<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ARCH COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4812 31-1358569
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MASSACHUSETTS 01581
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
C. EDWARD BAKER, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ARCH COMMUNICATIONS GROUP, INC.
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MASSACHUSETTS 01581
(508) 870-6700
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
EDWARD YOUNG, ESQ.
JAY E. BOTHWICK, ESQ.
DAVID A. WESTENBERG, ESQ.
C/O HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
(617) 526-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date 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, please 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>
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(1) PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.0001....................... 29,651,984 Shares $6.321 $187,430,191 $49,482
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(f) under the Securities Act.
------------------------
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 THIS 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
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 DECEMBER 22, 1999
PROSPECTUS
LOGO
29,651,984 SHARES COMMON STOCK
ARCH COMMUNICATIONS GROUP, INC.
We are offering to exchange up to 29,651,984 shares of our common stock for
all of our outstanding 10 7/8% senior discount notes due 2008 at an exchange
ratio of 66.1318 shares for each $1,000 principal amount of notes.
THE EXCHANGE OFFER WILL EXPIRE AT 11.59 P.M., NEW YORK CITY TIME, ON
, 2000 UNLESS EXTENDED.
We expect the exchange to be non-taxable for federal income tax purposes.
Our common stock is traded on the Nasdaq National Market under the symbol
"APGR".
To learn how to exchange your discount notes for common stock, see
"Summary -- The Exchange Offer" beginning on page 3 and "The Exchange Offer"
beginning on page 25.
The exchange offer is part of a transaction in which we and Paging Network,
Inc. will merge. See "Summary -- The Merger" beginning on page 2 and "The
Merger" beginning on page 23. We will not exchange our shares for your discount
notes unless the PageNet merger takes place and other specified conditions are
satisfied.
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<CAPTION>
<S> <C> <C>
- ------------------------------------------ ----------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES WE URGE YOU TO CAREFULLY READ THE "RISK
REGULATORS HAVE APPROVED OR DISAPPROVED FACTORS" SECTION BEGINNING ON PAGE 11
THE SHARES OR THE EXCHANGE OFFER OR BEFORE YOU MAKE ANY INVESTMENT DECISION.
DETERMINED IF THIS PROSPECTUS IS
ACCURATE OR ADEQUATE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
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</TABLE>
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary..................................................... 1
Arch and PageNet............................................ 1
The Merger................................................ 2
The Exchange Offer........................................ 3
Summary Financial and Operating Data...................... 6
Stock Ownership in the Combined Company................... 9
Capitalization............................................ 10
Risk Factors................................................ 11
Risks Related to the Exchange Offer and an Investment in
Arch's Common Stock.................................... 11
Risks Related to the PageNet Merger....................... 13
Arch's Business and Financial Risks....................... 15
Risks Related to PageNet.................................. 20
Forward-Looking Statements.................................. 22
The Merger.................................................. 23
The Exchange Offer.......................................... 25
Proposed Amendments......................................... 31
Material Federal Income Tax Considerations.................. 33
Unaudited Selected Pro Forma Consolidated Financial Data.... 36
Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................ 37
Selected Historical Consolidated Financial and Operating
Data -- Arch.............................................. 44
Arch Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 47
Selected Historical Consolidated Financial and Operating
Data -- MobileMedia....................................... 59
MobileMedia Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 62
Selected Historical Consolidated Financial and Operating
Data -- PageNet........................................... 74
PageNet Management's Discussion and Analysis of Financial
Condition and Results of Operation........................ 77
Market Price Information and Dividend Policy................ 87
Discount Notes............................................ 87
Common Stock.............................................. 87
Dividend Policy........................................... 88
Industry Overview........................................... 89
Arch's Business............................................. 94
Business Strategy......................................... 94
Wireless Communications Services, Products and
Operations............................................. 95
Networks and Licenses..................................... 97
Subscribers and Marketing................................. 98
Sources of Equipment...................................... 99
Competition............................................... 99
Employees................................................. 100
Trademarks................................................ 100
Properties................................................ 100
Litigation................................................ 101
The Company............................................... 101
Arch's Management........................................... 102
Arch's Principal Stockholders............................... 108
PageNet's Business.......................................... 112
PageNet's Management........................................ 117
PageNet's Principal Stockholders............................ 123
The Combined Company........................................ 125
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Description of Arch's Equity Securities..................... 128
Description of Discount Notes............................... 134
Description of Other Indebtedness........................... 153
Legal Matters............................................... 158
Experts..................................................... 158
Where You Can Find More Information......................... 158
Incorporation by Reference.................................. 160
Index to Financial Statements............................... F-1
Annex A -- Unaudited Combined Company Projections........... A-1
Annex B -- Form of Letter of Transmittal, with Waiver and
Consent to Amendments..................................... B-1
Annex C -- Form of Notice of Guaranteed Delivery............ C-1
Annex D -- Agreement and Plan of Merger among Paging
Network, Inc., Arch Communications Group, Inc. and St.
Louis Acquisition Corp., dated November 7, 1999........... D-1
</TABLE>
"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. "PageNet" is a registered mark of PageNet. Other
trademarks, service marks and trade names used in this prospectus are owned by
persons who are not associated with Arch or PageNet.
ii
<PAGE> 5
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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 all of
the information incorporated by reference into the prospectus. We use the name
"Arch" to refer to Arch Communications Group, Inc. and its consolidated
subsidiaries both before and after the proposed PageNet merger. Sometimes we use
the phrase "combined company" when we wish to emphasize that we are referring
specifically to Arch after the proposed PageNet merger.
All share information in this prospectus reflects the effects of a 1-for-3
reverse stock split effected by Arch during June 1999.
ARCH AND PAGENET
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 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 guaranteed messaging, which is also known as
1.5-way messaging; and
- offers enhanced or complementary wireless communications 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, 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.
PAGENET
PageNet is a leading provider of wireless communications services
throughout the United States and the U.S. Virgin Islands, Puerto Rico and
Canada. 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;
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1
<PAGE> 6
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- offers two primary types of wireless messaging services which comprise
99.7% of its business: digital messaging and alphanumeric messaging; and
- also offers "advanced" messaging services, consisting of 1.5-way
services, which enable subscribers to know 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 respond to messages with original or pre-scripted replies.
In addition, PageNet is preparing for the launch of other applications on
its wireless network through its wholly owned subsidiary Vast Solutions, Inc.,
including:
- the delivery of content and information services to subscribers;
- customized wireless information management services for its corporate
clients which will integrate software and hardware systems to allow
access to company information from a variety of sources; and
- gateway services that can be used as a "bridge" to enable customers to
receive data across multiple network technologies.
PageNet's principal office is located at Corporate Centre, 14911 Quorum
Drive, Dallas, Texas 75240. PageNet's telephone number is (972) 801-8000.
THE MERGER
In the merger, each share of PageNet common stock will be converted into
0.1247 shares of Arch's common stock and PageNet will become a wholly owned
subsidiary of Arch. The merger will take place at the same time as the Arch
exchange offer and an offer by PageNet to holders of its outstanding senior
subordinated notes to exchange those notes for shares of common stock of PageNet
and shares of Class B common stock of Vast Solutions. Arch also proposes to
convert shares of Arch's Series C preferred stock into shares of Arch common
stock in connection with the merger. If the Arch and PageNet exchange offers are
fully subscribed, the merger and the related exchange offers and proposed
conversion of Series C preferred shares will result in holders of Arch's
discount notes owning 17.2% of Arch's outstanding common stock immediately after
the closing and 15.4% on a fully diluted basis. See "-- Stock Ownership in the
Combined Company".
After the merger the Arch board 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, Arch's current directors will designate additional
directors.
The merger is currently expected to take place during the first half of
2000, assuming that numerous conditions are satisfied. It is intended generally
to be a tax-free transaction and will be accounted for as a purchase.
For more information about the merger, see "The Merger".
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2
<PAGE> 7
THE EXCHANGE OFFER
THE EXCHANGE OFFER We are offering to exchange 66.1318 shares of
our common stock for each $1,000 principal
amount of 10 7/8% senior discount notes due
2008 that are properly tendered and accepted.
There was approximately $448.4 million
aggregate principal amount of discount notes
outstanding at November 30, 1999. The principal
amount of your notes is their principal face
amount at maturity, not just the amount that
has accreted to date.
EXPIRATION DATE The exchange offer will expire at 11:59 p.m.,
New York City time, on , 2000
unless we and PageNet jointly extend the
expiration date of the exchange offer in our
sole discretion. See "The Exchange
Offer -- Expiration Date; Extensions".
ACCRETED INTEREST ON THE NOTES Interest accreted through the expiration date
of the exchange offer on discount notes that
are exchanged will be transferred with the
notes and will not be paid separately. The
exchange ratio is calculated solely on the
principal amount of the notes at maturity,
regardless of how much interest has accreted to
date. See "The Exchange Offer -- Terms of the
Exchange Offer".
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 discount
notes outstanding, unless either
- we exercise our right in specified
circumstances to reduce this percentage
to not less than 67.0%; or
- PageNet exercises its right to reduce
this percentage to any amount, including
zero;
- satisfaction of all conditions to the closing
of the PageNet merger, possibly including the
confirmation of a plan of reorganization
under Chapter 11 of the United States
Bankruptcy Code which PageNet may file in
specified circumstances; and
- various other customary conditions which in
specified circumstances, we and PageNet 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 PageNet's
approval. See "The Exchange
Offer -- Conditions".
3
<PAGE> 8
AMENDMENTS AND WAIVERS You will be required, as a condition to
tendering your notes, to approve various
amendments to the indenture for the notes. The
amendments will remove substantially all of the
rights of those discount 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, you 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 or notice of guaranteed
delivery that are attached to this prospectus,
contact Customer Service by telephone at ( )
, or by facsimile at ( ) .
HOW TO TENDER NOTES If you wish to accept the exchange offer, you
must do one of the following:
- if your discount 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 discount notes through The
Depository Trust Company, you must tender
your notes through DTC's Automated Tender
Offer Program. See "The Exchange Offer --
Procedures for Tendering".
SPECIAL PROCEDURES FOR
BENEFICIAL
OWNERS If you are a beneficial owner whose notes are
registered in the name of a financial
institution or other nominee and you wish to
tender your notes in the exchange offer, you
should contact the registered holder promptly
and instruct it to tender for you. If you wish
to tender on your own behalf, you must, before
completing and executing the letter of
transmittal and delivering your notes, either
make appropriate arrangements to register
ownership of the notes in your own name or
obtain a properly completed bond power from the
registered holder. Transfer of registered
ownership may take considerable time and it may
not be possible to complete it before the
expiration date. See "The Exchange
Offer -- Procedures for Tendering".
GUARANTEED DELIVERY PROCEDURES If you wish to tender your notes but your notes
are not immediately available or you cannot
deliver your notes, the letter of transmittal
or any other documentation required by the
letter of transmittal to the exchange agent
before the expiration date, you must tender
your notes by using the guaranteed delivery
procedures described under "The Exchange
Offer -- Guaranteed Delivery Procedures".
ACCEPTANCE OF TENDERS AND
DELIVERY OF
STOCK CERTIFICATES 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. Stock certificates for the
shares issued in exchange for notes will be
delivered as soon as practicable after the
expiration date.
4
<PAGE> 9
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WITHDRAWAL RIGHTS You may withdraw your tender of notes at any
time before the expiration date. See "The
Exchange Offer -- Withdrawal of Tenders".
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS Your exchange of notes for common stock should
be non-taxable for federal income tax purposes
and no material federal income tax consequences
should result to you. See "Material Federal
Income Tax Considerations".
RESALES The common stock you receive will be freely
transferable unless you are an affiliate of
Arch. See "The Exchange Offer -- Resales of
Common Stock Issued in Exchange for Notes".
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5
<PAGE> 10
SUMMARY FINANCIAL AND OPERATING DATA
The following summary historical financial and operating data for each of
the years in the four year period ended December 31, 1998 have been derived from
Arch's audited consolidated financial statements and notes. The following
summary historical financial information and operating data for the year ended
December 31, 1994 have 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
have been derived from Arch's unaudited consolidated financial statements and
notes. The following summary financial and operating data give effect to the
PageNet merger and the MobileMedia acquisition, which closed on June 3, 1999, as
if such transactions had been consummated on September 30, 1999 in the case of
the balance sheet data and on January 1, 1998, in the case of the statement of
operations and other operating data. 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 PageNet 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 "Arch Management's
Discussion and Analysis of Financial Condition and Results of Operations" set
forth below and Arch's consolidated financial statements and notes.
Adjusted EBITDA, as determined by Arch, does not reflect restructuring
charges, 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.
6
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
PRO FORMA
1994 1995 1996 1997 1998 1998
-------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Service, rental and
maintenance
revenues............. $ 61,529 $ 138,466 $ 291,399 $ 351,944 $ 371,154 $ 1,731,283
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 1,900,889
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 1,771,102
Depreciation and
Amortization....... 18,321 60,205 191,871 232,347 221,316 692,740
Operating income
(loss)............. (352) (13,019) (86,070) (102,015) (94,429) (193,256)
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) (251,643)
Basic/diluted income
(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
income (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 $ 596,347
Adjusted EBITDA
margin............. 28% 33% 35% 35% 37% 34%
Capital expenditures,
excluding
acquisitions....... $ 33,450 $ 60,468 $ 165,206 $ 102,769 $ 113,184 $ 477,157
Cash flows provided
by operating
activities......... $ 14,155 $ 14,749 $ 37,802 $ 63,590 $ 81,105 $ 570,633
Cash flows used in
investing
activities......... $(55,860) $(192,549) $(490,626) $(102,769) $ (82,868) $ (820,476)
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)
<S> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Service, rental and
maintenance
revenues............. $ 277,826 $ 403,607 $ 1,263,448
Product sales........ 31,811 36,963 115,139
--------- --------- -----------
Total revenues....... 309,637 440,570 1,378,587
Cost of products
sold............... (21,863) (24,988) (75,689)
--------- --------- -----------
287,774 415,582 1,302,898
Depreciation and
Amortization....... 164,990 222,836 499,290
Operating income
(loss)............. (74,157) (77,707) (133,948)
Interest and other
income
(expense).......... 80,553 146,523 (158,311)
Net income
(loss)............. (156,430) (227,591) (292,468)
Basic/diluted income
(loss) per common
share before
extraordinary item
and accounting
change............. $ (22.20) $ (9.00) $ (1.70)
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) $ (1.70)
========= ========= ===========
OTHER OPERATING DATA:
Adjusted
EBITDA............. $ 105,533 $ 142,929 $ 395,878
Adjusted EBITDA
margin............. 37% 34% 30%
Capital expenditures,
excluding
acquisitions....... $ 85,785 $ 83,186 $ 283,874
Cash flows provided
by operating
activities......... $ 61,276 $ 76,422 $ 311,736
Cash flows used in
investing
activities......... $ (55,646) $(598,869) $ (806,787)
Cash flows provided
by (used in)
financing
activities......... $ (2,387) $ 542,302 $ 728,882
Units in service at
end of period...... 4,211,000 7,024,000 16,088,000
</TABLE>
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<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1999
------------------------
ACTUAL PRO FORMA
---------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 99,180 $ 302,655
Total assets................................................ 1,424,518 3,021,816
Long-term debt, less current maturities..................... 1,357,743 1,782,141
Stockholders' equity (deficit).............................. (180,892) 755,123
</TABLE>
The following table reconciles net income to the presentation of Arch's
adjusted pro forma EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ ---------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1997 1998 1998 1998 1999 1999
------- -------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA Reconciliation
Net income (loss)..... $(6,462) $(36,602) $(114,662) $(181,874) $(206,051) $(251,643) $(156,430) $(227,591) $(292,468)
Interest and other
income (expense).... 4,973 26,499 77,895 101,031 109,902 54,429 80,553 146,523 158,311
Income tax (benefit)
provision........... -- (4,600) (51,207) (21,172) -- 3,958 -- -- 209
Depreciation and
amortization........ 18,321 60,205 191,871 232,347 221,316 692,740 164,990 222,836 499,290
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 of
accounting charge... -- -- -- -- -- -- -- 3,361 --
------- -------- --------- --------- --------- --------- --------- --------- ---------
Adjusted EBITDA....... $17,969 $ 47,186 $ 105,801 $ 130,332 $ 141,587 $596,347 $ 105,533 $ 142,929 $ 395,878
======= ======== ========= ========= ========= ========= ========= ========= =========
</TABLE>
8
<PAGE> 13
- --------------------------------------------------------------------------------
STOCK OWNERSHIP IN THE COMBINED COMPANY
The PageNet merger, the Arch exchange offer and the PageNet exchange offer
are expected to have the following effect on beneficial ownership of Arch's
common stock:
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP OF PERCENTAGE OWNERSHIP OF
ARCH COMMON STOCK ARCH COMMON STOCK, ON A
OUTSTANDING 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 PageNet merger may vary considerably from the foregoing
table. For example, if 50% of the discount notes were tendered and accepted,
their holders would own 9.4% of Arch's outstanding stock and 8.4% on a fully
diluted basis; if 1% of the discount notes were tendered and accepted, their
holders would own 0.2% and 0.2%, respectively. See "The Merger".
- --------------------------------------------------------------------------------
9
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of Arch, on a
consolidated basis, at September 30, 1999 and as adjusted to give effect to the
exchange offer, the PageNet exchange offer and the PageNet merger. You should
read this table together with the other financial information appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999 AS ADJUSTED(1)(2)
------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt........................ $ 3,060 $ 3,060
---------- ----------
Long-term debt, less current maturities:
Senior bank debt.......................................... 446,940 1,216,940
10 7/8% senior discount notes due 2008(3)................. 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..... 1,357,743 1,782,141
---------- ----------
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 stockholders' equity........................ (180,892) 755,123
---------- ----------
Total capitalization.............................. $1,179,911 $2,540,324
========== ==========
</TABLE>
- ---------------
(1) If none of the Arch discount notes are exchanged, total long-term debt, less
current maturities will be $2.2 billion, total stockholders' equity will be
$376.5 million and total capitalization will be $2.5 billion.
(2) If 50% of the Arch discount notes are exchanged, total long-term debt, less
current maturities will be $2.0 billion, total stockholders' equity will be
$565.8 million and total capitalization will be $2.5 billion.
(3) Gives effect to repurchase of $16.3 million accreted value of discount notes
by Arch during October 1999 in exchange for Arch common stock.
10
<PAGE> 15
RISK FACTORS
You should consider carefully the following risks before you decide whether
to exchange your discount notes for common stock. If any of these possible
developments occur, our business, financial condition and results of operations
would likely suffer. In that case, the trading price of our common stock could
decline, and the value of your shares could be less than the value of the notes
that you exchanged for shares.
RISKS RELATED TO THE EXCHANGE OFFER AND AN INVESTMENT IN ARCH'S COMMON STOCK
Common stock is subject to greater risks than are the discount notes
Because Arch's common stock lacks the senior position of debt securities
and the specific rights currently granted to holders of discount notes, the
value of the common stock will be less able than the value of the notes to
withstand adverse developments relating to Arch's financial condition or results
of operations.
The exchange ratio used in the exchange offer may prove to be unfavorable to
you
The exchange ratio of 66.1318 shares of common stock for each $1,000
principal amount of discount notes was determined by Arch, after consultation
with its financial advisors, without any negotiation between Arch and any of the
holders of discount notes. The exchange ratio is not necessarily related to
trading prices for Arch's common stock or other recognized criteria of value for
common stock such as Arch's assets, net worth or results of operations, or to
trading prices for the notes or the accreted value of the notes. There can be no
assurance that the market value of the shares of common stock issued in the
exchange offer 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 you tender a note and the time you take delivery of the
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 November 30, 1999, the
reported sale price of common stock on the Nasdaq National Market 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 offer and the PageNet 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.
Shares eligible for future sale may depress market price of 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 common stock. No prediction
can be made as to the effect, if any, that future sales of common stock, or the
availability of shares for future sales, will have
11
<PAGE> 16
on the market price of the common stock prevailing from time to time. Sales of
substantial amounts of 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 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. These 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.
Your tender of notes for common stock may be accepted even though few other
noteholders tender their notes
PageNet is entitled, in its sole discretion, to reduce the required minimum
percentage of the Arch discount notes that must be tendered in the exchange
offer from 97.5% to any other percentage, or to zero, in specified
circumstances. Arch is entitled, in its sole discretion, to reduce the required
minimum percentage to any number in excess of 67.0% in specified circumstances.
See "The Exchange Offer -- Conditions". If PageNet were to reduce the required
minimum percentage to zero, your tender would no longer be conditioned on the
participation of other noteholders in the exchange offer and you might be the
only noteholder to exchange notes for common stock. To the extent that the
required minimum percentage is reduced when you tender, you will become a common
stockholder in a company with more financial leverage than it would have if
97.5% or more of the discount notes were exchanged.
Since tenders of notes are revocable, you will not know at any time before
the expiration date how many other discount notes are being tendered.
If you do not tender your notes, the notes that you retain may 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 discount 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 the notes is
a condition to the merger and the exchange offer unless PageNet reduces the
minimum required percentage below a majority. Accordingly, if you decide not to
tender all or some of your notes, the notes that you retain will no longer have
any special rights unless PageNet chooses to reduce the minimum required
percentage below 50%. You will not know, when you decide to tender your notes,
whether or not the amendments will be adopted.
If you tender your notes, other noteholders' non-tendered notes may continue
to have special rights
For the reasons discussed in the previous paragraph, it is possible that
you may exchange your notes, but the remaining non-tendered notes will not lose
their special rights. If this happens, you would become a common stockholder in
a corporation whose remaining discount noteholders continue to have special
rights.
12
<PAGE> 17
RISKS RELATED TO THE PAGENET MERGER
Integrating Arch and PageNet may 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, or a loss of momentum. 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 middle 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 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 making or
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 Merger". 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. In
addition, if Arch stockholders do not approve the merger or if the exchange
offer is not successful, PageNet could terminate the merger agreement and under
specified circumstances Arch may be required to pay a $40.0 million termination
fee to PageNet.
Actual results may differ from unaudited combined company projections
The managements of Arch and PageNet have jointly prepared the combined
company financial projections contained in Annex A to this prospectus in
connection with the development of PageNet's disclosure statement for the
Chapter 11 proceeding that PageNet may commence in order to implement the
merger. These projections present the projected effects of the plan of
reorganization on future operations if the exchange offers and merger are
consummated. 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 Arch,
13
<PAGE> 18
PageNet, 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 has assumed
that 100% of the discount notes will be tendered and accepted in the exchange
offer. As described above, the merger may take place in some circumstances if a
smaller amount of discount notes, or no notes at all, are tendered. Arch has
also assumed that the market value of the common stock to be issued in
connection with the merger and the 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 December 20,
1999, the closing market price of the 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
PageNet 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.
Loss of corporate tax benefits is probable
It is anticipated that the PageNet merger and the Arch and PageNet 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
Arch and PageNet, 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 PageNet 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 Other
Indebtedness". 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 PageNet merger may not take place
The PageNet merger will not take place unless many conditions are satisfied
or waived. These conditions include stockholder and noteholder approvals,
governmental approvals and the availability of senior credit facilities. See
"The Merger". Moreover, PageNet may be required in some circumstances to file a
prepackaged Chapter 11 case 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 to Arch will not be realized, and you will retain your interest as a
noteholder in a company which will not enjoy the anticipated benefits of the
merger despite incurring substantial transaction costs. Trading prices of
discount notes may fluctuate between now and the closing, due in part to
uncertainty as to whether or when the merger will take place.
14
<PAGE> 19
ARCH'S BUSINESS AND FINANCIAL RISKS
Continued losses are likely
Arch and PageNet 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.
Arch, MobileMedia and PageNet have reported net losses in all but two of
the periods shown in the table below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------
1996 1997 1998 1999
--------- ------- ------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net income (loss):
Arch............................... $ (114.7) $(181.9) $(206.1) $(227.6)
MobileMedia........................ $(1,059.9) $(124.6) $ 35.6 $ 387.3(1)
PageNet............................ $ (104.3) $(156.9) $(162.0) $(234.0)
</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,
other costs of growth and, in the case of PageNet, restructuring costs.
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 PageNet merger and the
MobileMedia acquisition, Arch would have incurred, on a pro forma basis, losses
before extraordinary items and cumulative effect of accounting charge of $251.6
million for the year ended December 31, 1998 and $292.5 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 PageNet 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 PageNet merger. The following table compares the total
debt, total assets and latest three-month annualized adjusted EBITDA of Arch and
PageNet at or as of September 30, 1999 and the total debt,
15
<PAGE> 20
total assets and nine month annualized adjusted pro forma EBITDA of the combined
company as of September 30, 1999.
<TABLE>
<CAPTION>
PRO PRO PRO
FORMA FORMA FORMA
COMBINED COMBINED COMBINED
ARCH PAGENET COMPANY(1) COMPANY(2) COMPANY(3)
-------- -------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total debt......................... $1,360.8 $1,999.3 $2,168.8 $1,977.0 $1,785.2
Total assets....................... $1,424.5 $1,520.9 $3,021.8 $3,021.8 $3,021.8
Annualized adjusted EBITDA......... $ 262.1 $ 236.5 $ 527.8 $ 527.8 $ 527.8
</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 Arch and PageNet, 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.
- 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 some of 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,
service revenues, technological developments, marketing and sales expenses,
competitive conditions, the nature and timing of Arch's N-PCS strategy and
acquisition strategies and opportunities. No assurance can be given that
additional equity or debt financing will be available to Arch when needed on
acceptable terms, if at all. If sufficient financing is unavailable when needed,
Arch may experience material adverse effects.
16
<PAGE> 21
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 many other providers of paging and advanced messaging
services. If any of such competitors were to devote additional resources to the
wireless communications business or focus on Arch's or PageNet'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 each of Arch 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 personal communications
services, which are commonly referred to as PCS, as well as specialized mobile
radio services and services provided over dedicated data networks which use
hand-held devices to send and receive data. Although these services are
primarily focused on 2-way voice communications, they may include wireless
messaging as an adjunct service or may replace the need for 2-way messaging
entirely. It is far less expensive to obtain a cellular or PCS unit with data
capability than the 2-way messaging units currently available, 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 two-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. Although
2-way services generally are higher priced than traditional one-way messaging
services, this situation may change. Future technological advances in the
telecommunications industry could increase the number and type of new services
or products which compete with the wireless messaging services historically
provided by Arch and PageNet.
Obsolescence in company-owned units may impose additional costs on Arch
Technological change may also adversely affect the value of the units owned
by Arch and PageNet that are leased to their subscribers. If Arch's or PageNet'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.
17
<PAGE> 22
Government regulation may burden operations
Licenses may not be automatically renewed
Arch's and PageNet'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 Arch or PageNet 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. Arch 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 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 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.
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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 some 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 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. 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.
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 is 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 will be met.
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. 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
material adverse effects.
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
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maximum leverage ratio and a minimum interest coverage ratio. 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 and investments;
- 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.
RISKS RELATED TO PAGENET
PageNet faces many of the 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
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PageNet 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
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
schedule. PageNet's original plans called for the conversions to be
substantially complete during early 1999. PageNet recently announced the
suspension of future conversions after January of 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
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 and 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 to reverse this
trend of accelerating customer cancellations could have a material adverse
effect on PageNet and, as a result, on the combined company 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 the shares of its 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, at which time it 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 SmallCap Market if its stock remains consistently above $1.00 per share,
or to over-the-counter trading if its stock trades below $1.00. 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 compliance until the completion of the merger.
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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 Arch
or its management or board of directors "believe", "expect", "anticipate",
"plan" and similar expressions. A number of important factors could cause actual
results to differ materially from those expressed in any forward-looking
statements. See "Risk Factors". Arch undertakes no obligation to update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
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THE MERGER
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 Arch and PageNet 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 and up to 68.9% of
the equity interest in Vast Solutions, Inc., an entity which will conduct
PageNet's wireless solutions business, for all 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;
- PageNet will distribute up to 11.6% of the equity interest in Vast
Solutions 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.
REQUIRED CONSENTS; CONDITIONS
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 under Chapter 11 of the Bankruptcy Code consistent with the terms
of the merger agreement. Both PageNet and Arch have agreed to solicit waivers
from the holders of notes being exchanged in the Arch and PageNet exchange
offers of any existing defaults that can be waived by a majority vote. Holders
of Arch notes are required to consent to the waivers of any existing defaults or
rescission rights as a condition of tendering notes in the Arch exchange offer.
Holders of PageNet notes are required to consent to the prepackaged plan of
reorganization under Chapter 11 of the Bankruptcy Code and the waivers of any
existing defaults as a condition of tendering notes in the PageNet exchange
offer.
Arch and PageNet will also seek approval of amendments to their respective
certificates of incorporation in connection with the merger. Each of Arch and
PageNet will need to increase the number of shares it is authorized to issue and
Arch will need to seek approval for the conversion of the Series C preferred
shares into shares of its common stock. Arch and PageNet will also seek approval
of amendments to the terms of any notes that are not tendered. See "Proposed
Amendments".
Consummating the exchange offers and the merger is subject to a number of
conditions, including:
- exchange of at least 97.5% of the PageNet notes and at least 97.5% of the
Arch notes in the exchange offers, unless PageNet elects to reduce the
required minimum percentage of Arch notes
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to any amount or Arch elects in specified circumstances to reduce such
percentage to 67.0% or more;
- approval by the Arch stockholders;
- approval by the PageNet stockholders or bankruptcy court approval of the
prepackaged plan;
- receipt of all necessary governmental approvals; and
- the availability to Arch after the merger of senior credit facilities of
at least $1.5 billion.
PageNet has agreed that it will either 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, or a lower percentage in some circumstances as
described above, have been tendered for exchange in the Arch exchange
offer;
- the holders of at least 66 2/3% in principal amount of the PageNet notes
that constitute at least a majority in number of all such holders consent
to the prepackaged plan;
- sufficient debt financing has been obtained to fund PageNet's operations
until the prepackaged plan is approved; and
- senior credit facilities of at least $1.5 billion have been obtained or
can be obtained through the prepackaged plan.
Arch or PageNet will be required to pay a $40.0 million termination fee if
it seeks to terminate the merger agreement after responding in specified ways to
an alternative acquisition proposal or in other specified circumstances.
The merger is intended to be a tax free reorganization. Arch, PageNet and
their stockholders and noteholders should not recognize gain or loss in
connection with the merger, except that the distribution and receipt of
interests in Vast Solutions, PageNet's wireless solutions business, is expected
to be taxable to PageNet and its stockholders and noteholders. The merger will
be accounted for as a purchase.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
Arch will accept all discount notes validly tendered and not withdrawn
before the expiration date, upon the terms and subject to the conditions set
forth in this prospectus and in the letter of transmittal which accompanies this
prospectus. Arch will issue 66.1318 shares of common stock in exchange for each
$1,000 principal amount of discount notes surrendered pursuant to the exchange
offer. All accreted interest on the notes will be transferred with the notes and
will not be paid separately. The exchange ratio is calculated solely on the
principal amount of the notes at maturity, regardless of how much interest has
accreted to date. Calculations of share amounts will be rounded down to the
nearest whole share and no fractional shares of common stock will be issued.
Discount notes may be tendered only in whole multiples of $1,000, unless you are
tendering all of the discount notes that you own.
As of the date of this prospectus, $448.4 million in aggregate principal
amount at maturity of discount notes are outstanding. Only a registered holder
of discount notes, or a registered holder's legal representative or
attorney-in-fact, as reflected on the records of the trustee under the
indenture, may participate in the exchange offer. There will be no fixed record
date for determining the registered holders of the discount notes entitled to
participate in the exchange offer.
Holders of discount notes do not have any appraisal or dissenters' rights
under the indenture in connection with the exchange offer. Arch intends to
conduct the exchange offer in accordance with the provisions of the merger
agreement and the applicable requirements of the Securities Act, the Exchange
Act, and the rules and regulations of the SEC.
Holders who tender discount notes in the exchange offer will not be
required to pay brokerage commissions or fees with respect to the exchange of
discount 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. Arch will pay all charges and expenses in connection with the
exchange offer, other than applicable taxes described below. See "-- Fees and
Expenses".
EXPIRATION DATE; EXTENSIONS
The expiration date will be 11:59 p.m., New York City time, on the
twentieth business day after the commencement of the exchange offer, or at a
later date which is mutually agreed upon by Arch and PageNet.
CONDITIONS
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 67.0% at its sole discretion.
Arch will be deemed to have accepted validly tendered discount notes only
when, and if, Arch gives oral or written notice of acceptance to the exchange
agent. The exchange agent will act as agent for the tendering holders of
discount notes for the purposes of receiving the common stock from Arch.
The merger agreement requires that holders of the discount notes who tender
in connection with the exchange offer must give their consent to:
- amend the indenture, if necessary, to permit completion of the merger;
- amend the indenture to eliminate:
- all covenants which may be modified or eliminated by a majority vote
of the discount notes;
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- 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 discount 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, Arch will not be
required to exchange shares of common stock for any discount notes 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, Arch may:
- refuse to accept any discount notes and return all untendered discount
notes to their holders; or
- extend the exchange offer and retain all discount 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 discount notes may tender discount 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 discount 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 discount 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 Arch in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
THE METHOD OF DELIVERY OF DISCOUNT NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR CHOICE AND YOUR
RISK. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT YOU USE AN OVERNIGHT
OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE YOUR DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR DISCOUNT NOTES SHOULD BE SENT TO ARCH. YOU MAY
REQUEST YOUR BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR NOMINEE TO EFFECT
THESE TRANSACTIONS FOR YOU.
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If you are the beneficial owner of discount notes that are registered in
the name of a broker, dealer, commercial bank, trust company, or other nominee
and you wish to tender, you should contact the registered holder promptly and
instruct the registered holder to tender on your behalf. Holders who intend to
tender discount notes through DTC's ATOP procedures need not submit a letter of
transmittal. If you are a beneficial owner and you wish to tender on your own
behalf, you must, prior to completing and executing the letter of transmittal
and delivering your discount notes, either make appropriate arrangements to
register ownership of the discount notes in your own name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time and may therefore be impractical.
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 discount 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 discount notes being tendered, the discount notes must
be endorsed or accompanied by a properly completed bond power, signed by a
registered holder as the registered holder's name appears on the discount notes.
If the letter of transmittal or any discount notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should indicate that fact when signing, and should
submit evidence satisfactory to Arch of their authority to act in that capacity
with the letter of transmittal, unless Arch waives the requirement.
The exchange agent and the depositary have confirmed that any financial
institution that is participant in DTC's system may use DTC's ATOP procedures to
tender discount notes. All questions as to the validity, form, eligibility,
including time of receipt, acceptance and withdrawal of tendered discount notes
will be determined by Arch in its sole discretion. Arch's determination will be
final and binding. Arch reserves the absolute right to reject any and all
discount notes not properly tendered and any discount notes, if Arch's
acceptance of those notes would be unlawful in the opinion of Arch's legal
counsel. Arch also reserves the right to waive any defects, irregularities or
conditions of tender as to particular discount notes. Arch's interpretation of
the terms and conditions of the exchange offer, including the instructions in
the letter of transmittal, will be final and binding on all parties. Any defects
or irregularities in connection with tenders of discount notes must be cured by
the deadline set by Arch, unless Arch waives them. Although Arch intends to
notify holders of defects or irregularities with respect to tenders of discount
notes, neither Arch, the exchange agent nor any other person shall incur any
liability for failure to give that kind of notification. Tenders of discount
notes will not be deemed to have been made until all defects or irregularities
have been cured or waived.
Although Arch has no present plan to acquire any discount notes that are
not tendered in the exchange offer, Arch reserves the right in its sole
discretion to purchase or make offers for any discount notes that remain
outstanding after the expiration date or, as set forth below under
"-- Conditions", to terminate the exchange offer and purchase discount notes on
the open market, in privately negotiated transactions or otherwise, to the
extent permitted by applicable law. The terms of any such purchases or offers
could differ from the terms of the exchange offer.
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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 discount notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, Arch will return the unaccepted, withdrawn or non-exchanged
notes without expense to their holder as promptly as practicable. Discount 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
discount 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 system may make book-entry delivery of discount 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 discount notes through book-entry transfer at DTC, it must
either follow DTC's ATOP procedures, 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 or follow the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders whose discount notes are not immediately available or who cannot
deliver their discount notes, the letter of transmittal or any other required
documentation to the exchange agent before the expiration date, may effect a
tender if:
- the tender is made through an eligible institution;
- before the expiration date, the exchange agent receives from the eligible
institution, by facsimile transmission, mail or hand delivery, a properly
completed and executed notice of guaranteed delivery substantially in the
form provided by Arch;
- setting forth the name and address of the holder, the certificate
number (s) of the discount notes and the principal amount of the
discount notes tendered;
- stating that the tender is being made;
- guaranteeing that it will deposit with the exchange agent, within five
New York Stock Exchange trading days after the expiration date, the
letter of transmittal or a facsimile, together with the certificate(s)
representing discount notes in proper form for transfer or a
book-entry confirmation and any other documents required by the letter
of transmittal; and
- the properly executed letter of transmittal or facsimile, as well as
the certificate(s) representing all tendered notes in proper form for
transfer and all other documentation required by the letter of
transmittal are received by the exchange agent within five New York
Stock Exchange trading days after the expiration date.
Upon the request of the exchange agent, a notice of guaranteed delivery
will be sent to all holders who wish to tender their discount notes according to
the guaranteed delivery procedures described above.
WITHDRAWAL OF TENDERS
You may withdraw tenders of discount notes at any time before 12:00
midnight, on the expiration date, except as otherwise provided below.
28
<PAGE> 33
To withdraw a tender of discount 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.
Arch will determine, in its sole discretion, all questions as to validity,
form and eligibility of withdrawal notices including the time of receipt. Arch's
determination will be final and binding on all parties. Any withdrawn discount
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 discount notes are later validly retendered. Properly
withdrawn discount notes may be retendered by following 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.
You 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:
[Address]
Delivery of the letter of transmittal to a different address or
transmission of instructions to a different facsimile address does not
constitute a valid delivery of such letter of transmittal.
FEES AND EXPENSES
Arch will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, additional solicitations may be
made by telegraph, by telephone or in person by officers and regular employees
of Arch and affiliates.
Arch 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. Arch, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
The cash expenses to be incurred in connection with the exchange offer will
be paid by Arch and are estimated in the aggregate to be approximately $1
million. These expenses include registration fees, fees and expenses of the
exchange agent and the trustee, accounting and legal fees and printing costs,
among others.
Arch will pay all transfer taxes, if any, applicable to the exchange of
discount notes pursuant to the exchange offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the discount 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.
RESALES OF COMMON STOCK ISSUED IN EXCHANGE FOR NOTES
Arch common stock issued in exchange for discount notes will generally be
freely transferable. However, persons who are deemed to be "affiliates," as
defined by Rule 144 under the Securities Act, of Arch when the merger takes
place must resell shares of common stock received by them only in
29
<PAGE> 34
transactions permitted by the resale provisions of Rule 144 or as otherwise
permitted under the Securities Act.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the exchange offer is voluntary. Holders of discount notes
are urged to consult their financial and tax advisors in making their own
decisions on what action to take. See "Risk Factors -- Your tender of notes for
common stock may be accepted even though few other noteholders tender their
notes".
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
See "Material Federal Income Tax Considerations".
ACCOUNTING TREATMENT
For accounting purposes, Arch will recognize an extraordinary gain on the
early extinguishment of debt relating to the discount notes exchanged as part of
this transaction.
30
<PAGE> 35
PROPOSED AMENDMENTS
To tender discount notes for exchange in the exchange offer, you must
consent to proposed amendments to the indenture for the discount notes. The
proposed amendments constitute a single proposal and a tendering holder must
consent to the proposal in its entirety, and may not consent selectively with
respect to some of the proposed amendments.
The proposed amendments will be included in a supplement to the indenture
that will be signed by Arch and the trustee on or promptly following Arch's
receipt of the required consents. Accordingly, Arch expects to sign the
supplemental indenture before the Arch exchange offer expires. The proposed
amendments will not take effect, however, until Arch accepts for exchange
discount notes issued under the indenture that represent at least the required
majority consent.
WHAT IS PROPOSED TO BE ELIMINATED FROM THE NOTES
The proposed amendments to the indenture would eliminate the following
rights of noteholders and other provisions of the discount notes. For summaries
of these rights and provisions, see "Description of Discount Notes". The
summaries contained in that section are qualified in their entirety by reference
to the full terms of the indenture as well as the proposed supplemental
indenture, copies of which can be obtained without charge. See "Where You Can
Find More Information".
These proposed amendments may have adverse consequences for you if you do
not participate in the Arch exchange offer. See "Risk Factors -- If you do not
tender your notes, the notes that you retain may have substantially fewer rights
than they currently have".
<TABLE>
<CAPTION>
SECTION OF INDENTURE WHERE DESCRIBED UNDER "DESCRIPTION OF DISCOUNT NOTES -- RESTRICTIVE COVENANTS"
- -------------------- ------------------------------------------------------------------------------
<S> <C>
801 "-- Limitations on Mergers or Sales of Assets"
1005 "-- Other Covenants"
1006 "-- Other Covenants"
1007 "-- Other Covenants"
1008 "-- Limitations on Debt"
1009 "-- Limitations on Restricted Payments"
1010 "-- Limitations on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries"
1011 "-- Limitations on Transactions with Affiliates and Related Persons"
1012 "-- Limitations on Asset Sales"
1013 "-- Limitations on Issuances and Sale of Capital Stock of Restricted
Subsidiaries"
1014 "-- Other Covenants"
1015 "-- Purchase of Notes upon a Change of Control"
1017 "-- Limitations on Liens"
1018 "-- Unrestricted Subsidiaries"
1021 "-- Other Covenants"
</TABLE>
31
<PAGE> 36
The proposed amendments would also eliminate the following events of default
from Section 501 of the indenture.
<TABLE>
<CAPTION>
WHERE DESCRIBED UNDER "DESCRIPTION OF
SECTION OF INDENTURE DISCOUNT NOTES -- EVENTS OF DEFAULT"
- -------------------- -------------------------------------
<S> <C>
501(3) Paragraph 1
501(5) Paragraph 5
501(6) Paragraph 6
501(7) Paragraph 7
501(8) Paragraph 8
501(9) Paragraph 8
</TABLE>
The proposed amendments would also eliminate any references in the
indenture and the 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
indenture that are used solely in those deleted sentences, provisions, sections
and subsections.
32
<PAGE> 37
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
SCOPE AND LIMITATION
The following general discussion summarizes certain federal income tax
considerations of the exchange offer and summarizes the principal federal income
tax considerations of general application that a noteholder should consider in
deciding whether to exchange notes for Arch stock pursuant to the exchange
offer. This discussion assumes that the noteholder is a citizen or resident of
the United States for federal income tax purposes, and holds the 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 noteholder
and does not address the federal income tax consequences relevant to particular
categories of 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 noteholder. No
rulings have been requested from the Internal Revenue Service concerning any of
the matters described in this exchange offer. 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 NOTEHOLDER
SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING THE DECISION TO EXCHANGE NOTES FOR
ARCH STOCK AS WELL AS THE SPECIFIC TAX CONSEQUENCES (FOREIGN, FEDERAL, STATE AND
LOCAL) APPLICABLE TO IT.
FEDERAL INCOME TAX CONSEQUENCES TO NOTEHOLDERS OF THE EXCHANGE OFFER
Exchanging Noteholders
The federal income tax consequences of the exchange offer to an exchanging
noteholder will depend upon a number of factors, including whether such exchange
transaction constitutes a tax free recapitalization or a taxable transaction and
whether the notes held by each noteholder constitute "securities" for federal
income tax purposes.
Qualification as a "Security"
The issuance of Arch common stock to the noteholders who exchange their
notes will constitute an exchange for federal income tax purposes. The federal
income tax consequences to these noteholders will depend on 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 on 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 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.
Qualification as a "Recapitalization"
In general, if the notes constitute securities, the exchange of such notes
for Arch common stock should qualify as a "recapitalization" for federal income
tax purposes. In such case, the noteholders will not recognize gain or loss on
the receipt of the Arch common stock in satisfaction of their notes. The Arch
common stock will have a tax basis equal to the adjusted tax basis of the notes
surrendered and will have a holding period that includes the tendering
noteholder's holding period for the exchanged notes.
33
<PAGE> 38
If the notes do not constitute securities, the exchange of such notes will
not qualify as a "recapitalization," and the entire amount of a noteholder's
realized gain or loss will be recognized for federal income tax purposes.
Generally, the holder of a note will realize gain or loss on the exchange in an
amount equal to the difference between the fair market value of the Arch common
stock received and the holder's tax basis in the note. In such a case, a
noteholder's tax basis in the Arch common stock will be equal to the fair market
value of such stock at the time of the exchange. A noteholder's holding period
in the Arch common stock received will begin on the day following the exchange.
Character of Gain or Loss
Except as discussed under "Market Discount" below, any gain or loss
recognized on the exchange will be capital gain or loss, and such gain or loss
will be long-term capital gain or loss if such noteholder's holding period for
the notes surrendered exceeds one year at the time of the exchange.
Market Discount
In general, if a holder recognizes gain upon disposition of a debt
instrument, the lesser of (i) such gain, or (ii) 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), if the basis of the
property received in the exchange, or the exchanged basis property, is
determined by reference to 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 with original issue discount, such as the notes, 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 include currently accrued market
discount in income.
Market discount on the notes, if any, will generally only apply to a
noteholder who purchased such notes after 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 the notes for Arch stock should
qualify as a "nonrecognition transaction," and the Arch 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
stock, any remaining accrued, unrecognized market discount on the notes would
carry over to the Arch 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 stock. If the exchange does
not qualify as a nonrecognition transaction, the noteholder would 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. Exchanging noteholders should consult their tax advisors
concerning the effect of the market discount provisions and the associated
elections.
34
<PAGE> 39
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 indenture 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,
Arch 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 and the notes (either as originally issued or
modified) do not constitute "securities" so that the exchange does not qualify
as a recapitalization, a nontendering noteholder would recognize gain or loss on
the date of the exchange in accordance with the discussion above relating to
taxable exchanges. 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 offer.
FEDERAL INCOME TAX CONSEQUENCES TO ARCH OF THE EXCHANGE OFFER, THE MERGER AND
THE PAGENET EXCHANGE OFFER
While the merger is expected generally to be tax-free to both Arch and
PageNet, both companies are expected to incur tax liability 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, from the distribution of interests in Vast Solutions,
which conducts PageNet's wireless solutions business. The exact amount of this
tax liability cannot be determined precisely, because it depends on the values
of the Arch stock, and the interests in Vast at the time of 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 stock and the interests in 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 which would otherwise be available to offset future taxable income of
the combined companies.
35
<PAGE> 40
UNAUDITED SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma financial information gives
effect to the PageNet merger and the MobileMedia acquisition, which closed on
June 3, 1999, as if such transactions had been consummated on September 30, 1999
in the case of the balance sheet and on January 1, 1998 in the case of the
statement of operations and other operating data.
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 PageNet merger and the MobileMedia acquisition is
excluded from this presentation.
The pro forma information is presented for illustrative purposes only and
does not necessarily predict the operating results or financial position that
would have occurred if the PageNet merger and the MobileMedia acquisition had
been consummated as of the dates indicated above. Nor does it predict the future
operating results or financial position of Arch following the PageNet merger and
the MobileMedia acquisition.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service, rental and maintenance revenues.................... $1,731,283 $1,263,448
Product sales............................................... 169,606 115,139
---------- ----------
Total revenues......................................... 1,900,889 1,378,587
Cost of products sold....................................... (129,787) (75,689)
---------- ----------
1,771,102 1,302,898
Operating Expenses:
Service rental and maintenance......................... 394,397 326,092
Selling................................................ 214,588 148,958
General and administrative............................. 565,770 431,970
Depreciation and amortization.......................... 692,740 499,290
Restructuring charge................................... 88,700 (2,200)
Provision for asset impairment......................... -- 17,798
Bankruptcy and related expenses........................ 8,163 14,938
---------- ----------
Operating income (loss)..................................... (193,256) (133,948)
Interest and other income (expense)......................... (54,429) (158,311)
---------- ----------
Income (loss) before income tax benefit and extraordinary
item...................................................... (247,685) (292,259)
Income tax provision........................................ 3,958 209
---------- ----------
Income (loss) before extraordinary item and cumulative
effect of accounting change............................... $ (251,643) $ (292,468)
========== ==========
Basic/diluted income (loss) before extraordinary item and
cumulative effect of accounting change per share.......... $ (1.46) $ (1.70)
========== ==========
OTHER OPERATING DATA:
Capital expenditures, excluding acquisitions................ $ 477,157 $ 283,874
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.............................................. $ 302,655
Total assets................................................ 3,021,816
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.
36
<PAGE> 41
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has
been prepared to reflect the PageNet 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 unaudited pro forma condensed consolidated
statements of operations for the year ended December 31, 1998 and the nine
months ended September 30, 1999 present the result of operations of Arch and
PageNet assuming the PageNet merger and the MobileMedia acquisition, which
closed on June 3, 1999, had been effected on January 1, 1998. You should read
the unaudited pro forma financial data in conjunction with the consolidated
historical financial statements of Arch and PageNet including the notes to all
sets of financial statements.
The pro forma condensed consolidated financial data is for information
purposes only and is not necessarily indicative of the results of future
operations of the combined company or the actual results that would have been
achieved had the PageNet merger and the MobileMedia acquisition been consummated
during the periods indicated. Moreover, 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.
37
<PAGE> 42
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
ARCH PAGENET ------------------------ PRO FORMA
(HISTORICAL) (HISTORICAL) DR CR CONSOLIDATED
------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 21,488 $ 102,961 $ 124,449
Accounts receivable, net......... 57,570 77,253 134,823
Inventories...................... 10,163 10,278 20,441
Prepaid expenses and other....... 9,959 12,983 22,942
---------- ---------- ----------
Total current assets........ 99,180 203,475 302,655
---------- ---------- ----------
Property and equipment, net...... 409,056 783,497 1,192,553
Intangible and other assets...... 916,282 533,913 106,537(2) 30,124(2) 1,526,608
---------- ---------- ----------
$1,424,518 $1,520,885 $3,021,816
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of long-term
debt........................... $ 3,060 $ -- $ 3,060
Accounts payable................. 23,444 109,962 133,406
Accrued expenses................. 51,919 33,800 5,000(1) 90,719
Accrued interest................. 31,861 38,585 34,104(2) 36,342
Customer deposits and deferred
revenue........................ 41,191 38,338 79,529
Accrued restructuring, current
portion........................ 18,239 12,521 20,000(2) 50,760
---------- ---------- ----------
Total current liabilities... 169,714 233,206 393,816
---------- ---------- ----------
Long-term debt, less current
maturities......................... 1,357,743 1,999,320 1,200,000(2) 25,000(2) 1,782,141
383,631(1)
16,291(12)
Accrued restructuring, non-current
portion............................ -- 12,783 12,783
Other long-term liabilities.......... 77,953 -- 77,953
Stockholders' equity (deficit):
Preferred stock.................. 3 -- 3(1) --
Common stock..................... 481 1,040 1,040(2) 898(2) 1,720
318(1)
23(12)
----------
Additional paid-in capital....... 639,559 134,161 134,161(2) 540,195(2) 1,367,249
178,190(1)
9,305(12)
Accumulated other comprehensive
income......................... -- 1,161 1,161(2) --
Accumulated deficit.............. (820,935) (860,786) 860,786(2) (613,846)
200,126(1)
6,963(12)
---------- ---------- ----------
Total stockholders' equity
(deficit)................. (180,892) (724,424) 755,123
---------- ---------- ----------
$1,424,518 $1,520,885 $3,021,816
========== ========== ==========
</TABLE>
38
<PAGE> 43
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTED
ARCH MOBILEMEDIA PRO FORMA ARCH PAGENET PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA (HISTORICAL) ADJUSTMENTS
------------ -------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Service, rental and
maintenance
revenues............. $ 403,607 $167,318 $ (3,521)(3) $ 567,404 $ 696,566 $ (522)(6)
Product sales........ 36,963 9,207 46,170 68,969
----------- -------- ------------ ----------- ------------ -------------
Total
revenues.... 440,570 176,525 (3,521) 613,574 765,535 (522)
Cost of products
sold................ (24,988) (6,216) (31,204) (43,013) (1,472)(7)
----------- -------- ------------ ----------- ------------ -------------
415,582 170,309 (3,521) 582,370 722,522 (1,994)
Operating expenses:
Service, rental
and
maintenance..... 91,421 44,530 (3,521)(3) 132,430 193,705 (43)(6)
Selling........... 57,589 23,115 80,704 70,223 (1,969)(6)
General and
administrative... 123,643 51,562 175,205 260,877 (4,112)(6)
Depreciation and
amortization.... 222,836 45,237 2,958(4) 282,731 268,171 (216)(6)
11,700(4) 34,290(8)
(85,686)(7)
Provision for
asset
impairment...... -- -- -- 17,798
Restructuring
charge.......... (2,200) -- (2,200)
Bankruptcy related
expenses........ -- 14,938 14,938 --
----------- -------- ------------ ----------- ------------ -------------
Total
operating
expenses.... 493,289 179,382 11,137 683,808 810,774 (57,736)
----------- -------- ------------ ----------- ------------ -------------
Operating income
(loss).............. (77,707) (9,073) (14,658) (101,438) (88,252) 55,742
Interest expense,
net............. (98,927) (17,660) 17,660(5) (115,766) (109,111) 120,257(9)
(16,839)(5) (9,553)(10)
Other income
(expense)....... (47,596) 1,435 (46,161) 806 1,217(12)
----------- -------- ------------ ----------- ------------ -------------
Income (loss) before
income tax benefit
and extraordinary
item................ (224,230) (25,298) (13,837) (263,365) (196,557) 167,663
Provision for income
taxes............... -- 209 209 --
----------- -------- ------------ ----------- ------------ -------------
Income (loss) before
extraordinary item
and cumulative
effect of accounting
change.............. $ (224,230) $(25,507) $ (13,837) $ (263,574) $ (196,557) $ 167,663
=========== ======== ============ =========== ============ =============
Basic/diluted income
(loss) per common
share before
extraordinary item
and cumulative
effect of accounting
change.............. $ (9.00) $ (5.52) $ (1.89)
=========== =========== ============
(103,960,240)(2)
2,327,120(12)
Weighted average
common shares
outstanding......... 25,088,969 22,971,813(13) 48,060,782 103,960,240 121,638,763(1)(2)
=========== ============ =========== ============ =============
<CAPTION>
PRO FORMA
CONSOLIDATED
------------
<S> <C>
Service, rental and
maintenance
revenues............. $ 1,263,448
Product sales........ 115,139
------------
Total
revenues.... 1,378,587
Cost of products
sold................ (75,689)
------------
1,302,898
Operating expenses:
Service, rental
and
maintenance..... 326,092
Selling........... 148,958
General and
administrative... 431,970
Depreciation and
amortization.... 499,290
Provision for
asset
impairment...... 17,798
Restructuring
charge.......... (2,200)
Bankruptcy related
expenses........ 14,938
------------
Total
operating
expenses.... 1,436,846
------------
Operating income
(loss).............. (133,948)
Interest expense,
net............. (112,956)
Other income
(expense)....... (45,355)
------------
Income (loss) before
income tax benefit
and extraordinary
item................ (292,259)
Provision for income
taxes............... 209
------------
Income (loss) before
extraordinary item
and cumulative
effect of accounting
change.............. $ (292,468)
============
Basic/diluted income
(loss) per common
share before
extraordinary item
and cumulative
effect of accounting
change.............. $ (1.70)
============
Weighted average
common shares
outstanding......... 172,026,665
============
</TABLE>
39
<PAGE> 44
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTED
ARCH MOBILEMEDIA PRO FORMA ARCH PAGENET PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA (HISTORICAL) ADJUSTMENTS
------------ -------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Service, rental and
maintenance
revenues.............. $ 371,154 $423,059 $ (8,454)(3) $ 785,759 $ 945,524
Product sales......... 42,481 26,622 69,103 100,503
---------- -------- ----------- ----------- ------------ -------------
Total
revenues..... 413,635 449,681 (8,454) 854,862 1,046,027
Cost of products
sold................. (29,953) (22,162) (52,115) (77,672)
---------- -------- ----------- ----------- ------------ -------------
383,682 427,519 (8,454) 802,747 968,355
Operating expenses:
Service, rental and
maintenance...... 80,782 111,589 (8,454)(3) 183,917 210,480
Selling............ 49,132 61,106 110,238 104,350
General and
administrative... 112,181 133,003 245,184 320,586
Depreciation and
amortization..... 221,316 114,903 7,100(4) 371,399 281,259 40,082(8)
28,080(4)
Restructuring
expense.......... 14,700 -- 14,700 74,000
Bankruptcy related
expenses......... -- 8,163 8,163 --
---------- -------- ----------- ----------- ------------ -------------
Total operating
expenses..... 478,111 428,764 26,726 933,601 990,675 40,082
---------- -------- ----------- ----------- ------------ -------------
Operating income
(loss)............... (94,429) (1,245) (35,180) (130,854) (22,320) (40,082)
Interest expense,
net.............. (104,213) (53,043) 53,043(5) (144,626) (141,692) 156,929(9)
(40,413)(5) (16,661)(10)
Gain on sale of
assets........... -- 94,165 94,165 -- 1,480(12)
Other expenses..... (5,689) (338) (6,027) 2,003
---------- -------- ----------- ----------- ------------ -------------
Income (loss) before
income tax benefit
and extraordinary
item................. (204,331) 39,539 (22,550) (187,342) (162,009) 101,666
Provision for income
taxes................ -- 3,958 3,958 --
---------- -------- ----------- ----------- ------------ -------------
Income (loss) before
extraordinary item... $ (204,331) $ 35,581 $ (22,550) $ (191,300) $ (162,009) $ 101,666
========== ======== =========== =========== ============ =============
Basic/diluted income
(loss) per common
share before
extraordinary item... $ (29.34) $ (4.01) $ (1.57)
========== =========== ============
(103,377,424)(2)
2,327,120(12)
Weighted average
common shares
outstanding.......... 6,997,730 40,988,922(13) 47,986,652 103,377,424 121,638,763(1)(2)
========== =========== =========== ============ =============
<CAPTION>
PRO FORMA
CONSOLIDATED
------------
<S> <C>
Service, rental and
maintenance
revenues.............. $ 1,731,283
Product sales......... 169,606
------------
Total
revenues..... 1,900,889
Cost of products
sold................. (129,787)
------------
1,771,102
Operating expenses:
Service, rental and
maintenance...... 394,397
Selling............ 214,588
General and
administrative... 565,770
Depreciation and
amortization..... 692,740
Restructuring
expense.......... 88,700
Bankruptcy related
expenses......... 8,163
------------
Total operating
expenses..... 1,964,358
------------
Operating income
(loss)............... (193,256)
Interest expense,
net.............. (144,570)
Gain on sale of
assets........... 94,165
Other expenses..... (4,024)
------------
Income (loss) before
income tax benefit
and extraordinary
item................. (247,685)
Provision for income
taxes................ 3,958
------------
Income (loss) before
extraordinary item... $ (251,643)
============
Basic/diluted income
(loss) per common
share before
extraordinary item... $ (1.46)
============
Weighted average
common shares
outstanding.......... 171,952,535
============
</TABLE>
40
<PAGE> 45
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) 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. See note 12 to the notes to 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.
(2) To record:
- the issuance of 76,918,795 shares of Arch common stock to the holders
of $1.2 billion of PageNet senior subordinated notes;
- the issuance of 12,963,842 shares of Arch common stock to the
stockholders of PageNet. Each outstanding share of PageNet common
stock will be converted into 0.1247 shares of Arch common stock;
- the write-off of $30.1 million of deferred financing costs associated
with PageNet's debt facilities; and
- the excess of purchase price over the assumed fair value of the
identifiable assets acquired.
The historical book value of the tangible and intangible assets of 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 holders of PageNet
senior subordinated notes (76,918,795 shares at $6.02
per share)........................................... $ 463,051
Fair value of shares issued to PageNet stockholders
(12,963,842 shares at $6.02 per share)............... 78,042
----------
541,093
Liabilities Assumed:
Bank debt.............................................. 745,000
Other long-term debt................................... 54,320
Accounts payable....................................... 109,962
Accrued expenses....................................... 33,800
Accrued interest....................................... 4,481
Accrued restructuring.................................. 25,304
Customer deposits and deferred revenue................. 38,338
----------
Total consideration exchanged............................... 1,552,298
Transaction costs........................................... 25,000
Restructuring reserve....................................... 20,000
----------
Total purchase price........................................ 1,597,298
Less fair value of tangible and intangible net assets
acquired.................................................. 1,490,761
----------
Excess of purchase price over tangible and intangible net
assets acquired........................................... $ 106,537
==========
</TABLE>
41
<PAGE> 46
(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 in accordance with Emerging
Issues 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.
(3) To eliminate revenues and expenses between Arch and MobileMedia
(4) 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
ended June 3, 1999, the closing date of the MobileMedia acquisition, to conform
MobileMedia's 25 year estimated useful life of FCC licenses to Arch's 10 year
estimated useful life and to conform MobileMedia's 3 year estimated useful life
for acquired customer lists to Arch's 5 year estimated useful life.
(5) 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.
(6) To remove the nine month period ended September 30, 1999 operating
results of Vast Solutions, which will be spun off as part of the overall
transaction involving Arch and PageNet. The operating results of Vast Solutions
for 1998 were not material to PageNet's consolidated results for 1998.
(7) To adjust PageNet's 1999 cost of sales and depreciation to be
consistent with Arch's Pager useful life of three years per unit.
(8) 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 $10.7 million for the year ended December 31, 1998 and
$8.0 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 APB 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.
(9) To remove the interest expense associated with PageNet's senior
subordinated notes and Arch's discount notes which will be converted into common
stock as part of the PageNet transaction as well as the amortization of
PageNet's deferred financing costs which are included in interest expense.
(10) 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
42
<PAGE> 47
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 EXPENSE
---------------------------------------
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>
(11) The pro forma financial statements 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...................... (142,156) (127,556)
Income (loss) before extraordinary item and cumulative
effect of accounting change:
Year ended December 31, 1998.............................. (287,137) (269,390)
Nine Months ended September 30, 1999...................... (321,668) (307,068)
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...................... $ (2.26) $ (1.95)
</TABLE>
(12) To record the issuance of 2,327,120 shares of common stock relating
to Arch's October 1999 senior discount note transaction and to adjust related
interest expense for the debt converted for the year ended December 31, 1998 and
the nine month period ended September 30, 1999. 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.
(13) To record issuance of Arch common stock in conjunction with the
MobileMedia acquisition.
43
<PAGE> 48
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.
44
<PAGE> 49
<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) $ (0.89) $ (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) $ (29.88)
======== ======== ======== ======== ========== ========== ========== ==========
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>
45
<PAGE> 50
<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
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<PAGE> 52
restrictions imposed by the terms of existing or future indebtedness, including
the repayment of such indebtedness or the payment of associated interest,
limitations imposed by applicable law upon the payment of dividends or
distributions or capital expenditure requirements.
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.
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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 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
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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.
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.
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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 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
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<PAGE> 57
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 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.
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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;
- 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
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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 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
55
<PAGE> 60
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 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.
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<PAGE> 61
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 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
57
<PAGE> 62
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
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<PAGE> 64
recurring nature that are necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Results of operations for the interim periods presented are not necessarily
indicative of results of operations for the entire year or any future period.
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ----------- --------- ---------- ---------- ----------
(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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<PAGE> 67
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>
63
<PAGE> 68
<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 17,553
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
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approximately $0.2 million resulting from lower retail sales. Selling expenses
as a percentage of net revenue decreased from 14.3% to 13.8%.
General and administrative expenses decreased 9.8% to $31.5 million for the
three months ended March 31, 1999 compared to $34.9 million for the three months
ended March 31, 1998 and decreased as a percentage of net revenues to 30.8% for
the three months ended March 31, 1999. 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
66
<PAGE> 71
due to a greater percentage of alphanumeric units in service, increased units in
service in the direct distribution channel and a smaller percentage in the
reseller distribution channel.
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.
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Interest expense decreased 21.5% to $53.0 million for 1998 compared to
$67.6 million for 1997. The decrease was primarily due to lower interest expense
on MobileMedia's debtor-in-possession credit facility resulting from lower
outstanding borrowings in 1998.
Gain on sale of assets increased to $93.8 million for 1998 primarily as a
result of the sale of transmission towers and related equipment. See note 3 to
MobileMedia's consolidated financial statements.
Income (loss) from continuing operations before income tax provision, as a
result of the above factors, increased to income of $39.5 million for 1998
compared to a loss of $124.6 million for 1997.
Income tax provision increased to $4.0 million for 1998 primarily as a
result of the sale of transmission towers.
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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 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,
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<PAGE> 74
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.
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.
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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.
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
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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, MobleMedia repaid $170.0 million of
borrowings under its 1995 credit facility using proceeds from the sale of 166
transmission towers.
MobleMedia issued $250.0 million senior subordinated 9 3/8% notes in
November 1995, concurrent with MobileMedia's second offering of Class A common
stock. See note 11 to MobileMedia's consolidated financial statements. These
notes bore interest at a rate of 9 3/8% payable semiannually on May 1 and
November 1 of each year. On November 1, 1996, MobileMedia did not make its
scheduled interest payment on the 9 3/8% notes which constituted an event of
default under the indenture.
MobleMedia issued $210.0 million of senior subordinated deferred coupon
notes, at a discount, in November 1993. These deferred coupon notes accreted at
a rate of 10.5%, compounded semiannually, to an aggregate principal amount of
$210.0 million by December 1, 1998 after which interest was payable in cash at a
rate of 10.5% and was payable semiannually.
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).
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
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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.
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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
74
<PAGE> 79
industry to evaluate a company's EBITDA relative to total revenues less cost of
products sold as an indicator of the efficiency of a company's operating
structure.
<TABLE>
<CAPTION>
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>
CONSOLIDATED 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)
</TABLE>
75
<PAGE> 80
<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>
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 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>
76
<PAGE> 81
PAGENET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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 units and paging system equipment, 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
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<PAGE> 82
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, 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 $70 million, and a decrease in
inventories of $20 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, $166 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 is behind
schedule. PageNet originally 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 indirect customers and approximately 50% of its direct customers 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. 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 of 1999, PageNet announced the establishment of Vast Solutions in
order to provide a dedicated focus and dedicated resources towards developing a
suite of new wireless solutions. Vast is currently developing the following new
services: (1) content and information services designed to bring a wide variety
of information to its customers' messaging devices from third party providers
and the internet, (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) 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. 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 has not yet launched content services or gateway services, but expects to
do so in the first half of 2000. Vast has already signed contracts with its
first customers for wireless information management services.
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<PAGE> 83
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, 1999
Net revenues for the nine months ended September 30, 1998 and 1999, were
$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
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 and
intensifying price competition for paging services. 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 three years to two years, effective April 1, 1999. This change had
the
79
<PAGE> 84
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 costs of establishing PageNet's centers of excellence, 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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<PAGE> 85
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 a 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
81
<PAGE> 86
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.
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 Voice Now
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
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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 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 is in the process
of building an advanced messaging network, which will 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.
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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 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 has 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.
ADVANCED MESSAGING OPERATIONS
Capital expenditures related to advanced messaging operations were $47
million, $104 million, and $97 million, respectively, for the years ended
December 31, 1996, 1997, and 1998, and $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 years
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 thereafter, pending the development of detailed
integration plans with Arch.
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
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 of
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
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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
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 has implemented a task force and has developed a comprehensive plan
to address Year 2000 issues. PageNet continues to utilize both internal and
external resources to evaluate and test its systems. PageNet has developed an
approach to address Year 2000 issues that includes:
- phases for inventory of business processes and systems;
- assessment of Year 2000 risk;
- remediation;
- testing;
- implementation; and
- evaluation.
PageNet has completed all of these phases for its critical business
processes. PageNet also has completely evaluated the project documentation that
represents the Year 2000 readiness of its application systems and embedded
systems, such as its paging terminals and paging network. PageNet is archiving
the documentation in its corporate Year 2000 repository. In connection with the
restructuring, PageNet replaced all of its core systems in connection with
establishing its new centers of excellence. PageNet has completed its Year 2000
readiness assessment and testing on these systems. PageNet expects that its
total expense associated with correcting Year 2000 problems will be
approximately $4 million, in addition to costs related to the replacement of all
of PageNet's core systems in connection with establishing its new centers of
excellence. Substantially all of this expense has been incurred.
PageNet continues to work with Motorola, Inc., Glenayre Technologies, Inc.,
and its other primary vendors to assess their Year 2000 readiness. Assessment
has been completed for PageNet's mission critical primary vendors. PageNet's
primary vendors are making the preparations necessary for their products and
services to be ready for the Year 2000. However, there can be no assurance that
third parties will successfully ready their systems on a timely basis.
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PageNet also relies on electrical power and telecommunications transmission
services in the operation of its business. PageNet has asked its primary
electrical and telecommunications suppliers regarding their Year 2000
compliance. Each of these suppliers has told PageNet that it believes that it
will be Year 2000 ready by the end of 1999. PageNet has no means of confirming
these statements. PageNet believes that any power and/or transmission outages
related to Year 2000 problems will be limited in both scope and duration and
will not have a material adverse effect on PageNet's ability to operate or on
its results of operations.
PageNet is working with a globally recognized consulting firm to develop
contingency plans to mitigate the impact of potential system failures related to
Year 2000 issues. The contingency plans will address the risk of potential
failures related to:
- internal software applications;
- embedded systems, and
- infrastructure and third-party systems, including electrical power and
telecommunications transmission services.
The contingency plans have been completed for mission critical systems.
Selected failure scenarios will continue to be practiced during the fourth
quarter of 1999 to validate the thoroughness of these plans.
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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MARKET PRICE INFORMATION AND DIVIDEND POLICY
DISCOUNT NOTES
The discount notes are traded on the American Stock Exchange. Trading
quotations are customarily expressed as a percentage of principal amount at
maturity. The following table sets forth the high and low closing prices per
$1,000 principal amount at maturity of discount notes (expressed in dollars) and
per share of Arch common stock for the quarterly periods indicated, which
correspond to Arch's quarterly fiscal periods for financial reporting purposes.
Prices for the discount notes are not based upon actual transactions, but are
indicative prices based on available market maker information.
For information regarding recent purchases of discount notes by Arch, see
"Arch Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
<TABLE>
<CAPTION>
ARCH ARCH
DISCOUNT NOTES COMMON STOCK
------------------ --------------------
HIGH LOW HIGH LOW
------- ------- -------- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1997:
First Quarter..................................... $575.00 $410.00 $30.00 $ 11.25
Second Quarter.................................. $555.00 $440.00 $25.125 $ 11.25
Third Quarter................................... $660.00 $520.00 $28.50 $ 17.625
Fourth Quarter.................................. $670.00 $615.00 $27.375 $ 12.375
Fiscal Year Ended December 31, 1998:
First Quarter................................... $618.00 $390.00 $18.375 $ 9.00
Second Quarter.................................. $590.00 $535.00 $20.8125 $ 10.50
Third Quarter................................... $580.00 $470.00 $15.00 $ 5.0625
Fourth Quarter.................................. $605.00 $310.00 $ 5.4375 $ 2.0625
Fiscal Year Ended December 31, 1999:
First Quarter................................... $600.00 $460.00 $ 7.5 $ 3.1875
Second Quarter.................................. $510.00 $320.00 $11.625 $ 3.375
Third Quarter................................... $465.00 $345.00 $ 8.875 $ 4.00
Fourth Quarter (through Dec. 14, 1999).......... $470.00 $340.00 $ 7.75 $ 3.50
</TABLE>
- ---------------
The following table presents comparative trading information for common
stock and discount notes for November 5, 1999 and , 2000. November 5,
1999 was the last full trading day prior to the public announcement of the
proposed PageNet 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 also provides trading information for the common
stock equivalent of each $1,000 principal amount at maturity of notes based on
the exchange ratio to be used in the exchange offer.
<TABLE>
<CAPTION>
COMMON STOCK DISCOUNT NOTES PRO FORMA EQUIVALENT
------------------------- ----------------- ------------------------------
HIGH LOW CLOSE INDICATIVE PRICE HIGH LOW CLOSE
------ ------ ------- ----------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
November 5, 1999.................. $7.125 $6.375 $6.8125 $410.00 $471.189 $421.590 $450.523
, 2000...................
</TABLE>
COMMON STOCK
Arch common stock is traded on the Nasdaq National Market under the symbol
"APGR". PageNet stock is traded on the Nasdaq National Market and the Chicago
Stock Exchange under the symbol "PAGE". The following table sets forth the high
and low closing prices per share of Arch common stock
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<PAGE> 92
and PageNet common stock for the quarterly periods indicated, which correspond
to the companies' respective quarterly fiscal periods for financial reporting
purposes.
<TABLE>
<CAPTION>
ARCH PAGENET
COMMON STOCK COMMON STOCK
-------------------- --------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1997:
First Quarter................................. $30.00 $11.25 $15.875 $ 7.625
Second Quarter................................ $25.125 $11.25 $ 9.750 $ 5.750
Third Quarter................................. $28.50 $17.625 $13.5625 $ 7.875
Fourth Quarter................................ $27.375 $12.375 $14.125 $ 10.375
Fiscal Year Ended December 31, 1998:
First Quarter................................. $18.375 $ 9.00 $16.375 $ 9.500
Second Quarter................................ $20.8125 $10.50 $16.625 $ 12.500
Third Quarter................................. $15.00 $ 5.0625 $14.625 $ 4.8125
Fourth Quarter................................ $ 5.4375 $ 2.0625 $ 7.375 $ 3.5625
Fiscal Year Ended December 31, 1999:
First Quarter................................. $ 7.5 $ 3.1875 $ 6.813 $ 4.000
Second Quarter................................ $11.625 $ 3.375 $ 4.813 $ 3.156
Third Quarter................................. $ 8.875 $ 4.00 $ 6.125 $ 0.906
Fourth Quarter (through Dec. 14, 1999)........ $ 7.75 $ 3.50 $ 1.406 $ 0.594
</TABLE>
The following table presents trading information for Arch common stock and
PageNet 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 Arch
Common Stock, (2) one share of PageNet 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 Solutions to be received by PageNet stockholders.
<TABLE>
<CAPTION>
ARCH PAGENET 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.......... $ 7.125 $ 6.375 $6.8125 $1.0625 $0.9375 $ 1.0 $ .888 $ .795 $ .8495
, 2000...........
</TABLE>
DIVIDEND POLICY
Arch has never 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. In addition, the terms of Arch's
outstanding Series C preferred stock generally prohibit the payment of cash
dividends on common stock unless all accrued dividends due on to the Series C
preferred stock have been paid in full. See "Description of Arch's Equity
Securities" and "Description of Other Indebtedness".
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INDUSTRY OVERVIEW
The 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
2-way types of mobile communications services. Throughout its history, the
industry has been characterized by rapid changes in technology and growing
consumer demand for 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 and MCI/Worldcom.
Arch entered the wireless communications industry as a provider of one-way
numeric paging services and later added alphanumeric paging to its service
offerings. Paging is a method of wireless communication which uses an assigned
radio frequency to contact a paging subscriber anywhere within a designated
service area. A subscriber carries a pager which receives messages by the
transmission of a one-way radio signal. There are numerous ways to contact a
paging subscriber through the services offered by Arch. Historically, the
primary means of contacting a paging subscriber was by placing a telephone call
to a subscriber's designated telephone number which then routed the call to a
paging terminal. Once the call is received by the terminal, the caller may,
utilizing a touchtone key pad, either input a numeric page, or, if the
subscriber has elected voice mail service, a code to leave a voice message. In
the case of a numeric page, the paging terminal generates and transmits a signal
that is sent to radio receivers in the service area, either terrestrially
through transmitters or, in the case of nationwide service, through satellite
transmission and terrestrial transmitters. A message left in voice mail may be
retrieved by a subscriber by calling the voice mail telephone number and
inputting his personal identification number.
Other means of contacting a subscriber of paging services have been
developed. A caller may send an alphanumeric page through a computer modem using
specialized alpha access software or through a messaging operator who inputs the
message which is converted to a format accepted by, and then transmitted
through, a paging company's network. With the increasing use of internet based
services, alternate access mechanisms are becoming more dominant. Arch has
developed a proprietary system which serves as a collection of gateways to its
paging network through a variety of Internet based mechanisms. The most popular
web based access method is email, which is now being enhanced to include a web
based post office. Another popular method is through Arch's web based home page
utilizing an Internet browser. Access through alternative web applications are
expected to be added, which will enable callers to send messages utilizing more
direct, customized, applications, such as instant messaging and other mail
applications customized for business and other group accounts, address book
access programs, and user selected information services. See "Arch's
Business -- Wireless Communications Services, Products and Operations".
Recently, Arch has expanded its service offerings to provide, initially
through arrangements with another carrier, guaranteed or 1.5-way messaging,
2-way messaging, voice mail, information messaging and other advanced
communications features and services. The advent of N-PCS has allowed Arch to
provide a return channel. This channel permits the unit to automatically
acknowledge having received the message and allows Arch to guarantee that a
message has been received. Full 2-way messaging allows the operator of the pager
to reply to the message page either by composing a short message or by selecting
from a menu of prescribed messages. Voice mail enables the end user to retrieve
recorded messages left by the caller. Information delivery services allow
customers to receive stock quotes, weather, news or other data directly through
their Arch service.
There are other wireless communications services available to consumers
which Arch does not currently offer, other than as a distributor of some of
these services for other carriers. These services include digital and analog
cellular phone service which permits consumers to make and receive calls on a
small portable handset without the need for a wired telephone. More recently,
the industry has seen the introduction of broadband personal communications
services, known as PCS. Broadband PCS, digital cellular and digital SMR offer
new handsets and infrastructure which enable paging services together with
mobile voice services.
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Technological improvements have generally contributed to strong growth in
the market for wireless communications services and have enabled Arch to provide
better quality services at lower prices to its subscribers. Companies providing
one-way paging have benefitted from technological advances resulting from
research and development conducted by vendors of paging units and transmission
equipment. These advances include microcircuitry, liquid crystal display
technology and standard digital encoding formats. These advances have enhanced
the capability and capacity of paging services while lowering equipment and air
time costs.
Other 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, digital
SMR, dedicated data network and other wireless information services and
equipment. As quality, convenience and availability of broadband offerings has
expanded, prices have decreased and consumer interest has increased.
Arch believes that paging is a cost-effective form of mobile wireless
communications. Paging has an advantage over a cellular telephone or broadband
PCS or SMR handset because a pager 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 cost
less than equipment and air time for cellular telephones or broadband PCS or SMR
handsets. However, a significant percentage of two-way voice services are
combining short messaging services with two-way voice capability in a single
unit, and 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, cheaper and with better transmission quality. Arch is
committed to expanding its service offerings, such as guaranteed and 2-way
messaging, to ensure that its services remain competitive in this rapidly
changing market.
Paging subscribers typically pay a flat monthly service fee for pager
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 and messaging
services Arch offers. Arch is sensitive to these technological and availability
changes and is working to design competitively attractive values for the
consumer even in the midst of these changes by broadband and digital SMR
providers.
The 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 paging units and
other telecommunications equipment; and (5) most recently, the Internet.
REGULATION
Wireless messaging operations and the construction, modification, ownership
and acquisition of wireless messaging systems are subject to extensive
regulation by the FCC under the Communications Act of 1934 and, to a much more
limited extent, by public utility or public service commissions in certain
states. Arch is licensed to conduct various types of wireless messaging
operations. Although the following description is intended to address all
material aspects of governmental regulation, it does not purport to be a
complete discussion of all present and proposed legislation and regulations
relating to the paging operations of Arch.
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Federal Regulation
Regulatory Classification
Paging companies historically have been subject to different federal
regulatory requirements depending upon whether they were providing service as a
radio common carrier, or RCC, as a private carrier paging operator, or PCP, or
as a reseller. Arch's operations encompass RCC, PCP and resale operations.
However, federal legislation enacted in 1993 required the FCC to reduce the
disparities in the regulatory treatment of similar mobile services such as RCC
and PCP services. The FCC has taken, and continues to take, actions to implement
this legislation. As a CMRS provider, Arch is regulated as a common carrier,
except that the FCC has exempted paging services from some typical common
carrier regulations, such as tariff filing and resale requirements, because
paging services have been found to be highly competitive.
The classification of Arch's paging operations as CMRS affects the level of
permissible foreign ownership in Arch, as discussed below, and the nature and
extent of state regulation. In addition, the FCC now is required to resolve
competing requests for CMRS spectrum by conducting auctions. This may have the
effect of increasing the costs of acquiring additional spectrum in markets in
which Arch operates. Also, Arch is obligated to pay certain regulatory fees in
connection with its paging operations.
FCC Regulatory Approvals and Authorizations
The Communications Act requires radio licensees such as Arch to obtain
prior approval from the FCC for the assignment or transfer of control of any FCC
authorizations it holds. This statutory requirement attaches to acquisitions of
other paging companies (or other radio licensees) by Arch as well as transfers
of a controlling interest in any of Arch's licenses, construction permits or
related rights; however the FCC's Wireless Telecommunications Bureau, which
directly regulates Arch's paging activities, has decided to forbear from
enforcing its filing requirements with respect to pro forma assignments and
transfers of control of certain wireless authorizations, such as Arch's RCC and
PCP licenses. Pursuant to this decision, Arch now only has to file a written
notification of a pro forma transaction within 30 days after the transaction is
completed. Note, however, that Arch may still be required to obtain prior FCC
approval for the pro forma assignment or transfer of control of some of its
licenses not covered by the forbearance decision, such as certain business radio
authorizations.
To date, the FCC has approved each assignment and transfer of control for
which Arch has sought approval. Although there can be no assurance that any
future requests for approval of transfers of control and/or assignments of
license will be acted upon in a timely manner by the FCC, or that the FCC will
grant the approval requested, Arch does not know of any reason that any such
applications will not be approved or granted.
The FCC paging licenses granted to Arch are for varying terms of up to 10
years, at the end of which renewal applications must be approved by the FCC. The
FCC has so far granted each license renewal application that Arch has filed,
other than those renewal applications still pending. Arch is unaware of any
circumstances which would prevent the grant of any pending or future renewal
applications made by Arch. However, no assurance can be given that any of Arch's
renewal applications will be free of challenge or will be granted by the FCC. It
is possible that there may be competition for radio spectrum associated with
licenses as they expire. This would increase the chances of third-party
interventions in the renewal proceedings.
The FCC's review and revision of rules affecting paging companies is
ongoing. The regulatory requirements to which Arch is subject may change
significantly over time. For example, the FCC has decided to adopt a market area
licensing scheme for all paging channels under which carriers would be licensed
to operate on a particular channel throughout a broad geographic area (such as a
major economic area as defined by The Bureau of Economic Affairs of the U.S.
Department of Commerce) rather than being licensed on a site-by-site basis.
These geographic area licenses will be awarded through an auction. Incumbent
paging licensees that do not acquire licenses at auction will be entitled to
interference protection from the market area licensee. Arch has been
participating actively in this proceeding in order
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to protect its existing operations and retain flexibility, on an interim and
long-term basis, to modify systems as necessary to meet subscriber demands.
Currently, however, the Communications Act requires that Arch obtain
licenses from the FCC to use radio frequencies to conduct its paging operations
at specified locations. FCC licenses issued to Arch set forth the technical
parameters, such as power strength and tower height, under which Arch is
authorized to use those frequencies. In many instances, Arch requires the prior
approval of the FCC before it can implement any significant changes to its radio
systems. Once the FCC's market area licensing rules are implemented, however,
these site-specific licensing obligations will be eliminated, except for
applications still required by Sections 1.923 and 1.924 of the FCC rules
(request for authority to operate in a designated Quiet Zone and request for
authority to operate in a protected radio receiving location) and Section 1.1301
et seq. (construction/modification that may have a significant environmental
impact) or for coordination with Canada or Mexico.
The FCC has issued a Further Notice of Proposed Rulemaking in which the FCC
seeks comments on, among other matters, (1) whether it should impose coverage
requirements on licensees with nationwide exclusivity (such as Arch), (2)
whether these coverage requirements should be imposed on a nationwide or
regional basis, and (3) whether -- if such requirements are imposed -- failure
to meet the requirements should result in a revocation of the entire nationwide
license or merely a portion of the license. If the FCC were to impose stringent
coverage requirements on licensees with nationwide exclusivity, Arch might have
to accelerate the build-out of its systems in certain areas.
Telecommunications Act of 1996 and Other Regulation
Some aspects of the Telecommunications Act may place financial obligations
upon Arch or subject it to increased competition. For example, the FCC has
adopted new rules that govern compensation to be paid to pay phone providers
which has resulted in increased costs for certain paging services including
toll-free 1-800 number paging. Arch has generally passed these costs on to its
subscribers. This makes its services more expensive and could affect its ability
to attract or retain customers. However, there can be no assurance that Arch
will be able to continue to pass on these costs.
The FCC also has adopted new rules regarding payments by telecommunications
companies into a revamped fund that will provide for the widespread availability
of telecommunications services including universal service. Prior to the
implementation of the Telecommunications Act, universal service obligations were
largely met by local telephone companies, supplemented by long-distance
telephone companies. Under the new rules, all telecommunications carriers,
including paging companies, are required to contribute to the universal service
fund. In addition, certain state regulatory authorities have enacted, or have
indicated that they intend to enact, similar contribution requirements based on
intrastate revenues. Arch cannot yet know the impact of these federal and state
contribution requirements.
Some aspects of the Telecommunications Act could have a beneficial effect
on Arch's business. For example, proposed federal guidelines regarding antenna
siting issues may remove local and state barriers to the construction of
communications facilities, although states and municipalities continue to
exercise significant control with regard to such siting issues.
Moreover, in a rulemaking proceeding pertaining to interconnection between
LECs (local exchange carriers) and CMRS providers such as Arch, the FCC has
concluded that LECs are required to compensate CMRS providers for the reasonable
costs incurred by such providers in terminating traffic that originates on LEC
facilities, and vice versa. Consistent with this ruling, the FCC has determined
that LECs may not charge a CMRS provider or other carrier for terminating
LEC-originated traffic or for dedicated facilities used to deliver
LEC-originated traffic to one-way paging networks. Nor may LECs charge CMRS
providers for number activation and use fees. These interconnection issues are
still in dispute, and it is unclear whether the FCC will maintain its current
position.
Depending on further FCC disposition of these issues, Arch may or may not
be successful in securing refunds, future relief or both, with respect to
charges for termination of LEC-originated local traffic. If the
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FCC ultimately reaches an unfavorable resolution, then Arch believes that it
would pursue relief through settlement negotiations, administrative complaint
procedures or both. If these issues are ultimately decided in favor of the LECs,
Arch likely would be required to pay all past due contested charges and may also
be assessed interest and late charges for amounts withheld.
The Communications Assistance for Law Enforcement Act (CALEA) requires
certain telecommunications companies, including Arch, 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. Consequently, Arch can not determine at this time what compliance
measures will be required or the costs thereof.
Future Regulation
From time to time, federal or state legislators propose legislation which
could potentially affect Arch, either beneficially or adversely. It is possible
that legislation will be enacted by the federal or state governments, or that
regulations will be adopted or actions taken by the FCC or state regulatory
authorities, which might materially adversely affect the business of Arch.
Changes such as the allocation by the FCC of radio spectrum for services that
compete with Arch's business could also adversely affect Arch's results of
operations.
Foreign Ownership
The Communications Act limits foreign investment in and ownership of
entities that are licensed as radio common carriers by the FCC. Arch owns or
controls several radio common carriers and is accordingly subject to these
foreign investment restrictions. Because Arch is the parent of radio common
carriers (but is not a radio common carrier itself), Arch may not have more than
25% of its stock owned or voted by aliens or its representatives, a foreign
government or its representatives or a foreign corporation if the FCC finds that
the public interest would be served by denying such ownership. In connection
with the World Trade Organization Agreement -- agreed to by 69 countries -- the
FCC adopted rules effective February 9, 1998 that create a very strong
presumption in favor of permitting a foreign interest in excess of 25% if the
foreign investor's home market country signed the WTO Agreement. Arch's
subsidiaries that are radio common carrier licensees are subject to more
stringent requirements and may have only up to 20% of their stock owned or voted
by aliens or their representatives, a foreign government or their
representatives or a foreign corporation. This ownership restriction is not
subject to waiver. Arch's certificate of incorporation 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 redemption would
be subject to the availability of capital to Arch and any restrictions contained
in applicable debt instruments and under the Delaware corporations statute
(which currently would not permit any such redemptions). The failure to redeem
such shares promptly could jeopardize the FCC licenses held by Arch or its
subsidiaries.
State Regulation
In addition to regulation by the FCC, certain states impose various
regulations on the common carrier paging operations of Arch. Rates, terms and
conditions under which Arch provided services, or any changes to those rates,
have been subject to state regulation. In certain instances, the construction
and operation of radio transmitters also will be subject to zoning, land use,
public health and safety, consumer protection and other state and local taxes,
levies and ordinances. However, as a general rule, states are preempted from
exercising rate and entry regulation of CMRS, but may choose to regulate other
terms and conditions of service: for example, requiring the identification of an
agent to receive complaints. States may also petition the FCC for authority to
continue to regulate CMRS rates if certain conditions are met. State filings
seeking rate authority have all been denied by the FCC, although new petitions
seeking such authority may be filed in the future. Furthermore, some states and
localities continue to exert jurisdiction over (1) approval of acquisitions and
transfers of wireless systems and (2) resolution of consumer complaints. Arch
believed that to date all required filings for its paging operations have been
made.
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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 differenti-
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ated premium pricing and niche positioning, the other two fundamental
competitive tactics in the wireless 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>
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Net increase in units through internal growth includes internal growth in
acquired paging businesses after their acquisition by Arch and is net of
subscriber cancellations during each applicable period. Increase in units
through acquisitions is based on units in service of acquired paging businesses
at the time of their acquisition by Arch.
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 62,000 --
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
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message retrieval center. When a message is left, the subscriber can be
automatically alerted through the subscriber's pager and can retrieve the stored
message by calling Arch's paging terminal. Personalized greetings allow the
subscriber to record a message to greet callers who reach the subscriber's pager
or voice mail box. Message storage and retrieval allows a subscriber who leaves
Arch's service area to retrieve calls that arrived during the subscriber's
absence from the service area. Pager loss protection allows subscribers who
lease pagers to limit their costs of replacement upon loss or destruction of a
pager. Pager maintenance services are offered to subscribers who own their own
equipment. Wireless information delivery allows subscribers to receive stock
quotes, news and weather through their Arch service. Arch is also in the process
of test marketing various other services that add value, and can be integrated
with existing paging services. 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
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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 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
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risk of the end user, although Arch retains the credit risk of the reseller.
Because resellers are responsible for customer equipment, the capital costs that
would otherwise be borne by Arch are reduced.
Arch's resellers generally are not exclusive distributors of Arch's
services and often have access to networks of more than one provider.
Competition among service providers to attract and maintain reseller
distribution is based primarily upon price, including the sale of equipment to
resellers at discounted rates. Arch intends to be an active participant in the
reseller channel and to concentrate on accounts that are profitable and where
longer term partnerships can be established with selected resellers. As of
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,
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<PAGE> 104
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 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
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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.
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.................... 46 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....................... 36 Director
R. Schorr Berman(2).................. 51 Director
James S. Hughes(1)................... 57 Director
John Kornreich....................... 53 Director
H. Sean Mathis(1).................... 51 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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<PAGE> 107
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 PageNet 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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ARCH'S EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The annual and long-term compensation of Arch's Chief Executive Officer and
other executive officers named below was as follows for the years ended December
31, 1996, 1997 and 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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
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<PAGE> 110
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 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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<PAGE> 111
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> 112
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> 113
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
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president and sole stockholder of Palmer Service Corporation, 159 shares
issuable upon conversion of $8,000 principal amount of Arch's 6 3/4%
convertible subordinated debentures due 2003 held by Palmer Service
Corporation, and 418 shares issuable upon conversion of Arch's 6 3/4%
convertible subordinated debentures held by Mr. Shane. See "Description of
Outstanding Indebtedness -- Arch Convertible Debentures".
(5) Includes 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.
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and provides investment advisory 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
- Credit Suisse First Boston Corporation, 11 Madison Avenue, New York, New
York 10010
- Whippoorwill Associates, Inc., 11 Martine Avenue, White Plains, New York
10606
- Resurgence Asset Management L.L.C., 10 New King Street, 1st Floor, White
Plains, New York 10604.
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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 numeric and alphanumeric wireless
messaging services. Numeric 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, numeric 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 over 9,314,000 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 know 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 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 Solutions, Inc., 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 through Vast; and (4) focusing
PageNet's sales and marketing efforts on more profitable services, such as
alphanumeric and nationwide paging, and 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 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 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 during the fourth quarter of 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 the customer
units placed in service by PageNet's resellers, and the directly marketed
customer units in service in all but 21 offices, as of January 2000. 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.
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BUILD-OUT OF ADVANCED MESSAGING NETWORK AND DEPLOYMENT OF ADVANCED
MESSAGING SERVICES. PageNet has made considerable progress toward the completion
of the build-out of its advanced wireless messaging network, and PageNet expects
to launch 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. PageNet is currently developing other applications
for its wireless network through its wholly-owned subsidiary Vast. These will
include:
- content and information services designed to bring a wide variety of
information to its customers' messaging devices from third party
providers and the internet;
- 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
- 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.
PageNet formed dedicated groups to launch these new services in 1998, and placed
these groups under the umbrella of Vast beginning in June of 1999. Vast has not
yet launched content and information services or gateway services, but expects
to do so in the first half of 2000. Vast has already signed contracts with its
first customers for wireless information management services.
REVIEW OF CUSTOMER ACCOUNTS AND SALES AND MARKETING STRUCTURE. PageNet has
also 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 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 is designed to
increase PageNet's sales results and effectiveness. However, 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 end of 1999. 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 similar to those offered in the United States and
Canada 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 cellular telephone services and broadband personal
communications services, and 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
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registered service marks. 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 following the merger as to the future
direction of the combined company. 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......................... 45 Executive Vice President and Chief Administrative
Officer
Hermann Buerger...................... 55 Director
Julian B. Castelli................... 31 Senior Vice President and Chief Financial Officer
Jeffrey M. Cunningham................ 46 Director
J. Barry Duncan...................... 41 Vice President and Controller
Gary J. Fernandes.................... 55 Director
John P. Frazee, Jr. ................. 54 Chairman of the Board of Directors and Chief Executive
Officer
Scott D. Grimes...................... 36 Senior Vice President -- Strategic Wireless Ventures
for Vast
Mark A. Knickrehm.................... 36 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. ............. 45 President and Chief Operating Officer
Timothy J. Paine..................... 44 Senior Vice President -- Customer Service
Douglas R. Ritter.................... 40 Senior Vice President -- Sales
William G. Scott..................... 42 Senior Vice President and Chief Technology Officer of
Vast
G. Robert Thompson................... 36 Senior Vice President -- Operations Staff
Ruth Williams........................ 42 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. 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.
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
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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 -- Strategic Wireless
Ventures for Vast since June 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 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.
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.
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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 June 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 directors 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 directors 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.
In 1998, each director waived his rights to cash payments and elected to receive
deferred shares of PageNet common stock. Messrs. Alberding, Buerger, Cressey,
Fernandes, Llewellyn, Mitchell and Thoma have elected to continue to defer their
compensation to phantom stock units in 1999. Messrs. Cunningham and Miller have
elected to receive their 1999 compensation in cash.
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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 (1) PageNet's chief
executive officer, (2) those persons who were, at December 31, 1998, the other
four most highly compensated executive officers of PageNet, and (3) Lynn A.
Bace, executive vice president and chief administrative officer. Positions
indicated are as of December 1, 1999.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------
ANNUAL RESTRICTED SECURITIES
COMPENSATION STOCK UNDERLYING ALL
-------------------------------- AWARDS OPTIONS OTHER
YEAR SALARY BONUS OTHER ($) (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 1997 45,337 60,000 -- -- 250,000
Operating Officer
William G. Scott............ 1998 224,583 72,000 -- -- 20,000 5,000
Senior Vice President and 1997 224,583 80,000 -- 55,313(11) 113,464 4,750
Chief Technology Officer 1996 215,000 75,000 8,942(12) -- -- --
of Vast
Ruth Williams............... 1998 220,000 74,800 8,942(12) -- -- --
Senior Vice President & 1997 143,333(13) 58,000 -- -- 20,000 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 15, 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.
(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.
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<PAGE> 125
(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 (1) PageNet's
chief executive officer, (2) those persons who were, at December 31, 1998, the
other four most highly compensated executive officers of PageNet, and (3) Lynn
A. Bace, executive vice president and chief administrative officer of PageNet.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL OPTIONS
SHARES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES PRESENT VALUE ON
NAME GRANTED(1) IN 1998 EXERCISE PRICE EXPIRATION DATE 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.
(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 stock options have no value because the trading price
of PageNet shares is below the option exercise prices.
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<PAGE> 126
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>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS HELD AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE 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 PageNet 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, 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, in December of
1999.
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<PAGE> 127
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>
PERCENT
NUMBER OF SHARES AND OF
NATURE OF BENEFICIAL COMMON
NAME OWNERSHIP(1) STOCK(2)
- ---- -------------------- --------
<S> <C> <C>
Wellington Management Company, LLP
75 State Street, Boston, MA 02109..................... 5,770,500(3) 5.6%
Richard C. Alberding.................................... 47,307(4) *
Hermann Buerger......................................... 41,810(5) *
Jeffrey M. Cunningham................................... 18,000 *
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 (11
persons).............................................. 2,332,202(16) 2.24%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, each person has the 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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<PAGE> 128
(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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<PAGE> 129
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 total revenues of $1.9 billion and $1.4 billion,
respectively, adjusted pro forma EBITDA of $596.3 and 395.9, and net loss before
extraordinary item and cumulative effect of accounting change of $251.6 million
and $292.5 million. 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 $311.7
million, $806.8 million and $728.9 million. 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 3.4 to 1.00. 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".
Arch believes 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 broadcast 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 will 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 is
offering 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 explore the new types of services it can offer. The
combined company will apply Arch's marketing skill to PageNet's advanced service
capabilities to expand the number of customers
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<PAGE> 130
using these advanced services. Arch and PageNet 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 that its management believes can be eliminated 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 transaction
will enable both companies to enhance their current financial condition.
Specifically, PageNet and Arch will recapitalize, thereby reducing their overall
leverage ratios. On a pro forma basis, the combination would immediately provide
the combined company with more than $1.7 billion in annual revenue and nine
month annualized EBITDA of $527.8 million. This level of financial performance,
combined with total debt of $1.8 billion upon completion of the
recapitalization, would substantially reduce the combined company's leverage to
less than 3.5 times EBITDA. These financial benefits should assist the combined
company in making the necessary 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 A. 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
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<PAGE> 131
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".
127
<PAGE> 132
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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<PAGE> 133
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
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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.
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.
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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,
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,
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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 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.
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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.
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 DISCOUNT NOTES
The discount notes that are to be exchanged have the following rights and
other terms at present. Proposed modifications to these rights and terms are
described under "Proposed Amendments". See also "Risk Factors -- If you do not
tender your notes, the notes that you retain may have substantially fewer rights
that they currently have".
We have issued the discount notes under an indenture, dated as of March 12,
1996, between us and IBJ Schroder Bank & Trust Company, as trustee. The terms of
the notes include those stated in the indenture and those made a part of the
indenture by reference to the Trust Indenture Act of 1939. The following
description is a summary of the material provisions of the indenture. This
summary does not restate the indenture in its entirety. We urge you to read the
indenture and the Trust Indenture Act because they, and not this description,
define your rights as holders of the notes. To obtain copies of the indenture,
see "Where You Can Find More Information". The precise definitions of some of
the terms used in the following summary are set forth below under "-- Important
Definitions". All references to "Arch", "us" or "our company" in this
"Description of Discount Notes" refer only to Arch Communications Group, Inc.
and do not include its subsidiaries.
Arch is a holding company with no material assets other than the stock of
its subsidiaries. Because the operations of Arch are conducted entirely through
its subsidiaries, Arch's cash flow and consequent ability to service its debt,
including the notes, depend upon the earnings of the subsidiaries and the
distribution of those earnings to Arch or upon loans or other payments of funds
by the subsidiaries to Arch. None of Arch's subsidiaries has any obligation,
contingent or otherwise, to pay any amounts due under the notes or to make any
funds available for that purpose, whether by dividends, loans or other payments.
Covenants in our subsidiaries' current bank credit facilities and other debt
instruments limit their ability to pay dividends or make loans to us.
At present, all of Arch's subsidiaries are restricted subsidiaries, as
defined in the indenture. However, under certain circumstances, we will be able
to designate current or future subsidiaries as unrestricted subsidiaries.
Unrestricted subsidiaries will not be limited by any of the restrictive
covenants contained in the indenture.
PRINCIPAL, MATURITY AND INTEREST
The notes to be exchanged had accreted an aggregate principal amount of
$390.5 million at November 30, 1999 and will have an aggregate principal amount
of $448.4 million at March 15, 2001 and an identical aggregate principal amount
when they mature on March 15, 2008. These amounts reflect repurchases made
during October 1999. THE EXCHANGE RATIO USED IN THE EXCHANGE OFFER IS BASED UPON
PRINCIPAL AMOUNT AT MATURITY, NOT PRINCIPAL AMOUNT ACCRETED TO DATE. Interest
will not accrue on the notes until March 15, 2001. Interest will then accrue at
the rate of 10 7/8% per year, payable in cash twice a year on each March 15 and
September 15, beginning September 15, 2001. We will pay interest to the persons
in whose names the notes are registered at the close of business on the
immediately preceding March 1 or September 1. After interest has been paid at
least once, interest will continue to accrue from the date it was most recently
paid or duly provided for. We will compute interest on the basis of a 360-day
year of twelve 30-day months. See "Material Federal Income Tax Considerations".
The notes are issuable only in registered form, without coupons, in
denominations of $1,000 or any whole multiple of $1,000. Principal, premium and
interest will be payable at the principal corporate trust office of the trustee
unless we designate otherwise. The notes may be presented for transfer or
exchange there also. At our option, we may pay interest by check mailed to
registered holders of the notes at the addresses set forth on the registry books
maintained by the trustee, which will initially act as registrar and transfer
agent for the notes. No service charge will be made for any exchange or
registration of transfer of notes, but we may require payment of an amount
sufficient to cover any associated tax or other governmental charge.
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SENIORITY; RANKING
The discount notes rank equal in right of payment to $4.5 million of Arch's
outstanding convertible notes. The discount notes are structurally subordinated
to all liabilities of Arch's subsidiaries. This includes several series of
senior notes described under "Description of Other Indebtedness" as well as
trade payables, capitalized lease obligations and debt that may be incurred by
Arch's subsidiaries under their bank credit facilities or other current or
future financing arrangements. Any right of Arch to receive assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be
structurally subordinated to the claims of that subsidiary's creditors. If Arch
is itself recognized as a creditor of the subsidiary, Arch's claims would still
be subject to any security interests in the assets of the subsidiary and to any
liabilities of the subsidiary which are senior to Arch's claims, and may
otherwise be challenged in a liquidation or reorganization proceeding. At
September 30, 1999, after giving pro forma effect to the consummation of the
PageNet acquisition, the discount notes would have been structurally
subordinated to approximately $2.1 billion of liabilities of Arch's
subsidiaries.
The notes are not secured by any collateral and will not have the benefit
of any sinking fund obligations.
REDEMPTION
We may choose to redeem the notes as a whole or from time to time in part,
at any time beginning March 15, 2001 on between 30 and 60 days' prior notice.
The redemption prices will equal the following percentages of principal amount,
plus accrued and unpaid interest, if any, to the redemption date:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------
<S> <C> <C>
March 15, 2001 through March 14, 2002....................... 104.078%
March 15, 2002 through March 14, 2003....................... 102.719%
March 15, 2003 through March 14, 2004....................... 101.359%
After March 15, 2004........................................ 100.000%
</TABLE>
If we decide to redeem only part of the notes, the trustee will select
which notes will be redeemed on a pro rata basis or by lot, at its discretion,
within 60 days of the date of redemption.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
If a change of control occurs at any time, then each holder of notes will
have the right to require us to purchase all or any portion of its notes, in
whole multiples of $1,000. We will pay a purchase price in cash of 101% of the
accreted value of the holder's notes, plus accrued and unpaid interest, if any,
to the date of purchase, according to the procedures described below and others
required by the indenture.
Change of control means the occurrence of any of the following events:
- any person or group, as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act, becomes the beneficial owner, directly or
indirectly, of more than a majority of the voting power of all classes of
voting stock of Arch; the term beneficial owner is as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have beneficial ownership of all securities that such person
has the right to acquire, whether such right is exercisable immediately
or only after the passage of time;
- as a result of a merger, sale of assets or similar transaction
- any person or group, as defined above, is the beneficial owner, as
defined above, directly or indirectly, of more than a majority of
the total outstanding voting stock of the surviving entity which
carries on Arch's business, or
- the outstanding voting stock of Arch is not converted into or
exchanged for capital stock of the surviving entity;
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- during any consecutive two-year period, individuals who at the beginning
of such period constituted the board of directors of Arch, who for this
purpose shall be known as original directors, together with any new
directors whose election to the board of directors was approved by a vote
of two thirds of the still serving original directors and any directors
who had been previously approved in accordance with this paragraph, cease
for any reason to constitute a majority of the board of directors of Arch
then in office; or
- Arch is liquidated or dissolved.
Within 30 days following any change of control, we will notify each holder
of notes.
If a change of control offer is made, there can be no assurance that we
will have available, or be able to obtain, funds sufficient to pay the change of
control purchase price for all of the notes that might be tendered by holders of
the notes seeking to accept the change of control offer. Our bank credit
facilities prohibits us from repurchasing any of the notes unless we first fully
repay all outstanding indebtedness under the bank credit facilities. We cannot
be sure that, after a change of control, we will be able to obtain the necessary
consents from the lenders under the bank credit facilities or from any other
debt holders to consummate a change of control offer. If we fail to make or
consummate the change of control offer or pay the change of control purchase
price when due, an event of default would result under the indenture and the
trustee and the holders of the notes would then have the rights described under
"Events of Default".
In addition to our obligations under the indenture upon the occurrence of a
change of control, our bank credit facilities contain provisions defining a
change of control and designating it as an event of default. We are therefore
obligated to immediately repay all outstanding amounts under our bank credit
facilities in the event of a change in control.
One of the events which constitutes a change of control under the indenture
is the disposition of "all or substantially all" of our assets. The phrase "all
or substantially all" has not been interpreted to represent a specific
quantitative test under New York law, which governs the indenture. As a
consequence, if holders of the notes elect to require us to purchase the notes
and we choose to contest such election, we cannot be sure how a court
interpreting New York law would interpret the phrase.
The definition of change of control in the indenture is limited in scope.
The provisions of the indenture may not afford you, as noteholders, the right to
require us to repurchase your notes following a transaction which is not defined
as a change of control, even if the transaction may adversely affect you as
noteholders. Such transactions may include a highly leveraged transaction;
various transactions with our management or our affiliates; a reorganization,
restructuring, merger or similar transaction involving our company; or an
acquisition of our company by management or its affiliates. Any proposed highly
leveraged transaction, whether or not constituting a change of control, would be
required to comply with the other covenants in the indenture, including those
described under "Limitations on Debt" and "Limitations on Liens".
The board of directors cannot waive any of the provisions relating to
purchases of notes if a change of control occurs.
EVENTS OF DEFAULT
The following are events of default under the indenture:
1. default in the payment of any interest or liquidated damages on any
note when it becomes due and payable if the default continues for 30 days;
2. default in the payment of the principal of or premium, if any, on
any note at its maturity;
3. failure to perform or comply with the indenture provisions
described under "Consolidation, Merger or Sale of Assets";
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4. default in the performance, or breach, of any covenant or agreement
contained in the indenture, other than a default in the performance, or
breach, of a covenant or warranty which is specifically dealt with
elsewhere in the indenture, and if the default or breach continues for 60
days after written notice is given to Arch by the trustee or to Arch and
the trustee by the holders of at least 25% in aggregate principal amount of
the notes then outstanding;
5. either:
- an event of default has occurred under any mortgage, bond, indenture,
loan agreement or other document evidencing an issue of debt of Arch
or a restricted subsidiary with an aggregate outstanding principal
amount of at least $5.0 million, and
- the default has resulted in such debt becoming due and payable
prior to the date on which it would otherwise become due and
payable, whether by declaration or otherwise; or
- a default has occurred in any payment when due at final maturity of
any such debt;
6. any person entitled to take the actions described in this clause,
after the occurrence of any event of default under any agreement or
instrument evidencing any debt in excess of $5.0 million in the aggregate
of Arch or any restricted subsidiary,
- notifies the trustee of the intended sale or disposition of any assets
of Arch or any restricted subsidiary that have been pledged to or for
the benefit of the person to secure the debt, or
- commences proceedings, or
- takes action to retain in satisfaction of any debt, or to collect on,
seize, dispose of or apply, any assets of Arch or any restricted
subsidiary, pursuant to the terms of any agreement or instrument
evidencing any such debt of Arch or any restricted subsidiary or in
accordance with applicable law;
7. one or more final judgments or orders
- are rendered against Arch or any restricted subsidiary which require
the payment of money, either individually or in an aggregate amount,
in excess of $5.0 million;
- are not discharged; and
- 60 days elapse without a stay of enforcement being in effect for such
judgment or order, by reason of a pending appeal or otherwise; or
8. the occurrence of specified events of bankruptcy, insolvency or
reorganization with respect to Arch or any significant subsidiary;
If an event of default specified in clauses 1 through 7 above occurs and is
continuing, then the trustee or the holders of at least 25% in aggregate
principal amount of the notes then outstanding may declare all payments on all
of the outstanding notes to be due and payable immediately. This includes the
accreted value of, and premium, if any, on, and accrued and unpaid interest on
the notes as of such date of declaration. The trustee must give a notice in
writing to Arch and the holders must give notice to Arch and the trustee. Upon
any such declaration of acceleration all amounts payable in respect of the notes
will become immediately due and payable. If an event of default specified in
clause 8 above occurs, then all of the outstanding notes will automatically
become and be immediately due and payable without any declaration or other act
on the part of the trustee or any holder of notes.
After a declaration of acceleration under the indenture, the holders of a
majority in aggregate principal amount of the notes then outstanding, by written
notice to Arch and the trustee, may rescind such declaration and its
consequences if:
- a judgment or decree for payment of the money due has not been obtained
by the trustee,
- Arch has paid or deposited with the trustee a sum sufficient to pay:
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- all overdue interest on all notes,
- all unpaid accreted value of, and premium, if any, on any outstanding
notes which has become due independently of such declaration of
acceleration and interest on such amount at the rate borne by the
notes,
- interest upon overdue interest and overdue accreted value at the rate
borne by the notes and
- all sums paid or advanced by the trustee under the indenture and the
reasonable compensation, expenses, disbursements and advances of the
trustee, its agents and counsel; and
- all other events of default have been cured or waived.
Rescinding a declaration of acceleration will not affect or impair the
rights of the holders if another default occurs later.
The holders of a majority in aggregate principal amount of the notes then
outstanding may waive any past defaults under the indenture, on behalf of the
holders of all the notes, except that they cannot waive a default
- in the payment of the accreted value of, and premium, if any, or interest
on any note, or
- in respect of a covenant or provision which under the indenture requires
unanimous consent for modification or waiver.
If the trustee knows that a default or an event of default has occurred and
is continuing, the trustee must mail a notice to each holder of the notes within
90 days after it first occurs, or if the trustee only learns of it later,
promptly upon learning of it. If the default or event of default does not
involve non-payment, the trustee may withhold the notice to the holders of the
notes if its board of directors, executive committee or a committee of its trust
officers determines in good faith that withholding the notice is in the interest
of the holders.
A noteholder may institute any proceeding with respect to the indenture or
for any remedy under the indenture only if the holder has previously given the
trustee written notice of a continuing event of default and the holders of at
least 25% in aggregate principal amount of the notes then outstanding have made
written request, and offered reasonable indemnity, to the trustee to institute
the proceeding as trustee, and the trustee
- has not received contrary directions from the holders of a majority in
aggregate principal amount of the notes then outstanding, and
- has failed to institute such proceeding within 60 days. However, these
limitations do not apply to a suit instituted by a holder of a note for
enforcement of payment of any amounts then due.
RESTRICTIVE COVENANTS
The indenture currently imposes the following restrictions on Arch:
Limitations on Debt
Arch or any restricted subsidiary may incur additional debt only if after
the incurrence, Arch's consolidated cash flow ratio would be less than 6.5 to
1.0.
In determining Arch's consolidated cash flow ratio, all debt incurred
pursuant to clause 1 of the definition of permitted debt is excluded, and pro
forma effect will be given to
- the net proceeds of the debt incurred to refinance other debt; and
- acquisitions or dispositions of any company, entity or business acquired
or disposed of since the first day of the most recent full fiscal
quarter, as if such acquisition or disposition occurred at the beginning
of the most recent full fiscal quarter.
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Despite the limitation just described, Arch may incur the following
additional debt, known as permitted debt, and may permit its restricted
subsidiaries to do so:
1. debt under the bank credit facilities up to $150.0 million total at
any one time;
2. other debt of Arch or any restricted subsidiary that was
outstanding on the date of the indenture;
3. various types of subordinated intracompany debt;
4. debt represented by the discount notes;
5. debt incurred or incurrable under letters of credit, bankers'
acceptances or similar facilities not to exceed $5.0 million at any one
time;
6. capital lease obligations whose attributable value, as defined,
does not exceed $5.0 million at any one time;
7. guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including shares of capital stock;
8. debt, including trade letters of credit, in respect of purchase
money obligations not to exceed $5.0 million at any time;
9. debt relating to bank overdrafts in the ordinary course of
business, if such debt is extinguished within two business days of its
incurrence; and
10. renewals, extensions, substitutions, replacements or other
refinancings of outstanding debt, so long as the amount, maturity,
redemption provisions, seniority, subordination and other specified terms
of the new debt meet criteria specified in the indenture.
Limitations on Restricted Payments
Arch may not, directly or indirectly, take any of the following actions,
which we refer to collectively in this document as restricted payments, and may
not permit any restricted subsidiary to do so:
- declare or pay any dividend, or make any distribution to stockholders,
other than
- dividends or distributions payable solely in qualified equity
interests of Arch and
- dividends or distributions by a restricted subsidiary payable to Arch
or another restricted subsidiary;
- purchase, redeem or otherwise acquire or retire for value, directly or
indirectly, any shares of capital stock of Arch, any restricted
subsidiary or any affiliate of Arch, or any options, warrants or other
rights to acquire shares of capital stock, unless already redeemable by
its terms or convertible into debt securities;
- make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire, any subordinated debt, including
disqualified stock, prior to the scheduled principal payment, sinking
fund payment or maturity;
- make any loan, advance, capital contribution to or other investment in
any affiliate of Arch or guarantee any affiliate's obligations, except
for a permitted investment; or
- make any other investment in any person, except for a permitted
investment;
unless at the time of, and immediately after giving effect to, the proposed
action:
- no default or event of default has occurred and is continuing;
- Arch could incur additional debt, other than permitted debt, under the
"Limitations on Debt" covenant; and
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- the aggregate amount of all restricted payments of the types listed
above, declared or made after the issue date of the discount notes, does
not exceed the sum of:
- the difference between
- 100% of Arch's aggregate consolidated cash flow measured on a
cumulative basis during the period beginning on January 1, 1996 and
ending on the last day of Arch's most recent fiscal quarter for
which internal financial statements are available ending before the
date of the proposed restricted payment, and
- twice the amount of consolidated interest expense accrued on a
cumulative basis during the same period; plus
- the total net proceeds received by Arch from the issuance or sale of
qualified equity interests of Arch, plus
- the total net proceeds received by Arch from the issuance or sale of
debt securities or disqualified stock that have been converted into or
exchanged for qualified stock of Arch, together with the total net
cash proceeds received by Arch from the conversion of exchange, plus
- the net cash proceeds received by Arch or a wholly-owned subsidiary
from the sale of any unrestricted subsidiary unless such proceeds have
already been included in any one of the previous calculations.
In computing Arch's consolidated cash flow,
- the net income, but not the net loss, of any restricted subsidiary is
excluded to the extent that the declaration or payment of dividends or
similar distributions by such restricted subsidiary is restricted,
directly or indirectly, except to the extent that such net income could
be paid to Arch or one of its restricted subsidiaries by loans, advances,
intercompany transfers, principal repayments or otherwise.
- When determining, however, whether Arch may make investments in any
person or permit a restricted subsidiary to make a similar investment,
the net income of any restricted subsidiary is included in aggregate
consolidated cash flow.
- Arch may use audited financial statements for the portions of the
relevant period for which audited financial statements are available on
the date of determination and unaudited financial statements and other
current financial data based on the books and records of Arch for the
remaining portion of the relevant period; and
- Arch will be permitted to rely in good faith on the financial statements
and other financial data derived from its books and records that are
available on the date of determination. If Arch makes a restricted
payment which, when made, would be permitted under the requirements of
the indenture, in the good faith determination of the board of directors
of Arch that restricted payment will be deemed to have been made in
compliance with the indenture even though later adjustments may be made
in good faith to Arch's financial statements affecting its consolidated
adjusted net income for any period.
Despite the above limitations, Arch and its restricted subsidiaries may do
one or more of the following:
1. pay any dividend within 60 days after it is declared, if on the day
it is declared the payment would not have been prohibited by the provisions
described above;
2. repurchase, redeem, acquire or retire any shares of capital stock
of Arch, in exchange for qualified equity interests of Arch, or out of the
net cash proceeds of a substantially concurrent issuance and sale of
qualified equity interests of Arch to a person other than a restricted
subsidiary;
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3. purchase, redeem, acquire or retire subordinated debt in exchange
for qualified stock of Arch, or out of the net cash proceeds of a
substantially concurrent issuance and sale of shares of qualified stock of
Arch to a person other than a restricted subsidiary;
4. purchase, redeem, acquire or retire subordinated debt, plus the
amount of any premium required to be paid in connection with the
refinancing under the terms of the debt being refinanced or the amount of
any premium reasonably determined by Arch as necessary to accomplish the
refinancing through a tender offer or privately negotiated repurchase, in
exchange for subordinated debt of Arch, or out of the net cash proceeds of
a substantially concurrent incurrence or sale of subordinated debt of Arch
to a person other than a restricted subsidiary, so long as
- the new subordinated debt is subordinated to the notes to the same
extent as the subordinated debt that is purchased, redeemed, acquired
or retired; and
- the new subordinated debt has an average life longer than the average
life of the notes and a final stated maturity of principal later than
the final stated maturity of the notes.
If no default or event of default has occurred and is continuing, Arch and
its restricted subsidiaries may do one or more of the following:
5. pay cash, property or securities to any employee of Arch or any
subsidiary in connection with the issuance or redemption of stock of any
such company pursuant to any employee stock option plan or board
resolution, up to a total of $500,000 during any fiscal year or a total of
$2.0 million during the term of the notes;
6. repurchase subordinated debt at a purchase price that does not
exceed 101% of its principal amount, following a change of control, if
before the repurchase Arch has
- made a change of control offer, as described in "Purchase of Notes
upon a Change of Control", and
- repurchased all notes validly tendered for payment in connection with
the change of control offer;
7. make investments in persons with shares of Arch's qualified stock
or investments in persons made out of the net cash proceeds of a
substantially concurrent issuance and sale of shares of Arch's qualified
stock, except for a sale to a restricted subsidiary;
8. make investments of up to $50.0 million total in persons whose
operations are all or substantially all in the telecommunications business;
9. make debt investments of up to $75.0 million total in Benbow PCS
Ventures, Inc.; and/or
10. pay up to $5.0 million total that would otherwise constitute a
restricted payment.
The restricted payments described in clauses 2, 3, 5, 6, 7, 8, 9 and 10
above will reduce the permitted amount of restricted payments that would
otherwise be available under the provisions summarized in the first paragraph of
this section. The restricted payments described in clauses 1 and 4 above will
not reduce the amount that would otherwise be available for restricted payments.
For the purpose of making any calculations under the indenture,
- an investment will include the fair market value of the net assets of any
restricted subsidiary at the time that the restricted subsidiary is
designated an unrestricted subsidiary and will, for the purpose of this
covenant, exclude the fair market value of the net assets of any
unrestricted subsidiary that is designated as a restricted subsidiary;
- any property transferred to or from an unrestricted subsidiary will be
valued at fair market value at the time of such transfer, if the fair
market value of the asset or property is determined by the board of
directors of Arch in good faith; and
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- subject what we have just said, the board of directors of Arch will make
a good faith determination of the value of any restricted payment not
made in cash.
If the total amount of all restricted payments calculated under these
provisions includes an investment in an unrestricted subsidiary or other person
that later becomes a restricted subsidiary, the investment will no longer be
counted as a restricted payment for purposes of calculating the aggregate amount
of restricted payments.
If an investment resulted in the making of a restricted payment, the
aggregate amount of all restricted payments calculated under these provisions
will be reduced by the amount of any net reduction in that investment that
results from the payment of interest or dividends, loan repayment, transfer of
assets or otherwise, to the extent the net reduction is not included in Arch's
consolidated adjusted net income. The aggregate amount of all restricted
payments, however, may only be reduced by the lesser of the cash proceeds
received by Arch and its restricted subsidiaries in connection with the net
reduction or the initial amount of the investment.
Limitations on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
Arch may not, and may not permit any restricted subsidiary to, create,
assume or otherwise cause or suffer to exist or to become effective any
consensual encumbrance or restriction on the ability of any restricted
subsidiary to:
- pay any dividends or make any other distributions on its capital stock;
- pay any debt owed to Arch or any restricted subsidiary;
- make loans or advances to Arch or any restricted subsidiary; or
- transfer any of its property or assets to Arch or any restricted
subsidiary or
- guarantee any debt of Arch or any restricted subsidiary,
other than those encumbrances or restrictions under
- bank credit facilities existing as of the date of issuance of the notes;
- other debt of Arch or any restricted subsidiary existing as of the date
of issuance of the notes;
- customary non-assignment or sublease provisions of any lease governing a
leasehold interest of Arch or any restricted subsidiary;
- any agreement or other instrument binding solely upon any one person at
the time that person becomes a subsidiary of Arch, if the encumbrances or
restrictions were not incurred in anticipation of that person becoming a
subsidiary of Arch;
- bank credit facilities to refinance amounts outstanding under the 9 1/2%
notes or the 14 1/2% notes referred to under "Description of Other
Indebtedness", but only if the board of directors of Arch files a
resolution with the trustee that the terms and conditions of any such
encumbrances or restrictions are not materially more restrictive than
those contained under the existing Arch Enterprises Credit Facility;
- any renewals, extensions, substitutions, refinancings, successive
refinancings or replacement of any debt described in the five clauses
above, but only if the board of directors of Arch files a resolution with
the trustee that the terms and conditions are not materially more
restrictive than those of the agreements relating to the debt that is
being renewed, extended, substituted, refinanced or replaced.
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Limitations on Asset Sales
Arch may not engage in any asset sale and will not permit any restricted
subsidiary to do so, unless
- the consideration received by Arch or the restricted subsidiary from the
asset sale equals or exceeds the fair market value of the assets sold, as
determined by the board of directors of Arch, whose good faith
determination will be conclusive; and
- at least 85% of the consideration received by Arch or the relevant
restricted subsidiary from the asset sale consists of
- cash or cash equivalents; or
- the assumption by the transferee of debt of Arch that ranks equal in
right of payment with the notes, or any debt of a restricted
subsidiary, and the release of Arch or the restricted subsidiary from
all liability on the debt that is assumed.
If Arch or any restricted subsidiary engages in an asset sale, Arch may use
the net cash proceeds of the asset sale, within 12 months after the asset sale,
to
- make a permanent reduction of amounts outstanding under the bank credit
facilities or repay or prepay any then outstanding debt of Arch that
ranks equal in right of payment with the notes, or any debt of a
restricted subsidiary; or
- invest, or enter into a legally binding agreement to invest, in
- properties and assets to replace the properties and assets that were
the subject of the asset sale, or
- properties and assets that will be used in the telecommunications
businesses of Arch or its restricted subsidiaries.
If a legally binding agreement to invest net cash proceeds is terminated, then
Arch may, within 90 days of such termination or within 12 months of such asset
sale, whichever is later, actually invest the net cash proceeds as provided in
the first or second clause above. Before applying the net cash proceeds of an
asset sale pursuant to the second clause above, Arch may use the net cash
proceeds to temporarily reduce borrowings under the bank credit facilities. We
refer to the amount of any net cash proceeds not used in the way described in
this paragraph as excess proceeds.
When excess proceeds total $5.0 million, Arch will, within 30 days, make an
offer to purchase the maximum accreted value, expressed as a multiple of $1,000,
of notes that may be purchased with the excess proceeds. Arch will extend the
offer to all noteholders, on a pro rata basis, in accordance with the procedures
set forth in the indenture. The offer price for each note will be payable in
cash. The price will equal 100% of the accreted value of the note, plus accrued
interest, if any, to the date the offer to purchase is completed. To the extent
that the aggregate accreted value of notes tendered in response to our offer to
purchase is less than the excess proceeds, Arch may use the remaining excess
proceeds for other general corporate purposes. If the aggregate accreted value
of notes validly tendered and not withdrawn by their holders exceeds the excess
proceeds, notes to be purchased will be selected on a pro rata basis. Upon
completion of our offer to purchase, the amount of excess proceeds will be reset
to zero.
Limitations on Mergers or Sales of Assets
Arch may not
- consolidate with or merge with or into any other person, or
- convey, transfer or lease its properties and assets as an entirety to any
person or persons, or
- permit any restricted subsidiary to enter into any such transaction or
series of transactions, if such transaction or series of transactions, in
the aggregate, would result in the conveyance, transfer or
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lease of all or substantially all of the properties and assets of Arch
and its restricted subsidiaries on a consolidated basis to any person,
unless:
- either
- Arch is the surviving corporation; or
- the person formed by such consolidation or into which Arch or a
restricted subsidiary is merged or the person which acquires, by
conveyance, transfer or lease, the properties and assets of Arch or
such restricted subsidiary substantially as an entirety
- is a corporation, partnership or trust organized and validly
existing under the laws of the United States of America, any state
or the District of Columbia and
- expressly assumes, by a supplemental indenture executed and
delivered to the trustee, in form satisfactory to the trustee,
Arch's obligation for the due and punctual payment of the
principal, premium, if any, and interest on all the notes and the
performance and observance of every covenant of the indenture to be
performed or observed on the part of Arch;
- immediately after giving effect to such transaction or series of
transactions and treating any obligation of Arch or a subsidiary in
connection with or as a result of such transaction as having been
incurred as of the time of such transaction, no default or event of
default has occurred and is continuing;
- immediately after giving effect to such transaction or series of
transactions on a pro forma basis, Arch's consolidated net worth, or the
consolidated net worth of the surviving entity if Arch is not the
continuing obligor under the indenture, is at least equal to Arch's
consolidated net worth immediately before the transaction or series of
transactions;
- immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis, Arch, or the
surviving entity if Arch is not the continuing obligor under the
indenture, could incur additional debt, other than permitted debt, under
the provisions of the "Limitations on Debt" covenant
- on the assumption that the transaction or series of transactions
occurred on the first day of the last full fiscal quarter immediately
prior to the actual consummation of such transaction or series of
transactions,
- with the appropriate adjustments with respect to the transaction or
series of transactions being included in such pro forma calculation;
and
- if any of the property or assets of Arch or any of its restricted
subsidiaries would become subject to any lien, the provisions of the
"Limitations on Liens" covenant are complied with.
In connection with any such consolidation, merger, conveyance, transfer or
lease, Arch or the surviving entity will deliver to the trustee an officer's
certificate, attaching the computations to demonstrate compliance with the third
and fourth clause above, and an opinion of counsel, each stating that
- the consolidation, merger, conveyance, transfer or lease complies with
the requirements of the covenant described under "Limitations on Mergers
or Sales of Assets",
- any supplemental indenture required in connection with such transaction
complies with that covenant; and
- all conditions precedent relating to such transaction provided for in
that covenant have been complied with.
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Upon any transaction or series of transactions that are of the type
described in the immediately preceding paragraphs, and that are effected in
accordance with the conditions described above, the surviving entity shall
succeed to Arch, shall be substituted for Arch, and may exercise every right and
power of Arch under the indenture with the same effect as if the surviving
entity had been named as Arch in the indenture. When a surviving entity duly
assumes all of the obligations and covenants of Arch pursuant to the indenture
and the notes, the predecessor person shall be relieved of all such obligations,
except in the case of a lease.
Limitations on Transactions with Affiliates and Related Persons
Arch and its restricted subsidiaries may not enter into any transaction or
series of transactions with any affiliate of Arch or any related person other
than Arch or a wholly owned restricted subsidiary, unless
- the terms of the transaction or series of transactions are no less
favorable to Arch or such restricted subsidiary than those that could be
obtained in a comparable arm's-length transaction with an entity that is
not an affiliate or a related person; and
- if the transaction or series of transactions involves aggregate
consideration of over $1.0 million, then it is approved by a resolution
adopted by a majority of Arch's board of directors, including the
approval of a majority of the disinterested directors. Any such
transaction or series of transactions approved in this manner shall be
conclusively deemed to be on terms no less favorable to Arch or such
restricted subsidiary than those that could be obtained in an
arm's-length transaction.
This restriction will not apply, however, to
- transactions between Arch or any of its restricted subsidiaries and any
employee of Arch or any of its restricted subsidiaries that are entered
into in the ordinary course of business;
- the payment of reasonable and customary regular fees and expenses to
directors of Arch;
- the making of indemnification, contribution or similar payments to any
director or officer of Arch or any restricted subsidiary under charter or
by-law provisions, whether now in effect or subsequently amended, or any
indemnification or similar agreement with any director or officer; or
- the entering into of any such indemnification agreements with any current
or future directors or officers of Arch or any restricted subsidiary.
Limitations on Issuances and Sales of Capital Stock of Restricted Subsidiaries
Arch
- may not permit any restricted subsidiary to issue any capital stock,
except to Arch or a restricted subsidiary; and
- may not permit any person other than Arch or a restricted subsidiary to
own any capital stock of any restricted subsidiary;
except that
- Arch or any restricted subsidiary may issue and sell all, but not less
than all, of the issued and outstanding capital stock of any restricted
subsidiary owned by it in compliance with the other provisions of the
indenture; or
- Arch may acquire less than all of the equity ownership or voting stock of
a person that will be a subsidiary upon the consummation of the
acquisition.
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Unrestricted Subsidiaries
Arch's board of directors may designate any subsidiary, including any newly
acquired or newly formed subsidiary, to be an unrestricted subsidiary so long as
- neither Arch nor any restricted subsidiary is directly or indirectly
liable for any debt of such subsidiary;
- no default with respect to any debt of such subsidiary would permit, upon
notice, lapse of time or otherwise, any holder of any other debt of Arch
or any restricted subsidiary to declare a default on such other debt or
cause the payment of such other debt to be accelerated or payable prior
to its stated maturity;
- any investment in such subsidiary made as a result of designating such
subsidiary an unrestricted subsidiary will not violate the provisions of
the "Limitations on Restricted Payments" covenant;
- every contract, agreement, arrangement, understanding or obligation of
any kind, whether written or oral, between such subsidiary and Arch or
any restricted subsidiary is on terms that might be obtained at the time
from persons who are not affiliates of Arch; and
- neither Arch nor any restricted subsidiary has any obligation to
subscribe for additional shares of capital stock or other equity interest
in such subsidiary, or to maintain or preserve such subsidiary's
financial condition or to cause such subsidiary to achieve certain levels
of operating results. However, Arch may not designate as an unrestricted
subsidiary any subsidiary which is a significant subsidiary on the date
of the indenture, and may not sell, transfer or otherwise dispose of any
properties or assets of any significant subsidiary to an unrestricted
subsidiary, except in the ordinary course of business.
Arch's board of directors may designate any unrestricted subsidiary as a
restricted subsidiary, but doing so will be deemed an incurrence of debt by a
restricted subsidiary of any outstanding debt of such unrestricted subsidiary.
Arch's board of directors may only make the designation if:
- such debt is permitted under the "Limitations on Debt" covenant and
- no default or event of default would be in existence following such
designation.
Limitations on Liens
Arch may not create, incur or assume any liens, and will not permit any
restricted subsidiary to incur any liens, on or with respect to any of its
property, assets, including any shares of stock or indebtedness of any
restricted subsidiary, whenever acquired, income, profits or other proceeds, or
assign or convey any right to receive income, unless
- in the case of any lien securing any debt which ranks equally in right of
payment with the notes or is subordinated debt, the notes are secured by
a lien on such property, assets or proceeds that is senior in priority to
such lien, and
- in the case of any other lien, the notes are equally and ratably secured
with the obligation or liability secured by such lien.
Despite the limitations just described, Arch and its restricted
subsidiaries may incur the following liens, called permitted liens:
- liens existing on the issuance date of the notes, except for liens
securing debt under the bank credit facilities;
- liens on property or assets of Arch securing debt under or with respect
to the bank credit facilities;
- liens securing the discount notes;
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- liens on property or assets of a restricted subsidiary securing debt of
the restricted subsidiary other than guarantees with respect to debt of
Arch;
- any interest or title of a lessor under any capital lease obligation or
sale and leaseback transaction under which Arch is lessee so long as the
attributable value secured by the lien does not exceed the principal
amount of debt permitted under the "Limitations on Debt" covenant;
- liens securing acquired debt created before the incurrence of such debt
by Arch and not in connection with or in contemplation of incurring such
debt, if the lien does not extend to any property or assets of Arch other
than the assets acquired in connection with the incurrence of the
acquired debt;
- liens arising from purchase money mortgages and purchase security
interests incurred in the ordinary course of the business of Arch, if
- the related debt is not secured by any property or assets of Arch
other than the property and assets that are acquired and
- the lien securing the debt is created within 60 days of the
acquisition;
- statutory liens or landlords' and carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's or other similar liens arising in
the ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by appropriate proceedings,
if Arch has made whatever reserve or other appropriate provision may be
required in conformity with GAAP;
- liens for taxes, assessments, government charges or claims that are being
contested in good faith by appropriate proceedings promptly instituted
and diligently conducted, if Arch has made whatever reserve or other
appropriate provision may be required in conformity with GAAP;
- liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security;
- rights of banks to set off deposits against debts owed to them;
- other liens incidental to the conduct of the business of Arch or any of
its subsidiaries, or the ownership of their assets that do not materially
detract from the value of the property subject to the liens;
- liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts and other obligations of a similar nature incurred in the
ordinary course of business, other than contracts for the payment of
money;
- easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the business of
Arch and the restricted subsidiaries, taken as a whole, incurred in the
ordinary course of business;
- liens arising by reason of any judgment, decree or order of any court so
long as such lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of the
judgment, decree or order have not been finally terminated or the period
within which such proceedings may be initiated has not expired; and
- any extension, renewal or replacement, in whole or in part, of any lien
described in the previous 15 clauses if any such extension, renewal or
replacement does not extend to any additional property or assets.
Other Covenants
The indenture also contains restrictions on indebtedness between Arch and
its subsidiaries, and requires Arch to maintain its properties, pay its taxes,
maintain insurance coverage and provide financial statements to the trustee.
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AMENDMENTS AND WAIVERS
Arch and the trustee can modify and amend the indenture with the consent of
holders of a majority of the principal amount of the notes then outstanding.
Every holder, however, must consent in order to:
- change the stated maturity of the principal of any note or any
installment of interest on any note, or reduce the principal amount of
any note or the rate of interest on any note or any premium payable upon
the redemption of any note, or change the place of payment, or the coin
or currency of payment for amounts due under any note, or impair the
right to sue for payment after the stated maturity of such payment or, in
the case of redemption, on or after the redemption date;
- reduce the percentage of holder approval required for consent to any such
amendment or any waiver of compliance with specified provisions of the
indenture or specified defaults and their consequences provided for under
the indenture; or
- modify any provisions relating to "Amendments and Waivers" or the fourth
full paragraph under "Events of Default" above, except to increase the
percentage of outstanding notes required to consent to such actions or to
provide that certain other provisions of the indenture cannot be modified
or waived without the consent of the holder of every outstanding note
affected by the modification or waiver.
Except as described above, holders of a majority of the principal amount of
the notes then outstanding may waive compliance with restrictive covenants and
provisions of the indenture.
IMPORTANT DEFINITIONS
There are certain defined terms used in the indenture. You should read the
indenture for a full definition of all these terms, as well as other terms we
have used but not defined in this prospectus.
Accreted value means,
- for a date before March 15, 2001, the sum of
- the initial offering price of the note and
- the amount of amortization through the date with respect to
- the difference between the offering price and the principal amount
of the note at maturity, and
- for a date on or after March 15, 2001, the value of the principal amount
of the note at maturity.
Amortization is determined on a daily basis and compounded twice per year,
on March 15 and September 15. The rate of amortization is 10 7/8% per year,
beginning with the date the notes were issued and computed on the basis of a
360-day year of twelve 30 day months.
Asset sale means any kind of transfer to any person, whether through sale,
issuance, conveyance, transfer, lease or other disposition, including
disposition by way of merger, consolidation or sale and leaseback transaction,
directly or indirectly, in one transaction or a series of related transactions,
of:
- any capital stock of any restricted subsidiary;
- all or substantially all of the properties and assets of Arch and its
restricted subsidiaries representing a division or line of business; or
- any other properties or assets of Arch or any restricted subsidiary,
other than in the ordinary course of business.
The term asset sale shall not include any transfer of properties or assets
- that is governed by the provisions of the indenture described under
"Limitations on Mergers or Sales of Assets",
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- between or among Arch and its restricted subsidiaries,
- constituting an investment in a telecommunications business, if permitted
under the "Limitations on Restricted Payments" covenant,
- representing obsolete or permanently retired equipment and facilities or
- the gross proceeds of which, exclusive of indemnities, do not exceed $1.0
million for any particular item or $2.0 million in the aggregate for any
fiscal year of Arch.
Attributable value means, with respect to any lease, the present value of
the obligations of the lessee of the property subject to the lease for rental
payments during the shorter of
- the remaining term of the lease, including any period for which the lease
has been extended or may be extended at the option of the lessor, or
- the period during which the lessee is not entitled to terminate the lease
without penalty or upon payment of penalty if on the date of
determination it is the lessee's intention to terminate the lease when it
becomes entitled to do so. If the first event to occur is the lessee's
becoming eligible to terminate the lease upon payment of a penalty, the
rental payments shall include the penalty. In calculating the present
value of the rental payments, all amounts required to be paid on account
of maintenance and repairs, insurance, taxes, assessments, water,
utilities and similar charges shall be excluded. The present value should
be discounted at the interest rate implicit in the lease, or, if not
known, at Arch's incremental borrowing rate.
Average life means, with respect to amounts payable under any debt or
disqualified stock,
- the sum of the products of
- the number of years from the date of determination to the date or
dates of each principal payment, multiplied by
- the amount of each such successive scheduled principal payment,
divided by
- the sum of all such principal payments.
Consolidated adjusted net income means, for any period, the net income or
net loss of Arch and its restricted subsidiaries for such period as determined
on a consolidated basis in accordance with GAAP, adjusted to the extent included
in calculating such net income or loss by excluding
- any net after-tax extraordinary gains or losses, less all related fees
and expenses,
- any net after-tax gains or losses, less all related fees and expenses,
attributable to asset sales,
- the portion of net income or loss of any unrestricted subsidiary or other
person except for Arch or a restricted subsidiary, in which Arch or any
restricted subsidiary has an ownership interest, except to the extent of
the amount of dividends or other distributions actually paid to Arch or
any restricted subsidiary in cash dividends or distributions by such
person during such period, and
- the net income or loss of any person combined with Arch or any restricted
subsidiary on a "pooling of interests" basis attributable to any period
prior to the date of combination.
Consolidated cash flow means consolidated adjusted net income increased,
without duplication, by
- consolidated interest expense, plus
- consolidated income tax expense, plus
- consolidated non-cash charges.
Consolidated cash flow ratio means the ratio of
- the aggregate principal amount of debt of Arch and its restricted
subsidiaries on a consolidated basis outstanding as of the date of
calculation to
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- consolidated cash flow for the most recently ended full fiscal quarter
multiplied by four.
Consolidated income tax expense means the provision for federal, state,
local and foreign income taxes of Arch and its restricted subsidiaries as
determined on a consolidated basis in accordance with GAAP.
Consolidated interest expense means, without duplication, the sum of
- the amount which would be set forth opposite the caption "interest
expense", or any like caption, on a consolidated statement of operations
of Arch and its restricted subsidiaries, in conformity with GAAP
including,
- amortization of debt discount,
- the net cost of interest rate contracts including amortization of
discounts,
- the interest portion of any deferred payment obligation,
- amortization of debt issuance costs,
- the interest component of capital lease obligations of Arch and its
restricted subsidiaries, and
- the portion of any rental obligation of Arch and its restricted
subsidiaries in respect of any sale and leaseback transaction
allocable during such period to interest expense, determined as if it
were treated as a capital lease obligation, plus
- all interest on any debt of any other person guaranteed and paid by Arch
or any of its restricted subsidiaries.
Consolidated interest expense will not, however, include any gain or loss from
extinguishment of debt, including write-off of debt issuance costs.
Consolidated non-cash charges means the aggregate depreciation,
amortization and other non-cash expenses of Arch and its restricted subsidiaries
reducing consolidated adjusted net income, determined on a consolidated basis in
accordance with GAAP, excluding any non-cash charge that requires an accrual of
or reserve for cash charges for any future period.
The debt of a person means, without duplication,
- every obligation of that person for money borrowed,
- every obligation of that person evidenced by bonds, debentures, notes or
other similar instruments,
- every reimbursement obligation of that person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the account
of that person,
- every obligation of that person issued or assumed as the deferred
purchase price of property or services,
- the attributable value of every capital lease obligation and sale and
leaseback transaction of that person,
- all disqualified stock of that person valued at its maximum fixed
repurchase price, plus accrued and unpaid dividends and
- every guarantee by that person of an obligation of the type referred to
in the previous six clauses, of another person and dividends of another
person.
An obligation constitutes debt of a person whether recourse is to all or a
portion of that person's assets, and whether or not contingent. For purposes of
this definition, the "maximum fixed repurchase price" of any disqualified stock
that does not have a fixed repurchase price will be calculated in accordance
with the terms of such disqualified stock as if such disqualified stock were
repurchased on any date on which debt is required to be determined pursuant to
the indenture, and if the price is based upon, or measured by, the
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fair market value of such disqualified stock, the fair market value will be
determined in good faith by the board of directors of the issuer of such
disqualified stock. In no case, however, will trade accounts payable and accrued
liabilities arising in the ordinary course of business and any liability for
federal, state or local taxes or other taxes owed by a person be considered debt
for purposes of this definition. The amount outstanding at any time of any debt
issued with original issue discount is the aggregate principal amount of such
debt, less the remaining unamortized portion of the original issue discount of
such debt at such time, as determined in accordance with GAAP.
Default means any event that is, or after notice or passage of time or both
would be, an event of default.
Eligible institution means the trustee or any financial institution that is
a member of the Federal Reserve System having a combined capital and surplus and
undivided profits of at least $500 million.
Incur means, to incur, create, issue, assume, guarantee or otherwise become
liable for or with respect to, or become responsible for, the payment of,
contingently or otherwise, a debt. However, the accrual of interest or the
accretion of original issue discount shall not be considered an incurrence of
debt.
Maturity means the date on which any principal of a note becomes due and
payable as provided in the note or in the indenture, whether at the stated
maturity of the principal of the note or by declaration of acceleration, call
for redemption, purchase or otherwise.
The net cash proceeds of any asset sale are the proceeds of such sale in
the form of cash or cash equivalents, including payments in respect of deferred
payment obligations when received in the form of cash or cash equivalents, or
stock or other assets when disposed for cash or cash equivalents, except to the
extent that such obligations are financed or sold by Arch or any restricted
subsidiary with recourse to Arch or any restricted subsidiary, net of
- brokerage commissions, legal and investment banking fees and expenses and
other fees and expenses related to the asset sale,
- provisions for all taxes payable as a result of the asset sale,
- payments made to retire debt that is secured by the assets that are sold,
- amounts required to be paid to any person other than Arch or any
restricted subsidiary owning a beneficial interest in the assets that are
sold and
- appropriate amounts to be provided by Arch or any restricted subsidiary
as a reserve required in accordance with GAAP against any liabilities
associated with the asset sale and retained by the seller after the asset
sale, including pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with the asset sale.
Permitted investments means any of the following:
- investments in
- any evidence of debt consisting of government securities with a
maturity of 180 days or less;
- certificates of deposit or acceptances with a maturity of 180 days or
less of any financial institution that is a member of the Federal
Reserve System having combined capital and surplus and undivided
profits of at least $500 million; and
- commercial paper with a maturity of 180 days or less issued by a
corporation that is not an affiliate of Arch and is organized under
the laws of any state of the United States or the District of Columbia
and having the highest rating obtainable from Moody's Investors
Service or Standard & Poor's Ratings Group;
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- investments by Arch or any restricted subsidiary in another person, if as
result of such investment the other person
- becomes a restricted subsidiary or
- is merged or consolidated with or into Arch or a restricted
subsidiary, or transfers or conveys all or substantially all of its
assets to Arch or a restricted subsidiary;
- investments by Arch or any restricted subsidiary in another person made
pursuant to the terms of a definitive merger, stock purchase or similar
agreement providing for a business combination transaction between Arch
or a restricted subsidiary and such person if
- within 365 days of the date of the investment, such other person,
pursuant to the terms of such agreement, becomes a restricted
subsidiary or is merged or consolidated with or into Arch or a
restricted subsidiary, or transfers or conveys all or substantially
all of its assets to Arch or a restricted subsidiary, or
- if the agreement is terminated before the transactions it contemplates
are closed, Arch or such restricted subsidiary liquidates the
investment within 365 days of such termination.
- investments by Arch or any of the restricted subsidiaries in one another;
- investments in assets owned or used in the ordinary course of business;
- investments in existence on March 12, 1996; and
- promissory notes received as a result of asset sales permitted under the
"Limitations on Asset Sales" Covenent.
Qualified equity interest means any qualified stock and all warrants,
options or other rights to acquire qualified stock but excludes any debt
security that is convertible into or exchangeable for capital stock.
Related person means any beneficial owner of 10% or more of Arch's voting
stock.
Subordinated debt means debt of Arch that is subordinated in right of
payment to the notes.
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DESCRIPTION OF OTHER 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.
SENIOR CREDIT FACILITY
A principal operating subsidiary has a senior credit facility in the
current total amount of $581.0 million with The Bank of New York, Royal Bank of
Canada, Toronto Dominion (Texas), Inc., Barclays Bank, PLC and other financial
institutions.
The facility consists of a $175.0 million reducing revolving Tranche A
facility, a $100.0 million 364-day revolving credit Tranche B facility and a
$306.0 million Tranche C facility. The Tranche A Facility will be reduced on a
quarterly basis commencing on September 30, 2000 and will mature on June 30,
2005. The Tranche B Facility converted into a term loan on June 27, 1999 and
will be amortized in quarterly installments commencing September 30, 2000, with
an ultimate maturity date of June 30, 2005. The Tranche C Facility will be
amortized in annual installments commencing December 31, 1999, with an ultimate
maturity date of June 30, 2006.
Arch 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 ACCRETED INTEREST MATURITY INTEREST PAYMENT
SEPTEMBER 30, 1999 RATE DATE DATES
------------------ -------- ---------------- --------------------
<S> <C> <C> <C>
$125.0 million............. 9 1/2% February 1, 2004 February 1, August 1
$100.0 million............. 14% November 1, 2004 May 1, November 1
$127.5 million............. 12 3/4% July 1, 2007 January 1, July 1
$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:
9 1/2% SENIOR NOTES
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------
<S> <C>
February 1, 1999 to January 31, 2000........................ 104.750%
February 1, 2000 to January 31, 2001........................ 103.167%
February 1, 2001 to January 31, 2002........................ 101.583%
On or after February 1, 2002................................ 100.000%
</TABLE>
14% SENIOR NOTES
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------
<S> <C>
November 1, 1999 to October 31, 2000........................ 107.000%
November 1, 2000 to October 31, 2001........................ 104.625%
November 1, 2001 to October 31, 2002........................ 102.375%
On or after November 1, 2002................................ 100.000%
</TABLE>
12 3/4% SENIOR NOTES
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
- --------------- ----------------
<S> <C>
July 1, 2003 to June 30, 2004............................... 106.375%
July 1, 2004 to June 30, 2005............................... 104.250%
July 1, 2005 to June 30, 2006............................... 102.125%
On or after July 1, 2006.................................... 100.000%
</TABLE>
13 3/4% SENIOR NOTES
<TABLE>
<CAPTION>
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
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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.
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
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- 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 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, 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;
- 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;
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- 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 INDEBTEDNESS TO BE ASSUMED BY ARCH
The maximum aggregate principal amount of the PageNet notes that may remain
outstanding after the merger is $30 million. Alternatively, if PageNet's
exchange offer is fully subscribed or 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 PageNet notes will be outstanding after the merger.
The terms of the PageNet notes 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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LEGAL MATTERS
The validity of the common stock offered by Arch in the exchange offer will
be passed upon for Arch by Hale and Dorr LLP, 60 State Street, Boston,
Massachusetts.
EXPERTS
The financial statements of Arch included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports which are included in this prospectus in reliance upon their
authority as experts in accounting and auditing in giving those reports.
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.
The consolidated financial statements of Paging Network, Inc. at December
31, 1998 and 1997, and for each of the three years in the period ended December
31, 1998, appearing in this prospectus and registration statement 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.
The descriptions of the regulatory requirements under the Communications
Act and associated regulations set forth under "Risk Factors -- Government
regulation may burden operations" and under "Industry Overview -- Regulation" in
this prospectus, except for matters that are unique to PageNet, have been
included under the authority of Wilkinson, Barker, Knauer LLP, as experts in
telecommunications law. Noteholders of Arch should not rely on Wilkinson,
Barker, Knauer LLP with respect to any other matters.
WHERE YOU CAN FIND MORE INFORMATION
Arch and PageNet 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 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 Arch, by PageNet 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 Arch 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
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about the public reference rooms. You can review Arch's, PageNet'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. Arch's and PageNet's common stock trades on the Nasdaq
National Market under the symbols "APGR" and "PAGE", respectively. Therefore,
you can inspect reports, proxy statements and other information concerning Arch
and PageNet at the offices of the National Association of Securities Dealers,
Inc., Market Listing Section, 1735 K Street, N.W., Washington, D.C. 20006. Arch
maintains a world wide web site at http://www.arch.com. PageNet maintains a
world wide web site at http://www.pagenet.com. Neither Arch's nor PageNet's web
site is a part of this prospectus.
Arch 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 Arch, PageNet, MobileMedia
Communications, Inc., MobileMedia Corporation and Arch's and PageNet'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 ARCH'S, PAGENET'S AND MOBILEMEDIA'S FILINGS WITH
THE SEC, AT NO COST, BY WRITING OR TELEPHONING ARCH AT THE FOLLOWING ADDRESS:
ARCH COMMUNICATIONS GROUP, INC.
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MASSACHUSETTS 01581
ATTENTION: INVESTOR RELATIONS
TELEPHONE (508) 870-6700
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INCORPORATION OF DOCUMENTS BY REFERENCE
Some of the information that you may want to consider in deciding whether
to exchange your notes is not physically included in this prospectus, but rather
is "incorporated by reference" to documents that Arch previously filed with the
SEC. The information incorporated by reference is an important part of this
prospectus, and information that we file later with the SEC will automatically
update and supersede this information. The following Arch documents filed with
the SEC are incorporated by reference in this prospectus.
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
2. Quarterly Report on Form 10-Q for the quarter ended September 30,
1999.
3. Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
4. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
5. Current Reports on Form 8-K filed June 16 and August 6, 1999; and
6. The description of Arch's capital stock contained in Arch's Current
Report on Form 8-K dated June 28, 1999.
All documents and reports filed by Arch pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this prospectus are also
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 made in this prospectus modify and supersede any information
incorporated by reference to the extent they differ from the old information.
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
----
<S> <C>
ARCH COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... 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 Stockholders' Equity (Deficit)
for Each of the Three Years in the Period Ended December
31, 1998.................................................. F-5
Consolidated Statements of Cash Flows 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 Condensed Balance Sheets as of December 31,
1998 and September 30, 1999............................ F-21
Consolidated Condensed Statements of Operations for Three
and Nine Month Periods Ended September 30, 1998 and
1999................................................... F-22
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1999.......... F-23
Notes to Consolidated Condensed Financial Statements...... F-24
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-30
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (unaudited)............................ F-31
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-32
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-33
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-34
Notes to Consolidated Financial Statements.................. F-35
PAGING NETWORK, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-51
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-52
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1998............... F-53
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............... F-54
Consolidated Statements of Shareowners' Deficit for each of
the Three Years in the Period Ended December 31, 1998..... F-55
Notes to Consolidated Financial Statements.................. F-56
Interim Financial Statements (Unaudited):
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998...................................... F-69
Consolidated Statements of Operations for Three and Nine
Month Periods Ended September 30, 1999 and 1998........ F-70
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998...................... F-71
Notes to Consolidated Condensed Financial Statements...... F-72
</TABLE>
F-1
<PAGE> 166
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-2
<PAGE> 167
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-3
<PAGE> 168
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-4
<PAGE> 169
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-5
<PAGE> 170
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-6
<PAGE> 171
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-7
<PAGE> 172
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
F-8
<PAGE> 173
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the United States in the FCC narrowband wireless spectrum auction. As of
December 31, 1998, Arch's investment in CONXUS totaled $6.5 million and is
accounted for under the cost method.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To
Be Disposed Of" Arch evaluates the recoverability of its carrying value of the
Company's long-lived assets and certain intangible assets based on estimated
undiscounted cash flows to be generated from each of such assets as compared to
the original estimates used in measuring the assets. To the extent impairment is
identified, Arch reduces the carrying value of such impaired assets. To date,
Arch has not had any such impairments.
Fair Value of Financial Instruments--Arch's financial instruments, as
defined under SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", include its cash, its debt financing and interest rate protection
agreements. The fair value of cash is equal to the carrying value at December
31, 1997 and 1998.
As discussed in Note 3, Arch's debt financing primarily consists of (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-9
<PAGE> 174
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-10
<PAGE> 175
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.
F-11
<PAGE> 176
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, $267.0 million was outstanding and $93.5 million
was available under the API Credit Facility. At December 31, 1998, such advances
bore interest at an average annual rate of 8.45%.
On November 16, 1998, the lenders to API approved an increase in API's
existing credit facility from $400.0 million to $600.0 million, 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.
F-12
<PAGE> 177
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-13
<PAGE> 178
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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; (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
F-14
<PAGE> 179
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
F-15
<PAGE> 180
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-16
<PAGE> 181
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-17
<PAGE> 182
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-18
<PAGE> 183
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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-19
<PAGE> 184
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-20
<PAGE> 185
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-21
<PAGE> 186
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-22
<PAGE> 187
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-23
<PAGE> 188
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)
F-24
<PAGE> 189
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 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.
F-25
<PAGE> 190
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
<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>
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
F-26
<PAGE> 191
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
$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>
(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
F-27
<PAGE> 192
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 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,
F-28
<PAGE> 193
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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-29
<PAGE> 194
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-30
<PAGE> 195
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-31
<PAGE> 196
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-32
<PAGE> 197
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-33
<PAGE> 198
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-34
<PAGE> 199
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,
F-35
<PAGE> 200
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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.
F-36
<PAGE> 201
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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.
F-37
<PAGE> 202
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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
F-38
<PAGE> 203
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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
F-39
<PAGE> 204
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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>
F-40
<PAGE> 205
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Pagers.................................. $196,791 $176,610 $190,903
Radio transmission equipment............ 202,296 203,048 204,054
Computer equipment...................... 30,896 32,679 32,866
Furniture and fixtures.................. 20,918 22,019 21,187
Leasehold improvements.................. 14,652 16,516 16,745
Construction in progress................ 1,128 11,624 13,140
Land, buildings and other............... 7,911 6,697 6,591
-------- -------- --------
474,592 469,193 485,486
Accumulated depreciation................ 216,655 249,551 259,920
-------- -------- --------
Property and equipment, net............. $257,937 $219,642 $225,566
======== ======== ========
</TABLE>
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999 (UNAUDITED)
----------------------------------------------------------------------- ----------------------------------
1997 1998
---------------------------------- ----------------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET COST AMORTIZATION NET
-------- ------------ -------- -------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FCC Licenses.......... $261,323 $ (8,918) $252,405 $261,523 $(16,891) $244,632 $261,623 $(18,937) $242,686
Customer lists........ 64,430 (21,477) 42,953 64,430 (42,953) 21,477 64,430 (48,323) 16,107
-------- -------- -------- -------- -------- -------- -------- -------- --------
$325,753 $(30,395) $295,358 $325,953 $(59,844) $266,109 $326,053 $(67,260) $258,793
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
MobileMedia is not amortizing the cost of two nationwide Personal
Communications Services ("PCS") licenses, one acquired directly from the FCC and
the other as a result of the MobileComm acquisition, because the construction of
paging networks related to such licenses has not been completed. These networks
are expected to begin commercial operation in 1999 and, accordingly,
amortization of these licenses will begin at such time.
F-41
<PAGE> 206
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
6. DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
DIP credit facility.................................. $ 10,000 $ -- $ 5,000
Revolving loan....................................... 99,000 72,900 72,900
Term loan............................................ 550,000 406,100 406,100
10 1/2% Senior Subordinated Deferred Coupon Notes due
December 1, 2003................................... 174,125 174,125 174,125
9 3/8% Senior Subordinated Notes due November 1,
2007............................................... 250,000 250,000 250,000
Dial Page Notes...................................... 1,570 1,570 1,570
Note Payable......................................... 986 986 986
---------- -------- --------
Total debt...................................... $1,085,681 $905,681 $910,681
========== ======== ========
</TABLE>
The debt obligations of MobileMedia include:
1) A debtor-in-possession credit facility ("DIP Facility") with a
syndicate of lenders including The Chase Manhattan Bank, as Agent (the "DIP
Lenders"). As of March 31, 1999 there was $5,000 of borrowings outstanding
under this facility, as of December 31, 1998 there were no funded
borrowings and as of December 31, 1997, there was $10,000 of borrowings
outstanding under this facility. MobileMedia is subject to certain
financial and operating restrictions customary to credit facilities of this
type including a limitation on periodic capital expenditures, minimum
allowable periodic EBITDA and retention of a turnaround professional.
Additionally, MobileMedia is required to make monthly interest payments to
the DIP Lenders and pay a commitment fee of 0.5% on any unused portion of
the DIP Facility. The DIP Facility bears interest at a rate of LIBOR plus
250 basis points or Base Rate plus 150 basis points, at the option of
MobileMedia. During 1997, the Debtors drew down $47,000 of borrowings and
repaid $37,000 under the DIP Facility. During January and February, 1998
the Debtors repaid an additional $10,000. On January 27, 1998, the DIP
Facility was amended and reduced from $200,000 to $100,000. On August 12,
1998, MobileMedia received approval from the Bankruptcy Court to extend the
DIP Facility to March 31, 1999 and further reduce it from $100,000 to
$75,000. MobileMedia has negotiated an extension of the DIP Facility
through and including December 31, 1999.
2) A $750,000 senior secured and guaranteed credit agreement (the
"Pre-Petition Credit Agreement") with a syndicate of lenders including The
Chase Manhattan Bank, as Agent. As of March 31, 1999 and December 31, 1998
there was $479,000 outstanding under this facility consisting of term loans
of $101,500 and $304,600 and loans under a revolving credit facility
totaling $72,900. This agreement was entered into on December 4, 1995, in
connection with the financing of the MobileComm Acquisition. Commencing in
1996 MobileMedia was in default under this agreement. As a result of such
default and the bankruptcy filing, MobileMedia has no borrowing capacity
under this agreement. Since the Petition date, MobileMedia has brought
current its interest payments and has been making monthly payments to the
lenders under the Pre-Petition Credit Agreement equal to the amount of
interest accruing under such agreement. On September 3, 1998, MobileMedia
repaid $170,000 of borrowings under the Pre-Petition Credit Agreement with
proceeds from the Tower Sale (see Note 3).
F-42
<PAGE> 207
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3) $250,000 Senior Subordinated Notes due November 1, 2007 (the
"9 3/8% Notes") issued in November 1995. These notes bear interest at a
rate of 9 3/8% payable semi-annually on May 1 and November 1 of each year.
On November 1, 1996, MobileMedia did not make its scheduled interest
payment on its 9 3/8% Notes which constituted an event of default. The note
holders have not exercised any rights or remedies afforded holders (which
rights include, but are not limited to, acceleration of the stated maturity
of the notes). Since the Petition date, any such right or remedy is subject
to the automatic stay created by the Bankruptcy Code.
4) $210,000 of Senior Subordinated Deferred Coupon Notes (the
"Deferred Coupon Notes") issued, at a discount, in November 1993. The
Deferred Coupon Notes accrete at a rate of 10 1/2%, compounded
semi-annually, to an aggregate principal amount of $210,000 by December 1,
1998 after which interest is paid in cash at a rate of 10 1/2% and is
payable semi-annually. By virtue of the missed interest payments on the
9 3/8% Notes and the Pre-Petition Credit Agreement an event of default has
occurred. The note holders have not exercised any rights or remedies
afforded such holders (which rights include, but are not limited to,
acceleration of the stated maturity of the notes). Since the Petition date,
any such right or remedy is subject to the automatic stay created by the
Bankruptcy Code.
Interest Expense on Debt
Interest paid during the years ended December 31, 1996, 1997 and 1998, and
the three months ended March 31, 1998 and 1999 (unaudited) was $65,978, $70,817,
$51,560, $13,915 and $9,383 respectively. Total interest cost incurred for the
years ended December 31, 1996, 1997 and 1998 was $94,231, $68,409 and $53,982,
respectively of which $1,292, $176 and $228 was capitalized. Total interest cost
incurred for the three months ended March 31, 1998 and 1999 (unaudited), was
$14,793 and $10,248, respectively, of which $21 and $149 was capitalized.
Subsequent to the Petition date, interest was accrued and paid only on the
Pre-Petition Credit Agreement and the DIP Facility. If not for the filing,
interest expense for the year ended December 31, 1997 and 1998 and March 31,
1998 and 1999 (unaudited), would have been approximately $104,152, $97,776,
$25,724 and $21,187, respectively.
7. INCOME TAXES
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Current:
Federal.............................. $ -- $ -- $(1,757)
State and local...................... -- -- (2,201)
------- -------- -------
-- -- (3,958)
Deferred:
Federal.............................. 52,081 -- --
State and local...................... 17,361 -- --
------- -------- -------
Total........................... $69,442 $ -- $(3,958)
======= ======== =======
</TABLE>
F-43
<PAGE> 208
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
MobileMedia is included in the Parent's consolidated federal income tax
return. Income taxes are presented in the accompanying financial statements as
if MobileMedia filed tax returns as a separate consolidated entity.
A reconciliation of income tax benefit (expense) and the amount computed by
applying the statutory federal income tax rate to loss before income taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Tax benefit (expense) at federal
statutory rate........................... $ 395,285 $ 43,604 $(13,838)
Goodwill and intangible amortization and
writedown.............................. (95,362) -- --
State income taxes....................... -- -- (1,783)
Nondeductible expenses................... -- -- (4,765)
Valuation allowance on federal deferred
tax assets............................. (230,481) (43,604) 16,428
--------- -------- --------
Total.......................... $ 69,442 $ -- $ (3,958)
========= ======== ========
</TABLE>
F-44
<PAGE> 209
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, 1996, 1997 and
1998 and the three months ended March 31, 1998 and 1999 (unaudited),
F-45
<PAGE> 210
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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
F-46
<PAGE> 211
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
forms and applications. MobileMedia was permitted to operate its licensed
facilities and provide service to the public during the pendency of the hearing.
On June 6, 1997, the FCC issued an order staying the hearing proceeding in
order to allow MobileMedia to develop and consummate a plan of reorganization
that provides for a change of control of MobileMedia and a permissible transfer
of MobileMedia's FCC licenses. The grant of the stay was premised on the
availability of an FCC doctrine known as Second Thursday, which provides that,
if there is a change of control that meets certain conditions, the regulatory
issues designated for administrative hearing will be resolved by the transfer of
MobileMedia's FCC licenses to the new owners of MobileMedia and the hearing will
not proceed. The stay was originally granted for ten months and was extended by
the FCC through October 6, 1998.
On September 2, 1998, MobileMedia and Arch Communications Group, Inc.
("Arch") filed a joint Second Thursday application. The FCC released an order
granting the application on February 5, 1999. The order, which is conditioned on
confirmation of the plan and consummation thereof within nine months, expressly
terminated the administrative hearing and resolved the issues designated
therein. The order denied the parties' request for permanent authority to
operate transmitters for which MobileMedia was granted interim authority on
January 13, 1997. If the Merger is consummated, Arch must cease operating these
facilities within 6 months after the merger. The order also denied the parties'
request for a waiver of the spectrum cap (which prohibits narrowband PCS
licensees from having ownership interest in more than three channels in any
geographic area). Arch must divest any excess channels within 6 months after the
merger.
Prior to the Petition date, five actions allegedly arising under the
federal securities laws were filed against MobileMedia and certain of its
present and former officers, directors and underwriters in the United States
District Court for the District of New Jersey (the "New Jersey District Court").
These actions were subsequently consolidated as In re MobileMedia Securities
Litigation, No. 96-5723 (AJL) (the "New Jersey Actions"). A consolidated amended
complaint (the "Complaint") was filed on November 21, 1997. The Complaint does
not name MobileMedia as a defendant.
In June 1997, the Debtors initiated an Adversary Proceeding in the
Bankruptcy Court to stay the prosecution of the New Jersey Actions. Pursuant to
a Stipulation entered into among the Debtors and the plaintiffs in the New
Jersey Actions and "So Ordered" by the Bankruptcy Court on October 31, 1997, the
plaintiffs in the New Jersey Actions could conduct only limited discovery in
connection with the New Jersey Actions and could not file any pleadings, except
responses to motions to dismiss, until the earlier of September 30, 1998 and the
effective date of a plan of reorganization. On October 21, 1998, the 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.
F-47
<PAGE> 212
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The plaintiffs in both the New Jersey Actions and California Actions are
currently conducting discovery of MobileMedia in connection with their
prosecution of the actions against the named defendants. Following consummation
of the Plan of Reorganization, the Company may be subject to further discovery
in these proceedings.
Neither the New Jersey Actions nor the California Actions name any of the
Debtors as a defendant. However, proofs of claim have been filed against the
Debtors by the plaintiffs in the New Jersey Actions, and both the New Jersey
Actions and the California Actions may give rise to claims against the Debtors'
Directors, Officers and Corporate Liability Insurance Policy. It is anticipated
that under any plan of reorganization for MobileMedia these Claims will receive
no distributions.
12. OTHER INVESTMENTS
On March 21, 1995, MobileMedia purchased a 33% interest in Abacus
Communications Partners, L.P., ("Abacus") a Delaware limited partnership, from
Abacus Business Services, Inc. for $1,641. Abacus Communications Partners, L.P.
is one of MobileMedia's alphanumeric dispatch services providers. The investment
has been accounted for under the equity method in accordance with Accounting
Principles Board Opinion No. 18. Under the equity method, original investments
are recorded at cost and adjusted by MobileMedia's share of undistributed
earnings or losses of the purchased company. MobileMedia's share of income
(loss) of affiliate, net of distribution, for the years ended December 31, 1996,
1997 and 1998, was $160, $69, and $(87), respectively. On December 30, 1998
MobileMedia reached an agreement to sell its interest in Abacus to Abacus
Exchange Inc. for $1,400 and subsequently completed the sale on January 25,
1999. Accordingly, MobileMedia wrote down its investment in Abacus from $1,612
to $1,400 as of December 31, 1998.
13. IMPACT OF YEAR 2000 (UNAUDITED)
GENERAL
Computer systems were originally designed to recognize calendar years by
the last two digits in the date code field. Beginning in the year 2000, these
date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. Any of MobileMedia's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, in less than two
years, the computerized systems (including both information and 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,
F-48
<PAGE> 213
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
finance, inventories, operations, pager activation, purchasing and
sales/marketing) will be Year 2000 compliant. In addition, in the last quarter
of 1998, programs designed to identify Year 2000 problems associated with dates
embedded in certain business-related files were created and executed to identify
any Year 2000 compliance issues. The testing unearthed a few Year 2000 problems
all of which have been addressed and retested for Year 2000 readiness.
Additional testing took place the first quarter of 1999, which included testing
of MobileMedia's financial and human resource software packages. Although the
results of these tests are still being analyzed, relatively few Year 2000
problems were identified. There can be no assurance, however, that such testing
has detected, or will detect, all compliance issues related to the Year 2000
problem.
With respect to external matters, MobileMedia has distributed
questionnaires and requests for certification to its mission-critical vendors
and is in the process of obtaining and reviewing the responses 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.
F-49
<PAGE> 214
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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-50
<PAGE> 215
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-51
<PAGE> 216
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-52
<PAGE> 217
PAGING NETWORK, INC.
CONSOLIDATED STATEMENT 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-53
<PAGE> 218
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-54
<PAGE> 219
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-55
<PAGE> 220
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-56
<PAGE> 221
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
F-57
<PAGE> 222
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-58
<PAGE> 223
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continue to be available for purchase from multiple sources, consistent with
normal manufacturing and delivery lead times.
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-59
<PAGE> 224
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 collaterized or
certain financial conditions are met. As of December 31, 1998, the Company's
Canadian subsidiaries are in compliance with all financial covenants of
F-60
<PAGE> 225
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
their separate credit 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>
F-61
<PAGE> 226
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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
F-62
<PAGE> 227
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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,
F-63
<PAGE> 228
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-64
<PAGE> 229
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
F-65
<PAGE> 230
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-66
<PAGE> 231
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-67
<PAGE> 232
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-68
<PAGE> 233
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-69
<PAGE> 234
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-70
<PAGE> 235
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-71
<PAGE> 236
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 an
effective 68.9% interest in Vast Solutions, while holders of the Company's
common stock will receive an effective 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
F-72
<PAGE> 237
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
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 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
F-73
<PAGE> 238
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
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 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
F-74
<PAGE> 239
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
$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>
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.
F-75
<PAGE> 240
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
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.
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>
F-76
<PAGE> 241
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
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, 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.
F-77
<PAGE> 242
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(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-78
<PAGE> 243
ANNEX A
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>
A-1
<PAGE> 244
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>
A-2
<PAGE> 245
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
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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 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.
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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 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".
A-5
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ANNEX B
[TO BE INSERTED LATER]
B-1
<PAGE> 249
ANNEX C
[TO BE INSERTED LATER]
C-1
<PAGE> 250
ANNEX D
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
PAGING NETWORK, INC.,
ARCH COMMUNICATIONS GROUP, INC.
AND
ST. LOUIS ACQUISITION CORP.
DATED AS OF NOVEMBER 7, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 251
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.......................................... 16
6.2. Acquisition Proposals....................................... 19
6.3. The Certificate Amendments.................................. 20
6.4. Information Supplied........................................ 20
6.5. Stockholders Meetings....................................... 21
6.6. Filings; Other Actions; Notification........................ 22
6.7. Access; Consultation........................................ 24
6.8. Affiliates.................................................. 24
</TABLE>
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<PAGE> 252
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
6.9. Stock Exchange Listing...................................... 24
6.10. Publicity................................................... 24
6.11. Benefits.................................................... 24
6.12. Expenses.................................................... 25
6.13. Indemnification; Directors' and Officers' Insurance......... 25
6.14. Takeover Statute............................................ 26
6.15. Confidentiality............................................. 27
6.16. Tax-Free Reorganization..................................... 27
6.17. Senior Credit Facilities.................................... 27
6.18. The Exchange Offers......................................... 27
6.19. Bankruptcy Provisions....................................... 30
6.20. Rights Agreement............................................ 34
6.21. Preferred Stock............................................. 35
6.22. Spinoff..................................................... 35
ARTICLE VII.
Conditions
Conditions to Each Party's Obligation to Effect the
7.1. Merger...................................................... 35
7.2. Conditions to Obligations of Arch and Merger Sub............ 37
7.3. Conditions to Obligation of PageNet......................... 37
ARTICLE VIII.
Termination
8.1. Termination by Mutual Consent............................... 38
8.2. Termination by Either Arch or PageNet....................... 38
8.3. Termination by PageNet...................................... 39
8.4. Termination by Arch......................................... 39
8.5. Effect of Termination and Abandonment....................... 40
ARTICLE IX.
Miscellaneous and General
9.1. Survival.................................................... 41
9.2. Modification or Amendment................................... 41
9.3. Waiver of Conditions........................................ 41
9.4. Counterparts................................................ 41
9.5. Governing Law and Venue; Waiver of Jury Trial............... 42
9.6. Notices..................................................... 42
9.7. Entire Agreement............................................ 43
9.8. No Third Party Beneficiaries................................ 43
9.9. Obligations of Arch and of PageNet.......................... 43
9.10. Severability................................................ 43
9.11. Interpretation.............................................. 43
</TABLE>
ii
<PAGE> 253
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9.12. Captions.................................................... 44
9.13. Assignment.................................................. 44
</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> 254
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>
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<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> 256
<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
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<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> 258
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement"), dated as of November 7,
1999, is 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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<PAGE> 259
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
D-2
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Shares (other than Excluded PageNet Shares) shall thereafter represent only
the right to receive the Merger Consideration 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.
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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 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.
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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 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,
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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 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
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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.
(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
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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.
(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
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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 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
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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 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
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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.
(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
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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 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,
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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, 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
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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
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
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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.
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
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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 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;
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(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 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
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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 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
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(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 15% 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 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
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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 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
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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 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.
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(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.
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.
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(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.
(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
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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.
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
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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 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
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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 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
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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 $1.5 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 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
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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 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
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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
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
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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;
"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;
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"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.
(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
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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, 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
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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.
(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.
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(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.
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(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 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 $1.5 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.
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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 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
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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 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
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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 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).
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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.
(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
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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 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.
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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.
(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
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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.
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."
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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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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arch Certificate provides that Arch will, to the fullest extent
permitted by the Delaware corporations statute, indemnify all persons whom it
has the power to indemnify against all costs, expenses and liabilities incurred
by them by reason of having been officers or directors of Arch, any subsidiary
of Arch or any other corporation for which such persons acted as an officer or
director at the request of Arch.
The Arch Certificate also provides that the directors of Arch will not be
personally liable for monetary damages to Arch or its stockholders for any act
or omission provided that the foregoing shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
Arch 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 corporations statute (relating to illegal dividends
or stock redemptions) or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware corporations statute is
amended to permit further elimination or limitation of the personal liability of
directors, then the liability of a director of Arch shall be eliminated or
limited to the fullest extent permitted by the Delaware corporations statute as
so amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
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 D to the prospectus
forming a part of this Registration Statement and incorporated
herein by reference.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Wilkinson Barker Knauer, LLP
23.4 Consent of Ernst & Young LLP
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby 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;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or most recent
post-effective amendment thereof) 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 SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20% 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 (a)(1)(i) and (a)(1)(ii)
do not
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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
with or furnished to the SEC by the registrant pursuant to Section 13 or
15(d) of the Exchange Act that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, 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 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) If the registration is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of this chapter at the start of
any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Securities Act need not be furnished, provided, that the registrant
includes in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph (a)(4) and other
information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial
statements. Notwithstanding the foregoing, with respect to registration
statements on Form F-3, a post-effective amendment need not be filed to
include financial statements and information required by Section 10(a)(3)
of the Securities Act or Rule 3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the SEC by the registrant pursuant to Section 13 or Section
15(d) of the Exchange Act that are incorporated by reference in the Form
F-3.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder 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 offering 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.
(c) The registrant undertakes that every prospectus: (1) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act 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, 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.
(d) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities 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 a registrant in the
successful defense of any action,
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<PAGE> 305
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
Securities Act and will be governed by the final adjudication of such issue.
(f) The registrant undertakes to respond to requests for information that
is incorporated by reference into the prospectus pursuant to Items 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 this Registration Statement through the date of responding to
the request.
(g) The registrant undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Westborough, Commonwealth
of Massachusetts on December 16, 1999.
Arch Communications Group, Inc.
By: /s/ C. EDWARD BAKER, JR.
------------------------------------
C. Edward Baker, Jr. Chairman of
The Board and Chief Executive
Officer
SIGNATURES AND POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
J. Roy Pottle, Gerald J. Cimmino and David A. Westenberg as his or her true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments
and any Registration Statement pursuant to Rule 462(b)) to this Registration
Statement on Form S-4 and to file the same with all exhibits thereto and any
other documents in connection therewith, with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ C. EDWARD BAKER, JR. Chairman of the Board and December 16, 1999
- --------------------------------------------------- Chief Executive Officer,
C. Edward Baker, Jr. Director (principal executive
officer)
/s/ J. ROY POTTLE Executive Vice President and December 16, 1999
- --------------------------------------------------- Chief Financial Officer
J. Roy Pottle (principal financial officer
and principal accounting
officer)
/s/ R. SCHORR BERMAN Director December 16, 1999
- ---------------------------------------------------
R. Schorr Berman
/s/ JAMES S. HUGHES Director December 16, 1999
- ---------------------------------------------------
James S. Hughes
/s/ JOHN KORNREICH Director December 16, 1999
- ---------------------------------------------------
John Kornreich
/s/ ALLAN L. RAYFIELD Director December 16, 1999
- ---------------------------------------------------
Allan L. Rayfield
</TABLE>
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<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN B. SAYNOR Director December 16, 1999
- ---------------------------------------------------
John B. Saynor
/s/ JOHN A. SHANE Director December 16, 1999
- ---------------------------------------------------
John A. Shane
Director December , 1999
- ---------------------------------------------------
Edwin M. Banks
Director December , 1999
- ---------------------------------------------------
H. Sean Mathis
</TABLE>
II-5
<PAGE> 308
EXHIBIT INDEX
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 D to the prospectus forming a part of
this Registration Statement and incorporated herein by reference.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Wilkinson Barker Knauer, LLP
23.4 Consent of Ernst & Young LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement 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
December 17, 1999
<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 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, included in the Arch Communications Group, Inc.
Registration Statement on Form S-4 for the registration of 29,651,980 shares of
common stock to be exchanged for all of the outstanding 10 7/8% senior discount
notes due 2008 at an exchange ratio of 66.1318 shares for each $1,000 principal
amount of notes.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
December 17, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT
We hereby consent to the reference to our firm under the heading "Experts"
in the Form S-4 Registration Statement (No. 333-XXXXX) of Arch Communications
Group, Inc. ("Arch"). Our review and input only pertains to the FCC matters
unique to Arch which are included in the description of the regulatory
requirements under the Communications Act and the Telecommunications Act of
1996, and the regulations thereunder, set forth under "Risk
Factors -- Government regulation may burden operations" and "Industry
Overview -- Regulation", as this information is incorporated by reference
herein. Stockholders of Arch should not rely on Wilkinson Barker Knauer, LLP
with respect to any other matters or any other sections of the document.
WILKINSON BARKER KNAUER, LLP
By: /s/ KENNETH D. PATRICH
------------------------------------
Kenneth D. Patrich
Date: December 20, 1999
<PAGE> 1
EXHIBIT 23.4
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 of Paging Network, Inc., in the Registration Statement on
(Form S-4) and related Prospectus of Arch Communications Group, Inc. dated
December 21, 1999.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 21, 1999
