (158,289)
----------- -----------
</TABLE>
104
<PAGE> 113
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Income (loss) before income tax benefit and extraordinary
item....................................................... (247,652) (285,307)
Income tax provision....................................... 3,958 209
----------- -----------
Income (loss) before extraordinary item and cumulative
effect of accounting change.............................. $ (251,610) $ (285,516)
=========== ===========
Basic/diluted income (loss) before extraordinary item and
cumulative effect of accounting change per share......... $ (1.46) $ (1.66)
=========== ===========
Other Operating Data:
Capital expenditures, excluding acquisitions............... $ 477,078 $ 282,593
Units in service at end of period(1)....................... 17,030,000 16,088,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
<S> <C> <C>
BALANCE SHEET:
Current assets............................................. $ 272,222
Total assets............................................... 3,021,110
Long-term debt, less current maturities.................... 1,782,141
Stockholders' equity....................................... 755,123
</TABLE>
- ---------------
(1) Consolidated units in service is calculated by adding the Arch, PageNet and
MobileMedia (for December 31, 1998) amounts less an elimination for
intercompany units in service.
105
<PAGE> 114
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements of PageNet and Arch
give effect to the following transactions as if they were consummated as of
September 30, 1999 with respect to the unaudited pro forma balance sheet, except
for Arch's acquisition of MobileMedia which closed prior to September 30, 1999,
and on January 1, 1998 with respect to the unaudited pro forma statements of
operations:
- the exchange of $1.2 billion of PageNet senior subordinated notes and
accrued interest thereon for 616.8 million shares of PageNet common stock
and 13.8 million shares of Vast Class B common stock;
- the distribution by PageNet of 2.3 million shares of Vast Class B common
stock to the current PageNet stockholders;
- PageNet's merger with Arch;
- Arch's acquisition of MobileMedia, which closed on June 3, 1999;
- the exchange of $183.6 million (accreted value) of Arch discount notes
for 29.7 million shares of Arch common stock,
- the conversion of 250,000 shares of Arch convertible preferred stock into
2.1 million shares of Arch common stock; and
- the exchange of $16.3 million (accreted value) of Arch discount notes for
2.3 million shares of Arch common stock in October 1999.
The pro forma financial statements utilize the purchase method of
accounting for the merger of Arch and PageNet. Arch is the acquiring company for
accounting purposes. Under the purchase method of accounting, the purchase price
is allocated to assets acquired and liabilities assumed based on their estimated
fair value at the time of the merger. Income of the combined company will not
include income or loss of PageNet prior to the merger. The pro forma condensed
consolidated financial statements reflect preliminary pro forma adjustments made
to combine Arch with PageNet using the purchase method of accounting. The actual
adjustments will be made after the closing and may differ from those reflected
in the pro forma financial statements.
The pro forma condensed consolidated financial data is for information
purposes only and is not necessarily indicative of the results of future
operations of the combined company or the actual results that would have been
achieved had the merger of Arch and PageNet and Arch's acquisition of
MobileMedia been consummated during the periods indicated. You should read the
unaudited pro forma financial data in conjunction with the consolidated
historical financial statements of PageNet, Arch and MobileMedia, including the
notes to all sets of financial statements.
106
<PAGE> 115
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTED
PAGENET FOR PAGENET FOR VAST PAGENET
(HISTORICAL) EXCHANGE DISTRIBUTION PRO FORMA
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... $ 102,961 $ (30,347)(1) $ 72,614
Accounts receivable, net................ 77,253 (71)(1) 77,182
Inventories............................. 10,278 10,278
Prepaid expenses and other.............. 12,983 (15)(1) 12,968
---------- ----------
Total current assets.............. 203,475 173,042
Property and equipment, net............. 783,497 (918)(1) 782,579
Intangible and other assets............. 533,913 (12,884)(1) $(3,742)(2) 517,287
---------- ----------
1,520,885 1,472,908
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt.... $ -- $ --
Accounts payable........................ 109,962 25(1) 109,987
Accrued expenses........................ 33,800 (460)(1) 33,340
Accrued interest........................ 38,585 (34,104)(1) 4,481
Customer deposits and deferred
revenue............................... 38,338 (271)(1) 38,067
Accrued restructuring, current
portion............................... 12,521 12,521
---------- ----------
Total current liabilities......... 233,206 198,396
Long-term debt.......................... 1,999,320 (1,200,000)(1) 799,320
Accrued restructuring, non-current
portion............................... 12,783 12,783
Other long-term liabilities............. -- --
Stockholders' equity (deficit):
Preferred stock......................... -- --
Common stock............................ 1,040 6,168(1) 7,208
Additional paid-in capital.............. 134,161 542,811(1) (3,742)(2) 673,230
Accumulated other comprehensive
income................................ 1,161 1,161
Accumulated deficit..................... (860,786) 641,596(1) (219,190)
---------- ----------
Total stockholders' equity
(deficit)....................... (724,424) 462,409
---------- ----------
$1,520,885 $1,472,908
========== ==========
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
ARCH FOR ARCH ADJUSTMENTS PRO FORMA
(HISTORICAL) EXCHANGE(14) FOR MERGER CONSOLIDATED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............... $ 21,488 $ 94,102
Accounts receivable, net................ 57,570 134,752
Inventories............................. 10,163 20,441
Prepaid expenses and other.............. 9,959 22,927
---------- ----------
Total current assets.............. 99,180 272,222
Property and equipment, net............. 409,056 1,191,635
Intangible and other assets............. 916,282 $ 123,684(4) 1,557,253
---------- ----------
1,424,518 3,021,110
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt.... $ 3,060 $ 3,060
Accounts payable........................ 23,444 133,431
Accrued expenses........................ 51,919 $ 5,000(3) 90,259
Accrued interest........................ 31,861 36,342
Customer deposits and deferred
revenue............................... 41,191 79,258
Accrued restructuring, current
portion............................... 18,239 20,000(4) 50,760
---------- ----------
Total current liabilities......... 169,714 393,110
Long-term debt.......................... 1,357,743 (383,631)(3) 25,000(4) 1,782,141
(16,291)(15)
Accrued restructuring, non-current
portion............................... -- 12,783
Other long-term liabilities............. 77,953 77,953
Stockholders' equity (deficit):
Preferred stock......................... 3 (3)(3) --
Common stock............................ 481 318(3) (6,310)(4) 1,720
23(15)
Additional paid-in capital.............. 639,559 178,190(3) (133,035)(4) 1,367,249
9,305(15)
Accumulated other comprehensive
income................................ -- (1,161)(4) --
Accumulated deficit..................... (820,935) 200,126(3) 219,190(4) (613,846)
6,963(15)
---------- ----------
Total stockholders' equity
(deficit)....................... (180,892) 755,123
---------- ----------
$1,424,518 $3,021,110
========== ==========
</TABLE>
107
<PAGE> 116
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTED ADJUSTMENTS
PAGENET FOR PAGENET PAGENET ARCH MOBILEMEDIA FOR ARCH
(HISTORICAL) EXCHANGE PRO FORMA (HISTORICAL) (HISTORICAL) EXCHANGE(14)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues...... $ 696,566 $ (744)(5) $ 695,822 $ 403,607 $ 167,318
Product Sales............. 68,969 68,969 36,963 9,207
------------ ------------ ----------- ---------
Total Revenues..... 765,535 764,791 440,570 176,525
Cost of products sold..... (43,013) (43,013) (24,988) (6,216)
------------ ------------ ----------- ---------
722,522 721,778 415,582 170,309
Operating expenses:
Service, rental and
maintenance............ 193,705 66(5) 193,771 91,421 44,530
Selling.................. 70,223 70,223 57,589 23,115
General and
administrative......... 260,877 (14,034)(5) 246,843 123,643 51,562
Depreciation and
amortization........... 268,171 268,171 222,836 45,237
Provision for asset
impairment............. 17,798 17,798 -- --
Restructuring charge..... -- -- (2,200) --
Bankruptcy related
expenses............... -- -- -- 14,938
------------ ------------ ----------- ---------
Total operating
expenses.......... 810,774 796,806 493,289 179,382
------------ ------------ ----------- ---------
Operating income (loss)... (88,252) (75,028) (77,707) (9,073)
Interest expense, net.... (109,111) 91,077(6) (18,034) (98,927) (17,660) $ 29,199(7)
1,217(15)
Other income (expense)... 806 3(5) 809 (47,596) 1,435
------------ ------------ ----------- ---------
Income (loss) before
income tax provisions,
extraordinary item, and
cumulative effect of
accounting change........ (196,557) (92,253) (224,230) (25,298)
Provision for income
taxes.................... -- -- -- 209
------------ ------------ ----------- ---------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change........ $ (196,557) $ (92,253) $ (224,230) $ (25,507)
============ ============ =========== =========
Basic diluted income
(loss) per common share
before extraordinary item
and cumulative effect of
accounting change........ $ (1.89) $ (0.13) $ (9.00)
============ ============ ===========
Weighted average common 31,756,126(3)
shares outstanding....... 103,960,240 616,830,757(1) 720,790,997 25,088,969 2,327,120(15)
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
FOR MOBILEMEDIA ADJUSTMENTS PRO FORMA
ACQUISITION FOR MERGER CONSOLIDATED
---------------- ------------ ------------
<S> <C> <C> <C>
Service, rental and
maintenance revenues...... $ (3,521)(8) $ 1,263,226
Product Sales............. 115,139
------------
Total Revenues..... 1,378,365
Cost of products sold..... (1,472)(11) (75,689)
------------
1,302,676
Operating expenses:
Service, rental and
maintenance............ (3,521)(8) 326,201
Selling.................. 150,927
General and
administrative......... 422,048
Depreciation and
amortization........... 2,958(9) (87,158)(11) 499,982
11,700(9) 36,238(12)
Provision for asset
impairment............. 17,798
Restructuring charge..... (2,200)
Bankruptcy related
expenses............... 14,938
------------
Total operating
expenses.......... 1,429,694
------------
Operating income (loss)... (127,018)
Interest expense, net.... 17,660(10) (9,553)(13) (112,937)
(16,839)(10)
Other income (expense)... (45,352)
------------
Income (loss) before
income tax provisions,
extraordinary item, and
cumulative effect of
accounting change........ (285,307)
Provision for income
taxes.................... 209
------------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change........ $ (285,516)
============
Basic diluted income
(loss) per common share
before extraordinary item
and cumulative effect of
accounting change........ $ (1.66)
============
Weighted average common (720,790,997)(4)
shares outstanding....... 22,971,813(16) 89,882,637(4) 172,026,665
</TABLE>
108
<PAGE> 117
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTED MOBILE ADJUSTMENTS
PAGENET FOR PAGENET PAGENET ARCH MEDIA FOR ARCH
(HISTORICAL) EXCHANGE PRO FORMA (HISTORICAL) (HISTORICAL) EXCHANGE(14)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues..... $ 945,524 $ (44)(5) $ 945,480 $ 371,154 $423,059
Product Sales............ 100,503 100,503 42,481 26,622
------------ ------------ ---------- --------
Total Revenues..... 1,046,027 1,045,983 413,635 449,681
Cost of products sold.... (77,672) (77,672) (29,953) (22,162)
------------ ------------ ---------- --------
968,355 968,311 383,682 427,519
Operating expenses:
Service, rental and
maintenance........... 210,480 47(5) 210,527 80,782 111,589
Selling................. 104,350 104,350 49,132 61,106
General and
administrative........ 320,586 (2,721)(5) 317,865 112,181 133,003
Depreciation and
amortization.......... 281,259 281,259 221,316 114,903
Restructuring charge.... 74,000 74,000 14,700 --
Bankruptcy related
expenses.............. -- -- -- 8,163
------------ ------------ ---------- --------
Total operating
expenses......... 990,675 988,001 478,111 428,764
------------ ------------ ---------- --------
Operating income
(loss).................. (22,320) (19,690) (94,429) (1,245)
Interest expense, net... (141,692) 121,435(6) (20,257) (104,213) (53,043) $ 35,494(7)
1,480(15)
Gain on sale of
assets................ -- -- -- 94,165
Other income (expense).. 2,003 2,003 (5,689) (338)
------------ ------------ ---------- --------
Income (loss) before
income tax provision and
extraordinary item...... (162,009) (37,944) (204,331) 39,539
Provision for income
taxes................... -- -- -- 3,958
------------ ------------ ---------- --------
Income (loss) before
extraordinary item...... $ (162,009) $ (37,944) $ (204,331) $ 35,581
============ ============ ========== ========
Basic diluted income
(loss) per common share
before extraordinary
item.................... $ (1.57) $ (0.05) $ (29.34)
============ ============ ==========
Weighted average common 31,756,126(3)
shares outstanding...... 103,377,424 616,830,757(1) 720,208,181 6,997,730 2,327,120(15)
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
FOR MOBILE MEDIA ADJUSTMENTS PRO FORMA
ACQUISITION FOR MERGER CONSOLIDATED
---------------- ------------ ------------
<S> <C> <C> <C>
Service, rental and
maintenance revenues..... $ (8,454)(8) $ 1,731,239
Product Sales............ 169,606
------------
Total Revenues..... 1,900,845
Cost of products sold.... (129,787)
------------
1,771,058
Operating expenses:
Service, rental and
maintenance........... (8,454)(8) 394,444
Selling................. 214,588
General and
administrative........ 563,049
Depreciation and
amortization.......... 7,100(9) $ 42,679(12) 695,337
28,080(9)
Restructuring charge.... 88,700
Bankruptcy related
expenses.............. 8,163
------------
Total operating
expenses......... 1,964,281
------------
Operating income
(loss).................. (193,223)
Interest expense, net... 53,043(10) (16,661)(13) (144,570)
(40,413)(10)
Gain on sale of
assets................ 94,165
Other income (expense).. (4,024)
------------
Income (loss) before
income tax provision and
extraordinary item...... (247,652)
Provision for income
taxes................... 3,958
------------
Income (loss) before
extraordinary item...... $ (251,610)
============
Basic diluted income
(loss) per common share
before extraordinary
item.................... $ (1.46)
============
Weighted average common (720,208,181)(4)
shares outstanding...... 40,988,922(16) 89,882,637(4) 171,952,535
</TABLE>
109
<PAGE> 118
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1) To record the issuance of 616,830,757 shares of PageNet common stock
valued at $0.89 per share and 13,780,000 shares of Vast Class B common
stock in exchange for $1.2 billion principal amount of PageNet senior
subordinated notes plus accrued interest:
- This adjustment includes the elimination of all $24.1 million of
accrued interest on PageNet's senior subordinated notes and the
write-off of $21.3 million of deferred financing costs associated with
PageNet's senior subordinated notes.
- The conversion of the PageNet senior subordinated notes would result
in an extraordinary gain from the early extinguishment of debt of
$641.6 million. There is no provision for income taxes on this gain as
we expect to have sufficient net operating loss carryforwards (which
have been fully reserved in our financial statements) available at the
time of the exchange to fully offset the gain.
- This adjustment also includes the elimination of all consolidated
amounts related to Vast and the recording of our net investment in
Vast as a component of intangible and other assets following the
reduction of our ownership of Vast to below 50%.
- We will not exchange the shares of our common stock and the common
stock of Vast for the senior subordinated notes unless the merger with
Arch is approved. The adjusted PageNet pro forma balance sheet column
included in the unaudited pro forma condensed consolidated financial
statements is an intermediate step in the overall merger transaction.
HOLDERS OF THE PAGENET SENIOR SUBORDINATED NOTES CANNOT ELECT TO
EXCHANGE THEIR NOTES IF THE MERGER IS NOT CONSUMMATED AND THEREFORE
CANNOT OWN AN EQUITY INTEREST IN THE PRO FORMA COMPANY SET FORTH IN
THE ADJUSTED PAGENET PRO FORMA BALANCE SHEET COLUMN.
2) To record the distribution of 2,320,000 shares of Vast Class B common
stock to the current stockholders of PageNet.
3) To record:
- the issuance of 29,651,984 shares of Arch common stock valued at $6.02
per share in exchange for $383.6 million (accreted value, representing
$448.4 million of principal amount) of Arch discount notes. The value
of Arch discount notes used in the preparation of these pro forma
financial statements reflect the value of discount notes remaining
after giving effect to the October 1999 exchanges of debt for equity
referred to in note 15 of the notes to the unaudited pro forma
condensed consolidated financial statements. The conversion of the
Arch discount notes will result in an extraordinary gain from the
early extinguishment of debt of $200.1 million, net of tax; and
- the conversion of 250,000 shares of Arch convertible preferred stock
into 2,104,142 shares of Arch common stock.
4) To record:
- the issuance of 89,882,637 shares of Arch common stock to the
stockholders of PageNet, including the stockholders who previously
held the PageNet senior subordinated notes converted to PageNet common
stock as discussed in note 1 of the notes to the unaudited pro forma
condensed consolidated financial statements above. Each outstanding
share of PageNet common stock will be converted into 0.1247 shares of
Arch common stock;
- the excess of purchase price over the assumed fair value of the
identifiable assets required.
110
<PAGE> 119
The historical book value of the tangible and intangible assets of PageNet
was assumed to approximate fair value. The excess of purchase prices over the
assumed fair value of identifiable assets acquired was calculated as follows (in
thousands):
<TABLE>
<S> <C>
Consideration Exchanged:
Fair value of shares issued to PageNet stockholders
(89,882,637 shares at $6.02 per share)................. $ 541,093
Liabilities Assumed:
Bank debt................................................. 745,000
Other long-term debt...................................... 54,320
Accounts payable.......................................... 109,987
Accrued expenses.......................................... 33,340
Accrued interest.......................................... 4,481
Accrued restructuring..................................... 25,304
Customer deposits and deferred revenue.................... 38,067
----------
Total consideration exchanged............................... 1,551,592
Transaction costs........................................... 25,000(a)
Restructuring reserve....................................... 20,000(b)
----------
Total purchase price........................................ 1,596,561
Less fair value of tangible and intangible net assets
acquired.................................................. 1,464,084
----------
Excess of purchase price over tangible and intangible net
assets acquired........................................... $ 132,508
==========
</TABLE>
(a) Transaction costs include legal, investment banking, financing,
accounting and other costs incurred by Arch to consummate the PageNet
merger.
(b) Restructuring reserve consists of severance costs related
primarily to duplicative general and administrative functions at the
corporate, regional and market levels of PageNet, such as technical,
marketing, finance, and other support functions to be recorded in
accordance with Emerging Issue Task Force Consensus 95-3. These
terminations will occur as operations of PageNet are integrated into those
of Arch and are based on management's preliminary review of synergies that
exist between the two companies. The analysis is expected to be finalized
after consummation of the PageNet acquisition and may result in additional
amounts to be reserved.
5) To remove the operating results of Vast, which will be spun off as part
of the overall transaction involving Arch and PageNet. This adjustment removes
only the direct expenses of Vast, as no expenses allocated to Vast by PageNet
were assumed to be eliminated as a result of the spinoff.
6) To remove the interest expense associated with PageNet's senior
subordinated notes which will be converted into common stock as part of the
PageNet exchange as well as the amortization of PageNet's deferred financing
costs which are included in interest expense.
7) To remove the interest expense associated with Arch's discount notes
which will be converted into common stock in connection with the Arch exchange.
8) To eliminate revenues and expenses between Arch and MobileMedia.
Revenues and expenses between Arch and PageNet were not material in 1998 or
1999.
9) To record amortization on the excess of purchase price over the tangible
and intangible assets in the MobileMedia acquisition on a straight-line basis in
the amount of $7.1 million for the year ended December 31, 1998 and $3.0 million
for the period ended June 3, 1999, the closing date of the MobileMedia
acquisition. The amortization relates to $400.7 million assumed fair value of
intangible assets, consisting primarily of customer lists with an assumed fair
value of $239.7 million and FCC licenses with an assumed fair value of $143.0
million. The MobileMedia historical amortization was adjusted by $28.1 million
for the year ended December 31, 1998 and by $11.7 million for the period
111
<PAGE> 120
ended June 3, 1999, the closing date of the MobileMedia acquisition, to conform
MobileMedia's 25 year estimated useful life for FCC licenses to Arch's 10 year
estimated useful life and to conform MobileMedia's 2 year estimated useful life
for acquired customer lists to Arch's 5 year estimated useful life.
10) To remove the interest expense associated with the various MobileMedia
credit facilities and notes eliminated as a result of its insolvency proceedings
and to record the interest associated with Arch's additional borrowings to
finance the MobileMedia acquisition. Interest was calculated using an 11% rate
on $181.0 million of bank borrowings and a 14.75% rate on $139.0 million senior
discount notes.
11) To adjust PageNet's 1999 cost of sales and depreciation to be
consistent with Arch's pager useful life of three years per unit.
12) To record amortization of the excess of purchase price over the
tangible and intangible assets in the PageNet acquisition on a straight-line
basis in the amount of $13.3 million for the year ended December 31, 1998 and
$9.9 million for the nine month period ended September 30, 1999. The actual
amortization recorded after consummation of the PageNet transaction may differ
from these amounts due to the full allocation of purchase price to assets and
liabilities assumed pursuant to AFB No. 16. The amortization relates to $454.9
million assumed fair value of intangible assets consisting primarily of FCC
licenses with an assumed fair value of $429.3 million and goodwill with an
assumed fair value of $25.6 million. PageNet's historical amortization was
adjusted by $29.4 million for the year ended December 31, 1998 and by $26.3
million for the nine month period September 30, 1999 to conform PageNet's 40
year estimated useful life of FCC licenses and goodwill to Arch's 10 year
estimated useful life.
13) To record additional interest expense on pro forma consolidated bank
debt. Interest was calculated assuming a 10% interest rate on the average bank
debt outstanding for the year ended December 31, 1998 and the nine month period
ended September 30, 1999. Additional interest expense on bank borrowings would
be as follows if interest rates were to increase or decrease by 1/8 of a percent
(in thousands):
<TABLE>
<CAPTION>
ASSUMED INTEREST EXPENSES
--------------------------------------
YEAR ENDED NINE MONTHS ENDED
ASSUMED CHANGE IN INTEREST RATE DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------------------- ----------------- ------------------
<S> <C> <C>
Increase of 1/8%........................................... $17,640 $10,562
Decrease of 1/8%........................................... 15,681 8,544
</TABLE>
14) The pro forma financial statements of Arch assume 100% conversion of
Arch's $383.6 million (accreted value) discount notes. The following table
illustrates the impact on Arch's pro forma financial statements in the event
that no discount noteholder or only 50% of discount noteholders elect(s) to
convert their discount notes into Arch common stock (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
ASSUMING ASSUMING
0% 50%
DISCOUNT NOTE DISCOUNT NOTE
CONVERSION CONVERSION
------------- -------------
<S> <C> <C>
Total long-term debt, less current maturities............... $2,165,772 $1,973,957
Stockholders' equity........................................ 376,491 565,807
Interest expense, net:
Year ended December 31, 1998.............................. (180,064) (162,317)
Nine months ended September 30, 1999...................... (142,137) (127,537)
Income (loss) before extraordinary item and cumulative
effect of accounting change:
Year ended December 31, 1998.............................. (287,104) (269,357)
Nine months ended September 30, 1999...................... (314,716) (300,116)
Basic/diluted income (loss) per common share before
extraordinary item and cumulative
effect of accounting change:
Year ended December 31, 1998.............................. $ (2.02) $ (1.71)
Nine months ended September 30, 1999...................... $ (2.21) $ (1.91)
</TABLE>
112
<PAGE> 121
15) To record the repurchase of $16.3 million accreted value of discount
notes by Arch during October 1999 in exchange for 2,327,120 shares of Arch
common stock and to adjust the related interest expense for the notes
repurchased. In October 1999, Arch completed transactions with two senior
discount noteholders in which Arch issued 2,327,120 shares of Arch common stock
in exchange for $16.3 million accreted value ($19.0 million maturity value) of
discount notes. The conversion of the discount notes resulted in a gain from the
early extinguishment of debt of $7.0 million.
16) To record issuance of Arch common stock in conjunction with the
MobileMedia acquisition.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA -- PAGENET
The following table sets forth selected historical consolidated financial
and operating data of PageNet as of and for the years ended December 31, 1994,
1995, 1996, 1997, and 1998, for the nine months ended September 30, 1998 and
1999, and as of September 30, 1999. The selected financial and operating data as
of December 31, 1994, 1995, 1996, 1997, and 1998 and for each of the five years
ended December 31, 1998, has been derived from PageNet's audited consolidated
financial statements and notes. The selected financial and operating data for
the nine months ended September 30, 1998 and 1999, and as of September 30, 1999,
has been derived from PageNet's unaudited consolidated financial statements and
notes. You should read the following consolidated financial information in
conjunction with "PageNet Management's Discussion and Analysis of Financial
Condition and Results of Operations" and PageNet's consolidated financial
statements and notes.
The provision for asset impairment for the nine months ended September 30,
1999, represents a charge for the impairment of the assets of PageNet's
majority-owned Spanish subsidiaries. The restructuring charge for the year ended
December 31, 1998, and the nine months ended September 30, 1998, represents a
charge primarily for the abandonment of facilities and property and related
severance costs associated with the reorganization of PageNet's domestic
operations. The non-recurring charge for the year ended December 31, 1996
represents a provision to write off subscriber devices leased by PageNet to
customers under an agreement with a national marketing affiliate. The
non-recurring charge for the year ended December 31, 1997, represents a
provision to write down certain subscriber devices to their net realizable
value. The extraordinary item for the year ended December 31, 1997, represents
the loss on the early retirement of all $200 million of PageNet's outstanding
11.75% senior subordinated notes in May 1997. The cumulative effect of a change
in accounting principle for the nine months ended September 30, 1999, represents
the write-off of all remaining unamortized start-up costs as of January 1, 1999,
upon the adoption of AICPA Statement of Position 98-5 "Reporting on the Costs of
Start-Up Activities." Effective April 1, 1999, PageNet changed the depreciable
lives for its subscriber devices and a portion of its network equipment. As a
result of these changes, depreciation expense increased by approximately $77
million during the nine months ended September 30, 1999. Further discussion of
these items is included in "PageNet Management's Discussion and Analysis of
Financial Condition and Results of Operations" and PageNet's consolidated
financial statements and notes.
Earnings before interest, income taxes, depreciation, and amortization
(EBITDA) is commonly used by analysts and investors as a principal measure of
financial performance in the wireless messaging industry. EBITDA is also one of
the primary financial measures used to calculate whether PageNet and its
subsidiaries are in compliance with financial covenants under their debt
agreements. These covenants, among other things, limit the ability of PageNet
and its subsidiaries to: incur additional indebtedness, advance funds to some of
PageNet's affiliates, pay dividends, grant liens on its assets, merge, sell or
acquire assets, repurchase or redeem capital stock, incur capital expenditures
and prepay certain indebtedness. EBITDA is also one of the financial measures
used by analysts to value PageNet. Therefore, PageNet's management believes that
the presentation of EBITDA provides relevant information to investors. Adjusted
EBITDA, as determined by PageNet, does not reflect minority interest, equity in
loss of an unconsolidated subsidiary, provision for asset impairment,
restructuring charge, non-recurring charges, extraordinary items, and cumulative
effect of a change in accounting principle; consequently Adjusted EBITDA may not
necessarily be comparable to similarly titled data of other wireless messaging
companies. EBITDA and Adjusted EBITDA should not be construed as an alternative
to operating income or cash flows from operating activities as determined in
accordance with GAAP or as a measure of liquidity. Amounts reflected as EBITDA
or Adjusted EBITDA are not necessarily available for discretionary use as a
result of restrictions imposed by the terms of existing indebtedness and
limitations imposed by applicable law upon the payment of dividends or
distributions, among other things. See "PageNet Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Adjusted EBITDA margin is calculated by dividing PageNet Adjusted EBITDA by
total revenues less cost of products sold. EBITDA margin is a measure commonly
used in the wireless messaging industry to evaluate a company's EBITDA relative
to total revenues less cost of products sold as an indicator of the efficiency
of a company's operating structure.
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<PAGE> 123
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- --------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Services, rent and maintenance
revenues........................... $ 389,919 $ 532,079 $ 685,960 $ 818,461 $ 945,524 $ 704,722 $ 696,566
Product sales...................... 99,765 113,943 136,527 142,515 100,503 80,600 68,969
---------- ---------- --------- ----------- ----------- ----------- ---------
Total revenues..................... 489,684 646,022 822,487 960,976 1,046,027 785,322 765,535
Cost of products sold.............. (78,102) (93,414) (116,647) (121,487) (77,672) (62,540) (43,013)
---------- ---------- --------- ----------- ----------- ----------- ---------
411,582 552,608 705,840 839,489 968,355 722,782 722,522
Services, rent and maintenance
expenses......................... 74,453 109,484 146,896 173,058 210,480 158,011 193,705
Selling expenses................... 60,555 67,561 82,790 102,995 104,350 72,320 70,223
General and administrative
expenses......................... 136,539 174,432 219,317 253,886 320,586 224,035 260,877
Depreciation and amortization
expense.......................... 107,362 148,997 213,440 289,442 281,259 213,220 268,171
Provision for asset impairment..... -- -- -- -- -- -- 17,798
Restructuring charge............... -- -- -- -- 74,000 74,000 --
Non-recurring charges.............. -- -- 22,500 12,600 -- -- --
---------- ---------- --------- ----------- ----------- ----------- ---------
Total operating expenses........... 378,909 500,474 684,943 831,981 990,675 741,586 810,774
---------- ---------- --------- ----------- ----------- ----------- ---------
Operating income (loss)............ 32,673 52,134 20,897 7,508 (22,320) (18,804) (88,252)
Interest expense................... (53,717) (102,846) (128,014) (151,380) (143,762) (109,353) (111,097)
Interest income.................... 3,079 6,511 3,679 3,689 2,070 1,564 1,986
Minority interest.................. -- -- 41 56 2,003 2,174 806
Equity in loss of an unconsolidated
subsidiary....................... -- -- (923) (1,276) -- -- --
---------- ---------- --------- ----------- ----------- ----------- ---------
Loss before extraordinary item and
cumulative effect of a change in
accounting principle............. (17,965) (44,201) (104,320) (141,403) (162,009) (124,419) (196,557)
Extraordinary item................. -- -- -- (15,544) -- -- --
Cumulative effect of a change in
accounting principle............. -- -- -- -- -- -- (37,446)
---------- ---------- --------- ----------- ----------- ----------- ---------
Net loss........................... $ (17,965) $ (44,201) $(104,320) $ (156,947) $ (162,009) $ (124,419) $(234,003)
========== ========== ========= =========== =========== =========== =========
Per common share data (basic and
diluted):
Loss before extraordinary item
and cumulative effect of a
change in accounting
principle...................... $ (0.18) $ (0.43) $ (1.02) $ (1.38) $ (1.57) $ (1.20) $ (1.89)
Extraordinary item............... -- -- -- (0.15) -- -- --
Cumulative effect of a change in
accounting principle........... -- -- -- -- -- -- (0.36)
---------- ---------- --------- ----------- ----------- ----------- ---------
Net loss per share............... $ (0.18) $ (0.43) $ (1.02) $ (1.53) $ (1.57) $ (1.20) $ (2.25)
========== ========== ========= =========== =========== =========== =========
OTHER OPERATING DATA:
EBITDA............................. $ 140,035 $ 201,131 $ 233,455 $ 280,186 $ 260,942 $ 196,590 $ 143,279
Adjusted EBITDA.................... 140,035 201,131 256,837 309,550 332,939 268,416 197,717
Adjusted EBITDA margin............. 34.0% 36.4% 36.4% 36.9% 34.4% 37.1% 27.4%
Free cash flow (1)................. $ (123,911) $ (207,493) $(304,886) $ (166,506) $ (105,794) $ (10,668) $ (74,224)
Capital expenditures............... 213,308 312,289 437,388 328,365 297,041 171,295 162,830
Cash flows provided by operating
activities....................... 107,744 160,629 110,382 150,503 276,959 190,744 89,016
Cash flows used in investing
activities....................... (260,839) (589,387) (601,122) (459,929) (314,444) (172,994) (175,712)
Cash flows provided by (used in)
financing activities............. 153,055 624,489 296,335 308,573 37,638 (6,590) 186,580
Units in service at end of
period........................... 4,409,000 6,738,000 8,588,000 10,344,000 10,110,000 10,484,000 9,314,000
</TABLE>
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
------- ---------- ---------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.................................. $39,375 $ 259,096 $ 95,550 $ 105,214 $ 108,961 $ 203,475
Total assets.................................... 706,008 1,228,338 1,439,613 1,597,233 1,581,244 1,520,885
Long-term obligations, less current
maturities.................................... 504,000 1,150,000 1,459,188 1,779,491 1,815,137 1,999,320
Total shareowners' deficit...................... (39,908) (80,784) (182,175) (337,931) (490,419) (724,424)
</TABLE>
- ---------------
(1) Free cash flow is defined by PageNet as Adjusted EBITDA less capital
expenditures (excluding payments for spectrum licenses) and debt service
(interest expense net of interest income).
The following table reconciles PageNet's net loss to EBITDA and Adjusted
EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss................................... $(17,965) $(44,201) $(104,320) $(156,947) $(162,009) $(124,419) $(234,003)
Interest expense........................... 53,717 102,846 128,014 151,380 143,762 109,353 111,097
Interest income............................ (3,079) (6,511) (3,679) (3,689) (2,070) (1,564) (1,986)
Depreciation and amortization expense...... 107,362 148,997 213,440 289,442 281,259 213,220 268,171
-------- -------- --------- --------- --------- --------- ---------
EBITDA..................................... 140,035 201,131 233,455 280,186 260,942 196,590 143,279
Minority interest.......................... -- -- (41) (56) (2,003) (2,174) (806)
Equity in loss of an unconsolidated
subsidiary............................... -- -- 923 1,276 -- -- --
Provision for asset impairment............. -- -- -- -- -- -- 17,798
Restructuring charge....................... -- -- -- -- 74,000 74,000 --
Non-recurring charges...................... -- -- 22,500 12,600 -- -- --
Extraordinary item......................... -- -- -- 15,544 -- -- --
Cumulative effective of a change in
accounting principle..................... -- -- -- -- -- -- 37,446
-------- -------- --------- --------- --------- --------- ---------
Adjusted EBITDA............................ $140,035 $201,131 $ 256,837 $ 309,550 $ 332,939 $ 268,416 $ 197,717
======== ======== ========= ========= ========= ========= =========
</TABLE>
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PAGENET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATION
INTRODUCTION
You should read the following discussion and analysis in conjunction with
PageNet's consolidated financial statements and notes.
EBITDA is a commonly used measure of financial performance in the wireless
messaging industry and is one of the financial measures used to calculate
whether PageNet is in compliance with the financial covenants under its debt
agreements. EBITDA is defined as earnings before interest, income taxes,
depreciation, and amortization.
Adjusted EBITDA is defined as earnings before interest, income taxes,
depreciation, amortization, minority interest, equity in loss of an
unconsolidated subsidiary, provision for asset impairment, restructuring charge,
non-recurring charges, extraordinary items, and cumulative effect of a change in
accounting principle. One of PageNet's financial objectives is to increase its
adjusted EBITDA, since adjusted EBITDA is a significant source of funds for
servicing indebtedness and for investment in continued growth, including
purchase of paging units and paging system equipment and the construction and
expansion of paging systems. Free cash flow is defined as adjusted EBITDA less
capital expenditures, excluding payments for spectrum license, and debt service.
Another of PageNet's financial objectives is to increase its free cash flow,
since free cash flow represents the adjusted EBITDA remaining after capital
expenditures and debt service costs. Adjusted EBITDA and free cash flow, as
determined by PageNet, may not be comparable to similarly titled data of other
wireless messaging companies. Amounts described as adjusted EBITDA and free cash
flow are not necessarily available for discretionary use as a result of
restrictions imposed by the terms of existing or future indebtedness, including
the repayment of such indebtedness or the payment of associated interest,
limitations imposed by law upon the payment of dividends or distributions or
capital expenditure requirements. Adjusted EBITDA and free cash flow should not
be considered an alternative to operating income or cash flows from operating
activities as determined in accordance with GAAP.
LIQUIDITY AND CAPITAL RESOURCES
PageNet is currently in compliance with all of the covenants in its U.S.
and Canadian debt agreements. PageNet is pursuing various efforts to improve its
domestic EBITDA for the fourth quarter of 1999. If these efforts are not
successful, PageNet will not be able to satisfy the interest coverage covenant
in its credit agreement after the close of the fourth quarter of 1999. Should
this happen, PageNet would try to obtain a waiver for its noncompliance with the
domestic credit agreement. If PageNet is unable to obtain a waiver, the lenders
could demand that PageNet immediately pay all indebtedness outstanding under the
credit agreement. This demand would cause PageNet to be in default under the
PageNet notes.
The terms of the PageNet notes prevent PageNet from borrowing any more
money. As of November 30, 1999, PageNet had approximately $25 million in cash.
PageNet believes that this cash, plus the cash expected to be generated from
operations, is sufficient to meet its obligations into the first quarter of
2000. However, if PageNet does not improve its domestic EBITDA, PageNet may not
have enough cash or borrowing capacity to meet its obligations through the first
quarter of 2000. PageNet is considering several alternatives to ensure that it
has sufficient liquidity through the completion of the merger. However, there
can be no guarantee that PageNet's efforts to obtain additional liquidity will
be timely or successful or that the merger will be completed. PageNet may have
to reduce the level of its operations and/or file for protection under chapter
11 of the Bankruptcy Code to restructure its obligations. Filing for bankruptcy
would be likely to have a material impact on PageNet's results of operations and
financial position. In addition, if the merger is not completed, PageNet may
incur significant charges for asset impairments and restructuring its
operations.
Net cash provided by operating activities was $89 million for the nine
months ended September 30, 1999, compared to $191 million for the nine months
ended September 30, 1998. The decrease resulted primarily from an increase in
net loss before non-cash charges and a decrease in accrued liabilities due to
timing of payments. Net cash provided by operating activities was $277 million
for the year ended December 31, 1998,
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<PAGE> 126
an increase of $126 million as compared to the year ended December 31, 1997. The
increase resulted primarily from a decrease in net loss before restructuring
charge of $69 million, an increase in accounts payable of $54 million, and a
decrease in inventories of $18 million. The increase in accounts payable during
1998 resulted from the timing of invoices at year-end 1998 related to additional
capital expenditures incurred in the fourth quarter of 1998 and additional
expenses in the fourth quarter of 1998 related to the centers of excellence.
The deficiency in free cash flow for PageNet's consolidated operations for
the nine months ended September 30, 1999 was $74 million. The deficiency in free
cash flow for PageNet's consolidated operations for the nine months ended
September 30, 1998 was $11 million. The deficiency in free cash flow for
PageNet's consolidated operations for the years ended December 31, 1996, 1997,
and 1998 was $305 million, $167 million, and $106 million, respectively. The
decline in free cash flow for the nine months ended September 30, 1999 was
primarily the result of a decrease in adjusted EBITDA. The improvements in free
cash flow in 1997 and 1998 were primarily the result of decreases in capital
expenditures and increases in adjusted EBITDA in PageNet's core domestic
operations.
STRATEGIC INITIATIVES
PageNet continues to implement its previously announced restructuring to
eliminate redundant administrative operations by consolidating key support
functions. While progress has been made, PageNet's efforts to convert its
offices to its new billing and customer service software platforms are behind
its original schedule. PageNet planned for the conversions to be substantially
completed during early 1999. PageNet now plans to continue to implement the
restructuring through January 2000, by which time it expects to have converted
100% of its customer units placed in service by its resellers and approximately
50% of its direct customer units to its centralized centers of excellence
operating platforms. Thereafter, PageNet plans to suspend conversions of
additional customers to these platforms pending the decision of the combined
company with respect to the operating platforms to be used going forward after
the merger. As result, PageNet will realize a portion of the anticipated cost
savings resulting from its centers of excellence initiative and will eliminate
some of the duplicative costs that have adversely affected its results from
operations. However, due to the suspension of future conversions, combined with
the impact of the contemplated merger on operations, PageNet is unable to
determine the amount of potential cost savings resulting from the centers of
excellence initiative.
PageNet also has made progress in expanding its advanced wireless network.
PageNet expects the expansion to be completed in January 2000. The expansion
will allow PageNet to more effectively offer a broad variety of wireless
information products and services. In April 1999, PageNet completed a
realignment of its sales and marketing organizations. This realignment is
intended to focus PageNet's sales and marketing organizations on customer needs
and PageNet's overall strategy.
In June 1999, PageNet announced the establishment of its Vast Solutions
division in order to provide a focus and dedicated resources towards developing
a suite of new wireless solutions. Vast is currently developing the following
new services: (1) the provision of gateway services, which use a single,
transparent "bridge" between different wireless networks, protocols and data
management systems, to enable customers and their employees to receive data
across multiple network technologies, (2) customized wireless information
management services for its corporate clients which involve integrated software
and hardware systems that allow access to vital company information from a
variety of sources, including company intranets, remote industrial assets, or
mobile employees, and (3) content and information services designed to bring a
wide variety of information to its customers' messaging devices from third party
providers and the internet. PageNet formed dedicated groups to launch these
services in 1998, and placed these groups under the umbrella of Vast beginning
in June of 1999. Vast is a development stage company and, since its inception,
has been engaged primarily in product research and development and developing
markets for its products and services. Vast has incurred significant operating
losses as a result of its start-up activities. It began to market its products
and services in late 1999, and believes that revenue from sales of these
products and services will grow rapidly.
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RESULTS OF OPERATIONS
The following table presents selected items from PageNet's consolidated
statements of operations as a percentage of net revenues and certain other items
for the periods indicated. Net revenues are revenues from services, rent and
maintenance plus product sales less the cost of products sold.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Services, rent and maintenance................... 20.8 20.6 21.7 21.9 26.8
Selling.......................................... 11.7 12.3 10.8 10.0 9.7
General and administrative....................... 31.1 30.2 33.1 31.0 36.1
Depreciation and amortization.................... 30.2 34.5 29.1 29.5 37.1
Provision for asset impairment................... -- -- -- -- 2.5
Restructuring charge............................. -- -- 7.6 10.2 --
Non-recurring charges............................ 3.2 1.5 -- -- --
----- ----- ----- ----- -----
Operating income (loss)............................ 3.0 0.9 (2.3) (2.6) (12.2)
Net loss........................................... (14.8) (18.7) (16.7) (17.2) (32.4)
EBITDA............................................. 33.1 33.4 26.9 27.2 19.8
Adjusted EBITDA.................................... 36.4 36.9 34.4 37.1 27.4
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net revenues for the nine months ended September 30, 1998 and net revenues
for the nine months ended September 30, 1999, were each $723 million. Revenues
from services, rent and maintenance, which PageNet considers its primary
business, decreased 1.2% to $697 million for the nine months ended September 30,
1999, compared to $705 million for the nine months ended September 30, 1998. The
average revenue per unit for PageNet's core domestic operations increased to
$7.96 for the nine months ended September 30, 1999, compared to $7.52 for the
nine months ended September 30, 1998. However, the increases in average revenue
per unit, which resulted from the shift of PageNet's subscriber base toward
higher revenue products and services, were offset by the decrease in revenues
due to the reduction of the number of units in service during the nine months
ended September 30, 1999.
The number of units in service with subscribers at September 30, 1999 was
approximately 9,314,000, compared to 10,110,000 and 10,484,000 units in service
with subscribers at December 31, 1998 and September 30, 1998. This reduction was
mainly due to PageNet's continued rationalization of its customer base,
intensifying price competition in the market for wireless communications
services and the degree to which broadband services, such as those with short
messaging capability built into the units, are being subscribed to in lieu of
one-way messaging services such as those offered by PageNet. Approximately two-
thirds of the loss in units in service was a result of continued weakness in
PageNet's reseller channel and most of the losses of subscribers were to lower
cost services. The cancellation of units from a national account relationship
and the bankruptcy of a major reseller resulted in a loss of approximately
120,000 units from PageNet's reseller channel. In addition, another 122,000
units were lost in the reconciliation of PageNet's reseller account records as
they were converted to the centers of excellence platform.
Product sales decreased 14.4% to $69 million for the nine months ended
September 30, 1999, compared to $81 million for the nine months ended September
30, 1998. The decreases in product sales and cost of products sold from 1998 to
1999 resulted primarily from PageNet's efforts to reduce the number of customers
using unprofitable services, and from increased price competition, both of which
resulted in a substantial decrease in sales through PageNet's reseller channel.
In addition, the decrease in cost of products sold from 1998 to 1999 also
resulted from the decrease in the depreciable lives of PageNet's subscriber
devices from
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three years to two years, effective April 1, 1999. This change had the effect of
increasing depreciation expense and thereby reducing the net book values of sold
subscriber devices.
Services, rent and maintenance expenses increased 22.6% to $194 million for
the nine months ended September 30, 1999, compared to $158 million for the nine
months ended September 30, 1998. The increase in services, rent and maintenance
expenses for the nine months ended September 30, 1999 was primarily due to:
- the adoption of SOP 98-5, effective January 1, 1999, which requires
start-up costs to be expensed as incurred;
- increased contracted dispatch costs related to advanced messaging units
placed in service during 1998 and the first nine months of 1999;
- increased pager parts and repairs expense; and
- additional expenses associated with an increase in transmitter sites in
connection with the buildout of its advanced messaging network.
The increase for the nine months ended September 30, 1999 was partially
offset by the decline in the reserve for non-recoverable subscriber devices
resulting from the change in the depreciable lives of its subscriber devices
from three years to two years. Selling expenses decreased 2.9% to $70 million
for the first nine months of 1999, compared to $72 million for the first nine
months of 1998. The decrease in selling expenses for the nine months ended
September 30, 1999 was due to a one-time adjustment to sales commissions made
during the second quarter of 1999 and lower sales commissions paid in
conjunction with the net decrease in units in service as compared to the same
period of 1998. Marketing research, development costs, and advertising expenses
associated with PageNet's core and advanced messaging operations are expected to
be scaled back in future periods.
General and administrative expenses increased 16.4% to $261 million for the
first nine months of 1999, compared to $224 million for the first nine months of
1998. The increase in general and administrative expenses was primarily related
to the centers of excellence initiative, including:
- expenses associated with establishing PageNet's centers of excellence;
- redundant operating costs associated with operating the new centers of
excellence infrastructure and the traditional decentralized
infrastructure; and
- increased levels of contract labor utilized during the transition to the
centers of excellence.
Depreciation and amortization expense increased 25.8% to $268 million for
the nine months ended September 30, 1999, compared to $213 million for the nine
months ended September 30, 1998. The increase in depreciation and amortization
expense resulted primarily from PageNet's change in the depreciable lives of its
subscriber devices and certain of its network equipment, effective April 1,
1999. PageNet changed the depreciable lives of its subscriber devices from three
years to two years and the depreciable life of certain of its network equipment
from seven years to ten years. The changes resulted from PageNet's review of the
historical usage periods of its subscriber devices and its network equipment and
PageNet's expectations regarding future usage periods for subscriber devices
considering current and projected technological advances. As a result of these
changes, depreciation expense increased by approximately $77 million during the
nine months ended September 30, 1999 and is expected to increase by
approximately $3 million during the fourth quarter of 1999. PageNet also
commenced depreciation and amortization on the assets related to its centers of
excellence during the third quarter of 1999. This is expected to increase
depreciation and amortization expense during the fourth quarter of 1999 by
approximately $2 million. PageNet expects to commence depreciation and
amortization on the assets related to its advanced messaging operations during
the first quarter of 2000, which is expected to increase depreciation and
amortization expense during 2000 by approximately $25 million.
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PageNet recorded a provision of $18 million during the quarter ended March
31, 1999, for the impairment of the assets of PageNet's majority-owned Spanish
subsidiaries. See note 5 to PageNet's consolidated financial statements for the
quarter ended September 30, 1999.
As a result of the factors outlined above, adjusted EBITDA decreased 26.3%
to $198 million for the first nine months of 1999, compared to $268 million for
the same period in 1998. Adjusted EBITDA and adjusted EBITDA as a percentage of
net revenues were negatively impacted by PageNet's advanced messaging
operations, the development and implementation of its centers of excellence, its
international operations, and the adoption of SOP 98-5. Adjusted EBITDA and
adjusted EBITDA as a percentage of net revenues for the nine months ended
September 30, 1999 were positively impacted by approximately $3 million as a
result of the change in the depreciable lives of subscriber devices previously
discussed.
Interest expense, net of amounts capitalized, was relatively flat for the
nine months ended September 30, 1999, compared to the same period in 1998.
Interest expense, net of amounts capitalized, was $111 million for the nine
months ended September 30, 1999, compared to $109 million for the nine months
ended September 30, 1998. Interest expense is expected to increase in early 2000
because the amount of interest capitalized is anticipated to decrease after
PageNet's advanced wireless network is completed.
PageNet adopted the provisions of SOP 98-5 effective January 1, 1999 and
recorded a charge of $37 million as the cumulative effect of a change in
accounting principle to write-off all remaining unamortized start-up costs as of
January 1, 1999. See note 4 to PageNet's consolidated financial statements for
the quarter ended September 30, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
Net revenues for the year ended December 31, 1998 were $968 million, an
increase of 15.4% over net revenues of $839 million for the year ended December
31, 1997. Revenues from services, rent and maintenance increased 15.5% to $946
million for the year ended December 31, 1998, compared to $818 million for the
year ended December 31, 1997. The increases in net revenues and revenues from
services, rent and maintenance were primarily due to an increase in average
revenue per unit resulting from the shift of PageNet's subscriber base toward
higher revenue products and services.
The average revenue per unit for PageNet's core domestic operations
increased to $7.71 for the year ended December 31, 1998, compared to $7.20 for
the corresponding period of 1997. The number of units in service with
subscribers at December 31, 1998, was 10,110,000, compared to 10,344,000 units
in service with subscribers at December 31, 1997.
Product sales decreased 29.5% to $101 million for the year ended December
31, 1998 compared to $143 million for the year ended December 31, 1997. The
decrease in product sales and corresponding decrease in cost of products sold
from 1997 to 1998 resulted primarily from PageNet's efforts to reduce the number
of customers using unprofitable services through certain pricing initiatives,
which resulted in a substantial decrease in sales through the reseller channel.
Services, rent, and maintenance expenses increased 21.6% to $210 million
for the year ended December 31, 1998, compared to $173 million for the year
ended December 31, 1997. The increase in services, rent, and maintenance
expenses was partially a result of an increase in telephone expenses associated
with the enactment of regulations requiring that the providers of pay phones be
compensated for all calls placed from pay phones to toll-free numbers. This
requirement increased PageNet's cost of providing toll-free number service
commencing in the fourth quarter of 1997. The increases in services, rent, and
maintenance expenses from 1997 to 1998 were also attributable to the increased
contracted dispatch costs related to advanced messaging units placed in service
during 1998 and expenses associated with an increase in transmitter sites.
Selling expenses were $104 million for the year ended December 31, 1998,
compared to $103 million for the year ended December 31, 1997. The decrease in
selling expenses as a percentage of net revenues from 1997 to 1998 resulted
primarily from a lower amount of sales commissions paid in conjunction with the
net decline in units in service with subscribers during 1998, and an overall
decrease in marketing research, development costs, and advertising expenses
associated with PageNet's VoiceNow service.
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<PAGE> 130
General and administrative expenses increased 26.3% to $321 million for the
year ended December 31, 1998, compared to $254 million for the year ended
December 31, 1997. The increase in general and administrative expenses from 1997
to 1998 was caused by the same factors that caused increases in general and
administrative expenses from 1998 to 1999.
Depreciation and amortization expense decreased 2.8% to $281 million for
the year ended December 31, 1998, compared to $289 million for the year ended
December 31, 1997. The decrease in depreciation and amortization expense from
1997 to 1998 resulted primarily from certain property and equipment becoming
fully depreciated, certain non-current assets becoming fully amortized, and the
decline in capital expenditures by PageNet.
PageNet recorded a restructuring charge of $74 million during the quarter
ended March 31, 1998, as a result of a restructuring approved by PageNet's board
of directors in February 1998. See note 2 of PageNet's consolidated financial
statements for the year ended December 31, 1998.
Adjusted EBITDA increased 7.6% to $333 million for the year ended December
31, 1998, compared to $310 million for the year ended December 31, 1997.
Adjusted EBITDA and adjusted EBITDA as a percentage of net revenues for 1998
were negatively impacted by PageNet's advanced messaging operations, the
formation of its centers of excellence, and its international operations.
Interest expense, net of amounts capitalized, was $144 million for the year
ended December 31, 1998, compared to $151 million for the year ended December
31, 1997. The decrease in interest expense from 1997 to 1998 was primarily
attributable to an increase in interest capitalized, a decrease in interest
rates on outstanding borrowings under PageNet's credit agreement, and the
redemption of PageNet's 11.75% senior subordinated notes on May 14, 1997 with
lower interest rate funds borrowed under the credit agreement.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
Net revenues for the year ended December 31, 1997 were $839 million, an
increase of 18.9% over net revenues of $706 million for the year ended December
31, 1996. Revenues from services, rent and maintenance increased 19.3% to $818
million for the year ended December 31, 1997, compared to $686 million for the
year ended December 31, 1996. Product sales, less cost of products sold, were
$21 million for 1997 compared to $20 million for 1996. The increases in net
revenues and revenues from services, rent and maintenance were primarily due to
growth in the number of units in service with subscribers of PageNet.
The number of units in service with subscribers at December 31, 1997, was
10,344,000, compared to 8,588,000 units in service with subscribers at December
31, 1996. The average revenue per unit for PageNet's core domestic operations
was $7.20 for the year ended December 31, 1997, compared to $7.46 for the year
ended December 31, 1996.
Services, rent, and maintenance expenses increased 17.8% to $173 million
for the year ended December 31, 1997, compared to $147 million for the year
ended December 31, 1996. The increase in services, rent, and maintenance
expenses was the result of:
- the growth in the number of units in service with subscribers;
- expenses associated with an increase in transmitter sites;
- expansion of nationwide transmission networks;
- costs incurred by PageNet's Canadian operations; and
- costs associated with the rollout of VoiceNow
Selling expenses increased 24.4% to $103 million for the year ended
December 31, 1997, compared to $83 million for the year ended December 31, 1996.
The increase in selling expenses and the increase as a percentage of net
revenues from 1996 to 1997 resulted primarily from marketing research,
development costs, and advertising expenses associated with PageNet's VoiceNow
service, and from the addition of sales
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<PAGE> 131
personnel to support the growth from 1996 to 1997 in both net revenues and the
number of units in service with subscribers.
General and administrative expenses increased 15.8% to $254 million for the
year ended December 31, 1997, compared to $219 million for the year ended
December 31, 1996. The increase in general and administrative expenses from 1996
to 1997 occurred to support the growth in the number of units in service with
subscribers.
Depreciation and amortization expense increased 35.6% to $289 million for
the year ended December 31, 1997, compared to $213 million for the year ended
December 31, 1996. The increase in depreciation and amortization expense from
1996 to 1997 resulted primarily from the increase in the number of subscriber
devices owned by PageNet and leased to subscribers, the increase in computer and
wireless messaging equipment used by PageNet in its operations, changes in
subscriber device depreciation, and the commencement of spectrum license
amortization. Effective January 1, 1997, PageNet shortened the depreciable life
of its subscriber devices from four to three years, and revised the related
residual values, in order to better reflect the estimated periods during which
the subscriber devices remain in service. The changes in depreciable lives and
residual values and the commencement of spectrum license amortization and other
costs associated with the introduction of PageNet's VoiceNow service increased
net loss by approximately $27 million for the year ended December 31, 1997.
The non-recurring charge of $13 million in 1997 represents a write-down of
certain subscriber devices to their net realizable value. The non-recurring
charge of $23 million in 1996 represents a provision to write-off in excess of
400,000 subscriber devices leased by PageNet to customers under an agreement
with a national marketing affiliate. During 1996, PageNet experienced
significant cancellations by the customer base developed through this affiliate
and therefore did not expect to recover the subscriber devices from the former
customers of this marketing affiliate. Adjusted EBITDA increased 20.5% to $310
million for the year ended December 31, 1997, compared to $257 million for the
year ended December 31, 1996. Adjusted EBITDA and adjusted EBITDA as a
percentage of net revenues for 1997 were negatively impacted by the introduction
of PageNet's VoiceNow service and its international operations. Adjusted EBITDA
and adjusted EBITDA as a percentage of net revenues for 1996 were negatively
impacted by PageNet's international operations.
Interest expense, net of amounts capitalized, was $151 million for the year
ended December 31, 1997, compared to $128 million for the year ended December
31, 1996. The increase in interest expense from 1996 to 1997 was primarily due
to the higher average level of indebtedness outstanding during 1997. The average
level of indebtedness outstanding during 1997 was $1.7 billion, compared to $1.2
billion outstanding during 1996. On May 14, 1997, PageNet redeemed its 11.75%
senior subordinated notes with lower interest rate funds borrowed under the
credit agreement. PageNet recorded an extraordinary loss of $16 million in the
second quarter of 1997 as a result of the early retirement of the 11.75% senior
subordinated notes. The extraordinary loss was comprised of the redemption
premium of $12 million and the write-off of unamortized issuance costs of $4
million.
CAPITAL EXPENDITURES
PageNet's operations and expansion into new markets and product lines have
required substantial capital investment. Furthermore, PageNet has almost
completed building an advanced messaging network, which will enable it to offer
new enhanced messaging services and customized wireless information, and has
continued to convert certain back office functions from its decentralized field
offices into the centers of excellence. Capital expenditures, excluding payments
for spectrum licenses, were $437 million, $328 million, and $297 million,
respectively, for the years ended December 31, 1996, 1997, and 1998, and $171
million and $163 million, respectively, for the nine months ended September 30,
1998 and 1999, and consisted primarily of expenditures on PageNet's core
operations, PageNet's advanced messaging operations, and the centers of
excellence.
Core Operations
Capital expenditures related to PageNet's core operations, excluding
capital expenditures related to the centers of excellence, were $390 million,
$224 million, and $143 million, respectively, for the years ended
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<PAGE> 132
December 31, 1996, 1997, and 1998, and $83 million and $66 million,
respectively, for the nine months ended September 30, 1998 and 1999. The
decreases in core capital expenditures have been primarily due to a reduction in
PageNet's network-related expenditures pertaining to geographic coverage and
capacity expansion. Also, during 1997, PageNet began instituting programs to
utilize subscriber devices more effectively and to more closely control
subscriber device capital expenditures. In addition to the programs to utilize
subscriber devices more effectively, the decrease in core capital expenditures
in 1997 was also due to increased efficiencies in infrastructure deployment.
VoiceNow and Advanced Messaging Operations
Capital expenditures related to VoiceNow were $47 million, $104 million,
and $97 million, respectively, for the years ended December 31, 1996, 1997, and
1998, and capital expenditures related to advanced messaging operations were $58
million and $72 million, respectively, for the nine months ended September 30,
1998 and 1999. PageNet expects to substantially complete capital expenditures
related to its advanced messaging network during the first quarter of 2000.
Centers of Excellence
Capital expenditures related to establishing PageNet's centers of
excellence, including new system implementations, were $57 million for the year
ended December 31, 1998, and $30 million and $25 million, respectively, for the
nine months ended September 30, 1998 and 1999. PageNet plans to spend additional
capital related to the establishment of its centers of excellence in the fourth
quarter of 1999 and the first quarter of 2000, and to suspend expenditure of
additional related capital after that time, pending the development of detailed
integration plans with Arch following the merger.
The amount of capital expenditures may fluctuate from quarter to quarter
and on an annual basis due to several factors, including the variability of
units in service with subscribers. Based on current expectations, PageNet
currently expects the total amount of capital expenditures to be approximately
$50 million in the fourth quarter of 1999. With the substantial completion of
the expansion of the advanced messaging network and the suspension of future
conversions to the centers of excellence beyond January 2000, PageNet expects
its capital expenditures in 2000 to decrease as compared to 1999. However,
PageNet is currently unable to estimate its capital expenditures for 2000 due to
uncertainty about the merger and the liquidity matters discussed in note 1 to
PageNet's consolidated financial statements for the quarter ended September 30,
1999.
CANADIAN CREDIT AGREEMENTS
The two credit agreements of PageNet's Canadian subsidiaries provide for
total borrowings of approximately $75 million. As of September 30, 1999,
approximately $52 million of borrowings were outstanding under the Canadian
credit facilities. Additional borrowings are available to PageNet's Canadian
subsidiaries under these facilities, so long as the borrowings are either
collateralized or certain financial covenants are met.
MARKET RISK
The risk inherent in PageNet's market risk sensitive instruments is the
potential loss arising from adverse changes in interest rates and foreign
currency exchange rates. PageNet's earnings are affected by changes in interest
rates due to the impact those changes have on the Company's variable-rate debt
obligations, which represented approximately 34% and 40% of its total long-term
obligations as of December 31, 1998, and September 30, 1999, respectively. If
interest rates average one percent more in 1999 than they did during 1998,
PageNet's interest expense would increase by approximately $6 million. The
impact of an increase in interest rates was determined based on the impact of
the hypothetical change in interest rates on PageNet's variable-rate long-term
obligations as of December 31, 1998. Market risk for fixed-rate long-term
obligations is estimated as the potential increase in fair value resulting from
a hypothetical one percent decrease in interest rates and amounted to
approximately $68 million as of December 31, 1998, based on discounted cash flow
analyses. The preceding sensitivity analyses do not, however, consider the
effects that such changes in
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<PAGE> 133
interest rates may have on overall economic activity, nor does it consider
additional actions PageNet may take to mitigate its exposure to such changes.
Actual results may differ from the above analyses.
PageNet's earnings are also affected by foreign exchange rate fluctuations
between the U.S. dollar and the Canadian dollar. In addition, PageNet is subject
to market risk related to its net investments in its Canadian subsidiaries.
However, the impact of such market risk exposures as a result of foreign
exchange rate fluctuations has not been, and is not expected to be, material
based on the relative insignificance of PageNet's Canadian subsidiaries to
PageNet's financial position or results of operations. As of September 30, 1999,
PageNet was not engaged in other activities that would cause exposure to the
risk of material earnings or cash flow loss due to changes in interest rates,
foreign currency exchange rates, or market commodity prices.
INFLATION
Inflation has not had a material effect on PageNet's operations to date.
Paging systems equipment and operating costs have not increased in price and
PageNet's pager costs have declined substantially in recent years. This
reduction in costs has generally been reflected in lower pager prices charged to
subscribers who purchase their units. PageNet's general and administrative
operating expenses, such as salaries, employee benefits and occupancy costs, are
subject to normal inflationary pressures.
YEAR 2000 COMPLIANCE
PageNet implemented a task force, and developed a comprehensive plan to
address Year 2000 issues.
PageNet completed all of the phases for its critical business processes
and, to date, has not experienced any Year 2000-related errors. PageNet
continues to utilize both internal and external resources to evaluate and test
its systems. PageNet expended approximately $4 million correcting Year 2000
problems.
PageNet believes that all mission critical vendors have successfully
readied their systems for the Year 2000 and, to date, we have not experienced
any Year 2000-related errors in their systems.
PageNet believes it has met all project deliverables according to schedule
based on management's review and verification of the project documentation.
However, actual results could differ materially from those anticipated,
particularly due to the potential impact of third-party modification plans.
PageNet's business, financial position, or results of operations could be
materially adversely affected by the failure of its computer systems and
applications, or those operated by third parties, to properly operate or manage
dates beyond 1999. In addition, disruptions in the economy generally resulting
from Year 2000 issues could materially adversely affect PageNet. PageNet cannot
estimate the amount of any potential liability or lost revenue.
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<PAGE> 134
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA -- ARCH
The following table sets forth selected historical consolidated financial
and operating data of Arch for the year ended August 31, 1994, the four months
ended December 31, 1993 and 1994, each of the five years ended December 31, 1998
and the nine months ended September 30, 1998 and 1999. The selected financial
and operating data as of December 31, 1995, 1996, 1997 and 1998 and for each of
the four years ended December 31, 1998 have been derived from Arch's audited
consolidated financial statements and notes. The selected financial and
operating data for the year ended December 31, 1994 has been derived from the
audited financial statements for the year ended August 31, 1994, the four month
period ended December 31, 1994 and the unaudited financial statements for the
four month period ended December 31, 1993. The selected financial and operating
data as of September 30, 1999 and for the nine months ended September 30, 1998
and 1999 have been derived from Arch's unaudited consolidated financial
statements and notes. You should read the following consolidated financial
information in conjunction with "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Arch's consolidated financial
statements and notes set forth below.
During 1994, Arch changed its fiscal year end from August 31 to December
31. Arch was required to file a transition report on Form 10-K with audited
financial statements for the period September 1, 1994 through December 31, 1994
and has elected to include in the following table, for comparative purposes,
unaudited financial statements for the periods September 1, 1993 through
December 31, 1993 and January 1, 1994 through December 31, 1994.
In the following table, equity in loss of affiliate represents Arch's share
of net losses of USA Mobile Communications Holdings, Inc. for the period of time
from Arch's acquisition of its initial 37% interest in USA Mobile on May 16,
1995 through the completion of Arch's acquisition of USA Mobile on September 7,
1995 and Arch's share of net losses of Benbow PCS Ventures, Inc. since Arch's
acquisition of Westlink Holdings, Inc. in May 1996. See "Arch Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
The extraordinary item is an extraordinary charge resulting from prepayment
of indebtedness. See "Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations".
Adjusted EBITDA, as determined by Arch, does not reflect restructuring
charge, equity in loss of affiliate, and extraordinary items; consequently
adjusted EBITDA may not necessarily be comparable to similarly titled data of
other wireless communications companies. EBITDA is commonly used by analysts and
investors as a principal measure of financial performance in the wireless
communications industry. EBITDA is also one of the primary financial measures
used to calculate whether Arch and its subsidiaries are in compliance with
financial covenants under their debt agreements. These covenants, among other
things, limit the ability of Arch and its subsidiaries to: incur additional
indebtedness, make investments, pay dividends, grant liens on its assets, merge,
sell or acquire assets, repurchase or redeem capital stock, incur capital
expenditures and prepay certain indebtedness. EBITDA is also one of the
financial measures used by analysts to value Arch. Therefore Arch management
believes that the presentation of EBITDA provides relevant information to
investors. EBITDA should not be construed as an alternative to operating income
or cash flows from operating activities as determined in accordance with GAAP or
as a measure of liquidity. Amounts reflected as EBITDA or adjusted EBITDA are
not necessarily available for discretionary use as a result of restrictions
imposed by the terms of existing indebtedness and limitations imposed by
applicable law upon the payment of dividends or distributions, among other
things. See "Arch Management's Discussion and Analysis of Financial Condition
and Results of Operation".
Adjusted EBITDA margin is calculated by dividing Arch's adjusted EBITDA by
total revenues less cost of products sold. EBITDA margin is a measure commonly
used in the wireless communications industry to evaluate a company's EBITDA
relative to total revenues less cost of products sold as an indicator of the
efficiency of a company's operating structure.
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<PAGE> 135
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
AUGUST 31, ---------------------- ------------------------------------------------------------
1994 1993 1994 1994 1995 1996 1997 1998
---------- ----------- -------- -------- ---------- ---------- ---------- ----------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Service, rental and
maintenance revenues.... $ 55,139 $ 16,457 $ 22,847 $ 61,529 $ 138,466 $ 291,399 $ 351,944 $ 371,154
Product sales............. 12,108 2,912 5,178 14,374 24,132 39,971 44,897 42,481
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Total revenues............ 67,247 19,369 28,025 75,903 162,598 331,370 396,841 413,635
Cost of products sold..... (10,124) (2,027) (4,690) (12,787) (20,789) (27,469) (29,158) (29,953)
-------- -------- -------- -------- ---------- ---------- ---------- ----------
57,123 17,342 23,335 63,116 141,809 303,901 367,683 383,682
Operating expenses:
Service, rental and
maintenance........... 13,123 3,959 5,231 14,395 29,673 64,957 79,836 80,782
Selling................. 10,243 3,058 4,338 11,523 24,502 46,962 51,474 49,132
General and
Administrative........ 17,717 5,510 7,022 19,229 40,448 86,181 106,041 112,181
Depreciation and
Amortization.......... 16,997 5,549 6,873 18,321 60,205 191,871 232,347 221,316
Restructuring charge.... -- -- -- -- -- -- -- 14,700
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Operating income (loss)... (957) (734) (129) (352) (13,019) (86,070) (102,015) (94,429)
Interest and non-operating
Expenses, net........... (4,112) (1,132) (1,993) (4,973) (22,522) (75,927) (97,159) (104,213)
Equity in loss of
affiliate............... -- -- -- -- (3,977) (1,968) (3,872) (5,689)
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Income (loss) before
income tax benefit,
extraordinary item and
accounting change....... (5,069) (1,866) (2,122) (5,325) (39,518) (163,965) (203,046) (204,331)
Income tax benefit........ -- -- -- -- 4,600 51,207 21,172 --
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item and
accounting change....... (5,069) (1,866) (2,122) (5,325) (34,918) (112,758) (181,874) (204,331)
Extraordinary item........ -- -- (1,137) (1,137) (1,684) (1,904) -- (1,720)
Cumulative effect of
accounting change....... -- -- -- -- -- -- -- --
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss)......... $ (5,069) $ (1,866) $ (3,259) $ (6,462) $ (36,602) $ (114,662) $ (181,874) $ (206,051)
======== ======== ======== ======== ========== ========== ========== ==========
Basic/diluted income
(loss) per common share
before extraordinary
item and accounting
change.................. $ (2.13) $ (0.78) $ (0.88) $ (2.23) $ (7.79) $ (16.59) $ (26.31) $ (29.34)
Extraordinary item per
basic/diluted common
share................... -- -- (0.47) (0.47) (0.37) (0.27) -- (0.24)
Cumulative effect of
accounting change per
basic/diluted common
share................... -- -- -- -- -- -- -- --
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Basic/diluted net income
(loss) per common
share................... $ (2.13) $ (0.78) $ (1.35) $ (2.70) $ (8.16) $ (16.86) $ (26.31) $ (29.58)
======== ======== ======== ======== ========== ========== ========== ==========
OTHER OPERATING DATA:
Adjusted EBITDA........... $ 16,040 $ 4,815 $ 6,744 $ 17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587
Adjusted EBITDA margin.... 28% 28% 29% 28% 33% 35% 35% 37%
Capital expenditures,
excluding
acquisitions............ $ 25,657 $ 7,486 $ 15,279 $ 33,450 $ 60,468 $ 165,206 $ 102,769 $ 113,184
Cash flows provided by
operating activities.... $ 14,781 $ 5,306 $ 4,680 $ 14,155 $ 14,749 $ 37,802 $ 63,590 $ 81,105
Cash flows used in
investing activities.... $(28,982) $ (7,486) $(34,364) $(55,860) $ (192,549) $ (490,626) $ (102,769) $ (82,868)
Cash flows provided by
(used in) financing
activities.............. $ 14,636 $ 11,290 $ 26,108 $ 29,454 $ 179,092 $ 452,678 $ 39,010 $ 68
Units in service at end of
period.................. 410,000 288,000 538,000 538,000 2,006,000 3,295,000 3,890,000 4,276,000
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Service, rental and
maintenance revenues.... $ 277,826 $ 403,607
Product sales............. 31,811 36,963
---------- ----------
Total revenues............ 309,637 440,570
Cost of products sold..... (21,863) (24,988)
---------- ----------
287,774 415,582
Operating expenses:
Service, rental and
maintenance........... 60,812 91,421
Selling................. 36,902 57,589
General and
Administrative........ 84,527 123,643
Depreciation and
Amortization.......... 164,990 222,836
Restructuring charge.... 14,700 (2,200)
---------- ----------
Operating income (loss)... (74,157) (77,707)
Interest and non-operating
Expenses, net........... (78,334) (143,323)
Equity in loss of
affiliate............... (2,219) (3,200)
---------- ----------
Income (loss) before
income tax benefit,
extraordinary item and
accounting change....... (154,710) (224,230)
Income tax benefit........ -- --
---------- ----------
Income (loss) before
extraordinary item and
accounting change....... (154,710) (224,230)
Extraordinary item........ (1,720) --
Cumulative effect of
accounting change....... -- (3,361)
---------- ----------
Net income (loss)......... $ (156,430) $ (227,591)
========== ==========
Basic/diluted income
(loss) per common share
before extraordinary
item and accounting
change.................. $ (22.20) $ (9.00)
Extraordinary item per
basic/diluted common
share................... (0.25) --
Cumulative effect of
accounting change per
basic/diluted common
share................... -- (0.13)
---------- ----------
Basic/diluted net income
(loss) per common
share................... $ (22.45) $ (9.13)
========== ==========
OTHER OPERATING DATA:
Adjusted EBITDA........... $ 105,533 $ 142,929
Adjusted EBITDA margin.... 37% 34%
Capital expenditures,
excluding
acquisitions............ $ 85,785 $ 83,186
Cash flows provided by
operating activities.... $ 61,276 $ 76,422
Cash flows used in
investing activities.... $ (55,646) $ (598,869)
Cash flows provided by
(used in) financing
activities.............. $ (2,387) $ 542,302
Units in service at end of
period.................. 4,211,000 7,024,000
</TABLE>
127
<PAGE> 136
<TABLE>
<CAPTION>
AS OF
AUGUST 31, AS OF DECEMBER 31,
---------- --------------------------------------------------------- AS OF SEPTEMBER 30,
1994 1994 1995 1996 1997 1998 1999
---------- -------- ------- ---------- ---------- ---------- -------------------
BALANCE SHEET DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets..................... $6,751 $ 8,483 $33,671 $ 43,611 $ 51,025 $ 50,712 $ 99,180
Total assets....................... 76,255 117,858 785,376 1,146,756 1,020,720 904,285 1,424,518
Long-term debt, less current
maturities....................... 67,328 93,420 457,044 918,150 968,896 1,003,499 1,357,743
Redeemable preferred stock......... -- -- 3,376 3,712 -- -- --
Stockholders' equity (deficit)..... (3,304) 9,368 246,884 147,851 (33,255) (213,463) (180,892)
</TABLE>
The following table reconciles net income to the presentation of Arch's
adjusted EBITDA:
<TABLE>
<CAPTION>
FOUR MONTHS
AS OF ENDED
AUGUST 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
---------- ----------------- --------------------------------------------------------
1994 1993 1994 1994 1995 1996 1997 1998
---------- ------- ------- ------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)................... $(5,069) $(1,866) $(3,259) $(6,462) $(36,602) $(114,662) $(181,874) $(206,051)
Interest and non-operating expenses,
net............................... 4,112 1,132 1,993 4,973 22,522 75,927 97,159 104,213
Income tax benefit.................. -- -- -- -- (4,600) (51,207) (21,172) --
Depreciation and amortization....... 16,997 5,549 6,873 18,321 60,205 191,871 232,347 221,316
Restructuring charge................ -- -- -- -- -- -- -- 14,700
Equity in loss of affiliate......... -- -- -- -- 3,977 1,968 3,872 5,689
Extraordinary Item.................. -- -- 1,137 1,137 1,684 1,904 -- 1,720
Cumulative effect of accounting
charge............................ -- -- -- -- -- -- -- --
------- ------- ------- ------- -------- --------- --------- ---------
Adjusted EBITDA..................... $16,040 $ 4,815 $ 6,744 $17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587
======= ======= ======= ======= ======== ========= ========= =========
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Net income (loss)................... $(156,430) $(227,591)
Interest and non-operating expenses,
net............................... 78,334 143,323
Income tax benefit.................. -- --
Depreciation and amortization....... 164,990 222,836
Restructuring charge................ 14,700 (2,200)
Equity in loss of affiliate......... 2,219 3,200
Extraordinary Item.................. 1,720 --
Cumulative effect of accounting
charge............................ -- 3,361
--------- ---------
Adjusted EBITDA..................... $ 105,533 $ 142,929
========= =========
</TABLE>
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ARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
You should read the following discussion and analysis in conjunction with
Arch's consolidated financial statements and notes. This discussion and analysis
addresses Arch both before and after its acquisition of MobileMedia. For
MobileMedia's previous operations under separate ownership and management, see
"MobileMedia Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Arch derives most of its revenues from fixed monthly or other periodic fees
charged to subscribers for wireless communications services. Such fees are not
dependent on usage. As long as a subscriber remains on service, operating
results benefit from the recurring payments of the fixed periodic fees without
incurrence of additional selling expenses by Arch. Arch's service, rental and
maintenance revenues and the related expenses exhibit substantially similar
growth trends. Arch's average revenue per subscriber has declined over the last
three years for two principal reasons:
- an increase in the number of reseller customers who purchase airtime at
wholesale rates; and
- an increase in the number of subscriber owned and reseller owned units
for which Arch receives no recurring equipment revenue.
The reduction in average revenue per subscriber resulting from these trends
has been more than offset by the elimination of associated expenses so that
Arch's margins have improved over this period. Furthermore, recent data
indicates that the rate of decline in revenue per customer has slowed.
Arch has achieved significant growth in units in service, revenues and
adjusted EBITDA through a combination of internal growth and acquisitions. From
January 1, 1996 through March 31, 1999, Arch's total number of units in service
grew from 2.0 million to 4.3 million units. The MobileMedia acquisition added
another 2.8 million units on June 3, 1999. Arch's total revenues increased from
$331.4 million in the year ended December 31, 1996 to $396.8 million in the year
ended December 31, 1997, to $413.6 million in the year ended December 31, 1998
and $440.6 million in the nine months ended September 30, 1999. Over the same
periods, through operating efficiencies and economies of scale, Arch has been
able to reduce its per unit operating costs to enhance its competitive position
in its markets. Due to the rapid growth in its subscriber base, Arch has
incurred significant selling expenses, which are charged to operations in the
period incurred. Arch had net losses of $114.7 million in the year ended
December 31, 1996, $181.9 million in the year ended December 31, 1997, $206.1
million in the year ended December 31, 1998 and $227.6 million in the nine
months ended September 30, 1999, as a result of significant depreciation and
amortization expenses related to acquired and developed assets and interest
charges associated with indebtedness. However, as its subscriber base has grown,
Arch's operating results have improved, as evidenced by an increase in Arch's
adjusted EBITDA from $105.8 million in the year ended December 31, 1996 to
$130.3 million in the year ended December 31, 1997 to $141.6 million in the year
ended December 31, 1998 and to $190.6 million on an annualized basis in the nine
months ended September 30, 1999.
EBITDA is a commonly used measure of financial performance in the wireless
communications industry. Adjusted EBITDA is also one of the financial measures
used to calculate whether Arch and its subsidiaries are in compliance with the
financial covenants under their debt agreements. Adjusted EBITDA should not be
construed as an alternative to operating income or cash flows from operating
activities as determined in accordance with GAAP. One of Arch's financial
objectives is to increase its adjusted EBITDA, since this is a significant
source of funds for servicing indebtedness and for investment in continued
growth, including purchase of units and messaging system equipment, construction
and expansion of messaging systems, and possible acquisitions. Adjusted EBITDA,
as determined by Arch, may not necessarily be comparable to similarly titled
data of other wireless communications companies. Amounts reflected as adjusted
EBITDA are not necessarily available for discretionary use as a result of
restrictions imposed by the terms of existing or future indebtedness, including
the repayment of such indebtedness or the payment of associated interest,
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<PAGE> 138
limitations imposed by applicable law upon the payment of dividends or
distributions or capital expenditure requirements.
DIVISIONAL REORGANIZATION
To reduce redundancy and take advantage of various operating efficiencies,
Arch is reorganizing its operating divisions over a period which was originally
expected to take 18 to 24 months. Arch has consolidated its former Midwest,
Western, and Northern divisions into existing operating divisions, and is in the
process of consolidating regional administrative support functions, such as
customer service, collections, inventory and billing. Upon completion of the
MobileMedia acquisition, Arch management reviewed the timing and implementation
of the divisional reorganization. After reviewing the divisional reorganization
plan within the context of the combined company integration plan which was
approved by Arch in the third quarter of 1999, management decided that
significant changes needed to be made. Arch anticipates that the impact of the
MobileMedia acquisition will extend the timing for making cash outlays under the
divisional reorganization plan to December 31, 2000.
In connection with the divisional reorganization as initially implemented,
Arch (1) anticipated a net reduction of approximately 10% of its workforce, (2)
closed certain office locations and redeployed other real estate assets and (3)
recorded a restructuring charge of $14.7 million during 1998. The restructuring
charge consisted of approximately $9.7 million for employee severance, $3.5
million for lease obligations and terminations and $1.5 million of other costs.
The severance costs and lease obligations require cash outlays throughout the
restructuring period. Arch is funding these cash outlays from operations and its
secured credit facility. The divisional reorganization has recently been
reevaluated in light of the MobileMedia merger. In the quarter ended September
30, 1999 Arch identified more facilities and network leases that will not be
utilized following the merger integration, resulting in an additional charge of
$2.6 million. This charge was more than offset by reductions to previously
provided severance and other costs of $4.8 million. There can be no assurance
that the desired cost savings will be achieved or that the anticipated
reorganization of Arch's business will be accomplished smoothly, expeditiously
or successfully.
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RESULTS OF OPERATIONS
The following table presents selected items from Arch's consolidated
statements of operations as a percentage of net revenues and certain other
information for the periods indicated. Net revenues are total revenues less cost
of products sold. MobileMedia's results are reflected in Arch's results
beginning on June 3, 1999.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues................. 109.0% 107.9% 107.8% 107.6% 106.0%
Cost of products sold.......... (9.0) (7.9) (7.8) (7.6) (6.0)
--------- --------- -------- --------- ----------
Net revenues................... 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Service, rental and
maintenance.................. 21.4 21.7 21.1 21.1 22.0
Selling........................ 15.4 14.0 12.8 12.8 13.8
General and administrative..... 28.4 28.8 29.2 29.4 29.8
Depreciation and
amortization................. 63.1 63.2 57.7 57.3 53.6
Restructuring charge........... -- -- 3.8 5.1 (0.5)
--------- --------- -------- --------- ----------
Operating income (loss)........ (28.3)% (27.7)% (24.6)% (25.7)% (18.7)%
========= ========= ======== ========= ==========
Net income (loss).............. (37.7)% (49.5)% (53.7)% (54.4)% (54.8)%
========= ========= ======== ========= ==========
Arch adjusted EBITDA........... 34.8% 35.4% 36.9% 36.7% 34.4%
========= ========= ======== ========= ==========
Cash flows provided by
operating activities......... $ 37,802 $ 63,590 $ 81,105 $ 61,276 $ 76,422
Cash flows used in investing
activities................... $(490,626) $(102,769) $(82,868) $ (55,646) $ (598,869)
Cash flows provided by (used
for) financing activities.... $ 452,678 $ 39,010 $ 68 $ (2,387) $ 542,302
Annual service, rental and
maintenance expenses per
unit......................... $ 25 $ 22 $ 20 $ 20 $ 22
</TABLE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Total revenues increased to $440.6 million, a 42.3% increase, in the nine
months ended September 30, 1999, from $309.6 million in the nine months ended
September 30, 1998. Net revenues (total revenues less cost of products sold)
increased to $415.6 million, a 44.4% increase, in the nine months ended
September 30, 1999, from $287.8 million in the nine months ended September 30,
1998. Total revenues and net revenues in the 1999 period increased primarily due
to the MobileMedia merger, which took place on June 3, 1999. The acquisition of
MobileMedia added approximately 2.8 million units in service while units in
service otherwise decreased by 14.0 thousand. Total revenues and net revenues
were also adversely affected by a general slowing of paging industry growth,
compared to prior years. Although industry sources estimate that the number of
paging units in service grew at an annual rate of approximately 25% between 1992
and 1997, growth in basic paging services has slowed considerably since 1997.
Revenues were also adversely affected by:
- Arch's decision in the fourth quarter of 1998, in anticipation of the
MobileMedia merger, not to replace normal attrition among direct sales
personnel;
- the reduced effectiveness of the reseller channel of distribution; and
- reduced sales through Arch's company owned stores.
Arch expects revenue to continue to be adversely affected in 1999 and 2000
due to these factors. Service, rental and maintenance revenues, which consist
primarily of recurring revenues associated with the sale or lease of units,
increased to $403.6 million, a 45.3% increase, in the nine months ended
September 30, 1999
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from $277.8 million in the nine months ended September 30, 1998. These increases
in revenues were due primarily to the acquisition of MobileMedia on June 3,
1999. Maintenance revenues represented less than 10% of total service, rental
and maintenance revenues in the nine months ended September 30, 1999 and 1998.
Arch does not differentiate between service and rental revenues. Product sales,
less cost of products sold, increased to $12.0 million, a 20.4% increase, in the
nine months ended September 30, 1999, from $9.9 million in the nine months ended
September 30, 1998, as a result of the MobileMedia acquisition.
Service, rental and maintenance expenses, which consist primarily of
telephone line and site rental expenses, were $91.4 million, 22.0% of net
revenues, in the nine months ended September 30, 1999, compared to $60.8
million, 21.1% of net revenues, in the nine months ended September 30, 1998. The
increases in the nine month periods were due primarily to increased expenses
associated with the provision of wireless communications services to a greater
number of units. Annualized service, rental and maintenance expenses per unit
increased to $22 in the nine months ended September 30, 1999, from $20 in the
corresponding 1998 period. This increase was due primarily to the increase in
paging systems and associated expenses as a result of the MobileMedia merger.
However, the per unit costs should decrease in the future if expected synergies
are achieved and as existing systems become more populated through the addition
of new units and the fixed costs of operating these systems are spread over a
greater unit base.
Selling expenses were $57.6 million, 13.8% of net revenues, in the nine
months ended September 30, 1999 compared to $36.9 million, 12.8% of net
revenues, in the nine months ended September 30, 1998. The increase in absolute
dollars was primarily due to increased headcount and the increase as a
percentage of net revenues was primarily due to redundant headcount as a result
of the MobileMedia merger.
General and administrative expenses increased to $123.6 million, 29.8% of
net revenues, in the nine months ended September 30, 1999 from $84.5 million,
29.4% of net revenues, in the nine months ended September 30, 1998. The increase
in absolute dollars was primarily due to increased headcount, administrative and
facility costs and the increase as a percentage of net revenues was primarily
due to the redundant headcount, administrative and facility costs associated
with MobileMedia.
Depreciation and amortization expenses increased to $222.8 million in the
nine months ended September 30, 1999 from $165.0 million in the nine months
ended September 30, 1998. These expenses principally reflect the acquisition of
MobileMedia, as well as Arch's acquisitions in prior periods, accounted for as
purchases, and investment in wireless communication units and other system
expansion equipment to support growth. Additionally, depreciation expense for
the nine months ended September 30, 1999 included the write-off of approximately
$7.1 million of costs associated with the development of an integrated billing
and management system. Arch decided to discontinue development efforts due to
the capabilities of the system acquired in conjunction with the MobileMedia
merger.
Operating losses were $77.7 million in the nine months ended September 30,
1999 compared to $74.2 million in the nine months ended September 30, 1998, as a
result of the factors outlined above.
Net interest expense increased to $98.9 million in the nine months ended
September 30, 1999 from $76.7 million in the nine months ended September 30,
1998. The increase was principally attributable to an increase in Arch's
outstanding debt. Interest expense for the nine months ended September 30, 1999
and 1998 included approximately $30.4 million and $27.4 million, respectively,
of non-cash interest accretion on the discount notes under which semi-annual
interest payments commence on September 15, 2001.
Other expense increased to $44.4 million in the nine months ended September
30, 1999 from $1.7 million in the nine months ended September 30, 1998. In the
nine months ended September 30, 1999, other expense includes $6.5 million
representing the write-off of Arch's investment in CONXUS Communications, Inc.
and $35.8 million associated with the arrangements made among Arch, Benbow and
Benbow's controlling stockholder in June 1999. CONXUS, which holds rights to a
50 KHz outbound/50 KHz inbound 2-way messaging license throughout the United
States, filed for bankruptcy protection in May 1999. See note (b) to the notes
to consolidated condensed financial statements for the quarter ended September
30, 1999.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
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On January 1, 1999, Arch adopted SOP 98-5. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Initial
application of SOP 98-5 resulted in a $3.4 million charge which was reported as
the cumulative effect of a change in accounting principle. This charge
represents the unamortized portion of start-up and organization costs which had
been deferred in prior years.
Net loss increased to $227.6 million in the nine months ended September 30,
1999 from $156.4 million in the nine months ended September 30, 1998, as a
result of the factors outlined above.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Total revenues increased to $413.6 million, a 4.2% increase, in 1998 from
$396.8 million in 1997 as the number of units in service increased from 3.9
million at December 31, 1997 to 4.3 million at December 31, 1998. Net revenues
increased to $383.7 million, a 4.4% increase, in 1998 from $367.7 million in
1997. Total revenues and net revenues in 1998 were adversely affected by a
general slowing of industry growth, compared to prior years. Revenues were also
adversely affected in the fourth quarter of 1998 by:
- Arch's decision, in anticipation of the MobileMedia acquisition, not to
replace normal attrition among direct sales personnel;
- the reduced effectiveness of Arch's reseller channel of distribution; and
- reduced sales through Arch-operated retail stores.
Service, rental and maintenance revenues increased to $371.2 million, a
5.5% increase, in 1998 from $351.9 million in 1997. These increases in revenues
were due primarily to the increase, through internal growth, in the number of
units in service from 3.9 million at December 31, 1997 to 4.3 million at
December 31, 1998. Maintenance revenues represented less than 10% of total
service, rental and maintenance revenues in 1998 and 1997. Product sales, less
cost of products sold, decreased to $12.5 million, a 20.4% decrease, in 1998
from $15.7 million in 1997, as a result of a decline in the average revenue per
unit sold.
Service, rental and maintenance expenses, increased to $80.8 million, 21.1%
of net revenues, in 1998 from $79.8 million, 21.7% of net revenues, in 1997. The
increase was due primarily to increased expenses associated with system
expansions and an increase in the number of units in service. Annualized
service, rental and maintenance expenses per subscriber were $20 in 1998
compared to $22 in 1997.
Selling expenses decreased to $49.1 million, 12.8% of net revenues, in 1998
from $51.5 million, 14.0% of net revenues, in 1997. The decrease was due
primarily to a decrease in the number of net new units in service and to
nonrecurring marketing costs incurred in 1997 to promote Arch's new Arch Paging
brand identity. The number of net new units in service resulting from internal
growth decreased by 35.1% in 1998 compared to 1997 primarily due to the factors
set forth above that adversely affected revenues.
General and administrative expenses increased to $112.2 million, 29.2% of
net revenues, in 1998, from $106.0 million, 28.8% of net revenues, in 1997. The
increase was due primarily to administrative and facility costs associated with
supporting more units in service.
Depreciation and amortization expenses decreased to $221.3 million in 1998
from $232.3 million in 1997. These expenses principally reflected Arch's
acquisitions in prior periods accounted for as purchases. They also reflected
investment in units and other system expansion equipment to support growth.
Operating losses were $94.4 million in 1998 compared to $102.0 million in
1997, as a result of the factors outlined above.
Net interest expense increased to $104.2 million in 1998 from $97.2 million
in 1997. The increase was principally attributable to an increase in Arch's
outstanding debt. Interest expense for 1998 included approximately $37.0 million
of interest which accretes on Arch's 10 7/8% senior discount notes even though
the cash payment of the interest is deferred. Interest expense for 1997 included
approximately $33.3 million of accretion on these notes.
Arch recognized an income tax benefit of $21.2 million in 1997. This
benefit represented the tax benefit of operating losses incurred after the
acquisitions of USA Mobile and Westlink which were available to offset
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deferred tax liabilities arising from those acquisitions. The tax benefit of
these operating losses was fully recognized during 1997. Accordingly, Arch
established a valuation reserve against its deferred tax assets which reduced
the income tax benefit to zero as of December 31, 1998. Arch does not expect to
recover its deferred tax asset in the foreseeable future and will continue to
increase its valuation reserve accordingly. See Note 5 to Arch's consolidated
financial statements.
In June 1998, Arch recognized an extraordinary charge of $1.7 million
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under prior credit facilities.
Net loss increased to $206.1 million in 1998 from $181.9 million in 1997,
as a result of the factors outlined above.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues increased $65.5 million, or 19.8%, to $396.8 million in 1997
from $331.4 million in 1996 and net revenues increased $63.8 million, or 21.0%,
from $303.9 million to $367.7 million over the same period. Service, rental and
maintenance revenues increased $60.5 million, or 20.8%, to $351.9 million in
1997 from $291.4 million in 1996. These increases in revenues were due primarily
to the increase in the number of units in service from 3.3 million at December
31, 1996 to 3.9 million at December 31, 1997 and the full year impact of the
Westlink acquisition which was completed in May 1996. Maintenance revenues
represented less than 10% of total service, rental and maintenance revenues in
1996 and 1997. Product sales, less cost of products sold, increased 25.9% to
$15.7 million in 1997 from $12.5 million in 1996 as a result of a greater number
of unit sales.
Service, rental and maintenance expenses increased to $79.8 million, 21.7%
of net revenues, in 1997 from $65.0 million, 21.4% of net revenues, in 1996. The
increase was due primarily to increased expenses associated with system
expansions and an increase in the number of units in service. Annual service,
rental and maintenance expenses per subscriber decreased to $22 in 1997 from $25
in 1996.
Selling expenses increased to $51.5 million, 14.0% of net revenues, in 1997
from $47.0 million, 15.4% of net revenues, in 1996. The increase in selling
expenses was due to the full year impact of the Westlink acquisition and the
marketing costs incurred to promote Arch's Arch Paging brand identity. Arch's
selling cost per net new unit in service increased to $87 in 1997 from $58 in
1996, primarily due to fixed selling costs and increased marketing costs being
spread over fewer net new units put into service.
General and administrative expenses increased to $106.0 million, 28.8% of
net revenues, in 1997 from $86.2 million, 28.4% of net revenues, in 1996. The
increase in absolute dollars was due primarily to increased expenses associated
with supporting more units in service, including the full year impact of
Westlink, as well as expenses associated with the establishment of Arch's
national services division.
Depreciation and amortization expenses increased to $232.3 million, 63.2%
of net revenues, in 1997 from $191.9 million, 63.1% of net revenues, in 1996.
These expenses reflect Arch's acquisitions, accounted for as purchases, and
continued investment in units and other system expansion equipment to support
continued growth.
Operating loss increased to $102.0 million in 1997 from $86.1 million in
1996 as a result of the factors outlined above.
Net interest expense increased to $97.2 million in 1997 from $75.9 million
in 1996. The increase was attributable to an increase in Arch's average
outstanding debt. Interest expense included approximately $33.0 million in 1997
and $24.0 million in 1996, of non-cash interest accretion on Arch's 10 7/8%
senior discount notes due 2008 under which semi-annual interest payments
commence on September 15, 2001. See Note 3 to Arch's consolidated financial
statements.
Arch recognized income tax benefits of $21.2 million in 1997 and $51.2
million in 1996, representing the tax benefit of operating losses subsequent to
the acquisitions of USA Mobile in September 1995 and Westlink
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in May 1996 which were available to offset deferred tax liabilities arising from
Arch's acquisitions of USA Mobile and Westlink.
During 1996, Arch recognized an extraordinary charge of $1.9 million,
representing the write-off of unamortized deferred financing costs associated
with the prepayment of indebtedness under a prior credit facility.
Net loss increased to $181.9 million in 1997 from $114.7 million in 1996 as
a result of the factors outlined above. Included in the net loss were charges of
$3.9 million for 1997 and $2.0 million for 1996, representing Arch's pro rata
share of Benbow's losses since the Westlink acquisition in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
Arch's business strategy requires the availability of substantial funds to
finance the expansion of existing operations, to fund capital expenditures for
subscriber equipment and network system equipment, to service debt and to
finance acquisitions.
Capital Expenditures and Commitments
Excluding acquisitions of wireless messaging businesses, Arch's capital
expenditures were $165.2 million in 1996, $102.8 million in 1997 and $113.2
million in 1998. Arch's capital expenditures decreased from $85.8 million in the
nine months ended September 30, 1998 to $83.2 million in the nine months ended
September 30, 1999. To date, Arch generally has funded its capital expenditures
with net cash provided by operating activities and the incurrence of debt. Arch
believes that it will have sufficient cash available from operations and credit
facilities to fund its capital expenditures for the remainder of 1999 and 2000.
Arch's 1999 capital expenditures primarily involved the purchase of
wireless messaging units, system equipment and transmission equipment,
information systems, advances to Benbow, as described below, and capitalized
financing costs.
Arch estimates the amount of capital that will be required to fund capital
expenditures by the combined company for 2000 will be approximately $267
million. Such expenditures will be used primarily for subscriber equipment,
network infrastructure, information systems and the construction of certain
markets for a nationwide network of narrowband personal communications services,
which are commonly referred to as N-PCS. However, the actual amount of capital
to be required by the combined company will depend upon a number of factors.
These include subscriber growth, the type of products and services demanded by
customers, service revenues, technological developments, marketing and sales
expenses, competitive conditions, the nature and timing of Arch's N-PCS
strategy, and acquisition strategies and opportunities. Arch believes it will
have sufficient cash available from operations and from borrowings under the
secured credit facility to fund anticipated capital expenditures of the combined
company for 2000.
Through Arch's May 1996 acquisition of Westlink, Arch acquired a 49.9%
equity interest in Benbow PCS Ventures, Inc. Benbow holds exclusive rights to a
50 KHz outbound/12.5 KHz inbound N-PCS license in each of the five regions of
the United States. Arch was formerly obligated to advance to Benbow sufficient
funds to service debt obligations incurred by Benbow in connection with its
acquisition of its N-PCS licenses and to finance construction of an N-PCS system
unless funds were available to Benbow from other sources. This obligation was
subject to the approval of Arch's designee on Benbow's board of directors. As of
March 31, 1999, Arch had advanced approximately $23.7 million to Benbow. In June
1999, Arch, Benbow and Benbow's controlling stockholder agreed that:
- the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated;
- Benbow will not make any further FCC payments and will not pursue
construction of an N-PCS system;
- Arch will not be obligated to fund FCC payments or construction of an
N-PCS system by Benbow;
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- the parties will seek FCC approval of the forgiveness of Benbow's
remaining payment obligations and the transfer of the controlling
stockholder's Benbow shares to Arch;
- the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of FCC approval; and
- Arch will pay the controlling stockholder, in installments, $3.5 million
(if the transaction closes before January 23, 2001) or $3.8 million (if
the transaction closes on January 23, 2001).
As a result of these arrangements, Benbow will not have any meaningful
business operations and is unlikely to retain its N-PCS licenses. The closing of
the transaction will not affect the funding obligations of Arch in connection
with Benbow's acquisition of Page Call in June 1998 described below.
Other Commitments and Contingencies
Interest payments on the $448.4 million principal amount at maturity of
Arch's discount notes commence September 15, 2001. Unless all of the discount
notes are tendered in the exchange offer, Arch expects to service such interest
payments out of cash made available to it by its subsidiaries. Based on the
principal amount of Arch's discount notes now outstanding, and assuming that no
notes are tendered, such interest payments will equal a maximum of $24.4 million
on March 15 and September 15 of each year until scheduled maturity on March 15,
2008. A default by Arch in its payment obligations under the discount notes
could have material adverse effects.
On June 29, 1998, Benbow acquired all of the outstanding stock of Page Call
by issuing to Page Call's former stockholders preferred stock and a 12%
promissory note for $17.2 million. Benbow also agreed to pay one of Page Call's
stockholders $911,000 over five years for consulting services. Benbow's
preferred stock and promissory note, which will total $22.8 million upon
maturity at April 8, 2000, are exchangeable for Arch common stock:
- at any time at the holders' option, at an exchange price equal to the
higher of (1) $39.00 per share or (2) the market price of Arch common
stock,
- mandatorily on April 8, 2000, at the then prevailing market price of
common stock, or
- automatically at an exchange price of $39.00 per share, if the market
price of Arch common stock equals or exceeds $39.00 for 20 consecutive
trading days.
Arch is permitted to require Benbow to redeem its preferred stock and
promissory note at any time for cash. Arch guaranteed all obligations of Benbow
under the Benbow preferred stock, promissory note and consulting agreement
described above. Arch may elect to make payments under its guarantee in common
stock or cash. Benbow's redemption of its preferred stock and promissory note
for cash, or Arch's payment of cash pursuant to its guarantees of Benbow's
preferred stock and promissory note, would depend upon the availability of
capital and any restrictions contained in applicable debt instruments and under
the Delaware corporations statute, which currently would not permit any such
cash redemptions or payments. If Arch issues common stock or pays cash pursuant
to its guarantees, Arch will receive from Benbow a promissory note and
non-voting, non-convertible preferred stock of Benbow with an annual yield of
14.5% payable upon an acquisition of Benbow or earlier to the extent that
available cash and applicable law permit. Page Call's former stockholders
received customary registration rights for any shares of common stock issued in
exchange for Benbow's preferred stock and promissory note or pursuant to Arch's
guarantees.
Arch may be obligated to pay PageNet a termination fee of $40.0 million in
specified circumstances. See note (j) to the notes to Arch's consolidated
condensed financial statements.
Sources of Funds
Arch's net cash provided by operating activities was $37.8 million in 1996,
$63.6 million in 1997, $81.1 million in 1998 and $76.4 million in the nine
months ended September 30, 1999. Arch expects to fund its capital needs for the
foreseeable future with borrowings under current and future credit facilities,
net cash
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<PAGE> 145
provided by operations and, depending on Arch's needs and market conditions,
possible sales of equity or debt securities. For additional information, see
Note 3 to Arch's consolidated financial statements. Arch's ability to borrow in
the future will depend, in part, on its ability to continue to increase its
EBITDA. At September 30, 1999, Arch had $131 million in available borrowing
capacity under its secured credit facility.
Secured Credit Facility
In June 1998 and March 1999, an Arch subsidiary amended an existing credit
facility to establish senior secured revolving credit and term loan facilities
in the aggregate amount of $581.0 million consisting of:
- Tranche A: a $175.0 million reducing revolving credit facility;
- Tranche B: a $100.0 million 364-day revolving credit facility under which
the principal amount outstanding on June 27, 1999 was converted into a
term loan; and
- Tranche C: a $306.0 million term loan of which $125.0 million was made
available in a single drawing on June 29, 1998 and $181.0 million was
made available in a single drawing on June 3, 1999.
The amount of these facilities will reduce as time passes. See "Description
of Other Indebtedness -- Arch -- Senior Credit Facility".
Recent Issuances of Notes
In June 1998, a subsidiary of Arch issued $130.0 million principal amount
of 12 3/4% senior notes due 2007 for net proceeds of $122.6 million, after
deducting selling discounts and expenses, in a private placement made pursuant
to Rule 144A under the Securities Act. These notes were sold at an initial price
to investors of 98.049% of the face amount of their investment. On June 3, 1999,
the same subsidiary received the proceeds of an offering of $147.0 million
principal amount of 13 3/4% senior notes due 2008 in another Rule 144A
placement. The notes were sold at 95.091% of the face amount for net proceeds of
$134.6 million. See "Description of Other Indebtedness -- Arch -- Subsidiary's
Senior Notes".
Equity Issued in Exchange for Debt
In October 1999, Arch purchased $8.9 million principal amount of its
convertible subordinated debentures from two noteholders in exchange for 809,545
shares of Arch common stock, which had a weighted average closing price of $4.03
per share as of the dates of the transactions, and warrants to purchase 540,487
shares of Arch common stock for $9.03 per share. Arch also purchased $16.3
million accreted value ($19.0 million principal amount at maturity) of discount
notes in exchange for 2,327,120 shares of Arch common stock, which had a
weighted average closing price of $4.01 per share as of the dates of the
transactions. Following these transactions, at October 31, 1999, Arch had $4.5
million principal amount of the convertible debentures and $387.1 million
accreted value ($448.4 million principal amount at maturity) of discount notes
outstanding.
Sandler Equity Investment
On June 29, 1998, two partnerships managed by Sandler Capital Management
Company, Inc., an investment management firm, together with certain other
private investors, made an equity investment in Arch of $25.0 million in the
form of Series C preferred stock. Arch used such amount to repay indebtedness
under a former credit facility as part of the establishment of the current
senior credit facility. See "Description of Arch's Equity Securities -- Series C
Preferred Stock".
During 1999 Arch will accrue dividends of $2.1 million on the Series C
preferred stock, payable upon redemption or conversion of the Series C preferred
stock or liquidation of Arch.
The MobileMedia Acquisition
In June 1999, Arch acquired MobileMedia Communications, Inc., which is now
a wholly owned subsidiary of Arch. Immediately prior to the acquisition,
MobileMedia's parent company had contributed all
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<PAGE> 146
of its assets to MobileMedia Communications, Inc. Both MobileMedia companies had
been operating as debtors-in-possession under Chapter 11 of the Federal
Bankruptcy Act.
Arch acquired MobileMedia for a combination of cash and Arch securities, as
follows:
- Arch paid approximately $479.0 million in cash to secured creditors of
the MobileMedia debtors-in-possession;
- Arch paid a total of $58.0 million to pay fees and expenses, repay all
borrowings outstanding under MobileMedia's post-petition credit facility,
pay pre-petition priority claims and post-petition claims incurred by the
debtors-in-possession in the ordinary course of business or authorized by
the bankruptcy court, and pay principal and accrued interest plus
indenture trustee fees outstanding under senior notes assumed by
MobileMedia in its acquisition of Dial Page in 1995;
- Arch issued 4,781,656 shares of its common stock to unsecured creditors
of MobileMedia;
- Arch issued and sold 36,207,265 additional shares of its common stock to
unsecured creditors of MobileMedia for a total purchase price of $217.2
million; and
- Arch issued to four unsecured creditors, who had agreed to act as standby
purchasers and to purchase shares not purchased by other unsecured
creditors, warrants to acquire up to 1,225,219 shares of its common stock
on or before September 1, 2001 for $9.03 per share.
Arch also issued to the holders of its common stock and Series C preferred
stock on January 27, 1999 non-transferable rights to acquire up to 14,964,388
shares of its common stock at a price of $6.00 per share. A total of 102,964
non-transferable rights were exercised. Because non-transferable rights to
acquire 14,861,424 shares were not exercised, Arch issued in their place
warrants to purchase 14,861,424 shares of its common stock for $9.03 per share.
Subsidiaries of Arch also borrowed a total of $320.8 million, as described
above, to help fund the MobileMedia acquisition.
During the third quarter of 1999, Arch decided to eliminate redundant
headcount and facilities in connection with the overall integration of
MobileMedia's operations. To the extent that it is determined that headcount and
facilities acquired with MobileMedia should be eliminated, the purchase price of
the acquisition was increased for accounting purposes to cover the costs. It is
expected that the MobileMedia integration process will continue until to end of
2000.
In connection with the MobileMedia acquisition, Arch anticipates a net
reduction of approximately 10% of MobileMedia's workforce and the closing of
certain facilities and tower sites. This resulted in the establishment a $13.1
million acquisition reserve which is included in the purchase price of
MobileMedia for accounting purposes. The initial acquisition reserve consisted
of approximately (i) $5.6 million for employee severance, (ii) $7.0 million for
lease obligations and terminations and (iii) $0.5 million of other costs. The
acquisition reserve will continue to be evaluated in the event that assumptions
change in the future. There can no assurance that the desired cost savings will
be achieved or that the integration of the two companies will be accomplished
smoothly, expeditiously or successfully. See Note (h) to the notes to
consolidated condensed financial statements.
Inflation
Inflation has not had a material effect on Arch's operations to date.
Systems equipment and operating costs have not increased in price and Arch's
internal costs per unit have tended to decline in recent years. This reduction
in costs has generally been reflected in lower pager prices charged to
subscribers who purchase their units. Arch's general operating expenses, such as
salaries, employee benefits and occupancy costs, are subject to normal
inflationary pressures.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of Arch's
computer programs that have time-sensitive software may
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<PAGE> 147
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
To address this issue, Arch has created a cross-functional Y2K project
group that has analyzed and identified internal and external areas likely to be
affected by the Year 2000 problem. Arch has requested information from certain
mission critical vendors and has held discussions with equipment and other
mission critical vendors concerning their efforts to identify and address
potential issues associated with their equipment and/or software.
Arch is in the final stages of its inventory audit and is nearing
completion of appropriate modifications and/or replacements of its computerized
systems and applications to address the issue. The costs associated with such
replacements have been capitalized and amortized in accordance with Arch's
existing accounting policies and future replacement costs, if any, will be
capitalized and amortized in a similar manner. Maintenance or modification costs
have been, and will be, expensed as incurred.
Arch is finalizing its contingency plans relating to the Year 2000 problem.
Such plans include, among other things, the use of (1) backup power generators
for some of its operations, (2) some alternate vendors and (3) various
communication channels to deploy its work force in a timely and efficient manner
to address potential problems that arise.
RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Arch adopted SFAS No. 130 in 1998. The
adoption of this standard did not have an effect on its reporting of income.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Arch adopted SFAS No. 131 for its year ended December 31, 1998.
Adoption of this standard did not have a significant impact on Arch's reporting.
In March 1998, the Accounting Standards Committee of the Financial
Accounting Standards Board issued Statement of Position 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes criteria for capitalizing costs of computer software developed or
obtained for internal use. Arch adopted SOP 98-1 in 1998. The adoption of SOP
98-1 has not had a material effect on Arch's financial position or results of
operations.
In April 1998, the Accounting Standards Executive Committee of the
Financial Accounting Standards Board issued Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Arch
adopted SOP 98-5 effective January 1, 1999. The initial application of SOP 98-5
resulted in a $3.4 million charge which was reported as the cumulative effect of
a change in accounting principle. The charge represents the unamortized portion
of start-up and organization costs which had been deferred in prior years. The
adoption of SOP 98-5 is not expected to have a material effect on Arch's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings. Arch intends to
adopt this standard effective January 1, 2001. Arch has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements; however, adopting
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL
AND OPERATING DATA -- MOBILEMEDIA
The following table sets forth selected historical consolidated financial
and operating data of MobileMedia for each of the five years in the period ended
December 31, 1998 and the three months ended March 31, 1998 and 1999. The
historical financial and operating data presented under consolidated statements
of operations data and consolidated balance sheet data for each of the five
years in the period ended December 31, 1998 have been derived from MobileMedia's
audited consolidated financial statements and notes. The selected financial and
operating data as of March 31, 1998 and for the three months ended March 31,
1998 and 1999 have been derived from MobileMedia's unaudited consolidated
financial statements and notes. You should read the following consolidated
financial information in conjunction with "MobileMedia Management's Discussion
and Analysis of Financial Condition and Results of Operations" and MobileMedia's
consolidated financial statements and notes set forth below.
MobileMedia completed its acquisition of the paging and wireless messaging
business of Dial Page, Inc. on August 31, 1995 for a purchase price of $187.4
million. The consolidated statement of operations data includes Dial Page's
results of operations from that date. See Note 3 to MobileMedia's consolidated
financial statements and "Business -- Predecessors to the Combined Company;
Events Leading Up to MobileMedia's Bankruptcy Filings". MobileMedia completed
the acquisition of Mobile Communications Corporation of America, commonly known
as MobileComm, on January 4, 1996 for a purchase price of $928.7 million. The
consolidated statement of operations data includes MobileComm results of
operations from that date. See Note 3 to MobileMedia's consolidated financial
statements and "Arch's Business -- The Company".
In the following table, services, rents and maintenance, selling, general
and administrative expenses includes non-recurring adjustments to record
executive separation expenses of $2.5 million in 1994 and $0.7 million in 1995.
Impairment of long-lived assets includes a non-recurring adjustment to
record, effective December 31, 1996, a $792.5 million write-down of intangible
assets based upon MobileMedia's determination that an impairment of long-lived
assets existed pursuant to Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". See Note 2 to MobileMedia's consolidated financial statements.
Restructuring costs includes non-recurring adjustments to record
restructuring costs related to MobileMedia's bankruptcy filing on January 30,
1997.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, amortization of deferred gain on
tower sale, impairment of long-lived assets and restructuring costs. EBITDA is a
financial measure commonly used in MobileMedia's industry and should not be
construed as an alternative to operating income, as determined in accordance
with GAAP, as an alternative to cash flows from operating activities, as
determined in accordance with GAAP, or as a measure of liquidity. MobileMedia's
adjusted EBITDA is, however, the primary financial measure by which
MobileMedia's covenants are calculated under the agreements governing
MobileMedia's indebtedness. EBITDA is also one of the financial measures used by
analysts to value MobileMedia. MobileMedia's adjusted EBITDA in 1996 excludes
the impact of the $792.5 million writedown of intangible assets. MobileMedia's
adjusted EBITDA may not necessarily be comparable to similarly titled data of
other paging companies.
Adjusted EBITDA margin is calculated by dividing MobileMedia's adjusted
EBITDA by total revenues less cost of products sold. EBITDA margin is a measure
commonly used in the paging industry to evaluate a company's EBITDA relative to
total revenues less cost of products sold as an indicator of the efficiency of a
company's operating structure. MobileMedia's adjusted EBITDA margin in 1996
excludes the impact of the $792.5 million writedown of intangible assets. The
interim financial information as of March 31, 1999 and for the three months
ended March, 1998 and 1999 contained in this prospectus is unaudited. However,
in the opinion of MobileMedia management, it includes all adjustments of a
normal recurring nature that are necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods
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<PAGE> 149
presented. Results of operations for the interim periods presented are not
necessarily indicative of results of operations for the entire year or any
future period.
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ----------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues............... $ 203,149 $ 252,996 $ 640,710 $ 527,392 $ 449,681 $ 115,163 $ 105,824
Cost of products sold................ (18,705) (26,885) (72,595) (35,843) (22,162) (5,513) (3,516)
---------- ---------- ----------- --------- ---------- ---------- ----------
184,444 226,111 568,115 491,549 427,519 109,650 102,308
Services, rents and maintenance,
selling, and general and
administrative expenses............ 136,672 164,037 459,474 388,476 305,698 79,510 72,694
Reduction of liabilities subject to
compromise......................... -- -- -- -- (10,461) -- (3,050)
Impairment of long-lived assets...... -- -- 792,478 -- -- -- --
Restructuring costs.................. -- -- 4,256 19,811 18,624 4,558 5,067
Depreciation and amortization........ 67,651 71,408 348,698 140,238 116,459 31,671 27,969
Amortization of deferred gain on
tower sale......................... -- -- -- -- (1,556) -- (1,167)
---------- ---------- ----------- --------- ---------- ---------- ----------
Operating (loss) income.............. (19,879) (9,334) (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense) interest
expense............................ (18,237) (31,745) (92,663) (67,611) (53,043) (14,626) (10,018)
(Loss) gain on sale of assets........ 1,049 -- 68 3 94,165 1 (323)
Other................................ -- -- -- -- (338) -- 2,063
---------- ---------- ----------- --------- ---------- ---------- ----------
Total other income
(expense).................. (17,188) (31,745) (92,595) (67,608) 40,784 (14,625) (8,278)
---------- ---------- ----------- --------- ---------- ---------- ----------
Income (loss) before income tax
provision (benefit)................ (37,067) (41,079) (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income tax benefit (provision)....... -- -- 69,442 -- (3,958) -- (209)
---------- ---------- ----------- --------- ---------- ---------- ----------
Net income (loss).................... $ (37,067) $ (41,079) $(1,059,944) $(124,584) $ 35,581 $ (20,714) $ (7,692)
========== ========== =========== ========= ========== ========== ==========
OTHER DATA
Adjusted EBITDA...................... $ 47,772 $ 62,074 $ 108,641 $ 103,073 $ 121,821 $ 30,140 $ 29,614
Adjusted EBITDA margin............... 25.9 % 27.5 % 19.1 % 21.0 % 28.5% 27.5% 28.9%
Units in service (at end of
period)............................ 1,447,352 2,369,101 4,424,107 3,440,342 3,143,968 3,319,553 3,106,775
Capital expenditures................. $ 65,574 $ 86,163 $ 161,861 $ 40,556 $ 53,867 $ 4,854 $ 26,806
Cash flows provided by operating
activities......................... $ 53,781 $ 43,849 $ 57,194 $ 14,920 $ 54,462 $ 19,542 $ 17,552
Cash flows provided by (used in)
investing activities............... $ (50,878) $ (312,698) $(1,028,321) $ (40,556) $ 115,836 $ (4,854) $ (25,025)
Cash flows provided by (used in)
financing activities............... $ -- $ 671,794 $ 586,111 $ 13,396 $ (180,000) $ (10,000) $ 6,255
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
-------- ---------- ---------- ---------- -------- ------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Total assets...................................... $353,703 $1,128,546 $ 790,230 $ 655,134 $561,454 $554,009
Debt.............................................. 195,677 476,156 1,074,196 1,075,681 905,681 910,681
Total stockholders' equity (deficit).............. 101,500 578,753 (468,391) (589,579) (553,998) (561,690)
</TABLE>
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The following table reconciles net income to the presentation of
MobileMedia's adjusted EBITDA.
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- ----------- --------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)............................ $(37,067) $(41,079) $(1,059,944) $(124,584) $ 35,581 $(20,714) $(7,692)
Interest expense............................. 18,237 31,745 92,663 67,611 53,043 14,626 10,018
Income tax provision (benefit)............... -- -- (69,442) -- 3,958 -- 209
Depreciation and amortization................ 67,651 71,408 348,698 140,238 116,459 31,671 27,969
Amortization of deferred gain on tower
sale....................................... -- -- -- -- (1,556) -- (1,167)
Restructuring costs.......................... -- -- 4,256 19,811 18,624 4,558 5,067
Impairment of long lived assets.............. -- -- 792,478 -- -- -- --
Reduction of liabilities subject to
compromise................................. -- -- -- -- (10,461) -- (3,050)
Gain/loss on sale of assets.................. (1,049) -- (68) (3) (94,165) (1) 323
Other income/expense......................... -- -- -- -- 338 -- (2,063)
-------- -------- ----------- --------- -------- -------- -------
Adjusted EBITDA.............................. $ 47,772 $ 62,074 $ 108,641 $ 103,073 $121,821 $ 30,140 $29,614
======== ======== =========== ========= ======== ======== =======
</TABLE>
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MOBILEMEDIA MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis describes MobileMedia's operations
through March 31, 1999. This section should be read in conjunction with
MobileMedia's consolidated financial statements and notes.
The following are principal components of MobileMedia's operating results:
- Services, rents and maintenance revenues, also referred to as paging
revenue: includes primarily monthly, quarterly, semi-annually and
annually billed recurring revenue, not dependent on usage, charged to
subscribers for paging and related services such as voice mail and pager
repair and replacement.
- Net revenues: includes primarily paging revenues and sales of customer
owned and maintained units less cost of units sold.
- Services, rents and maintenance expenses: includes costs related to the
management, operation and maintenance of MobileMedia's network systems.
- Selling expenses: includes salaries, commissions and administrative
costs for MobileMedia's sales force and related marketing and advertising
expenses.
- General and administrative expenses: includes primarily customer service
expense, executive management, accounting, office telephone, rents and
maintenance and information services.
- Average revenues per unit, or ARPU: calculated by dividing (1) the
average monthly services, rents and maintenance revenues for the period
by (2) the weighted average number of units in service for the period.
ARPU, as determined by MobileMedia, may not necessarily be comparable to
similarly titled data of other paging companies.
- Average monthly operating expense per unit: calculated by dividing (1)
the average monthly services, rents and maintenance, selling and general
and administrative expenses for the period by (2) the weighted average
number of units in service for the period.
MobileMedia's adjusted EBITDA represents earnings before other income
(expense), taxes, depreciation, amortization, impairment of long-lived assets,
amortization of deferred gain on its tower sale and restructuring costs. See
notes 2 and 3 to MobileMedia's consolidated financial statements.
As used below, the term "acquisitions" refers to both the MobileComm
acquisition and the Dial Page acquisition.
MobileMedia built and operated wireless messaging and communications
systems and generated revenues from the provision of paging and other wireless
communications services. MobileMedia's strategy was to strengthen its industry
leadership position by providing superior paging and messaging services at
competitive prices.
MobileMedia's revenues were derived primarily from fixed periodic recurring
fees charged to MobileMedia's subscribers for paging services. These fees were
not dependent on usage. While a subscriber remained in MobileMedia's service,
future operating results benefitted from this recurring revenue stream with
minimal requirements for incremental selling expenses or other costs.
MobileMedia completed its acquisition of MobileComm in January 1996 and
purchased the paging business of Dial Page in August 1995. MobileMedia incurred
integration related costs in excess of those originally anticipated to (1)
transfer units-in-service between paging networks to rationalize capacity, (2)
temporarily operate duplicative functions, primarily customer service, and (3)
hire additional employees and consultants to focus on the integration.
MobileMedia also experienced increased loss of subscribers related to the
integration difficulties. MobileMedia's financial results were negatively
impacted by the higher than anticipated integration costs and increased loss of
subscribers.
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On January 30, 1997, MobileMedia and its parent company filed voluntary
petitions for relief under the Bankruptcy Code in order to implement an
operational and financial restructuring. Until Arch's acquisition of MobileMedia
on June 3, 1999, MobileMedia and its parent company operated their business as
debtors-in-possession subject to the jurisdiction of the bankruptcy court.
RESULTS OF OPERATIONS
The following table presents selected items from MobileMedia's consolidated
statement of operations and selected other information for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
1998 1999
---------------------- -----------------------
(IN THOUSANDS, EXCEPT PERCENTAGE AND UNIT DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues
Services, rents and maintenance................. $108,542 99.0% $100,631 98.4%
Equipment sales and activation fees............. 6,621 6.0 5,193 5.1
-------- ----- -------- ------
Total revenues.................................... 115,163 105.0 105,824 103.4
Cost of products sold............................. (5,513) (5.0) (3,516) (3.4)
-------- ----- -------- ------
Net revenues...................................... 109,650 100.0 102,308 100.0
Operating expenses
Services, rents and maintenance................. 28,899 26.4 27,077 26.5
Selling......................................... 15,703 14.5 14,136 13.8
General and administrative...................... 34,908 31.8 31,481 30.8
Reduction of liabilities subject to
compromise................................... -- -- (3,050) (3.0)
Restructuring costs............................. 4,558 4.2 5,067 5.0
Depreciation and amortization................... 31,671 28.9 27,969 27.3
Amortization of deferred gain on tower sale..... -- -- (1,167) (1.1)
-------- ----- -------- ------
Total operating expenses.......................... 115,739 105.6 101,513 99.2
-------- ----- -------- ------
Operating income (loss)........................... (6,089) (5.6) 795 0.8
Other income (expense)
Interest expense (net).......................... (14,626) (13.3) (10,018) (9.8)
Gain (loss) on sale of assets................... 1 0.0 (323) (0.3)
Other income.................................... -- -- 2,063 2.0
-------- ----- -------- ------
Total other income (expense)...................... (14,625) (13.3) (8,278) (8.1)
-------- ----- -------- ------
Income from continuing operations before income
tax provision................................... (20,714) (18.9) (7,483) (7.3)
Income tax provision.............................. -- -- 209 0.2
-------- ----- -------- ------
Income from continuing operations................. $(20,714) (18.9)% $ (7,692) (7.5)%
======== ===== ======== ======
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT
PERCENTAGE AND UNIT DATA)
<S> <C> <C>
OTHER DATA
Adjusted EBITDA............................................. 30,140 29,614
Cash flows provided by operating activities................. 19,542 17,552
Cash flows used in investing activities..................... (4,854) (25,025)
Cash flows provided by (used in) financing activities....... (10,000) 6,255
ARPU........................................................ 10.70 10.73
Average monthly operating expense per unit.................. 7.84 7.75
Units in service (at end of period)......................... 3,319,553 3,106,775
</TABLE>
Three Months Ended March 31, 1999 Compared With Three Months Ended March 31,
1998
Units in service decreased 212,778 from 3,319,553 as of March 31, 1998 to
3,106,775 as of March 31, 1999, and decrease of 6.4%. The decrease was primarily
attributable to gross additions which were below expectations due to competitive
pressures.
Services, rents and maintenance revenues decreased 7.3% to $100.6 million
for the three months ended March 31, 1999 compared to $108.5 million for the
three months ended March 31, 1998. The decrease was attributable to fewer units
in service and partially offset by the $0.03 increase in ARPU from $10.70 for
the three months ended March 31, 1998 to $10.73 for the three months ended March
31, 1999. The increase in ARPU was largely due to a greater percentage of
alphanumeric units in service and a smaller percentage in the reseller
distribution channel. Alphanumeric units generally are sold at higher ARPU and
units sold through the reseller distribution channel are generally sold at lower
ARPU.
Equipment sales and activation fees decreased 21.6% to $5.2 million for the
three months ended March 31, 1999 compared to $6.6 million for the three months
ended March 31, 1998. The decrease in equipment sales was primarily due to a
$0.7 million decrease in equipment sold through the direct distribution channel
and a $0.6 million decrease in billings for non-returned equipment. Equipment
sales and activations fees, less cost of products sold, increased to $1.7
million for the three months ended March 31, 1999 from $1.1 million for the
three months ended March 31, 1998. This increase was primarily attributable to
improved equipment sales margins on units sold through the retail distribution
channel.
Net revenues decreased 6.7% to $102.3 million for the three months ended
March 31, 1999 compared to $109.7 million for the three months ended March 31,
1998.
Services, rents and maintenance expenses decreased 6.3% to $27.1 million
for the three months ended March 31, 1999 compared to $28.9 million for the
three months ended March 31, 1998. This decrease resulted primarily from lower
subcontracted paging expenses of approximately $3.2 million arising from billing
reconciliations, increased unit cancellations and customer migration to
company-owned networks, lower paging-related telecommunications expenses of
approximately $0.6 million as a result of continued usage of lower cost
facilities and lower pager repair expenses of $0.4 million. These expense
reductions were offset by an increase in antenna site lease expense of $2.7
million primarily resulting from the leaseback of antenna sites on transmission
towers sold to Ponnacle Towers, Inc. See note 3 to MobileMedia's consolidated
financial statements. As a percentage of net revenue, services, rents and
maintenance expenses were constant at approximately 26.5%.
Selling expenses for the three months ended March 31, 1999 decreased 10.0%
to $14.1 million compared to $15.7 million for the three months ended March 31,
1998. The decrease resulted primarily from lower sales personnel costs of
approximately $0.8 million attributable to lower sales headcount, lower
advertising expenses of approximately $0.6 million and lower retail distribution
channel selling expenses of approximately $0.2 million resulting from lower
retail sales. Selling expenses as a percentage of net revenue decreased from
14.3% to 13.8%.
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General and administrative expenses decreased 9.8% to $31.5 million for the
three months ended March 31, 1999 compared to $34.9 million for the three months
ended March 31, 1998 and decreased as a percentage of net revenues to 30.8% for
the three months ended March 31, 1999. The decrease primarily resulted from
reduced bad debt expense of $1.3 million due to improvements in MobileMedia's
billing and collections functions, lower administrative telephone expenses of
$1.0 million resulted from lower call volume and lower customer service expenses
of $1.4 million primarily resulting from lower headcount.
Reduction of liabilities subject to compromise was $3.1 million for the
three months ended March 31, 1999. See note 2 to MobileMedia's consolidated
financial statements.
Restructuring costs increased 11.2% from $4.6 million for the three months
ended March 31, 1998 to $5.1 million for the three months ended March 31, 1999
due to an increase in professional fees incurred by MobileMedia resulting from
its confirmed plan of reorganization on April 12, 1999. See note 1 to
MobileMedia's consolidated financial statements.
Depreciation and amortization decreased 11.7% to $28.0 million for the
three months ended March 31, 1999 compared to $31.7 million for the three months
ended March 31, 1998. The decrease was primarily due to lower pager depreciation
attributable to a reduced depreciable base of pager assets and decreased pager
purchases. As a percentage of net revenues, depreciation and amortization
expense decreased to 27.3% for the three months ended March 31, 1999 from 28.9%
for the three months ended March 31, 1998.
Amortization of deferred gain on tower sale was $1.2 million for the three
months ended March 31, 1999. See note 3 to MobileMedia's consolidated financial
statements.
Operating income (loss) increased 113.1% to income of $0.8 million for the
three months ended March 31, 1999 form a loss of $6.1 million for the three
months ended March 31, 1998. The increase was primarily due to decreased
operating expenses.
Interest expense decreased 31.5% to $10.0 million for the three months
ended March 31, 1999 compared to $14.7 million for the three months ended March
31, 1998. The decrease was primarily due to lower interest expense on
MobileMedia's pre-petition credit facility resulting from lower outstanding
borrowings in the three months ended March 31, 1999.
Gain (loss) on sale of assets of $0.3 million for the three months ended
March 31, 1999 was primarily due to the write off of equipment related to the
resolution of a legal dispute with an equipment provider.
Other income was $2.1 million for the three months ended March 31, 1999 and
primarily resulted from resolution of a legal dispute with an equipment
provider.
Loss from continuing operations before income tax provision, as a result of
the above factors, decreased to $7.5 million for the three months ended March
31, 1999 compared to $20.7 million for the three months ended March 31, 1998.
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Income tax provision increased to $0.2 million for the three months ended
March 31, 1999 primarily as a result of state income tax expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998
----------------------- -----------------------
(IN THOUSANDS, EXCEPT PERCENTAGE AND UNIT DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues
Services, rents and maintenance.................... $ 491,174 99.9% $ 423,059 99.0%
Equipment sales and activation fees................ 36,218 7.4 26,622 6.2
---------- ------ ---------- ------
Total revenues....................................... 527,392 107.3 449,681 105.2
Cost of products sold................................ (35,843) (7.3) (22,162) (5.2)
---------- ------ ---------- ------
Net revenues......................................... 491,549 100.0 427,519 100.0
Operating expenses
Services, rents and maintenance.................... 139,333 28.3 111,589 26.1
Selling............................................ 69,544 14.2 61,106 14.3
General and administrative......................... 179,599 36.5 133,003 31.1
Reduction of liabilities subject to compromise..... -- -- (10,461) (2.4)
Restructuring costs................................ 19,811 4.0 18,624 4.4
Depreciation and amortization...................... 140,238 28.6 116,459 27.2
Amortization of deferred gain on tower sale........ -- -- (1,556) (0.4)
---------- ------ ---------- ------
Total operating expenses............................. 548,525 111.6 428,764 100.3
---------- ------ ---------- ------
Operating loss....................................... (56,976) (11.6) (1,245) (0.3)
Other income (expense)
Interest expense (net)............................. (67,611) (13.7) (53,043) (12.4)
Gain on sale of assets............................. 3 0.0 93,827 21.9
---------- ------ ---------- ------
Total other income (expense)......................... (67,608) (13.7) 40,784 9.5
---------- ------ ---------- ------
Income (loss) from continuing operations before
income tax provision............................... $ (124,584) (25.3) $ 39,539 9.2
Income tax provision................................. -- -- 3,958 0.9
---------- ------ ---------- ------
Income (loss) from continuing operations............. $ (124,584) (25.3)% $ 35,581 8.3%
========== ====== ========== ======
OTHER DATA
Adjusted EBITDA...................................... $ 103,073 21.0% $ 121,821 28.5%
Cash flows provided by operating activities.......... 14,920 54,462
Cash flows provided by (used in) investing
activities......................................... (40,556) 115,836
Cash flows provided by (used in) financing
activities......................................... 13,396 (180,000)
ARPU................................................. 10.41 10.71
Average monthly operating expense per unit........... 8.23 7.74
Units in service (at end of period).................. 3,440,342 3,143,968
</TABLE>
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Units in service decreased 296,374 from 3,440,342 as of December 31, 1997
to 3,143,968 as of December 31, 1998, a decrease of 8.6%. The decrease was
primarily attributable to gross additions which were below expectations due to
competitive pressures.
Services, rents and maintenance revenues decreased 13.9% to $423.1 million
for 1998 compared to $491.2 million for 1997. The decrease was attributable to
fewer units in service and was partially offset by a $0.30 increase in ARPU from
$10.41 for 1997 to $10.71 for 1998. The increase in ARPU was largely due to a
147
<PAGE> 156
greater percentage of alphanumeric units in service, increased units in service
in the direct distribution channel and a smaller percentage in the reseller
distribution channel.
Equipment sales and activation fees decreased 26.5% to $26.6 million for
1998 compared to $36.2 million for 1997. The decrease in equipment sales was
primarily due to a $2.7 million decrease in equipment sold through the retail
distribution channel and a $5.7 million decrease in billings for non-returned
equipment. Equipment sales and activation fees, less cost of products sold,
increased to $4.5 million for 1998 from $0.4 million for 1997. This increase was
primarily attributable to sales of used pagers with lower net book values
resulting from a change in pager depreciation from a four-year life to a
three-year life as of October 1, 1997.
Net revenues decreased 13.0% to $427.5 million for 1998 compared to $491.5
million for 1997.
Services, rents and maintenance expenses decreased 19.9% to $111.6 million
for 1998 compared to $139.3 million for 1997. This decrease resulted primarily
from lower subcontracted paging expenses of approximately $15.9 million arising
from billing reconciliations, increased unit cancellations, increased movement
of customers to company-owned networks and a reduction of approximately $10.4
million in paging-related telecommunications expenses. The decline in
paging-related telecommunications expenses resulted primarily from the FCC's
clarification of its interconnection rules pursuant to the Telecommunications
Act. These rules prohibit local exchange carriers from charging paging carriers
for the cost of dedicated facilities used to deliver local telecommunications
traffic to paging networks. The FCC clarification, however, noted that the FCC
is considering requests for reconsideration of these rules. In addition,
paging-related telecommunications expense declined as a result of a
reconfiguration of MobileMedia's network to maximize usage of lower cost
facilities. As a percentage of net revenue, services, rents and maintenance
expenses decreased from 28.3% to 26.1%.
Selling expenses for 1998 decreased 12.1% to $61.1 million compared to
$69.5 million for 1997. The decrease resulted primarily from lower sales
personnel costs of approximately $6.4 million attributable to lower sales
headcount and lower retail distribution channel selling expenses of
approximately $2.2 million resulting from lower retail sales. Selling expenses
as a percentage of net revenues were constant at approximately 14.3%.
General and administrative expenses decreased 25.9% to $133.0 million for
1998 compared to $179.6 million for 1997 and decreased as a percentage of net
revenues to 31.1% for 1998 from 36.5% for 1997. The decrease primarily resulted
from reduced bad debt expense of $27.8 million due to improvements in
MobileMedia's billing and collections functions, lower administrative telephone
expenses of $7.0 million resulting from lower call volume and lower long
distance rates as of October 1, 1997 and lower customer service and retail
activation expenses of $9.7 million primarily resulting from lower headcount.
Reduction of liabilities subject to compromise was $10.5 million for the
year ended December 31, 1998. See note 2 to MobileMedia's consolidated financial
statements.
Restructuring costs decreased from $19.8 million for 1997 to $18.6 million
for 1998 due to a decline in professional fees incurred by MobileMedia as a
result of the bankruptcy filing on January 30, 1997.
Depreciation and amortization decreased 17.0% to $116.5 million for 1998
compared to $140.2 million for 1997. The decrease was primarily due to lower
pager depreciation attributable to a reduced depreciable base of pager assets
resulting from the change in useful life from four to three years on October 1,
1997 and decreased pager purchases. As a percentage of net revenues,
depreciation and amortization expense decreased to 27.2% for 1998 from 28.5% for
1997.
Amortization of deferred gain on tower sale was $1.6 million for 1998. See
note 3 to MobileMedia's consolidated financial statements.
Operating loss decreased 97.8% to $1.2 million for 1998 from $57.0 million
for 1997. The decrease was primarily due to decreased operating expenses.
Interest expense decreased 21.5% to $53.0 million for 1998 compared to
$67.6 million for 1997. The decrease was primarily due to lower interest expense
on MobileMedia's debtor-in-possession credit facility resulting from lower
outstanding borrowings in 1998.
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<PAGE> 157
Gain on sale of assets increased to $93.8 million for 1998 primarily as a
result of the sale of transmission towers and related equipment. See note 3 to
MobileMedia's consolidated financial statements.
Income (loss) from continuing operations before income tax provision, as a
result of the above factors, increased to income of $39.5 million for 1998
compared to a loss of $124.6 million for 1997.
Income tax provision increased to $4.0 million for 1998 primarily as a
result of the sale of transmission towers.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
The following table presents selected items from MobileMedia's consolidated
statement of operations and selected other information for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1997
------------------------ ---------------------
(IN THOUSANDS, EXCEPT PERCENTAGE AND UNIT DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues
Services, rents and maintenance.................... $ 568,892 100.1% $ 491,174 99.9%
Equipment sales and activation fees................ 71,818 12.7 36,218 7.4
----------- ------ --------- -----
Total revenues....................................... 640,710 112.8 527,392 107.3
Cost of products sold.............................. (72,595) (12.8) (35,843) (7.3)
----------- ------ --------- -----
568,115 100.0 491,549 100.0
Operating expenses
Services, rents and maintenance.................... 144,050 25.4 139,333 28.3
Selling............................................ 96,817 17.0 69,544 14.2
General and administrative......................... 218,607 38.5 179,599 36.5
Impairment of long-lived assets.................... 792,478 139.5 -- --
Restructuring costs................................ 4,256 0.7 19,811 4.0
Depreciation and amortization...................... 348,698 61.4 140,238 28.6
----------- ------ --------- -----
Total operating expenses............................. 1,604,906 282.5 548,525 111.6
----------- ------ --------- -----
Operating loss....................................... (1,036,791) (182.5) (56,976) (11.6)
Total other expense.................................. (92,595) (16.2) (67,608) (13.7)
----------- ------ --------- -----
Loss before income tax benefit....................... (1,129,386) (198.7) (124,584) (25.3)
Income tax benefit................................... (69,442) 12.2 -- --
----------- ------ --------- -----
Net loss............................................. $(1,059,944) (186.5)% $(124,584) (25.3)%
=========== ====== ========= =====
OTHER DATA
MobileMedia adjusted EBITDA.......................... $ 108,641 19.1% $ 103,073 21.0%
Cash flows provided by operating activities.......... $ 57,194 $ 14,920
Cash flows used in investing activities.............. $(1,028,321) $ (40,556)
Cash flows provided by financing activities.......... $ 586,111 $ 13,396
ARPU................................................. $ 11.08 $ 10.41
Average monthly operating expense per unit(1)........ $ 8.95 $ 8.23
Units in service (at end of period).................. 4,424,107 3,440,342
</TABLE>
- ---------------
(1) Does not include impact of $792.5 million asset impairment writedown in
1996.
Units in service decreased from 4,424,107 as of December 31, 1996 to
3,440,342 as of December 31, 1997, a decrease of 22.2%. The decrease was
attributable to a decrease in gross unit additions and an increase
149
<PAGE> 158
in unit cancellations primarily resulting from acquisition integration
difficulties, billing system clean up to remove non-revenue generating units and
cancellation of units for non-payment.
Services, rents and maintenance revenues decreased 13.7% to $491.2 million
for 1997 compared to $568.9 million for 1996 due to fewer units in service and
lower ARPU. ARPU decreased to $10.41 for 1997 from $11.08 for 1996 largely due
to continued competitive market conditions.
Equipment sales and activation fees decreased 49.6% to $36.2 million for
1997 compared to $71.8 million for 1996. The decrease in equipment sales was
primarily attributable to less equipment sold through the retail distribution
channel. Equipment sales and activation fees, less cost of products sold,
increased from $(0.8) million for 1996 to $0.4 million for 1997 primarily as a
result of lower retail sales of equipment sold at a discount. Cost of products
sold for 1996 included a writedown of $3.2 million, reflecting the establishment
of a lower of cost or market reserve for units held for resale through
MobileMedia's retail and reseller distribution channels.
Net revenues decreased 13.5% to $491.5 million for 1997 compared to $568.1
million for 1996.
Services, rents and maintenance expenses decreased 3.3% to $139.3 million
for 1997 compared to $144.1 million for 1996, primarily due to billing
reconciliation and lower nationwide subcontracted paging expenses resulting from
cancellations and customer migration from networks not owned by MobileMedia to
company-owned networks.
Selling expenses for 1997 decreased 28.2% to $69.5 million from $96.8
million for 1996 primarily due to lower sales personnel costs and lower sales
commissions attributable to lower sales headcount and lower gross additions. In
addition, reseller and retail distribution channel selling expenses declined as
a result of lower sales volume. Selling expenses as a percentage of net revenue
decreased to 14.2% for 1997 from 17.0% for 1996.
General and administrative expenses decreased 17.8% to $179.6 million for
1997 compared to $218.6 million for 1996. General and administrative expenses
decreased as a percentage of net revenues to 36.5% for 1997 from 38.5% for 1996
primarily due to decreased bad debt expense, customer service expenses related
to the assimilation of MobileComm's customer service functions, and consulting
fees related to the integration of the acquisitions. Bad debt expense decreased
as a result of increased collections resulting from improvements in
MobileMedia's billing and collection functions.
Restructuring costs increased from $4.2 million for 1996 to $19.8 million
for 1997 due to professional fees constituting administrative expenses incurred
by MobileMedia as a result of the bankruptcy filing on January 30, 1997 as
compared to the 1996 expenses incurred in connection with MobileMedia's attempt
to restructure its debt.
Depreciation and amortization decreased 59.8% to $140.2 million for 1997
compared to $348.7 million for 1996. The decrease was primarily due to a
writedown of impaired assets by $792.5 million pursuant to Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of" effective December 31, 1996, as
described in note 2 to MobileMedia's consolidated financial statements,
amortization of a non-competition agreement related to its MobileComm
acquisition which was fully amortized in 1996 and decreased pager depreciation
resulting from a decrease in expenses related to unrecoverable subscriber
equipment and a reserve established to lower book values of certain pager models
to current market values in 1996. As a percentage of net revenues, depreciation
and amortization expense decreased to 28.6% for 1997 from 61.4% for 1996.
Operating loss decreased to $57.0 million for 1997 from $1,036.8 million
for 1996. The decrease was primarily due to the $792.5 million asset impairment
writedown effective December 31, 1996 and other factors indicated above.
Total other expense, principally interest expense, decreased 27.0% to $67.6
million for 1997 compared to $92.6 million for 1996. The decrease was primarily
due to interest expense related to MobileMedia's $250.0 million senior
subordinated notes due November 1, 2007 and $210.0 million senior subordinated
deferred coupon notes not being recognized subsequent to the bankruptcy filing
on January 30, 1997.
150
<PAGE> 159
Loss before income tax benefit, as a result of the above factors, decreased
to $124.6 million for 1997 from $1,129.4 million for 1996.
Income tax benefit of $69.4 million resulted from the deferred tax
adjustment attributable to the $792.5 asset impairment writedown effective
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
MobileMedia's operations and strategy required the availability of
substantial funds to finance the development and installation of wireless
communications systems, to procure subscriber equipment and to service debt.
Historically, these requirements were funded by net cash from operating
activities, additional borrowings and capital contributions from its former
parent company. Following the MobileMedia acquisition, Arch has had to supply
these requirements for MobileMedia. See "Arch Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
Chapter 11 Filing and Related Matters
On January 30, 1997, MobileMedia and affiliates filed voluntary petitions
for relief under the Bankruptcy Code in order to implement an operational and
financial restructuring. Until consummation of the MobileMedia acquisition, they
operated their businesses as debtors-in-possession subject to the jurisdiction
of the bankruptcy court. In January 1997, the bankruptcy court approved payment
of a total of $47.4 million of the pre-petition claims of MobileMedia's key
suppliers, Motorola, Glenayre, NEC and Panasonic. MobileMedia also entered into
supply agreements with each of the key suppliers. Chase Manhattan Bank and
certain other financial institutions initially provided MobileMedia with up to
$200.0 million of debtor-in-possession financing during its Chapter 11
proceedings.
Capital Expenditures and Commitments
Capital expenditures were $26.8 million for the three months ended March
31, 1999 compared to $4.9 million for the three months ended March 31, 1998 and
$53.9 million for the year ended December 31, 1998 compared to $40.6 million for
the year ended December 31, 1997. Capital expenditures increased $21.9 million
for the three months ended March 31, 1999 compared to the three-month period
ended March 31, 1998 primarily as a result of increased pager purchases, and
$13.3 million for the 1998 year compared to the 1997 year principally as a
result of capital spending for the construction of a nationwide N-PCS network.
Sources of Funds
MobileMedia's net cash provided by operating activities was $17.6 million
for the three months ended March 31, 1999 compared to $19.5 million for the
three months ended March 31, 1998. Inventories decreased $0.6 million from
December 31, 1998 to March 31, 1999 compared to a decrease of $0.4 million from
December 31, 1997 to March 31, 1998 as a result of utilizing pager inventory
stock and lower sales volume in the retail sales distribution channel. Accounts
payable, accrued expenses and other liabilities decreased $2.0 million from
December 31, 1998 to March 31, 1999 compared to a increase of $1.4 million from
December 31, 1997 to March 31, 1998. Net accounts receivable decreased $1.7
million from December 31, 1998 to March 31, 1999 compared to a decrease of $7.8
million from December 31, 1997 to March 31, 1998 primarily due to collections of
past due accounts receivable in the first quarter of 1998.
MobileMedia's net cash provided by operating activities was $54.5 million
for the year ended December 31, 1998 compared to $14.9 million for the year
ended December 31, 1997. Inventories increased $1.3 million from December 31,
1997 to December 31, 1998 as a result of additional pagers purchased for sale
through the retail sales distribution channel. Accounts payable, accrued
expenses and other liabilities decreased $7.1 million from $156.4 million as of
December 31, 1997 to $149.3 million as of December 31, 1998. Net accounts
receivable decreased $16.5 million from $55.4 million as of December 31, 1997 to
$38.9 million as of December 31, 1998 due to improved billing and collections
functions.
151
<PAGE> 160
Tower Sale
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers for $170.0 million in cash. Under the terms of a 15-year lease with the
buyer, MobileMedia continues to own and utilize transmitters, antennas and other
equipment located on these towers at an aggregate annual rental of $10.7
million. The sale was accounted for in accordance with Statement of Financial
Accounting Standards No. 28, Accounting for Sales with Leasebacks, and resulted
in a recognized gain of $94.2 million and a deferred gain of $70.0 million. The
deferred gain will be amortized over the initial lease period of 15 years. After
the sale, MobileMedia distributed the $170.0 million in proceeds to its secured
creditors, who had a lien on the towers.
Debt Obligations
In addition to the debtor-in-possession credit facility, the debt
obligations of MobileMedia during the periods described above also included the
following:
MobileMedia's 1995 credit facility provided for $750.0 million senior
secured and guaranteed credit facility with a syndicate of lenders including The
Chase Manhattan Bank. This became available on December 4, 1995, in connection
with the financing of the MobileComm acquisition. Commencing in 1996,
MobileMedia was in default under this facility. As a result of such default and
the bankruptcy filing, MobileMedia had no borrowing capacity under this
facility. After filing under Chapter 11, MobileMedia brought current its
interest payments and made monthly adequate protection payments to the lenders
under the 1995 credit facility equal to the amount of interest accruing under
such agreement. On September 3, 1998, MobileMedia repaid $170.0 million of
borrowings under its 1995 credit facility using proceeds from the sale of 166
transmission towers.
MobileMedia issued $250.0 million senior subordinated 9 3/8% notes in
November 1995, concurrent with MobileMedia's second offering of Class A common
stock. See note 11 to MobileMedia's consolidated financial statements. These
notes bore interest at a rate of 9 3/8% payable semiannually on May 1 and
November 1 of each year. On November 1, 1996, MobileMedia did not make its
scheduled interest payment on the 9 3/8% notes which constituted an event of
default under the indenture.
MobileMedia issued $210.0 million of senior subordinated deferred coupon
notes, at a discount, in November 1993. These deferred coupon notes accreted at
a rate of 10.5%, compounded semiannually, to an aggregate principal amount of
$210.0 million by December 1, 1998 after which interest was payable in cash at a
rate of 10.5% and was payable semiannually.
LITIGATION CONTINGENCIES
MobileMedia disclosed in 1996 that misrepresentations and other violations
had occurred during the licensing process for as many as 400 to 500, or
approximately 6% to 7%, of its approximately 8,000 local transmission one-way
paging stations. On January 13, 1997, the FCC announced that it had (1)
automatically terminated approximately 185 authorizations for paging facilities
that were not constructed by the expiration date of their construction permits
and remained unconstructed, (2) dismissed approximately 94 applications for
fill-in sites around existing paging stations (which had been filed under the
so-called "40-mile rule") as defective because they were predicated upon
unconstructed facilities and (3) automatically terminated approximately 99 other
authorizations for paging facilities that were apparently constructed after the
expiration date of their construction permits. With respect to each of these
approximately 99 authorizations where the underlying station was apparently
untimely constructed, the FCC granted MobileMedia interim operating authority
subject to further action by the FCC. On February 5, 1999, the FCC released an
order granting its consent to the transfer of control of MobileMedia to Arch;
however, the order conditioned the FCC's consent on Arch coming into compliance
with the N-PCS spectrum aggregation limit contained in Section 24.101(a) of the
FCC's rules by December 3, 1999. The order also required Arch to terminate the
99 MobileMedia facilities operating under interim operating authority within six
months of consummating the merger (December 3, 1999).
152
<PAGE> 161
Since February 5, 1999, Arch has resolved all of the issues related to the
99 facilities operating pursuant to interim operating authority. Specifically,
Arch has determined that (1) 28 of the 99 authorizations were for facilities
that were wholly encompassed by existing, authorized contour and were therefore
properly authorized facilities that did not need to be terminated; (2) 66 of the
99 authorizations were for facilities that were never constructed or were not
being used and were therefore properly terminated; (3) three of the
authorizations were for facilities that Arch has since filed for and obtained
permanent authority to operate; and (4) on November 23, 1999, the FCC granted
Arch interim operating authority to continue operating two facilities until 90
days after Arch is notified by the winner of the geographic area licenses
encompassing the two facilities that the auction winner wants to provide service
on the frequencies Arch is operating pursuant to interim operating authority. If
Arch is the winner of the two geographic area licenses encompassing its two
facilities, Arch will not need to terminate service.
On December 3, 1999, Arch notified the FCC that, in accordance with the
FCC's February 5, 1999 order, it had come into compliance with the N-PCS
spectrum aggregation limit.
NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
See "Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of new accounting pronouncements.
Management does not believe that MobileMedia's adoption of SFAS No. 130, SFAS
No. 131 and SOP 98-5 has had or will have any material effects.
153
<PAGE> 162
MARKET PRICE INFORMATION AND DIVIDEND POLICY
PAGENET AND ARCH COMMON STOCK
PageNet common stock is traded on the Nasdaq National Market and the
Chicago Stock Exchange under the symbol "PAGE." Arch stock is traded on the
Nasdaq National Market under the symbol "APGR." The following table sets forth
the high and low closing prices per share of PageNet common stock and Arch
common stock for the quarterly periods indicated, which correspond to the
companies' respective quarterly fiscal periods for financial reporting purposes.
<TABLE>
<CAPTION>
PAGENET ARCH
COMMON STOCK COMMON STOCK
-------------------- --------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1998:
First Quarter................................. $16.2500 $ 9.7500 $18.0000 $10.1250
Second Quarter................................ $16.5000 $12.9375 $19.6875 $11.6250
Third Quarter................................. $14.4375 $ 5.3125 $13.8750 $ 5.0625
Fourth Quarter................................ $ 7.0313 $ 3.9375 $ 5.2500 $ 2.1563
Fiscal Year Ended December 31, 1999:
First Quarter................................. $ 6.8125 $ 4.0000 $ 6.9375 $ 3.2813
Second Quarter................................ $ 4.8125 $ 3.1563 $10.5938 $ 3.6563
Third Quarter................................. $ 6.1250 $ 0.8125 $ 8.7500 $ 4.0000
Fourth Quarter................................ $ 1.4063 $ 0.5938 $ 7.6250 $ 3.8125
-------- -------- -------- --------
</TABLE>
The following table presents trading information for PageNet common stock
and Arch common stock for November 5, 1999 and , 2000. November 5,
1999 was the last full trading day prior to the public announcement of the
proposed merger. , 2000 was the last practicable trading day for
which information was available prior to the date of the first mailing of this
prospectus. The table provides trading information for (1) one share of PageNet
common stock, (2) one share of Arch common stock and (3) 0.1247 shares of Arch
common stock, which is the equivalent of one share of PageNet common stock based
on the exchange ratio to be used in the merger, exclusive of the value of shares
of Vast to be received by PageNet stockholders.
<TABLE>
<CAPTION>
PAGENET ARCH ARCH
COMMON STOCK COMMON STOCK PRO FORMA EQUIVALENT
------------------------------ -------------------------- ------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE HIGH LOW CLOSE
-------- -------- -------- ------- ------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 5, 1999..... $1.03125 $0.90625 $0.96875 $ 7.125 $6.375 $6.8125 $0.88849 $0.79496 $0.84952
, 2000....
</TABLE>
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<PAGE> 163
PAGENET NOTES
PageNet's 8.875% notes, 10.125% notes and 10% notes are traded over the
counter. The following table sets forth the high and low closing prices per
$1,000 principal amount of PageNet's senior subordinated notes and per share of
PageNet common stock and Arch common stock for the quarterly periods indicated,
which correspond to PageNet's and Arch's quarterly fiscal periods for financial
reporting purposes.
<TABLE>
<CAPTION>
PAGENET
8.875% NOTES 10.125% NOTES 10% NOTES COMMON STOCK
------------------- --------------------- --------------------- -------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
--------- ------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year Ended
December 31, 1998:
First Quarter...... $ 998.75 $ 980.00 $ 1,055.00 $ 1,035.00 $ 1,055.00 $ 1,032.50 $ 16.2500 $ 9.7500
Second Quarter..... $ 1,003.75 $ 981.25 $ 1,065.00 $ 1,035.00 $ 1,065.00 $ 1,032.50 $ 16.5000 $ 12.9375
Third Quarter...... $ 1,003.75 $ 890.00 $ 1,055.00 $ 950.00 $ 1,055.00 $ 950.00 $ 14.4375 $ 5.3125
Fourth Quarter..... $ 990.00 $ 900.00 $ 1,042.50 $ 952.50 $ 1,041.25 $ 945.00 $ 7.0313 $ 3.9375
Fiscal Year Ended
December 31, 1999:
First Quarter...... $ 947.50 $ 790.00 $ 971.25 $ 860.00 $ 970.00 $ 850.00 $ 6.8125 $ 4.0000
Second Quarter..... $ 840.00 $ 620.00 $ 880.00 $ 640.00 $ 860.00 $ 630.00 $ 4.8125 $ 3.1563
Third Quarter...... $ 805.00 $ 255.00 $ 830.00 $ 265.00 $ 840.00 $ 255.00 $ 6.1250 $ 0.8125
Fourth Quarter..... $ 380.00 $ 230.00 $ 380.00 $ 235.00 $ 390.00 $ 240.00 $ 1.4063 $ 0.5938
<CAPTION>
ARCH
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal Year Ended
December 31, 1998:
First Quarter...... $ 18.0000 $ 10.1250
Second Quarter..... $ 19.6875 $ 11.6250
Third Quarter...... $ 13.8750 $ 5.0625
Fourth Quarter..... $ 5.2500 $ 2.1563
Fiscal Year Ended
December 31, 1999:
First Quarter...... $ 6.9375 $ 3.2813
Second Quarter..... $ 10.5938 $ 3.6563
Third Quarter...... $ 8.7500 $ 4.0000
Fourth Quarter..... $ 7.6250 $ 3.8125
</TABLE>
- ---------------
The following table presents comparative trading information for PageNet
common stock, Arch common stock and PageNet notes for November 5, 1999 and
, 2000. November 5, 1999 was the last full trading day prior to the
public announcement of the proposed merger. , 2000 was the last
practicable trading day for which information was available prior to the date of
the first mailing of this prospectus. The table provides trading information for
(1) one share of PageNet common stock, (2) one share of Arch common stock, (3)
$1,000 principal amount of each series of senior subordinated notes, (4)
64.4915, 64.6928 and 63.3884 shares of Arch common stock, which would have been
the equivalent of $1,000 principal amount of the 8.875% notes, $1,000 principal
amount of 10.125% notes and $1,000 principal amount of 10% notes, respectively,
if the exchange offer and merger had occurred on November 5, 1999, based on the
exchange ratios to be used in the exchange offer and the merger, exclusive of
the value of shares of Vast to be received by PageNet noteholders, assuming 100%
of the senior subordinated notes were exchanged in the exchange offer, and (5)
, and shares of Arch common stock, which would have been
the equivalent of $1,000 principal amount of the 8.875% notes, $1,000 principal
amount of 10.125% notes and $1,000 amount of 10% notes, respectively, if the
exchange offer and merger had occurred on , 2000, based on the
exchange ratios to be used in the exchange offer and the merger, exclusive of
the value of Vast shares to be received by PageNet noteholders, assuming 100% of
the senior subordinated notes were exchanged in the exchange offer.
<TABLE>
<CAPTION>
PAGENET ARCH 8.875% 10.125% 10%
COMMON STOCK COMMON STOCK NOTES NOTES NOTES
-------------------------------- --------------------------- -------- -------- --------
HIGH LOW CLOSE HIGH LOW CLOSE CLOSE(1) CLOSE(1) CLOSE(1)
-------- -------- -------- ------ ------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 5, 1999..... $1.03125 $0.90625 $0.96875 $7.125 $6.375 $6.8125 $350.00 $350.00 $350.00
, 2000.....
</TABLE>
<TABLE>
<CAPTION>
ARCH PRO FORMA
EQUIVALENT(2)
------------------------------------------------------------------------------------------------
8.875% 10.125% 10%
NOTES NOTES NOTES
-------------------------------- --------------------------- -----------------------------
HIGH LOW CLOSE HIGH LOW CLOSE HIGH LOW CLOSE
-------- -------- -------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 5, 1999..... $459.50 $411.13 $439.35 $460.94 $412.42 $440.72 $451.64 $404.10 $431.83
, 2000.....
</TABLE>
- ---------------
(1) Prices for PageNet senior subordinated notes as of November 5, 1999 and as
of , 2000 reflect closing prices obtained from FactSet Research
Systems Inc.
(2) Pro forma equivalent calculations assume that 100% of the notes have been
exchanged.
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<PAGE> 164
DIVIDEND POLICY
Neither PageNet nor Arch has ever declared or paid any cash dividends on
its common stock. Arch anticipates that substantially all of its earnings in the
foreseeable future will be used to finance the continued growth and development
of its business and has no current intention to pay cash dividends. Arch's
future dividend policy will depend on its earnings, capital requirements and
financial condition, as well as requirements of its financing agreements and
other factors that Arch's board of directors considers relevant. Arch's secured
credit facility prohibits declaration or payment of cash dividends to Arch
stockholders without the written consent of a majority of the lenders. The terms
of other outstanding indebtedness only permit the declaration or payment of cash
dividends if specified leverage and cash flow requirements are met. Arch does
not currently meet these requirements. See "Description of Arch's Equity
Securities" and "Description of Indebtedness -- Arch".
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<PAGE> 165
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth certain historical per share data of Arch
and PageNet and combined per share data on an unaudited pro forma basis after
giving effect to the merger based on the purchase method of accounting. This
data should be read in conjunction with the selected financial data and the
historical financial statements of Arch and PageNet and notes. The pro forma
information is presented for informational purposes only and is not necessarily
indicative of the financial position or results of operations that would have
occurred if Arch and PageNet had been a single entity during the period
presented nor is it necessarily indicative of the results of operations which
may occur in the future.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- ---------
PAGENET ARCH COMBINED
------- ------- ---------
<S> <C> <C> <C>
As of and for the nine month period ended September 30,
1999:
Earnings per common share -- basic and diluted............ $(1.89) $ (9.00) $(1.66)
Book value per common share............................... (6.97) (7.21) 4.39
For the twelve month period ended December 31, 1998:
Earning per common share -- basic and diluted............. (1.57) (29.34) (1.46)
</TABLE>
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INDUSTRY OVERVIEW
The mobile wireless communications industry has been in existence since
1949 when the FCC allocated a group of radio frequencies for use in providing
one-way and two-way types of mobile communications services. Throughout its
history, the industry has been characterized by rapid changes in technology and
growing consumer demand for mobile wireless communications products with
increased capabilities. Particularly since the 1980s, the number of firms
competing in this business has increased and now includes major
telecommunications companies such as AT&T, SBC Communications, and MCI/Worldcom.
The mobile wireless industry now consists of multiple voice and data
providers which compete among one another, both directly and indirectly, for
subscribers. Providers in the mobile wireless industry may offer both two-way
interactive voice services ("voice communications"), and traditional paging
services, either separately or through a device which offers the capability to
have voice communications and traditional paging services (referred to as short
messaging services) combined, or may focus on providing a more narrow range of
services, e.g. data only. PageNet and Arch presently offer both numeric and
alphanumeric messaging services, as well as 1 1/2 way, and two-way messaging
services which have in part been offered initially over facilities of other
carriers. PageNet also offers certain information and content based services for
both mass market and customized application. PageNet provides voice
communications through VoiceNow, and Arch provides voice communications as a
distributor for other carriers.
Technological improvements have generally contributed to strong growth in
the market for mobile wireless communications services and the provision of
better quality services at lower prices to subscribers. Companies providing
traditional one-way paging have benefited from technological advances resulting
from research and development conducted by vendors of paging units and
transmission equipment. These advances include microcircuitry, liquid crystal
display technology and standard digital encoding formats. These advances have
enhanced the capability and capacity of mobile wireless messaging services while
lowering equipment and air time costs.
Other mobile wireless communications alternatives have similarly
experienced rapid changes through technological improvement which has resulted
in more consumer interest and demand. Much of this development has occurred in
various broadband products and services, such as digital cellular phones and
services, broadband personal communication services (PCS), and digital SMR,
dedicated data networks and other mobile wireless information services and
equipment. As quality, convenience and availability of broadband offerings has
expanded, prices have decreased and consumer interest has increased.
PageNet and Arch believe that paging has historically been a cost-effective
form of mobile wireless communications. Paging has traditionally had somewhat of
an advantage over a cellular telephone or broadband PCS or SMR handset because
the handset is smaller and has a longer battery life, and the service has
broader coverage and better building penetration. Moreover, paging units and air
time required to transmit an average message generally have cost less than
equipment and airtime for cellular telephones or broadband PCS or SMR handsets.
However, because a significant percentage of two-way voice services are
combining short messaging services with two-way voice capability in a single
unit, it may be economical and convenient for customers who have traditionally
used both services to discontinue their traditional paging services in favor of
the combined unit and services. Furthermore, as technology continues to develop,
these other communications alternatives are becoming smaller, more durable and
cheaper, and have better transmission quality. PageNet and Arch are committed to
expanding their service offerings, such as 1 1/2 and two-way messaging, to
ensure that their services remain competitive under rapidly changing market
conditions.
Messaging subscribers such as those served by PageNet and Arch pay a flat
monthly service fee for paging services, unlike cellular telephone or broadband
PCS subscribers, whose bills typically have a significant variable usage
component. However, cellular and PCS firms are beginning to offer one rate, and
other plans which lower the price point so that these services compete directly
with the paging services PageNet and Arch offer. PageNet and Arch are sensitive
to these technological and availability changes and are working to design
competitively attractive values for the consumer even in the midst of these
changes by cellular, broadband PCS and digital SMR providers.
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<PAGE> 167
The mobile wireless communications industry originally distributed its
services through direct marketing and sales activities. Later, additional
channels of distribution evolved. These channels include: (1) carrier-operated
stores, (2) resellers, who purchase services on a wholesale basis from carriers
and resell those services on a retail basis to their own customers; (3) agents
who solicit customers for carriers and are compensated on a commission basis;
(4) retail outlets that often sell a variety of merchandise, including pagers
and other telecommunications equipment; and (5) most recently, the Internet.
REGULATION
Federal Regulation
PageNet's and Arch's mobile wireless messaging operations are subject to
regulation by the Federal Communications Commission (FCC) under the
Communications Act of 1934, as amended (the Communications Act). The Company's
operations are all classified as Commercial Mobile Radio Services (CMRS) and are
subject to common carrier regulation by the FCC. The FCC has granted PageNet and
Arch licenses to use the radio frequencies necessary to conduct their CMRS
operations. Licenses issued by the FCC to PageNet and Arch set forth the
technical parameters, such as power strength and tower height, under which
PageNet and Arch are authorized to use those frequencies. Each FCC license held
by PageNet or Arch has construction and operational requirements within set time
frames. The Communications Act was amended in August 1993 (August 1993
Amendments) to permit the FCC to grant certain applications for licenses which
are mutually exclusive by competitive bidding. The August 1993 Amendments do not
permit auctions to be used for license renewals or license modifications. The
FCC is currently using auctions to assign all new licenses over which CMRS can
be offered.
The FCC licenses granted to PageNet and Arch have varying terms of up to 10
years, at the end of which time renewal applications must be approved by the
FCC. In the past, FCC renewal applications have been routinely granted, in most
cases upon a demonstration of compliance with FCC regulations and adequate
service to the public. The FCC has granted each renewal license PageNet and Arch
have filed, other than those which are pending. Although PageNet and Arch are
unaware of any circumstances which would prevent the grant of any pending or
future renewal applications, no assurance can be given that any of PageNet's or
Arch's licenses will be renewed by the FCC. Furthermore, although revocation and
involuntary modification of licenses are extraordinary regulatory measures, the
FCC has the authority to restrict the operation of licensed facilities or revoke
or modify licenses. PageNet is seeking an extension of time in which to meet
construction benchmarks for certain licenses acquired at auction. Failure to
obtain such extensions could result in PageNet or Arch having to make capital
expenditures it would prefer to delay. No license of PageNet or Arch has ever
been revoked or modified involuntarily.
The FCC's review and revision of rules affecting companies such as PageNet
and Arch, is ongoing. The regulatory requirements to which PageNet and Arch are
subject may change significantly over time. For example, the FCC has decided to
adopt a market area licensing scheme for non-nationwide paging channels under
which carriers would be licensed to operate on a particular channel throughout a
broad geographic area (such as a major economic area as defined by The Bureau of
Economic Affairs of the U.S. Department of Commerce) rather than being licensed
on a transmitter site-by-transmitter site basis. These geographic area licenses
will initially be awarded through an auction. Incumbent paging licensees that do
not acquire licenses at auction will be entitled to interference protection from
the market area licensee.
In many instances PageNet and Arch still require the prior approval of the
FCC before they can implement any significant changes to their radio systems.
Once the FCC's market area licensing rules are implemented, however, these
site-specific licensing obligations will be eliminated, with specific
exceptions.
The FCC has issued a Further Notice of Proposed Rulemaking in which the FCC
seeks comments on, among other matters, (1) whether it should impose coverage
requirements on licensees with nationwide exclusivity (such as the Company), (2)
whether these coverage requirements should be imposed on a nationwide or
regional basis, and (3) whether - if such requirements are imposed - failure to
meet the requirements should result in a revocation of the entire nationwide
license or merely a portion of the license. If
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<PAGE> 168
the FCC were to impose additional, stringent coverage requirements on licensees
with nationwide exclusivity, PageNet and Arch might have to accelerate the build
out of their systems in certain areas.
The Communications Act requires licensees such as PageNet and Arch to
obtain prior approval from the FCC for the transfer of control of any
construction permit or station license. The Communications Act also requires
prior approval by the FCC of acquisitions of other CMRS companies by PageNet and
Arch and transfers by PageNet and Arch of a controlling interest in any of their
licenses or construction permits. The FCC has approved each acquisition and
transfer of control for which PageNet or Arch have sought approval. PageNet and
Arch also regularly apply for FCC authority to use additional frequencies,
modify the technical parameters of existing licenses, expand their service
territory, provide new services, and modify the conditions under which they
provide service. Although there can be no assurance that any requests for
approval of applications filed by PageNet and Arch will be approved or acted
upon in a timely manner by the FCC, or that the FCC will grant the relief
requested, PageNet and Arch know of no reason to believe any such requests,
applications, or relief will not be approved or granted. Neither PageNet nor
Arch make any representations, however, about the continued availability of
additional frequencies used to provide their services.
The Communications Act also limits foreign ownership of entities that
directly or indirectly hold certain licenses from the FCC, including certain of
those held by PageNet or Arch. Because PageNet and Arch hold licenses from the
FCC only through subsidiaries, up to 25% of either company's common stock can be
owned or voted by aliens or their representatives, a foreign government or its
representatives, or a foreign corporation, without restriction. However, if more
than 25% of either company's common stock is owned or voted by aliens or their
representatives, a foreign corporation, or a foreign government or its
representatives, the Telecommunications Act of 1996 (the 1996 Act) gives the FCC
the right to revoke or refuse to grant licenses if the FCC finds that such
revocation or refusal serves the public interest. The FCC has indicated that,
pursuant to the World Trade Organization Telecommunications Agreement, it would
waive the 25% limitation in appropriate circumstances. Based upon information
obtained by PageNet and Arch, each of PageNet and Arch believe that
substantially less than 25% of their issued and outstanding common stock is
owned by aliens or their representatives, foreign governments or their
representatives, or foreign corporations. PageNet and Arch subsidiaries that are
radio common carrier licensees are subject to more stringent requirements and
may have only up to 20% of their stock owned or voted by aliens or their
representatives, a foreign government or their representatives or a foreign
corporation. This ownership restriction is not subject to waiver.
Increased demand for telephone numbers, particularly in metropolitan areas,
is causing depletion of numbers in certain area codes. Recent plans to address
this increased demand have included certain elements that could impact PageNet's
and Arch's operations, including the take-back of numbers already assigned for
use and service-specific plans whereby only certain services, such as paging and
cellular, would be assigned numbers using a new area code, or plans which
require the pooling of blocks of numbers for use by multiple carriers. Neither
PageNet nor Arch can provide any assurance that such plans will not be adopted
by a federal or state commission, or that such plans will not require PageNet or
Arch to incur further, substantial expenses in order to continue to obtain
telephone numbers for its subscribers.
The 1996 Act is intended to promote competition in local exchange services
through the removal of legal or other barriers to entry. Under the 1996 Act, the
Regional Bell Operating Companies and other local exchange carriers (LECs) may
be permitted to jointly market commercial mobile service in conjunction with
their traditional local exchange services. It imposes upon all
telecommunications carriers the duty to interconnect with the facilities and
equipment of other telecommunications carriers. The FCC, and the 9th Circuit
Court of Appeals, among others, have interpreted the 1996 Act to require LECs to
compensate mobile wireless carriers for calls originated by customers of the
LECs which terminate on a mobile wireless carrier's network. The FCC has also
found unlawful certain charges levied against messaging carriers in the past
that have been assessed on a monthly basis by the LECs for the use of
interconnection facilities, including telephone numbers. These findings by the
FCC have been challenged at the FCC and in the courts. Neither PageNet nor Arch
can predict with certainty the ultimate outcome of these proceedings.
Compensation amounts may be determined in subsequent proceedings either at the
federal or state level, or may be determined based on negotiations between the
LECs and the paging companies. Any agreements reached between the LECs and the
paging companies may be required to be submitted to state regulatory commission
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<PAGE> 169
for approval. PageNet has negotiated interconnection agreements with certain
major LECs and is in negotiations with other LECs but can provide no assurances
that they will obtain interconnection agreements with all LECs. Arch is also in
negotiations with LECs, but as with PageNet in markets where PageNet has not
reached agreements, it may or may not be successful in securing refunds, future
relief, or both, with respect to charges for termination of LECs originated
local traffic. If these issues are ultimately decided in favor of the LECs,
Arch, and to a lesser extent PageNet because of the agreements it has reached,
may be required to pay past due contested charges and may also be assessed
interest and late charges for amounts withheld.
While the 1996 Act has had a beneficial effect for mobile wireless
providers, some provisions place or may place additional financial obligations
on PageNet, Arch, and other carriers. As an example, the 1996 Act, as
interpreted by some regulatory and judicial bodies, requires CMRS such as
PageNet and Arch to contribute to "Universal Service" or other funds to assure
the continued availability of local exchange service to high cost areas, as well
as to contribute funds to cover other designated costs or societal goals.
Further, the 1996 Act requires that providers of payphones be compensated for
all calls placed from pay telephones to toll-free numbers. This latter
requirement increases PageNet's and Arch's costs of providing toll-free number
service, and there are no assurances that either PageNet or Arch will be able to
continue to pass on their costs to their subscribers. Beneficially, the 1996 Act
also limits the circumstances under which states and local governments may deny
a request by a commercial mobile service provider to place transmission
facilities, and gives the FCC the authority to preempt the states in some
circumstances.
The Communications Assistance for Law Enforcement Act (CALEA) requires
certain telecommunications companies, including the Company, to modify the
design of their equipment or services to ensure that electronic surveillance or
interceptions can be performed. Technical parameters applicable to the messaging
industry have been established but not acknowledged by all governmental bodies
to date. Therefore, neither PageNet nor Arch can determine at this time what
compliance measures will be required or the costs thereof. As part of, and in
addition to, implementation of the 1996 Act, the FCC has instituted proceedings
addressing the manner in which telecommunications carriers are permitted to
jointly market certain types of services, and the manner in which
telecommunications carriers render bills for these services. Depending on the
outcome of these proceedings, PageNet, Arch, and other telecommunications
carriers could incur higher administration and other costs in order to comply.
State Regulation
In addition to potential regulation by the FCC, certain states have the
authority to regulate messaging services, except where such regulation
constitutes rate or entry, both of which have been preempted by the August 1993
Amendments, as interpreted by the FCC. States may also petition the FCC for
authority to continue to regulate CMRS rates if certain conditions are met.
State filings seeking rate authority have all been denied by the FCC, although
new petitions seeking such authority may be filed in the future. Furthermore,
some states and localities continue to exert jurisdiction over (1) approval of
acquisitions of assets and transfers of licenses of mobile wireless systems and
(2) resolution of consumer complaints. PageNet and Arch believe that to date all
required filings for their respective paging operations have been made. All
state approvals of acquisitions or transfers made by PageNet and Arch have been
approved, and neither PageNet nor Arch knows of any reason to believe such
approvals will not continue to be granted in connection with any future
requests, even if states exercise that review. The August 1993 Amendments do not
preempt state regulatory authority over other aspects of the Company's
operations, and some state may choose to exercise such authority. Some state and
local governments have imposed additional taxes or fees upon certain activities
in which the Company is engaged. In addition, in certain instances, the
construction and operation of radio transmitters also will be subject to zoning,
land use, public health and safety, consumer protection and other state and
local taxes, levies and ordinances. As noted above, states also have authority
over telephone number allocation and assignment that may be delegated them by
the FCC.
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<PAGE> 170
ARCH'S BUSINESS
Arch is a leading provider of wireless communications services in the
United States, and believes that it is well positioned to compete effectively in
the highly competitive wireless communications industry for the following
reasons. The combination of Arch's recently acquired market presence in major
metropolitan markets with its historical emphasis on middle and small markets
has significantly broadened the geographic scope of Arch's marketing presence
and has positioned Arch to compete more effectively for large corporate
customers with diverse geographic operations. Arch's enlarged subscriber base
enables it to obtain better strategic distribution arrangements, as well as
amortize marketing investments over a larger revenue base. In addition, Arch's
third-party retail distribution agreements complement the more than 175
Arch-operated retail outlets. Similarly, Arch's two nationwide paging networks
and the associated potential for higher-revenue nationwide services enhance
Arch's local coverage and provide an opportunity to take advantage of Arch's
distribution networks. Arch recognizes that changes in competition and the newly
offered products and services that incorporate paging as one of their features
demand that Arch aggressively develop new products with enhanced features and
that Arch do so at a competitive cost for customers.
Arch's plan to deploy its nationwide N-PCS spectrum using its existing
network infrastructure, together with its recent agreement with Weblink
Wireless, formerly known as PageMart Wireless, described below, should permit
Arch to market N-PCS services, such as multi-market alphanumeric and other
advanced messaging services, sooner than it would otherwise be able to, and
these services are expected to offer higher revenue and more growth potential
than basic paging services. Finally, Arch's investments to date in two national
call centers and additional regional call centers should supplement its
previously developed call center and complement its strategy of evolving to
regional customer service centers. Achieving these intended benefits, however,
will depend on a number of factors and no assurance can be given that the
benefits will be realized, in whole or in part. See "Arch Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"-- Networks and Licenses".
The expected effects of the PageNet merger on Arch's business are described
under "The Combined Company -- Business".
BUSINESS STRATEGY
Arch's strategic objective is to strengthen its position as one of the
leading providers of wireless communications services in the United States and
at the same time begin to position itself to remain competitive in the rapidly
expanding wireless communications market which now includes major
telecommunications companies such as MCI/Worldcom and AT&T.
Arch is committed to continuing to provide high-quality service to its
current customers while at the same time working to expand the wireless
communications choices it provides them. Arch has already begun to offer
guaranteed or 1.5-way messaging and 2-way messaging and seeks to continue that
development. Arch has recognized that in order to fully serve its current
customers it will need to have a strong presence in the N-PCS market which will
allow it to expand its present offerings even further. The wireless
communications industry is going to continue to change and Arch seeks to
position itself to offer wireless communication options that are broad enough to
meet the needs of most potential customers. At the same time, Arch recognizes
the need to offer a good value to consumers, letting them utilize the services
they need at economical prices. This means providing local, regional and
national services that allow consumers to choose the type of coverage that they
require. Arch is aggressively seeking cost savings and working to continue to
operate more efficiently.
Operating Strategy. Arch's operating objectives are to increase its
adjusted EBITDA, deploy its capital efficiently, reduce its financial leverage
and expand its customer relationships. Arch will pursue the following strategies
to achieve its operating objectives:
- Low-Cost Operating Structure. Arch has selected a low-cost
operating strategy as its principal competitive tactic. Management believes
that a low-cost operating structure, compared to differentiated premium
pricing and niche positioning, the other two fundamental competitive
tactics in the wireless
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<PAGE> 171
communications industry, will maximize its flexibility to offer competitive
prices while still achieving target margins and adjusted EBITDA. Arch will
continue to improve its low-cost operating structure by consolidating some
operating functions, including centralized purchases from key vendors, to
achieve economies of scale, and installing technologically advanced and
reliable transmission systems.
- Efficient Capital Deployment. Arch's principal financial objective
is to reduce financial leverage by reducing capital requirements and
increasing adjusted EBITDA. To reduce capital expenditures, Arch has
already implemented a company-wide focus on the sale, rather than lease, of
pagers. This is because subscriber-owned units require a lower level of
capital investment than company-owned units.
- Balanced Distribution. Arch's combination of direct sales,
company-owned stores and third party resellers are supplemented by its
local market direct sales force and its distribution agreements with
third-party regional and national retailers. In addition, Arch's national
accounts sales force is enabling Arch to improve distribution to nationwide
customers.
- Capitalize on Revenue Enhancement Opportunities. Arch has one of
the broadest product offerings in the industry, including traditional
paging services as well as new services such as guaranteed or 1.5-way
messaging and 2-way messaging services, wireless e-mail and content
delivery services. Arch has entered into a strategic alliance with Weblink
Wireless, formerly known as PageMart Wireless, to accelerate delivery of
these new services, utilizing portions of Weblink Wireless' N-PCS network
in conjunction with Arch's own network while sharing specified costs with
Weblink Wireless. This will provide Arch with more economical and broader
access to higher ARPU nationwide, regional or text messaging services. To
date, Arch has marketed these services only on a limited basis through the
resale of other carriers' services on less attractive terms. Arch believes
there will be a number of new revenue opportunities associated with its
approximately 7.0 million units in service, including selling enhanced
services which add value such as voice mail, resale of long-distance
service and fax storage and retrieval. See "-- Wireless Communications
Services, Products and Operations" and "-- Networks and Licenses".
Arch's strategic plans following the PageNet merger are described under
"The Combined Company -- Strategy".
WIRELESS COMMUNICATIONS SERVICES, PRODUCTS AND OPERATIONS
Arch is a leading provider of wireless communications services, primarily
wireless messaging services, including digital display, alphanumeric display,
guaranteed messaging and 2-way messaging. Arch operates in all 50 states and the
District of Columbia and in each of the 100 largest markets in the United
States. Arch offers these services on a local, regional and nationwide basis
employing digital networks covering more than 90% of the United States
population.
The following table sets forth information about the approximate number of
units in service with Arch subscribers and net increases in number of units
through internal growth and acquisitions since 1995:
<TABLE>
<CAPTION>
UNITS IN SERVICE NET INCREASE IN INCREASE IN UNITS UNITS IN SERVICE
AT BEGINNING OF UNITS THROUGH THROUGH AT END OF
YEAR ENDED DECEMBER 31, PERIOD INTERNAL GROWTH(1) ACQUISITIONS(2) PERIOD
- ----------------------- ---------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
1995........................... 538,000 366,000 1,102,000 2,006,000
1996......................... 2,006,000 815,000 474,000 3,295,000
1997......................... 3,295,000 595,000 -- 3,890,000
1998......................... 3,890,000 386,000 -- 4,276,000
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
- -----------------
<S> <C> <C> <C> <C>
1999........................... 4,276,000 (14,000) 2,762,000 7,024,000
</TABLE>
Net increase in units through internal growth includes internal growth in
acquired paging businesses after their acquisition by Arch and is net of
subscriber cancellations during each applicable period. Increase in units
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through acquisitions is based on units in service of acquired paging businesses
at the time of their acquisition by Arch.
A digital display pager permits a caller to transmit to the subscriber a
numeric message that may consist of a telephone number, an account number or
coded information, and has the capability to store several such numeric messages
in memory for later recall by the subscriber. An alphanumeric display pager
allows subscribers to receive and store messages consisting of both numbers and
letters.
Digital display paging service, which was introduced by the paging industry
nearly 20 years ago, currently represents a majority of all units in service.
The growth of alphanumeric display service, which was introduced in the
mid-1980s, has been constrained by its difficulties, such as inputting data, its
requirements of specialized equipment and its relatively high use of system
capacity during transmission, which has, to some extent, been relieved by
deploying alternate communications pathways, such as the Internet.
The following table summarizes the types of Arch's units in service at
specified dates:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1997 1998 1999
--------------- --------------- ---------------
UNITS % UNITS % UNITS %
--------- --- --------- --- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Digital display............................ 3,284,000 85% 3,586,000 84% 5,391,000 77%
Alphanumeric display....................... 524,000 13 621,000 14 1,195,000 17
Other...................................... 82,000 2 69,000 2 52,000 --
Customers with Nationwide Services......... -- -- -- -- 386,000 6
--------- --- --------- --- --------- ---
Total............................. 3,890,000 100% 4,276,000 100% 7,024,000 100%
========= === ========= === ========= ===
</TABLE>
Units reflected in chart include guaranteed and 2-way messaging units.
Arch provides messaging service to subscribers for a monthly fee.
Subscribers either lease the unit from Arch for an additional fixed monthly fee
or they own the unit, having purchased it either from Arch or from another
vendor. Arch owned units leased to subscribers require capital investment by
Arch while customer-owned and maintained units, commonly referred to as COAM
units, and those owned by resellers do not. The monthly service fee is generally
based upon the type of service provided, the geographic area covered, the number
of units provided to the customer and the period of the subscriber's commitment.
Subscriber-owned units provide a more rapid recovery of Arch's capital
investment than units owned and maintained by Arch, but may generate less
recurring revenue. Arch also sells units to third-party resellers who lease or
resell units to their own subscribers and resell Arch's wireless messaging
services under marketing agreements. Resellers are responsible for sales,
billing, collection and equipment maintenance costs. Arch sells other products
and services, including units and accessories and unit replacement and
maintenance contracts. The following table summarizes the number of Arch-owned
and leased, subscriber-owned and reseller-owned units in service at specified
dates:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
1997 1998 1999
--------------- --------------- ---------------
UNITS % UNITS % UNITS %
<S> <C> <C> <C> <C> <C> <C>
Arch-owned and leased...................... 1,740,000 45% 1,857,000 43% 3,541,000 50%
Subscriber-owned........................... 1,087,000 28 1,135,000 27 1,611,000 23
Reseller-owned............................. 1,063,000 27 1,284,000 30 1,872,000 27
--------- --- --------- --- --------- ---
Total............................. 3,890,000 100% 4,276,000 100% 7,024,000 100%
========= === ========= === ========= ===
</TABLE>
Arch provides enhancements and ancillary services such as voice mail,
wireless information delivery services, personalized greetings, message storage
and retrieval, pager loss protection and pager maintenance services. Voice mail
allows a caller to leave a recorded message that is stored in Arch's
computerized message retrieval center. When a message is left, the subscriber
can be automatically alerted through the subscriber's pager and can retrieve the
stored message by calling Arch's paging terminal. Personalized greetings allow
the subscriber to record a message to greet callers who reach the subscriber's
pager or voice mail box. Message
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storage and retrieval allows a subscriber who leaves Arch's service area to
retrieve calls that arrived during the subscriber's absence from the service
area. Pager loss protection allows subscribers who lease pagers to limit their
costs of replacement upon loss or destruction of a pager. Pager maintenance
services are offered to subscribers who own their own equipment. Wireless
information delivery allows subscribers to receive stock quotes, news and
weather through their Arch service. Arch is also in the process of test
marketing various other services that add value, and can be integrated with
existing paging services. These include, among other services, fax storage and
retrieval.
NETWORKS AND LICENSES
Arch operates local, regional and national networks which enable its
customers to receive pages over a broad geographical area. Many of these
networks were acquired in the MobileMedia acquisition. The extensive coverage
provided by this network infrastructure provides Arch with an advantage over
some of its competitors whose networks lack comparable coverage in securing
accounts with large corporate clients and retail chains, which frequently demand
national network coverage from their paging service provider.
Although Arch's networks provide local, regional and national coverage, its
networks operate over numerous frequencies and are subject to capacity
constraints in certain geographic markets. Although the capacity of Arch's
networks varies significantly market by market, almost all of Arch's markets
have adequate capacity to meet the demands of projected growth for the next
several years. The use of multiple frequencies adds complexity to inventory
management, customer service and order fulfillment processes. Some of Arch's
networks use older technologies and are comparatively costlier to operate.
Arch is seeking to improve overall network efficiency by deploying paging
terminals, consolidating subscribers on fewer, higher capacity networks and
increasing the transmission speed, or baud rate, of certain of its existing
networks. Arch believes its investments in its network infrastructure will
facilitate and improve the delivery of high quality communications services
while at the same time reducing associated costs of such services.
Nationwide Wireless Networks
Arch operates two nationwide 900 MHz networks. As part of its acquisition
of MobileMedia, Arch acquired MobileMedia's fully operational nationwide
wireless "8875" network, which was upgraded in 1996 to incorporate high-speed
FLEX(TM) technology developed by Motorola. In addition, in 1996, MobileMedia
completed the construction of a second nationwide "5375" network that uses
FLEX(TM) technology. The use of FLEX(TM) technology significantly increases
transmission capacity and represents a marked improvement over other systems
that use older paging protocols.
N-PCS Networks and Licenses
N-PCS networks enable wireless communications companies to offer 2-way
messaging services and to make more efficient use of radio spectrum than do
non-PCS networks. Arch has taken the following steps to position itself to
participate in new and emerging N-PCS services and applications.
Arch's N-PCS Licenses. MobileMedia purchased five regional licenses
through the FCC's 1994 auction of N-PCS licenses, providing the equivalent of a
nationwide 50 kHz outbound/12.5 kHz inbound PCS system. In addition, MobileMedia
acquired a second 2-way N-PCS license for a nationwide 50 kHz outbound/12.5 kHz
inbound system. In order to retain these N-PCS licenses, Arch must comply with
specified minimum buildout requirements. With respect to each of the regional
PCS licenses purchased at the FCC's 1994 auction, Arch would be required to
build out the related PCS system to cover 150,000 sq. km. or 37.5% of each of
the five regional populations by April 27, 2000 and 300,000 sq. km. or 75% of
each of the five regional populations by April 27, 2005. With respect to the
nationwide PCS license acquired as part of the MobileMedia acquisition, Arch
built out the related PCS system to cover 750,000 sq. km. or 37.5% of the U.S.
population by September 29, 1999 in compliance with applicable build out
requirements and is still required to extend the build out of the related PCS
system to cover 1,500,000 sq. km. or 75% of the U.S. population by September 29,
2004. In each instance, the population percentage will be determined by
reference to
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population figures at the time of the applicable deadline. Arch estimates that
the costs of these minimum build-outs would be approximately $9.0 million.
Although these minimum build-outs would be sufficient to satisfy regulatory
requirements, they would not be sufficient for Arch to provide significant N-PCS
applications of the types which the combined company intends to provide.
Weblink Wireless, Inc. In May 1999, Arch and Weblink Wireless, Inc.,
formerly PageMart Wireless, Inc. signed a five-year agreement for the provision
of N-PCS services. The agreement calls for Arch and Weblink to share certain
capital and operating expenses. Under the agreement, Arch can market N-PCS
advanced messaging services, including guaranteed or 1.5-way messaging and 2-way
messaging, using portions of Weblink's network in conjunction with Arch's
network. As demand for advanced messaging increases over time, Arch plans to
expand its own N-PCS network. In the interim, Arch believes its arrangements
with Weblink will provide it with more economical and broader access to N-PCS
services. Weblink previously announced similar agreements with each of
Metrocall, Inc. and Airtouch Communications, Inc.
SUBSCRIBERS AND MARKETING
Arch's wireless communications accounts are generally businesses with
employees who travel frequently but must be immediately accessible to their
offices or customers. Arch's subscribers have historically included proprietors
of small businesses, professionals, management personnel, field sales personnel
and service forces, members of the construction industry and construction
trades, and real estate brokers and developers. After Arch's acquisition of
MobileMedia, Arch's subscribers now include medical personnel, sales and service
organizations, specialty trade organizations, manufacturing organizations and
governmental agencies. Arch believes that use of wireless communications among
retail consumers will increase significantly in the future, although consumers
do not currently account for a substantial portion of Arch's subscriber base.
Although today Arch operates in all 50 states and all of the 100 most
populated markets in the United States, Arch originally focused on medium-sized
and small market areas with lower rates of wireless communications penetration
and attractive demographics. Arch believes that these markets will continue to
offer significant opportunities for growth, and that its national scope and
presence will also provide Arch with growth opportunities in larger markets.
Arch markets its services through three primary sales channels: direct,
reseller and retail.
Direct. In the direct channel, Arch leases or sells equipment directly to
its customers and bills and services such customers. Arch markets its services
through a direct marketing and sales organization which operated approximately
375 retail stores as of September 30, 1999. Arch's direct customers range from
individuals and small- and medium-sized businesses to Fortune 500 accounts and
government agencies. Business and government accounts typically experience less
turnover than consumer accounts. The direct channel will continue to have the
highest priority among Arch's marketing and sales efforts, because of its
critical contribution to recurring revenue and projected growth. Arch has been
engaged in efforts to improve sales productivity and strengthen its direct
channel sales force, segments of which had previously suffered from high
turnover and open positions under MobileMedia's ownership and management. In
addition, Arch commenced implementing consumer direct marketing techniques in
1998. As of September 30, 1999, the direct channel accounted for approximately
86.4% of recurring revenue.
Reseller. In the reseller channel, Arch sells access to its transmission
networks in bulk to a third party, who then resells such services to consumers
or small businesses or other end users. Arch offers access to its network to
resellers at bulk discounted rates. The third party reseller provides customer
service, is responsible for pager maintenance and repair costs, invoices the end
user and retains the credit risk of the end user, although Arch retains the
credit risk of the reseller. Because resellers are responsible for customer
equipment, the capital costs that would otherwise be borne by Arch are reduced.
Arch's resellers generally are not exclusive distributors of Arch's
services and often have access to networks of more than one provider.
Competition among service providers to attract and maintain reseller
distribution is based primarily upon price, including the sale of equipment to
resellers at discounted rates. Arch intends to be an active participant in the
reseller channel and to concentrate on accounts that are
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profitable and where longer term partnerships can be established with selected
resellers. As of September 30, 1999, the reseller channel accounted for
approximately 8.7% of recurring revenue.
Retail. In the retail channel, Arch sells equipment to retailers and,
after the consumer purchases the pager from the retailer, the consumer contacts
Arch to activate service. The retail channel is targeted at the consumer market
and consists primarily of national retail chains. Consumers served by the retail
channel typically purchase, rather than lease, equipment. This reduces Arch's
capital investment requirements. Subscribers obtained through retailers are
billed and serviced directly by Arch. Retail distribution permits Arch to
penetrate the consumer market by supplementing direct sales efforts. As of
September 30, 1999, the retail channel accounted for approximately 4.9% of
recurring revenue.
SOURCES OF EQUIPMENT
Arch does not manufacture any of the messaging equipment or other equipment
used in operations. The equipment used in Arch's paging operations is generally
available for purchase from multiple sources. Arch centralizes price and
quantity negotiations for all of its operating subsidiaries to achieve cost
savings from volume purchases. Arch buys customer equipment primarily from
Motorola, NEC and Panasonic and purchased terminals and transmitters primarily
from Glenayre and Motorola. Motorola has announced its intention to discontinue
manufacturing transmitters and other paging infrastructure during 2000, although
it will continue to maintain and service existing infrastructure into the
future. Arch anticipates that equipment will continue to be available in the
foreseeable future, consistent with normal manufacturing and delivery lead
times.
Because of the high degree of compatibility among different models of
transmitters, computers and other equipment manufactured by suppliers, Arch is
able to design its systems without being dependent upon any single source of
such equipment. Arch routinely evaluates new developments in technology in
connection with the design and enhancement of its paging systems and selection
of products to be offered to subscribers. Arch believes that its system
equipment is among the most technologically sophisticated in the paging
industry.
COMPETITION
The wireless communications industry is highly competitive. Companies in
this industry compete on the basis of price, coverage area offered to
subscribers, available services offered, transmission quality, system
reliability and customer service. Arch believes that it will generally compete
effectively based on these factors.
Arch has competed by maintaining competitive pricing of its products and
services, by providing broad coverage options through high-quality, reliable
transmission networks and by furnishing subscribers a superior level of customer
service. Several hundred licensed paging companies provide only local basic
numeric or tone paging service. Compared to these companies, Arch offers
wireless messaging services on a local, regional and nationwide basis. Arch also
offers enhanced services such as alphanumeric messaging, guaranteed messaging
and 2-way messaging, voice mail and voice mail notifications, news, sports,
weather reports and stock quotes and other information delivery services.
However, the products and services Arch offers compete with a broad array
of wireless communications services. For example, 2-way cellular phones are now
offered routinely as a package with short messaging services, which are
substantially similar to numeric and alphanumeric paging. In addition, rates for
flat rate broadband PCS and SMR services are dropping to a price point at which
the mobile telephone services compete directly with services Arch offers.
Some competitors are small, privately owned companies serving one market
area but others are large diversified telecommunications companies serving many
markets. Some competitors possess financial, technical and other resources
greater than those of Arch. Major wireless messaging carriers that currently
compete with Arch in one or more markets include MCI/Worldcom/SkyTel, Sprint
PCS, Metrocall, AirTouch/Vodafone, Nextel, Bell Atlantic, Ardis Company and
BellSouth Wireless Data.
The intensity of competition for communications service customers will
continue to increase as wireless communications products continue to be
developed and continue to offer new and different services. For
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example, the FCC has created potential sources of competition by auctioning new
spectrum for wireless communications services, local multipoint distribution
service and the 220-222 MHz service. Furthermore, the FCC has announced plans to
auction licenses in the general wireless communications service, a service
created from spectrum reallocated from federal government use in 1995. Moreover,
entities offering service on wireless 2-way communications technology, including
cellular, broadband PCS, N-PCS and specialized mobile radio services, as well as
mobile satellite service providers, also compete with the paging services that
Arch provides.
Arch holds one nationwide and five regional N-PCS licenses. Competitors of
Arch also hold N-PCS licenses. Some of these competitors have substantially
greater resources than Arch. One competitor, SkyTel, currently offers a 2-way
N-PCS wireless data service from its own network. Although Arch cannot predict
the types of N-PCS services which will be offered by those companies, Arch
expects that those services will compete with the N-PCS and paging services
offered by Arch. Moreover, broadbrand PCS, cellular and enhanced SMR compete
with many of the services provided by Arch over N-PCS.
EMPLOYEES
At September 30, 1999, Arch employed approximately 5,200 persons. None of
Arch's employees is represented by a labor union. Arch believes that its
employee relations are good. As part of its divisional reorganization and the
integration of MobileMedia, Arch anticipates a net reduction of approximately
10% of its current workforce. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Divisional Reorganization".
TRADEMARKS
In May 1997, Arch established a single national identity, Arch Paging, for
its paging services which previously had been marketed under various trademarks.
In addition, Arch adopted a new corporate logo, developed a corporate-wide
positioning strategy tied to customer service delivery, and launched its
Internet Web site at www.arch.com. At present, Arch has continued to market to
former MobileMedia customers under the MobileComm and MobileMedia brand names,
but is working to transition its marketing under the Arch name.
Arch owns the service marks "Arch" and "Arch Paging", and holds federal
registrations for the service marks "MobileComm" and "MobileMedia" as well as
various other trademarks. Arch filed an application for federal registration of
the mark "Arch" in October 1999 and for the mark "Arch Communications" in
December 1999.
PROPERTIES
At September 30, 1999, Arch owned 10 office buildings and leased office
space, including its executive offices, in approximately 375 locations in 42
states for use in its paging operations. Arch leases transmitter sites and/or
owns transmitters on commercial broadcast towers, buildings and other fixed
structures in approximately 4,800 locations in all 50 states, the U.S. Virgin
Islands and Puerto Rico. Arch's leases are for various terms and provide for
monthly lease payments at various rates. Arch believes that it will be able to
obtain additional space as needed at acceptable cost. Substantially all of
Arch's and MobileMedia's tower sites were sold during 1998 and 1999 and Arch
currently rents transmitter space. As part of its divisional reorganization,
Arch is closing some office locations and redeploying other real estate assets.
See "Arch Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Divisional Reorganization".
LITIGATION
Arch, from time to time, is involved in lawsuits arising in the normal
course of business. Arch believes that its currently pending lawsuits will not
have a material adverse effect on its financial condition or results of
operations.
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THE COMPANY
A predecessor to Arch, also named Arch Communications Group, Inc., was
incorporated in January 1986 in Delaware and conducted its operations through
wholly owned direct and indirect subsidiaries. On September 7, 1995, this
predecessor completed its acquisition of USA Mobile Communications Holdings,
Inc. through the merger of the predecessor with and into USA Mobile, which
simultaneously changed its name to Arch Communications Group, Inc. and continued
in existence as a Delaware corporation. See Note 2 to Arch's consolidated
financial statements. On June 3, 1999, Arch acquired the business of
MobileMedia, which was then operating as a debtor-in-possession under chapter 11
of the Bankruptcy Code.
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ARCH'S MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Arch are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Chairman of the Board, Chief Executive Officer and
C. Edward Baker, Jr.................. 49 Director
Lyndon R. Daniels.................... 47 President and Chief Operating Officer
John B. Saynor....................... 59 Executive Vice President and Director
J. Roy Pottle........................ 40 Executive Vice President and Chief Financial Officer
Executive Vice President/Technology and Regulatory
Paul H. Kuzia........................ 57 Affairs
Edwin M. Banks(2).................... 37 Director
R. Schorr Berman(2).................. 51 Director
James S. Hughes(1)................... 57 Director
John Kornreich....................... 53 Director
H. Sean Mathis(1).................... 52 Director
Allan L. Rayfield(2)................. 64 Director
John A. Shane(1)(2).................. 66 Director
</TABLE>
- ---------------
(1) Member of the audit committee
(2) Member of the executive compensation and stock option committee
C. EDWARD BAKER, JR. has served as Chief Executive Officer and a director
of Arch since 1988. Mr. Baker became Chairman of the Board of Arch in 1989. He
also served as President of Arch from 1988 to January 1998. From 1986 until
joining Arch in March 1988, Mr. Baker was President and Chief Executive Officer
of US West Paging.
LYNDON R. DANIELS joined Arch in January 1998 as President and Chief
Operating Officer. From November 1993 to January 1998, Mr. Daniels was the
President and Chief Executive Officer of Pacific Bell Mobile Services, a
subsidiary of SBC Communications Inc. From May 1988 until November 1993, Mr.
Daniels was the Chief Financial Officer of Pactel Corp., a mobile telephone
company.
JOHN B. SAYNOR has served as a director of Arch since 1988. Mr. Saynor has
served as Executive Vice President of Arch since 1990. Mr. Saynor is a founder
of Arch and served as President and Chief Executive Officer of Arch from 1986 to
March 1988 and as Chairman of the Board from 1986 until May 1989.
J. ROY POTTLE joined Arch in February 1998 as Executive Vice President and
Chief Financial Officer. From October 1994 to February 1998, Mr. Pottle was Vice
President/Treasurer of Jones Intercable, Inc., a cable television operator. From
September 1989 to October 1994, he served as Vice President and Relationship
Manager at The Bank of Nova Scotia, New York Agency.
PAUL H. KUZIA has served as Executive Vice President/Technology and
Regulatory Affairs of Arch since September 1996. He served as Vice
President/Engineering and Regulatory Affairs of Arch from 1988 to September
1996. Prior to 1988, Mr. Kuzia was director of operations at Message Center Inc.
EDWIN M. BANKS has been a director of Arch since June 1999. He has been
employed by W.R. Huff Asset Management since 1988 and currently serves as a
portfolio manager. From 1985 until he joined W.R. Huff, Mr. Banks was employed
by Merrill Lynch & Company. Mr. Banks also serves as a director of Magellan
Health Services, formerly Charter Medical Corporation, and e.spire Corporation,
formerly American Communications Services, Inc.
R. SCHORR BERMAN has been a director of Arch since 1986. Since 1987, he has
been the President and Chief Executive Officer of MDT Advisers, Inc., an
investment adviser. He is a director of Mercury Computer Systems, Inc. as well
as a number of private companies.
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JAMES S. HUGHES has been a director of Arch since 1986. Since 1987, he has
been President and Chief Executive Officer of Norwich Corporation, a real estate
investment and service firm, and, since 1992, he has served as President and
Managing Director of Inventa Corporation, an international business development
firm.
JOHN KORNREICH has been a director of Arch since June 1998. Mr. Kornreich
has served as a Managing Director of Sandler Capital Management Co., Inc. since
1988.
H. SEAN MATHIS has been a director of Arch since June 1999. He has also
been Chairman of the Board and Chief Executive Officer of Allis Chalmers, Inc.
since January 1996 and previously served as a Vice President of that company
since 1989. From July 1996 to September 1997, Mr. Mathis was Chairman of the
Board of Universal Gym Equipment Inc., a privately owned company which filed for
protection under the Bankruptcy Code in July 1997. From 1991 to 1993, Mr. Mathis
was President of RCL Acquisition Corp., and from 1993 to 1995 he was President
and a director of RCL Capital Corporation, which was merged into DISC Graphics
in November 1995. Previously, Mr. Mathis was a director and Chief Operating
Officer of Ameriscribe Corporation. Mr. Mathis is a director of Thousand Trails,
Inc.
ALLAN L. RAYFIELD has been a director of Arch since 1997. He has been a
consultant since 1995. From November 1993 until December 1994, Mr. Rayfield
served as Chief Executive Officer of M/A Com Inc., a microwave electrical
manufacturing company. From April 1991 until November 1993, he served as Chief
Operating Officer of M/A Com Inc. He is a director of Parker Hannifin
Corporation and Acme Metals Incorporated.
JOHN A. SHANE has been a director of Arch since 1988. He has been the
President of Palmer Service Corporation since 1972. He has been a general
partner of Palmer Partners L.P., a venture capital firm, since 1981. He serves
as a director of Overland Data, Inc., United Asset Management Corporation and
Gensym Corporation and as a trustee of Nvest Funds.
Arch's certificate of incorporation and by-laws provide that Arch has a
classified board of directors composed of three classes, each of which serves
for three years, with one class being elected each year. The term of Messrs.
Saynor, Shane and Mathis will expire at Arch's annual meeting of stockholders to
be held in 2000. The term of Messrs. Baker, Berman and Kornreich will expire at
Arch's annual meeting of stockholders to be held in 2001. The term of Messrs.
Hughes, Rayfield and Banks will expire at Arch's annual meeting of stockholders
to be held in 2002.
Two of Arch's stockholders, W.R. Huff Asset Management and Whippoorwill
Associates, Inc., have the right to designate one member each for election to
Arch's board of directors. This right of designation will continue through 2002
for W.R. Huff and 2003 for Whippoorwill if the designating stockholder is still
entitled to cast at least 5% of all votes at an Arch stockholders' meeting, and
will continue afterwards if the designating stockholder is still entitled to
cast at least 10% of all such votes. Under this arrangement, Mr. Banks has been
designed by W.R. Huff and Mr. Mathis has been designed by Whippoorwill.
The holders of Series C preferred stock have the right, voting as a
separate class, to elect one member of Arch's board of directors, and such
director has the right to be a member of any committee of the board. Mr.
Kornreich is currently the director elected by the holders of Series C preferred
stock. This right of designation will terminate if less than 50% of the Series C
preferred stock remains outstanding.
Arch's officers are elected by the board of directors and hold office until
their successors are elected or until their earlier death, resignation or
removal.
Most of Arch's executive officers have entered into non-competition
agreements with Arch which provide that they will not compete with Arch for one
year following termination, or recruit or hire any other Arch employee for three
years following termination. See "Executive Compensation -- Executive Retention
Agreements".
For a discussion of the expected effects of the merger, see "The Combined
Company -- Management."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Arch and three other entities have co-founded an offshore corporation to
pursue wireless messaging opportunities in Latin America. Arch and Mr. Hughes
each contributed $250,000 to this offshore corporation and each owns
approximately 12% of its equity. Arch's Board of Directors has approved an
additional investment of $200,000 by Arch, subject to certain conditions.
Between August 6, 1998 and October 28, 1998, Arch's board of directors
approved three full recourse, unsecured demand loans totaling $279,500 from Arch
to Mr. Baker. The loans bear interest at approximately 5% annually.
BOARD COMMITTEES
Arch's board of directors has an audit committee and an executive
compensation and stock option committee. The audit committee reviews the annual
consolidated financial statements of Arch and its subsidiaries before their
submission to Arch's board of directors and consults with Arch's independent
public accountants to review financial results, internal financial controls and
procedures, audit plans and recommendations. The audit committee also recommends
the selection, retention or termination of independent public accountants and
approves services provided by independent public accountants prior to the
provision of such services. The compensation committee recommends to Arch's
board the compensation of executive officers, key managers and directors and
administers Arch's stock option plans. Arch's board of directors has no standing
nominating committee.
INDEMNIFICATION AND DIRECTOR LIABILITY
Arch's certificate of incorporation eliminates the liability of its
directors for monetary damages for breaches of fiduciary duties, except in
certain circumstances involving wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions that involve intentional
misconduct or a knowing violation of law. The certificate of incorporation also
requires Arch to indemnify its directors and officers to the fullest extent
permitted by the Delaware corporations statute.
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SUMMARY COMPENSATION TABLE
The annual and long-term compensation of Arch's Chief Executive Officer and
other executive officers named below was as follows for the years ended December
31, 1996, 1997 and 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------- LONG-TERM
OTHER ANNUAL COMPENSATION
BONUS COMPENSATION --------------
NAME AND PRINCIPAL POSITION DURING 1997 YEAR SALARY $ $(1) ($)(2) OPTIONS (#)(3)
- --------------------------------------- ---- -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
C. Edward Baker, Jr.......................... 1998 $373,742 $135,000 $ 600 151,554(4)
Chairman, President and Chief Executive 1997 353,317 227,500 600 16,545(4)
Officer 1996 329,050 36,833 600 89,621(5)(6)
Lyndon R. Daniels............................ 1998 295,416 -- 113,905(7) 46,666
President and Chief Operating Officer
(joined Arch in January 1998)
J. Roy Pottle................................ 1998 179,200 -- 99,304(7) 30,000
Executive Vice President and Chief
Financial Officer (joined Arch in February
1998)
John B. Saynor............................... 1998 157,646 41,770 600 17,247(8)
Executive Vice President 1997 153,188 72,900 600 5,302(9)
1996 146,867 15,300 600 6,667(6)
Paul H. Kuzia................................ 1998 165,489 58,435 600 29,616(9)
Executive Vice President/Technology 1997 157,633 77,400 600 5,629(9)
and Regulatory Affairs 1996 133,800 14,620 600 2,667(6)
</TABLE>
- ---------------
(1) Represents bonus paid in such fiscal year with respect to prior year.
(2) Represents Arch's matching contributions paid under Arch's 401(k) plan.
(3) No restricted stock awards or SARs were granted to any of the named
executive officers during the years ended December 31, 1996, 1997 or 1998.
(4) Includes options to purchase 136,563 shares granted as part of Arch's
January 16, 1998 option repricing program.
(5) Includes options to purchase 35,620 shares replaced in connection with
Arch's October 23, 1996 option repricing program.
(6) Option replaced in connection with Arch's January 16, 1998 option repricing
program.
(7) Represents reimbursement for certain relocation costs and associated taxes.
(8) Includes options to purchase 11,968 shares granted as part of Arch's January
16, 1998 option repricing program.
(9) Includes options to purchase 23,229 shares granted as part of Arch's January
16, 1998 option repricing program.
EXECUTIVE RETENTION AGREEMENTS
Arch is a party to executive retention agreements with a total of 17
executives, including Messrs. Baker, Daniels, Kuzia, Pottle and Saynor.
Following the merger, the PageNet change of control severance plan will provide
similar severance arrangements for PageNet executives. See "PageNet's
Management".
The purpose of the executive retention agreements is to assure the
continued employment and dedication of the executives without distraction from
the possibility of a change in control of Arch as defined in the executive
retention agreements. The executive will be eligible to receive benefits if a
change in control occurs, and Arch terminates the executive's employment at any
time within the following 12 months except for cause, disability or death, or
the executive terminates employment for good reason, as defined in the executive
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retention agreements. Such benefits will include (1) a lump sum cash severance
payment equal to a specified multiple of the executive's annual base salary in
effect at the time of the change in control plus a specified multiple of the
executive's average annual bonus paid during the previous three full calendar
years, (2) payment of any accrued but unpaid base salary plus any other amounts
earned but unpaid through the date of termination and (3) any amounts or
benefits required to be paid or provided to the executive or which the executive
is eligible to receive following the executive's termination under any plan,
program, policy, practice, contract or agreement of Arch. In addition, for up to
12 months after termination, Arch must provide the executive with life,
disability, accident and health insurance benefits similar to those previously
maintained until the executive becomes reemployed with another employer and is
eligible to receive substantially equivalent benefits. The specified multiple of
salary and bonus for Messrs. Baker, Daniels, Kuzia, Pottle and Saynor is three,
and the specified multiple for the other executives is one or two. Good reason
is defined to include, among other things, a material reduction in employment
responsibilities, compensation or benefits. In the case of Mr. Baker, good
reason includes his not becoming the chief executive officer of any entity
succeeding or controlling Arch.
STOCK OPTION GRANTS
The following options were granted to the five executive officers named in
the summary compensation table during 1998. No SARs were granted during 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
OPTIONS/SARS STOCK PRICE APPRECIATION
OPTIONS/SARS GRANTED TO EXERCISE OR FOR OPTIONS TERM(3)
GRANTED EMPLOYEE IN BASE PRICE EXPIRATION -------------------------
(#)(1) FISCAL YEAR ($/SHARE)(2) DATE 5% ($) 10% ($)
------------ ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. .. 14,991 2.31% $13.5939 03/04/08 $128,143 $ 324,739
136,563(4) 21.00 15.1875 01/16/08 553,600 2,110,041
Lyndon R. Daniels...... 46,666 7.18 14.8125 01/02/08 434,723 1,101,674
J. Roy Pottle.......... 30,000 4.61 10.6875 02/17/08 201,639 510,994
John B. Saynor......... 5,279 0.81 13.5939 03/04/08 45,122 114,349
11,968(4) 1.84 15.1875 01/16/08 48,517 184,924
Paul H. Kuzia.......... 6,387 0.98 13.5939 03/04/08 54,603 138,375
23,229(4) 3.57 15.1875 01/16/08 94,166 358,913
</TABLE>
- ---------------
(1) Options generally become exercisable at a rate of 20% of the shares subject
to the option on the first anniversary of the date of grant and 5% of the
shares subject to the option per calendar quarter thereafter.
(2) The exercise price is equal to the fair market value of common stock on the
date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option terms. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the options were granted and are not intended to forecast future
appreciation of the price of the common stock. The named executive officers
will realize gain upon the exercise of these options only if there is an
increase in the price of common stock which benefits all Arch stockholders
proportionately.
(4) Option granted as part of the January 16, 1998 option repricing program.
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OPTION EXERCISES AND YEAR-END OPTION TABLE
The named executive officers exercised stock options during 1998 as
described below. They held the following stock options as of December 31, 1998:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
SHARES OF AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
NAME (#) ($)(1) (#) ($)(2)
- ---- ----------- -------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. .............. 31,344 $270,342 37,914 113,641 -- --
Lyndon R. Daniels.................. -- -- -- 46,666 -- --
John B. Saynor..................... -- -- 1,668 15,580 -- --
J. Roy Pottle...................... -- -- -- 30,000 -- --
Paul H. Kuzia...................... -- -- 6,644 22,973 -- --
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and the fair market
value of common stock on the date of exercise.
(2) Based on the fair market value of common stock on December 31, 1998 ($4.3125
per share) less the option exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of Arch's compensation committee are R. Schorr Berman,
Allan L. Rayfield and John A. Shane. Messrs. Berman, Rayfield and Shane served
on the compensation committee throughout 1998, and Mr. Rayfield joined the
compensation committee upon his election as a director in July 1998.
C. Edward Baker, Jr., the chairman and chief executive officer of Arch,
makes recommendations and participates in discussions regarding executive
compensation, but he does not participate directly in discussions regarding his
own compensation. No current executive officer of Arch has served as a director
or member of the compensation committee (or other committee serving an
equivalent function) of any other entity that has an executive officer who
serves as a director of Arch or as a member of the compensation committee of
Arch.
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<PAGE> 184
ARCH'S PRINCIPAL STOCKHOLDERS
The following table sets forth certain information about the beneficial
ownership of Arch's common stock by
- each person who is known by Arch to beneficially own more than 5% of its
outstanding shares of common stock;
- each current director of Arch;
- Arch's chief executive officer and the other named executive officers;
and
- all current directors and executive officers of Arch as a group.
The table provides information at November 30, 1999 and as adjusted to give
effect to the exchange offer, the PageNet merger and related transactions,
assuming that all of the outstanding discount notes and all of PageNet's
outstanding notes are tendered.
Beneficial ownership is determined in accordance with the rules of the SEC
based upon voting or investment power over the securities. The number of shares
of common stock outstanding that is used in calculating the percentage for each
listed person includes any shares that person has the right to acquire through
exercise of warrants or options within 60 days after November 30, 1999. These
shares, however, are not deemed to be outstanding for the purpose of calculating
the percentage beneficially owned by any other person.
Unless otherwise indicated, each person or entity listed in the table has
sole voting power and investment power, or shares such power with his spouse,
with respect to all shares of capital stock listed as owned by such person or
entity. The inclusion of shares in the table does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of the
shares.
The table assumes
- the conversion of Series C preferred stock into common stock at the
current conversion ratio of 6.7444 to 1.00; and
- the conversion of Class B common stock into common stock at a one-for-one
conversion ratio.
Because Class B common stock is not entitled to vote in the election of
directors, the voting power of its holders is less than their percentages of
beneficial ownership shown in the table. Thus, the Class B stockholders
identified in notes (7), (8) and (9) to the table would be entitled to cast a
maximum of 28.4% of the votes in the election of directors, assuming that
they -- and only they -- exercised outstanding options and warrants. This
contrasts with the more than 36.2% of beneficial ownership which is obtained by
adding their individual beneficial ownership percentages in the table.
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<PAGE> 185
Number of Shares
<TABLE>
<CAPTION>
SHARES SHARES TO BE
UNDERLYING ISSUED IN
OPTIONS AND CONNECTION
WARRANTS WITH THE PERCENTAGE
SHARES EXERCISABLE EXCHANGE -----------------------
OUTSTANDING AT PRIOR TO TOTAL OFFER AND AT
NOVEMBER 30, JANUARY 29, BENEFICIALLY PAGENET NOVEMBER 30, AS
NAME 1999 2000 OWNED MERGER(1) 1999 ADJUSTED
- ---- -------------- ----------- ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. ......... 37,434 141,122 178,550 * *
Lyndon R. Daniels............. 4,000 25,582 29,582 * *
John B. Saynor................ 64,642 118,700 185,342 * *
J. Roy Pottle................. -- 10,500 10,500 * *
Paul H. Kuzia................. 1,320 17,679 18,999 * *
R. Schorr Berman(2)........... 655,664 1,140,115 1,795,779 3.3% *
James S. Hughes............... 40,196 47,503 87,699 * *
John Kornreich(3)............. 1,757,810 2,890,373 4,648,183 361,606 8.3% 2.9%
Allan L. Rayfield............. 334 3,576 3,910 * *
John A. Shane(4).............. 6,856 17,686 24,542 * *
Edwin M. Banks(5)............. 8,854,357 569,002 9,423,359 17.6% 5.4%
H. Sean Mathis................ -- 1,000 1,000 * *
Sandler Capital
Management(6)............... 1,677,616 2,751,494 4,429,110 357,425 8.0% 2.7%
W.R. Huff Asset Management
Co., L.L.C.(7).............. 8,854,357 568,002 9,422,359 17.6% 5.4%
The Northwestern Mutual Life
Insurance Company(8)........ 3,243,629 207,544 3,451,173 6.5% 2.0%
Whippoorwill Associates,
Inc.(9)..................... 6,020,045 439,904 6,459,949 12.1% 3.7%
Resurgence Asset Management
L.L.C.(10)
Resurgence Asset Management
International L.L.C.(10)
Re/Enterprise Asset
Management, L.L.C.(10)...... 9,164,096 -- 9,164,096 17.3% 5.3%
Paul Tudor Jones II(11)....... 4,080,899 126,176 4,207,075 7.9% 2.4%
All current directors and
executive officers of Arch
as a group (12 persons)..... 11,422,613 6,118,842 17,541,455 361,606 29.7% 10.0%
</TABLE>
- ---------------
* Less than 1%
(1) Based upon ownership of Arch discount notes, PageNet common stock and
PageNet senior subordinated notes, to the extent Arch is aware of that
ownership.
(2) Includes 649,330 shares and 1,122,334 shares issuable upon exercise of
warrants held by Memorial Drive Trust, over which Mr. Berman may be deemed
to share voting and investment power as administrator and chief executive
officer of Memorial Drive Trust. Mr. Berman disclaims beneficial ownership
of such shares held by Memorial Drive Trust.
(3) Includes 1,677,616 shares and 2,751,495 shares issuable upon exercise of
warrants beneficially owned by Sandler, over which Mr. Kornreich may be
deemed to have voting and investment power as managing director, and 63,334
shares beneficially owned by two limited partnerships, over which Mr.
Kornreich may be deemed to have voting and investment power as a general
partner. Mr. Kornreich disclaims beneficial ownership of all such shares.
(4) Includes 350 shares and 606 shares issuable upon exercise of warrants owned
by Palmer Service Corporation, over which Mr. Shane may be deemed to have
voting and investment power as president
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<PAGE> 186
and sole stockholder of Palmer Service Corporation, 159 shares issuable
upon conversion of $8,000 principal amount of Arch's 6 3/4% convertible
subordinated debentures due 2003 held by Palmer Service Corporation, and
418 shares issuable upon conversion of Arch's 6 3/4% convertible
subordinated debentures held by Mr. Shane. See "Description of Outstanding
Indebtedness -- Arch Convertible Debentures".
(5) Includes 8,854,357 shares and 1,704,006 shares issuable upon exercise of
warrants W.R. Huff manages on behalf of various discretionary accounts and
1,306,134 shares held by The Huff Alternative Income Fund, L.P., an
affiliate of W.R. Huff. This director is a portfolio manager of W.R. Huff.
This director disclaims beneficial ownership of all such shares.
(6) Sandler has sole voting and investment power over 116,000 of such shares
and 200,500 of the shares issuable upon exercise of warrants and shared
voting and investment power over the remaining shares and warrants.
(7) Consists of 7,528,218 shares and 568,002 shares issuable upon exercise of
warrants W.R. Huff manages on behalf of various discretionary accounts and
1,306,139 shares held by The Huff Alternative Income Fund, L.P., an
affiliate of W.R. Huff. This standby purchaser disclaims beneficial
ownership of these shares.
(8) Consists of 2,632,048 shares held by The Northwestern Mutual Life Insurance
Company, 158,287 of which are issuable upon exercise of warrants, 638,686
shares held in The Northwestern Mutual Life Insurance Company Group Annuity
Separate Account (as to which The Northwestern Mutual Life Insurance
Company has shared voting and investment power), 38,361 of which are
issuable upon exercise of warrants, and 180,439 shares held by the High
Yield Bond Portfolio of Northwestern Mutual Series Fund, Inc., a
wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company
and a registered investment company, 10,895 shares of which are issuable
upon exercise of warrants. Northwestern Mutual Investment Services, LLC, a
wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company
and a registered investment advisor, serves as investment adviser to the
High Yield Bond Portfolio of Northwestern Mutual Series Fund, Inc.
(9) All of such shares are owned by various limited partnerships, a limited
liability company, a trust and third party accounts for which Whippoorwill
Associates, Inc. has discretionary authority and acts as general partner or
investment manager.
(10) Resurgence Asset Management, L.L.C., Resurgence Asset Management
International L.L.C. and Re/Enterprise Asset Management, L.L.C. exercise
voting power and investment power over these shares on behalf of certain
client accounts and accounts managed by their affiliates with which such
powers are shared. Additionally, employees of Resurgence Asset Management,
L.L.C., Resurgence Asset Management International L.L.C. and Re/Enterprise
Asset Management, L.L.C. and their affiliates have an indirect beneficial
interest in certain of the client entities which own these shares. Each of
Resurgence Asset Management, L.L.C., Resurgence Asset Management
International L.L.C. and Re/Enterprise Asset Management, L.L.C. disclaims
beneficial ownership of shares owned by their clients. James B. Rubin
shares voting and investment power in the above shares as Chief Investment
Officer and a Manager of each of Resurgence Asset Management, L.L.C.,
Resurgence Asset Management International L.L.C. and Re/Enterprise Asset
Management, L.L.C. Mr. Rubin disclaims beneficial ownership of these
shares.
(11) Consists of 1,058,816 shares held by Tudor BVI Futures, Ltd., 33,417 of
which are issuable upon exercise of warrants, 243,346 shares held by Tudor
Proprietary Trading, L.L.C., 8,181 of which are issuable upon exercise of
warrants, 496,013 shares held by The Raptor Global Fund, L.P., 16,881 of
which are issuable upon exercise of warrants, 2,176,353 shares held by The
Raptor Global Fund Ltd., 59,516 of which are issuable upon exercise of
warrants and 232,547 shares held by The Upper Mill Capital Appreciation
Fund Ltd., 8,181 of which are issuable upon exercise of warrants. Mr. Jones
may be deemed to beneficially own all of these shares because he is the
indirect controlling equity holder of Tudor Proprietary Trading, L.L.C. and
the controlling shareholder of Tudor Investment Corporation, which is the
sole general partner of The Raptor Global Fund L.P. and provides investment
advisory
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<PAGE> 187
services to the Raptor Global Fund Ltd., The Raptor Global Fund L.P., Tudor
BVI Futures, Ltd. and The Upper Mill Capital Appreciation Fund Ltd.
Each person or entity listed in the table has an address c/o Arch except
for:
- Sandler Capital Management, 767 Fifth Avenue, 45th Floor, New York, New
York 10153
- W.R. Huff Asset Management Co., L.L.C., 67 Park Place, Ninth Floor,
Morristown, NJ 07960
- Paul Tudor Jones II, c/o Tudor Investment Corporation, 600 Steamboat
Road, Greenwich, CT 06830
- The Northwestern Mutual Life Insurance Company, 720 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202
- Whippoorwill Associates, Inc., 11 Martine Avenue, White Plains, New York
10606
- Resurgence Asset Management L.L.C., 10 New King Street, 1st Floor, White
Plains, New York 10604.
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<PAGE> 188
PAGENET'S BUSINESS
PageNet is a leading provider of wireless communications services
throughout the United States and in the U.S. Virgin Islands, Puerto Rico and
Canada. It provides services in all 50 states and the District of Columbia,
including service in the 100 most populated markets in the United States.
PageNet also owns a minority interest in a wireless communications company in
Brazil.
The main services of PageNet are digital and alphanumeric wireless
messaging services. Digital devices allow a subscriber to receive a numeric
message (such as a telephone number to call back or a pre-arranged code), and
alphanumeric devices allow a subscriber to receive numeric and text messages. As
of September 30, 1999, digital units represented approximately 83.5% of
PageNet's total units in service with subscribers and alphanumeric units
represented approximately 16.2% of PageNet's total units in service with
subscribers. The total units in service has grown from 4,408,000 at December 31,
1994 to more than 9,027,000 at September 30, 1999, representing a compounded
annual growth rate of approximately 17.1%. However, total units in service have
declined each quarter since their high of 10,604,000 at June 30, 1998. In
addition, PageNet sells 1.5-way services, which enable subscribers to receive
acknowledgements that their messages were delivered, 1.75-way services, which
enable subscribers to respond to messages with their messaging devices by using
pre-scripted replies, and 2-way services, which enable subscribers to initiate
messages and to respond to messages with their messaging devices by using
pre-scripted replies or by creating original replies. PageNet is currently
developing other applications for its wireless network through its wholly-owned
subsidiary Vast, as described more fully below.
STRATEGY AND RESTRUCTURING
In February 1998, PageNet announced its intention to realign its strategy
from rapid expansion and subscriber growth towards profitable growth. The major
components of this realignment have included: (1) centralizing its key support
functions into "centers of excellence"; (2) completing the buildout of its new
advanced messaging network, and launching new, value-added advanced messaging
services for its customers; (3) developing other applications for its network to
provide "wireless solutions" to customers; and (4) focusing PageNet's sales and
marketing efforts on more profitable services, such as alphanumeric and
nationwide paging; and (5) increasing prices to certain existing customers in an
effort to reduce the number of unprofitable customers. As a result of the
restructuring, PageNet recorded a charge of $74.0 million, or $0.72 per share,
during the quarter ended March 31, 1998. In June of 1999, PageNet announced a
further reorganization involving the consolidation of certain previous
initiatives to develop "wireless solutions" into Vast.
CENTERS OF EXCELLENCE. In February 1998 PageNet announced it was
restructuring its domestic operations from approximately 50 decentralized field
offices to four centers of excellence. PageNet is restructuring these operations
to eliminate redundant administrative operations by consolidating certain key
support functions into the centers of excellence, including: customer service;
billing and accounting; order fulfillment; inventory management; and technical
operations. PageNet began this consolidation in 1998, and will continue its
consolidation efforts through January 2000. As of November 30, 1999,
approximately 80% of customer units placed in service indirectly through
PageNet's resellers and 38% of directly marketed customer units in service had
been consolidated into the centers of excellence. PageNet intends to suspend any
further consolidation after January 2000 pending a selection following the
merger of the operating platforms to be used by the combined company. PageNet
expects to have completed the conversion of all of customer units placed in
service by PageNet's resellers, and the approximately 50% of the directly
marketed customer units in service, as of January 2000. As a result, PageNet
will realize a portion of the anticipated cost savings resulting from its
centers of excellence initiative and will eliminate some of the duplicative
costs that have adversely affected its results from operations. However, due to
the suspension of future conversions, combined with the impact of the
contemplated merger on operations, PageNet is unable to estimate the amount of
potential cost savings resulting from the centers of excellence initiative.
BUILD-OUT OF ADVANCED MESSAGING NETWORK AND DEPLOYMENT OF ADVANCED
MESSAGING SERVICES. PageNet has nearly completed the build-out of its advanced
wireless messaging network and PageNet expects to launch
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<PAGE> 189
2-way services over its own network in January 2000. PageNet believes that, upon
completion, its advanced wireless messaging network will be one of the largest
and most sophisticated wireless messaging networks in North America. PageNet
continues to prepare for the launch of advanced messaging services in order to
generate additional revenue and cash flow growth and compete within the wireless
communications market.
ESTABLISHMENT OF VAST. Through its wholly-owned subsidiary Vast, PageNet
is commencing operations that can provide integrated wireless solutions to
connect businesses with their employees, customers and remote assets, such as
vending machines, automobiles and storage tanks. Using an expandable software
platform (Gateway), provisioning and service and support operations, Vast will
be able to provide customers with a comprehensive end-to-end wireless solution
that seamlessly connects their mobile users with the Internet or corporate data
network using wireless devices. Vast will provide the equipment, servers,
billing systems, training and support needed to offer mobile access to
enterprise applications, Internet services, messaging and e-commerce. Using the
Vast solution, a mobile workforce can stay continuously connected to enterprise
applications and perform necessary tasks while at home, in the office, on the
road, at a meeting or at a job site.
Vast is a development stage company and, since its inception, has been
engaged primarily in product research and development and developing markets for
its products and services. Vast has incurred significant operating losses as a
result of its start-up activities. It began to market its products and services
in late 1999, and believes that revenues from sales of these products and
services will grow rapidly.
Annex A to this prospectus describes Vast's business in detail.
REVIEW OF CUSTOMER ACCOUNTS AND SALES AND MARKETING STRUCTURE. PageNet has
reviewed its customers and prospects in each market in order to design a sales
and marketing structure that is more closely aligned with its customers' needs
and with PageNet's overall goal of profitable growth. This new sales structure,
which was implemented in April of 1999, enables PageNet to sell a diversified
portfolio of products to a sophisticated group of customers. This structure
includes account segmentation and focused selling skills, career paths for all
sales personnel, sales targets, training curriculums for each selling group, and
competitive compensation plans. This structure was designed to increase
PageNet's sales results and effectiveness but has not yet had a positive impact
on sales results. As a result of price increases and increased competition in
the marketplace for wireless communications services, PageNet's units in service
have decreased each quarter from the third quarter of 1998 through the third
quarter of 1999, and this trend is expected to continue through at least the
first quarter of 2000. PageNet experienced its first year-to-year increase in
average revenue per unit in 1998, although average revenue per unit has since
declined during the second and third quarters of 1999. PageNet continues to
review its pricing structure for all of its services.
SALES AND DISTRIBUTION
PageNet's services are sold to its customers through both direct and
indirect distribution channels. The direct channel consists of selling services
to customers through local sales representatives who are PageNet employees
calling on prospects and customers or taking orders at storefront locations, as
well as sales completed through PageNet's internet store. The indirect channel
consists of selling services to customers primarily through resellers. PageNet
does not depend upon any single subscriber or reseller for a significant portion
of its net revenues.
As of September 30, 1999, direct sales accounted for approximately 48% of
PageNet's overall units in service, and the indirect sales channel accounted for
approximately 52%. In the direct channel, PageNet charges a monthly fee and
either leases or sells its messaging devices to its customers. In the indirect
channel, PageNet provides services to resellers under marketing agreements at
wholesale monthly service rates. PageNet sells or leases messaging devices to
resellers, who sell PageNet's services to end users. Resellers are responsible
for all costs associated with servicing their customers. However, in some cases,
resellers may contract with PageNet to provide billing and other customer
service functions.
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MARKETING
PageNet promotes its products and services through a variety of programs,
including television, print, newspaper, yellow pages advertising, and co-op
programs with manufacturers and other third parties. Traditionally, PageNet has
focused its marketing efforts primarily on business users, who represent the
majority of its subscribers.
MESSAGING DEVICES AND TRANSMISSION EQUIPMENT
PageNet currently purchases messaging devices from many sources,
transmitters from Glenayre Technologies, Inc. and Motorola, Inc., and wireless
messaging terminals from Glenayre. Motorola has announced its intention to
discontinue manufacturing transmitters and other paging infrastructure during
2000, although it will continue to maintain and service existing infrastructure
into the future. PageNet believes that it will be able to continue to purchase
messaging devices from multiple sources.
PageNet's technical functions include testing of new messaging devices and
transmission equipment, designing wireless transmission systems and installing
and maintaining transmitters to support PageNet's transmission system. Because
of the compatibility among different transmitters, computers, and other
messaging equipment, PageNet can design its systems without being dependent upon
any single supplier.
As of September 30, 1999, PageNet owned messaging devices having a net book
value of approximately $198 million.
INTERNATIONAL OPERATIONS
PageNet provides services in Canada similar to those offered in the United
States through its wholly owned subsidiary, Paging Network of Canada Inc., and
with its Canadian partner, Madison Venture Corp. PageNet has sales operations in
Montreal, Ottawa, Quebec City, Toronto, and Vancouver. PageNet services a
geographic area containing more than 75% of the population of Canada.
PageNet holds a minority interest in a wireless messaging company in
Brazil. PageNet, through its subsidiaries, also owns frequency licenses in the
United Kingdom, Argentina, and Chile. PageNet recorded a provision for the
impairment of the net assets of its Spanish subsidiary during the first quarter
of 1999. PageNet is not actively considering opportunities for international
expansion at this time.
COMPETITION
PageNet has numerous competitors in all of the locations in which it
operates. Competition in most geographic markets is based primarily on price,
type and quality of service offered and geographic coverage. In addition to
other wireless messaging companies, PageNet experiences significant competition
from companies which provide real-time wireless voice communications and, more
recently, also offer basic and advanced messaging services and internet access.
Many of these competitors possess financial, technical and other resources
greater than those of PageNet. PageNet's competitors currently include wireless
messaging carriers such as AirTouch Paging/Vodafone, Arch, Bell Atlantic, Bell
South Wireless Data, MCI/WorldCom/Skytel Communications, Inc., Metrocall, Inc.,
Nextel, RSR, Sprint PCS, and WebLink Wireless, Inc. (formerly known as PageMart
Wireless).
Future technological advances in the industry could create new services or
products which could be competitive with the services provided by PageNet.
PageNet continuously evaluates new technologies and applications in wireless
services. However, PageNet cannot guarantee that it will not be adversely
affected by technological changes in the marketplace.
TRADEMARKS
PageNet markets its services under various names and marks, including
PageNet(R), PageMail(R), PageMate(R), PageNet Nationwide(R), SurePage(R),
FaxNow(R), and MessageNow(R), all of which are federally registered service
marks. PageNet's federal mark registrations must be renewed at various times
between 1999
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<PAGE> 191
and 2005. PageNet has filed applications with the United States patent and
trademark office to register additional names and marks.
CORPORATE ORGANIZATION
Historically, PageNet's subsidiaries operated as independent business units
making their own staffing, administrative, operational and marketing decisions
within guidelines established by the executive officers of PageNet. Effective
December 31, 1998, PageNet merged a substantial number of its operating
subsidiaries into PageNet, Inc., a first tier subsidiary of Paging Network, Inc.
PageNet now has eight wholly-owned domestic subsidiaries. PageNet conducts its
international operations through eleven wholly and partially owned subsidiaries.
SEASONALITY
Generally, PageNet's results of operations are not significantly affected
by seasonal factors. However, the number of holidays and adverse winter weather
in the fourth and first quarters of the year result in fewer selling days. As a
result, the growth rate of units placed in service has been somewhat lower
during these periods.
EMPLOYEES
PageNet had approximately 4,400 employees as of September 30, 1999. Of
these, approximately 1,800 were engaged in administrative, customer service, and
technical capacities at PageNet's headquarters and its centers of excellence.
Approximately 2,600, including approximately 1,600 sales personnel, were
employed in PageNet's domestic and international offices. In addition to its
4,400 employees, PageNet had approximately 1,700 temporary workers in various
customer service and administrative roles as of September 30, 1999. As PageNet
restructures its operations, redundant administrative and support positions
currently held by fulltime employees are being eliminated and the number of
temporary workers is being reduced. PageNet eliminated approximately 800
permanent and temporary positions during 1999. None of PageNet's employees is
represented by a labor union, and PageNet believes employee relations are good.
PROPERTIES
As of December 1, 1999, PageNet leased office space in 110 cities in 35
states in the United States and the District of Columbia, and in seven cities in
four provinces in Canada. These leases expire, subject to renewal options, on
various dates through December 31, 2007. As of December 31, 1999, PageNet is
paying annualized rent of approximately $25 million. This amount includes
amounts paid under leases that are to be closed as part of PageNet's
restructuring, but excludes any potential income from subleasing these
facilities. PageNet has announced its intention to suspend further consolidation
during 2000 pending a determination as to the infrastructure to be used by the
combined company following the merger. There are 15 leases which will be
expiring before the second quarter of 2000, and PageNet will request extensions
of these leases until December 31, 2000 if possible.
PageNet also leases sites for its transmitters on commercial broadcast
towers, buildings, and other structures. As of December 1, 1999, PageNet leased
transmitter sites for approximately 10,000 -- 12,000 transmitters. A few local
municipalities have imposed moratoria on the designation of new transmitter
locations and/or the addition of new towers. Should these moratoria, or others,
continue for an extended period of time, it could affect PageNet's and other
wireless carriers' ability to offer coverage in those areas.
In July 1996, PageNet purchased 44 acres of undeveloped land at the Legacy
Office Park in Plano, Texas for a new corporate headquarters. During 1998,
PageNet decided to lease, rather than build, a new corporate headquarters and
subsequently entered into an agreement in December 1998 with Electronic Data
Systems Corporation, the owner and developer of the Legacy Office Park, for the
marketing and resale of the property. Beginning in June 1998, PageNet leased
office space for its corporate headquarters in Dallas, Texas under a five-year
lease term.
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LEGAL PROCEEDINGS
PageNet is involved in various lawsuits arising in the normal course of
business. In management's opinion, the ultimate outcome of these lawsuits will
not have a material adverse effect on PageNet's business, financial position, or
results of operations.
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PAGENET'S MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of PageNet's
directors and executive officers as of December 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard C. Alberding................. 68 Director
Lynn A. Bace......................... 46 Executive Vice President and Chief Administrative
Officer
Hermann Buerger...................... 55 Director
Julian B. Castelli................... 31 Senior Vice President and Chief Financial Officer and
Acting Chief Financial Officer of Vast
Jeffrey M. Cunningham................ 46 Director
J. Barry Duncan...................... 42 Vice President and Controller
Gary J. Fernandes.................... 55 Director
John P. Frazee, Jr. ................. 55 Chairman of the Board of Directors and Chief Executive
Officer
Scott D. Grimes...................... 37 Senior Vice President of Vast -- Business Development
Mark A. Knickrehm.................... 37 President and Chief Operating Officer of Vast
John S. Llewellyn.................... 64 Director
Robert J. Miller..................... 54 Director
Lee M. Mitchell...................... 55 Director
Edward W. Mullinix, Jr. ............. 46 President and Chief Operating Officer
Timothy J. Paine..................... 45 Senior Vice President -- Customer Service
Douglas R. Ritter.................... 41 Senior Vice President -- Sales
William G. Scott..................... 43 Senior Vice President and Chief Technology Officer of
Vast
G. Robert Thompson................... 37 Senior Vice President -- Operations Staff
Ruth Williams........................ 43 Senior Vice President, General Counsel and Assistant
Secretary
</TABLE>
RICHARD C. ALBERDING has been a director of PageNet since 1994. From 1958
through 1991, Mr. Alberding held various management positions with
Hewlett-Packard Co., including Executive Vice President. Mr. Alberding also
serves as a director of Digital Microwave Corporation, Quickturn Design Systems,
Inc., Kennametal, Inc., Digital Link Corp., Sybase, Inc., Walker Interactive
Systems, Inc. and JLK Direct, Inc.
LYNN A. BACE has served as Executive Vice President and Chief
Administrative Officer of PageNet since June 1999. She served as Executive Vice
President -- Sales and Marketing from December 1998 through June 1999, and as
Senior Vice President -- Marketing from August 1998 to December 1998. Prior to
that, Ms. Bace was employed in several executive positions with Kraft Foods,
Inc. from September 1993 to April 1997, most recently as Executive Vice
President and General Manager for a division of Kraft.
HERMANN BUERGER has been a director of PageNet since 1998. Mr. Buerger has
held the position of Executive Vice President and General Manager of North
American Operations for Commerzbank AG since 1989. Mr. Buerger also serves as a
director of Security Capital Group, Inc. and United Dominion Industries.
JULIAN B. CASTELLI has served as Senior Vice President and Chief Financial
Officer since June 1999. He also serves as Acting Chief Financial Officer of
Vast, a position he has held since December 1999. Mr. Castelli served as Vice
President and Treasurer for PageNet from July 1998 to June 1999. Prior to
joining PageNet, Mr. Castelli was employed by McKinsey & Company, an
international consulting firm, from August 1995 to July 1998, serving as
Engagement Manager from June 1997. Mr. Castelli served in the Corporate Finance
Department of Goldman, Sachs & Co. as an analyst from 1990 to 1993.
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JEFFREY M. CUNNINGHAM has been a director of PageNet since 1998. Mr.
Cunningham has served as the President of Planet Direct, an internet media
company and majority owned subsidiary of CMGI, Inc., since December 1998.
Previously, Mr. Cunningham served as President and Chief Executive Officer of
Knowledge Universe, an internet media company, from July 1998 through December
1998. From June 1993 through July 1998, Mr. Cunningham was the Group Publisher
for Forbes, Inc. Mr. Cunningham also serves as a director of Countrywide Credit,
Inc., Data General Corp. and Schindler Holdings.
J. BARRY DUNCAN has served as Vice President and Controller for PageNet
since October 1998 and as Corporate Controller from May 1995 to October 1996.
Mr. Duncan served as Vice President of Finance for the Southwest Region of
Unisource Worldwide, Inc. from October 1996 to October 1998, and as Corporate
Controller for Dal-Tile International from February 1994 to May 1995.
GARY FERNANDES has been a director of PageNet since 1999. Mr. Fernandes has
held the position of managing partner of Convergent Partners LLC, a private
equity capital investment firm since January 1999. Mr. Fernandes previously held
the position of Vice Chairman as well as other senior management positions with
Electronic Data Systems Corporation from 1969 through 1999. Mr. Fernandes also
serves as a director of 7-Eleven Inc. and John Wiley & Sons, Inc.
JOHN P. FRAZEE, JR. has been a director of PageNet since 1995 and has
served as Chairman of the Board of Directors and Chief Executive Officer since
June 1999. From August 1997 through June 1999, Mr. Frazee served as Chairman of
the Board, President and Chief Executive Officer of PageNet. Mr. Frazee was a
private investor from August 1993 to August 1997. Mr. Frazee also serves as a
director of Security Capital Group, Inc., Dean Foods Company and Homestead
Village Incorporated.
SCOTT D. GRIMES has served as Senior Vice President -- Business Development
for Vast since December 1999 and served in a similar capacity for the wireless
solutions operations of PageNet from June 1999 through December 1999. Prior to
that time he served as Senior Vice-President -- Advanced Wireless Integration
Group for PageNet from January 1999 to June 1999, and as Senior Vice
President -- Sales Development and Operations for PageNet from April 1998 to
January 1999. From 1991 to April 1998, Mr. Grimes was employed by McKinsey &
Company, an international consulting firm, where he served as a Partner
beginning in 1996.
MARK A. KNICKREHM has served as President and Chief Operating Officer of
Vast since December 1999 and has been responsible for the wireless solutions
operations of PageNet since June 1999. He served as Executive Vice President and
Chief Financial Officer for PageNet from February 1998 through June 1999. Mr.
Knickrehm was employed by McKinsey & Company, an international consulting firm,
from 1989 to February 1998, where he served as a Partner beginning in 1995.
JOHN S. LLEWELLYN, JR. has been a director of PageNet since 1997. From 1982
to his retirement in 1997, Mr. Llewellyn held various management positions with
Ocean Spray Cranberries, Inc., including Chief Executive Officer. Mr. Llewellyn
also serves as a director of Dean Foods Company.
ROBERT J. MILLER has been a director of PageNet since 1999. From 1989 to
January 1999, Mr. Miller served as the governor of Nevada. Upon his retirement,
Mr. Miller became a partner in the law firm of Jones Vargas in Las Vegas,
Nevada. Mr. Miller also serves as a director of Newmont Mining Corporation and
Zenith National Insurance Corp.
LEE M. MITCHELL has been a director of PageNet since 1991. Mr. Mitchell is
a partner in Thoma Cressey Equity Partners, successor to Golder, Thoma, Cressey,
Rauner, Inc., an investment firm for which Mr. Mitchell has been a principal
since 1994. Mr. Mitchell also serves as a director of the Chicago Stock
Exchange.
EDWARD W. MULLINIX, JR. has served as President and Chief Operating Officer
of PageNet since June 1999. He served as Executive Vice President -- Operations
for PageNet from February 1998 through June 1999, and as Senior Vice
President -- Strategic Planning from November 1997 to February 1998. From
September 1995 to October 1997, Mr. Mullinix served as Senior Vice President of
Finance and Administration and Chief Financial Officer of The Haskell Company.
He was Vice President -- Finance for LCI, Ltd. From August 1994 to April 1995.
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<PAGE> 195
TIMOTHY J. PAINE has served as Senior Vice President -- Customer Service
for PageNet since March 1998. Prior to joining PageNet, Mr. Paine served in
various positions for American Express Travel Related Services, Inc. from 1982
to March 1998, most recently as Vice President of Credit and Operations for the
new accounts branch of American Express Centurion Bank.
DOUGLAS R. RITTER has served as Senior Vice President -- Sales for PageNet
since January 1999. Mr. Ritter served as Senior Vice President -- Corporate
Development for PageNet from February 1998 to January 1999 and as Vice
President -- Corporate Development for PageNet from December 1997 to February
1998. Mr. Ritter served as Vice President -- Business Planning for PageNet from
January 1996 to December 1997 and as Vice President -- New Business Development
for PageNet from July 1993 to January 1996.
WILLIAM G. SCOTT has served as Senior Vice President and Chief Technology
Officer of Vast since December 1999 and served in a similar capacity for the
wireless solutions operations of PageNet from June 1999 through December 1999.
He served as Senior Vice President -- Systems and Technology for PageNet from
February 1997 to June 1999, and as Vice President -- Systems and Technology for
PageNet from December 1995 to February 1997. Prior to joining PageNet, Mr. Scott
served as President of Lion Software, Inc. from 1993 to 1995.
G. ROBERT THOMPSON has served as Senior Vice President -- Staff Operations
since June 1999. He also served as Senior Vice President -- Process Improvement
for PageNet from November 1998 to June 1999. Mr. Thompson served as Vice
President -- Finance for PageNet from February 1995 to November 1998 and was
Corporate Controller for PageNet from 1990 to 1995.
RUTH WILLIAMS has served as Senior Vice President, General Counsel and
Assistant Secretary for PageNet since May 1997. Prior to joining PageNet, Ms.
Williams was Associate General Counsel for First Data Corporation from September
1996 to April 1997. Ms. Williams was employed by Automatic Data Processing, Inc.
from 1986 to 1996, most recently as Staff Vice President and Associate General
Counsel.
COMPENSATION OF DIRECTORS
Directors that are also full-time officers of PageNet do not receive any
additional compensation for serving on the board or its committees. Directors
who are not full-time officers receive an annual retainer of $20,000, plus
$1,500 for each meeting they attend in person, $1,000 for each teleconference
meeting in which they participate, and reimbursement for traveling costs and
other out-of-pocket expenses incurred. Directors who serve on one or more
committees receive $5,000 per year for their service. Directors who serve as a
chairman of one or more of these committees receive an additional $5,000 per
year.
In addition, pursuant to PageNet's 1992 director compensation plan, each
non-employee director is granted an option to purchase 45,000 shares of PageNet
common stock. The exercise price is the fair market value on the date of grant.
The options vest in five equal annual installments so long as the person remains
a director of PageNet. In addition to these initial grants, subsequent grants to
purchase an additional 45,000 shares are made to each director on the date that
the options granted to such director under the 1992 director compensation plan
become fully exercisable. The exercise price for these options is also the fair
market value on the date of the grant. These options vest in five equal annual
installments so long as the person remains a director of PageNet.
The 1992 director compensation plan also allows a director to waive his or
her right to the cash retainer and meeting fees and in lieu thereof:
- receive the number of shares of PageNet common stock equal to the dollar
amount of the annual retainer, meeting and other fees due for such year;
- defer receipt of all compensation until a designated future date, and
invest such compensation in an interest-bearing account; or
- defer receipt of all compensation until a designated future date, and
invest such compensation in a phantom stock account whose value will
increase and decrease with the value of PageNet's stock.
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<PAGE> 196
In 1998, each director waived his rights to cash payments and elected to receive
deferred shares of PageNet common stock. Messrs. Alberding, Buerger, Fernandes,
Llewellyn, and Mitchell elected to defer their compensation to phantom stock
units in 1999. Messrs. Cunningham and Miller elected to receive their 1999
compensation in cash.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation paid by PageNet for services rendered in all capacities
for the years ended December 31, 1998, 1997 and 1996 of (i) PageNet's chief
executive officer, (ii) those persons who were, at December 31, 1998, the other
four most highly compensated executive officers of PageNet, and (iii) Lynn A.
Bace, executive vice president and chief administrative officer. Positions
indicated are as of December 1, 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- ------------------------
SECURITIES
RESTRICTED UNDERLYING ALL
STOCK OPTIONS OTHER
YEAR SALARY BONUS OTHER AWARDS($) (SHARES) COMPENSATION(1)
---- -------- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
John P. Frazee, Jr. ............ 1998 $671,875 $430,000 $115,246(2) -- $ 100,000 $ 2,333
Chairman and 1997 279,571(3) 150,000 50,938(4) 100,000(5) 600,000 20,000(6)
Chief Executive Officer 1996 -- -- -- -- -- 16,250(6)
Mark A. Knickrehm(7)............ 1998 266,036 230,000(8) -- -- 300,000 --
Executive Vice President &
Chief
Operating Officer of Vast
Edward W. Mullinix, Jr.(9)...... 1998 247,916 120,000 43,158(10) -- 50,000 3,750
President and Chief Operating 1997 45,337 60,000 -- 250,000
Officer
William G. Scott................ 1998 224,583 72,000 -- -- 20,000 5,000
Senior Vice President and
Chief 1997 215,000 80,000 -- 55,313(11) 113,464 4,750
Technology Officer of Vast 1996 172,982 75,000 8,942(12) -- -- --
Ruth Williams................... 1998 220,000 74,800 -- -- 20,000 --
Senior Vice President & 1997 143,333(13) 58,000 115,250(12) -- 125,000 3,123
General Counsel
Lynn A. Bace(14)................ 1998 93,750 51,000 -- -- 250,000 --
Executive Vice President
and Chief Administrative
Officer
</TABLE>
- ---------------
(1) Represents matching contributions to PageNet's 401(k) Plan, except where
noted.
(2) Includes housing allowance of $66,158.
(3) Annual compensation for 1997 represents compensation for the period from
August 4, 1997, when Mr. Frazee became chairman, president & chief
executive officer of PageNet, through December 31, 1997.
(4) Includes payment of $23,214 to defray expenses associated with relocation
to the Dallas, Texas area.
(5) Represents the fair market value on the date of grant of 11,510 shares of
PageNet common stock awarded to Mr. Frazee on August 4, 1997.
(6) Represents compensation for services rendered as a non-employee director of
PageNet.
(7) Annual compensation for 1998 represents compensation for the period from
February 4, 1998, when Mr. Knickrehm became employed with PageNet as its
executive vice president and chief financial officer through December 31,
1998.
(8) Includes a $100,000 employment bonus and $130,000 paid as an annual bonus
for performance in 1998.
(9) Mr. Mullinix joined PageNet on November 3, 1997 as senior vice president of
strategic planning, and was promoted to executive vice
president -- operations of PageNet on February 4, 1998.
(10) Includes payment of $41,589 made to Mr. Mullinix to defray expenses
associated with relocation to the Dallas, Texas area.
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(11) Represents the fair market value on the date of grant of 5,000 shares of
PageNet common stock awarded to Mr. Scott on February 2, 1997, vesting at
the rate of 20% per year beginning on February 2, 1998 through 2002,
contingent upon meeting certain performance goals.
(12) Represents payments made to defray expenses associated with relocation to
the Dallas, Texas area.
(13) Annual compensation for 1997 represents compensation for the period from
May 1, 1997, when Ms. Williams became senior vice president and general
counsel of PageNet, through December 31, 1997.
(14) Annual compensation for 1998 represents compensation for the period from
August 19, 1998, when Ms. Bace became senior vice president of marketing
through December 31, 1998. On December 16, 1998, Ms. Bace was elected to
the position of executive vice president -- sales and marketing.
OPTION GRANTS IN 1998
The following table sets forth information on grants of options to purchase
PageNet common stock during the year ended December 31, 1998, to (i) PageNet's
chief executive officer, (ii) those persons who were, at December 31, 1998, the
other four most highly compensated executive officers of PageNet, and (iii) Lynn
A. Bace, executive vice president and chief administrative officer of PageNet.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO PRESENT VALUE
OPTIONS EMPLOYEES ON DATE
NAME GRANTED (1) IN 1998 EXERCISE PRICE EXPIRATION DATE OF GRANT(2)
- ---- ----------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
John P. Frazee, Jr. ......... 100,000 2.0% $12.9375 01/29/08 $ 730,000
Mark A. Knickrehm............ 300,000 5.9% 12.9375 02/04/08 2,192,100
Edward W. Mullinix, Jr. ..... 50,000 1.0% 12.9375 01/29/08 365,000
William G. Scott............. 20,000 * 12.9375 01/29/08 146,000
Ruth Williams................ 20,000 * 12.9375 01/29/08 146,000
Lynn A. Bace................. 250,000 4.9% 9.5625 08/19/08 1,372,000
</TABLE>
- ---------------
* Less than 1%
(1) All options are exercisable only so long as employment continues or within
limited periods following termination of employment. All options have a term
of 10 years. All options vest in five equal annual installments beginning on
the date of the grant, except that all of such options would vest at the
closing of the merger by virtue of a change in control of the ownership of
PageNet.
(2) The determination of the present value of PageNet common stock on the date
of the grant is based on the Black-Scholes pricing model. Estimated values
under the Black-Scholes model are based on standard assumptions as to
variables in the model such as stock price volatility, projected future
dividend yield and interest rates. In addition, the estimated value is
discounted for potential forfeiture due to vesting schedules. The discount
rate is consistent with PageNet's employment turnover experience over time.
The estimated Black-Scholes values above are based on a range of values for
the key variable. The range reflects different values in effect on the grant
date of the option: volatility -- ranged from .559 to .583; dividend
yield -- 0%; turnover -- 8% per year; risk-free interest rate -- yield to
maturity of 10-year treasury note at grant date (rates ranged from 5.41% to
5.56%). The actual value, if any, that an executive may realize will depend
on the excess of the stock price over the exercise price on the date the
option is exercised. There is no assurance that the value realized by an
executive will be at or near the value estimated using a Black-Scholes
model. Currently, all such stock options have no value because the trading
price of PageNet shares is below the option exercise prices.
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AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
The following table sets forth information related to the unexercised
options to purchase PageNet common stock that were granted during the year ended
December 31, 1998, and prior years under PageNet's 1991 stock option plan to the
named officers and held by them at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD IN-THE-MONEY OPTIONS HELD
SHARES AT DECEMBER 31, 1998 AT DECEMBER 31, 1998(1)
ACQUIRED ON --------------------------- ----------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John P. Frazee, Jr.......... 0 0 476,000 269,000 0 0
Mark A. Knickrehm........... 0 0 120,000 180,000 0 0
Edward W. Mullinix, Jr...... 0 0 120,000 180,000 0 0
William G. Scott............ 0 0 71,642 61,822 0 0
Ruth Williams............... 0 0 58,000 87,000 0 0
Lynn A. Bace................ 0 0 50,000 200,000 0 0
</TABLE>
- ---------------
(1) Based on the difference between the exercise price of each option and $4.68
the last reported sales price of PageNet common stock on the last trading
date in 1998.
CONTRACTS RELATED TO EMPLOYMENT
PageNet and Mr. Frazee entered into an employment agreement on August 4,
1997. This agreement provides that Mr. Frazee is to be employed until July 31,
1998. The agreement is automatically extended for one-year periods unless either
PageNet or Mr. Frazee notifies the other party of termination not less than 90
days prior to the beginning of any one-year renewal period. Mr. Frazee's base
salary is $675,000 and he has a target bonus of $350,000 if PageNet achieves the
objectives established by the board of directors. The employment agreement also
provides that at least 40% of the bonus is to be paid in shares of PageNet
common stock. The board of directors gave Mr. Frazee his 1997 and 1998 bonuses
in cash, with the understanding that he would use 40% or more of the bonus to
purchase Page Net common stock in the public market. In 1997, Mr. Frazee
purchased shares in excess of this requirement. Upon signing the employment
agreement, Mr. Frazee was granted options to purchase 600,000 shares of common
stock, all of which have vested. Mr. Frazee also was awarded 11,510 shares of
PageNet common stock under PageNet's 1997 restricted stock plan. In addition,
PageNet provides Mr. Frazee with transportation to and from his residence in
Florida.
CHANGE OF CONTROL SEVERANCE PLAN
On January 20, 1999, the board of directors approved a severance plan which
would provide benefits to substantially all of PageNet's employees in the event
of a "change of control" of PageNet. "Change of control" is defined as any
merger, sale or other transaction which results in 35% or more of PageNet common
stock being held by an outsider, or any change in the composition of a majority
of the board of directors. This definition is consistent with the change of
control provisions that trigger accelerated vesting under PageNet's 1991
employee stock option plan. The severance plan provides for severance amounts
ranging from 50% to 200% of an employee's annual salary and bonus compensation.
The amount an employee will receive depends upon the employee's position at
PageNet. Payments are made in one lump sum payment if an employee suffers an
involuntary or deemed termination within 12 months after the change of control.
In contemplation of the merger, PageNet's board of directors approved an
increase in the severance percentages applicable to John P. Frazee, Mark A.
Knickrehm, Edward W. Mullinix, Jr., Lynn A. Bace and up to one other officer
from 200% to 300% of their annual salary and bonus compensation, in December of
1999.
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PAGENET'S PRINCIPAL STOCKHOLDERS
The following table sets forth information on the beneficial ownership of
PageNet's common stock as of December 1, 1999 by:
- each person who is known by PageNet to beneficially own more than 5% of
its outstanding shares of common stock;
- each current director of PageNet;
- PageNet's chief executive officer and the other named executive officers
of PageNet; and
- all of PageNet's current executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND
NATURE OF BENEFICIAL PERCENT OF
NAME OWNERSHIP(1) COMMON STOCK(2)
- ---- -------------------- ---------------
<S> <C> <C>
Wellington Management Company, LLP....................... 5,770,500(3) 5.6%
75 State Street, Boston, MA 02109
Richard C. Alberding..................................... 47,307(4) *
Hermann Buerger.......................................... 41,810(5) *
Jeffrey M. Cunningham.................................... 18,000(6) *
Gary J. Fernandes........................................ 9,000(7) *
John P. Frazee, Jr....................................... 1,006,060(8) *
Mark A. Knickrehm........................................ 166,000(9) *
John S. Llewellyn, Jr.................................... 27,437(10) *
Robert J. Miller......................................... 9,000(11) *
Lee M. Mitchell.......................................... 71,621(12) *
Edward W. Mullinix, Jr................................... 227,000(13) *
William G. Scott......................................... 93,547(14) *
Ruth Williams............................................ 77,000(15) *
All executive officers and directors as a group (19
persons)............................................... 2,332,202(16) 2.24%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, each person has sole voting and investment
power over the shares listed. These numbers include options vested and
exercisable as of December 1, 1999 or within 60 days after such date.
(2) The total number of shares of PageNet common stock outstanding as of
December 1, 1999 is 103,960,240.
(3) Information has been obtained from the Form 13F filed by Wellington
Management Company, LLP as of November 15, 1999. Wellington has sole
investment discretion and sole voting power with respect to 4,250,500 and
2,260,500 shares, respectively. Wellington has shared investment discretion
and shared voting power with Wellington Trust Company, NA with respect to
1,520,000 shares. Wellington has no authority to vote 1,990,000 shares.
(4) Includes 45,000 shares subject to options that are vested and exercisable
within 60 days.
(5) Includes 18,000 shares subject to options that are vested and exercisable
within 60 days.
(6) Includes 18,000 shares subject to options that are vested and exercisable
within 60 days.
(7) Includes 9,000 shares subject to options that are vested and exercisable
within 60 days.
(8) Includes 882,900 shares subject to options that are vested and exercisable
within 60 days.
(9) Includes 166,000 shares subject to options that are vested and exercisable
within 60 days.
(10) Includes 27,000 shares subject to options that are vested and exercisable
within 60 days.
(11) Includes 9,000 shares subject to options that are vested and exercisable
within 60 days.
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(12) Includes 63,000 shares subject to options that are vested and exercisable
within 60 days.
(13) Includes 226,000 shares subject to options that are vested and exercisable
within 60 days.
(14) Includes 85,643 shares subject to options that are vested and exercisable
within 60 days.
(15) Includes 77,000 shares subject to options that are vested and exercisable
within 60 days.
(16) Includes 2,154,453 shares subject to options that are vested and
exercisable within 60 days.
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THE COMBINED COMPANY
BUSINESS
The combined company to be formed by the merger of Arch and PageNet will be
one of the leading wireless communications companies in the United States. On a
pro forma basis at September 30, 1999, the combined company would have had
approximately 16.1 million units in service, total assets of $3.0 billion and
total debt, less current maturities, of $1.8 billion, assuming that all of the
outstanding discount notes are exchanged for common stock. For the year ended
December 31, 1998 and the nine months ended September 30, 1999, the combined
company would have had pro forma total revenues of $1.9 billion and $1.4
billion, respectively, adjusted pro forma EBITDA of $599.0 million and $403.5
million, respectively, and net loss before extraordinary item and cumulative
effect of accounting change of $251.6 million and $285.5 million, respectively.
This excludes the impact of expected operational cost synergies. For the nine
month period ended September 30, 1999, the combined company's pro forma cash
flows provided by operating activities, used in investing activities and
provided by financing activities would have been $332.6 million, $805.5 million
and $698.9 million, respectively. The adjusted pro forma cash flow information
assumes that the merger and related transactions had been effected as of January
1, 1998. Leverage for the combined company on a pro forma basis, as measured by
the ratio of total debt to annualized adjusted pro forma EBITDA for the nine
months ended September 30, 1999, would have been 3.3 to 1.0. This also excludes
the impact of expected operational cost synergies. Adjusted pro forma EBITDA is
EBITDA, net of restructuring charges and bankruptcy related expenses, equity in
loss of affiliates, income tax benefit, interest and non-operating expenses
(net), extraordinary items and amortization of deferred gain on tower sale. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements."
PageNet and Arch believe that the combined company will be well positioned
to compete effectively in the highly competitive wireless communications
industry for the following reasons. The combination of PageNet's broad range of
wireless products and new advanced wireless network with Arch's extensive
national accounts and strong sales and marketing infrastructure should
significantly benefit both companies' operations and should position the
combined company to compete more effectively. Among other significant benefits,
the merger should give customers of the combined company greater access to an
expanded range of wireless products and services, along with greater ubiquity of
coverage and reliability with the consolidation of the two companies' networks.
Expanded service offerings will include Internet-based wireless information, as
well as such advanced services as guaranteed messaging over PageNet's advanced
wireless network. The market now includes a broader set of wireless competitors
such as broadband PCS and other wireless technologies. Arch and PageNet believe
that the combination of their strong distribution vehicles will provide a base
upon which to more effectively compete and to expand the combined company's
business beyond the historical focus on paging.
STRATEGY
Arch expects the combined company to execute the following strategy:
The combined company will offer expanded products and services. The
combined company plans to immediately offer a broader spectrum of products and
services to a larger number of customers than either Arch or PageNet currently
offers by itself. Furthermore, the combination of PageNet's existing N-PCS
network, together with Arch's customer base, marketing abilities and innovative
customer service and support platform should facilitate the development,
commercialization and introduction of advanced communications products and
services that management believes Arch must provide in order to compete
effectively in the fast-paced, constantly changing wireless communications
industry.
Arch intends to combine its expertise in direct marketing and retail
distribution with the technologically-advanced network over which PageNet plans
to offer an expanding array of advanced messaging services. Not only does
PageNet hold N-PCS licenses, it has invested heavily in infrastructure and
software development to develop new services to offer. The combined company will
apply Arch's marketing skill to PageNet's advanced service capabilities to
expand the number of customers using these advanced services. Arch and PageNet
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believe that the size of their combined customer base will create greater
incentives for equipment manufacturers to engage in research and development and
the deployment of new equipment for its subscribers.
The combination will create significant economic efficiencies. The
combined company will also work to identify redundant managerial and
administrative functions to eliminate without material impact on customer
service. In addition, the combined company should be able to reduce its costs by
gradually improving the operating processes of the combined company and by
taking advantage of opportunities to obtain efficiency gains.
The merger will result in a financially stronger company. The combined
company will be financially stronger than Arch or PageNet individually. As part
of the merger, as much as $1.584 billion of Arch and PageNet debt (assuming 100%
of the Arch discount notes and PageNet senior subordinated notes are exchanged)
will be converted into Arch common stock. As a result, the combined company will
have a significantly lower overall leverage ratio. The combined company projects
$1.6 billion in annualized revenue and annualized EBITDA of $536.4 million. The
combined company's leverage ratio would be reduced to less than 3.5 times
EBITDA. This reduction in leverage should assist the combined company in making
the capital investments necessary to execute its strategy.
MANAGEMENT
The combined company's board of directors will consist of six designees of
the current Arch board, three designees of the PageNet board and up to three
designees of PageNet's three largest noteholders. If any of such noteholders do
not designate directors for themselves, Arch's current board will designate
additional directors instead, so that there may be up to nine Arch nominees.
The board is expected to consist of the following persons:
<TABLE>
<CAPTION>
NAME TERM EXPIRES NOMINATED BY
---- ------------ ------------
<S> <C> <C> <C>
Arch
Arch
Arch For biographical information,
Arch see "Arch's Management"
Arch
Arch
PageNet
PageNet For biographical information,
PageNet see "PageNet's Management"
</TABLE>
None of PageNet's three largest noteholders has informed Arch or PageNet
who it intends to nominate.
Mr. Frazee will become chairman of the board of the combined company, Mr.
Baker will continue to serve as chief executive officer and Arch's other
executive officers will retain their current positions.
UNAUDITED FINANCIAL PROJECTIONS AND OPERATIONAL COST SYNERGIES
Arch and PageNet have developed the unaudited combined company projections
contained in Annex E. The projections consist of projected operating and
financial results for the six months ending December 31, 2000 and the year
ending December 31, 2001. The projections assume that the merger and related
transactions will take place as of June 30, 2000. The projections have been
prepared for filing with the bankruptcy court if PageNet commences a bankruptcy
case.
THE COMBINED COMPANY PROJECTIONS WERE NOT PREPARED TO COMPLY WITH THE
GUIDELINES FOR PROSPECTIVE FINANCIAL STATEMENTS PUBLISHED BY THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. NEITHER THE INDEPENDENT ACCOUNTANTS
FOR ARCH NOR THE INDEPENDENT AUDITORS FOR PAGENET HAVE EXAMINED OR COMPILED THE
ACCOMPANYING PROJECTIONS AND ACCORDINGLY DO NOT EXPRESS AN OPINION OR ANY OTHER
FORM OF ASSURANCE WITH
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RESPECT TO THE PROJECTIONS, ASSUME NO RESPONSIBILITY FOR THE PROJECTIONS AND
DISCLAIM ANY ASSOCIATION WITH THE PROJECTIONS.
ARCH AND PAGENET DO NOT PUBLISH PROJECTIONS OF THEIR RESPECTIVE ANTICIPATED
FINANCIAL POSITION OR RESULTS OF OPERATIONS. ACCORDINGLY, ARCH AND PAGENET DO
NOT INTEND, AND DISCLAIM ANY OBLIGATION TO:
- FURNISH UPDATED COMBINED COMPANY PROJECTIONS,
- INCLUDE SUCH UPDATED INFORMATION IN ANY DOCUMENTS WHICH MAY BE REQUIRED
TO BE FILED WITH THE SEC, OR
- OTHERWISE MAKE SUCH UPDATED INFORMATION PUBLICLY AVAILABLE.
THE PROJECTIONS, ALTHOUGH PRESENTED WITH NUMERICAL SPECIFICITY, ARE BASED
UPON A SERIES OF ESTIMATES AND ASSUMPTIONS WHICH, ALTHOUGH CONSIDERED REASONABLE
BY ARCH AND PAGENET, MAY NOT BE REALIZED, AND ARE INHERENTLY SUBJECT TO
SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES,
MANY OF WHICH ARE BEYOND THE CONTROL OF ARCH AND PAGENET. NO REPRESENTATIONS CAN
BE OR ARE MADE AS TO WHETHER ACTUAL RESULTS WILL MEET THE RESULTS SET FORTH IN
THE COMBINED COMPANY PROJECTIONS. SOME ASSUMPTIONS INEVITABLY WILL NOT
MATERIALIZE, AND EVENTS AND CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE DATE ON
WHICH THE PROJECTIONS WERE PREPARED MAY BE DIFFERENT FROM THOSE ASSUMED OR MAY
BE UNANTICIPATED AND, ACCORDINGLY, MAY AFFECT FINANCIAL RESULTS IN A MATERIAL
AND POSSIBLY ADVERSE MANNER. THE PROJECTIONS, THEREFORE, MAY NOT BE RELIED UPON
AS A GUARANTEE OR OTHER ASSURANCE OF THE ACTUAL RESULTS THAT WILL OCCUR. SEE
"FORWARD-LOOKING STATEMENTS."
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DESCRIPTION OF PAGENET'S COMMON STOCK
PageNet's authorized capital stock consists of 250,000,000 shares of common
stock and 25,000,000 shares of preferred stock. Each share, held by 735
stockholders of record, has a par value of $.01. On December 1, 1999, there were
103,960,240 shares of common stock outstanding and no shares of preferred stock
issued and outstanding.
The following summary of certain provisions of PageNet common stock and
preferred stock is not intended to be complete and is qualified by reference to
the provisions of applicable law and to PageNet's certificate of incorporation
and by-laws. See "Where You Can Find More Information."
COMMON STOCK
Holders of common stock are entitled to one vote per share. They are
entitled to receive dividends when and if declared by PageNet's board of
directors and to share, on the basis of their shareholdings, in the assets of
PageNet that are available for distribution to its stockholders in the event of
liquidation. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. All outstanding shares of common stock are
fully paid and nonassessable. Holders of common stock do not have cumulative
voting rights.
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DESCRIPTION OF ARCH'S EQUITY SECURITIES
Arch's authorized capital stock consists of 65,000,000 shares of common
stock, 10,000,000 shares of Class B common stock and 10,000,000 shares of
preferred stock, consisting of 300,000 shares of Series B preferred stock,
250,000 shares of Series C preferred stock and 9,450,000 additional shares of
preferred stock. Each share has a par value of $.01. On December 20, 1999, there
were 47,229,297 outstanding shares of common stock held by approximately
stockholders of record, 3,968,150 outstanding shares of Class B common stock
held by three stockholders of record and 250,000 outstanding shares of Series C
preferred stock held by nine stockholders of record.
The following summary of certain provisions of Arch common stock, Class B
common stock, preferred stock, Series C preferred stock, warrants and Arch's
certificate of incorporation and by-laws is not intended to be complete and is
qualified by reference to the provisions of applicable law and to the
certificate of incorporation and by-laws. To learn how to obtain copies of the
certificate of incorporation and by-laws, see "Where You Can Find More
Information."
COMMON STOCK
Holders of common stock are entitled to one vote per share. They are
entitled to receive dividends when and if declared by Arch's board of directors
and to share, on the basis of their shareholdings, in the assets of Arch that
are available for distribution to its stockholders in the event of liquidation.
These rights of the common stock are subject to any preferences or participating
or similar rights of any series of preferred stock that is outstanding at the
time. Holders of common stock have no preemptive, subscription, redemption or
conversion rights. All outstanding shares of common stock are fully paid and
nonassessable. Holders of common stock do not have cumulative voting rights.
CLASS B COMMON STOCK
The Class B common stock is identical to common stock, except that holders
of Class B common stock are not entitled to vote in the election of directors
and are entitled to 1/100th of a vote per share on all other matters. Class B
common stock and common stock vote together as a single class, except as
otherwise required by law.
Class B common stock was originally issued only to four stockholders, who
acted as standby purchasers in connection with Arch's acquisition of
MobileMedia. Shares of Class B common stock were issued only to the extent that
the standby purchasers and their affiliates would otherwise have owned, in the
aggregate, more than 49.0% of the outstanding shares of capital stock of Arch
generally entitled to vote in the election of directors or more than 49.0% of
the voting power of the outstanding voting shares upon consummation of the
MobileMedia acquisition, assuming the conversion of all convertible securities
and assuming the exercise of all warrants held by the standby purchasers and
their affiliates. Any shares of Class B common stock transferred by any standby
purchaser to any transferee other than another standby purchaser automatically
convert into an equal number of shares of common stock. Class B Common Stock has
been used so that the issuance of stock to the standby purchasers in connection
with the MobileMedia acquisition would not trigger the change of control
repurchase provisions contained in the indentures governing certain outstanding
indebtedness of Arch. See "Description of Other Indebtedness."
PREFERRED STOCK
Arch's board of directors is authorized, without any further action by the
stockholders of Arch, to issue preferred stock from time to time in one or more
series and to fix the voting, dividend, conversion, redemption and liquidation
rights and preferences of any such series and whatever other designations,
preferences and special rights Arch's board of directors may decide upon. Arch
does not have any present plans to issue shares of its preferred stock, other
than the shares of Series C preferred stock currently outstanding.
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SERIES C PREFERRED STOCK
The Series C preferred stock has the rights and preferences summarized
below:
Conversion. The Series C preferred stock was convertible into common stock
at an initial conversion rate of 6.06 shares of common stock for each share of
Series C preferred stock, subject to certain adjustments. These adjustments
include the issuance of common stock, or rights or options for common stock, at
a price less than the market price of common stock. The conversion of the Series
C preferred stock automatically adjusts on a quarterly basis to reflect the
accrual of dividends to the extent that dividends are not paid on a current
basis in cash or stock. Until January 1, 2000, the conversion rate will be
6.7444-to-1, so that 1,686,101 shares of common stock are issuable upon the
conversion of all shares of Series C preferred stock in the aggregate. This
aggregate number of common shares increases by approximately 32,000 shares per
quarter.
Dividends. The Series C preferred stock earns dividends at an annual rate
of 8.0% payable when declared quarterly in cash or, at Arch's option, through
the issuance of shares of common stock valued at 95% of the then prevailing
market price. If not paid quarterly, dividends accumulate and become payable
upon redemption or conversion of the Series C preferred stock or upon
liquidation of Arch.
Voting Rights. So long as at least 50% of the Series C preferred stock
remains outstanding, the holders of the Series C preferred stock have the right,
voting as a separate class, to designate one member of the boards of directors
of Arch and a principal subsidiary. The director has the right to be a member of
any committee of either board of directors. On all other matters, the Series C
preferred stock and the common stock vote together as a single class. Each share
of Series C preferred stock is entitled to as many votes as the number of shares
of common stock into which it is convertible (6.7444 prior to January 1, 2000).
Redemption. Holders of Series C preferred stock may require Arch to redeem
the Series C preferred stock in the year 2005. Arch may elect to pay the
redemption price in cash or in common stock valued at 95% of its then prevailing
market price. Series C preferred stock is subject to redemption for cash or
common stock at Arch's option in specified circumstances.
Liquidation Preference. Upon liquidation, dissolution or winding up of
Arch, before any distribution or payment is made to holders of common stock,
Arch must pay to the holders of Series C preferred stock $100.00 per share of
Series C preferred stock, subject to specified adjustments, plus any accrued and
unpaid dividends on such shares of Series C preferred stock. If the assets of
Arch are insufficient to permit full payment of such liquidation preferences to
the holders of Series C preferred stock, then the assets will be distributed pro
rata among the holders of the Series C preferred stock.
WARRANTS
In connection with the MobileMedia acquisition, Arch issued:
- warrants to acquire up to 1,225,220 shares of common stock to the standby
purchasers and
- warrants to acquire up to 14,861,424 shares of common stock to persons
who were holders of record of common stock and Series C preferred stock
on January 27, 1999.
Each warrant represents the right to purchase one-third of one share of
common stock. The warrant exercise price is $3.01 per warrant ($9.03 per share).
This exercise price was determined by negotiations between Arch and MobileMedia.
These warrants will expire on September 1, 2001.
As partial payment for the convertible subordinated debentures Arch
repurchased in October 1999, Arch issued warrants to purchase 540,487 shares of
common stock at $9.03 per share. These warrants expire on September 1, 2001.
The warrant exercise price or the number of shares purchasable upon
exercise of the warrants is subject to adjustment from time to time upon the
occurrence of stock dividends, stock splits, reclassifications, issuances of
stock or options at prices below prevailing market prices and other events
described in the warrant agreement. Arch may irrevocably reduce the warrant
exercise price for any period of at least 20 calendar days to any amount that
exceeds the par value of common stock.
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FOREIGN OWNERSHIP RESTRICTIONS
Under the Communications Act, not more than 25% of Arch's capital stock may
be owned or voted by aliens or their representatives, a foreign government or
its representative or a foreign corporation if the FCC finds that the public
interest would be served by denying such ownership. See "Industry Overview --
Regulation". Accordingly, Arch's certificate of incorporation provides that Arch
may redeem outstanding shares of its stock from certain holders if the continued
ownership of such stock by such holders, because of their foreign citizenship or
otherwise, would place the FCC licenses held by Arch in jeopardy. Required
redemptions, if any, will be made at a price per share equal to the lesser of
the fair market value of the shares, as defined in the certificate of
incorporation, or, if such shares were purchased within one year prior to the
redemption, the purchase price of such shares.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and Arch's certificate of incorporation
and by-laws may have the effect of delaying, making more difficult or preventing
a change in control or acquisition of Arch by means of a tender offer, a proxy
contest or otherwise. These provisions, as summarized below, are expected to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of Arch to first
negotiate with Arch. Arch believes that the benefits of increased protection of
Arch's potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Arch outweigh the disadvantages
of discouraging such proposals because, among other things, negotiations with
respect to such proposals could result in an improvement of their terms.
Rights Plan
Under Arch's preferred stock rights plan, each outstanding share of common
stock has attached to it one purchase right. Each purchase right entitles its
holder to purchase from Arch a unit consisting of one one-thousandth of a share
of Series B preferred stock at a cash purchase price of $150.00 per preferred
stock unit, subject to adjustment. The purchase rights automatically attach to
and trade together with each share of common stock.
The purchase rights are not exercisable or transferable separately from the
shares of common stock to which they are attached until ten business days
following the earlier of:
- a public announcement that an acquiring person, or group of affiliated or
associated acquiring persons, has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of
the common stock, or up to 33% in certain specified circumstances
described below, or
- the commencement of a tender offer or exchange offer that would result in
a person or group individually owning 30% or more of then outstanding
shares of common stock.
The purchase rights will not become exercisable, however, if the acquiring
person offers to purchase all outstanding shares of common stock and Arch's
independent directors determine that such offer is fair to Arch's stockholders
and in their best interests.
If the purchase rights become exercisable, each holder of a purchase right,
other than the acquiring person, will have the right to use the exercise price
of the purchase right ($150.00) to purchase shares of common stock at one-half
of their then current market price. All purchase rights that are beneficially
owned by an acquiring person will become null and void in such circumstances.
If an acquiring person acquires common stock and either:
- Arch is acquired in a merger or other business combination transaction in
which Arch is not the surviving corporation or the common stock is
changed or exchanged, except for a merger that follows an offer
determined to be fair by Arch's independent directors as described above,
or
- 50% or more of Arch's assets or earning power is sold or transferred,
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then each holder of a purchase right, other than the acquiring person, will have
the right to use the exercise price of the purchase right ($150.00) to purchase
shares of common stock of the acquiring company at one-half of their then
current market price.
The purchase rights are not currently exercisable. In connection with the
MobileMedia acquisition, Arch amended the preferred stock rights plan to permit
each standby purchaser to acquire, without becoming an acquiring person, up to
(1) the number of shares distributed to it or purchased by it in connection with
the MobileMedia acquisition, plus (2) an additional 5% of the outstanding common
stock, but in no event more than a total of 33% of such outstanding stock for
W.R. Huff, 27% for Whippoorwill, 26% for CS First Boston, 15.5% for Northwestern
Mutual or 19.0% for Resurgence. The standby purchasers will not be considered to
be a group for purposes of the preferred stock rights plan solely because of
performance of their contractual commitments as standby purchasers.
Arch has further amended the plan to permit the PageNet merger to take
place without causing the purchase rights to become exercisable.
Classified Board of Directors
Arch's certificate of incorporation and by-laws provide that Arch's board
of directors will be divided into three classes, with the terms of each class
expiring in a different year. The by-laws provide that the number of directors
will be fixed from time to time exclusively by the board of directors, but shall
consist of not more than 15 nor less than three directors. A majority of the
board of directors then in office has the sole authority to fill in any
vacancies on the board of directors. The certificate of incorporation provides
that directors may be removed only by the affirmative vote of holders of at
least 80% of the voting power of all then outstanding shares of stock, voting
together as a single class.
Stockholder Actions and Meetings
Arch's certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The certificate of
incorporation and by-laws provide that special meetings of stockholders can be
called by the chairman of the board, pursuant to a resolution approved by a
majority of the total number of directors which Arch would have if there were no
vacancies on the board of directors, or by stockholders owning at least 20% of
the stock entitled to vote at the meeting. The business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting by the chairman of the board, or at the request of a
majority of the members of the board of directors, or as specified in the
stockholders' call for a meeting.
The by-laws set forth an advance notice procedure with regard to the
nomination of candidates for election as directors who are not nominees of the
board of directors. The by-laws provide that any stockholder entitled to vote in
the election of directors generally may nominate one or more persons for
election as directors only if detailed written notice has been given to the
Secretary of Arch within specified time periods.
Amendment of Certain Provisions of Arch's Certificate of Incorporation and
By-laws
Arch's certificate of incorporation requires the affirmative vote of the
holders of at least 80% of the voting power of all then outstanding shares of
stock, voting together as a single class, to amend specified provisions of the
certificate of incorporation. These include provisions relating to the removal
of directors, the prohibition on stockholder action by written consent instead
of a meeting, the procedural requirements of stockholder meetings and the
adoption, amendment and repeal of certain articles of the by-laws.
Consideration of Non-Economic Factors in Acquisitions
Arch's certificate of incorporation empowers Arch's board of directors,
when considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include: (1) comparison of the proposed consideration to be
received by
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stockholders in relation to the then current market price of the capital stock,
the estimated current value of Arch in a freely negotiated transaction, and the
estimated future value of Arch as an independent entity; (2) the impact of such
a transaction on the subscribers and employees of Arch and its effect on the
communities in which Arch operates; and (3) the ability of Arch to fulfill its
objectives under applicable statutes and regulations.
Restrictions on Purchases of Stock by Arch
Arch's certificate of incorporation prohibits Arch from repurchasing any
shares of Arch's stock from any person, entity or group that beneficially owns
5% or more of Arch's then outstanding voting stock at a price exceeding the
average closing price for the twenty trading business days prior to the purchase
date, unless a majority of Arch's disinterested stockholders approves the
transaction. A disinterested stockholder is a person who holds less than 5% of
the voting power of Arch. This restriction on purchases by Arch does not apply
to (1) any offer to purchase a class of Arch's stock which is made on the same
terms and conditions to all holders of the class of stock, (2) any purchase of
stock owned by such a 5% stockholder occurring more than two years after such
stockholder's last acquisition of Arch's stock, (3) any purchase of Arch's stock
in accordance with the terms of any stock option or employee benefit plan, or
(4) any purchase at prevailing marketing prices pursuant to a stock repurchase
program.
"Blank Check" Preferred Stock
Arch's board of directors is authorized, without any further action by the
stockholders of Arch, to issue preferred stock from time to time in one or more
series and to fix the voting, dividend, conversion, redemption and liquidation
rights and preferences of any such series and whatever other designations,
preferences and special rights the board of directors may determine. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible financings, acquisitions and other corporate purposes, could,
among other things, adversely affect the voting power of the holders of common
stock and, under certain circumstances, be used as a means of discouraging,
delaying or preventing a change of control in Arch.
Delaware Anti-Takeover Statute
Section 203 of the Delaware corporations statute is applicable to publicly
held corporations organized under the laws of Delaware, including Arch. Subject
to various exceptions, Section 203 provides that a corporation may not engage in
any "business combination" with any "interested stockholder" for a three-year
period after such stockholder becomes an interested stockholder unless the
interested stockholder attained that status with the approval of the board of
directors or the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
which result in a financial benefit to the interested stockholder. Subject to
various exceptions, an interested stockholder is a person who, together with
affiliates and associates, owns 15% or more of the corporation's outstanding
voting stock or was the owner of 15% or more of the outstanding voting stock
within the previous three years. Under certain circumstances, Section 203 makes
it more difficult for an interested stockholder to effect various business
combinations with a corporation for a three-year period. The stockholders may
elect not to be governed by Section 203, by adopting an amendment to the
corporation's certificate of incorporation or by-laws which becomes effective
twelve months after adoption. Arch's certificate of incorporation and by-laws do
not exclude Arch from the restrictions imposed by Section 203. It is anticipated
that the provisions of Section 203 may encourage companies interested in
acquiring Arch to negotiate in advance with Arch's board of directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for common stock is The Bank of New York,
101 Barclay Street, New York, New York 10286.
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REGISTRATION RIGHTS
Each holder of Class B common stock has demand registration rights which
may be exercised no more than twice. Arch has also agreed to provide these
stockholders "piggyback" registration rights with respect to other offerings
filed by Arch. The holders of Series C preferred stock and the former
stockholders of PageCall are also entitled to registration rights.
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DESCRIPTION OF INDEBTEDNESS
ARCH
Arch and its principal operating subsidiaries each have substantial amounts
of outstanding indebtedness that provide necessary funding and impose various
limitations on Arch's operations.
Secured Credit Facility
A principal operating subsidiary has a secured credit facility in the
current total amount of $581.0 million with The Bank of New York, Royal Bank of
Canada, Toronto Dominion (Texas), Inc., Barclays Bank, PLC and other financial
institutions.
The facility consists of a $175.0 million reducing revolving Tranche A
facility, a $100.0 million Tranche B facility and a $306.0 million Tranche C
facility. The Tranche A Facility will be reduced on a quarterly basis commencing
on September 30, 2000 and will mature on June 30, 2005. The Tranche B Facility
converted into a term loan on June 27, 1999 and will be amortized in quarterly
installments commencing September 30, 2000, with an ultimate maturity date of
June 30, 2005. The Tranche C Facility will be amortized in annual installments
commencing December 31, 1999, with an ultimate maturity date of June 30, 2006.
Arch and substantially all of its operating subsidiaries are either
borrowers or guarantors under the secured credit facility. Direct obligations
and guarantees under the facility are secured by a pledge of the capital stock
of all principal operating subsidiaries and by security interests in various
assets.
Borrowings under the secured credit facility bear interest based on a
reference rate equal to either The Bank of New York's alternate base rate or The
Bank of New York's LIBOR rate, in each case plus a margin determined by
specified ratios of total debt to annualized EBITDA.
The secured credit facility requires payment of fees on the daily average
amount available to be borrowed under the Tranche A facility. These fees vary
depending on specified ratios of total debt to annualized EBITDA.
The secured credit facility contains restrictions that limit, among other
things:
- additional indebtedness and encumbrances on assets;
- cash dividends and other distributions;
- mergers and sales of assets;
- the repurchase or redemption of capital stock;
- investments;
- acquisitions that exceed certain dollar limitations without the lenders'
prior approval; and
- prepayment of indebtedness other than indebtedness under the secured
credit facility.
In addition, the secured credit facility requires Arch and its subsidiaries
to meet certain financial covenants, including ratios of EBITDA to fixed
charges, EBITDA to debt service, EBITDA to interest service and total
indebtedness to EBITDA.
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Subsidiary's Senior Notes
Another principal operating subsidiary has the following issues of
unsecured senior notes outstanding:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT INTEREST
ACCRETED AT 9/30/99 RATE MATURITY DATE INTEREST PAYMENT DATES
- ------------------- -------- ---------------- ----------------------
<S> <C> <C> <C>
$125.0 million 9 1/2% February 1, 2004 February 1, August 1
$100.0 million 14% November 1, 2004 May 1, November 1
$127.5 million 12 3/4% July 1, 2007 January 1, July 1
$139.8 million 13 3/4% April 15, 2008 April 15, October 1
</TABLE>
Redemption
The subsidiary may choose to redeem any amounts of these senior notes
during the periods indicated in the following table. The redemption prices will
equal the indicated percentages of the principal amount of the notes, together
with accrued and unpaid interest to the redemption date:
<TABLE>
<CAPTION>
9 1/2% SENIOR NOTES
- ------------------------------------------------------
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------
<S> <C>
February 1, 1999 to January 31, 2000 104.750 %
February 1, 2000 to January 31, 2001 103.167 %
February 1, 2001 to January 31, 2002 101.583 %
On or after February 1, 2002 100.000 %
</TABLE>
<TABLE>
<CAPTION>
14% SENIOR NOTES
- ------------------------------------------------------
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------
<S> <C>
November 1, 1999 to October 31, 2000 107.000 %
November 1, 2000 to October 31, 2001 104.625 %
November 1, 2001 to October 31, 2002 102.375 %
On or after November 1, 2002 100.000 %
</TABLE>
<TABLE>
<CAPTION>
12 3/4% SENIOR NOTES
- ------------------------------------------------------
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------
<S> <C>
July 1, 2003 to June 30, 2004 106.375 %
July 1, 2004 to June 30, 2005 104.250 %
July 1, 2005 to June 30, 2006 102.125 %
On or after July 1, 2006 100.000 %
</TABLE>
<TABLE>
<CAPTION>
13 3/4% SENIOR NOTES
- ------------------------------------------------------
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------
<S> <C>
April 15, 2004 to April 14, 2005 106.875 %
April 15, 2005 to April 14, 2006 104.583 %
April 15, 2006 to April 14, 2007 102.291 %
On or after April 15, 2007 100.000 %
</TABLE>
In addition, until July 1, 2001, the subsidiary may elect to use the
proceeds of a qualifying equity offering to redeem up to 35% in principal amount
of the 12 3/4% senior notes until July 1, 2001, or up to 35% in principal amount
of the 13 3/4% senior notes until April 15, 2002, at a redemption price equal to
112.75% of the principal amount of the 12 3/4% senior notes or 113.75% of the
principal amount of the 13 3/4% senior notes, together with accrued interest.
The subsidiary may make such redemption, however, only if 12 3/4% senior notes
with an aggregate principal amount of at least $84.5 million remain outstanding
immediately after giving effect to any such redemption of 12 3/4% senior notes,
and only if 13 3/4% senior notes with an aggregate principal amount of at least
$95.6 million remain outstanding immediately after giving effect to any such
redemption of 13 3/4% senior notes. Arch is not, however, obligated to redeem
any 12 3/4% senior notes or 13 3/4% senior notes with the proceeds of any equity
offering.
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Restrictive Covenants
The indentures for the senior notes limit the ability of specified
subsidiaries to pay dividends, incur secured or unsecured indebtedness, incur
liens, dispose of assets, enter into transactions with affiliates, guarantee
parent company obligations, sell or issue stock and engage in any merger,
consolidation or sale of substantially all of their assets.
Changes in Control
Upon the occurrence of a change of control of Arch or a principal operating
subsidiary, each holder of senior notes has the right to require repurchase of
its senior notes for cash. The repurchase prices for the four series of senior
notes vary from 101% to 102% of the principal amount of such notes plus accrued
and unpaid interest to the date of repurchase. A change of control of a
corporation, as defined in the indentures, includes:
- the acquisition by a person or group of beneficial ownership of the
majority of securities having the right to vote in the election of
directors;
- specified types of changes in the board of directors;
- the sale or transfer of all or substantially all of the corporation's
assets or
- merger or consolidation with another corporation which results in a
person or group becoming the beneficial owner of a majority of the
securities of the surviving corporation having the right to vote in the
election of directors.
Events of Default
The following constitute events of default under the indentures:
- a default in the timely payment of interest on the senior notes if such
default continues for 30 days;
- a default in the timely payment of principal of, or premium, if any, on
any of the senior notes either at maturity, upon redemption or
repurchase, by declaration or otherwise;
- the borrowers' failure to observe or perform any of their other covenants
or agreements in the senior notes or in the indenture, but generally only
if the failure continues for a period of 30 or 60 days after written
notice of default;
- specified events of bankruptcy, insolvency or reorganization involving
the borrowers;
- a default in timely payment of principal, premium or interest on any
indebtedness for borrowed money aggregating $5.0 million or more in
principal amount;
- the occurrence of an event of default as defined in any indenture or
instrument involving at least $5.0 million aggregate principal amount of
indebtedness for borrowed money that gives rise to the acceleration of
such indebtedness;
- the entry of one or more judgments, orders or decrees for the payment of
more than a total of $5.0 million, net of any applicable insurance
coverage, against the borrowers or any of their properties; or
- the holder of any secured indebtedness aggregating at least $5.0 million
in principal amount seeks foreclosure, set-off or other recourse against
assets of the borrowers having an aggregate fair market value of more
than $5.0 million.
Arch's Discount Notes
In March 1996, Arch issued discount notes representing $467.4 million in
aggregate principal amount at maturity. The discount notes are scheduled to
mature on March 15, 2008. The discount notes were issued at a substantial
discount from the principal amount due at maturity. Interest does not accrue on
the discount notes prior to March 15, 2001. After that date, interest will
accrue at the rate of 10 7/8% per year, payable semi-annually on March 15 and
September 15, commencing September 15, 2001.
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<PAGE> 214
Arch may choose to redeem any amount of discount notes on or after March
15, 2001 at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------------------
<S> <C>
March 15, 2001 to March 14, 2002 104.078% of principal amount
March 15, 2002 to March 14, 2003 102.719% of principal amount
March 15, 2003 to March 14, 2004 101.359% of principal amount
On or after March 15, 2004 100.000% of principal amount
</TABLE>
The indenture for the discount notes contains restrictive covenants, change
in control provisions and events of default that are generally comparable to
those of the senior notes described above.
Arch's Convertible Debentures
Arch has outstanding $4.5 million in principal amount of 6 3/4% convertible
subordinated debentures due 2003. Interest is payable twice a year on June 1 and
December 1. The convertible debentures are scheduled to mature on December 1,
2003. The principal amount of the convertible debentures is currently
convertible into common stock at a conversion price of $50.25 per share at any
time prior to redemption or maturity.
Arch may choose to redeem any amount of the convertible debentures at any
time, at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------------------
<S> <C>
December 1, 1997 to November 30, 1998 104.050% of principal amount
December 1, 1998 to November 30, 1999 103.375% of principal amount
December 1, 1999 to November 30, 2000 102.700% of principal amount
December 1, 2000 to November 30, 2001 102.025% of principal amount
December 1, 2001 to November 30, 2002 101.350% of principal amount
December 1, 2002 to November 30, 2003 100.675% of principal amount
On or after December 1, 2003 100.000% of principal amount
</TABLE>
The convertible debentures represent senior unsecured obligations of Arch
and are subordinated to senior indebtedness of Arch, as defined in the
indenture. The indenture does not contain any limitation or restriction on the
incurrence of senior indebtedness or other indebtedness or securities of Arch or
its subsidiaries.
Upon the occurrence of a fundamental change, as defined in the indenture,
each holder of convertible debentures has the right to require Arch to
repurchase its convertible debentures for cash, at a repurchase price of 100% of
the principal amount of the convertible debentures, plus accrued interest to the
repurchase date. The following constitute fundamental changes:
- acquisition by a person or a group of beneficial ownership of stock of
Arch entitled to exercise a majority of the total voting power of all
capital stock, unless such beneficial ownership is approved by the board
of directors;
- specified types of changes in Arch's board of directors;
- any merger, share exchange, or sale or transfer of all or substantially
all of the assets of Arch to another person, with specified exceptions;
- the purchase by Arch of beneficial ownership of shares of its common
stock if the purchase would result in a default under any senior debt
agreements to which Arch is a party; or
- distributions of common stock by Arch to its stockholders in specified
circumstances.
The following constitute events of default under the indenture:
- a default in the timely payment of any interest on the convertible
debentures if such default continues for 30 days;
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<PAGE> 215
- a default in the timely payment of principal or premium on any
convertible debenture at maturity, upon redemption or otherwise;
- a default in the performance of any other covenant or agreement of Arch
that continues for 30 days after written notice of such default;
- a default under any indebtedness for money borrowed by Arch that results
in more than $5.0 million of indebtedness being accelerated; or
- the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to Arch.
PAGENET
Because the exchange offer and the merger is subject to the requirement
that at least 97.5% of the PageNet senior subordinated notes are tendered and
not withdrawn in the exchange offer, the maximum aggregate principal amount of
the senior subordinated notes that may remain outstanding after the Arch merger
is $30,000,000. Alternatively, if the merger is approved in accordance with the
terms of the prepackaged plan of reorganization under chapter 11 of the
Bankruptcy Code, none of the senior subordinated notes will be outstanding after
the merger. If any senior subordinated notes remain outstanding after the Arch
merger, they will remain obligations of PageNet, which will become a wholly
owned subsidiary of Arch.
The terms of the senior subordinated notes that are the subject of the
exchange offer made by this prospectus are as follows:
8.875% senior subordinated notes due 2006
The 8.875% notes are limited in aggregate principal amount to $300,000,000
and bear interest at the rate of 8.875% per annum, payable semi-annually on
February 1 and August 1 of each year. The 8.875% notes are subject to
redemption, as a whole or in part, at any time after February 1, 1999, at the
following redemption prices: 104.438% of the face amount in 1999, 102.959% of
the face amount in 2000, 101.479% of the face amount in 2001 and at 100% of the
face amount each year thereafter, together with accrued interest up to the date
of the redemption.
10.125% senior subordinated notes due 2007
The 10.125% notes are limited in aggregate principal amount to $400,000,000
and bear interest at the rate of 10.125% per annum, payable semi-annually on
February 1 and August 1 of each year. The 10.125% notes are subject to
redemption, as a whole or in part, at any time after August 1, 2000, at the
following redemption prices: 105.0625% of the face amount in 2000, 103.3750% of
the face amount in 2001, 101.6875% of the face amount in 2002 and at 100% of the
face amount each year thereafter, together with accrued interest up to the date
of the redemption.
10% senior subordinated notes due 2008
The 10% notes are limited in aggregate principal amount to $500,000,000 and
bear interest at the rate of 10% per annum, payable semi-annually on April 15
and October 15 of each year. The 10% notes are subject to redemption, as a whole
or in part, at any time after October 15, 2001, at the following redemption
prices: 105% of the face amount in 2001, 103.333% of the face amount in 2002,
101.667% of the face amount in 2003 and at 100% of the face amount each year
thereafter, together with accrued interest up to the date of the redemption.
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<PAGE> 216
COMPARISON OF RIGHTS OF
PAGENET STOCKHOLDERS AND ARCH STOCKHOLDERS
The rights of PageNet stockholders are currently governed by Delaware
corporate law and PageNet's certificate of incorporation and by-laws. Upon
completion of the merger, PageNet's stockholders will become stockholders of
Arch and their rights as Arch stockholders will be governed by Delaware
corporate law and Arch's certificate of incorporation and by-laws. There are a
number of differences between the rights of PageNet stockholders and Arch
stockholders. The following is a brief summary of the material differences
between the rights of Arch stockholders and the rights of PageNet stockholders.
AUTHORIZED CAPITAL
Arch
Arch is authorized to issue 85,000,000 shares of all classes of stock,
65,000,000 of which are shares of common stock, par value $.01 per share,
10,000,000 of which are shares of Class B common stock, par value $.01 per
share, and 10,000,000 of which are shares of preferred stock, par value $.01 per
share. Arch's board of directors is authorized, subject to Delaware corporate
law and without further approval of its stockholders, to issue shares of
preferred stock from time to time in one or more series and to fix the
designations, powers, preferences and other rights and qualifications,
limitations and restrictions on any series of preferred stock. As of December
20, 1999, there were 47,229,297 shares of common stock issued and outstanding,
3,968,150 shares of Class B common stock issued and outstanding, no shares of
Series B preferred stock issued and outstanding and 250,000 shares of Series C
convertible preferred stock issued and outstanding.
Class B Common Stock. Shares of Arch's Class B common stock are identical
in all respects to shares of Arch's common stock, except that:
- a holder of Class B common stock is not entitled to vote in the election
of directors and is entitled to 1/100th vote per share of common stock on
all other matters voted on by Arch's stockholders;
- shares of Class B common stock will automatically convert into an
identical number of shares of common stock upon the transfer of Class B
common shares to any person or entity, other than a Class B holder. A
"Class B holder" is defined as:
- any person or entity that received shares of Class B common stock in
the initial distribution of those shares;
- any person or entity that, when taken together with any person or
entity that received shares of Class B common stock in the initial
distribution, constitutes a "person" or "group," as defined in
sections 13(d) and 14(d) of the Securities and Exchange Act of 1934;
or
- any affiliate of the preceding persons or entities.
The holder that is transferring its shares of Class B common stock must
certify to Arch:
- the number of shares of Class B common stock being transferred; and
- that, to its knowledge, after due inquiry, the shares of Class B
common stock are not being transferred to a Class B holder; and
Shares of Class B common stock may be converted at any time into an
identical number of shares of common stock, if the holder of the Class B common
shares certifies to Arch that:
- the holder has transferred a stated number of shares of Class B common
stock; and
- that, to its knowledge, after due inquiry, the shares of common stock
are not being transferred to a Class B holder; and
provided, that the number of shares of Class B common stock being converted
may not exceed the number of shares of common stock being transferred.
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Series C Preferred Stock. Arch's Series C preferred stockholders are
entitled to receive annual dividends, payable quarterly, of 8% per share. So
long as Arch's common stock remains listed on the Nasdaq National Market, Arch,
at its option, may pay dividends on the Series C preferred stock in fully
registered, fully paid and nonassessable shares of common stock, valued at 95%
of its then prevailing market price. Arch's Series C preferred stock ranks
senior to Arch's common stock and Series B preferred stock as to the payment of
dividends. Dividends on the Series C preferred stock are cumulative and accrue
on a daily basis whether or not declared by Arch's board of directors and
whether or not any funds are legally available for the payment of dividends.
In the event of Arch's liquidation, dissolution or winding up, Arch must
pay to the holders of Series C preferred stock $100.00 per share of Series C
preferred stock plus all accrued and unpaid dividends. If the assets of Arch are
insufficient to permit full payment of such liquidation preferences to the
holders of Series C preferred stock, then the assets will be distributed pro
rata among the holders of Series C preferred stock. Arch's Series C preferred
stock ranks senior to Arch's common stock and Series B junior preferred stock,
as to the distribution of assets upon the liquidation, dissolution or winding up
of Arch.
Series C preferred stockholders may convert their shares of Series C
preferred stock into shares of Arch common stock at a rate determined by
dividing $100.00 per share, plus all accrued and unpaid dividends, by a
conversion price of $5.50 per share. The conversion of Series C preferred stock
automatically adjusts on a quarterly basis to reflect the accrual of dividends
to the extent that dividends are not paid on a current basis in cash or stock.
Until January 1, 2000, the conversion rate will be 6.7444 to 1, so that
1,686,101 shares of Arch common stock are issuable upon the conversion of all
shares of Series C preferred stock in the aggregate. This aggregate number of
common shares increases by approximately 32,000 shares per quarter.
In addition, on or after the third anniversary of the issuance of the
Series C preferred stock, Arch is entitled to cause the conversion of all of the
shares of Series C preferred stock into shares of Arch common stock at a rate
determined by dividing $100.00 per share, plus all accrued and unpaid dividends,
by a conversion price of $5.50 per share, provided, however, that Arch may not
convert the Series C preferred stock unless the average closing price for its
common stock for the thirty trading days prior to the conversion is greater than
$11.00 per share. Arch is not entitled to cause the conversion of any Series C
preferred stock at any time prior to the third anniversary of the issuance of
the Series C preferred stock.
On or after the seventh anniversary of the issuance of the Series C
preferred stock, each Series C preferred stockholder may require Arch, at Arch's
sole option, to either:
- redeem its shares of Series C preferred stock, in whole or in part, in
cash, at a price equal to $100.00 per share, plus all accrued and unpaid
dividends; or
- so long as Arch's common stock is listed on the Nasdaq National Market
System or other national securities exchange, convert its shares of
Series C preferred stock into fully registered, fully paid and
nonassessable shares of Arch common stock, valued at 95% of its then
prevailing market price.
On or after the third anniversary of the issuance of the Series C preferred
stock, Arch has the right to redeem all, but not less than all, of the
outstanding shares of Series C preferred stock, in cash, at a price equal to
$100.00 per share, plus all accrued and unpaid dividends, plus a "make whole
payment." The "make whole payment" is equal to:
- On or after the seventh anniversary of the issuance of the Series C
preferred stock, zero;
- On or after the fifth anniversary, but prior to the seventh anniversary,
of the issuance of the Series C preferred stock, an amount equal to the
excess, if any, of:
- an amount sufficient to provide a Series C preferred stockholder with
a compounded internal rate of return of 20%, measured from the
original issuance date of the Series C preferred stock to the date of
redemption, based on an initial investment of $100.00 per share of
Series C preferred stock, over
- $100.00, plus all accrued and unpaid dividends, per share of Series C
preferred stock; and
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- On or after the third anniversary, but prior to the fifth anniversary, of
the issuance of the Series C preferred stock, an amount equal to the
excess, if any, of:
- an amount sufficient to provide a Series C preferred stockholder with
a compounded internal rate of return of 25%, measured from the
original issuance date of the Series C preferred stock to the date of
redemption, based on an initial investment of $100.00 per share of
Series C preferred stock, over
- $100.00, plus all accrued and unpaid dividends, per share of Series C
preferred stock.
Upon a change of control of Arch, each Series C preferred stockholder will
have the right to require Arch, at Arch's option, to either:
- redeem its shares of Series C preferred stock, in cash, at a price equal
to 105% of $100.00 per share, plus all accrued and unpaid dividends; or
- convert its shares of Series C preferred stock, at a price equal to 105%
of $100.00 per share, plus all accrued and unpaid dividends, into fully
registered, fully paid and nonassessable shares of Arch common stock,
valued at 95% of their market price.
Each share of Arch's Series C preferred stock is entitled to one vote for
each share of Arch common stock into which a share of Series C preferred stock
could then be converted. Series C preferred stockholders are entitled to vote,
together with common stockholders, upon all matters submitted to a vote of
Arch's common stockholders. In addition, so long as at least 50% of the shares
of Series C preferred stock remains outstanding, the holders of Series C
preferred stock have the right voting as a separate class, to designate one
member of the boards of directors of Arch and a principal subsidiary. The
director has the right to be a member of any committee of either board of
directors. Each share of Series C preferred stock is entitled to as many votes
as the number of shares of Arch common stock into which it is convertible
(6.7444 prior to January 1, 2000).
Unless approved by a majority of the outstanding shares of Series C
preferred stock, voting together as a single class, Arch may not:
- authorize, increase the authorized number of, or issue any shares of
stock ranking senior to the Series C preferred stock or, so long as at
least 50% of the shares of Series C preferred stock issued on the
original issuance date remain outstanding, on a parity with the Series C
preferred stock;
- increase the authorized number of, or issue any shares of Series C
preferred stock;
- amend Arch's certificate of incorporation so as to reduce the number of
authorized shares of Series C preferred stock below the number then
outstanding or adversely affect the powers, preferences or special rights
of the Series C preferred stock; or
- reclassify any shares of stock so as to rank senior to the Series C
preferred stock or, so long as at least 50% of the shares of Series C
preferred stock issued on the original issuance date remain outstanding,
on a parity with the Series C preferred stock.
In addition, at any time prior to the third anniversary of the issuance of
the Series C preferred stock, Arch may not participate in any merger or
consolidation, in which its outstanding securities are converted into
securities, cash or other property, or sell all or substantially all of its
assets without the prior approval a majority of the outstanding shares of Series
C preferred stock, voting as a single class, unless the conditions in any of the
following paragraphs are satisfied:
- at least 50% of the total consideration to be received by Arch or its
stockholders is cash and the consideration payable to the Series C
preferred stockholders for each share of Series C preferred stock or on
an "as converted" basis with respect to the common stock underlying each
share of Series C preferred stock is not less than the greater of (i)
$150.00 or (ii) an amount sufficient to provide a Series C preferred
stockholder with a compounded internal rate of return of 30%, measured
from the original issuance date of the Series C preferred stock to the
date of redemption, based on an initial
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investment of $100.00 per share of Series C preferred stock, provided
that this is not meant to limit the amount that a Series C preferred
stockholder may be entitled to receive on an "as converted" basis;
- less than 50% of the total consideration to be received by Arch or its
stockholders is cash, the Series C preferred stock is assumed by the
surviving entity and the surviving entity maintains a ratio of total
consolidated debt, including preferred stock, to total consolidated
operating cash flow that does not exceed 6.5 to 1; or
- if the conditions in the preceding two paragraphs are not satisfied, Arch
has offered, at its election, to redeem the Series C preferred stock in
cash at a price per share equal to the greater of (i) $150.00 or (ii) an
amount sufficient to provide a Series C preferred stockholder with a
compounded internal rate of return of 30%, measured from the original
issuance date of the Series C preferred stock to the date of redemption,
based on an initial investment of $100.00 per share of Series C preferred
stock.
Each Series C preferred stockholder is entitled to a preemptive right,
unless waived by a majority of the outstanding shares of Series C preferred
stock, to purchase on a pro rata basis any "new securities" that Arch proposes
to issue if the issuance reflects a price per share for Arch's common stock that
is less than $5.50. "New securities" are defined as any shares of Arch common
stock, any rights, options or warrants to purchase shares of common stock and
any securities that may be converted into shares of common stock, except that
the definition of "new securities" does not include:
- securities issued in the acquisition of another corporation;
- shares of, or options or other rights to purchase, common stock issued to
employees, officers, directors or consultants of Arch pursuant to any
arrangement approved by Arch's board of directors;
- shares of common stock issuable upon conversion of outstanding preferred
stock or other convertible securities; or
- stock issued in connection with a stock split, stock dividend,
recapitalization, reclassification or other similar events.
PageNet
PageNet is authorized to issue 275,000,000 shares of all classes of stock,
250,000,000 of which are shares of common stock, par value $.01 per share, and
25,000,000 of which are shares of preferred stock, par value $.01 per share. As
of December 1, 1999, there were 103,960,240 shares of common stock issued and
outstanding and no shares of preferred stock issued and outstanding.
STOCKHOLDERS RIGHTS AGREEMENT
Arch
Arch's preferred stock rights plan is described under "Description of
Arch's Equity Securities -- Antitakeover Provisions -- Rights Plan."
PageNet
Under PageNet's stock purchase rights plan, each outstanding share of
PageNet common stock has attached to it one common share purchase right. Each
purchase right entitles its holder to purchase from PageNet one share of PageNet
common stock at a cash purchase price of $150.00 per share. The purchase rights
automatically attach to and trade together with each share of PageNet common
stock.
The purchase rights are not exercisable or transferable separately from the
shares of PageNet common stock to which they are attached until ten business
days following the earlier of:
- a public announcement that an acquiring person, or group of affiliated or
associated acquiring persons, has acquired, or obtained the right to
acquire, beneficial ownership of 20%;
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- the commencement or announcement of a tender offer or exchange offer that
would result in a person or group individually owning 20% or more of the
then outstanding shares of PageNet common stock; or
- the declaration of the board of directors that a person which has become
the beneficial owner of more than 10% of PageNet's then outstanding
shares of common stock is an adverse person. A person may be deemed an
adverse person if (a) the board determines, after a reasonable inquiry,
that such person's ownership is likely to cause PageNet to either
repurchase such shares or place pressure on PageNet to enter into a
transaction that not serve the long term best interests of PageNet but
would provide such person with a short term financial gain or (b) such
ownership is likely to have a material adverse impact on the business or
prospects of PageNet.
PageNet's board of directors may redeem the rights at a price of $.01 per
right, in whole or in part, at any time prior to ten business days following:
- the first public announcement that a person has become an acquiring
person;
- the declaration by the board of directors that a person is an adverse
person; or
- the expiration of the rights on September 24, 2004.
Thereafter, the rights may be redeemed in connection with certain acquisitions
not involving any acquiring person or adverse person or in certain circumstances
following a disposition of shares by the acquiring person or adverse person.
If a purchase right becomes exercisable, each holder of a purchase right,
other than an acquiring person, will have the right to purchase at an exercise
price of $150.00, shares of PageNet common stock at a price equal to one-half of
their current market price. All purchase rights that are beneficially owned by
an acquiring person will become null and void in such circumstances.
If an acquiring person acquires common stock and:
- PageNet is acquired in a merger or other business combination transaction
in which PageNet is not the surviving corporation or the common stock is
changed or exchanged; or
- 50% or more of PageNet's assets or earning power is sold or transferred;
each holder of a purchase right, other than the acquiring person, will have the
right to use the exercise price of the purchase right ($150.00) to purchase
shares of common stock of the acquiring company at one-half of their then
current market price.
BOARDS OF DIRECTORS
Arch
Arch's certificate of incorporation divides its board of directors, not
including any directors that may be elected by the preferred stockholders, into
three classes of directors that are as nearly equal in number as possible with
three-year terms. As a result, approximately one-third of PageNet's directors,
not including the directors elected by preferred stockholders, if any, are
elected each year. A quorum of directors consists of a majority of Arch's board
of directors.
PageNet
PageNet's certificate of incorporation divides its board of directors into
three classes of directors that are as nearly equal in number as possible with
three-year terms. As a result, approximately one-third of PageNet's board of
directors is elected each year. A quorum of directors consists of a majority of
PageNet's directors then in office.
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NUMBER, FILLING OF VACANCIES AND REMOVAL OF DIRECTORS
Arch
Currently, Arch's board of directors has nine members. Directors can be
removed, with or without cause, at any annual or special meeting of
stockholders, the notice for which must state that the removal of a director is
among the purposes of the meeting, by the vote of stockholders holding at least
80% of the voting power of Arch's outstanding stock entitled to vote generally
in the election of directors, voting together as a single class.
Directors elected to Arch's board of directors by the series B preferred
stockholders can be removed, with or without cause, only by the series B
preferred stockholders entitled to vote in the election of those directors.
Vacancies created by the resignation, death or removal of a director elected by
the series B preferred stockholders will be filled at a special meeting called
for that purpose by the series B preferred stockholders.
The holders of Series C preferred stock have the right, voting as a
separate class, to elect one member of Arch's board of directors, and such
director has the right to be a member of any committee of the board.
PageNet
Currently, PageNet has eight members on its board of directors. Directors
can be removed, with or without cause, at any annual or special meeting of
stockholders, the notice for which must state that the removal of a director is
among the purposes of the meeting, by the vote of stockholders holding at least
80% of the voting power of PageNet's outstanding stock entitled to vote
generally in the election of directors, voting together as a single class.
INDEMNIFICATION
Arch
Arch's certificate of incorporation provides that, to the fullest extent
permitted by Delaware corporate law, Arch will indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of Arch, because the
person:
- was a director, officer, employee or agent of Arch; or
- is or was serving as a director, officer, employee or agent of any other
entity at Arch's request, against any and all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually or reasonably incurred by the person in connection with the
action, suit or proceeding.
The person must have acted in good faith and in a manner that the person
reasonably believed to be in, or not opposed to, the best interests of Arch and,
with respect to any criminal actions, had no reasonable cause to believe the
conduct was unlawful. The termination of any action, suit or proceedings by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, will not, by itself, create a presumption that the person did not
meet the required standard of conduct.
Arch's certificate of incorporation provides that Arch may indemnify any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action or suit by or in the right of Arch to
procure a judgment in its favor, because the person:
- is or was a director, officer, employee or agent of Arch; or
- is or was serving as a director, officer, employee or agent of any other
entity at Arch's request, against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection with the
defense or settlement of the action or suit.
The person must have acted in good faith and in a manner that the person
reasonably believed to be in, or not opposed to, the best interests of Arch,
except that Arch will not indemnify any person for any claim, issue or matter in
which the person has been adjudged to be liable to Arch, unless and only to the
extent that the court in which the action or suit was brought determines
otherwise.
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Arch's bylaws provide that Arch's obligation, if any, to indemnify any
person will be reduced by any amount that the person may receive as
indemnification from any other entity or from insurance.
Arch's bylaws provide that to the extent a director, officer, employee or
agent of Arch, or person serving as a director, officer, employee or agent of
another entity at Arch's request, has been successful on the merits or otherwise
in the defense of any action, suit or proceeding, or in the defense of any
claim, issue or matter therein, he or she will be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection with the defense of the action, suit, proceeding, claim, issue or
matter.
Arch's bylaws provide that Arch's indemnification provisions will apply to
a resulting corporation and, to the extent the board of directors of the
resulting corporation decides, all constituent corporations, including any
constituent of a constituent, absorbed in a consolidation or merger which, if
its separate existence had continued, would have had the power and authority to
indemnify its directors, officers and employees or agents. Therefore, any person
who is or was a director, officer, employee or agent of a constituent
corporation, or is or was serving as a director, officer, employee or agent of
another entity at the request of the constituent corporation, will stand in the
same position under Arch's indemnification provisions with respect to the
resulting or surviving corporation as he or she would have stood with respect to
the constituent corporation if its separate existence had continued.
Arch's certificate of incorporation enables Arch to advance expenses to an
officer or director who is defending any civil, criminal, administrative or
investigative action, suit or proceeding if the person promises to repay the
expenses if he or she is ultimately determined not to qualify for
indemnification by Arch. Expenses incurred by other employees and agents may be
similarly paid on terms and conditions, if any, as Arch's board of directors
deems appropriate.
Arch's indemnification and advancement of expenses continues after the
person is no longer a director, officer, employee or agent and inures to the
benefit of the person's heirs, executor and administrators. Indemnification and
advancement of expenses are not exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any:
- bylaw;
- agreement; or
- vote of stockholders or disinterested directors.
Arch may purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of Arch, or is or was serving as a
director, officer, employee or agent of any other entity at Arch's request,
against any liability asserted against and incurred by the person in his or her
capacity, or arising out of his or her status, as a director, officer, employee
or agent, whether or not Arch would have the power under its certificate of
incorporation to indemnify the person against the liability.
If the claim for indemnification is not paid in full by Arch within 30 days
after receipt of a written claim, the claimant may, at any time thereafter, sue
Arch to recover the unpaid amount plus, if successful in whole or in part, the
expenses incurred in prosecuting the claim. Arch may use as a defense to such
action that the claimant did not meet the required standard of conduct as set
forth in Delaware corporate law for Arch to indemnify the claimant for the
amount claimed, but the burden of proving the defense will be on Arch. Neither
Arch's failure to make a prior determination that indemnification of the
claimant is proper because he or she met the applicable standard of conduct nor
its actual determination that the claimant has not met the applicable standard
of conduct, will be a defense to the action or create a presumption that the
claimant did not meet the applicable standard of conduct.
PageNet
PageNet's certificate of incorporation provides that, to the fullest extent
authorized by Delaware corporate law, PageNet will indemnify any person who was
or is a party, or is threatened to be made a party, to
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any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, investigative or other, including appeals, because the
person:
- is or was a director, officer, employee or agent of PageNet; or
- is or was serving as a director, officer, employee or agent of any other
entity at PageNet's request, against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes and
penalties, and amounts paid or to be paid in settlement) reasonably
incurred or suffered by the person in connection with the action, suit or
proceeding.
PageNet's bylaws provide that PageNet will indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of PageNet, because the
person:
- is or was an officer of PageNet; or
- is or was serving as a director or officer of any other entity at
PageNet's request, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit or proceeding.
The person must have acted in good faith and in a manner that the person
reasonably believed to be in, or not opposed to, the best interests of PageNet
and, with respect to any criminal actions, had no reasonable cause to believe
the conduct was unlawful. The termination of any action, suit or proceedings by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, will not, by itself, create a presumption that the person did not
meet the required standard of conduct.
PageNet's bylaws provide that PageNet will indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding by or in the right of PageNet to procure a
judgment in its favor, because the person:
- is or was an officer of PageNet; or
- is or was serving as a director or officer of any other entity at
PageNet's request, against expenses (including attorneys' fees) actually
and reasonably incurred by the person in connection with the defense or
settlement of the action or suit.
The person must have acted in good faith and in a manner that the person
reasonably believed to be in, or not opposed to, the best interests of PageNet,
except that PageNet will not indemnify any person for any claim, issue or matter
in which the person has been adjudged to be liable to PageNet, unless and only
to the extent that the court in which the action or suit was brought determines
otherwise.
PageNet's bylaws provide that to the extent an officer of PageNet, or
person serving as a director or officer of another entity at PageNet's request,
has been successful on the merits or otherwise in the defense of any action,
suit or proceeding, or in the defense of any claim, issue or matter therein, he
or she will be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection with the defense of the
action, suit, proceeding, claim, issue or matter.
PageNet's bylaws provide that PageNet's indemnification provisions will
apply, in addition to a resulting corporation, to any constituent corporation,
including any constituent of a constituent, absorbed in a consolidation or
merger which, if its separate existence had continued, would have had the power
and authority to indemnify its directors and officers. Therefore, any person who
is or was a director or officer of a constituent corporation, or is or was
serving as a director or officer of another corporation at the request of the
constituent corporation, will stand in the same position with respect to the
resulting corporation under PageNet's indemnification provisions as he or she
would have stood with respect to the constituent corporation if its separate
existence had continued.
PageNet's bylaws enable PageNet to advance expenses to an officer of
PageNet, or a person serving as a director or officer of any other entity at
PageNet's request, who is defending any civil or criminal action, suit or
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proceeding if the person promises to repay the expenses if he or she is
ultimately determined not to qualify for indemnification by PageNet.
PageNet's indemnification and advancement of expenses continues after the
person is no longer an officer, employee or person serving as a director or
officer of any other entity at PageNet's request, and inures to the benefit of
the person's heirs, executors and administrators. Indemnification and
advancement of expenses are not exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any:
- bylaw;
- agreement; or
- vote of stockholders or disinterested directors.
PageNet may purchase and maintain insurance on behalf of any person who is
or was an officer of PageNet, or is or was serving as a director or officer of
any other entity at PageNet's request, against any liability asserted against
and incurred by the person in his or her capacity, or arising out of his or her
status, as a director, officer, employee or agent, whether or not PageNet would
have the power to indemnify the person against the liability.
SPECIAL MEETINGS OF STOCKHOLDERS
Arch
Arch's certificate of incorporation provides that only the chairman of the
board, a majority of the total number of directors which Arch would have if
there were no vacancies or holders of not less than 20% of the shares of Arch's
outstanding stock entitled to vote generally in the election of directors,
voting together as a single class, may call a special meeting of stockholders.
The business permitted to be conducted at any special stockholders' meeting is
limited to business brought before the meeting by the chairman of the board, at
the request of a majority of the board of directors or as specified in a written
request by the holders of 20% of the shares of Arch's outstanding stock entitled
to vote generally in the election of directors, voting together as a single
class.
PageNet
PageNet's certificate of incorporation provides that only the chairman of
the board or the president may call a special meeting of stockholders, within
ten days after receipt of a written request of a majority of PageNet's board of
directors. The business permitted to be conducted at any special stockholders'
meeting is limited to business brought before the meeting by the chairman of the
board, the president, or at the request of a majority of the board of directors.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS OTHER THAN ELECTION OF
DIRECTORS AT AN
ANNUAL MEETING
Arch
Arch's bylaws provide that a stockholder may propose that business be
brought before an annual stockholders' meeting if written notice of such
proposal is delivered to and received by Arch's secretary at Arch's principal
executive office not less than 80 days prior to the annual meeting. If notice of
the date of the annual meeting or public disclosure of the date of the annual
meeting is given less than 90 days prior to the date of the annual meeting, then
the stockholder's notice must be received not later than the 10th day following
the date on which notice of the meeting was mailed or was publicly announced.
PageNet
PageNet's bylaws provide that a stockholder may propose that business be
brought before an annual stockholders' meeting if written notice of such
proposal is delivered to and received by PageNet's senior vice
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president, general counsel and assistant secretary at PageNet's principal
executive office not more than 120 days nor less than 80 days prior to the
anniversary date of the preceding year's annual meeting. If the date of the
meeting has changed more than 30 days from the preceding year, then the
stockholder's notice must be received not later than the 15th day following the
date on which notice of the meeting was mailed or was publicly announced,
whichever occurred first.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS OF DIRECTORS
Arch
Arch's bylaws provide that a stockholder may nominate a person for election
to the board of directors at an annual or special stockholders' meeting if
written notice is delivered to and received by Arch's secretary at Arch's
principal executive office not less than 80 days prior to the annual or special
meeting. If notice of the date of the annual or special meeting or public
disclosure of the date of the meeting is given less than 90 days prior to the
date of the annual or special meeting, then the stockholder's nomination must be
received not later than the 10th day following the date on which the
announcement of the meeting date was communicated to stockholders.
PageNet
PageNet's bylaws provide that a stockholder may nominate a person for
election to the board of directors at an annual or special stockholders' meeting
if written notice is delivered to and received by PageNet's senior vice
president, general counsel and assistant secretary at PageNet's principal
executive office not more than 120 days nor less than 80 days prior to the
anniversary date of the preceding year's annual meeting or the date of the
special meeting. If the date of the annual meeting has changed more than 30 days
from the preceding year or the date of the special meeting was not publicly
announced more than 90 days prior to the meeting, then the stockholder's notice
must be received not later than the 15th day following the date on which notice
of the annual or special meeting was mailed or was publicly announced, whichever
occurred first.
LIQUIDATION
Arch
Arch's certificate of incorporation contains no liquidation provision.
PageNet
PageNet's certificate of incorporation provides that any vote authorizing
liquidation of PageNet or proceedings for its dissolution may provide, subject
to the rights of creditors and the rights expressly provided for particular
classes or series of stock, for the pro rata distribution of PageNet's assets to
its stockholders, wholly or in part in kind, whether in cash or other property.
The vote may also authorize PageNet's board of directors to determine the
valuation of PageNet's assets for the purpose of liquidation and may divide, or
authorize the board of directors to divide, PageNet's assets, or any part of
them, among its stockholders in a manner that each stockholder will receive a
proportionate amount in value of PageNet's cash or property upon liquidation or
dissolution, even though each stockholder may not receive a strictly
proportionate share of each asset.
AMENDMENTS TO BYLAWS
Arch
Arch's certificate of incorporation provides that its board of directors is
authorized to adopt, amend or repeal Arch's bylaws. Bylaws adopted by Arch's
board of directors may be amended or repealed by the board of directors or by a
majority stockholder vote, except that Arch's certificate of incorporation
requires the vote of at least 80% of Arch's outstanding shares of capital stock
entitled to vote generally in the election of
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directors, voting together as a single class, to amend, repeal or adopt any
provisions inconsistent with the bylaws related to:
- when and where stockholders' meetings may be held and the business
permitted to be conducted at annual meetings of stockholders;
- the business permitted to be conducted at special meetings of
stockholders and who may call those special meetings;
- the notice and quorum requirements for stockholder meetings;
- the requirements for stockholders to bring proposals before an annual
meeting of stockholders;
- the voting procedures at meetings of stockholders and the use of
inspectors of election;
- the requirements for stockholders to nominate persons for election as
directors;
- the size of the board of directors;
- the election and classification of directors;
- the removal of directors and the filling of vacancies on the board of
directors; and
- the amendment of Arch's bylaws.
PageNet
The provisions in PageNet's certificate of incorporation relating to the
amendment of PageNet's bylaws are similar to those in Arch's certificate of
incorporation, except that, PageNet's certificate of incorporation does not
require an 80% vote of PageNet's outstanding shares of capital stock to amend,
repeal or adopt provisions inconsistent with the bylaws related to when and
where stockholders' meetings may be held, the business permitted to be conducted
at annual meetings of stockholders or the voting procedures at meetings of
stockholders and the use of inspectors of election.
REDEMPTION
Arch
Outstanding shares of Arch's stock are always subject to redemption by
Arch, by action of Arch's board of directors, if, in the judgment of the board
of directors, the action should be taken to prevent the loss of, or to secure
the reinstatement of, any license or franchise from any governmental agency that
is held by Arch or any of its subsidiaries to conduct any portion of their
business and which license or franchise is conditioned upon some or all of
Arch's stockholders possessing prescribed qualifications. The terms and
conditions of any such redemption will be as follows:
- the redemption price will equal the lesser of (i) the average closing
price for the shares of stock for the 45 days preceding the notice of
redemption, or (ii) the purchase price of shares of stock, if the shares
were purchased within one year of the redemption date by a person whose
stockholdings, either individually or taken together with the
stockholdings of any other person, may result in the loss of, or the
failure to secure the reinstatement of, any license or franchise from any
governmental agency;
- the redemption price may be paid in cash, in debt or equity securities of
Arch or any of its subsidiaries or in any combination of cash and
securities;
- if Arch is to redeem less than all the shares of stock held by a person
whose stockholdings, either individually or taken together with the
stockholdings of any other person, may result in the loss of, or the
failure to secure the reinstatement of, any license or franchise from any
governmental agency, the selection of the shares to be redeemed will be
determined by Arch's board of directors;
- at least 30 days' written notice of the redemption date must be given to
the holders of the shares of stock to be redeemed, provided that the date
of the written notice may be the redemption date if the
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cash and/or securities used effect the redemption are placed in trust for
the benefit of the holders of the shares of stock to be redeemed and are
subject to immediate withdrawal upon surrender of the stock certificates;
- from and after the redemption date, any and all rights of the holders of
the shares of stock to be redeemed will terminate and the holders will
only be entitled to receive the cash and/or securities payable upon
redemption; and
- any other terms and conditions as Arch's board of directors may
determine.
PageNet
Shares of PageNet's common stock are not subject to redemption by PageNet.
Shares of any series of PageNet's preferred stock will be subject to redemption
by PageNet as set forth in the resolutions adopted by PageNet's board of
directors that authorize the issuance of that series of preferred stock.
LEGAL MATTERS
The validity of the common stock of PageNet and the Class B common stock of
Vast offered by PageNet in the exchange offer will be passed upon for PageNet by
Mayer, Brown & Platt, 190 South LaSalle Street, Chicago, Illinois 60603.
EXPERTS
The consolidated financial statements of PageNet at December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report which is included in this prospectus. Such consolidated financial
statements are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The financial statements of Arch included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports which are included in this prospectus in reliance upon their
authority as experts in accounting and auditing in giving those reports.
The consolidated financial statements of MobileMedia at December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report (which contains an explanatory paragraph describing conditions that
raise substantial doubt about MobileMedia's ability to continue as a going
concern as described in Note 1 of MobileMedia's notes to the consolidated
financial statements) which is included in this prospectus. Such consolidated
financial statements are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
PageNet and Arch file reports, proxy statements and other information with
the SEC as required by the Exchange Act.
MobileMedia Communications, Inc. and MobileMedia Corporation were also
subject to the informational requirements of the Exchange Act but filed only
limited reports after the commencement of their bankruptcy proceedings in
January 1997. Financial statements included in MobileMedia Communications, Inc.
and MobileMedia Corporation's periodic reports from February 1997 through June
1998 were not prepared in accordance with generally accepted accounting
principles due to those companies' inability at the time of such filings to
determine the amount of an impairment loss related to long-lived assets pursuant
to Financial Accounting Standard No. 121. Those financial statements are
unaudited and have been revised periodically based on subsequent determinations
of changes in facts and circumstances impacting previously filed unaudited
financial statements. The audited financial statements of MobileMedia contained
in this
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prospectus reflect adjustments from the unaudited statements, including an
impairment adjustment of $792.5 million recorded as of December 31, 1996.
You can find, copy and inspect information filed by PageNet, by Arch, and,
to the extent available, by MobileMedia Communications, Inc. and MobileMedia
Corporation with the SEC at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
SEC's regional offices at 7 World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
obtain copies of information filed by PageNet with the SEC at prescribed rates
by writing to the SEC's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms. You can review PageNet's, Arch's,
MobileMedia Communications, Inc. and MobileMedia Corporation's electronically
filed reports, proxy and information statements on the SEC's world wide web site
at http://www.sec.gov. PageNet's and Arch's common stock trades on the Nasdaq
National Market under the symbols "PAGE" and "APGR," respectively. Therefore,
you can inspect reports, proxy statements and other information concerning
PageNet and Arch at the offices of the National Association of Securities
Dealers, Inc., Market Listing Section, 1735 K Street, N.W., Washington, D.C.
20006. PageNet maintains a world wide web site at http://www.pagenet.com. Arch
maintains a world wide web site at http://www.arch.com. Neither PageNet's nor
Arch's web site is a part of this prospectus.
PageNet has filed with the SEC a registration statement on Form S-4 under
the Securities Act to register the common stock offered in the exchange offer.
The term "registration statement" includes all amendments, exhibits, annexes and
schedules. This prospectus does not contain all the information you can find in
the registration statement or the exhibits and schedules to the registration
statement. For further information about PageNet, Arch, MobileMedia
Communications, Inc., MobileMedia Corporation and PageNet's and Arch's common
stock, please refer to the registration statement, including its exhibits and
schedules. You may inspect and copy the registration statement, including
exhibits and schedules, as described above. Statements contained in this
prospectus about the contents of any contract or other document are not
necessarily complete, and we refer you, in each case, to the copy of such
contract or other document filed as an exhibit to the registration statement.
YOU MAY REQUEST A COPY OF PAGENET'S, ARCH'S AND MOBILEMEDIA'S FILINGS WITH
THE SEC, AT NO COST, BY WRITING OR TELEPHONING PAGENET AT THE FOLLOWING ADDRESS:
PAGING NETWORK, INC.
14911 QUORUM DRIVE
DALLAS, TEXAS 75240
ATTENTION: INVESTOR RELATIONS
TELEPHONE (972) 801-8000
INCORPORATION OF DOCUMENTS BY REFERENCE
All documents and reports filed by PageNet pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus are
incorporated by reference in this prospectus and will be deemed a part of this
prospectus from the dates of filing of such documents or reports.
Statements contained in subsequently filed documents incorporated or deemed
to be incorporated by reference will modify and supersede statements in the
prospectus or in any previously filed documents to the extent the new
information differs from the old information. Any statements modified or
superseded will no longer constitute a part of this prospectus in their original
form.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PAGING NETWORK, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1998............... F-4
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............... F-5
Consolidated Statements of Shareowners' Deficit for each of
the Three Years in the Period Ended December 31, 1998..... F-6
Notes to Consolidated Financial Statements.................. F-7
Interim Financial Statements (Unaudited):
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998...................................... F-20
Consolidated Statements of Operations for Three and Nine
Month Periods Ended September 30, 1999 and 1998........ F-21
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998...................... F-22
Notes to Consolidated Financial Statements................ F-23
ARCH COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-29
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-30
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1998............... F-31
Consolidated Statements of Stockholders' Equity (Deficit)
for Each of the Three Years in the Period Ended December
31, 1998.................................................. F-32
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............... F-33
Notes to Consolidated Financial Statements.................. F-34
Interim Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets as of December 31,
1998 and September 30, 1999............................ F-48
Consolidated Condensed Statements of Operations for Three
and Nine Month Periods Ended September 30, 1998 and
1999................................................... F-49
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1999.......... F-50
Notes to Consolidated Condensed Financial Statements...... F-51
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-56
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (unaudited)............................ F-57
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1998 and for the
Three Months Ended March 31, 1998 and 1999 (unaudited).... F-58
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for Each of the Three Years in the Period Ended
December 31, 1998 and for the Three Months Ended March 31,
1999 (unaudited).......................................... F-59
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998 and for the
Three Months Ended March 31, 1998 and 1999 (unaudited).... F-60
Notes to Consolidated Financial Statements.................. F-61
</TABLE>
F-1
<PAGE> 230
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and shareowners
Paging Network, Inc.
We have audited the accompanying consolidated balance sheets of Paging
Network, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, cash flows and shareowners' deficit for each of the
three years in the period ended December 31, 1998. These financial statements
arc the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Paging Network,
Inc. as of December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Dallas, Texas
February 15, 1999
F-2
<PAGE> 231
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,924 $ 3,077
Accounts receivable (less allowance for doubtful
accounts of $6,670 and $11,119 in 1997 and 1998,
respectively)......................................... 63,288 84,440
Inventories............................................ 24,114 6,379
Prepaid expenses and other assets...................... 14,888 15,065
---------- ----------
Total current assets.............................. 105,214 108,961
Property, equipment, and leasehold improvements, at cost.... 1,387,560 1,452,870
Loss accumulated depreciation.......................... (469,526) (547,599)
---------- ----------
Net property, equipment and leasehold
improvements.................................... 918,034 905,271
Other non-current assets, at cost........................... 659,661 629,372
Less accumulated amortization.......................... (85,676) (62,360)
---------- ----------
573,985 567,012
---------- ----------
$1,597,233 $1,581,244
========== ==========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Accounts payable....................................... $ 42,640 $ 96,478
Accrued expenses....................................... 36,854 49,692
Accrued interest....................................... 40,085 43,209
Accrued restructuring costs, current portion........... -- 8,256
Customer deposits...................................... 24,460 22,735
Deferred revenue....................................... 11,634 15,874
---------- ----------
Total current liabilities......................... 155,673 236,244
---------- ----------
Long-term obligations....................................... 1,779,491 1,815,137
Accrued restructuring costs, non-current portion............ -- 18,765
Minority interest........................................... -- 1,517
Commitments and contingencies............................... -- --
Shareowners' deficit:
Common Stock -- $.01 par, authorized 250,000,000
shares: issued and outstanding 102,659,915 shares at
December 31, 1997 and 103,640,554 shares at December
31, 1998.............................................. 1,027 1,036
Paid-in capital........................................ 124,908 132,950
Accumulated other comprehensive income................. 908 2,378
Accumulated deficit.................................... (464,774) (626,783)
---------- ----------
Total shareowners' deficit........................ (337,931) (490,419)
---------- ----------
$1,597,233 $1,581,244
========== ==========
</TABLE>
F-3
<PAGE> 232
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Services, rent and maintenance revenues..................... $ 685,960 $ 818,461 $ 945,524
Product sales............................................... 136,527 142,515 100,503
--------- --------- ----------
Total revenues.................................... 822,487 960,976 1,046,027
Cost of products sold....................................... (116,647) (121,487) (77,672)
--------- --------- ----------
705,840 839,489 968,355
Operating expenses:
Services, rent and maintenance......................... 146,896 173,058 210,480
Selling................................................ 82,790 102,995 104,350
General and administrative............................. 219,317 253,886 320,586
Depreciation and amortization.......................... 213,440 289,442 281,259
Restructuring charge................................... -- -- 74,000
Non-recurring charges.................................. 22,500 12,600 --
--------- --------- ----------
Total operating expenses.......................... 684,943 831,981 990,675
--------- --------- ----------
Operating income (loss)..................................... 20,897 7,508 (22,320)
Other income (expense):
Interest expense....................................... (128,014) (151,380) (143,762)
Interest income........................................ 3,679 3,689 2,070
Minority interest...................................... 41 56 2,003
Equity in loss of an unconsolidated subsidiary......... (923) (1,276) --
--------- --------- ----------
Total other income (expense)...................... (125,217) (148,911) (139,689)
--------- --------- ----------
Loss before extraordinary item.............................. (104,320) (141,403) (162,009)
Extraordinary loss.......................................... -- (15,544) --
--------- --------- ----------
Net loss.................................................... $(104,320) $(156,947) $ (162,009)
========= ========= ==========
Net loss per share (basic and diluted):
Loss before extraordinary item......................... $ (1.02) $ (1.38) $ (1.57)
Extraordinary loss..................................... -- (0.15) --
--------- --------- ----------
Net loss per share.......................................... $ (1.02) $ (1.53) $ (1.57)
========= ========= ==========
</TABLE>
F-4
<PAGE> 233
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $(104,320) $(156,947) $(162,009)
Adjustments to reconcile net loss to cash provided by
operating activities:
Restructuring charge................................. -- -- 74,000
Extraordinary loss................................... -- 15,544 --
Depreciation......................................... 191,471 258,798 252,234
Amortization......................................... 21,969 30,644 29,025
Provision for doubtful accounts...................... 14,033 18,343 20,516
Amortization of debt issuance costs.................. 5,261 8,418 4,430
Minority interest.................................... (41) (56) (2,003)
Non-recurring charges................................ 22,500 12,600 --
Other................................................ 923 1,276 --
Changes in operating assets and liabilities:
Accounts receivable.................................. (32,787) (21,542) (35,081)
Inventories.......................................... (8,728) (1,302) 18,349
Prepaid expenses and other assets.................... (3,377) (6,016) 9,133
Accounts payable..................................... (9,919) (18,397) 51,626
Accrued expenses and accrued interest................ 7,548 4,286 16,203
Accrued restructuring costs.......................... -- -- (1,979)
Customer deposits and deferred revenue............... 5,849 4,854 2,515
--------- --------- ---------
Net cash provided by operating activities................... 110,382 150,503 276,959
--------- --------- ---------
Investing activities:
Capital expenditures................................... (437,388) (328,365) (297,041)
Payments for spectrum licenses......................... (109,236) (92,856) (13,065)
Business acquisitions and joint venture investments.... (9,352) (7,253) (7,322)
Deposits for purchase of subscriber devices............ -- (13,493) --
Restricted cash invested in money market instruments... (27,039) (6,422) --
Other, net............................................. (18,107) (11,540) 2,984
--------- --------- ---------
Net cash used in investing activities....................... (601,122) (459,929) (314,444)
--------- --------- ---------
Financing activities:
Borrowings of long-term obligations.................... 223,438 558,317 305,587
Repayments of long-term obligations.................... (414,250) (39,000) (275,555)
Proceeds from exercise of stock options................ 2,825 87 7,606
Redemption of $200 million senior subordinated notes... -- (211,750) --
Proceeds from Senior Notes offerings................... 500,000 -- --
Debt issuance costs on Senior Notes offerings.......... (11,250) -- --
Debt issuance costs on credit agreements............... (3,766) -- --
Other, net............................................. (662) 919 --
--------- --------- ---------
Net cash provided by financing activities................... 296,335 308,573 37,638
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (194,405) (853) 153
Cash and cash equivalents at beginning of year.............. 198,182 3,777 2,924
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 3,777 $ 2,924 $ 3,077
========= ========= =========
</TABLE>
F-5
<PAGE> 234
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' DEFICIT
YEAR ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON PAID-IN COMPREHENSIVE ACCUMULATED SHAREOWNERS'
STOCK CAPITAL INCOME DEFICIT DEFICIT
------ -------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............... $1,022 $121,701 $ -- $(203,507) $ (80,784)
Net loss............................ -- -- -- (104,320) (104,320)
Foreign currency translation
adjustments....................... -- -- 104 -- 104
------ -------- ------ --------- ---------
Total comprehensive loss....... (104,216)
Issuance of 375,270 shares of
Common Stock pursuant to stock
option plans................. 4 2,821 -- -- 2,825
------ -------- ------ --------- ---------
Balance, December 31, 1996............... 1,026 124,522 104 (307,827) (182,175)
Net loss............................ -- -- -- (156,947) (156,947)
Foreign currency translation
adjustments....................... -- -- 804 -- 804
------ -------- ------ --------- ---------
Total comprehensive loss....... (156,143)
Issuance of 38,838 shares of
Common Stock pursuant to stock
option and compensation
plans........................ 1 386 -- -- 387
------ -------- ------ --------- ---------
Balance, December 31, 1997............... 1,027 124,908 908 (464,774) (337,931)
Net loss............................ -- -- -- (162,009) (162,009)
Foreign currency translation
adjustments....................... -- -- 1,470 -- 1,470
------ -------- ------ --------- ---------
Total comprehensive loss....... (160,539)
Issuance of 980,639 shares of
Common Stock pursuant to stock
option and compensation
plans........................ 9 8,042 -- -- 8,051
------ -------- ------ --------- ---------
Balance, December 31, 1998............... $1,036 $132,950 $2,378 $(626,783) $(490,419)
====== ======== ====== ========= =========
</TABLE>
F-6
<PAGE> 235
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Paging Network, Inc. (the Company) is a provider of wireless messaging and
information delivery services. The Company provides service in all 50 states,
the District of Columbia, the U.S. Virgin Islands, Puerto Rico, Canada, and
Spain, including service in all of the largest 100 markets (in population) in
the United States, and owns a minority interest in a wireless messaging company
in Brazil. The consolidated financial statements include the accounts of all of
its wholly and majority-owned subsidiaries. Effective January 1, 1998, the
Company began consolidating the results of its Spanish subsidiary, which had
previously been accounted for under the equity method of accounting. All
intercompany transactions have been eliminated.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Inventories -- Inventories consist of subscriber devices which are held
specifically for resale. Inventories are stated at the lower of cost or market,
with cost determined on a first-in, first-out basis.
Property, equipment, and leasehold improvements -- Property, equipment, and
leasehold improvements are stated at cost, less accumulated depreciation.
Expenditures for maintenance are charged to expense as incurred. Upon retirement
of units of equipment, the costs of units retired and the related accumulated
depreciation amounts are removed from the accounts. Depreciation is computed
using the straight-line method based on the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment..................................... 3 to 7 years(1)
Subscriber devices.......................................... 3 years(2)
Furniture and fixtures...................................... 7 years(1)
Leasehold improvements...................................... 5 years(1)(3)
Building and building improvements.......................... 20 years
</TABLE>
- ---------------
(1) Certain assets written down as a result of the Company's restructuring
described in Note 2 are being depreciated to a common retirement date of
November 30, 1999.
(2) Effective January 1, 1997, the Company changed the estimated useful life of
subscriber devices from 4 years to 3 years, with estimated residual value
ranging up to $20 (see Note 3).
(3) Or term of lease if shorter.
The Company reserves for subscriber devices which it estimates to be
non-recoverable.
Other non-current assets -- Other non-current assets are stated at cost,
less accumulated amortization. Amortization is computed using the straight-line
method based upon the following estimated useful lives:
<TABLE>
<S> <C>
Licenses and frequencies................................ 40 years
Goodwill................................................ 20 years
Other intangible assets................................. 18 months to 3 years
Other non-current assets................................ 10 years to 12 years
</TABLE>
Deferred revenues and customer deposits -- Deferred revenues represent
billing to customers in advance for services not yet performed and are
recognized as revenue in the month the service is provided. Deposits are
received from some customers at the time a service agreement is signed and are
recognized as a liability of the Company until such time as the deposits are
applied, generally against the customer's final bill.
Revenue recognition -- Services, rent and maintenance revenues are
recognized in the month the related services are performed. Product sales are
recognized upon delivery of product to the customer.
F-7
<PAGE> 236
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee stock options -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee stock option
plans. Under APB 25, because the exercise price of the Company's employee stock
options has historically equalled the market price of the underlying stock on
the date of grant, no compensation expense has been recognized.
Advertising costs -- The Company expenses the costs of advertising as
incurred. Advertising expense for the years ended December 31, 1996, 1997, and
1998, was $12.5 million, $21.9 million, and $19.1 million, respectively.
Capitalization of internally developed software -- In March 1998, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants issued Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed For or Obtained for Internal Use" (SOP 98-1). SOP
98-1 requires the capitalization of certain costs of developing or acquiring
computer software for internal use. The Company adopted the provisions of SOP
98-1 effective January 1, 1999; however, the adoption is not expected to have a
material impact on the Company's results of operations or financial position as
the Company's current policy for accounting for the costs of developing or
acquiring computer software for internal use is generally consistent with the
provisions of SOP 98-1.
Comprehensive income (loss) -- As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), which establishes new rules for the reporting and display of
comprehensive income (loss) and its components. SFAS 130 requires certain items,
which prior to adoption were reported separately in shareowners' deficit, to be
included in other comprehensive income (loss). Other comprehensive income as of
December 31, 1996, 1997, and 1998, consists solely of foreign currency
translation adjustments. The adoption of SFAS 130 had no impact on the Company's
net loss or shareowners' deficit.
Reclassifications -- Certain 1996 and 1997 amounts have been reclassified
to conform with the 1998 presentation.
2. RESTRUCTURING CHARGE
On February 8, 1998, the Company's Board of Directors approved a
restructuring of the Company's domestic operations (the Restructuring). As part
of the Restructuring, the Company is reorganizing its operations to expand its
sales organization, eliminate local and redundant administrative operations, and
consolidate certain key support functions. The Company expects to eliminate
approximately 1,600 positions, net of positions added, through the consolidation
of redundant administrative operations and certain key support functions located
in offices throughout the country into centralized facilities (the Centers of
Excellence). As a result of the Restructuring, the Company recorded a charge of
$74.0 million, or $0.72 per share (basic and diluted), during the quarter ended
March 31, 1998. The components of the charge included (in thousands):
<TABLE>
<S> <C>
Write-down of property and equipment........................ $38,900
Lease obligations and terminations.......................... 18,900
Severance and related benefits.............................. 12,700
Other 3,500
-------
Total restructuring charge........................ $74,000
=======
</TABLE>
The write-down of property and equipment related to a non-cash charge to
reduce the carrying amount of certain machinery and equipment, furniture and
fixtures, and leasehold improvements, that the Company will not continue to
utilize following the Restructuring, to their estimated net realizable value as
of the date such assets are projected to be disposed of or abandoned by the
Company, allowing for the recognition of normal
F-8
<PAGE> 237
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
depreciation expense on such assets through their projected disposal date. The
net realizable value of these assets was determined based on management
estimates, which considered such factors as the nature and age of the assets to
be disposed of, the timing of the assets' disposal, and the method and potential
costs of the disposal. Such estimates are subject to change.
The provision for lease obligations and terminations related primarily to
future lease commitments on local and regional office facilities that will be
closed as part of the Restructuring. The charge represents future lease
obligations, net of projected sublease income, on such leases past the dates the
offices will be closed by the Company, or, for certain leases, the cost of
terminating the leases prior to their scheduled expiration. Projected sublease
income was based on management estimates, which are subject to change. Cash
payments on the leases and lease terminations will occur over the remaining
lease terms, the majority of which expire prior to 2003.
Through the elimination of certain local and regional administrative
operations and the consolidation of certain support functions, the Company
expects to eliminate approximately 1,600 net positions, the majority of which
are non-sales related positions in local and regional offices. As a result of
eliminating these positions, the Company will involuntarily terminate an
estimated 1,950 employees. The majority of the severance and benefits costs to
be paid by the Company will be paid during 1999.
During the fourth quarter of 1998, the Company identified additional
furniture, fixtures, and equipment that will not be utilized following the
Restructuring, resulting in an additional non-cash charge of $2.6 million. This
charge was offset by reductions in the provisions for lease obligations and
terminations and severance costs as a result of refinements to the Company's
schedule for local and regional office closures. Also as a result of the
refinements to the office closing schedule, the Company adjusted, effective
October 1, 1998, the depreciable lives of certain of the assets written down in
the first quarter of 1998, resulting in a decrease in depreciation expense of
approximately $3.3 million for the fourth quarter of 1998.
The Company's restructuring activity through December 31, 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
UTILIZATION OF RESERVE
INITIAL ADJUSTMENTS ---------------------- REMAINING
CHARGE TO CHARGE CASH NON-CASH RESERVE
------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Fixed assets impairments............... $38,900 $2,600 $ -- $41,500 $ --
Lease obligation costs................. 18,900 (1,300) 683 -- 16,917
Severance costs........................ 12,700 (1,300) 1,296 -- 10,104
Other.................................. 3,500 -- -- 3,500 --
------- ------ ------ ------- -------
$74,000 $ -- $1,979 $45,000 $27,021
======= ====== ====== ======= =======
</TABLE>
3. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
The cost of property, equipment, and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
1997 1998
(IN THOUSANDS) DECEMBER 31, ---------- ----------
<S> <C> <C>
Machinery and equipment............................. $ 761,208 $ 871,870
Subscriber devices.................................. 506,026 497,238
Furniture and fixtures.............................. 63,772 59,996
Leasehold improvements.............................. 36,704 20,609
Land, buildings, and building improvements.......... 19,850 3,157
---------- ----------
Total cost................................ $1,387,560 $1,452,870
========== ==========
</TABLE>
The Company does not manufacture any of the subscriber devices or related
transmitting and computerized terminal equipment used in the Company's
operations. The Company purchases its subscriber devices from multiple competing
sources. The Company anticipates that subscriber devices will continue to be
available for purchase from multiple sources, consistent with normal
manufacturing and delivery lead times.
F-9
<PAGE> 238
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1997, the Company shortened the depreciable lives of
its subscriber devices from four to three years, and revised the related
residual values. This change increased net loss for the year ended December 31,
1997 by $16.5 million and net loss per share by $0.16.
4. OTHER NON-CURRENT ASSETS
The cost of other non-current assets consisted of the following:
<TABLE>
<CAPTION>
1997 1998
(IN THOUSANDS) DECEMBER 31, -------- --------
<S> <C> <C>
Licenses and frequencies............................... $452,551 $473,211
Goodwill............................................... 49,246 50,495
Restricted cash invested in money market instruments,
at fair value........................................ 33,461 33,461
Other intangible assets................................ 59,460 13,920
Deposits for purchase of subscriber devices............ 13,493 --
Other non-current assets............................... 51,450 58,285
-------- --------
Total cost................................... $659,661 $629,372
======== ========
</TABLE>
Licenses and frequencies consist of amounts paid in conjunction with the
purchase of three nationwide narrowband personal communications services (PCS)
frequencies at a Federal Communications Commission (FCC) auction held in 1994,
amounts paid in conjunction with the purchase of blocks of 2-way 900 MHz
specialized mobile radio (SMR) major trading area based licenses, amounts paid
to purchase exclusive rights to certain of the SMR frequencies from incumbent
operators, and amounts paid to secure other licenses.
At December 31, 1998, the carrying value of the Company's net assets
related to its Spanish subsidiary was $17.7 million, including goodwill of $11.5
million. The Company is currently evaluating certain alternatives with respect
to this subsidiary. It is reasonably possible, depending upon the outcome of
this evaluation and other factors, that the Company's estimate that it will
recover the carrying value of the net assets of its Spanish subsidiary will
change in the near term. As a result, a provision for the impairment of such
assets may be recorded during the year ending December 31, 1999.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities" (SOP 98-5), effective for years
beginning after December 15, 1998. SOP 98-5 requires the expensing of all
start-up costs as incurred as well as the writing off of the remaining
unamortized balance of capitalized start-up costs at the date of adoption of SOP
98-5. The Company adopted the provisions of SOP 98-5 effective January 1, 1999
and recorded a charge of $37.0 million as the cumulative effect of a change in
accounting principle to write-off all unamortized start-up costs as of January
1, 1999.
F-10
<PAGE> 239
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
1997 1998
-------------------------- --------------------------
(CARRYING (CARRYING
(IN THOUSANDS) DECEMBER 31, VALUE) (FAIR VALUE) VALUE) (FAIR VALUE)
<S> <C> <C> <C> <C>
Borrowings under Credit Agreement......... $ 539,000 $ 539,000 $ 565,000 $ 565,000
10% Senior Subordinated Notes due October
15, 2008................................ 500,000 517,900 500,000 477,473
10.125% Senior Subordinated Notes due
August 1, 2007.......................... 400,000 418,080 400,000 382,964
8.875% Senior Subordinated Notes due
February 1, 2006........................ 300,000 295,770 300,000 292,484
Other..................................... 40,491 40,491 50,137 50,137
---------- ---------- ---------- ----------
Total long-term obligations..... $1,779,491 $1,811,241 $1,815,137 $1,768,058
========== ========== ========== ==========
</TABLE>
Under the Company's $1.0 billion domestic revolving credit agreement (the
Credit Agreement), the Company is able to borrow, provided it meets certain
financial covenants, the lesser of $1.0 billion or an amount based primarily
upon the Company's domestic earnings before interest, income taxes,
depreciation, and amortization (EBITDA) for the most recent fiscal quarter. As
of December 31, 1998, the Company had $565.0 million of borrowings outstanding
under the Credit Agreement, and $65.8 million was available for additional
borrowings as of that date based on the Company's domestic EBITDA for the fourth
quarter of 1998. The availability of additional borrowings in periods subsequent
to December 31, 1998 is based upon the Company's domestic EBITDA for such future
periods. The Company's maximum borrowings under the Credit Agreement are
permanently reduced beginning on June 30, 2001, by the following amounts:
2001 -- $150.0 million; 2002 -- $200.0 million; 2003 -- $250.0 million; and
2004 -- $400.0 million. The Company's Credit Agreement expires on December 31,
2004.
Under the Credit Agreement, the Company may designate all or a portion of
outstanding borrowings to be either a Base Rate Loan or a loan based on the
London Interbank Offered Rate (LIBOR). As of December 31, 1998, the Company had
designated $552.0 million of borrowings as LIBOR loans, which bear interest at a
rate equal to LIBOR plus a spread of 1.50%, and $13.0 million of borrowings as a
Base Rate Loan, which bears interest at a rate equal to the prime rate plus a
spread of 0.50%, based on the Company's total leverage ratio as defined. The
interest rates for the $552.0 million of LIBOR loans as of December 31, 1998
ranged from 6.47% to 6.81%. The interest rate for the $13.0 million Base Rate
Loan as of December 31, 1998 was 8.25%.
The Credit Agreement prohibits the Company from paying cash dividends or
other cash distributions to shareowners. The Credit Agreement also prohibits the
Company from paying more than a total of $2.0 million in connection with the
purchase of Common Stock owned by employees whose employment with the Company is
terminated. The Credit Agreement contains other covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
indebtedness, engage in transactions with affiliates, dispose of assets, and
engage in mergers, consolidations, and other acquisitions. Amounts owing under
the Credit Agreement are secured by a security interest in substantially all of
the Company's assets, the assets of the Company's subsidiaries, and the capital
stock of the subsidiaries of the Company.
The two credit agreements of the Company's Canadian subsidiaries provide
for total borrowings of approximately $70 million. As of December 31, 1998,
approximately $45.1 million of borrowings were outstanding under the credit
facilities. Such borrowings were collateralized by $33.5 million of restricted
cash included in other non-current assets. Additional borrowings are available
under these facilities, provided such borrowings are either collateralized or
certain financial conditions are met. As of December 31, 1998, the Company's
Canadian subsidiaries are in compliance with all financial covenants of their
separate credit
F-11
<PAGE> 240
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreements; however, the Company has entered into negotiations with its lenders
to modify certain covenants that the Company believes may not be satisfied
during the second and third quarters of 1999. Although the Company anticipates
that these negotiations will be successful and will not result in a material
change in borrowing capacity or interest expense, no assurance can be made that
such result will be attained. Maximum borrowings that may be outstanding under
the credit facilities are permanently reduced beginning on March 31, 2001, by
the following amounts: 2001 -- $7 million; 2002 -- $21 million; 2003 -- $21
million; and 2004 -- $21 million. Both credit agreements expire on December 31,
2004.
The 8.875% Senior Subordinated Notes (8.875% Notes), the 10.125% Senior
Subordinated Notes (10.125% Notes), and the 10% Senior Subordinated Notes (10%
Notes) are redeemable on or after February 1, 1999; August 1, 2000; and October
15, 2001; respectively, at the option of the Company, in whole or in part from
time to time, at certain prices declining annually to 100 percent of the
principal amount on or after February 1, 2002; August 1, 2003; and October 15,
2004; respectively, plus accrued interest. The 8.875% Notes, the 10.125% Notes,
and the 10% Notes are subordinated in right of payment to all senior debt, and
contain various covenants that, among other things, limit the ability of the
Company and its subsidiaries to incur indebtedness, pay dividends, engage in
transactions with affiliates, sell assets, and engage in mergers,
consolidations, and other acquisitions. The fair values of the 8.875% Notes, the
10.125% Notes, and the 10% Notes were based on quoted market prices and
discounted cash flow analyses.
On May 14, 1997, the Company redeemed all $200.0 million of its outstanding
11.75% Senior Subordinated Notes (11.75% Notes), utilizing funds borrowed under
the Company's Credit Agreement. The Company recorded an extraordinary loss of
$15.5 million in the second quarter of 1997 on the early retirement of the
11.75% Notes. The extraordinary loss was comprised of the redemption premium of
$11.8 million and the write-off of unamortized issuance costs of $3.7 million.
6. INCOME TAXES
For the years ended December 31, 1996, 1997, and 1998, the Company had no
provision or benefit for income taxes because the deferred benefit from the
operating losses was offset by an increase in the valuation allowance of $36.9
million, $56.4 million, and $57.6 million, respectively. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1998
(IN THOUSANDS) DECEMBER 31, -------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $167,330 $197,983
Deferred revenue.................................. 4,394 5,982
Bad debt reserve.................................. 2,561 3,768
Other tax credit carryforwards.................... 691 679
Other............................................. 6,445 28,482
-------- --------
Total deferred tax assets.................... 181,421 236,894
Valuation allowance............................... (143,897) (201,496)
-------- --------
Net deferred tax assets...................... 37,524 35,398
Deferred tax liabilities:
Depreciation...................................... (29,232) (23,450)
Amortization...................................... (8,292) (11,948)
-------- --------
Total deferred tax liabilities............... (37,524) (35,398)
-------- --------
$ -- $ --
======== ========
</TABLE>
As of December 31, 1998, the Company has net operating loss carryforwards
of approximately $508 million that expire in years 1999 through 2018. Of such
amounts, $5.0 million expire in 1999 and
F-12
<PAGE> 241
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$5.1 million expire in 2001. Loss before income taxes attributable to the
Company's foreign operations was $13.1 million, $13.9 million, and $11.8 million
for the years ended December 31, 1996, 1997, and 1998.
7. STOCK OPTIONS
The 1982 Incentive Stock Option Plan, as amended (1982 Plan), for officers
and key employees of the Company provides for the granting of stock options
intended to qualify as Incentive Stock Options (ISOs) to purchase Common Stock
at not less than 100% of the fair market value on the date the option is
granted, as determined by the Board of Directors. No further options may be
granted under the 1982 Plan. As of December 31, 1998, options for 297,111 shares
were exercisable under the 1982 Plan. All options outstanding and exercisable
under the 1982 Plan are fully vested.
Options granted were exercisable immediately, or in installments as the
Board of Directors determined at the time it granted such options, and have a
duration of ten years from the date of grant. Any stock issued is subject to
repurchase at the option of the Company, which occurs at the exercise price for
the unvested portion of the shares issued and at fair market value, as defined
or allowed in the Stock Option Agreement, for the vested portion. Such options
vest ratably over a five-year period from the date they first become
exercisable. However, in the event of a change in ownership control of the
Company, all options vest immediately.
The 1991 Stock Option Plan (1991 Plan) for officers and key employees of
the Company provides for the granting of ISOs and non-statutory options to
purchase Common Stock at not less than 100% of the fair market value on the date
the options are granted. The 1991 Plan is administered by the Compensation and
Management Development Committee of the Board of Directors (the Committee).
Approximately 4.7 million shares remained available for grant under the 1991
Plan as of December 31, 1998. A total of 2,645,400 shares were vested and
exercisable under the 1991 Plan as of December 31, 1998. Options granted under
the 1991 Plan are non-transferable except by the laws of descent and
distribution and are exercisable upon vesting, which occurs in installments, as
the Board of Directors or the Committee may determine at the time it grants such
options.
On May 21, 1998, the Company's shareowners approved an amendment to its
1991 Plan to broaden the group of employees eligible to receive stock options
under such plan to include all employees of the Company and its subsidiaries. On
May 22, 1998, the Company granted approximately 2.1 million of options under the
1991 Plan to approximately 2,700 employees at an exercise price of $13.94 per
share, which represented the market price of the Company's Common Stock at the
date of grant. Grants of stock options to eligible new employees are made
following the completion of three months of service.
The Amended and Restated 1992 Directors Compensation Plan (Directors'
Plan), for non-employee Directors of the Company, provides for the granting of
non-statutory options to purchase Common Stock at not less than 100% of the fair
market value on the date the options are granted. The Directors' Plan is
administered by the Committee. The total number of shares of Common Stock with
respect to which options may be granted under the Directors' Plan may not exceed
750,000. Approximately 165,000 shares remain available for grant under the
Directors' Plan as of December 31, 1998. A total of 261,000 shares were vested
and exercisable as of December 31, 1998. Options granted under the Directors'
Plan are non-transferable except by the laws of descent and distribution and are
exercisable upon vesting, which occurs in installments, as the Board of
Directors or the Committee may determine at the time it grants such options.
With respect to the 1991 Plan and the Directors' Plan, notwithstanding the
above, ten business days before a merger or a change in the ownership control of
the Company or a sale of substantially all the assets of the Company, all
options issued vest immediately and become exercisable in full; upon a merger or
a change in ownership control of the Company or the sale of substantially all
the assets of the Company, all options issued under the 1991 Plan and Directors'
Plan which have not been exercised terminate.
F-13
<PAGE> 242
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 12, 1997, the Company offered an election to its employees with
options granted during 1995 and 1996 under the 1991 Plan to cancel such options
and accept a lesser number of new options at a lower exercise price, with the
vesting dates being restarted with the new grant dates. As a result of the
election by certain of its employees, the Company canceled 2.9 million of
options with exercise prices ranging from $13.69 to $26.50 and granted
approximately 1.1 million of options to the same optionees with an exercise
price of $8.25 per share.
Information concerning options as of December 31, 1996, 1997, and 1998 is
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at January 1..................... 4,664,735 5,968,605 5,687,335
Granted................................. 2,307,100 3,435,873 5,066,000
Canceled................................ (627,960) (3,705,609) (1,241,982)
Exercised............................... (375,270) (11,534) (931,785)
------------ ------------ ------------
Outstanding at December 31................... 5,968,605 5,687,335 8,579,568
============ ============ ============
Exercisable at December 31................... 1,920,085 2,450,795 3,253,511
============ ============ ============
Option price range-options outstanding....... $2.67-$26.50 $2.67-$25.50 $2.67-$25.50
Option price range-options exercised......... $2.73-$14.38 $2.73-$ 9.25 $2.67-$14.38
</TABLE>
Weighted-average exercise prices are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -----
<S> <C> <C> <C>
Outstanding at January 1.................................... $12.22 $15.90 $9.47
Granted................................................ 22.33 9.54 12.59
Canceled............................................... 17.19 19.89 12.79
Exercised.............................................. 7.53 7.49 8.16
Outstanding at December 31.................................. 15.90 9.47 10.98
Exercisable at December 31.................................. 9.65 9.12 9.85
</TABLE>
Certain information is being presented based on a range of exercise prices
as of December 31, 1998, as follows:
<TABLE>
<S> <C> <C> <C>
$ 2.67-$8.69 $9.06-$13.38 $13.63-$25.50
------------ ------------ -------------
Number of shares outstanding................ 2,946,560 2,877,468 2,755,540
Weighted-average exercise price............. $ 7.18 $ 11.97 $ 14.00
Weighted-average remaining contractual
life...................................... 7.06 8.28 9.11
Number of shares exercisable................ 1,622,223 960,468 670,820
Weighted-average exercise price of shares
exercisable............................... $ 7.02 $ 11.69 $ 14.07
</TABLE>
The Company adopted the pro forma disclosure provisions of the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) in 1996. As required by SFAS 123, pro forma information
regarding net loss and net loss per share has been determined as if the Company
had accounted for employee stock options and stock-based awards granted
subsequent to December 31, 1994 under the fair value method provided for under
SFAS 123. The weighted-average fair value of stock options granted during 1996,
1997, and 1998 was $13.58, $5.98, and $7.21, respectively. The fair value for
the stock options granted to officers and key employees of the Company after
January 1, 1995 was estimated at the date of the grant using the Black-Scholes
option pricing model with the following assumptions: risk-free interest ranging
from 5.54% to 6.83% for 1996, ranging from 5.46% to 6.89% for 1997, and ranging
from 4.09% to 5.72% for 1998; a dividend yield of 0%; volatility factors of the
expected market price of the Company's Common Stock ranging from 53.2% to 54.4%
for 1996, ranging from 54.4% to 57.6% for 1997, and ranging
F-14
<PAGE> 243
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from 56.8% to 60.0% for 1998; and a weighted average expected life of each
option ranging from 5.5 years to 6.7 years for 1996, 1997, and 1998.
For purposes of the pro forma disclosures, the estimated fair market value
of the options and stock-based awards is amortized to expense over the vesting
period. The Company's pro forma information is as follows (in thousands, except
for net loss per common share information):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C> <C>
Net loss As reported $(104,320) $(156,947) $(162,009)
Pro forma $(110,533) $(172,884) $(179,834)
Net loss per common share (basic and
diluted) As reported $ (1.02) $ (1.53) $ (1.57)
Pro forma $ (1.08) $ (1.68) $ (1.74)
</TABLE>
Because SFAS 123 is applicable only to options and stock-based awards
granted subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 2001.
8. COMMITMENTS
The Company has operating leases for office and transmitting sites with
lease terms ranging from a month to approximately ten years. There are no
significant renewal or purchase options. Total rent expense for 1996, 1997, and
1998 was approximately $60.7 million, $69.5 million, and $80.5 million,
respectively.
The following is a schedule by year of future minimum rental payments
required under operating leases that have remaining noncancelable lease terms in
excess of one year as of December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: (IN THOUSANDS)
---------------------------------------
<S> <C>
1999........................................................ $24,225
2000.............................................. 18,680
2001.............................................. 13,004
2002.............................................. 8,019
2003.............................................. 3,671
Later years....................................... 4,941
-------
Total minimum payments required......... $72,540
=======
</TABLE>
As part of the Company's Restructuring, certain leases will be terminated
prior to their scheduled expiration, generally upon the payment of a termination
fee, and certain office space and facilities will be subleased through the
expiration of the related leases, generally for amounts less than the Company's
lease commitments for such space. The aforementioned leases are included in the
table above based on the term of the lease without consideration of any
potential sublease income.
9. CONTINGENCIES
The Company is involved in various lawsuits arising in the normal course of
business. In management's opinion, the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company's business, financial
position, or results of operations.
10. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted average
number of common shares outstanding. The number of shares used to compute per
share amounts for the years ended December 31, 1996, 1997, and 1998, was 102.5
million, 102.6 million, and 103.4 million, respectively. The average number of
options to purchase shares of the Company's Common Stock during the years ended
December 31, 1996,
F-15
<PAGE> 244
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997, and 1998, were 5.6 million, 6.0 million, and 7.8 million, respectively, at
exercise prices ranging from $2.67 per share to $25.50 per share. These stock
options were not included in the computation of diluted earnings per share
because the effect of assuming their exercise would have been antidilutive.
The Company has 275.0 million of authorized shares, of which 250.0 million
are Common Stock and 25.0 million are preferred stock. As of December 31, 1998,
approximately 15.8 million shares of Common Stock were reserved for the issuance
of shares under the Company's stock option and other plans. As of December 31,
1998, there were no preferred shares issued or outstanding.
On May 23, 1996, the Company's shareowners approved an employee stock
purchase plan of up to 2.0 million shares of the Company's Common Stock. Under
the employee stock purchase plan, an employee may elect to purchase shares of
the Company's Common Stock at the end of a predetermined period at a price equal
to 85% of the fair market value of the Company's Common Stock at the beginning
or end of such period, whichever is lower. The Company implemented two-year
employee stock purchase plans on January 1, 1997 and 1998, and a one-year plan
on January 1, 1999.
11. NON-RECURRING CHARGES
During the year ended December 31, 1997, the Company recorded a provision
of $12.6 million to write-down certain subscriber devices to their net
realizable value. During the year ended December 31, 1996, the Company recorded
a provision of $22.5 million to write-off certain subscriber devices deemed to
be unrecoverable that had been distributed through a national marketing
affiliate to customers who later discontinued service.
12. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less. As of December 31, 1998, cash
equivalents also include investments in money market instruments, which are
carried at fair market value. Cash payments made for interest for the years
ended December 31, 1996, 1997, and 1998 were approximately $115.5 million,
$143.5 million, and $136.2 million, respectively, net of $15.9 million and $21.9
million, respectively, of interest capitalized during the years ended December
31, 1997 and 1998. During the year ended December 31, 1998, the Company utilized
$13.5 million of deposits made in 1997 for the purchase of subscriber devices.
There were no significant federal or state income taxes paid or refunded for the
years ended December 31, 1996, 1997, and 1998.
13. EMPLOYEE BENEFIT PLANS
The Company has adopted a plan to provide retirement benefits under the
provisions of Section 401(k) of the Internal Revenue Code (the Code) for all
employees who have completed a specified term of service. Effective January 1,
1996, Company contributions equal 50% of employee contributions up to a maximum
of 6% of the employee's compensation. Employees may elect to contribute up to
15% of their compensation on a pre-tax basis, not to exceed the maximum amount
allowed as determined by the Code. The Company's contributions aggregated
approximately $1.9 million in 1996, $2.2 million in 1997, and $2.8 million in
1998.
14. STOCK PURCHASE RIGHTS
In September 1994, the Board of Directors of the Company adopted a Stock
Purchase Rights Plan and declared a distribution of one common share purchase
right for each outstanding share of the Company's Common Stock. As of September
28, 1994, certificates representing shares of the Company's Common Stock also
represent ownership of one common share purchase right. In January 1999, the
Board of Directors of the Company amended the Rights Plan to eliminate certain
provisions held to be unenforceable under Delaware law.
F-16
<PAGE> 245
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Generally, the rights will become exercisable only if a person or group (I)
acquires 20% or more of the Company's Common Stock or (ii) announces a tender
offer that would result in ownership of 20% or more of the Company's Common
Stock or (iii) is declared to be an "Adverse Person" by the Board of Directors.
Adverse Person includes any person or group who owns at least 10% of the
Company's Common Stock and attempts an action that would adversely impact the
Company.
Once a person or group has acquired 20% or more of the outstanding Common
Stock of the Company, each right may entitle its holder (other than the 20%
person or group) to purchase, at an exercise price of $150, shares of Common
Stock of the Company (or of any company that acquires the Company) at a price
equal to 50% of their current market price. Under certain circumstances, the
Board of Directors may exchange the rights for Common Stock (or equivalent
securities) on a one-for-one basis.
Until declaration of an Adverse Person, or ten (10) days after public
announcement that any person or group has acquired 20% or more of the Common
Stock of the Company, the rights are redeemable at the option of the Board of
Directors. Thereafter, they may be redeemed by the Board of Directors in
connection with certain acquisitions not involving any acquiring person or
Adverse Person or in certain circumstances following a disposition of shares by
the acquiring person or Adverse Person. The redemption price is $0.01 per right.
The rights will expire on September 27, 2004, unless redeemed prior to that
date.
15. SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131). The Company has adopted
SFAS 131 in its 1998 annual financial statements. SFAS 131 requires that a
public company report annual and interim financial and descriptive information
about its reportable operating segments pursuant to criteria that differ from
current accounting practice. Operating segments, as defined, are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance.
The Company has determined that it has two reportable segments, core
operations and advanced messaging operations. The Company's basis for the
segments relates to the types of products and services each segment provides.
The core operating segment includes the traditional display and alphanumeric
services, which are basic one-way services, and 1 1/2-way paging services. The
advanced messaging operating segment includes the new 2-way wireless messaging
services, advanced wireless integration products, consumer content, VoiceNow
service, Iridium WorldPage, and other future advanced messaging products.
F-17
<PAGE> 246
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents certain information related to the Company's
business segments as of December 31, 1996, 1997, and 1998 or for the years ended
December 31, 1996, 1997, and 1998.
<TABLE>
<CAPTION>
1996 1997 1998
(IN THOUSANDS) ---------- ---------- ----------
<S> <C> <C> <C>
Net Revenues (1):
Core(2)......................................... $ 705,840 $ 839,217 $ 966,204
Advanced Messaging.............................. -- 272 2,151
---------- ---------- ----------
$ 705,840 $ 839,489 $ 968,355
========== ========== ==========
Depreciation and amortization:
Core(2)......................................... $ 213,440 $ 276,590 $ 266,319
Advanced Messaging.............................. -- 12,852 14,940
---------- ---------- ----------
$ 213,440 $ 289,442 $ 281,259
========== ========== ==========
Operating income (loss):
Core(2)......................................... $ 20,897(3) $ 31,399(4) $ 17,406(5)
Advanced Messaging.............................. -- (23,891) (39,726)(6)
---------- ---------- ----------
$ 20,897 $ 7,508 $ (22,320)
========== ========== ==========
Adjusted EBITDA(7):
Core(2)......................................... $ 256,837 $ 320,589 $ 357,725
Advanced Messaging.............................. -- (11,039) (24,786)
---------- ---------- ----------
$ 256,837 $ 309,550 $ 332,939
========== ========== ==========
Capital expenditures:
Core(2)......................................... $ 390,685 $ 224,459 $ 199,610
Advanced Messaging.............................. 46,703 103,906 97,431
---------- ---------- ----------
$ 437,388 $ 328,365 $ 297,041
========== ========== ==========
Net interest expense(8):
Core(2)......................................... $ 96,365 $ 90,458 $ 74,729
Advanced Messaging.............................. 27,970 57,233 66,963
---------- ---------- ----------
$ 124,335 $ 147,691 $ 141,692
========== ========== ==========
Free Cash Flow(9):
Core(2)......................................... $ (230,213) $ 5,672 $ 83,386
Advanced Messaging.............................. (74,673) (172,178) (189,180)
---------- ---------- ----------
$ (304,886) $ (166,506) $ (105,794)
========== ========== ==========
Total assets:
Core(2)......................................... $1,077,772 $1,045,761 $ 932,889
Advanced Messaging.............................. 361,841 551,472 648,355
---------- ---------- ----------
$1,439,613 $1,597,233 $1,581,244
========== ========== ==========
</TABLE>
- ---------------
(1) Net Revenues are revenues from services, rent, and maintenance plus product
sales less the cost of products sold.
(2) The international operations of the Company currently consist entirely of
core services and accordingly are included in the Company's core business
segment.
(3) Operating income for the core business segment for 1996 includes a $22.5
million non-recurring charge related to the write-off of certain subscriber
devices deemed to be unrecoverable that had been distributed through a
national marketing affiliate to customers who later discontinued service.
See Note 11.
(4) Operating income for the core business segment for 1997 includes a $12.6
million non-recurring charge to write-down certain subscriber devices to
their net realizable value. See Note 11.
F-18
<PAGE> 247
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) Operating income for the core business segment for 1998 includes a
restructuring charge of $74.0 million. See Note 2.
(6) Operating loss for the advanced messaging business segment for 1998 includes
a provision of $4.1 million to write-off a deposit determined to be
non-recoverable.
(7) Adjusted EBITDA is earnings before interest, income taxes, depreciation,
amortization, minority interest, equity in loss of an unconsolidated
subsidiary, restructuring charge, non-recurring charges, and extraordinary
loss.
(8) Net interest expense is interest expense less interest income.
(9) Free Cash Flow is Adjusted EBITDA less capital expenditures (excluding
payments for spectrum licenses) and debt service.
Adjusted EBITDA and Free Cash Flow are not measures defined in generally
accepted accounting principles and should not be considered in isolation or as a
substitute for measures of performance in accordance with generally accepted
accounting principles.
16. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the two years ended December 31, 1998
is summarized below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
Services, rent and maintenance revenues....... $188,880 $199,584 $210,611 $219,386
Product sales................................. 36,368 33,666 35,753 36,728
-------- -------- -------- --------
Total revenues........................... 225,248 233,250 246,364 256,114
Cost of products sold......................... (31,357) (28,805) (30,341) (30,984)
-------- -------- -------- --------
193,891 204,445 216,023 225,130
Operating income (loss).......................... (188) 6,120 8,263 (6,687)(1)
Loss before extraordinary item................ (37,314) (31,963) (29,401) (42,725)(1)
Extraordinary loss............................ -- (15,544) -- --
Net loss...................................... (37,314) (47,507) (29,401) (42,725)(1)
Net loss per share (basic and diluted):
Loss before extraordinary item................ (0.36) (0.31) (0.29) (0.42)(1)
Extraordinary loss............................ -- (0.15) -- --
Net loss per share............................ (0.36) (0.46) (0.29) (0.42)(1)
1998
Services, rent and maintenance revenues....... $229,861 $235,172 $239,689 $240,802
Product sales................................. 25,889 29,329 25,382 19,903
-------- -------- -------- --------
Total revenues........................... 255,750 264,501 265,071 260,705
Cost of products sold......................... (21,103) (23,161) (18,276) (15,132)
-------- -------- -------- --------
234,647 241,340 246,795 245,573
Operating income (loss)....................... (56,605)(2) 19,803 17,998 (3,516)(3)
Net loss...................................... (92,372)(2) (15,619) (16,428) (37,590)(3)
Net loss per share (basic and diluted)........ (0.90)(2) (0.15) (0.16) (0.36)(3)
</TABLE>
- ---------------
(1) Operating loss for the fourth quarter of 1997 includes a $12.6 million
non-recurring charge related to the write-down of certain subscriber devices
to their net realizable value. See Note 11.
(2) Operating loss for the first quarter of 1998 includes a restructuring charge
of $74.0 million. See Note 2.
(3) Operating loss for the fourth quarter of 1998 includes a provision of $4.1
million to write-off a deposit determined to be non-recoverable during the
fourth quarter of 1998.
F-19
<PAGE> 248
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,077 $ 102,961
Accounts receivable, less allowance for doubtful
accounts.............................................. 84,440 77,253
Inventories............................................ 6,379 10,278
Prepaid expenses and other assets...................... 15,065 12,983
---------- ----------
Total current assets.............................. 108,961 203,475
Property, equipment, and leasehold improvements, at cost.... 1,452,870 1,511,209
Less accumulated depreciation.......................... (547,599) (727,712)
---------- ----------
Net property, equipment, and leasehold improvements.... 905,271 783,497
Other non-current assets, at cost........................... 629,372 612,231
Less accumulated amortization.......................... (62,360) (78,318)
---------- ----------
Net other non-current assets........................... 567,012 533,913
---------- ----------
$1,581,244 $1,520,885
========== ==========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Accounts payable....................................... $ 96,478 $ 109,962
Accrued expenses....................................... 49,692 33,800
Accrued interest....................................... 43,209 38,585
Accrued restructuring costs, current portion........... 8,256 12,521
Customer deposits...................................... 22,735 17,785
Deferred revenue....................................... 15,874 20,553
---------- ----------
Total current liabilities......................... 236,244 233,206
---------- ----------
Long-term obligations....................................... 1,815,137 1,999,320
Accrued restructuring costs, non-current portion............ 18,765 12,783
Minority interest........................................... 1,517 --
Commitments and contingencies............................... -- --
Shareowners' deficit:
Common Stock -- $.01 par, authorized 250,000,000
shares; 103,640,554 and 103,960,240 shares issued and
outstanding as of December 31, 1998 and September 30,
1999, respectively.................................... 1,036 1,040
Paid-in capital........................................ 132,950 134,161
Accumulated other comprehensive income................. 2,378 1,161
Accumulated deficit.................................... (626,783) (860,786)
---------- ----------
Total shareowners' deficit........................ (490,419) (724,424)
---------- ----------
$1,581,244 $1,520,885
========== ==========
</TABLE>
See accompanying notes
F-20
<PAGE> 249
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1998 1999 1998 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues............ $239,689 $ 223,063 $ 704,722 $ 696,566
Product sales...................................... 25,382 24,347 80,600 68,969
-------- --------- --------- ---------
Total revenues........................... 265,071 247,410 785,322 765,535
Cost of products sold.............................. (18,276) (16,374) (62,540) (43,013)
-------- --------- --------- ---------
246,795 231,036 722,782 722,522
Operating expenses:
Services, rent and maintenance................ 52,643 63,033 158,011 193,705
Selling....................................... 27,284 24,231 72,320 70,223
General and administrative.................... 79,811 84,648 224,035 260,877
Depreciation and amortization................. 69,059 72,623 213,220 268,171
Provision for asset impairment................ -- -- -- 17,798
Restructuring charge.......................... -- -- 74,000 --
-------- --------- --------- ---------
Total operating expenses................. 228,797 244,535 741,586 810,774
-------- --------- --------- ---------
Operating income (loss)............................ 17,998 (13,499) (18,804) (88,252)
Other income (expense):
Interest expense................................... (35,822) (37,296) (109,353) (111,097)
Interest income.................................... 534 681 1,564 1,986
Minority interest.................................. 862 626 2,174 806
-------- --------- --------- ---------
Total other income (expense)............. (34,426) (35,989) (105,615) (108,305)
-------- --------- --------- ---------
Loss before cumulative effect of a change in
accounting principle............................. (16,428) (49,488) (124,419) (196,557)
Cumulative effect of a change in accounting
principle........................................ -- -- -- (37,446)
-------- --------- --------- ---------
Net loss........................................... $(16,428) $ (49,488) $(124,419) $(234,003)
======== ========= ========= =========
Net loss per share (basic and diluted):
Loss before cumulative effect of a change in
accounting principle............................. $ (0.16) $ (0.48) $ (1.20) $ (1.89)
Cumulative effect of a change in accounting
principle........................................ -- -- -- (0.36)
-------- --------- --------- ---------
Net loss per share................................. $ (0.16) $ (0.48) $ (1.20) $ (2.25)
======== ========= ========= =========
</TABLE>
See accompanying notes
F-21
<PAGE> 250
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss............................................... $(124,419) $(234,003)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Provision for asset impairment......................... -- 17,798
Cumulative effect of a change in accounting
principle............................................. -- 37,446
Restructuring charge................................... 74,000 --
Depreciation........................................... 193,242 254,884
Amortization........................................... 19,978 13,287
Provision for doubtful accounts........................ 13,780 20,896
Amortization of debt issuance costs.................... 3,316 3,411
Minority interest...................................... (2,174) (806)
Other.................................................. 4,160 --
Changes in operating assets and liabilities:
Accounts receivable............................... (11,990) (14,841)
Inventories....................................... 2,512 (4,066)
Prepaid expenses and other assets................. 2,430 1,939
Accounts payable.................................. 11,752 15,132
Accrued expenses and accrued interest............. 3,248 (20,147)
Accrued restructuring costs....................... (2,101) (1,717)
Customer deposits and deferred revenue............ 3,010 (197)
--------- ---------
Net cash provided by operating activities................... 190,744 89,016
--------- ---------
Investing activities:
Capital expenditures................................... (171,295) (162,830)
Payments for spectrum licenses......................... (6,044) (3,835)
Business acquisitions and joint venture investments.... (6,528) --
Other, net............................................. 10,873 (9,047)
--------- ---------
Net cash used in investing activities....................... (172,994) (175,712)
--------- ---------
Financing activities:
Borrowings of long-term obligations.................... 216,710 321,353
Repayments of long-term obligations.................... (230,907) (135,979)
Proceeds from exercise of stock options................ 7,607 1,206
--------- ---------
Net cash provided by (used in) financing activities......... (6,590) 186,580
--------- ---------
Net increase in cash and cash equivalents................... 11,160 99,884
Cash and cash equivalents at beginning of period............ 2,924 3,077
--------- ---------
Cash and cash equivalents at end of period.................. $ 14,084 $ 102,961
========= =========
</TABLE>
See accompanying notes
F-22
<PAGE> 251
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. MERGER AGREEMENT AND LIQUIDITY
On November 8, 1999, Paging Network, Inc. (the Company) announced that the
Company had signed a definitive agreement (the Merger Agreement) to merge (the
Merger) with Arch Communications Group, Inc. (Arch). Under the terms of the
Merger Agreement, each share of the Company's common stock will be exchanged for
0.1247 share of Arch common stock. Under the terms of the Merger Agreement, the
Company's 8.875% senior subordinated notes due 2006, its 10% senior subordinated
notes due 2008, and its 10.125% senior subordinated notes due 2007
(collectively, the Notes), along with all accrued interest thereon, will be
exchanged in a registered exchange offer under which the holders of each $1,000
of outstanding principal of Notes will receive, upon consummation of the Merger,
approximately 64 shares of common stock of Arch. The Merger Agreement also
requires that certain senior notes and preferred stock of Arch be converted into
Arch common stock as part of a recapitalization of the combined company.
As part of the Merger, the Company intends to distribute 80.5% of its
interest in Silverlake Communications, Inc., a wholly-owned subsidiary of the
Company doing business as Vast Solutions (Vast Solutions), to holders of the
Notes and the Company's common stock. Holders of the Notes will receive up to an
68.9% interest in Vast Solutions, while holders of the Company's common stock
will receive up to an 11.6% interest. The remaining 19.5% interest will be held
by the combined company following the Merger.
The Merger Agreement and related recapitalization of the combined company
require a 97.5% acceptance by the holders of the Notes and Arch's senior
discount noteholders, in addition to the affirmative votes of a majority of the
Company's stockholders, Arch's stockholders, and Arch's Series C preferred
stockholders, to complete the Merger. Consent of the lenders under the Company's
$1 billion revolving credit facility (the Credit Agreement) is also required.
The Merger Agreement also provides for the Company to file a "pre-packaged"
Chapter 11 reorganization plan if the level of acceptances from the holders of
the Notes is below 97.5%, but greater than 66.7%, the level required for
consummation of a "pre-packaged" Chapter 11 reorganization plan.
Consummation of the Merger is subject to completion of the recapitalization
described, customary regulatory review, certain third-party consents, and the
approvals noted above. The Company anticipates the Merger to be completed during
the first half of 2000.
The Company is currently in compliance with the financial covenants set
forth in all of its U.S. and Canadian debt agreements. The Company is pursuing
various efforts to improve the Company's domestic earnings before interest,
income taxes, depreciation, and amortization (EBITDA) for the fourth quarter of
1999. However, if these efforts prove unsuccessful, the Company will cease to
remain in compliance with the interest coverage covenant set forth in the
Company's Credit Agreement following the close of the fourth quarter of 1999. In
that event, the Company would seek to obtain a waiver for such non-compliance
under the Credit Agreement. If the Company is unable to obtain a waiver for such
non-compliance, the lenders will have various rights, including the right to
accelerate the outstanding indebtedness. Such acceleration would also result in
the Company being in default under the cross-default provisions of the Notes.
The Company is currently precluded from further borrowings by the terms of
its Notes. As of November 5, 1999, the Company had approximately $50 million in
cash, which, combined with cash expected to be generated from operations, the
Company believes is sufficient to meet its obligations into the first quarter of
2000. If the Company does not achieve an improvement in its domestic EBITDA, the
Company may not have sufficient cash or borrowing capacity to meet its
obligations through the first quarter of 2000. The Company is currently
exploring certain strategic and financing alternatives to ensure continued
liquidity through the consummation of the Merger. However, there can be no
assurance that the Company's efforts to obtain additional liquidity will prove
timely or successful or that the Merger will be completed, and the
F-23
<PAGE> 252
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
Company may be required to reduce the level of its operations and/or file for
protection under Chapter 11 of the U.S. Bankruptcy Code to restructure its
obligations, including those under the Notes. Such a filing would likely have a
material impact on the Company's results of operations and financial position.
Furthermore, if the Merger is not ultimately consummated, the Company may incur
significant charges, including charges for asset impairments and restructuring
the Company's operations.
2. THE COMPANY
The Company is a provider of wireless messaging and information delivery
services. The Company provides service in all 50 states, the District of
Columbia, the U.S. Virgin Islands, Puerto Rico, Canada, and Spain, including
service in all of the largest 100 markets (in population) in the United States,
and owns a minority interest in a wireless messaging company in Brazil. The
consolidated financial statements include the accounts of all of its wholly and
majority-owned subsidiaries. All intercompany transactions have been eliminated.
3. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments, which are
of a normal recurring nature, except for the cumulative effect of a change in
accounting principle discussed in Note 4, the provision for asset impairment
discussed in Note 5, and the restructuring charge discussed in Note 6, necessary
for a fair presentation of the financial position, results of operations, and
cash flows for the periods presented. These financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, these financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The balance sheet as of December
31, 1998, has been derived from the audited financial statements as of that
date. Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year. These financial
statements and related notes should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
4. ACCOUNTING CHANGES
The Company adopted the provisions of Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" (SOP 98-5), effective January 1, 1999. SOP
98-5 requires the expensing of all start-up costs as incurred as well as writing
off the remaining unamortized balance of capitalized start-up costs at the date
of adoption of SOP 98-5. The impact of the Company's adoption of SOP 98-5 was a
charge of $37 million representing the cumulative effect of a change in
accounting principle to write-off all unamortized start-up costs as of January
1, 1999, and an increase in services, rent and maintenance expenses of $5
million and $16 million, respectively, for the three and nine months ended
September 30, 1999, and a decrease in depreciation and amortization expense of
$1 million and $4 million, respectively, for the three and nine months ended
September 30, 1999.
Effective April 1, 1999, the Company changed the depreciable lives for its
subscriber devices and certain network equipment. The Company changed the
depreciable lives of its subscriber devices from three years to two years and
the depreciable life of certain of its network equipment from seven years to ten
years. The changes resulted from a review by the Company of the historical usage
periods of its subscriber devices and its network equipment and the Company's
expectations regarding future usage periods for subscriber devices considering
current and projected technological advances. As a result of these changes,
depreciation expense
F-24
<PAGE> 253
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
increased by approximately $8 million and $77 million, respectively, during the
three and nine months ended September 30, 1999.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed For of Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires the capitalization of certain costs
of developing or acquiring computer software for internal use. The Company
adopted the provisions of SOP 98-1, effective January 1, 1999. The adoption of
SOP 98-1 did not have a significant impact on the Company's results of
operations or financial position, as the Company's policy for accounting for the
costs of developing or acquiring computer software for internal use prior to the
adoption of SOP 98-1 was generally consistent with the provisions of SOP 98-1.
5. PROVISION FOR ASSET IMPAIRMENT
The Company recorded a provision of $18 million during the quarter ended
March 31, 1999, for the impairment of the assets of the Company's majority-owned
Spanish subsidiaries in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ", which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. During the first quarter of
1999, the Company made the decision to narrow its focus to its North American
operations and, as a result, made the decision to sell or otherwise dispose of
its operations in Spain. As a result of this decision, the Company analyzed the
estimated future cash flows expected to be generated from its Spanish operations
and determined that they would not be sufficient to recover the net book value
of the assets of the subsidiaries and, accordingly, recorded a provision to
write down the assets of the Spanish subsidiaries based on the estimated value
of the Company's investment in its Spanish subsidiaries as of March 31, 1999. No
cash costs have been incurred or are expected as a result of the provision for
the impairment of the assets of the Company's Spanish subsidiaries.
6. RESTRUCTURING CHARGE
In February 1998, the Company's Board of Directors approved a restructuring
of the Company's domestic operations (the Restructuring). As part of the
Restructuring, the Company is in the process of reorganizing its operations to
expand its sales organization, eliminate local and redundant administrative
operations, and consolidate certain key support functions. Subject to the
potential merger described in Note 1, the Company expects to eliminate a total
of approximately 1,600 positions, including positions already eliminated and net
of positions added, through the consolidation of redundant administrative
operations and certain key support functions located in offices throughout the
country into central facilities (the Centers of Excellence). As a result of the
Restructuring, the Company recorded a charge of $74 million, or $0.72 per share
(basic and diluted), during the quarter ended March 31, 1998. The components of
the charge included (in thousands):
<TABLE>
<S> <C>
Write-down of property and equipment........................ $38,900
Lease obligations and terminations.......................... 18,900
Severance and related benefits.............................. 12,700
Other....................................................... 3,500
-------
Total restructuring charge........................ $74,000
=======
</TABLE>
F-25
<PAGE> 254
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
The writedown of property and equipment related to a non-cash charge to
reduce the carrying amount of certain machinery and equipment, furniture and
fixtures, and leasehold improvements that the Company would not continue to
utilize following the Restructuring to their estimated net realizable value as
of the date such assets were projected to be disposed of or abandoned by the
Company, allowing for the recognition of normal depreciation expense on such
assets through their projected disposal date. The net realizable value of these
assets was determined based on management estimates, which considered such
factors as the nature and age of the assets to be disposed of, the timing of the
assets' disposal, and the method and potential costs of the disposal. Such
estimates are subject to change.
The provision for lease obligations and terminations related primarily to
future lease commitments on local and regional office facilities that would be
closed as part of the Restructuring. The charge represented future lease
obligations, net of projected sublease income, on such leases past the dates the
offices would be closed by the Company, or, for certain leases, the cost of
terminating the leases prior to their scheduled expiration. Projected sublease
income was based on management estimates, which are subject to change. Cash
payments on the leases and lease terminations will occur over the remaining
lease terms, the majority of which expire prior to 2003.
Through the elimination of certain local and regional administrative
operations and the consolidation of certain support functions, the Company
expects to eliminate a total of approximately 1,600 net positions, including
positions already eliminated, the majority of which are non-sales related
positions in local and regional offices. As a result of eliminating these
positions, the Company expects to involuntarily terminate an estimated 1,950
employees. The majority of the remaining severance and benefits costs to be paid
by the Company will be paid during 2000. The number of positions eliminated and
employees involuntarily terminated may be significantly impacted if the Merger
discussed in Note 1 is consummated.
During the fourth quarter of 1998, the Company identified additional
furniture, fixtures, and equipment that would not be utilized following the
Restructuring, resulting in an additional non-cash charge of $3 million. This
charge was offset by reductions in the provisions for lease obligations and
terminations and severance costs as a result of refinements to the Company's
schedule for local and regional offices closures. Also as a result of the
refinements to the office closing schedule, the Company adjusted, effective
October 1, 1998, the depreciable lives of certain of the assets written down in
the first quarter of 1998, resulting in a decrease in depreciation expense of
approximately $5 million for the third quarter of 1999 and $15 million for the
nine months ended September 30, 1999.
The Company's restructuring activity from January 1, 1999 through September
30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
UTILIZATION OF RESERVE
BEGINNING ---------------------- REMAINING
RESERVE CASH NON-CASH RESERVE
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Lease obligation costs............. $16,917 $ 527 $ -- $16,390
Severance costs.................... 10,104 1,190 -- 8,914
------- ------ ------- -------
Total.................... $27,021 $1,717 $ -- $25,304
======= ====== ======= =======
</TABLE>
7. LONG-TERM OBLIGATIONS
As of September 30, 1999, the Company had $745 million of borrowings
outstanding under its Credit Agreement.
F-26
<PAGE> 255
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
8. INCOME TAX PROVISION
No provision or benefit for income taxes has been made for the three and
nine months ended September 30, 1998 and 1999, as the deferred benefit from
operating losses was offset by an increase in the valuation allowance.
9. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted average
number of common shares outstanding. The number of shares used to compute per
share amounts for both the three months ended September 30, 1998 and 1999 were
104 million. The number of shares used to compute per share amounts for the nine
months ended September 30, 1998 and 1999 were 103 million and 104 million,
respectively. The average number of options to purchase shares of the Company's
Common Stock during the three and nine months ended September 30, 1998 were 8
million and 7 million, respectively, at exercise prices ranging from $2.67 per
share to $25.50 per share. The average number of options to purchase shares of
the Company's Common Stock during the three and nine months ended September 30,
1999 were 10 million, at exercise prices ranging from $2.73 per share to $17.13
per share. These stock options were not included in the computation of diluted
earnings per share because the effect of assuming their exercise would have been
antidilutive.
The Company has 275 million authorized shares, of which 250 million are
Common Stock and 25 million are preferred stock. As of September 30, 1999, there
were no preferred shares issued or outstanding.
10. COMPREHENSIVE LOSS
Comprehensive loss for the three and nine months ended September 30, 1998
and 1999, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ----------------------
1998 1999 1998 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net loss...................................... $(16,428) $(49,488) $(124,419) $(234,003)
Foreign currency translation adjustments...... 526 (210) 1,636 (1,217)
-------- -------- --------- ---------
Total comprehensive loss............ $(15,902) $(49,698) $(122,783) $(235,220)
======== ======== ========= =========
</TABLE>
11. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less. As of September 30, 1999, cash
equivalents also include investments in money market instruments, which are
carried at fair market value. Cash payments made for interest during the nine
months ended September 30, 1998 and 1999, were approximately $108 million and
$112 million, respectively, net of interest capitalized during the nine months
ended September 30, 1998 and 1999 of $14 million and $17 million, respectively.
There were no significant federal or state income taxes paid or refunded for the
nine months ended September 30, 1998 and 1999.
12. SEGMENT INFORMATION
The Company has determined that it has two reportable segments, core
operations and advanced messaging operations. The Company's basis for the
segments relates to the types of products and services each segment provides.
The core operating segment includes the traditional display and alphanumeric
services,
F-27
<PAGE> 256
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
which are basic one-way services, and 1 1/2-way paging services. The advanced
messaging operating segment consists of the Company's new 2-way wireless
messaging services, VoiceNow service and Iridium WorldPage, and the operations
of Vast Solutions, which include wireless integration products, consumer
content, and wireless software development and sales.
The following table presents certain information related to the Company's
business segments for the three and nine months ended September 30, 1998 and
1999.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
1998 1999 1998 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Revenues (1):
Core (2).................................. $246,134 $227,238 $721,960 $ 712,469
Advanced Messaging........................ 661 3,798 822 10,053
-------- -------- -------- ---------
$246,795 $231,036 $722,782 $ 722,522
======== ======== ======== =========
Operating income (loss):
Core (2).................................. $ 28,353 $ (379) $ 1,778(3) $ (54,625)(4)
Advanced Messaging........................ (10,355) (13,120) (20,582) (33,627)
-------- -------- -------- ---------
$ 17,998 $(13,499) $(18,804) $ (88,252)
======== ======== ======== =========
Adjusted EBITDA (5):
Core (2).................................. $ 92,759 $ 71,694 $276,855 $ 229,551
Advanced Messaging........................ (5,702) (12,570) (8,439) (31,834)
-------- -------- -------- ---------
$ 87,057 $ 59,124 $268,416 $ 197,717
======== ======== ======== =========
Free Cash Flow (6):
Core (2).................................. $ 30,432 $ 29,009 $107,255 $ 91,176
Advanced Messaging........................ (62,232) (63,374) (117,923) (165,400)
-------- -------- -------- ---------
$(31,800) $(34,365) $(10,668) $ (74,224)
======== ======== ======== =========
</TABLE>
- ---------------
(1) Net Revenues are revenues from services, rent, and maintenance plus product
sales less the cost of products sold.
(2) The international operations of the Company currently consist entirely of
core services and accordingly are included in the Company's core business
segment.
(3) Operating loss for the core business segment for the first nine months of
1998 includes a restructuring charge of $74 million. See Note 6.
(4) Operating loss for the core business segment for the first nine months of
1999 includes a provision for asset impairment of $18 million. See Note 5.
(5) Adjusted EBITDA is earnings before interest, income taxes, depreciation,
amortization, minority interest, restructuring charge, provision for asset
impairment, and cumulative effect of a change in accounting principle.
(6) Free Cash Flow is Adjusted EBITDA less capital expenditures (excluding
payments for spectrum licenses) and debt service.
The Company's method for allocating costs to business segments is not
consistent with the contemplated asset transfer in connection with the intended
distribution of Vast Solutions in connection with the Merger. See Note 1.
Adjusted EBITDA and Free Cash Flow are not measures defined in generally
accepted accounting principles and should not be considered in isolation or as
substitutes for measures of performance in accordance with generally accepted
accounting principles.
F-28
<PAGE> 257
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arch Communications Group, Inc.:
We have audited the accompanying consolidated balance sheets of Arch
Communications Group, Inc. (a Delaware corporation) (the "Company") and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements, based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Arch Communications Group, Inc. and subsidiaries as of December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 24, 1999 (except with respect to the matters
discussed in Note 12, as to which the date is June 28, 1999)
F-29
<PAGE> 258
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,328 $ 1,633
Accounts receivable (less reserves of $5,744 and $6,583
in 1997 and 1998, respectively)....................... 30,147 30,753
Inventories............................................ 12,633 10,319
Prepaid expenses and other............................. 4,917 8,007
---------- ----------
Total current assets.............................. 51,025 50,712
---------- ----------
Property and equipment, at cost:
Land, buildings and improvements....................... 10,089 10,480
Paging and computer equipment.......................... 361,713 400,312
Furniture, fixtures and vehicles....................... 16,233 17,381
---------- ----------
388,035 428,173
Less accumulated depreciation and amortization......... 146,542 209,128
---------- ----------
Property and equipment, net............................ 241,493 219,045
---------- ----------
Intangible and other assets (less accumulated amortization
of $260,932 and $372,122 in 1997 and 1998,
respectively)............................................. 728,202 634,528
---------- ----------
$1,020,720 $ 904,285
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt................... $ 24,513 $ 1,250
Accounts payable....................................... 22,486 25,683
Accrued restructuring charges.......................... -- 11,909
Accrued expenses....................................... 11,894 11,689
Accrued interest....................................... 11,249 20,997
Customer deposits...................................... 6,150 4,528
Deferred revenue....................................... 8,787 10,958
---------- ----------
Total current liabilities......................... 85,079 87,014
---------- ----------
Long-term debt, less current maturities..................... 968,896 1,003,499
---------- ----------
Other long-term liabilities............................ -- 27,235
---------- ----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock--$.01 par value, authorized 10,000,000
shares; issued 250,000 shares (aggregate liquidation
preference of $26,030 in 1999)........................ -- 3
Common stock--$.01 par value, authorized 75,000,000
shares, issued and outstanding: 6,954,521 and
7,071,861 shares in 1997 and 1998, respectively....... 70 71
Additional paid-in capital............................. 351,349 378,218
Accumulated deficit.................................... (384,674) (591,755)
---------- ----------
Total stockholders' equity (deficit).............. (33,255) (213,463)
---------- ----------
$1,020,720 $ 904,285
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 259
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Service, rental and maintenance revenues................ $ 291,399 $ 351,944 $ 371,154
Product sales........................................... 39,971 44,897 42,481
--------- --------- ---------
Total revenues................................ 331,370 396,841 413,635
Cost of products sold................................... (27,469) (29,158) (29,953)
--------- --------- ---------
303,901 367,683 383,682
--------- --------- ---------
Operating expenses:
Service, rental and maintenance.................... 64,957 79,836 80,782
Selling............................................ 46,962 51,474 49,132
General and administrative......................... 86,181 106,041 112,181
Depreciation and amortization...................... 191,871 232,347 221,316
Restructuring charge............................... -- -- 14,700
--------- --------- ---------
Total operating expenses...................... 389,971 469,698 478,111
--------- --------- ---------
Operating income (loss)................................. (86,070) (102,015) (94,429)
Interest expense........................................ (76,303) (96,482) (104,019)
Interest income......................................... 1,426 904 1,766
Other expense........................................... (1,050) (1,581) (1,960)
Equity in loss of affiliate............................. (1,968) (3,872) (5,689)
--------- --------- ---------
Income (loss) before income tax benefit, extraordinary
item and accounting change............................ (163,965) (203,046) (204,331)
Benefit from income taxes............................... 51,207 21,172 --
--------- --------- ---------
Income (loss) before extraordinary item and
accounting change..................................... (112,758) (181,874) (204,331)
Extraordinary charge from early extinguishment of
debt.................................................. (1,904) -- (1,720)
Cumulative effect of accounting change.................. -- -- --
--------- --------- ---------
Net income (loss)....................................... (114,662) (181,874) (206,051)
Accretion of redeemable preferred stock................. (336) (32) --
Preferred stock dividend................................ -- -- (1,030)
--------- --------- ---------
Net income (loss) applicable to common stockholders..... $(114,998) $(181,906) $(207,081)
========= ========= =========
Basic/diluted income (loss) per common share before
extraordinary item and accounting change.............. $ (16.59) $ (26.31) $ (29.34)
Extraordinary charge from early extinguishment of debt
per basic/diluted common share........................ (0.27) -- (0.24)
--------- --------- ---------
Basic/diluted net income (loss) per common share........ $ (16.86) $ (26.31) $ (29.58)
========= ========= =========
Basic/diluted weighted average number of common shares
outstanding........................................... 6,815,314 6,915,413 6,997,730
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 260
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PREFERRED COMMON PAID-IN ACCUMULATED EQUITY
STOCK STOCK CAPITAL DEFICIT (DEFICIT)
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.............. $-- $66 $334,956 $ (88,138) $ 246,884
Exercise of options to purchase
56,436 shares of common stock.... -- 1 1,470 -- 1,471
Issuance of 15,614 shares of common
stock under Arch's Employee Stock
Purchase Plan.................... -- -- 373 -- 373
Issuance of 281,013 shares of
common stock upon conversion of
convertible subordinated
debentures....................... -- 3 14,118 -- 14,121
Accretion of redeemable preferred
stock............................ -- -- (336) -- (336)
Net loss........................... -- -- -- (114,662) (114,662)
--- --- -------- --------- ---------
Balance, December 31, 1996.............. -- 70 350,581 (202,800) 147,851
Issuance of 50,447 shares of common
stock under Arch's Employee Stock
Purchase Plan.................... -- -- 800 -- 800
Accretion of redeemable preferred
stock............................ -- -- (32) -- (32)
Net loss........................... -- -- -- (181,874) (181,874)
--- --- -------- --------- ---------
Balance, December 31, 1997.............. -- 70 351,349 (384,674) (33,255)
Exercise of options to purchase
31,344 shares of common stock.... -- -- 294 -- 294
Issuance of 250,000 shares of
preferred stock.................. 3 -- 24,997 -- 25,000
Issuance of 85,996 shares of common
stock under Arch's Employee Stock
Purchase Plan.................... -- 1 548 -- 549
Preferred stock dividend........... -- -- 1,030 (1,030) --
Net loss........................... -- -- -- (206,051) (206,051)
--- --- -------- --------- ---------
Balance, December 31, 1998.............. $ 3 $71 $378,218 $(591,755) $(213,463)
=== === ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 261
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(114,662) $(181,874) $(206,051)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 191,871 232,347 221,316
Deferred income tax benefit............................ (51,207) (21,172) --
Extraordinary charge from early extinguishment of
debt................................................. 1,904 -- 1,720
Equity in loss of affiliate............................ 1,968 3,872 5,689
Accretion of discount on senior notes.................. 24,273 33,259 37,115
Gain on Tower Site Sale................................ -- -- (2,500)
Accounts receivable loss provision..................... 8,198 7,181 8,545
Changes in assets and liabilities, net of effect from
acquisitions of paging companies:
Accounts receivable............................... (15,513) (11,984) (9,151)
Inventories....................................... 1,845 (2,394) 2,314
Prepaid expenses and other........................ 89 (386) (3,090)
Accounts payable and accrued expenses............. (12,520) 3,683 24,649
Customer deposits and deferred revenue............ 1,556 1,058 549
--------- --------- ---------
Net cash provided by operating activities................... 37,802 63,590 81,105
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net............... (138,899) (87,868) (79,249)
Additions to intangible and other assets............... (26,307) (14,901) (33,935)
Net proceeds from Tower Site Sale...................... -- -- 30,316
Acquisition of paging companies, net of cash
acquired............................................. (325,420) -- --
--------- --------- ---------
Net cash used for investing activities...................... (490,626) (102,769) (82,868)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt............................. 676,000 91,000 463,239
Repayment of long-term debt............................ (225,166) (49,046) (489,014)
Repayment of redeemable preferred stock................ -- (3,744) --
Net proceeds from sale of preferred stock.............. -- -- 25,000
Net proceeds from sale of common stock................. 1,844 800 843
--------- --------- ---------
Net cash provided by financing activities................... 452,678 39,010 68
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (146) (169) (1,695)
Cash and cash equivalents, beginning of period.............. 3,643 3,497 3,328
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 3,497 $ 3,328 $ 1,633
========= ========= =========
Supplemental disclosure:
Interest paid.......................................... $ 48,905 $ 62,231 $ 57,151
========= ========= =========
Issuance of common stock for convertible debentures.... $ 14,121 $ -- $ --
========= ========= =========
Accretion of redeemable preferred stock................ $ 336 $ 32 $ --
========= ========= =========
Preferred stock dividend............................... $ -- $ -- $ 1,030
========= ========= =========
Liabilities assumed in acquisition of paging
companies............................................ $ 58,233 $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 262
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization--Arch Communications Group, Inc. ("Arch" or the "Company") is
a leading provider of wireless messaging services, primarily paging services,
and is the third largest paging company in the United States (based on units in
service).
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition--Arch recognizes revenue under rental and service
agreements with customers as the related services are performed. Maintenance
revenues and related costs are recognized ratably over the respective terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions are
recognized as an expense when incurred.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less. The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
Inventories--Inventories consist of new pagers which are held primarily for
resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
Property and Equipment--Pagers sold or otherwise retired are removed from
the accounts at their net book value using the first-in, first-out method.
Property and equipment is stated at cost and is depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Buildings and improvements............................. 20 Years
Leasehold improvements................................. Lease Term
Pagers................................................. 3 Years
Paging and computer equipment.......................... 5-8 Years
Furniture and fixtures................................. 5-8 Years
Vehicles............................................... 3 Years
</TABLE>
Depreciation and amortization expense related to property and equipment
totaled $87.5 million, $108.0 million and $101.1 million for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-34
<PAGE> 263
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible and Other Assets--Intangible and other assets, net of
accumulated amortization, are composed of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Goodwill............................................. $312,017 $271,808
Purchased FCC licenses............................... 293,922 256,519
Purchased subscriber lists........................... 87,281 56,825
Deferred financing costs............................. 8,752 22,072
Investment in Benbow PCS Ventures, Inc............... 6,189 11,347
Investment in CONXUS Communications, Inc............. 6,500 6,500
Non-competition agreements........................... 2,783 1,790
Other................................................ 10,758 7,667
-------- --------
$728,202 $634,528
======== ========
</TABLE>
Amortization expense related to intangible and other assets totaled $104.4
million, $124.3 million and $120.2 million for the years ended December 31,
1996, 1997 and 1998, respectively.
Subscriber lists, Federal Communications Commission ("FCC") licenses and
goodwill are amortized over their estimated useful lives, ranging from five to
ten years using the straight-line method. Non-competition agreements are
amortized over the terms of the agreements using the straight-line method. Other
assets consist of contract rights, organizational and FCC application and
development costs which are amortized using the straight-line method over their
estimated useful lives not exceeding ten years. Development and start up costs
include nonrecurring, direct costs incurred in the development and expansion of
paging systems, and are amortized over a two-year period. In April 1998, the
Accounting Standards Executive Committee of the Financial Accounting Standards
Board issued Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of
Start-Up Activities". SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Arch adopted SOP 98-5 effective
January 1, 1999. Initial application of SOP 98-5 will be reported as the
cumulative effect of a change in accounting principle.
Deferred financing costs incurred in connection with Arch's credit
agreements (see Note 3) are being amortized over periods not to exceed the terms
of the related agreements. As credit agreements are amended and restated,
unamortized deferred financing costs are written off as an extraordinary charge.
During 1996 and 1998, charges of $1.9 million and $1.7 million, respectively,
were recognized in connection with the closing of new credit facilities.
In connection with Arch's May 1996 acquisition of Westlink Holdings, Inc.
("Westlink") (see Note 2), Arch acquired Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. ("Benbow"). Benbow has exclusive rights to a
50kHz outbound/12.5kHz inbound narrowband personal communications license in
each of the central and western regions of the United States. Arch is obligated,
to the extent such funds are not available to Benbow from other sources, and
subject to the approval of Arch's designee on Benbow's Board of Directors, to
advance Benbow sufficient funds to service debt obligations incurred by Benbow
in connection with its acquisition of its narrowband PCS licenses and to finance
the build out of a regional narrowband PCS system. Arch's investment in Benbow
is accounted for under the equity method whereby Arch's share of Benbow's
losses, since the acquisition date of Westlink, are recognized in Arch's
accompanying consolidated statements of operations under the caption equity in
loss of affiliate.
On November 8, 1994, CONXUS Communications, Inc. ("CONXUS"), formerly PCS
Development Corporation, was successful in acquiring the rights to a 2-way
paging license in five designated regions in the
F-35
<PAGE> 264
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
United States in the FCC narrowband wireless spectrum auction. As of December
31, 1998, Arch's investment in CONXUS totaled $6.5 million and is accounted for
under the cost method.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To
Be Disposed Of" Arch evaluates the recoverability of its carrying value of the
Company's long-lived assets and certain intangible assets based on estimated
undiscounted cash flows to be generated from each of such assets as compared to
the original estimates used in measuring the assets. To the extent impairment is
identified, Arch reduces the carrying value of such impaired assets. To date,
Arch has not had any such impairments.
Fair Value of Financial Instruments--Arch's financial instruments, as
defined under SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", include its cash, its debt financing and interest rate protection
agreements. The fair value of cash is equal to the carrying value at December
31, 1997 and 1998.
As discussed in Note 3, Arch's debt financing primarily consists of (1)
senior bank debt, (2) fixed rate senior notes and (3) convertible subordinated
debentures. Arch considers the fair value of senior bank debt to be equal to the
carrying value since the related facilities bear a current market rate of
interest. Arch's fixed rate senior notes are traded publicly. The following
table depicts the fair value of the fixed rate senior notes and the convertible
subordinated debentures based on the current market quote as of December 31,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------- ---------------------
CARRYING CARRYING
DESCRIPTION VALUE FAIR VALUE VALUE FAIR VALUE
----------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
10 7/8% Senior Discount Notes due
2008................................ $332,532 $288,418 $369,506 $221,704
9 1/2% Senior Notes due 2004........ 125,000 122,488 125,000 112,500
14% Senior Notes due 2004........... 100,000 112,540 100,000 103,000
12 3/4% Senior Notes due 2007....... -- -- 127,604 127,604
6 3/4% Convertible Subordinated
Debentures due 2003............... 13,364 7,968 13,364 6,682
</TABLE>
Arch had off-balance-sheet interest rate protection agreements consisting
of interest rate swaps and interest rate caps with notional amounts of $140.0
million and $80.0 million, respectively, at December 31, 1997 and $265.0 million
and $40.0 million, respectively, at December 31, 1998. The fair values of the
interest rate swaps and interest rate caps were $47,000 and $9,000,
respectively, at December 31, 1997. The cost to terminate the outstanding
interest rate swaps and interest rate caps at December 31, 1998 would have been
$6.4 million. See Note 3.
Basic/Diluted Net Income (Loss) Per Common Share -- In February 1997, the
Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share".
The Company adopted this standard in 1997. The adoption of this standard did not
have an effect on the Company's financial position, results of operations or
income (loss) per share. Basic net income (loss) per common share is based on
the weighted average number of common shares outstanding. Shares of stock
issuable pursuant to stock options and upon conversion of the subordinated
debentures (see Note 3) or the Series C Preferred Stock (see Note 4) have not
been considered, as their effect would be anti-dilutive and thus diluted net
income (loss) per common share is the same as basic net income (loss) per common
share.
Reclassifications--Certain amounts of prior periods were reclassified to
conform with the 1998 presentation.
F-36
<PAGE> 265
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
In May 1996, Arch completed its acquisition of all the outstanding capital
stock of Westlink for $325.4 million in cash, including direct transaction
costs. The purchase price was allocated based on the fair values of assets
acquired and liabilities assumed (including deferred income taxes arising in
purchase accounting), which amounted to $383.6 million and $58.2 million,
respectively.
This acquisition has been accounted for as a purchase, and the results of
its operations have been included in the consolidated financial statements from
the date of the acquisition. Goodwill resulting from the acquisition is being
amortized over a ten-year period using the straight-line method.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the period
presented, after giving effect to certain adjustments, including depreciation
and amortization of acquired assets and interest expense on acquisition debt.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made at the beginning of the period presented, or of results that may occur
in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(UNAUDITED AND IN THOUSANDS
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C>
Revenues............................................ $358,900
Income (loss) before extraordinary item............. (128,444)
Net income (loss)................................... (130,348)
Basic/diluted net income (loss) per common share.... (6.39)
</TABLE>
3. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- ----------
<S> <C> <C>
Senior Bank Debt....................................... $422,500 $ 267,000
10 7/8% Senior Discount Notes due 2008................. 332,532 369,506
9 1/2% Senior Notes due 2004........................... 125,000 125,000
14% Senior Notes due 2004.............................. 100,000 100,000
12 3/4% Senior Notes due 2007.......................... -- 127,604
Convertible Subordinated Debentures.................... 13,364 13,364
Other.................................................. 13 2,275
-------- ----------
993,409 1,004,749
Less -- Current maturities............................. 24,513 1,250
-------- ----------
Long-term debt......................................... $968,896 $1,003,499
======== ==========
</TABLE>
Senior Bank Debt -- The Company, through its operating subsidiary, Arch
Paging, Inc. ("API") entered into senior secured revolving credit and term loan
facilities in the aggregate amount of $400.0 million (collectively, the "API
Credit Facility") consisting of (i) a $175.0 million reducing revolving credit
facility (the "Tranche A Facility"), (ii) a $100.0 million 364-day revolving
credit facility under which the principal amount outstanding on June 27, 1999
will convert to a term loan (the "Tranche B Facility") and (iii) a $125.0
million term loan (the "Tranche C Facility").
F-37
<PAGE> 266
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Tranche A Facility will be subject to scheduled quarterly reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term loan
portion of the Tranche B Facility will be amortized in quarterly installments
commencing September 30, 2000, with an ultimate maturity date of June 30, 2005.
The Tranche C Facility will be amortized in annual installments commencing
December 31, 1999, with an ultimate maturity date of June 30, 2006.
API's obligations under the API Credit Facility are secured by its pledge
of its interests in Arch LLC and Arch Connecticut Valley, Inc. The API Credit
Facility is guaranteed by Arch, Arch Communications, Inc. ("ACI") and Arch LLC
and Arch Connecticut Valley, Inc. Arch's guarantee is secured by a pledge of
Arch's stock and notes in ACI, and the guarantees of Arch LLC and Arch
Connecticut Valley, Inc. are secured by a security interest in those assets that
were pledged under ACE's former credit facility.
Borrowings under the API Credit Facility bear interest based on a reference
rate equal to either the Bank's Alternate Base Rate or LIBOR, in each case plus
a margin based on ACI's or API's ratio of total debt to annualized Adjusted
EBITDA.
The API Credit Facility requires payment of fees on the daily average
amount available to be borrowed under the Tranche A Facility and the Tranche B
Facility, which fees vary depending on ACI's or API's ratio of total debt to
annualized Adjusted EBITDA.
The API Credit Facility requires that at least 50% of total ACI debt,
including outstanding borrowings under the API Credit Facility, be subject to a
fixed interest rate or interest rate protection agreements. Entering into
interest rate cap and swap agreements involves both the credit risk of dealing
with counterparties and their ability to meet the terms of the contracts and
interest rate risk. In the event of nonperformance by the counterparty to these
interest rate protection agreements, API would be subject to the prevailing
interest rates specified in the API Credit Facility.
Under the interest rate swap agreements, the Company will pay the
difference between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR,
and the Company will receive the difference between LIBOR and the fixed swap
rate if LIBOR exceeds the swap rate. Settlement occurs on the quarterly reset
dates specified by the terms of the contracts. The notional principal amount of
the interest rate swaps outstanding was $65.0 million at December 31, 1998. The
weighted average fixed payment rate was 5.93%, while the weighted average rate
of variable interest payments under the API Credit Facility was 5.30% at
December 31, 1998. At December 31, 1997 and 1998, the Company had a net
receivable of $18,000 and a net payable of $47,000, respectively, on the
interest rate swaps.
The interest rate cap agreements will pay the Company the difference
between LIBOR and the cap level if LIBOR exceeds the cap levels at any of the
quarterly reset dates. If LIBOR remains below the cap level, no payment is made
to the Company. The total notional amount of the interest rate cap agreements
was $40.0 million with cap levels between 7.5% and 8% at December 31, 1998. The
transaction fees for these instruments are being amortized over the terms of the
agreements.
The API Credit Facility contains restrictions that limit, among other
things: additional indebtedness and encumbrances on assets; cash dividends and
other distributions; mergers and sales of assets; the repurchase or redemption
of capital stock; investments; acquisitions that exceed certain dollar
limitations without the lenders' prior approval; and prepayment of indebtedness
other than indebtedness under the API Credit Facility. In addition, the API
Credit Facility requires API and its subsidiaries to meet certain financial
covenants, including covenants with respect to ratios of EBITDA to fixed
charges, EBITDA to debt service, EBITDA to interest service and total
indebtedness to EBITDA. As of December 31, 1998, API and its operating
subsidiaries were in compliance with the covenants of the API Credit Facility.
As of December 31, 1998, $267.0 million was outstanding and $93.5 million
was available under the API Credit Facility. At December 31, 1998, such advances
bore interest at an average annual rate of 8.45%.
F-38
<PAGE> 267
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 16, 1998, the lenders to API approved an increase in API's
existing credit facility from $400.0 million to $600.0 million, subject to
completing the MobileMedia Merger and certain other conditions. The increase of
$200.0 million (the "API Credit Facility Increase") was to fund a portion of the
cash necessary for Arch to complete the MobileMedia Merger. The API Credit
Facility Increase was to be provided by four of API's existing lenders, provided
the MobileMedia Transactions were completed prior to March 31, 1999. The four
API lenders that were to fund the API Credit Facility Increase have indicated
their willingness to seek approval to extend $135.0 million of the API Credit
Facility Increase through June 30, 1999, subject to formal approval, definitive
documentation and negotiation of certain terms.
Senior Notes--On March 12, 1996, Arch completed a public offering of
10 7/8% Senior Discount Notes due 2008 (the "Senior Discount Notes") in the
aggregate principal amount at maturity of $467.4 million ($275.0 million initial
accreted value). Interest does not accrue on the Senior Discount Notes prior to
March 15, 2001. Commencing September 15, 2001, interest on the Senior Discount
Notes is payable semi-annually at an annual rate of 10 7/8%. The $266.1 million
net proceeds from the issuance of the Senior Discount Notes, after deducting
underwriting discounts and commissions and offering expenses, were used
principally to fund a portion of the purchase price of Arch's acquisition of
Westlink (see Note 2).
Interest on ACI's 14% Senior Notes due 2004 (the "ACI 14% Notes") and ACI's
9 1/2% Senior Notes due 2004 (the "ACI 9 1/2% Notes") (collectively, the "Senior
Notes") is payable semiannually. The Senior Discount Notes and Senior Notes
contain certain restrictive and financial covenants, which, among other things,
limit the ability of Arch or ACI to: incur additional indebtedness; pay
dividends; grant liens on its assets; sell assets; enter into transactions with
related parties; merge, consolidate or transfer substantially all of its assets;
redeem capital stock or subordinated debt; and make certain investments.
Arch has entered into interest rate swap agreements in connection with the
ACI 14% Notes. Under the interest rate swap agreements, the Company has
effectively reduced the interest rate on the ACI 14% Notes from 14% to the fixed
swap rate of 9.45%. In the event of nonperformance by the counterparty to these
interest rate protection agreements, the Company would be subject to the 14%
interest rate specified on the notes. As of December 31, 1998, the Company had
received $2,275,000 in excess of the amounts paid under the swap agreements,
which is included in long-term debt in the accompanying balance sheet. At
December 31, 1998, the Company had a net receivable of $733,500 on these
interest rate swaps.
On June 29, 1998, ACI issued and sold $130.0 million principal amount of
12 3/4% Senior Notes due 2007 (the "ACI 12 3/4% Notes") for net proceeds of
$122.6 million (after deducting the discount to the initial purchasers and
estimated offering expenses payable by ACI). The ACI 12 3/4% Notes were sold at
an initial price to investors of 98.049%. The ACI 12 3/4% Notes mature on July
1, 2007 and bear interest at a rate of 12 3/4% per annum, payable semi-annually
in arrears on January 1 and July 1 of each year, commencing January 1, 1999.
The indenture under which the ACI 12 3/4% Notes were issued ("the
Indenture") contains certain covenants that, among other things, limit the
ability of ACI to incur additional indebtedness, issue preferred stock, pay
dividends or make other distributions, repurchase Capital Stock (as defined in
the Indenture), repay subordinated indebtedness or make other Restricted
Payments (as defined in the Indenture), create certain liens, enter into certain
transactions with affiliates, sell assets, issue or sell Capital Stock of ACI's
Restricted Subsidiaries (as defined in the Indenture) or enter into certain
mergers and consolidations.
Convertible Subordinated Debentures--On March 6, 1996, the holders of $14.1
million principal amount of Arch's 6 3/4% Convertible Subordinated Debentures
due 2003 ("Arch Convertible Debentures") elected to convert their Arch
Convertible Debentures into Arch common stock at a conversion price of $50.25
per share and received approximately 281,000 shares of Arch common stock
together with a $1.6 million cash premium.
F-39
<PAGE> 268
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest on the remaining outstanding Arch Convertible Debentures is
payable semiannually on June 1 and December 1. The Arch Convertible Debentures
are unsecured and are subordinated to all existing indebtedness of Arch.
The Arch Convertible Debentures are redeemable, at the option of Arch, in
whole or in part, at certain prices declining annually to 100% of the principal
amount at maturity plus accrued interest. The Arch Convertible Debentures also
are subject to redemption at the option of the holders, at a price of 100% of
the principal amount plus accrued interest, upon the occurrence of certain
events.
The Arch Convertible Debentures are convertible at their principal amount
into shares of Arch's common stock at any time prior to redemption or maturity
at an initial conversion price of $50.25 per share, subject to adjustment.
Maturities of Debt--Scheduled long-term debt maturities at December 31,
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................................ $ 1,250
2000........................................................ 17,725
2001........................................................ 29,650
2002........................................................ 29,650
2003........................................................ 43,014
Thereafter.................................................. 883,460
----------
$1,004,749
==========
</TABLE>
4. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Redeemable Preferred Stock--In connection with the its merger (the "USAM
Merger") with USA Mobile Communications Holdings, Inc. ("USA Mobile"), Arch
assumed the obligations associated with 22,530 outstanding shares of Series A
Redeemable Preferred Stock issued by USA Mobile. The preferred stock is recorded
at its accreted redemption value, based on 10% annual accretion through the
redemption date. On January 30, 1997, all outstanding preferred stock was
redeemed for $3.7 million in cash.
Redeemable Series C Cumulative Convertible Preferred Stock--On June 29,
1998, two partnerships managed by Sandler Capital Management Company, Inc., an
investment management firm ("Sandler"), together with certain other private
investors, made an equity investment in Arch of $25.0 million in the form of
Series C Convertible Preferred Stock of Arch ("Series C Preferred Stock"). The
Series C Preferred Stock: (i) is convertible into Common Stock of Arch at an
initial conversion price of $5.50 per share, subject to certain adjustments;
(ii) bears dividends at an annual rate of 8.0%, (A) payable quarterly in cash
or, at Arch's option, through the issuance of shares of Arch's Common Stock
valued at 95% of the then prevailing market price or (B) if not paid quarterly,
accumulating and payable upon redemption or conversion of the Series C Preferred
Stock or liquidation of Arch; (iii) permits the holders after seven years to
require Arch, at Arch's option, to redeem the Series C Preferred Stock for cash
or convert such shares into Arch's Common Stock valued at 95% of the then
prevailing market price of Arch's Common Stock; (iv) is subject to redemption
for cash or conversion into Arch's Common Stock at Arch's option in certain
circumstances; (v) in the event of a "Change of Control" as defined in the
indenture governing Arch's 10 7/8% Senior Discount Notes due 2008 (the "Senior
Discount Notes Indenture"), requires Arch, at its option, to redeem the Series C
Preferred Stock for cash or convert such shares into Arch's Common Stock valued
at 95% of the then prevailing market price of Arch's Common Stock, with such
cash redemption or conversion being at a price equal to 105% of the sum of the
original purchase price plus accumulated dividends; (vi) limits certain mergers
or asset sales by Arch;
F-40
<PAGE> 269
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(vii) so long as at least 50% of the Series C Preferred Stock remains
outstanding, limits the incurrence of indebtedness and "restricted payments" in
the same manner as contained in the Senior Discount Notes Indenture; and (viii)
has certain voting and preemptive rights. Upon an event of redemption or
conversion, Arch currently intends to convert such Series C Preferred Stock into
shares of Arch Common Stock.
Stock Options--Arch has a 1989 Stock Option Plan (the "1989 Plan") and a
1997 Stock Option Plan (the "1997 Plan"), which provide for the grant of
incentive and nonqualified stock options to key employees, directors and
consultants to purchase Arch's common stock. Incentive stock options are granted
at exercise prices not less than the fair market value on the date of grant.
Options generally vest over a five-year period from the date of grant with the
first such vesting (20% of granted options) occurring one year from the date of
grant and continuing ratably at 5% on a quarterly basis thereafter. However, in
certain circumstances, options may be immediately exercised in full. Options
generally have a duration of 10 years. The 1989 Plan provides for the granting
of options to purchase a total of 376,315 shares of common stock. All
outstanding options on September 7, 1995, under the 1989 Plan, became fully
exercisable and vested as a result of the USAM Merger. The 1997 Plan provides
for the granting of options to purchase a total of 2,000,000 shares of common
stock.
Effective October 23, 1996, the Compensation Committee of the Board of
Directors of Arch authorized the grant of new options to each employee who had
an outstanding option at a price greater than $37.50 (the fair market value of
Arch's common stock on October 23, 1996). The new option would be for the total
number of shares (both vested and unvested) subject to each employee's
outstanding stock option agreement(s). As a result of this action 141,402
options were terminated and regranted at a price of $37.50. The Company treated
this as a cancellation and reissuance under APB opinion No. 25, "Accounting for
Stock Issued to Employees".
As a result of the USAM Merger, Arch assumed a stock option plan originally
adopted by USA Mobile in 1994 and amended and restated on January 26, 1995 (the
"1994 Plan"), which provides for the grant of up to 200,500 options to purchase
Arch's common stock. Under the 1994 Plan, incentive stock options may be granted
to employees and nonqualified stock options may be granted to employees,
directors and consultants. Incentive stock options are granted at exercise
prices not less than the fair market value on the date of grant. Option duration
and vesting provisions are similar to the 1989 Plan. All outstanding options
under the 1994 Plan became fully exercisable and vested as a result of the USAM
Merger.
In January 1995, Arch adopted a 1995 Outside Directors' Stock Option Plan
(the "1995 Directors' Plan"), which terminated upon completion of the USAM
Merger. Prior to termination of the 1995 Directors' Plan, 5,000 options were
granted at an exercise price of $55.50 per share. Options have a duration of ten
years and vest over a five-year period from the date of grant with the first
such vesting (20% of granted options) occurring one year from the date of grant
and continuing ratably at 5% on a quarterly basis thereafter.
As a result of the USAM Merger, Arch assumed from USA Mobile the
Non-Employee Directors' Stock Option Plan (the "Outside Directors Plan"), which
provides for the grant of up to 26,733 options to purchase Arch's common stock
to non-employee directors of Arch. Outside directors receive a grant of 1,000
options annually under the Outside Directors Plan, and newly elected or
appointed outside directors receive options to purchase 1,000 shares of common
stock as of the date of their initial election or appointment. Options are
granted at fair market value of Arch's common stock on the date of grant.
Options have a duration of ten years and vest over a three-year period from the
date of grant with the first such vesting (25% of granted options) occurring on
the date of grant and future vesting of 25% of granted options occurring on each
of the first three anniversaries of the date of grant.
On December 16, 1997, the Compensation Committee of the Board of Directors
of Arch authorized the Company to offer an election to its employees who had
outstanding options at a price greater than $15.19 to cancel such options and
accept new options at a lower price. In January 1998, as a result of this
election by
F-41
<PAGE> 270
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain of its employees, the Company canceled 361,072 options with exercise
prices ranging from $17.82 to $61.88 and granted the same number of new options
with an exercise price of $15.19 per share, the fair market value of the stock
on December 16, 1997.
On December 29, 1997, Arch adopted a Deferred Compensation Plan for
Nonemployee Directors. Under this plan, outside directors may elect to defer,
for a specified period of time, receipt of some or all of the annual and meeting
fees which would otherwise be payable for service as a director. A portion of
the deferred compensation may be converted into phantom stock units, at the
election of the director. The number of phantom stock units granted equals the
amount of compensation to be deferred as phantom stock divided by the fair value
of Arch's common stock on the date the compensation would have otherwise been
paid. At the end of the deferral period, the phantom stock units will be
converted to cash based on the fair market value of the Company's common stock
on the date of distribution. Deferred compensation is expensed when earned.
Changes in the value of the phantom stock units are recorded as income/expense
based on the fair market value of the Company's common stock.
The following table summarizes the activity under Arch's stock option plans
for the periods presented:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Options Outstanding at December 31, 1995................ 335,250 $39.06
Granted............................................ 231,738 46.37
Exercised.......................................... (56,436) 26.07
Terminated......................................... (161,487) 64.79
-------- ------
Options Outstanding at December 31, 1996................ 349,065 34.11
Granted............................................ 166,785 20.03
Exercised.......................................... -- --
Terminated......................................... (62,207) 31.97
-------- ------
Options Outstanding at December 31, 1997................ 453,643 29.22
Granted............................................ 656,096 14.27
Exercised.......................................... (31,344) 9.38
Terminated......................................... (430,127) 28.52
-------- ------
Options Outstanding at December 31, 1998................ 648,268 $15.51
======== ======
Options Exercisable at December 31, 1998................ 111,249 $20.77
======== ======
</TABLE>
The following table summarizes the options outstanding and options
exercisable by price range at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 4.31 -- $12.38 54,178 9.38 $10.08 1,500 $ 5.66
13.59 -- 13.59 170,389 9.17 13.59 -- --
13.69 -- 14.81 50,875 9.00 14.72 2,209 13.78
15.19 -- 15.19 323,018 9.04 15.19 77,321 15.19
18.75 -- 82.68 49,808 7.02 30.86 30,219 36.32
--------------- ------- ---- ------ ------- ------
$ 4.31 -- $82.68 648,268 8.94 $15.51 111,249 $20.77
=============== ======= ==== ====== ======= ======
</TABLE>
Employee Stock Purchase Plans--On May 28, 1996, the stockholders approved
the 1996 Employee Stock Purchase Plan (the "1996 ESPP"). The 1996 ESPP allows
eligible employees the right to purchase
F-42
<PAGE> 271
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock, through payroll deductions not exceeding 10% of their
compensation, at the lower of 85% of the market price at the beginning or the
end of each six-month offering period. During 1996, 1997 and 1998, 15,614,
50,447 and 85,996 shares were issued at an average price per share of $23.91,
$15.87 and $6.39, respectively. At December 31, 1998, 14,609 shares are
available for future issuance.
On January 26, 1999, the stockholders approved the 1999 Employee Stock
Purchase Plan ( the "1999 ESPP"). The 1999 ESPP allows eligible employees the
right to purchase common stock, through payroll deductions not exceeding 10% of
their compensation, at the lower of 85% of the market price at the beginning or
the end of each six-month offering period. The stockholders authorized 500,000
shares for future issuance under this plan.
Accounting for Stock-Based Compensation--Arch accounts for its stock option
and stock purchase plans under APB Opinion No. 25 "Accounting for Stock Issued
to Employees". Since all options have been issued at a grant price equal to fair
market value, no compensation cost has been recognized in the Statement of
Operations. Had compensation cost for these plans been determined consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation", Arch's net income
(loss) and income (loss) per share would have been increased to the following
pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss):
As reported $(114,662) $(181,874) $(206,051)
Pro forma (115,786) (183,470) (208,065)
Basic net income (loss) per common As reported (16.86) (26.31) (29.58)
share
Pro forma (17.04) (26.55) (29.88)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to the
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. In computing these pro forma amounts, Arch
has assumed risk-free interest rates of 4.5% - 6%, an expected life of 5 years,
an expected dividend yield of zero and an expected volatility of 50% - 85%.
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1996, 1997 and 1998 were $14.85, $10.11 and
$8.34, respectively. The weighted average fair value of shares sold under the
ESPP in 1996, 1997 and 1998 was $16.38, $8.49 and $5.64, respectively.
Stockholders Rights Plan--Upon completion of the USAM Merger, Arch's
existing stockholders rights plan was terminated. In October 1995, Arch's Board
of Directors adopted a new stockholders rights plan (the "Rights") and declared
a dividend of one preferred stock purchase right (a "Right") for each
outstanding share of common stock to stockholders of record at the close of
business on October 25, 1995. Each Right entitles the registered holder to
purchase from Arch one one-thousandth of a share of Series B Junior
Participating Preferred Stock, at a cash purchase price of $150, subject to
adjustment. Pursuant to the Plan, the Rights automatically attach to and trade
together with each share of common stock. The Rights will not be exercisable or
transferable separately from the shares of common stock to which they are
attached until the occurrence of certain events. The Rights will expire on
October 25, 2005, unless earlier redeemed or exchanged by Arch in accordance
with the Plan.
F-43
<PAGE> 272
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Arch accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities, given the provisions of enacted laws.
The components of the net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheets at December 31, 1997 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets................................ $134,944 $179,484
Deferred tax liabilities........................... (90,122) (67,652)
-------- --------
44,822 111,832
Valuation allowance................................ (44,822) (111,832)
-------- --------
$ -- $ --
======== ========
</TABLE>
The approximate effect of each type of temporary difference and
carryforward at December 31, 1997 and 1998 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Net operating losses................................... $106,214 $128,213
Intangibles and other assets........................... (87,444) (62,084)
Depreciation of property and equipment................. 24,388 39,941
Accruals and reserves.................................. 1,664 5,762
-------- --------
44,822 111,832
Valuation allowance.................................... (44,822) (111,832)
-------- --------
$ -- $ --
======== ========
</TABLE>
The effective income tax rate differs from the statutory federal tax rate
primarily due to the nondeductibility of goodwill amortization and the inability
to recognize the benefit of current net operating loss ("NOL") carryforwards.
The NOL carryforwards expire at various dates through 2013. The Internal Revenue
Code contains provisions that may limit the NOL carryforwards available to be
used in any given year if certain events occur, including significant changes in
ownership, as defined.
The Company has established a valuation reserve against its net deferred
tax asset until it becomes more likely than not that this asset will be realized
in the foreseeable future.
6. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company and its subsidiaries are
defendants in a variety of judicial proceedings. In the opinion of management,
there is no proceeding pending, or to the knowledge of management threatened,
which, in the event of an adverse decision, would result in a material adverse
change in the financial condition of the Company.
Arch has operating leases for office and transmitting sites with lease
terms ranging from one month to approximately ten years. In most cases, Arch
expects that, in the normal course of business, leases will be renewed or
replaced by other leases.
F-44
<PAGE> 273
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancellable operating leases at
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1999........................................................ $21,372
2000........................................................ 13,826
2001........................................................ 8,853
2002........................................................ 6,026
2003........................................................ 2,495
Thereafter.................................................. 1,516
-------
Total............................................. $54,088
=======
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1996, 1997 and 1998 approximated $14.7 million, $19.8 million and $19.6 million,
respectively.
7. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan--Arch has a retirement savings plan, qualifying
under Section 401(k) of the Internal Revenue Code covering eligible employees,
as defined. Under the plan, a participant may elect to defer receipt of a stated
percentage of the compensation which would otherwise be payable to the
participant for any plan year (the deferred amount) provided, however, that the
deferred amount shall not exceed the maximum amount permitted under Section
401(k) of the Internal Revenue Code. The plan provides for employer matching
contributions. Matching contributions for the years ended December 31, 1996,
1997 and 1998 approximated $217,000, $302,000 and $278,000, respectively.
8. TOWER SITE SALE
In April 1998, Arch announced an agreement to sell certain of its tower
site assets (the "Tower Site Sale") for approximately $38.0 million in cash
(subject to adjustment), of which $1.3 million was paid to entities affiliated
with Benbow in payment for certain assets owned by such entities and included in
the Tower Site Sale. In the Tower Site Sale, Arch is selling communications
towers, real estate, site management contracts and/or leasehold interests
involving 133 sites in 22 states and will rent space on the towers on which it
currently operates communications equipment to service its own paging network.
Arch used its net proceeds from the Tower Site Sale to repay indebtedness under
the API Credit Facility. Arch held the initial closing of the Tower Site Sale on
June 26, 1998 with gross proceeds to Arch of approximately $12.0 million
(excluding $1.3 million which was paid to entities affiliated with Benbow for
certain assets which such entities sold as part of this transaction) and held a
second closing on September 29, 1998 with gross proceeds to Arch of
approximately $20.4 million.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain is deferred and included in other long-term
liabilities. At December 31, 1998, Arch had sold 117 of the 133 sites, which
resulted in a total gain of approximately $23.5 million and through December 31,
1998 approximately $2.5 million of this gain had been recognized in the
statement of operations and is included in operating income.
9. DIVISIONAL REORGANIZATION
In June 1998, Arch's Board of Directors approved a reorganization of Arch's
operations (the "Divisional Reorganization"). As part of the Divisional
Reorganization, which is being implemented over a period of 18 to 24 months,
Arch has consolidated its former Midwest, Western and Northern divisions into
four existing operating divisions and is in the process of consolidating certain
regional administrative support functions,
F-45
<PAGE> 274
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such as customer service, collections, inventory and billing, to reduce
redundancy and take advantage of various operating efficiencies. In connection
with the Divisional Reorganization, Arch (i) anticipates a net reduction of
approximately 10% of its workforce, (ii) is closing certain office locations and
redeploying other assets and (iii) recorded a restructuring charge of $14.7
million, or $2.10 per share (basic and diluted) in 1998. The restructuring
charge consisted of approximately (i) $9.7 million for employee severance, (ii)
$3.5 million for lease obligations and terminations and (iii) $1.5 million of
other costs.
The provision for lease obligations and terminations relates primarily to
future lease commitments on local, regional and divisional office facilities
that will be closed as part of the Divisional Reorganization. The charge
represents future lease obligations, on such leases past the dates the offices
will be closed by the Company, or for certain leases, the cost of terminating
the leases prior to their scheduled expiration. Cash payments on the leases and
lease terminations will occur over the remaining lease terms, the majority of
which expire prior to 2001.
Through the elimination of certain local and regional administrative
operations and the consolidation of certain support functions, the Company will
eliminate approximately 280 net positions. As a result of eliminating these
positions, the Company will involuntarily terminate an estimated 900 personnel.
The majority of the positions to be eliminated will be related to customer
service, collections, inventory and billing functions in local and regional
offices which will be closed as a result of the Divisional Reorganization. As of
December 31, 1998, 217 employees had been terminated due to the Divisional
Reorganization. The majority of the remaining severance and benefits costs to be
paid by the Company will be paid during 1999.
The Company's restructuring activity as of December 31, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
RESERVE
INITIALLY UTILIZATION OF REMAINING
ESTABLISHED RESERVE RESERVE
----------- -------------- ---------
<S> <C> <C> <C>
Severance costs.......................... $ 9,700 $2,165 $ 7,535
Lease obligation costs................... 3,500 366 3,134
Other costs.............................. 1,500 260 1,240
------- ------ -------
Total.......................... $14,700 $2,791 $11,909
======= ====== =======
</TABLE>
10. SEGMENT REPORTING
The Company operates in one industry: providing wireless messaging
services. On December 31, 1998, the Company operated approximately 175 retail
stores in 35 states of the United States.
F-46
<PAGE> 275
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the years ended December 31, 1997 and
1998 is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Revenues...................................... $ 95,539 $ 98,729 $101,331 $101,242
Operating income (loss).................. (26,632) (29,646) (27,208) (18,529)
Net income (loss)........................ (45,815) (49,390) (47,645) (39,024)
Basic net income (loss) per common share:
Net income (loss)........................ (6.63) (7.14) (6.87) (5.64)
YEAR ENDED DECEMBER 31, 1998:
Revenues................................. $102,039 $103,546 $104,052 $103,998
Operating income (loss).................. (19,418) (35,356) (20,783) (18,872)
Income (loss) before extraordinary
item................................... (45,839) (62,277) (47,994) (48,221)
Extraordinary charge..................... -- (1,720) -- --
Net income (loss)........................ (45,839) (63,997) (47,994) (48,221)
Basic net income (loss) per common share:
Income (loss) before extraordinary item..... (6.60) (8.91) (6.90) (6.93)
Extraordinary charge........................ -- (.24) -- --
Net income (loss)........................... (6.60) (9.15) (6.90) (6.93)
</TABLE>
12. SUBSEQUENT EVENT
On June 28, 1999, Arch effected a one for three reverse stock split. All
share and per share data included in these financial statements for all periods
presented have been adjusted to give effect to this reverse split.
F-47
<PAGE> 276
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,633 $ 21,488
Accounts receivable, net............................... 30,753 57,570
Inventories............................................ 10,319 10,163
Prepaid expenses and other............................. 8,007 9,959
---------- ----------
Total current assets.............................. 50,712 99,180
---------- ----------
Property and equipment, at cost............................. 428,173 697,337
Less accumulated depreciation and amortization.............. (209,128) (288,281)
---------- ----------
Property and equipment, net................................. 219,045 409,056
---------- ----------
Intangible and other assets, net............................ 634,528 916,282
---------- ----------
$ 904,285 $1,424,518
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt................... $ 1,250 $ 3,060
Accounts payable....................................... 25,683 23,444
Accrued restructuring.................................. 11,909 18,239
Accrued interest....................................... 20,997 31,861
Accrued expenses and other liabilities................. 27,175 93,110
---------- ----------
Total current liabilities......................... 87,014 169,714
---------- ----------
Long-term debt.............................................. 1,003,499 1,357,743
---------- ----------
Other long-term liabilities................................. 27,235 77,953
---------- ----------
Stockholders' equity (deficit):
Preferred stock -- $.01 par value...................... 3 3
Common stock -- $.01 par value......................... 71 481
Additional paid-in capital............................. 378,218 639,559
Accumulated deficit.................................... (591,755) (820,935)
---------- ----------
Total stockholders' equity (deficit).............. (213,463) (180,892)
---------- ----------
$ 904,285 $1,424,518
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE> 277
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1998 1999 1998 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Service, rental, and maintenance
revenues................................ $ 93,546 $ 190,798 $ 277,826 $ 403,607
Product sales........................... 10,506 15,391 31,811 36,963
---------- ----------- ---------- -----------
Total revenues................ 104,052 206,189 309,637 440,570
Cost of products sold................... (7,173) (10,459) (21,863) (24,988)
---------- ----------- ---------- -----------
96,879 195,730 287,774 415,582
---------- ----------- ---------- -----------
Operating expenses:
Service, rental, and maintenance... 20,403 43,035 60,812 91,421
Selling............................ 12,658 26,545 36,902 57,589
General and administrative......... 28,011 60,622 84,527 123,643
Depreciation and amortization...... 56,590 94,803 164,990 222,836
Restructuring charge............... -- (2,200) 14,700 (2,200)
---------- ----------- ---------- -----------
Total operating expenses...... 117,662 222,805 361,931 493,289
---------- ----------- ---------- -----------
Operating income (loss)................. (20,783) (27,075) (74,157) (77,707)
Interest expense, net................... (26,863) (39,740) (76,658) (98,927)
Other expense........................... (348) (924) (1,676) (44,396)
Equity in loss of affiliate............. -- -- (2,219) (3,200)
---------- ----------- ---------- -----------
Income (loss) before extraordinary item
and accounting change................. (47,994) (67,739) (154,710) (224,230)
---------- ----------- ---------- -----------
Extraordinary charge from early
extinguishment of debt................ -- -- (1,720) --
Cumulative effect of accounting
change................................ -- -- (3,361)
---------- ----------- ---------- -----------
Net income (loss)....................... (47,994) (67,739) (156,430) (227,591)
Preferred stock dividend................ (515) (546) (515) (1,589)
---------- ----------- ---------- -----------
Net income (loss) to common
stockholders.......................... $ (48,509) $ (68,285) $ (156,945) $ (229,180)
========== =========== ========== ===========
Basic/diluted net income (loss) per
common share before extraordinary
charge and accounting change.......... $ (6.91) $ (1.42) $ (22.20) $ (9.00)
Extraordinary charge per basic/diluted
common share.......................... -- -- (0.25) --
Cumulative effect of accounting change
per basic/diluted common share........ -- -- -- (0.13)
---------- ----------- ---------- -----------
Basic/diluted net income (loss) per
common share.......................... $ (6.91) $ (1.42) $ (22.45) $ (9.13)
========== =========== ========== ===========
Basic/diluted weighted average number of
common shares outstanding............. 7,022,370 48,060,782 6,989,427 25,088,969
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE> 278
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities................... $ 61,276 $ 76,422
--------- ---------
Cash flows from investing activities:
Additions to property and equipment, net............... (58,029) (65,035)
Additions to intangible and other assets............... (27,756) (18,151)
Net proceeds from tower site sale...................... 30,139 3,046
Acquisition of paging company, net of cash acquired.... -- (518,729)
--------- ---------
Net cash used for investing activities...................... (55,646) (598,869)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt............................. 455,964 466,058
Repayment of long-term debt............................ (484,013) (140,999)
Net proceeds from sale of preferred stock.............. 25,000 --
Net proceeds from sale of common stock................. 662 217,243
--------- ---------
Net cash provided by (used for) financing activities........ (2,387) 542,302
--------- ---------
Net increase in cash and cash equivalents................... 3,243 19,855
Cash and cash equivalents, beginning of period.............. 3,328 1,633
--------- ---------
Cash and cash equivalents, end of period.................... $ 6,571 $ 21,488
========= =========
Supplemental disclosure:
Interest paid.......................................... $ 42,962 $ 58,734
Accretion of discount on senior notes.................. $ 27,430 $ 30,995
Issuance of common stock in acquisition of paging
company............................................... $ -- $ 20,083
Liabilities assumed in acquisition of paging company... $ -- $ 135,676
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE> 279
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(a) Preparation of Interim Financial Statements -- The consolidated
condensed financial statements of Arch Communications Group, Inc. ("Arch" or the
"Company") have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission. The financial information included
herein, other than the consolidated condensed balance sheet as of December 31,
1998, has been prepared by management without audit by independent accountants
who do not express an opinion thereon. The consolidated condensed balance sheet
at December 31, 1998 has been derived from, but does not include all the
disclosures contained in, the audited consolidated financial statements for the
year ended December 31, 1998. In the opinion of management, all of these
unaudited statements include all adjustments and accruals consisting only of
normal recurring accrual adjustments which are necessary for a fair presentation
of the results of all interim periods reported herein. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes included in Arch's
Annual Report on Form 10-K for the year ended December 31, 1998. The results of
operations for the periods presented are not necessarily indicative of the
results that may be expected for a full year.
(b) Intangible and Other Assets -- Intangible and other assets, net of
accumulated amortization, are comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Goodwill............................................. $259,877 $271,808
Purchased FCC licenses............................... 367,014 256,519
Purchased subscriber lists........................... 258,530 56,825
Deferred financing costs............................. 25,318 22,072
Investment in Benbow PCS Ventures, Inc. ("Benbow")... -- 11,347
Investment in CONXUS Communications, Inc.
("CONXUS")......................................... -- 6,500
Non-competition agreements........................... 1,063 1,790
Other................................................ 4,480 7,667
-------- --------
$916,282 $634,528
======== ========
</TABLE>
In June 1999, Arch, Benbow and Ms. June Walsh, who holds a 50.1% equity
interest in Benbow, agreed that:
- the shareholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated
- Benbow will not make any further FCC payments and will not pursue
construction of an N-PCS system
- Arch will not be obligated to fund FCC payments or construction of an
N-PCS system by Benbow
- the parties will seek FCC approval of the forgiveness of Benbow's
remaining payment obligations and the transfer of Ms. Walsh's equity
interest in Benbow to Arch
- the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of FCC approval
- Arch will pay Ms. Walsh, in installments, an aggregate amount of $3.5
million (if the transaction closes before January 23, 2001) or $3.8
million (if the transaction closes on January 23, 2001)
As a result of these arrangements, Benbow will not have any meaningful business
operations and is unlikely to retain its N-PCS licenses. Therefore, Arch has
written off substantially all of its investment in Benbow in the amount of $8.2
million. Arch has also accrued the payment to Ms. Walsh of $3.8 million and
legal and other
F-51
<PAGE> 280
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
expenses of approximately $1.0 million which is included in accrued expenses. In
addition, Arch guaranteed Benbow's obligations in conjunction with Benbow's
purchase of the stock of PageCall in June 1998. Since it is unlikely that Benbow
will be able to meet these obligations and Arch is currently required to settle
the obligation in stock, Arch has recorded the issuance of $22.8 million of its
common stock in additional paid-in capital as a charge to operations, to satisfy
the obligation in April 2000.
On May 18, 1999, CONXUS filed for Chapter 11 protection in the U.S.
Bankruptcy Court in Delaware, which case was converted to a case under Chapter 7
on August 17, 1999. In June 1999, Arch wrote-off its $6.5 million investment in
CONXUS. On November 3, 1999, in order to document its disposition of any
interest it has, if any, in CONXUS, Arch offered to transfer to CONXUS its
shares in CONXUS for no consideration.
(c) Acquisition of MobileMedia -- On June 3, 1999 Arch completed its
acquisition of MobileMedia Communications, Inc. ("MobileMedia") for $674.5
million, consisting of cash paid of $518.7 million, including direct transaction
costs, 4,781,656 shares of Arch common stock valued at $20.1 million and the
assumption of liabilities of $135.7 million. The cash payments were financed
through the issuance of approximately 36.2 million shares of Arch common stock
in a rights offering for $6.00 per share, the issuance of $147.0 million
principal amount of 13 3/4% senior notes due 2008 (see note (d)) and additional
borrowings under the Company's credit facility.
The purchase price was allocated based on the fair values of assets
acquired and liabilities assumed. The allocation is subject to change based on
finalization of asset appraisals. The acquisition has been accounted for as a
purchase, and the results of MobileMedia's operations have been included in the
consolidated financial statements from the date of the acquisition. Goodwill
resulting from the acquisition is being amortized over a ten-year period using
the straight-line method.
The liabilities assumed, referred to above, include an unfavorable lease
accrual related to MobileMedia's rentals on communications towers which were in
excess of market rental rates. This accrual amounted to approximately $52.4
million and is included in other long-term liabilities. This accrual will be
amortized over the remaining lease term of 14 1/4 years.
Concurrent with the consummation of the acquisition, Arch commenced the
development of a plan to integrate the operations of MobileMedia. The
liabilities assumed, referred to above, also included a $13.1 million
restructuring accrual to cover the costs to eliminate redundant headcount and
facilities in connection with the overall integration of operations (see note
(h)).
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the periods
presented, after giving effect to certain adjustments, including depreciation
and amortization of acquired assets and interest expense on acquisition debt.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made at the beginning of the period presented, or of results that may occur
in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues................................................ $616,432 $643,665
Income (loss) before extraordinary item................. (251,632) (127,165)
Net income (loss)....................................... (251,632) (128,885)
Basic/diluted net income (loss) per common share........ (5.27) (2.67)
</TABLE>
F-52
<PAGE> 281
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In connection with the acquisition of MobileMedia, Arch issued
approximately 48.3 million warrants to purchase Arch common stock. Each warrant
represents the right to purchase one-third of one share of Arch common stock at
an exercise price of $3.01 ($9.03 per share). The warrants expire on September
1, 2001.
(d) Senior Notes -- On June 3, 1999, Arch Communications, Inc. ("ACI"), a
wholly-owned subsidiary of Arch, received the proceeds of an offering of $147.0
million principal amount at maturity of 13 3/4% Senior
Notes due 2008 (the "13 3/4% Notes") to qualified institutional buyers
under Rule 144A promulgated under the Securities Act of 1933, as amended. The
13 3/4% Notes were sold at an initial price to investors of 95.091% for net
proceeds of $134.6 million (after deducting the discount to the Initial
Purchasers and offering expenses). The 13 3/4% Notes mature on April 15, 2008
and bear interest at a rate of 13 3/4% per annum, payable semi-annually in
arrears on April 15 and October 15 of each year, commencing October 15, 1999.
The indenture governing the 13 3/4% Notes (the "Indenture") contains
certain covenants that, among other things, limit the ability of ACI to incur
additional indebtedness, issue preferred stock, pay dividends or make other
distributions, repurchase Capital Stock (as defined in the Indenture), repay
subordinated indebtedness or make other Restricted Payments (as defined in the
Indenture), create certain liens, enter into certain transactions with
affiliates, sell assets, issue or sell Capital Stock of ACI's Restricted
Subsidiaries (as defined in the Indenture) or enter into certain mergers and
consolidations.
(e) Reverse Stock Split -- On June 28, 1999, Arch effected a one for three
reverse stock split. All share and per share data included in this Quarterly
Report for all periods presented have been adjusted to give effect to this
reverse split.
(f) Change in Accounting Principle -- In April 1998, the Accounting
Standards Executive Committee of the Financial Accounting Standards Board issued
Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. Arch adopted SOP 98-5 effective January 1,
1999. Initial application of SOP 98-5 resulted in a $3.4 million charge, which
was reported as the cumulative effect of a change in accounting principle. This
charge represents the unamortized portion of start-up and organization costs,
which had been deferred in prior years.
(g) Divisional Reorganization -- In conjunction with the completion of the
MobileMedia merger, the timing and implementation of the divisional
reorganization announced in June 1998 was reviewed by Arch management. The plan
was reviewed within the context of the combined company integration plan which
was approved by the Company in the third quarter of 1999. After a thorough
review it was decided that significant changes needed to be made to the
divisional reorganization plan. In the quarter ended September 30, 1999 the
Company identified certain of its facilities and network leases that will not be
utilized following the integration of the Company and MobileMedia, resulting in
an additional charge of $2.6 million. This charge was offset by reductions to
previously provided severance and other costs of $4.8 million. As of September
30, 1999, 426 employees had been terminated due to the divisional
reorganization.
The Company's restructuring activity as of September 30, 1999 was as
follows (in thousands):
<TABLE>
<CAPTION>
RESERVE
INITIALLY UTILIZATION OF RESERVE REMAINING
ESTABLISHED RESERVE ADJUSTMENT RESERVE
----------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
Severance costs............................ $ 9,700 $4,541 $(3,547) $1,612
Lease obligation costs..................... 3,500 737 2,570 5,333
Other costs................................ 1,500 277 (1,223) --
------- ------ ------- ------
Total............................ $14,700 $5,555 $(2,200) $6,945
======= ====== ======= ======
</TABLE>
F-53
<PAGE> 282
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(h) MobileMedia Acquisition Reserve -- On June 3, 1999, Arch completed its
acquisition of MobileMedia and commenced the development of plans to integrate
the operations of MobileMedia. During the third quarter of 1999, Arch approved
plans covering the elimination of redundant headcount and facilities in
connection with the overall integration of operations. To the extent that it is
determined that headcount and facilities acquired with MobileMedia should be
eliminated, the purchase price of the acquisition will be increased to cover the
costs of executing the plan. It is expected that the integration activity
relating to the MobileMedia merger, which commenced on July 1, 1999, will take
approximately 18 months.
In connection with the MobileMedia acquisition, Arch anticipates a net
reduction of approximately 10% of MobileMedia's workforce and the closing of
certain facilities and tower sites. This resulted in the establishment of a
$13.1 million acquisition reserve which is included as part of the purchase
price of MobileMedia. The initial acquisition reserve consisted of approximately
(i) $5.6 million for employee severance, (ii) $7.0 million for lease obligations
and terminations and (iii) $0.5 million of other costs. As of September 30,
1999, 77 former MobileMedia employees had been terminated due to the
acquisition. The acquisition reserve will continue to be evaluated in the event
that certain assumptions change in the future.
The MobileMedia acquisition reserve activity as of September 30, 1999 was
as follows (in thousands):
<TABLE>
<CAPTION>
RESERVE
INITIALLY UTILIZATION OF REMAINING
ESTABLISHED RESERVE RESERVE
----------- -------------- ---------
<S> <C> <C> <C>
Severance costs.............................. $ 5,658 $1,839 $ 3,819
Lease obligation costs....................... 6,975 -- 6,975
Other costs.................................. 500 -- 500
------- ------ -------
Total.............................. $13,133 $1,839 $11,294
======= ====== =======
</TABLE>
(i) Subsequent Event -- Equity Issued in Exchange for Debt -- In October
1999, Arch completed transactions with four bondholders in which Arch issued an
aggregate of 3,136,665 shares of Arch common stock and warrants to purchase
540,487 shares of Arch common stock for $9.03 per share in exchange for $25.2
million accreted value of debt securities. Under two of the exchange agreements,
Arch issued 809,545 shares of Arch common stock and warrants to purchase 540,487
shares of Arch common stock for $9.03 per share in exchange for $8.9 million
principal amount of Arch 6 3/4% Convertible Subordinated Debentures Due 2003
(the "Convertible Debentures"). Under the remaining exchange agreements, Arch
issued 2,327,120 shares of Arch common stock in exchange for $16.3 million
accreted value ($19.0 million maturity value) of its 10 7/8% Senior Discount
Notes due 2008 (the "Senior Discount Notes"). Following these transactions, Arch
has $4.5 million in principal amount of the Convertible Debentures and $387.1
million accreted value (at October 31, 1999) ($448.4 million maturity value) of
the Senior Discount Notes outstanding.
(j) Subsequent Event -- Merger Agreement -- In November 1999, Arch signed a
definitive agreement (the "Merger Agreement") with Paging Network, Inc.
("PageNet") pursuant to which PageNet will merge with a wholly owned subsidiary
of Arch (the "Merger"). Each outstanding share of PageNet common stock will be
converted into 0.1247 share of Arch common stock in the Merger.
Under the Merger Agreement, PageNet is required to make an exchange offer
(the "PageNet Exchange Offer") of PageNet common stock to holders of its
outstanding 8.875% Senior Subordinated Notes due 2006 (the "8.875% Notes"), its
10.125% Senior Subordinated Notes due 2007 (the "10.125% Notes") and its 10%
Senior Subordinated Notes due 2008 (the "10% Notes"), having an aggregate
outstanding principal amount of $1.2 billion. Under the PageNet Exchange Offer,
an aggregate of 616,830,757 shares of PageNet common stock, together with 68.9%
of the equity interest in PageNet's subsidiary, Vast Solutions, would be
exchanged for all of the 8.875% Notes, 10.125% Notes and 10% Notes
(collectively, the "PageNet Notes"), in the aggregate. In connection with the
Merger, PageNet would distribute to its stockholders (other than holders
F-54
<PAGE> 283
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
who received shares in the PageNet Exchange Offer), 11.6% of the equity
interests in Vast Solutions. After the Merger, PageNet would retain 19.5% of the
equity interests of Vast Solutions.
Under the Merger Agreement Arch is required to make an exchange offer (the
"Arch Exchange Offer") of 29,651,984 shares of its common stock (in the
aggregate) for all of its Senior Discount Notes, and to convert all of its
outstanding shares of Series C Convertible Preferred Stock ("Series C Preferred
Stock") into 2,104,142 shares of its common stock.
If the PageNet Exchange Offer and the Arch Exchange Offer were fully
subscribed, immediately following the Merger (and the issuance of Arch common
stock in exchange for PageNet common stock, in the Arch Exchange Offer and upon
the conversion of Series C Preferred Stock), current holders of Arch's common
stock would own approximately 29.6% of the outstanding Arch common stock,
holders of Series C Preferred Stock would own approximately 1.2% of the
outstanding Arch common stock, holders of the Senior Discount Notes would own
approximately 17.6% of the outstanding Arch common stock, current holders of
PageNet common stock would own approximately 7.5% of the outstanding Arch common
stock and current holders of the PageNet Notes (in the aggregate) would own
approximately 44.5% of the outstanding Arch common stock. In addition, following
the Merger Arch would have, on a pro forma basis, total debt of approximately
$1.8 billion.
Under the Merger Agreement, the Arch Board of Directors at the closing
would consist of 12 individuals, at least six of whom would be designated by the
existing Arch Board of Directors. The PageNet Board of Directors would designate
three members, and the three largest holders of PageNet Notes would each be
entitled to designate one member. To the extent any such holder of PageNet Notes
did not elect to designate a director, the number of directors designated by the
Arch Board of Directors would increase.
Arch expects the Merger, which has been approved by the Boards of Directors
of Arch and PageNet, but is subject to customary regulatory review, shareholder
approval, other third-party consents and the completion of the exchange offers
and preferred stock conversion, to be completed during the first half of 2000.
Each of the PageNet Exchange Offer and the Arch Exchange Offer is conditioned
upon acceptance by the holders of 97.5% of the PageNet Notes and Senior Discount
Notes, respectively.
Under the Merger Agreement, PageNet is required to include a "prepackaged"
plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
materials relating to the PageNet Exchange Offer, and to solicit consents for
this prepackaged plan from holders of the PageNet Notes and its senior
creditors. In certain circumstances PageNet has agreed either to file the
prepackaged plan in lieu of completing the PageNet Exchange Offer or to pay to
Arch a termination fee.
The Merger Agreement provides that under certain circumstances a fee may be
payable by Arch or PageNet upon termination of the agreement. These
circumstances include withdrawal of the recommendation or approval of the Merger
Agreement or the Merger by the Arch or PageNet Board of Directors, the failure
of shareholders or noteholders to approve the transaction or exchange followed
by the making of an alternative proposal and Arch or PageNet entering into an
agreement with a third party within 12 months of such termination, and PageNet's
failure to file a prepackaged plan in certain circumstances. The termination fee
payable by Arch or PageNet under the Merger Agreement is $40.0 million.
The Merger Agreement provides that either party may terminate the agreement
if the Merger is not consummated by June 30, 2000. This termination date is
subject to extension for 90 days for regulatory approval and is subject to
extension to as late as December 31, 2000 under certain circumstances where
PageNet files for protection under the U.S. Bankruptcy Code.
F-55
<PAGE> 284
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MobileMedia Communications, Inc.
We have audited the accompanying consolidated balance sheets of MobileMedia
Communications, Inc. and Subsidiaries ("MobileMedia") as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MobileMedia Communications, Inc. and Subsidiaries at December 31, 1997 and 1998
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
MobileMedia will continue as a going concern. As more fully described in Note 1,
on January 30, 1997, MobileMedia Corporation and substantially all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court). Additionally, as more fully
described in Note 11, on April 8, 1997, the Federal Communications Commission
("FCC") issued a Public Notice commencing an administrative hearing into the
qualification of MobileMedia to remain a licensee. These events, and
circumstances relating to the Chapter 11 filing with the Bankruptcy Court,
including MobileMedia's highly leveraged financial structure, non-compliance
with certain covenants of loan agreements with banks and note indentures, net
working capital deficiency and recurring losses from operations, raise
substantial doubt about MobileMedia's ability to continue as a going concern.
Although MobileMedia is currently operating the business as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court, the
continuation of the business as a going concern is contingent upon, among other
things, the ability to (a) gain approval of the creditors and confirmation by
the Bankruptcy Court of a plan of reorganization, (b) maintain compliance with
all covenants under the debtor-in-possession financing agreement, (c) achieve
satisfactory levels of future operating profit and (d) retain FCC qualification
as a licensee. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
/S/ ERNST & YOUNG LLP
MetroPark, New Jersey
February 12, 1999, except for the eighth paragraph of Note 1 and
the second paragraph of Note 6, as to which the date is March 26, 1999
and the ninth paragraph of Note 1, as to which the date is April 12, 1999
F-56
<PAGE> 285
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................... $ 10,920 $ 1,218 $ --
Accounts receivable (less allowance for uncollectible
accounts of $26,500, $15,000 and $14,893 in 1997,
1998 and 1999, respectively)......................... 55,432 38,942 37,270
Inventories............................................. 868 2,192 1,609
Prepaid expense......................................... 5,108 5,523 5,261
Other current assets.................................... 2,783 4,855 4,900
----------- ----------- -----------
Total current assets............................... 75,111 52,730 49,040
----------- ----------- -----------
Investment in net assets of equity affiliate................ 1,788 1,400 --
Property and equipment, net................................. 257,937 219,642 225,566
Intangible assets, net...................................... 295,358 266,109 258,793
Other assets................................................ 24,940 21,573 20,610
----------- ----------- -----------
Total assets....................................... $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit facility.............. $ 10,000 $ -- $ 5,000
Accrued restructuring costs............................. 4,897 5,163 7,197
Accrued wages, benefits and payroll..................... 11,894 12,033 9,944
Book cash overdraft..................................... -- -- 1,255
Accounts payable--post petition......................... 2,362 1,703 7,334
Accrued interest........................................ 4,777 3,692 3,566
Accrued expenses and other current liabilities.......... 35,959 35,735 30,061
Current income taxes payable............................ -- 2,871 1,200
Advance billing and customer deposits................... 34,252 28,554 28,892
Deferred gain on tower sale............................. -- 68,444 67,278
----------- ----------- -----------
Total liabilities not subject to compromise........ 104,141 158,195 161,727
----------- ----------- -----------
Liabilities subject to compromise
Accrued wages, benefits and payroll taxes............... 562 647 476
Accrued interest........................................ 18,450 17,579 17,578
Accounts payable--pre petition.......................... 19,646 15,410 15,351
Accrued expenses and other current liabilities.......... 20,663 15,285 12,231
Debt.................................................... 1,075,681 905,681 905,681
Other liabilities....................................... 2,915 -- --
----------- ----------- -----------
Total liabilities subject to compromise............ 1,137,917 954,602 951,317
----------- ----------- -----------
Deferred tax liabilities................................ 2,655 2,655 2,655
Stockholders' deficit
Common stock (1 share, no par value, issued and
outstanding at December 31, 1997 and 1998 and March
31, 1999)............................................ -- -- --
Additional paid-in-capital.................................. 676,025 676,025 676,025
Accumulated deficit--pre petition........................... (1,154,420) (1,154,420) (1,154,420)
Accumulated deficit--post petition.......................... (111,184) (75,603) (83,295)
----------- ----------- -----------
Total stockholders' deficit........................ (589,579) (553,998) (561,690)
----------- ----------- -----------
Total liabilities and stockholders' deficit........ $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
</TABLE>
See accompanying notes.
F-57
<PAGE> 286
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- -------------------
1996 1997 1998 1998 1999
----------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Services, rents and maintenance..... $ 568,892 $ 491,174 $423,059 $108,542 $100,631
Product sales....................... 71,818 36,218 26,622 6,621 5,193
----------- --------- -------- -------- --------
Total revenues................. 640,710 527,392 449,681 115,163 105,824
Cost of products sold.................... (72,595) (35,843) (22,162) (5,513) (3,516)
----------- --------- -------- -------- --------
568,115 491,549 427,519 109,650 102,308
Operating expenses
Services, rents and maintenance..... 144,050 139,333 111,589 28,899 27,077
Selling............................. 96,817 69,544 61,106 15,703 14,136
General and administrative.......... 218,607 179,599 133,003 34,908 31,481
Reduction of liabilities subject to
compromise........................ -- -- (10,461) -- (3,050)
Impairment of long-lived assets..... 792,478 -- -- -- --
Restructuring costs................. 4,256 19,811 18,624 4,558 5,067
Depreciation........................ 136,434 110,376 86,624 24,193 20,501
Amortization........................ 212,264 29,862 29,835 7,478 7,468
Amortization of deferred gain on
tower sale........................ -- -- (1,556) -- (1,167)
----------- --------- -------- -------- --------
Total operating expenses....... 1,604,906 548,525 428,764 115,739 101,513
----------- --------- -------- -------- --------
Operating Income (loss).................. (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense)
Interest expense, net............... (92,663) (67,611) (53,043) (14,626) (10,018)
Gain (loss) on sale/disposal of
assets............................ 68 3 94,165 1 (323)
Other............................... -- -- (338) -- 2,063
----------- --------- -------- -------- --------
Total other expense............ (92,595) (67,608) 40,784 (14,625) (8,278)
----------- --------- -------- -------- --------
Income (loss) before income taxes
(benefit).............................. (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income taxes (benefit)................... (69,442) -- 3,958 -- 209
----------- --------- -------- -------- --------
Net income (loss)........................ $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
=========== ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-58
<PAGE> 287
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED ACCUMULATED
PAID IN DEFICIT DEFICIT
CAPITAL PRE-PETITION POST-PETITION TOTAL
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................... $659,829 $ (81,076) $ 0 $ 578,753
Capital contribution from MobileMedia.......... 12,800 -- -- 12,800
Net loss....................................... -- (1,059,944) -- (1,059,944)
-------- ----------- --------- -----------
Balance at December 31, 1996................... 672,629 (1,141,020) 0 (468,391)
Capital contribution from MobileMedia.......... 3,396 -- -- 3,396
Net loss....................................... -- (13,400) (111,184) (124,584)
-------- ----------- --------- -----------
Balance at December 31, 1997................... 676,025 (1,154,420) (111,184) (589,579)
Net income..................................... -- -- 35,581 35,581
-------- ----------- --------- -----------
Balance at December 31, 1998................... 676,025 (1,154,420) (75,603) (553,998)
Net loss (unaudited)........................... -- -- (7,692) (7,692)
-------- ----------- --------- -----------
Balance at March 31, 1999 (unaudited).......... $676,025 $(1,154,420) $ (83,295) $ (561,690)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
F-59
<PAGE> 288
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- -------------------
1996 1997 1998 1998 1999
----------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)........................ $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
Adjustments to reconcile net loss to net cash
provided by (used in) Operating activities:
Depreciation and amortization............ 348,698 140,238 116,459 31,672 27,969
Amortization of deferred gain on tower
sale.................................. -- -- (1,556) -- (1,167)
Income tax benefit....................... (69,442) -- -- -- --
Accretion of note payable discount....... 16,792 1,485 -- -- --
Provision for uncollectible accounts..... 56,556 65,181 14,841 4,981 2,131
Reduction of liabilities subject to
compromise............................ -- -- (10,461) -- (3,050)
Recognized gain on sale of tower
assets................................ -- -- (94,165) -- --
Impairment of long-lived assets.......... 792,478 -- -- -- --
Undistributed earnings of affiliate,
net................................... 160 69 (87) 22 --
Change in operating assets and liabilities:
Accounts receivable...................... (55,965) (53,904) 1,649 2,813 (459)
Inventories.............................. 2,433 12,514 (1,324) 407 583
Prepaid expenses and other assets........ 12,145 (686) 590 (1,052) 1,028
Accounts payable, accrued expenses and
other liabilities..................... 13,283 (25,393) (7,065) 1,413 (1,791)
----------- --------- --------- -------- --------
Net cash provided by (used in) operating
activities............................ 57,194 14,920 54,462 19,542 17,552
----------- --------- --------- -------- --------
Investing activities:
Construction and capital expenditures,
including net changes in pager
assets................................ (161,861) (40,556) (53,867) (4,854) (26,806)
Net proceeds from the sale of tower
assets................................ -- -- 169,703 -- --
Net proceeds from the sale of investment
in Abacus............................. -- -- -- -- 1,400
Net loss on the disposal of fixed
assets................................ -- -- -- -- 381
Acquisition of businesses................ (866,460) -- -- -- --
----------- --------- --------- -------- --------
Net cash provided by (used in) investing
activities................................. (1,028,321) (40,556) 115,836 (4,854) (25,025)
----------- --------- --------- -------- --------
Financing activities:
Book cash overdraft...................... -- -- -- -- 1,255
Capital contribution by MobileMedia
Corporation........................... 12,800 3,396 -- -- --
Payment of debt issue costs.............. (6,939) -- -- -- --
Borrowing from revolving credit
facilities............................ 580,250 -- -- -- --
Repayments on revolving credit
facilities............................ -- -- (170,000) -- --
Borrowing from DIP credit facilities..... -- 47,000 -- -- 5,000
Repayments on DIP credit facilities...... -- (37,000) (10,000) (10,000) --
----------- --------- --------- -------- --------
Net cash provided by (used in) financing
activities................................. 586,111 13,396 (180,000) (10,000) 6,255
----------- --------- --------- -------- --------
Net (decrease) increase in cash, cash
equivalents designated and cash designated
for the MobileComm acquisition............. (385,016) (12,240) (9,702) 4,688 (1,218)
Cash and cash equivalents at beginning of
period..................................... 408,176 23,160 10,920 10,920 1,218
----------- --------- --------- -------- --------
Cash and cash equivalents at end of period... $ 23,160 $ 10,920 $ 1,218 $ 15,608 $ 0
=========== ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-60
<PAGE> 289
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. CHAPTER 11 REORGANIZATION AND BASIS OF PRESENTATION
On January 30, 1997 (the "Petition date"), MobileMedia Corporation
("Parent"), its wholly owned subsidiary MobileMedia Communications, Inc., and
all seventeen of MobileMedia Communications, Inc.'s subsidiaries ("MobileMedia")
(collectively with Parent, the "Debtors"), filed for protection under Chapter 11
of Title 11 of the United States Code (the "Bankruptcy Code"). The Debtors are
operating as debtors-in-possession and are subject to the jurisdiction of the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business for the benefit of its creditors and stockholders. In
addition to permitting rehabilitation of the debtor, another goal of Chapter 11
is to promote equality of treatment of creditors and equity security holders of
equal rank with respect to the restructuring of debt. In furtherance of these
two goals, upon the filing of a petition for reorganization under Chapter 11,
section 362(a) of the Bankruptcy Code generally provides for an automatic stay
of substantially all acts and proceedings against the debtor and its property,
including all attempts to collect claims or enforce liens that arose prior to
the commencement of the debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations
of the Debtors with respect to the employment of attorneys, investment bankers
and other professionals, and transactions out of the Debtors' ordinary course of
business or otherwise requiring bankruptcy court approval under the Bankruptcy
Code. The Debtors have been paying undisputed obligations that have arisen
subsequent to the Petition date on a timely basis.
Since the Petition date, the Bankruptcy Court has entered orders, among
other things, allowing the Debtors (i) to pay certain customer refunds and
deposits in the ordinary course of business, (ii) to pay wages, salaries and
benefits owing to employees, and (iii) to pay specified pre-petition taxes owing
to various governmental entities. On February 6, 1997, the Bankruptcy Court
entered an order authorizing the Debtors to pay approximately $46,000 in
pre-petition amounts owing to certain essential vendors.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service contracts
and other unexpired executory pre-petition leases and contracts, subject to
Bankruptcy Court approval. Assumption of a contract requires the Debtors, among
other things, to cure all defaults under the contract, including payment of all
pre-petition liabilities. Rejection of a contract constitutes a breach of that
contract as of the moment immediately preceding the Chapter 11 filing and the
other party has the right to assert a general, unsecured claim against the
bankruptcy estate for damages arising out of such breach. These parties may also
seek to assert post-petition administrative claims against the Debtors to the
extent that the Debtors utilize the collateral or services of such parties
subsequent to the commencement of the Chapter 11 proceedings. The Debtors cannot
presently determine or reasonably estimate the ultimate liability that may
result from payments required to cure defaults under assumed leases and
contracts or from the filing of claims for all leases and contracts which may be
rejected.
In connection with the Chapter 11 filing, the Debtors notified all known
claimants that pursuant to an order of the Bankruptcy Court, all proofs of
claims, on account of pre-petition obligations, other than for certain
governmental entities, were required to be filed by June 16, 1997 (the "Bar
Date"). As of March 31, 1999, approximately 2,581 proofs of claim had been filed
against the Debtors. Included among the claims filed are claims of unspecified
and undeterminable amounts. The Debtors consider the amounts set forth in
certain proofs of claim to be inaccurate estimates of the Debtors' liabilities.
As of March 31, 1999, the Debtors had secured orders of the Bankruptcy Court
reducing approximately 1,607 claims filed in an aggregate amount of
approximately $143,362 to an allowed amount of $10,239. As of March 31, 1999,
the Debtors had also analyzed and resolved an additional 876 proofs of claim,
representing an aggregate allowed amount of $8,389. The Debtors expect the
objection process to continue.
F-61
<PAGE> 290
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
On August 20, 1998, MobileMedia announced that it had executed a merger
agreement with Arch Communications Group, Inc. ("Arch"), pursuant to which
MobileMedia Communications, Inc. will be merged with and into a wholly-owned
subsidiary of Arch. Immediately prior to the Merger, Parent will contribute all
of its assets to MobileMedia Communications, Inc. Also on August 20, 1998, the
Debtors filed a First Amended Joint Plan of Reorganization that reflects the
proposed merger with Arch. On September 3, 1998, Arch and MobileMedia executed
an amendment to the merger agreement and the Debtors filed a subsequent Second
Amended Joint Plan of Reorganization. On December 1, 1998 Arch and MobileMedia
executed a second amendment to the merger agreement and on December 2, 1998, the
Debtors filed a Third Amended Joint Plan of Reorganization (the "Plan"). As of
February 9, 1999, Arch and MobileMedia executed a third amendment to the merger
agreement. Under the Plan, the Debtors' secured creditors will receive cash in
an amount equal to their allowed pre-petition claims and the Debtors' unsecured
creditors will receive cash or equity securities of Arch in satisfaction of
their pre-petition claims against the Debtors. Because there are a variety of
conditions precedent to the consummation of the Plan and the merger with Arch,
there can be no assurance that the transactions contemplated thereby will be
consummated.
In December 1998 and January 1999, MobileMedia solicited the votes of its
creditors on the Plan. 100% of the voting creditors in Class 4 voted to accept
the Plan. As to Allowed Claims in Class 5, 83% in number and 91% in amount of
those voting voted to accept the Plan. Of the Allowed Claims in Class 6 that
voted on the Plan, 968 of such holders (approximately 94% in number and 69% in
amount) voted to accept the Plan, and 61 of such holders (approximately 6% in
number and 31% in amount) voted to reject the Plan.
Objections to confirmation were filed by New Generation Advisors, Inc.
("New Generation"), Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Corporate
Bond Fund, Inc.--High Income Portfolio and State Street Research High Income
Fund (the "Objectors"). On February 12, 1999, at a continued hearing on
confirmation of the Plan, the Bankruptcy Court ordered MobileMedia to provide
due diligence to a nominee of New Generation, to prepare supplemental disclosure
to the holders of Allowed Claims in Class 6, and to resolicit the votes of such
holders on the Plan. At a hearing held before the Bankruptcy Court on February
18, 1999, the Bankruptcy Court entered an order approving a form of Notice and
Supplemental Disclosure, directing MobileMedia to resolicit the votes of all
holders of Allowed Class 6 Claims and establishing March 23, 1999 as (a) the
Supplemental Voting Deadline for Class 6 and (b) the deadline for any further
objections to confirmation of the Plan arising out of the matters set forth in
the Notice of Supplemental Disclosure. No further objections to the Plan were
received by March 23, 1999. Taking into account the resolicitation of Class 6,
the Plan was accepted by 59.6% in number and 69.3% in dollar amount of voting
Class 6 creditors.
On March 22, 1999, the Debtors and various other parties (including the
Objectors, Arch, the Committee and the Agent for the Company's pre-petition
secured lenders) executed a stipulation (the "Stipulation") that was approved by
the Bankruptcy Court, effective as of March 23, 1999. The Stipulation resolved
the pending objections to the Plan by providing for the withdrawal of the
Objectors' objections and the waiver of all appeal rights of the Objectors. The
Plan was confirmed by the Bankruptcy Court on April 12, 1999.
The consolidated financial statements at December 31, 1997, 1998 and March
31, 1999 (unaudited) have been prepared on a going concern basis which assumes
continuity of operations and realization of assets and liquidation of
liabilities in the ordinary course of business. As discussed herein, there are
significant uncertainties relating to the ability of MobileMedia to continue as
a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or the amounts and classification of liabilities that might be
necessary as a result of the outcome of the uncertainties discussed herein.
F-62
<PAGE> 291
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
MobileMedia provides paging and wireless messaging services in the United
States, including the 100 largest metropolitan areas.
Consolidation
The consolidated financial statements include the accounts of MobileMedia
and its wholly-owned subsidiaries (MobileMedia Communications, Inc.
(California), MobileMedia Paging, Inc., MobileMedia DP Properties, Inc., Dial
Page Southeast, Inc., Radio Call Company of Va., Inc., MobileMedia PCS, Inc.,
Mobile Communications Corporation of America, MobileComm of Florida, Inc.,
MobileComm of Tennessee, Inc., MobileComm of the Midsouth, Inc., MobileComm
Nationwide Operations, Inc., MobileComm of the West, Inc., MobileComm of the
Northeast, Inc., MobileComm of the Southeast, Inc., MobileComm of the Southeast
Private Carrier Operations, Inc., MobileComm of the Southwest, Inc. and FWS
Radio, Inc.). All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents
MobileMedia considers all highly-liquid securities with an original
maturity of less than three months to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject MobileMedia to
concentrations of credit risk consist principally of temporary cash investments
and accounts receivable. MobileMedia places its cash with high-quality
institutions and, by policy, limits its credit exposure to any one institution.
Although MobileMedia faces significant credit risk from its customers, such risk
does not result from a concentration of credit risk as a result of the large
number of customers which comprise MobileMedia's customer base. MobileMedia
generally does not require collateral or other security to support customer
receivables.
Inventories
MobileMedia values inventories at the lower of specific cost or market
value. Inventories consist of pagers held specifically for resale by
MobileMedia.
Revenue Recognition
MobileMedia recognizes revenue under service, rent and maintenance
agreements with customers at the time the related services are performed.
Advance billings for services are deferred and recognized as revenue when
earned. MobileMedia leases (as lessor) certain pagers under operating leases.
Sales of pagers are recognized upon delivery.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
F-63
<PAGE> 292
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Property and Equipment
Effective October 1, 1997, MobileMedia shortened the estimated useful life
of pagers from four to three years. This change resulted in additional
depreciation expense of approximately $2,500 in 1997.
Property and equipment are stated at cost, less accumulated depreciation.
MobileMedia purchases a significant percentage of its pagers from one
supplier. Any disruption of such supply could have a material impact on
MobileMedia's operations.
Expenditures for maintenance are charged to expense as incurred.
Upon retirement of pagers, the cost and related accumulated depreciation
are removed from the accounts and the net book value, if any, is charged to
depreciation expense. Upon the sale of pagers, the net book value is charged to
cost of products sold.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Pagers...................................................... 3 years
Radio transmission equipment................................ 10 years
Computer equipment.......................................... 4 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... 1-10 years
Buildings................................................... 30 years
</TABLE>
Intangible Assets
Intangible assets consist primarily of customer lists and FCC licenses
which are being amortized principally using the straight-line method over
periods ranging from 3 to 25 years. In connection with the impairment writedown
discussed below, MobileMedia revised the useful lives of FCC licenses and
customer lists to 25 years and 3 years, respectively.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", MobileMedia records impairment losses on long-lived assets used
in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the net book value of those assets. In 1997, MobileMedia
determined impairment existed with respect to its long-lived assets as of
December 31, 1996. Such determination was based upon the existence of adverse
business circumstances, such as MobileMedia's bankruptcy, its 1996 operating
results and the uncertainty associated with the pending FCC proceeding. In July
1998, MobileMedia evaluated the ongoing value of its long-lived assets effective
December 31, 1996 and, based on this evaluation, MobileMedia determined that
intangible assets with a net book value of $1,118,231 were impaired and wrote
them down by $792,478 to their estimated fair value. Fair value was determined
through the application of generally accepted valuation methods to MobileMedia's
projected cash flows, discounted at an estimated market rate of interest. The
remaining carrying amount of long-lived assets are expected to be recovered
based on MobileMedia's estimates of cash flows. However, it is possible that
such estimates could change based upon the uncertainties of the bankruptcy
process and because future operating and financial results may differ from those
projected which may require further writedowns to fair value.
F-64
<PAGE> 293
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Debt Issue Costs
Debt issue costs, which relate to the long term debt discussed in Note 6,
are reported as "Other assets" in the accompanying balance sheets. Such costs
amounted to $22,939 at December 31, 1997 and $19,295 at December 31, 1998 and
$18,384 at March 31, 1999 (unaudited) and are being amortized on a straight line
basis over the term of the related debt.
Book Cash Overdraft
Under MobileMedia's cash management system, checks issued but not presented
to banks occasionally result in overdraft balances for accounting purposes and
are classified as "Book cash overdraft" in the balance sheet.
Liabilities Subject to Compromise
Liabilities subject to compromise consists of pre-petition liabilities that
may be affected by a plan of reorganization. In accordance with AICPA Statement
of Position 90-7 "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code", MobileMedia records liabilities subject to compromise based on
the expected amount of the allowed claims related to these liabilities.
Accordingly, in December 1998 and March 1999 MobileMedia reduced such
liabilities by approximately $10,461 and $3,050 (unaudited), respectively, to
reflect changes in estimated allowed claims.
Restructuring Costs
Restructuring costs are primarily comprised of professional fees
constituting administrative expenses incurred by MobileMedia as a result of
reorganization under Chapter 11 of the Bankruptcy Code.
Income Taxes
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 15, 1997.
MobileMedia has adopted SFAS No. 131 as of December 31, 1998. Such adoption did
not have an impact on MobileMedia's financial reporting.
In April 1998, the Accounting Standards Executive Committee of the
Financial Accounting Standards Board issued Statement of Position 98-5 ("SOP
98-5") "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires costs
of start-up activities and organization costs to be expensed as incurred.
Initial application of SOP 98-5 will be reported as the cumulative effect of a
change in accounting principle. MobileMedia has adopted SOP 98-5 effective
January 1, 1999. Such adoption did not have any effect on MobileMedia's
financial position or results of operations.
F-65
<PAGE> 294
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. ACQUISITIONS AND DIVESTITURES
On September 3, 1998, MobileMedia completed the sale of 166 transmission
towers to Pinnacle Towers, Inc. ("Pinnacle") for $170,000 in cash (the "Tower
Sale"). Under the terms of a lease with Pinnacle, MobileMedia will lease antenna
sites located on these towers for an initial period of 15 years at an aggregate
annual rental of $10,700. The sale was accounted for in accordance with
Statement of Financial Accounting Standards No. 28, Accounting for Sales with
Leasebacks, and resulted in a recognized gain of $94,200 and a deferred gain of
$70,000. The deferred gain will be amortized on a straight-line basis over the
initial lease period of 15 years. Subsequent to the sale, MobileMedia
distributed the $170,000 in proceeds to its secured creditors, who had a lien on
such assets.
On January 4, 1996, MobileMedia completed its acquisition of MobileComm,
BellSouth's paging and wireless messaging unit, and an associated nationwide
2-way narrowband 50/12.5 kHz PCS license, and BellSouth agreed to enter into a
two-year non-compete agreement and a five-year reseller agreement with
MobileMedia (the "MobileComm Acquisition"). The aggregate consideration paid for
the MobileComm Acquisition (excluding fees and expenses and related financing
costs) was approximately $928,709.
The MobileComm Acquisition has been accounted for as a purchase transaction
in accordance with Accounting Principles Board Opinion No. 16 and, accordingly,
the financial statements for the periods subsequent to January 4, 1996 reflect
the purchase price and transaction costs of $24,328, allocated to tangible and
intangible assets acquired and liabilities assumed based on their estimated fair
values as of January 4, 1996. The allocation of the purchase price is summarized
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets............................................ $ 55,301
Property and equipment.................................... 112,986
Intangible assets......................................... 934,269
Other assets.............................................. 143
Liabilities assumed....................................... (149,662)
---------
$ 953,037
=========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Pagers.................................. $196,791 $176,610 $190,903
Radio transmission equipment............ 202,296 203,048 204,054
Computer equipment...................... 30,896 32,679 32,866
Furniture and fixtures.................. 20,918 22,019 21,187
Leasehold improvements.................. 14,652 16,516 16,745
Construction in progress................ 1,128 11,624 13,140
Land, buildings and other............... 7,911 6,697 6,591
-------- -------- --------
474,592 469,193 485,486
Accumulated depreciation................ 216,655 249,551 259,920
-------- -------- --------
Property and equipment, net............. $257,937 $219,642 $225,566
======== ======== ========
</TABLE>
F-66
<PAGE> 295
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999 (UNAUDITED)
----------------------------------------------------------------------- ----------------------------------
1997 1998
---------------------------------- ----------------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET COST AMORTIZATION NET
-------- ------------ -------- -------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FCC Licenses.......... $261,323 $ (8,918) $252,405 $261,523 $(16,891) $244,632 $261,623 $(18,937) $242,686
Customer lists........ 64,430 (21,477) 42,953 64,430 (42,953) 21,477 64,430 (48,323) 16,107
-------- -------- -------- -------- -------- -------- -------- -------- --------
$325,753 $(30,395) $295,358 $325,953 $(59,844) $266,109 $326,053 $(67,260) $258,793
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
MobileMedia is not amortizing the cost of two nationwide Personal
Communications Services ("PCS") licenses, one acquired directly from the FCC and
the other as a result of the MobileComm acquisition, because the construction of
paging networks related to such licenses has not been completed. These networks
are expected to begin commercial operation in 1999 and, accordingly,
amortization of these licenses will begin at such time.
6. DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
DIP credit facility.................................. $ 10,000 $ -- $ 5,000
Revolving loan....................................... 99,000 72,900 72,900
Term loan............................................ 550,000 406,100 406,100
10 1/2% Senior Subordinated Deferred Coupon Notes due
December 1, 2003................................... 174,125 174,125 174,125
9 3/8% Senior Subordinated Notes due November 1,
2007............................................... 250,000 250,000 250,000
Dial Page Notes...................................... 1,570 1,570 1,570
Note Payable......................................... 986 986 986
---------- -------- --------
Total debt...................................... $1,085,681 $905,681 $910,681
========== ======== ========
</TABLE>
The debt obligations of MobileMedia include:
1) A debtor-in-possession credit facility ("DIP Facility") with a
syndicate of lenders including The Chase Manhattan Bank, as Agent (the "DIP
Lenders"). As of March 31, 1999 there was $5,000 of borrowings outstanding
under this facility, as of December 31, 1998 there were no funded
borrowings and as of December 31, 1997, there was $10,000 of borrowings
outstanding under this facility. MobileMedia is subject to certain
financial and operating restrictions customary to credit facilities of this
type including a limitation on periodic capital expenditures, minimum
allowable periodic EBITDA and retention of a turnaround professional.
Additionally, MobileMedia is required to make monthly interest payments to
the DIP Lenders and pay a commitment fee of 0.5% on any unused portion of
the DIP Facility. The DIP Facility bears interest at a rate of LIBOR plus
250 basis points or Base Rate plus 150 basis points, at the option of
MobileMedia. During 1997, the Debtors drew down $47,000 of borrowings and
repaid $37,000 under the DIP Facility. During January and February, 1998
the Debtors repaid an additional $10,000. On January 27, 1998, the DIP
Facility was amended and reduced from $200,000 to $100,000. On August 12,
1998, MobileMedia received approval from the Bankruptcy Court to extend the
DIP Facility to
F-67
<PAGE> 296
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
March 31, 1999 and further reduce it from $100,000 to $75,000. MobileMedia
has negotiated an extension of the DIP Facility through and including
December 31, 1999.
2) A $750,000 senior secured and guaranteed credit agreement (the
"Pre-Petition Credit Agreement") with a syndicate of lenders including The
Chase Manhattan Bank, as Agent. As of March 31, 1999 and December 31, 1998
there was $479,000 outstanding under this facility consisting of term loans
of $101,500 and $304,600 and loans under a revolving credit facility
totaling $72,900. This agreement was entered into on December 4, 1995, in
connection with the financing of the MobileComm Acquisition. Commencing in
1996 MobileMedia was in default under this agreement. As a result of such
default and the bankruptcy filing, MobileMedia has no borrowing capacity
under this agreement. Since the Petition date, MobileMedia has brought
current its interest payments and has been making monthly payments to the
lenders under the Pre-Petition Credit Agreement equal to the amount of
interest accruing under such agreement. On September 3, 1998, MobileMedia
repaid $170,000 of borrowings under the Pre-Petition Credit Agreement with
proceeds from the Tower Sale (see Note 3).
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the
"9 3/8% Notes") issued in November 1995. These notes bear interest at a
rate of 9 3/8% payable semi-annually on May 1 and November 1 of each year.
On November 1, 1996, MobileMedia did not make its scheduled interest
payment on its 9 3/8% Notes which constituted an event of default. The note
holders have not exercised any rights or remedies afforded holders (which
rights include, but are not limited to, acceleration of the stated maturity
of the notes). Since the Petition date, any such right or remedy is subject
to the automatic stay created by the Bankruptcy Code.
4) $210,000 of Senior Subordinated Deferred Coupon Notes (the
"Deferred Coupon Notes") issued, at a discount, in November 1993. The
Deferred Coupon Notes accrete at a rate of 10 1/2%, compounded
semi-annually, to an aggregate principal amount of $210,000 by December 1,
1998 after which interest is paid in cash at a rate of 10 1/2% and is
payable semi-annually. By virtue of the missed interest payments on the
9 3/8% Notes and the Pre-Petition Credit Agreement an event of default has
occurred. The note holders have not exercised any rights or remedies
afforded such holders (which rights include, but are not limited to,
acceleration of the stated maturity of the notes). Since the Petition date,
any such right or remedy is subject to the automatic stay created by the
Bankruptcy Code.
Interest Expense on Debt
Interest paid during the years ended December 31, 1996, 1997 and 1998, and
the three months ended March 31, 1998 and 1999 (unaudited) was $65,978, $70,817,
$51,560, $13,915 and $9,383 respectively. Total interest cost incurred for the
years ended December 31, 1996, 1997 and 1998 was $94,231, $68,409 and $53,982,
respectively of which $1,292, $176 and $228 was capitalized. Total interest cost
incurred for the three months ended March 31, 1998 and 1999 (unaudited), was
$14,793 and $10,248, respectively, of which $21 and $149 was capitalized.
Subsequent to the Petition date, interest was accrued and paid only on the
Pre-Petition Credit Agreement and the DIP Facility. If not for the filing,
interest expense for the year ended December 31, 1997 and 1998 and March 31,
1998 and 1999 (unaudited), would have been approximately $104,152, $97,776,
$25,724 and $21,187, respectively.
F-68
<PAGE> 297
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
7. INCOME TAXES
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Current:
Federal.............................. $ -- $ -- $(1,757)
State and local...................... -- -- (2,201)
------- -------- -------
-- -- (3,958)
Deferred:
Federal.............................. 52,081 -- --
State and local...................... 17,361 -- --
------- -------- -------
Total........................... $69,442 $ -- $(3,958)
======= ======== =======
</TABLE>
MobileMedia is included in the Parent's consolidated federal income tax
return. Income taxes are presented in the accompanying financial statements as
if MobileMedia filed tax returns as a separate consolidated entity.
A reconciliation of income tax benefit (expense) and the amount computed by
applying the statutory federal income tax rate to loss before income taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Tax benefit (expense) at federal
statutory rate........................... $ 395,285 $ 43,604 $(13,838)
Goodwill and intangible amortization and
writedown.............................. (95,362) -- --
State income taxes....................... -- -- (1,783)
Nondeductible expenses................... -- -- (4,765)
Valuation allowance on federal deferred
tax assets............................. (230,481) (43,604) 16,428
--------- -------- --------
Total.......................... $ 69,442 $ -- $ (3,958)
========= ======== ========
</TABLE>
F-69
<PAGE> 298
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for federal and state income tax purposes. The
components of deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Difference in book and tax basis of fixed assets....... $ 10,206 $ 19,974
Other.................................................. 68 27
--------- ---------
Deferred tax liabilities.......................... 10,274 20,001
Deferred tax assets:
Tax credit carryforwards............................... -- 1,757
Accounts receivable reserves........................... 10,578 6,000
Differences between the book and tax basis of
intangible assets.................................... 128,462 121,526
Difference between book and tax basis of accrued
liabilities.......................................... 5,089 4,794
Net operating loss carryforward........................ 161,840 135,458
Deferred gain on tower sale............................ -- 27,378
--------- ---------
Total deferred assets............................. 305,969 296,913
Valuation allowances for deferred tax assets...... (298,350) (279,567)
--------- ---------
Deferred tax assets............................... 7,619 17,346
========= =========
Net deferred tax liabilities...................... $ 2,655 $ 2,655
========= =========
</TABLE>
As of December 31, 1998, MobileMedia has available net operating loss
carryforwards for tax purposes of approximately $330,000 which expire in years
2008 through 2012. Utilization of these losses may be limited under Section 382
of the Internal Revenue Code.
MobileMedia believes consummation of the public offering of 15,525,000
shares of Parent's Class A Common Stock on November 7, 1995 caused an ownership
change for MobileMedia for purposes of Section 382 of the Code. As a result, the
use of MobileMedia's pre-ownership change net operating loss carryforwards will
be limited annually by the Section 382 Limitation, which is estimated to be
approximately $40,000. In addition, if a second ownership change has occurred
subsequent to November 7, 1995, which has not yet been determined, use of
MobileMedia's net operating losses would be severely limited. It is also
anticipated that the net operating loss carryforwards and certain other tax
attributes of MobileMedia will be substantially reduced and their utilization
significantly limited as a result of consummation of the Plan.
8. LEASES
Certain facilities and equipment used in operations are held under
operating leases. Rental expenses under operating leases were $44,574, $43,453,
$40,936, $10,423 and $12,989 for the years ended December 31,
F-70
<PAGE> 299
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999
(unaudited), respectively. At December 31, 1998, the aggregate minimum rental
commitments under leases were as follows:
<TABLE>
<S> <C>
1999........................................................ $ 48,951
2000........................................................ 25,457
2001........................................................ 19,250
2002........................................................ 15,726
2003........................................................ 13,327
Thereafter.................................................. 15,783
--------
$138,494
========
</TABLE>
9. EMPLOYEE BENEFIT PLANS
MobileMedia has adopted a retirement savings plan that allows all employees
who have been employed for one year and have at least 1,000 hours of credited
service to contribute and defer up to 15% of their compensation. Effective
February 1, 1996, MobileMedia began a matching contribution of 50% of the first
2% of the elected deferral plus an additional 25% of the next 4% of the elected
deferral. MobileMedia's matching contribution was $700 in 1996, $730 in 1997 and
$692 in 1998 and $160 and $178 for the three months ended March 31, 1998 and
1999 (unaudited), respectively.
10. STOCK OPTION PLANS
MobileMedia has two stock option plans under which approximately 1.3
million options are currently outstanding. Under the proposed Plan of
Reorganization, MobileMedia's equity holders will receive no value for their
ownership interests in the Company, and accordingly, the options are also deemed
to have no value.
11. COMMITMENTS AND CONTINGENCIES
MobileMedia is party to a number of lawsuits and other matters arising in
the ordinary course of business.
As announced on September 27, 1996 and October 21, 1996, MobileMedia
disclosed that misrepresentations and other violations had occurred during the
licensing process for as many as 400 to 500, or approximately 6% to 7%, of its
approximately 8,000 local transmission one-way paging stations. MobileMedia
caused an investigation to be conducted by its outside counsel, and a
comprehensive report regarding these matters was provided to the FCC in the fall
of 1996.
On January 13, 1997, the FCC issued a Public Notice relating to the status
of certain FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (i) automatically terminated approximately
185 authorizations for paging facilities that were not constructed by the
expiration date of their construction permits and remained unconstructed, (ii)
dismissed as defective approximately 94 applications for fill-in sites around
existing paging stations because they were predicated upon unconstructed
facilities and (iii) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. However, the FCC granted MobileMedia interim
operating authority to operate transmitters in this last category subject to
further action by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an Administrative Law Judge to take evidence and develop a full factual
record on directed issues concerning MobileMedia's filing of false forms and
applications. MobileMedia was permitted to operate its licensed facilities and
provide service to the public during the pendency of the hearing.
F-71
<PAGE> 300
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible transfer
of MobileMedia's FCC licenses. The grant of the stay was premised on the
availability of an FCC doctrine known as Second Thursday, which provides that,
if there is a change of control that meets certain conditions, the regulatory
issues designated for administrative hearing will be resolved by the transfer of
MobileMedia's FCC licenses to the new owners of MobileMedia and the hearing will
not proceed. The stay was originally granted for ten months and was extended by
the FCC through October 6, 1998.
On September 2, 1998, MobileMedia and Arch Communications Group, Inc.
("Arch") filed a joint Second Thursday application. The FCC released an order
granting the application on February 5, 1999. The order, which is conditioned on
confirmation of the plan and consummation thereof within nine months, expressly
terminated the administrative hearing and resolved the issues designated
therein. The order denied the parties' request for permanent authority to
operate transmitters for which MobileMedia was granted interim authority on
January 13, 1997. If the Merger is consummated, Arch must cease operating these
facilities within 6 months after the merger. The order also denied the parties'
request for a waiver of the spectrum cap (which prohibits narrowband PCS
licensees from having ownership interest in more than three channels in any
geographic area). Arch must divest any excess channels within 6 months after the
merger.
Prior to the Petition date, five actions allegedly arising under the
federal securities laws were filed against MobileMedia and certain of its
present and former officers, directors and underwriters in the United States
District Court for the District of New Jersey (the "New Jersey District Court").
These actions were subsequently consolidated as In re MobileMedia Securities
Litigation, No. 96-5723 (AJL) (the "New Jersey Actions"). A consolidated amended
complaint (the "Complaint") was filed on November 21, 1997. The Complaint does
not name MobileMedia as a defendant.
In June 1997, the Debtors initiated an Adversary Proceeding in the
Bankruptcy Court to stay the prosecution of the New Jersey Actions. Pursuant to
a Stipulation entered into among the Debtors and the plaintiffs in the New
Jersey Actions and "So Ordered" by the Bankruptcy Court on October 31, 1997, the
plaintiffs in the New Jersey Actions could conduct only limited discovery in
connection with the New Jersey Actions and could not file any pleadings, except
responses to motions to dismiss, until the earlier of September 30, 1998 and the
effective date of a plan of reorganization. On October 21, 1998, the defendants'
motion to dismiss the New Jersey Actions filed with the New Jersey District
Court on January 16, 1998 was denied.
In addition to the New Jersey Actions, two lawsuits (together, the
"California Actions" and, together with the New Jersey Actions, the "Securities
Actions") were filed in September 1997 in the United States District Court for
the Northern District of California and the Superior Court of California naming
as defendants certain former officers and certain present and former directors
of MobileMedia, certain investment entities and the Debtors' independent
auditors. None of the Debtors is named as defendant in the California Actions.
On November 4, 1997, the Debtors commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At hearings held on December 10, 1997 and May 29,
1998, the Bankruptcy Court enjoined the plaintiffs in the California Actions
until September 15, 1998 from taking certain actions in connection with the
California Actions, with certain exceptions.
The plaintiffs in both the New Jersey Actions and California Actions are
currently conducting discovery of MobileMedia in connection with their
prosecution of the actions against the named defendants. Following consummation
of the Plan of Reorganization, the Company may be subject to further discovery
in these proceedings.
F-72
<PAGE> 301
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Neither the New Jersey Actions nor the California Actions name any of the
Debtors as a defendant. However, proofs of claim have been filed against the
Debtors by the plaintiffs in the New Jersey Actions, and both the New Jersey
Actions and the California Actions may give rise to claims against the Debtors'
Directors, Officers and Corporate Liability Insurance Policy. It is anticipated
that under any plan of reorganization for MobileMedia these Claims will receive
no distributions.
12. OTHER INVESTMENTS
On March 21, 1995, MobileMedia purchased a 33% interest in Abacus
Communications Partners, L.P., ("Abacus") a Delaware limited partnership, from
Abacus Business Services, Inc. for $1,641. Abacus Communications Partners, L.P.
is one of MobileMedia's alphanumeric dispatch services providers. The investment
has been accounted for under the equity method in accordance with Accounting
Principles Board Opinion No. 18. Under the equity method, original investments
are recorded at cost and adjusted by MobileMedia's share of undistributed
earnings or losses of the purchased company. MobileMedia's share of income
(loss) of affiliate, net of distribution, for the years ended December 31, 1996,
1997 and 1998, was $160, $69, and $(87), respectively. On December 30, 1998
MobileMedia reached an agreement to sell its interest in Abacus to Abacus
Exchange Inc. for $1,400 and subsequently completed the sale on January 25,
1999. Accordingly, MobileMedia wrote down its investment in Abacus from $1,612
to $1,400 as of December 31, 1998.
13. IMPACT OF YEAR 2000 (UNAUDITED)
GENERAL
Computer systems were originally designed to recognize calendar years by
the last two digits in the date code field. Beginning in the year 2000, these
date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. Any of MobileMedia's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, in less than two
years, the computerized systems (including both information and non-information
technology systems) and applications used by MobileMedia will need to be
reviewed, evaluated and, if and where necessary, modified or replaced to ensure
that all financial, information and operating systems are Year 2000 compliant.
State of Readiness
MobileMedia has formed an internal task force comprised of representatives
of its various relevant departments to address Year 2000 compliance matters. The
task force has undertaken a preliminary review of internal and external areas
that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or
non-critical/non-important. MobileMedia also expects to hire outside consultants
to review MobileMedia's testing methodology and test results, to assess its
contingency planning and to provide general oversight relating to Year 2000
compliance matters.
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be Year 2000
compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain
business-related files were created and executed to identify any Year 2000
compliance issues. The testing unearthed a few Year 2000 problems all of which
have been addressed and retested for Year 2000 readiness. Additional testing
took place the first quarter of 1999, which included testing of
F-73
<PAGE> 302
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
MobileMedia's financial and human resource software packages. Although the
results of these tests are still being analyzed, relatively few Year 2000
problems were identified. There can be no assurance, however, that such testing
has detected, or will detect, all compliance issues related to the Year 2000
problem.
With respect to external matters, MobileMedia has distributed
questionnaires and requests for certification to its mission-critical vendors
and is in the process of obtaining and reviewing the responses thereto. The
questionnaires have requested information concerning embedded technologies of
such vendors, the hardware and software applications used by such vendors and
the Year 2000 compliance efforts of such vendors relating thereto.
Estimated Year 2000 Compliance Costs
MobileMedia has an information technology staff of approximately 68 people
that has addressed technical issues relating to Year 2000 compliance matters.
Through December 31, 1998, MobileMedia has incurred approximately $50 in costs
(excluding in-house labor and hardware) in connection with Year 2000 compliance
matters. In addition, MobileMedia has purchased upgraded hardware at a cost of
approximately $175 for use as redundant equipment in testing for Year 2000
problems in an isolated production environment. MobileMedia estimates that it
will expend approximately $500 on additional hardware, software and other items
related to the Year 2000 compliance matters.
In addition, MobileMedia estimates that it will incur approximately $200 in
costs relating to Year 2000 remediation efforts for its paging network hardware.
MobileMedia also upgraded its paging network hardware during 1998 and plans
further upgrades in fiscal year 1999. Such upgrades have not been and are not
expected to be purchased solely for remediation of the Year 2000 compliance
problems; such upgrades are not themselves expected to have Year 2000 compliance
problems.
Risks Relating to Year 2000 Compliance Matters
MobileMedia has a goal to become Year 2000 compliant with respect to
internal matters during 1999. Although MobileMedia has begun testing of its
internal business-related hardware and software applications, there can be no
assurances that such testing will detect all applications that may be affected
by Year 2000 compliance problems. With respect to external matters, due to the
multi-dependent and interdependent issues raised by Year 2000 compliance,
including many factors beyond its control, MobileMedia may face the possibility
that one or more of its mission-critical vendors, such as its utilities,
telephone carriers, equipment manufacturers or satellite carriers, may not be
Year 2000 compliant on a timely basis. Because of the unique nature of such
vendors, alternate providers may not be available. Finally, MobileMedia does not
manufacture any of the pagers, paging-related hardware or network equipment used
by MobileMedia or its customers in connection with MobileMedia's paging
operations. Although MobileMedia has tested such equipment, it has also relied
upon the representations of its vendors with respect to their Year 2000
readiness. MobileMedia can give no assurance as to the accuracy of such vendors'
representations.
Contingency Planning
MobileMedia has begun the process of assessing contingency plans that might
be available in the event of either internal or external Year 2000 compliance
problems. To this end, MobileMedia's various internal departments have begun to
prepare assessments of potential contingency alternatives. The task force will
undertake a review of these assessments on a department-by-department basis and
on a company-wide basis. MobileMedia intends to complete its contingency
planning during the second quarter of 1999.
F-74
<PAGE> 303
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
ANNEX A
SUBJECT TO COMPLETION, DATED JANUARY 11, 2000
PROSPECTUS
VAST LOGO
16,100,000 SHARES
VAST SOLUTIONS, INC.
CLASS B COMMON STOCK
-------------------------
Of the 16,100,000 shares of our Class B common stock covered by this
prospectus, 13,780,000 are being offered by Paging Network, Inc. in exchange for
its outstanding senior subordinated indebtedness and 2,320,000 are being
distributed by PageNet to its stockholders. PageNet currently owns all of our
outstanding Class A and Class B common stock.
The PageNet exchange offer and the distribution of our common stock to
PageNet stockholders are part of a merger transaction between PageNet and Arch
Communications Group, Inc. Both the exchange offer and the distribution will be
completed immediately prior to the merger. After the merger, Arch will
indirectly own all of our Class A common stock, which will constitute 19.5% of
our outstanding common stock.
We have the option to redeem shares of our Class B common stock, in whole
or in part, at any time following the sale by us of additional shares of Class A
common stock, or any shares of our capital stock convertible into shares of our
Class A common stock, other than sales pursuant to an employee benefit plan. See
"Description of Vast Capital Stock -- Common Stock -- Redemption." All shares of
Class B common stock will automatically convert into Class A common stock two
years after completion of the Arch merger or, if earlier, one year after we
complete an underwritten public offering of common stock with net proceeds of
more than $25 million.
Neither our Class A nor our Class B common stock is listed on any
securities exchange. We do not intend to apply for listing of our Class B common
stock on any securities exchange or quotation system.
AN INVESTMENT IN OUR CLASS B COMMON STOCK INVOLVES RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE A-5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
The date of this prospectus is , 2000.
A-1
<PAGE> 304
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................................... A-3
Risk Factors................................................ A-5
Forward-Looking Statements.................................. A-14
Dividend Policy............................................. A-15
Use of Proceeds............................................. A-15
Selected Financial Data..................................... A-16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. A-17
Business.................................................... A-21
Management.................................................. A-27
Arrangements Between Vast and PageNet....................... A-31
Principal Stockholders...................................... A-31
Security Ownership of Management............................ A-32
Description of Vast Capital Stock........................... A-33
Shares Eligible for Future Sale............................. A-38
Legal Matters............................................... A-39
Experts..................................................... A-39
Where You Can Find More Information......................... A-39
Index to Financial Statements............................... F-1
</TABLE>
A-2
<PAGE> 305
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us, our Class B common stock being offered by this
prospectus and our financial statements and notes relating to those financial
statements appearing elsewhere in this prospectus. References in this prospectus
to "Vast" mean Vast Solutions, Inc. References in this prospectus to "PageNet"
mean Paging Network, Inc. and its consolidated subsidiaries other than Vast.
References in this prospectus to "Arch" mean Arch Communications Group, Inc. and
its consolidated subsidiaries.
Information contained in this prospectus regarding our business and
operations, including information discussed in "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Business -- Wireless Network,
Content and Equipment Providers" and "Business -- Intellectual Property Rights,"
assumes the completion of the merger between PageNet and Arch and the completion
of certain related transactions. The related transactions include the transfer,
contribution or assignment of certain assets from PageNet to us, including
certain components of our Gateway, and PageNet's forgiveness of various
intercompany loans. The completion of the Arch merger and the related
transactions require the approval of PageNet's noteholders, stockholders and
bank lenders, Arch's stockholders and certain additional third parties.
Additional information regarding the Arch merger can be found in PageNet's
prospectus to which this prospectus is attached as Annex A. Additional
information regarding the nature of the related transactions can be found in
"Selected Financial Data" and "Arrangements Between Vast and PageNet."
THE COMPANY
We offer integrated wireless solutions that connect businesses to their
employees, customers and remote assets, such as vending machines, automobiles
and storage tanks. We can provide these solutions on a full-service basis,
allowing our customers to completely outsource complex wireless solutions. Using
our expandable software platform (our Gateway), provisioning and service and
support operations, we are able to provide our customers with a comprehensive
end-to-end wireless solution that seamlessly connects their mobile users with
the Internet or corporate data network using wireless devices. We believe our
principal assets are our wireless software and software development
capabilities, our Gateway, our enterprise application provider partners and our
ability to manage our customers' wireless data operations.
Vast is a development stage company and, since its inception, has been
engaged primarily in product research and development and developing markets for
its products and services. We have incurred significant operating losses as a
result of these start-up activities. We began offering some of our integrated
wireless solutions products and services in late 1999, and believe that revenues
from sales of these products and services will grow rapidly.
Our historical revenues consist primarily of sales of software developed by
Silverlake Communications, Inc., which PageNet acquired in December 1998.
Silverlake's product line is a suite of software products focusing on wireless
communications, including one-way messaging and two-way advanced communications.
Although we intend to maintain both sales and service of this product line, it
is not a material part of our future growth strategy.
Vast was incorporated in the State of Delaware in 1999. The operations of
Vast include the activities of PageNet's wireless solutions division since its
formation in September 1998, as well as the operations of Silverlake. Our
principal executive offices are located at 14131 Midway Road, Suite 500,
Addison, Texas 75001, telephone number: (972) 801-8800. Our website, which is
not part of this prospectus, is located at www.vast.com.
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THE EXCHANGE OFFER
PageNet is offering to exchange a pro rata portion of 616,830,757 shares of
PageNet common stock and a pro rata portion of 13,780,000 shares of our Class B
common stock for each of PageNet's:
- 8.875% senior subordinated notes due 2006;
- 10.125% senior subordinated notes due 2007; and
- 10% senior subordinated notes due 2008.
The pro rata portion will be computed immediately prior to the time when
the Arch merger occurs by dividing
- the principal amount, together with all accrued interest, of each PageNet
senior subordinated note; by
- the principal amount, together with all accrued interest, of all PageNet
senior subordinated notes outstanding at the time of the PageNet
exchange.
THE SPINOFF DISTRIBUTION
The merger agreement between PageNet and Arch provides that PageNet will
distribute to its stockholders interests in Vast representing up to 11.6% of our
total equity. In accordance with the merger agreement, the PageNet board of
directors will declare a dividend, payable to the persons who are PageNet
stockholders immediately prior to the acceptance of senior subordinated notes in
the exchange offer, consisting of 2,320,000 shares of our Class B common stock.
The dividend will not be paid unless all of the conditions to the Arch merger
have been satisfied. Because the dividend will be declared prior to acceptance
of PageNet senior subordinated notes in the exchange offer, noteholders who
become stockholders of PageNet in the exchange offer will not be entitled to
receive any portion of this distribution.
PREPACKAGED PLAN OF REORGANIZATION
PageNet noteholders will be required, as a condition to tendering their
notes in the exchange offer, to give their consent to a prepackaged plan of
reorganization of PageNet. If PageNet files a prepackaged reorganization plan
under Chapter 11 of the United States Bankruptcy Code and the prepackaged plan
is confirmed by the bankruptcy court and consummated, then 100% of the senior
subordinated notes will be converted into shares of Arch common stock and our
Class B common stock. The number of shares of our Class B common stock which the
holders of PageNet senior subordinated notes will receive under the prepackaged
plan and the exchange offer are the same. PageNet stockholders will also receive
the same number of shares of our Class B common stock under the prepackaged plan
as they would receive pursuant to the spinoff distribution.
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RISK FACTORS
As our stockholder, you may be subject to risks inherent in our business.
The performance of your shares will reflect the performance of our business
related to, among other things, our competition, general economic and market
conditions and industry conditions. The price of our common stock may decline
and the value of your investment could decrease. You should carefully consider
the following factors as well as other information contained in this prospectus
before deciding whether to participate in the PageNet exchange offer or to vote
in favor of the PageNet plan of reorganization.
THE ARCH MERGER MAY NOT TAKE PLACE.
The Arch merger will not take place unless many conditions are satisfied or
waived. These conditions include stockholder and noteholder approvals,
governmental approvals and the availability of senior credit facilities.
Moreover, PageNet may be required in some circumstances to file a prepackaged
plan under Chapter 11 of the United States Bankruptcy Code to implement the
merger. There can be no assurance that the proposed plan of reorganization would
be approved by the bankruptcy court if filed. If the Arch merger does not take
place, the contemplated exchange and distribution of shares of our Class B
common stock will not occur. If the Arch merger does not take place, it is
unlikely that we would be able to arrange for independent sources of debt or
equity financing. In addition, if the Arch merger does not take place, it is
unlikely that PageNet will be able to transfer certain assets to us, including
PageNet's rights under certain software licenses on which our business is
substantially dependent, and we may be unable to continue our current
operations.
PAGENET MAY BE REQUIRED TO REDUCE ITS OPERATIONS, INCLUDING THOSE OF VAST,
AND/OR SEEK IMMEDIATE REPAYMENT OF ITS FUNDING OF VAST AS PART OF A
RESTRUCTURING OF ITS OBLIGATIONS UNDER THE UNITED STATES BANKRUPTCY CODE.
If PageNet is unable to improve its domestic earnings before interest,
taxes, depreciation and amortization, or EBITDA, it may not have sufficient cash
or borrowing capacity to meet its obligations through the end of the first
quarter of 2000. While PageNet is currently exploring various alternatives to
ensure that it has sufficient liquidity through the consummation of the Arch
merger, there can be no assurance that such efforts will be timely or
successful. There also can be no assurance that the merger will be completed or
will not be substantially delayed. If PageNet's strategies to obtain additional
liquidity are not timely or successful, or the merger is not completed or is
delayed, PageNet may be required to reduce the level of its operations,
including the operations of Vast, and/or commence a proceeding under Chapter 11
of the United States Bankruptcy Code to restructure its obligations. PageNet may
also seek our immediate repayment of a $30.0 million non-interest bearing note
payable, and other amounts due, to PageNet. A bankruptcy filing by PageNet would
likely have a material impact on our results of operations and financial
position.
WE MAY NOT BE ABLE TO OBTAIN ADEQUATE FINANCING TO CONTINUE OUR CURRENT
OPERATIONS.
To date our operations have been funded primarily through investments by
PageNet, which we do not expect to continue following the merger of PageNet and
Arch. We may be required to reduce our current level of operations unless we are
able to obtain capital through additional debt or equity financings. We cannot
assure you that debt or equity financings will be available as required. Even if
financing is available, it may not be on terms that are favorable to us or
sufficient for our needs. If we are unable to obtain sufficient financing, we
may be unable to continue our current operations.
MANY OF OUR WIRELESS SOLUTIONS PRODUCTS AND SERVICES ARE IN DEVELOPMENT AND ARE
NOT NOW AVAILABLE FOR COMMERCIAL USE.
Several of our wireless solutions products and services are in "beta"
testing with various customers. A limited number of our customers are currently
using our wireless solutions products and services on a commercial basis. If one
or more of our customers decide not to place our products and services into
service,
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our revenues will not grow as anticipated. Further, if we are unable to achieve
market acceptance of our wireless solutions products and services, our business
would be materially adversely affected.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT AND, IN
ASSESSING OUR PROSPECTS, YOU SHOULD CONSIDER OUR EARLY STAGE OF DEVELOPMENT AND
PRESENCE IN A NEW AND RAPIDLY EVOLVING INDUSTRY.
Since our inception, we have been engaged primarily in the product
development and initial marketing activities of our wireless solutions business.
Therefore, it is difficult to forecast our future operating results. Our
operations began in September 1998 when PageNet established a separate wireless
solutions business unit. We have generated limited revenues to date.
Accordingly, you should assess our prospects in light of the risks and
difficulties frequently encountered by companies in the early stage of
development, particularly companies in new and rapidly evolving industries.
WE HAVE HISTORICALLY INCURRED LOSSES AND WE MAY NOT ACHIEVE PROFITABILITY.
We have not operated profitably to date. We incurred net losses during our
development stage of $4,163,733 for the four months we operated in 1998 and
$22,489,299 for the nine-month period ended September 30, 1999. At September 30,
1999, we had accumulated losses since inception of $26,653,032. We intend to
continue to make significant investments in our research and development,
marketing, services and sales operations. We anticipate that these expenses
could significantly precede any revenues generated by the increased spending. As
a result, we are likely to continue to experience losses and negative cash flow
from operations in future periods. If we do become profitable, we may not
sustain or increase our profitability. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
WE HAVE NO INDEPENDENT OPERATING HISTORY.
We have no independent operating history. Most of our current business
operations include various operations of PageNet which were conducted as a
separate business unit within PageNet. Following the Arch merger, we will be
required to supplement our administrative and other resources to provide
services necessary to operate as an independent company. Although the costs of
the services provided to us by PageNet are reflected in our historical financial
results and we believe the amounts allocated to us are a reasonable allocation
of the costs PageNet incurred on our behalf, financial information included in
this prospectus may not necessarily reflect what our results of operations would
have been had we been a separate, stand-alone entity during the periods
presented.
WE HAVE A LENGTHY SALES CYCLE.
We have generally experienced a lengthy sales cycle, averaging
approximately four to nine months. The lengthy sales cycle is one of the factors
that may cause our revenues and operating results to vary significantly from
quarter to quarter. Because of the unique characteristics of our products and
services, our prospective customers' decisions to license our products and/or
purchase our services often require significant investment and executive level
decision making. We believe that many companies currently are not aware of the
benefits of our wireless solutions products and services. For this reason, we
must provide a significant level of information to prospective customers about
the use and benefits of our products and services. This lengthy process can
cause potential customers to take many months to make these decisions. As a
result, sales cycles for customer orders vary substantially from customer to
customer. Excessive delay in completing sales could materially adversely affect
our business, financial condition or results of operations.
The length of the sales cycle for customer orders depends on a number of
other factors over which we have little or no control, including:
- a customer's budgetary constraints;
- the timing of a customer's budget cycles;
- concerns by customers about the introduction of new products or services
by us or our competitors; and
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- potential downturns in general economic conditions, including reductions
in demand for wireless data services.
THE LOSS OF A MAJOR CUSTOMER COULD ADVERSELY AFFECT OUR REVENUES AND OUR
OPERATING RESULTS.
No single customer accounted for more than 10% of our revenues in 1999.
However, our wireless solutions business is in the development stage, and we
have a limited number of customer relationships established. We expect to have a
high degree of customer concentration in our wireless solutions business,
although not necessarily involving the same customers from period to period. To
the extent that any significant customer reduces the scope of its relationship
with us, or terminates its relationship with us, our revenues for the relevant
fiscal period could substantially decline. As a result, the loss of any major
customer could materially harm our business.
OUR INABILITY TO SUCCESSFULLY MANAGE OUR INTENDED GROWTH OR OUR INCREASINGLY
COMPLEX THIRD-PARTY RELATIONSHIPS COULD ADVERSELY AFFECT US.
If we are not able to manage our intended growth successfully, we will not
grow as planned and our business could be adversely affected. Our existing
management, operational, financial and human resources, as well as our
management information systems and controls, may be inadequate to support our
future operations. In addition, as the complexity of our product technology and
our third-party relationships have increased, the management of those
relationships and the negotiation of contractual terms sufficient to protect our
rights and limit our potential liabilities has become more complicated, and we
expect this trend to continue in the future. As a result, our inability to
successfully manage these relationships or negotiate sufficient contractual
terms could have a material adverse effect on us.
COMPETITIVE PRESSURES MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
Because our industry is new and evolving and characterized by rapid
technological change, it is difficult for us to predict whether, when and by
whom new competing technologies or new competitors may be introduced into our
markets. Currently, we believe our competition will come from several different
market segments, including wireless data service providers, wireless
communications software companies, wireless systems integrators, wireless device
manufacturers and wireless network carriers. Many of our existing and potential
competitors have substantially greater financial, technical, marketing and
distribution resources than we do. Additionally, many of these companies have
greater name recognition and more established relationships with our target
customers. Furthermore, these competitors may be able to adopt more aggressive
pricing policies and offer customers more attractive terms than we can. Any one
of these factors could have a material adverse effect on our business, financial
condition or results of operations. See "Business -- Competition."
WE MAY NOT BE ABLE TO GROW OUR BUSINESS AS PLANNED IF WE DO NOT MAINTAIN
SUCCESSFUL RELATIONSHIPS WITH ENTERPRISE APPLICATION PROVIDERS AND CONTINUE TO
DEVELOP NEW RELATIONSHIPS WITH OTHER PROVIDERS.
Our ability to achieve revenue growth in the future will depend in part on
our success in maintaining successful relationships with enterprise application
providers and in developing new relationships with additional providers. We use
these relationships to jointly market and sell our products and services. Rapid
technological changes may result in certain providers no longer offering the
products or services desired by our customers, and we may be unable to attract
additional providers with the types of products and/or services that our
customers require. We do not have long-term or exclusive agreements with
enterprise application providers, and the loss of these relationships could
materially adversely affect our business, financial condition or results of
operations.
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WE DEPEND UPON WIRELESS NETWORKS OWNED AND CONTROLLED BY OTHERS. IF WE DO NOT
HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON RELIABLE NETWORKS, WE MAY BE
UNABLE TO DELIVER SERVICES AND OUR SALES COULD DECREASE.
Our ability to grow and achieve profitability partly depends on our ability
to buy sufficient capacity on the networks of the wireless carriers, such as
PageNet, BellSouth, MCI Worldcom and others, and on the reliability and security
of their systems. All of our services are delivered using airtime purchased from
third parties. We depend on these companies to provide uninterrupted and "bug
free" service. We would not be able to satisfy our customers' needs if our
wireless carriers failed to provide the required capacity or needed level of
service. In addition, our expenses would increase and our profitability could be
materially adversely affected if wireless carriers were to increase the prices
of their services. Some of these wireless carriers are, or could become, our
competitors.
THE RESOURCES OF PAGENET WILL NOT BE AVAILABLE TO US AFTER THE MERGER.
Since our inception, we have operated as a division of PageNet. Following
the Arch merger, we will not be able to rely on PageNet or Arch for financial
support or benefit from our relationships with PageNet to receive favorable
terms for the purchase or sale of various goods and services. In addition,
except as may be provided in agreements we expect to enter into with PageNet
prior to the Arch merger, we will be responsible after the merger for obtaining
our own sources of financing and for our own corporate administrative services
such as tax, treasury, risk management and insurance, accounting, payroll,
legal, information systems and human resources. We anticipate that these
agreements will allow for a transition period of 12 to 18 months, during which
PageNet will continue to provide many, if not all, of these services. Following
this transition period, we will need to outsource these functions to third
parties or hire additional staff to perform them internally.
AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM THIRD
PARTIES COULD CAUSE A DECLINE IN SALES OF OUR SERVICES.
In designing, developing and supporting our wireless data products and
services, we rely on wireless carriers, wireless handheld device manufacturers,
content providers and computer hardware and software providers. These suppliers
may experience difficulty in supplying us products or services sufficient to
meet our needs, or they may terminate or fail to renew contracts for supplying
us these products or services on terms we find acceptable. Any significant
interruption in the supply of any of these products or services could cause a
decline in sales of our products and services unless and until we are able to
replace the functionality provided by these products and services. We also
depend on third parties to deliver and support reliable products, enhance their
current products, develop new products on a timely and cost-effective basis and
respond to emerging industry standards and other technological changes. In
addition, we will rely on the ability of our content providers to provide us
with uninterrupted access to the news and financial information we expect to
provide to our customers. The failure of third parties to meet these criteria,
or their refusal or failure to deliver the information for whatever reason,
could materially harm our business.
A FAILURE IN OUR GATEWAY FACILITY WOULD ADVERSELY AFFECT OUR OPERATING RESULTS
AND OUR FINANCIAL CONDITION.
Our operations are dependent upon our ability to prevent interruptions to
our Gateway services due to fire, power loss, natural disaster or a similar
event. A substantial portion of the computer equipment that is essential to the
operation of our Gateway facility is located at PageNet's Technical Operations
Center in Richardson, Texas. We believe our Gateway facility is supported by
sufficient available back-up computing and electric power sources on site to
maintain the provision of Gateway services without interruption. Although we
intend to establish a second Gateway facility at a remote location, we currently
do not have the financial resources to create or operate a second facility. We
would be materially adversely affected by substantial damage to our current
Gateway facility or other catastrophic failure that causes significant
interruption in our operations. Our property and business interruption insurance
may not be adequate to compensate us for all losses that may occur.
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NEW LAWS AND REGULATIONS THAT IMPACT OUR INDUSTRY COULD INCREASE OUR COSTS OR
REDUCE OUR OPPORTUNITIES TO EARN REVENUE.
We are not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses in general. However, in the future, we may
become subject to regulation by the FCC or another regulatory agency. In
addition, the wireless carriers who supply us airtime are subject to regulation
by the FCC and regulations that affect them could increase our costs or reduce
our ability to continue selling and supporting our services.
OUR MARKETS ARE CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE WHICH MAY CAUSE US
TO INCUR SIGNIFICANT DEVELOPMENT COSTS.
The markets for our products and services are characterized by rapid
technological change, frequent new product and service introductions and
enhancements, uncertain product life cycles and changing customer demands. The
introduction of services embodying new technologies and the emergence of new
industry standards could render our existing products and services obsolete or
unmarketable and cause us to incur significant development costs to create new
or modify our existing products and services to utilize new technologies or
industry standards.
OUR FUTURE BUSINESS PROSPECTS DEPEND IN PART ON OUR ABILITY TO MAINTAIN AND
IMPROVE OUR CURRENT WIRELESS DATA SERVICES AND DEVELOP NEW SERVICES.
We believe that our future business prospects depend in large part on our
ability to maintain and improve our current services and to develop new services
on a timely basis. Our services will have to achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in our services, major
new wireless data services and service enhancements require long development and
testing periods. We may not be successful in developing and marketing, on a
timely and cost-effective basis, service enhancements or new services that
respond to technological change, evolving industry standards or customer
requirements. We may also experience difficulties that could delay or prevent
the successful development, introduction or marketing of service enhancements,
and our new services and service enhancements may not achieve market acceptance.
If we cannot effectively maintain, improve and develop services, we may not be
able to recover our fixed costs or otherwise become profitable. Significant
delays in the general availability of our services or significant problems in
the implementation of new services could have a material effect on our business,
financial condition or results of operations.
SLOWER THAN ANTICIPATED GROWTH IN DEMAND FOR WIRELESS ENTERPRISE SOLUTIONS OF
THE TYPE WE OFFER COULD MATERIALLY ADVERSELY AFFECT OUR GROWTH PROSPECTS.
If the demand for wireless enterprise solutions of the type we offer does
not continue to grow as anticipated within our targeted markets, our ability to
grow our business as planned could be materially adversely affected. We expect
these solutions to account for the majority of our revenues for the foreseeable
future.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS ADEQUATELY, WHICH COULD
ALLOW THIRD PARTIES TO COPY OR OTHERWISE OBTAIN AND USE OUR TECHNOLOGY WITHOUT
AUTHORIZATION.
We regard our software products as proprietary. In an effort to protect our
proprietary rights, we rely primarily on a combination of copyright, trademark
and trade secret laws, as well as licensing and other agreements with
consultants, suppliers, strategic partners and customers, and employee and
third-party non-disclosure agreements. These laws and agreements provide only
limited protection of our proprietary rights. In addition, we have not signed
agreements containing these types of protective provisions in every case, and
the contractual provisions that are in place and the protection they provide
vary and may not provide us with adequate protection in all circumstances.
Although PageNet has agreed to transfer to us a provisional patent application
it holds for an invention embodied in our Gateway, we currently have no patents
or registered
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copyrights. In addition, we do not have any federal trademark registrations in
the name "Vast" and we may not be able to obtain such registration due to
conflicting marks or otherwise. Because our means of protecting our proprietary
rights may not be adequate, it may be possible for a third party to copy or
otherwise obtain and use our technology without authorization. A third party
could also develop similar technology independently. Unauthorized copying, use
or reverse engineering of our products could materially adversely affect our
business, results of operations or financial condition.
We license technology that is embedded in our products from others. If one
or more of these licenses terminates or cannot be renewed on satisfactory terms,
we would have to modify the affected products to use alternative technology or
eliminate the affected product function, either of which could have a material
adverse effect on us.
INFRINGEMENT CLAIMS COULD ADVERSELY AFFECT US.
A third party could claim that our technology infringes its proprietary
rights. As the number of software products in our target markets increases and
the functionality of these products overlap, we believe that wireless software
developers may face infringement claims.
Infringement claims, even if without merit, can be time consuming and
expensive to defend. A third party asserting infringement claims against us or
our customers with respect to our current or future products may require us to
enter into costly royalty arrangements or litigation, or otherwise materially
adversely affect us. See "Business -- Intellectual Property Rights."
OUR BUSINESS MAY SUFFER IF WE HAVE DISPUTES OVER OUR RIGHT TO RESELL OR REUSE
INTELLECTUAL PROPERTY DEVELOPED FOR SPECIFIC CUSTOMERS.
Part of our business involves the development of software applications for
discrete customer engagements. Ownership of customer-specific software is often
retained by the customer, although we typically retain the right to reuse some
of the applications, processes and other intellectual property developed in
connection with customer engagements. Issues relating to the rights to
intellectual property can be complicated, and we cannot give any assurance that
disputes will not arise that affect our ability to resell or reuse such
applications, processes and other intellectual property. Such disputes could
damage our relationships with our customers, divert our management's attention
and have a material adverse effect on our business, financial condition or
results of operations.
WE DEPEND ON KEY PERSONNEL AND WILL NEED TO RECRUIT ADDITIONAL SKILLED
PERSONNEL, FOR WHICH COMPETITION IS INTENSE, TO CONDUCT AND GROW OUR BUSINESS
EFFECTIVELY.
Our success depends in large part on our ability to retain our key
personnel, particularly members of our engineering staff. The loss of the
services of a large number of these individuals could have a material adverse
effect on our business, financial condition or results of operations. Our future
success also depends upon our ability to attract, train, assimilate and retain
additional qualified personnel. Competition for persons with skills in the
software industry is intense, particularly for those with relevant technical
experience. We cannot assure you that we will be able to retain our key
employees or that we can attract, train, assimilate or retain other highly
qualified personnel in the future.
WE MAY PURSUE ACQUISITIONS THAT BY THEIR NATURE PRESENT RISKS AND THAT MAY NOT
BE SUCCESSFUL.
In the future we may pursue acquisitions to diversify our product offerings
and customer base or for other strategic purposes. We have made only one prior
acquisition and we cannot assure you that any future acquisitions will be
successful. The following are some of the risks associated with acquisitions
that could have a material adverse effect on our business, financial condition
or results of operations:
- We cannot ensure that any acquired businesses will achieve anticipated
revenues, earnings or cash flow.
- We may be unable to integrate acquired businesses successfully and
realize anticipated economic, operational and other benefits in a timely
manner, particularly if we acquire a business in a market in
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which we have limited or no current expertise, or with a corporate
culture different from our own. If we are unable to integrate acquired
businesses successfully, we could incur substantial costs and delays or
experience other operational, technical or financial problems.
- Acquisitions could disrupt our ongoing business, distract management,
divert resources and make it difficult to maintain our current business
standards, controls and procedures.
- We may finance future acquisitions by issuing common stock for some or
all of the purchase price. This could dilute the ownership interests of
our stockholders. We may also incur additional debt or be required to
recognize amortization expense related to goodwill and other intangible
assets purchased in future acquisitions.
- We would be competing with other firms, many of which have greater
financial and other resources, to acquire attractive companies. We
believe this competition will increase, making it more difficult to
acquire suitable companies on acceptable terms.
OUR PRODUCTS COULD HAVE DEFECTS FOR WHICH WE ARE POTENTIALLY LIABLE AND WHICH
COULD RESULT IN LOSS OF REVENUE, INCREASED COSTS OR LOSS OF OUR CREDIBILITY OR
DELAY IN ACCEPTANCE OF OUR PRODUCTS IN THE MARKET.
Our products, including components supplied by others, may contain errors
or defects, especially when first introduced or when new versions are released.
Errors in new products or releases could be found after commencement of
commercial shipments, and this could result in additional development costs,
diversion of technical and other resources from our other development efforts,
or the loss of credibility with current or future customers. This could result
in a loss of revenue or delay in market acceptance of our products, which could
have a material adverse effect upon our business, financial condition or results
of operations.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability and some contract
claims. However, not all of these agreements contain these types of provisions
and, where present, these provisions vary as to their terms and may not be
effective under the laws of some jurisdictions. A product liability, warranty,
or other claim brought against us could have a material adverse effect on our
business, financial condition or results of operations.
YEAR 2000 ISSUES MAY ADVERSELY AFFECT OUR BUSINESS.
In the course of our business, we test and evaluate our software products
for Year 2000 compliance and, to date, we have not experienced any Year
2000-related errors. Based on this testing and evaluation, we believe that the
current versions of our products are capable of adequately distinguishing 21st
century dates from 20th century dates. We have attempted to limit our exposure
to Year 2000-related liability in our customer agreements. However, if any of
our customers experience Year 2000 problems as a result of their use of our
products, those customers could assert claims against us for damages which, if
successful, could materially adversely affect our business, financial condition
or results of operations. In addition, many of our products have third-party
technologies embedded in them, and our products, at times, are integrated into
enterprise systems involving sophisticated hardware and complex software
products. We cannot adequately evaluate these technologies or products for Year
2000 compliance. Not all of our material suppliers have warranted that their
products are Year 2000 compliant. A reasonable worst case scenario is that we
could lose current or potential customers, incur costs related to replacing
third party products or face claims under our warranties, or otherwise, based on
Year 2000 problems in other companies' products, or issues arising from the
integration of multiple products within an overall system, any of which could
have a material adverse effect on our business, financial condition or results
of operations. Since we are in the business of selling software products and
services, our risk of facing claims relating to Year 2000 issues is greater than
that of companies in some other industries.
We will rely on many of PageNet's systems and operations during the time
period when Year 2000 issues may arise. PageNet implemented a task force and
developed a comprehensive plan to address Year 2000 issues and, to date, it has
not experienced any Year 2000-related errors. However, our business, financial
position, or results of operations could be materially adversely affected by the
failure of PageNet's computer
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systems and applications, or those operated by other third parties, to properly
operate or manage dates beyond 1999.
We believe that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or upgrade their current software systems for Year 2000
compliance. These expenditures may reduce the funds available to license
software products and purchase services such as those we offer. To the extent
Year 2000 issues significantly disrupt decisions to license our products or
purchase our services, our business, financial condition or results of
operations could be materially adversely affected.
For a more detailed description of our Year 2000 assessment, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
A LIQUID TRADING MARKET FOR OUR CLASS B COMMON STOCK LIKELY WILL NOT DEVELOP AND
THE MARKET PRICE OF OUR CLASS B COMMON STOCK COULD BE ADVERSELY AFFECTED.
There is no established trading market for our Class B common stock. A
liquid trading market likely will not develop for our Class B common stock,
which would adversely impact its market price. We do not intend to apply for
listing of our Class B common stock on any securities exchange, or for quotation
through any quotation system. Further, our Class B common stock will not be
convertible into shares of our Class A common stock until the earlier of (1) the
second anniversary of the completion of the merger or (2) one year following the
completion of an underwritten public offering of common stock by us in which the
net proceeds of the offering exceeds $25 million. It is likely that an
underwritten public offering, if made, would be of our Class A common stock.
The liquidity of any market and the market price for our Class B common
stock will depend on, among other things: (a) the number of holders of the Class
B common stock; (b) our performance; (c) the market for similar securities; (d)
the desire of former stockholders and debtholders of PageNet to continue to hold
our Class B common stock; and (e) the interest of securities dealers in making a
market in our Class B common stock. Even if a market for our Class B common
stock does develop there can be no assurance that it will continue.
OUR STOCK PRICE COULD BE HIGHLY VOLATILE.
Our stock price could be highly volatile due to a number of factors,
including:
- actual or anticipated fluctuations in our operating results;
- announcements by us, our competitors or our customers;
- changes in financial estimates of securities analysts or investors
regarding our industry, our competitors or our customers;
- technological innovations by us or by others;
- the operating and stock price performance of other comparable companies
or of our competitors or customers; and
- general market or economic conditions.
This risk may be heightened because our industry is new and evolving,
characterized by rapid technological change and susceptible to the introduction
of new competing technologies or competitors.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the trading prices of equity
securities of many technology companies. These price and volume fluctuations
often have been unrelated to the operating performance of the affected
companies. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against that company. This type of litigation, regardless of the
outcome,
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could result in substantial costs and a diversion of management's attention and
resources, which could materially and adversely affect our business, financial
condition or results of operations.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF COMMON STOCK FOR SALE IN THE FUTURE COULD
ADVERSELY AFFECT THE PRICE OF YOUR CLASS B COMMON STOCK, AND SALES BY US OF
ADDITIONAL SHARES OF COMMON STOCK WOULD DILUTE YOUR OWNERSHIP INTEREST.
Sales, or the availability for sale, of a substantial number of shares of
our Class B common stock in the public market or otherwise following the merger
could adversely affect the market price for our Class B common stock and make it
more difficult for us to sell common stock in the future at an appropriate time
and price. In addition, sales by us of common stock or other securities, such as
preferred stock or debentures convertible into shares of common stock, would
substantially reduce your percentage ownership of Vast. See "Shares Eligible for
Future Sale" for information regarding the number of shares of common stock
eligible for sale after the Arch merger.
ANTITAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAKE
ANY CHANGE IN CONTROL OF US MORE DIFFICULT, MAY DISCOURAGE BIDS AT A PREMIUM
OVER THE MARKET PRICE AND MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR STOCK.
Our certificate of incorporation and bylaws contain provisions that may
have the effect of delaying, deferring or preventing a change in control of
Vast, may discourage bids at a premium over the market price of our common stock
and may adversely affect the market price of our common stock, and the voting
and other rights of the holders of our common stock. These provisions include:
- the division of our board of directors into three classes serving
staggered three-year terms;
- removal of directors only for cause and only upon a 66 2/3% stockholder
vote;
- prohibiting stockholders from taking action by written consent or calling
a special meeting of stockholders;
- the ability to issue shares of our preferred stock without stockholder
approval;
- advance notice requirements for raising business or making nominations at
stockholders' meetings; and
- the adoption of a rights plan that would cause substantial dilution to a
person or group that attempts to acquire us on terms not approved by our
board of directors.
Delaware corporation law also contains provisions that may delay, deter or
inhibit a future acquisition of Vast. See "Description of Vast Capital Stock"
for a description of these provisions.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "intend," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they:
- discuss our future expectations;
- contain projections of our future results of operations or financial
condition; or
- state other "forward-looking" information.
These forward-looking statements are subject to risks, uncertainties and
assumptions. The "Risk Factors" set forth above, as well as other cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations
described in these forward-looking statements.
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DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. Further,
we do not anticipate paying any dividends on our common stock in the foreseeable
future and intend to retain all available funds for use in the operation and
development of our business.
USE OF PROCEEDS
We will not receive any proceeds from the PageNet exchange offer or the
distribution of shares of our Class B common stock by PageNet to its
stockholders.
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SELECTED FINANCIAL DATA
The following table sets forth our selected historical and unaudited pro
forma financial data as of December 31, 1998 and September 30, 1999, and for the
four month period from September 1, 1998 (inception) through December 31, 1998
and the nine months ended September 30, 1999. The selected historical financial
data has been derived from our audited financial statements and notes. The
unaudited selected pro forma financial data gives effect to the following
transactions as if they were consummated as of September 30, 1999 with respect
to the unaudited pro forma condensed balance sheet, and as of September 1, 1998
with respect to the unaudited pro forma statements of operations:
- the repayment of $10.0 million of the amounts due PageNet in October
1999;
- the anticipated contribution by PageNet of assets comprising a portion of
the Gateway to Vast;
- the anticipated forgiveness by PageNet of the $30.0 million, non-interest
bearing note payable to PageNet; and
- the anticipated forgiveness by PageNet of other amounts due PageNet.
We expect the contribution of the assets comprising the Gateway and the
forgiveness of the $30.0 million, non-interest bearing note payable and other
amounts due PageNet to occur simultaneously with the completion of the Arch
merger and spinoff of Vast by PageNet. However, these transactions are subject
to certain approvals, including the approvals of PageNet's lenders under its
domestic credit facility.
The following unaudited selected pro forma financial data is presented for
illustrative purposes only and does not necessarily predict the operating
results or financial position that would have occurred if the transactions had
been consummated on the dates indicated above, nor is it necessarily indicative
of future results of operations. You should read the following financial
information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------- ----------------------------
SEPTEMBER 1 SEPTEMBER 1
(INCEPTION) NINE MONTHS (INCEPTION) NINE MONTHS
THROUGH ENDED THROUGH ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1999 1998 1999
------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Total operating revenues.................. $ 90,035 $ 809,298 $ 90,035 $ 809,298
Total operating costs and expenses........ 4,163,149 22,324,508 4,163,149 22,324,508
Loss from operations...................... (4,073,114) (21,515,210) (4,073,114) (21,515,210)
Net loss.................................. (4,163,733) (22,489,299) (4,073,112) (21,518,048)
Loss per common share -- basic and
diluted................................. (0.21) (1.12) (0.20) (1.08)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets............................. $ 220,110 $ 30,464,605 $20,424,605
Total assets............................... 2,355,685 33,000,017 26,110,017
Amounts due PageNet........................ 6,302,220 28,715,177 --
Note payable to PageNet.................... -- 30,000,000 --
Stockholder's equity (deficit)............. (3,963,733) (26,453,032) 25,372,145
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and notes appearing elsewhere in this prospectus. See "Forward-
Looking Statements."
BACKGROUND
We began operation in September 1998, when PageNet formed a wireless
solutions division. Our historical financial results consist primarily of the
results of operations of Silverlake, which PageNet acquired in December 1998,
and the losses we have accumulated during the development and initial marketing
of the wireless solutions products and services we began offering on a limited
basis in late 1999. Silverlake's product line is a suite of software products
focusing on wireless communications, including one-way messaging and two-way
advanced communications. Although we intend to maintain both sales and service
of this product line, it is not a material part of our future growth strategy.
We intend to derive future revenue from the sale of our wireless solutions
products and services which include custom product development, wireless access
to our Gateway, software licenses, maintenance contracts and monthly service
fees. Maintenance fee revenue will be based on a percentage of software license
fees. Development revenue will come from the development of custom applications
for specific customers. Monthly service revenue will be associated with airtime
on wireless networks, transactions that pass through our Gateway and information
content.
Since our inception, we have been engaged primarily in product research and
development and developing markets for our wireless solutions products and
services. We have incurred significant operating losses as a result of these
start-up activities. However, we began offering some of these products and
services in late 1999, and believe that revenues from sales of these products
and services will grow rapidly.
RESULTS OF OPERATIONS
Our historical financial statements include our results of operations from
September 1, 1998 and the results of operations of Silverlake from the date of
its acquisition, December 9, 1998. The assets and liabilities of PageNet
transferred to us have been accounted for on the basis of their historical cost.
Since our historical financial statements reflect our results of operations,
financial condition and cash flows as a component of PageNet, they may not be
indicative of our results of operations and financial position as an independent
company. As a result of our relationship with PageNet and its affiliates, we
have extensive related party transactions. These transactions have been
recognized on a basis determined by PageNet and Vast, which may not be
representative of the terms we could have negotiated with third parties.
Management believes the historical financial results include a reasonable
allocation of research and overhead costs incurred by PageNet on our behalf.
However, these amounts may not be indicative of the costs we would incur if
these services were performed by us or obtained from an independent third party.
Because of our limited operating history, comparisons with prior periods
are not meaningful.
Revenues. Total revenues were $90,035 for the four months ended December
31, 1998 and $809,298 for the nine months ended September 30, 1999. Revenues
consisted primarily of the sale of Silverlake products.
Costs of revenues. Costs of revenues generally consisted of packaging,
material and other costs associated with our software products and amortization
of acquired developed technology which had been capitalized as a result of the
Silverlake acquisition. Costs of revenues were $23,963 for the four months ended
December 31, 1998 and $314,350 for the nine months ended September 30, 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses primarily consist of personnel costs associated with
selling, marketing, general management and software management, as well as fees
for professional services and other related costs. Selling, general and
administrative expenses were $2,204,673 for the four months ended December 31,
1998 and $10,744,115 for the nine months ended
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September 30, 1999. Selling, general and administrative expenses consisted
primarily of salaries and benefits for our direct sales force, our customer
service and distribution personnel, and our non-research and development
technical and corporate staff. Salaries and benefits for our corporate
personnel, which include our executive officers, and our business development,
financial planning and human resources staff, also are included. Other items
included are professional fees, rent, travel, marketing and trade shows.
Research and development expenses. Research and development expenses
consist primarily of compensation and related costs from our technical area, for
both employees and outside consultants engaged in research and development
activities and, to a lesser extent, costs of materials relating to these
activities. We expense research and development costs as they are incurred.
Research and development costs were $340,013 for the four months ended December
31, 1998 and $2,975,043 for the nine months ended September 30, 1999.
Allocated research and overhead expenses. PageNet allocated expenses of
$1,442,000 and $8,291,000 to us during the four months ended December 31, 1998
and nine months ended September 30, 1999, respectively, for information
technology support, management services, human resources management, and other
services, covering both research and development and general and administrative
activities. Amounts allocated to us for information technology support were
$114,800 for the four months ended December 31, 1998 and $3,894,000 for the nine
months ended September 30, 1999, and included services such as research and
development activities, maintenance of our Gateway and other technology used by
us, and other technology support services. Amounts allocated to us for
management services were $1,232,000 for the four months ended December 31, 1998
and $2,891,000 for the nine months ended September 30, 1999, and included
charges for executive functions, accounting and legal services, purchasing,
treasury, and other administrative functions. We were also allocated expenses of
$11,100 during the four months ended December 31, 1998 and $424,000 during the
nine months ended September 30, 1999 for human resources management and $84,100
during the four months ended December 31, 1998 and $1,082,000 during the nine
months ended September 30, 1999 for other general and administrative services.
These allocations are generally based on employee headcount or estimated usage
of the services provided by PageNet. We believe the expenses we have recognized
for the research and overhead services performed for us by PageNet are a
reasonable allocation of the costs incurred by PageNet on our behalf. However,
these amounts may not be indicative of the costs we would incur if we performed
these services or obtained them from an independent third party.
Purchased in-process research and development. In connection with the
acquisition of Silverlake, we recorded a charge of $152,500 during the four
months ended December 31, 1998 for research and development activities in
process at the date of the acquisition. We used an independent third-party
appraiser to assess and value the in-process research and development. The
amount of the Silverlake purchase price allocated to in-process research and
development represents the estimated fair value, based on risk-adjusted cash
flows, of the one in-process research project that had not yet reached
technological feasibility and for which no alternative future use existed at the
date of the acquisition. The value assigned to the purchased in-process research
and development was determined by estimating the costs to develop Silverlake's
purchased in-process research and development into a commercially viable
product, estimating the resulting net cash flows from the project and
discounting the net cash flows to their present value. At the acquisition date,
the one in-process research and development project underway was approximately
60% complete, and total continuing costs to complete the project were expected
to be approximately $45,000. The project was successfully completed during 1999.
The rate utilized to discount the net cash flows to their present value was
based on Silverlake's weighted average cost of capital. However, given the
nature of the risks associated with the estimated growth, profitability and
developmental projects, Silverlake's weighted average cost of capital was
adjusted. The discount rate we utilized of 23% was intended to be commensurate
with Silverlake's corporate maturity and the uncertainties in the economic
estimates described above. The revenue estimates used to value the in-process
research and development were based on estimates of relevant market sizes and
growth factors, expected trends in technology and the nature and expected timing
of new product introductions. The estimates we used in valuing in-process
research and development were based upon assumptions we believe to be reasonable
but which are inherently uncertain and unpredictable. However, our assumptions
may
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be incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur.
Other income and expense. Other income and expense consists primarily of
interest expense on amounts due to PageNet. Interest expense on amounts due
PageNet was $90,621 for the four months ended December 31, 1998 and $971,251 for
the nine months ended September 30, 1999. Since our inception, PageNet has
funded the majority of our disbursements, transferred assets used in our
business to us, funded the acquisition of Silverlake, and performed various
administrative services for us. To the extent that PageNet has provided funds,
paid expenses and performed services on our behalf, we have been charged
interest at the rate PageNet pays under its domestic credit facility. The
weighted average interest rate on the amounts due PageNet, which is reset
monthly, was 7.59% and 7.51% during the four months ended December 31, 1998, and
the nine months ended September 30, 1999, respectively. This arrangement
resulted in interest expense that may not be representative of what we would
have paid if we were not affiliated with PageNet.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had approximately $9.6 million in cash, which
we believe is sufficient to meet our obligations through the first quarter of
2000. However, we may not have sufficient liquidity to meet our obligations
through the second quarter of 2000. We are currently involved in discussions
with third parties regarding potential private equity investments, which, if
consummated, we would expect to close simultaneously with the Arch merger and
the spinoff of Vast. However, there can be no assurance that our efforts to
obtain such an equity investment will prove successful or that we will have
adequate liquidity to meet our obligations through the date of the spinoff.
Furthermore, we do not anticipate additional financing from PageNet, which is
currently precluded by the terms of its public indebtedness from further
borrowings under its domestic credit facility. PageNet is also currently
exploring certain strategic and financing alternatives to ensure its continued
liquidity through the consummation of the Arch merger. If PageNet's efforts are
unsuccessful or are delayed, or if its proposed merger with Arch is not
completed, PageNet may be required to reduce the level of its operations and/or
file for protection under Chapter 11 of the United States Bankruptcy Code to
restructure its obligations. These events would preclude any further investments
in Vast by PageNet and negatively impact our operations. The possibility of the
occurrence of these events also makes it more difficult for us to obtain
separate debt or equity financing prior to the spinoff of Vast.
Since our inception, PageNet has funded our operations. Net cash used in
operating activities was $4,040,335 for the four months ended December 31, 1998
and $20,827,754 for the nine months ended September 30, 1999. The principal use
of cash in operating activities for both periods was to fund our losses from
operations. Net cash used in investing activities was $2,419,179 for the four
months ended December 31, 1998 and $1,280,816 for the nine months ended
September 30, 1999. Cash used in investing activities for the four months ended
December 31, 1998 was primarily for the purchase of Silverlake and includes the
cash portion of the purchase price along with the reimbursement to PageNet of
the value of the PageNet common stock issued in connection with the acquisition.
Cash used in investing activities for both periods also includes the acquisition
of property and equipment to support the expansion of our operations. As of
September 30, 1999, we owed PageNet $28,715,177 for funds provided, expenses
paid and services performed by PageNet on our behalf. In October 1999, we repaid
$10,040,000 of the amounts due PageNet.
On September 30, 1999, we borrowed $30.0 million from PageNet under a
promissory note agreement. The PageNet note is due on demand by PageNet, has no
stated maturity, and does not bear interest. For financial reporting purposes,
we will recognize interest expense on the PageNet note in subsequent periods
based on the interest rate PageNet pays under its domestic credit facility,
which was the source of the funds loaned to us by PageNet, with a corresponding
increase to stockholder's equity. As the PageNet note is payable on demand by
PageNet, it has been classified as a current liability in our September 30, 1999
balance sheet.
In connection with the spinoff of Vast, we anticipate that PageNet will
forgive all amounts owed by Vast, including the $30.0 million, non-interest
bearing note. However, the forgiveness of the amounts we owe PageNet is subject
to certain approvals, including the approvals of PageNet's lenders under its
domestic credit
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facility. If PageNet does not forgive these amounts, we will not be able to
repay them unless we obtain other sources of financing.
Successful implementation of our growth strategy will likely require access
to additional capital in the future. We currently have no credit facilities or
sources of additional capital in place other than our relationship with PageNet.
Since we do not anticipate any additional funding from PageNet or Arch following
their merger, we will likely seek additional debt and/or equity financings to
fund our future operations and growth strategy. Our ability to continue our
current operations and to grow our business could be limited unless we are able
to obtain additional capital through future debt or equity financings.
YEAR 2000 COMPLIANCE
In the course of our business, we test and evaluate our software products
for Year 2000 compliance and, to date, we have not experienced any Year
2000-related errors. We will rely on many of PageNet's systems and operations
during the time period when Year 2000 issues may arise. PageNet has implemented
a task force and developed a comprehensive plan to address Year 2000 issues.
PageNet has completed all phases of its Year 2000 plan for its critical business
processes and, to date, has not experienced any Year 2000-related errors.
PageNet continues to utilize both internal and external resources to evaluate
and test its systems.
We believe that all our mission critical vendors have successfully readied
their systems for the Year 2000 and, to date, have not experienced any Year
2000-related errors.
We believe that we will not suffer a suspension or interruption of our
business due to a Year 2000-related failure. However, actual results could
differ materially from those anticipated, particularly due to the potential
impact of third-party products and services. Our business, financial position,
or results of operations could be materially adversely affected by the failure
of our computer systems and applications, or those operated by third parties, to
properly operate or manage dates beyond 1999. We cannot estimate the amount of
any potential liability or lost revenue.
INFLATION
We do not believe that the relatively moderate rates of inflation over the
past two years have had a significant effect on our revenues or our financial
results.
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BUSINESS
OVERVIEW
We offer integrated wireless solutions that connect businesses to their
employees, customers and remote assets, such as vending machines, automobiles
and storage tanks. We can provide these solutions on a full-service basis,
allowing our customers to completely outsource complex wireless solutions. Using
our expandable software platform (our Gateway), provisioning and service and
support operations, we are able to provide our customers with a comprehensive
end-to-end wireless solution that seamlessly connects their mobile users with
the Internet or corporate data network using wireless devices. Our solution
enables corporations to offer a more personalized and powerful wireless data
solution. We believe our principal assets are our wireless software and software
development capabilities, our Gateway, our enterprise application provider
partners and our ability to manage our customers' wireless data operations.
WIRELESS DATA OPPORTUNITIES
As businesses and individuals have become increasingly dependent on e-mail,
Internet-based services and corporate data networks, or intranets and extranets,
demand for wireless access to these resources has increased dramatically.
According to publicly available estimates, the U.S. wireless data market will
grow from 3 million subscribers in 1999 to 36 million subscribers in 2003. We
believe that four factors are driving the development of the wireless data
market:
- Growth of the Internet, Intranets and Extranets. The Internet and
corporate data networks have emerged as mission critical business tools
that allow users to communicate and conduct transactions electronically
over distributed geographic areas. In recent years, investment in
corporate data networks has grown substantially as businesses attempt to
equip their employees with the means to increase their productivity.
However, in most cases users of these networks are currently limited to
wired connections.
- Emergence of Mobile Workforce. One industry analyst, International Data
Corporation, forecasts that the remote and mobile workforce in the United
States will grow from 35.7 million individuals at the end of 1999 to 47.1
million at the end of 2003. We believe that workers and consumers have
grown accustomed to and dependent upon the information and applications
available on their corporate data networks and personal computers, and
they want access to similar information when they are away from their
office or home.
- Proliferation of Wireless Devices. There are an increasing number of
wireless devices capable of sending and receiving data, many of which are
being rapidly adopted by businesses. Many of the latest communication
devices in the United States, including personal digital assistants, or
PDAs, pagers and mobile phones, are wireless data enabled, smaller and
less expensive, and have longer battery life and more features than
earlier devices. Another important development has been the increasing
availability of fixed wireless, or "telemetry" devices, that enable
businesses to connect wirelessly with remote assets, such as vending
machines and storage tanks.
- Build-Out of Wireless Data Networks. In anticipation of accelerating
adoption of mobile Internet devices, digital wireless carriers worldwide
are in the process of upgrading their networks to support the
transmission of data. Recently, major wireless carriers have launched or
announced the availability of data service in addition to their existing
voice service capabilities. These carriers are also expanding the
geographic coverage of their networks.
Although we believe these four developments have increased demand for
wireless data solutions, businesses seeking to implement a wireless solution
still face four primary challenges: disparate and complex networks and devices,
different communication protocols and data standards, capacity limitations and
complex operational issues.
- Disparate and Complex Networks and Devices. Today, many wireless network
technologies exist and new technologies are continually being developed.
Each network technology has its own communica-
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tion protocol and other unique characteristics. In addition, each network
technology supports different user devices. Businesses need to have the
ability to run their applications in a secure manner across disparate
networks and on multiple user devices. At present, there are many
competing networks and technologies with a range of capabilities, each
able to support digital wireless data transmission. These networks
include: Reflex, offered by PageNet, WebLink Wireless and MCI Worldcom;
MobiTex, offered by BellSouth; digital PCS, offered by the nationwide
voice carriers; and cellular digital packet data (CDPD), offered by the
major analog cellular carriers.
- Different Communication Protocols and Data Standards. There are a number
of different languages for expressing data, such as hyper-text markup
language (HTML), wireless markup language (WML) and hand-held device
markup language (HDML). There are also different protocols for
transmitting the data, such as hyper-text transfer protocol (HTTP) and
wireless application protocol (WAP). In addition to these languages and
protocols, many networks and devices use their own proprietary protocol
and data format, which adds another layer of complexity to any wireless
data solution. This environment of multiple languages and protocols
presents difficult challenges for organizations seeking to implement a
robust wireless data solution. For example, supporting multiple data
languages can add significant data overhead and translating from one
language to another or switching from one protocol to another can add
significant airtime expense.
- Capacity Limitations. Currently, the speed and bandwidth of a wireless
network is only a fraction of that of a wired network. We expect wireless
networks to continue to lag behind wired networks in terms of speed and
bandwidth for the foreseeable future. We believe that the demands placed
on wireless networks for improved speed and performance will continue to
outpace the ability of wireless network providers to add capacity.
- Complex Operational Issues. The implementation of a wireless network
presents businesses with a wide range of operational issues, including
provisioning, customer service and integrated billing. Many corporations
and enterprise application providers lack the engineering talent and
overall resources necessary to design, develop, implement and manage
wireless access solutions. We believe businesses will increasingly look
to third-party integrators to implement and manage these solutions.
OUR SOLUTION
We offer integrated wireless solutions that connect businesses to their
employees, customers and remote assets, such as vending machines, automobiles
and storage tanks. We can provide these solutions on a full-service basis,
allowing our customers to completely outsource complex wireless solutions. Using
our expandable software platform (our Gateway), provisioning and service and
support operations, we are able to provide our customers with a comprehensive
end-to-end wireless solution that seamlessly connects their mobile users with
the Internet or corporate data network using wireless devices. We provide the
equipment, servers, billing systems, training and support needed to offer mobile
access to enterprise applications, Internet services, messaging and e-commerce.
Using our solution, a mobile workforce can stay continuously connected to
enterprise applications and perform necessary tasks while at home, in the
office, on the road, at a meeting or at a job site.
Our solution is comprised of the following elements:
Wireless Software System Design and Development. Our software design and
development capabilities allow corporations and enterprise software providers to
extend Internet and corporate enterprise applications to most available wireless
devices. We can develop, implement, support and manage wireless software
applications for use on many types of devices, including the Palm V and Palm
VII, Motorola's PageWriter 2000X, Research in Motion's 950 and Hewlett Packard's
Jornada. Our software platform is expandable and specifically designed to
maximize the efficient use of limited bandwidth. In addition, our device
software includes an intuitive and user-friendly interface specifically designed
for the limited display and input capabilities inherent in wireless devices.
Using our proprietary software design, we develop intuitive and fast wireless
Internet applications that more closely mirror a customer's enterprise network
environment.
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Our Gateway. The core of our technical solution is our Gateway, which
provides a process architecture and software platform for creating more
effective wireless solutions, faster and with less risk. Our Gateway makes
wireless solutions easier to adopt by handling most of the technical
complexities that these solutions bring. Our Gateway consists of network servers
running our proprietary software. Our Gateway manages the differences between
individual networks and devices, providing a single, standard interface to the
corporate enterprise. Our Gateway adapts and translates data transmissions for
many wireless network protocols, formats the transmissions for particular user
devices and optimizes the data in a bandwidth efficient manner for transmission
over a wireless network. Our Gateway accepts data from most protocols and data
formats. When data is received from an Internet or intranet application, our
Gateway queries its internal database to identify the target user's wireless
network and device. With this information, our Gateway formats the data for
effective user presentation, such as the number of characters and display color,
and packages the data for a specific network protocol, such as Reflex, MobiTex
or CDPD. Our Gateway also optimizes the transfer of information by leveraging
the compression and encryption technologies unique to specific networks and
devices. This significantly enhances an application's performance and reduces
the airtime expense associated with operating a wireless access solution. Our
Gateway also facilitates wireless extensions of corporate e-mail applications
and the delivery of personalized wireless content, such as news and sports.
Wireless Device Development and Integration. We design and develop custom
wireless devices for unique telemetry applications that can connect a business
to its remote assets, such as vending machines, automobiles and storage tanks.
We integrate these devices with commercially available wireless modems designed
for the appropriate network technology. In addition, we can provide custom
packaging for applications that have specific requirements, such as stringent
environmental specifications.
Internet-Based Provisioning and Customer Support. We can provide our
customers with a privately branded web-portal that allows users to order
wireless devices and contact customer support over the Internet. We offer a
web-based support system that includes credit card billing, e-mail customer
support, on-line training and software downloads. Through our customer support
center, we manage all operational components of our wireless solution including
distribution, coverage, billing and technical support.
STRATEGY
Our objective is to be a leading provider of integrated wireless solutions
that enable constant connectivity between businesses and their employees,
customers and remote assets. The key elements of our strategy include:
Continue to Expand Our Technical Capabilities. We plan to continue to
expand the technical capabilities of our Gateway, as well as to incorporate new
technologies. We are continuing to develop the expertise to offer applications
on a variety of data capable wireless devices, from PDAs to WAP phones to
interactive paging devices. We are also continuing to expand our software
development capabilities in order to provide custom solutions to specific
customer requirements. We expect to grow through internal growth, as well as
through relationships with leading enterprise application providers and selected
acquisitions.
Expand into New Markets/Channels. We plan to establish new markets/channels
by partnering with leading enterprise application providers, expanding our
direct sales efforts and entering international markets.
- Extend Our Strategic Alliances With Additional Enterprise Application
Providers. As a pioneer in the area of wireless connectivity for
enterprise software applications, we are joining with leading enterprise
application providers and e-commerce companies to extend their popular
enterprise software platforms to the wireless/mobile environment. Our
current relationships with leading enterprise application providers allow
us to leverage their sales force and installed base of customers to
quickly market a packaged wireless solution. We have found that these
providers value our ability to enhance their product offerings by
developing the wireless aspects of the solution, allowing them to focus
on their core business and customers.
- Expand Our Direct Sales Channel. We are working closely with a number of
corporations to develop mobile and telemetry solutions that are highly
integrated with their internal business systems. Our sales
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engineers work closely with our customers to understand their current
business systems and to design customized wireless solutions that we
believe will substantially improve their bottom-line performance.
- International Expansion. We believe that opportunities, like the ones
present in the U.S. market, also exist in portions of Europe and Asia
that have advanced wireless networks. We plan to expand into these
international markets as quickly as possible in order to capitalize on
these opportunities.
SALES AND MARKETING
We currently market our products through a direct sales force and through
relationships with enterprise application providers. Our direct sales force is
located in major business centers in the United States. These individuals target
major corporate customers, generally the top 1,000 U.S. companies as measured by
sales, to sell custom solutions for their mobile employees, their remote assets
or their customers.
Working with enterprise application providers, we jointly develop a
wireless extension that is integrated with their standard software offerings,
thereby enhancing the value of the overall offering. We market these wireless
extensions to the providers' installed base of customers, through their sales
force and through our own sales professionals. In this way we are able to
leverage each provider's sales force, brand name and installed base of
customers.
We also establish customer and marketing relationships through our business
development group. Our senior executives work very closely with our business
development group to build relationships that are large in scope and will
leverage our products and intellectual property into new applications or extend
current applications into new markets.
WIRELESS NETWORK, CONTENT AND EQUIPMENT PROVIDERS
Through our current affiliation with PageNet, we have established
relationships with network providers for airtime for both telemetry applications
and for mobile employees. These relationships include: PageNet, Arch, MCI
Worldcom and BellSouth. Prior to completion of the Arch merger, we plan to enter
into new agreements with these carriers, as well as expand these relationships
to include several of the nationwide analog cellular and PCS companies, such as
AT&T and Sprint.
In addition to airtime, we are establishing relationships with several
network providers that would allow us to provide wireless software integration
services to their larger customers. We believe network providers' sales
organizations encounter opportunities that require custom integration and which
the network providers are unable or unwilling to provide. We plan to provide our
services jointly with them in order to develop custom applications for their
customers.
We are completing arrangements with PageNet and Arch to provide customized
content, such as news, weather and sports, to their customers. We are seeking
arrangements whereby we would manage the content aggregation with a partner or
partners and market content services to the combined entity's customers.
Currently, approximately 17% of PageNet's customers and 23% of Arch's customers
use alphanumeric messaging devices, some of which may be capable of receiving
our content services.
We have established relationships with equipment providers, such as
Motorola, to resell their hardware to our customers. As part of our integrated
service offering, we distribute the devices to the end users. As more wireless
devices become available, and as more companies provide equipment, we plan to
expand these relationships.
COMPETITION
The market for our services is becoming increasingly competitive. We
believe we offer a comprehensive solution to businesses necessary to make
possible the development, offering and ongoing support of wireless data
communications for their employees, customers and remote assets. The widespread
adoption of industry standards may make it easier for existing competitors to
introduce some or all of the services they do not now provide, or improve the
quality of their services. We assess potential competitors based primarily on
their
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management, functionality and range of services, the security and scalability of
their architecture, and their customer base, geographic focus and
capitalization. Our current and potential competitors include:
- Wireless data services providers, such as Wireless Knowledge, a joint
venture of Microsoft and Qualcomm Incorporated, Aether Systems, Research
In Motion, Go America, mobilefinance.com, Logica and Infospace.com;
- Wireless communications software companies, including Phone.com, Nettech
Systems Inc., Dynamic Mobile Data, Mobimagic Co., a newly formed joined
venture between Microsoft and NTT Mobile, and 724 Solutions Inc.;
- Wireless systems integrators, such as IBM and GTE Corporation;
- Wireless device manufacturers, such as Ericsson, Motorola, Nokia and
Matsushita; and
- Wireless network carriers, such as AT&T Wireless Services, Bell Atlantic
Mobile, Sprint PCS, Nextel Communications, Inc., Airtouch, Omnipoint,
Metricom, Inc., BellSouth, MCI Worldcom and WebLink Wireless.
As we expand to include international operations, we likely will face
competition from several companies that have announced wireless data service
initiatives abroad, including Vodafone, British Telecom, Cellnet, Organ and One
2 One in the U.K., Deutsche Telecom and Starhub in continental Europe, and NTT
DoCoMo, DDI and IDO in Japan.
Many of our existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we do.
Additionally, many of these companies have greater name recognition and more
established relationships with our target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing policies and offer
customers more attractive terms than we can.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of copyright, trademark, service mark, trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our services. PageNet holds a preliminary patent
application on a portion of our Gateway technology, which it has agreed to
transfer to us at the closing of the Arch merger, subject to certain approvals,
including the approvals of PageNet's lenders under its domestic credit facility.
This patent application covers the architecture for message processing and
routing used in our Gateway.
We own one federal trademark, Airsource(R), and have applications for
federal registration or common law rights in several other trademarks. In
addition, we own applications for federal registration or common law rights in
the following service marks: Vast Gateway(SM), Vast Online(SM), Vast
Solutions(SM) and Vast Wireless Solutions(SM). This prospectus also includes
trade names and trademarks of other companies. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.
We rely on certain technologies that we license from third parties,
including certain Gateway software currently licensed by PageNet from Tibco
Software, Inc., as well as third-party software contained in administrative
systems operated by PageNet. Tibco has agreed to the assignment of a portion of
PageNet's license to us. We will also rely on data feeds and related software
from Reuters and other information content aggregators. Other third-party
technology licenses may not continue to be available to us on commercially
attractive terms. The loss of the ability to use such technology could require
us to obtain the rights to use substitute technology, which could be more
expensive or offer lower quality or performance, and therefore have a material
adverse effect on our business, financial condition or results of operations.
Third parties could claim infringement by us with respect to current or
future services. We expect that participants in our markets will be increasingly
subject to infringement claims as the number of services and competitors in our
industry segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service installation delays
or require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or
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at all. As a result, any such claim could have a material adverse effect upon
our business, financial condition or results of operations.
GOVERNMENTAL REGULATION
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. The
wireless network carriers we contract with to provide airtime are subject to
regulation by the Federal Communications Commission. Changes in FCC regulations
could affect the availability of wireless coverage these carriers are willing or
able to sell to us. We could also be adversely affected by developments in
regulations that govern or may in the future govern the Internet, the allocation
of radio frequencies or the placement of cellular towers. Also, changes in these
regulations could create uncertainty in the marketplace that could reduce demand
for our services or increase the cost of doing business as a result of costs of
litigation or increased service delivery cost or could in some other manner have
a material adverse effect on our business, financial condition or results of
operations.
We currently do not collect sales or other taxes with respect to the sales
of services or products in states and countries where we believe we are not
required to do so. We do collect sales and other taxes in the states where we
have offices and believe we are required by law to do so. One or more
jurisdictions have sought to impose sales or other tax obligations on companies
that engage in online commerce within their jurisdictions. A successful
assertion by one or more jurisdictions that we should collect sales or other
taxes on our products and services, or remit payment of sales or other taxes for
prior periods, could have a material adverse effect on our business, financial
condition or results of operations.
Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could have an adverse effect on our business.
FACILITIES
Our principal offices cover 24,606 square feet in an office complex located
in Addison, Texas. Under the current lease, which commenced on May 10, 1999 and
expires on May 31, 2004, we pay an annual base rent of $516,726. We have the
right to extend the term of the lease for up to an additional 60 months. We have
the right of first refusal on certain additional space in the building. Although
this facility is adequate for our current needs, we expect that we will need
additional space in the future.
In addition to our offices in Addison, we rent office space in the Los
Angeles area. Our current office is approximately 3,500 square feet and the
lease has been extended to expire on February 28, 2000. We have entered into a
new lease for 11,381 square feet in a new location in the Los Angeles area,
which will commence in March 2000. We will pay an annual base rent of $261,926
and the lease will expire in March 2007.
EMPLOYEES
As of January 4, 2000, our workforce was comprised of 99 full-time
employees. We also utilize the services of 34 software developers and 5 customer
support representatives through independent contractor relationships with
various third parties. None of our employees is covered by a collective
bargaining agreement. We believe that our relations with our employees are good.
LEGAL PROCEEDINGS
We are not currently subject to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND SOLE DIRECTOR
The following table describes our executive officers and our current sole
director. We will add additional members to our board of directors before
completion of the Arch merger, some of whom may be members of PageNet's existing
board of directors. Although Vast was incorporated in Delaware in December 1999,
our operations continue the activities of PageNet's wireless solutions division
and the relevant experience of many of our executive officers includes the
management of those operations.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John P. Frazee, Jr. ...................... 55 Chairman of the Board and Chief Executive Officer
Mark A. Knickrehm......................... 37 President and Chief Operating Officer
Julian B. Castelli........................ 31 Acting Chief Financial Officer
Scott D. Grimes........................... 37 Senior Vice President-Business Development
Steve Leggett............................. 51 Senior Vice President-Sales
Christopher C. Sanders.................... 47 Senior Vice President-Marketing
William G. Scott.......................... 43 Chief Technology Officer
</TABLE>
John P. Frazee, Jr., has been our Chairman of the Board and Chief Executive
Officer since December 1999. He has been a Director of PageNet since 1995 and
has served as Chairman of the Board of Directors and Chief Executive Officer of
PageNet since June 1999. From August 1997 through June 1999, Mr. Frazee served
as Chairman of the Board, President and Chief Executive Officer of PageNet. Mr.
Frazee was a private investor from August 1993 to August 1997 and served as
President and Chief Operating Officer of Sprint Corporation from March 1993 to
August 1993. Prior to that time, Mr. Frazee had been Chairman and Chief
Executive Officer of Centel Corporation, a telecommunications company, from
April 1988 to January 1993. Mr. Frazee also serves as a director of Security
Capital Group, Inc., Dean Foods Company and Homestead Village Incorporated.
Mark A. Knickrehm has been our President and Chief Operating Officer since
December 1999 and served in a similar capacity for the wireless solutions
operations of PageNet from June 1999 through December 1999. He served as
Executive Vice President and Chief Financial Officer for PageNet from February
1998 through June 1999. Prior to that time, Mr. Knickrehm was employed by
McKinsey & Company, an international consulting firm, from 1989 to February
1998, serving as a Partner since 1995.
Julian B. Castelli has been our acting Chief Financial Officer since
December 1999. He has served as Senior Vice President and Chief Financial
Officer of PageNet since June 1999. Mr. Castelli served as Vice President and
Treasurer of PageNet from July 1998 to June 1999. Prior to joining PageNet, Mr.
Castelli was employed by McKinsey & Company, an international consulting firm,
from August 1995 to July 1998, serving as Engagement Manager from June 1997. Mr.
Castelli served in the Corporate Finance Department of Goldman, Sachs & Co. as
an analyst from 1990 to 1993.
Scott D. Grimes has been our Senior Vice President-Business Development
since December 1999 and served in a similar capacity for the wireless solutions
operations of PageNet from June 1999 through December 1999. He served as Senior
Vice President-Advanced Wireless Integration Group for PageNet from January 1999
through June 1999. Mr. Grimes served as Senior Vice President-Sales Development
and Operations for PageNet from April 1998 to January 1999, during which time he
was responsible for the establishment of the Advanced Wireless Integration
Group. Prior thereto, Mr. Grimes was employed by McKinsey & Company, an
international consulting firm, from 1991 to April 1998, serving as a Partner
since 1996.
Steve Leggett has been our Senior Vice President-Sales since December 1999
and served in a similar capacity for the wireless solutions operations of
PageNet from September 1999 through December 1999. From January 1995 to July
1999, he served in various sales positions with Platinum Technology, Inc., a
software consulting firm, serving most recently as Senior Vice President,
Northeast Region. Prior to that time,
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Mr. Leggett was Executive Vice President of Marketing and Sales for the Meta
Group, an information technology analytical and consulting firm.
Christopher C. Sanders has been our Senior Vice President-Marketing since
December 1999. From January 1999 to December 1999, Mr. Sanders served as a
Principal of Neteligence, an Internet-related consulting firm. From September
1997 to January 1999, he served as Senior Vice President of Merant, Inc.,
formerly known as Micro Focus, Inc., a software vendor of enterprise
applications. From 1995 to September 1997, he served as Vice President of
Platinum Technology, Inc., a software vendor. Prior to that, Mr. Sanders served
as Vice President and General Manager of Locus Computing Corporation, a software
developer.
William G. Scott has been our Chief Technology Officer since December 1999
and served in a similar capacity for the wireless solutions operations of
PageNet from June 1999 through December 1999. He served as Senior Vice
President-Systems and Technology for PageNet from February 1997 through June
1999 and as Vice President-Systems and Technology for PageNet from December 1995
to February 1997. Before that, Mr. Scott served as President of Lion Software,
Inc. from 1993 to 1995.
BOARD COMMITTEES
We plan to establish an audit committee and a compensation committee. The
audit committee will review our internal accounting procedures and consider and
report to our board of directors on the other auditing and accounting matters,
including the selection of our independent auditors, the scope of annual audits,
fees to be paid to our independent auditors and the performance of our
independent auditors. The audit committee will be composed solely of directors
who are not our employees or affiliated with our management. The compensation
committee will review and recommend to our board of directors the salaries,
benefits and stock option grants of all employees, consultants, directors and
other individuals we compensate. The compensation committee will also administer
our stock option and other employee benefits plans. Our board of directors may
from time to time establish other committees.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to our Chief Executive
Officer and other executive officers whose total annual salary and bonus during
the period they were dedicated to the activities of Vast or PageNet's wireless
solutions division exceeded $100,000 for the fiscal year ended December 31,
1999. These persons are referred to in this prospectus as the named executive
officers.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
NAME AND ---------------------
PRINCIPAL OTHER ANNUAL SECURITIES UNDERLYING
POSITION SALARY BONUS COMPENSATION (6)($) OPTIONS (#)
--------- -------- ------- ------------------- ---------------------
<S> <C> <C> <C> <C>
John P. Frazee, Jr. (1)............... -- -- -- --
Chairman and Chief
Executive Officer
Mark A. Knickrehm (2)................. $164,423 -- $2,169 --
President and Chief
Operating Officer
Scott D. Grimes (3)................... 199,680 $45,400(5) 5,316(7) 30,000(9)
Senior Vice President-
Business Development
William G. Scott (4).................. 112,500 -- 2,776(8) --
Chief Technology Officer
</TABLE>
- ---------------
(1) Mr. Frazee, who serves as Chairman and Chief Executive Officer of PageNet,
did not receive any compensation on account of serving as Chairman and Chief
Executive Officer of Vast, positions he was elected to hold in December
1999.
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(2) Represents compensation from June 1999.
(3) Represents compensation from January 1999.
(4) Represents compensation from June 1999.
(5) Represents annual bonus for services rendered to PageNet in 1998.
(6) Except where noted, represents premiums paid under Executive Long Term
Disability Plan.
(7) Includes a matching contribution of $5,000 to Mr. Grimes' 401(k) plan.
(8) Includes a matching contribution of $1,714 to Mr. Scott's 401(k) plan.
(9) Options represent options to purchase PageNet common stock.
2000 LONG TERM STOCK INCENTIVE PLAN
Our Board plans to adopt, subject to the approval of our sole stockholder,
our 2000 Long Term Stock Incentive Plan. Under this plan, we may grant stock
options, stock appreciation rights, shares of common stock and performance units
to our employees and consultants. The total number of shares of our Class A
common stock that we may award under this plan is shares, which
may be adjusted in some cases. The shares may be newly issued shares or shares
purchased in the open market or in private transactions. We anticipate granting
options to acquire shares of our Class A common stock only.
Our compensation committee will administer our long term stock incentive
plan. Prior to the creation of our compensation committee, our long term stock
incentive plan will be administered by PageNet's compensation committee. This
plan essentially gives the compensation committee sole discretion and authority
to:
- select those employees and consultants to whom awards will be made;
- designate the number of shares covered by each award;
- establish vesting schedules and terms of each award;
- specify all other terms of awards; and
- interpret the plan.
Options awarded under our long term stock incentive plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
are intended to satisfy the requirements of Section 422 of the Internal Revenue
Code, while nonqualified stock options are not. We may grant stock appreciation
rights in connection with options, or as free-standing awards. If a participant
exercises an option, he or she will surrender the related stock appreciation
right. At a minimum, the exercise price of an option or stock appreciation right
must be at least 100% of the fair market value of a share of Class A common
stock on the date on which we grant the option or stock appreciation right.
Options and stock appreciation rights will be exercisable and will expire in
accordance with the terms set by the compensation committee. Under this plan,
all options and stock appreciation rights must expire within ten years after
they are granted. If a stock appreciation right is issued in connection with an
option, the stock appreciation right will expire when the related option
expires. Special rules and limitations apply to stock options which are intended
to be incentive stock options. Our compensation committee also may impose
restrictions on shares of our common stock that are issued upon the exercise of
options and stock appreciation rights under this plan.
Under our long-term stock incentive plan, our compensation committee may
grant common stock awards to participants. During the period that a stock award
is subject to restrictions or limitations, the participants may receive dividend
rights awards relating to the shares.
Our compensation committee may award plan participants performance units
which entitle the participant to receive value for the units at the end of a
performance period, if and to the extent the award so provides. Our compensation
committee will establish the number of units and the performance measures and
periods when it makes an award.
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All awards under our long term stock incentive plan will accelerate and
become fully vested if a change in control, as defined by the plan, of Vast
occurs.
Prior to completion of the Arch merger, we expect to grant options to
purchase shares of our Class A common stock to our named executive
officers and other personnel. These option grants will be reviewed and
authorized by PageNet's compensation committee.
The 2000 Long Term Stock Incentive Plan also contains an employee stock
option purchase plan component. We do not intend to implement this purchase plan
until such time as our Class A common stock is listed on a securities exchange
or quoted on Nasdaq.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Some of our employees received grants of options to purchase PageNet common
stock during 1999 at a time when they were primarily involved in Vast
activities. The following table summarizes all such option grants to the named
executive officers for the year ended December 31, 1999.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SHARES GRANTED TO PRESENT
UNDERLYING EMPLOYEES VALUE
OPTIONS IN EXERCISE EXPIRATION ON DATE
NAME GRANTED FISCAL YEAR(1) PRICE DATE OF GRANT(2)
---- ---------- -------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Scott D. Grimes......................... 30,000 0.74% $6.125 01/20/09 $142,200
</TABLE>
- ---------------
(1) As a percent of options granted to all PageNet employees in fiscal year.
(2) The determination of the present value of this option to purchase PageNet
common stock on the date of the grant is based on the Black-Scholes pricing
model. The estimated value under the Black-Scholes model is based on
standard assumptions as to variables in the model such as stock price
volatility, projected future dividend yield and interest rates. In addition,
the estimated value is discounted for potential forfeiture due to vesting
schedules. The estimated Black-Scholes value is based on the following key
variables: volatility -- 67.05%; dividend yield -- 0%; risk-free interest
rate -- yield to maturity of 10-year treasury note at grant date -- 4.745%.
The actual value, if any, that Mr. Grimes may realize will depend on the
excess of the stock price over the exercise price on the date the option is
exercised. There is no assurance that the value realized by Mr. Grimes will
be at or near the value estimated using the Black-Scholes model. Currently,
this stock option has minimal value because the trading price of PageNet
shares is below the option exercise price.
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ARRANGEMENTS BETWEEN VAST AND PAGENET
Since our inception, there have been significant transactions between us
and PageNet involving services (such as information technology support,
management services, human resources management and other administrative
services). See Note 3 to the Notes to Financial Statements. For purposes of
governing certain on-going relationships between us and PageNet, we and PageNet
will enter into (or continue in effect) various agreements and relationships.
PRINCIPAL STOCKHOLDERS
As of the date of this prospectus, PageNet owns all 3,900,000 outstanding
shares of our Class A common stock and all 16,100,000 outstanding shares of our
Class B common stock. Following the exchange by PageNet of 13,780,000 shares of
our Class B common stock and 616,830,757 shares of PageNet common stock for up
to $1.2 billion of PageNet's senior subordinated indebtedness and the
distribution by PageNet of the remaining 2,320,000 shares of our Class B common
stock to its stockholders immediately prior to the merger of PageNet into a
subsidiary of Arch, PageNet will own no shares of our Class B common stock.
After the merger, Arch will indirectly own all of the outstanding shares of our
Class A common stock, which will constitute 19.5% of our outstanding common
stock.
The address of PageNet is 14911 Quorum Drive, Dallas, Texas 75240. The
address of Arch is 1800 West Park Drive, Suite 250, Westborough, Massachusetts
01581.
We are not aware of any person who will beneficially own more than 5% of
the outstanding shares of our Class B common stock after the merger.
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SECURITY OWNERSHIP OF MANAGEMENT
OWNERSHIP OF VAST COMMON STOCK
The following table sets forth information with respect to the expected
beneficial ownership of our Class B common stock by each of our directors, by
each of our named executive officers and by all directors and executive officers
as a group based on their ownership as of December 1, 1999 of PageNet common
stock. Except as indicated in the footnotes to the table, the persons named in
the table will have sole voting and investment power with respect to all shares
of Class B common stock beneficially owned by them. None of our directors or
executive officers beneficially own any shares of our Class A common stock.
<TABLE>
<CAPTION>
SHARES OF CLASS B
COMMON STOCK
NAME BENEFICIALLY OWNED PERCENT OF CLASS
- ---- ------------------ ----------------
<S> <C> <C>
John P. Frazee, Jr.......................................... 2,748 *
Mark A. Knickrehm........................................... -- *
Scott D. Grimes............................................. -- *
William G. Scott............................................ 176 *
All directors and executive officers as a group (7
persons).................................................. 2,972 *
</TABLE>
- ---------------
* Represents less than 1%
OWNERSHIP OF PAGENET COMMON STOCK
The following table sets forth information as of December 1, 1999 with
respect to the beneficial ownership of PageNet common stock by each of our
directors, each of our named executive officers and by all of our directors and
executive officers as a group. Except as indicated in the footnotes to the
table, the persons named in the table have sole voting and investment power with
respect to all shares of PageNet common stock beneficially owned by then. The
number of shares beneficially owned includes shares covered by options that are
vested and exercisable as of December 1, 1999 or within 60 days of such date.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
NAME BENEFICIALLY OWNED PERCENT OF CLASS
- ---- ------------------ ----------------
<S> <C> <C>
John P. Frazee, Jr. ........................................ 1,006,060(1) *
Mark A. Knickrehm........................................... 166,000(2) *
Scott D. Grimes............................................. 62,000(3) *
William G. Scott............................................ 113,368(4) *
All directors and executive officers as a group (7
persons).................................................. 1,406,628(5) 1.1%
</TABLE>
- ---------------
* Represents less than 1%
(1) Includes 882,900 shares subject to options.
(2) Includes 166,000 shares subject to options.
(3) Includes 62,000 shares subject to options.
(4) Includes 105,464 shares subject to options.
(5) Includes 1,273,364 shares subject to options.
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DESCRIPTION OF VAST CAPITAL STOCK
The following description summarizes some of the general terms and
provisions of our capital stock and our certificate of incorporation and bylaws.
This description is not complete and you should refer to our certificate of
incorporation and bylaws and to Delaware law for more information.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of Class A
common stock, par value $0.01 per share, 50,000,000 shares of Class B common
stock, par value $0.01 per share and 25,000,000 shares of preferred stock, par
value $0.01 per share. Immediately following the Arch merger, approximately
3,900,000 shares of our Class A common stock and approximately 16,100,000 shares
of our Class B common stock will be outstanding. All of the Class A common stock
will be indirectly owned by Arch. No shares of our preferred stock are currently
outstanding.
COMMON STOCK
Voting Rights
The holders of Class A common stock and Class B common stock generally have
identical voting rights, with each holder entitled to one vote for each share of
common stock owned. Generally, matters to be voted on by stockholders, including
amendments to the certificate of incorporation, must be approved by a majority
vote of the holders of our common stock, voting together as a single class,
subject to any voting rights granted to holders of any preferred stock. However,
a majority vote of the affected class, voting separately, is also necessary for
amendments of the certificate of incorporation that would adversely affect the
rights of the Class A common stock or the Class B common stock. Any amendment to
the certificate of incorporation to increase the authorized shares of any class
of our capital stock requires the approval only of a majority of the votes
entitled to be cast by the holders of our common stock voting together as a
single class.
Holders of shares of our common stock may not cumulate their votes in the
election of directors. In cumulative voting, a stockholder has a number of votes
equal to the number to which his stockholdings would entitle him, multiplied by
the number of directors being elected. A stockholder can then vote all of those
votes in favor of one or more directors. This improves a minority stockholder's
ability to influence the election of specific directors.
Dividends
All holders of our common stock will share equally on a per share basis in
any dividend declared by the board of directors, subject to any rights of any
outstanding preferred stock to receive dividends. If the board declares a stock
dividend, stockholders of each class of common stock must receive shares of the
class of stock they already hold. Additionally, all common stockholders must
receive the same number of dividend shares on a per share basis.
We may not reclassify, subdivide or combine shares of either class of
common stock without simultaneously doing the same to shares of the other class.
Redemption
We may not redeem the Class A common stock.
We have the option to redeem the Class B common stock, in whole or in part,
at any time following the sale by us of additional shares of Class A common
stock, or any shares of our capital stock that are convertible into shares of
Class A common stock, other than sales pursuant to employee benefit plans. The
redemption price for the Class B common stock will be equal to the sale price of
the Class A common stock, net of any discounts or commissions, or the price at
which such capital stock may be converted into Class A common stock. The number
of shares of Class B common stock which may be redeemed at any time is limited
to the maximum number that we can redeem at the applicable redemption price
using the proceeds from the sale of
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the Class A common stock or the capital stock that is convertible into Class A
common stock. In the case of a redemption of less than all of the Class B common
stock, we will redeem the shares of Class B common stock on a pro rata basis.
In order to exercise our optional redemption right with respect to the
Class B common stock, we must send a redemption notice to holders not more than
15 business days following the sale of shares of Class A common stock or the
capital stock that is convertible into Class A common stock. Such notice will
include the redemption date, which may not be more than 60 days or less than 30
days from the date the notice is sent, and the applicable redemption price.
Conversion
Holders of Class A common stock may not convert their shares into any other
securities.
Each share of Class B common stock will automatically convert into one
share of Class A common stock upon the earlier of (i) the second anniversary of
the completion of the Arch merger or (ii) one year following the completion of
an underwritten public offering of common stock by us in which the net proceeds
of the offering exceeds $25 million.
Other Rights
If we merge or consolidate with another corporation and shares of our
common stock are converted into or exchangeable for shares of stock, other
securities or property, all holders of our common stock, regardless of class,
will be entitled to receive the same kind and amount of payment for their
shares. This requirement can be waived by a majority vote of each class of
holders of our common stock.
If we are liquidated, dissolved or wound up, after full payment of required
amounts to preferred stockholders, if any, all holders of our common stock,
regardless of class, will receive the same amount per share of any assets
distributed to common stock holders.
No shares of either class of common stock have any right to purchase
additional shares of common stock or other securities of ours.
All outstanding shares of our common stock, including all shares of common
stock issued in the distribution and the exchange offer, are or will be, when
issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
Our board of directors can issue shares of our preferred stock, in one or
more series, without stockholder approval. For each series of our preferred
stock, our board of directors can determine the powers, preferences, rights,
qualifications, limitations and restrictions, including the dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares in the series. As a result, our board of directors can
authorize and issue shares of preferred stock with voting or conversion rights
which may adversely affect the voting or other rights of holders of our common
stock. In addition, the issuance of preferred stock may delay or prevent a
transaction which would cause a change in our control, because the rights given
to the holders of a series of preferred stock may prohibit a merger,
reorganization, sale of all or substantially all of our assets, liquidation or
other extraordinary corporate transaction.
For purposes of the rights plan described below, our board of directors
intends to designate 1.0 million shares of Series A junior participating
preferred stock, par value $.01 per share. For a description of the rights plan,
see "-- Rights Plan."
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation will provide that our board of directors
may establish the number of our directors, provided that we must have at least
three directors and may not have more than 15. We intend to increase the size of
our board of directors to approximately seven directors before the closing of
the Arch merger. A majority of the remaining directors may fill any vacancy in
our board of directors, including a
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vacancy resulting from an increase in the size of our board of directors. Our
certificate of incorporation divides our board of directors into three classes
of directors, with approximately one-third of our directors serving in each
class. As the term of each class expires, the directors elected to that class
will hold office for three years, unless they die or resign or are removed
before that time. As a result, at least two annual meetings of stockholders,
instead of one, will generally be required to change a majority of our
directors. Also, our stockholders can only remove directors for cause by the
affirmative vote of the holders of 66 2/3% or more of the outstanding shares of
capital stock entitled to vote in the election of directors.
We believe that our classified board of directors and the inability of our
stockholders to remove directors without cause or to fill vacancies on our board
of directors will help ensure the continuity and stability of our business
strategy and policies from year to year. However, it also makes the removal of
incumbent directors more time-consuming and difficult. This may discourage third
parties from attempting to obtain control of our company, even if the change in
control would be in the best interests of our stockholders.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND BUSINESS PROPOSALS
We have adopted advance notice provisions in our bylaws which require our
stockholders to present their nominations for directors or other business
proposals for our annual meeting within a specified time frame. In general,
stockholders must deliver their notice of nominations or business proposals to
our Secretary not less than 60 days nor more than 90 days before the first
anniversary of the prior year's annual meeting of stockholders. Any nominations
must include all information relating to the nominated person which is required
to be disclosed in proxy statements under the Securities Act. Any business
proposals must include:
- a brief description of the business proposal;
- the reason for conducting that business at the annual meeting;
- any material interest of the proposing stockholder in that business; and
- the name, address and number of shares owned by the proposing
stockholder.
These requirements make the election of new directors not nominated by our
board of directors more time-consuming and difficult, which may discourage third
parties from attempting to obtain control of our company, even if the change in
control would be in the best interests of our stockholders.
SPECIAL MEETINGS
Our certificate of incorporation and our bylaws provide that only the
chairman of the board or the board of directors may call special meetings of
stockholders and stockholders may not call special meetings. In addition, our
certificate of incorporation and our bylaws provide that stockholders may only
act at an annual or special meeting of stockholders and not by written consent.
No business other than that stated in the notice of such meeting may be
transacted at any special meeting.
AMENDMENT OF BYLAWS AND CERTIFICATE OF INCORPORATION
Our certificate of incorporation requires the approval of 66 2/3% or more
of the outstanding shares of capital stock entitled to vote to amend our bylaws
or the provisions of our certificate of incorporation relating to the
classification and composition of our board of directors, stockholder action by
written consent and the right to call special meetings of stockholders. This
requirement may discourage third parties from attempting to obtain control of
our company.
RIGHTS PLAN
Our board of directors intends to adopt a shareholder rights plan. Pursuant
to the rights plan, our board of directors will cause to be issued one preferred
share purchase right for each outstanding share of Class A common stock and
Class B common stock (the "Class A Rights" and "Class B Rights," respectively,
together, the "Rights"). Each Right, when exercisable, entitles the registered
holder to purchase from us one one-hundredth of a share of Series A junior
participating preferred stock, at a price of $ .00 per
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one one-hundredth share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement between
Vast and , as Rights Agent. The description set forth below is
intended as a summary only and is qualified in its entirety by reference to the
form of Rights Agreement which will be filed as an exhibit to the registration
statement of which this prospectus is a part. See "Where You Can Find More
Information."
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired, or obtained the right to acquire, beneficial ownership of
any combination of Class A common stock or Class B common stock representing 15%
or more of the votes of all shares entitled to vote in the election of directors
(the "Shares Acquisition Date") or (ii) 15 business days (or such later date as
may be determined by action of our board of directors prior to the time that any
person becomes an Acquiring Person) following the commencement of (or a public
announcement of an intention to make) a tender or exchange offer if, upon
consummation thereof, such person or group would be a beneficial owner of any
combination of Class A common stock or Class B common stock representing 15% or
more of the votes of all shares entitled to vote in the election of directors
(the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced by the common stock certificates together with a copy of the
summary of the rights plan and not by separate certificates.
The Rights Agreement also provides that, until the Distribution Date, the
Rights will be transferred with and only with the respective Class A common
stock or Class B common stock. Until the Distribution Date (or earlier
redemption, expiration or termination of the Rights), the transfer of any
certificates for Class A common stock or Class B common stock will also
constitute the transfer of the Rights associated with such common stock
represented by such certificates.
The Rights are not exercisable until the Distribution Date and will expire
on , 2010 (the "Final Expiration Date"), unless the
Rights are earlier redeemed.
In the event that any person becomes an Acquiring Person, each holder of a
Class A Right and Class B Right will thereafter have the right to receive, upon
exercise at the then current exercise price of the Right, Class A common stock
and Class B common stock, respectively (or, in certain circumstances, cash,
property or other securities of Vast) having a value equal to two times the
exercise price of the Right. The Rights Agreement contains an exemption for any
issuance of Class A common stock or Class B common stock by us directly to any
person (for example, in a private placement or an acquisition by us in which
Class A common stock or Class B common stock is used as consideration), even if
that person would become the beneficial owner meeting the requirements set forth
in the second paragraph of this summary of the rights plan, provided that such
person does not acquire any additional shares of common stock.
In the event that, at any time following the Shares Acquisition Date, we
are acquired in a merger or other business combination transaction or 50% or
more of our assets or earning power are sold, proper provision will be made so
that each holder of a Right will thereafter have the right to receive, upon
exercise at the then current exercise price of the Right, common stock of the
acquiring or surviving company having a value equal to two times the exercise
price of the Right.
Notwithstanding the foregoing, following the occurrence of any of the
events set forth in the preceding two paragraphs, any Rights that are, or (under
certain circumstances specified in the Rights Agreement) were, beneficially
owned by any Acquiring Person will immediately become null and void.
At any time after the date of the Rights Agreement until the time that a
person becomes an Acquiring Person, our board of directors may redeem the
Rights, at a price of $0.01 per Right.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Vast, including, without limitation, the right to
vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire us without
conditioning the offer on the Rights being redeemed or a substantial number of
Rights being acquired, and under certain circumstances the Rights beneficially
owned by such a person or group may become void. The Rights should not interfere
with any merger or other business
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combination approved by our board of directors because, if the Rights would
become exercisable as a result of such merger or business combination, our board
of directors may, at its option, at any time prior to the time that any Person
becomes an Acquiring Person, redeem all (but not less than all) of the then
outstanding Rights at the redemption price.
DELAWARE BUSINESS COMBINATION STATUTE
We are organized under Delaware law. Some provisions of Delaware law may
delay or prevent a transaction which would cause a change in our control. In
addition, our certificate of incorporation contains some provisions which may
delay or prevent this type of transaction, even if our stockholders consider the
transaction to be in their best interests.
After the merger, we will be subject to Delaware's anti-takeover laws.
Delaware law prohibits a publicly held corporation from engaging in a "business
combination" with an "interested stockholder" for three years after the
stockholder becomes an interested stockholder, unless the corporation's board of
directors and stockholders approve the business combination in a prescribed
manner. Generally, an "interested stockholder" is a person who directly or
indirectly owns 15% or more of the corporation's outstanding voting stock. A
"business combination" includes a merger, asset sale or other transaction which
results in a financial benefit to the interested stockholder. Delaware law does
not prohibit these business combinations if:
(1) the corporation's board approves either the business combination
or the transaction which results in the stockholder becoming an interested
stockholder, before the stockholder becomes an interested stockholder;
(2) after the transaction which results in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
corporation's outstanding stock; or
(3) the corporation's board approves the business combination and the
holders of at least two-thirds of the corporation's outstanding voting
stock which the interested stockholder does not own, authorize the business
combination.
Although following the Arch merger Arch will indirectly own all of the
Class A common stock, which will constitute approximately 19.5% of all of our
outstanding common stock, Arch will not be an "interested stockholder."
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for:
(1) any breach of the director's duty of loyalty to us or our
stockholders;
(2) misconduct or a knowing violation of law;
(3) liability under Delaware corporate law for an unlawful payment of
dividends or an unlawful stock purchase or redemption of stock; or
(4) any transaction from which the director derives an improper
personal benefit;
Our certificate of incorporation and bylaws require us to indemnify and
advance expenses to our directors and officers to the fullest extent permitted
by Delaware law. Our certificate of incorporation and bylaws also permit us to
indemnify and advance expenses to our employees and agents if our board of
directors approves it.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
Its address is and its telephone number at this location is .
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<PAGE> 340
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the exchange offer with PageNet noteholders, and the
distribution to PageNet stockholders, we will have 3,900,000 million shares of
Class A common stock and 16,100,000 million shares of Class B common stock
outstanding, without taking into account any outstanding options or options
which may be granted in the future. Of these shares, the shares of Class B
common stock offered by this prospectus will be freely tradeable without
restriction or further registration under the Securities Act of 1933 (the
"Securities Act"), unless they are sold by persons deemed to be "affiliates" of
Vast as that term is defined in Rule 144 under the Securities Act. Shares
acquired by our affiliates may generally be sold in compliance with the
requirements of Rule 144.
Although the shares of Class B common stock held by persons who are not our
affiliates will be freely tradeable under the Securities Act, we do not intend
to apply for listing of our Class B common stock on any securities exchange, or
for quotation through any quotation system. Accordingly, a liquid trading market
for the Class B common stock is not likely to develop. See "Risk Factors -- A
liquid trading market for our Class B common stock likely will not develop and
the market price of our Class B common stock could be adversely affected."
The 3,900,000 million shares of Class A common stock that will be owned
indirectly by Arch will be "restricted" securities within the meaning of Rule
144 under the Securities Act and may not be sold in the absence of registration
under the Securities Act or unless an exemption from registration is available,
including the exemption contained in Rule 144 under the Securities Act.
In general, under Rule 144, a stockholder who has owned Class A or Class B
common stock for at least one year may, within any three-month period, sell up
to the greater of:
- 1% of the total number of shares of the applicable class of common stock
then outstanding; and
- the average weekly trading volume of the applicable class of common stock
on the national securities exchange and/or automated quotation system on
which the common stock is traded during the four weeks before the person
files a notice on Form 144 of that sale.
Sales of shares under Rule 144 are also subject to manner of sale and
notice requirements and requirements as to the availability of current public
information about us. Under Rule 144, a stockholder who has not been an
affiliate of Vast for at least 90 days and who has beneficially owned shares of
common stock for at least two years may sell those shares without complying with
the volume limitations or other requirements of Rule 144.
At the closing of the merger, options to purchase approximately
shares of our Class A common stock will be outstanding. After the
merger, we plan to file a registration statement on Form S-8 under the
Securities Act covering shares of Class A common stock which are
reserved for issuance under the Vast long term stock incentive plan. This
registration statement will become effective automatically upon filing. Shares
of Class A common stock registered under this registration statement will be
available for sale in the open market, subject to vesting restrictions. Any
sales of these shares will be subject to the volume limitations of Rule 144
described above if sold by affiliates.
Prior to the exchange offer and distribution, there has been no market for
our Class B common stock, and no precise predictions can be made of the effect,
if any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of our common stock in the public market, or the possibility
of those sales, may have an adverse effect on the market price of our common
stock and may make it more difficult for us to raise capital by issuing
additional common stock. See "Risk Factors -- Availability of significant
amounts of common stock for sale in the future could adversely affect the price
of your Class B common stock and sales by us of additional shares of common
stock would dilute your ownership interest."
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LEGAL MATTERS
The validity of the shares of Class B common stock being offered hereby
will be passed upon for us by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The financial statements of Vast Solutions, Inc. as of December 31, 1998
and September 30, 1999, and for the period September 1, 1998 (inception) through
December 31, 1998, the nine months ended September 30, 1999, and the period
September 1, 1998 (inception) through September 30, 1999, appearing in this
prospectus have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon (which contains an explanatory paragraph
describing the conditions that raise substantial doubt about the ability of Vast
Solutions, Inc. to continue as a going concern as described in Note 1 to the
financial statements) appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
The financial statements of Silverlake Communications, Inc. as of December
31, 1997 and December 9, 1998, and for the year ended December 31, 1997 and the
period January 1, 1998 through December 9, 1998, appearing in this prospectus
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
Class B common stock offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to us and
our Class B common stock offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed with the
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. A copy of the
registration statement may be inspected without charge at the Securities and
Exchange Commission's public reference facilities in Washington, D.C., New York,
New York or Chicago, Illinois. You may also copy any document we file with the
Securities and Exchange Commission at prescribed rates by writing to the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference facilities. The Securities and Exchange Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as Vast, that file
electronically with the Securities and Exchange Commission.
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INDEX TO FINANCIAL STATEMENTS
VAST SOLUTIONS, INC.
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets as of December 31, 1998 and September 30,
1999...................................................... F-3
Statements of Operations for the period September 1, 1998
(inception) through December 31, 1998, the nine months
ended September 30, 1999, and the period September 1, 1998
(inception) through September 30, 1999.................... F-4
Statements of Stockholder's Deficit for the period September
1, 1998 (inception) through December 31, 1998, the nine
months ended September 30, 1999, and the period September
1, 1998 (inception) through September 30, 1999............ F-5
Statements of Cash Flows for the period September 1, 1998
(inception) through December 31, 1998 and the nine months
ended September 30, 1999.................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
SILVERLAKE COMMUNICATIONS, INC.
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-15
Balance Sheets as of December 9, 1998 and December 31,
1997...................................................... F-16
Statements of Operations for the year ended December 31,
1997 and the period ended December 9, 1998................ F-17
Statements of Stockholders' Equity for the year ended
December 31, 1997 and the period ended December 9, 1998... F-18
Statements of Cash Flows for the year ended December 31,
1997 and the period ended December 9, 1998................ F-19
Notes to Financial Statements............................... F-20
</TABLE>
F-1
<PAGE> 343
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Vast Solutions, Inc.
We have audited the accompanying balance sheets of Vast Solutions, Inc.
(the Company), a company in the development stage and a wholly-owned subsidiary
of Paging Network, Inc., as of December 31, 1998 and September 30, 1999, and the
related statements of operations, stockholder's deficit, and cash flows for the
period September 1, 1998 (inception) through December 31, 1998, the nine months
ended September 30, 1999 and the period September 1, 1998 (inception) through
September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vast Solutions, Inc. as of
December 31, 1998 and September 30, 1999, and the results of its operations and
its cash flows for the period September 1, 1998 (inception) through December 31,
1998, the nine months ended September 30, 1999, and the period September 30,
1998 (inception) through September 30, 1999 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has accumulated losses of
$26.7 million since its inception and has negative working capital of $29.0
million as of September 30, 1999. As more fully described in Note 1, the Company
may not have sufficient liquidity to meet its obligations or fund its operations
through the second quarter of 2000. The Company currently does not have any
available borrowing facilities and does not anticipate any additional financing
from its parent company, Paging Network, Inc. Furthermore, the financial
position of its parent company makes it difficult for the Company to obtain
separate debt or equity financing prior to the planned spinoff of the Company by
its parent as part of a larger transaction, the completion of which is subject
to various approvals and consents and not expected to occur until the second
quarter of 2000. These events raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The accompanying financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
ERNST & YOUNG LLP
Dallas, Texas
January , 2000
The foregoing report is in the form that will be signed upon the transfer
of certain intellectual and other property by Paging Network, Inc. to Vast
Solutions, Inc. as described in Note 1 to the financial statements.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 5, 2000
F-2
<PAGE> 344
VAST SOLUTIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,706 $ 30,347,093
Accounts receivable....................................... 108,688 71,365
Accounts receivable from PageNet.......................... 56,232 30,894
Prepaid expenses and other current assets................. 12,484 15,253
---------- ------------
Total current assets........................................ 220,110 30,464,605
Property and equipment:
Computer equipment........................................ 100,006 614,683
Furniture and fixtures.................................... 21,970 565,098
Leasehold improvements.................................... -- 134,525
Other property and equipment.............................. -- 88,486
Accumulated depreciation.................................. (9,487) (484,775)
---------- ------------
Total property and equipment................................ 112,489 918,017
Other non-current assets:
Goodwill.................................................. 1,135,039 1,135,039
Software development costs................................ 727,600 727,600
Other intangible assets................................... 217,500 217,500
Accumulated amortization.................................. (57,053) (462,744)
---------- ------------
Total other non-current assets.............................. 2,023,086 1,617,395
---------- ------------
Total assets................................................ $2,355,685 $ 33,000,017
========== ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 2,113 $ 6,138
Accrued compensation...................................... -- 375,286
Other accrued liabilities................................. 15,085 84,899
Amounts due PageNet....................................... 6,302,220 28,715,177
Deferred revenue.......................................... -- 271,549
Note payable to PageNet................................... -- 30,000,000
---------- ------------
Total current liabilities................................... 6,319,418 59,453,049
Commitments and contingencies
Stockholder's deficit:
Preferred stock ($.01 par value; 25,000,000 shares
authorized; no shares issued or outstanding)........... -- --
Common stock ($.01 par value; 50,000,000 shares
authorized; 20,000,000 shares issued and
outstanding)........................................... 200,000 200,000
Deficit accumulated during the development stage.......... (4,163,733) (26,653,032)
---------- ------------
Total stockholder's deficit................................. (3,963,733) (26,453,032)
---------- ------------
Total liabilities and stockholder's deficit................. $2,355,685 $ 33,000,017
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 345
VAST SOLUTIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE FROM
SEPTEMBER 1 SEPTEMBER 1, 1998
(INCEPTION) NINE MONTHS (INCEPTION)
THROUGH ENDED THROUGH
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999
------------ ------------- -----------------
<S> <C> <C> <C>
Revenues:
External customers.......................... $ 43,563 $ 743,638 $ 787,201
PageNet..................................... 46,472 65,660 112,132
----------- ------------ ------------
Total revenues................................ 90,035 809,298 899,333
Operating costs and expenses:
Costs of revenues........................... 23,963 314,350 338,313
Selling, general and administrative
expenses................................. 2,204,673 10,744,115 12,948,788
Research and development activities......... 340,013 2,975,043 3,315,056
Allocated research and overhead expenses.... 1,442,000 8,291,000 9,733,000
Purchased in-process research and
development.............................. 152,500 -- 152,500
----------- ------------ ------------
Total operating costs and expenses............ 4,163,149 22,324,508 26,487,657
----------- ------------ ------------
Loss from operations.......................... (4,073,114) (21,515,210) (25,588,324)
Other income (expense):
Interest expense on amounts due PageNet..... (90,621) (971,251) (1,061,872)
Other income (expense)...................... 2 (2,838) (2,836)
----------- ------------ ------------
Net loss...................................... $(4,163,733) $(22,489,299) $(26,653,032)
=========== ============ ============
Loss per common share -- basic and diluted.... $ (0.21) $ (1.12)
=========== ============
Weighted averaged number of common shares
outstanding................................. 20,000,000 20,000,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 346
VAST SOLUTIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
COMMON DEVELOPMENT STOCKHOLDER'S
STOCK STAGE DEFICIT
-------- ------------ -------------
<S> <C> <C> <C>
Balance at September 1, 1998 (inception)............ $200,000 $ -- $ 200,000
Net loss.......................................... -- (4,163,733) (4,163,733)
-------- ------------ ------------
Balance at December 31, 1998........................ 200,000 (4,163,733) (3,963,733)
Net loss.......................................... -- (22,489,299) (22,489,299)
-------- ------------ ------------
Balance at September 30, 1999....................... $200,000 $(26,653,032) $(26,453,032)
======== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 347
VAST SOLUTIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 1 CUMULATIVE FROM
(INCEPTION) NINE MONTHS SEPTEMBER 1, 1998
THROUGH ENDED (INCEPTION)
DECEMBER 31, SEPTEMBER 30, THROUGH
1998 1999 SEPTEMBER 30, 1999
------------ ------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss..................................... $(4,163,733) $(22,489,299) $(26,653,032)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation............................... 9,487 475,288 484,775
Amortization............................... 57,053 405,691 462,744
Provision for doubtful accounts............ -- 25,000 25,000
Purchased in-process research and
development............................. 152,500 -- 152,500
Changes in operating assets and
liabilities:
Accounts receivable..................... (68,934) 37,661 (31,273)
Prepaid expenses and other current
assets................................ 2,037 (2,769) (732)
Accounts payable and accrued
liabilities........................... (28,745) 449,125 420,380
Deferred revenue........................ -- 271,549 271,549
----------- ------------ ------------
Net cash used in operating activities........ (4,040,335) (20,827,754) (24,868,089)
INVESTING ACTIVITIES:
Capital expenditures......................... (79,291) (1,280,816) (1,360,107)
Acquisition of Silverlake Communications,
Inc., net of cash acquired................. (2,339,888) -- (2,339,888)
----------- ------------ ------------
Net cash used in investing activities........ (2,419,179) (1,280,816) (3,699,995)
FINANCING ACTIVITIES:
Proceeds from note payable to PageNet........ -- 30,000,000 30,000,000
Increase in amounts due to PageNet........... 6,502,220 22,412,957 28,915,177
----------- ------------ ------------
Net cash provided by investing activities.... 6,502,220 52,412,957 58,915,177
----------- ------------ ------------
Net increase in cash and cash equivalents.... 42,706 30,304,387 30,347,093
Cash and cash equivalents at beginning of
period..................................... -- 42,706 --
----------- ------------ ------------
Cash and cash equivalents at end of period... $ 42,706 $ 30,347,093 $ 30,347,093
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the period..... $ 90,621 $ 971,251 $ 1,061,872
Cash paid for taxes during the period........ -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 348
VAST SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
Vast Solutions, Inc. (the Company) was formed in September 1998 by its
parent company, Paging Network, Inc. (PageNet), to develop three principal
businesses: (1) wireless information services, (2) customized wireless
solutions for business customers, and (3) wireless Internet gateway
services. The Company initially operated as a division of PageNet and had
no separate legal status or existence. On December 9, 1998, PageNet
acquired Silverlake Communications, Inc. (Silverlake) for a total purchase
price of approximately $2.4 million, comprised of cash consideration of
$1.75 million and 100,000 shares of common stock of PageNet (the
Acquisition). The Acquisition, additional terms of which are discussed in
Note 4, was carried out by PageNet to provide additional in-house software
development capabilities for the Company. On June 22, 1999, PageNet
publicly announced the organization of the Company as an operating unit to
be known as Vast Solutions to focus on the emerging market for wireless
information services. PageNet further announced that the Company would
include several parts of PageNet's then current organization; however, the
Company continued to operate as a division of PageNet following the June
1999 announcement. During the third quarter of 1999, PageNet determined
that the optimal structure for the Company would be for its operations to
be combined with those of Silverlake, which had remained a separate
subsidiary of PageNet following the Acquisition, as the activities of
Silverlake related directly to the operations of the Company. On September
13, 1999, the board of directors of PageNet authorized (i.) a capital
investment of $30 million in Silverlake, and (ii.) the operation of the
activities of the Company within Silverlake. On December 29, 1999,
Silverlake merged into a wholly-owned subsidiary of Silverlake, Vast
Solutions, Inc., primarily to change the Company's state of incorporation
from California to Delaware.
On November 8, 1999, PageNet and Arch Communications Group, Inc. (Arch)
announced a merger agreement under which the common stock and public
indebtedness of PageNet will be exchanged for Arch common stock (the
Arch-PageNet Merger). Under the terms of the Arch-PageNet Merger, holders
of PageNet's public indebtedness will receive up to a 68.9% direct interest
in the Company, while holders of PageNet's common stock will receive up to
a 11.6% direct interest (the Spinoff). The remaining 19.5% interest will be
held by Arch following the Arch-PageNet Merger. Consummation of the
Arch-PageNet Merger is subject to the approval of the shareholders of Arch
and PageNet, completion of a recapitalization of Arch and PageNet,
customary regulatory review, and certain third-party consents. Arch and
PageNet anticipate the Arch-PageNet Merger will be completed during the
first half of 2000.
On , 2000, PageNet transferred to the Company the rights
to certain hardware, proprietary software technology and licensed software
technology which together comprise the Company's Gateway.
The Company is in the development stage, and, since inception, has been
engaged primarily in product research and development and developing
markets for its products and services. The Company has had minimal revenues
from operations and in the course of its start-up activities has sustained
significant operating losses. The Company does not expect to generate
significant revenues until such time as it successfully completes its
development and marketing activities. Subsequent to the Acquisition, the
Company's revenues have been derived primarily from the sale of software
from Silverlake's Airsource suite of products. However, the Company's
primary operations in the future will be comprised of the following
integrated wireless solutions:
- The Gateway. The Company will provide solutions enabled through its
expandable software platform (the Gateway), which allows the Company to
deliver data services across multiple network technologies. Through the
Gateway, the Company will provide a single, transparent bridge between
the Internet and corporate data networks and wireless devices, managing
the complexities associated with wireless networks, protocols, and data
management. The Company's Gateway technology
F-7
<PAGE> 349
consists of network servers running proprietary software. The Gateway
manages the differences between individual networks and devices,
providing a single, standard interface to the corporate enterprise. The
Gateway adapts and translates data transmissions for many wireless
network protocols, formats the transmissions for particular user devices
and optimizes the data in a bandwidth efficient manner for transmission
over a wireless network. The Gateway also facilitates wireless extensions
of corporate e-mail applications and the delivery of personalized
wireless content, such as news and sports.
- Wireless Software System Design and Development. The Company is
designing and developing software to allow corporations and enterprise
application providers to extend Internet and corporate enterprise
applications to most available wireless devices. The Company will
develop, implement, support, and manage wireless software applications
for use on multiple device platforms.
- Wireless Device Development and Integration. The Company is designing
and developing custom wireless devices for unique telemetry applications
that connect a business to its remote assets, such as vending machines,
automobiles and storage tanks. These devices are integrated with
commercially available wireless modems designed for the appropriate
network technology.
- Internet-based Provisioning and Customer Support. The Company will
offer a privately branded web-portal that allows users to order wireless
devices and contact customer support over the Internet. This web-based
support model includes credit card billing, e-mail customer support,
on-line training and software downloads. The Company also will operate a
customer support center to manage all operational components of their
wireless solution including distribution, coverage, billing and
technical support.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has accumulated
losses of $26.7 million since its inception and has negative working
capital of $29.0 million as of September 30, 1999. As of December 31, 1999,
the Company had approximately $9.6 million in cash, which the Company
believes is sufficient to meet its obligations through the first quarter of
2000. However, the Company may not have sufficient liquidity to meet its
obligations or fund its development and operating activities through the
second quarter of 2000. The Company is currently involved in discussions
with third parties regarding potential private equity investments in the
Company, which, if consummated, the Company would expect to close
simultaneously with the Spinoff. However, there can be no assurance that
the Company's efforts to obtain such an equity investment will prove
successful or that the Company will have adequate liquidity to meet its
obligations through the date of the Spinoff. Furthermore, the Company does
not anticipate additional financing from PageNet, which is currently
precluded by the terms of its public indebtedness from further borrowings
under its domestic credit facility. PageNet is also currently exploring
certain strategic and financing alternatives to ensure its continued
liquidity through the consummation of the Arch-PageNet Merger. If such
efforts of PageNet prove untimely or unsuccessful, or if the Arch-PageNet
Merger is not completed, PageNet may be required to reduce the level of its
operations and/or file for protection under Chapter 11 of the United States
Bankruptcy Code to restructure its obligations. These events would preclude
any further investments in the Company by PageNet and negatively impact the
Company's operations. The possibility of the occurrence of these events
also makes it more difficult for the Company to obtain separate debt or
equity financing prior to the Spinoff. These events raise substantial doubt
about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result
from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accompanying financial statements have been prepared using PageNet's
historical basis in the assets and liabilities of the Company. The
financial statements reflect the results of operations, financial condition
and cash flows of the Company as a component of PageNet and may not be
indicative of the
F-8
<PAGE> 350
Company's results of operations and financial position as a separate,
stand-alone entity. Management believes the accompanying financial
statements include a reasonable allocation of administrative costs, which
are described in Note 3, incurred by PageNet on behalf of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues since the Company's inception have been derived primarily from the
sale of Airsource software licenses. The Company has also generated
revenues from sales of wireless communication devices; however, revenues
from such sales have been insignificant since the Company's inception.
Revenue for software sales is recognized in accordance with the provisions
of American Institute of Certified Public Accountants' Statement of
Position (SOP) 97-2, Software Revenue Recognition. Under SOP 97-2, software
sales are recognized upon execution of a contract and delivery of software,
provided that the license fee is fixed and determinable, no significant
production, modification or customization of the software is required, and
collection is considered probable by management. The Company provides
telephone customer and technical support and software upgrades as an
accommodation to purchasers of its products as a means of fostering
customer satisfaction. The majority of such services are provided during
the first 30 days of ownership of the Company's products. The costs
associated with these services, which are insignificant in relation to
product sales value, are accrued.
Revenue for providing content services is recognized in the month the
service is performed. Sales of wireless communication devices are
recognized upon delivery to the customer. Revenue for custom development
services is recognized as services are performed and after obtaining an
executed contract from the customer. Custom development revenues derived
from fixed-fee contracts are recognized on the percentage-of-completion
method based on costs incurred in relation to total estimated costs.
Anticipated contract losses are recognized when they can be estimated.
Revenue for time-and-materials contracts is recognized as services are
performed.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents consists primarily of depository and money market accounts.
PROPERTY AND EQUIPMENT
Property and equipment is stated at original cost less accumulated
depreciation. Property and equipment transferred from PageNet is recorded
at PageNet's net book value on the date of the transfer. Expenditures for
normal maintenance and repairs are charged to expense as incurred.
Depreciation of property and equipment is computed using the straight-line
method over the estimated lives of the assets which range from five to
seven years. Property and equipment transferred from PageNet is depreciated
over the remainder of its original estimated useful life.
F-9
<PAGE> 351
INTANGIBLE ASSETS
All intangible assets were recorded upon the acquisition of Silverlake by
the Company in December 1998. The acquisition of Silverlake is discussed in
Note 4. Intangible assets are amortized on a straight-line basis over the
following lives:
<TABLE>
<S> <C>
Goodwill.............................................. 5 years
Software development costs............................ 3 years
Other intangible assets............................... 3 years
</TABLE>
Other intangible assets consist of the value of Silverlake's trademarks and
workforce as of the date of the Acquisition.
DEFERRED REVENUE
Deferred revenue represents amounts billed to customers under terms
specified in consulting, software licensing, and maintenance contracts for
which completion of contractual terms or delivery of the software has not
occurred.
RESEARCH AND DEVELOPMENT COSTS
Research and product development costs, which are not subject to Statement
of Financial Accounting Standards No. 86, Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed, are expensed
as incurred and relate mainly to the development of new products and the
ongoing maintenance of existing products. Software development costs are
expensed as incurred until technological feasibility has been established,
at which time such costs are capitalized until the point at which the
product is available for general release to customers. Since the Company's
inception, the establishment of technological feasibility of the Company's
products and general release of such software have substantially coincided.
As a result, software development costs qualifying for capitalization have
been insignificant and, therefore, the Company has historically expensed
all software development costs.
EMPLOYEE STOCK OPTIONS
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No compensation expense
was recognized for any period presented for stock option grants since the
exercise price of PageNet's stock option grants to personnel of the Company
was equal to the fair market value of the underlying stock on the date of
grant.
3. RELATED PARTY TRANSACTIONS
As a result of its relationship with PageNet and its affiliates, the
Company has extensive related party transactions. These transactions have
been recognized on a basis determined by the parties, which may not be
representative of the terms the Company might have negotiated with third
parties.
Revenues from PageNet consist of sales of software from the Company's
Airsource product line to PageNet. Sales to PageNet are typically made on
terms and conditions similar to those of transactions with non-affiliates.
Research and overhead expenses are charged to the Company by PageNet to
cover information technology support, management services, human resources
management, and other administrative services based on employee headcount
or estimated usage of such services. Management of PageNet and the Company
believe such amounts are a reasonable allocation of the costs incurred by
PageNet on behalf of the Company. However, such amounts may not be
indicative of the costs the Company would incur if such services were
performed internally or obtained from an independent third party.
F-10
<PAGE> 352
Expenses charged to the Company by PageNet are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 1
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Information technology support.............................. $ 114,800 $3,894,000
Management services......................................... 1,232,000 2,891,000
Human resources management.................................. 11,100 424,000
Other general and administrative costs...................... 84,100 1,082,000
---------- ----------
Total allocated expenses.................................. $1,442,000 $8,291,000
========== ==========
</TABLE>
In connection with the Spinoff, the Company will enter into various
agreements with PageNet and Arch for certain of the services described
above. Certain of the services currently provided by PageNet will be
performed by the Company or obtained from third parties following the
Spinoff.
PageNet funds certain disbursements on behalf of the Company, with a
corresponding increase in amounts due PageNet. In addition, amounts due
PageNet are immediately credited or charged upon the recording of certain
transactions, including the recognition of certain sales to PageNet and the
payment of certain expenses by PageNet on behalf of the Company.
Accordingly, no receivables or payables for these transactions are
reflected on the Company's balance sheet. For purposes of the statement of
cash flows, amounts paid by PageNet on behalf of the Company and expenses
allocated to the Company by PageNet are presented as cash used in operating
or investing activities and changes in the amount due PageNet are presented
as financing activities. To the extent that PageNet has provided funds to
the Company and paid expenses on behalf of the Company in excess of the
amounts transferred to PageNet, the Company is charged interest at the rate
PageNet pays under its domestic credit facility. The weighted average
interest rate on the amounts due PageNet, which is reset monthly, was 7.59%
and 7.51% during the period September 1, 1998 (inception) through December
31, 1998, and the nine months ended September 30, 1999, respectively. This
arrangement resulted in interest expense that may not be representative of
what the Company would have paid if it were not affiliated with PageNet. In
October 1999, the Company repaid $10.0 million of the amounts due PageNet.
On September 30, 1999, the Company borrowed $30.0 million from PageNet
under a promissory note agreement between PageNet and the Company (the
PageNet Note). The PageNet Note is due on demand by PageNet, has no stated
maturity, and does not bear interest. For financial reporting purposes,
interest expense will be recognized by the Company on the PageNet Note
based on the interest rate PageNet pays under its domestic credit facility,
which was the source of the funds loaned to the Company by PageNet, with a
corresponding increase to stockholder's net investment. As the PageNet Note
is payable on demand by PageNet, it has been classified as a current
liability in the accompanying balance sheet as of September 30, 1999.
4. SILVERLAKE ACQUISITION
On December 9, 1998, PageNet completed the acquisition of all the
outstanding stock of Silverlake for a total purchase price of $2.4 million,
comprised of cash consideration of $1.75 million and 100,000 shares of
common stock of PageNet (the Acquisition). The Acquisition of Silverlake
was accounted for as a purchase.
F-11
<PAGE> 353
The purchase price has been allocated to the assets and liabilities
acquired based upon their fair values at the date of acquisition, as
follows:
<TABLE>
<S> <C>
Consideration:
Cash...................................................... $1,750,000
Common stock of PageNet................................... 612,500
Acquisition costs......................................... 18,000
----------
Total consideration............................... $2,380,500
==========
Assets acquired and liabilities assumed:
Cash...................................................... $ 40,612
Accounts receivable....................................... 95,986
Prepaid expenses and other assets......................... 14,521
Property and equipment.................................... 42,685
Developed technology...................................... 727,600
Goodwill.................................................. 1,135,039
Other intangible assets................................... 217,500
Accounts payable.......................................... (11,225)
Accrued liabilities....................................... (34,718)
----------
Total assets acquired and liabilities assumed............... 2,228,000
In-process research and development costs................. 152,500
----------
Total....................................................... $2,380,500
==========
</TABLE>
In connection with the acquisition of Silverlake, the Company recorded a
charge of $152,500 for research and development activities in process at
the date of the acquisition. The Company used an independent third-party
appraiser to assess and value the in-process research and development. The
amount of the Silverlake purchase price allocated to in-process research
and development represents the estimated fair market value, based on
risk-adjusted cash flows, of the one in-process research project that had
not yet reached technological feasibility and for which no alternative
future use existed at the date of the acquisition. The value assigned to
the purchased in-process research and development was determined by
estimating the costs to develop Silverlake's purchased in-process research
and development into a commercially viable product, estimating the
resulting net cash flows from the project and discounting the net cash
flows to their present value.
The terms of the Acquisition also provided for additional consideration of
up to $4.0 million payable at various dates through March 31, 2001, if
certain conditions were met. The additional consideration is equal to
twenty-five percent of revenues derived from purchasers and licensees of
Silverlake's products existing on December 1, 1998 during the six month
periods ended June 30, 1999 and December 31, 1999, and fifty percent of
such revenues during the six month periods ended June 30, 2000 and December
31, 2000. Any additional consideration due is payable by the Company three
months following the end of the respective valuation period. The payment of
the additional consideration is contingent upon the continued employment of
the former owners of Silverlake. As a result, any consideration due to the
former owners of Silverlake is recorded as an expense over the respective
valuation period. The Company recorded expense of $112,500 under this
arrangement for the additional consideration earned during the nine months
ended September 30, 1999.
5. CONCENTRATIONS OF RISK
A significant portion of the Company's revenues consists of licensing
software to companies in the U.S. paging industry, which gives rise to a
concentration of credit risk in receivables. As of September 30, 1999,
amounts receivable from companies in the U.S. paging industry represented
approximately 38% of gross accounts receivable from non-affiliates.
Revenues from companies in the U.S. paging industry
F-12
<PAGE> 354
represented approximately 32% of revenues from external customers during
the nine months ended September 30, 1999. The Company performs on-going
credit evaluations of its customers' financial condition and generally
requires no collateral. The Company maintains an allowance for doubtful
accounts based on the expected collectability of its accounts receivable.
The allowance for doubtful accounts as of December 31, 1998 and September
30, 1999 and write-offs of accounts receivable during 1998 and 1999 were
insignificant.
6. INCOME TAXES
The Company is included in the consolidated U.S. federal and various state
income tax returns of PageNet. Under the terms of PageNet's tax sharing
policy, income taxes are allocated to the Company as if the Company was a
separate taxable entity. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted
tax rates.
For the period September 1, 1998 (inception) through December 31, 1998, and
the nine months ended September 30, 1999, the Company had no provision or
benefit for income taxes because the deferred benefit from the operating
losses was offset by an increase in the valuation allowance on deferred tax
assets of $1.6 million, $8.9 million, respectively. The income tax
provision differed from amounts computed at the federal statutory income
tax rate as follows:
<TABLE>
<CAPTION>
SEPTEMBER 1
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Income tax benefit at the federal statutory rate............ $(1,457,307) $(7,871,255)
Increase in income taxes resulting from:
Non-recognition of tax benefit of current year
losses............................................... 1,644,296 8,903,332
Amortization of intangible assets...................... 6,621 59,590
Meals and entertainment expenses....................... 14,577 32,798
State income tax provision, net of federal benefit..... (208,187) (1,124,465)
----------- -----------
Income tax provision (benefit).............................. $ -- $ --
=========== ===========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 and September 30, 1999, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 1,535,431 $ 10,018,120
Intangible assets........................................ 71,970 135,252
Deferred revenue......................................... -- 105,904
Accounts receivable...................................... -- 9,750
Accrued liabilities...................................... 7,020 7,020
Valuation allowance...................................... (1,607,255) (10,275,136)
----------- ------------
Total deferred tax assets.................................. 7,166 910
Deferred tax liabilities:
Depreciation............................................. (7,166) (910)
----------- ------------
Net deferred tax asset (liability)......................... $ -- $ --
=========== ============
</TABLE>
As of September 30, 1999, the Company has net operating loss carryforwards
of approximately $26.0 million available under the terms of PageNet's tax
sharing policy. These net operating loss
F-13
<PAGE> 355
carryforwards expire in 2018 and 2019. There were no significant federal or
state income taxes paid or refunded during 1998 or 1999.
Following the Spinoff, the Company will file separate U.S. federal and
state income tax returns. The net operating loss carryforwards retained by
the Company following the Spinoff may differ from the amounts presented
above.
7. STOCK OPTIONS
The Company participates in PageNet's 1991 Stock Option Plan (1991 Plan),
whereby officers and key employees of PageNet and its affiliates may be
granted incentive stock options and non-statutory options to purchase
common stock of PageNet at not less than 100% of the fair market value of
PageNet's common stock on the date the options are granted. The 1991 Plan
is administered by the Compensation and Management Development Committee of
the Board of Directors of PageNet (the Committee). Options granted under
the 1991 Plan are non-transferable except by the laws of descent and
distribution and are exercisable upon vesting, which occurs in installments
as determined by the Committee at the time it grants such options.
Options to purchase shares of PageNet have been granted to officers and key
employees of the Company. Options granted are exercisable at the market
value upon grant, become exercisable over one to five years following the
date of grant, and expire ten years from the date of grant. As of September
30, 1999, there were approximately 1.3 million outstanding options to
purchase shares of PageNet common stock held by officers and key employees
of the Company, of which approximately 440,000 were exercisable. These
options have exercise prices ranging from $1.03 to $17.13 per share of
PageNet common stock, with a total exercise value of approximately $12.0
million. Upon the consummation of the Arch-PageNet Merger, all outstanding
options to purchase shares of PageNet common stock, including those held by
officers and key employees of the Company, will be converted into options
to purchase shares of Arch common stock.
The Company has adopted the pro forma disclosure features of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123). As required by FAS 123, pro forma information
regarding net income has been determined as if the Company had accounted
for grants of stock options and awards by PageNet to employees of the
Company using the fair value method prescribed by FAS 123. For purposes of
the pro forma disclosures, the estimated fair market value of the options
is amortized to expense over the vesting period. The Company's pro forma
net loss for the period September 1, 1998 (inception) through December 31,
1998, and the nine months ended September 30, 1999 is $4,168,879 and
$22,221,146, respectively.
8. COMMITMENTS AND CONTINGENCIES
PageNet has entered into various agreements with information content
providers to provide the Company with news, sports, weather, business, and
financial information for its information content services. As of September
30, 1999, the aggregate commitment under such agreements was approximately
$13.0 million.
The Company leases office facilities and certain equipment under operating
leases for various periods. Leases that expire are generally expected to be
renewed or replaced by other leases. Rental expense was $351,572 for the
nine months ended September 30, 1999. Future minimum base rents under terms
of non-cancellable operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000................................................. $ 755,250
2001................................................. 813,829
2002................................................. 817,808
2003................................................. 827,481
2004 and thereafter.................................. 1,112,697
</TABLE>
F-14
<PAGE> 356
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Silverlake Communications, Inc.
We have audited the accompanying balance sheets of Silverlake
Communications, Inc. (the Company) as of December 31, 1997 and December 9, 1998,
and the related statements of operations, stockholders' equity, and cash flows
for the year ended December 31, 1997, and the period January 1, 1998 through
December 9, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Silverlake Communications,
Inc. as of December 31, 1997 and December 9, 1998, and the results of its
operations and its cash flows for the year ended December 31, 1997, and the
period January 1, 1998 through December 9, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 23, 1999
F-15
<PAGE> 357
SILVERLAKE COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 9,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $172,513 $ 40,612
Accounts receivable....................................... 75,580 95,986
Prepaid expenses and other current assets................. 2,400 5,405
-------- --------
Total current assets........................................ 250,493 142,003
Property and equipment, at cost............................. 77,526 84,345
Accumulated depreciation.................................... (29,151) (41,660)
-------- --------
Total property and equipment................................ 48,375 42,685
-------- --------
Total assets................................................ $298,868 $184,688
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,801 $ 11,225
Accrued compensation...................................... 39,711 18,694
Other accrued liabilities................................. 23,481 16,024
-------- --------
Total current liabilities................................... 68,993 45,943
Stockholders' equity:
Common stock ($1.00 par value; 100,000 shares authorized;
100 shares issued and outstanding)..................... 100 100
Retained earnings......................................... 229,775 138,645
-------- --------
Total stockholders' equity.................................. 229,875 138,745
-------- --------
Total liabilities and stockholders' equity.................. $298,868 $184,688
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 358
SILVERLAKE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 1
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 9,
1997 1998
------------ -----------
<S> <C> <C>
Revenues.................................................... $896,166 $897,379
Operating costs and expenses:
Costs of revenues......................................... 145,618 157,149
Selling, general and administrative....................... 538,142 610,560
Research and development activities....................... 75,500 68,750
-------- --------
Total operating costs and expenses.......................... 759,260 836,459
-------- --------
Income from operations...................................... 136,906 60,920
Interest income............................................. 3,893 1,891
-------- --------
Income before taxes......................................... 140,799 62,811
Provision for income taxes.................................. (2,112) (941)
-------- --------
Net income.................................................. $138,687 $ 61,870
======== ========
Pro forma information (Note 4):
Income before taxes....................................... $140,799 $ 62,811
Provision for income taxes................................ (60,112) (31,501)
-------- --------
Net income................................................ $ 80,687 $ 31,310
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 359
SILVERLAKE COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------ --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1997............................. $100 $ 109,088 $ 109,188
Net income........................................... -- 138,687 138,687
Dividends declared................................... -- (18,000) (18,000)
---- --------- ---------
Balance at December 31, 1997........................... 100 229,775 229,875
Net income........................................... -- 61,870 61,870
Dividends declared................................... -- (153,000) (153,000)
---- --------- ---------
Balance at December 9, 1998............................ $100 $ 138,645 $ 138,745
==== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 360
SILVERLAKE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 9,
1997 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $138,687 $ 61,870
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 10,348 12,509
Changes in operating assets and liabilities:
Accounts receivable.................................... 33,955 (20,406)
Prepaid expenses and other current assets.............. (1,614) (3,005)
Accounts payable and accrued liabilities............... 34,296 (23,050)
-------- ---------
Net cash provided by operating activities................... 215,672 27,918
INVESTING ACTIVITIES:
Capital expenditures........................................ (48,620) (6,819)
FINANCING ACTIVITIES:
Repayment of note receivable from officer................... 20,210 --
Cash dividends paid......................................... (18,000) (153,000)
-------- ---------
Net cash provided by (used in) financing activities......... 2,210 (153,000)
-------- ---------
Net increase in cash and cash equivalents................... 169,262 (131,901)
Cash and cash equivalents at beginning of period............ 3,251 172,513
-------- ---------
Cash and cash equivalents at end of period.................. $172,513 $ 40,612
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 361
SILVERLAKE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Silverlake Communications, Inc. (the Company) was incorporated as a
California corporation on June 9, 1995. Prior to June 9, 1995, the Company
operated as partnership from its inception in 1993. The Company has created
and markets a sophisticated suite of software products focusing on wireless
communications management for mobile professionals. The Company's Airsource
suite of products spans from stand-alone one-way wireless messaging to
advanced two-way local area and wide area network solutions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
For software sales transactions entered into subsequent to December 31,
1997, revenue is recognized in accordance with the provisions of American
Institute of Certified Public Accountants' Statement of Position (SOP)
97-2, Software Revenue Recognition. Under SOP 97-2, software license
revenues are recognized upon execution of a contract and delivery of
software, provided that the license fee is fixed and determinable, no
significant production, modification or customization of the software is
required, and collection is considered probable by management.
For software sales transactions entered into prior to December 31, 1997,
revenues were recognized in accordance with SOP 91-1, Software Revenue
Recognition. Under SOP 91-1, software license revenues were recognized upon
execution of a contract and shipment of the software and after any customer
cancellation right had expired, provided that no significant vendor
obligations remained outstanding, amounts were due within one year, and
collection was considered probable by management. The application of SOP
97-2 did not have a material impact on the Company's consolidated financial
statements for the period ended December 9, 1998.
The Company provides telephone customer and technical support and software
upgrades as an accommodation to purchasers of its products as a means of
fostering customer satisfaction. The majority of such services are provided
during the first 30 days of ownership of the Company's products. The costs
associated with these services, which are insignificant in relation to
product sales value, are accrued.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents consists primarily of depository and money market accounts.
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture and fixtures, computer
equipment, and computer software and is stated at original cost less
allowance for accumulated depreciation. Expenditures for normal maintenance
and repairs are charged to expense as incurred. Depreciation of property
and equipment is computed using the straight-line method over the estimated
lives of the assets which range from five to seven years.
F-20
<PAGE> 362
The Company leased its office facilities under an operating lease expiring
on December 31, 1998. Rental expense was $54,375 and $70,498 for the year
ended December 31, 1997 and the period ended December 9, 1998,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and product development costs, which are not subject to Statement
of Financial Accounting Standards No. 86, Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed, are expensed
as incurred and relate mainly to the development of new products and the
ongoing maintenance of existing products. Software development costs are
expensed as incurred until technological feasibility has been established,
at which time such costs are capitalized until the point at which the
product is available for general release to customers. Since the Company's
inception, the establishment of technological feasibility of the Company's
products and general release of such software have substantially coincided.
As a result, software development costs qualifying for capitalization have
been insignificant and, therefore, the Company has historically expensed
all software development costs.
3. CONCENTRATIONS OF RISK
A significant portion of the Company's revenues consists of licensing
software and providing consulting services to the U.S. paging industry,
which gives rise to a concentration of credit risk in receivables. The
Company performs on-going credit evaluations of its customers' financial
condition and generally requires no collateral. Revenues from companies in
the U.S. paging industry represented approximately 59% and 42% of total
revenues during the year ended December 31, 1997 and the period January 1,
1998 through December 9, 1998, respectively. Paging Network, Inc. (PageNet)
represented 45% and 25% of revenues during the year ended December 31, 1997
and the period January 1, 1998 through December 9, 1998, respectively. One
other customer represented 13% of revenues during the period January 1,
1998 through December 9, 1998.
4. INCOME TAXES
Effective at its incorporation on June 9, 1995, the Company elected to be
treated as an S Corporation for federal and California state tax purposes.
As a result of this election, the Company was not a taxable entity for
federal tax purposes from June 9, 1995, through December 9, 1998, and,
accordingly, the Company's net income was includable in the Federal income
tax returns of the Company's stockholders. No provision for federal income
taxes has been made in the accompanying financial statements for the period
from January 1, 1997, through December 9, 1998. Also as a result of this
election, the Company was taxed for California state income tax purposes at
the S Corporation state tax rate of 1.5% through December 9, 1998. The
accompanying financial statements include a provision of 1.5% of income
before taxes for California state income taxes for the year ended December
31, 1997, and the period ended December 9, 1998. Deferred income tax assets
and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities and are measured
using the California S Corporation state tax rate of 1.5%. The net deferred
tax asset or liability as of each balance sheet date, which is not
material, has been included in prepaid expenses and other current assets
and accrued liabilities in the accompanying balance sheet.
The pro forma provision for income taxes and net income presented in the
accompanying financial statements has been determined as if the Company
were taxed as a C Corporation for federal and state tax purposes. The pro
forma net deferred tax asset or liability as of each balance sheet date is
not material.
5. EMPLOYEE BENEFITS
The Company maintains a Section 401(k) Salary Deferral Plan (the Plan).
Employees 21 years of age or older and with one or more years of service to
the Company are eligible to participate in the Plan. Under the Plan, the
Company makes an annual contribution of a portion of the Company's profits
for the benefit of participating employees. The Company's expenses under
the Plan were $35,149 for the year ended
F-21
<PAGE> 363
December 31, 1997 and $21,517 for the period January 1, 1998 through
December 9, 1998. The Plan was terminated on December 9, 1998.
6. ACQUISITION OF THE COMPANY
On December 9, 1998, all of the outstanding stock of the Company was
acquired by PageNet for a total purchase price of approximately $2.4
million, comprised of cash consideration of $1.75 million and 100,000
shares of common stock of PageNet. The terms of the acquisition also
provide for additional consideration of up to $4.0 million payable at
various dates through March 31, 2001, if certain conditions are met.
F-22
<PAGE> 364
ANNEX B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
PAGING NETWORK, INC.,
ARCH COMMUNICATIONS GROUP, INC.
AND
ST. LOUIS ACQUISITION CORP.
DATED AS OF NOVEMBER 7, 1999
AND AMENDED AS OF
JANUARY 7, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 365
TABLE OF CONTENTS
ARTICLE I.
The Merger; Closing; Effective Time
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1.1. The Merger.................................................. 1
1.2. Closing..................................................... 1
1.3. Effective Time.............................................. 1
ARTICLE II.
Certificate of Incorporation and Bylaws of the Surviving Corporation
2.1. The Certificate of Incorporation............................ 2
2.2. The Bylaws.................................................. 2
ARTICLE III.
Directors & Officers
3.1. Directors of Arch........................................... 2
3.2. Directors of the Surviving Corporation...................... 2
3.3. Officers of the Surviving Corporation....................... 2
ARTICLE IV.
Effect of the Merger on Capital Stock; Exchange of Certificates
4.1. Effect on Capital Stock..................................... 2
4.2. Exchange of Certificates for Shares......................... 3
4.3. Dissenters' Rights.......................................... 5
4.4. Adjustments to Prevent Dilution............................. 5
4.5. Alternate Transaction Structure............................. 5
ARTICLE V.
Representations and Warranties
Representations and Warranties of PageNet, Arch and Merger
5.1. Sub......................................................... 5
ARTICLE VI.
Covenants
6.1. Interim Operations.......................................... 15
6.2. Acquisition Proposals....................................... 19
6.3. The Certificate Amendments.................................. 20
6.4. Information Supplied........................................ 20
6.5. Stockholders Meetings....................................... 20
6.6. Filings; Other Actions; Notification........................ 22
6.7. Access; Consultation........................................ 23
6.8. Affiliates.................................................. 23
</TABLE>
i
<PAGE> 366
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
6.9. Stock Exchange Listing...................................... 23
6.10. Publicity................................................... 24
6.11. Benefits.................................................... 24
6.12. Expenses.................................................... 24
6.13. Indemnification; Directors' and Officers' Insurance......... 25
6.14. Takeover Statute............................................ 26
6.15. Confidentiality............................................. 26
6.16. Tax-Free Reorganization..................................... 26
6.17. Senior Credit Facilities.................................... 26
6.18. The Exchange Offers......................................... 26
6.19. Bankruptcy Provisions....................................... 29
6.20. Rights Agreement............................................ 33
6.21. Preferred Stock............................................. 34
6.22. Spinoff..................................................... 34
ARTICLE VII.
Conditions
Conditions to Each Party's Obligation to Effect the
7.1. Merger...................................................... 34
7.2. Conditions to Obligations of Arch and Merger Sub............ 35
7.3. Conditions to Obligation of PageNet......................... 36
ARTICLE VIII.
Termination
8.1. Termination by Mutual Consent............................... 37
8.2. Termination by Either Arch or PageNet....................... 37
8.3. Termination by PageNet...................................... 38
8.4. Termination by Arch......................................... 38
8.5. Effect of Termination and Abandonment....................... 38
ARTICLE IX.
Miscellaneous and General
9.1. Survival.................................................... 40
9.2. Modification or Amendment................................... 40
9.3. Waiver of Conditions........................................ 40
9.4. Counterparts................................................ 40
9.5. Governing Law and Venue; Waiver of Jury Trial............... 40
9.6. Notices..................................................... 41
9.7. Entire Agreement............................................ 42
9.8. No Third Party Beneficiaries................................ 42
9.9. Obligations of Arch and of PageNet.......................... 42
9.10. Severability................................................ 42
9.11. Interpretation.............................................. 42
</TABLE>
ii
<PAGE> 367
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9.12. Captions.................................................... 42
9.13. Assignment.................................................. 42
</TABLE>
<TABLE>
<S> <C>
Exhibits
Certificate of Incorporation of the Surviving Corporation... Exhibit A
Arch Rights Agreement Amendment............................. Exhibit B
PageNet Affiliates Agreement................................ Exhibit C
</TABLE>
iii
<PAGE> 368
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Acquisition Proposal........................................ 6.2 (a)
Agreement................................................... preamble
Alternative Merger.......................................... 4.5
Alternative Merger Notice................................... 4.5
Arch........................................................ preamble
Arch Class B Common Stock................................... 5.1 (b)(ii)
Arch Common Stock........................................... 4.1 (a)
Arch Companies.............................................. 4.1 (a)
Arch Conditions to the Prepackaged Plan..................... 6.19
Arch Disclosure Letter...................................... 5.1
Arch Exchange Offer......................................... 6.18(a)
Arch Exchange Prospectus.................................... 6.18(d)
Arch Exchange Registration Statement........................ 6.18(d)
Arch Minimum Condition...................................... 6.18(b)
Arch Notes.................................................. 6.18(a)
Arch Preferred Shares....................................... 5.1 (b)(ii)
Arch Required Consents...................................... 5.1 (d)(i)
Arch Requisite Vote......................................... 5.1 (c)(ii)
Arch Rights Agreement....................................... 5.1 (b)(ii)
Arch Series B Preferred Share............................... 5.1 (b)(ii)
Arch Series C Preferred Share............................... 5.1 (b)(ii)
Arch Stock Plans............................................ 5.1 (b)(ii)
Arch Stockholders Approval.................................. 6.5 (b)
Arch Stockholders Meeting................................... 6.5 (b)
Arch Termination Fee........................................ 8.5 (c)
Audit Date.................................................. 5.1 (f)
Bankruptcy and Equity Exception............................. 5.1 (c)(i)
Bankruptcy Case............................................. 6.19
Bankruptcy Code............................................. 6.19
Bankruptcy Court............................................ 6.19
Bylaws...................................................... 2.2
Certificate................................................. 4.1 (a)
Certificate Amendments...................................... recitals
Certificate of Merger....................................... 1.3
Charter..................................................... 2.1
Closing..................................................... 1.2
Closing Date................................................ 1.2
Code........................................................ recitals
Communications Act.......................................... 5.1 (d)(i)
Compensation and Benefit Plans.............................. 5.1 (h)(i)
Confidentiality Agreement................................... 6.15
Contracts................................................... 5.1 (d)(ii)
Costs....................................................... 6.13(a)
</TABLE>
iv
<PAGE> 369
<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Current Premium............................................. 6.13(c)
D&O Insurance............................................... 6.13(c)
Delaware Courts............................................. 9.5 (a)
DGCL........................................................ 1.1
Disclosure Letter........................................... 5.1
Dismissal Order............................................. 6.19(a)(v)
Distributed Interests....................................... 6.22
Distributed Subsidiary...................................... 6.22
Effective Time.............................................. 1.3
Environmental Law........................................... 5.1 (n)
ERISA....................................................... 5.1 (h)(i)
ERISA Affiliate............................................. 5.1 (h)(i)
Exchange Act................................................ 5.1 (b)(i)
Exchange Agent.............................................. 4.2 (a)
Exchange Offers............................................. 6.18(a)
Exchange Offers Expiration Date............................. 6.18(h)
Exchange Ratio.............................................. 4.1 (a)
Exchange Prospectus......................................... 6.18(d)
Exchange Registration Statements............................ 6.18(d)
Excluded PageNet Shares..................................... 4.1 (a)
Exclusivity Provision....................................... 6.19(d)
Exit Financing.............................................. 6.19
Extended Determination Date................................. 6.19(a)(iii)
FCC......................................................... 5.1 (d)(i)
FCC Regulations............................................. 5.1 (d)(i)
Final Confirmation Order.................................... 6.19
Final Order................................................. 7.1 (c)
GAAP........................................................ 5.1 (e)
Governmental Entity......................................... 5.1 (d)(i)
Governmental Regulations.................................... 5.1 (d)(i)
Hazardous Substance......................................... 5.1 (n)
HSR Act..................................................... 5.1 (d)(i)
Indemnified Parties......................................... 6.13(a)
Indenture Amendments........................................ 6.18(c)
Initial Determination Date.................................. 6.19
Initial Merger Motion....................................... 6.19(d)
Initial Merger Order........................................ 6.19(d)
Interim Financing........................................... 6.19
Involuntary Insolvency Event................................ 6.19(a)(v)
Involuntary Insolvency Event Date........................... 6.19(a)(v)
IRS......................................................... 5.1 (h)(ii)
Knowledgeable Executives.................................... 5.1 (g)
Laws........................................................ 5.1 (i)
Material Adverse Effect..................................... 5.1 (a)
</TABLE>
v
<PAGE> 370
<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Merger...................................................... recitals
Merger Consideration........................................ 4.1 (a)
Merger Sub.................................................. preamble
NASDAQ...................................................... 6.9
Note Consents............................................... 6.18(b)
Note Waivers................................................ 6.18(c)
Notes....................................................... 6.18(a)
Notes Exchange Agent........................................ 6.18(i)
Order....................................................... 7.1 (d)
PageNet..................................................... preamble
PageNet Affiliates Agreement................................ 6.8
PageNet Conditions to the Prepackaged Plan.................. 6.19
PageNet Disclosure Letter................................... 5.1
PageNet Exchange Offer...................................... 6.18(a)
PageNet Exchange Prospectus................................. 6.18(d)
PageNet Minimum Condition................................... 6.18(b)
PageNet Notes............................................... 6.18(a)
PageNet Option.............................................. 6.11(a)(i)
PageNet Required Consents................................... 5.1 (d)(i)
PageNet Rights Agreement.................................... 5.1 (b)(i)
PageNet Secured Creditors................................... 6.17
PageNet Share............................................... 4.1 (a)
PageNet Stock Plans......................................... 5.1 (b)(i)
PageNet Stockholders Approval............................... 6.5 (a)
PageNet Stockholders Meeting................................ 6.5 (a)
PageNet Termination Fee..................................... 8.5 (b)
Pension Plan................................................ 5.1 (h)(ii)
Permits..................................................... 5.1 (i)
Person...................................................... 4.2 (a)
Prepackaged Plan............................................ 6.19
Prospectus/Proxy Statement.................................. 6.4
PUC......................................................... 5.1 (d)(i)
Reports..................................................... 5.1 (e)
Representatives............................................. 6.2 (a)
Requisite Bankruptcy Vote of the PageNet Notes.............. 6.19
Requisite Bankruptcy Vote of the PageNet Secured
Creditors................................................. 6.19
Requisite Conditions to the Prepackaged Plan................ 6.19
Rule 145 Affiliates......................................... 6.8
S-4 Registration Statement.................................. 6.4
SEC......................................................... 5.1 (e)
Section 16 Person........................................... 6.11(a)(iii)
Securities Act.............................................. 5.1 (d)(i)
Series C Consent Agreement.................................. 6.21(a)
Series C Consideration...................................... 6.21(a)
</TABLE>
vi
<PAGE> 371
<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Series C Exchange Ratio..................................... 6.21(a)
Significant Investees....................................... 5.1 (d)(ii)
Significant Subsidiaries.................................... 5.1 (b)(i)
Spinoff..................................................... 6.22
Spinoff Dividend............................................ 6.22
Spinoff Record Date......................................... 6.22
State Laws.................................................. 5.1 (d)(i)
Subsidiary.................................................. 5.1 (a)
Substitute Option........................................... 6.11(a)(i)
Superior Proposal........................................... 6.2 (a)
Surviving Corporation....................................... 1.1
Takeover Statute............................................ 5.1 (j)
Tax......................................................... 5.1 (l)
Tax Return.................................................. 5.1 (l)
Taxable..................................................... 5.1 (l)
Termination Date............................................ 8.2
</TABLE>
vii
<PAGE> 372
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement"), dated as of November 7,
1999, as amended by the Amendment dated January [7], 2000, among Paging Network,
Inc., a Delaware corporation ("PageNet"), Arch Communications Group, Inc., a
Delaware corporation ("Arch"), and St. Louis Acquisition Corp., a Delaware
corporation that is a wholly owned subsidiary of Arch ("Merger Sub").
RECITALS
WHEREAS, the respective Boards of Directors of each of Arch, Merger Sub and
PageNet have approved, recommended and declared advisable this Agreement and the
merger of Merger Sub with and into PageNet (the "Merger") upon the terms and
subject to the conditions set forth in this Agreement;
WHEREAS, the parties hereto intend, by executing and delivering this
Agreement, to adopt a plan of reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and to
cause the Merger and the other transactions which are part of this plan of
reorganization to qualify as a "reorganization" as therein defined;
WHEREAS, the Arch Board of Directors has approved, recommended and declared
advisable certain amendments to its Certificate of Incorporation to effectuate
the actions described herein (the "Certificate Amendments"), contemporaneously
upon and in connection with the Merger;
WHEREAS, Arch, Merger Sub and PageNet desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained in this
Agreement, the parties hereto agree as follows:
ARTICLE I.
THE MERGER; CLOSING; EFFECTIVE TIME
1.1. The Merger. Upon the terms and subject to the conditions set forth
in this Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub
shall be merged with and into PageNet and the separate corporate existence of
Merger Sub shall thereupon cease. PageNet shall be the surviving corporation in
the Merger (sometimes referred to as the "SURVIVING CORPORATION") and shall
continue to be governed by the laws of the State of Delaware, and the separate
corporate existence of PageNet with all its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger, except as set
forth in Article III of this Agreement. The Merger shall have the effects
specified in the Delaware General Corporation Law, as amended (the "DGCL").
1.2. Closing. The closing of the Merger (the "Closing") shall take place:
(i) at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts,
at 9:00 A.M., local time, on the second business day after the date on which the
last to be fulfilled or waived of the conditions set forth in Article VII (other
than those conditions that by their nature are to be satisfied at the Closing,
but subject to the fulfillment or waiver of those conditions) shall be satisfied
or waived in accordance with this Agreement; or (ii) at such other place and
time and/or on such other date as Arch and PageNet may agree in writing (the
"Closing Date").
1.3. Effective Time. At the Closing, Arch and PageNet will cause a
Certificate of Merger (the "Certificate of Merger") to be executed,
acknowledged, and filed with the Secretary of State of the State of Delaware as
provided in Section 251 of the DGCL. The Merger shall become effective at the
time when the Certificate of Merger has been duly filed with the Secretary of
State of the State of Delaware or such other later time as shall be agreed upon
by the parties and set forth in the Certificate of Merger in accordance with the
DGCL (the "Effective Time").
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ARTICLE II.
CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION
2.1. The Certificate of Incorporation. The certificate of incorporation
of PageNet, amended and restated in its entirety as set forth in Exhibit A,
shall be the certificate of incorporation of the Surviving Corporation (the
"Charter"), until duly amended as provided therein or by applicable law.
2.2. The Bylaws. The bylaws of Merger Sub, as in effect immediately prior
to the Effective Time, shall be the bylaws of the Surviving Corporation (the
"Bylaws"), until thereafter amended as provided therein or by applicable law.
ARTICLE III.
DIRECTORS & OFFICERS
3.1. Directors of Arch. Arch shall take all actions necessary (subject to
applicable law and any necessary stockholder approval) to cause, at the
Effective Time, the number of directors comprising the full Board of Directors
of Arch to be comprised of twelve directors, six of which shall be nominated by
the Board of Directors of Arch, and six of which shall be nominated by the Board
of Directors of PageNet, each such person to serve from the Effective Time until
his or her successor has been duly elected and qualified, or until his or her
earlier death, resignation, or removal in accordance with the Charter and the
Bylaws; provided, however, that of the six directors nominated by the Board of
Directors of PageNet, one shall be designated by each of the three holders of
PageNet Notes holding the greatest percentage in aggregate principal amount of
the PageNet Notes; and if and to the extent that any such holder declines to
make such designation, the number of directors nominated by the Board of
Directors of PageNet shall be decreased and the number of directors nominated by
the Board of Directors of Arch shall be increased. The directors nominated by
PageNet shall be divided as nearly evenly as is possible among the classes of
directors of Arch.
3.2. Directors of the Surviving Corporation. The directors of Merger Sub
at the Effective Time shall, from and after the Effective Time, be the directors
of the Surviving Corporation until his or her successor has been duly elected
and qualified, or until his or her earlier death, resignation, or removal in
accordance with the Charter and the Bylaws;
3.3. Officers of the Surviving Corporation. The officers of PageNet at
the Effective Time shall at the Effective Time, be the officers of the Surviving
Corporation until his or her successor has been duly elected and qualified, or
until their earlier death, resignation, or removal in accordance with the
Charter and the Bylaws.
ARTICLE IV.
EFFECT OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES
4.1. Effect on Capital Stock. At the Effective Time, the Merger shall
have the following effects on the capital stock of Arch, Merger Sub and PageNet,
without any action on the part of the holder of any capital stock of Arch,
Merger Sub or PageNet:
(a) Merger Consideration. Each share of common stock, par value $0.01
per share, of PageNet (each, a "PageNet Share") issued and outstanding
immediately prior to the Effective Time (excluding PageNet Shares
(collectively, "Excluded PageNet Shares") that are owned by Arch, Merger
Sub or any direct or indirect, wholly owned subsidiary of Arch or Merger
Sub (collectively, the "Arch Companies")), shall be converted into and
become exchangeable for 0.1247 of a share (the "Exchange Ratio") of common
stock, par value $0.01 per share, of Arch (the "Arch Common Stock"),
subject to adjustment as provided in Section 4.4, (the "Merger
Consideration"). At the Effective Time, all PageNet Shares shall no longer
be outstanding, shall be canceled and retired and shall cease to exist, and
each certificate (a "Certificate") formerly representing any of such
PageNet Shares (other than Excluded PageNet Shares) shall thereafter
represent only the right to receive the Merger Consideration
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and the right, if any, to receive a distribution or dividend pursuant to
Section 4.2(b)(i), in each case without interest, or to vote pursuant to
Section 4.2(b)(ii).
(b) Cancellation of Excluded PageNet Shares. At the Effective Time,
each Excluded PageNet Share shall no longer be outstanding, shall be
canceled and retired without payment of any consideration therefor, and
shall cease to exist.
(c) Merger Sub Capital Stock. At the Effective Time, each share of
Common Stock, par value $0.01 per share, of Merger Sub issued and
outstanding immediately prior to the Effective Time shall be converted into
one share of common stock of the Surviving Corporation, and the Surviving
Corporation shall thereby become a wholly owned subsidiary of Arch.
4.2. Exchange of Certificates for Shares.
(a) Exchange Procedures. Promptly after the Effective Time, Arch
shall cause its transfer agent or another exchange agent selected by Arch
with PageNet's prior approval (the "Exchange Agent"), which shall not be
unreasonably withheld, to mail to each holder of record as of the Effective
Time of a Certificate: (i) a letter of transmittal specifying that delivery
of the Certificates shall be effected, and that risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates (or
affidavits of loss in lieu thereof) to the Exchange Agent in accordance
with the terms and conditions of such letter of transmittal, such letter of
transmittal to be in such form and have such other provisions as Arch and
PageNet may reasonably agree; and (ii) instructions for exchanging the
Certificates for: (A) certificates representing shares of Arch Common
Stock; and (B) any unpaid dividends and other distributions due to such
holder with respect to such shares, including, with respect to holders of
PageNet Shares at the Spinoff Record Date (as defined in Section 6.22), the
Distributed Interests (as defined in Section 6.22). Subject to Section
4.2(g), upon proper surrender of a Certificate for cancellation (or
affidavits of loss in lieu thereof) to the Exchange Agent together with
such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor: (x) a certificate
representing that number of shares of Arch Common Stock that such holder is
entitled to receive pursuant to this Article IV and, with respect to
PageNet Shares at the Spinoff Record Date, certificates representing the
Distributed Interests that such holder is entitled pursuant to Section
6.22; and (y) a check in the amount (after giving effect to any required
tax withholdings) of any dividends or other distributions that such holder
has the right to receive pursuant to the provisions of this Article IV. The
Certificate so surrendered shall forthwith be canceled. No interest will be
paid or accrued on any amount payable upon due surrender of any
Certificate. In the event of a transfer of ownership of PageNet Shares that
is not registered in the transfer records of PageNet, a certificate
representing the proper number of shares of Arch Common Stock and, with
respect to PageNet Shares at the Spinoff Record Date, certificates
representing the Distributed Interests, together with a check for any
dividends or distributions with respect thereto, may be issued and/or paid
to such a transferee if the Certificate formerly representing such PageNet
Shares is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and to evidence that all
applicable stock transfer taxes have been paid. If any certificate for
shares of Arch Common Stock is to be issued in a name other than that in
which the Certificate surrendered in exchange therefor is registered, it
shall be a condition of such exchange that the Person (as defined below)
requesting such exchange shall pay all transfer and other taxes required by
reason of the issuance of certificates for shares of Arch Common Stock
and/or Distributed Interests in a name other than that of the registered
holder of the Certificate surrendered, or shall establish to the
satisfaction of Arch or the Exchange Agent that such tax has been paid or
is not applicable.
The term "Person" means any individual, corporation (including
not-for-profit), general or limited partnership, limited liability company,
joint venture, estate, trust, association, organization, Governmental Entity (as
defined in Section 5.1(d)(i)), or other entity of any kind or nature.
(b) Distributions with Respect to Unexchanged Shares; Voting.
(i) Whenever a dividend or other distribution is declared by Arch
with respect to Arch Common Stock, the record date for which is at or
after the Effective Time, that declaration shall
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include dividends or other distributions with respect to all shares of
Arch Common Stock issuable pursuant to this Agreement. No dividends or
other distributions with respect to such Arch Common Stock shall be paid
to any holder of any unsurrendered Certificate until such Certificate is
surrendered for exchange in accordance with this Article IV. Subject to
the effect of applicable Laws, following surrender of any such
Certificate, there shall be issued or paid to the holder of the
certificates representing shares of Arch Common Stock issued in exchange
therefor, without interest: (A) at the time of such surrender, the
dividends or other distributions with a record date after the Effective
Time and a payment date on or prior to the date of issuance of such
shares of Arch Common Stock and not previously paid; and (B) at the
appropriate payment date, the dividends or other distributions payable
with respect to such shares of Arch Common Stock with a record date
after the Effective Time and prior to the date of issuance of such
shares of Arch Common Stock but with a payment date subsequent to
surrender. For purposes of dividends or other distributions with respect
to shares of Arch Common Stock, all such shares to be issued pursuant to
the Merger shall be deemed issued and outstanding as of the Effective
Time.
(ii) At any meeting of stockholders of Arch with a record date at
or after the Effective Time, registered holders of unsurrendered
Certificates shall be entitled to vote the number of shares of Arch
Common Stock represented by such Certificates, regardless of whether
such holders have exchanged their Certificates; provided, however, that
any such vote shall be at the times, upon the conditions, and in the
manner prescribed by the certificate of incorporation and bylaws of
Arch.
(c) Transfers. From and after the Effective Time, there shall be no
transfers of PageNet Shares or Arch Series C Preferred Shares that were
outstanding immediately prior to the Effective Time recorded on the stock
transfer books of PageNet or Arch, as the case may be.
(d) Fractional Shares. Notwithstanding any other provision of this
Agreement to the contrary, no certificates or scrip representing fractional
shares of Arch Common Stock will be issued in the Merger, but in lieu
thereof, each holder of Certificates otherwise entitled to a fractional
share of Arch Common Stock will be entitled to receive, from the Exchange
Agent in accordance with the provisions of this Section 4.2(d), a cash
payment in lieu of such fractional shares of Arch Common Stock determined
by multiplying such fraction (rounded to the nearest one-hundredth of a
share) by the average closing price of a share of Arch Common Stock, as
reported in The Wall Street Journal, New York City edition, on the ten (10)
days immediately prior to the Effective Time. As soon as practicable after
the determination of the amount of cash, if any, to be paid to the holders
of Certificates in lieu of any fractional shares of Arch Common Stock, the
Exchange Agent shall make available such amounts of cash to such holders of
Certificates, without interest thereon.
(e) Termination of Exchange Period; Unclaimed Stock. Any shares of
Arch Common Stock, and any portion of the dividends or other distributions
with respect to the Arch Common Stock deposited by Arch with the Exchange
Agent (including the proceeds of any investments thereof) that remain
unclaimed by the holders of Certificates 180 days after the Effective Time
shall be re-delivered to Arch. Any holders of Certificates who have not
theretofore complied with this Article IV shall thereafter be entitled to
look only to the Surviving Corporation for exchange of shares of Arch
Common Stock, and any dividends and other distributions with respect
thereto issuable and/or payable pursuant to Section 4.1, Section 4.2(b),
and Section 4.2(d) upon due surrender of their Certificates (or affidavits
of loss in lieu thereof), in each case, without any interest thereon.
Notwithstanding the foregoing, none of Arch, the Exchange Agent, nor any
other Person shall be liable to any former holder of Certificates for any
amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(f) Lost, Stolen or Destroyed Certificates. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the Person claiming such Certificate to be
lost, stolen or destroyed, and the posting by such Person of a bond in the
form customarily required by Arch as indemnity against any claim that may
be made against it with respect to such Certificate, Arch will issue the
shares of Arch Common Stock and the Exchange Agent will issue stock and any
dividends
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and other distributions with respect thereto issuable or payable in
exchange for such lost, stolen, or destroyed Certificate pursuant to
Section 4.1, Section 4.2(b) and Section 4.2(d), in each case, without
interest.
(g) Affiliates. Notwithstanding anything in this Agreement to the
contrary, Certificates surrendered for exchange by any Rule 145 Affiliate
(as determined pursuant to Section 6.8) of PageNet shall not be exchanged
until Arch has received a written agreement from such Person as provided in
Section 6.8.
4.3. Dissenters' Rights. In accordance with Section 262 of the DGCL, no
appraisal rights will be available to holders of PageNet Shares in connection
with the Merger.
4.4. Adjustments to Prevent Dilution. In the event that prior to the
Effective Time, solely as a result of a distribution, reclassification, stock
split (including a reverse split), stock dividend or stock distribution, or
other similar transaction, there is a change in the number of PageNet Shares,
Arch Series C Preferred Shares, Arch Common Stock, or securities convertible or
exchangeable into, or exercisable for, PageNet Shares, Arch Series C Preferred
Shares or Arch Common Stock issued and outstanding, the Exchange Ratio and the
Series C Exchange Ratio shall be equitably adjusted to eliminate the effects of
such event.
4.5. Alternate Transaction Structure. At any time prior to the
effectiveness of the S-4 Registration Statement (as defined herein), either Arch
or PageNet may notify the other party (the "Alternative Merger Notice") that it
desires to restructure the Merger or the other transactions contemplated hereby
in a manner contemplated to (i) increase the likelihood that the Merger would be
treated as a tax-free reorganization within the meaning of Section 368(a) of the
Code, (ii) decrease any potential tax liability of PageNet, Arch or the
Surviving Corporation after the Effective Time, (iii) provide greater
operational flexibility to Arch and the Surviving Corporation after the
Effective Time, or (iv) increase the number of PageNet Shares (or Distributed
Interests) offered to holders of PageNet Notes or the number of shares of Arch
Common Stock offered to holders of Arch Notes in the Exchange Offers (with a
corresponding reduction in the number of shares offered to the holders of
PageNet Shares (or Distributed Interests) or the holders of Arch Common Stock,
respectively). Upon delivery of the Alternative Merger Notice, the parties to
this Agreement shall cooperate with each other and use their respective
reasonable best efforts to determine the manner in which the Merger, the
Agreement and the transactions contemplated hereby shall be restructured (the
Merger, restructured as contemplated by the parties pursuant to this Section
4.5, shall be referred to herein as the "Alternative Merger"). With the written
consent of each of the parties to this Agreement (such consent not to be
unreasonably withheld), the Merger, this Agreement and the other transactions
contemplated hereby may be modified to reflect the Alternative Merger with a
view to ensuring that the parties hereto are not adversely affected by the
restructuring.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
5.1. Representations and Warranties of PageNet, Arch and Merger Sub.
Except as set forth in the corresponding sections or subsections of the
respective disclosure letters, dated as of the date of this Agreement, and
delivered by PageNet to Arch or by Arch to PageNet (each a "Disclosure Letter,"
and the "Pagenet Disclosure Letter" and the "Arch Disclosure Letter,"
respectively), as the case may be, PageNet (except for subparagraphs (b)(ii),
(c)(ii), (j)(ii) and (o)(ii) below and references in subparagraphs (a) and (e)
below to documents made available by Arch to PageNet) represents and warrants to
Arch and Merger Sub, and Arch, on behalf of itself and Merger Sub (except for
subparagraphs (b)(i), (c)(i), (j)(i), and (o)(i) below, and references in
subparagraphs (a) and (e) below to documents made available by PageNet to Arch)
represents and warrants to PageNet, that:
(a) Organization, Good Standing and Qualification. Each of it and its
Subsidiaries is a corporation duly organized, validly existing, and in good
standing under the laws of its respective jurisdiction of organization and
has all requisite corporate or similar power and authority to own and
operate its properties and assets and to carry on its business as presently
conducted, and is qualified to do business
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and is in good standing as a foreign corporation in each jurisdiction where
the ownership or operation of its properties or conduct of its business
requires such qualification, except when the failure to be so qualified or
in good standing, when taken together with all other such failures, is not
reasonably likely to have a Material Adverse Effect (as defined below) on
it. It has made available to Arch, in the case of PageNet, and to PageNet,
in the case of Arch, a complete and correct copy of its certificate of
incorporation and bylaws, each as amended to date. Such certificates of
incorporation and bylaws are in full force and effect.
The term "Subsidiary" means, with respect to PageNet or Arch, as the case
may be, any entity, whether incorporated or unincorporated, of which at least a
majority of the securities or other ownership interests having by their terms
ordinary voting power to elect at least a majority of the Board of Directors or
other persons performing similar functions is directly or indirectly owned by
such party.
The term "Material Adverse Effect" means, with respect to any Person, a
material adverse effect on the business, assets (including licenses, franchises
and other intangible assets), financial condition and results of operations of
such Person and its Subsidiaries, taken as a whole; provided, however, that
Material Adverse Effect shall exclude any effect resulting from, or related to,
changes or developments involving: (1) a prospective change arising out of any
proposed or adopted legislation, or any other proposal or enactment by any
governmental, regulatory, or administrative authority; (2) general conditions
applicable to the U.S. economy, including changes in interest rates; or (3)
conditions affecting the U.S. wireless telecommunications industry, in each case
taken as a whole.
Reference to "the other party" means, with respect to PageNet, Arch and
means, with respect to Arch, PageNet.
(b) Capital Structure.
(i) The authorized capital stock of PageNet consists of 250,000,000
PageNet Shares, of which 103,960,240 PageNet Shares were issued and
outstanding and no PageNet Shares were held in treasury as of the close of
business on November 5, 1999, and 25,000,000 shares of preferred stock, of
which no shares were issued and outstanding as of the close of business on
November 5, 1999. All of the outstanding PageNet Shares have been duly
authorized and are validly issued, fully paid and nonassessable. There are
no PageNet Shares reserved for issuance pursuant to the Shareholder Rights
Agreement, dated as of September 8, 1994, between PageNet and The First
National Bank of Boston, as Rights Agent, as amended (the "PageNet Rights
Agreement"), and PageNet Shares subject to issuance as set forth below, as
of the date of this Agreement, and PageNet has no PageNet Shares or
preferred stock reserved for, or subject to, issuance. As of November 5,
1999, there were 9,887,588 PageNet Shares that PageNet was obligated to
issue pursuant to PageNet's stock plans, at a weighted average exercise
price of $9.2637 per PageNet Share, and each of such plans is listed in
Section 5.1(b)(i) of the PageNet Disclosure Letter (collectively, the
"PageNet Stock Plans"). Each of the outstanding shares of capital stock or
other securities of each of PageNet's "Significant Subsidiaries" (as
defined in Rule 1.02(w) of Regulation S-X promulgated pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including
any Subsidiaries that, if aggregated, would together constitute a
Significant Subsidiary) is duly authorized, validly issued, fully paid and
nonassessable and owned by PageNet or a direct or indirect wholly owned
subsidiary of PageNet, free and clear of any lien, pledge, security
interest, claim or other encumbrance. Except as set forth above, as of the
date of this Agreement there are no preemptive or other outstanding rights,
options, warrants, conversion rights, stock appreciation rights, redemption
rights, repurchase rights, agreements, arrangements or commitments to issue
or to sell any shares of capital stock or other securities of PageNet or
any of its Significant Subsidiaries or any securities or obligations
convertible or exchangeable into, or exercisable for, or giving any Person
a right to subscribe for or acquire, any securities of PageNet or any of
its Significant Subsidiaries, and no securities or obligation evidencing
such rights are authorized, issued or outstanding. As of the date hereof,
PageNet does not have outstanding any bonds, debentures, notes or other
debt obligations, the holders of which have the right to vote (or
convertible into or exercisable for securities having the right to vote)
with the stockholders of PageNet on any matter. No PageNet Shares are held
by a Subsidiary of PageNet.
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(ii) The authorized capital stock of Arch consists of 65,000,000
shares of Arch Common Stock, of which 45,837,186 shares of Arch Common
Stock were issued and outstanding and no shares of Arch Common Stock were
held in treasury as of the close of business on November 5, 1999,
10,000,000 shares of Class B common stock, par value $0.01 per share, of
Arch (the "Arch Class B Common Stock") of which 5,360,261 shares of Arch
Class B Common Stock were issued and outstanding as of the close of
business on November 5, 1999, and 10,000,000 shares of preferred stock, of
which (x) 250,000 were designated Series C Convertible Preferred Stock, par
value $0.01 per share (each a "Arch Series C Preferred Share"), of which
250,000 shares were issued and outstanding as of the close of business on
November 5, 1999, and (y) 300,000 shares of which were designated Series B
Junior Participating Preferred Stock, par value $0.01 per share (each a
"Arch Series B Preferred Share," collectively the "Arch Series B Preferred
Shares"), none of which were outstanding as of the close of business on
November 5, 1999 (the Arch Series B Preferred Shares together with the Arch
Series C Preferred Shares, the "Arch Preferred Shares"). All of the
outstanding shares of Arch Common Stock, Arch Class B Common Stock and Arch
Preferred Shares have been duly authorized and are validly issued, fully
paid and nonassessable. Other than 300,000 Arch Series B Preferred Shares
reserved for issuance pursuant to the Rights Agreement, dated as of October
13, 1995, between Arch and The Bank of New York, as Rights Agent, as
amended (the "Arch Rights Agreement"), and Arch Common Stock subject to
issuance as set forth below, and Arch Preferred Shares, Arch has not
authorized, issued, or reserved for issuance any common stock, preferred
stock, or other shares of capital stock as of the date of this Agreement.
As of November 5, 1999, there were 1,834,253 shares of Arch Common Stock
that Arch was obligated to issue pursuant to Arch' stock plans, at a
weighted average exercise price of $10.18 per share of Arch Common Stock,
each of such plans is listed in Section 5.1(b)(ii) of the Arch Disclosure
Letter (collectively the "Arch Stock Plans"), and 5,902,702 shares of Arch
Common Stock that Arch was obligated to issue pursuant to outstanding
warrants having an expiration date of September 1, 2001 and an effective
exercise price of $9.03 per Share of Arch Common Stock. As of the date
hereof, each outstanding Arch Series C Preferred Share is convertible into
6.7444 shares of Arch Common Stock. Each of the outstanding shares of
capital stock or other securities of each of Arch' Significant Subsidiaries
is duly authorized, validly issued, fully paid and nonassessable and owned
by Arch or a direct or indirect wholly owned Subsidiary of Arch, free and
clear of any lien, pledge, security interest, claim, or other encumbrance.
Except as set forth above and except pursuant to the Arch Series B
Preferred Shares or the Arch Series C Preferred Shares, there are no
preemptive or other outstanding rights, options, warrants, conversion
rights, stock appreciation rights, redemption rights, repurchase rights,
agreements, arrangements or commitments to issue or sell any shares of
capital stock or other securities of Arch or any of its Significant
Subsidiaries or any securities or obligations convertible or exchangeable
into, or exercisable for, or giving any Person a right to subscribe for or
acquire, any securities of Arch or any of its Significant Subsidiaries, and
no securities or obligations evidencing such rights are authorized, issued
or outstanding. Arch does not have outstanding any bonds, debentures, notes
or other debt obligations, the holders of which have the right to vote (or
convertible into or exercisable for securities having the right to vote)
with the stockholders of Arch on any matter. No shares of Arch Common Stock
or Arch Preferred Shares are held by a Subsidiary of Arch. The authorized
capital stock of Merger Sub consists of 1,000 shares of Common Stock, par
value $0.01 per share, all of which are validly issued and outstanding. All
of the issued and outstanding capital stock of Merger Sub is, and at the
Effective Time will be, owned by Arch, and there are (i) no other shares of
capital stock or other voting securities of Merger Sub, (ii) no securities
of Merger Sub convertible into or exchangeable for shares of capital stock
or other voting securities of Merger Sub and (iii) no options or other
rights to acquire from Merger Sub, and no obligations of Merger Sub to
issue, any capital stock, other voting securities or securities convertible
into or exchangeable for capital stock or other voting securities of Merger
Sub. Merger Sub has not conducted any business prior to the date of this
Agreement and has no, and prior to the Effective Time will have no, assets,
liabilities or obligations of any nature other than those incident to its
formation and pursuant to this Agreement and the Merger and the other
transactions contemplated by this Agreement.
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(c) Corporate Authority; Approval and Fairness.
(i) PageNet has all requisite corporate power and authority and has
taken all corporate action necessary in order to execute, deliver and
perform its obligations under this Agreement and, subject only to adoption
of this Agreement and approval of the Merger and the amendment to the
PageNet certificate of incorporation to increase the number of PageNet
Shares authorized to the amount sufficient to complete the transactions
contemplated by this Agreement by the holders of a majority of the PageNet
Shares in accordance with applicable law and PageNet's bylaws and charter
and to the receipt of PageNet Required Consents (as defined in Section
5.1(d)(i)), to consummate the Merger. This Agreement has been duly executed
and delivered by PageNet and is a valid and binding agreement of PageNet,
enforceable against PageNet in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles (the "Bankruptcy and Equity
Exception"). The Board of Directors of PageNet: (A) has unanimously
approved and declared advisable this Agreement and the other transactions
contemplated by this Agreement; and (B) has received the opinion of each of
its financial advisors, Houlihan Lokey Howard & Zukin Capital, Goldman,
Sachs & Co. and Morgan Stanley Dean Witter, in a customary form and to the
effect that the Merger Consideration and the Distributed Interests, taken
as a whole, to be received by the holders of PageNet Shares, on the date of
such opinion, is fair to such holders from a financial point of view. The
PageNet Shares when issued pursuant to the PageNet Exchange Offer (as
defined in Section 6.18(a)), will be validly issued, fully paid and
nonassessable, and no stockholder of PageNet will have any preemptive right
of subscription or purchase with respect thereto.
(ii) Arch and Merger Sub each has all requisite corporate power and
authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under this Agreement and the Series C
Consent Agreement and, subject only to adoption of the Certificate
Amendments (or this Agreement and the Alternative Merger if Arch is a party
to the Alternative Merger) and the other transactions contemplated by this
Agreement pursuant to this Agreement by a majority of the votes of the Arch
Common Stock and Arch Series C Preferred Shares voting together and a
majority of the votes of the Arch Series C Preferred Shares (for certain of
the Certificate Amendments) in accordance with applicable law and Arch
certificate of incorporation and bylaws (the "Arch Requisite Vote"), and to
the receipt of the Arch Required Consents (as defined in Section
5.1(d)(i)), to consummate the Merger. This Agreement has been duly executed
and delivered by Arch and Merger Sub and is a valid and binding agreement
of Arch and Merger Sub, enforceable against Arch and Merger Sub in
accordance with its terms, subject to the Bankruptcy and Equity Exception.
The Board of Directors of Arch: (A) has unanimously approved and declared
advisable this Agreement and the Series C Consent Agreement and the other
transactions contemplated by this Agreement and the Series C Consent
Agreement; and (B) has received the opinion of its financial advisor, Bear,
Stearns & Co. Inc., in a customary form and to the effect that the Exchange
Ratio, as of the date of such opinion, is fair to the public stockholders
of Arch from a financial point of view. The shares of Arch Common Stock,
when issued pursuant to this Agreement or the Arch Exchange Offer, will be
validly issued, fully paid and nonassessable, and no stockholder of Arch
will have any preemptive right of subscription or purchase with respect
thereto.
(d) Government Filings; No Violations.
(i) Other than the filings, notices and/or approvals: (A) pursuant to
Section 1.3 of this Agreement, or, in connection with the Bankruptcy Case
and the Prepackaged Plan, the Final Confirmation Order; (B) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Exchange Act, and the Securities Act of 1933, as amended (the
"Securities Act"); (C) of the Federal Communications Commission (the "FCC")
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"), or the rules, regulations, and policies of the FCC (the "FCC
Regulations"); (D) of any state public utility commissions or similar state
regulatory bodies (each, a "PUC") identified in its respective Disclosure
Letter pursuant to applicable state laws (as defined in Section 5.1(i))
regulating the paging or other telecommunications business ("State Laws");
(E) to comply with state securities or "blue-sky" laws; and (F) of any
local, state or federal governmental
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authorities required for a change in ownership of transmission sites (all
of such filings and/or notices of Arch being referred to as the "Arch
Required Consents" and of PageNet being referred to as the "PageNet
Required Consents"), no notices, reports or other filings are required to
be made by it with, nor are any consents, registrations, approvals, permits
or authorizations required to be obtained by it from, any governmental or
regulatory authority, court, agency, commission, body or other governmental
entity ("Governmental Entity"), in connection with the execution and
delivery of this Agreement by it and the consummation by it of the Merger
and the other transactions contemplated by this Agreement, except those
that the failure to make or obtain are not, individually or in the
aggregate, reasonably likely to have a Material Adverse Effect on it or
prevent, materially delay or materially impair its ability to (x)
consummate the transactions contemplated by this Agreement or (y) operate
its business following the Effective Time.
The term "Governmental Regulations" includes the HSR Act, the
Communications Act, the FCC Regulations, State Laws, and any other antitrust,
competition, or telecommunications Law of the United States of America or any
other nation, province, territory or jurisdiction that must be satisfied or
complied with in order to consummate and make effective the Merger and the other
transactions contemplated by this Agreement.
(ii) The execution, delivery and performance of this Agreement by it
do not, and the consummation by it of the Merger and the other transactions
contemplated by this Agreement will not, constitute or result in: (A) a
breach or violation of, or a default under, its certificate of
incorporation or bylaws or the comparable governing instruments of any of
its Significant Subsidiaries or any entity in which it has an equity
interest of 20% or more (collectively, with Significant Subsidiaries,
"Significant Investees"); (B) a breach or violation of, or a default under,
the acceleration of any obligations or the creation of a lien, pledge,
security interest or other encumbrance on its assets or the assets of any
of its Significant Investees (with or without notice, lapse of time or
both) pursuant to, any agreement, lease, contract, note, mortgage,
indenture, arrangement or other obligation ("Contracts") binding upon it or
any of its Significant Investees or any Law or governmental or
non-governmental permit or license to which it or any of its Significant
Investees is subject or is a party; or (C) any change in the rights or
obligations of any party under any Contracts to which it or any of its
Significant Investees is subject or is a party, except for such defaults,
breaches, violations or accelerations as may result from the Bankruptcy
Case or the Prepackaged Plan, and except, in the case of clauses (B) or (C)
above for any breach, violation, default, acceleration, creation or change
that, individually or in the aggregate, is not reasonably likely to have a
Material Adverse Effect on it or prevent, materially delay or materially
impair its ability to (x) consummate the transactions contemplated by this
Agreement or (y) operate its business following the Effective Time. The
PageNet Disclosure Letter, with respect to PageNet, and the Arch Disclosure
Letter, with respect to Arch, sets forth a correct and complete list of
Contracts to which it or any of its Significant Investees is a party,
pursuant to which consents or waivers are or may be required prior to
consummation of the transactions contemplated by this Agreement, other than
as may be required in connection with the Bankruptcy Case or the
Prepackaged Plan, or those where the failure to obtain such consents or
waivers is not, individually or in the aggregate, reasonably likely to have
a Material Adverse Effect on it or prevent or materially impair its (x)
ability to consummate the transactions contemplated by this Agreement or
(y) operate its business following the Effective Time.
(e) Reports; Financial Statements. It has made available to the other
party each registration statement, report, proxy statement or information
statement prepared by it since December 31, 1996, including without
limitation its Annual Report on Form 10-K for the years ended December 31,
1996, December 31, 1997 and December 31, 1998 in the form (including
exhibits, annexes and any amendments thereto) filed with the Securities and
Exchange Commission (the "SEC") (collectively, including any such reports
filed subsequent to the date of this Agreement, its "Reports"). As of their
respective dates, its Reports complied, as to form, with all applicable
requirements under the Securities Act, the Exchange Act, and the rules and
regulations thereunder, and (together with any amendments thereto filed
prior to the date hereof) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading. Each of the
consolidated balance
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sheets included in, or incorporated by reference into, its Reports
(including the related notes and schedules) fairly presents the
consolidated financial position of it and its Subsidiaries as of its date
and each of the consolidated statements of income, stockholders' equity,
and of cash flows included in, or incorporated by reference into, its
Reports (including any related notes and schedules) fairly presents the
consolidated results of operations, retained earnings and cash flows, as
the case may be, of it and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to notes and normal
year-end audit adjustments that will not be material in amount or effect),
in each case in accordance with generally accepted accounting principles
("GAAP") consistently applied during the periods involved, except as may be
noted therein. It has made available to the other party all correspondence
since December 31, 1996 between it or its representatives, on the one hand,
and the SEC, on the other hand. To its knowledge, as of the date of this
Agreement, there are no pending or threatened SEC inquiries or
investigations relating to it or any of its Reports. To its knowledge and
except as disclosed in its Reports or in filings by its holders with the
SEC, as of the date of this Agreement, no Person or "group" "beneficially
owns" 5% or more of its outstanding voting securities, with the terms
"beneficially owns" and "group" having the meanings ascribed to them under
Rule 13d-3 and Rule 13d-5 under the Exchange Act.
(f) Absence of Certain Changes. Except as disclosed in its Reports
filed prior to the date of this Agreement or as expressly contemplated by
this Agreement, since December 31, 1998 (the "Audit Date"), it and its
Subsidiaries have conducted their respective businesses only in, and have
not engaged in any material transaction other than according to, the
ordinary and usual course of such businesses and there has not been: (i)
any change in the business, assets (including licenses, franchises and
other intangible assets), financial condition and results of operations of
it and its Subsidiaries, except those changes that are not, individually or
in the aggregate, reasonably likely to have a Material Adverse Effect on
it; (ii) any damage, destruction or other casualty loss with respect to any
asset or property owned, leased or otherwise used by it or any of its
Subsidiaries, whether or not covered by insurance, which damage,
destruction or loss is reasonably likely, individually or in the aggregate,
to have a Material Adverse Effect on it; (iii) any declaration, setting
aside or payment of any dividend or other distribution with respect to its
capital stock; or (iv) any change by it in accounting principles, practices
or methods, except as required by GAAP. Since the Audit Date, except as
provided for in this Agreement, in its respective Disclosure Letter, or as
disclosed in its Reports filed prior to the date of this Agreement, there
has not been any increase in the salary, wage, bonus, grants, awards,
benefits or other compensation payable or that could become payable by it
or any of its respective Subsidiaries, to directors, officers or key
employees as identified in the corresponding section of each party's
Disclosure Letter or any amendment of any of its Compensation and Benefit
Plans (as defined in Section 5.1(h)(i)), other than increases or amendments
in the ordinary and usual course of its business (which may include normal
periodic performance reviews and related compensation and benefit increases
and the provision of new individual compensation and benefits for promoted
or newly hired officers and employees on terms consistent with past
practice).
(g) Litigation and Liabilities. Except as disclosed in its Reports
filed prior to the date of this Agreement, there are no: (x) (i) civil,
criminal or administrative actions, suits, claims, hearings, investigations
or proceedings pending or, to the actual knowledge of its executive
officers identified in the corresponding section of each party's Disclosure
Letter ("Knowledgeable Executives"), threatened against it or any of its
Affiliates (as defined in Rule 12b-2 under the Exchange Act); or (ii)
obligations or liabilities, whether or not accrued, contingent or
otherwise, and whether or not required to be disclosed, including those
relating to matters involving any Environmental Law, or (y) any other facts
or circumstances, in any such case, of which the Knowledgeable Executives
have actual knowledge and that are reasonably likely to result in any
claims against or obligations or liabilities of it or any of its
Affiliates, except, in the case of (x) or (y), those that are not,
individually or in the aggregate, reasonably likely to have a Material
Adverse Effect on it or prevent, materially delay or materially impair its
ability to consummate the transactions contemplated by this Agreement.
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(h) Employee Benefits.
(i) Neither it nor any of its respective ERISA Affiliates (as
defined below) maintains, is a party to, participates in, or has any
liability or contingent liability with respect to, any employee benefit
plan (within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or any bonus,
deferred compensation, pension, retirement, profit-sharing, thrift,
savings, employee stock ownership, stock bonus, change-of-control, stock
purchase, restricted stock, stock option, employment, consulting,
termination, severance, compensation, medical, health or fringe benefit
plan, or other plan, program, agreement, policy or arrangement for any
of its agents, consultants, employees, directors, former employees or
former directors and/or any of its respective ERISA Affiliates which
does not constitute an employee benefit plan under ERISA (which employee
benefit plans and other plans, programs, agreements, policies and
arrangements are collectively referred to as the "Compensation and
Benefit Plans"). A true and correct copy of each Compensation and
Benefit Plan which have been reduced to writing and, to the extent
applicable, copies of the most recent annual report, actuarial report,
accountant's opinion of the plan's financial statements, summary plan
description and Internal Revenue Service determination letter with
respect to any Compensation and Benefit Plans and any trust agreements
or insurance contracts forming a part of such Compensation and Benefit
Plans has been made available by PageNet and Arch to the other party
prior to the date of this Agreement. In the case of any Compensation and
Benefit Plan which is not in written form, PageNet and Arch has supplied
to the other party an accurate description of such Compensation and
Benefit Plan as in effect on the date of this Agreement. For purposes of
this Agreement, the term "ERISA Affiliate" means any corporation or
trade or business which, together with PageNet or Arch, as applicable,
is a member of a controlled group of Persons or a group of trades or
businesses under common control with PageNet or Arch, as applicable,
within the meaning of Sections 414(b), (c), (m) or (o) of the Code.
(ii) All Compensation and Benefit Plans, other than a multiemployer
plan (as defined in Section 3(37) of ERISA), are in substantial
compliance with all requirements of applicable law, including the Code
and ERISA and no event has occurred which will or could cause any such
Compensation and Benefit Plan to fail to comply with such requirements
and no notice has been issued by any governmental authority questioning
or challenging such compliance. There have been no acts or omissions by
it or any of its respective ERISA Affiliates, which have given rise to
or may give rise to material fines, penalties, taxes or related charges
under Section 502 of ERISA or Chapters 43, 47, 68 or 100 of the Code for
which PageNet, Arch, as applicable, or any of its respective ERISA
Affiliates may be liable. Each of the Compensation and Benefit Plans
that is an "employee pension benefit plan" within the meaning of Section
3(2) of ERISA, other than a multiemployer plan (each a "Pension Plan"),
and that is intended to be qualified under Section 401(a) of the Code
has received a favorable determination letter from the Internal Revenue
Service (the "IRS") which covers all changes in law for which the
remedial amendment period (within the meaning of Section 401(b) of the
Code and applicable regulations) has expired and neither it, nor any of
its respective ERISA Affiliates is aware of any circumstances reasonably
likely to result in revocation of any such favorable determination
letter. There is no pending or, to the actual knowledge of PageNet's or
Arch', as applicable, Knowledgeable Executives, threatened material
litigation relating to its Compensation and Benefit Plans. Neither it,
nor any of its respective ERISA Affiliates, has engaged in a transaction
with respect to any of the Compensation and Benefit Plans that, assuming
the taxable period of such transaction expired as of the date of this
Agreement, would subject it or any of the ERISA Affiliates to a material
tax or penalty imposed by either Section 4975 of the Code or Section 502
of ERISA.
(iii) As of the date of this Agreement, no liability under Title IV
of ERISA (other than the payment of prospective premium amounts to the
Pension Benefit Guaranty Corporation in the normal course) has been or
is expected to be incurred by it or any of its respective ERISA
Affiliates with respect to any Compensation and Benefit Plan. No notice
of a "reportable event," within the meaning of Section 4043 of ERISA for
which the 30-day reporting requirement has not been waived, has been
required to be filed for any Pension Plans within the 12-month period
ending on the
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date of this Agreement or will be required to be filed in connection
with the transactions contemplated by this Agreement.
(iv) All contributions required to be made under the terms of any
of the Compensation and Benefit Plans as of the date of this Agreement
have been timely made or have been reflected on the most recent
consolidated balance sheet filed or incorporated by reference in its
Reports prior to the date of this Agreement. None of the Pension Plans
has an "accumulated funding deficiency" (whether or not waived) within
the meaning of Section 412 of the Code or Section 302 of ERISA. Neither
it, nor any of its respective ERISA Affiliates has provided, or is
required to provide, security to any Pension Plans pursuant to Section
401(a)(29) of the Code or to the PBGC pursuant to Title IV or ERISA.
(v) Under each of the Pension Plans as of the last day of the most
recent plan year ended prior to the date of this Agreement, the
actuarially determined present value of all "benefit liabilities,"
within the meaning of Section 4001(a)(16) of ERISA (as determined on the
basis of the actuarial assumptions contained in such Pension Plan's most
recent actuarial valuation), did not exceed the then current value of
the assets of such Pension Plan, and there has been no material change
in the financial condition of such Pension Plan since the last day of
the most recent plan year.
(vi) Neither it, nor any of its respective ERISA Affiliates, have
any obligations for post-termination health and life benefits under any
of the Compensation and Benefit Plans, except as set forth in its
Reports filed prior to the date of this Agreement or as required by
applicable law.
(vii) The consummation of the Merger (or the approval thereof by
its respective stockholders) and the other transactions contemplated by
this Agreement, will not (except as may result from, or be contemplated
by, the Bankruptcy Case or the Prepackaged Plan): (x) entitle any of its
employees or directors or any employees of any of its ERISA Affiliates,
as applicable, to severance pay, directly or indirectly, upon
termination of employment or otherwise; (y) accelerate the time of
payment or vesting or trigger any payment of compensation or benefits
under, or increase the amount payable or trigger any other material
obligation pursuant to, any of the Compensation and Benefit Plans; or
(z) result in any breach or violation of, or a default under, any of the
Compensation and Benefit Plans.
(viii) None of the Compensation and Benefit Plans is a
multiemployer plan and neither it, nor any of its respective ERISA
Affiliates, have contributed or been obligated to contribute to a
multiemployer plan at any time.
(i) Compliance with Laws. Except as set forth in its Reports filed
prior to the date of this Agreement, the businesses of each of it and its
Subsidiaries have not been, and are not being, conducted in violation of
any law, statute, ordinance, regulation, judgment, order, decree,
injunction, arbitration award, license, authorization, opinion, agency
requirement or permit of any Governmental Entity or common law
(collectively, "Laws"), except for violations or possible violations that
are not, individually or in the aggregate, reasonably likely to have a
Material Adverse Effect on it or prevent, materially delay or materially
impair its ability to consummate the transactions contemplated by this
Agreement. Except as set forth in its Reports filed prior to the date of
this Agreement, no investigation or review by any Governmental Entity with
respect to it or any of its Subsidiaries is pending or, to the actual
knowledge of the Knowledgeable Executives, threatened, nor has any
Governmental Entity indicated an intention to conduct the same, except for
those the outcome of which are not, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect on it or prevent,
materially delay or materially impair its ability to consummate the
transactions contemplated by this Agreement. To the actual knowledge of the
Knowledgeable Executives, no material change is required in its or any of
its Subsidiaries' processes, properties or procedures in connection with
any such Laws, and it has not received any notice or communication of any
material noncompliance with any such Laws that has not been cured as of the
date of this Agreement, except for such changes and noncompliance that are
not, individually or in the aggregate, reasonably likely to have a Material
Adverse Effect on it or prevent, materially delay or materially impair its
ability to consummate the transactions contemplated by this Agreement. Each
of it and its Subsidiaries has all permits, licenses, franchises,
variances, exemptions, orders, operating rights,
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and other governmental authorizations, consents and approvals
(collectively, "Permits"), necessary to conduct their business as presently
conducted, except for those the absence of which are not, individually or
in the aggregate, reasonably likely to have a Material Adverse Effect on it
or prevent, materially delay or materially impair its ability to consummate
the transactions contemplated by this Agreement.
(j) Takeover Statutes; Charter and Bylaw Provisions.
(i) The PageNet Board of Directors has taken all appropriate and
necessary actions to exempt the Merger, this Agreement and the other
transactions contemplated hereby from the restrictions of Section 203 of
the DGCL. No other "control share acquisition," "fair price,"
"moratorium" or other anti-takeover laws or regulations enacted under
U.S. stated or federal laws (each a "Takeover Statute") apply to the
Merger, this Agreement, or any of the other transactions contemplated
hereby. PageNet and the PageNet Board of Directors have taken all
appropriate and necessary actions to (A) render the PageNet Rights
Agreement inapplicable to the Merger and the other transactions
contemplated by this Agreement, (B) provide that (I) neither Arch nor
Merger Sub shall be deemed an Acquiring Person (as defined in the
PageNet Rights Agreement) as a result of this Agreement or the
transactions contemplated hereby and thereby, (II) no Distribution Date
(as defined in the PageNet Rights Agreement) shall be deemed to have
occurred as a result of this Agreement or the transactions contemplated
hereby and (III) the rights issuable pursuant to the PageNet Rights
Agreement will not separate from the shares of PageNet Common Stock, as
a result of the approval, execution or delivery of this Agreement or the
consummation of the transactions contemplated hereby, and (C) render any
anti-takeover or other provision contained in the certificate of
incorporation or by-laws of PageNet inapplicable to the Merger, this
Agreement and the other transactions contemplated hereby.
(ii) The Arch Board of Directors has taken all appropriate and
necessary actions to exempt the Merger, this Agreement and the
transactions contemplated hereby from the restrictions of Section 203 of
the DGCL. No other Takeover Statute applies to this Agreement or any of
the transactions contemplated hereby. Arch and the Arch Board of
Directors have taken all appropriate and necessary actions to (A) amend
the Arch Rights Agreement as set forth in Exhibit B to this Agreement,
(B) provide that (I) PageNet shall not be deemed an Acquiring Person (as
defined in the Arch Rights Agreement) as a result of this Agreement or
the transactions contemplated thereby, (II) no Distribution Date (as
defined in the Arch Rights Agreement) shall be deemed to have occurred
as a result of this Agreement or the transactions contemplated thereby
unless the ownership threshold set forth in Exhibit B shall be exceeded,
and (III) the rights issuable pursuant to the Arch Rights Agreement will
not separate from the shares of Arch Common Stock, as a result of the
approval, execution or delivery of this Agreement or the consummation of
the transactions contemplated hereby unless the ownership threshold set
forth in Exhibit B shall be exceeded, and (C) render any anti-takeover
or other provision contained in the certificate of incorporation or
by-laws of Arch inapplicable to the Merger, this Agreement and the other
transactions contemplated hereby.
(k) Tax Matters. As of the date of this Agreement, neither it nor any
of its Subsidiaries has taken or agreed to take any action, nor do the
Knowledgeable Executives have any actual knowledge of any fact or
circumstance (excluding possible uncertainties regarding valuation of
securities to be issued in the Merger and Exchange Offers), that would
prevent the Merger and the other transactions contemplated by this
Agreement from qualifying as a "reorganization" within the meaning of
Section 368(a) of the Code.
(l) Taxes. It and each of its Subsidiaries have prepared in good
faith and duly and timely filed (taking into account any extension of time
within which to file) all material Tax Returns required to be filed by any
of them at or before the Effective Time and all such filed Tax Returns are
complete and accurate in all material respects. It and each of its
Subsidiaries as of the Effective Time: (x) will have paid all Taxes and
estimated Taxes (including all amounts shown to be due on all filed Tax
Returns) that they are required to pay prior to the Effective Time; and (y)
will have withheld or collected all federal, state and local income taxes,
FICA, FUTA and other Taxes, including, without limitation, similar foreign
Taxes, required to be withheld from amounts owing to any employee,
creditor, or third party, and to the extent required, will have paid such
amounts to the proper governmental authority. As of the date of this
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Agreement, (i) there are not pending or threatened in writing, any audits,
examinations, investigations or other proceedings with respect to Taxes or
Tax matters, and (ii) there are not, to the actual knowledge of its
Knowledgeable Executives, any unresolved questions, claims or outstanding
proposed or assessed deficiencies concerning its or any of its
Subsidiaries' Tax liability which, if determined adversely would have a
Material Adverse Effect on it. Neither it nor any of its Subsidiaries has
any liability with respect to income, franchise or similar Taxes in excess
of the amounts accrued with respect to such Taxes that are reflected in the
financial statements included in its Reports. Neither it nor any of its
Subsidiaries has executed any waiver of any statute of limitations on, or
extended the period for the assessment or collection of, any Tax. There are
no tax liens (other than liens for current Taxes not yet due and payable)
upon its assets or the assets of any Subsidiary. There is no "Section 382
limitation," as defined in Section 382(b) of the Code, currently applicable
to its or its Subsidiaries' net operating loss, investment credit, or other
tax attribute carryforwards. Neither it nor any of its Subsidiaries: (A) is
a party to any tax sharing agreement; or (B) is liable for the Tax
obligations of any person other than it or one of its Subsidiaries.
The term "Tax" (including, with correlative meaning, the terms "Taxes," and
"Taxable") includes all federal, state, local and foreign income, profits,
franchise, gross receipts, environmental, customs duty, capital stock,
severance, stamp, payroll, sales, employment, unemployment, disability, use,
property, withholding, excise, production, value added, occupancy and other
taxes, duties, charges, fees, or assessments of any nature whatsoever, together
with all interest, penalties and additions imposed with respect to such amounts
and any interest with respect to such penalties and additions. The term "Tax
Return" includes all federal, state, local and foreign returns and reports
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be supplied to a Tax authority relating to
Taxes.
(m) Labor Matters. Neither it nor any of its Subsidiaries is the
subject of any material proceeding asserting that it or any of its
Subsidiaries has committed an unfair labor practice or is seeking to compel
it to bargain with any labor union or labor organization, nor is there
pending or, to the actual knowledge of its Knowledgeable Executives,
threatened, nor has there been for the past five years, any labor strike,
dispute, walkout, work stoppage, slow-down or lockout involving it or any
of its Subsidiaries, except in each case as is not, individually or in the
aggregate, reasonably likely to have a Material Adverse Effect on it. None
of the employees of PageNet or Arch or any of their respective Subsidiaries
is subject to a collective bargaining agreement, no collective bargaining
agreement is currently being negotiated, and no attempt is currently being
made or during the past three (3) years has been made to organize any of
its employees to form or enter into any labor union or similar
organization.
(n) Environmental Matters. Except as disclosed in its Reports filed
prior to the date of this Agreement and except for such matters that,
individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect on it: (i) each of it and its Subsidiaries has
complied with all applicable Environmental Laws; (ii) the properties
currently owned or operated by it or any of its Subsidiaries (including
soils, groundwater, surface water, buildings, or other structures) do not
contain any Hazardous Substances; (iii) the properties formerly owned or
operated by it or any of its Subsidiaries did not contain any Hazardous
Substances during the period of ownership or operation by it or any of its
Subsidiaries; (iv) neither it nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any
third party property; (v) neither it nor any Subsidiary has been associated
with any release or threat of release of any Hazardous Substance; (vi)
neither it nor any Subsidiary has received any notice, demand, letter,
claim, or request for information alleging that it or any of its
Subsidiaries may be in violation of or liable under any Environmental Law;
(vii) neither it nor any of its Subsidiaries is subject to any orders,
decrees, injunctions, or other arrangements with any Governmental Entity or
is subject to any indemnity or other agreement with any third party
relating to liability under any Environmental Law or relating to Hazardous
Substances; and (viii) there are no circumstances or conditions involving
it or any of its Subsidiaries that could reasonably be expected to result
in any claims, liability, investigations, costs, or restrictions on the
ownership, use, or transfer of any of its properties pursuant to any
Environmental Law.
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The term "Environmental Law" means any Law relating to: (A) the protection,
investigation or restoration of the environment, health, safety, or natural
resources; (B) the handling, use, presence, disposal, release, or threatened
release of any Hazardous Substance; or (C) noise, odor, wetlands, pollution,
contamination, or any injury or threat of injury to persons or property or
notifications to government agencies or the public in connection with any
Hazardous Substance.
The term "Hazardous Substance" means any substance that is listed,
classified, or regulated pursuant to any Environmental Law, including any
petroleum product or by-product, asbestos- containing material, lead-containing
paint or plumbing, polychlorinated biphenyls, electromagnetic fields, microwave
transmission, radioactive materials, or radon.
(o) Brokers and Finders. Neither it nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in
connection with the Merger or the other transactions contemplated in this
Agreement or, the Series C Consent Agreement, as applicable, except that:
(i) PageNet has employed Houlihan Lokey Howard & Zukin Capital, Goldman,
Sachs & Co. and Morgan Stanley Dean Witter as its financial advisors, the
arrangements with which have been disclosed to Arch prior to the date of
this Agreement; and (ii) Arch has employed Bear, Stearns & Co. Inc. as its
financial advisor, the arrangements with which have been disclosed to
PageNet prior to the date of this Agreement.
(p) Computer Systems. Except as set forth in its Reports: (i) its
computer system performs and shall perform properly all date-sensitive
functions with respect to dates prior to and after December 31, 1999; and
(ii) it has developed feasible contingency plans to ensure uninterrupted
and unimpaired business operation in the event of a failure of its own or a
third party's computer system or equipment on or about January 1, 2000
(including, those of vendors, customers, and suppliers, and a general
failure of, or interruption in, its communications and delivery
infrastructure).
(q) FCC Licenses. Each of Arch and PageNet, and each of its
respective Subsidiaries, is the authorized and legal holder of, or
otherwise has all rights to, all Permits issued under or pursuant to the
Communications Act, the FCC Regulations, and State Laws which are necessary
for the operation of their respective businesses as presently operated,
except as would not, individually or in aggregate, have a Materially
Adverse Effect on it. All such Permits and licenses are validly issued and
in full force and effect, except as would not, individually or in the
aggregate, have a Material Adverse Effect on it. Each of Arch and PageNet,
and each of its respective Subsidiaries, is in compliance in all respects
with the terms and conditions of each such Permit and with all applicable
Governmental Regulations, except where the failure to be in compliance
would not have a Material Adverse Effect on it. There is not pending, and
to the actual knowledge of the Knowledgeable Executives of Arch and
PageNet, as applicable, any threatened, action by or before the FCC or any
governmental or regulatory authority to revoke, suspend, cancel, rescind,
or modify in any material respect any of such party's Permits rights under
the Communications Act, the FCC Regulations or State Laws. Each party has
made all regulatory filings required, and paid all fees and assessments
imposed, by any Governmental Entity, and all such filings and the
calculation of such fees, are accurate in all material respects, except
where the failure to make such filing or pay such fees or assessments would
not have a Material Adverse Effect on such party.
ARTICLE VI.
COVENANTS
6.1. Interim Operations.
(a) PageNet covenants and agrees as to itself and its Subsidiaries that,
from and after the date of this Agreement and prior to the Effective Time
(unless Arch shall otherwise approve in writing, and except as
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otherwise expressly contemplated by this Agreement, disclosed in the PageNet
Disclosure Letter, or required by applicable Law):
(i) Its business and the business of its Subsidiaries shall be
conducted only in the ordinary and usual course and, to the extent
consistent therewith, it and its Subsidiaries shall use their reasonable
best efforts to preserve their respective business organizations intact and
maintain their respective existing relations and goodwill with customers,
suppliers, regulators, distributors, creditors, lessors, employees and
business associates;
(ii) It shall not: (A) amend its certificate of incorporation or
bylaws; (B) split, combine, subdivide or reclassify its outstanding shares
of capital stock; (C) declare, set aside or pay any dividend payable in
cash, stock or property with respect to any capital stock; or (D)
repurchase, redeem or otherwise acquire, except in connection with existing
commitments under PageNet Stock Plans but subject to PageNet's obligations
under subparagraph (iii) below, or permit any of its Subsidiaries to
purchase or otherwise acquire, any shares of its capital stock or any
securities convertible into, or exchangeable or exercisable for, any shares
of its capital stock;
(iii) Neither it nor any of its Subsidiaries shall take any action
that would prevent the Merger from qualifying as a "reorganization" within
the meaning of Section 368(a) of the Code or that would cause any of its
representations and warranties in this Agreement to become untrue in any
material respect;
(iv) Neither it nor any of its ERISA Affiliates shall: (A) accelerate,
amend or change the period of exercisability of or terminate, establish,
adopt, enter into, make any new grants or awards of stock-based
compensation or other benefits under any Compensation and Benefit Plans;
(B) amend or otherwise modify any Compensation and Benefit Plan; or (C)
increase the salary, wage, bonus or other compensation of any directors,
officers or key employees, except: (x) for grants or awards to directors,
officers and employees of it or its Subsidiaries under existing
Compensation and Benefit Plans in such amounts and on such terms as are
consistent with past practice; (y) in the ordinary and usual course of its
business (which may include normal periodic performance reviews and related
compensation and benefit increases and the provision of individual PageNet
Compensation and Benefit Plans consistent with past practice for promoted
or newly hired officers and employees on terms consistent with past
practice);or (z) for actions necessary to satisfy existing contractual
obligations under Compensation and Benefit Plans existing as of the date of
this Agreement;
(v) Neither it nor any of its Subsidiaries shall incur, repay or
retire prior to maturity or refinance any indebtedness for borrowed money
or guarantee any such indebtedness or issue, sell, repurchase or redeem
prior to maturity any debt securities or warrants or rights to acquire any
debt securities or guarantee any debt securities of others, except (A) in
the ordinary and usual course of its business, (B) for any refinancing of
such indebtedness or debt securities on terms no less favorable in the
aggregate to PageNet and which would not prevent, materially delay or
materially impair PageNet's ability to consummate the transactions
contemplated by this Agreement, and (C) for any retirement in exchange for
PageNet Shares consistent with past practice;
(vi) Neither it nor any of its Subsidiaries shall make any capital
expenditures in an aggregate amount in excess of the aggregate amount
reflected in PageNet's capital expenditure budget for the fiscal years
ending December 31, 1999 and 2000, a copy of which has been provided to
Arch;
(vii) Neither it nor any of its Subsidiaries shall issue, deliver,
sell, pledge or encumber shares of any class of its capital stock or any
securities convertible or exchangeable into, or any rights, warrants or
options to acquire, or any bonds, debentures, notes, or other debt
obligations having the right to vote or that are convertible or exercisable
for, any such shares, except PageNet may issue PageNet Shares in exchange
for indebtedness or debt securities pursuant to clause (v) above;
(viii) Neither it nor any of its Subsidiaries shall authorize, propose
or announce an intention to authorize or propose, or enter into an
agreement with respect to, any merger, consolidation or business
combination (other than the Merger), or any purchase, sale, lease, license
or other acquisition or disposition of any business or of a material amount
of assets or securities, except for transactions entered
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into in the ordinary and usual course of its business, except for any
acquisition of assets or any investment having a cash purchase price of
$25,000,000 or less in any single instance and $50,000,000 or less in the
aggregate where such acquisition or investment would not prevent,
materially delay or materially impair PageNet's ability to consummate the
transactions contemplated by this Agreement;
(ix) PageNet shall not make any material change in its accounting
policies or procedures, other than any such change that is required by
GAAP;
(x) PageNet shall not release, assign, settle or compromise any
material claims or litigation in excess of $300,000 or make any material
tax election or settle or compromise any material federal, state, local or
foreign tax liability; and
(xi) Neither it nor any of its Subsidiaries shall authorize or enter
into any agreement to do any of the foregoing.
(b) Arch covenants and agrees as to itself and its Subsidiaries that, from
and after the date of this Agreement and prior to the Effective Time (unless
PageNet shall otherwise approve in writing and except as otherwise expressly
contemplated by this Agreement, disclosed in the Arch Disclosure Letter, or
required by applicable Law):
(i) Its business and the business of its Subsidiaries shall be
conducted only in the ordinary and usual course and, to the extent
consistent therewith, it and its Subsidiaries shall use their reasonable
best efforts to preserve their respective business organizations intact and
maintain their respective existing relations and goodwill with customers,
suppliers, regulators, distributors, creditors, lessors, employees and
business associates;
(ii) It shall not: (A) amend its certificate of incorporation or
bylaws; (B) split, combine, subdivide or reclassify its outstanding shares
of capital stock; (C) declare, set aside or pay any dividend payable in
cash, stock or property with respect to any capital stock, except for a
dividend that would be received by holders of PageNet Shares on an
equivalent post-Merger basis per share of Arch Common Stock after the
Effective Time; or (D) repurchase, redeem or otherwise acquire, except in
connection with existing commitments under Arch Stock Plans but subject to
Arch' obligations under subparagraph (iii) below, or permit any of its
Subsidiaries to purchase or otherwise acquire, any shares of its capital
stock or any securities convertible into, or exchangeable or exercisable
for, any shares of its capital stock;
(iii) Neither it nor any of its Subsidiaries shall take any action
that would prevent the Merger from qualifying as a "reorganization" within
the meaning of Section 368(a) of the Code or that would cause any of its
representations and warranties in this Agreement to become untrue in any
material respect;
(iv) Neither it nor any of its ERISA Affiliates shall: (A) accelerate,
amend or change the period of exercisability of or terminate, establish,
adopt, enter into, make any new grants or awards of stock-based
compensation or other benefits under any Compensation and Benefit Plans;
(B) amend or otherwise modify any Compensation and Benefit Plan; or (C)
increase the salary, wage, bonus or other compensation of any directors,
officers or key employees, except: (x) for grants or awards to directors,
officers and employees of it or its Subsidiaries under existing
Compensation and Benefit Plans in such amounts and on such terms as are
consistent with past practice; (y) in the ordinary and usual course of its
business (which may include normal periodic performance reviews and related
compensation and benefit increases and the provision of individual Arch
Compensation and Benefit Plans consistent with past practice for promoted
or newly hired officers and employees on terms consistent with past
practice); or (z) for actions necessary to satisfy existing contractual
obligations under its Compensation and Benefit Plans existing as of the
date of this Agreement;
(v) Neither it nor any of its Subsidiaries shall incur, repay or
retire prior to maturity or refinance any indebtedness for borrowed money
or guarantee any such indebtedness or issue, sell, repurchase or redeem
prior to maturity any debt securities or warrants or rights to acquire any
debt securities or guarantee any debt securities of others, except in (A)
the ordinary and usual course of its business, (B) for any refinancing of
such indebtedness or debt securities on terms no less favorable in the
aggregate
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to Arch and which would not prevent, materially delay or materially impair
Arch' or Merger Sub's ability to consummate the transactions contemplated
by this Agreement, and (C) for any retirement in exchange for shares of
Arch Common Stock consistent with past practice;
(vi) Neither it nor any of its Subsidiaries shall make any capital
expenditures in an aggregate amount in excess of the aggregate amount
reflected in Arch' capital expenditure budget for the fiscal years ending
December 31, 1999 and 2000, a copy of which has been provided to PageNet;
(vii) Neither it nor any of its Subsidiaries shall issue, deliver,
sell, pledge or encumber shares of any class of its capital stock or any
securities convertible or exchangeable into, or any rights, warrants or
options to acquire, or any bonds, debentures, notes, or other debt
obligations having the right to vote or that are convertible or exercisable
for, any such shares, except Arch may issue shares of Arch Common Stock
issued in exchange for indebtedness or debt securities pursuant to clause
(v) above;
(viii) Neither it nor any of its Subsidiaries shall authorize, propose
or announce an intention to authorize or propose, or enter into an
agreement with respect to, any merger, consolidation or business
combination (other than the Merger), or any purchase, sale, lease, license
or other acquisition or disposition of any business or of a material amount
of assets or securities, except for transactions entered into in the
ordinary and usual course of its business, except for any acquisition of
assets or any investment having a cash purchase price of $25,000,000 or
less in any single instance and $50,000,000 or less in the aggregate where
such acquisition or investment would not prevent, materially delay or
materially impair Arch' or Merger Sub's ability to consummate the
transactions contemplated by this Agreement;
(ix) Arch shall not make any material change in its accounting
policies or procedures, other than any such change that is required by
GAAP;
(x) Arch shall not release, assign, settle or compromise any material
claims or litigation in excess of $300,000 or make any material tax
election or settle or compromise any material federal, state, local or
foreign tax liability; and
(xi) Neither it nor any of its Subsidiaries shall authorize or enter
into any agreement to do any of the foregoing.
(c) Arch and PageNet agree that any written approval obtained under this
Section 6.1 must be signed, if on behalf of Arch, by the Chief Executive Officer
or the Chief Financial Officer of Arch, or if on behalf of PageNet, by the
Chairman of the Board and Chief Executive Officer or President and Chief
Operating Officer of PageNet.
(d) Notwithstanding any other provision hereof to the contrary, PageNet
may, after the date hereof (i) issue, deliver, sell, pledge or encumber in
arms-length transactions with unaffiliated third parties shares of any class of
capital stock of the Distributed Subsidiary or any securities convertible or
exchangeable into, or any rights, warrants or options to acquire, or any bonds,
debentures, notes, or other debt obligations having the right to vote or that
are convertible or exercisable for, any such shares of the Distributed
Subsidiary, (ii) cause the Distributed Subsidiary to incur any indebtedness for
borrowed money, if all proceeds thereof are used solely by the Distributed
Subsidiary, (iii) transfer the assets set forth in the corresponding section of
the PageNet Disclosure Letter to the Distributed Subsidiary, (iv) determine the
form of security or securities representing the equity ownership of the
Distributed Subsidiary to be distributed to the holders of PageNet Shares or
PageNet Notes pursuant to Sections 6.18 and 6.22 of this Agreement and designate
the rights and restrictions applicable to such securities, (v) establish an
employee stock option, stock ownership or other similar plan and set aside
common equity (of the same type as the Distributed Interests or any securities
underlying such Distributed Interests) representing up to 20% of the equity
ownership of the Distributed Subsidiary for such purpose, or (vi) enter into
such transactions, arrangements or agreements with the Distributed Subsidiary on
terms and conditions approved by Arch or cause the Distributed Subsidiary to
enter into arms-length transactions, arrangements or agreements with third
parties, in each case, as are reasonably necessary and appropriate to permit the
Distributed Subsidiary to continue its business and operations in the ordinary
course following the Merger; provided, that the taking of such action shall not
cause Arch or the Surviving Corporation (other than through its ownership of
capital stock in the Distributed Subsidiary after
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the Effective Time) to incur any liability or obligation which would not have
been incurred by the Surviving Corporation pursuant to the Merger or the other
transactions contemplated hereby. It is understood and agreed by the parties to
this Agreement, that in the event that, prior to or at the Effective Time,
PageNet shall take any action set forth in (i), (ii), (v) or (vi) above that
reduces the aggregate amount of Distributed Interests available to be
distributed to the parties, the distribution of the Distributed Interests will
be ratably adjusted such that holders of PageNet Shares at the Spinoff Record
Date and holders of PageNet Notes immediately prior to the Effective Time
receive 80.5% of the remaining interests in the Distributed Subsidiary and the
Surviving Corporation receives 19.5% of the remaining interests in the
Distributed Subsidiary.
6.2. Acquisition Proposals.
(a) Except as set forth in Section 6.1(d) of this Agreement, PageNet and
Arch each agree that neither it nor any of its Subsidiaries nor any of the
officers and directors of it or its Subsidiaries shall, and that each shall
direct and use its best efforts to cause its and its Subsidiaries' employees,
agents and representatives (including any investment banker, attorney or
accountant retained by it or any of its Subsidiaries) (PageNet or Arch, as the
case may be, its respective Subsidiaries and their officers, directors,
employees, agents and representatives being referred to as its
"Representatives") not to, directly or indirectly, initiate, solicit, encourage
or otherwise facilitate any inquiries or the making of any proposal or offer
with respect to a merger, reorganization, acquisition, share exchange,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving it, or any purchase or sale of the consolidated
assets (including without limitation stock of Subsidiaries) of it or any of its
Subsidiaries, taken as a whole, having an aggregate value equal to 10% or more
of its assets, or any purchase or sale of, or tender or exchange offer for, 15%
or more of its equity securities (any such proposal or offer being referred to
as an "Acquisition Proposal"). PageNet and Arch further agree that neither it
nor any of its Subsidiaries nor any of the officers and directors of it or its
Subsidiaries shall, and that it shall direct and use its best efforts to cause
its Representatives not to, directly or indirectly, have any discussion with, or
provide any confidential information or data to, any Person relating to, or in
contemplation of, an Acquisition Proposal or engage in any negotiations
concerning an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; provided, however, that
nothing contained in this Agreement shall prevent PageNet, Arch or their
respective Board of Directors from: (A) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to an Acquisition Proposal; (B) engaging in
any discussions or negotiations with or providing any information to, any Person
in response to an unsolicited bona fide written Acquisition Proposal by any such
Person; or (C) subject to the obligation of (x) PageNet pursuant to Section
6.5(a) to duly convene a PageNet Stockholders Meeting at which a vote of the
stockholders of PageNet shall be taken regarding the adoption of this Agreement
and the approval of the Merger and the other transactions contemplated by this
Agreement, and (y) Arch pursuant to Section 6.5(b) to duly convene a Arch
Stockholders Meeting at which a vote of the stockholders of Arch shall be taken
with respect to the matters set forth in Section 6.5(b) of this Agreement,
recommending such an unsolicited bona fide written Acquisition Proposal to its
stockholders if, and only to the extent that, with respect to the actions
referred to in clauses (B) or (C): (i) its Board of Directors concludes in good
faith (after consultation with its outside legal counsel and its financial
advisor) that such Acquisition Proposal is reasonably capable of being
completed, taking into account all legal, financial, regulatory and other
aspects of the proposal and the Person making the proposal, and would, if
consummated, result in a transaction more favorable to its stockholders from a
financial point of view than the transaction contemplated by this Agreement (any
such Acquisition Proposal being referred to herein as a "Superior Proposal");
(ii) its Board of Directors determines in good faith after consultation with
outside legal counsel that such action is necessary for the Board of Directors
to comply with its fiduciary duty to its stockholders under applicable Law; and
(iii) prior to providing any information or data to any Person in connection
with a Superior Proposal by any such Person, its Board of Directors shall
receive from such Person an executed confidentiality agreement on terms
substantially similar to those contained in the Confidentiality Agreement (as
defined in Section 6.15); provided, that such confidentiality agreement shall
contain terms that allow it to comply with its obligations under this Section
6.2.
(b) PageNet and Arch each agree that it will immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any Acquisition
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Proposal. PageNet and Arch each agree that it will take the necessary steps to
promptly inform each of its Representatives of the obligations undertaken in
Section 6.2(a). PageNet and Arch each agree that it will notify the other party
immediately if any such inquiries, proposals or offers are received by, any such
information is requested from, or any such discussions or negotiations are
sought to be initiated or continued with, any of its Representatives indicating,
in connection with such notice, the name of such Person making such inquiry,
proposal, offer or request and the substance of any such inquiries, proposals or
offers. Such party thereafter shall keep the other informed, on a current basis,
of the status and terms of any such inquiries, proposals or offers and the
status of any such discussions or negotiations. PageNet and Arch each also agree
that it will promptly request each Person that has heretofore executed a
confidentiality agreement in connection with its consideration of any
Acquisition Proposal to return all confidential information heretofore furnished
to such Person by, or on behalf of, it or any of its Subsidiaries.
6.3. The Certificate Amendments. Arch shall take all actions necessary
(subject to applicable law and any necessary stockholder approval) to adopt the
Certificate Amendments. The Certificate Amendments shall provide for (i) an
increase in the authorized number of shares of Arch Common Stock to an amount
sufficient to effectuate the actions contemplated hereby and (ii) the conversion
of each Arch Series C Preferred Share into shares of Arch Common Stock as
described in this Agreement. Some or all of the Certificate Amendments may, in
the discretion of Arch, be made contingent upon the consummation of the Merger
or the Alternative Merger (as the case may be).
6.4. Information Supplied. PageNet and Arch each agrees, as to itself and
its Subsidiaries, that none of the information supplied or to be supplied by it
or its Subsidiaries for inclusion or incorporation by reference in: (i) the
Registration Statement on Form S-4 to be filed with the SEC by Arch in
connection with the issuance of shares of Arch Common Stock in the Merger
(including the joint proxy statement and prospectus (the "Prospectus/Proxy
Statement") constituting a part thereof) (the "S-4 Registration Statement")
will, at the time the S-4 Registration Statement becomes effective under the
Securities Act; and (ii) the Prospectus/ Proxy Statement and any amendment or
supplement thereto will, at the date of mailing to stockholders and at the time
of each of the PageNet Stockholders Meeting and the Arch Stockholders Meeting to
be held in connection with the Merger, in any such case, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. If at any time
prior to the Effective Time any information relating to Arch or PageNet, or any
of their respective affiliates (as defined in SEC Rule 12b-2), officers or
directors, is discovered by Arch or PageNet which should be set forth in an
amendment or supplement to any of the S-4 Registration Statement or the
Prospectus/Proxy Statement, so that any of such documents would not include any
misstatement of a material fact or would omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, the
party which discovers such information shall promptly notify the other parties
to this Agreement and an appropriate amendment or supplement describing such
information shall be promptly filed with the SEC and, to the extent required by
law, disseminated to the stockholders of PageNet and Arch.
6.5. Stockholders Meetings.
(a) PageNet will take, in accordance with applicable Law and its
certificate of incorporation and bylaws, all action necessary to convene a
meeting of its stockholders (the "PageNet Stockholders Meeting") as promptly as
practicable after the S-4 Registration Statement is declared effective to
consider and vote upon the adoption of this Agreement, and to approve the
Merger, an amendment to the PageNet certificate of incorporation to increase the
number of PageNet Shares authorized to an amount sufficient to complete the
transactions contemplated by this Agreement and the other transactions
contemplated by this Agreement. PageNet will take all necessary action to obtain
the adoption of this Agreement, the approval of the Merger, the amendment to the
PageNet certificate of incorporation to increase the number of PageNet Shares
authorized to the amount sufficient to complete the transactions contemplated by
this Agreement and the other transactions contemplated by this Agreement by the
holders of the PageNet Shares (the "PageNet Stockholders Approval"). The Board
of Directors of PageNet shall: (i) recommend that the stockholders adopt this
Agreement and thereby approve the Merger and the other transactions contemplated
by this
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Agreement (including without limitation adoption of the Prepackaged Plan and
authorization of the Bankruptcy Case) and the amendment to the PageNet
certificate of incorporation to increase the number of PageNet Shares authorized
to the amount sufficient to complete the transactions contemplated by this
Agreement; and (ii) take all lawful action to solicit such adoption and
approval; provided, however, that PageNet's Board of Directors may, at any time
prior to the Effective Time, withdraw, modify or change any such recommendation
to the extent that PageNet's Board of Directors determines in good faith, after
consultation with outside legal counsel, that such withdrawal, modification or
change of its recommendation is required by its fiduciary duties to PageNet's
stockholders under applicable Law; provided, further, that, unless this
Agreement is terminated by Arch pursuant to Section 8.4, PageNet shall, as
promptly as practicable after the S-4 Registration Statement is declared
effective, duly convene and complete the PageNet Stockholders Meeting regarding
the adoption of this Agreement and the approval of the Merger, the amendment to
the PageNet certificate of incorporation set forth above and the other
transactions contemplated by this Agreement, regardless of whether PageNet's
Board of Directors has withdrawn, modified, or changed its recommendation to the
stockholders regarding the adoption of this Agreement or the approval of the
Merger, the amendment to the PageNet certificate of incorporation set forth
above or the other transactions contemplated by this Agreement prior to such
PageNet Stockholders Meeting. Notwithstanding the foregoing or any other
provision of this Agreement to the contrary, PageNet shall not be required to
convene a PageNet Stockholders Meeting after (x) the Bankruptcy Case has
commenced or (y) PageNet stipulates to bankruptcy relief after the occurrence of
an Involuntary Insolvency Event pursuant to Section 6.19(a)(v) hereof.
(b) Arch will take, in accordance with applicable Law and its certificate
of incorporation and bylaws, all action necessary to convene a meeting of its
stockholders (the "Arch Stockholders Meeting") as promptly as practicable after
the S-4 Registration Statement is declared effective to (i) consider and vote
upon (A) the Certificate Amendments and the issuance of shares of Arch Common
Stock pursuant to the Merger, the conversion of the Arch Series C Preferred
Shares and the Arch Exchange Offer or (B) if the Alternative Merger is elected
pursuant to Section 4.5 and Arch is a party to the Alternative Merger, the
adoption of this Agreement and the approval of the Alternative Merger and the
other transactions contemplated by this Agreement (including the actions
contemplated by the Certificate Amendments, which may be effectuated pursuant to
a certificate of merger filed in connection with such Alternative Merger); and
(ii) to approve any actions necessary pursuant to Section 3.1 hereof (the "Arch
Stockholders Approval"). Arch will take all necessary action to obtain such
consents and approvals. The Board of Directors of Arch shall: (i) recommend that
the stockholders adopt the Certificate Amendments and approve the issuance of
Arch Common Stock pursuant to the Merger, the conversion of the Arch Series C
Preferred Shares and the Arch Exchange Offer (or this Agreement and the
Alternative Merger if Arch is a party to the Alternative Merger) and the other
transactions contemplated by this Agreement; and (ii) take all lawful action to
solicit such adoption; provided, however, that Arch' Board of Directors may, at
any time prior to the Effective Time, withdraw, modify or change any such
recommendation to the extent that Arch' Board of Directors determines in good
faith, after consultation with outside legal counsel, that such withdrawal,
modification or change of its recommendation is required by its fiduciary duties
to Arch' stockholders under applicable Law; provided, further, that, unless this
Agreement is terminated by PageNet pursuant to Section 8.3, Arch shall, as
promptly as practicable after the S-4 Registration Statement is declared
effective, duly convene and complete the Arch Stockholders Meeting regarding the
adoption of the Certificate Amendments and the issuance of shares of Arch Common
Stock pursuant to the Merger, the conversion of the Arch Series C Preferred
Shares and the Arch Exchange Offer (or this Agreement and the Alternative Merger
if Arch is a party to the Alternative Merger) and the other transactions
contemplated by this Agreement, regardless of whether Arch' Board of Directors
has withdrawn, modified, or changed its recommendation to the stockholders
regarding the adoption of the Certificate Amendments and the issuance of shares
of Arch Common Stock pursuant to the Merger, the conversion of the Arch Series C
Preferred Shares and the Arch Exchange Offer (or this Agreement and the
Alternative Merger if Arch is a party to the Alternative Merger) or the other
transactions contemplated by this Agreement prior to such Arch Stockholders
Meeting.
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6.6. Filings; Other Actions; Notification.
(a) Arch and PageNet shall promptly prepare and file with the SEC the
Prospectus/Proxy Statement, and Arch shall prepare and file with the SEC the S-4
Registration Statement as promptly as practicable. Arch and PageNet each shall
use its reasonable best efforts to have the S-4 Registration Statement declared
effective under the Securities Act as promptly as practicable and on the same
day as each of the Exchange Registration Statements, and promptly thereafter
mail the Prospectus/Proxy Statement to the stockholders of Arch and PageNet.
Arch shall also use its reasonable best efforts to obtain prior to the effective
date of the S-4 Registration Statement all necessary state securities law or
"blue sky" permits and approvals required in connection with the Merger and the
other transactions contemplated by this Agreement and will pay all expenses
incident thereto. Each party shall notify the other of the receipt of the
comments of the SEC and of any requests by the SEC for amendments or supplements
to the Prospectus/Proxy Statement or the S-4 Registration Statement or for
additional information and shall promptly supply one another with copies of all
correspondence between any of them (or their Representatives) and the SEC (or
its staff) with respect thereto. If, at any time prior to either of the Arch
Stockholders Meeting or the PageNet Stockholders Meeting, any event shall occur
relating to or affecting Arch, PageNet, or their respective officers or
directors, which event should be described in an amendment or supplement to the
Prospectus/Proxy Statement or the S-4 Registration Statement, the parties shall
promptly inform one another and shall cooperate in promptly preparing filing and
clearing with the SEC and, if required by applicable securities laws, mailing to
Arch' or PageNet's stockholders, as the case may be, such amendment or
supplement.
(b) PageNet and Arch each shall use its respective reasonable best efforts
to cause to be delivered to the other party and its directors a letter of its
independent auditors, dated: (i) the date on which the S-4 Registration
Statement and the Exchange Registration Statements shall become effective; and
(ii) the Closing Date, and addressed to the other party and its directors, in
form and substance customary for "comfort" letters delivered by independent
public accountants in connection with registration statements similar to the S-4
Registration Statement and the Exchange Registration Statements.
(c) PageNet and Arch shall cooperate with each other and use (and shall
cause their respective Subsidiaries to use) their respective reasonable best
efforts: (i) to take or cause to be taken all actions, and do or cause to be
done all things, necessary, proper or advisable on its part under this Agreement
and applicable Laws to consummate and make effective the Merger, the Exchange
Offers and the other transactions contemplated by this Agreement (including, if
necessary, the Prepackaged Plan) as soon as practicable, including: (A)
obtaining opinions of their respective attorneys referred to in Article VII
below; (B) preparing and filing as promptly as practicable all documentation to
effect all necessary applications, notices, petitions, filings and other
documents; and (C) instituting court actions or other proceedings necessary to
obtain the approvals required to consummate the Merger, the Exchange Offers or
the other transactions contemplated by this Agreement or defending or otherwise
opposing all court actions or other proceedings instituted by a Governmental
Entity or other Person under the Governmental Regulations for purposes of
preventing the consummation of the Merger, the Exchange Offers and the other
transactions contemplated by this Agreement; and (ii) to obtain as promptly as
practicable all consents, registrations, approvals, permits and authorizations
necessary or advisable to be obtained from any third party and/or any
Governmental Entity in order to consummate the Merger, the Exchange Offers or
any of the other transactions contemplated by this Agreement; provided, however,
that nothing in this Section 6.5 shall require either Arch or PageNet to agree
to any divestitures or hold separate or similar arrangements if such
divestitures or arrangements would reasonably be expected to have a material
adverse effect on Arch or PageNet, or a material adverse effect on the expected
benefits of the Merger to it. Neither Arch nor PageNet will agree to any
divestitures or hold separate or similar arrangements without the prior written
approval of the other party. Subject to applicable laws relating to the exchange
of information, Arch and PageNet shall have the right to review in advance, and
to the extent practicable each will consult the other party on, all the
information relating to Arch or PageNet, as the case may be, and any of their
respective Subsidiaries, that appear in any filing made with, or written
materials submitted to, any third party and/or any Governmental Entity in
connection with the Merger and the other transactions contemplated by this
Agreement. In exercising the foregoing right, each of PageNet and Arch shall act
reasonably and as promptly as practicable.
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(d) PageNet and Arch each shall, upon request by the other party, furnish
the other party with all information concerning itself, its Subsidiaries,
directors, officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Prospectus/Proxy Statement, the
S-4 Registration Statement, the Exchange Registration Statements or any other
statement, filing, notice or application made by, or on behalf of, Arch, PageNet
or any of their respective Subsidiaries to any third party and/or any
Governmental Entity in connection with the Merger, the Exchange Offers and the
transactions contemplated by this Agreement.
(e) PageNet and Arch each shall keep the other party apprised of the status
of matters relating to completion of the transactions contemplated by this
Agreement, including promptly furnishing the other party with copies of notices
or other communications received by Arch or PageNet, as the case may be, or any
of its Subsidiaries, from any third party and/or any Governmental Entity with
respect to the Merger, the Exchange Offers and the other transactions
contemplated by this Agreement. Each of PageNet and Arch shall give prompt
notice to the other party of any change that is reasonably likely to result in a
Material Adverse Effect on it or of any failure of any conditions to the other
party's obligations to effect the Merger set forth in Article VII.
(f) Each of PageNet and Arch agrees that if a bona fide Acquisition
Proposal is made to acquire shares of the other party to this Agreement, then
upon the request of the party not receiving the Acquisition Proposal, the party
receiving the Acquisition Proposal will cooperate with the other party to this
Agreement to make such filings and take such other actions as may be permitted
or required under the FCC's Policy Statement in Tender Offers and Proxy
Contests, in order to allow the parties to this Agreement to take all steps as
are necessary to consummate the transactions contemplated hereby pending FCC
approval of the transaction.
6.7. Access; Consultation. Upon reasonable notice, and except as may be
prohibited by applicable Law, PageNet and Arch each shall (and shall cause its
Subsidiaries to) afford the other and its respective Representatives, reasonable
access, during normal business hours throughout the period prior to the
Effective Time, to its properties, books, contracts and records and, during such
period, each shall (and shall cause its Subsidiaries to) furnish promptly to the
other party all information concerning its business, properties and personnel as
may reasonably be requested; provided that no investigation pursuant to this
section shall affect or be deemed to modify any representation or warranty made
by PageNet or Arch under this Agreement; and provided, further, that the
foregoing shall not require PageNet or Arch to permit any inspection, or to
disclose any information, that in the reasonable judgment of PageNet or Arch, as
the case may be, would result in the disclosure of any trade secrets of it or
third parties, or violate any of its obligations with respect to confidentiality
if PageNet or Arch, as the case may be, shall have used all reasonable efforts
to obtain the consent of such third party to such inspection or disclosure. All
requests for information made pursuant to this section shall be directed to an
executive officer of PageNet or Arch, as the case may be, or such Person as may
be designated by any such executive officer, as the case may be.
6.8. Affiliates. PageNet shall deliver to Arch a letter identifying all
Persons whom PageNet believes to be, at the date of its Stockholders Meeting,
affiliates of PageNet for purposes of Rule 145 under the Securities Act ("Rule
145 Affiliates"). PageNet shall use all reasonable efforts to cause each Person
who is identified as a Rule 145 Affiliate in the letter referred to above to
deliver to Arch on or prior to the date of such party's respective Stockholders
Meeting a written agreement, in the form attached as Exhibit C (the "PageNet
Affiliates Agreement"). Prior to the Effective Time, PageNet shall use all
reasonable efforts to cause each additional Person who is identified as a Rule
145 Affiliate after the date of its Stockholders Meeting to execute the
applicable written agreement as set forth in this Section 6.8, as soon as
practicable after such Person is identified.
6.9. Stock Exchange Listing. To the extent they are not already listed,
Arch shall use its reasonable best efforts to cause the shares of Arch Common
Stock to be issued pursuant to the Merger, Arch Exchange Offer and pursuant to
the Certificate Amendments to be approved for listing on the Nasdaq National
Market (the "NASDAQ") and on all other stock exchanges on which shares of Arch
Common Stock are then listed, subject to official notice of issuance, prior to
the Closing Date.
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6.10. Publicity. The initial press release with respect to the Merger
shall be a joint press release. Thereafter PageNet and Arch shall consult with
each other prior to issuing any press releases or otherwise making public
announcements with respect to the Merger, the Exchange Offers and the other
transactions contemplated by this Agreement and prior to making any filings with
any third party and/or any Governmental Entity (including any securities
exchange) with respect thereto, except as may be required by Law or by
obligations pursuant to any listing agreement with, or rules of, any securities
exchange.
6.11. Benefits.
(a) Stock Options.
(i) At the Effective Time, each outstanding option to purchase PageNet
Shares (a "PageNet Option") under PageNet Stock Plans, and which has not
vested prior to the Effective Time, shall become fully exercisable and
vested as of the Effective Time. At the Effective Time, each PageNet Option
shall be converted to an option to acquire, on the same terms and
conditions as were applicable under such PageNet Option, the same number of
shares of Arch Common Stock as the holder of such PageNet Option would have
been entitled to receive pursuant to the Merger had such holder exercised
such PageNet Option in full immediately prior to the Effective Time
(rounded down to the nearest whole number) (a "Substitute Option"), at an
exercise price per share (rounded to the nearest whole cent) equal to: (y)
the aggregate exercise price for PageNet Shares otherwise purchasable by
such holder pursuant to such PageNet Option; divided by (z) the number of
full shares of Arch Common Stock deemed purchasable pursuant to such
PageNet Option in accordance with the foregoing.
(ii) Notwithstanding the foregoing provisions, in the case of any
option to which Code Section 421 applies, the option price, the number of
shares subject to such option, and the terms and conditions of exercise of
such option shall be determined in order to comply with Code Section
424(a). As promptly as practicable after the Effective Time, Arch shall
deliver to the participants in PageNet Stock Plans appropriate notices
setting forth such participants' rights pursuant to the Substitute Options.
(iii) With respect to each of the directors and officers of PageNet
identified in Section 6.11(a)(iii) of the PageNet Disclosure Letter (each,
a "Section 16 Person"), the full Board of Directors of PageNet shall
approve the disposition by each such Section 16 Person of the PageNet
equity securities (including derivative securities) set forth next to such
Section 16 Person's name in Section 6.11(a)(iii) of the PageNet Disclosure
Letter and the full Board of Directors of Arch shall approve the
acquisition by each such Section 16 Person of the Arch equity securities
(including derivative securities) set forth next to such Section 16
Person's name in Section 6.11(a)(iii) of the PageNet Disclosure Letter.
Each such approval shall specify, in the form set forth in Section
6.11(a)(iii) of the PageNet Disclosure Letter, the material terms of the
derivative securities and each such approval shall specify that the
approval is granted for purposes of exempting the transaction under Rule
16b-3 under the Exchange Act.
(b) Conversion and Registration. At or prior to the Effective Time,
PageNet shall make all necessary arrangements with respect to PageNet Stock
Plans to permit the conversion of the unexercised PageNet Options into
Substitute Options pursuant to this section and, as soon as practicable after
the Effective Time, Arch shall use its reasonable best efforts to register under
the Securities Act on Form S-8 or other appropriate form (and use its best
efforts to maintain the effectiveness thereof) shares of Arch Common Stock
issuable pursuant to all Substitute Options.
(c) Amendment to 401(k) Plan. Prior to the Effective Time, PageNet shall
(i) amend the PageNet Employees Savings Plan and the related trust to prohibit
the investment of Employer Salary Reduction Contributions in equity securities
of PageNet (ii) deregister interests under such plan and any registered but
unsold equity securities of PageNet under the Securities Act of 1933 and the
Exchange Act.
6.12. Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the Merger, the Exchange
Offers and the other transactions contemplated by this Agreement shall be paid
by the party incurring such cost and expense, except that costs and expenses
incurred in connection with the filing fee for the S-4 Registration Statement
and the Exchange Registration Statements, printing and mailing the
Prospectus/Proxy Statement, the S-4 Registration Statement and the
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Exchange Registration Statements, and the filing fees under the HSR Act, any
other filings fees under any Governmental Regulations, and any filings fees in
connection with obtaining approvals under the Communications Act, FCC
Regulations and State Laws shall be shared equally by Arch and PageNet.
6.13. Indemnification; Directors' and Officers' Insurance.
(a) For six years from and after the Effective Time, Arch will indemnify
and hold harmless each present and former director and officer of PageNet
(solely when acting in such capacity) determined as of the Effective Time (the
"Indemnified Parties"), against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to matters existing or occurring at,
or prior to, the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent that PageNet would have been
permitted under Delaware law and its certificate of incorporation or bylaws in
effect on the date of this Agreement to indemnify such Person (and the Surviving
Corporation shall also advance expenses as incurred to the fullest extent
permitted under applicable law, provided the Person to whom expenses are
advanced provides an undertaking to repay such advances if it is ultimately
determined that such Person is not entitled to indemnification).
(b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 6.13 shall promptly notify Arch, upon learning of any such
claim, action, suit, proceeding or investigation, but the failure to so notify
shall not relieve Arch of any liability it may have to such Indemnified Party if
such failure does not materially prejudice the ability of Arch to defend such
claims. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) Arch
shall have the right to assume the defense thereof and Arch shall not be liable
to such Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection with
the defense thereof, except that if Arch elects not to assume such defense or
counsel for the Indemnified Parties advises that there are actual conflicts of
interest between Arch and the Indemnified Parties, the Indemnified Parties may
retain counsel satisfactory to them, and Arch shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; provided, however, that Arch shall be obligated pursuant
to this paragraph (b) to pay for only one firm of counsel for all Indemnified
Parties in any jurisdiction (unless there is such an actual conflict of
interest), (ii) the Indemnified Parties will cooperate in the defense of any
such matter and (iii) Arch shall not be liable for any settlement effected
without its prior written consent.
(c) Arch shall maintain a policy of officers' and directors' liability
insurance for acts and omissions occurring prior to the Effective Time ("D&O
Insurance") with coverage in amount and scope at least as favorable as PageNet's
existing directors' and officers' liability insurance coverage for a period of
six years after the Effective Time; provided, however, if the existing D&O
Insurance expires, is terminated or canceled, or if the annual premium therefor
is increased to an amount in excess of 200% of the last annual premium paid
prior to the date of this Agreement (the "Current Premium"), in each case during
such six year period, Arch will use its best efforts to obtain D&O Insurance in
an amount and scope as great as can be obtained for the remainder of such period
for a premium not in excess (on an annualized basis) of 200% of the Current
Premium. The provisions of this Section 6.13(c) shall be deemed to have been
satisfied if prepaid policies shall have been obtained by PageNet prior to the
Closing, which policies provide such directors and officers with coverage for an
aggregate period of six years with respect to claims arising from facts or
events that occurred on, or prior to, the Effective Time, including, without
limitation, with respect to the transactions contemplated by this Agreement. If
such prepaid policies shall have been obtained by PageNet prior to the Closing,
then Arch shall maintain such policies in full force and effect and shall
continue to honor PageNet's obligations thereunder.
(d) If Arch or any of its successors or assigns: (i) shall consolidate
with, or merge into, any other corporation or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger;
or (ii) shall transfer all or substantially all of its properties and assets to
any individual, corporation or other entity, then and in each such case, proper
provisions shall be made so that the successors and assigns of
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Arch shall assume all of the obligations set forth in this section. At the
Effective Time, Arch shall assume and be bound by all of PageNet's indemnity
obligations with respect to officers, directors and employees of corporations it
previously acquired that are identified in the corresponding section of the
PageNet Disclosure Letter.
(e) The provisions of this section are intended to be for the benefit of,
and shall be enforceable by, each of the Indemnified Parties, their heirs and
their representatives.
6.14. Takeover Statute. If any Takeover Statute or similar statute or
regulation is or may become applicable to this Agreement or to the other
transactions contemplated hereby or thereby, each of the parties and its Board
of Directors shall grant such approvals and take all such actions as are legally
permissible so that the transactions contemplated under such agreements may be
consummated as promptly as practicable on the terms contemplated under such
agreements and otherwise act to eliminate or minimize the effects of any such
statute or regulation on the transactions contemplated under such agreements.
6.15. Confidentiality. PageNet and Arch each acknowledges and confirms
that it has entered into a Confidentiality Agreement, dated as of August 26,
1999 (the "Confidentiality Agreement"), and that the Confidentiality Agreement
shall remain in full force and effect in accordance with its terms.
6.16. Tax-Free Reorganization. Arch, Merger Sub and PageNet shall each
use its best efforts to cause the Merger to be treated as a reorganization with
the meaning of Section 368(a) of the Code and to obtain an opinion of its
respective counsel as contemplated by Sections 7.2(d) and 7.3(d), respectively.
6.17. Senior Credit Facilities. PageNet and Arch shall use their
reasonable best efforts to secure, through the amendment or restatement of their
respective current credit facilities, through a new credit facility or through
the operation of the Prepackaged Plan, or any combination of the foregoing,
senior secured debt financing in an amount not less than $1.3 billion on terms
reasonably acceptable to the parties to this Agreement. Simultaneously with the
Exchange Offers, PageNet shall solicit the consent of the holders of PageNet's
senior credit facilities (the "PageNet Secured Creditors") to the Prepackaged
Plan. The solicitation of the PageNet Secured Creditors shall be made in
accordance with the standards and requirements set forth in Section 6.18(e).
6.18. The Exchange Offers.
(a) Provided that nothing shall have occurred that would result in a
failure to satisfy any other conditions set forth in Section 6.18(b) of this
Agreement, Arch and PageNet shall, as promptly as practicable, commence separate
exchange offers (the "Arch Exchange Offer" and the "PageNet Exchange Offer" and
together, the "Exchange Offers") to issue an aggregate of up to: (i) 29,651,984
shares of Arch Common Stock in exchange for the $448.4 million in aggregate
principal amount of Arch' 10 7/8% Senior Discount Notes due March 15, 2008
issued under and pursuant to an Indenture, dated as of March 12, 1996, between
Arch and IBJ Schroder Bank & Trust Company, as Trustee (the "Arch Notes"); and
(ii) in the case of PageNet, 616,830,757 PageNet Shares and, subject to Section
6.1(d) of this Agreement, Distributed Interests representing 68.9% of the equity
ownership in the Distributed Subsidiary in exchange for the $1.2 billion in
aggregate principal amount, together with all accrued interest thereon, of: (x)
10% Senior Subordinated Notes Due October 15, 2008 issued under and pursuant to
an Indenture, dated as of July 15, 1995, between PageNet and Shawmut Bank, N.A.,
as Trustee, as supplemented by a Second Supplemental Indenture, dated as of
October 15, 1996, between PageNet and Fleet National Bank; (y) 10.125% Senior
Subordinated Notes Due August 1, 2007 issued under and pursuant to an Indenture,
dated as of July 15, 1995, between PageNet and Shawmut Bank, N.A., as Trustee,
as supplemented by a First Supplemental Indenture, dated as of July 15, 1995,
between PageNet and Shawmut Bank, N.A.; and (z) 8.875% Senior Subordinated Notes
Due February 1, 2006 issued under and pursuant to an Indenture, dated as of
January 15, 1994, between PageNet and Shawmut Bank, N.A., as Trustee, as
supplemented by a First Supplemental Indenture, dated as of January 15, 1994,
between PageNet and Shawmut Bank, N.A. (collectively, the "PageNet Notes" and
together with the Arch Notes, the "Notes"). In the Exchange Offers, (i) Arch
will offer to exchange 66.1318 shares of Arch Common Stock for each $1,000
principal amount, together with all accreted or accrued interest thereon, of
outstanding Arch Notes and (ii) PageNet will offer to exchange a pro rata
portion
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of 616,830,757 PageNet Shares and, subject to Section 6.1(d) of this Agreement,
Distributed Interests representing the portion of such equity ownership in the
Distributed Subsidiary equal to 68.9% of the total equity ownership of the
Distributed Subsidiary for each PageNet Note (such pro rata portion to be
computed immediately prior to the Effective Time by dividing the principal
amount, together with all accrued interest thereon, of each PageNet Note by the
principal amount, together with all accrued interest thereon, of all PageNet
Notes). Calculations of share amounts for such purpose will be rounded down to
the nearest whole share and no fractional shares of Arch Common Stock or PageNet
Shares will be issued for Notes.
(b) The obligations of Arch and PageNet under the Exchange Offers shall be
subject to the satisfaction of the conditions to the consummation of the Merger
set forth in Article VII of this Agreement and, to the further condition that,
(i) in the case of the PageNet Exchange Offer, not less than 97.5% of the
aggregate outstanding principal amount of PageNet Notes and not less than a
majority of the outstanding principal amount of each series of PageNet Notes
shall have been validly tendered in accordance with the terms of the PageNet
Exchange Offer prior to the expiration date of the PageNet Exchange Offer and
not withdrawn (such 97.5% of the outstanding principal amount of the PageNet
Notes and no less than a majority of the outstanding principal amount of each
series of PageNet Notes tendered and not withdrawn being herein referred to as
the "PageNet Minimum Condition") and (ii) in the case of the Arch Exchange
Offer, not less than 97.5% (the "Arch Minimum Percent") of the aggregate
outstanding principal amount of Arch Notes shall have been validly tendered in
accordance with the terms of the Arch Exchange Offer prior to the expiration
date of the Arch Exchange Offer and not withdrawn; provided, however, that (x)
PageNet may elect, in its sole discretion, to waive the Arch Minimum Percent, or
to lower such Arch Minimum Percent to any level, and require the Arch Exchange
Offer to be consummated at such specified level (subject to applicable Law and
the other provisions of this Agreement), and (y) at any time after either the
PageNet Minimum Condition or the PageNet Conditions to the Prepackaged Plan have
been satisfied, Arch may elect, in its sole discretion, to lower the Arch
Minimum Percent to any percentage equal to or greater than 67% (such amount of
Arch Notes tendered and not withdrawn, as may be adjusted by either PageNet or
Arch as set forth above, being herein referred to as the "Arch Minimum
Condition"). Except as otherwise provided in this Agreement, no term or
condition of the Exchange Offers may be amended or modified without the written
consent of the parties hereto, which consent shall not be unreasonably withheld.
(c) Holders of Notes who tender into the Exchange Offers will be required,
as a condition to a valid tender, to give their consent (the "Note Consents")
with respect to all Notes tendered by them to, with respect to the PageNet
Notes, the Prepackaged Plan and, with respect to all Notes (including the Arch
Notes), the following amendments to the respective indenture or supplemental
indentures, together with such additional amendments thereto or waivers thereof
as shall be determined and consented to by each of Arch and PageNet to be
necessary or desirable (the "Indenture Amendments"): (i) amendment of each such
indenture to the extent necessary, if any, to permit the completion of the
Merger, the Prepackaged Plan and the other transactions contemplated by this
Agreement; and (ii) amendments to eliminate (A) any covenants which may be
modified or eliminated by majority vote of the Notes, including without
limitation any covenants which restrict (s) the sale of assets, (t) any change
of control, (u) the incurrence of indebtedness, (v) the making of restricted
payments, (w) the existence of limitations on distributions by subsidiaries, (x)
the existence of liens, (y) transactions with affiliates or related persons or
(z) the issuance and sale of stock of subsidiaries, (B) any events of default
which relate to (x) the non-payment or acceleration of other indebtedness (or
notification of foreclosure proceedings with respect to property secured by
other indebtedness), (y) the failure to discharge judgments for the payment of
money, or (z) the bankruptcy or insolvency of subsidiaries, and (C) any
provisions which condition mergers or consolidations on compliance with any
financial criteria. Such holders will also be required, as a condition to a
valid tender, to waive (the "Note Waivers") any and all existing defaults on or
with respect to the Notes and any and all rights to rescind their acceptance of
the Exchange Offer after the Exchange Offers Expiration Date (as defined in
Section 6.18(h) hereof), such waiver of rescission rights to be subject,
however, to their withdrawal rights under applicable law and regulations, or to
claim any payments relating to the Notes tendered under applicable law and
regulations, and for any other relief, legal or equitable, based on any possible
future judicial, administrative or other governmental or legal determination
that the Note Consents or the adoption of any of the Indenture Amendments are
invalid or unenforceable. Notwithstanding anything to the contrary herein, the
Note Waivers
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shall not be deemed to cover claims for violations of federal or state
securities laws relating to the Exchange Offers.
(d) PageNet and Arch each agrees, as to itself and its Subsidiaries, that
none of the information supplied or to be supplied by it or its Subsidiaries for
inclusion or incorporation by reference in: (i) (x) the Registration Statement
on Form S-4 to be filed with the SEC by Arch in connection with the issuance of
shares of Arch Common Stock in the Arch Exchange Offer (including the consent
solicitation and prospectus (the "Arch Exchange Prospectus" constituting a part
thereof) (the "Arch Exchange Registration Statement")) and (y) the Registration
Statement on Form S-4 to be filed with the SEC by PageNet in connection with the
issuance of PageNet Shares and Distributed Interests in the PageNet Exchange
Offer (including the consent solicitation and prospectus (the "PageNet Exchange
Prospectus" and, together with the Arch Exchange Statement, the "Exchange
Prospectuses" constituting a part thereof) (the "PageNet Exchange Registration
Statement" and, together with the Arch Exchange Registration Statement, the
"Exchange Registration Statements")) will, at the time the Exchange Registration
Statements become effective under the Securities Act; and (ii) the Exchange
Prospectuses and any amendment or supplement thereto will, at the date of
mailing to noteholders contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. If at any time prior to the Effective Time any
information relating to Arch or PageNet, or any of their respective affiliates
(as defined in SEC Rule 12b-2), officers or directors, is discovered by Arch or
PageNet which should be set forth in an amendment or supplement to any of the
Exchange Registration Statements or the Exchange Prospectuses, so that any of
such documents would not include any misstatement of a material fact or would
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, the party which discovers such information shall
promptly notify the other parties to this Agreement and an appropriate amendment
or supplement describing such information shall be promptly filed with the SEC
and, to the extent required by law, disseminated to the noteholders.
(e) The PageNet Exchange Prospectus sent to the holders of the PageNet
Notes in connection with the PageNet Exchange Offer will also constitute a
disclosure statement for the purpose of soliciting the acceptances of such
holders for the Prepackaged Plan (as defined in Section 6.19). PageNet and Arch
shall consult with each other prior to sending the PageNet Exchange Prospectus
to the holders of the PageNet Notes for purposes of ensuring that such materials
comply with the disclosure requirements of the Bankruptcy Code and other
applicable law insofar as they relate to prepackaged plans.
(f) Arch and PageNet shall promptly prepare Exchange Prospectuses, and
shall prepare and file with the SEC the Exchange Registration Statements as
promptly as practicable. Arch and PageNet each shall use its reasonable best
efforts to have each of the Exchange Registration Statements declared effective
under the Securities Act as promptly as practicable and on the same day as the
S-4 Registration Statement, and promptly thereafter mail the Exchange
Prospectuses to the noteholders of Arch and PageNet. Each party shall notify the
other of the receipt of the comments of the SEC and of any requests by the SEC
for amendments or supplements to the Exchange Prospectuses or the Exchange
Registration Statements or for additional information and shall promptly supply
one another with copies of all correspondence between any of them (or their
Representatives) and the SEC (or its staff) with respect thereto. If, at any
time prior to the expiration date of the Exchange Offers, any event shall occur
relating to or affecting Arch, PageNet, or their respective officers or
directors, which event should be described in an amendment or supplement to the
Exchange Prospectuses or the Exchange Registration Statements, the parties shall
promptly inform one another and shall cooperate in promptly preparing, filing
and clearing with the SEC and, if required by applicable securities laws,
mailing to Arch' or PageNet's noteholders, as the case may be, such amendment or
supplement.
(g) Provided the conditions to the Exchange Offers referred to in Section
6.18(b) above have been satisfied or waived and Arch or PageNet, as the case may
be, has accepted for exchange Notes properly tendered and not withdrawn, Notes
that are not tendered into or accepted in the Exchange Offers will remain
outstanding as obligations of Arch or the Surviving Corporation, as the case may
be, after consummation of the Merger and Arch or the Surviving Corporation, as
the case may be, alone shall be obligated to comply with the terms thereof,
except as may otherwise be provided in the Prepackaged Plan or the Final
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Confirmation Order (as defined in Section 6.19) if the Bankruptcy Case (as
defined in Section 6.19) is commenced. Such Notes shall be modified only to the
extent provided in the Indenture Amendments and the Note Consents.
(h) The Exchange Offers will expire at 12:00 midnight, New York City time,
on the twentieth business day after such commencement, or, consistent with this
Agreement and the provisions of Section 6.19, at such later time and date as
PageNet and Arch shall select consistent with applicable law and regulations
(the "Exchange Offers Expiration Date").
(i) The Arch Common Stock or PageNet Shares and Distributed Interests, as
the case may be, to be issued in exchange for the Notes tendered and accepted in
the Exchange Offers will be so issued only after timely receipt by the exchange
agent selected jointly by Arch and PageNet (the "Notes Exchange Agent") of: (i)
certificates for all physically delivered Notes in proper form for transfer, or
timely confirmation of book-entry transfer of such Notes for such purposes; (ii)
a properly completed and duly executed letter of transmittal in the form
provided on behalf of Arch or the Surviving Corporation, as the case may be, for
such purpose; (iii) a duly executed form of Note Consent and Note Waiver; and
(iv) any other documents required by the letter of transmittal.
(j) For purposes of the Exchange Offers, Arch or PageNet, as the case may
be, shall be deemed to have accepted for exchange the tendered Notes as, if and
when Arch or PageNet, as the case may be, gives oral or written notice to the
Notes Exchange Agent of such party's acceptance of such Notes for exchange. Each
of Arch and PageNet agree to simultaneously accept for exchange the Notes
pursuant to their respective Exchange Offers. The Notes Exchange Agent will act
as agent for the tendering holders for the purpose of receiving the Notes and
transmitting the Arch Common Stock, PageNet Shares or Distributed Interests, as
the case may be, in exchange therefor.
(k) Arch and PageNet shall jointly establish such additional procedures and
requirements with respect to the conduct of the Exchange Offers and shall cause
the same to be communicated to holders of the Notes in such manner as they shall
determine to be necessary or appropriate, including procedures and requirements
as may be necessary to obtain confirmation of the Prepackaged Plan if the
Bankruptcy Case is commenced. All questions concerning the timeliness, validity,
form, eligibility, and acceptance for exchange or withdrawal of any tender of
the Notes pursuant to any of the procedures described herein or any additional
procedures established by the parties shall be determined jointly by the
parties, whose determinations shall be final and binding. Arch and PageNet, as
the case may be, also reserve in connection with their respective Exchange
Offers, the absolute right to: (i) waive any defect or irregularity in any
tender with respect to any particular Note or any particular holder; (ii) permit
a defect or irregularity to be corrected within such time as it may determine;
or (iii) reject the purported tender of any Note and interest coupons
appertaining thereto. Tenders shall not be deemed to have been received or
accepted until all defects and irregularities have been cured or waived within
such time as Arch or PageNet, as the case may be, may determine in its sole
discretion. None of Arch, PageNet or the Notes Exchange Agent or any other
person shall be under any duty to give notification of any defects or
irregularities relating to tenders or incur any liability for failure to give
such notification.
(l) Each of PageNet and Arch shall accept the Notes tendered in their
respective Exchange Offer as of immediately prior to the Effective Time.
(m) Promptly upon receipt of the consents of the holders of at least a
majority of the outstanding principal amount of a series of Notes, Arch or
PageNet, as the case may be, shall execute the applicable supplemental indenture
to be effective as of the Effective Time.
6.19. Bankruptcy Provisions. As used in this Agreement, the term:
"Bankruptcy Case" shall mean the bankruptcy case filed or stipulated to by
PageNet and its Subsidiaries under Chapter 11 of the Bankruptcy Code pursuant to
the terms hereof;
"Bankruptcy Code" shall mean Title 11 of the United States Code, 11
U.S.C.sec.101 et seq., as now in effect or hereafter amended;
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"Bankruptcy Court" shall mean the court in which the Bankruptcy Case may be
filed or otherwise administered, including any court to which the Bankruptcy
Case may be transferred at any time under applicable law. PageNet and Arch
hereby agree that the U.S. Bankruptcy Court for the District of Delaware is the
appropriate venue for the Bankruptcy Case and that if the Bankruptcy Case is
filed by PageNet it will be filed in the District of Delaware;
"Exit Financing" shall mean the senior secured debt financing referred to
in Section 6.17 hereof;
"Final Confirmation Order" shall mean an order of the Bankruptcy Court
confirming the Prepackaged Plan in form and substance reasonably acceptable to
PageNet and Arch, which has not been amended, modified and added to without the
express consent of PageNet and Arch and as to which order as of the Effective
Time there is no stay or injunction;
"Initial Determination Date" shall mean the date which is 60 days after the
date upon which the S-4 Registration Statement and the Exchange Registration
Statements are declared effective by the SEC;
"Interim Financing" shall mean debt financing in an amount and on terms
reasonably acceptable to Arch and appropriate to permit PageNet to continue its
business and operations in the ordinary course following the filing of the
Bankruptcy Case;
"Prepackaged Plan" shall mean the "prepackaged" plan of reorganization for
PageNet and its Subsidiaries that (1) is prepared by PageNet and its
Subsidiaries in accordance with, and intended by PageNet and its Subsidiaries to
be confirmed under, the provisions of Chapter 11 of the Bankruptcy Code
(including the confirmation requirements set forth in Section 1129 thereof), (2)
consists of terms, conditions and provisions that are mutually acceptable to
Arch and PageNet (it being understood and agreed by PageNet and Arch that
neither party will unreasonably withhold its consent to proposed amendments to
non-material provisions of the Prepackaged Plan) and are not inconsistent with
the terms, conditions and provisions of this Agreement, (3) is included in the
SEC disclosure materials sent to holders of the PageNet Notes in connection with
the Exchange Offers pursuant to Sections 6.18(a) and (e) of this Agreement and
(4) which contains terms intended to implement this Agreement and other terms
which are not inconsistent with this Agreement, together with any and all
changes, amendments or modifications to, or restatements of, such prepackaged
plan which with respect to material provisions have been agreed to by Arch and
PageNet, without regard to whether such changes, amendments, modifications and
restatements are made to the Prepackaged Plan before or after the commencement
of the Bankruptcy Case;
"PageNet Conditions to the Prepackaged Plan" shall mean (i) the Requisite
Bankruptcy Vote of the PageNet Notes, (ii) the Requisite Bankruptcy Vote of the
PageNet Secured Creditors and (iii) the Interim Financing;
"Requisite Bankruptcy Vote of the PageNet Notes" shall mean a vote in favor
of the Prepackaged Plan by the holders of at least two-thirds of the outstanding
principal amount of the PageNet Notes that are actually voted, and a vote in
favor of the Prepackaged Plan by a majority in number of the holders of the
PageNet Notes that actually vote;
"Requisite Bankruptcy Vote of the PageNet Secured Creditors" shall mean a
vote in favor of the Prepackaged Plan by the holders of at least two-thirds of
the outstanding indebtedness owed under the PageNet senior credit facilities
that are actually voted, and a vote in favor of the Prepackaged Plan by a
majority in number of the holders of the indebtedness under the PageNet senior
credit facilities that actually vote;
"Requisite Conditions to the Prepackaged Plan" shall mean (i) the PageNet
Conditions to the Prepackaged Plan, (ii) the Arch Conditions to the Prepackaged
Plan, and (iii) that either the Exit Financing has been obtained or upon entry
of the Final Order will be obtained;
"Arch Conditions to the Prepackaged Plan" shall mean the (i) Arch Minimum
Condition and (ii) Arch Stockholders Approval.
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(a) Notwithstanding any other provision of this Agreement to the contrary,
in the event that:
(i) prior to or at the Initial Determination Date the PageNet Minimum
Condition and the Arch Minimum Condition are satisfied, and the PageNet
Stockholders Approval and the Arch Stockholders Approvals are obtained,
then the Exchange Offers shall be consummated pursuant to the terms hereof,
the Bankruptcy Case shall not be filed and the Prepackaged Plan shall be
abandoned, unless PageNet and Arch agree that the filing of the Bankruptcy
Case and the confirmation of the Prepackaged Plan are in the best interests
of PageNet and Arch, notwithstanding satisfaction of the PageNet Minimum
Condition and the Arch Minimum Condition;
(ii) at the Initial Determination Date, the PageNet Minimum Condition
is not satisfied or the PageNet Stockholders Approval is not obtained but
the Requisite Conditions to the Prepackaged Plan are satisfied, then either
(x) (1) PageNet shall file the Bankruptcy Case (in the U.S. Bankruptcy
Court for the District of Delaware or such other bankruptcy court as
PageNet and Arch mutually agree) and seek confirmation of the Prepackaged
Plan by the Bankruptcy Court, and (2) Arch shall be bound by all of the
terms hereof, and shall consummate the Merger through the Prepackaged Plan
if such plan is confirmed by the Bankruptcy Court by a Final Confirmation
Order within 120 days of the commencement of the Bankruptcy Case, or such
later date as is mutually agreed to in writing by Arch and PageNet, and if
the other conditions to the Merger set forth in Article VII hereof (other
than Section 7.1(a)(2) and 7.1(g)(ii), which shall have been satisfied by
entry of the Final Confirmation Order) are satisfied after entry of the
Final Confirmation Order but prior to the Termination Date, as such date
may be extended in accordance with Section 8.2, or (y) PageNet shall
terminate this Agreement and simultaneously pay to Arch the Arch
Termination Fee pursuant to Section 8.5(c) hereof. In the event the
Bankruptcy Case is commenced, Arch shall:
(w) support assumption of this Agreement by PageNet as a
debtor-in-possession pursuant to 11 U.S.C. sec.365;
(x) enter into a new agreement identical to the terms of this
Agreement with PageNet as a debtor-in-possession after commencement of
the Bankruptcy Case, in the event PageNet and Arch agree (upon the
advice of counsel) or the Bankruptcy Court determines that applicable
law prohibits assumption of this Agreement by PageNet as a
debtor-in-possession pursuant to 11 U.S.C. sec.365(c)(2);
(y) support confirmation of the Prepackaged Plan and all actions
and pleadings reasonably undertaken by PageNet in the Bankruptcy Case to
achieve confirmation thereof; and
(z) oppose any effort by any party to (1) dismiss the Bankruptcy
Case or convert the Bankruptcy Case to a case under chapter 7 of the
Bankruptcy Code, or (2) defeat confirmation of the Prepackaged Plan;
(iii) at the Initial Determination Date, the PageNet Minimum Condition
is not satisfied or the PageNet Stockholders Approval is not obtained and
the Requisite Conditions to the Prepackaged Plan are not satisfied, then
the Initial Determination Date shall be extended to the earlier of (x) the
date upon which the PageNet Minimum Condition and the Arch Minimum
Condition are satisfied, and the PageNet Stockholders Approval and the Arch
Stockholders Approval are obtained, (y) the date upon which the Requisite
Conditions to the Prepackaged Plan are satisfied and (z) June 30, 2000 (the
"Extended Determination Date"). If the PageNet Minimum Condition and the
Arch Minimum Condition are satisfied and the PageNet Stockholders Approval
and the Arch Stockholders Approval are obtained prior to June 30, 2000,
then the provisions of Section 6.19(a)(i) of this Agreement shall apply. If
the Requisite Conditions to the Prepackaged Plan are satisfied prior to
June 30, 2000, then the provisions of Section 6.19(a)(ii) of this Agreement
shall apply;
(iv) at any time after the date of this Agreement, the Board of
Directors of PageNet determines that the filing of the Bankruptcy Case is
in the best interests of PageNet, then (1) PageNet may file the Bankruptcy
Case and shall seek, to the extent not already satisfied, to satisfy the
PageNet Conditions to the Prepackaged Plan and otherwise seek confirmation
of the Prepackaged Plan by the Bankruptcy Court,
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and (2) Arch shall (x) seek, to the extent not already satisfied, to
satisfy the Arch Conditions to the Prepackaged Plan and (y) be bound by all
of the terms hereof, and shall consummate the Merger through the
Prepackaged Plan if such plan is confirmed by the Bankruptcy Court by a
Final Confirmation Order (provided that such Final Confirmation Order shall
be entered by no later than December 31, 2000, or such later date as is
mutually agreed to by Arch and PageNet) and if the other conditions to the
Merger set forth in Article VII hereof (other than Section 7.1(a)(2) and
7.1(g)(ii), which shall have been satisfied by entry of the Final
Confirmation Order) are satisfied after entry of the Final Confirmation
Order but prior to the Termination Date, as such date may be extended in
accordance with Section 8.2;
(v) an Involuntary Insolvency Event occurs prior to a voluntary
commencement of the Bankruptcy Case pursuant to Sections 6.19(a)(ii), (iii)
or (iv), (1) (A) if the date of the Insolvency Event (the "Involuntary
Insolvency Event Date") is prior to the Initial Determination Date, PageNet
shall have up to 120 days after such Involuntary Insolvency Event Date to
obtain from the appropriate court an order which dismisses such Involuntary
Insolvency Event (including, with respect to an involuntary petition filed
in any bankruptcy court, an order which holds or requires that the court
abstain from adjudicating the petition pursuant to 11 U.S.C. sec.305) and
which order is not subject to a stay or injunction and is not subject to an
appeal and all periods for taking an appeal shall have expired (the
"Dismissal Order"), so that the Exchange Offers may be completed, and this
Agreement shall remain in full force and effect and Arch shall be bound by
all of the terms hereof or (B) if an Involuntary Insolvency Event occurs
after the Initial Determination Date, and as of the Involuntary Insolvency
Event Date the PageNet Minimum Condition and the Arch Minimum Condition
have been satisfied and the PageNet Stockholders Approval and Arch
Stockholders Approval have been obtained, then (x) PageNet shall have up to
120 days after such Involuntary Insolvency Event Date to obtain entry of
the Dismissal Order, and (y) this Agreement shall remain in full force and
effect and Arch shall consummate the Merger (outside of bankruptcy, unless
PageNet and Arch mutually consent to file the Bankruptcy Case as
contemplated by Section 6.19(a)(i) hereof) pursuant to the terms hereof
provided that such Dismissal Order has been obtained before the expiration
of such 120-day period, (2) if on the Involuntary Insolvency Event Date the
PageNet Minimum Condition has not been satisfied or PageNet Stockholders
Approval has not been obtained but the Requisite Conditions to the
Prepackaged Plan have been satisfied, then PageNet shall stipulate to
bankruptcy relief under Chapter 11 of the Bankruptcy Code and the
provisions of Section 6.19(a)(ii)(x)(1) of this Agreement shall apply
(including the provisions therein requiring Arch to be obligated to
consummate the Merger pursuant to the Prepackaged Plan); and (3) if on the
Involuntary Insolvency Event Date the PageNet Minimum Condition has not
been satisfied or PageNet Stockholders Approval or Arch Stockholders
Approval has not been obtained and the Requisite Conditions to the
Prepackaged Bankruptcy have not been obtained, then PageNet may (but shall
not be obligated to) stipulate to bankruptcy relief under Chapter 11 of the
Bankruptcy Code and the provisions of Section 6.19(a)(iv) of this Agreement
shall apply (including the provisions therein requiring Arch to be
obligated for a period of time to consummate the Merger pursuant to the
Prepackaged Plan). For purposes hereof, an "Involuntary Insolvency Event"
shall mean any filing of an involuntary bankruptcy petition against PageNet
or any of its Subsidiaries by any party, or the appointment under other
applicable state or federal law of a liquidator or a trustee for PageNet or
any of its Subsidiaries.
(b) As soon as practicable after entering into this Agreement, PageNet and
Arch shall jointly prepare the Prepackaged Plan in form and substance
satisfactory to PageNet and Arch. PageNet shall include the Prepackaged Plan and
related solicitation materials (including a ballot) in the PageNet Exchange
Prospectus, the solicitation materials sent to the PageNet Secured Creditors,
and (to the extent PageNet and Arch deem necessary) in any materials sent to the
holders of PageNet Shares. PageNet and Arch shall cooperate to ensure that the
Exchange Offers, including the disclosures to holders of PageNet Notes made in
connection therewith, and the solicitation of PageNet Secured Creditors comply
with the disclosure requirements of the Bankruptcy Code and applicable law. The
Prepackaged Plan may not be amended, modified or added to in any material
respect without the written consent of PageNet and Arch.
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(c) Notwithstanding any other provision hereof to the contrary, (i) the
filing of the Bankruptcy Case, the operation of PageNet's business in accordance
with the Bankruptcy Code or the pendency of the Bankruptcy Case, or (ii) the
occurrence of an Involuntary Insolvency Event with respect to PageNet shall not
be considered in and of itself a Material Adverse Effect for purposes of this
Agreement.
(d) On the same day that the Bankruptcy Case is filed, an order for relief
is consented to under Section 6.19(a)(v) of this Agreement or an order for
relief is entered, as applicable, PageNet shall file a motion (the "Initial
Merger Motion") for expedited determination of approval of Section 6.2 hereof
concerning Acquisition Proposals (the "Exclusivity Provision"), Section 8.5(c)
concerning the Arch Termination Fee and Section 8.5(b) concerning the PageNet
Termination Fee in form and substance acceptable to Arch, PageNet shall use its
best efforts to obtain an order approving the Initial Merger Motion (the
"Initial Merger Order") within 15 days of the commencement of the Bankruptcy
Case, but in no event not later than 30 days after the commencement thereof,
which order shall be in form and substance acceptable to Arch.
(e) PageNet shall promptly provide to Arch with drafts of all documents,
motions, orders, filings or pleadings that PageNet proposes to file with the
Bankruptcy Court and will provide Arch with reasonable opportunity prior to the
filing thereof to review such filings to the extent reasonably practicable.
PageNet shall consult and cooperate with Arch with respect to all such filings.
(f) PageNet and Arch shall use their best efforts to cause the transactions
contemplated by this Agreement and the Prepackaged Plan to be consummated in
accordance with the terms hereof and thereof, and without limiting the
generality of the foregoing shall use their best efforts to obtain all necessary
approvals, waivers, consents, permits, licenses, registrations and other
authorizations required in connection with this Agreement and the Prepackaged
Plan and the transactions contemplated hereby and thereby, including without
limitation, entry of the Final Confirmation Order.
(g) PageNet shall cause its Subsidiaries to take all actions and to execute
all agreements and documents which are necessary or useful in the preparation of
and commencement of the Bankruptcy Case, the preparation, filing and prosecution
of the Prepackaged Plan and the entry of the Final Confirmation Order.
(h) Concurrent with the commencement of the Exchange Offers, PageNet shall
send solicitation and disclosure materials to its creditors as would bind such
creditors to the Prepackaged Plan under the provisions of the Bankruptcy Code.
PageNet shall make such solicitations of its creditors (in addition to
solicitations of holders of the PageNet Notes) as PageNet and Arch determine is
necessary to facilitate and expedite the confirmation of the Prepackaged Plan in
the event of any potential Bankruptcy Case.
(i) If the Bankruptcy Case is commenced pursuant to Section 6.19(a)(iv) or
(v), then Arch shall not be subject to the restrictions set forth in Section 6.2
or the restrictions on the conduct of its business set forth in Section
6.1(b)(viii) with respect to merger or acquisition transactions or the other
restrictions set forth in Section 6.1(b), to the extent such restrictions would
impede or prohibit Arch from entering into another merger or acquisition
transaction; provided, however, that Arch may not enter into another merger or
acquisition transaction that would prevent, materially impair or materially
delay its ability to consummate the Merger or the other transactions
contemplated hereby; provided, further, that if Arch enters into a merger or
acquisition transaction following the commencement of the Bankruptcy Case
pursuant to Section 6.19(a)(iv) or (v) and as a result of such event PageNet is
required to amend its disclosure statement and resolicit the votes of its
creditors, then the time within which the Final Confirmation Order must be
obtained shall be extended for an additional 90 days.
6.20. Rights Agreement. At or prior to the Effective Time, the Arch Board
of Directors shall take all action required to render inapplicable the Arch
Rights Agreement to the Merger and the transactions contemplated by this
Agreement. At or prior to the Effective Time, the Arch Board of Directors shall
take all action required by Section 5.1(j)(ii) of this Agreement and the PageNet
Board of Directors shall take all action required by Section 5.1(j)(i) of this
Agreement.
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6.21. Preferred Stock.
(a) Arch shall use its reasonable best efforts to obtain, as soon as
practicable after the date of this Agreement, the written agreement of each
holder of Arch Series C Preferred Shares (such written agreement referred to
herein as the "Series C Consent Agreement"), pursuant to which: (i) such holder
agrees to vote in favor of an amendment to the Arch certificate of incorporation
pursuant to which each Series C Convertible Preferred Share shall be converted
at the Effective Time into 8.416568 shares (the "Series C Exchange Ratio") of
Arch Common Stock, subject to adjustment as provided in Section 4.4 (the "Series
C Consideration"), (ii) waive any and all rights such holder may have under
section 7A of the Certificate of Designations, Preferences and Relative,
Participating, Optional or other Special Rights of Series C Convertible Stock of
Arch; and (iii) Arch agrees to register for sale by such holder and certain
transferees, the shares of Arch Common Stock received by such holder, unless
such shares would be freely tradeable under applicable securities laws. When
executed and delivered by Arch, the Series C Consent Agreement will be a valid
and binding agreement of Arch, enforceable against Arch in accordance with its
terms, subject to the Bankruptcy and Equity Exception.
(b) The exchange of certificates formerly representing Arch Series C
Preferred Shares shall be effected by the Exchange Agent (as defined in Section
4.2) pursuant to the provisions set forth in Section 4.2 of this Agreement. The
term "Certificate" shall include certificates formerly representing Arch Series
C Preferred Shares.
6.22. Spinoff. Prior to the Closing, the Board of Directors of PageNet
will declare a dividend (the "Spinoff Dividend"), payable to those holders of
PageNet Shares who hold PageNet Shares immediately prior to the acceptance of
PageNet Notes in the PageNet Exchange Offer (the "Spinoff Record Date"), of
interests (the "Distributed Interests") representing the portion of such equity
ownership in Silverlake Communications, Inc. (also doing business as Vast
Solutions, Inc. and Vast Solutions) (the "Distributed Subsidiary") equal to (x)
subject to Section 6.1(d), 11.6% of the total equity ownership of the
Distributed Subsidiary divided by (y) the number of PageNet Shares issued and
outstanding at the Spinoff Record Date (the issuance of the Spinoff Dividend
shall be referred to herein as the "Spinoff"). Payment of the Spinoff Dividend
declared by the Board of Directors of PageNet shall be conditioned upon the
occurrence of (i) either (A) the satisfaction of the PageNet Minimum Condition
and the acceptance of the PageNet Notes or (B) the filing of the Final
Confirmation Order and (ii) the consummation of the Merger. PageNet and the
Distributed Subsidiary shall take such action reasonably necessary (including
filings with and no- action requests of the SEC and communications with
stockholders) to effectuate the Spinoff. Upon satisfaction of the conditions to
the Spinoff Dividend, Arch shall use its reasonable best efforts to consummate,
or cause to be consummated the Spinoff as promptly as practicable after the
Effective Time.
ARTICLE VII.
CONDITIONS
7.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver, if applicable, at or prior to the Effective Time of each
of the following conditions:
(a) Stockholder Approval. The Arch Stockholders Approval shall have
been obtained, and PageNet shall have obtained either (1) the PageNet
Stockholders Approval or (2) entry of the Final Confirmation Order
confirming the Prepackaged Plan, such that this Agreement and the
transactions contemplated hereby can be accomplished without the approval
of the holders of the PageNet Shares.
(b) NASDAQ Listing. The shares of Arch Common Stock issuable pursuant
to this Agreement shall have been approved for listing (either before or
after the execution of this Agreement) on the NASDAQ.
(c) Governmental Regulations. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated, and all other consents, permits, licenses, and
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approvals for the Merger and the other transactions contemplated by this
Agreement required by the Governmental Regulations, as well as all other
material PageNet Required Consents and Arch Required Consents, shall have
been obtained and shall have become Final Orders. For purposes of this
agreement, a "Final Order" shall mean an action taken or order issued by
the applicable Governmental Entity as to which (i) no request for stay by
such Governmental Entity of the action or order is pending, no such stay is
in effect, and, if any deadline for filing any such request is designated
by statute or regulation, it is passed; (ii) no petition for rehearing or
reconsideration of the action or order is pending before the Governmental
Entity and the time for filing any such petition is passed; (iii) the
Governmental Entity does not have the action or order under reconsideration
on its own motion and the time for such reconsideration has passed; (iv)
the action or order is not then under active judicial review, there is no
notice of appeal or other application for judicial review pending, and the
deadline for filing such notice of appeal or other application for judicial
review has passed; and (v) with respect to an action taken or order issued
by the Governmental Entity granting consent to the Merger, such consent
shall be without material adverse conditions, other than conditions that
have been agreed to by PageNet and Arch or that are routine conditions with
respect to transfer of this nature.
(d) Laws and Orders. No Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any Law
(whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the Merger, the
Exchange Offers, the Spinoff or the other transactions contemplated by this
Agreement (collectively, an "Order"), and no Governmental Entity shall have
instituted any proceeding or threatened to institute any proceeding seeking
any such Order.
(e) S-4. The S-4 Registration Statement and the Exchange Registration
Statements shall have become effective under the Securities Act. No stop
order suspending the effectiveness of the S-4 Registration Statement or the
Exchange Registration Statements shall have been issued, and no proceedings
for that purpose shall have been initiated or be threatened by the SEC.
(f) Senior Credit Facilities. Arch and its subsidiaries, including
PageNet after giving effect to the Merger, will have senior credit
facilities in an amount not less than $1.3 billion.
(g) Exchange Offers/Bankruptcy. Either (i) the PageNet Minimum
Condition and the Arch Minimum Condition shall have been satisfied or (ii)
if the PageNet Minimum Condition has not been satisfied, the Final
Confirmation Order shall have been entered confirming the Prepackaged Plan
and the Arch Minimum Condition shall have been obtained and all conditions
to the Effective Time occurring under the Prepackaged Plan shall have been
satisfied.
(h) Blue Sky Approvals. Arch shall have received all state securities
and "blue sky" permits and approvals necessary to consummate the
transactions contemplated by this Agreement.
(i) Expected Out-of-Pocket Income Tax Liability. PageNet, Arch,
Merger Sub and their respective subsidiaries shall not be reasonably
expected to incur out-of-pocket income tax liability in their respective
taxable periods which include the Effective Time resulting directly from
the consummation of the Merger, the Exchange Offers and the Spinoff in
excess of $25 million in the aggregate. In making this determination the
following shall be taken into account: (1) the amount of cancellation of
indebtedness income, if any, includible in gross income, (2) gain, if any,
incurred as a result of the distribution or transfer of appreciated assets,
and (3) the amount of losses, credits or deductions, including both
available net operating loss or credit carryforwards and losses, deductions
or credits expected to be generated in the taxable periods which include
the Effective Time, but excluding any expected carrybacks from subsequent
taxable periods.
7.2. Conditions to Obligations of Arch and Merger Sub. The obligations of
Arch and Merger Sub to effect the Merger are also subject to the satisfaction or
waiver by Arch at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of PageNet set forth in this Agreement (other than those
representations and warranties which would be breached as a result of
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the filing or conduct of the Bankruptcy Case or the occurrence of an
Involuntary Insolvency Event with respect to PageNet): (i) to the extent
qualified by materiality, shall be true and correct; and (ii) to the extent
not qualified by materiality, shall be true and correct (except that this
clause (ii) shall be deemed satisfied so long as any failures of such
representations and warranties to be true and correct, taken together,
would not reasonably be expected to have a Material Adverse Effect on
PageNet and would not reasonably be expected to have a material adverse
effect on the expected benefits of the Merger to Arch), in the case of each
of clauses (i) and (ii), as of the date of this Agreement and (except to
the extent such representations and warranties speak as of an earlier date)
as of the Closing Date as though made on and as of the Closing Date, and
Arch shall have received a certificate signed on behalf of PageNet by an
executive officer of PageNet to such effect.
(b) Performance of Obligations of PageNet. PageNet shall have
performed in all material respects all of its covenants, agreements and
obligations set forth in this Agreement at or prior to the Closing Date,
and Arch shall have received a certificate signed on behalf of PageNet by
an executive officer of PageNet to such effect.
(c) Consents Under Agreements. PageNet shall have obtained the
consent or approval of each Person whose consent or approval shall be
required in order to consummate the transactions contemplated by this
Agreement under any Contract to which PageNet or any of its Subsidiaries is
a party (other than consents or waivers relating to the Bankruptcy Case or
the occurrence of an Involuntary Insolvency Event), except those for which
the failure to obtain such consent or approval, individually or in the
aggregate, is not reasonably likely to have, a Material Adverse Effect on
PageNet or a material adverse effect on the expected benefits of the Merger
to Arch.
(d) Tax Opinion. Arch shall have received the opinion of Hale and
Dorr LLP, counsel to Arch, dated the Closing Date, to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and that each of Arch,
Merger Sub and PageNet will be a party to that reorganization within the
meaning of Section 368(b) of the Code. Such opinion shall be based on
certain assumptions concerning the fair market value of stock and
securities to be surrendered and issued in the Merger, the Exchange Offers
and the Spinoff, which PageNet, Arch and, with respect to PageNet, Houlihan
Lokey Howard & Zukin Financial Advisors, Inc., and, with respect to Arch,
Bear, Stearns & Co. Inc. will certify as being reasonable. In addition, in
rendering such opinions, counsel may rely upon representations and
certificates given for this purpose by responsible officers of PageNet,
Arch and Merger Sub.
(e) Certificate. PageNet shall have delivered to Arch a certificate
(without qualification as to knowledge or materiality or otherwise) to the
effect that each of the conditions specified in Section 7.2 is satisfied in
all respects, that the PageNet Stockholders Meeting has been convened
(unless the Bankruptcy Case precedes the scheduled date of such meeting),
and that the actions set forth in Section 6.5(a) of this Agreement have
been adopted and approved in accordance with such section (except to the
extent such approval is not required by reason of the entry of the Final
Confirmation Order).
7.3. Conditions to Obligation of PageNet. The obligation of PageNet to
effect the Merger is also subject to the satisfaction or waiver by PageNet at or
prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Arch and Merger Sub set forth in this Agreement: (i) to the
extent qualified by materiality, shall be true and correct; and (ii) to the
extent not qualified by materiality, shall be true and correct (except that
this clause (ii) shall be deemed satisfied so long as any failures of such
representations and warranties to be true and correct, taken together,
would not reasonably be expected to have a Material Adverse Effect and
would not reasonably be expected to have a material adverse effect on the
expected benefits of the Merger to PageNet), in the case of each of clauses
(i) and (ii), as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, and PageNet
shall have received a certificate signed on behalf of Arch and Merger Sub
by an executive officer of Arch to such effect.
(b) Performance of Obligations of Arch. Each of Arch and Merger Sub
shall have performed in all material respects all of its covenants,
agreements and obligations set forth in this Agreement at or prior
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to the Closing Date, and PageNet shall have received a certificate signed
on behalf of Arch and Merger Sub by an executive officer of Arch to such
effect.
(c) Consents Under Agreements. Arch shall have obtained the consent
or approval of each Person whose consent or approval shall be required in
order to consummate the transactions contemplated by this Agreement under
any Contract to which Arch or any of its Subsidiaries is a party, except
those for which the failure to obtain such consent or approval,
individually or in the aggregate, is not reasonably likely to have, a
Material Adverse Effect on Arch or a material adverse effect on the
expected benefits of the Merger to PageNet.
(d) Tax Opinion. PageNet shall have received the opinion of Mayer,
Brown & Platt, counsel to PageNet, dated the Closing Date, to the effect
that the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, and that
each of Arch, Merger Sub and PageNet will be a party to that reorganization
within the meaning of Section 368(b) of the Code. Such opinion shall be
based on certain assumptions concerning the fair market value of stock and
securities to be surrendered and issued in the Merger, the Exchange Offers
and the Spinoff, which PageNet, Arch and, with respect to PageNet, Houlihan
Lokey Howard & Zukin Financial Advisors, Inc., and, with respect to Arch,
Bear, Stearns & Co. Inc. will certify as being reasonable. In addition, in
rendering such opinions, counsel may rely upon representations and
certificates given for this purpose by responsible officers of PageNet and
Arch.
(e) Certificate. Arch shall have delivered to PageNet a certificate
(without qualification as to knowledge or materiality or otherwise) to the
effect that each of the conditions specified in Section 7.3 (a)-(d) is
satisfied in all respects, that the Arch Stockholders Meeting has been
convened, and that the actions set forth in Section 6.5(b) have been
adopted and approved in accordance with such section.
(f) Series C Consent Agreement. The Series C Consent Agreement will
be in full force and effect, Arch shall not be in breach or default of the
Series C Consent Agreement, and to the actual knowledge of the
Knowledgeable Executives of Arch, there shall not exist a breach or default
under the Series C Consent Agreement by any other party thereto.
(g) Spinoff. The Spinoff Dividend may be declared pursuant to Section
6.22 of this Agreement or the Final Confirmation Order shall have been
entered confirming the Prepackaged Plan.
ARTICLE VIII.
TERMINATION
8.1. Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by stockholders of PageNet or Arch referred to in
Section 7.1(a), by mutual written consent of PageNet and Arch, through action of
their respective Boards of Directors.
8.2. Termination by Either Arch or PageNet. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the Board of Directors of either Arch or PageNet if: (i) the
Merger shall not have been consummated by June 30, 2000 if no Bankruptcy Case
has been filed by that date or 30 days following the date by which the Final
Confirmation Order must be entered under Section 6.19(a) (the "Termination
Date"); provided, however, that either party shall have the option, in its sole
discretion, to extend the Termination Date for an additional period of time not
to exceed 90 days if the sole reason that the Merger has not been consummated by
such date is that the condition set forth in Section 7.1(c) has not been
satisfied due to the failure to obtain the necessary consents and approvals
under applicable Governmental Regulations and Arch or PageNet are still
attempting to obtain such necessary consents and approvals under applicable
Governmental Regulations or are contesting the refusal of the relevant
Government Entities to give such consents or approvals in court or through other
applicable proceedings; (ii) the PageNet Stockholders Meeting and the Arch
Stockholders Meeting shall have been held and completed, but the PageNet
Stockholders Approval or the Arch Stockholders Approval, to the extent
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required by Section 7.1(a), shall not have occurred; or (iii) any Order
permanently restraining, enjoining or otherwise prohibiting consummation of the
Merger shall become final and non-appealable (whether before or after the
PageNet Stockholders Approval or the Arch Stockholders Approval); provided,
further, that the right to terminate this Agreement pursuant to clause (i) above
shall not be available to any party that has breached in any material respect
its obligations under this Agreement in any manner that shall have proximately
contributed to the failure of the Merger to be consummated.
8.3. Termination by PageNet. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the PageNet Stockholder Approval referred to in Section 7.1(a), by action of the
Board of Directors of PageNet if:
(a) the Board of Directors of Arch shall have withdrawn or adversely
modified its approval or recommendation of this Agreement;
(b) there has been a breach by Arch or Merger Sub of any
representation, warranty, covenant or agreement contained in this Agreement
which both: (i) would result in a failure of a condition set forth in
Section 7.3(a) or 7.3(b); and (ii) cannot be or is not cured prior to the
Termination Date;
(c) PageNet has received a Superior Proposal, has otherwise complied
with the requirements of Section 6.2, provides Arch with all of the
material terms of Superior Proposal at least two business days prior to
termination and simultaneously with such termination pays to Arch the Arch
Termination Fee required by Section 8.5(c); or
(d) pursuant to Section 6.19(a)(ii), PageNet shall not file the
Bankruptcy Case and seek confirmation of the Prepackaged Plan by the
Bankruptcy Court and simultaneously pays to Arch the Arch Termination Fee.
8.4. Termination by Arch. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
Arch Stockholder Approval referred to in Section 7.1(a), by action of the Board
of Directors of Arch if:
(a) the Board of Directors of PageNet shall have withdrawn or
adversely modified its approval or recommendation of this Agreement to do
so;
(b) there has been a breach by PageNet of any representation,
warranty, covenant or agreement contained in this Agreement which both: (i)
would result in a failure of a condition set forth in Section 7.2(a) or
7.2(b); and (ii) cannot be or is not cured prior to the Termination Date,
other than a breach that results solely from the filing or conduct of the
Bankruptcy Case consistent with the terms of this Agreement or solely from
the occurrence of an Involuntary Insolvency Event with respect to PageNet;
(c) the Initial Merger Order has not been entered within 30 days of
the commencement of the Bankruptcy Case;
(d) the Final Confirmation Order is not entered within the time
permitted by Section 6.19(a);
(e) the Prepackaged Plan is amended, modified or added to in violation
of Section 6.19(b); or
(f) Arch has received a Superior Proposal, has otherwise complied with
the requirements of Section 6.2, provides PageNet with all of the material
terms of the Superior Proposal at least two business days prior to such
termination and simultaneously pays to PageNet the PageNet Termination Fee
required by Section 8.5(b).
8.5. Effect of Termination and Abandonment.
(a) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Article VIII, this Agreement (other than as
set forth in Section 9.1) shall become void and of no effect with no
liability (other than as set forth in Section 8.5(b) or (c), or in the
proviso at the end of this sentence) on the part of any party to this
Agreement or of any of its directors, officers, employees, agents, legal or
financial advisors or other representatives; provided, however, no such
termination shall relieve any party to this Agreement from any liability
for damages resulting from any breach of this Agreement.
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(b) In the event that: (i) an Acquisition Proposal shall have been made to
Arch or have been made directly to Arch' stockholders or noteholders generally
or any Person shall have publicly announced an intention (whether or not
conditional) to make an Acquisition Proposal and thereafter: (A) Arch'
stockholders do not adopt this Agreement or the other transactions contemplated
hereby at the Arch Stockholders Meeting or Arch' noteholders do not satisfy the
Arch Minimum Condition with respect to the Arch Notes; (B) this Agreement is
terminated by either Arch or PageNet pursuant to the terms of this Agreement and
(C) Arch enters into an agreement with a third party with respect to an
Acquisition Proposal within 12 months of the termination of this Agreement; (ii)
this Agreement is terminated by PageNet pursuant to Section 8.3(a) or (b)
provided that, with respect to Section 8.3(b), it is terminated solely with
respect to a breach of (A) Section 6.2 or (B) Section 6.5 (but, only with
respect to Arch' obligation in accordance with such Section to duly convene and
complete the Arch Stockholders Meeting regarding the adoption of this Agreement
and the matters set forth in Section 6.5(b) of this Agreement); or (iii) this
Agreement is terminated by Arch pursuant to Section 8.4(f), then Arch and its
Subsidiaries (jointly and severally) shall pay PageNet a fee equal to $40.0
million (the "PageNet Termination Fee"), which amount shall be in addition to
any expenses to be paid pursuant to Section 6.12, payable by wire transfer of
same day funds. A PageNet Termination Fee payable pursuant to Section 8.5(b)(i),
or (ii) shall be paid no later than two days after the date of termination and a
PageNet Termination Fee payable pursuant to Section 8.5(b)(iii) shall be paid
simultaneously with (and such payment shall be a condition of) termination
pursuant to Section 8.4(f). Arch acknowledges that the agreements contained in
this Section 8.5(b) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, PageNet would not enter into
this Agreement. Accordingly, if Arch fails to pay promptly the amount due
pursuant to this Section 8.5(b), and, in order to obtain such payment, PageNet
commences a suit which results in a judgment against Arch for the fee set forth
in this paragraph (b), Arch shall pay to PageNet its costs and expenses
(including attorneys' fees) in connection with such suit, together with interest
on the amount of the fee at the prime rate of Citibank N.A. in effect on the
date such payment was required to be made.
(c) In the event that: (i) an Acquisition Proposal shall have been made to
PageNet or have been made directly to PageNet's stockholders or noteholders
generally or any Person shall have publicly announced an intention (whether or
not conditional) to make an Acquisition Proposal and thereafter: (A) PageNet's
stockholders do not adopt this Agreement or the other transactions contemplated
hereby at the PageNet Stockholders Meeting or PageNet's noteholders do not
satisfy the PageNet Minimum Condition with respect to the PageNet Notes, and the
Bankruptcy Court fails to enter the Final Confirmation Order which would
otherwise enable the transactions set forth in this Agreement to occur without
approval by the holders of PageNet Shares; (B) this Agreement is terminated by
either Arch or PageNet pursuant to the terms of this Agreement and (C) either
(x) PageNet executes and delivers an agreement with respect to an Acquisition
Proposal or (y) an Acquisition Proposal with respect to PageNet is consummated,
in either case, within 12 months of the date this Agreement is terminated; (ii)
this Agreement is terminated by Arch pursuant to Section 8.4(a) or (b) provided
that, with respect to Section 8.4(b), it is terminated solely with respect to a
breach of (A) Section 6.2 or (B) Section 6.5 (but, only with respect to
PageNet's obligation in accordance with such Section to duly convene and
complete the PageNet Stockholders Meeting (unless the Bankruptcy Case has
commenced or PageNet has stipulated to bankruptcy relief after the occurrence of
an Involuntary Insolvency Event pursuant to Section 6.19(a)(iv) hereof)
regarding the adoption of this Agreement and the approval of the matters set
forth in Section 6.5(a) of this Agreement); (iii) the Prepackaged Plan is
withdrawn without the prior written consent of Arch, or PageNet files any other
plan of reorganization or amends, modifies or adds to any material provision of
the Prepackaged Plan in each case without the prior written consent of Arch;
(iv) any other plan of reorganization filed by a person other than PageNet is
confirmed by the Bankruptcy Court; (v) PageNet files a motion to sell or
otherwise transfer all or a substantial portion of its assets as part of a sale
pursuant to Section 363 of the Bankruptcy Code without the prior written consent
of Arch; or (vi) this Agreement is terminated by PageNet pursuant to Section
8.3(c) or (d), then PageNet and its Subsidiaries (jointly and severally) shall
pay Arch a fee equal to $40.0 million (the "Arch Termination Fee"), which amount
shall be in addition to any expenses to be paid pursuant to Section 6.12,
payable by wire transfer of same day funds. A Arch Termination Fee payable
pursuant to Section 8.5(c)(i), (ii), (iii), (iv) or (v) shall be paid no later
than two days after the date of termination and a Arch
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Termination Fee payable pursuant to Section 8.5(c)(vi) shall be paid
simultaneously with (and such payment shall be a condition of) termination
pursuant to Section 8.3(c) or (d). PageNet acknowledges that the agreements
contained in this Section 8.5(c) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, Arch and
Merger Sub would not enter into this Agreement. Accordingly, if PageNet fails to
pay promptly the amount due pursuant to this Section 8.5(c) (and in any case in
which the Bankruptcy Case has been commenced, the Initial Merger Order approves
this provision), and, in order to obtain such payment, Arch commences a suit
which results in a judgment against PageNet for the fee set forth in this
paragraph (c), PageNet shall pay to Arch its costs and expenses (including
attorneys' fees) in connection with such suit, together with interest on the
amount of the fee at the prime rate of Citibank N.A. in effect on the date such
payment was required to be made.
ARTICLE IX.
MISCELLANEOUS AND GENERAL
9.1. Survival. Article II, Article III, Article IV and this Article IX
(other than Section 9.4 (Counterparts)), and the agreements of PageNet, Arch and
Merger Sub contained in Sections 6.8 (Affiliates), 6.11 (Benefits), 6.12
(Expenses) and 6.13 (Indemnification; Directors' and Officers' Insurance) shall
survive the consummation of the Merger. This Article IX (other than Section 9.2
(Modification or Amendment), Section 9.3 (Waiver of Conditions) and Section 9.13
(Assignment)) and the agreements of PageNet, Arch and Merger Sub contained in
Section 6.12 (Expenses), Section 6.14 (Takeover Statute), Section 6.15
(Confidentiality) and Section 8.5 (Effect of Termination and Abandonment) shall
survive the termination of this Agreement. All other representations,
warranties, covenants and agreements in this Agreement shall not survive the
consummation of the Merger or the termination of this Agreement.
9.2. Modification or Amendment. Subject to the provisions of the
applicable law, at any time prior to the Effective Time, the parties to this
Agreement may modify or amend this Agreement, by written agreement executed and
delivered by duly authorized officers of the respective parties.
9.3. Waiver of Conditions.
(a) Any provision of this Agreement may be waived prior to the
Effective Time if, and only if, such waiver is in writing and signed by an
authorized representative or the party against whom the waiver is to be
effective.
(b) No failure or delay by any party in exercising any right, power or
privilege under this Agreement shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
Except as otherwise provided in this Agreement, the rights and remedies
herein provided shall be cumulative and not exclusive of any rights or
remedies provided by Law.
9.4. Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
9.5. Governing Law and Venue; Waiver of Jury Trial.
(a) This Agreement shall be deemed to be made in and in all respects
shall be interpreted, construed, and governed by, and in accordance with,
the substantive laws of the State of Delaware, without regard to the
conflict of law principles thereof. The parties hereby irrevocably and
unconditionally consent to submit to the exclusive jurisdiction of the
courts of the State of Delaware and of the United States of America located
in Wilmington, Delaware, including the U.S. Bankruptcy Court for the
District of Delaware (the "Delaware Courts"), for any litigation arising
out of or relating to this Agreement or the Prepackaged Plan and the
transactions contemplated by this Agreement (and agree not to commence any
litigation relating thereto except in such Delaware Courts), waive any
objection to the laying of venue of any such litigation in the Delaware
Courts and agree not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
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(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE, EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY
WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, OR
RELATING TO, THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT: (i) NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER; (ii) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER; (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY; AND (iv) EACH SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.5.
9.6. Notices. Notices, requests, instructions or other documents to be
given under this Agreement shall be in writing and shall be deemed given: (i)
when sent if sent by facsimile, provided that receipt of the fax is promptly
confirmed by telephone; (ii) when delivered, if delivered personally to the
intended recipient; and (iii) one business day later, if sent by overnight
delivery via a national courier service, and in each case, addressed to a party
at the following address for such party:
If to Arch or Merger Sub:
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Attention: Chief Executive Officer
Fax: (508) 870-6076
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Jay E. Bothwick
Fax: (617) 526-5000
and if to PageNet:
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attention: Chief Executive Officer
Fax: (972) 801-8950
and
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attention: Senior Vice President and General Counsel
Fax: (972) 801-8978
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603-3441
Attention: John R. Schmidt
Fax: (312) 701-7711
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
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9.7. Entire Agreement. This Agreement (including any exhibits and annexes
to this Agreement), Series C Consent Agreement, the Confidentiality Agreement,
the PageNet Disclosure Letter, and the Arch Disclosure Letter constitute the
entire agreement, and supersede all other prior agreements, understandings,
representations and warranties, both written and oral, among the parties with
respect to the subject matter of this Agreement. EACH PARTY TO THIS AGREEMENT
AGREES THAT, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS
AGREEMENT, NEITHER ARCH AND MERGER SUB NOR PAGENET MAKES ANY REPRESENTATIONS OR
WARRANTIES, AND EACH HEREBY DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES
MADE BY ITSELF OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, FINANCIAL
AND LEGAL ADVISORS OR OTHER REPRESENTATIVES, WITH RESPECT TO THE EXECUTION AND
DELIVERY OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT,
NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER PARTY OR THE OTHER
PARTY'S REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH RESPECT
TO ANY ONE OR MORE OF THE FOREGOING.
9.8. No Third Party Beneficiaries. Except as provided in Section 6.11
(Benefits), and Section 6.13 (Indemnification; Directors' and Officers'
Insurance), this Agreement is not intended to confer upon any Person other than
the parties to this Agreement any rights or remedies under this Agreement.
9.9. Obligations of Arch and of PageNet. Whenever this Agreement requires
a Subsidiary of Arch to take any action, such requirement shall be deemed to
include an undertaking on the part of Arch to cause such Subsidiary to take such
action. Whenever this Agreement requires a Subsidiary of PageNet to take any
action, such requirement shall be deemed to include an undertaking on the part
of PageNet to cause such Subsidiary to take such action and, after the Effective
Time, on the part of the Surviving Corporation to cause such Subsidiary to take
such action.
9.10. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions of this Agreement.
If any provision of this Agreement, or the application thereof to any Person or
any circumstance, is invalid or unenforceable: (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision; and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.11. Interpretation. Where a reference in this Agreement is made to a
section or exhibit, such reference shall be to a section of, or exhibit or annex
to this Agreement unless otherwise indicated. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
9.12. Captions. The table of contents, article, section, and paragraph
captions in this Agreement are for convenience of reference only, do not
constitute part of this Agreement and shall not be deemed to limit or otherwise
affect any of the provisions of this Agreement.
9.13. Assignment. This Agreement shall not be assignable by operation of
law or otherwise, provided, that the parties agree that this Agreement may be
assumed by PageNet as a debtor-in-possession in the Bankruptcy Case and may be
assumed by Arch should Arch become a debtor in any bankruptcy case under the
Bankruptcy Code. Any assignment in contravention of the preceding sentence shall
be null and void.
* * * * *
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties to this Agreement as of the date
first written above.
PAGING NETWORK, INC.
By: /s/ JOHN P. FRAZEE, JR.
----------------------------------
Name: John P. Frazee, Jr.
Title: Chairman of the Board and
Chief Executive Officer
ARCH COMMUNICATIONS GROUP, INC.
By: /s/ C.E. BAKER, JR.
----------------------------------
Name: C.E. Baker, Jr.
Title: Chairman of the Board and
Chief Executive Officer
ST. LOUIS ACQUISITION CORP.
By: /s/ C.E. BAKER, JR.
----------------------------------
Name: C.E. Baker, Jr.
Title: Chief Executive Officer
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ANNEX C
THE PREPACKAGED PLAN OF REORGANIZATION
[Important: A Bankruptcy Case Has Not Been
Commenced as of the Date of the Distribution of this Document]
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
<TABLE>
<S> <C> <C>
IN RE:
PAGING NETWORK, INC., ET AL., CHAPTER 11
DEBTORS.
CASE NOS. 99- ( - )
</TABLE>
- --------------------------------------------------------------------------------
JOINT PLAN OF REORGANIZATION
OF PAGING NETWORK, INC. AND CERTAIN SUBSIDIARIES
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
- --------------------------------------------------------------------------------
C-1
<PAGE> 416
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I. Defined Terms, Rules of Interpretation, Computation of
Time and Governing Law......................................... C-4
A. Rules of Interpretation, Computation of Time and Governing C-4
Law.........................................................
B. Defined Terms............................................... C-4
ARTICLE II. Treatment of Unclassified Claims..................... C-12
A. Summary..................................................... C-12
B. Administrative Expense Claims............................... C-12
C. Priority Tax Claims......................................... C-12
D. DIP Facility Claims......................................... C-12
ARTICLE III. Classification and Treatment of Classified Claims
and Interests.................................................. C-12
A. Summary..................................................... C-12
B. Classification and Treatment................................ C-13
C. Special Provision Governing Unimpaired Claims............... C-15
ARTICLE IV. Non-Consensual Confirmation.......................... C-15
ARTICLE V. Means for Implementation of the Plan.................. C-16
A. Continued Corporate Existence............................... C-16
B. Vesting of Assets and Consummation of Mergers............... C-16
C. Cancellation of Instruments and Securities.................. C-16
D. Issuance of New Securities; Execution of Related C-16
Documents...................................................
E. Corporate Governance, Directors and Officers, and Corporate C-17
Action......................................................
ARTICLE VI. Treatment of Executory Contracts and Unexpired
Leases......................................................... C-17
A. Assumption of Executory, Contracts and Unexpired Leases..... C-17
B. Claims Based on Rejection of Executory Contracts or C-18
Unexpired Leases............................................
C. Cure of Defaults for Executory Contracts and Unexpired C-18
Leases Assumed..............................................
D. Indemnification of Directors, Officers and Employees........ C-18
E. Stock Options............................................... C-18
ARTICLE VII. Provisions Governing Distributions.................. C-19
A. Timing of Distributions..................................... C-19
B. Methods of Distribution..................................... C-19
C. Undeliverable and Unclaimed Distributions................... C-22
D. Compliance with Tax Requirements............................ C-22
E. Compensation and Reimbursement for Services Related to C-22
Balloting and Distributions.................................
F. Setoffs..................................................... C-23
ARTICLE VIII. Procedures for Resolving Disputed Claims........... C-23
A. Prosecution of Objections to Claims and Interests........... C-23
B. Estimation of Claims........................................ C-23
C. Payments and Distributions on Disputed Claims............... C-23
</TABLE>
C-2
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE IX. Conditions Precedent to Consummation of the Plan..... C-24
A. Conditions Precedent to Consummation........................ C-24
B. Waiver of Conditions........................................ C-24
C. Effect of Vacation of Confirmation Order.................... C-24
ARTICLE X. Release, Injunction and Related Provisions............ C-24
A. Subordination............................................... C-24
B. Limited Releases by the Debtors............................. C-25
C. Preservation of Rights of Action............................ C-25
D. Exculpation................................................. C-25
E. Injunction.................................................. C-25
ARTICLE XI. Retention of Jurisdiction............................ C-26
ARTICLE XII. Miscellaneous Provisions............................ C-27
A. Dissolution of Committee(s)................................. C-27
B. Payment of Statutory Fees................................... C-27
C. Discharge of Debtors........................................ C-27
D. Modification of Plan........................................ C-27
E. Revocation of Plan.......................................... C-27
F. Successors and Assigns...................................... C-27
G. Reservation of Rights....................................... C-28
H. Section 1146 Exemption...................................... C-28
I. Further Assurances.......................................... C-28
J. Service of Documents........................................ C-28
K. Filing of Additional Documents.............................. C-29
</TABLE>
C-3
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- --------------------------------------------------------------------------------
JOINT PLAN OF REORGANIZATION
OF PAGING NETWORK, INC. AND CERTAIN SUBSIDIARIES
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
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Pursuant to title 11 of the United States Code, 11 U.S.C. sec.sec. 101 et
seq., Paging Network, Inc., PageNet, Inc., Paging Network Finance Corp., Paging
Network of America, Inc., Paging Network of Colorado, Inc., Paging Network of
Michigan, Inc., Paging Network of Northern California, Inc., and Paging Network
of San Francisco, Inc., each a debtor and debtor in possession, propose the
following Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code:
ARTICLE I.
DEFINED TERMS, RULES OF INTERPRETATION,
COMPUTATION OF TIME AND GOVERNING LAW
A. RULES OF INTERPRETATION, COMPUTATION OF TIME AND GOVERNING LAW
1. For purposes of the Plan: (a) whenever from the context is appropriate,
each term, whether stated in singular or the plural, shall include both the
singular and the plural, and pronouns stated in the masculine, feminine or
neuter gender shall include the masculine, feminine and the neuter gender; (b)
any reference in the Plan to a contract, instrument, release, indenture or other
agreement or document being in a particular form or on particular terms and
conditions means that such document shall be substantially in such form or
substantially on such terms and conditions; (c) any reference in the Plan to an
existing document or exhibit Filed, or to be Filed, shall mean such document or
exhibit, as it may have been or may be amended, modified or supplemented; (d)
unless otherwise specified, all references in the Plan to Sections, Articles and
Exhibits are references to Sections, Articles and Exhibits of or to the Plan;
(e) the words "herein" and "hereto" refer to the Plan in its entirety rather
than to a particular portion of the Plan; (f) captions and headings to Articles
and Sections are inserted for convenience of reference only and are not intended
to be a part of or to affect the interpretation of the Plan; (g) the rules of
construction set forth in section 102 of the Bankruptcy Code shall apply; and
(h) any term used in capitalized form in the Plan that is not defined herein but
that is used in the Bankruptcy Code or the Bankruptcy Rules shall have the
meaning assigned to such term in the Bankruptcy Code or the Bankruptcy Rules, as
the case may be.
2. In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.
3. The rights and obligations arising under the Plan shall be interpreted,
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware, without regard to the conflict of law principles thereof, the
Bankruptcy Code and the Bankruptcy Rules.
B. DEFINED TERMS
Unless the context otherwise requires, the following terms shall have the
following meanings when used in capitalized form in the Plan:
1. "Administrative Agent Bank" means one or more lenders performing
the function of "Administrative Agent" under the Credit Agreement.
2. "Administrative Expense Claim" means a Claim to the extent that it
is entitled to priority under section 507(a)(1) of the Bankruptcy Code.
3. "Agent Bank" means one or more lenders performing the functions of
"Administrative Agent," "Co-Syndication Agent," "Documentation Agent,"
"Managing Agent," "Co-Agent," or "Lead Manager" under the Credit Agreement
or otherwise designated as an agent for the lenders under the Credit
Agreement.
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4. "Agent Bank Charges" means any lien, right or other priority in
payment or right to indemnification or reimbursement to which an Agent Bank
is entitled, pursuant to the Credit Agreement, against distributions to be
made to or payment to be made by Holders of Allowed Claims under the Credit
Agreement, including such liens, rights or priorities in payment with
respect to an Agent Bank's out-of-pocket costs and expenses for attorneys,
financial advisors and other professionals that are incurred or authorized
by an Agent Bank acting in such capacity.
5. "Allowed" means, with respect to any Claim: (a) a Claim that has
been listed by the Debtors in their Schedules as other than disputed,
contingent or unliquidated and as to which the Debtors or other parties in
interest have not Filed an objection by the Effective Date; (b) a Claim
that has been timely filed on or before any applicable Bar Date set by the
Bankruptcy Court and either is not a Disputed Claim or has been allowed by
Final Order; (c) a Claim that is allowed: (i) in any stipulation of amount
and nature of Claim executed prior to the Confirmation Date and approved by
the Bankruptcy Court; (ii) in any stipulation with the Debtors of amount
and nature of Claim executed on or after the Confirmation Date; or (iii) in
any contract, instrument, indenture or other agreement entered into or
assumed in connection with the Plan; (d) a Claim that has been Filed by the
Bar Date or has otherwise been deemed timely Filed under applicable law
relating to a rejected executory contract or unexpired lease that either
(i) is not a Disputed Claim or (ii) has been allowed by a Final Order; or
(e) any Claim that is allowed pursuant to the terms of the Plan. The term
"Allowed," when used to modify a reference in the Plan to any Claim or
Class of Claims means a Claim (or any Claim in any such Class) that is so
allowed.
6. "Allowed" means, with respect to any Interest, an Interest that is
listed in the respective transfer books and records for the Debtors as of
the applicable record date. The term "Allowed," when used to modify a
reference in the Plan to any Interest or Class of Interests means an
Interest (or any Interest in any such Class) that is so allowed.
7. "Amended PageNet Notes" means the promissory notes issued pursuant
to an amendment and restatement of the Credit Agreement, containing the
terms and being entitled to the benefits described in Part II of the Arch
Credit Facility Term Sheet.
8. "Arch" means Arch Communications Group, Inc., a Delaware
corporation.
9. "Arch Common Stock" means the common stock of Arch, par value $0.01
per share, which is issued and outstanding plus additional stock which will
be authorized and issued as and when contemplated by the Merger Agreement.
10. "Arch Companies" means, collectively, Arch, Merger Sub and any
direct or indirect, wholly owned subsidiary of Arch or Merger Sub.
11. "Arch Credit Facility" means the Third Amended and Restated Credit
Facility among Arch Paging, Inc., The Bank of New York, Royal Bank of
Canada, Barclays Bank plc and Toronto Dominion (Texas), Inc., as Managing
Agents, Royal Bank of Canada and Barclays Bank plc, as Co-Documentation
Agents, Toronto Dominion (Texas), Inc., as Syndication Agent and The Bank
of New York, as Administrative Agent, to be entered into on or before the
Effective Date as it may be amended, supplemented or otherwise modified
from time to time. The Terms and conditions of the Arch Credit Facility are
set forth in the Arch Credit Facility Term Sheet.
12. "Arch Credit Facility Term Sheet" means the Summary of Principal
Terms and Conditions for an Amendment and Restatement of the Existing
Credit Agreement, dated January , 2000, setting forth the terms and
conditions for the Arch Credit Facility, a copy of which is attached as an
exhibit to the Disclosure Statement.
13. "Avoidance Action" means any avoidance or recovery action under
sections 510, 542, 544, 545, 547, 548, 549, 550, 551 and 553 of the
Bankruptcy Code.
14. "Ballot Date" means the date stated in the Voting Instructions by
which all Ballots must be received.
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15. "Ballots" means the ballots accompanying the Disclosure Statement
upon which Holders of Impaired Claims or Impaired Interests shall indicate
their acceptance or rejection of the Plan in accordance with the Plan and
the Voting Instructions.
16. "Bank Secured Claims" means all Claims arising from or relating to
the Credit Agreement.
17. "Bankruptcy Code" means title 11 of the United States Code, as now
in effect or hereafter amended.
18. "Bankruptcy Court" means the United States District Court for the
District of Delaware with jurisdiction over the Chapter 11 Cases and, to
the extent of any reference made pursuant to section 157 of title 28 of the
United States Code and/or the General Order of such District Court pursuant
to section 151 of title 28 of the United States Code, the bankruptcy unit
of such District Court.
19. "Bankruptcy Rules" means, collectively, the Federal Rules of
Bankruptcy Procedure and the local rules of the Bankruptcy Court, as now in
effect or hereafter amended.
20. "Bar Date" means (i) the date set pursuant to Article VI.B of the
Plan for the Filing of proofs of claim with respect to executory contracts
and unexpired leases which are rejected pursuant to this Plan or otherwise
pursuant to section 365 of the Bankruptcy Code or (ii) the deadline set by
the Bankruptcy Court for the Filing of proofs of claim with respect to
Senior Subordinated Note Claims (other than Claims for principal and
accrued interest payable with respect to any senior subordinated note,
which Claims are deemed allowed under the Plan) and Old Stock Related
Claims.
21. "Beneficial Holder" means the Person or Entity holding the
beneficial interest in a Claim or Interest.
22. "Business Day" means any day, other than a Saturday, Sunday or
"legal holiday" (as defined in Bankruptcy Rule 9006(a)).
23. "Cash" means cash and cash equivalents.
24. "Causes of Action" means all actions, causes of action, suits,
debts, dues, sums of money, accounts, reckonings, bonds, bills,
specialities, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages or judgments.
25. "Chapter 11 Cases" means the cases under chapter 11 of the
Bankruptcy Code, commenced by the Debtors in the Bankruptcy Court.
26. "Claim" means a "claim" as defined in section 101(5) of the
Bankruptcy Code, as supplemented by section 102(2) of the Bankruptcy Code,
against one or more of the Debtors or the property of one or more of the
Debtors.
27. "Claim Holder" or "Claimant" means the Holder of a Claim.
28. "Class" means a category of Holders of Claims or Interests as set
forth in Article III of the Plan.
29. "Committee" or "Committees" means a statutory official committee
(or committees, if more than one) appointed in the Chapter 11 Cases
pursuant to section 1102 of the Bankruptcy Code, if any.
30. "Compensation and Benefit Plans" means all employment and
severance policies, and all compensation and benefit plans, policies, and
programs of the Debtors applicable to their employees, retirees and
non-employee directors and the employees and retirees of their
subsidiaries, including, without limitation, all savings plans, retirement
plans, health care plans, disability plans, severance benefit plans,
incentive plans, and life, accidental death, and dismemberment insurance.
31. "Confirmation" means the entry of the Confirmation Order.
32. "Confirmation Date" means the date upon which the Confirmation
Order is entered by the Bankruptcy Court in its docket, within the meaning
of the Bankruptcy Rules 5003 and 9021.
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33. "Confirmation Order" means the order of the Bankruptcy Court
confirming the Plan pursuant to section 1129 of the Bankruptcy Code, which
order shall be in form and substance reasonably satisfactory to Arch.
34. "Consummation" means the occurrence of the Effective Date.
35. "Credit Agreement" means that certain Second Amended and Restated
Credit Agreement dated as of June 5, 1996 among the Parent Corporation and
certain of the subsidiaries of the Parent Corporation designated therein,
the Agent Banks, and the Lenders designated therein, together with all
related notes, certificates, security agreements, mortgages, pledges,
indemnities, collateral assignments, undertakings, guaranties, and other
instruments and documents, as each may have been amended or modified from
time to time.
36. "Creditor" means any Holder of a Claim.
37. "D&O Releasees" means all officers, directors, employees,
attorneys, financial advisors, accountants, investment bankers, agents and
representatives of the Debtors and their subsidiaries who served in such
capacity on or after , in each case in their capacity as
such.
38. "Debtors" mean, collectively, the Parent Corporation and the
Operating Subsidiaries.
39. "Debtors in Possession" mean the Debtors, as debtors in possession
in the Chapter 11 Cases.
40. "Delaware General Corporation Law" means title 8 of the Delaware
Code, as now in effect or hereafter amended.
41. "DIP Facility" means the debtor in possession financing facility
between the DIP Lenders and the Debtors, as approved by the Bankruptcy
Court in accordance with the DIP Financing Order.
42. "DIP Facility Claims" mean all Claims arising from or relating to
the DIP Loan Documents.
43. "DIP Financing Order" means the order or orders of the Bankruptcy
Court approving and authorizing the terms of debtor in possession financing
arrangements in the Chapter 11 Cases in accordance with the DIP Loan
Documents.
44. "DIP Lenders" means the lender or lenders under the DIP Loan
Documents.
45. "DIP Loan Documents" mean all documents and instruments
evidencing, setting forth the terms, and implementing the terms of, the DIP
Facility executed in the Chapter 11 Cases and as approved by the DIP
Financing Order.
46. "Disclosure Statement" means the Disclosure Statement and
Prospectus for the Solicitation of Votes for the Joint Plan of the Debtors
dated [ ], as amended, supplemented, or modified from time to
time, describing the Plan.
47. "Disputed" means, with respect to any Claim or Interest, any Claim
or Interest: (a) listed on the Schedules as disputed, contingent or
unliquidated; or (b) as to which the Debtors or any other parties in
interest have interposed a timely objection or request for estimation, or
have sought to subordinate or otherwise limit recovery, in accordance with
the Bankruptcy Code and the Bankruptcy Rules, or which is otherwise
disputed by the Debtors in accordance with applicable law, which objection,
request for estimation, action to limit recovery or dispute has not been
withdrawn or determined by a Final Order.
48. "Distribution Record Date" means the close of business on the
Business Day immediately preceding the Effective Date.
49. "Effective Date" means the date selected by the Debtors and Arch
which is a Business Day not later than five (5) Business Days after the
date on which all of the following conditions are satisfied: (a) the
Confirmation Date has occurred and the Confirmation Order has not been
modified, amended or supplemented (without the express written consent of
the Corporation and Arch) and as to which no stay or injunction is in
effect with respect to the Confirmation Order, and (b) all conditions
specified in Article IX.A of the Plan have been (i) satisfied or (ii)
waived pursuant to Article IX.B.
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50. "Entity" means an entity as defined in section 101(15) of the
Bankruptcy Code.
51. "Estates" means the estates of the Debtors created by section 541
of the Bankruptcy Code upon the commencement of the Chapter 11 Cases.
52. "Exchange Agent" means Arch's transfer agent or other exchange
agent selected by Arch with the Parent Corporation's prior approval.
53. "File" or "Filed" means file or filed with the Bankruptcy Court in
the Chapter 11 Cases.
54. "Final Decree" means the decree contemplated under Bankruptcy Rule
3022.
55. "Final Order" means an order or judgment of the Bankruptcy Court,
or other court of competent jurisdiction with respect to the subject
matter, which has not been reversed, stayed, modified, amended, or
supplemented.
56. "General Unsecured Claims" means, collectively, all Unsecured
Claims against a Debtor held by any Person or Entity, other than Claims
classified in Class 5, 6 or 8.
57. "Holder" means a Person or Entity holding an Interest or Claim,
and with respect to a vote on the Plan, means the Beneficial Holder as of
the Voting Record Date or any authorized signatory who has completed and
executed a Ballot or on whose behalf a Ballot has been completed and
executed in accordance with the Voting Instructions.
58. "Impaired Claim" means a Claim classified in an Impaired Class.
59. "Impaired Class" means each of Classes 2, 5, 6, 7 and 8 as set
forth in Article III of the Plan.
60. "Indenture Trustee" means the trustee(s) under the Senior
Subordinated Note Indentures.
61. "Indenture Trustee Charging Lien" means any lien or other priority
in payment arising prior to the Effective Date to which the Indenture
Trustee is entitled, pursuant to the applicable Senior Subordinated Note
Indentures, against distributions to be made to holders of Allowed Senior
Subordinated Note Claims for payment of any fees, costs or disbursements
incurred by such Indenture Trustee.
62. "Insider" means "insider" as defined in section 101(31) of the
Bankruptcy Code.
63. "Interest" means any equity interest in the Parent Corporation and
the Parent Corporation's or any Operating Subsidiary's equity interest in
any Operating Subsidiary including, but not limited to, all issued,
unissued, authorized or outstanding shares or stock, together with any
warrants, options or contract rights to purchase or acquire such interests
at any time.
64. "Investor Releasees" means the Arch Companies and each of their
respective officers, directors, shareholders, employees, attorneys,
accountants, and agents.
65. "Joinder Agreement" means an agreement in form and substance
reasonably satisfactory to the lender parties to the Arch Credit Facility
pursuant to which a Holder of an Allowed Class 2 Claim agrees to join and
be bound by the terms of the Arch Credit Facility, as the same may be
amended or modified, or an amendment and restatement of the Credit
Agreement, with respect to the Tranche B-1 Credit Facility Notes or the
Amended PageNet Notes to be received by such Holders under the Plan.
66. "Lender Releasees" means each Holder of an Allowed Bank Secured
Claim that timely votes to accept the Plan and their respective officers,
directors, shareholders, employees, attorneys, accountants, and agents.
67. "Merger" means the merger of Merger Sub with and into the
Reorganized Parent Corporation upon the terms and subject to the conditions
set forth in the Merger Agreement.
68. "Merger Agreement" means that certain Agreement and Plan of Merger
dated as of November 7, 1999 among the Parent Corporation, Arch and Merger
Sub (as amended and supplemented from time to time), a copy of which is
attached as an exhibit to the Disclosure Statement.
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69. "Merger Sub" means St. Louis Acquisition Corp., a Delaware
corporation that is a wholly owned subsidiary of Arch.
70. "Nominee" means any broker, dealer, commercial bank, trust
company, savings and loan, or other nominee who is the record owner of a
Claim or Interest for the benefit of a Beneficial Holder.
71. "Noteholder Merger Consideration" means 76,918,795 shares of Arch
Common Stock, subject to adjustment as provided in section 4.4 of the
Merger Agreement.
72. "Noteholder Vast Stock" means 13,780,000 shares of Class B Common
Stock of Vast, subject to Section 6.1(d) of the Merger Agreement.
73. "Old Common Stock" means the common stock, par value $0.01 per
share, of the Parent Corporation issued and outstanding immediately prior
to the Effective Date.
74. "Old Stock Interests" means all equity interests in the Parent
Corporation represented by the Old Common Stock.
75. "Old Stock Related Claims" means any Claims arising from
rescission or a purchase or sale of Old Stock Interests, or for damages
arising from the purchase or sale of Old Stock Interests, or any Claim by
any Person or Entity that asserts equitable or contractual rights of
reimbursement, contribution, or indemnification arising from such Claim
including any Claim that has been or may be asserted against the Parent
Corporation and/or its officers, directors, employees, attorneys, financial
advisors, accountants, investment bankers, agents and/or representatives
asserting violations of any federal securities laws and any applicable
non-federal law.
76. "Old Stock Options" means each option to purchase common stock of
the Parent Corporation under the Parent Corporation's stock plans that is
outstanding immediately prior to the Effective Date.
77. "Operating Subsidiaries" means Paging Network, Inc., PageNet,
Inc., Paging Network of America, Inc., Paging Network of Colorado, Inc.,
Paging Network of Michigan, Inc., Paging Network of Northern California,
Inc., and Paging Network of San Francisco, Inc.
78. "Operating Subsidiary Debtors" means the Operating Subsidiaries in
their capacities as debtors in the Chapter 11 cases.
79. "Other Claims" means, collectively, all Claims against a Debtor
held by any Person or Entity, other than Claims classified in Classes 2, 5,
6 and 8.
80. "Other Secured Claims" means, collectively, all Secured Claims
against a Debtor held by any Person or Entity, other than Claims classified
in Class 2.
81. "Parent Corporation" means Paging Network, Inc., a Delaware
Corporation.
82. "Person" means a person as defined in section 101(41) of the
Bankruptcy Code.
83. "Petition Date" means the date on which the Debtors filed their
petitions for relief commencing the Chapter 11 Cases.
84. "Plan" or "Joint Plan" means this Chapter 11 Joint Plan of
Reorganization, either in its present form or as it may be altered,
amended, modified or supplemented from time to time in accordance with the
Plan, the Merger Agreement, the Bankruptcy Code, and the Bankruptcy Rules.
85. "Priority Claims" means any Claim accorded priority in right of
payment under section 507(a) of the Bankruptcy Code, other than an
Administrative Expense Claim, a Priority Tax Claim, or a DIP Facility
Claim.
86. "Priority Tax Claim" means a Claim of a governmental unit of the
kind specified in section 507(a)(8) of the Bankruptcy Code.
87. "Professionals" means a Person or Entity (a) employed pursuant to
a Final Order in accordance with sections 327 and 1103 of the Bankruptcy
Code and to be compensated for services rendered prior to
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the Effective Date, pursuant to sections 327, 328, 329, 330 and 331 of the
Bankruptcy Code, or (b) for which compensation and reimbursement has been
allowed by the Bankruptcy Court pursuant to section 503(b) of the
Bankruptcy Code.
88. "Pro Rata" means proportionately so that with respect to an
Allowed Claim and/or Allowed Interest, the ratio of (a)(i) the amount of
property distributed on account of a particular Allowed Claim or Allowed
Interest to (ii) the amount of the Allowed Claim or Allowed Interest, is
the same as the ratio of (b)(i) the amount of property distributed on
account of all Allowed Claims and Allowed Interests of the Class in which
the particular Allowed Claim and/or Allowed Interest are/is included to
(ii) the amount of all Allowed Claims and/or Allowed Interests in that
Class. In determining allocation with respect to Allowed Class 6 Claims and
Allowed Class 7 Interests, such Class 7 Interests shall be valued based on
the closing price of the Old Common Stock on the date before the Petition
Date.
89. "Reorganized Debtors" means, collectively, Reorganized Parent
Corporation and Reorganized Operating Subsidiaries.
90. "Reorganized Operating Subsidiary" means any Operating Subsidiary
and any successors thereto, by merger, consolidation, or otherwise, on and
after the Effective Date.
91. "Reorganized Parent Corporation" means the Parent Corporation and
any successors thereto, by merger, consolidation, or otherwise, on and
after the Effective Date.
92. "Schedules" means the schedules of assets and liabilities, the
list of holders of interests, and the statement of financial affairs filed
by the Debtors under section 521 of the Bankruptcy Code and Bankruptcy Rule
1007, as such schedules, lists, and statements may be supplemented or
amended from time to time.
93. "Secured Claim" means (a) a Claim that is secured by a lien on
property in which any Estate has an interest, which lien is valid,
perfected and enforceable under applicable law or by reason of a Final
Order, or that is subject to setoff under section 553 of the Bankruptcy
Code, to the extent of the value of the Claim Holder's interest in an
Estate's interest in such property or to the extent of the amount subject
to setoff, as applicable, as determined pursuant to section 506(a) of the
Bankruptcy Code, or (b) a Claim Allowed under this Plan as a Secured Claim.
94. "Senior Subordinated Notes" means, collectively, (i) the 10%
Senior Subordinated Notes Due October 15, 2008 issued under and pursuant to
an Indenture, dated as of July 15, 1995, between the Parent Corporation and
Shawmut Bank, N.A., as Trustee, as supplemented by a Second Supplemental
Indenture, dated as of October 15, 1996, between the Parent Corporation and
Fleet National Bank, (ii) the 10.125% Senior Subordinated Notes Due August
1, 2007 issued under and pursuant to an Indenture, dated as of July 15,
1995, between the Parent Corporation and Shawmut Bank, N.A., as Trustee, as
supplemented by a First Supplemental Indenture, dated as of July 15, 1995,
between the Parent Corporation and Shawmut Bank, N.A., and (iii) the 8.875%
Senior Subordinated Notes Due February 1, 2006 issued under and pursuant to
an Indenture, dated as of January 15, 1994, between the Parent Corporation
and Shawmut Bank, N.A., as Trustee, as supplemented by a First Supplemental
Indenture, dated as of January 15, 1994, between the Parent Corporation and
Shawmut Bank, N.A.
95. "Senior Subordinated Note Claims" means all Claims under the
Senior Subordinated Notes or the Senior Subordinated Note Indentures
(including, to the extent provided herein, unpaid principal accrued and
unpaid interest and the reasonable expenses and related charges of the
Indenture Trustee) and any Senior Subordinated Note Related Claims.
96. "Senior Subordinated Note Indentures" means, collectively, the
indentures and supplemental indentures, as each may have been amended or
modified from time to time, pursuant to which the Parent Corporation issued
the Senior Subordinated Notes.
97. "Senior Subordinated Note Related Claims" means all Claims arising
from rescission or a purchase or sale of a Senior Subordinated Note, or for
damages arising from the purchase or sale of a Senior Subordinated Note, or
any Claim by any Person or Entity that asserts equitable or contractual
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rights of reimbursement, contribution, or indemnification arising from such
Claim including any Claim that has been or may be asserted against the
Parent Corporation and/or its officers, directors, employees, attorneys,
financial advisors, accountants, investment bankers, agents and/or
representatives asserting violations of any federal securities laws and any
applicable non-federal law.
98. "Stockholder Merger Consideration" means a number of shares of
Arch Common Stock equal to the product of (y) the number of shares of Old
Common Stock issued and outstanding immediately prior to the Effective Date
and (z) 0.1247, subject to adjustment to prevent dilution as provided in
section 4.4 of the Merger Agreement.
99. "Stockholder Vast Stock" means 2,320,000 shares of Class B Common
Stock of Vast.
100. "Subsidiary Claims" means all Claims by a Debtor against another
Debtor.
101. "Subsidiary Stock" means the common stock of, and all equity
interests in, any Operating Subsidiary Debtor, issued and outstanding
immediately prior to the Effective Date.
102. "Subsidiary Stock Interests" means all equity interests held by
Parent Corporation in any Operating Subsidiary or by any Operating
Subsidiary in any other Operating Subsidiary.
103. "Substitute Option" means an option to acquire, on the same terms
and conditions as were applicable under such Old Stock Option, the same
number of shares of Arch Common Stock as the holder of such Old Stock
Option would have been entitled to receive pursuant to the Merger Agreement
had such holder exercised such Old Stock Option in full immediately prior
to the Effective Date (rounded down to the nearest whole number), at an
exercise price per share (rounded to the nearest whole cent) equal to: (y)
the aggregate exercise price for Old Common Stock otherwise purchasable by
such holder pursuant to such Old Stock Option; divided by (z) the number of
full shares of Arch Common Stock deemed purchasable pursuant to such Old
Stock Option in accordance with the foregoing.
104. "Tranch B-1 Arch Credit Facility Notes" means Tranche B-1 Notes
issued pursuant to the Arch Credit Facility, containing the terms and being
entitled to the benefits described in Part I of the Arch Credit Facility
Term Sheet.
105. "Unimpaired Claim" means an unimpaired Claim within the meaning
of section 1124 of the Bankruptcy Code.
106. "Unimpaired Class" means an unimpaired Class within the meaning
of section 1124 of the Bankruptcy Code.
107. "Unsecured Claim" means any Claim against a Debtor that is not a
Secured Claim, Administrative Expense Claim, Priority Tax Claim, DIP
Facility Claim, or Priority Claim.
108. "Vast" means Vast Solutions, Inc., a Delaware corporation that is
a wholly owned subsidiary of the Parent Corporation.
109. "Vast Class B Common Stock" means the Noteholder Vast Stock and
the Stockholder Vast Stock.
110. "Voting Instructions" means the instructions for voting on the
Plan contained in the section of the Disclosure Statement entitled
["SOLICITATION; VOTING PROCEDURES"] and in the Ballots.
111. "Voting Record Date" means [ ].
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ARTICLE II.
TREATMENT OF UNCLASSIFIED CLAIMS
A. SUMMARY
Pursuant to section 1123(a)(1) of the Bankruptcy Code, Administrative
Expense Claims, Priority Tax Claims, and DIP Facility Claims against the Debtors
are not classified for purposes of voting on, or receiving distributions under,
the Plan. Holders of such Claims are not entitled to vote on the Plan. All such
Claims are instead treated separately in accordance with this Article II and in
accordance with the requirements set forth in Section 1129(a)(9)(A) of the
Bankruptcy Code.
B. ADMINISTRATIVE EXPENSE CLAIMS
Subject to the provisions of section 330(a) and 331 of the Bankruptcy Code,
each Holder of an Allowed Administrative Expense Claim will be paid the full
unpaid amount of such Allowed Administrative Expense Claim in Cash on the later
of (i) the Effective Date or (ii) the date such Claim becomes an Allowed
Administrative Expense Claim, or upon such other terms as may be agreed upon by
such Holder and the Reorganized Debtors or otherwise upon order of the
Bankruptcy Court; provided, however, that Allowed Administrative Expense Claims
representing obligations incurred in the ordinary course of business or
otherwise assumed by the Debtors on the Effective Date pursuant to the Plan will
be paid or performed by the Reorganized Debtors when due in accordance with the
terms and conditions of the particular agreements governing such obligations.
C. PRIORITY TAX CLAIMS
Each Holder of an Allowed Priority Tax Claim due and payable on or prior to
the Effective Date will be paid the full unpaid amount of such Allowed Priority
Tax Claim in Cash on the Effective Date, or upon such other terms as may be
agreed upon by such Holder and the Reorganized Debtors or otherwise upon order
of the Bankruptcy Court. The amount of any Priority Tax Claim that is not an
Allowed Claim or that is not otherwise due and payable on or prior to the
Effective Date, and the rights of the Holder of such Claim, if any, to payment
in respect thereof shall (i) be determined in the manner in which the amount of
such Claim and the rights of the Holder of such Claim would have been resolved
or adjudicated if the Chapter 11 Cases had not been commenced, (ii) survive the
Effective Date and Consummation of the Plan as if the Chapter 11 Cases had not
been commenced, and (iii) not be discharged pursuant to section 1141 of the
Bankruptcy Code. In accordance with section 1124 of the Bankruptcy Code, the
Plan leaves unaltered the legal, equitable, and contractual rights of each
Holder of a Priority Tax Claim.
D. DIP FACILITY CLAIMS
Each Holder of an Allowed DIP Facility Claim will be paid the full unpaid
amount of such Allowed DIP Facility Claim in Cash on the later of (i) the
Effective Date or (ii) the date such Claim becomes an Allowed DIP Facility
Claim, or upon such other terms as may be agreed upon by such Holder and the
Reorganized Debtors or otherwise upon order of the Bankruptcy Court.
ARTICLE III.
CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND INTERESTS
A. SUMMARY
The categories of Claims and Interests listed below classify Claims and
Interests for all purposes. A Claim or Interest shall be deemed classified in a
particular Class only to the extent that the Claim or Interest qualifies within
the description of that Class and shall be deemed classified in a different
Class to the extent that any remainder of such Claim or Interest qualifies
within the description of such different Class. A Claim
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or Interest is in a particular Class only to the extent that such Claim or
Interest is Allowed in that Class and has not been paid or otherwise settled
prior to the Effective Date.
The classification of Claims and Interests pursuant to this Plan is as
follows:
<TABLE>
<CAPTION>
CLASS STATUS VOTING RIGHTS
----- ------ -------------
<S> <C> <C>
Class 1 -- Priority Claims Unimpaired -- not entitled to
vote
Class 2 -- Bank Secured Claims Impaired -- entitled to vote
Class 3 -- Other Secured Claims Unimpaired -- not entitled to
vote
Class 4 -- General Unsecured Claims Unimpaired -- not entitled to
vote
Class 5 -- Senior Subordinated Note Claims Impaired -- entitled to vote
Class 6 -- Old Stock Related Claims Impaired -- entitled to vote
Class 7 -- Old Stock Interests Impaired -- entitled to vote
Class 8 -- Subsidiary Claims and Subsidiary Impaired -- entitled to vote
Stock Interests
</TABLE>
B. CLASSIFICATION AND TREATMENT
1. Class 1 -- Priority Claims
(a) Classification: Class 1 consists of all Priority Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 1 Claims are unaltered by the Plan. Unless the Holder of such Claim and
the Debtors agree to a different treatment, each Holder of an Allowed Class 1
Claim shall receive one of the following alternative treatments, at the election
of the Debtors and Arch:
(i) to the extent then due and owing on the Effective Date, such Claim
will be paid in full in Cash by the Reorganized Debtors on the Effective
Date;
(ii) to the extent not due and owing on the Effective Date, such Claim
will be paid in full in Cash by the Reorganized Debtors when and as such
Claim becomes due and owing in the ordinary course of business; or
(iii) such Claim will be otherwise treated in any other manner so that
such Claims shall otherwise be rendered unimpaired pursuant to section 1124
of the Bankruptcy Code.
Any default with respect to any Class 1 Claim that occurred before or after the
commencement of the Chapter 11 Cases shall be deemed cured upon the Effective
Date.
(c) Voting: Class 1 is not impaired and the Holders of Class 1 Claims are
conclusively deemed to have accepted the Plan pursuant to section 1126(f) of the
Bankruptcy Code. Therefore, the Holders of Claims in Class 1 are not entitled to
vote to accept or reject the Plan.
2. Class 2 -- Bank Secured Claims
(a) Classification: Class 2 consists of all Bank Secured Claims.
(b) Treatment: On the later of (i) the Effective Date or (ii) the date on
which such Claim becomes an Allowed Bank Secured Claim, and upon the execution
and delivery of a Joinder Agreement, each Holder of an Allowed Class 2 Claim
will receive, in accordance with the terms of the Arch Credit Facility Term
Sheet and in full satisfaction of its Claim, either (i) Tranche B-1 Arch Credit
Facility Notes or (ii) Amended PageNet Notes, in either case in a principal
amount equal to such Holder's Allowed Bank Secured Claim.
(c) Voting: Class 2 is impaired and the Holders of Allowed Class 2 Claims
are entitled to vote to accept or reject the Plan.
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3. Class 3 -- Other Secured Claims
(a) Classification: Class 3 consists of all Other Secured Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 3 Claims are unaltered by the Plan. Unless the Holder of such Claim,
the Debtors, and Arch agree to a different treatment, each Holder of an Allowed
Class 3 Claim shall receive one of the following alternative treatments, at the
election of the Debtors and Arch:
(i) the legal, equitable and contractual rights to which such Claim
entitles the Holder thereof shall be reinstated and the Holder paid in
accordance with such legal, equitable and contractual rights;
(ii) the Debtors shall surrender all collateral securing such Claim to
the Holder thereof, in full satisfaction of such Holder's Allowed Class 3
Claim, without representation or warranty by or recourse against the
Debtors or the Reorganized Debtors; or
(iii) such Claim will be otherwise treated in any other manner so that
such Claims shall otherwise be rendered unimpaired pursuant to section 1124
of the Bankruptcy Code.
Any default with respect to any Class 3 Claim that occurred before or after the
commencement of the Chapter 11 Cases shall be deemed cured upon the Effective
Date.
(c) Voting: Class 3 is not impaired and the Holders of Class 3 Claims are
conclusively deemed to have accepted the Plan pursuant to section 1126(f) of the
Bankruptcy Code. Therefore, the Holders of Claims in Class 3 are not entitled to
vote to accept or reject the Plan.
4. Class 4 -- General Unsecured Claims
(a) Classification: Class 4 consists of all General Unsecured Claims.
(b) Treatment: The legal, equitable and contractual rights of the Holders
of Class 4 Claims are unaltered by the Plan. Unless the Holder of such Claim,
the Debtors, and Arch agree to a different treatment, each Holder of an Allowed
Class 4 Claim shall receive one of the following alternative treatments, at the
election of the Debtors and Arch:
(i) to the extent then due and owing on the Effective Date, such Claim
will be paid in full in Cash by the Reorganized Debtors on the Effective
Date;
(ii) to the extent not due and owing on the Effective Date, such Claim
will be paid in full in Cash by the Reorganized Debtors (x) when and as
such Claim becomes due and owing in the ordinary course of business (y) or,
to the extent such Claim arises as a result of the rejection of an
executory contract or unexpired lease pursuant to Article VI hereof, on the
date such Claim becomes an Allowed Claim; or
(iii) such Claim will be otherwise treated in any other manner so that
such Claims shall otherwise be rendered unimpaired pursuant to section 1124
of the Bankruptcy Code.
Any default with respect to any Class 4 Claim that occurred before or after the
commencement of the Chapter 11 Cases shall be deemed cured upon the Effective
Date.
(c) Voting: Class 4 is not impaired and the Holders of Class 4 Claims are
conclusively deemed to have accepted the Plan pursuant to section 1126(f) of the
Bankruptcy Code. Therefore, the Holders of Claims in Class 4 are not entitled to
vote to accept or reject the Plan.
5. Class 5 -- Senior Subordinated Note Claims
(a) Classification: Class 5 consists of all Senior Subordinated Note
Claims.
(b) Treatment: On the Effective Date, each Holder (excluding the Arch
Companies) of an Allowed Class 5 Claim will receive a Pro Rata share of (i) the
Noteholder Merger Consideration and (ii) the Noteholder Vast Stock.
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(c) Voting: Class 5 is impaired and the Holders of Allowed Class 5 Claims
are entitled to vote to accept or reject the Plan.
6. Class 6 -- Old Stock Related Claims
(a) Classification: Class 6 consists of all Old Stock Related Claims.
(b) Treatment: On the later of (i) the Effective Date, or (ii) the date on
which such Claim becomes an Allowed Old Stock Related Claim, each Holder of an
Allowed Class 6 Old Stock Related Claim will receive, together with the Holders
of Allowed Class 7 Old Stock Interests, a Pro Rata share of (x) the Stockholder
Merger Consideration and (y) the Stockholder Vast Stock.
(c) Voting: Class 6 is impaired and the Holders of Allowed Class 6 Claims
are entitled to vote to accept or reject the Plan.
7. Class 7 -- Old Stock Interests
(a) Classification: Class 7 consists of all Old Stock Interests.
(b) Treatment: On the Effective Date, each Holder (excluding the Arch
Companies) of an Allowed Class 7 Interest will receive, together with Holders of
Allowed Class 6 Old Stock Related Claims, a Pro Rata share of (i) the
Stockholder Merger Consideration and (ii) the Stockholder Vast Stock.
(c) Voting: Class 7 is impaired and the Holders of Allowed Class 7
Interests are entitled to vote to accept or reject the Plan.
8. Class 8 -- Subsidiary Claims and Subsidiary Stock Interests
(a) Classification: Class 8 consists of all Subsidiary Claims and
Subsidiary Stock Interests
(b) Treatment: On the Effective Date, the Holders of Class 8 Claims shall
not receive any distributions or retain any property under the Plan. On the
Effective Date, Reorganized Parent Corporation shall retain its Interest in each
Reorganized Operating Subsidiary and each Reorganized Operating Subsidiary shall
retain its Interest (if any) in any other Reorganized Operating Subsidiary.
(c) Voting: Class 8 is impaired and the Holders of Allowed Class 8 Claims
and Interests are entitled to vote to accept or reject the Plan.
C. SPECIAL PROVISION GOVERNING UNIMPAIRED CLAIMS
Except as otherwise provided in the Plan, including as provided in Article
X, nothing under the Plan shall affect the Debtors' or the Reorganized Debtors'
rights in respect of any Unimpaired Claims, including, but not limited to, all
rights in respect of legal and equitable defenses to or setoffs or recoupments
against such Unimpaired Claims.
ARTICLE IV.
NON-CONSENSUAL CONFIRMATION
In the event that any Impaired Class of Claims or Interests fails to accept
the Plan in accordance with section 1129(a)(8) of the Bankruptcy Code, the
Debtors reserve the right (a) to request that the Bankruptcy Court confirm the
Plan in accordance with section 1129(b) of the Bankruptcy Code and/or (b) to
modify the Plan in accordance with Article XII.D of the Plan.
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ARTICLE V.
MEANS FOR IMPLEMENTATION OF THE PLAN
A. CONTINUED CORPORATE EXISTENCE
Except as otherwise provided in the Plan or the Confirmation Order, the
Debtors shall, as Reorganized Debtors, continue to exist after the Effective
Date as separate corporate entities, each with all the powers of a corporation
under the laws of the respective state of incorporation and without prejudice to
any right to alter or terminate such existence (whether by merger or otherwise)
under such applicable state law. On and after the Effective Date, the
Reorganized Debtors may operate their business and may use, acquire or dispose
of their property and compromise or settle any Claims or Interests, without
supervision or approval by the Bankruptcy Court and free of any restrictions of
the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly
imposed by the Plan or the Confirmation Order.
B. VESTING OF ASSETS AND CONSUMMATION OF MERGER
On the Effective Date, each of the following transactions shall occur in
the order listed: (i) except as otherwise provided in the Plan or the
Confirmation Order, all property of the Estates, and any property acquired by
the Debtors or the Reorganized Debtors under the Plan, shall vest in the
Reorganized Debtors, free and clear of all Claims, liens, charges, or other
encumbrances and Interests except as provided in the Arch Credit Facility Term
Sheet; (ii) Merger Sub shall merge, upon the terms and conditions set forth in
the Merger Agreement, with and into the Reorganized Parent Corporation and the
separate corporate existence of Merger Sub shall thereupon cease; and (iii) each
share of common stock of Merger Sub issued and outstanding immediately prior to
the Effective Date shall be converted into one share of common stock of the
Reorganized Parent Corporation, and the Reorganized Parent Corporation shall
thereby become a wholly owned subsidiary of Arch. On the Effective Date, the
Reorganized Debtors, Arch and Merger Sub shall take all such actions as may be
necessary or appropriate to effect the Merger on the terms and conditions set
forth in the Plan and the Merger Agreement. The Reorganized Debtors and Merger
Sub shall cause certificates of merger to be executed, acknowledged, and filed
as may otherwise be required under the laws of their respective states of
incorporation and will take or cause to be taken all other actions, including
making appropriate filings or recordings, that may be required by the laws of
their respective states of incorporation or other applicable law in connection
with the Merger.
C. CANCELLATION OF INSTRUMENTS AND SECURITIES
Subject to the provisions of Article VII.B(1) and (2) of the Plan, on the
Effective Date, except to the extent provided otherwise in the Plan, the Senior
Subordinated Notes, the Old Common Stock and the Old Stock Options, together
with all related notes, certificates, security agreements, mortgages, pledges,
indemnities, collateral assignments, undertakings, guaranties, and other
instruments and documents, shall no longer be outstanding, shall be canceled,
retired, and deemed terminated, and shall cease to exist. On the Effective Date,
except to the extent provided otherwise in the Plan, any indenture relating to
any of the foregoing, including, without limitation, the Senior Subordinated
Note Indentures, shall be deemed to be canceled, as permitted by section
1123(a)(5)(F) of the Bankruptcy Code.
D. ISSUANCE OF NEW SECURITIES; EXECUTION OF RELATED DOCUMENTS
On the Effective Date, the Reorganized Debtors or Arch, as the case may be,
shall issue or cause to be issued (i) all securities, instruments, certificates,
and other documents required to be issued pursuant to the Plan, including,
without limitation, the Arch Common Stock and the Vast Class B Common Stock,
each of which shall be distributed as provided in the Plan and (ii) the
Substitute Options, in accordance with Section 6.11(a) of the Merger Agreement.
The Reorganized Debtors shall execute and deliver such other agreements,
documents and instruments as are required to be executed pursuant to the terms
of the Plan or the Merger Agreement.
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E. CORPORATE GOVERNANCE, DIRECTORS AND OFFICERS, AND CORPORATE ACTION
1. Certificate of Incorporation and Bylaws
On the Effective Date, upon consummation of the Merger, (i) the certificate
of incorporation of the Parent Corporation, as amended and restated in its
entirety as set forth in Exhibit A to the Merger Agreement, shall be the
certificate of incorporation of the Reorganized Parent Corporation and (ii) the
bylaws of Merger Sub, as in effect immediately prior to the Effective Date,
shall be the bylaws of the Reorganized Parent Corporation. On the Effective
Date, the Reorganized Parent Corporation will file its certificate of
incorporation with the Secretary of the State of Delaware in accordance with
sections 102 and 103 of the Delaware General Corporation Law. Notwithstanding
any other provision of the Plan, the certificates of incorporation of the
Reorganized Debtors will, among other things, prohibit the issuance of nonvoting
equity securities to the extent required by section 1123(a) of the Bankruptcy
Code. Before the Effective Date each of the Reorganized Operating Subsidiaries
shall amend its certificate of incorporation and bylaws to the extent required
to comply with the requirements of the Bankruptcy Code. After the Effective
Date, the Reorganized Debtors may amend and restate their certificates of
incorporation and bylaws as provided therein or by applicable law.
2. Directors and Officers
Subject to any requirement of Bankruptcy Court approval pursuant to section
1129(a)(5) of the Bankruptcy Code, on the Effective Date, upon consummation of
the Merger, (i) the directors of Merger Sub immediately prior to the Effective
Date shall be the initial directors of the Reorganized Parent Corporation and
(ii) the officers of the Parent Corporation immediately prior to the Effective
Date shall be the initial officers of the Reorganized Parent Corporation.
Pursuant to section 1129(a)(5), the Debtors will disclose, on or prior to the
Confirmation Date, the identity and affiliations of any other Person proposed to
serve on the initial board of directors of the Reorganized Debtors or as an
initial officer of the Reorganized Debtors, and, to the extent such Person is an
Insider, the nature of any compensation for such Person. The classification and
composition of the board of directors shall be consistent with the certificates
of incorporation. Each such director and officer shall serve from and after the
Effective Date pursuant to the terms of certificates of incorporation and bylaws
of the Reorganized Debtors and the Delaware General Corporation Law.
3. Corporate Action
On the Effective Date, as provided in the Plan and the Merger Agreement,
the adoption of the certificate of incorporation and the bylaws, the selection
of directors and officers for the Reorganized Debtors, and all actions
contemplated by the Plan and the Merger Agreement shall be deemed, without
further action of any kind or nature, to be authorized and approved in all
respects (subject to the provisions of the Plan). All matters provided for in
the Plan and the Merger Agreement involving the corporate structure of the
Debtors or the Reorganized Debtors, and any corporate action required by the
Debtors or the Reorganized Debtors in connection with the Plan and the Merger
Agreement, shall be deemed to have occurred and shall be in effect, without any
requirement of further action by the security holders or directors of the
Debtors or the Reorganized Debtors. On the Effective Date, the appropriate
officers of the Reorganized Debtors and members of the boards of directors of
the Reorganized Debtors are authorized and directed to issue, execute and
deliver the agreements, documents, securities and instruments contemplated by
the Plan or the Merger Agreement in the name of and on behalf of the Reorganized
Debtors.
ARTICLE VI.
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
A. ASSUMPTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
On the Effective Date, all executory contracts, including all Compensation
and Benefit Plans, and unexpired leases of the Reorganized Debtors will be
deemed assumed in accordance with the provisions and requirements of sections
365 and 1123 of the Bankruptcy Code except those executory contracts and
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unexpired leases that (1) have been rejected by order of the Bankruptcy Court,
(2) are the subject of a motion to reject pending on the Effective Date, (3) are
identified on a list to be filed by the Debtors with the Bankruptcy Court on or
before the Confirmation Date as to be rejected, or (4) are rejected pursuant to
the terms of the Plan. Entry of the Confirmation Order by the Bankruptcy Court
shall constitute approval of such assumptions and rejections pursuant to
sections 365(a) and 1123 of the Bankruptcy Code.
Notwithstanding anything to the contrary contained herein, on the
Confirmation Date, the Parent Corporation will be deemed to have assumed the
Merger Agreement, pursuant to sections 365 and 1123 of the Bankruptcy Code,
unless the Merger Agreement is assumed by the Parent Corporation prior to the
Confirmation Date pursuant to an order of the Bankruptcy Court.
B. CLAIMS BASED ON REJECTION OF EXECUTORY CONTRACTS OR UNEXPIRED LEASES
All proofs of claim with respect to Claims arising from the rejection of
executory contracts or unexpired leases, if any, must be Filed with the
Bankruptcy Court within thirty (30) days after the date of entry of an order of
the Bankruptcy Court approving such rejection. Any Claims arising from the
rejection of executory contracts or unexpired leases that become Allowed Claims
are classified and shall be treated as Class 4 General Unsecured Claims. Any
Claims arising from the rejection of an executory contract or unexpired lease
not Filed within such times will be forever barred from assertion against the
Debtor or Reorganized Debtors, their Estates and property unless otherwise
ordered by the Bankruptcy Court or provided in this Plan. All such Claims for
which proofs of claim are required to be Filed will be, and will be treated as,
General Unsecured Claims subject to the provisions of Article VIII hereof.
C. CURE OF DEFAULTS FOR EXECUTORY CONTRACTS AND UNEXPIRED LEASES ASSUMED
Any monetary amounts by which each executory contract and unexpired lease
to be assumed pursuant to the Plan is in default shall be satisfied, pursuant to
section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in
Cash on the Effective Date or on such other terms as the parties to such
executory contracts or unexpired leases may otherwise agree. In the event of a
dispute regarding: (1) the amount of any cure payments, (2) the ability of the
Reorganized Debtors or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (3) any other matter pertaining to
assumption, the cure payments required by section 365(b)(1) of the Bankruptcy
Code shall be made following the entry of a Final Order resolving the dispute
and approving the assumption.
D. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The obligations of the Debtors to indemnify any Person or Entity serving at
any time on or prior to the Effective Date as one of its directors, officers or
employees by reason of such Person's or Entity's service in such capacity, or as
a director, officer or employee of any other corporation or legal entity, to the
extent provided in the Debtors' constituent documents or by a written agreement
with the Debtors or the Delaware General Corporation Law, shall be deemed and
treated as executory contracts that are assumed by the Debtors pursuant to the
Plan and section 365 of the Bankruptcy Code as of the Effective Date, subject to
the limitations set forth in Section 6.13 of the Merger Agreement. Any such
indemnification obligations shall survive unimpaired and unaffected by entry of
the Confirmation Order, irrespective of whether such indemnification is owed for
an act or event occurring before or after the Petition Date, subject to the
limitations set forth in Section 6.13 of the Merger Agreement.
E. STOCK OPTIONS
On the Effective Date, each outstanding Old Stock Option, which has not
vested prior to the Effective Date, shall (i) become fully exercisable and
vested as of the Effective Date and (ii) be converted to a Substitute Option, in
accordance with Section 6.11(a) of the Merger Agreement.
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ARTICLE VII.
PROVISIONS GOVERNING DISTRIBUTIONS
A. TIMING OF DISTRIBUTIONS
1. Except as otherwise provided in this Article VII, distributions to be
made on the Effective Date on account of Claims and Interests that are Allowed
as of the Effective Date and are entitled to receive distributions under the
Plan shall be made on the Effective Date or as promptly thereafter as
practicable.
2. Distributions on account of Disputed Claims that become Allowed Claims
after the Effective Date shall be made quarterly pursuant to Article VIII.C
below beginning on the date that is 20 calendar days after the end of the
calendar quarter in which such Claim was Allowed. Such quarterly distributions
shall be in the full amount that the Plan provides for Allowed Claims in the
applicable Class.
B. METHODS OF DISTRIBUTION
1. Distributions to Holders of Bank Secured Claims
All Tranche B-1 Arch Credit Facility Notes and Amended PageNet Notes and
other distributions provided for in the Plan on account of Allowed Bank Secured
Claims shall be made or delivered by Arch or the Reorganized Debtors to the
Administrative Agent Bank for delivery by the Administrative Agent Bank to
individual Holders of such Claims in accordance with the provisions of the
Credit Agreement, or as otherwise agreed between the Administrative Agent Bank
and any holder of an Allowed Bank Secured Claim, subject to any Agent Bank
Charges as provided in the Credit Agreement. Notwithstanding the foregoing,
Holders of Allowed Bank Secured Claims shall not receive, or be entitled to
receive any Tranche B-1 Arch Credit Facility Notes or Amended PageNet Notes or
other distributions provided for in the Plan prior to executing a Joinder
Agreement as contemplated by the Arch Credit Facility Term Sheet. Neither Arch
nor the Reorganized Debtors shall have liability for any act or omission of the
Administrative Agent Bank.
2. Distributions to Holders of Senior Subordinated Note Claims, Old Stock
Related Claims and Old Stock Interests
(a) Distributions from Arch and the Reorganized Debtors. All distributions
provided for in the Plan on account of Allowed Senior Subordinated Note Claims,
Allowed Old Stock Related Claims and Allowed Old Stock Interests shall be made
by Arch and the Reorganized Debtors to the Exchange Agent for delivery by the
Exchange Agent to individual holders of such Claims and Interests as provided in
the Plan. Notwithstanding the provisions of Article V.C above regarding
cancellation of the Senior Subordinated Note Indentures, the distribution
provisions of the Senior Subordinated Note Indentures shall continue in effect
to the extent necessary to authorize the Exchange Agent to receive and
distribute to Holders of Allowed Senior Subordinated Note Claims distributions
received by the Exchange Agent pursuant to the Plan on account of Allowed Senior
Subordinated Note Claims and shall terminate completely upon completion of all
distributions. Neither Arch nor the Reorganized Debtors shall have liability for
any act or omission of the Exchange Agent. The Exchange Agent will serve without
bond and may employ or contract with other entities to assist in or make the
distributions required by the Plan.
(b) Distributions from the Exchange Agent. As soon as practicable after
the Effective Date, Arch shall cause the Exchange Agent to send a letter of
transmittal to each Holder of an Allowed Senior Subordinated Note Claim, an
Allowed Old Stock Related Claim or an Allowed Old Stock Interest advising such
Holder of the effectiveness of the Mergers and the Plan and the instructions for
delivering to the Exchange Agent any Senior Subordinated Notes and Old Common
Stock in exchange for the Arch Common Stock and the Vast Class B Common Stock
issuable or distributable pursuant to the Plan. Such letter of transmittal shall
specify that delivery of any Senior Subordinated Notes and Old Common Stock will
be effected, and that risk of loss and title thereto shall pass, only upon
delivery of such Senior Subordinated Notes and Old Common Stock to the Exchange
Agent in accordance with the terms and conditions of such letter of transmittal,
such letter of
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transmittal to be in such form and have such other provisions as Arch and the
Reorganized Debtors may reasonably agree.
(c) Lost or Stolen Notes or Stock. In addition to any requirements under
the Senior Subordinated Note Indentures, or any related agreement, in the event
any Senior Subordinated Notes or Old Common Stock shall have been lost, stolen
or destroyed, then upon the delivery to the Exchange Agent of an affidavit
attesting to the fact by the Holder of the Senior Subordinated Note Claim or Old
Common Stock Interest relating to such Note or Stock, and the posting by such
Holder of a bond as may be required by Arch and the Reorganized Debtors as
indemnity against any claim that may be made against either of them with respect
to such Note or Stock, the Exchange Agent shall issue the shares of Arch Common
Stock and Vast Class B Common Stock, and any dividends and other distributions
with respect thereto, issuable or payable in exchange for such lost, stolen, or
destroyed Note or Stock pursuant to the provisions of the Plan. Upon compliance
with this Article VII.B.1(b) by a Holder of a Claim or Interest evidenced by a
Senior Subordinated Note or Old Common Stock, such Holder shall, for all
purposes under the Plan, be deemed to have surrendered such Note or Stock.
(d) Failure to Surrender Canceled Notes and Stock. Any Holder of a Senior
Subordinated Note Claim or Old Stock Interest that fails to surrender or is
deemed to have failed to surrender any applicable Senior Subordinated Note or
Old Common Stock required to be delivered hereunder, or fails to comply with the
provisions of Article VII.B.2(c), (i) within 180 days after the Effective Date,
shall thereafter be entitled to look only to the Reorganized Debtors for their
distributions under the Plan, or (ii) within three (3) years after the Effective
Date, shall have its Claim or Interest for a distribution pursuant to the Plan
on account of such Senior Subordinated Note or Old Common Stock discharged and
shall be forever barred from asserting any such Claim or Interest against or in
the Reorganized Debtors or its property and, in such case, any Arch Common Stock
or Vast Class B Common Stock held for distribution on account of such Claim or
Interest shall be disposed of pursuant to the provisions of Article VII.C below.
(e) Distribution Record Date. As of the close of business on the
Distribution Record Date, the respective transfer books and records for the
Senior Subordinated Notes and the Old Common Stock as maintained by the
pertinent Indenture Trustee (in the case of a Senior Subordinated Note) or the
Parent Corporation (in the case of Old Common Stock), or their respective
agents, shall be closed and any transfer of a Senior Subordinated Note or Old
Common Stock or any interest therein shall be prohibited. The Reorganized
Debtors, Arch, the Exchange Agent and their respective agents will have no
obligation to recognize the transfer of any Senior Subordinated Note or Old
Common Stock occurring after the Distribution Record Date, and shall be entitled
for all purposes herein to recognize and deal only with those Holders of record
as of the close of business on the Distribution Record Date.
(f) Unregistered Transfers. In the event of a transfer of ownership of a
Senior Subordinated Note or Old Common Stock that is not registered in the
respective transfer books and records of the pertinent Indenture Trustee (in the
case of a Senior Subordinated Note) or the Parent Corporation (in the case of
Old Common Stock), the property to be distributed to the Holder of the Senior
Subordinated Note Claim or Old Common Stock Interest with respect to such Claim
or Interest shall be delivered to the Holder of record on the Distribution
Record Date unless the transferee of such Holder delivers an executed letter of
transmittal to the Exchange Agent, in form satisfactory to the Exchange Agent,
accompanied by such documents as are required to evidence and effect such
transfer and to evidence that all applicable transfer taxes have been paid.
(g) Stock Issued in Different Name. If any Arch Common Stock or Vast Class
B Common Stock is to be issued or distributed in a name other than that in which
the Senior Subordinated Note or Old Common Stock surrendered in exchange
therefor is registered, it shall be a condition of such exchange that (i) the
Senior Subordinated Note or Old Common Stock so surrendered shall be
transferable, and shall be properly assigned and endorsed, (ii) such transfer
shall otherwise be proper, and (iii) the Holder requesting such transfer shall
pay all transfer or other taxes payable by reason of the foregoing and establish
to the satisfaction of the Exchange Agent that such taxes have been paid.
(h) Dividends With Respect to Unexchanged Notes and Stock. Whenever a
dividend or other distribution is declared by Arch with respect to Arch Common
Stock, or Vast with respect to Vast Class B
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Common Stock, the record date for which is on or after the Effective Date, that
declaration shall include dividends or other distributions with respect to all
shares of Arch Common Stock or Vast Class B Common Stock issuable or
distributable pursuant to the Plan. No dividends or other distributions with
respect to such Arch Common Stock or Vast Class B Common Stock shall be paid to
any holder of any unsurrendered Senior Subordinated Note or Old Common Stock
until same is surrendered for exchange in accordance with the provisions of this
Article VII.B. Subject to the effect of applicable laws, following surrender of
any such Senior Subordinated Note or Old Common Stock, there shall be issued or
paid to the Holder of same certificates representing shares of Arch Common Stock
and Vast Class B Common Stock issued or distributed in exchange therefor,
without interest: (i) at the time of such surrender, the dividends or other
distributions with a record date after the Effective Date and a payment date on
or prior to the date of issuance of such shares of Arch Common Stock or Vast
Class B Common Stock and not previously paid; and (ii) at the appropriate
payment date, the dividends or other distributions payable with respect to such
shares of Arch Common Stock or Vast Class B Common Stock with a record date
after the Effective Date and prior to the date of issuance of such shares of
Arch Common Stock or Vast Class B Common Stock but with a payment date
subsequent to surrender. For purposes of dividends or other distributions with
respect to shares of Arch Common Stock and Vast Class B Common Stock, all such
shares to be issued or distributed pursuant to the Plan shall be deemed issued
and distributed as of the Effective Date.
(i) Voting With Respect to Unexchanged Notes and Stock. Subject to the
provisions of Article VII.B.2(d) hereof, at any meeting of stockholders of Arch
or Vast with a record date on or after the Effective Date, registered Holders of
unsurrendered Senior Subordinated Notes or Old Common Stock shall be entitled to
vote the number of shares of Arch Common Stock or Vast Class B Common Stock
represented by such Senior Subordinated Notes or Old Common Stock, regardless of
whether such Holders have exchanged their Senior Subordinated Notes or Old
Common Stock; provided, however, that any such vote shall be at the times, upon
the conditions, and in the manner prescribed by the certificate of incorporation
and bylaws of Arch or Vast, respectively.
(j) Fractional Shares. Notwithstanding any other provision of the Plan,
the Arch Common Stock will only be issued in whole shares. No certificates or
scrip representing fractional shares of Arch Common Stock will be issued, but in
lieu thereof, each Holder of an Allowed Senior Subordinated Note Claim or an
Allowed Old Common Stock Interest otherwise entitled to a fractional share of
Arch Common Stock will be entitled to receive, from the Exchange Agent in
accordance with the provisions of Article VII.B.2(i) hereof, a cash payment in
lieu of such fractional shares of Arch Common Stock determined by multiplying
such fraction (rounded to the nearest one-hundredth of a share) by the average
closing price of a share of Arch Common Stock, as reported in The Wall Street
Journal, New York City edition, on the ten (10) days immediately prior to the
Effective Date. As soon as practicable after the determination of the amount of
cash, if any, to be paid to the Holders of Allowed Senior Subordinated Note
Claims or Allowed Old Stock Interests in lieu of any fractional shares of Arch
Common Stock, Arch and the Exchange Agent shall make available such amounts of
cash to such holders of Allowed Senior Subordinated Note Claims or Allowed Old
Stock Interests.
3. Distributions to Holders of Other Claims
All distributions provided for in the Plan on account of Allowed Other
Claims will be made by the Reorganized Debtors, or such Disbursing Agents as the
Reorganized Debtors may employ or contract with, as provided herein or in the
Confirmation Order. Neither the Reorganized Debtors nor Arch shall have
liability for any act or omission of any Disbursing Agent. Each Disbursing Agent
will serve without bond, and any Disbursing Agent may employ or contract with
other entities to assist in or make the distributions required by the Plan.
C. UNDELIVERABLE AND UNCLAIMED DISTRIBUTIONS
1. Delivery of Distributions
All property under the Plan to be distributed by mail shall be sent to the
latest mailing address Filed with the Bankruptcy Court for the party entitled
thereto or, if no such mailing address has been so Filed, the
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mailing address reflected in the Debtor's Schedules or, in the case of the
Holders of Allowed Senior Subordinated Note Claims, to the latest mailing
address maintained of record by the pertinent Indenture Trustee or, if no
mailing address is maintained of record, to the pertinent Indenture Trustee.
2. Undeliverable Distributions
If any distribution to the Holder of an Allowed Claim or Allowed Interest
is returned as undeliverable, no further distributions shall be made to such
Holder unless and until the Reorganized Debtors are notified in writing of such
Holder's then-current address. Undeliverable distributions made by Arch or the
Reorganized Debtors shall be returned to Arch or the Reorganized Debtors,
respectively, and will remain in the possession of Arch or the Reorganized
Debtors pursuant to this Article VII.C until such time as a distribution becomes
deliverable. Undeliverable distributions shall not be entitled to any interest,
dividends or other accruals of any kind.
3. After Distributions Become Deliverable
Within 20 days after the end of each calendar quarter following the
Effective Date, the Reorganized Debtors or Arch shall make all distributions, as
provided herein or in the Confirmation Order, that become deliverable during the
preceding calendar quarter.
4. Failure to Claim Undeliverable Distributions
The Reorganized Debtors will file with the Bankruptcy Court, from time to
time, a listing of the Holders of unclaimed distributions. This list will be
maintained until the entry of an order and/or final decree concluding the
Chapter 11 Cases. Any Holder of an Allowed Claim or Allowed Interest that does
not assert a Claim or Interest pursuant to the Plan for an undeliverable
distribution within three (3) years after the Effective Date shall have its
Claim or Interest for such undeliverable distribution discharged and shall be
forever barred from asserting any such Claim or Interest against or in the
Reorganized Debtors, Arch, or their property. In such cases: (i) any Cash held
for distribution on account of such Claims or Interests shall be property of the
Reorganized Debtors or Arch, in accordance with Article VII.C.2, free of any
restrictions thereon; and (ii) any Arch Common Stock or Vast Class B Common
Stock held for distribution on account of such Claims or Interests shall be
canceled and of no further force or effect. Nothing contained in the Plan shall
require the Reorganized Debtors, Arch, the Administrative Agent Bank, the
Exchange Agent, the Indenture Trustees, or the Disbursing Agents to attempt to
locate any Holder of an Allowed Claim or Allowed Interest.
D. COMPLIANCE WITH TAX REQUIREMENTS
In connection with the Plan, to the extent applicable, the Reorganized
Debtors shall comply with all tax withholding and reporting requirements imposed
on them by any governmental unit, and all distributions pursuant to the Plan
shall be subject to such withholding and reporting requirements. Notwithstanding
any other provision of this Plan, each Person or Entity that has received any
distribution pursuant to the Plan shall have sole and exclusive responsibility
for the satisfaction and payment of any tax obligation imposed by any
governmental unit, including income, withholding and tax obligations, on account
of such distribution.
E. COMPENSATION AND REIMBURSEMENT FOR SERVICES RELATED TO BALLOTING AND
DISTRIBUTIONS
1. Administrative Agent Bank and Indenture Trustees
All reasonable fees and expenses incurred by the Administrative Agent Bank
and the Indenture Trustees on and after the Petition Date, including reasonable
fees and expenses of Professionals retained by the Administrative Agent Bank or
the Indenture Trustees, shall be paid by the Reorganized Debtors as
Administrative Expense Claims. The foregoing payments will be in addition to
distributions made on account of any Agent Bank Charges or Indenture Trustee
Charging Liens.
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2. Exchange Agent and Disbursing Agents
The Exchange Agent and each Disbursing Agent providing services related to
distributions pursuant to the Plan will receive from the Reorganized Debtors,
without further Bankruptcy Court approval, reasonable compensation for such
services and reimbursement of reasonable out-of-pocket expenses incurred in
connection with such services. These payments will be made on terms agreed to
with the Reorganized Debtors.
F. SETOFFS
The Reorganized Debtors may, pursuant to section 553 of the Bankruptcy Code
or applicable non-bankruptcy law, set off against any Allowed Claim and the
distributions to be made pursuant to the Plan on account of such Claim (before
any distribution is made on account of such Claim), the claims, rights and
causes of action of any nature that the Debtors or Reorganized Debtors may hold
against the Holder of such Allowed Claim; provided, however, that neither the
failure to effect such a setoff nor the allowance of any Claim hereunder shall
constitute a waiver or release by the Debtors or Reorganized Debtors of any such
claims, rights and causes of action that the Debtors or Reorganized Debtors may
possess against such Holder.
ARTICLE VIII.
PROCEDURES FOR RESOLVING DISPUTED CLAIMS
A. PROSECUTION OF OBJECTIONS TO CLAIMS AND INTERESTS
After the Confirmation Date, the Debtors and the Reorganized Debtors shall
have the exclusive authority to File objections, settle, compromise, withdraw or
litigate to judgment objections to Claims. From and after the Confirmation Date,
the Debtors and the Reorganized Debtors may settle or compromise any Disputed
Claim without approval of the Bankruptcy Court.
B. ESTIMATION OF CLAIMS
The Debtors or the Reorganized Debtors may, at any time, request that the
Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code regardless of whether the Debtors or the
Reorganized Debtors have previously objected to such Claim or whether the
Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court will
retain jurisdiction to estimate any Claim at any time during litigation
concerning any objection to any Claim, including during the pendency of any
appeal relating to any such objection. In the event that the Bankruptcy Court
estimates any contingent or unliquidated Claim, that estimated amount will
constitute either the Allowed amount of such Claim or a maximum limitation on
such Claim, as determined by the Bankruptcy Court. If the estimated amount
constitutes a maximum limitation on such Claim, the Debtors or Reorganized
Debtors may elect to pursue any supplemental proceedings to object to any
ultimate payment on such Claim. All of the aforementioned Claims objection,
estimation and resolution procedures are cumulative and not necessarily
exclusive of one another. Claims may be estimated and subsequently compromised,
settled, withdrawn or resolved by any mechanism approved by the Bankruptcy
Court.
C. PAYMENTS AND DISTRIBUTIONS ON DISPUTED CLAIMS
Notwithstanding any provision in the Plan to the contrary, except as
otherwise agreed by the Reorganized Debtors in their sole discretion, no partial
payments and no partial distributions will be made with respect to a Disputed
Claim until the resolution of such disputes by settlement or Final Order.
Subject to the provisions of Article VIII.A above, after a Disputed Claim
becomes an Allowed Claim, the Holder of such Allowed Claim will receive all
payments and distributions to which such Holder is then entitled under the Plan.
Notwithstanding the foregoing, any Person or Entity who holds both an Allowed
Claim(s) and a Disputed Claim(s) will receive the appropriate payment or
distribution on the Allowed Claim(s), although, except as otherwise
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agreed by the Reorganized Debtors in their sole discretion, no payment or
distribution will be made on the Disputed Claim(s) until such dispute is
resolved by settlement or Final Order.
ARTICLE IX.
CONDITIONS PRECEDENT TO CONSUMMATION OF THE PLAN
A. CONDITIONS PRECEDENT TO CONSUMMATION
It shall be a condition to Consummation of the Plan that the following
conditions shall have been satisfied or waived pursuant to the provisions of
Article IX.B of the Plan:
1. the Confirmation Order shall have been signed by the Bankruptcy
Court and duly entered on the docket for the Chapter 11 Cases by the Clerk
of the Bankruptcy Court;
2. the Confirmation Order shall be a Final Order; and
3. all conditions precedent to the "Closing," as defined in the Merger
Agreement, shall have been satisfied.
B. WAIVER OF CONDITIONS
The conditions precedent to the "Closing," as defined in the Merger
Agreement, may only be waived pursuant to the terms thereof. The Parent
Corporation may waive any such conditions without leave or order of the
Bankruptcy Court, and without any formal action other than proceeding to
consummate the Plan.
C. EFFECT OF VACATION OF CONFIRMATION ORDER
If the Confirmation Order is vacated, except for the assumption of the
Merger Agreement which shall continue in effect, the Plan shall be null and void
in all respects and nothing contained in the Plan or the Disclosure Statement
shall: (1) constitute a waiver or release of any Claims by or against, or any
Interests in, the Debtors; (2) prejudice in any manner the rights of the
Debtors; or (3) constitute an admission, acknowledgment, offer or undertaking by
the Debtors in any respect.
ARTICLE X.
RELEASE, INJUNCTION AND RELATED PROVISIONS
A. SUBORDINATION
The classification and manner of satisfying all Claims and Interests and
the respective distributions and treatments under the Plan take into account
and/or conform to the relative priority and rights of the Claims and Interests
in each Class in connection with any contractual, legal and equitable
subordination rights relating thereto whether arising under general principles
of equitable subordination, section 510(b) of the Bankruptcy Code or otherwise,
and any and all such rights are settled, compromised and released pursuant to
the Plan. The Confirmation Order shall permanently enjoin, effective as of the
Effective Date, all Persons and Entities from enforcing or attempting to enforce
any such contractual, legal and equitable subordination rights satisfied,
compromised and settled pursuant to this Article X.A.
B. LIMITED RELEASES BY THE DEBTORS
Except as otherwise specifically provided in the Plan or the Confirmation
Order, for good and valuable consideration, including, but not limited to, the
commitment and obligation of the Lender Releasees to provide the financial
support necessary for consummation of the Plan, including the financial
accommodations reflected in the Arch Credit Facility, the obligations and
undertakings of the Investor Releasees set forth in the Merger Agreement, and
the service of the D&O Releasees to facilitate the expeditious reorganization of
the Debtors and the implementation of the Merger and restructuring contemplated
by the Plan and the
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Merger Agreement, the Lender Releasees, the Investor Releasees, and the D&O
Releasees are released, as of the Effective Date, by the Debtors and the
Reorganized Debtors and their subsidiaries from any and all Claims, obligations,
rights, suits, damages, Causes of Action, Avoidance Actions, remedies and
liabilities whatsoever, whether known or unknown, foreseen or unforeseen,
existing or hereafter arising, in law, equity or otherwise, that the Debtors or
their subsidiaries would have been legally entitled to assert in their own right
(whether individually or collectively) or on behalf of the Holder of any Claim
or Interest or other Person or Entity, based in whole or in part upon any act or
omission, transaction, agreement, event or other occurrence taking place on or
before the Effective Date; provided, however, that the foregoing provisions of
this Article X.B shall have no effect on the liability of (i) the Arch Companies
resulting from any breach of the Merger Agreement or (ii) any Person or Entity
(a) that results from any such act or omission that is determined in a Final
Order to have constituted fraud, gross negligence or willful misconduct or (b)
in respect of any (1) loan, advance or similar payment by the Debtors or their
subsidiaries to any such Person or Entity or (2) contractual obligation owed by
such Person or Entity to the Debtors or their subsidiaries.
C. PRESERVATION OF RIGHTS OF ACTION
Except as otherwise provided in the Plan or in any contract, instrument,
release, indenture or other agreement entered into in connection with the Plan,
in accordance with section 1123(b) of the Bankruptcy Code, the Reorganized
Debtors shall retain and may exclusively enforce any Avoidance Actions or other
Causes of Action or rights to payment of claims, that the Debtors or the Estates
may hold against any Person or Entity. The Reorganized Debtors may pursue such
retained Avoidance Actions, other Causes of Action and rights to payment of
claims, as appropriate, in accordance with the best interests of the Reorganized
Debtors. The Reorganized Debtors' shall retain and may enforce all defenses,
counterclaims and rights against all Claims and Interests asserted against the
Debtors, the Reorganized Debtors or their Estates.
D. EXCULPATION
The Debtors, the Reorganized Debtors, the Lender Releasees, the Investor
Releasees, and the D&O Releasees and their respective members and Professionals
(acting in such capacity) shall neither have nor incur any liability to any
Person or Entity for any act taken or omitted to be taken in connection with or
related to the formulation, preparation, dissemination, implementation,
administration, Confirmation or Consummation of the Plan, the Disclosure
Statement or any contract, instrument, release or other agreement or document
created or entered into in connection with the Plan, including the Merger
Agreement, or any other act taken or omitted to be taken in connection with the
Debtor's Chapter 11 Cases; provided, however, that the foregoing provisions of
this Article X.D shall have no effect on the liability of (i) the Corporation or
the Arch Companies resulting from any breach of the Merger Agreement or (ii) any
Person or Entity that results from any such act or omission that is determined
in a Final Order to have constituted fraud, gross negligence or willful
misconduct.
E. INJUNCTION
From and after the Effective Date, all Persons and Entities are permanently
enjoined from commencing or continuing in any manner, any suit, action or other
proceeding, on account of or respecting any Claim, obligation, debt, right,
Cause of Action, remedy, or liability released or to be released pursuant to
this Article X; provided, however, that this injunction shall not preclude
police or regulatory agencies from fulfilling their statutory duties.
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ARTICLE XI.
RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order and the occurrence of
the Effective Date, the Bankruptcy Court shall retain such jurisdiction over the
Chapter 11 Cases after the Effective Date as is legally permissible, including
jurisdiction to:
A. Allow, disallow, determine, liquidate, classify, estimate or
establish the priority or secured or unsecured status of any Claim or
Interest, including the resolution of any request for payment of any
Administrative Expense Claim and the resolution of any and all objections
to the allowance or priority of Claims or Interests;
B. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending on or before the Effective Date;
C. Resolve any matters related to the assumption, assumption and
assignment or rejection of any executory contract or unexpired lease to
which the Debtors are a party or with respect to which the Debtors may be
liable and to hear, determine and, if necessary, liquidate, any Claims
arising therefrom, including those matters related to the amendment after
the Effective Date pursuant to Article VI above to add any executory
contracts or unexpired leases to the list of executory contracts and
unexpired leases to be rejected;
D. Ensure that distributions to Holders of Allowed Claims and Allowed
Interests are accomplished pursuant to the provisions of the Plan,
including ruling on any motion Filed pursuant to Articles VII or VIII;
E. Decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving the Debtors that may be pending on the Effective Date;
F. Enter such orders as may be necessary or appropriate to implement
or consummate the provisions of the Plan and all contracts, instruments,
releases, indentures, and other agreements or documents created in
connection with the Plan or the Disclosure Statement or the Confirmation
Order;
G. Resolve any cases, controversies, suits or disputes that may arise
in connection with the Consummation, interpretation or enforcement of the
Plan or any Person's or Entity's obligations incurred in connection with
the Plan;
H. Permit the Debtors or the Reorganized Debtors to modify the Plan
before or after the Effective Date pursuant to section 1127 of the
Bankruptcy Code, the Confirmation Order or any contract, instrument,
release or other agreement or document created in connection with the Plan,
the Disclosure Statement, or the Confirmation Order; or remedy any defect
or omission or reconcile any inconsistency in any Bankruptcy Court order,
the Plan, the Disclosure Statement or the Confirmation Order or any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan, the Disclosure Statement or the
Confirmation Order, in such manner as may be necessary or appropriate to
consummate the Plan, to the extent authorized by the Bankruptcy Code;
I. Issue injunctions, enter and implement other orders or take such
other actions as may be necessary or appropriate to restrain interference
by any Person or Entity with Consummation, implementation or enforcement of
the Plan or the Confirmation Order, except as otherwise provided herein;
J. Resolve any cases, controversies, suits or disputes with respect to
the releases, injunction and other provisions contained in Article X and
enter such orders as may be necessary or appropriate to implement such
releases, injunction and other provisions;
C-26
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K. Enter and implement such orders as are necessary or appropriate if
the Confirmation Order is for any reason modified, stayed, reversed,
revoked or vacated or distributions pursuant to the Plan are enjoined or
stayed;
L. Determine any other matters that may arise in connection with or
relate to the Plan, the Disclosure Statement, the Confirmation Order or any
contract, instrument, release, indenture or other agreement or document
created in connection with the Plan, the Disclosure Statement or the
Confirmation Order; and
M. Enter an order and/or final decree concluding the Chapter 11
Cases.
ARTICLE XII.
MISCELLANEOUS PROVISIONS
A. DISSOLUTION OF COMMITTEE(S)
On the Effective Date, the Committee(s) shall dissolve and members shall be
released and discharged from all rights and duties arising from, or related to,
the Chapter 11 Cases.
B. PAYMENT OF STATUTORY FEES
All fees payable pursuant to section 1930 of title 28 of the United States
Code shall be paid on or before the Effective Date.
C. DISCHARGE OF DEBTORS
Except as otherwise provided herein or in the Confirmation Order, (1) the
rights afforded in the Plan and the treatment of all Claims and Interests
therein, shall be in exchange for and in complete satisfaction, discharge and
release of Claims and Interests of any nature whatsoever, (2) on the Effective
Date, all such Claims against, and Interests in, the Debtors and the Reorganized
Debtors shall be satisfied, discharged, and released in full, and (3) all
Persons and Entities shall be precluded from asserting against the Debtors or
the Reorganized Debtors, their successors or their assets or properties any
other or further Claims or Interests based upon any act or omission, transaction
or other activity of any kind or nature that occurred prior to the Confirmation
Date.
D. MODIFICATION OF PLAN
Subject to the limitations contained herein and the Merger Agreement, (1)
the Debtors reserve the right, in accordance with the Bankruptcy Code and the
Bankruptcy Rules, to amend or modify the Plan prior to the entry of the
Confirmation Order and (2) after the entry of the Confirmation Order, the
Debtors or the Reorganized Debtors, as the case may be may, upon order of the
Bankruptcy Court, amend or modify the Plan, in accordance with section 1127(b)
of the Bankruptcy Code, or remedy any defect or omission or reconcile any
inconsistency in the Plan in such manner as may be necessary to carry out the
purpose and intent of the Plan.
E. REVOCATION OF PLAN
Subject to the Merger Agreement, the Debtors reserve the right, at any time
prior to the entry of the Confirmation Order, to revoke and withdraw the Plan.
F. SUCCESSORS AND ASSIGNS
The rights, benefits and obligations of any Person or Entity named or
referred to in the Plan shall be binding on, and shall inure to the benefit of
any heir, executor, administrator, successor or assign of such Person or Entity.
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G. RESERVATION OF RIGHTS
Except as expressly set forth herein, this Plan shall have no force or
effect unless the Bankruptcy Court shall enter the Confirmation Order. None of
the filing of this Plan, any statement or provision contained this Plan or the
Disclosure Statement, or the taking of any action by the Debtors with respect to
this Plan shall be or shall be deemed to be an admission or waiver of any rights
of the Debtors with respect to the Holders of Claims or Interests prior to the
Effective Date.
H. SECTION 1146 EXEMPTION
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer,
or exchange of any security under the Plan, or the making or delivery of an
instrument of transfer under this Plan, may not be taxed under any law imposing
a stamp tax or similar tax.
I. FURTHER ASSURANCES
The Debtors, the Reorganized Debtors, and all Holders of Claims or
Interests receiving distributions under the Plan and all other parties in
interest shall, from time to time, prepare, execute and deliver any agreements
or documents and take any other actions as may be necessary or advisable to
effectuate the provisions and intent of this Plan.
J. SERVICE OF DOCUMENTS
Any pleading, notice or other document required by the Plan to be served on
or delivered to the Debtors or the Reorganized Debtors shall be in writing and
served by either (a) certified mail, return receipt requested, postage prepaid,
(b) hand delivery, (c) national overnight courier, freight prepaid or (d) fax,
assessed as follows:
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attn: Chief Executive Officer
Fax: (972) 801-8950
and
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attn: Senior Vice President and General Counsel
Fax: (972) 801-8978
with copies to:
and
Mayer, Brown & Platt
190 South LaSalle Drive
Chicago, Illinois 60603
Attn: Lawrence K. Snider
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and
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Attn: Chief Executive Officer
Fax: (508) 870-6076
and
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attn: Mark N. Polebaum
Fax: (617) 526-5000
K. FILING OF ADDITIONAL DOCUMENTS
On or before the Effective Date, the Debtors may file with the Bankruptcy
Court such agreements and other documents as may be necessary or appropriate to
effectuate and further evidence the terms and conditions of the Plan.
Dated: [ ]
PAGING NETWORK, INC., PAGENET, INC.,
PAGING NETWORK FINANCE CORP., PAGING
NETWORK OF AMERICA, INC., PAGING
NETWORK OF COLORADO, INC., PAGING
NETWORK OF MICHIGAN, INC., PAGING
NETWORK OF NORTHERN CALIFORNIA, INC.,
AND PAGING NETWORK OF SAN FRANCISCO,
INC.
Debtors and Debtors In Possession
By:
------------------------------------
Name: John P. Frazee, Jr.
Title: Chairman of the Board and
Chief Executive Officer
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ANNEX D
[ARCH CREDIT FACILITY TERM SHEET TO BE FILED BY AMENDMENT]
D-1
<PAGE> 445
ANNEX E
UNAUDITED COMBINED COMPANY PROJECTED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
2000 2001
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6.0 $ 4.0
Accounts receivable, net.................................. 129.3 131.7
Inventories............................................... 24.7 26.8
Prepaid expenses and other................................ 26.8 27.4
-------- --------
Total current assets................................... 186.8 189.9
Property and equipment, net................................. 1,004.5 828.9
Intangible and other assets, net............................ 1,348.2 1,061.9
-------- --------
$2,539.5 $2,080.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 108.9 $ 132.5
Accounts payable.......................................... 108.2 103.1
Accrued expenses.......................................... 98.1 116.4
Accrued interest.......................................... 51.2 49.5
Customer deposits and deferred revenue.................... 77.9 79.5
Accrued restructuring charges............................. 25.7 --
-------- --------
Total current liabilities.............................. 470.0 481.0
Long-term debt, less current maturities..................... 1,585.3 1,438.9
Other long-term liabilities................................. 65.5 55.5
Stockholders' equity........................................ 418.7 105.3
-------- --------
$2,539.5 $2,080.7
======== ========
</TABLE>
E-1
<PAGE> 446
UNAUDITED COMBINED COMPANY PROJECTED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
<S> <C> <C>
Service, rental and maintenance revenues.................... $ 785.9 $ 1,602.9
Product sales............................................... 79.3 155.7
------- ---------
Total revenues............................................ 865.2 1,758.6
Cost of products sold....................................... (58.4) (114.6)
------- ---------
806.8 1,644.0
------- ---------
Operating expenses:
Service, rental and maintenance........................... 199.1 398.2
Selling................................................... 105.0 221.7
General and administrative................................ 234.5 441.5
Depreciation and amortization............................. 343.0 714.3
------- ---------
Total operating expenses............................... 881.6 1,775.7
------- ---------
Operating income (loss)..................................... (74.8) (131.7)
Interest expense, net....................................... 94.5 181.7
------- ---------
Net income (loss)........................................... $(169.3) $(313.4)
======= =========
</TABLE>
E-2
<PAGE> 447
UNAUDITED COMBINED COMPANY PROJECTED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
<S> <C> <C>
Net cash provided by operating activities................... $ 163.9 $ 374.3
------- -------
Cash flow from investing activities:
Additions to property and equipment, net.................. (136.8) (241.4)
Additions to intangible and other assets.................. (5.0) (11.0)
------- -------
Net cash used from investing activities..................... (141.8) (252.4)
------- -------
Cash flows from financing activities-repayment of long-term
debt...................................................... (23.1) (123.9)
------- -------
Net increase in cash and cash equivalents................... (1.0) (2.0)
Cash and cash equivalents, beginning of period.............. 7.0 6.0
------- -------
Cash and cash equivalents, end of period.................... $ 6.0 $ 4.0
======= =======
EBITDA...................................................... $ 268.2 $ 582.6
======= =======
</TABLE>
UNAUDITED FINANCIAL PROJECTIONS AND OPERATIONAL COST SYNERGIES
Arch and PageNet have developed the unaudited combined company projections
reflected herein. The projections consist of projected operating and financial
results for the six months ending December 31, 2000 and the year ending December
31, 2001. The projections assume that the merger and related transactions will
take place as of June 30, 2000. The projections have been prepared for filing
with the bankruptcy court if PageNet commences a bankruptcy case.
The projections, which were developed by management of each of Arch and
PageNet, are based on:
- Arch's projected financial results, as developed by the
management of Arch, taking into account anticipated cost
reductions associated with its integration of MobileMedia;
- PageNet's projected financial results, as developed by the
management of PageNet, taking into account anticipated cost
reductions associated with the restructuring of its domestic
operations and divestiture of 80.5% of its interest in Vast;
Certain adjustments to PageNet's projected results were made by the
management of Arch to reflect more conservative assumptions with regard to
expected subscriber additions, subscriber turnover and net revenues. Such
adjustments were intended to reflect the continuing potential impact from the
effects of a bankruptcy case and the integration of Arch's and PageNet's
operations.
ASSUMPTIONS USED IN THE UNAUDITED FINANCIAL PROJECTIONS
A number of important assumptions are reflected in the projections. No
assurance can be given that such assumptions will be realized. See "Risk
Factors" for a discussion of various factors that could materially affect the
combined company's financial condition, results of operations, business,
prospects and securities.
1. The projections assume the merger will take place on June 30, 2000.
2. The projections assume that general economic conditions will
continue unchanged throughout the projection period and that their
potential impact on capital spending and revenues within each of the
combined company's operating regions will not fluctuate.
3. Management estimates that it will achieve $80 million in operating
cost reductions annually after the consummation of the merger. However, due
to the time involved in implementing these cost savings, the projections
assume that the combined company would recognize only $5.5 million in
operating cost reductions for the six months ended December 31, 2000, and
$56 million in operating cost reductions for
E-3
<PAGE> 448
the year ended December 31, 2001. The managements of Arch and PageNet
estimated the amounts and timing of these operating cost reductions during
multiple meetings. During these meetings, they performed a market-by-market
analysis to identify redundant costs.
4. Service revenues for the combined company have been projected on
the basis of Arch management's estimates for subscriber growth and average
revenue per unit. Based on these estimates, Arch's service revenues for
2000 were projected to decrease by approximately 1.1% from 1999 estimates,
while PageNet's service revenues were projected to decrease by
approximately 9.2% from 1999 estimates. Arch's service revenues for 2001
were projected to increase by 3.0% as compared to 2000, and PageNet's
service revenues were projected to decrease by 0.5% as compared to 2000.
5. Projected operating costs for 2000 are based on historical cost
margins for both companies individually and the expected decrease in cost
margins as Arch achieves further cost reductions resulting from its
integration of MobileMedia and PageNet. The combined company's projected
operating costs for 2000 are based on the 1999 business plans for the
individual companies, which included three quarters of historical costs at
the time the projections were created. The cost margins used for 2000
assume a reduction in the historical cost margins (approximately 2.2% of
net revenue) for Arch's base business and assume a reduction in the
historical cost margins (approximately 1.7% of net revenue) for PageNet's
base business. Projected costs are based upon historical experience,
expected market conditions and historical decreases in Arch's costs as Arch
increased its operating leverage. These cost assumptions were then adjusted
to reflect the impact of the assumed synergies.
6. The projections assume that the combined company will utilize
available borrowing capacity from its senior credit facility to fully repay
all administrative claims and transaction expenses and provide for working
capital throughout the period of the projections. Outstanding obligations
to PageNet's secured bank lenders are assumed to become obligations of the
combined company.
7. Interest expense is calculated based upon the capital structure
that would result upon consummation of the merger and related transactions,
as described in "Unaudited Selected Pro Forma Consolidated Financial Data",
during the projection period. This assumes tender and acceptance of 100% of
Arch's discount notes and 100% of PageNet's senior subordinated notes.
Interest also includes the amortization of any original issue discounts.
8. The projections have been prepared in accordance with applicable
principles of purchase accounting. Under purchase accounting principles,
the combined company will record an intangible asset equal to the excess,
if any, of the purchase price paid by Arch in the merger over the net fair
market value allocated to the identifiable assets and liabilities of
PageNet. We refer to any such excess as goodwill. The projections assume
that goodwill will be amortized ratably on a straight-line basis over a
period of 10 years. The actual calculation of goodwill will depend upon the
actual price of Arch's common stock at the time of the merger. The
projections assume a value of $6.02 per share of Arch common stock to
calculate the purchase accounting adjustment and an assumption that the
historical, restated book value of PageNet's assets and liabilities
generally approximates fair value.
Arch and PageNet have made these assumptions and resultant
computations solely for the purpose of preparing the projections. The
combined company will be required to determine the actual amount of
goodwill and the appropriate amortization period when the merger takes
place. Such determination will be based on the fair values of PageNet's net
assets and other relevant information when the merger takes place. Although
these determinations are not currently expected to result in the actual
amount of goodwill and related amortization being materially greater or
less than the amounts assumed for purposes of the projections, there can be
no assurance in that regard. Any increase in the amount of amortization of
goodwill would reduce periodic income before taxes and net income.
9. Projections of changes in certain balance sheet accounts such as
accounts receivable and accounts payable are based on historic ratios of
such accounts to other accounts such as revenue. These projections have
been modified, where deemed appropriate, to recognize any adjustment or
balance sheet item changes necessary to reflect the business combination.
Arch assumed approximately 30 days sales
E-4
<PAGE> 449
outstanding to estimate the accounts receivable balance and approximately
45 days costs outstanding to estimate the accounts payable balance. The
projected long-term debt reflects payments made to reduce borrowings under
the senior credit facility.
THE COMBINED COMPANY PROJECTIONS WERE NOT PREPARED TO COMPLY WITH THE
GUIDELINES FOR PROSPECTIVE FINANCIAL STATEMENTS PUBLISHED BY THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. NEITHER THE INDEPENDENT ACCOUNTANTS
FOR ARCH NOR THE INDEPENDENT AUDITORS FOR PAGENET HAVE EXAMINED OR COMPILED THE
ACCOMPANYING PROJECTIONS AND ACCORDINGLY DO NOT EXPRESS AN OPINION OR ANY OTHER
FORM OF ASSURANCE WITH RESPECT TO THE PROJECTIONS, ASSUME NO RESPONSIBILITY FOR
THE PROJECTIONS AND DISCLAIM ANY ASSOCIATION WITH THE PROJECTIONS.
ARCH AND PAGENET DO NOT PUBLISH PROJECTIONS OF THEIR RESPECTIVE ANTICIPATED
FINANCIAL POSITION OR RESULTS OF OPERATIONS. THE COMBINED COMPANY PROJECTIONS
WERE PREPARED FOR THE DISCLOSURE STATEMENT BEING DISTRIBUTED TO PAGENET'S
CREDITORS IN CONNECTION WITH THE POSSIBLE COMMENCEMENT OF A BANKRUPTCY CASE.
PAGENET DID THIS IN ORDER TO SATISFY APPLICABLE REQUIREMENTS FOR INFORMATION
REQUIRED TO BE INCLUDED IN A BANKRUPTCY COURT APPROVED DISCLOSURE STATEMENT. THE
PROJECTIONS ARE PROVIDED IN THIS PROSPECTUS SO THAT ARCH STOCKHOLDERS AND
NOTEHOLDERS WILL HAVE THE SAME INFORMATION AS IS BEING PROVIDED TO PAGENET'S
CREDITORS. ACCORDINGLY, ARCH AND PAGENET DO NOT INTEND, AND DISCLAIM ANY
OBLIGATION TO,
- FURNISH UPDATED COMBINED COMPANY PROJECTIONS,
- INCLUDE SUCH UPDATED INFORMATION IN ANY DOCUMENTS WHICH MAY BE REQUIRED
TO BE FILED WITH THE SEC, OR
- OTHERWISE MAKE SUCH UPDATED INFORMATION PUBLICLY AVAILABLE.
THE PROJECTIONS, ALTHOUGH PRESENTED WITH NUMERICAL SPECIFICITY, ARE BASED
UPON A SERIES OF ESTIMATES AND ASSUMPTIONS WHICH, ALTHOUGH CONSIDERED REASONABLE
BY ARCH AND PAGENET, MAY NOT BE REALIZED, AND ARE INHERENTLY SUBJECT TO
SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES,
MANY OF WHICH ARE BEYOND THE CONTROL OF ARCH AND PAGENET. NO REPRESENTATIONS CAN
BE OR ARE MADE AS TO THE ACCURACY OF THE COMBINED COMPANY PROJECTIONS. SOME
ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE, AND EVENTS AND CIRCUMSTANCES
OCCURRING SUBSEQUENT TO THE DATE ON WHICH THE PROJECTIONS WERE PREPARED MAY BE
DIFFERENT FROM THOSE ASSUMED OR MAY BE UNANTICIPATED AND, ACCORDINGLY, MAY
AFFECT FINANCIAL RESULTS IN A MATERIAL AND POSSIBLY ADVERSE MANNER. THE
PROJECTIONS, THEREFORE, MAY NOT BE RELIED UPON AS A GUARANTEE OR OTHER ASSURANCE
OF THE ACTUAL RESULTS THAT WILL OCCUR. SEE "FORWARD-LOOKING STATEMENTS".
E-5
<PAGE> 450
ANNEX F
[to be filed by amendment]
F-1
<PAGE> 451
ANNEX G
[to be filed by amendment]
G-1
<PAGE> 452
ANNEX H
[to be filed by amendment]
H-1
<PAGE> 453
PART II FOR PAGING NETWORK, INC. S-4
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate of Incorporation of the Registrant provides that
the Registrant shall indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, investigative or
other, including appeals, by reason of the fact that he or she is or was a
director, officer, employee or other agent of the Registrant, or is or was
serving at the request of the Registrant as a director, officer, employee or the
agent of any corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or other agent, to the fullest extent authorized by the
Delaware General Corporation Law, against all expenses, liability and loss
(including attorney's fees, judgements, fines, ERISA excise taxes and penalties,
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith; provided, however, that except with respect
to proceedings seeking to enforce the rights to indemnification granted herein,
the Registrant shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
the proceeding (or part thereof) was authorized by the Board of Directors of the
Registrant.
The Registrant's Certificate of Incorporation also limits the liability of
directors, providing that no director of the Registrant shall be personally
liable to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director. Such limitation of liability does not extend to
liability (i) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, relating to prohibited
dividends or distributions or the repurchase or redemption of stock, or (iv) for
any transaction from which the director derives an improper personal benefit.
The Registrant's By-Laws provide for indemnification as follows:
ARTICLE VI
INDEMNIFICATION OF OFFICERS AND OTHERS
Section 1. The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was an officer of the corporation, or is
or was serving at the request of the corporation as director or officer of
another corporation, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
her in connection with such action, suit or proceeding if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interest of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his or
her conduct was unlawful.
Section 2. The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she is or was an officer
of the corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, against expenses (including
attorneys' fees) actually and reasonably incurred by him or her in connection
with the defense or settlement of such action or suit if he or she acted in good
faith and in a manner he or she reasonably believed
II-1
<PAGE> 454
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 3. To the extent that an officer of the corporation or person
serving at the request of the corporation as a director or officer of another
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 and 2 of this Article VI or
in defense of any claim, issue or matter therein, he or she shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him or her in connection therewith.
Section 4. Any indemnification under Sections 1 and 2 of this Article VI
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the officer or
person serving at the request of the corporation as a director or officer of
another corporation is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in Sections 1 and 2 of this Article VI.
Such determination shall be made (1) by the board of directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2) if such quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders.
Section 5. Expenses incurred in defending a civil or criminal action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the officer or person serving at the request of the corporation as a
director or officer of another corporation to repay such amount entitled to be
indemnified by the corporation as authorized in this Article VI.
Section 6. The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office.
Section 7. The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was an officer of the corporation or
is or was serving at the request of the corporation as a director or officer of
another corporation against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or her status
as such, whether or not the corporation would have the power to indemnify him or
her against such liability under the provisions of this Article VI.
Section 8. For purposes of this Article VI, references to "the
corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors and officers so that any
person who is or was a director or officer of such constituent corporation or is
or was serving at the request of such constituent corporation as a director or
officer of another corporation shall stand in the same position under the
provisions of this Article VI with respect to the resulting or surviving
corporation as he or she would have with respect to such constituent corporation
if its separate existence had continued.
Section 9. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VI shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be an officer,
employee or person serving at the request of the corporation as a director or
officer of another corporation and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 10. This Article VI may be amended or repealed only by the
affirmative vote of the holders of a majority of the Voting Stock; provided that
no such amendment or repeal shall adversely affect any right to
II-2
<PAGE> 455
indemnification for any act or omission of any person referred to in Sections 1
and 2 of this Article VI which occurred or allegedly occurred prior to the
effective date of such amendment or repeal
Section 11. If in any action, suit or other proceeding or investigation, a
director of the corporation is held liable for monetary damages because that
director is relieved of personal liability under Article VI of the By-Laws or
otherwise, the director shall be deemed to have met the standards of conduct set
forth above and to be entitled to indemnification as provided above.
Pursuant to the provisions of Section 145 of the Delaware General
Corporation Law, every Delaware corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that he or
she is or was a director, officer, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, against any and all
expenses, judgments, fines and amounts paid in settlement and reasonably
incurred in connection with such action, suit or proceedings. The power to
indemnify applies only if such person acted in good faith and in a manner he or
she reasonably believed to be in the best interest, or not opposed to the best
interest, of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication unless the court, in its discretion,
believes that in the light of all the circumstances indemnification should
apply.
To the extent any of the persons referred to in the two immediately
preceding paragraphs is successful in the defense of the actions referred to
therein, such person is entitled, pursuant to Section 145, to indemnification as
described above.
The Registrant has entered into Indemnification Agreements with each of its
directors and the officers subject to Section 16 of the Exchange Act. Each
Indemnification Agreement provides for indemnification of directors and officers
of the Registrant to the fullest extent permitted by law and additionally
permits advancing attorney's fees and all other costs, expenses, fees, fines and
losses, paid or incurred by a director or officer in connection with the
investigation, defense or other participation in any event or occurrence that is
related to the fact that the director or officer is or was a director or officer
of the Registrant or is serving at the request of the Registrant as a director
or officer in another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise, or by reason of any action taken or not taken
by the director or officer in any such capacity. The foregoing provisions are
subject to the condition that the Registrant's Board of Directors or any other
person or body appointed by the Board who is not a party to the particular claim
for which the director or officer is seeking indemnification has not determined
that the indemnification would not be permitted under applicable law. The
Indemnification Agreements further provide that in the event of a change in
control of the Registrant, then with respect to all matters arising concerning
the rights of directors to indemnification, such decisions will be made only by
independent legal counsel selected by the director and approved by the
Registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See Index to Exhibits which is incorporated by reference in this item.
II-3
<PAGE> 456
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
II-4
<PAGE> 457
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING COSTS AND AND OTHER BALANCE AT
OF PERIOD EXPENSES ADJUSTMENTS END OF PERIOD
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1996......................................... $ 4,704 $14,033 $13,743 $ 4,994
1997......................................... 4,994 18,343 16,667 6,670
1998......................................... 6,670 20,516 16,923 10,263
Reserve for unrecoverable subscriber devices:
1996......................................... $ 1,345 $ 756 $ (319) $ 2,420
1997......................................... 2,420 4,184 4,064 2,540
1998......................................... 2,540 5,193 3,411 4,322
Valuation allowance on deferred tax assets:
1996......................................... $ 50,642 $36,890 $ -- $ 87,532
1997......................................... 87,532 56,365 -- 143,897
1998......................................... 143,897 57,599 -- 201,496
Accrued restructuring costs:
1996......................................... $ -- $ -- $ -- $ --
1997......................................... -- -- -- --
1998......................................... -- 29,000 1,979 27,021
</TABLE>
II-5
<PAGE> 458
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
Paging Network, Inc.
We have audited the consolidated financial statements of Paging Network,
Inc. as of December 31, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998, and have issued our report thereon dated
February 15, 1999. Our audits also included Schedule II -- Valuation and
Qualifying Accounts. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 15, 1999
II-6
<PAGE> 459
ITEM 22. UNDERTAKINGS.
The undersigned Registrant undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment of the Registration Statement) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement,
shall be deemed to be a new registration statement relating to the
securities offered in the Registration Statement and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof;
(5) That, prior to any public reoffering of the securities registered
under this Registration Statement through use of a prospectus which is a
part of this Registration Statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings
by persons who may be deemed underwriters, in addition to the information
called for by the other Items of the applicable form;
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall
II-7
<PAGE> 460
be deemed to be a new registration statement relating to the securities
offered in the Registration Statement, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering of such
securities;
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved in a
transaction that was not the subject of and included in the registration
statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-8
<PAGE> 461
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, PAGING NETWORK,
INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN DALLAS, TEXAS, ON JANUARY 11,
2000.
PAGING NETWORK, INC.
By: /s/ JOHN P. FRAZEE, JR.
-----------------------------------
John P. Frazee, Jr.
Chairman of the Board of Directors
and
Chief Executive Officer
(Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON JANUARY 11, 2000.
<TABLE>
<S> <C>
* *
- -------------------------------------------- --------------------------------------------
Richard C. Alberding Hermann Buerger
Director Director
/s/ JULIAN B. CASTELLI *
- -------------------------------------------- --------------------------------------------
Julian B. Castelli Jeffrey M. Cunningham
Senior Vice President and Chief Financial Director
Officer
(Principal Financial Officer and Principal
Accounting Officer)
* /s/ JOHN P. FRAZEE, JR.
- -------------------------------------------- --------------------------------------------
Gary J. Fernandes John P. Frazee, Jr.
Director Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
* *
- -------------------------------------------- --------------------------------------------
John S. Llewellyn Robert J. Miller
Director Director
- --------------------------------------------
Lee M. Mitchell
Director
*By: /s/ JOHN P. FRAZEE, JR.
---------------------------------------
John P. Frazee, Jr.
Attorney-in-fact
</TABLE>
II-9
<PAGE> 462
PART II FOR VAST SOLUTIONS, INC. S-1
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities registered hereby, all of which
will be paid by the Registrant:
<TABLE>
<S> <C>
Registration fee............................................ $1,338
Transfer agent fees......................................... *
Printing and duplicating expenses........................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Miscellaneous expenses...................................... *
------
Total.................................................. $ *
======
</TABLE>
- ----------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Registrant provides that the
Registrant shall indemnify, in accordance with and to the full extent now or
hereafter permitted by law, any person who was or is a party or its threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (including,
without limitation, an action by or in the right of the Registrant), by reason
of his or her acting as a director or officer of the Registrant (and the
Registrant, in the discretion of the Board of Directors, may so indemnify a
person by reason of the fact that he is or was an employee or agent of the
Registrant or is or was serving at the request of the Registrant in any other
capacity for or on behalf of the Registrant) against any liability or expense
actually and reasonably incurred by such person in respect thereof; provided,
however, the Registrant shall be required to indemnify an officer or director in
connection with an action, suit or proceeding initiated by such person only if
such action, suit or proceeding was authorized by the Board of Directors of the
Registrant.
The Registrant's Certificate of Incorporation also limits the liability of
directors, providing that no director of the Registrant shall be personally
liable to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director. Such limitation of liability does not extend to
liability (i) for any breach of the director's duty loyalty to the Registrant or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, relating to prohibited dividends or
distributions or the repurchase or redemption of stock, or (iv) for any
transaction from which the director derives an improper personal benefit.
The Registrant's By-Laws provide for indemnification as follows:
"ARTICLE VI.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee, agent or
representative of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, agent or representative of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to
A-II-1
<PAGE> 463
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 2. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee,
agent or representative of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee, agent or representative of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnify for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 3. To the extent that a director, officer, employee, agent or
representative of the Corporation has been successful on the merits or otherwise
in defense of any action, suit or proceeding referred to in Sections 1 and 2 of
this article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 4. Any indemnification under Sections 1 and 2 of this article
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee, agent or representative is proper in the circumstances
because he has met the applicable standard of conduct set forth in Sections 1
and 2 of this article. Such determination shall be made (1) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 5. Expenses (including attorneys' fees) incurred in defending any
civil, criminal, administrative or investigative action, suit or proceeding may
be paid by the Corporation in advance of the final disposition of such action,
suit or proceeding as authorized by the Board of Directors in the manner
provided in Section 4 of this article upon receipt of an undertaking by or on
behalf of the director, officer, employee, agent or representative to repay such
amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation under this article.
Section 6. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, (i) arising under the Employee Retirement Income Security Act of
1974 or regulations promulgated thereunder, or under any other law or regulation
of the United States or any agency or instrumentality thereof or law or
regulation of any state or political subdivision or any agency or
instrumentality of either, or under the common law of any of the foregoing,
against expenses (including attorneys' fees), judgments, fines, penalties, taxes
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding by reason of the fact that he is
or was a fiduciary, disqualified person or party in interest with respect to an
employee benefit plan covering employees of the Corporation or of a subsidiary
corporation, or is or was serving in any other capacity with respect to such
plan, or has or had any obligations or duties with respect to such plan by
reason of such laws or regulations, provided that such person was or is a
director, officer, employee, agent or representative of the Corporation, or (ii)
in connection with any matter arising under federal, state or local revenue or
taxation laws or regulations,
A-II-2
<PAGE> 464
against expenses (including attorneys' fees), judgments, fines, penalties,
taxes, amounts paid in settlement and amounts paid as penalties or fines
necessary to contest the imposition of such penalties or fines, actually and
reasonably incurred by him in connection with such action, suit or proceeding by
reason of the fact that he is or was a director, officer, employee, agent or
representative of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, agent or representative of another
corporation, partnership, joint venture, trust or other enterprise and had
responsibility for or participated in activities relating to compliance with
such revenue or taxation laws and regulations; provided, however, that such
person did not act dishonestly or in willful or reckless violation of the
provisions of the law or regulation under which such suit or proceeding arises.
Unless the Board of Directors determines that under the circumstances then
existing, it is probable that such director, officer, employee, agent or
representative will not be entitled to be indemnified by the Corporation under
this section, expenses incurred in defending such suit or proceeding, including
the amount of any penalties or fines necessary to be paid to contest the
imposition of such penalties or fines, shall be paid by the Corporation in
advance of the final disposition of such suit or proceeding upon receipt of an
undertaking by or on behalf of the director, officer, employee, agent or
representative to repay such amount if it shall ultimately be determined that he
is not entitled to be indemnified by the Corporation under this section.
Section 7. The indemnification provided by this article shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, agent or representative and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
Section 8. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, agent or representative
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, agent or representative of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not he would be entitled to indemnity against
such liability under the provisions of this article."
Pursuant to the provisions of Section 145 of the Delaware General
Corporation Law, every Delaware corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that he or
she is or was a director, officer, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, against any and all
expenses, judgments, fines and amounts paid in settlement and reasonably
incurred in connection with such action, suit or proceedings. The power to
indemnify applies only if such person acted in good faith and in a manner he or
she reasonably believed to be in the best interest, or not opposed to the best
interest, of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication unless the court, in its discretion,
believes that in the light of all the circumstances indemnification should
apply.
To the extent any of the persons referred to in the two immediately
preceding paragraphs is successful in the defense of the actions referred to
therein, such person is entitled, pursuant to Section 145, to indemnification as
described above.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
A-II-3
<PAGE> 465
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See the Exhibit Index included herewith which is incorporated
herein by reference.
(b) Financial Statement Schedules:
No schedule for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission is
required or applicable under the related instructions, or the amounts
that would be included in such schedule are immaterial, and therefore
have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
A-II-4
<PAGE> 466
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Vast Solutions,
Inc. has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in Addison, Texas, on January 11,
2000.
VAST SOLUTIONS, INC.
By: /s/ JOHN P. FRAZEE, JR.
------------------------------------
John P. Frazee, Jr.
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on January 11, 2000.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ JOHN P. FRAZEE, JR. Chairman of the Board and Chief Executive
- --------------------------------------------------- Officer (Sole Director and Principal Executive
John P. Frazee, Jr. Officer)
/s/ JULIAN B. CASTELLI Acting Chief Financial Officer (Principal
- --------------------------------------------------- Financial and Accounting Officer)
Julian B. Castelli
</TABLE>
A-II-5
<PAGE> 467
PAGING NETWORK, INC.
EXHIBIT INDEX
FOR FORM S-4
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 7, 1999 by
and among Paging Network, Inc., Arch Communications Group,
Inc. and St. Louis Acquisition Corp. (Included as Annex B to
the prospectus included herein.)
3.1 Restated Certificate of Incorporation of Paging Network,
Inc. (Filed as an exhibit to Registration Statement No.
33-42253 on Form S-1 and incorporated by reference herein.)
3.3 Bylaws of Paging Network, Inc. , as amended. (Filed as an
exhibit to Paging Network, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 and incorporated
by reference herein.)
4.1 Articles Sixth, Seventh, Eighth, Twelfth, and Thirteenth of
the Restated Certificate of Incorporation of Paging Network,
Inc., as amended. (Filed as an exhibit to Registration
Statement No. 33-42253 on Form S-1 and incorporated by
reference herein.)
4.2 Articles II, III, and VII and Section 1 of Article VIII of
Paging Network, Inc.'s Bylaws, as amended. (Filed as an
exhibit to Paging Network, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 and incorporated
by reference herein.)
4.3 Form of Indenture. (Filed as an exhibit to Registration
Statement No. 33-46803 on Form S-1 and incorporated by
reference herein.)
4.4 Shareholder Rights Agreement. (Filed as an exhibit to Paging
Network, Inc.'s Report on Form 8-K on September 15, 1994 and
incorporated by reference herein.)
4.5 First Amendment to the Shareholder Rights Agreement. (Filed
as an exhibit to Paging Network, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 and
incorporated by reference herein.)
4.6 Second Amendment to the Shareholder Rights Agreement. (Filed
as an exhibit to Paging Network, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999
and incorporated by reference herein.)
5.1 Opinion of Mayer, Brown & Platt. (To be filed by amendment.)
8.1 Tax Opinion of Mayer, Brown & Platt. (To be filed by
amendment.)
10.1 1982 Incentive Stock Option Plan, as amended and restated.
(Filed as an exhibit to Registration Statement No. 33-42253
on Form S-1 and incorporated by reference herein.)
10.2 Form of Stock Option Agreement executed by recipients of
options granted under the 1982 Incentive Stock Option Plan.
(Filed as an exhibit to Registration Statement No. 33-42253
on Form S-1 and incorporated by reference herein.)
10.3 Form of Management Agreement executed by recipients of
options granted under the 1982 Incentive Stock Option Plan.
(Filed as an exhibit to Registration Statement No. 33-42253
on Form S-1 and incorporated by herein.)
10.4 Form of Vesting Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan. (Filed
as an exhibit to Registration Statement No. 33-42253 on Form
S-1 and incorporated by herein.)
10.5 Form of Indemnification Agreement executed by recipients of
options granted under the 1991 Stock Option Plan. (Filed as
an exhibit to Registration Statement No. 33-42253 on Form
S-1 and incorporated by herein.)
</TABLE>
<PAGE> 468
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
10.6 Form of First Amendment to Vesting Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan. (Filed as an exhibit to Registration Statement
No. 33-42253 on Form S-1 and incorporated by herein.)
10.7 Form of First Amendment to Management Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan. (Filed as an exhibit to Registration Statement
No. 33-42253 on Form S-1 and incorporated by herein.)
10.8 Amended and Restated Credit Agreement dated as of May 2,
1995 among Paging Network, Inc., NationsBank of Texas, N.A.,
Toronto Dominion (Texas), Inc., The First National Bank of
Boston, and certain other lenders. (Filed as an exhibit to
Paging Network, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995 and incorporated by
reference herein.)
10.9 Amendment No. 1 dated as of December 12, 1995 to the Amended
and Restated Credit Agreement dated as of May 2, 1995 among
Paging Network, Inc., NationsBank of Texas, N.A., Toronto
Dominion (Texas), Inc., The First National Bank of Boston,
and certain other lenders. (Filed as an exhibit to Paging
Network, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 1, 1995 and incorporated by reference
herein.)
10.10 Second Amended and Restated Credit Agreement dated as of
June 5, 1996 among Paging Network, Inc., NationsBank of
Texas, N.A., Toronto Dominion (Texas), Inc., The First
National Bank of Boston, Chase Securities Inc. and certain
other lenders. (Filed as an exhibit to Paging Network,
Inc.'s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996.)
10.11 Loan Agreement dated as of June 5, 1996 among Paging Network
of Canada Inc., The Toronto-Dominion Bank, and such other
financial institutions as become banks. (Filed as an exhibit
to Paging Network, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996 and incorporated by
reference herein.)
10.12 Loan Agreement dated as of June 5, 1996 among Madison
Telecommunications Holdings, Inc., The Toronto-Dominion
Bank, and such other financial institutions as become banks.
(Filed as an exhibit to Paging Network, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1996 and incorporated by reference herein.)
10.13 1997 Restricted Stock Plan, as approved by shareowners on
May 22, 1997. (Filed as an exhibit to Paging Network, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 and incorporated by reference herein.)
10.14 Employment Agreement dated as of August 4, 1997 among Paging
Network, Inc. and John P. Frazee, Jr. (Filed as an exhibit
to Paging Network, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1997 and
incorporated by reference herein.)
10.15 First Amendment dated April 18, 1997 to the Loan Agreement
dated as of June 5, 1996 among Paging Network of Canada
Inc., The Toronto-Dominion Bank, and such other financial
institutions as become banks. (Filed as an exhibit to Paging
Network, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated by reference
herein.)
10.16 First Amendment dated April 18, 1997 to the Loan Agreement
dated as of June 5, 1996 among Madison Telecommunications
Holdings, Inc., The Toronto-Dominion Bank, and such other
financial institutions as become banks. (Filed as an exhibit
to Paging Network, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated by
reference herein.)
10.17 1992 Director Compensation Plan, as amended and restated on
April 22, 1998. (Filed as an exhibit to Paging Network,
Inc.'s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 and incorporated by reference
herein.)
10.18 Amended and Restated 1991 Stock Option Plan, as approved by
shareowners on May 21, 1998. (Filed as an exhibit to Paging
Network, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998 and incorporated by
reference herein.)
</TABLE>
<PAGE> 469
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
10.19 Letter dated May 26, 1998 regarding Second Amendments
effective March 31, 1998 to the Loan Agreements dated as of
June 5, 1996: (1) among Paging Network of Canada Inc., The
Toronto-Dominion Bank, and such other financial institutions
as become banks (2) among Madison Telecommunications
Holdings, Inc., The Toronto-Dominion Bank, and such other
financial institutions as become banks. (Filed as an exhibit
to Paging Network, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated by
reference herein.)
10.20 Forms of Stock Option Agreement executed by recipients of
options granted under the 1991 Stock Option Plan. (Filed as
an exhibit to Paging Network, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1998 and
incorporated by reference herein.)
10.21 Employee Stock Purchase Plan, as amended on December 16,
1998. (Filed as an exhibit to Paging Network, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1998 and
incorporated by reference herein.)
10.22 Severance Pay Plan dated as of January 20, 1999. (Filed as
an exhibit to Paging Network, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated
by reference herein.)
10.23 Form of Stock Option Agreement executed by recipients of
options grant under the 1992 Director Compensation Plan.
(Filed as an exhibit to Paging Network, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1998 and
incorporated by reference herein.)
10.24 Amended and Restated Loan Agreement dated August 5, 1999
among Paging Network of Canada Inc., The Toronto-Dominion
Bank, Canadian Imperial Bank of Commerce, National Bank of
Canada, and such other financial institutions as become
banks. (Filed as an exhibit to Paging Network, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999 and incorporated by reference herein.)
10.25 Amended and Restated Loan Agreement dated August 5, 1999
among Madison Telecommunications Holdings, Inc., The
Toronto-Dominion Bank, Canadian Imperial Bank of Commerce,
National Bank of Canada, and such other financial
institutions as become banks. (Filed as an exhibit to Paging
Network, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated by reference
herein.)
21.1 List of Subsidiaries of Paging Network, Inc.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Mayer, Brown & Platt. (To be filed by amendment.)
24.1 Power of Attorney of certain directors and officers of
Paging Network, Inc.
99.1 Form of Ballot. (To be filed by amendment.)
99.2 Form of Letter of Transmittal. (To be filed by amendment.)
99.3 Consent of Houlihan, Lokey, Howard & Zukin Capital. (To be
filed by amendment.)
99.4 Consent of Goldman, Sachs & Co. (To be filed by amendment.)
99.5 Consent of Morgan Stanley Dean Witter. (To be filed by
amendment.)
</TABLE>
<PAGE> 1
EXHIBIT 21.1
The following is a list of all subsidiaries of Paging Network, Inc.:
<TABLE>
<CAPTION>
OWNERSHIP
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION PERCENTAGE
------------------ ----------------------------- ----------
<S> <C> <C>
PageNet, Inc. Delaware 100%
Paging Network of America, Inc. Delaware 100%
Paging Network Canadian Holdings, Inc. Delaware 100%
Paging Network of Colorado, Inc. Delaware 100%
Paging Network Finance Corp. Delaware 100%
Paging Network International, Inc. Delaware 100%
Paging Network of Michigan, Inc. Delaware 100%
Paging Network of Northern California, Inc. Delaware 100%
Paging Network of San Francisco, Inc. Delaware 100%
Vast Solutions, Inc. Delaware 100%
PageNet de Argentina S.A. Argentina 99%
Paging Network do Brasil S.A. Brazil 17.5%
Paging Network of Canada Inc. Canada 100%
PageNet Chile S.A. Chile 100%
Paging Network International N.V. The Netherlands 100%
Paging Network (UK), Limited England 100%
Madison Telecommunications Holdings, Inc. Canada 80%
Madison Telecommunications, Inc. Canada 100%
Compania Europea De Radiobusqueda, S.A. Spain 79.7%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 15, 1999, with respect to the consolidated
financial statements and financial statement schedule of Paging Network, Inc. in
the Registration Statement (Form S-4) and related Prospectus of Paging Network,
Inc. for the registration of 616,830,757 shares of Paging Network, Inc. common
stock and 13,780,000 shares of Class B common stock of Vast Solutions, Inc., a
wholly-owned subsidiary of Paging Network, Inc., to be exchanged for all of the
outstanding 8.875% senior subordinated notes due 2006, 10.125% senior
subordinated notes due 2007, and 10% senior subordinated notes due 2008 of
Paging Network, Inc.(the Registration Statement).
We also consent to the use of our report dated February 12, 1999, except
for the eighth paragraph of Note 1, and the second paragraph of Note 6, as to
which the date is March 26, 1999, and the ninth paragraph of Note 1, as to which
the date is April 12, 1999, with respect to the financial statements of
MobileMedia Communications, Inc. as of December 31, 1998 and 1997 and for each
of the three years in the period ended December 31, 1998, in the Registration
Statement.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 5, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 24, 1999 (except with respect to the matters discussed in Note
12, as to which the date is June 28, 1999) included herein and to all references
to our firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 7, 2000
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints John P.
Frazee, Jr., Ruth Williams and Julian B. Castelli, acting severally, as his
attorney-in-fact and agent, to sign any registration statement on Form S-4 and
any and all amendments (including post-effective amendments) to such
registration statement in connection with the registration under the Securities
and Exchange Act of 1933 of up to 616,830,757 shares of common stock, par value
$.01 per share, of Paging Network, Inc. to be issued in connection with the
offer to exchange such common stock for PageNet's outstanding debt securities,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting to
said attorney-in-fact and agent full power and authority to perform any act in
connection with any of the foregoing as fully as he might do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent may lawfully
do or cause to be done. Each attorney-in-fact and agent is hereby granted full
power of substitution and revocation with respect hereto.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD C. ALBERDING Director December 23, 1999
- ------------------------------------------------
Richard C. Alberding
/s/ HERMANN BUERGER Director December 30, 1999
- ------------------------------------------------
Hermann Buerger
/s/ JEFFREY M. CUNNINGHAM Director December 23, 1999
- ------------------------------------------------
Jeffrey M. Cunningham
/s/ GARY J. FERNANDES Director December 23, 1999
- ------------------------------------------------
Gary J. Fernandes
/s/ JOHN P. FRAZEE, JR. Chairman of the Board of December 22, 1999
- ------------------------------------------------ Directors and Chief Executive
John P. Frazee, Jr. Officer
/s/ JOHN S. LLEWELLYN Director December 23, 1999
- ------------------------------------------------
John S. Llewellyn
/s/ ROBERT J. MILLER Director December 23, 1999
- ------------------------------------------------
Robert J. Miller
/s/ LEE M. MITCHELL Director December 23, 1999
- ------------------------------------------------
Lee M. Mitchell
</TABLE>
<PAGE> 1
VAST SOLUTIONS, INC.
EXHIBIT INDEX
FOR FORM S-1
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
3.1* Certificate of Incorporation of Vast Solutions, Inc.
3.2* Bylaws of Vast Solutions, Inc.
4.1* Certificate for shares of Vast Solutions, Inc.'s Class B
common stock, par value $0.01 per share.
4.2* Rights Agreement, dated , between Vast
Solutions, Inc. and , as rights agent.
5.1* Opinion of Mayer, Brown and Platt.
10.1* 2000 Stock Option Plan.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ernst & Young LLP.
23.3* Consent of Mayer, Brown & Platt (included in the opinion
filed as exhibit 5.1 to this registration statement).
</TABLE>
- ---------------
* To be included with an amendment to this registration statement.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 5, 2000 with respect to the financial
statements of Vast Solutions, Inc., a wholly-owned subsidiary of Paging Network,
Inc., in the Registration Statement (Form S-1) and related Prospectus of Vast
Solutions, Inc. for the registration of 13,780,000 shares of Class B common
stock of Vast Solutions, Inc.
ERNST & YOUNG LLP
Dallas, Texas
, 2000
The foregoing consent is in the form that will be signed upon the transfer
of certain intellectual and other property by Paging Network, Inc. to Vast
Solutions, Inc. as described in Note 1 to the financial statements.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 5, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 23, 1999 with respect to the financial
statements of Silverlake Communications, Inc. in the Registration Statement
(Form S-1) and related Prospectus of Vast Solutions, Inc. for the registration
of 13,780,000 shares of Class B common stock of Vast Solutions, Inc.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 5, 2000
