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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 2000
REGISTRATION NO. 333-93321
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ARCH COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4812 31-1358569
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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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)
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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)
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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
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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. [ ]
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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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PROSPECTUS
[ARCH LOGO]
29,651,984 SHARES COMMON STOCK
ARCH COMMUNICATIONS GROUP, INC.
We have offered 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
OCTOBER , 2000 UNLESS EXTENDED.
Our common stock is traded on the Nasdaq National Market under the symbol
"APGR."
We have announced a proposed transaction in which we and Paging Network,
Inc. intend to merge. However, the PageNet merger is not a condition to our
exchange offer. If you tender your discount notes in the exchange offer, we will
exchange our shares for your discount notes whether or not the PageNet merger
takes place.
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NEITHER THE SECURITIES AND EXCHANGE WE URGE YOU TO CAREFULLY READ THE "RISK
COMMISSION NOR ANY STATE SECURITIES FACTORS" SECTION BEGINNING ON PAGE 7
REGULATORS HAVE APPROVED OR DISAPPROVED BEFORE YOU MAKE ANY INVESTMENT DECISION.
THE SHARES OR THE EXCHANGE OFFER OR
DETERMINED IF THIS PROSPECTUS IS
ACCURATE OR ADEQUATE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
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THE DATE OF THIS PROSPECTUS IS SEPTEMBER , 2000.
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TABLE OF CONTENTS
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PAGE
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Summary............................... 1
The Overall Transaction............. 1
The Exchange Offer.................. 1
Material Federal Income Tax
Considerations................... 2
The Merger.......................... 2
Arch and PageNet.................... 3
Capitalization...................... 5
Transaction Diagram................. 6
Risk Factors.......................... 7
Risks Related to the Exchange Offer
and an Investment in Arch's
Common Stock..................... 7
Risks Related to the Merger......... 8
Risks Related to PageNet's
Business......................... 11
Risks Related to PageNet's
Bankruptcy Filing................ 11
Forward-Looking Statements............ 12
Selected Pro Forma Financial and
Operating Data...................... 13
The Exchange Offer.................... 15
Proposed Amendments................... 23
Material Federal Income Tax
Considerations...................... 25
The Merger............................ 29
General............................. 29
Conditions to Completion of the
Merger........................... 29
PageNet's Bankruptcy Plan............. 31
Classification of Claims and Equity
Interests under the PageNet
Bankruptcy Plan.................. 31
Unaudited Pro Forma Consolidated
Financial Data of the Combined
Company............................. 36
Unaudited Pro Forma Condensed
Consolidated Financial Statements... 39
Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements... 43
Selected Historical Consolidated
Financial and Operating
Data -- Arch........................ 47
Arch Management's Discussion and
Analysis of Financial Condition and
Results of Operations............... 50
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PAGE
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Selected Historical Consolidated
Financial and Operating
Data -- PageNet..................... 66
PageNet Management's Discussion and
Analysis of Financial Condition and
Results of Operations............... 70
Market Price Information and Dividend
Policy.............................. 85
Dividend Policy..................... 85
Industry Overview..................... 86
Regulation.......................... 87
Arch's Business....................... 91
Wireless Messaging Services,
Products and Operations.......... 91
Networks and Licenses............... 93
Subscribers and Marketing........... 94
Sources of Equipment................ 95
Competition......................... 95
Employees........................... 96
Trademarks.......................... 96
Properties.......................... 96
Litigation.......................... 96
The Company......................... 96
Arch's Management..................... 97
Arch's Principal Stockholders......... 104
PageNet's Business.................... 108
The Combined Company.................. 114
Description of Arch's Equity
Securities.......................... 117
Description of Discount Notes......... 125
Description of Other Indebtedness..... 144
Legal Matters......................... 148
Experts............................... 148
Where You Can Find More Information... 148
Index to Financial Statements......... F-1
Annex A -- Form of Letter of
Transmittal and Notice of Guaranteed
Delivery............................ A-1
Annex B -- Agreement and Plan of
Merger.............................. B-1
Annex C -- Arch Credit Facilities Term
Sheet............................... C-1
Annex D -- Unaudited Combined Company
Projected Balance Sheets............ D-1
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SUMMARY
This summary highlights information contained elsewhere in this prospectus.
We urge you to read the entire prospectus, including "Risk Factors," and the
information contained in the public documents that we and PageNet have filed
with the Securities and Exchange Commission.
OVERALL TRANSACTION
The exchange offer described in this prospectus is part of an overall
proposed transaction in which we intend to merge with PageNet and simultaneously
strengthen our combined balance sheet by exchanging common stock for outstanding
debt. Through the exchange offer, we are offering to exchange shares of our
common stock for all of your outstanding discount notes, whether or not the
PageNet merger takes place. We will issue shares of our common stock for all of
PageNet's outstanding senior subordinated notes when and if the merger takes
place.
THE EXCHANGE OFFER (PAGE 15)
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.
Approximately $172.4 million aggregate
principal amount of discount notes were
outstanding at June 30, 2000. This excludes
notes that have already been exchanged in
privately negotiated transactions. The
principal amount of your notes is their
principal face amount at maturity, not just the
amount that has accreted to date.
ACCRETED INTEREST ON THE
NOTES......................... The exchange ratio is based solely on principal
amount at maturity. No additional shares or
other consideration will be paid on account of
accreted interest.
COMPARATIVE MARKET PRICES..... On November 5, 1999, the last trading day
before the public announcement of the proposed
exchange offer, the indicative price for each
$1,000 principal amount of discount notes,
based on available market maker information,
was $410.00, compared to a closing price of
$453.523 for 66.1318 shares of Arch common
stock. On September 8, 2000, the last trading
day for which information was available prior
to the date of this prospectus, each $1,000
principal amount of discount notes had an
indicative price of $550.00, which exceeded the
closing price of $380.258 for 66.1318 shares of
Arch common stock.
EXPIRATION DATE............... The exchange offer will expire at 11:59 p.m.,
New York City time, on October , 2000 unless
we and PageNet jointly extend the expiration
date of the exchange offer in our sole
discretion.
CONDITIONS TO THE EXCHANGE
OFFER......................... There is no required minimum amount of discount
notes that must be tendered as a condition to
the exchange offer. The exchange offer is not
conditioned upon consummation of the PageNet
merger. WE WILL ISSUE COMMON STOCK IN EXCHANGE
FOR ANY NOTES YOU PROPERLY TENDER, WHETHER OR
NOT THE PAGENET MERGER EVER TAKES PLACE. We
cannot give any assurances that the PageNet
merger will take place. Conditions to the
PageNet merger include the confirmation of a
plan of reorganization
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under chapter 11 of the United States
Bankruptcy Code which PageNet has filed in
order to help effect the merger.
AMENDMENTS.................... You will be required, as a condition to
tendering your notes, to approve amendments to
the indenture for the notes. The amendments
will eliminate substantially all of the rights
of those discount notes that are not tendered,
other than their right to receive payments of
principal and interest.
WITHDRAWAL RIGHTS............. You may withdraw tenders of discount notes at
any time prior to 11:59 p.m., New York City
time, on the expiration date. To withdraw a
tender of discount notes, the exchange agent,
Harris Trust Company of New York, must receive
a signed written or facsimile transmission
notice of withdrawal specifying the name of the
holder of the notes to be withdrawn and the
identity of the notes to be withdrawn.
Any notice of withdrawal of discount notes
tendered by book-entry transfer must also
include the name and number of the account at
the Depository Trust Company to be credited
with the withdrawn discount notes. Any
withdrawn discount notes will not be deemed to
be validly tendered for purposes of the
exchange offer and no shares of common stock
will be exchanged for them unless they are
again validly tendered at a later date prior to
the deadline for the exchange offer.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS (PAGE 25)
For federal income tax purposes, you will not recognize gain or loss upon
exchanging your discount notes if, as is likely, such discount notes constitute
securities for federal income tax purposes, except that any consideration
allocated to accrued but unpaid interest will be considered ordinary income and
you will recognize gain or loss with respect to cash received instead of a
fractional share of our common stock.
THE MERGER
STRUCTURE OF THE MERGER AND RELATED TRANSACTIONS (PAGE 29, ANNEX B)
Through the merger, PageNet will become a wholly owned subsidiary of Arch,
the two companies' businesses will be combined and investors in PageNet will
become investors in Arch.
In the merger, each outstanding share of PageNet's common stock will be
exchanged for 0.04796505 shares of Arch's common stock. PageNet's bankruptcy
plan provides for the exchange of a total of approximately 89,917,844 shares of
Arch's common stock for all of PageNet's outstanding senior subordinated notes
as well as all of PageNet's outstanding common stock.
Confirmation of the bankruptcy plan, implementation of the merger and
consummation of the exchange offer will result in the issuance of a total of
approximately 119,569,828 new shares of Arch common stock to PageNet
stockholders, PageNet noteholders and Arch noteholders if all Arch discount
notes are exchanged.
In connection with the merger, 80.5% of the total equity of PageNet's
subsidiary, Vast Solutions, Inc., will be issued to PageNet's current
stockholders and noteholders and the combined company will hold the remaining
19.5% of Vast's equity.
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STOCK OWNERSHIP AND GOVERNANCE FOLLOWING THE EXCHANGE OFFER AND THE MERGER
If all of the outstanding discount notes are exchanged, the exchange offer
and the merger will result in Arch's outstanding common stock being held:
- 6.5% by the existing holders of Arch's discount notes;
- 42.4% by Arch's existing stockholders, including former Arch discount
noteholders who have already become Arch stockholders in the past several
months by exchanging their notes for stock in privately negotiated
transactions;
- 48.2% by the existing holders of PageNet's senior subordinated notes; and
- 2.9% by the existing holders of PageNet's common stock.
The capitalization of the combined company following the merger is expected
to be leveraged, although less heavily leveraged than Arch's current
capitalization. The exchange offer and merger will reduce combined overall debt
by approximately $1.3 billion and increase combined stockholders' equity by
approximately $1.7 billion, if all discount notes are exchanged.
After the merger, the Arch board of directors will consist of 12 directors.
Six directors will be designated by the current Arch directors and three
directors will be designated by the current PageNet directors. Each of the three
largest holders of PageNet notes being exchanged for shares of Arch common stock
may designate one director. To the extent any of these three largest holders do
not designate directors, the Arch directors will designate additional directors.
CONDITIONS TO THE MERGER (PAGE 29)
The merger is conditioned upon:
- approval of the merger transaction by Arch's stockholders;
- entry of a final confirmation order by the bankruptcy court confirming
PageNet's bankruptcy plan;
- receipt of all necessary governmental approvals;
- PageNet's receipt of a legal opinion to be rendered at the closing of the
merger regarding the treatment of the merger as a tax-free transaction;
and
- other customary contractual conditions specified in the merger agreement.
PAGENET'S BANKRUPTCY PLAN (PAGE 31)
PageNet and all of its wholly-owned domestic subsidiaries, except for Vast,
are parties to a chapter 11 proceeding. On July 25, 2000, PageNet filed its
bankruptcy plan as a means to implement the merger and recapitalization. PageNet
is soliciting the approval of its noteholders and its stockholders in favor of
its bankruptcy plan in the manner required by chapter 11. The bankruptcy plan
provides for the merger of PageNet into Arch and the related transactions on the
same terms as are provided in the amended merger agreement.
If the bankruptcy plan is not confirmed, PageNet will evaluate its
strategic alternatives while under the protection of the bankruptcy court. These
alternatives could include, but are not limited to, a standalone restructuring,
transactions with other merger partners, or liquidation.
ARCH AND PAGENET
Arch. Arch is a leading provider of wireless messaging services in the
United States, with approximately 6.7 million units in service as of June 30,
2000. Arch primarily provides traditional paging services which enable
subscribers to receive messages on their pagers composed entirely of numbers,
such as a phone number, or on some pagers, numbers and letters which enable the
subscriber to receive text
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messages. Both kinds of services are commonly referred to as messaging services.
Arch has also begun to market and sell "advanced" messaging services which
enable subscribers to receive acknowledgements that their messages were
delivered or to respond to messages. Arch also offers enhanced or complementary
wireless messaging 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 principal office is located at 1800 West Park Drive, Suite 250,
Westborough, Massachusetts 01581. Arch's telephone number is (508) 870-6700.
Arch's common stock is traded on the Nasdaq National Market under the symbol
"APGR."
PageNet. PageNet is a provider of wireless messaging services throughout
the United States and Canada, with approximately 7.9 million units in service as
of June 30, 2000. PageNet primarily provides traditional paging services.
PageNet has also begun to market and sell "advanced" messaging services. PageNet
also offers enhanced or complementary wireless communications services, such as
stock quotes, news and other wireless information delivery services, voice mail
and personalized greetings. Through its wholly owned subsidiary Vast, PageNet is
commencing operations that use wireless technology to connect businesses with
their employees, customers and remote assets, such as vending machines,
automobiles and storage tanks. PageNet's principal office is located at
Corporate Centre, 14911 Quorum Drive, Dallas, Texas 75240. PageNet's telephone
number is (972) 801-8000. PageNet's common stock was traded on the Nasdaq Small
Cap Market under the symbol "PAGE" until July 14, 2000, when trading was
suspended due to PageNet's chapter 11 proceeding. Trading of PageNet's common
stock commenced in the over-the-counter market on July 27, 2000 under the symbol
"PAGEQ."
Arch's web site, www.arch.com, and PageNet's website, www.pagenet.com, are
not part of this prospectus. Arch has supplied all information about Arch
contained in this prospectus, and PageNet has supplied all information about
PageNet and Vast.
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CAPITALIZATION
The following table sets forth the capitalization of Arch at June 30, 2000
and the capitalization of Arch as adjusted to give effect to the Arch exchange
offer and merger, assuming 100% of the currently outstanding discount notes are
exchanged. You should read this table together with the other financial
information appearing elsewhere in this prospectus.
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HISTORICAL AS ADJUSTED(1)
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(DOLLARS IN THOUSANDS)
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CURRENT MATURITIES OF LONG-TERM DEBT........................ $ 14,310 $ 14,310
---------- ----------
LONG-TERM DEBT, LESS CURRENT MATURITIES:
Senior bank debt.......................................... 449,630 1,264,630
10 7/8% senior discount notes due 2008.................... 159,628 --
6 3/4% convertible subordinated debentures due 2003....... 959 959
12 3/4% senior notes due 2007............................. 128,028 128,028
13 3/4% senior notes due 2008............................. 140,766 140,766
9 1/2% senior notes due 2004.............................. 125,000 125,000
14% senior notes due 2004................................. 100,000 100,000
Other..................................................... -- 59,507
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Total long-term debt, less current maturities...... 1,104,011 1,818,890
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Redeemable convertible preferred stock...................... 43,953 --
STOCKHOLDERS' EQUITY:
Preferred stock -- $.01 par value, authorized 10,000,000
shares, issued and outstanding 250,000 shares ($29,310
aggregate liquidation preference)......................... 3 3
Common stock and Class B common stock
$.01 par value, authorized 160,000,000 shares (300,000,000
as adjusted), issued and outstanding 66,078,561
(174,008,068 as adjusted)................................. 661 1,740
Additional paid-in capital.................................. 817,116 1,469,913
Accumulated deficit......................................... (962,911) (874,901)
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Total stockholders' equity (deficit)............... (145,131) 596,755
---------- ----------
Total capitalization............................... $1,017,143 $2,429,955
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(1) If 1% of the currently outstanding discount notes are exchanged, total
long-term debt, less current maturities would be $2.0 billion, total
stockholders' equity would be $441.7 million and total capitalization would
be $2.4 billion.
If the merger does not take place, Arch's capitalization will be as
described in the "Historical" column except that (1) long-term debt, less
current maturities will be reduced and (2) total stockholders' equity will be
increased, to reflect the amount of discount notes, if any, that are exchanged.
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TRANSACTION DIAGRAM
The following diagrams illustrate in general terms (1) the structure and
capital stock ownership percentages of Arch and PageNet prior to the
announcement of the exchange offer and the merger and (2) the structure and
capital stock ownership percentages of the combined company and Vast following
the exchange offer and the merger.
[CURRENT STRUCTURE/STOCK OWNER PERCENT GRAPH]
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RISK FACTORS
RISKS RELATED TO THE EXCHANGE OFFER AND AN INVESTMENT IN ARCH'S COMMON STOCK
If you tender your notes, you will lose all of your contractual rights as a
creditor of Arch and your priority in bankruptcy proceedings and, as a
stockholder, will be more vulnerable to decreases in the value of your
investment if future adverse developments in Arch's business occur
If you exchange your notes for Arch common stock, you will lose the senior
position and the specific rights that you currently have as a holder of discount
notes. As a holder of Arch common stock, you will suffer more from future
adverse developments relating to the combined company's financial condition,
results of operations or prospects than you would as a holder of debt
securities.
The exchange ratio used in the exchange offer was not negotiated by the Arch
noteholders, is not currently favorable to you, and may never prove to be
favorable to you. The exchange ratio is fixed, and will not be adjusted to
reflect changes in the market price of Arch's common stock or discount notes.
The market value of Arch common stock received may be less than the market
value of discount notes exchanged for these shares at the time of the exchange
The exchange ratio for discount notes used in the exchange offer, which
requires the exchange of 66.1318 shares of Arch common stock for each $1,000
principal amount at maturity of discount notes, was determined by Arch, on the
basis that Arch should use an exchange ratio reasonably expected to result in
acceptance by the required number of noteholders. No negotiation took place
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 discount notes
or other recognized criteria of value for common stock such as assets, net worth
or results of operations, or to trading prices for the notes or the principal
amount of the notes. On September 8, 2000, the last trading day for which
information was available prior to the date of this prospectus, the closing
price for 66.1318 shares of Arch common stock was $380.258. This amount was
substantially less than the indicative price of $550.00 for each $1,000
principal amount at maturity of discount notes.
The exchange ratio is fixed and will not be adjusted if the market price of
Arch's common stock declines or the market price of Arch's discount notes
increases. The market value of the shares of Arch common stock ultimately issued
in the merger may fall below their current market value and below the valuation
that may be implied for them by the exchange ratio. Prices may fall during the
period between the time you tender notes and the time you take delivery of the
Arch common stock. Prices may also fall at any time afterwards.
Trading prices of Arch's common stock have fluctuated significantly in the
past and may continue to be volatile so that stockholders cannot predict
whether or when they can resell their stock at a profit
The market price of Arch's common stock has fluctuated substantially since
1998. Between January 1, 1998 and June 30, 2000, the reported sale price of
Arch's common stock on the Nasdaq National Market System ranged from a high of
$20.8125 per share in April 1998 to a low of $2.0625 per share in October 1998.
On September 8, 2000, the closing price of Arch's common stock was $5.75 per
share.
The trading price of Arch common stock following the closing of the
exchange offer and the merger will be affected by the risk factors described in
this prospectus, as well as prevailing economic and financial trends and
conditions in the public securities markets. Share prices of wireless messaging
companies such as Arch have exhibited a high degree of volatility during recent
periods. Shortfalls in revenues or in earnings before interest, income taxes,
depreciation and amortization 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. 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.
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These include reported financial results and fluctuations in the trading prices
of the shares of other publicly held companies in the wireless messaging
industry.
Approximately 31.6 million shares of Arch's common stock may be issued in the
future. This could cause the market price of Arch common stock to drop
significantly, even if Arch's business is doing well
On June 30, 2000, 66.5 million shares of Arch common stock and Arch Class B
common stock were issued and outstanding. In addition, 31.6 million shares of
Arch common stock were issuable upon conversion of convertible securities and
exercise of warrants and stock options, including PageNet options to be assumed
by Arch. Arch's issuance of these shares will substantially dilute the
proportionate equity interests of the holders of Arch common stock. Having these
shares available for resale in the public securities markets, and particularly
the perception that substantial numbers of shares might be resold, could depress
prevailing market prices of Arch common stock.
If you do not tender your notes, the notes that you retain may have
substantially fewer rights than they currently have and this may leave you
unprotected in the future
We are soliciting the approval of the holders of discount notes to
amendments that include the elimination of substantially all rights of the
noteholders other than the right to receive payments of principal and interest.
Your approval of these amendments is a condition to your participation in the
exchange offer. If you decide not to tender all or some of your notes, the notes
that you retain will no longer have any of these additional rights if the other
discount noteholders approve the amendments. Your position as noteholders may
suffer if any developments occur which these additional rights were designed to
protect you against, such as distributions to stockholders or unfavorable
business combinations.
Your tender of notes for common stock may be accepted even though few other
noteholders tender their notes
Your tender is not conditioned on the participation of other noteholders in
the exchange offer and you might be the only noteholder to exchange notes for
common stock, other than noteholders who exchanged their notes in private
transactions earlier this year. If all of the outstanding discount notes are not
exchanged, you will become a common stockholder in a company with more financial
leverage than it would have if all 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.
You may end up exchanging your discount notes for common stock even though
Arch and PageNet do not merge
If you tender your notes, we will issue common stock for your notes after
the expiration date even though the PageNet merger has not, and may never, take
place. If the PageNet merger does not take place, Arch will incur substantial
transaction costs but will not enjoy the anticipated benefits of the merger.
RISKS RELATED TO THE MERGER
The exchange ratio used in connection with the merger may be unfavorable to
Arch stockholders. The exchange ratio is fixed, and will not be adjusted to
reflect changes in the market price of Arch's common stock.
The exchange ratio used in connection with the merger, which requires the
exchange of 89,917,844 shares of Arch common stock for all of PageNet's common
stock and senior subordinated notes, was determined by negotiations between Arch
and PageNet, after consultation with their respective financial advisors. The
exchange ratio is not necessarily related to trading prices for Arch's or
PageNet's common stock or senior subordinated notes or other recognized criteria
of value for common stock or notes such as
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assets, net worth, cash flow coverage or results of operations. Arch may not
terminate the merger agreement or resolicit the votes of its stockholders solely
because of changes in the trading price of Arch's common stock. A change in
trading prices will not result in any change in the exchange ratio.
Challenges involved in integrating Arch and PageNet may strain Arch's
capacities and may prevent the combined company from achieving intended
synergies
Arch may not be able to successfully integrate PageNet's operations. The
combination of the two companies will require, among other things, coordination
of administrative, sales and marketing, customer billing and services
distribution and accounting and finance functions and expansion of information
and management systems. The difficulties of such integration will initially be
increased by the need to coordinate geographically separate organizations and to
integrate personnel with disparate business backgrounds and corporate cultures
and by the fact that PageNet has suspended a significant restructuring of its
own operations.
The integration process could cause the disruption of the activities of the
two businesses that are being combined. 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. Even if integrated in a
timely manner, there is no assurance that Arch will operate smoothly or that it
will fulfill management's objective of achieving cost reductions and synergies.
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.
PageNet's operations may be disrupted by a loss of customers, vendors and
employees as a result of PageNet's bankruptcy filing
Some customers and potential customers and vendors may be reluctant to do
business with PageNet because it is operating in bankruptcy. Any significant
loss of customers or vendors, or other deterioration in PageNet's business could
adversely effect PageNet's revenues and operations, which, in turn, would
adversely impact Arch if the merger is consummated. In addition, PageNet's level
of employee turnover is likely to increase as a result of the bankruptcy filing.
The merger may cost more than Arch and PageNet anticipate, due to
unforeseeable cost overruns and delays. This would create an additional
financial burden on the combined company
Arch and PageNet estimate that they will incur total direct transaction and
closing costs of approximately $70.0 million associated with the merger and
related transactions. This amount is a preliminary estimate and is therefore
subject to change. It is quite possible that Arch will incur significant
additional unforeseen costs in connection with the merger which will impose an
added burden on the combined company.
The combined company's financial projections in Annex D are based upon a
number of assumptions and estimates. These assumptions and estimates may be
incorrect and as a result the combined company may not achieve the financial
results, including the level of cash flow, that management projects
The managements of PageNet and Arch have jointly prepared the combined
company financial projections contained in Annex D to this prospectus. The
projections are contained in this prospectus solely because they have been
publicly disclosed in connection with PageNet's chapter 11 proceeding. These
projections assume that the merger and related transactions will be implemented
in accordance with their current terms and present the projected effects of the
bankruptcy plan on future operations if the plan, the merger and the Arch
exchange offer are consummated. These projections are based upon a number of
other assumptions and estimates. For example, these projections assume that 100%
of Arch discount notes will be tendered and accepted in the exchange offer.
However, the exchange of Arch notes is not a condition to the merger. If some of
the notes remain outstanding, Arch will be more leveraged and will have higher
interest payments than indicated in the projections. The assumptions and
estimates underlying
9
<PAGE> 13
the projections are inherently uncertain and are subject to significant
business, economic and competitive risks and uncertainties. Accordingly, future
financial condition and results of operations of the combined company following
the merger may vary significantly from those set forth in the projections.
Consequently, the projections should not be regarded as a representation by
PageNet, Arch, their advisors or any other person that the projections will be
achieved. See "Forward-Looking Statements." If the projected results are not
achieved, Arch's operating losses may be larger and the trading price of Arch's
common stock may suffer.
The pro forma financial statements are also based upon a number of assumptions
and estimates that may be incorrect and as a result may not be a good
indication of future financial results for the combined company
The pro forma condensed consolidated financial statements included in this
prospectus are based on the same assumptions and estimates noted above for the
combined company financial projections, as well as other assumptions and
estimates. For example, the pro forma financial statements value PageNet's
assets based on the number of shares of Arch common stock to be issued in the
merger at an assumed trading value of $6.02 per share, which was the average
closing price of Arch common stock for the four trading days prior to and the
four trading days following the announcement of the merger. 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 September 8, 2000, the
closing market price of Arch's common stock was $5.75. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements." If trading prices after the merger
are less than $6.02 per share, the recorded value of Arch's assets will not be
modified, and their recorded value will be greater than their value would be if
that value were to be based on trading prices after the merger. As a result, the
pro forma financial results may not be a good indication of the financial
condition or the results of operations that would be recorded by the combined
company if a different price per share had been used.
Amortization charges from the PageNet merger and Arch's earlier acquisition of
MobileMedia may occur sooner than management expects, resulting in earlier
decreases in earnings
Under purchase accounting treatment for the PageNet merger and the
acquisition of MobileMedia in 1999, Arch must record a substantial amount of
goodwill and other intangible assets. This will result in substantial
amortization charges to the consolidated income of Arch over the useful lives of
those assets. Arch estimates the amount of those charges will total
approximately $73.2 million per year for ten years. However, actual charges in
the early years could be greater, and could adversely affect reported results of
operations more than is currently anticipated, if the underlying assets are
impaired or if the useful lives of the assets are less than currently estimated.
The merger will probably eliminate corporate tax benefits that Arch might
otherwise utilize in the future
It is anticipated that the merger and related transactions will result in
the elimination of substantially all of the tax benefit of net operating loss
carryforwards and certain other tax attributes available to PageNet and Arch,
and also will result in some out-of-pocket tax liability. See "Material Federal
Income Tax Considerations." If Arch generates any taxable income in the future,
the net operating loss carryforwards will no longer be available to shelter it.
The merger may not take place. If it does not take place, Arch will incur
substantial costs and will not enjoy the anticipated benefits of the merger
If the merger does not take place, the contemplated benefits of the merger
will not be realized, and Arch stockholders and noteholders will retain their
interest as investors in a company which will not enjoy the anticipated benefits
of the merger despite incurring substantial transaction costs. If the merger
does not take place after Arch pursues an alternative acquisition proposal, Arch
may be required to pay a $40.0 million termination fee to PageNet.
10
<PAGE> 14
RISKS RELATED TO PAGENET'S BUSINESS
PageNet faces many of the same risks that Arch faces. See "Arch
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results." In addition, PageNet
is subject to these particular risks:
Recent declines in PageNet's units in service are expected to continue or even
accelerate; this trend will impair PageNet's financial results
PageNet had approximately 7,858,000 units in service at June 30, 2000, down
from its high of approximately 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 eight previous quarters ended June 30, 2000, and the amount of such net
reduction has increased during each quarter. Units in service are expected to
continue to decline in the second half of 2000. The net reduction of units in
service with subscribers is due to a combination of factors, including customer
service problems, the impact of various price increases by PageNet, increased
sales activity by competitors since the merger announcement, and an increasing
number of paging customers who are choosing cellular, PCS and other mobile phone
services instead of paging services. 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 earnings before interest, income taxes, depreciation and amortization.
The continued failure to reverse this trend of accelerating customer
cancellations will have a material adverse effect on PageNet's business.
The restructuring of PageNet's back office field operations has been suspended
and will not result in the cost savings that were originally contemplated; it
is uncertain whether or when the consolidation will resume
Beginning in 1998, PageNet began restructuring its decentralized back
office field operations into centralized processing facilities. In January 2000,
PageNet suspended future conversions of its back office field operations, at
which time PageNet had converted 100% of its customer units placed in service
indirectly through PageNet's resellers, and approximately 50% of its directly
marketed customer units, to its centralized facilities. The suspension of future
conversions, combined with the impact of the contemplated merger on operations,
make it difficult for PageNet to determine the amount of potential cost savings
resulting from the restructuring initiative and will make it difficult for
PageNet to realize the full benefits intended to be achieved when restructuring
efforts began.
RISKS RELATED TO PAGENET'S BANKRUPTCY FILING
If the bankruptcy plan is not confirmed, the merger will not be consummated
PageNet's ability to have its plan of reorganization confirmed is
uncertain. Failure to have the plan confirmed would prevent the merger from
taking place. Furthermore, if the bankruptcy plan is not confirmed by December
31, 2000 the merger might not be consummated and implemented.
Only some of the provisions of the merger agreement, such as the
termination fees payable by Arch and PageNet, have been approved to the
bankruptcy court. The remaining provisions may not be binding upon PageNet, in
its capacity as a debtor in possession under the Bankruptcy Code, unless the
merger agreement is assumed by PageNet under the Bankruptcy Code.
The bankruptcy plan provides that the merger agreement is to be assumed by
PageNet, thus becoming enforceable, in connection with confirmation of the
bankruptcy plan. As discussed in this proxy statement, there can be no assurance
that the necessary confirmation requirements will be satisfied or that, if they
are satisfied, the bankruptcy court will confirm the bankruptcy plan.
11
<PAGE> 15
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,
PageNet, or any of their affiliates, management or 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" and "Arch Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results." If new information
becomes available or other events occur in the future, Arch will update any
forward-looking statements to the extent required by the securities laws, but
not otherwise.
12
<PAGE> 16
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA
The following unaudited selected pro forma financial and operating data of
the combined company gives effect to the following transactions as if they were
consummated as of June 30, 2000 with respect to the unaudited pro forma balance
sheet, except for Arch's acquisition of MobileMedia which closed prior to
December 31, 1999, and on January 1, 1999 with respect to the unaudited pro
forma statements of operations:
- Arch's acquisition of MobileMedia, on June 3, 1999;
- the exchange of $159.6 million (accreted value at June 30, 2000) of Arch
discount notes for 11.4 million shares of Arch common stock in Arch's
exchange offer;
- the conversion of $44.0 million of Arch Series D preferred stock into
approximately 6.6 million shares of Arch common stock upon completion of
the merger; and
- Arch's merger with PageNet.
The following selected pro forma financial information should be read in
conjunction with the unaudited pro forma condensed consolidated financial
statements and notes. The financial impact of expected operational cost
synergies resulting from the merger of PageNet and Arch and Arch's acquisition
of MobileMedia is excluded from this presentation.
The pro forma financial and operating data is presented for illustrative
purposes only and does not necessarily predict the operating results or
financial position that would have occurred if the merger of PageNet and Arch
and Arch's acquisition of MobileMedia had been consummated as of the dates
indicated above. Nor does it predict the future operating results or financial
position of Arch following the merger and the MobileMedia acquisition.
Adjusted earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, does not reflect restructuring charge,
provision for asset impairment and bankruptcy related expenses; consequently
adjusted earnings before interest, income taxes, depreciation and amortization
may not necessarily be comparable to similarly titled data of other wireless
communications companies. Earnings before interest, income taxes, depreciation
and amortization is commonly used by analysts and investors as a principal
measure of financial performance in the wireless communications industry.
Earnings before interest, income taxes, depreciation and amortization 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 repay certain
indebtedness. Earnings before interest, income taxes, depreciation and
amortization is also one of the financial measures used by analysts to value
Arch. Therefore Arch management believes that the presentation of earnings
before interest, income taxes, depreciation and amortization provides relevant
information to investors. Earnings before interest, income taxes, depreciation
and amortization should not be construed as an alternative to operating income
or cash flows from operating activities as determined in accordance with
generally accepted accounting principles or as a measure of liquidity. Amounts
reflected as earnings before interest, income taxes, depreciation and
amortization or adjusted earnings before interest, income taxes, depreciation
and amortization 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.
13
<PAGE> 17
Adjusted earnings before interest, income taxes, depreciation and
amortization margin is calculated by dividing Arch's adjusted earnings before
interest, income taxes, depreciation and amortization by total revenues less
cost of products sold. Earnings before interest, income taxes, depreciation and
amortization margin is a measure commonly used in the wireless communications
industry to evaluate a company's earnings before interest, income taxes,
depreciation and amortization relative to total revenues less cost of products
sold as an indicator of the efficiency of a company's operating structure.
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 2000
------------------ --------------
(DOLLARS IN THOUSANDS, EXCEPT
PERCENTAGE, PER SHARE AND UNIT DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service, rental and maintenance revenues.................... $ 1,651,502 $ 746,933
Product sales............................................... 152,017 67,555
----------- -----------
Total revenues.............................................. 1,803,519 814,488
Cost of products sold....................................... (113,891) (53,404)
----------- -----------
1,689,628 761,084
Operating expenses:
Service rental and maintenance.............................. 440,534 202,964
Selling..................................................... 204,777 84,700
General and administrative.................................. 573,294 258,032
Depreciation and amortization............................... 682,403 338,685
Restructuring charge........................................ (25,731) --
Provision for asset impairment.............................. 17,798 --
Bankruptcy related expenses................................. 14,938 --
----------- -----------
Operating income (loss)..................................... (218,385) (123,297)
----------- -----------
Interest and other income (expense)......................... (216,407) (105,324)
----------- -----------
Income (loss) before income tax provision................... (434,792) (228,621)
Income tax provision........................................ 209 --
----------- -----------
Net income (loss)........................................... $ (435,001) $ (228,621)
=========== ===========
Basic/diluted income (loss) per share....................... $ (2.56) $ (1.33)
=========== ===========
OTHER OPERATING DATA:
Adjusted earnings before interest, income taxes,
depreciation and amortization............................. $ 471,023 $ 215,388
Adjusted earnings before interest, income taxes,
depreciation and amortization margin...................... 28% 28%
Capital expenditures, excluding acquisitions................ $ 354,808 $ 79,410
Cash flows provided by operating activities................. 325,191 159,384
Cash flows used in investing activities..................... (894,682) (82,261)
Cash flows provided by financing activities................. 717,678 27,937
Units in service at end of period(1)........................ 15,500,000 14,030,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
-------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets................................................................. $ 259,020
Total assets................................................................... 2,853,128
Long-term debt, less current maturities........................................ 1,818,890
Stockholders' equity........................................................... 596,755
</TABLE>
---------------
(1) Units in service is calculated by adding the Arch and PageNet units in
service less an elimination for intercompany units in service.
The following table reconciles net income (loss) to the presentation of
Arch's pro forma adjusted earnings before interest, income taxes, depreciation
and amortization:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
<S> <C> <C>
Net income (loss)........................................... $ (435,001) $ (228,621)
Interest and other (income) expense......................... 216,407 105,324
Income tax provision........................................ 209 --
Depreciation and amortization............................... 682,403 338,685
Provision for asset impairment.............................. 17,798 --
Restructuring and bankruptcy expenses....................... (10,793) --
----------- -----------
Adjusted earnings before interest, income taxes,
depreciation and amortization............................. $ 471,023 $ 215,388
=========== ===========
</TABLE>
14
<PAGE> 18
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 Arch common stock for each $1,000
principal amount of maturity of outstanding discount notes that are tendered. As
of the date of this prospectus, $172.4 million in aggregate principal amount at
maturity of discount notes are outstanding.
The exchange ratio has been calculated based on principal amount of
maturity. No additional shares or other consideration will be paid on account of
accreted interest. Calculations of share amounts with respect to common stock
will be rounded down to the nearest whole share and no fractional shares of
common stock will be issued. Instead discount noteholders will receive cash for
such fractional shares of common stock.
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 respective 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 or otherwise in connection with the exchange offer and will
not be entitled to any such rights in the merger with PageNet. Arch intends to
conduct the exchange offer in accordance with the provisions of the merger
agreement and the applicable requirements of the Securities Act of 1933, the
Securities Exchange Act of 1934 and the rules and regulations of the Securities
and Exchange Commission.
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.
EXPIRATION DATE; EXTENSIONS
The expiration date will be 11:59 p.m., New York City time, on October ,
2000, the 35th day after the commencement of the exchange offer, or at a later
date which is mutually agreed upon by PageNet and Arch.
CONDITIONS
ARCH'S OBLIGATION TO CONSUMMATE THE EXCHANGE OFFER IS NOT CONDITIONED ON
THE VALID TENDER OF ANY SPECIFIED AMOUNT OF DISCOUNT NOTES AND IS NOT
CONDITIONED ON THE CONSUMMATION OF THE PAGENET MERGER.
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 their common stock from Arch.
The merger agreement requires that holders of the discount notes who tender
in connection with the exchange offer must also give their consent to:
- amend the indenture, if necessary, to permit completion of the merger;
- amend the indenture to eliminate:
-- any covenants which may be modified or eliminated by a majority vote
of the discount notes;
-- any events of default which relate to the non-payment or acceleration
of other indebtedness; and
15
<PAGE> 19
-- any provisions which condition a merger on compliance with any
financial criteria.
These amendments will remove substantially all of the rights of those discount
notes that are not tendered, other than their right to receive payment of
principal and interest. In addition, each holder will be required to waive any
and all existing defaults with respect to the discount notes. See "Proposed
Amendments."
Regardless of any other term of the exchange offer, Arch will not be
required to accept any discount notes for exchange if it reasonably believes
that the exchange offer violates applicable laws, rules or regulations or an
applicable interpretation of the staff of the SEC. In that case, Arch may:
- refuse to accept any discount notes and return all tendered 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."
INFORMATION AGENT
MacKenzie Partners, Inc. will act as the information agent for the exchange
offer. All inquiries in connection with the exchange offer should be addressed
to the information agent at the address and telephone number set forth on the
back cover page of this document.
EXCHANGE AGENT
Harris Trust Company of New York will act as exchange agent for the
exchange offer. All correspondence in connection with the exchange offer and the
letter of transmittal should be addressed to the exchange agent as set forth on
the back cover page of this document.
PROCEDURE FOR TENDERING DISCOUNT NOTES AND DELIVERY OF CONSENTS
The following summarizes the procedures to be followed by all holders of
discount notes in tendering their securities and delivering consents to the
proposed amendments to the indenture. Each holder of discount notes will receive
a letter of transmittal and other materials and instructions for tendering its
notes. Holders who tender discount notes in the exchange offer in accordance
with the procedures described below will be deemed to have delivered a consent
to the proposed amendments to the indenture.
TENDER OF DISCOUNT NOTES; DELIVERY OF CONSENTS
A registered holder of discount notes can tender discount notes by:
- delivering a properly completed and duly executed letter of transmittal
or manually-signed facsimile or an agent's message in connection with a
book-entry transfer and any other documents required by the letter of
transmittal, to the exchange agent at the address set forth below and on
the back cover page of this prospectus; and
- either delivering certificates representing the discount notes to the
exchange agent or complying with the book-entry transfer procedures
described under "-- Book-Entry Transfers" below,
on or prior to the expiration date. A registered holder who cannot comply with
these procedures on a timely basis or whose discount notes are not immediately
available may tender discount notes pursuant to the guaranteed delivery
procedures under "Guaranteed Delivery Procedures" described below.
16
<PAGE> 20
LETTERS OF TRANSMITTAL AND CERTIFICATES REPRESENTING DISCOUNT NOTES SHOULD
BE SENT ONLY TO THE EXCHANGE AGENT AND NOT TO US, TO THE INFORMATION AGENT OR TO
THE TRUSTEE. The following is the address for hand deliveries and delivery by
overnight courier to the exchange agent:
<TABLE>
<S> <C>
By Mail: By Hand and Overnight Courier:
Harris Trust Company of New York Harris Trust Company of New York
Wall Street Station 88 Pine Street
P.O. Box 1023 19th Floor
New York, New York 10268-1023 New York, New York 10005
</TABLE>
By Facsimile Transmission: (212) 701-7636 or (212) 701-7637
(For Eligible Institutions Only)
Confirm Facsimile by Telephone: (212) 701-7624
For Information Call: (212) 701-7624
If the certificates for discount notes are registered in the name of a
person other than the signer of a letter of transmittal, the certificates must
be endorsed or accompanied by appropriate bond powers, signed exactly as the
name or names of the holder or holders appear on the certificates, with the
signatures on the certificates or bond powers guaranteed as provided below. In
the event these procedures are followed by a beneficial owner tendering discount
notes, the registered holder or holders of the discount notes must sign a valid
consent pursuant to the letter of transmittal, because discount notes may not be
tendered without also consenting to the proposed amendments to the indenture,
and only holders are entitled to deliver consents.
Any beneficial owner whose discount notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominees, or held
through a book-entry transfer facility, and who wishes to tender discount notes
and deliver a consent to the proposed amendments should contact the registered
holder promptly and instruct the registered holder to tender discount notes on
the beneficial owner's behalf. If the beneficial owner wishes to tender its
discount notes itself, the beneficial owner must either make appropriate
arrangements to register ownership of the notes in the beneficial owner's name
prior to completing and executing the letter of transmittal and, where
applicable, delivering such notes, or follow the procedures described in the
immediately preceding paragraph.
To effectively tender discount notes that are held through The Depository
Trust Company, participants in The Depository Trust Company should transmit
their acceptance through The Depository Trust Company's Automated Tender Offer
Program, for which the transaction will be eligible, and The Depository Trust
Company will then edit and verify the acceptance and send an agent's message to
the exchange agent for its acceptance. Delivery of tendered discount notes held
through The Depository Trust Company must be made to the exchange agent pursuant
to the book-entry delivery procedures set forth below or the tendering
Depository Trust Company participant must comply with the guaranteed delivery
procedures set forth below.
THE METHOD OF DELIVERY OF DISCOUNT NOTES AND ALL OTHER REQUIRED DOCUMENTS
TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER TENDERING
DISCOUNT NOTES. INSTEAD OF DELIVERY BY MAIL, WE RECOMMEND THAT YOU USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IF DELIVERY IS BY MAIL, WE SUGGEST THAT YOU
USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT
THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE OF THE
EXCHANGE OFFER TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE.
A valid tender of your discount notes will constitute an agreement with us
in accordance with the terms and conditions set forth in this prospectus and in
the letter of transmittal. You should read the letter of transmittal carefully.
The tender of discount notes is not conditioned on the consummation of the
PageNet merger unless you so indicate by checking the appropriate box on the
letter of transmittal.
The entire principal amount of discount notes deposited with the exchange
agent will be deemed to have been tendered unless otherwise indicated. If less
than the entire principal amount of any discount notes evidenced by a submitted
certificate is tendered, the tendering holder should fill in the principal
17
<PAGE> 21
amount tendered in the appropriate box on the letter of transmittal with respect
to the deposit being made. The tender will also constitute a consent to the
proposed amendments to the indenture, but only to the extent of the principal
amount of senior subordinated notes being tendered. Upon completion of the
exchange offer, unless otherwise required under "Special Delivery Instructions"
in the letter of transmittal, the exchange agent will then return to the
tendering holder as promptly as practicable following the expiration date of the
exchange offer, discount notes in principal amount equal to the portion of the
delivered discount notes not tendered.
SIGNATURE GUARANTEES
All signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an institution that is eligible to make signature guarantees.
These eligible institutions include a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office in the United
States. Signature guarantees are not required if the discount notes are
tendered:
- by a registered holder of discount notes or by a participant in The
Depository Trust Company whose name appears on a security position
listing the participant as the owner of such senior subordinated notes,
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the letter of transmittal; or
- for the account of an eligible institution.
BOOK-ENTRY TRANSFERS
The exchange agent will establish an account with respect to the discount
notes at The Depository Trust Company promptly after the date of this
prospectus. A financial institution that is a participant in The Depository
Trust Company's system may make book-entry delivery of discount notes by causing
The Depository Trust Company to transfer the discount notes into the exchange
agent's account at The Depository Trust Company in accordance with The
Depository Trust Company's procedure for the transfer. Although delivery of the
discount notes may be effected through book-entry delivery at The Depository
Trust Company, in any case either:
- the letter of transmittal, with any required signature guarantees, or an
agent's message, together with any other required documents, must be
transmitted to and received by the exchange agent on or prior to the
expiration date of the exchange offer; or
- the guaranteed delivery procedures set forth below must be followed.
Delivery of documents to The Depository Trust Company in accordance with The
Depository Trust Company's procedure does not constitute delivery to the
exchange agent.
The term "agent's message" means a message transmitted by The Depository
Trust Company to, and received by, the exchange agent and forming a part of a
book-entry confirmation, which states that The Depository Trust Company has
received an express acknowledgment from the participant in The Depository Trust
Company tendering the discount notes stating:
- the aggregate principal amount of discount notes which have been tendered
by the participant and for which consents to the proposed amendments to
the indenture have been delivered;
- that such participant has received and agrees to be bound by the terms of
the exchange offer; and
- that we may enforce such agreement against the participant.
GUARANTEED DELIVERY PROCEDURES
If a holder desires to tender discount notes and consent to the proposed
amendments to the indenture and (1) the holder's discount notes are not lost but
are not immediately available, (2) time will not permit the holder's discount
notes or other required documents to reach the exchange agent before the
18
<PAGE> 22
expiration date of the exchange offer or (3) the procedures for book-entry
transfer cannot be completed on a timely basis, a tender and consent may be
effected if:
- the tender is made through an eligible institution; and
- prior to the expiration date of the exchange offer, the exchange agent
receives from the eligible institution a properly completed Notice of
Guaranteed Delivery by telegram, telex, facsimile transmission, mail or
hand delivery substantially in the form we provide which states the name
and address of the holder and the amount of discount notes tendered; and
- within three New York Stock Exchange trading days after the date of
execution of the Notice of Guaranteed Delivery, the exchange agent
receives:
-- a letter of transmittal, properly completed and validly executed with
any required signature guarantees, or, in the case of a book-entry
transfer, an agent's message, together with
-- certificates for all discount notes in proper form for transfer or a
book-entry confirmation with respect to all tendered discount notes,
and
-- any other required documents.
TRANSFERS OF OWNERSHIP OF TENDERED NOTES
Holders may not transfer record ownership of any discount notes validly
tendered into the exchange offer and not validly withdrawn. The holder may
transfer beneficial ownership in tendered discount notes by:
- delivering to the exchange agent, at one of its addresses set forth on
the back cover of this prospectus, an executed letter of transmittal
identifying the name of the person who deposited the notes to be
transferred, and
- completing the special issuance instructions box with the name of the
transferee or, if tendered by book-entry transfer, the name of the
participant in The Depository Trust Company whose name appears on the
security position listing as the transferee of the notes and the
principal amount of the discount notes to be transferred.
If certificates have been delivered or otherwise identified through a book-entry
confirmation with respect to the discount notes to the exchange agent, the name
of the holder who deposited the discount notes, the name of the transferee and
the certificate numbers relating to the discount notes should also be provided
in the letter of transmittal. A person who succeeds to the beneficial ownership
of tendered discount notes pursuant to the procedures set forth in this section
will be entitled to receive:
- the exchange consideration if the discount notes are accepted for
exchange, or
- the tendered discount notes if the exchange offer is terminated.
BACKUP WITHHOLDING TAX
Each tendering holder must complete and deliver the Substitute Form W-9
provided in the letter of transmittal to us or the exchange agent and either:
- provide his correct social security number or other taxpayer
identification number and certify that the number provided is correct or
that such holder is awaiting a taxpayer identification number and that
either:
-- the holder has not been notified by the Internal Revenue Service that
he is subject to backup withholding as a result of failure to report
all interest or dividends or
-- the Internal Revenue Service has notified the holder that he is no
longer subject to backup withholding; or
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<PAGE> 23
- otherwise provide an adequate basis for exemption from backup
withholding.
Holders who do not satisfy these conditions may be subject to a $50 or
greater penalty imposed by the Internal Revenue Service and may be subject to
backup withholding as discussed below. Exempt holders such as corporations and
some foreign individuals are not subject to these requirements if they
satisfactorily establish their status as such. Some foreign holders may be
required to provide a Form W-8 or Form 1001 or successor form in order to avoid
or reduce withholding tax.
Pursuant to the backup withholding provisions of federal income tax law,
unless the conditions described above are satisfied, we or the exchange agent
will withhold an amount of any cash proceeds payable to a tendering holder that
will enable us or the exchange agent to remit the appropriate amount of backup
withholding due to the Internal Revenue Service with respect to the exchange.
Backup withholding is 31%. Amounts paid as backup withholding do not constitute
an additional tax and generally will be credited against the holder's federal
income tax liabilities. Different withholding rates and rules may apply in the
case of foreign holders. By tendering discount notes pursuant to the exchange
offer, a holder that does not comply with the conditions described in the
preceding paragraph authorizes us or the exchange agent to pay cash in an amount
sufficient to satisfy the holder's withholding obligations.
ACCEPTANCE OF DISCOUNT NOTES, DELIVERY OF COMMON STOCK AND PAYMENT
The acceptance for exchange and payment of discount notes validly tendered
and not withdrawn and delivery of Arch common stock in exchange for the discount
notes will be made as promptly as practicable after the expiration date of the
exchange offer. We, however, expressly reserve the right to delay acceptance of
any of the discount notes or terminate the exchange offer and not accept for
exchange any discount notes not accepted if any of the conditions set forth
under "The Exchange Offer -- Conditions" are not satisfied or waived by us. For
purposes of the exchange offer, we will be deemed to have accepted for exchange
validly tendered discount notes if, as and when we give oral or written notice
of acceptance to the exchange agent. Subject to the following paragraph and the
other terms and conditions of the exchange offer, delivery of Arch common stock
for discount notes accepted pursuant to the exchange offer will be made by the
exchange agent as soon as practicable after receipt of such notice. The exchange
agent will act as agent for the tendering holders for the purposes of receiving
Arch common stock from Arch and transmitting the Arch common stock and to the
tendering holders. We will return any tendered discount notes not accepted for
exchange without expense to the tendering holder as promptly as practicable
following the expiration date of the exchange offer.
Notwithstanding any other provision described in this prospectus, delivery
of exchange consideration for discount notes accepted for exchange pursuant to
the exchange offer will in all cases be made only after timely receipt by the
exchange agent of:
- certificates for, or a timely book-entry confirmation with respect to,
the discount notes;
- a letter of transmittal, properly completed and validly executed, with
any required signature guarantees, or, in the case of a book-entry
transfer, an agent's message; and
- any other documents required by the letter of transmittal and the
instructions to the letter of transmittal.
Holders tendering pursuant to the procedures for guaranteed delivery
discussed under the caption "-- Guaranteed Delivery Procedures" whose
certificates for discount notes or book-entry confirmation with respect to
discount notes are actually received by the exchange agent after the expiration
date may be paid later than other tendering holders.
All tendering holders, by execution of the letter of transmittal, waive any
right to receive notice of acceptance of their discount notes for exchange.
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<PAGE> 24
WITHDRAWAL
You may withdraw tenders of discount notes at any time before 11:59 p.m.,
on the expiration date, except as otherwise provided below.
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 11:59 p.m., 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.
If discount notes have been tendered pursuant to the procedures for book-entry
transfer discussed under the caption "-- Book-Entry Transfers," any notice of
withdrawal must specify the name and number of the account at The Depository
Trust Company to be credited with the withdrawn discount notes and must
otherwise comply with The Depository Trust Company's procedures.
We will determine, in our sole discretion, all questions as to validity,
form and eligibility of withdrawal notices including the time of receipt. Our
determination will be final and binding on all parties. Any withdrawn discount
notes will not be deemed to be 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 one of the procedures described
above under "-- Procedures for Tendering Discount Notes and Delivery of
Consents" at any time before the expiration date.
PRIOR TO THE EXECUTION OF THE SUPPLEMENTAL INDENTURE WITH RESPECT TO THE
DISCOUNT NOTES, A WITHDRAWAL OF THE TENDER OF A DISCOUNT NOTE WILL ALSO EFFECT A
REVOCATION OF A CONSENT TO THE PROPOSED AMENDMENTS TO THE INDENTURE. Consents to
the proposed amendments to the indenture cannot be revoked after execution of
the supplemental indenture to the indenture governing the discount notes. See
"Proposed Amendments." A supplemental indenture to the indenture will be
executed by us and the trustee on or promptly following expiration of the
exchange offer as long as a majority of the outstanding discount notes are
tendered.
REVOCATION OF CONSENTS
Any holder who has delivered a consent, or who succeeds to ownership of
discount notes in respect of which a consent has previously been delivered, may
validly revoke such consent prior to the execution of the supplemental indenture
to the indenture by delivering a written notice of revocation in accordance with
the following procedures. A supplemental indenture to the indenture will be
executed by Arch and the trustee on or promptly following expiration of the
exchange offer. In order to be valid, a notice of revocation of a consent must:
- contain the following:
-- the name of the person who delivered the consent;
-- the description of the discount notes to which it relates;
-- the certificate number or numbers of the discount notes, unless the
notes were tendered by book-entry transfer; and
-- the aggregate principal amount represented by the notes;
- be signed by the holder of the discount notes in the same manner as the
original signature on the applicable letter of transmittal, including the
required signature guarantees, or be accompanied by
21
<PAGE> 25
evidence satisfactory to us that the person revoking the consent has
succeeded to the beneficial ownership of the discount notes; and
- be received by the exchange agent at one of its addresses set forth on
the back cover of this prospectus prior to the execution of the amendment
to the indenture by the trustee.
A purported notice of revocation that lacks any of the required information or
is dispatched to an improper address will not validly revoke a consent
previously given.
THE VALID REVOCATION OF A HOLDER'S CONSENT WILL CONSTITUTE THE CONCURRENT
VALID WITHDRAWAL OF THE TENDERED DISCOUNT NOTES WITH RESPECT TO WHICH THE
CONSENT WAS DELIVERED. AS A RESULT, A HOLDER WHO VALIDLY REVOKES A PREVIOUSLY
DELIVERED CONSENT WILL NOT RECEIVE ANY CONSIDERATION IN THE EXCHANGE OFFER.
INTERPRETATION
We, in our sole discretion, will determine all questions as to the form of
all documents, time of receipt, and the validity, eligibility, acceptance and
withdrawal of tendered discount notes. Our determination shall be final and
binding. We reserve the absolute right to reject any and all tenders not in
proper form or the acceptance of which would be unlawful, in the opinion of our
legal counsel. Neither we, the exchange agent nor any other person will be under
any duty to give notification of any defects or irregularities in tenders or
withdrawals or will incur any liability for failure to give any such
notification. The exchange agent will return any discount notes it receives that
are not properly tendered and as to which irregularities have not been cured or
waived. Our interpretation of the terms and conditions of the exchange offer,
including the letter of transmittal and its instructions, will be final and
binding on all parties.
RELEASE OF CLAIMS BY TENDERING HOLDERS OF DISCOUNT NOTES
A holder whose discount notes are exchanged will release all claims, rights
or causes of action against us relating to the discount notes, the exchange
offer or any other dealings with us up to and including the date of the
exchange. The holder will be releasing all claims on behalf of itself, its
affiliates, successors or assigns against us, as well as all of our
subsidiaries, affiliates, officers, employees and all others acting on our
behalf. However, this release does not apply to:
- claims relating to our obligation to deliver the securities offered
pursuant to the exchange offer in accordance with the terms thereof; or
- claims, if any, against us or any of our subsidiaries under federal or
state securities laws that the prospectus includes any untrue statement
of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
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."
We are also soliciting the approval of the holders of discount notes to
amendments that include the elimination of substantially all rights of the notes
other than the right to receive payments of principal and interest. If Arch
noteholders decide not to tender all or some of their notes, the notes that they
retain will no longer have any of these additional rights if the holders of a
majority of the outstanding discount notes tender their discount notes and do
not withdraw their tenders before the appropriate date. Their position as
noteholders may suffer if any developments occur which these additional rights
were designed to protect them against, such as distributions to stockholders or
unfavorable business combinations.
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<PAGE> 26
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 discount notes, the notes that you retain will have substantially
fewer rights than they currently have and this may leave you unprotected in the
future."
<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>
23
<PAGE> 27
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 discount 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.
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<PAGE> 28
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
SCOPE AND LIMITATION
In the opinion of Hale and Dorr LLP, counsel to Arch, this section
describes the material 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
discount notes for Arch stock pursuant to the exchange offer.
This discussion assumes that each Arch noteholder is both:
- a citizen or resident of the United States for federal income tax
purposes; and
- holds Arch discount notes as capital assets under Section 1221 of the
Internal Revenue Code.
The following discussion is limited to material federal income tax
consequences. The discussion does not describe any tax consequences arising out
of the laws of any state, locality, or foreign jurisdiction. The discussion does
not address all aspects of federal income taxation that may be applicable to a
noteholder in light of the noteholder's particular circumstances or to
noteholders subject to special treatment under federal income tax laws
including, without limitation:
- dealers in securities;
- financial institutions;
- life insurance companies;
- persons who acquired Arch discount notes as part of a straddle, hedge,
conversion transaction or other integrated transaction;
- tax-exempt entities;
- foreign individuals and entities; and
- persons who hold Arch discount notes through a partnership or other
pass-through entity.
EACH ARCH NOTEHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING THE SPECIFIC
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES APPLICABLE TO IT.
FEDERAL INCOME TAX CONSEQUENCES TO EXCHANGING NOTEHOLDERS
The following discussion applies to noteholders who exchange their discount
notes pursuant to the exchange offer. 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 discount 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
discount notes will constitute an exchange for federal income tax purposes. The
federal income tax consequences to these noteholders will depend on whether
their discount notes constitute "securities" for federal income tax purposes.
The term "securities" is not defined in the Internal Revenue Code or applicable
regulations and has not been clearly defined by court decisions. The
determination of whether an instrument constitutes a "security" for federal
income tax purposes is based upon all the facts and circumstances including, but
not limited to:
- the term of the debt instrument;
- the degree of participation and continuing interest in the business;
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<PAGE> 29
- the extent of proprietary interest compared with the similarity of the
note to a cash payment; and
- the overall purpose of the advances.
Although the determination of whether an instrument constitutes a "security" is
based upon all facts and circumstances, the term of the debt instrument is
usually considered the most significant factor. In general, a bona fide debt
instrument which has a term of ten years or more is more likely to be classified
as a "security." The discount notes which are being exchanged mature more than
10 years after issuance. Based upon the terms of the discount notes and other
relevant factors, the discount notes are likely to be classified as securities;
however, this conclusion is not entirely free from doubt.
Qualification as a "Recapitalization"
If the discount notes constitute securities, the exchange of such discount
notes for Arch common stock should qualify as a "recapitalization" for federal
income tax purposes. In such case, except as described below under the
subheadings "-- Allocation to Accrued Interest" and "-- Receipt of Cash Instead
of Fractional Shares," the noteholders will not recognize gain or loss on the
receipt of the Arch common stock in satisfaction of their discount notes. The
Arch common stock will have a tax basis equal to the adjusted tax basis of the
discount notes surrendered and will have a holding period that includes the
tendering noteholder's holding period for the exchanged discount notes.
If the discount notes do not constitute "securities," then the exchange of
such discount notes will not qualify as a "recapitalization," and an exchanging
noteholder would recognize the entire amount of its gain or loss for federal
income tax purposes. The noteholder's gain or loss would be the difference
between:
- the fair market value of Arch common stock received, including fractional
shares received instead of cash; and
- the noteholder's tax basis in the discount notes surrendered.
In such a case, the tax basis in the Arch common stock received would equal the
fair market value of the Arch common stock at the time of the exchange, and the
holding period for the Arch common stock would begin on the day after the
exchange.
Character of Gain or Loss Recognized
Any gain or loss recognized on the exchange will be capital gain or loss
except for any amounts attributable to market discount, as discussed under the
next subheading. This capital gain or loss will be long-term capital gain or
loss if the noteholder's holding period for the discount notes surrendered
exceeds one year at the time of the exchange.
The maximum federal ordinary income tax rate for individuals, estates and
trusts is generally 39.6%, whereas the maximum federal long-term capital gains
rate for such taxpayers is 20% for capital assets held for more than 12 months.
The federal income tax rates applicable to capital gains for taxpayers other
than individuals, estates and trusts are currently the same as those applicable
to ordinary income. However, capital losses generally may be used by a corporate
taxpayer only to offset capital gains, and by an individual taxpayer only to the
extent of capital gains plus $3,000 of other income per year.
Market Discount
If an exchanging noteholder has accrued and unrecognized market discount on
its discount notes, a portion of the gain, if any, recognized on the exchange
will be treated as ordinary income and will not receive capital gain treatment.
In the case of a debt instrument issued with original issue discount,
market discount generally equals the excess of the adjusted issue price of the
debt instrument over the adjusted basis of the instrument in the hands of the
holder immediately after its acquisition by the holder. In the case of a debt
instrument
26
<PAGE> 30
issued without original issue discount, market discount generally equals the
excess of the face amount of the debt instrument over the basis of the
instrument in the hands of the holder immediately after its acquisition by the
holder.
Under the market discount rules, an exchanging noteholder will recognize as
ordinary income an amount equal to the lesser of:
- any gain recognized on the exchange, determined as described above; and
- any accrued and unrecognized market discount on the discount notes.
Any remaining accrued and unrecognized market discount will carry over to the
Arch common stock and will be treated as ordinary income upon disposition of the
Arch common stock.
If the discount notes do not constitute "securities," then accrued and
unrecognized market discount will be includible in a noteholder's ordinary
income at the consummation of the exchange offer to the extent of any gain
recognized by the noteholder on the exchange.
Although the foregoing treatment is likely, there is no exact precedent
governing the exchanging noteholder's situation. Noteholders exchanging discount
notes with market discount should consult their tax advisors concerning the
effect of the market discount provisions.
Allocation to Accrued Interest
The foregoing rules will not apply to any consideration received by an
exchanging noteholder which is treated as interest. In particular, a noteholder
who, under its accounting method, was not previously required to include in
income accrued but unpaid interest attributable to its ownership of discount
notes, and who, pursuant to the exchange offer, exchanges its discount notes for
Arch common stock, will be treated as receiving ordinary interest income to the
extent that any consideration so received is allocable to the accrued interest.
This amount will be includible as ordinary income regardless of whether the
noteholder realizes an overall gain or loss as a result of the exchange. In
addition, a noteholder who had previously included in income accrued but unpaid
interest attributable to the holder's discount notes will be allowed to
recognize a loss to the extent such accrued but unpaid interest is not satisfied
in full in the exchange. This loss will generally be deductible in full against
ordinary income. For purposes of this discussion, accrued interest means
interest which was accrued while the note was held by the noteholder.
The extent to which consideration received in the exchange offer is
allocable to accrued but unpaid interest is unclear under existing law. Under
existing authority, the consideration received could be allocated to accrued but
unpaid interest under three possible alternatives. First, there is authority
which indicates that all of the consideration received would first be allocated
to interest which accrued while the discount note was held by the noteholder,
with any remaining amount being allocated to outstanding principal. However,
there is also authority for the conclusion that in a case where the value
received for the debt being discharged is less than the principal amount of the
debt, none of the consideration should be allocated to accrued but unpaid
interest. Finally, there is authority that the consideration received should be
allocated ratably between principal and interest based upon the amount of the
outstanding principal and the amount of accrued unpaid interest as of the date
of the exchange. Because of the existence of these conflicting authorities,
exchanging noteholders should consult their tax advisors concerning the method
of allocation.
Receipt of Cash Instead of Fractional Shares
An exchanging noteholder will recognize gain or loss to the extent that
cash is received instead of a fractional share of Arch common stock. The
fractional share will be treated as received by the exchanging
27
<PAGE> 31
noteholder and then redeemed by Arch. Such gain or loss will be recognized in an
amount equal to the difference between:
- the amount of cash received for the fractional Arch share; and
- such holder's adjusted tax basis allocable to the fractional Arch share.
FEDERAL INCOME TAX CONSEQUENCES TO NONTENDERING NOTEHOLDERS
If a noteholder does not participate in the exchange offer, there will be
no change in such noteholder's tax position, assuming the proposed amendments to
the indenture do not cause the discount notes to be considered materially
different in kind from the discount notes in their current form. The proposed
amendments will be considered to have caused the discount notes to be materially
different in kind if the proposed amendments constitute a "significant
modification" of the discount 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
discount notes. That conclusion, however, is not free from doubt. If the
proposed amendments are considered to cause a significant modification of the
discount notes and the discount 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 discount notes the difference between the face
value of the discount notes and the fair market value of such discount notes on
the date of the exchange offer.
FEDERAL INCOME TAX CONSEQUENCES TO ARCH OF THE EXCHANGE OFFER
Arch expects to incur tax liability resulting from the elimination in the
exchange offer of indebtedness in exchange for consideration having a value less
than the adjusted issue price of the outstanding debt. The exact amount of this
tax liability cannot be determined precisely, because it depends on the value of
the Arch stock at the time of the closing of the merger with PageNet, and on
certain other factors. In addition, the exchange offer is 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 Arch after the merger.
28
<PAGE> 32
THE MERGER
GENERAL
Arch and PageNet have agreed to merge on the terms set forth in the merger
agreement. 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 exchange offer
and under the PageNet bankruptcy plan.
The merger agreement provides that:
- PageNet will merge with a wholly owned subsidiary of Arch. In the merger,
each share of PageNet common stock will be converted into 0.04796505
shares of Arch common stock. On November 5, 1999, the last trading day
before the public announcement of the proposed merger, PageNet's common
stock had a closing price of $0.96875 per share, which exceeded the
closing price equivalent of $0.32677 for 0.04796505 shares of Arch common
stock. On September 8, 2000, the last day for which information was
available prior to the first mailing of this prospectus, PageNet's common
stock had a closing price of $0.297 per share compared to $0.27580 for
0.04796505 shares of Arch common stock.
- In connection with the merger, approximately 84,917,844 shares of Arch
common stock and 60.5% of the equity interest in Vast will be exchanged
for all of PageNet's outstanding senior subordinated notes.
- PageNet will distribute 20.0% of the equity interest in Vast to the
holders of PageNet common stock in connection with the merger.
- Concurrently with, but separate from the merger and not conditioned upon
the merger, Arch has agreed to 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. During 2000, Arch has issued
11,640,321 shares of Arch common stock and 1,000,000 shares of Arch
Series D convertible preferred stock that automatically converts into
6,613,180 shares of common stock when the merger closes in exchange for
discount notes tendered by Arch noteholders in negotiated transactions.
If all of the remaining outstanding discount notes are exchanged, Arch
will have issued a total of 29,651,984 shares of its common stock for all
of its discount notes that were outstanding on November 7, 1999.
- 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.
CONDITIONS TO COMPLETION OF THE MERGER
We will complete the merger only if the conditions set forth in the merger
agreement are satisfied or waived. The conditions to each of Arch's and
PageNet's obligation to complete the merger include:
- stockholder approval of the transaction by Arch's stockholders;
- entry of a confirmation order, not subject to a stay or injunction, by
the bankruptcy court confirming the PageNet bankruptcy plan;
- the filing of a notification for the listing on the Nasdaq National
Market System of the Arch common stock to be issued in connection with
the merger and other transactions contemplated by the merger agreement;
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<PAGE> 33
- the receipt of specified governmental consents, permits, licenses and
approvals for the merger and the expiration or termination of all
applicable waiting periods, and any extensions of these periods, under
the Hart-Scott-Rodino Act;
- the availability of senior credit facilities in a minimum amount of $1.3
billion to Arch and its subsidiaries, including PageNet, after the
merger;
- Arch's receipt of all required state securities and "blue sky" permits
and approvals;
- that neither PageNet, Arch nor any of their subsidiaries incur
out-of-pocket income tax liability in their respective taxable periods of
more than $25.0 million in the aggregate as a result of the merger; and
- all conditions under the PageNet bankruptcy plan have been satisfied.
The additional conditions to Arch's obligation to complete the merger
include:
- the accuracy of PageNet's material representations and warranties, apart
from any representations and warranties which would be breached by
PageNet filing or conducting a bankruptcy case or the filing of an
involuntary bankruptcy petition or similar creditors' rights petition
against PageNet;
- PageNet's performance in all material respects of all its covenants,
agreements and obligations under the merger agreement;
- PageNet's receipt of required material consents or approvals to the
merger and the other transactions contemplated by the merger agreement;
- Arch's receipt of required material consents or approvals to the merger
and the other transactions contemplated by the merger agreement; and
- Arch's receipt of an unqualified certificate from PageNet that each of
the conditions described above has been satisfied.
The additional conditions to PageNet's obligation to complete the merger
include:
- the accuracy of Arch's material representations and warranties,
- Arch's performance in all material respects of all its covenants,
agreements and obligations under the merger agreement;
- Arch's receipt of required material consents or approvals to the merger
and the other transactions contemplated by the merger agreement;
- PageNet's receipt of a favorable tax opinion rendered as of the closing
of the merger from Mayer, Brown & Platt as to the tax consequences of the
merger to PageNet's stockholders; and
- PageNet's receipt of an unqualified certificate from Arch that each of
the conditions described above has been satisfied, that the Arch
stockholders meeting has been convened and Arch stockholders have:
- increased the authorized number of shares of Arch common stock to an
amount sufficient to complete the merger; and
- approved the issuance of such common stock.
At any time before the effective time of the merger, to the extent allowed
by law and except for the condition relating to receipt of a favorable tax
opinion, Arch or PageNet may waive any of these conditions without the approval
of their respective stockholders except to the extent they believe that, in the
particular circumstances presented, applicable law requires stockholder
approval. As of the date of this prospectus, neither company expects to waive
any of these conditions.
30
<PAGE> 34
PAGENET'S BANKRUPTCY PLAN
PageNet filed its bankruptcy plan in its chapter 11 case on July 25, 2000.
Through confirmation of its bankruptcy plan, PageNet is seeking to bind its
noteholders and stockholders to the terms of the merger. The following is a
summary of some matters of significance to Arch discounted noteholders that will
occur either pursuant to or in connection with the filing of the chapter 11 case
and confirmation of the PageNet bankruptcy plan.
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS UNDER THE PAGENET BANKRUPTCY PLAN
The Bankruptcy Code requires that the PageNet bankruptcy plan classify the
claims against, and equity interests in PageNet. PageNet believes that all
claims and equity interests have been appropriately classified in its bankruptcy
plan. PageNet has separately classified general unsecured claims, mostly claims
of trade creditors, from claims arising under PageNet's senior subordinated
notes. Many of the holders of general unsecured claims are key suppliers of
products and services to PageNet. A failure by PageNet to pay these trade
creditors in accordance with the terms agreed upon could adversely affect
PageNet's ability to obtain essential trade credit and could substantially
impair PageNet's ability to do business with trade creditors whose goods and
services are essential to PageNet.
The Bankruptcy Code also requires that the PageNet bankruptcy plan provide
the same treatment for each claim or equity interest of a particular class
unless the holder of a particular claim or equity interest agrees to a less
favorable treatment of its claim or equity interest. PageNet believes that its
bankruptcy plan complies with this requirement of equal treatment.
A class of claims or equity interests that is impaired under the PageNet
bankruptcy plan is entitled to vote to accept or reject the plan, unless the
class will not receive or retain any property under the bankruptcy plan in which
case the class is deemed to have rejected the plan. A class of claims or equity
interests is not impaired if the plan does not alter the legal, equitable or
contractual rights of the holders of such claims or equity interests. Under the
Bankruptcy Code, holders of claims or equity interests which are not impaired
are conclusively presumed to have accepted the bankruptcy plan.
The PageNet bankruptcy plan classifies creditor claims and stockholder
interests as follows:
<TABLE>
<CAPTION>
CLASS STATUS VOTING RIGHTS
----- ---------- ---------------------------
<S> <C> <C>
Class 1 -- Priority Claims Unimpaired -- not entitled to vote
Class 2 -- Bank Secured Claims Impaired -- entitled to vote
Class 3 -- Other Secured Claims Unimpaired -- not entitled to vote
Class 4 -- General Unsecured Claims Unimpaired -- not entitled to vote
Class 5 -- Senior Subordinated Note Claims Impaired -- entitled to vote
Class 6 -- Old Stock Interests Impaired -- entitled to vote
Class 7 -- Subsidiary Stock Interests and Impaired -- entitled to vote
Subsidiary Claims
</TABLE>
TREATMENT OF PAGENET STOCKHOLDER RIGHTS UNDER THE PAGENET BANKRUPTCY PLAN
The interests of PageNet stockholders are classified as Class 6 interests
under the PageNet bankruptcy plan.
Class 6 -- Old Stock Interests
- Classification: Old stock interests consist of all equity interests in
PageNet.
- Treatment: On the effective date each holder of an allowed old stock
interest (excluding Arch and any of its subsidiaries) will receive, in full
satisfaction of their rights and interests with respect to, on account of or
arising from or in connection with such old stock interests, a pro rata share of
5,000,000 shares of Arch common stock and 4,000,000 shares of Class B common
stock of Vast.
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<PAGE> 35
- Voting: Old stock interests are impaired and the holders of allowed old
stock interests are entitled to vote to accept or reject the PageNet bankruptcy
plan.
The PageNet bankruptcy plan provides that holders of allowed Class 6
interests will receive a pro rata share of Arch common stock and Vast Class B
common stock. For each 100 shares of PageNet common stock, the PageNet
bankruptcy plan provides for distribution of approximately 4.797 shares of Arch
common stock and approximately 3.837 shares of Vast Class B common stock.
OTHER PROVISIONS OF THE PAGENET BANKRUPTCY PLAN AND INTENDED ACTIONS DURING THE
CHAPTER 11 CASE
Releases
With some exceptions PageNet will release pursuant to the PageNet
bankruptcy plan the holders of PageNet secured bank claims, Arch, its
subsidiaries and their officers, directors and agents and PageNet's officers and
directors of all claims which PageNet may have against any of them except for
claims under the merger agreement, other contractual claims and claims for
fraud, gross negligence or willful misconduct.
Indemnification of Directors, Officers and Employees
The PageNet bankruptcy plan provides that the obligations of PageNet to
indemnify any person serving at any time on or prior to the effective date as
one of its directors, officers, or employees by reason of such person's service
in such capacity, to the extent provided in PageNet's constituent documents or
by written agreement or Delaware law, shall be deemed and treated as executory
contracts that are assumed by PageNet as of the effective date. Accordingly,
such indemnification obligations shall survive unimpaired and unaffected by
entry of the confirmation order, irrespective of whether such indemnification
becomes owing on account of an act or event occurring before or after the
commencement of the chapter 11 case.
Provisions Relating to the Merger Agreement
The bankruptcy court has approved the provisions of the merger agreement
that restrict PageNet's ability to solicit other offers for PageNet's
businesses, and that require PageNet to pay a termination fee to Arch upon
specified termination events and Arch to pay a termination fee to PageNet upon
specified termination events.
In addition, the PageNet bankruptcy plan provides that on the confirmation
date, PageNet will be deemed to have assumed the merger agreement unless the
merger agreement is assumed by PageNet prior to the confirmation date pursuant
to an order of the bankruptcy court.
Payment of Prepetition General Unsecured Claims
During the pendency of the chapter 11 case filed in connection with the
restructuring, PageNet intends to operate its businesses in the ordinary course
and to make payment in full on a timely basis for all goods and services
provided after the commencement of the chapter 11 case. PageNet also obtained
bankruptcy court approval to pay in full in the ordinary course of business the
pre-petition claims owing to general unsecured creditors that were incurred in
the ordinary course of PageNet's business (not including claims under the senior
subordinated notes). PageNet also received a commitment for a $50 million
debtor-in-possession loan facility, and expects that PageNet will have
sufficient funds to pay its prepetition and postpetition general unsecured
creditors in the ordinary course of business through the conclusion of the
chapter 11 case.
Provisions for Employees; Retention Programs; Employment Contracts
PageNet also obtained relief from the bankruptcy court so that salaries,
wages accrued and unpaid vacation, health benefits, severance benefits and
similar employee benefits will be unaffected by the filing of the chapter 11
case. PageNet obtained approval of the bankruptcy court, immediately upon
commencement of the chapter 11 case, to honor payroll checks outstanding as of
the date of the
32
<PAGE> 36
commencement of the chapter 11 case, to permit employees to utilize their paid
vacation time which was accrued prior to the filing and to continue paying
medical and other employee benefits under the applicable health plans. PageNet
also obtained the authority to honor certain portions of its employee retention
program. Employee claims and benefits not paid or honored, as the case may be,
prior to the consummation of the bankruptcy plan, will be paid or honored upon
consummation or as soon thereafter as such payment or other obligation becomes
due or payable. Employee benefit claims that accrue prior to the date of the
commencement of the chapter 11 case, will receive unimpaired treatment under the
terms of the PageNet bankruptcy plan.
STANDARDS FOR CONFIRMATION OF THE PAGENET BANKRUPTCY PLAN
The Bankruptcy Code sets forth the requirements that must be satisfied to
confirm a plan of reorganization. A number of the more significant confirmation
requirements are discussed below. PageNet believes that it has complied or will
comply with each of these requirements.
Good Faith and Compliance with Law
The Bankruptcy Code requires that a plan of reorganization be proposed in
good faith and disclose certain relevant information regarding payments due and
the nature of compensation to insiders. PageNet believes it has satisfied these
requirements and will seek a ruling to that effect from the bankruptcy court in
connection with confirmation of the PageNet bankruptcy plan.
Best Interests
The Bankruptcy Code requires that, with respect to each impaired class,
each member of such class either:
- accepts the bankruptcy plan; or
- will receive or retain under the bankruptcy plan on account of its claim
or equity interest property of a value, as of the effective date, that is
at least equal to the value of the property that such member of the class
would receive or retain if PageNet were liquidated under chapter 7 of the
Bankruptcy Code.
PageNet's management has prepared a hypothetical Chapter 7 liquidation analysis
to indicate the estimated net present values which would be allocated to
PageNet's creditors and equity holders if PageNet's assets were liquidated.
PageNet believes that its bankruptcy plan will provide members of each impaired
class with at least what they would receive in a chapter 7 liquidation, and
therefore the bankruptcy plan meets this test. For further information on the
liquidation analysis, we refer you to the filings by PageNet with the bankruptcy
court in connection with this matter.
Feasibility
The bankruptcy court must also determine that PageNet's bankruptcy plan is
feasible and is not likely to be followed by liquidation or further
reorganization of PageNet. To determine whether the PageNet bankruptcy plan
meets this requirement, PageNet has analyzed its ability, along with Arch, to
meet its obligations under the plan. This analysis includes a forecast of
financial performance of Arch and reorganized PageNet. Based upon such forecast,
PageNet believes that it will have the financial capability to satisfy their
obligations following the effective date of the PageNet bankruptcy plan.
Accordingly, PageNet will seek a ruling to that effect in connection with the
confirmation of the PageNet bankruptcy plan.
Plan Acceptance
The Bankruptcy Code requires, subject to certain exceptions, that the
PageNet bankruptcy plan be accepted by all impaired classes of claims and equity
interests. Classes of claims that are not "impaired" under a plan are deemed to
have accepted the plan and are not entitled to vote. A class of claims accepts a
plan if the holders of at least 66 2/3% in dollar amount and more than one-half
in number of the allowed
33
<PAGE> 37
claims in that class that actually vote on the plan, vote to accept the plan. A
class of equity interests accepts a plan if at least 66 2/3% of the allowed
interests in that class that actually vote on the plan vote to accept the plan.
Holders of claims or equity interests who fail to vote or who abstain will not
be counted to determine the acceptance or rejection of the PageNet bankruptcy
plan by any impaired class. PageNet may, however, request confirmation of the
PageNet bankruptcy plan even though some impaired classes have not accepted the
plan.
CONFIRMATION OF THE PAGENET BANKRUPTCY PLAN WITHOUT ACCEPTANCE BY ALL CLASSES OF
IMPAIRED CLAIMS
In the event that all classes of PageNet's creditors and equity holders do
not accept the PageNet bankruptcy plan, the Bankruptcy Code allows PageNet to
confirm the PageNet bankruptcy plan even if one or more, but not all, of the
impaired classes rejects the plan. If PageNet can demonstrate to the bankruptcy
court that its bankruptcy plan satisfies the requirements of the "cramdown"
provision, each impaired class that voted to reject the PageNet bankruptcy plan
would, nonetheless, be bound to the treatment afforded to that class under the
plan.
To obtain confirmation of the PageNet bankruptcy plan using the "cramdown"
provision, PageNet must demonstrate to the bankruptcy court that, as to each
class that has rejected the PageNet bankruptcy plan, the treatment afforded to
such class under the plan "does not discriminate unfairly" and is "fair and
equitable."
In general, a plan does not discriminate unfairly if it provides a
treatment to the class that is substantially equivalent in value to the
treatment that is provided to other classes consisting of claims that have equal
rank. The Bankruptcy Code applies a different test to holders of secured claims,
unsecured claims and equity interests to determine whether the treatment
proposed in a plan of reorganization is "fair and equitable." For secured
claims, the PageNet bankruptcy plan must either provide that the holder will
retain its lien and receive cash payments equal to its claim, or the holder must
receive property that is the indubitable equivalent of the claim. For unsecured
claims, the PageNet bankruptcy plan must provide that the holder will retain
property having a value equal to the amount of its claim, or that no holder of a
claim or interest that is junior to the creditor will receive any value under
the plan. For equity interest holders, the PageNet bankruptcy plan must provide
that no holder of an interest that is junior to the holder will receive any
value under the plan of reorganization.
In the event that any impaired class fails to accept its bankruptcy plan,
PageNet reserves the right to request that the bankruptcy court confirm the
bankruptcy plan in accordance with the "cramdown" provision under the Bankruptcy
Code. In addition, or as an alternative, PageNet also reserves the right to
modify the plan. Any such confirmation would be subject to judicial approval.
34
<PAGE> 38
CAPITALIZATION
The following table sets forth the capitalization of Arch at June 30, 2000
and the capitalization of Arch as adjusted to give effect to the Arch exchange
offer and merger, assuming 100% of the currently outstanding discount notes are
exchanged. You should read this table together with the other financial
information appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED(1)
---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT MATURITIES OF LONG-TERM DEBT........................ $ 14,310 $ 14,310
---------- ----------
LONG-TERM DEBT, LESS CURRENT MATURITIES:
Senior bank debt.......................................... 449,630 1,264,630
10 7/8% senior discount notes due 2008.................... 159,628 --
6 3/4% convertible subordinated debentures due 2003....... 959 959
12 3/4% senior notes due 2007............................. 128,028 128,028
13 3/4% senior notes due 2008............................. 140,766 140,766
9 1/2% senior notes due 2004.............................. 125,000 125,000
14% senior notes due 2004................................. 100,000 100,000
Other..................................................... -- 59,507
---------- ----------
Total long-term debt, less current maturities...... 1,104,011 1,818,890
---------- ----------
Redeemable convertible preferred stock...................... 43,953 --
STOCKHOLDERS' EQUITY:
Preferred stock -- $.01 par value, authorized 10,000,000
shares, issued and outstanding 250,000 shares ($29,310
aggregate liquidation preference)......................... 3 3
Common stock and Class B common stock
$.01 par value, authorized 160,000,000 shares (300,000,000
as adjusted), issued and outstanding 66,078,561
(174,008,068 as adjusted)................................. 661 1,740
Additional paid-in capital.................................. 817,116 1,469,913
Accumulated deficit......................................... (962,911) (874,901)
---------- ----------
Total stockholders' equity (deficit)............... (145,131) 596,755
---------- ----------
Total capitalization............................... $1,017,143 $2,429,955
========== ==========
</TABLE>
---------------
(1) If 1% of the currently outstanding discount notes are exchanged, total
long-term debt, less current maturities would be $2.0 billion, total
stockholders' equity would be $441.7 million and total capitalization would
be $2.4 billion.
If the merger does not take place, Arch's capitalization will be as
described in the "Historical" column except that (1) long-term debt, less
current maturities will be reduced and (2) total stockholders' equity will be
increased, to reflect the amount of discount notes, if any, that are exchanged.
35
<PAGE> 39
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
OF THE COMBINED COMPANY
The following unaudited selected pro forma data of the combined company
gives effect to the following transactions as if they were consummated as of
June 30, 2000 with respect to the unaudited pro forma balance sheet, except for
Arch's acquisition of MobileMedia which closed prior to December 31, 1999, and
on January 1, 1999 with respect to the unaudited pro forma statements of
operations:
- Arch's acquisition of MobileMedia, which closed on June 3, 1999;
- the exchange of $159.6 million (accreted value at June 30, 2000) of Arch
discount notes for 11.4 million shares of Arch common stock in Arch's
exchange offer;
- the conversion of $44.0 million of Arch Series D preferred stock into
approximately 6.6 million shares of Arch common stock upon completion of
the merger; and
- Arch's merger with PageNet.
The following selected pro forma financial information should be read in
conjunction with the unaudited pro forma condensed consolidated financial
statements and notes. The financial impact of expected operational cost
synergies resulting from the merger of PageNet and Arch and Arch's acquisition
of MobileMedia is excluded from this presentation.
EFFECTS OF THE MERGER
PageNet has identified several factors that have contributed to its
deteriorating financial results and liquidity. See "PageNet Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
These include declines in units in service and cash flows resulting from
increased pricing by PageNet, reduced demand and increased competition for
traditional paging services, and problems encountered in converting to new
billing and customer service systems. Reduced cash flows from operations caused
PageNet to be in default under its credit facilities and the covenants relating
to its senior subordinated notes.
As part of the merger, all of the PageNet senior subordinated notes will be
converted into Arch common stock, eliminating the accrued or future interest
payments associated with this indebtedness. The combined company will have
access to Arch's amended credit facility as a source of additional liquidity.
Arch also anticipates that the integration of management and information
functions can result in lower operating expenses, although such reductions will
require 12 to 18 months to achieve. As a result of these and other factors, Arch
and PageNet believe the combined company should not experience the liquidity
problems currently faced by PageNet.
Arch does not anticipate that the combined company will increase prices for
traditional paging services. Arch also anticipates that the combined company
will have access to sufficient funding to more broadly introduce advanced
messaging services that it expects to be in greater demand and that it expects
to be more competitive with alternative wireless messaging services.
If Arch acquires PageNet as described in this prospectus, the combined
company will have substantially larger assets, liabilities, revenues and
expenses. On a pro forma basis at June 30, 2000, the combined company would have
had approximately 14.0 million units in service, total assets of $2.8 billion
and total long term debt of $1.8 million, assuming that all of the outstanding
discount notes are exchanged for common stock. For the year ended December 31,
1999, the combined company would have had pro forma total revenues of $1.7
billion, adjusted pro forma earnings before interest, income taxes, depreciation
and amortization of $471.0 million, and net loss before extraordinary items and
cumulative effect of a change in accounting principle of $435.0 million. This
pro forma net loss excludes the effects of an extraordinary gain relating to the
extinguishment of debt of $7.0 million and the negative $40.8 million cumulative
effect of an accounting change relating to Arch's and PageNet's original
application of Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities." For the six months ended June 30, 2000, the combined company would
have had pro forma total revenues of $814.5 million,
36
<PAGE> 40
adjusted pro forma earnings before interest, income taxes, depreciation and
amortization of $215.4 million and a net loss before extraordinary items and
cumulative effect of a change in accounting principle of $228.6 million. This
pro forma net loss excludes the effect of an extraordinary gain of $52.1 million
relating to the extinguishment of Arch debt. This amount also excludes the
impact of expected operational cost synergies. For the year ended December 31,
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 $325.2 million, $894.7 million and $717.7 million, respectively.
For the six months ended June 30, 2000, the combined company's pro forma cash
flows provided by operating activities, used in investing activities and
provided by financing activities were $159.4 million, $82.3 million and $27.9
million, respectively. The adjusted pro forma cash flow information assumes that
the merger and related transactions had been effected as of January 1, 1999.
Leverage for the combined company on a pro forma basis, as measured by the ratio
of total debt to annualized adjusted pro forma earnings before interest, income
taxes, depreciation and amortization for the year ended December 31, 1999, and
six months ended June 30, 2000 would have been 3.8 to 1.0 and 4.3 to 1.0,
respectively. This also excludes the impact of expected operational cost
synergies. Adjusted pro forma earnings before interest, income taxes,
depreciation and amortization is earnings before interest, income taxes,
depreciation and amortization, net of restructuring charges, bankruptcy related
expenses, equity in loss of affiliates, income tax benefit, interest and
non-operating expenses (net) and extraordinary items. The PageNet merger is
expected to increase amortization charges by approximately $63.6 million per
year.
As noted above, Arch and PageNet have experienced significant net losses in
the past and on a combined pro forma basis for the year ended December 31, 1999
and the six months ended June 30, 2000. Arch expects that the combined company
will continue to experience net losses and can give no assurance about when, if
ever, it will attain profitability. As also noted above, the combined company
pro forma cash flows provided by operating activities were positive for the year
ended December 31, 1999 and the six months ended June 30, 2000. While Arch
expects the cash provided by operating activities of the combined company will
remain positive in future periods, it can give no assurance that it will remain
positive.
Following the merger, PageNet customers will be converted to Arch's billing
and customer service systems. Arch believes that its billing and customer
service systems have the capacity to handle all of the customers of the combined
company. Arch has significant experience consolidating multiple billing and
customer service systems as a result of prior acquisitions, including its recent
acquisition of MobileMedia. Arch believes that its acquisition of MobileMedia
demonstrates that elements of an otherwise insolvent business can become useful
assets under Arch's management.
SELECTED PRO FORMA DATA
The pro forma information is presented for illustrative purposes only and
does not necessarily predict the operating results or financial position that
would have occurred if the merger of PageNet and Arch and Arch's acquisition of
MobileMedia had been consummated as of the dates indicated above. Nor does it
predict the future operating results or financial position of Arch following the
merger and the MobileMedia acquisition.
37
<PAGE> 41
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Service, rental and maintenance revenues.................... $ 1,651,502 $ 746,933
Product sales............................................... 152,017 67,555
----------- -----------
Total revenues.................................... 1,803,519 814,488
Cost of products sold....................................... (113,891) (53,404)
----------- -----------
1,689,628 761,084
Operating Expenses:
Service, rental and maintenance........................... 440,534 202,964
Selling................................................... 204,777 84,700
General and administrative................................ 573,294 258,032
Depreciation and amortization............................. 682,403 338,685
Restructuring charge...................................... (25,731) --
Provision for asset impairment............................ 17,798 --
Bankruptcy related expenses............................... 14,938 --
----------- -----------
Operating income (loss)..................................... (218,385) (123,297)
Interest and other income (expense)......................... (216,407) (105,324)
----------- -----------
Income (loss) before income tax provision................... (434,792) (228,621)
Income tax provision........................................ 209 --
----------- -----------
Net income (loss)........................................... $ (435,001) $ (228,621)
=========== ===========
Basic/diluted income (loss) per share....................... $ (2.56) $ (1.33)
=========== ===========
Other Operating Data:
Capital expenditures, excluding acquisitions................ $ 354,808 $ 79,410
Units in service at end of period(1)........................ 15,500,000 14,030,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
-------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 259,020
Total assets................................................ 2,853,128
Long-term debt, less current maturities..................... 1,818,890
Stockholders' equity........................................ 596,755
</TABLE>
---------------
(1) Units in service is calculated by adding the Arch and PageNet units in
service less an elimination for intercompany units in service.
38
<PAGE> 42
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements of Arch and PageNet
give effect to the following transactions as if they were consummated as of June
30, 2000 with respect to the unaudited pro forma balance sheet, except for
Arch's acquisition of MobileMedia which closed prior to December 31, 1999, and
on January 1, 1999 with respect to the unaudited pro forma statements of
operations:
- Arch's acquisition of MobileMedia, which closed on June 3, 1999;
- the exchange of $159.6 million (accreted value at June 30, 2000) of Arch
discount notes for 11.4 million shares of Arch common stock;
- the conversion of $44.0 million of Arch Series D preferred stock into
approximately 6.6 million shares of Arch common stock upon completion of
the merger; and
- Arch's merger with PageNet.
The pro forma financial statements utilize the purchase method of
accounting for the merger of Arch and PageNet. Arch is the acquiring company for
accounting purposes. Under the purchase method of accounting, the purchase price
is allocated to assets acquired and liabilities assumed based on their estimated
fair value at the time of the merger. Income of the combined company will not
include income or loss of PageNet prior to the merger. The pro forma condensed
consolidated financial statements reflect preliminary pro forma adjustments made
to combine Arch with PageNet using the purchase method of accounting. The actual
adjustments will be made after the closing and may differ from those reflected
in the pro forma financial statements; however, Arch does not believe that they
will materially differ from the final purchase price allocation.
The pro forma condensed consolidated financial data is for information
purposes only and is not necessarily indicative of the results of future
operations of the combined company or the actual results that would have been
achieved had the merger of Arch and PageNet and Arch's acquisition of
MobileMedia been consummated during the periods indicated. You should read the
unaudited pro forma financial data in conjunction with the consolidated
historical financial statement of Arch, PageNet and MobileMedia, including the
notes to all sets of financial statements.
39
<PAGE> 43
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR
ARCH EXCHANGE ADJUSTED
ARCH -------------------- ARCH PAGENET
(HISTORICAL) DEBIT CREDIT PRO FORMA (HISTORICAL)
------------ -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 3,858 $ 3,858 $ 71,111
Accounts receivable, net......... 63,368 63,368 82,782
Inventories...................... 7,246 7,246 6,340
Prepaid expenses and other 16,306 16,306 15,810
---------- ---------- -----------
Total current assets....... 90,778 90,778 176,043
Property and equipment, net...... 382,238 382,238 659,391
Intangible and other assets...... 778,210 778,210 515,785
---------- ---------- -----------
$1,251,226 $1,251,226 $ 1,351,219
========== ========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt........................... $ 14,310 $ 14,310
Long-term debt in default........ $ 1,946,450
Accounts payable................. 48,122 48,122 70,813
Accrued expenses................. 32,607 $ 3,000(1) 35,607 46,153
Accrued interest................. 30,200 30,200 99,185
Customer deposits and deferred
revenue........................ 31,628 31,628 39,133
Accrued restructuring, current
portion........................ 12,754 12,754 --
---------- ---------- -----------
Total current
liabilities.............. 169,621 172,621 2,201,734
Long-term debt, less current
maturities..................... 1,104,011 $159,628(1) 944,383 59,507
Accrued restructuring,
non-current portion............ --
Other long-term liabilities...... 78,772 78,772
Redeemable convertible preferred
stock.......................... 43,953 43,953
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock.................. 3 3 --
Common stock..................... 661 114(1) 775 1,042
Additional paid-in capital....... 817,116 68,504(1) 885,620 134,742
Accumulated other comprehensive
income......................... 1,614
Accumulated deficit.............. (962,911) 88,010(1) (874,901) (1,047,420)
---------- ---------- -----------
Total stockholders' equity
(deficit)................ (145,131) 11,497 (910,022)
---------- ---------- -----------
$1,251,226 $1,251,226 $ 1,351,219
========== ========== ===========
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR MERGER
-------------------------- PRO FORMA
DEBIT CREDIT CONSOLIDATED
---------- ---------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 5,733(2) $ 69,236
Accounts receivable, net......... 1,797(2) 144,353
Inventories...................... 13,586
Prepaid expenses and other 271(2) 31,845
----------
Total current assets....... 259,020
Property and equipment, net...... 2,586(2) 1,039,043
Intangible and other assets...... $ 287,232(2) $ 26,162(2) 1,555,065
----------
$2,853,128
==========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt........................... $ 14,310
Long-term debt in default........ $1,946,450(2) --
Accounts payable................. 1,364(2) 117,571
Accrued expenses................. 501(2) 81,259
Accrued interest................. 96,948(2) 32,437
Customer deposits and deferred
revenue........................ 381(2) 70,380
Accrued restructuring, current
portion........................ 30,000(2) 42,754
----------
Total current
liabilities.............. 358,711
Long-term debt, less current
maturities..................... 70,000(2) 1,818,890
745,000(2)
Accrued restructuring,
non-current portion............ --
Other long-term liabilities...... 78,772
Redeemable convertible preferred
stock.......................... 43,953(16) --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock.................. 3
Common stock..................... 1,042(2) 899(2) 1,740
66(16)
Additional paid-in capital....... 134,742(2) 540,406(2) 1,469,913
43,887(16) --
Accumulated other comprehensive
income......................... 1,614(2)
Accumulated deficit.............. 1,047,420(2) (874,901)
----------
Total stockholders' equity
(deficit)................ 596,755
----------
$2,853,128
==========
</TABLE>
40
<PAGE> 44
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTED
ARCH MOBILEMEDIA FOR MOBILEMEDIA FOR ARCH ARCH PAGENET
(HISTORICAL) (HISTORICAL) ACQUISITION EXCHANGE PRO FORMA (HISTORICAL)
------------ ------------ --------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Service, rental and maintenance
revenues.......................... $ 591,389 $167,318 $ (3,521)(3) $ 755,186 $ 897,348
Product sales...................... 50,435 9,207 59,642 92,375
---------- -------- ---------- -----------
Total revenues..................... 641,824 176,525 814,828 989,723
Cost of products sold.............. (34,954) (6,216) (41,170) (57,901)
---------- -------- ---------- -----------
606,870 170,309 773,658 931,822
Operating expenses:
Service, rental and maintenance... 132,400 44,530 (3,521)(3) 173,409 267,043
Selling........................... 84,249 23,115 107,364 97,413
General and administrative........ 180,726 51,562 232,288 361,386
Depreciation and amortization..... 309,434 45,237 2,958(4) 369,329 327,101
11,700(4)
Provision for asset impairment.... 17,798
Restructuring charge.............. (2,200) (2,200) (23,531)
Bankruptcy related expenses....... 14,938 14,938
---------- -------- ---------- -----------
Total operating expenses........... 704,609 179,382 895,128 1,047,210
---------- -------- ---------- -----------
Operating income (loss)............ (97,739) (9,073) (121,470) (115,388)
Interest expense, net............. (143,028) (17,660) 17,660(5) $ 15,031(6) (128,574) (150,921)
(16,839)(5) 16,262(15)
Other income (expense)............ (48,421) 1,435 (46,986) 4,753
---------- -------- ---------- -----------
Income (loss) before income tax
provisions, extraordinary item and
cumulative effect of accounting
change............................ (289,188) (25,298) (297,030) (261,556)
Provision for income taxes......... -- 209 209 --
---------- -------- ---------- -----------
Income (loss) before extraordinary
item and cumulative effect of
accounting change................. $ (289,188) $(25,507) $ (297,239) $ (261,556)
========== ======== ========== ===========
Basic/diluted income (loss) per
share before extraordinary item
and cumulative effect of
accounting change(17)............. $ (9.21) $ (4.04) $ (2.52)
========== ========== ===========
1,793,576(14)
11,398,483(1)
Weighted average common shares
outstanding(17)................... 31,603,410 17,181,660(13) 11,640,321(15) 73,617,450 103,960,240
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
FOR MERGER CONSOLIDATED
------------ ------------
<S> <C> <C>
Service, rental and maintenance
revenues.......................... $ (1,032)(7) $ 1,651,502
Product sales...................... 152,017
-----------
Total revenues..................... 1,803,519
Cost of products sold.............. (14,820)(9) (113,891)
-----------
1,689,628
Operating expenses:
Service, rental and maintenance... 82(7) 440,534
Selling........................... 204,777
General and administrative........ (20,380)(7) 573,294
Depreciation and amortization..... (77,559)(9) 682,403
63,532(10)
Provision for asset impairment.... 17,798
Restructuring charge.............. (25,731)
Bankruptcy related expenses....... 14,938
-----------
Total operating expenses........... 1,908,013
-----------
Operating income (loss)............ (218,385)
Interest expense, net............. 121,729(8) (174,034)
(25,676)(11)
9,408(16)
Other income (expense)............ (140)(7) (42,373)
-----------
Income (loss) before income tax
provisions, extraordinary item and
cumulative effect of accounting
change............................ (434,792)
Provision for income taxes......... 209
-----------
Income (loss) before extraordinary
item and cumulative effect of
accounting change................. $ (435,001)
===========
Basic/diluted income (loss) per
share before extraordinary item
and cumulative effect of
accounting change(17)............. $ (2.56)
===========
6,613,180(16)
(103,960,240)(2)
Weighted average common shares
outstanding(17)................... 89,917,844(2) 170,148,474
</TABLE>
41
<PAGE> 45
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS ADJUSTED PRO FORMA
ARCH FOR ARCH ARCH PAGENET ADJUSTMENTS PRO FORMA
(HISTORICAL) EXCHANGE PRO FORMA (HISTORICAL) FOR MERGER CONSOLIDATED
------------ ----------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues....... $ 353,291 $ 353,291 $ 396,157 $ (2,515)(7) $ 746,933
Product sales................ 24,556 24,556 42,999 67,555
---------- ---------- ----------- -----------
Total revenues....... 377,847 377,847 439,156 814,488
Cost of products sold........ (17,261) (17,261) (26,236) (9,907)(9) (53,404)
---------- ---------- ----------- -----------
360,586 360,586 412,920 761,084
Operating expenses:
Service, rental and
maintenance.......... 76,954 76,954 125,240 770(7) 202,964
Selling................ 49,378 49,378 35,322 84,700
General and
administrative....... 109,296 109,296 159,934 (11,198)(7) 258,032
Depreciation and
amortization......... 180,589 180,589 121,825 4,459(9) 338,685
31,812(10)
---------- ---------- ----------- -----------
Total operating
expenses........... 416,217 416,217 442,321 884,381
---------- ---------- ----------- -----------
Operating income (loss)...... (55,631) (55,631) (29,401) (123,297)
Interest expense,
net.................. (76,699) 10,730(6) (65,969) (93,123) 60,760(8) (104,016)
(9,108)(11)
3,424(16)
Other income
(expense)............ (2,010) (2,010) 889 (187)(7) (1,308)
---------- ---------- ----------- -----------
Income (loss) before income
tax provisions,
extraordinary item and
cumulative effect of
accounting change.......... (134,340) (123,610) (121,635) (228,621)
Provision for income taxes... -- -- -- --
---------- ---------- ----------- -----------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change.......... $ (134,340) $(123,610) $ (121,635) $ (228,621)
========== ========== =========== ===========
Basic/diluted income (loss)
per share before
extraordinary item and
cumulative effect of
accounting change (17)..... $ (2.26) $ (1.63) $ (1.17) $ (1.33)
========== ========== =========== ===========
6,613,180(16)
11,398,483(1) (104,242,567)(2)
Weighted average common
shares outstanding (17).... 60,555,685 3,845,148(15) 75,799,316 104,242,567 89,917,844(2) 172,330,340
</TABLE>
42
<PAGE> 46
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) To record the issuance of 11,398,483 shares of Arch common stock valued at
$6.02 per share in exchange for $159.6 million (accreted value, representing
$172.4 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 privately negotiated exchange transactions which have taken place in 2000
referred to in notes 15 and 16 of the notes to audited pro forma condensed
consolidated financial statements.
2) To record the issuance of 84,917,844 shares of Arch common stock and
12,100,000 shares of Vast Class B common stock in exchange for $1.2 billion
principal amount of PageNet senior subordinated notes plus accrued interest
and 5,000,000 shares of Arch common stock and the distribution of 4,000,000
shares of Vast Class B common stock in exchange for all of the outstanding
common stock of PageNet:
- This adjustment includes the elimination of all of approximately $96.9
million of accrued interest on PageNet's senior subordinated notes and
the write-off of $19.2 million and $7.6 million of deferred financing
costs associated with PageNet's senior subordinated notes and its
domestic revolving credit agreement, respectively, which Arch will not
assume as part of this transaction.
- This adjustment also includes the elimination of all consolidated amounts
related to Vast and the recording of Arch's net investment in Vast as a
component of intangible and other assets following the reduction of
PageNet's ownership of Vast to below 50%. Additionally, the adjustment
reflects the forgiveness of $59.1 million of intracompany indebtedness
between PageNet and Vast, which is required under the merger agreement
and is a condition to the consummation of the Vast distribution.
43
<PAGE> 47
This historical book value of the tangible and intangible assets of
PageNet was assumed to approximate fair value as Arch believes that they
will not materially differ from the final purchase price allocation. The
excess of purchase prices over the assumed fair value of identifiable
assets acquired was calculated as follows (in thousands):
<TABLE>
<S> <C>
Consideration Exchanged:
Fair value of shares issued to PageNet stockholders and
noteholders (approximately 89,917,844 shares at $6.02
per share)............................................. $ 541,305
Liabilities Assumed:
Bank debt................................................. 745,000
Other long-term debt...................................... 59,507
Accounts payable.......................................... 69,449
Accrued expenses.......................................... 45,652
Accrued interest.......................................... 2,237
Customer deposits and deferred revenue.................... 38,752
PageNet closing costs..................................... 41,000(a)
----------
Total consideration exchanged............................... 1,542,902
Transaction costs........................................... 29,000(b)
Restructuring reserve....................................... 30,000(c)
----------
Total purchase price........................................ 1,601,902
Less fair value of tangible and intangible net assets
acquired:
Cash and cash equivalents................................. 65,378
Accounts receivable, net.................................. 80,985
Inventories............................................... 6,340
Prepaid expenses and other................................ 15,539
Property and equipment, net............................... 656,805
Intangible and other assets............................... 489,623(d)
----------
$1,314,670
==========
Excess of purchase price over tangible and intangible assets
acquired.................................................. $ 287,232
==========
</TABLE>
---------------
(a) PageNet closing costs consist primarily of investment banking,
financing and other costs which will be paid to PageNet's financial
advisors by Arch at the time of closing.
(b) Transaction costs include legal, investment banking, financing,
accounting and other costs incurred by Arch to consummate the PageNet
merger.
(c) Restructuring reserve consists of severance costs related
primarily to duplicative general and administrative functions at the
corporate, regional and market levels of PageNet, such as technical,
marketing, finance, and other support functions to be recorded in
accordance with Emerging Issue Task Force Consensus 95-3. These
terminations will occur as operations of PageNet are integrated into those
of Arch and are based on management's preliminary review of synergies that
exist between the two companies. The analysis is expected to be finalized
after consummation of the PageNet acquisition and may result in additional
amounts to be reserved but is not expected to be materially different from
the amount disclosed above.
(d) Intangible and other assets are shown net of the $7.6 million
elimination of deferred financing costs discussed earlier in this note 2.
3) To eliminate revenues and expenses between Arch and MobileMedia.
Revenues and expenses between Arch and PageNet were not material in 1999 or
2000.
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
44
<PAGE> 48
MobileMedia acquisition. The amortization relates to $400.4 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 $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 for FCC
licenses to Arch's 10 year estimated useful life and to conform MobileMedia's 2
year estimated useful life for acquired customer lists to Arch's 5 year
estimated useful life.
5) To remove the interest expense associated with the various MobileMedia
credit facilities and notes terminated 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 interest expense associated with Arch's discount notes
which will be converted into common stock in connection with the Arch exchange
offer.
7) To remove the operating results of Vast, which shares will be
distributed as part of the overall transaction involving Arch and PageNet. This
adjustment removes only the direct expenses of Vast, as no expenses allocated to
Vast by PageNet were assumed to be eliminated as a result of the distribution.
8) To remove the interest expenses associated with PageNet's senior
subordinated notes which will be converted into common stock as part of the
PageNet exchange as well as the amortization of PageNet's deferred financing
costs which are included in interest expenses.
9) To adjust PageNet's 1999 and 2000 cost of sales and depreciation to be
consistent with Arch's pager useful life of three years per unit.
10) To record amortization of the excess of purchase price over the
tangible and intangible assets in the PageNet acquisition on a straight-line
basis of $28.7 million for the year ended December 31, 1999 and $14.4 million
for the six months ended June 30, 2000. It is Arch's policy to amortize goodwill
on a straight-line basis over 10 (ten) years. 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 $450.9 million assumed fair
value of intangible assets consisting primarily of FCC licenses with an assumed
fair value of $425.7 million and goodwill with an assumed fair value of $25.2
million. PageNet's historical amortization was adjusted by $34.9 million for the
year ended December 31, 1999 and $17.5 million for the six months ended June 30,
2000 to conform PageNet's 40 year estimated useful life of FCC licenses and
goodwill to Arch's 10 year estimated useful life.
11) 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 periods indicated. Additional interest expense on bank
borrowings would be as follows if interest rates were to increase or decrease by
1/8 of a percent (in thousands):
<TABLE>
<CAPTION>
ASSUMED INTEREST EXPENSES
-----------------------------------------------
YEAR ENDED SIX MONTHS ENDED
ASSUMED CHANGE IN INTEREST RATE DECEMBER 31, 1999 JUNE 30, 2000
------------------------------- ------------------------- ------------------
<S> <C> <C>
Increase of 1/8%........................... $27,146 $9,907
Decrease of 1/8%........................... $24,206 $8,309
</TABLE>
45
<PAGE> 49
12) The pro forma financial statements of Arch assume 100% conversion of
Arch's $159.6 million (accreted value) discount notes. The following table
illustrates the impact on Arch's pro forma financial statements as of December
31, 1999 and June 30, 2000 in the event that only 1% of discount noteholders
elect to convert their discount notes into Arch common stock (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
ASSUMING
1%
DISCOUNT NOTE
CONVERSION
-------------
<S> <C>
Total long-term debt, less current maturities............... $1,976,922
Total stockholders' equity.................................. $ 441,692
Interest expense, net
Year ended December 31, 1999.............................. $ (186,929)
Six months ended June 30, 2000............................ $ (114,639)
Income (loss) before extraordinary item and cumulative
effect of accounting change
Year ended December 31, 1999.............................. $ (447,896)
Six months ended June 30, 2000............................ $ (239,244)
Basic/diluted income (loss) per common share before
extraordinary item and cumulative effect of accounting
change
Year ended December 31, 1999.............................. $ (2.82)
Six months ended June 30, 2000............................ $ (1.49)
</TABLE>
13) To record issuance of Arch common stock in conjunction with the
MobileMedia acquisition.
14) To record issuance of Arch common stock in conjunction with the
repurchase of $16.3 million accreted value of discount notes in October 1999.
15) To remove interest expense and record issuance of Arch common stock in
conjunction with the repurchase of $157.4 million accreted value of discount
notes in February and March 2000.
16) To record the exchange of $91.1 million ($100 million maturity value)
accreted value of Arch's discount notes in exchange for $44.0 million of Arch's
Series D preferred stock in May 2000 and to adjust related interest expense and
debt issuance costs for the discount notes exchanged. The Series D preferred
stock was issued to Resurgence Asset Management and will be convertible into
6,613,180 shares of Arch common stock at any time at the option of Resurgence or
will be subject to mandatory conversion into common stock upon the completion of
the PageNet merger. The exchange of the discount notes resulted in a gain of
$44.4 million.
17) All share information reflects a 1-for-3 reverse stock split effected
by Arch during June 1999.
46
<PAGE> 50
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA -- ARCH
The following table sets forth selected historical consolidated financial
and operating data of Arch for each of the five years ended December 31, 1999
and the six months ended June 30, 1999 and 2000. The selected financial and
operating data as of December 31, 1995, 1996, 1997, 1998 and 1999 and for each
of the five years ended December 31, 1999 have been derived from Arch's audited
consolidated financial statements and notes. The selected financial and
operating data as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 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.
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 gain or loss resulting from
prepayment of indebtedness. See "Arch Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations".
Adjusted earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, does not reflect restructuring charge,
equity in loss of affiliate, and extraordinary items; consequently adjusted
earnings before interest, income taxes, depreciation and amortization may not
necessarily be comparable to similarly titled data of other wireless messaging
companies. Earnings before interest, income taxes, depreciation and amortization
is commonly used by analysts and investors as a principal measure of financial
performance in the wireless messaging industry. Adjusted earnings before
interest, income taxes, depreciation and amortization 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. Earnings
before interest, income taxes, depreciation and amortization is also one of the
financial measures used by analysts to value Arch. Therefore Arch management
believes that the presentation of earnings before interest, income taxes,
depreciation and amortization provides relevant information to investors.
Earnings before interest, income taxes, depreciation and amortization should not
be construed as an alternative to operating income or cash flows from operating
activities as determined in accordance with generally accepted accounting
procedures or as a measure of liquidity. Amounts reflected as earnings before
interest, income taxes, depreciation and amortization or adjusted earnings
before interest, income taxes, depreciation and amortization 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 earnings before interest, income taxes, depreciation and
amortization margin is calculated by dividing Arch's adjusted earnings before
interest, income taxes, depreciation and amortization by total revenues less
cost of products sold. Earnings before interest, income taxes, depreciation and
amortization margin is a measure commonly used in the wireless messaging
industry to evaluate a company's earnings before interest, income taxes,
depreciation and amortization relative to total revenues less cost of products
sold as an indicator of the efficiency of a company's operating structure.
47
<PAGE> 51
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Service, rental and maintenance
revenues.......................... $ 138,466 $ 291,399 $ 351,944 $ 371,154 $ 591,389 $ 212,809 353,291
Product sales....................... 24,132 39,971 44,897 42,481 50,435 21,572 24,556
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues...................... 162,598 331,370 396,841 413,635 641,824 234,381 377,847
Cost of products sold............... (20,789) (27,469) (29,158) (29,953) (34,954) (14,529) (17,261)
---------- ---------- ---------- ---------- ---------- ---------- ----------
141,809 303,901 367,683 383,682 606,870 219,852 360,586
Operating expenses:
Service, rental and maintenance... 29,673 64,957 79,836 80,782 132,400 48,386 76,954
Selling........................... 24,502 46,962 51,474 49,132 84,249 31,044 49,378
General and administrative........ 40,448 86,181 106,041 112,181 180,726 63,021 109,296
Depreciation and amortization..... 60,205 191,871 232,347 221,316 309,434 128,033 180,589
Restructuring charge.............. -- -- -- 14,700 (2,200) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)............. (13,019) (86,070) (102,015) (94,429) (97,739) (50,632) (55,631)
Interest and non-operating expenses,
net............................... (22,522) (75,927) (97,159) (104,213) (188,249) (102,659) (78,709)
Equity in loss of affiliate......... (3,977) (1,968) (3,872) (5,689) (3,200) (3,200) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income tax
benefit, extraordinary item and
accounting change................. (39,518) (163,965) (203,046) (204,331) (289,188) (156,491) (134,340)
Income tax benefit.................. 4,600 51,207 21,172 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item and accounting change........ (34,918) (112,758) (181,874) (204,331) (289,188) (156,491) (134,340)
Extraordinary item.................. (1,684) (1,904) -- (1,720) 6,963 -- 52,051
Cumulative effect of accounting
change............................ -- -- -- -- (3,361) (3,361) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................... $ (36,602) $ (114,662) $ (181,874) $ (206,051) $ (285,586) $ (159,852) (82,289)
========== ========== ========== ========== ========== ========== ==========
Basic/diluted income (loss) per
common share before extraordinary
item and accounting change........ $ (7.79) $ (16.59) $ (26.31) $ (29.34) $ (9.21) $ (11.75) $ (2.26)
Extraordinary item per basic/diluted
common share...................... (0.37) (0.27) -- (0.25) 0.22 -- 0.86
Cumulative effect of accounting
change per basic/diluted common
share............................. -- -- -- -- (0.11) (0.25) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic/diluted net income (loss) per
common share...................... $ (8.16) $ (16.86) $ (26.31) $ (29.59) $ (9.10) $ (12.00) (1.40)
========== ========== ========== ========== ========== ========== ==========
OTHER OPERATING DATA:
Capital expenditures, excluding
acquisitions...................... $ 60,468 $ 165,206 $ 102,769 $ 113,184 $ 113,651 $ 57,364 $ 77,663
Cash flows provided by operating
activities........................ $ 14,749 $ 37,802 $ 63,590 $ 83,380 $ 99,536 $ 36,378 $ 53,006
Cash flows used in investing
activities........................ $ (192,549) $ (490,626) $ (102,769) $ (82,868) $ (627,166) $ (573,428) $ (77,663)
Cash flows provided by (used in)
financing activities.............. $ 179,092 $ 452,678 $ 39,010 $ (2,207) $ 529,158 $ 557,302 $ 25,354
Adjusted earnings before interest,
income taxes, depreciation and
amortization...................... $ 47,186 $ 105,801 $ 130,332 $ 141,587 $ 209,495 $ 77,401 $ 124,958
Adjusted earnings before interest,
income taxes, depreciation and
amortization margin............... 33% 35% 35% 37% 35% 35% 35%
Units in service at end of period... 2,006,000 3,295,000 3,890,000 4,276,000 6,949,000 7,095,000 6,672,000
</TABLE>
48
<PAGE> 52
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
----------------------------------------------------------- ----------
1995 1996 1997 1998 1999 2000
------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Current assets.............. $33,671 $ 43,611 $ 51,025 $ 50,712 $ 85,303 $ 90,778
Total assets................ 785,376 1,146,756 1,020,720 904,285 1,353,045 1,251,226
Long-term debt, less current
maturities................ 457,044 918,150 968,896 1,001,224 1,322,508 1,104,011
Redeemable preferred
stock..................... 3,376 3,712 -- -- -- 43,953
Stockholders' equity
(deficit)................. 246,884 147,851 (33,255) (213,463) (217,559) (145,131)
</TABLE>
The following table reconciles net income to the presentation of Arch's
adjusted earnings before interest, income taxes, depreciation and amortization:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- --------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)............. $(36,602) $(114,662) $(181,874) $(206,051) $(285,586) $(159,852) (82,289)
Interest and non-operating
expenses, net............... 22,522 75,927 97,159 104,213 188,249 102,659 78,709
Income tax benefit............ (4,600) (51,207) (21,172) -- -- -- --
Depreciation and
amortization................ 60,205 191,871 232,347 221,316 309,434 128,033 180,589
Restructuring charge.......... -- -- -- 14,700 (2,200) -- --
Equity in loss of affiliate... 3,977 1,968 3,872 5,689 3,200 3,200 --
Extraordinary item............ 1,684 1,904 -- 1,720 (6,963) -- (52,051)
Cumulative effect of
accounting charge........... -- -- -- -- 3,361 3,361 --
-------- --------- --------- --------- --------- --------- --------
Adjusted earnings before
interest, income taxes,
depreciation and
amortization................ $ 47,186 $ 105,801 $ 130,332 $ 141,587 $ 209,495 $ 77,401 $124,958
======== ========= ========= ========= ========= ========= ========
</TABLE>
49
<PAGE> 53
ARCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
Arch's consolidated financial statements and notes.
Arch derives the majority of its revenues from fixed monthly or other
periodic fees charged to subscribers for wireless messaging services. Such fees
are not generally 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. 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:
- primarily due to an increase in competition in certain of the markets in
which Arch operates, particularly competition from telephone, cellular
and PCS providers; and
- to a lesser extent, an increase in the number of reseller customers whose
airtime is purchased at wholesale rates.
The reduction in average revenue per subscriber resulting from these trends
has been offset by the reduction of expenses so that Arch's margins had been
improving until the consummation of the MobileMedia merger in June 1999 which
resulted in redundant management and administrative headcount. Arch expects the
margins to improve as the integration of the two companies eliminates these
redundant expenses.
Arch has achieved significant growth in units in service and adjusted
earnings before interest, income taxes, depreciation and amortization through
acquisitions and, prior to 1999, internal growth. During 1999, units in service
decreased by 89,000 units, excluding the addition of subscribers from the
MobileMedia acquisition. During the six months ended June 30, 2000, units in
service decreased by a further 277,000 units due to subscriber cancellations and
changes in the definition of units in service. Arch believes it will experience
a net decline in the number of units in service during the remainder of 2000,
excluding the addition of subscribers, from the PageNet acquisition, as Arch's
addition of advanced messaging subscribers is likely to be exceeded by its loss
of basic paging subscribers. Arch's ability to compete against telephone,
cellular and PCS providers in providing advanced messaging services is as yet
unproven. From January 1, 1997 through December 31, 1999, Arch's total number of
units in service grew from 3.3 million to 6.9 million units. Arch's total
revenues have increased from $396.8 million in the year ended December 31, 1997
to $413.6 million in the year ended December 31, 1998 and to $641.8 million in
the year ended December 31, 1999. Arch had net losses of $181.9 million, $206.1
million and $285.6 million in the years ended December 31, 1997, 1998 and 1999,
respectively, as a result of significant depreciation and amortization expenses
related to acquired and developed assets and interest charges associated with
indebtedness. As its subscriber base has grown, Arch's adjusted earnings before
interest, income taxes, depreciation and amortization have increased from $130.3
million in the year ended December 31, 1997 to $141.6 million in the year ended
December 31, 1998 and to $209.5 million in the year ended December 31, 1999.
Earnings before interest, income taxes, depreciation and amortization is a
commonly used measure of financial performance in the wireless messaging
industry. Adjusted earnings before interest, income taxes, depreciation and
amortization is also one of the financial measures used to calculate whether
Arch and its subsidiaries are in compliance with the covenants under their
respective debt agreements. Adjusted earnings before interest, income taxes,
depreciation and amortization should not be construed as an alternative to
operating income or cash flows from operating activities as determined in
accordance with generally accepted accounting principles. One of Arch's
financial objectives is to increase its adjusted earnings before interest,
income taxes, depreciation and amortization, since this is a significant source
of funds for servicing indebtedness and for investment in continued growth,
including purchase of messaging
50
<PAGE> 54
units and messaging system equipment, construction and expansion of messaging
systems, and possible acquisitions. Adjusted earnings before interest, income
taxes, depreciation and amortization, as determined by Arch, may not necessarily
be comparable to similarly titled data of other wireless messaging companies.
Amounts reflected as adjusted earnings before interest, income taxes,
depreciation and amortization 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 applicable law upon the payment of
dividends or distributions or capital expenditure requirements.
POTENTIAL EFFECTS OF THE PAGENET MERGER
If Arch acquires PageNet as described in this prospectus, the combined
company will have substantially larger assets, liabilities, revenues and
expenses. On a pro forma basis at June 30, 2000, the combined company would have
had approximately 14.0 million units in service, total assets of $2.8 billion
and total long term debt of $1.8 billion, assuming that all of the outstanding
discount notes are exchanged for common stock. For the year ended December 31,
1999, the combined company would have had pro forma total revenues of $1.7
billion, adjusted pro forma earnings before interest, income taxes, depreciation
and amortization of $471.0 million, and net loss of $435.0 million. This pro
forma net loss excludes the effects of an extraordinary gain relating to the
extinguishment of debt of $7.0 million and the negative $40.8 million cumulative
effect of an accounting change relating to Arch's and PageNet's original
application of Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities." For the six months ended June 30, 2000, the combined company would
have had pro forma total revenues of $814.5 million, adjusted pro forma earnings
before interest, income taxes, depreciation and amortization of $215.4 million
and a net loss of $228.6 million. This pro forma net loss excludes the effect of
an extraordinary gain of $52.1 million relating to the extinguishment of Arch
debt. This amount also excludes the impact of expected operational cost
synergies. For the year ended December 31, 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 $325.2 million, $894.7
million and $717.7 million, respectively. For the six months ended June 30,
2000, the combined company's pro forma cash flows provided by operating
activities, used in investing activities and provided by financing activities
were $159.4 million, $82.3 million and $27.9 million, respectively. The adjusted
pro forma cash flow information assumes that the merger and related transactions
had been effected as of January 1, 1999. Leverage for the combined company on a
pro forma basis, as measured by the ratio of total debt to annualized adjusted
pro forma earnings before interest, income taxes, depreciation and amortization
for the year ended December 31, 1999, and six months ended June 30, 2000 would
have been 3.8 to 1.0 and 4.3 to 1.0, respectively. This also excludes the impact
of expected operational cost synergies. Adjusted pro forma earnings before
interest, income taxes, depreciation and amortization is earnings before
interest, income taxes, depreciation and amortization, net of restructuring
charges, bankruptcy related expenses, equity in loss of affiliates, income tax
benefit, interest and non-operating expenses (net) and extraordinary items. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements." The PageNet
merger is expected to increase amortization charges by approximately $63.6
million per year.
The PageNet merger is subject to stockholder, noteholder and lender
consents, bankruptcy court confirmation and many other conditions and,
therefore, it may not take place. If Arch does not acquire PageNet, the
contemplated benefits of the merger will not be realized, despite the incurrence
of substantial transaction costs which are estimated at $30.0 million for Arch
and $20.0 million for PageNet. If the merger agreement is terminated after Arch
pursues an alternative offer, Arch will be required to pay to PageNet a
termination fee of $40.0 million.
MOBILEMEDIA MERGER
In June 1999, Arch acquired MobileMedia Communications, Inc., which is now
a wholly owned subsidiary of Arch. MobileMedia had been operating as a
debtor-in-possession under chapter 11 of the Bankruptcy Code.
51
<PAGE> 55
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;
- Arch paid a total of $37.6 million of fees, expenses and other debts;
- Arch issued 4,781,656 shares of its common stock to unsecured creditors
of MobileMedia;
- Arch issued 36,207,265 additional shares of its common stock to unsecured
creditors of MobileMedia and Arch stockholders 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 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 to help fund
the MobileMedia acquisition.
During the third quarter of 1999, Arch's board of directors approved plans
covering the elimination of redundant headcount and facilities in connection
with the overall integration of operations. It is expected that the integration
will be completed by December 31, 2000. Because Arch anticipates a net reduction
of approximately 10% of MobileMedia's workforce and the closing of some
facilities and tower sites, it established a $14.5 million acquisition reserve
which is included as part of the purchase price of MobileMedia. The initial
acquisition reserve consisted of approximately:
- $6.1 million for employee severance;
- $7.9 million for lease obligations and terminations; and
- $0.5 million of other costs.
There can be no assurance that the desired cost savings will be achieved or
that the integration of the two companies will be accomplished smoothly,
expeditiously or successfully. See Note 9 to the notes to Arch's consolidated
financial statements.
52
<PAGE> 56
RESULTS OF OPERATIONS
The following table presents certain items from Arch's consolidated
statements of operations as a percentage of net revenues and certain other
information for the periods indicated (dollars in thousands except per unit
data):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1997 1998 1999 1999 2000
--------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Total revenues........................... 107.9% 107.8% 105.8% 106.6% 104.8%
Cost of products sold.................... (7.9) (7.8) (5.8) (6.6) (4.8)
--------- -------- --------- --------- --------
Net revenues............................. 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Service, rental and maintenance........ 21.7 21.1 21.8 22.0 21.3
Selling................................ 14.0 12.8 13.9 14.1 13.7
General and administrative............. 28.8 29.2 29.8 28.7 30.3
Depreciation and amortization.......... 63.2 57.7 51.0 58.2 50.1
Restructuring charge................... -- 3.8 (0.4) -- --
--------- -------- --------- --------- --------
Operating income (loss).................. (27.7)% (24.6)% (16.1)% (23.0)% (15.4)%
========= ======== ========= ========= ========
Net income (loss)........................ (49.5)% (53.7)% (47.1)% (72.7)% (22.8)%
========= ======== ========= ========= ========
Cash flows provided by operating
activities............................. $ 63,590 $ 83,380 $ 99,536 $ 36,378 $ 53,006
Cash flows used in investing
activities............................. $(102,769) $(82,868) $(627,166) $(573,428) $(77,663)
Cash flows provided by (used in)
financing activities................... $ 39,010 $ (2,207) $ 529,158 $ 557,302 $ 25,354
Adjusted earnings before interest, income
taxes, depreciation and amortization... 35.4% 36.9% 34.5% 35.2% 34.7%
========= ======== ========= ========= ========
Annual service, rental and maintenance
expenses per unit in service........... $ 22 $ 20 $ 23 $ 20 $ 23
</TABLE>
Adjusted earnings before interest, income taxes, depreciation and
amortization, as determined by Arch, does not reflect restructuring charge,
equity in loss of affiliate, and extraordinary items; consequently adjusted
earnings before interest, income taxes, depreciation and amortization may not
necessarily be comparable to similarly titled data of other wireless messaging
companies. Earnings before interest, income taxes, depreciation and amortization
is commonly used by analysts and investors as a principal measure of financial
performance in the wireless messaging industry. Adjusted earnings before
interest, income taxes, depreciation and amortization 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.
Earnings before interest, income taxes, depreciation and amortization is also
one of the financial measures used by analysts to value Arch. Therefore Arch
management believes that the presentation of earnings before interest, income
taxes, depreciation and amortization provides relevant information to investors.
53
<PAGE> 57
Earnings before interest, income taxes, depreciation and amortization should not
be construed as an alternative to operating income or cash flows from operating
activities as determined in accordance with general accepted accounting
principles or as a measure of liquidity. Amounts reflected as earnings before
interest, income taxes, depreciation and amortization or adjusted earnings
before interest, income taxes, depreciation and amortization 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.
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999
Total revenues increased $143.4 million, or 61.2%, to $377.8 million in the
six months ended June 30, 2000 from $234.4 million in the six months ended June
30, 1999, as the number of units in service increased from 4.3 million at March
31, 1999 to 6.7 million at June 30, 2000 entirely due to the MobileMedia
acquisition in June 1999. Net revenues (total revenues less cost of products
sold) increased to $360.6 million, a 64.0% increase, in the six months ended
June 30, 2000 from $219.9 million for the corresponding 1999 period. Total
revenues and net revenues in 1999 and 2000 were adversely affected by (1) the
declining demand for basic paging services and (2) subscriber cancellations and
changes in the definition of units in service which led to a decrease of 277,000
units in service during the six months ended June 30, 2000.
Arch expects revenue to continue to be adversely affected in 2000 by
declining demand for basic numeric and alphanumeric paging services. Arch
believes that the basic paging industry did not grow during 1999, that demand
for basic paging services will decline in 2000 and the following years and that
any significant future growth in the industry will be attributable to advanced
messaging services. As a result, Arch believes that it will experience a net
decline in the number of its units in service in 2000, excluding the addition of
subscribers from the pending PageNet acquisition, as Arch's addition of advanced
messaging subscribers is likely to be exceeded by its loss of basic paging
subscribers.
Service, rental and maintenance revenues, which consist primarily of
recurring revenues associated with the sale or lease of messaging services,
increased to $353.3 million in the six months ended June 30, 2000 from $212.8
million in the six months ended June 30, 1999. This increase was due entirely to
the acquisition of MobileMedia in June 1999. Maintenance revenues represented
less than 10% of total service, rental and maintenance revenues in the six
months ended June 30, 2000 and 1999. Arch does not differentiate between service
and rental revenues.
Service, rental and maintenance expenses, which consist primarily of
telephone, third party carrier fees and site rental expenses, increased to $77.0
million, 21.3% of net revenues, in the six months ended June 30, 2000 from $48.4
million, 22.0% of net revenues, in the six months ended June 30, 1999. The
increase was due primarily to increased expenses associated with the provision
of wireless messaging services to a greater number of units due to the
MobileMedia acquisition. Annualized service, rental and maintenance expenses per
unit in service increased to $23 in the six months ended June 30, 2000 from $20
in the six months ended June 30, 1999. This increase is due primarily to the
provision of alphanumeric and nationwide messaging services to a higher
percentage of customers due to the MobileMedia acquisition.
Selling expenses increased to $49.4 million, 13.7% of net revenues, in the
six months ended June 30, 2000 from $31.0 million, 14.1% of net revenues, in the
six months ended June 30, 1999 due primarily to the MobileMedia acquisition.
General and administrative expenses increased to $109.3 million, 30.3% of
net revenues, in the six months ended June 30, 2000 from $63.0 million, 28.7% of
net revenues, in the six months ended June 30, 1999. The increase was due
primarily to the MobileMedia acquisition.
Depreciation and amortization expenses increased to $180.6 million in the
six months ended June 30, 2000 from $128.0 million in the six months ended June
30, 1999. The increase in these expenses was principally attributable to
additional depreciation associated with assets purchased in the MobileMedia
54
<PAGE> 58
acquisition and amortization expense associated with intangibles which resulted
from the MobileMedia acquisition. Additionally, depreciation expense for the six
months ended June 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 these development efforts due to the
capabilities of the system acquired with the MobileMedia acquisition.
Operating loss increased to $55.6 million in the six months ended June 30,
2000 from $50.6 million in the six months ended June 30, 1999 as a result of the
factors outlined above.
Net interest expense increased to $76.7 million in the six months ended
June 30, 2000 from $59.2 million in the six months ended June 30, 1999. The
increase was attributable to an increase in Arch's average outstanding debt due
to the MobileMedia acquisition and to a lesser extent to a one-time charge of
$2.4 million in relation to the convertible debt for equity exchange. Interest
expense in the six months ended June 30, 2000 and 1999 includes approximately
$14.7 million and $20.3 million, respectively, of non-cash interest accretion on
Arch's notes. This reduction was due to the exchange of $276.0 million principal
amount of discount notes for common stock and preferred stock during 2000.
In the six months ended June 30, 2000, Arch recognized an extraordinary
gain of $52.1 million on the retirement of debt exchanged for common stock.
On January 1, 1999, Arch adopted the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants Statement of
Position 98-5 (SOP 98-5). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of SOP 98-5
resulted in a $3.4 million charge in the quarter ended March 31, 1999 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 $82.3 million in the six months ended June 30, 2000
from $159.9 million in the six months ended June 30, 1999 as a result of the
factors outlined above.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Total revenues increased to $641.8 million, a 55.2% increase, in 1999 from
$413.6 million in 1998 as the number of units in service increased from 4.3
million at December 31, 1998 to 6.9 million at December 31, 1999 entirely due to
the MobileMedia acquisition in June 1999. Net revenues increased to $606.9
million, a 58.2% increase, in 1999 from $383.7 million in 1998. Total revenues
and net revenues in 1999 were adversely affected by (1) the declining demand for
basic paging services and (2) Arch subscriber cancellations which led to a
decrease of 89,000 units in service excluding the addition of subscribers from
the MobileMedia acquisition. Revenues were also adversely affected in the fourth
quarter of 1998 and in 1999 by:
- Arch's decision, in anticipation of the MobileMedia acquisition, not to
replace normal attrition among direct sales personnel; and
- to a lesser extent, the reduced effectiveness of Arch's reseller channels
of distribution;
- reduced sales through Arch-operated retail stores; and
- subscriber cancellations during 1999.
Arch expects revenue to continue to be adversely affected in 2000 by
declining demand for basic numeric and alphanumeric paging services. Arch
believes that the basic paging industry did not grow during 1999, that demand
for basic paging services will decline in 2000 and the following years and that
any significant future growth in the paging industry will be attributable to
advanced messaging services. See "Industry Overview." As a result, Arch believes
that it will experience a net decline in the number of its units in service in
2000, excluding the addition of subscribers from the PageNet acquisition, as
Arch's addition of advanced messaging subscribers is likely to be exceeded by
its loss of basic paging subscribers.
55
<PAGE> 59
Service, rental and maintenance revenues increased to $591.4 million, a
59.3% increase, in 1999 from $371.2 million in 1998. These increases in revenues
were due primarily to the net increase in the number of units in service from
4.3 million at December 31, 1998 to 6.9 million at December 31, 1999. This net
increase was entirely due to the acquisition of MobileMedia on June 3, 1999,
offset by a net decrease from other sources of 89,000 units in service.
Maintenance revenues represented less than 10% of total service, rental and
maintenance revenues in 1999 and 1998. Product sales, less cost of products
sold, increased to $15.5 million, a 23.6% increase, in 1999 from $12.5 million
in 1998, respectively, as a result of a the MobileMedia acquisition.
Service, rental and maintenance expenses increased to $132.4 million, 21.8%
of net revenues, in 1999 from $80.8 million, 21.1% of net revenues, in 1998. The
increase was due primarily to increased expenses associated with the provision
of wireless messaging services to a greater number of units due to the
MobileMedia acquisition. Annualized service, rental and maintenance expenses per
unit increased to $23 in 1999 from $20 in 1998. This increase was due primarily
to the increase in wireless messaging systems and associated expenses as a
result of the MobileMedia merger.
Selling expenses increased to $84.2 million, 13.9% of net revenues, in 1999
from $49.1 million, 12.8% of net revenues, in 1998. The increase in absolute
dollars was primarily due to increased headcount and the increase as a
percentage of net revenues was primarily due to redundant headcount as a result
of the MobileMedia merger.
General and administrative expenses increased to $180.7 million, 29.8% of
net revenues, in 1999 from $112.2 million, 29.2% of net revenues, in 1998. The
increase in absolute dollars was due primarily to increased headcount,
administrative and facility costs and the increase as a percentage of net
revenues was primarily due to the redundant headcount, administrative and
facility costs associated with MobileMedia.
Depreciation and amortization expenses increased to $309.4 million in 1999
from $221.3 million in 1998. The increase in these expenses principally
reflected the acquisition of MobileMedia. Additionally, depreciation expense in
1999 included the write-off of approximately $7.1 million of costs associated
with the development of an integrated billing and management system. Arch
decided to discontinue further development of that system due to the
capabilities of the system acquired through the MobileMedia merger.
Operating loss was $97.7 million in 1999 compared to $94.4 million in 1998,
as a result of the factors outlined above.
Net interest expense increased to $143.0 million in 1999 from $102.3
million in 1998. The increase was principally attributable to an increase in
Arch's outstanding debt due to the MobileMedia acquisition. Interest expense for
1999 included approximately $41.6 million of accreted interest on Arch's senior
discount notes, the payment of which is deferred. Interest expense for 1998
included approximately $37.1 million of accretion on these notes.
Other expense increased to $45.2 million in 1999 from $2.0 million in 1998.
Other expense in 1999 included:
- a $6.5 million for a write-off of Arch's entire investment in CONXUS
Communications, Inc., a holder of narrowband PCS licenses. CONXUS filed
for bankruptcy protection in May 1999.
- a $35.8 million write-off of Arch's investment in Benbow PCS Ventures,
Inc., another holder of narrowband PCS licenses. In June 1999, Arch,
Benbow and Benbow's controlling shareholder agreed to terminate their
business relationship and wind-up Benbow's business. For additional
information see "Liquidity and Capital Resources -- Other Commitments and
Contingencies."
In October 1999, Arch recognized an extraordinary gain of $7.0 million on
the retirement of debt exchanged for Arch common stock. 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.
56
<PAGE> 60
On January 1, 1999, Arch adopted the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants Statement of
Position 98-5 (SOP 98-5). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of SOP 98-5
resulted in a $3.4 million charge in the quarter ended March 31, 1999 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 $285.6 million in 1999 from $206.1 million in 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; and
- to a lesser extent, 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, respectively, 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 nonrecurring marketing costs incurred in 1997 to promote Arch's new
Arch Paging brand identity and to a lesser degree to a decrease in the number of
net new units in service. Internal growth decreased by 35.1% in 1998 compared to
1997 primarily due to the factors set forth above that adversely affected
revenues.
General and administrative expenses increased to $112.2 million, 29.2% of
net revenues, in 1998, from $106.0 million, 28.8% of net revenues, in 1997. The
increase was due primarily to administrative and facility costs associated with
supporting more units in service.
Depreciation and amortization expenses decreased to $221.3 million in 1998
from $232.3 million in 1997. Depreciation and amortization expenses principally
reflect Arch's acquisitions in prior periods accounted for as purchases. They
also reflect 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
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approximately $37.0 million of interest which accretes on Arch's 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 subsequent to
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 has
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 the year ended December 31, 1998
from $181.9 million in the year ended December 31, 1997, as a result of the
factors outlined above.
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. Arch's net cash flows from operating, investing and
financing activities for the periods indicated in the table below are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------- ENDED
1997 1998 1999 JUNE 30, 2000
------- ------ ------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities....... $ 63.6 $ 83.4 $ 99.5 $ 53.0
Net cash used for investing activities.......... $(102.8) $(82.9) $(627.2) $(77.7)
Net cash provided by (used in) financing
activities.................................... $ 39.0 $ (2.2) $ 529.2 $ 25.4
</TABLE>
Investing activities in 1999 included $516.6 million for the acquisition of
MobileMedia. Financing activities in 1999 included $217.2 million from the sale
of common stock to unsecured creditors of MobileMedia and borrowings of $320.8
million in connection with the acquisition of MobileMedia as described above.
Capital Expenditures and Commitments
Excluding acquisitions of wireless messaging businesses, Arch's capital
expenditures were $102.8 million in 1997, $113.2 million in 1998, $113.7 million
in 1999 and $77.7 million in the six months ended June 30, 2000. To date, Arch
generally has funded its capital expenditures with net cash provided by
operating activities and the incurrence of debt.
Arch's 1999 capital expenditures primarily involved the purchase of
wireless messaging units, system and transmission equipment, information systems
and capitalized financing costs.
Arch estimates the amount of capital that will be required to fund capital
expenditures for 2000 will be approximately $120 million ($227 million on a pro
forma basis if the PageNet merger were consummated on January 1, 2000). Arch
estimates that capital expenditures for 2001-2003 will be approximately $230
million per year. Such expenditures will be used primarily for subscriber
equipment, network infrastructure, information systems and the construction of
certain markets for the nationwide network of narrowband PCS. However, the
actual amount of capital to be required by the combined company will depend on a
number of factors. These include subscriber growth, the type of products and
services demanded by customers, service revenues, the nature and timing of
Arch's strategy to deploy its narrowband personal communications services
network, and acquisition strategies and opportunities. Arch believes that it
will have sufficient cash available from operations and credit facilities to
fund its capital expenditures for 2000.
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Other Commitments and Contingencies
Interest payments commence September 15, 2001 on the $172.4 million
principal amount at maturity of Arch's 10 7/8% senior discount notes outstanding
as of June 30, 2000. Unless all of the senior 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 outstanding
at June 30, 2000 and assuming that no additional notes are tendered, such
interest payments will equal a maximum of $9.4 million on March 15 and September
15 of each year, beginning September 15, 2001, until scheduled maturity on March
15, 2008.
If the PageNet Merger agreement is terminated after Arch pursues an
alternative offer, Arch may be required to pay a termination fee of $40.0
million.
Arch acquired a 49.9% equity interest in Benbow PCS Ventures, Inc. in May
1996. Benbow holds exclusive rights to Federal Communications Commission
authorizations in each of the five regions of the United States which enable
Benbow to provide advanced messaging services using radio frequencies called
"narrowband PCS" frequencies. Arch was formerly obligated to advance Benbow
sufficient funds to service debt obligations to the Federal Communications
Commission incurred by Benbow in connection with its acquisition of these five
licenses and to finance construction of a network to operate on the frequencies
authorized by these five licenses unless funds were available to Benbow from
other sources. Arch estimates that this obligation totaled approximately $100
million at March 31, 1999. 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 stockholders agreement, the management agreement and the employment
agreement governing the establishment and operation of Benbow will be
terminated;
- Benbow will not make any further Federal Communications Commission
payments and will not pursue construction of a network to operate on the
frequencies authorized by the five licenses discussed here;
- Arch will not be obligated to fund Federal Communications Commission
payments or construction of a network by Benbow; and
- the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of Federal Communications Commission approval.
On December 20, 1999, Benbow filed with the Federal Communications
Commission a proposal for debt forgiveness which, if approved, would result in
(1) surrender by Benbow of its five narrowband PCS licences back to the
government, and (2) forgiveness by the government of the remaining debt owed on
the surrendered licenses and waiver of any applicable default payments. A total
of approximately $35.25 million in principal debt to the government remains
payable by Benbow on the five narrowband PCS licenses. Benbow's debt forgiveness
proposal is pending and Arch can not determine whether the Federal
Communications Commission ultimately will approve it. In its debt-forgiveness
proposal, however, Benbow demonstrated that the proposal meets standards for
debt forgiveness under applicable federal law.
The June 1999 agreement between Arch, Benbow and Benbow's controlling
shareholder provides, regardless of the outcome of the debt forgiveness
proposal, that (1) Arch will fulfill all of its current financial obligations to
Benbow, (2) Arch is released from any further obligations to provide funding to
Benbow, and (3) Benbow's controlling shareholder will be paid for her Benbow
stock consistent with the preexisting agreement with Arch which requires Arch to
pay the controlling stockholder in Benbow, 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. In addition to the five
licenses discussed here, Benbow holds conventional paging licenses which would
be transferred to Arch upon Federal Communications Commission approval.
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As a result of these arrangements, Benbow does not have any meaningful
business operations and is unlikely to retain the five licenses discussed here.
The closing of the transaction did not affect the funding obligations of Arch in
connection with Benbow's acquisition of PageCall in June 1998 described below.
On June 29, 1998, Benbow acquired all of the outstanding stock of PageCall
by issuing to PageCall's former stockholders preferred stock and a 12%
promissory note for $17.2 million. Benbow also agreed to pay one of PageCall's
stockholders $911,000 over five years for consulting services. Arch guaranteed
all obligations of Benbow under the Benbow preferred stock, promissory note and
consulting agreement. Effective April 8, 2000, pursuant to its guarantee, Arch
issued 2.9 million shares of common stock to PageCall's former stockholders in
exchange for their Benbow preferred stock and promissory note.
In exchange for its issuance of common stock pursuant to its guarantee,
Arch received 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. Arch recorded the issuance of $22.8 million of its common
stock in additional paid-in capital and as a charge to operations as a result of
its satisfaction of this obligation in April 2000.
Sources of Funds
Arch believes that its capital needs for the foreseeable future will be
funded 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
adjusted earnings before interest, taxes, depreciation and amortization.
Recent Issuance of Notes
In June 1999, a subsidiary of Arch issued $147.0 million principal amount
of 13 3/4% senior notes due 2008 in a private placement pursuant to Rule 144A
under the Securities Act of 1933. The notes were sold at 95.091% of the face
amount for net proceeds of $134.6 million.
Credit Facility
An Arch subsidiary has a senior credit facility that currently permits it
to borrow up to $577.9 million consisting of (1) a $175.0 million reducing
revolving Tranche A facility, (2) a $100.0 million Tranche B term loan and (3) a
$302.9 million Tranche C term loan.
The Tranche A facility will be reduced on a quarterly basis commencing on
September 30, 2000 and will mature on June 30, 2005. The Tranche B term loan
will be amortized in quarterly installments commencing September 30, 2000, with
an ultimate maturity date of June 30, 2005. The Tranche C term loan began
amortizing in annual installments on December 31, 1999, with an ultimate
maturity date of June 30, 2006. For more details, see Annex C to this
prospectus.
On March 23, 2000, the senior credit facility was amended to add a $746.6
million Tranche B-1 term loan to be used to repay obligations under PageNet's
existing credit facility upon completion of the pending PageNet merger. The
Tranche B term loan will be amortized in quarterly installments commencing March
31, 2000, with an ultimate maturity date of June 30, 2006.
PageNet's bankruptcy plan requires Arch to amend its secured credit
facility to require a reduction of between $110.0 million and $130.0 million in
Arch's outstanding borrowings within one year after the merger takes place.
Although Arch expects to fund this reduction in borrowings through sales of
assets selected by Arch and acceptable to the banks, or through the issuance of
equity securities, no assurance can be given that Arch will do so. A failure to
reduce the borrowings would constitute a default under the secured credit
facility. A reduction in borrowings funded by asset sales would reduce the
combined company's total assets and total indebtedness by approximately $110.0
million to $130.0 million, would reduce annual interest by approximately $11.0
million to $13.0 million and would reduce annual amortization expense by
approximately $11.0 million to $13.0 million. A reduction in borrowings funded
by
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the issuance of equity securities would reduce total indebtedness by
approximately $110.0 million to $130.0 million and would reduce annual interest
expense by approximately $11.0 million to $13.0 million.
Equity Issued in Exchange for Debt
In October 1999, Arch issued 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 in exchange for $8.9 million principal amount of Arch
convertible debentures. Arch also issued 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, in exchange for $16.3 million accreted value ($19.0 million
maturity value) of its senior discount notes.
In February and March 2000, Arch issued 285,715 shares of its common stock,
which had a closing price of $10.875 per share as of the date of the
transaction, in exchange for $3.5 million principal amount of Arch convertible
debentures. Arch also issued 11,640,321 shares of its common stock, which had a
weighted average closing price of $12.87 per share as of the dates of the
transactions, in exchange for $157.4 million accreted value ($176.0 million
maturity value) of its senior discount notes.
In May 2000, Arch issued 1,000,000 shares of its Series D convertible
preferred stock in exchange for $91.1 million accreted value ($100.0 million
maturity value) of senior discount notes held by various entities affiliated
with Resurgence Asset Management L.L.C. Upon completion of the merger, the
Series D convertible preferred stock will automatically convert into a total of
6,613,180 shares of common stock. The other terms of the Series D preferred
stock are described under "Description of Arch's Equity Securities."
Following these transactions, on June 30, 2000, Arch had $1.0 million
principal amount of the convertible debentures and $159.6 million accreted value
($172.4 million maturity value) of discount notes outstanding.
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 wireless
messaging units have tended to decline in recent years. This reduction in costs
has generally been reflected in lower prices charged to subscribers who purchase
their wireless messaging units. Arch's general operating expenses, such as
salaries, employee benefits and occupancy costs, are subject to normal
inflationary pressures.
RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized in earnings. Arch intends to adopt this standard effective January 1,
2001. Arch has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements; however, adopting SFAS No. 133 could increase volatility
in earnings and other comprehensive income.
The Securities and Exchange Commission released Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," on December 3,
1999. This SAB provides additional guidance on the accounting for revenue
recognition, including both broad conceptual discussions as well as certain
industry-specific guidance. The guidance is effective for the fourth quarter of
fiscal 2000. Arch does not expect SAB 101 to have a material impact on its
results of operations upon adoption.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
Recent declines in Arch's units in service may continue or even accelerate;
this trend may impair Arch's financial results
In 1999, Arch experienced a decrease of 89,000 units in service, excluding
the addition of subscribers from the MobileMedia acquisition. Arch experienced
further decreases of 277,000 units in service during the first six months of
2000 due to subscriber cancellations and definitional changes. Arch believes
that the basic paging industry did not grow during 1999, that demand for basic
paging services will decline in 2000 and in the following years and that any
significant future growth in the paging industry will be attributable to
advanced messaging services. As a result, Arch believes that it will experience
a net decline in the number of its units in service during the remainder of
2000, excluding the addition of subscribers from the PageNet acquisition, as
Arch's addition of advanced messaging subscribers is likely to be exceeded by
its loss of traditional paging subscribers. However, the magnitude of the
expected decline cannot be predicted.
Cancellation of units in service can significantly affect the results of
operations of wireless messaging 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 messaging
business is characterized by high fixed costs, cancellations directly and
adversely affect earnings before interest, income taxes, depreciation and
amortization.
Competition from large telephone, cellular and PCS companies is intensifying
and may reduce Arch's revenues and operating margins
Traditional paging companies like Arch and PageNet, whose units in service
have been declining, increasingly compete for market share against large
telephone, cellular and PCS providers like MCI WorldCom, AT&T, Nextel, BellSouth
Wireless Data and Motient, Inc., formerly known as American Mobile Satellite
Corporation. The combined company will also compete with other paging companies
that continue to offer messaging and advanced messaging services. Some
competitors possess greater financial, technical and other resources than those
available to the combined company. If any of such competitors were to devote
additional resources to their wireless communications business or focus on
Arch's or PageNet's historical business segments, they could secure the combined
company's customers and reduce demand for its products. This could materially
reduce the combined company's revenues and operating margins and have a material
adverse effect on earnings before interest, income taxes, depreciation and
amortization.
Mobile, cellular and PCS telephone companies have introduced phones and phone
services with substantially the same features and functions as the advanced
messaging pagers and services provided by Arch and PageNet, and have priced
such devices and services competitively. The future growth and profitability
of Arch and PageNet depends on the success of our advanced messaging services
Arch and PageNet's advanced messaging services will compete with other
available mobile wireless services which have already demonstrated high levels
of market acceptance, including cellular, PCS and other mobile phone services,
such as those offered by Nextel, whose hand-held devices can send and receive
messages. Many of these other mobile wireless phone services now include
wireless messaging as an adjunct service or may replace send-and-receive
messaging services entirely. It is less expensive for an end user to enhance a
cellular, PCS or other mobile phone with modest data capability than to use both
a mobile phone and a pager. This is because the nationwide cellular, PCS and
other mobile phone carriers have subsidized the purchase of mobile phones and
because prices for mobile wireless services have been declining rapidly. In
addition, the availability of coverage for these services has increased, making
the two types of services and product offerings more comparable. Thus, companies
other than Arch and PageNet seeking to provide wireless messaging services may
be able to bring their products to market faster or in packages of products that
consumers and businesses find more valuable than those to be provided by Arch
and PageNet. If this occurs, Arch's and PageNet's market share will erode and
financial operations will be impaired.
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Continued net losses are likely and Arch cannot predict whether it will ever
be profitable
Arch and PageNet have reported net losses in the past. Arch expects that
the combined company will continue to report net losses and cannot give any
assurance about when, if ever, it is likely to attain profitability. Many of the
factors that will determine whether or not Arch attains profitability are
inherently difficult to predict. These include the decreased demand for basic
paging services and the uncertain market for advanced paging services which
compete against services offered by telephone, cellular and PCS providers, new
service developments and technological change, both before and after the merger.
Arch's revenues and operating results may fluctuate, leading to fluctuations
in trading prices and possible liquidity problems
Arch believes that future fluctuations in its revenues and operating
results may occur due to many factors, particularly the decreased demand for
basic paging services and the uncertain market for advanced paging services.
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.
Arch's leverage will still be significant following the merger and may
continue to burden Arch's operations, impair its ability to obtain additional
financing, reduce the amount of cash available for operations and make Arch
more vulnerable to financial downturns than if it had less debt
Arch expects to remain leveraged to a substantial degree following the
merger, with a ratio of pro forma total debt, total assets to adjusted earnings
before interest, income taxes, depreciation and amortization of 4.3 to 1 as of
June 30, 2000, assuming the exchange of all currently outstanding Arch discount
notes, or 4.6 to 1 assuming no exchange of any currently outstanding Arch
discount notes. Arch's total debt would be $1.8 billion assuming exchange of all
notes and $2.0 billion assuming no further exchange of notes.
Adjusted earnings before interest, income taxes, depreciation and
amortization is not a measure defined in generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. Adjusted earnings before interest, income taxes,
depreciation and amortization, as determined by PageNet and Arch, may not
necessarily be comparable to similarly titled data of other wireless messaging
companies.
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; and
- require a substantial portion of Arch's cash flow to be used to pay
interest expense; this will reduce the funds which would otherwise be
available for operations and future business opportunities.
Arch may not be able to reduce its financial leverage as it intends, and may not
be able to achieve an appropriate balance between growth which it considers
acceptable and future reductions in financial leverage. If Arch is not able to
achieve continued growth in earnings before interest, income taxes, depreciation
and amortization, it may be precluded from incurring additional indebtedness due
to cash flow coverage requirements under existing or future debt instruments.
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Restrictions under Arch's debt instruments may prevent Arch from declaring
dividends, incurring or repaying debt, making acquisitions, altering its lines
of business or taking other actions which its management considers beneficial
Various debt instruments impose operating and financial restrictions on
Arch. Arch's senior credit facility requires various Arch operating subsidiaries
to maintain specified financial ratios, including a maximum leverage ratio, a
minimum interest coverage ratio, a minimum debt service coverage ratio and a
minimum fixed charge coverage ratio. It also limits or restricts, among other
things, Arch's operating subsidiaries' ability to:
- declare dividends or repurchase stock;
- incur or pay back indebtedness;
- engage in mergers, consolidations, acquisitions and asset sales; or
- alter its lines of business or accounting methods, even though these
actions would otherwise benefit Arch.
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.
Arch may need additional capital to expand its business which could be
difficult to obtain. Failure to obtain additional capital may preclude Arch
from developing or enhancing its products, taking advantage of future
opportunities, growing its business or responding to competitive pressures
Arch's business strategy requires substantial funds to be available to
finance the continued development and future growth and expansion of its
operations, including the development and implementation of advanced messaging
services and possible acquisitions. Arch's future capital requirements will
depend upon factors that include:
- subscriber growth;
- the type of wireless messaging devices and services demanded by
customers;
- technological developments;
- marketing and sales expenses;
- competitive conditions;
- the scope and timing of Arch's strategy for developing technical
resources to provide advanced messaging services; and
- acquisition strategies and opportunities.
Arch cannot be certain that additional equity or debt financing will be
available to Arch when needed on acceptable terms, if at all. If sufficient
financing is unavailable when needed, Arch may be unable to develop or enhance
its products, take advantage of future opportunities, grow its business or
respond to competitive pressures or unanticipated needs.
Obsolescence in company-owned units may impose additional costs on Arch
Technological change may 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
pagers which can send and receive messages, 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 costs
or capital expenditures could have a material adverse effect on the combined
company's results of operations.
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Because Arch depends on Motorola for pagers and on Glenayre and Motorola for
other equipment, Arch's operations may be disrupted if it is unable to obtain
equipment from them in the future
Arch does not manufacture any of the equipment customers need to take
advantage of its services. It is dependent primarily on Motorola, Inc. to obtain
sufficient pager 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 any of this equipment, 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 during 2000, although it will continue to
maintain and service existing equipment into the future. Arch's purchase
agreement with Motorola for pagers expires on March 17, 2001. There can be no
assurance that the agreement with Motorola for pagers 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 messaging services. To the extent there are satellite
outages or if satellite coverage is impaired in other ways, Arch may experience
a loss of service until such time as satellite coverage is restored, which could
have a material adverse effect due to customer complaints.
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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, 1995,
1996, 1997, 1998, and 1999, for the six months ended June 30, 1999 and 2000, and
as of June 30, 2000. The selected financial and operating data as of December
31, 1995, 1996, 1997, 1998, and 1999 and for each of the five years in the
period ended December 31, 1999, has been derived from PageNet's audited
consolidated financial statements and notes. The selected financial and
operating data for the six months ended June 30, 1999 and 2000, and as of June
30, 2000, has been derived from PageNet's unaudited consolidated financial
statements and notes. The following consolidated financial information should be
read 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 six months ended June 30, 1999
and the year ended December 31, 1999 represents a charge for the impairment of
the assets of PageNet's majority-owned Spanish subsidiaries. The provision for
asset impairment 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 provision for asset impairment for the
year ended December 31, 1997 represents a provision to write down certain
subscriber devices to their net realizable value. The restructuring charges for
the years ended December 31, 1998 and 1999 represent a charge in 1998 and
adjustment of such charge in 1999, for the abandonment of facilities and
property and related severance costs associated with the reorganization of
PageNet's domestic operations. 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 year ended
December 31, 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 $78 million during the year ended December 31, 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 is
commonly used by analysts and investors as a principal measure of financial
performance in the wireless messaging industry. Earnings before interest, income
taxes, depreciation and amortization 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. Earnings before interest, income taxes,
depreciation and amortization is also one of the financial measures used by
analysts to value PageNet. Therefore, PageNet's management believes that the
presentation of earnings before interest, income taxes, depreciation and
amortization provides relevant information to investors. Adjusted earnings
before interest, income taxes, depreciation and amortization, as determined by
PageNet, does not reflect other non-operating (income) expense, provision for
asset impairment, restructuring charge, extraordinary items, and cumulative
effect of a change in accounting principle; consequently adjusted earnings
before interest, income taxes, depreciation and amortization may not necessarily
be comparable to similarly titled data of other wireless messaging companies.
Earnings before interest, income taxes, depreciation and amortization and
adjusted earnings before interest, income taxes, depreciation and amortization
should not be construed as alternatives to operating income or cash flows from
operating activities as determined in accordance with generally accepted
accounting principles or as a measure of liquidity. Amounts reflected as
earnings before interest, income taxes, depreciation and amortization or
adjusted earnings before interest, income taxes, depreciation and amortization
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
66
<PAGE> 70
payment of dividends or distributions, among other things. See "PageNet
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Adjusted earnings before interest, income taxes, depreciation and
amortization margin is calculated by dividing PageNet adjusted earnings before
interest, income taxes, depreciation and amortization by total revenues less
cost of products sold. Earnings before interest, income taxes, depreciation and
amortization margin is a measure commonly used in the wireless messaging
industry to evaluate a company's earnings before interest, income taxes,
depreciation and amortization relative to total revenues less cost of products
sold as an indicator of the efficiency of a company's operating structure.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- --------- --------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Services, rent and
maintenance
revenues.............. $532,079 $ 685,960 $ 818,461 $ 945,524 $ 897,348 $ 473,503 $ 396,157
Product sales........... 113,943 136,527 142,515 100,503 92,375 44,622 42,999
-------- --------- --------- ---------- ---------- --------- ---------
Total revenues.......... 646,022 822,487 960,976 1,046,027 989,723 518,125 439,156
Cost of products sold... (93,414) (116,647) (121,487) (77,672) (57,901) (26,639) (26,236)
-------- --------- --------- ---------- ---------- --------- ---------
552,608 705,840 839,489 968,355 931,822 491,486 412,920
Services, rent and
maintenance
expenses.............. 109,484 146,896 173,058 210,480 267,043 130,672 125,240
Selling expenses........ 67,561 82,790 102,995 104,350 97,413 45,992 35,322
General and
administrative
expenses.............. 174,432 219,317 253,886 320,586 361,386 176,229 159,934
Depreciation and
amortization
expense............... 148,997 213,440 289,442 281,259 327,101 195,548 121,825
Provision for asset
impairment............ -- 22,500 12,600 -- 17,798 17,798 --
Restructuring charge.... -- -- -- 74,000 (23,531) -- --
-------- --------- --------- ---------- ---------- --------- ---------
Total operating
expenses.............. 500,474 684,943 831,981 990,675 1,047,210 566,239 442,321
-------- --------- --------- ---------- ---------- --------- ---------
Operating income
(loss)................ 52,134 20,897 7,508 (22,320) (115,388) (74,753) (29,401)
Interest expense........ (102,846) (128,014) (151,380) (143,762) (150,921) (73,801) (93,123)
Interest income......... 6,511 3,679 3,689 2,070 3,902 1,305 938
Other non-operating
income (expense)...... -- (882) (1,220) 2,003 851 180 (49)
-------- --------- --------- ---------- ---------- --------- ---------
Loss before
extraordinary item and
cumulative effect of a
change in accounting
principle............. (44,201) (104,320) (141,403) (162,009) (261,556) (147,069) (121,635)
Extraordinary loss...... -- -- (15,544) -- -- -- --
Cumulative effect of a
change in accounting
principle............. -- -- -- -- (37,446) (37,446) --
-------- --------- --------- ---------- ---------- --------- ---------
Net loss................ $(44,201) $(104,320) $(156,947) $ (162,009) $ (299,002) $(184,515) $(121,635)
======== ========= ========= ========== ========== ========= =========
Per common share data
(basic and diluted):
Loss before
extraordinary item and
cumulative effect of a
change in accounting
principle............. $ (0.43) $ (1.02) $ (1.38) $ (1.57) $ (2.52) $ (1.42) $ (1.17)
Extraordinary loss...... -- -- (0.15) -- -- -- --
Cumulative effect of a
change in accounting
principle............. -- -- -- -- (0.36) (0.36) --
-------- --------- --------- ---------- ---------- --------- ---------
Net loss per share...... $ (0.43) $ (1.02) $ (1.53) $ (1.57) $ (2.88) $ (1.78) $ (1.17)
======== ========= ========= ========== ========== ========= =========
</TABLE>
67
<PAGE> 71
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Capital expenditures... $ 312,289 $ 437,388 $ 328,365 $ 268,183 $ 234,926 $ 134,814 $ 6,727
Cash flows provided by
operating
activities........... 160,629 110,382 150,503 248,101 77,866 101,516 42,360
Cash flows used in
investing
activities........... (589,387) (601,122) (459,929) (285,586) (237,319) (144,109) (5,976)
Cash flows provided by
financing
activities........... 624,489 296,335 308,573 37,638 188,520 50,859 2,583
Earnings before
interest, income
taxes, depreciation
and amortization..... 201,131 233,455 280,186 260,942 175,118 83,529 92,375
Adjusted earnings
before interest,
income taxes,
depreciation and
amortization......... 201,131 256,837 309,550 332,939 205,980 138,593 92,424
Adjusted earnings
before interest,
income taxes,
depreciation and
amortization
margin............... 36.4% 36.4% 36.9% 34.4% 22.1% 28.2% 22.4%
Units in service at end
of period............ 6,738,000 8,588,000 10,344,000 10,110,000 8,991,000 9,766,000 7,858,000
</TABLE>
The following table reconciles PageNet's net loss to earnings before
interest, income taxes, depreciation and amortization and adjusted earnings
before interest, income taxes, depreciation and amortization:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss................. $(44,201) $(104,320) $(156,947) $(162,009) $(299,002) $(184,515) $(121,635)
Interest expense......... 102,846 128,014 151,380 143,762 150,921 73,801 93,123
Interest income.......... (6,511) (3,679) (3,689) (2,070) (3,902) (1,305) (938)
Depreciation and
amortization expense... 148,997 213,440 289,442 281,259 327,101 195,548 121,825
-------- --------- --------- --------- --------- --------- ---------
Earnings before interest,
income taxes,
depreciation and
amortization........... 201,131 233,455 280,186 260,942 175,118 83,529 92,375
Other non-operating
(income) expense....... -- 882 1,220 (2,003) (851) (180) 49
Provision for asset
impairment............. -- 22,500 12,600 -- 17,798 17,798 --
Restructuring charge..... -- -- -- 74,000 (23,531) -- --
Extraordinary loss....... -- -- 15,544 -- -- -- --
Cumulative effective of a
change in accounting
principle.............. -- -- -- -- 37,446 37,446 --
-------- --------- --------- --------- --------- --------- ---------
Adjusted earnings before
interest, income taxes,
depreciation and
amortization........... $201,131 $ 256,837 $ 309,550 $ 332,939 $ 205,980 $ 138,593 $ 92,424
======== ========= ========= ========= ========= ========= =========
</TABLE>
68
<PAGE> 72
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, JUNE 30,
------------------------------------------------------------------ ----------
1995 1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets....... $ 259,096 $ 95,550 $ 105,214 $ 108,961 $ 130,930 $ 176,043
Total assets......... 1,228,338 1,439,613 1,597,233 1,581,244 1,422,560 1,351,219
Long-term obligations
in default......... -- -- -- -- 1,945,000 1,946,450
Long-term
obligations, less
current
maturities......... 1,150,000 1,459,188 1,779,491 1,815,137 58,127 59,507
Total shareowners'
deficit............ (80,784) (182,175) (337,931) (490,419) (789,839) (910,022)
</TABLE>
69
<PAGE> 73
PAGENET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
PageNet is a provider of wireless messaging services throughout the United
States and in 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 markets in the United States. PageNet also owns a minority interest in
a wireless messaging company in Brazil. During 1999 and 2000, several
significant events have occurred:
- On November 8, 1999, PageNet announced a merger with Arch. Under the
merger, PageNet will become a wholly owned subsidiary of Arch. Also as
part of the merger, 80.5% of PageNet's advanced wireless data and
wireless solutions business will be distributed to PageNet's noteholders
and stockholders. See "--Merger Agreement."
- PageNet's deteriorating financial results and defaults under its debt
agreements have resulted in significant liquidity constraints. The report
of PageNet's independent auditors for the year ended December 31, 1999
expresses substantial doubt about its ability to continue as a going
concern. See "Liquidity and Capital Resources."
- In February, April and August 2000, PageNet failed to make the
semi-annual interest payments due under its $1.2 billion of senior
subordinated notes. PageNet is also not in compliance with several
financial covenants of its domestic revolving credit facility. See
"--Liquidity and Capital Resources."
- On July 24, 2000, PageNet commenced a bankruptcy proceeding under chapter
11 of the United States Bankruptcy Code. See "--Bankruptcy Filing."
- As a result of billing software and system implementation problems
encountered throughout 1999 and the proposed merger with Arch, PageNet
initially postponed and subsequently suspended the conversions of certain
local offices to its new billing and customer service systems. As a
result of these suspensions, in the fourth quarter of 1999 PageNet
reversed $24 million of a restructuring charge that it had recorded in
1998. See "Restructuring."
- Units in service with subscribers decreased from approximately 10.1
million units at December 31, 1998 to approximately 9.0 million units at
December 31, 1999. Units in service were approximately 8.4 million units
at March 31, 2000 and 7.9 million units at June 30, 2000, reflecting
declines of approximately 567,000 units in the first quarter of 2000 and
approximately 566,000 units in the second quarter of 2000. Units in
service are expected to continue to decline in the second half of 2000.
- In June 1999, PageNet consolidated its initiative to develop advanced
messaging services including wireless data and wireless solutions into
its wholly owned subsidiary, Vast. Vast is a development stage company
and, since its inception, has been engaged primarily in product research
and development and developing markets for its products and services.
Vast had total revenues of $1 million and $3 million, respectively, for
the year ended December 31, 1999 and six months ended June 30, 2000. Vast
incurred net losses of approximately $35 million and $13 million,
respectively, for the year ended December 31, 1999 and six months ended
June 30, 2000, as a result of these startup activities.
- PageNet's Spanish subsidiaries ceased operations during the third quarter
of 1999. PageNet had recorded a provision of $18 million during the first
quarter of 1999 for the impairment of the assets of the Spanish
subsidiaries.
- PageNet incurred net losses of $299 million for the year ended December
31, 1999 and $122 million for the six months ended June 30, 2000. The net
loss for 1999 includes an increase in depreciation expense of $78 million
resulting from changes in the depreciable lives of subscriber
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<PAGE> 74
devices and network equipment and a charge of $37 million for the
cumulative effect of adopting a new accounting standard. See "Results of
Operations."
- On July 26, 2000, PageNet's common stock was delisted from the Nasdaq
Small Cap Market. On July 27, 2000, PageNet's common stock began to be
traded in the over-the-counter market.
MERGER AGREEMENT
On November 7, 1999, PageNet signed a definitive agreement to merge with
Arch. The merger agreement was subsequently amended as of January 7, 2000, May
10, 2000, July 23, 2000 and September 7, 2000. Under terms of the merger
agreement, as amended, PageNet's senior subordinated notes, along with all
accrued interest thereon, will be exchanged for common stock of Arch
representing 48.2% of the common stock of the combined company and PageNet's
common stock will be converted into common stock representing 2.9% of the common
stock of the combined company. The merger agreement also provides for PageNet to
distribute 80.5% of its interest in Vast to holders of PageNet's senior
subordinated notes and common stock. Holders of the senior subordinated notes
will receive common stock of Vast representing 60.5% of the equity of Vast,
while holders of PageNet's common stock will receive common stock of Vast
representing 20% of the equity of Vast. The remaining interest in Vast will be
held by the combined company following the merger.
As more fully discussed below, PageNet will seek to complete the merger
through the reorganization resulting from PageNet's bankruptcy filing in July
2000. Consummation of the merger is subject to customary regulatory review. Arch
and PageNet have received approval from the Department of Justice and the
Federal Communications Commission to proceed with the merger.
On July 19, 2000, Metrocall, Inc. announced that it had offered to acquire
PageNet for a combination of cash and stock. On July 24, 2000, PageNet announced
that its board of directors had concluded that the proposal received from
Metrocall was not a "superior proposal" to the Arch transaction within the
meaning of the merger agreement. PageNet also announced that its board would not
discuss the proposal further with Metrocall. On September 8, 2000, the
bankruptcy court dismissed Metrocall's motion requesting that the court
terminate PageNet's exclusivity period and permit Metrocall to submit a
competing plan of reorganization in PageNet's chapter 11 reorganization.
BANKRUPTCY FILING
On July 14, 2000, three senior subordinated noteholders commenced an
involuntary proceeding against PageNet under chapter 11 of the United States
Bankruptcy Code. The petition related solely to Paging Network, Inc. and not to
any of its subsidiaries. On July 24, 2000, Paging Network, Inc. consented to an
order for relief which, in effect, converted the involuntary chapter 11 petition
into a voluntary proceeding. On the same date, Paging Network, Inc.'s domestic
subsidiaries other than Vast filed voluntary chapter 11 petitions in the United
States Bankruptcy Court. Subsequent to the petition date, PageNet and its
domestic subsidiaries other than Vast are operating as debtors-in-possession and
are subject to the jurisdiction of the United States Bankruptcy Court for the
District of Delaware. Chapter 11 is the principal business reorganization
chapter of the United States 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.
The bankruptcy court has exercised supervisory powers over the operations
of PageNet with respect to the employment of attorneys, investment bankers and
other professionals, and transactions out of the ordinary course of business or
otherwise requiring bankruptcy court approval under the bankruptcy code. PageNet
has 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 PageNet (1) to pay certain
customer refunds and deposits in the ordinary course of business, (2) to pay
wages, salaries and benefits owing to employees, and (3) to pay pre-petition
obligations owed to continuing vendors as such obligations come due.
On July 25, 2000, PageNet filed a joint plan of reorganization and
disclosure statement which provide for the implementation of the merger as
PageNet's plan of reorganization. The bankruptcy court approved
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<PAGE> 75
the disclosure statement on September 8, 2000, and authorized PageNet to submit
the joint plan of reorganization to its creditors and stockholders for approval.
PageNet's motion to assume the merger termination fee and certain related
provisions of the merger agreement was approved by the bankruptcy court on
August 22, 2000. The court has scheduled a hearing on the confirmation of the
plan for October 26, 2000.
LIQUIDITY AND CAPITAL RESOURCES
General
PageNet's deteriorating financial results and liquidity caused PageNet to
be in default of the covenants of all of its domestic debt agreements. On
February 2, 2000 and August 1, 2000, PageNet failed to make the semi-annual
interest payment on its 8.875% senior subordinated notes due 2006, and its
10.125% senior subordinated notes due 2007. As of March 2, 2000, the non-payment
of interest constituted a default under the indentures of these notes. As of
April 17, 2000, PageNet failed to make the semi-annual interest payment on its
10% senior subordinated notes due 2008, and does not expect to make additional
cash interest payments on any of its senior subordinated notes. PageNet also
defaulted on several of the financial and other covenants of its credit
agreement. As a result of these defaults, PageNet's bondholders and the lenders
under its credit agreement had the right to demand at any time that PageNet
immediately pay its outstanding indebtedness in full. On July 14, 2000, three
senior subordinated noteholders commenced the involuntary bankruptcy proceeding
against PageNet discussed above.
PageNet is prohibited from additional borrowings under its credit agreement
and has classified all of its outstanding indebtedness under its credit
agreement and the senior subordinated notes as a current liability as of
December 31, 1999 and June 30, 2000. On July 24, 2000, PageNet entered into a
debtor-in-possession loan facility with the lenders under its credit agreement.
The debtor-in-possession loan facility provides for additional secured
borrowings by both PageNet and Vast not to exceed $50 million in the aggregate,
subject to certain limitations as set forth in the loan agreement. Borrowings
under the debtor-in-possession loan facility bear interest at prime plus 2.5%
for outstanding borrowings up to $15 million, and at prime plus 3.0% for
outstanding borrowings in excess of $15 million, due monthly. All amounts
outstanding under the debtor-in-possession loan facility are due the earlier of
(1) the confirmation of PageNet's plan of reorganization, or (2) November 30,
2000. As of July 31, 2000, PageNet had approximately $66 million in cash.
PageNet believes that its existing cash, the cash expected to be generated from
operations, and the cash available under the debtor-in-possession loan facility
is sufficient to meet its obligations, except for the cash interest payments due
under the senior subordinated notes, through the completion of the merger.
However, if PageNet's financial results continue to deteriorate, the merger is
delayed, or other unforeseen events occur, PageNet may not be able to complete
the merger. If the merger is not completed, PageNet would likely be required to
consider a stand-alone restructuring, asset sales, transactions with other
potential merger parties or acquirers, or liquidation.
Effects of the Merger
PageNet believes that the combined company should not experience the
liquidity problems currently faced by PageNet. As part of the merger, all of the
PageNet senior subordinated notes will be converted into Arch common stock,
significantly reducing or eliminating the accrued or future interest payments
associated with this indebtedness. The combined company will have access to
Arch's amended credit facility as a source of additional liquidity. PageNet also
anticipates that the integration of management and information functions will
result in lower operating expenses, although such reductions will require 12 to
18 months to achieve.
PageNet also anticipates that the combined company will have access to
sufficient funding to more broadly introduce advanced messaging services that it
expects to be in greater demand and that it expects to be more competitive with
alternative wireless messaging services.
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<PAGE> 76
Vast Solutions
Since the inception of Vast, PageNet has funded substantially all of its
operations, which are in the development stage. However, as a result of the
above described defaults, PageNet was prohibited from providing any additional
funding to Vast. Under the debtor-in-possession financing discussed above,
however, Vast will have access to additional borrowings during PageNet's
bankruptcy proceedings. Furthermore, Arch has also committed to provide,
following the close of the PageNet bankruptcy proceeding, a loan of $7.5 million
to Vast. Of PageNet's cash on hand at July 31, 2000, approximately $4 million
was held by Vast. Vast believes cash on hand, together with the amount of cash
available under the debtor-in-possession financing, is sufficient to meet its
obligations through the date at which PageNet expects to complete the merger or
otherwise restructure its obligations. However, there can be no assurance that
these efforts will provide Vast with adequate liquidity to meet its obligations
through the completion of the merger. As a result, Vast may be required to
reduce or cease its current level of development stage operations. Such events
would have a material impact on PageNet's ability to consummate the merger.
Cash Provided by Operating Activities
Net cash provided by operating activities was $151 million, $248 million,
and $78 million, respectively, for the years ended December 31, 1997, 1998, and
1999, and $42 million for the six months ended June 30, 2000, compared to $102
for the six months ended June 30, 1999. The decrease in cash provided by
operating activities of $60 million for the six months ended June 30, 2000 as
compared to the same period in 1999 resulted primarily from the continuing
decline in revenues associated with the decline in units in service, a decrease
in accounts payable, and an increase in accounts receivable. The decrease in
accounts payable during the first six months of 2000 was primarily due to lower
levels of capital expenditures and reduced purchases of paging devices. The
increase in accounts receivable during the first six months of 2000 was the
result of reduced cash collections during this period caused by issues
associated with PageNet's new billing and customer service systems, employee
turnover, and PageNet's proposed merger with Arch, all of which have required a
significant portion of PageNet's resources. PageNet increased its collections
efforts during the latter part of the first quarter of 2000 and expects to
realize the benefits of these efforts in future quarters. The decrease in cash
provided from operating activities of $170 million from 1998 to 1999 was
primarily attributable to a continuing decline in revenues associated with the
decline of units in service and duplicative costs which were incurred as
centralized service centers were operating in advance of field offices being
closed. In addition, PageNet expanded its use of temporary personnel due to
turnover in employees and used outside consultants to a greater extent than in
the previous years. Furthermore, accounts receivable increased over 1998 as a
result of a reduced level of collection efforts, and accounts payable decreased
due to lower levels of capital expenditures and reduced purchases of paging
devices. The increase of $97 million from 1997 to 1998 resulted primarily from a
decrease in net loss before non-cash charges, an increase in accounts payable,
and a decrease in inventories. The increase in accounts payable in 1998 was due
to the high level of accounts payable at December 31, 1998, resulting from
additional expenses incurred late in the fourth quarter of 1998 related to the
restructuring of PageNet's operations. The decrease in inventories during 1998
was the result of programs PageNet began instituting in 1997 to utilize
subscriber devices more effectively and to more closely control subscriber
device purchases.
Cash Provided by Financing Activities
Net cash provided by financing activities was $309 million, $38 million,
and $189 million, respectively, for the years ended December 31, 1997, 1998, and
1999, and $51 million and $3 million, respectively, for the six months ended
June 30, 1999 and 2000. The primary source of financing for each period except
for the first six months of 2000 was net borrowings under PageNet's domestic
revolving credit agreement, which increased by $519 million, $30 million, and
$187 million, respectively, for the years ended December 31, 1997, 1998, and
1999, and $52 million for the three months ended March 31, 1999. As discussed
below, PageNet does not anticipate being able to make additional borrowings
under the credit
73
<PAGE> 77
agreement in the future. As of June 30, 2000, PageNet had approximately $747
million of borrowings under its credit agreement. As of April 11, 2000, PageNet
agreed to reduce its maximum borrowings under the credit agreement to
approximately $747 million. During the year ended December 31, 1997, PageNet
redeemed all its outstanding 11.75% senior subordinated notes utilizing funds
borrowed under the credit agreement. As a result, PageNet recorded an
extraordinary loss on the early retirement of debt of approximately $16 million
during the year ended December 31, 1997. Net cash provided by financing
activities has been used for capital expenditures, working capital, and other
general corporate purposes, which included expansion of its existing business
and acquisition of new paging frequencies.
Cash Used in Investing Activities
PageNet's operations and expansion into new markets and product lines have
required substantial capital investment. Furthermore, PageNet has been building
an advanced messaging network, which will enable it to offer new advanced
messaging services, and has converted certain back office functions from
decentralized field offices into centralized processing facilities. PageNet
substantially completed building its advanced messaging network in early 2000.
PageNet continued to convert certain back office functions from its
decentralized field offices into the centralized processing facilities through
January 2000, at which time PageNet suspended further conversions. Cash used in
investing activities was $460 million, $286 million, and $237 million,
respectively, for the years ended December 31, 1997, 1998, and 1999, and $144
million and $6 million, respectively, for the six months ended June 30, 1999 and
2000. Capital expenditures, excluding payments for spectrum licenses, were $328
million, $268 million, and $235 million, respectively, for the years ended
December 31, 1997, 1998, and 1999, and $135 million and $7 million,
respectively, for the six months ended June 30, 1999 and 2000, and consisted
primarily of expenditures for PageNet's traditional paging operations, PageNet's
advanced messaging operations, and its restructuring. Payments for spectrum
licenses were $93 million, $13 million, and $4 million, respectively, for the
years ended December 31, 1997, 1998, and 1999, and $3 million for the six months
ended June 30, 1999, and consisted primarily of expenditures for the acquisition
of exclusive rights to certain specialized mobile radio frequency licenses from
incumbent operators.
Capital expenditures related to PageNet's traditional paging operations,
excluding capital expenditures related to the restructuring, were $224 million,
$136 million, and $84 million, respectively, for the years ended December 31,
1997, 1998, and 1999, $55 million for the six months ended June 30, 1999 and
were minimal for the six months ended June 30, 2000. The decreases in
traditional paging capital expenditures have been primarily due to a reduction
in PageNet's network-related expenditures pertaining to geographic coverage and
capacity expansion. Also, during 1997 PageNet began instituting programs to
utilize subscriber devices more effectively and to more closely control
subscriber device capital expenditures. In addition to the programs to utilize
subscriber devices more effectively, the decrease in traditional paging capital
expenditures in 1997 was also due to increased efficiencies in infrastructure
deployment.
Capital expenditures related to advanced messaging operations were $104
million, $75 million, and $113 million, respectively, for the years ended
December 31, 1997, 1998, and 1999, and $63 million and $4 million, respectively,
for the six months ended June 30, 1999 and 2000. PageNet launched its send-and-
receive messaging services on its advanced messaging network on February 1,
2000. PageNet expects to spend an additional $15 million in capital expenditures
to complete the buildout of sites started in the fourth quarter of 1999 and
expand capacity in certain cities throughout the nation during 2000. This will
substantially complete PageNet's investment in its advanced messaging network.
Capital expenditures related to establishing PageNet's centralized
processing facilities, including new system implementations, were $57 million
and $38 million, respectively, for the years ended December 31, 1998 and 1999,
and $17 million and $3 million, respectively, for the six months ended June 30,
1999 and 2000. In January 2000, PageNet suspended further capital expenditures
for its centralized processing facilities, pending the decision as to which
operating platforms will be used by the combined company. During May 2000, a
decision was made to use Arch's existing billing and customer service systems
upon completion of the merger. PageNet believes that Arch's billing and customer
service systems have the capacity to handle all of the customers of the combined
company. Arch has significant experience
74
<PAGE> 78
consolidating multiple billing and customer service systems as a result of prior
acquisitions, including its recent acquisition of MobileMedia. The decisions
regarding other systems to be utilized by the combined company are still
pending.
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. With the substantial completion of the
buildout of its advanced messaging network and the suspension of the
restructuring initiatives beyond January 2000, PageNet expects its capital
expenditures in 2000 to decrease to between $50 million and $65 million. PageNet
expects to fund these capital expenditures through cash on hand, additional cash
generated from operations prior to its contemplated merger with Arch, and the
debtor-in-possession financing described above.
In 1994, PageNet acquired three nationwide narrowband PCS frequencies in a
Federal Communications Commission auction for $197 million. During April 1996,
PageNet concluded its participation in a Federal Communications Commission
auction of specialized mobile radio frequency licenses, and ultimately acquired
rights to two to four blocks of two-way spectrum in markets across the United
States. During the remainder of 1996 and through 1999, PageNet purchased the
exclusive rights to certain of these specialized mobile radio frequencies from
incumbent operators. The total cost of PageNet's investment in its nationwide
specialized mobile radio frequencies was $221 million. PageNet has employed the
nationwide PCS and specialized mobile radio frequencies for its advanced
messaging network.
Credit Agreement
PageNet's ability to borrow under its domestic credit agreement effectively
terminated when the chapter 11 case was filed. As of the commencement of the
chapter 11 case, there were approximately $747 million of outstanding borrowings
under the credit agreement. Under the credit agreement, PageNet was permitted to
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. As of June 30, 2000,
PageNet had designated $745 million of borrowings as London interbank offered
rate loans, which bear interest at a rate equal to London interbank offered rate
plus a spread of 2.00% and $1 million of borrowings as a base rate loan. The
interest rates for the $745 million of London interbank offered rate loans as of
June 30, 2000 ranged from 8.43% to 8.67%. As a result of the defaults described
in Note 2 to the consolidated financial statements, PageNet's lenders have the
right to collect default interest up to 12.00% for PageNet's outstanding
balances under its credit agreement. PageNet has negotiated certain relief from
this default interest rate as part of its efforts associated with the merger
which relief is reflected in the lenders' treatment under the bankruptcy plan.
Amounts owing under the credit agreement are secured by a security interest in
substantially all of PageNet's assets, the assets of PageNet's subsidiaries, and
the capital stock of the subsidiaries of PageNet, other than the international
subsidiaries and Vast.
The two credit agreements of PageNet's Canadian subsidiaries provide for
total borrowings of approximately $75 million. Because the Canadian subsidiaries
are not debtors in the chapter 11 case, their credit facility is not impacted by
the chapter 11 case. The lenders are Toronto Dominion Bank, Canadian Imperial
Bank of Commerce and National Bank of Canada. Amounts available under the two
credit agreements begin reducing in the first quarter of 2002 and reduce to zero
on December 31, 2004. Borrowings of up to approximately $40 million require
security in the form of cash or government securities. Borrowings of up to
approximately $35 million require a first security in the assets of the Canadian
subsidiaries. Furthermore, PageNet is required to provide an additional $2
million of cash collateral by December 31, 2000. However, as a result of the
commencement of the chapter 11 case and the above described defaults, PageNet is
precluded from providing any additional funding on behalf of its Canadian
subsidiaries without approval from U.S. lenders and the bankruptcy court. The
ability of PageNet's Canadian subsidiaries to continue as a going concern is
dependent on meeting the terms of their credit agreements, either by providing
the additional cash collateral or by establishing alternative arrangements
satisfactory to the lenders. PageNet and its Canadian subsidiaries have taken
and plan to take actions that management believes will mitigate any adverse
conditions and events resulting from the possible failure of PageNet to provide
the required cash collateral on December 31, 2000. However, there
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is no certainty that these actions or other strategies will be sufficient to
allow PageNet's Canadian subsidiaries to meet the terms of their credit
agreements.
As of June 30, 2000, approximately $59 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 the financial covenants in the
credit agreements are met. The interest rate for borrowings secured by cash or
government securities is the bankers' acceptance rate for bankers' acceptances
reported by Toronto Dominion Bank plus 0.5%. The interest rate for borrowings
secured by the assets of the Canadian subsidiaries is the bankers' acceptance
rate for bankers' acceptances reported by Toronto Dominion Bank plus 1%, 2%, 3%,
or 4%, depending on the current debt ratio of the Canadian subsidiaries. The
current bankers' acceptance rate for bankers' acceptances reported by Toronto
Dominion Bank is 5.2% and the current spread required for borrowings secured by
the assets of the Canadian subsidiaries is 4.0%.
RESTRUCTURING
In February 1998, PageNet's board of directors approved PageNet's
restructuring. PageNet's restructuring plan called for the elimination of
redundant administrative operations by consolidating key support functions
located in offices throughout the country into centralized processing
facilities. In addition, the restructuring plan called for the conversion to new
billing and customer service software platforms. The restructuring plan
specified local and regional office closures, the disposition of certain
furniture, fixtures, and equipment and the termination of approximately 1,950
employees by job function and location. Having adopted a formal plan of
restructuring, PageNet recorded a restructuring charge of $74 million during the
quarter ended March 31, 1998. While progress in establishing the centralized
processing facilities was made, PageNet's efforts to convert its offices to its
new billing and customer service software platforms fell behind the original
schedule of being completed during the second quarter of 1999. Billing software
and system implementation problems surfaced during the first office conversions,
and as a result, PageNet had to postpone the conversion of many of its other
offices. These postponements resulted in delays in office closures which
deferred the payments of amounts accrued for lease obligations and terminations
and severance and related benefits. Additional implementation problems surfaced
during 1999 and caused further delays. In November 1999, and in conjunction with
the announcement of PageNet's planned merger with Arch, PageNet decided to
suspend further conversions after January 2000 pending the decisions as to which
operating platforms will be used by the combined company. During May 2000, a
decision was made to use Arch's existing billing and customer service systems
upon completion of the merger. The decisions regarding other systems to be
utilized by the combined company are still pending. As a result of the decision
to suspend the restructuring indefinitely, PageNet recorded a reversal of the
unused portion of the original restructuring charge of $24 million during the
quarter ended December 31, 1999.
PageNet has converted to its new billing and customer service software
platforms all of its customer units placed in service by its resellers and
approximately 50% of its direct customer units. As a result, PageNet will
realize a portion of the anticipated cost savings resulting from its
restructuring initiative and will eliminate some of the duplicative costs that
have adversely affected its results of operations. However, due to the
suspension of future conversions, combined with the impact of the contemplated
merger on its operations, PageNet is unable to determine the amount of future
cost savings resulting from the centralized processing facilities initiative.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
PageNet's consolidated financial statements and notes. Earnings before interest,
income taxes, depreciation and amortization 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. Adjusted earnings before
interest, income taxes, depreciation and amortization is defined as earnings
before interest, income taxes, depreciation, amortization, other non-operating
income
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(expense), provision for asset impairment, restructuring charge, extraordinary
items, and cumulative effect of a change in accounting principle. Adjusted
earnings before interest, income taxes, depreciation and amortization should not
be considered an alternative to operating income or cash flows from operating
activities as determined in accordance with generally accepted accounting
principles. One of PageNet's financial objectives is to increase its adjusted
earnings before interest, income taxes, depreciation and amortization, since
adjusted earnings before interest, income taxes, depreciation and amortization
is a significant source of funds for servicing indebtedness and for investment
in continued growth, including purchase of paging units and paging system
equipment and the construction and expansion of paging systems. Adjusted
earnings before interest, income taxes, depreciation and amortization, as
determined by PageNet, may not be comparable to similarly titled data of other
wireless messaging companies. Amounts described as adjusted earnings before
interest, income taxes, depreciation and amortization 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Services, Rent and Maintenance Revenues
Revenues from services, rent and maintenance, which PageNet considers its
primary business, decreased 16.3% to $396 million for the six months ended June
30, 2000, compared to $474 million for the six months ended June 30, 1999. The
average revenue per unit for PageNet's traditional paging domestic operations
decreased to $7.70 for the six months ended June 30, 2000, compared to $7.94 for
the corresponding period of 1999. The decrease in revenues from services, rent
and maintenance was primarily due to the 19.5% reduction in number of units in
service from June 30, 1999 to June 30, 2000.
The number of units in service with subscribers at June 30, 2000 was
7,858,000, compared to 8,991,000 and 9,766,000 units in service with subscribers
at December 31, 1999 and June 30, 1999, respectively. This reduction was mainly
due to customer cancellations as a result of certain price increases,
intensifying price competition in the market for wireless messaging services,
disruptions in customer service caused by conversions to new centralized
processing facilities systems and infrastructure, and the degree to which
cellular, personal communications services, and other mobile telephone services
are being subscribed to instead of traditional messaging services such as those
offered by PageNet. Many of the factors that reduced PageNet's units in service
in the first six months of 2000 have continued to exist in the third quarter of
2000. As a result, PageNet expects units in service to continue to decline
throughout 2000.
Product Sales
Product sales decreased 3.6% to $43 million for the six months ended June
30, 2000, compared to $45 million for the same period in 1999.
Services, Rent and Maintenance Expenses
Services, rent and maintenance expenses decreased 4.2% to $125 million for
the six months ended June 30, 2000, compared to $131 million for the six months
ended June 30, 1999. The decrease in services, rent and maintenance expenses was
primarily attributable to a decrease in pager parts, repairs and scrap expense
of approximately $6 million for the six months ended June 30, 2000, mainly due
to increased use of in-house repair facilities, a more selective approach in the
decision to repair units, and increased sales of "as is" units.
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Selling Expenses
Selling expenses decreased 23.2% to $35 million for the six months ended
June 30, 2000 compared to $46 million for the same period in 1999. The decrease
in selling expenses for the first half of 2000 was primarily due to:
- decreased marketing research, development costs, and advertising expenses
of approximately $7 million for the six months ended June 30, 2000,
associated with PageNet's traditional paging and advanced messaging
operations. Marketing research, development costs and advertising
expenses associated with PageNet's traditional paging and advanced
messaging operations are expected to continue to be scaled back in future
periods.
- decreased salaries and payroll costs of approximately $5 million for the
six months ended June 30, 2000, mainly due to lower amount of sales
commissions incurred in conjunction with decreased revenue levels.
General and Administrative Expenses
General and administrative expenses decreased 9.2% to $160 million for the
six months ended June 30, 2000, compared to $176 million for the six months
ended June 30, 1999. The decrease in general and administrative expenses was
primarily due to:
- decreased contract labor and outside consulting expense of approximately
$15 million for the six months ended June 30, 2000, primarily related to
decreased levels of contract labor and outside consulting incurred during
the first six months of 2000 as PageNet suspended its restructuring in
January 2000. During the six months ended June 30, 1999, PageNet incurred
higher contract labor and outside consulting expense primarily related to
the transition to the centralized processing facilities and costs for
temporary workforce personnel associated with PageNet's higher than
normal employee turnover during the first six months of 1999.
- decreased shipping and postage expense, office supplies expense, and
employee recruiting and relocation costs of approximately $6 million for
the six months ended June 30, 2000, mainly due to PageNet's
implementation of tighter cost controls and its decreased employee
headcount related to higher than normal employee turnover associated with
PageNet's restructuring and the merger.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased 37.7% to $122 million for
the six months ended June 30, 2000, compared to $196 million for the six months
ended June 30, 1999. Effective April 1, 1999, PageNet changed the depreciable
lives of its subscriber devices from three years to two years and the
depreciable life of some 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 expectation
regarding future usage periods for subscriber devices considering current and
projected technological advances. PageNet determined that the appropriate useful
life of subscriber devices is two years as a result of technological advances,
customer desire for new pager technology, and PageNet's decreasing ability to
redeploy older pager models. PageNet determined that the appropriate useful life
of network equipment is ten years since this equipment is operational for a
longer time period given current technology. As a result of these changes,
depreciation expense decreased by approximately $8 million during the six months
ended June 30, 2000. PageNet commenced depreciation and amortization on the
assets related to its centralized processing facilities during the third quarter
of 1999. This increased depreciation and amortization expense during the six
months ended June 30, 2000 by approximately $3 million. PageNet commenced
depreciation and amortization of the assets related to its advanced messaging
operations during the first quarter of 2000, which increased depreciation and
amortization expense by approximately $11 million during the six months ended
June 30, 2000, and is expected to increase depreciation and amortization expense
by approximately $24 million for the year ending December 31, 2000.
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Provision for Asset Impairment
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.
Interest Expense
Interest expense, net of amounts capitalized, was $93 million for the six
months ended June 30, 2000, compared to $74 million for the six months ended
June 30, 1999. The increase in interest expense was primarily due to a decrease
in capitalized interest resulting from the completion of the buildout of
PageNet's advanced wireless network during the first quarter of 2000, and a
higher level of indebtedness outstanding. The amount of interest capitalized
decreased by $10 million for the six months ended June 30, 2000 compared to the
same period of 1999. The average level of indebtedness outstanding during the
six months ended June 30, 2000 was $2.0 billion, compared to $1.9 billion
outstanding during the corresponding period of 1999.
Change in Accounting Principle
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 unamortized start-up costs as of January
1, 1999. See Note 4 to PageNet's consolidated financial statements.
Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization
As a result of the factors outlined above, adjusted earnings before
interest, income taxes, depreciation and amortization decreased 33.3% to $92
million for the first six months of 2000, compared to $139 million for the
corresponding period of 1999. Adjusted earnings before interest, income taxes,
depreciation and amortization and adjusted earnings before interest, income
taxes, depreciation and amortization as a percentage of total revenues less
costs of products sold for the six months ended June 30, 2000 were negatively
impacted by PageNet's declining revenues (negative $79 million and negative
19.1%, respectively) and its advanced messaging operations (negative $22 million
and negative 5.4%, respectively). Adjusted earnings before interest, income
taxes, depreciation and amortization and adjusted earnings before interest,
income taxes, depreciation and amortization as a percentage of total revenues
less costs of products sold for the six months ended June 30, 1999 were
negatively impacted by PageNet's advanced messaging operations (negative $19
million and negative 3.9%, respectively).
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Services, Rent and Maintenance Revenues
Revenues from services, rent and maintenance, which PageNet considers its
primary business, decreased 5.1% to $897 million for the year ended December 31,
1999, compared to $946 million for the year ended December 31, 1998. The average
revenue per unit for PageNet's traditional domestic paging operations increased
to $7.80 for the year ended December 31, 1999, compared to $7.71 for the year
ended December 31, 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 during early 1999, were offset by an 11.1% reduction in
the number of units in service during the year ended December 31, 1999.
The number of units in service with subscribers at December 31, 1999 was
approximately 8,991,000, compared to 10,110,000 and 10,344,000 units in service
with subscribers at December 31, 1998 and December 31, 1997. This reduction was
mainly due to the impact of price increases to some of its customers,
intensifying price competition in the market for wireless messaging services,
disruptions in customer service caused by conversions to new centralized
processing facilities systems and infrastructure, and the degree to which
cellular, PCS, and other mobile telephone services, are being subscribed to
instead of traditional paging services such as those offered by PageNet.
Approximately two-thirds of the
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loss in units in service was a result of continued weakness in PageNet's
reseller channel. Many of the factors that reduced PageNet's units in service in
the fourth quarter of 1999 have continued to exist in 2000. As a result, PageNet
estimates it has lost approximately 570,000 net subscribers in the first quarter
of 2000.
Product Sales
Product sales decreased 8.1% to $92 million for the year ended December 31,
1999, compared to $101 million for the year ended December 31, 1998. The
decreases in product sales and cost of products sold from 1998 to 1999 resulted
primarily from increased price competition and competition from cellular, PCS,
and other mobile telephone services, 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 effect of increasing
depreciation expense and thereby reducing the net book values of sold subscriber
devices.
Services, Rent and Maintenance Expenses
Services, rent and maintenance expenses increased 26.9% to $267 million for
year ended December 31, 1999, compared to $210 million for the year ended
December 31, 1998. The increase in services, rent and maintenance expenses for
the year ended December 31, 1999 was primarily due to:
- increased contracted dispatch costs of approximately $17 million,
primarily related to advanced messaging units placed in service during
1998 and 1999;
- increased transmitter site rent expense of approximately $17 million,
mainly related to the adoption of the provisions of AICPA Statement of
Position 98-5 "Reporting on the Costs of Start-up Activities" (SOP 98-5),
effective January 1, 1999, which required start-up costs to be expensed
as incurred, and an increase in transmitter sites in connection with the
buildout of PageNet's advanced messaging network;
- increased telephone expenses of approximately $8 million, primarily
associated with the operation of the advanced messaging network;
- increased salaries and payroll costs of technical personnel of
approximately $7 million, primarily related to the buildout of the
advanced messaging network; and
- increased pager parts, repairs and scrap expense of approximately $4
million.
Selling Expenses
Selling expenses decreased 6.6% to $97 million for the year ended December
31, 1999, compared to $104 million for the year ended December 31, 1998. The
decrease in selling expenses for the year ended December 31, 1999 was primarily
due to a decrease in salaries and payroll costs of sales personnel of
approximately $7 million, mainly due to reduced costs incurred associated with
PageNet's telemarketing and reseller sales program. Marketing research,
development costs, and advertising expenses associated with PageNet's
traditional paging and advanced messaging operations are expected to be scaled
back in future periods.
General and Administrative Expenses
General and administrative expenses increased 12.7% to $361 million for the
year ended December 31, 1999, compared to $321 million for the year ended
December 31, 1998. The increase in general and administrative expenses was
primarily due to:
- increased contract labor and outside consulting expense of approximately
$39 million, primarily related to the transition to the centralized
processing facilities in 1999 and costs for temporary workforce personnel
associated with PageNet's higher than normal employee turnover during
1999;
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- increased provision of bad debt expense of approximately $8 million,
related to an increased amount of uncollectible receivables written-off
from customer accounts during 1999 due to a deterioration of the aging of
the accounts receivable customer base.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 16.3% to $327 million for
the year ended December 31, 1999, compared to $281 million for the year ended
December 31, 1998. The increase in depreciation and amortization expense
resulted primarily from PageNet's change in the depreciable lives of its
subscriber devices and some 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 some 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. PageNet determined
that the appropriate useful life of its subscriber devices is two years as a
result of technological advances, customer desire for new pager technology, and
the company's decreasing ability to redeploy older pager models. PageNet
determined that the appropriate useful life of its network equipment is ten
years since this equipment is operational for a longer time period given current
technology. As a result of these changes, depreciation expense increased by
approximately $78 million during the year ended December 31, 1999. PageNet also
commenced depreciation and amortization on the assets related to its centralized
processing facilities during the third quarter of 1999. This increased
depreciation and amortization expense during 1999 by approximately $4 million.
PageNet has commenced 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 $24 million.
Provision for Asset Impairment
PageNet recorded a provision of $18 million during the year ended December
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
year ended December 31, 1999.
Restructuring Charge
PageNet recorded a partial reversal of its restructuring charge in the
amount of $24 million during the year ended December 31, 1999. See Note 4 to
PageNet's consolidated financial statements for the year ended December 31,
1999.
Interest Expense
Interest expense, net of amounts capitalized, was $151 million for the year
ended December 31, 1999, compared to $144 million for the year ended December
31, 1998. The increase in interest expense from 1998 to 1999 was primarily due
to the higher average level of indebtedness outstanding during 1999. The average
level of indebtedness outstanding during 1999 was $1.9 billion, compared to $1.8
billion outstanding during 1998.
Change in Accounting Principle
PageNet adopted the provisions of SOP 98-5 effective January 1, 1999 and
recorded a charge of $37 million as the cumulative effect of a change in
accounting principle to write-off all remaining unamortized start-up costs as of
January 1, 1999. See Note 6 to PageNet's consolidated financial statements for
the year ended December 31, 1999.
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Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization
As a result of the factors outlined above, adjusted earnings before
interest, income taxes, depreciation and amortization decreased 38.1% to $206
million for the year ended December 31, 1999, compared to $333 million for the
same period in 1998. Adjusted earnings before interest, income taxes,
depreciation and amortization and adjusted earnings before interest, income
taxes, depreciation and amortization as a percentage of total revenues less cost
of products sold for 1999 were negatively impacted by declines in PageNet's
revenues (of $56 million and 6.0%, respectively), the costs associated with its
advanced messaging operations ($57 million and 6.2%, respectively), the costs of
development and implementation of its centralized processing facilities ($16
million and 1.7%, respectively), and the costs of adoption of SOP 98-5 ($21
million and 2.3%, respectively).
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
Services, Rent and Maintenance Revenues
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 increase in revenues from services, rent and
maintenance was 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 traditional paging 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, a decrease of approximately
234,000 units in service compared to 10,344,000 units in service with
subscribers at December 31, 1997.
Product Sales
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 price increases and other
factors, including increased competition from cellular, PCS, and other mobile
phones, which resulted in a substantial decrease in sales through the reseller
channel.
Services, Rent and Maintenance Expenses
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:
- increased telephone expenses of approximately $6 million, mainly
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;
- increased contracted dispatch costs of approximately $8 million, mainly
related to advanced messaging units placed in service during 1998;
- increased transmitter site rent expense of approximately $5 million
associated with an increase in the number of transmitter sites;
- increased pager parts and repairs expense of approximately $12 million,
primarily the result of management's decision to increase its pager
redeployment efforts.
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Selling Expenses
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 total revenues from 1997 to 1998 resulted
primarily from a decrease in advertising expenses of approximately $3 million,
mainly related to a decline in marketing research, development costs, and
advertising expenses associated with the suspension of the promotion of
PageNet's VoiceNow service.
General and Administrative Expenses
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 primarily related to:
- increased contract labor expense of approximately $43 million, mainly
associated with increased levels of contract labor utilized during the
transition to the centralized processing facilities;
- approximately $6 million attributable to expenses associated with
establishing PageNet's centralized processing facilities and redundant
operating costs associated with operating both the new centralized
processing facilities infrastructure and the traditional decentralized
infrastructure.
Depreciation and Amortization Expense
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 of approximately $60 million.
Restructuring Charge
PageNet recorded a restructuring charge of $74 million during the year
ended December 31, 1998, as a result of a restructuring approved by PageNet's
board of directors in February 1998. See Note 4 of PageNet's consolidated
financial statements.
Interest Expense
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 of approximately $6 million,
a decrease in interest rates on outstanding borrowings under PageNet's credit
agreement, and the redemption of PageNet's 11.75% subordinated notes on May 14,
1997 with lower interest rate funds borrowed under the credit agreement.
Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization
Adjusted earnings before interest, income taxes, depreciation and
amortization 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
earnings before interest, income taxes, depreciation and amortization and
adjusted earnings before interest, income taxes, depreciation and amortization
as a percentage of total revenues less cost of products sold for 1998 were
negatively impacted by the costs associated with PageNet's advanced messaging
operations ($25 million and 2.6%, respectively), the costs of forming of its
centralized processing facilities ($13 million and 1.3%, respectively), and its
international operations ($6 million and 0.6%, respectively).
INFLATION
Inflation has not had a material effect on PageNet's operations to date.
Paging systems equipment and operating costs have generally 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
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subscribers who purchase their units. PageNet's general and administrative
operating expenses, such as salaries, employee benefits and occupancy costs are
subject to normal inflationary pressures.
YEAR 2000 COMPLIANCE
PageNet implemented a task force, and developed a comprehensive plan to
address Year 2000 issues. PageNet completed all of the phases for its critical
business processes and, to date, has not experienced any material Year
2000-related errors. PageNet believes that all mission critical vendors have
successfully readied their systems for the Year 2000 and, to date, has not
experienced any Year 2000-related errors in its systems.
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MARKET PRICE INFORMATION AND DIVIDEND POLICY
The discount notes are traded on the American Stock Exchange. Trading
quotations are customarily expressed as a percentage of principal amount at
maturity. Arch common stock is traded on the Nasdaq National Market System under
the symbol "APGR." 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
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HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1998:
First Quarter................................... $618.00 $390.00 $18.3750 $ 9.000
Second Quarter.................................. $590.00 $535.00 $20.8125 $ 10.5000
Third Quarter................................... $580.00 $470.00 $15.0000 $ 5.0625
Fourth Quarter.................................. $605.00 $310.00 $ 5.4375 $ 2.0625
Fiscal Year Ended December 31, 1999:
First Quarter................................... $600.00 $460.00 $ 7.500 $ 3.1875
Second Quarter.................................. $510.00 $320.00 $11.625 $ 3.3750
Third Quarter................................... $465.00 $345.00 $ 8.875 $ 4.0000
Fourth Quarter.................................. $470.00 $340.00 $ 7.625 $ 3.8125
Fiscal Year Ended December 31, 2000:
First Quarter................................... $840.00 $438.00 $14.250 $ 5.7500
Second Quarter.................................. $640.00 $553.00 $ 8.000 $ 4.0000
Third Quarter (through September 8, 2000)....... $590.00 $520.00 $ 7.2188 $ 4.5625
</TABLE>
---------------
The following table presents comparative trading information for common
stock and discount notes for November 5, 1999 and September 8, 2000. November 5,
1999 was the last full trading day prior to the public announcement of the
proposed PageNet merger. September 8, 2000 was the last practicable trading day
for which information was available prior to the date 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 $6.3750 $6.8125 $410.00 $471.189 $421.590 $450.523
September 8, 2000............... $6.3125 $ 5.000 $5.7500 $550.00 $417.457 $330.659 $380.258
</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. See "Description of Arch's Equity
Securities" and "Description of Indebtedness."
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INDUSTRY OVERVIEW
The mobile wireless telecommunications industry currently consists of
multiple voice and data providers which compete among one another, both directly
and indirectly, for subscribers. Traditional paging carriers like PageNet and
Arch provide customers with services such as numeric and alphanumeric paging.
Customers receive these paging services through a small, handheld device known
as a pager. A pager signals a customer when a message is received through a tone
and/or vibration and displays the incoming message on a small screen. With
numeric paging services the pager displays numeric messages, such as a telephone
number. With alphanumeric paging services the pager is capable of displaying
numeric messages and text messages on their pagers. These two types of paging
services are commonly referred to as messaging services.
Traditional paging carriers like PageNet and Arch also provide other
services via pagers, commonly referred to as advanced messaging services.
Advanced messaging services include confirmed receipt paging services, which
enable subscribers to receive acknowledgements that their messages were
delivered, services which enable subscribers to respond to messages with their
messaging devices by using pre-scripted replies, and send-and-receive services,
which enable subscribers to initiate messages and to respond to messages with
their messaging devices by using pre-scripted replies or by creating original
replies. Advanced messaging services have only been offered for a short period
of time, and account for less than 1% of revenue for both PageNet and Arch.
Traditional paging carriers, like PageNet and Arch, also offer enhanced wireless
messaging services such as stock quotes, news, voice mail and personalized
greeting.
Mobile telephone service providers such as cellular and broadband PCS
carriers provide telephone voice services as well as services that are
functionally identical to the messaging and advanced messaging services provided
by paging carriers such as PageNet and Arch. Customers subscribing to cellular,
broadband PCS or other mobile phone services utilize a wireless handset through
which they can make and receive voice telephone calls. These handsets are
commonly referred to as a cellular or PCS phones. These handsets are also
capable of receiving numeric and alphanumeric messages as well as information
services, such as stock quotes, news, voice mail, personalized greeting and
message storage and retrieval.
Technological improvements have generally contributed to strong growth in
the market for mobile wireless services and the provision of better quality
services at lower prices to subscribers. Companies providing traditional
messaging services have benefited from technological advances resulting from
research and development conducted by vendors of paging units and transmission
equipment. These advances include microcircuitry, liquid crystal display
technology and standard digital encoding formats. These advances have enhanced
the capability and capacity of mobile wireless messaging services while lowering
equipment and air time costs. However, these technological improvements, and the
degree of similarity in pagers, coverage and battery life have resulted in
messaging services becoming commodity products with price likely to be the most
significant factor in a subscriber's decision making.
Other mobile wireless alternatives, particularly cellular and PCS services,
have similarly experienced rapid changes through technological improvement which
has resulted in more consumer interest and demand. Messaging services offered by
cellular, PCS and other mobile phone providers are substantially similar to the
numeric and alphanumeric messaging services offered by PageNet and Arch and are
now available in conjunction with most mobile phone services.
The number of new subscribers to cellular, PCS and other mobile phone
services continues to increase each year. By one analyst's estimates, there were
a total of over 86 million such subscribers in the United States at the end of
1999. This estimate reflects an increase of approximately 25% over the
approximately 69 million subscribers estimated at the end of 1998. This trend is
expected to continue. The same analyst predicts an average annual subscriber
growth rate of approximately 13% through the year 2003 for cellular, PCS and
other mobile phone services.
Arch believes that approximately 44.7 million subscribers subscribed to
basic numeric and alphanumeric paging services in the United States as of the
end of 1999. Arch believes that the traditional
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<PAGE> 90
paging industry did not grow during 1999, that demand for traditional paging
services will decline in 2000 and in the following year, and that any
significant future growth in the wireless messaging industry will be
attributable to advanced messaging services. The decline is attributable to
traditional paging customers discontinuing their use of messaging services in
favor of using their mobile phones for combined voice and messaging services.
Although there can be no assurances they will be successful, PageNet and Arch
are committed to expanding their service offerings, especially their advanced
messaging services, to ensure that their services remain competitive under
rapidly changing market conditions.
Messaging subscribers such as those served by PageNet and Arch typically
pay a flat monthly service fee for paging services, unlike subscribers to
cellular telephone or PCS services, whose bills historically have had a
significant variable usage component. However, cellular, PCS and other mobile
phone companies now offer flat rate pricing plans which include both local and
long distance minutes for use at no additional charge. These and other plans
have lowered the price point so that these services compete directly with the
services PageNet and Arch offer. PageNet and Arch are sensitive to these
technological and availability changes and are working to design competitively
attractive values for the consumer.
The wireless messaging industry originally distributed its services through
direct marketing and sales activities. Additional channels of distribution have
evolved. These channels include:
- company-operated stores;
- resellers, who purchase services on a wholesale basis from the companies
and resell those services on a retail basis to their own customers;
- agents who solicit customers for companies and are compensated on a
commission basis;
- retail outlets that often sell a variety of merchandise, including pagers
and other telecommunications equipment; and
- most recently, the Internet.
REGULATION
Federal Regulation -- Overview
PageNet's and Arch's wireless messaging operations are subject to
regulation by the Federal Communications Commission under federal communications
laws and regulations. The Federal Communications Commission has granted PageNet
and Arch licenses to use the radio frequencies necessary to conduct their
business. Licenses issued by the Federal Communications Commission to PageNet
and Arch set forth the technical parameters, such as power strength and tower
height, under which PageNet and Arch are authorized to use those frequencies.
Each Federal Communications Commission license held by PageNet or Arch has
construction and operational requirements that must be satisfied within set time
frames. The Federal Communications Commission has the authority to auction most
new licenses over which wireless mobile services are traditionally offered but
does not have the authority to use auctions for license renewals or license
modifications.
The Federal Communications Commission licenses granted to PageNet and Arch
have varying terms of up to 10 years, at the end of which time renewal
applications must be approved by the Federal Communications Commission. In the
past, Federal Communications Commission renewal applications have been routinely
granted, in most cases upon a demonstration of compliance with Federal
Communications Commission regulations and adequate service to the public. The
Federal Communications Commission has granted each renewal license PageNet and
Arch have filed, other than those which are pending. Although PageNet and Arch
are unaware of any circumstances which would prevent the grant of any pending or
future renewal applications, no assurance can be given that any of PageNet's or
Arch's licenses will be renewed by the Federal Communications Commission.
Furthermore, although revocation and involuntary modification of licenses are
extraordinary regulatory measures, the Federal Communications Commission has the
authority to restrict the operation of licensed facilities or revoke or modify
licenses. No license of PageNet or Arch has ever been revoked or modified
involuntarily.
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<PAGE> 91
The Federal Communications Commission's review and revision of rules
affecting companies such as PageNet and Arch is ongoing. The regulatory
requirements to which PageNet and Arch are subject may change significantly over
time. For example, the Federal Communications Commission has adopted rules for
licensing particular messaging channels throughout a broad geographic area.
These licenses are being awarded through an auction. Incumbent messaging
carriers that are already licensed by the Federal Communications Commission in
these broad geographic areas are entitled to continue to operate without
interference from the auction winners.
In many instances, PageNet and Arch still require the prior approval of the
Federal Communications Commission before they can implement any significant
changes to their messaging networks. Once the Federal Communications
Commission's broad geographic licensing rules are implemented, however, many of
these licensing obligations will be eliminated.
The Federal Communications Commission has sought comment on adopting new
rules for certain frequencies licensed to and operated by PageNet and Arch on a
nationwide basis. If the Federal Communications Commission were to impose
additional, more stringent coverage requirements for these nationwide
frequencies, PageNet and Arch might have to accelerate the build out of their
systems.
Federal communications laws and regulations require licensees such as
PageNet and Arch to obtain prior approval from the Federal Communications
Commission for the transfer of control of any construction permit or station
license. These regulations also require prior approval by the Federal
Communications Commission of acquisitions of other messaging companies by
PageNet and Arch and transfers by PageNet and Arch of a controlling interest in
any of their licenses or construction permits. The Federal Communications
Commission has approved each acquisition and transfer of control for which
PageNet or Arch have sought approval, including those contemplated in connection
with the merger. PageNet and Arch also regularly apply for Federal
Communications Commission authority to use additional frequencies, modify the
technical parameters of existing licenses, expand their service territory,
provide new services, and modify the conditions under which they provide
service. Although there can be no assurance that any requests for approval of
applications filed by PageNet and Arch will be approved or acted upon in a
timely manner by the Federal Communications Commission, or that the Federal
Communications Commission will grant the relief requested, PageNet and Arch know
of no reason to believe any such requests, applications, or relief will not be
approved or granted. Neither PageNet nor Arch make any representations, however,
about the continued availability of additional frequencies used to provide their
services.
Foreign Ownership Restrictions
Foreign ownership of entities that directly or indirectly hold certain
licenses from the Federal Communications Commission is limited, including some
of those held by PageNet or Arch. Because PageNet and Arch hold licenses from
the Federal Communications Commission only through subsidiaries, up to 25% of
either company's common stock can be owned or voted by aliens or their
representatives, a foreign government or its representatives, or a foreign
corporation, without restriction. However, if more than 25% of either company's
common stock is owned or voted by aliens or their representatives, a foreign
corporation, or a foreign government or its representatives, the Federal
Communications Commission has the right to revoke or refuse to grant licenses if
it finds that such revocation or refusal serves the public interest. The Federal
Communications Commission has indicated that, pursuant to the World Trade
Organization Telecommunications Agreement, it would waive the 25% limitation in
appropriate circumstances. Based upon information obtained by PageNet and Arch,
each of PageNet and Arch believe that substantially less than 25% of their
issued and outstanding common stock is owned by aliens or their representatives,
foreign governments or their representatives, or foreign corporations. PageNet
and Arch subsidiaries that are radio common carrier licensees are subject to
more stringent requirements and may have only up to 20% of their stock owned or
voted by aliens or their representatives, a foreign government or their
representatives or a foreign corporation. This ownership restriction is not
subject to waiver.
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<PAGE> 92
Limitations on Allocation of Numbers
Increased demand for telephone numbers, particularly in metropolitan areas,
is causing depletion of numbers in some of the more popular area codes. Recent
plans to address this increased demand have included elements that could impact
PageNet's and Arch's operations, including the take-back of numbers already
assigned for use and service-specific plans whereby only some services, such as
paging and cellular, would be assigned numbers using a new area code, or plans
which require the pooling of blocks of numbers for use by multiple carriers.
Neither PageNet nor Arch can provide any assurance as to whether such plans will
be adopted by a federal or state commission, or whether such plans will require
PageNet or Arch to incur further, substantial expenses in order to continue to
obtain telephone numbers for their subscribers.
Interconnection
Recent amendments to federal communications laws are intended to promote
competition in the provision of phone services by removing legal or other
barriers to entry. Specifically, all telecommunications carriers have the duty
to interconnect with the facilities and equipment of other telecommunications
carriers. The Federal Communications Commission, and the 9th Circuit Court of
Appeals, among others, have interpreted this duty as requiring certain local
telephone companies to compensate mobile wireless companies for calls originated
by customers of the local telephone companies which terminate on a mobile
wireless company's network. The Federal Communications Commission has also found
to be unlawful charges to messaging companies in the past that have been
assessed on a monthly basis by certain local telephone companies for the use of
interconnection facilities, including telephone numbers. These findings by the
Federal Communications Commission have been challenged at the Federal
Communications Commission and in the courts. Neither PageNet nor Arch can
predict with certainty the ultimate outcome of these proceedings. Compensation
amounts may be determined in subsequent proceedings either at the federal or
state level, or may be determined based on negotiations between the local
telephone companies and the messaging companies. Any agreements reached between
the local telephone companies and the messaging companies may be required to be
submitted to a state regulatory commission for approval. PageNet has negotiated
interconnection agreements with some major local telephone companies and is in
negotiations with other local telephone companies but can provide no assurances
that it will obtain interconnection agreements with all local telephone
companies. Arch is also in negotiations with local telephone companies, but as
with PageNet in markets where PageNet has not reached agreements, it may or may
not be successful in securing refunds, future relief, or both, with respect to
charges for termination of local telephone companies originated local traffic.
If these issues are ultimately decided in favor of the local telephone
companies, Arch, and to a lesser extent PageNet because of the agreements it has
reached, may be required to pay past due contested charges and may also be
assessed interest and late charges for amounts withheld.
Additional Regulatory Obligations and Benefits
The Federal Communications Commission has determined that companies such as
PageNet and Arch are required to contribute to "Universal Service" or other
funds to assure the continued availability of local phone service to high cost
areas, as well as to contribute funds to cover other designated costs or
societal goals. Further, providers of payphones must be compensated for all
calls placed from pay telephones to toll-free numbers. This latter requirement
increases PageNet's and Arch's costs of providing toll-free number service, and
there are no assurances that either PageNet or Arch will be able to continue to
pass on to their subscribers these, or other increased costs imposed by federal
or state telecommunication regulators. Beneficially, the laws now limit the
circumstances under which states and local governments may deny a request by
most wireless companies to place transmission facilities in residential
communities and business districts, and give the Federal Communications
Commission the authority to preempt the states in some circumstances.
The laws require some telecommunications companies, including PageNet and
Arch, to modify the design of their equipment or services to ensure that
electronic surveillance or interceptions can be
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performed. Technical parameters applicable to the messaging industry have been
established but not acknowledged by all governmental bodies to date. Therefore,
neither PageNet nor Arch can determine at this time what compliance measures
will be required or the costs thereof. In addition, the Federal Communications
Commission has instituted proceedings addressing the manner in which
telecommunications carriers are permitted to jointly market certain types of
services, and the manner in which telecommunications carriers render bills for
these services. Depending on the outcome of these proceedings, PageNet, Arch,
and other telecommunications carriers could incur higher administration and
other costs in order to comply.
State Regulation
In addition to potential regulation by the Federal Communications
Commission, some states have the authority to regulate messaging services,
except where such regulation affects or relates to the rates charged to
customers and/or the ability of companies like Arch or PageNet to enter a
market. Such regulations have been preempted by the federal communications laws.
States may petition the Federal Communications Commission for authority to
continue to regulate commercial mobile radio service rates if certain conditions
are met. State filings seeking rate authority have all been denied by the
Federal Communications Commission, although new petitions seeking such authority
may be filed in the future. Furthermore, some states and localities continue to
exert jurisdiction over (1) approval of acquisitions of assets and transfers of
licenses of mobile wireless systems and (2) resolution of consumer complaints.
PageNet and Arch believe that to date all required filings for their respective
messaging operations have been made. All state approvals of acquisitions or
transfers made by PageNet and Arch have been approved, and neither PageNet nor
Arch knows of any reason to believe such approvals will not continue to be
granted in connection with any future requests, even if states exercise that
review.
The laws do not preempt state regulatory authority over other aspects of
PageNet's and Arch's operations, and some states may choose to exercise such
authority. Some state and local governments have imposed additional taxes or
fees upon some of the activities in which PageNet and Arch are engaged. In
addition, the construction and operation of radio transmitters may be subject to
zoning, land use, public health and safety, consumer protection and other state
and local taxes, levies and ordinances. As noted above, the Federal
Communications Commission may delegate to the states authority over telephone
number allocation and assignment.
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ARCH'S BUSINESS
Arch is a leading provider of wireless messaging services, primarily
traditional paging services, in the United States. Arch has established a market
presence in major metropolitan markets as well as in middle and small markets.
In addition, Arch's third-party retail distribution agreements complement the
more than 375 Arch-operated retail outlets. Similarly, Arch's nationwide
coverage utilizing two paging frequencies enables Arch to provide its services
on a nationwide basis to more subscribers. Arch's nationwide coverage also
enhances Arch's local coverage and provides an opportunity for Arch to take
advantage of Arch's distribution networks.
Arch's plan to deploy the nationwide radio frequencies it is authorized to
use under its narrowband PCS authorizations using its existing network
infrastructure, together with its strategic alliances, should permit Arch to
market advanced messaging services sooner than it would otherwise be able to.
These services are expected to offer higher revenue and more growth potential
than basic messaging 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."
WIRELESS MESSAGING SERVICES, PRODUCTS AND OPERATIONS
Arch provides wireless messaging services and advanced messaging services.
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 changes in number of units
through internal operations and acquisitions since 1995:
<TABLE>
<CAPTION>
NET INCREASE
UNITS IN SERVICE (DECREASE) IN INCREASE IN UNITS UNITS IN SERVICE
AT BEGINNING OF UNITS THROUGH THROUGH AT END OF
YEAR ENDED DECEMBER 31, PERIOD INTERNAL OPERATIONS ACQUISITIONS 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
1999......................... 4,276,000 (89,000) 2,762,000 6,949,000
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
<S> <C> <C> <C> <C>
2000......................... 6,949,000 (277,000) -- 6,672,000
</TABLE>
Net increase (decrease) in units through internal operations includes
internal changes from 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.
Numeric paging service, which was introduced by the paging industry nearly
20 years ago, currently represents a majority of all units in service. The
growth of alphanumeric paging service, which was introduced in the mid-1980s,
has been constrained by its difficulties, such as inputting data, specialized
equipment requirements and its relatively high use of system capacity during
transmission, which has, to some extent, been relieved by deploying alternate
communications pathways, such as the Internet.
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The following table summarizes the types of Arch's units in service at
specified dates:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999 2000
--------------- --------------- --------------- ---------------
UNITS % UNITS % UNITS % UNITS %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local Numeric..................... 3,284,000 85% 3,586,000 84% 5,299,000 76% 4,937,000 74%
Local Alphanumeric................ 524,000 13 621,000 14 1,215,000 18 1,335,000 20
Tone-only......................... 82,000 2 69,000 2 48,000 1 36,000 --
Nationwide Numeric................ -- -- -- -- 219,000 3 189,000 3
Nationwide Alphanumeric........... -- -- -- -- 168,000 2 175,000 3
--------- --- --------- --- --------- --- --------- ---
Total.................... 3,890,000 100% 4,276,000 100% 6,949,000 100% 6,672,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides messaging services 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. Although the following table reflects an increase in Arch-owned and
leased units, this increase is due to Arch's acquisition of MobileMedia in 1999.
MobileMedia had a customer base that had proportionately larger accounts that
negotiated for leased units rather than subscriber-owned units:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999 2000
--------------- --------------- --------------- ---------------
UNITS % UNITS % UNITS % UNITS %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arch-owned and leased............. 1,740,000 45% 1,857,000 43% 3,605,000 52% 3,558,000 53%
Subscriber-owned.................. 1,087,000 28 1,135,000 27 1,518,000 22 1,519,000 23
Reseller-owned.................... 1,063,000 27 1,284,000 30 1,826,000 26 1,595,000 24
--------- --- --------- --- --------- --- --------- ---
Total.................... 3,890,000 100% 4,276,000 100% 6,949,000 100% 6,672,000 100%
========= === ========= === ========= === ========= ===
</TABLE>
Arch provides enhanced wireless messaging services such as voice mail,
wireless information delivery services, personalized greetings, message storage
and retrieval, pager loss protection and pager maintenance services. Voice mail
allows a caller to leave a recorded message that is stored in Arch's
computerized message retrieval center. When a message is left, the subscriber
can be automatically alerted through the subscriber's pager and can retrieve the
stored message by calling Arch's paging terminal. Personalized greetings allow
the subscriber to record a message to greet callers who reach the subscriber's
pager or voice mail box. Message storage and retrieval allows a subscriber who
leaves Arch's service area to retrieve calls that arrived during the
subscriber's absence from the service area. Pager loss protection allows
subscribers who lease pagers to limit their costs of replacement upon loss or
destruction of a pager. Pager maintenance services are offered to subscribers
who own their own equipment. Wireless information delivery allows subscribers to
receive stock quotes, news and weather through their Arch service. Arch is also
in the process of test marketing various other services that add value, and can
be integrated with existing paging services.
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<PAGE> 96
NETWORKS AND LICENSES
Arch operates local, regional and national networks which enable its
customers to receive pages over a broad geographic area. Many of these networks
were acquired in the MobileMedia acquisition. Arch's extensive geographic
coverage may be attractive to large corporate clients and retail chains which
frequently demand national network coverage from their paging service provider.
Arch's networks provide local, regional and national coverage and its
networks operate over numerous frequencies. Although the capacity of Arch's
networks varies significantly market by market, Arch has an adequate amount of
spectrum licensed to meet the capacity demands of projected growth for the next
several years.
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.
Narrowband PCS Networks and Licenses
The Federal Communications Commission has allocated a set of radio
frequencies, called narrowband PCS frequencies, that enable wireless messaging
companies such as PageNet and Arch to offer advanced messaging services and to
make more efficient use of radio spectrum than do traditional paging networks.
Arch has taken the following steps to position itself to ensure it has access to
this valuable radio spectrum.
Arch's Narrowband Personal Communications Services Licenses. MobileMedia
purchased five regional licenses through the Federal Communications Commission's
1994 auction of narrowband PCS licenses, providing the equivalent of a
nationwide 50 kHz outbound/12.5 kHz inbound narrowband PCS system. In addition,
MobileMedia acquired a second narrowband PCS license for a nationwide inbound
system. In order to retain these narrowband PCS licenses, Arch must comply with
specified minimum build-out requirements. With respect to each of the regional
narrowband PCS licenses purchased at the Federal Communication Commission's 1994
auction, Arch has built out the related narrowband PCS system to cover 150,000
sq. km. or 37.5% of each of the five regional populations in compliance with the
Federal Communications Commission's applicable build-out requirements. Arch is
still required to build-out this system to cover 300,000 sq. km. or 75% of each
of the five regional populations by April 27, 2005. With respect to the
nationwide narrowband PCS license acquired as part of the MobileMedia
acquisition, Arch built out the related narrowband system to cover 750,000 sq.
km. or 37.5% of the U.S. population by September 29, 1999 in compliance with
applicable Federal Communications Commission build-out requirements. Arch is
still required to extend the build-out of this 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; however, Arch may exceed
these minimum build-out requirements in order to be able to provide nationwide
narrowband PCS. If Arch chooses to exceed its minimum narrowband PCS build-out
requirements, Arch estimates that the costs through 2000 will approximate $50
million.
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Strategic Alliances. Arch has entered into strategic alliances which it
believes provide it with an economical means to launch and offer to its
customers advanced messaging services, using its narrowband PCS spectrum by
leveraging its own network with those of its strategic partners while it
assesses the extent it will expand its network. Arch believes that its reseller
agreement with Weblink Wireless, Inc., formerly PageMart Wireless, Inc.,
together with its reseller agreement with PageNet, provides it with access to
additional spectrum to accommodate customer demands for higher volume and
bandwidth. Arch currently estimates that the total amount of future cash
expenditures related to deploying its narrowband PCS spectrum through 2003 with
Weblink and under its reseller agreement with PageNet, including expenditures
for network expansion as well as commitments under its strategic alliances, will
approximate $50 million.
SUBSCRIBERS AND MARKETING
Arch's wireless messaging accounts are generally businesses with employees
who travel frequently but must be immediately accessible to their offices or
customers. Arch's subscribers include proprietors of small businesses,
professionals, management personnel, field sales personnel and service forces,
members of the construction industry and construction trades, real estate
brokers and developers, medical personnel, sales and service organizations,
specialty trade organizations, manufacturing organizations and governmental
agencies.
Arch markets its services through three primary sales channels: direct,
reseller and retail.
Direct. In the direct channel, Arch leases or sells equipment directly to
its customers and bills and services such customers. Arch markets its services
through a direct marketing and sales organization which operated approximately
375 retail stores as of December 31, 1999. Arch's direct customers range from
individuals and small-and medium-sized businesses to Fortune 500 accounts and
government agencies. Business and government accounts typically experience less
turnover than consumer accounts. The direct channel will continue to have the
highest priority among Arch's marketing and sales efforts, because of its
critical contribution to recurring revenue and projected growth. Arch has been
engaged in efforts to improve sales productivity and strengthen its direct
channel sales force, segments of which had previously suffered from high
turnover and open positions under MobileMedia's ownership and management. In
addition, Arch commenced implementing consumer direct marketing techniques in
1998. As of December 31, 1999, the direct channel accounted for approximately
86.6% of recurring revenue.
Reseller. In the reseller channel, Arch sells access to its transmission
networks in bulk to a third party, who then resells such services to consumers
or small businesses or other end users. Arch offers access to its network to
resellers at bulk discounted rates. The third party reseller provides customer
service, is responsible for pager maintenance and repair costs, invoices the end
user and retains the credit risk of the end user, although Arch retains the
credit risk of the reseller. Because resellers are responsible for customer
equipment, the capital costs that would otherwise be borne by Arch are reduced.
Arch's resellers generally are not exclusive distributors of Arch's
services and often have access to networks of more than one provider.
Competition among service providers to attract and maintain reseller
distribution is based primarily upon price, including the sale of equipment to
resellers at discounted rates. Arch intends to continue to be an active
participant in the reseller channel and to concentrate on accounts that are
profitable and where longer term partnerships can be established with selected
resellers. As of December 31, 1999, the reseller channel accounted for
approximately 8.4% of recurring revenue.
Retail. In the retail channel, Arch sells equipment to retailers and,
after the consumer purchases the pager from the retailer, the consumer contacts
Arch to activate service. The retail channel is targeted at the consumer market
and consists primarily of national retail chains. Consumers served by the retail
channel typically purchase, rather than lease, equipment. This reduces Arch's
capital investment requirements. Subscribers obtained through retailers are
billed and serviced directly by Arch. Retail distribution permits Arch to
penetrate the consumer market by supplementing direct sales efforts. As of
December 31, 1999, the retail channel accounted for approximately 5.0% of
recurring revenue.
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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 messaging 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 competes by maintaining competitive pricing of its products and
services, by providing broad coverage options through high-quality, reliable
transmission networks and by furnishing subscribers a superior level of customer
service. Arch, the second largest messaging carrier in the United States, offers
messaging services, consisting primarily of basic paging services but also
including advanced messaging services and enhanced, or complementary, wireless
messaging services such as voice mail and voice mail notifications, news,
sports, weather reports, stock quotes and other information delivery services.
Arch's primary competitors in the traditional messaging market include
Metrocall, Vodafone/AirTouch and Weblink Wireless, all of which are among the
top eight largest paging carriers in the United States and offer highly similar
services. The products and services Arch offers also compete with a broad array
of wireless messaging services provided by cellular and PCS phone companies.
This competition has intensified as prices for these services have declined
rapidly, and these providers have incorporated messaging capability into their
handsets. Even people who recognize the advantages of traditional messaging may
discontinue subscription to these services in favor of subscription to a single
device which incorporates both traditional voice and messaging services. Many of
these companies possess financial, technical and other resources greater than
those of Arch. Such providers currently competing with Arch in one or more
markets include AT&T Wireless, SBC BellSouth, MCI/WorldCom/SkyTel, Sprint PCS,
Vodafone/AirTouch/Bell Atlantic (now called Verizon), Nextel and Motient, Inc.
Insofar as cellular, PCS and other mobile phone service providers provide
subscribers with both messaging and voice service using the same hand-held
device, services like cellular and PCS are more sophisticated than basic
messaging services and command a greater price. The price of cellular and PCS
and other mobile phone services, however, has fallen dramatically. The decline
in price of these services is reflected in the decline of the average monthly
bill for cellular and PCS services from $43.86 in June 1997 to $41.24 in
December 1999. Moreover, today many cellular and PCS providers offer basic
service packages for approximately $20 per month. By contrast, Arch management
believes that currently the average revenue per unit per month is approximately
$10.00.
While cellular, PCS and other mobile phone services are more expensive than
traditional messaging services, such mobile telephone service providers
typically provide traditional messaging service as an element of their basic
service package without additional charges. Subscribers that purchase these
combined services no longer need to subscribe to a separate messaging service as
well. As a result, a large
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number of traditional messaging customers can readily switch from messaging to
cellular, PCS and other mobile telephone services. The dramatic decrease in
prices for cellular, PCS and other mobile telephone services has led many
customers to select combined voice and messaging services as an alternative to
stand alone messaging services. Indeed, survey data indicates that roughly 20
percent of paging customers that drop their service do so in favor of cellular,
PCS and other mobile phone services. PageNet and Arch are sensitive to these
technological and availability changes and are working to design competitively
attractive values for the customer even in the midst of these changes by
cellular, PCS and other mobile phone service providers.
EMPLOYEES
At June 30, 2000, Arch employed approximately 4,900 persons. None of Arch's
employees is represented by a labor union. Arch believes that its employee
relations are good.
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," "Arch Paging" and "Arch
Communications," and holds federal registrations for the service marks
"MobileComm" and "MobileMedia" as well as various other trademarks.
PROPERTIES
At June 30, 2000, Arch owned 10 office buildings and leased office space,
including its executive offices, in approximately 375 locations in 42 states for
use in its paging operations. Arch leases transmitter sites and/or owns
transmitters on commercial broadcast towers, buildings and other fixed
structures in approximately 4,800 locations in all 50 states, the U.S. Virgin
Islands and Puerto Rico. Arch's leases are for various terms and provide for
monthly lease payments at various rates. Arch believes that it will be able to
obtain additional space as needed at acceptable cost. Substantially all of
Arch's and MobileMedia's tower sites were sold during 1998 and 1999 and Arch
currently rents transmitter space.
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>
C. Edward Baker, Jr.................. 50 Chairman of the Board, Chief Executive Officer and
Director
Lyndon R. Daniels.................... 47 President and Chief Operating Officer
John B. Saynor....................... 59 Executive Vice President and Director
J. Roy Pottle........................ 41 Executive Vice President and Chief Financial Officer
Paul H. Kuzia........................ 58 Executive Vice President/Technology and Regulatory
Affairs
Edwin M. Banks(2).................... 38 Director
R. Schorr Berman(2).................. 52 Director
James S. Hughes(1)................... 57 Director
John Kornreich....................... 54 Director
H. Sean Mathis(1).................... 53 Director
Allan L. Rayfield(2)................. 65 Director
John A. Shane(1)..................... 67 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 April 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 1986. Mr. Saynor has
served as Executive Vice President of Arch since 1990. Mr. Saynor is a founder
of Arch and served as President and Chief Executive Officer of Arch from 1986 to
March 1988 and as Chairman of the Board from 1986 until May 1989.
J. ROY POTTLE joined Arch in February 1998 as Executive Vice President and
Chief Financial Officer. From October 1994 to February 1998, Mr. Pottle was Vice
President/Treasurer of Jones Intercable, Inc., a cable television operator. From
September 1989 to October 1994, he served as Vice President and Relationship
Manager at The Bank of Nova Scotia, New York Agency.
PAUL H. KUZIA has served as Executive Vice President/Technology and
Regulatory Affairs of Arch since September 1996. He served as Vice
President/Engineering and Regulatory Affairs of Arch from 1988 to September
1996. Prior to 1988, Mr. Kuzia was director of operations at Message Center Inc.
EDWIN M. BANKS has been a director of Arch since June 1999. He has been
employed by W.R. Huff Asset Management since 1988 and currently serves as a
portfolio manager. From 1985 until he joined W.R. Huff, Mr. Banks was employed
by Merrill Lynch & Company. Mr. Banks also serves as a director of Magellan
Health Services, formerly Charter Medical Corporation, and e.spire Corporation,
formerly American Communications Services, Inc.
R. SCHORR BERMAN has been a director of Arch since 1986. Since 1987, he has
been the President and Chief Executive Officer of MDT Advisers, Inc., an
investment adviser. He is a director of Mercury Computer Systems, Inc. as well
as a number of private companies.
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JAMES S. HUGHES has been a director of Arch since 1986. Since 1987, he has
been President and Chief Executive Officer of Norwich Corporation, a real estate
investment and service firm, and, since 1992, he has served as President and
Managing Director of Inventa Corporation, an international business development
firm.
JOHN KORNREICH has been a director of Arch since June 1998. Mr. Kornreich
has served as a Managing Director of Sandler Capital Management Co., Inc. since
1988.
H. SEAN MATHIS has been a director of Arch since June 1999. He also has
been the President of Litchfield Asset Holdings, an investment advisory company,
since 1999. He was also the Chairman of the Board and Chief Executive Officer of
Allis Chalmers, Inc. from January 1996 to 1999 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 Kasper A.S.L. Ltd. and Thousand Trails, Inc.
ALLAN L. RAYFIELD has been a director of Arch since 1997. He has been a
consultant with the Executive Service Corps, a non-profit organization that
provides consulting services to non-profit organizations, 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 was a general partner of
Palmer Partners L.P., a venture capital firm, from 1981 to 1999. 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.
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. The term of Messrs.
Saynor, Shane and Mathis will expire at Arch's annual meeting of stockholders to
be held in 2003.
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."
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For a discussion of the expected changes in management as a result of the
merger, see "The Combined Company -- Management."
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. Arch and Mr. Hughes made
subsequent investments of $200,000 and $50,000, respectively, in the offshore
corporation in 1999. Arch and Mr. Hughes currently own 15.4% and 12.4%,
respectively, of the offshore corporation. Arch plans to maintain narrowband PCS
licenses obtained by the offshore corporation in Chile, Argentina and Peru. The
investment required to maintain these licenses is estimated at $30,000. Arch and
other stockholders of the offshore corporation, including Mr. Hughes, are
expected to make additional investments to fund the costs to maintain the
licenses.
Arch's has made several loans to Mr. Baker. The loans bear interest at
5%-9 1/2% annually. As of June 30, 2000, principal and accrued interest of
$392,000 was outstanding.
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, for
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.
DIRECTOR COMPENSATION
FEES AND EXPENSES
Arch pays its non-employee, or "outside," directors an annual fee of
$12,000, an additional annual fee of $1,000 for serving as chairs of board
committees, $2,000 for each meeting of the board of directors attended and $750
for each board committee meeting attended. Arch also reimburses all directors
for customary and reasonable expenses incurred in attending board and board
committee meetings.
Under a deferred compensation plan for Arch's outside directors, each
outside director has the right to make an election to defer his compensation as
an outside director and to receive the deferred amounts in cash on a specific
calendar date or a date on which a certain event occurs, such as the date he
ceases to be an outside director. All deferred compensation is credited, as of
the date on which such compensation would have been paid, at the participant's
election in either cash or shares of Arch common stock based on the market price
of such shares as of the date such compensation would have been paid. On the
distribution date, any deferred compensation credited in shares of common stock
is converted into cash by valuing each stock unit at the market price of a share
of common stock on the distribution date. Mr. Rayfield and Mr. Banks are the
only outside directors who have elected to participate in this plan. Mr.
Rayfield elected to defer all of his 1999 and 2000 director compensation, of
which 50% will be
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credited in cash and 50% will be credited in shares of common stock of Arch,
until the date he ceases to be a director of the company. Mr. Banks elected to
defer all of his 1999 and 2000 director compensation of which 100% will be
credited in shares of Arch common stock, until the date he ceases to be a
director of the company.
OUTSIDE DIRECTORS' STOCK OPTION PLANS
Outside Directors' Stock Option Plan. A total of 196,733 shares of common
stock may be issued upon the exercise of options granted under Arch's outside
directors' stock option plan. Only directors of Arch who are not employees of
Arch are eligible to receive options under the outside directors' option plan.
Options granted under the outside directors' option plan do not qualify as
incentive stock options under Section 422 of the Internal Revenue Code. Under
the outside directors' option plan, outside directors receive annual grants on
the annual meeting date of options to purchase 3,000 shares of common stock. In
addition, newly elected or appointed outside directors receive options to
purchase 3,000 shares of common stock as of the date of their initial
appointment or election. All options have an exercise price equal to the fair
market value of the common stock on the date of grant.
Currently, each option under the outside directors' option plan becomes
exercisable with respect to 100% of the shares subject to the option on the date
of grant, subject to Arch's repurchase option which would allow Arch to
repurchase, at its option up to 75% of the total number of shares subject to
such option on the date of grant less 25% on each of the first three
anniversaries of the date of grant. In general, an optionee may exercise his or
her option only while he or she is a director of Arch and for 90 days after he
or she ceases to be a director of the company, or one year after death or
permanent disability. In addition, options expire immediately if a director is
terminated for cause. Unexercised options expire ten years after the date of
grant. Options are not transferable or assignable other than upon the death of
the optionee or pursuant to a qualified domestic relations order.
An optionee's options become fully vested upon his or her death and all
options become fully vested in the event of a change in control of Arch.
Pursuant to the terms of the outside directors' option plan, all options
outstanding on May 16, 1995, covering a total of 2,406 shares of common stock
exercisable at $37.41 per share and none of which was held by Arch's current
directors, became fully exercisable and vested as a result of Arch's purchase of
approximately 37% of USA Mobile in the first step of Arch's acquisition of USA
Mobile.
As of June 30, 2000, options to purchase an aggregate of 48,000 shares of
common stock were outstanding and 2,406 options had been exercised under the
outside directors' option plan.
Prior Outside Directors' Stock Option Plan. Under a prior outside
directors' stock option plan; Messrs. Berman, Hughes and Shane each received an
option to purchase 1,667 shares of common stock at an exercise price equal to
the fair market value of the common stock on January 30, 1995 ($55.50 per
share). Each option under the plan becomes exercisable at the 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. In the
event of a change in control of Arch, all outstanding options will become fully
exercisable and vested. In general, an optionee may exercise his option, to the
extent vested, only while he is a director of Arch and for one year after he
ceases to be a director of Arch. Unexercised options expire ten years after the
date of grant. Options are not transferable or assignable other than upon the
death of the optionee or pursuant to a qualified domestic relations order. The
plan was terminated on September 7, 1995, but outstanding options continue to
vest on the same terms as in effect prior to termination. As of June 30, 2000,
options to purchase an aggregate of 5,001 shares of common stock were
outstanding and no options had been exercised under the plan.
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SUMMARY COMPENSATION TABLE
The annual and long-term compensation of Arch's Chief Executive Officer and
other executive officers named below was as follows for the years ended December
31, 1997, 1998 and 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------- LONG-TERM
OTHER ANNUAL COMPENSATION
BONUS COMPENSATION --------------
NAME AND PRINCIPAL POSITION DURING 1999 YEAR SALARY $ $(1) ($)(2) OPTIONS (#)(3)
--------------------------------------- ---- -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
C. Edward Baker, Jr.......................... 1999 $434,337 $185,000 $ 4,163 150,000
Chairman, President and Chief Executive 1998 373,742 135,000 600 151,554(4)
Officer 1997 353,317 227,500 600 16,545
Lyndon R. Daniels............................ 1999 313,735 203,000 23,363(5) 91,667
President and Chief Operating Officer 1998 295,416 -- 113,905(5) 46,666
(joined Arch in January 1998)
J. Roy Pottle................................ 1999 228,896 140,000 2,317 66,666
Executive Vice President and Chief 1998 179,200 -- 99,304(5) 30,000
Financial Officer (joined Arch in February
1998)
John B. Saynor............................... 1999 161,667 44,092 1,490 20,000
Executive Vice President 1998 157,646 41,770 600 17,247(6)
1997 153,188 72,900 600 5,302
Paul H. Kuzia................................ 1999 190,163 64,480 3,373 41,666
Executive Vice President/Technology 1998 165,489 58,435 600 29,616(7)
and Regulatory Affairs 1997 157,633 77,400 600 5,629
</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, 1997, 1998 or 1999.
(4) Includes options to purchase 136,563 shares granted as part of Arch's
January 16, 1998 option repricing program.
(5) Represents reimbursement for certain relocation costs and associated taxes.
(6) Includes options to purchase 11,968 shares granted as part of Arch's January
16, 1998 option repricing program.
(7) Includes options to purchase 23,229 shares granted as part of Arch's January
16, 1998 option repricing program.
EXECUTIVE RETENTION AGREEMENTS
Arch is a party to executive retention agreements with a total of 17
executives, including Messrs. Baker, Daniels, Kuzia, Pottle and Saynor.
Following the merger, the PageNet change of control severance plan will provide
similar severance arrangements for PageNet executives. See "PageNet's
Management."
The purpose of the executive retention agreements is to assure the
continued employment and dedication of the executives without distraction from
the possibility of a change in control of Arch as defined in the executive
retention agreements. The executive will be eligible to receive benefits if a
change in control occurs, and Arch terminates the executive's employment at any
time within the following 12 months except for cause, disability or death, or
the executive terminates employment for good reason,
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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 1999.
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. ................ 150,000 11.64% $7.8282 06/03/09 $738,467 $1,871,420
Lyndon R. Daniels..... 91,667 7.11 7.8282 06/03/09 451,287 1,143,650
J. Roy Pottle......... 66,666 5.17 7.8282 06/03/09 328,204 831,734
John B. Saynor........ 20,000 1.55 7.8282 06/03/09 98,462 249,523
Paul H. Kuzia......... 41,666 3.23 7.8282 06/03/09 205,126 519,831
</TABLE>
---------------
(1) Options generally become exercisable at a rate of 20% of the shares subject
to the option on each of the first five anniversaries of the date of grant.
(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.
During 2000, Arch has granted additional options, exercisable at $6.06 per
share, to Messrs. Baker (709,000), Daniels (481,000), Pottle (350,000), Saynor
(100,000) and Kuzia (263,000).
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OPTION EXERCISES AND YEAR-END OPTION TABLE
The named executive officers did not exercise any stock options during
1999. They held the following stock options as of December 31, 1999:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
NAME (#) ($) (#) ($)(1)
---- ----------- -------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. .............. -- -- 72,959 228,595 -- --
Lyndon R. Daniels.................. -- -- 16,335 121,998 -- --
John B. Saynor..................... -- -- 6,706 30,541 -- --
J. Roy Pottle...................... -- -- 10,500 86,166 -- --
Paul H. Kuzia...................... -- -- 14,371 56,911 -- --
</TABLE>
---------------
(1) Based on the fair market value of common stock on December 31, 1999 ($6.5938
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 Edwin M. Banks. Messrs. Berman and Rayfield served on the
compensation committee throughout 1999, and Mr. Banks joined the compensation
committee in August 1999.
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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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 August 11, 2000 and as adjusted to give
effect to the exchange offer, the PageNet merger and related transactions,
assuming that all of the outstanding discount 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 August 11, 2000. 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 D preferred stock into common stock at the
current conversion ratio of 6.61318 to 1.00;
- the conversion of Series C preferred stock into common stock at the
current conversion ratio of 7.1576 to 1.00; and
- the conversion of Class B common stock into common stock at a one-for-one
conversion ratio.
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<PAGE> 108
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) and (8) to the table would be entitled to cast a maximum
of 15.2% 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 17.7% of beneficial ownership which is obtained by adding their
individual beneficial ownership percentages in the table.
<TABLE>
<CAPTION>
SHARES
UNDERLYING
OPTIONS AND
WARRANTS PERCENTAGE
SHARES EXERCISABLE ------------------------
OUTSTANDING AT PRIOR TO TOTAL AT
AUGUST 11, NOVEMBER 10, BENEFICIALLY AUGUST 11, AS
NAME 2000 2000 OWNED 2000 ADJUSTED(1)
---- -------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. ................. 37,434 190,393 227,827 * *
Lyndon R. Daniels..................... -- 44,002 44,002 * *
John B. Saynor........................ 64,642 125,022 189,664 * *
J. Roy Pottle......................... -- 28,334 28,334 * *
Paul H. Kuzia......................... 440 29,426 29,866 * *
R. Schorr Berman(2)................... 655,671 1,143,948 1,799,619 2.4% 1.0%
James S. Hughes....................... 40,196 80,142 120,338 * *
John Kornreich(3)..................... 1,843,666 2,888,323 4,731,989 6.1% 2.5%
Allan L. Rayfield..................... 334 7,576 7,910 * *
John A. Shane(4)...................... 6,856 21,519 28,375 * *
Edwin M. Banks(5)..................... 8,345,429 572,002 8,917,431 11.9% 4.9%
H. Sean Mathis........................ -- 4,000 4,000 * *
Sandler Capital Management(6)......... 1,762,438 2,745,444 4,507,882 5.8% 2.4%
W.R. Huff Asset Management Co.,
L.L.C.(7)........................... 8,345,429 568,002 8,913,431 11.9% 4.9%
Whippoorwill Associates, Inc.(8)...... 3,939,048 439,904 4,378,952 5.8% 2.4%
Funds affiliated with Resurgence Asset
Management(9)....................... 15,963,776 -- 15,963,776 21.4% 8.7%
Paul Tudor Jones II(10)............... 4,136,799 126,716 4,262,975 5.7% 2.3%
Citigroup Inc.(11).................... 6,097,031 -- 6,097,031 8.2% 3.3%
Bay Harbour Management, L.C........... 4,405,201 -- 4,405,201 5.9% 2.4%
State of Wisconsin Investment Board... 602,776 3,125,556 3,728,332 4.8% 2.0%
All current directors and executive
officers of Arch as a group (12
persons)............................ 10,995,548 5,134,687 16,130,235 20.3% 8.6%
</TABLE>
---------------
* Less than 1%
(1) None of these stockholders is expected to receive any shares of Arch common
stock as a result of ownership of Arch discount notes, PageNet common stock
or PageNet senior subordinated notes, to the extent Arch is aware of that
ownership.
(2) Includes 649,337 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 1,762,438 shares and 2,745,444 shares issuable upon exercise of
warrants beneficially owned by Sandler Capital Management, 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.
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<PAGE> 109
(4) Includes 351 shares and 606 shares issuable upon exercise of warrants owned
by Palmer Service Corporation, over which Mr. Shane may be deemed to have
voting and investment power as president 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.
(5) Includes 7,548,218 shares and 568,002 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. Mr. Banks is a portfolio manager of W.R. Huff. Mr.
Banks disclaims beneficial ownership of all such shares.
(6) Sandler has sole voting and investment power over 112,500 of such shares
and 194,450 of the shares issuable upon exercise of warrants and shared
voting and investment power over the remaining shares and warrants. As
managing director of Sandler, John Kornreich may be deemed to have voting
and investment power of all such shares.
(7) Includes 7,548,218 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. W.R. Huff disclaims beneficial ownership of these
shares.
(8) 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. This information is based on Amendment No. 2 to
Schedule 13D filed by Whippoorwill Associates, Inc. on February 29, 2000
and the Form 4 filed by Whippoorwill Associates, Inc. on March 10, 2000
with the Securities and Exchange Commission.
(9) Includes 6,928,466 shares beneficially owned by various funds for which
Resurgence Asset Management, L.L.C. acts as investment manager and/or
general partner, 3,997,554 shares beneficially owned by various funds for
which Resurgence Asset Management International L.L.C. acts as investment
manager and/or general partner, 4,127,398 shares beneficially owned by
various funds for which Re/Enterprise Asset Management, L.L.C. acts as
investment manager and/or general partner, 92,648 shares held by Kingstreet
Ltd., 241,915 shares held by Resurgence Parallel Fund, Inc., 35,560 shares
held by M.D. Sass Associates, Inc. Employees Profit Sharing Plan, 241,317
shares held by James B. Rubin, 154,972 shares held by Devonshire Capital
Partners, L.L.C., 127,041 shares held by J.B. Rubin & Company Profit
Sharing Plan, 6,992 shares held by Guadalupe G. Rubin IRA, 8,458 shares
held by James B. Rubin, IRA and 895 shares held by Resurgence Asset
Management L.L.C. Employee Retirement Plan. Resurgence Asset Management,
L.L.C., Resurgence Asset Management International L.L.C. and Re/Enterprise
Asset Management, L.L.C., may be deemed to beneficially own the shares held
by the funds for which each acts as investment manager and/or general
partner and each disclaims beneficial ownership of such shares. James B.
Rubin serves as chief investment officer and is responsible for the day-to
day investment activities of each of Resurgence Asset Management, L.L.C.,
Resurgence Asset Management International, L.L.C. and Re/Enterprise Asset
Management, L.L.C. This information is based on shares issued pursuant to
the transaction described under "Arch Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Liquidity and Capital
Resources," and Amendment No. 1 to Schedule 13G filed by the funds
affiliated with Resurgence Asset Management with the Securities and
Exchange Commission on February 15, 2000.
(10) Includes 960,139 shares and 33,417 shares issuable upon exercise of
warrants held by Tudor BVI Futures, Ltd., 2,745,589 shares and 76,397
shares issuable upon exercise of warrants held by The Raptor Global
Portfolio Ltd., 10,650 shares held by The Alter Rock Fund, L.P., 204,346
shares and 8,181 shares issuable upon exercise of warrants held by The
Upper Mill Capital Appreciation Fund Ltd. and 216,075 shares and 8,181
shares issuable upon exercise of warrants held by Tudor Proprietary
Trading, L.L.C. Tudor Investment Corporation may be deemed to beneficially
own the
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<PAGE> 110
shares held by Tudor BVI Futures, Ltd., The Raptor Global Portfolio Ltd.,
The Alter Rock Fund, Ltd. and The Upper Mill Capital Appreciation Fund Ltd.
because Tudor Investment Corporation is the sole general partner of The
Alter Rock Fund L.P. and provides investment advisory services to The
Raptor Global Portfolio Ltd., Tudor BVI Futures, Ltd. and The Upper Mill
Capital Appreciation Fund Ltd. Mr. Jones may be deemed to beneficially own
the shares held by Tudor Investment Corporation and Tudor Proprietary
Trading, L.L.C. because he is the indirect controlling equity holder of
Tudor Proprietary Trading, L.L.C. and the controlling stockholder of Tudor
Investment Corporation. This information is based on Amendment No. 1 to
Schedule 13G filed by Paul Tudor Jones, II and Tudor Investment Corporation
with the Securities and Exchange Commission on February 14, 2000.
(11) Includes 3,144,828 shares held by SSB Citi Fund Management LLC and
2,891,513 held by Salomon Smith Barney Inc. Citigroup Inc. may be deemed to
beneficially own all of these shares because Citigroup is the sole
stockholder of Salomon Smith Barney Holdings, Inc. Salomon Smith Barney
Holdings, Inc. is the sole stockholder of each of SSB Citi Fund Management
LLC and Salomon Brothers Holding Company Inc. Salomon Brothers Holding
Company Inc. is the sole stockholder of Salomon Smith Barney Inc. Citigroup
Inc. and Salomon Smith Barney Holdings Inc. each disclaim beneficial
ownership of all of these shares. This information is based on Amendment
No. 1 to Schedule 13G filed by Citigroup Inc. with the Securities and
Exchange Commission on February 8, 2000.
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
- 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
- Citigroup Inc., 153 East 53rd Street, New York, New York 10043
- State of Wisconsin Investment Board, P.O. Box 7842, Madison, Wisconsin
53707
- Bay Harbour Management, L.C., 777 South Harbour Island Boulevard, Suite
270, Tampa, Florida 33602
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<PAGE> 111
PAGENET'S BUSINESS
PageNet is a provider of wireless messaging 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 messaging company in Brazil.
The main services of PageNet are numeric and alphanumeric wireless
messaging services. Numeric pagers allow a subscriber to receive a numeric
message, such as a telephone number to call back or a pre-arranged code, and
alphanumeric pagers allow a subscriber to receive numeric and text messages. As
of June 30, 2000, numeric pagers represented approximately 82% of PageNet's
total units in service with subscribers and alphanumeric pagers represented
approximately 17% of PageNet's total units in service with subscribers. However,
total units in service have declined each quarter since their high of 10,604,000
at June 30, 1998 and are expected to continue to decline in the second half of
2000. In addition, PageNet sells confirmed receipt paging services, which enable
subscribers to receive acknowledgements that their messages were delivered,
services which enable subscribers to respond to messages with their messaging
devices by using pre-scripted replies, and send-and-receive services, which
enable subscribers to initiate messages and to respond to messages with their
messaging devices by using pre-scripted replies or by creating original replies.
These services presently account for approximately 1% of PageNet's total units
in service. PageNet is currently developing other applications for its wireless
network through its wholly owned subsidiary, Vast, as described more fully
below.
STRATEGY AND RESTRUCTURING
In February 1998, PageNet announced its intention to refocus its strategy
from rapid expansion and subscriber growth towards profitable growth. The major
components of this realignment have included:
- restructuring and consolidation of its operations by eliminating
redundant administrative and support functions located in offices
throughout the country into centralized processing centers;
- completing the build-out of its new advanced messaging network, and
launching new, advanced messaging services for its customers;
- developing other applications for its network to provide "wireless
solutions" to customers;
- focusing PageNet's sales and marketing efforts on more profitable
services, such as alphanumeric and nationwide paging; and
- increasing prices of some services.
RESTRUCTURING OF OPERATIONS. In February, 1998, PageNet's board of
directors approved a restructuring of PageNet's domestic operations. PageNet's
restructuring plan called for the elimination of redundant administrative
operations by consolidating key support functions located in offices throughout
the country into centralized processing facilities. In addition, the
restructuring plan called for the conversion to new billing and customer service
software platforms. The restructuring plan specified local and regional office
closures, the disposition of certain furniture, fixtures, and equipment and the
termination of approximately 1,950 employees by job function and location. While
progress in establishing these centralized processing centers was made,
PageNet's efforts to convert its offices to its new billing and customer service
software platforms fell behind its original schedule of being completed during
the second quarter of 1999. Billing software and system implementation problems
surfaced during the first office conversions, and as a result, PageNet had to
postpone the conversion of many of its other offices. Additional implementation
problems surfaced during 1999 and caused further delays. In November 1999, and
in conjunction with the announcement of PageNet's planned merger with Arch,
PageNet decided to suspend the restructuring after January 2000 pending the
decision as to which operating platforms will be used by the combined company.
During May 2000, a decision was made to use Arch's existing billing and customer
service systems upon completion of the merger. The decisions regarding other
systems to be utilized by the combined company are still pending.
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<PAGE> 112
PageNet has converted to its new billing and customer service software
systems all of its customer units placed in service by its resellers and
approximately 50% of its directly placed customer units. However, due to the
suspension of the restructuring, combined with the impact of the contemplated
merger on its operations, PageNet is unable to determine the amount of future
savings resulting from the consolidation initiative.
COMPLETION OF ADVANCED MESSAGING NETWORK. On February 1, 2000, PageNet
launched its advanced messaging services. PageNet currently intends to invest
approximately $15 million in the network during 2000. This investment is
intended to complete the buildout of sites started in the fourth quarter of 1999
and expand capacity in certain cities throughout the nation during 2000, and
will substantially complete PageNet's investment in its advanced messaging
network.
DEVELOPING "WIRELESS SOLUTIONS" BUSINESS OF VAST. PageNet has been engaged
in several efforts to develop additional uses for its networks. In June 1999,
PageNet consolidated its initiative to develop advanced services, including
wireless data and wireless solutions, into Vast. Vast is a development stage
company and, since its inception, has been engaged primarily in product research
and development and developing markets for its products and services. In 1999
and for the six months ended June 30, 2000, Vast had total revenues of $1
million and $3 million, respectively and incurred net losses of approximately
$35 million and $13 million, respectively, as a result of these startup
activities. Through Vast, PageNet is commencing operations that can connect
corporate mobile users with Internet or corporate data networks using wireless
devices. Vast's initial focus is on large businesses with mobile workforces.
REALIGNMENT OF SALES AND MARKETING STRUCTURE. PageNet has reviewed its
customers and prospects in each market in order to design a sales and marketing
structure that is more closely aligned with its customers' needs and with
PageNet's overall goal of having its customers move to higher revenue products.
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.
PRICE INCREASES. In an effort to improve the profitability of some of its
services, PageNet implemented price increases in late 1998 and 1999 to some of
its customers. As a result of these price increases, increased competition in
the marketplace for wireless messaging services, and other factors, PageNet's
units in service have decreased each quarter from the third quarter of 1998
through the second quarter of 2000, and this trend is expected to continue in
the second half of 2000. PageNet experienced its first year-to-year increase in
average revenue per unit in 1998, although average revenue per unit declined
during the second, third, and fourth quarters of 1999. Average revenue per unit
increased during the first quarter of 2000 and decreased during the second
quarter of 2000. 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 employee sales representatives who call on prospects
and customers or take 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 June 30, 2000, direct sales accounted for approximately 49% of
PageNet's overall units in service, and the indirect sales channel accounted for
approximately 51%. 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 service rates. PageNet sells or leases messaging devices to resellers,
who sell PageNet's services to end users. Resellers
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<PAGE> 113
are typically 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.
MARKETING
PageNet promotes its products and services through a variety of programs,
including 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 primarily from Motorola,
Inc., transmitters from Glenayre Technologies, Inc. and Motorola, 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 Motorola and other sources and be able to purchase paging
infrastructure from sources other than Motorola.
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 June 30, 2000, PageNet owned messaging devices having a net book
value of approximately $102 million.
INTERNATIONAL OPERATIONS
PageNet provides services in Canada similar to those offered in the United
States through its wholly owned subsidiary, Paging Network of Canada Inc.
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 is currently considering options
to return these licenses to the regulatory bodies in each of these countries.
PageNet recorded a provision of $18 million during the first quarter of 1999 for
the impairment of the assets of its 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, PageNet 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, PageNet 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 PageNet'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
PageNet's Spanish subsidiaries. All operations in the Spanish subsidiaries were
ceased in the third quarter of 1999. No additional charges are required.
PageNet's international subsidiaries are not debtors in the chapter 11
case. PageNet is not considering opportunities for international expansion at
this time.
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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 PCS and cellular telephones and, more recently,
also offer traditional 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 Vodafone/AirTouch/Bell Atlantic (a combined company
now called Verizon), BellSouth Wireless Data, L.P., MCI WorldCom, Inc., Skytel
Communications, Inc., Metrocall, Inc., Nextel Communications, Inc., RSR, Sprint
PCS Group, and WebLink Wireless, Inc., formerly known as PageMart Wireless.
Future technological advances in wireless messaging 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 wireless messaging.
TRADEMARKS
PageNet markets its services under various names and marks, including
PageNet(R), PageMail(R), PageMate(R), PageNet Nationwide(R), SurePage(R),
FaxNow(R), and MessageNow(R), all of which are federally registered service
marks. PageNet's federal mark registrations must be renewed at various times
between 2000 and 2005. PageNet has filed applications with the United States
patent and trademark office to register additional names and marks.
CORPORATE ORGANIZATION
Historically, PageNet's subsidiaries operated as independent business units
making their own staffing, administrative, operational and marketing decisions
within guidelines established by the executive officers of PageNet. Effective
December 31, 1998, PageNet merged a substantial number of its operating
subsidiaries into PageNet, Inc., a first tier subsidiary of PageNet. PageNet has
eight wholly owned domestic subsidiaries. As of December 31, 1999, PageNet
conducted its international operations through eleven wholly and partially owned
subsidiaries. In March 2000, PageNet sold its interest in its Spanish
subsidiary.
SEASONALITY
PageNet's results of operations are not significantly affected by seasonal
factors.
EMPLOYEES
PageNet had approximately 4,200 employees as of June 30, 2000. Of these
employees, approximately 1,750 were engaged in administrative, customer service,
and technical capacities at PageNet's headquarters and its centralized
processing facilities. Approximately 2.400, including approximately 950 sales
personnel, were employed in PageNet's domestic and international offices. In
addition to its 4,200 employees, PageNet had approximately 800 temporary workers
in various customer service and administrative roles as of June 30, 2000. As a
result of PageNet's restructuring efforts, PageNet eliminated approximately 300
permanent and 850 temporary positions during 1999. None of PageNet's employees
is represented by a labor union. During 1999, PageNet experienced high employee
turnover primarily due to its restructuring initiative. PageNet is currently
continuing to experience a high employee turnover rate due to its deteriorating
financial results and its pending merger with Arch.
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PROPERTIES
As of June 30, 2000, PageNet leased office space in 108 cities in 34 states
in the United States and the District of Columbia, and in six cities in four
provinces in Canada. These leases expire, subject to renewal options, on various
dates through December 31, 2007. PageNet also leases office space for its
corporate headquarters in Dallas, Texas under a lease that expires in June 2003.
As of December 31, 1999, PageNet was paying annualized rent of approximately $28
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 suspended further restructuring during
2000 pending a determination as to the infrastructure to be used by the combined
company following the merger.
PageNet also leases sites for its transmitters on commercial broadcast
towers, buildings, and other structures. As of June 30, 2000, PageNet leased
transmitter sites for between 10,000 and 12,000 transmitters. A few local
municipalities have suspended the designation of new transmitter locations
and/or the addition of new towers. Should these suspensions, or others, continue
for an extended period of time, they 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. The Legacy Office Park property was sold
in December 1998 for a purchase price of approximately $15 million. Beginning in
June 1998, PageNet leased office space for its corporate headquarters in Dallas,
Texas under a five-year lease term.
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.
On July 14, 2000, three senior subordinated noteholders commenced an
involuntary proceeding against PageNet under chapter 11 of the United States
Bankruptcy Code. The petition related solely to Paging Network, Inc. and not to
any of its subsidiaries. On July 24, 2000, Paging Network, Inc. consented to an
order for relief, which in effect, converted the involuntary chapter 11 petition
into a voluntary proceeding. On the same date, Paging Network, Inc.'s domestic
subsidiaries other than Vast filed voluntary chapter 11 petitions in the United
States Bankruptcy Court. Subsequent to the petition date, PageNet and its
domestic subsidiaries other than Vast are operating as debtors-in-possession and
are subject to the jurisdiction of the United States Bankruptcy Court for the
District of Delaware. Chapter 11 is the principal business reorganization
chapter of the United States 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.
The bankruptcy court has exercised supervisory powers over the operations
of PageNet with respect to the employment of attorneys, investment bankers and
other professionals, and transactions out of the ordinary course of business or
otherwise requiring bankruptcy court approval under the bankruptcy code. PageNet
has 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 PageNet (1) to pay certain
customer refunds and deposits in the ordinary course of business, (2) to pay
wages, salaries and benefits owing to employees, and (3) to pay pre-petition
obligations owed to continuing vendors as such obligations come due.
On July 25, 2000, PageNet filed a joint plan of reorganization and
disclosure statement which provide for the implementation of the merger as
PageNet's plan of reorganization. The bankruptcy court approved the disclosure
statement on September 8, 2000, and authorized PageNet to submit the joint plan
of reorganization to its creditors and stockholders for approval. PageNet's
motion to assume the merger
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termination fee and certain related provisions of the merger agreement was
approved by the bankruptcy court on August 22, 2000. On September 8, 2000, the
bankruptcy court dismissed without prejudice a motion filed by Metrocall
requesting that the bankruptcy court terminate PageNet's exclusivity period and
permit Metrocall to submit a competing plan of reorganization in PageNet's
chapter 11 reorganization. The court has scheduled a hearing on the confirmation
of the bankruptcy plan for October 26, 2000.
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THE COMBINED COMPANY
BUSINESS
The combined company to be formed by the merger of Arch and PageNet will be
the largest paging company and one of the largest wireless messaging companies
in the United States, in terms of units in service.
PageNet and Arch believe that the combined company will be better
positioned than either company is currently to compete with large telephone,
cellular and PCS providers which are increasingly offering well accepted
services that compete effectively with both traditional and advanced paging
services, in some cases at significantly lower prices. The combination of
PageNet's range of wireless messaging products and advanced wireless messaging
network with Arch's extensive national accounts and sales and marketing
infrastructure should enable the combined company to:
- offer advanced messaging services and an expanded set of related products
and services such as Internet-based wireless information, over PageNet's
advanced wireless messaging network, with the goal of offsetting the
growing decline in demand for traditional paging services by increased
demand for advanced messaging services;
- create significant economic efficiencies which may help the combined
company to continue to price its services and products competitively; and
- create a financially stronger company as a result of the reduced leverage
of the combined company, although the combined company's pro forma
leverage ratio of approximately 4.0 times earnings before interest,
income taxes, depreciation and amortization may still impair its
operational flexibility.
Nevertheless, there can be no assurance that the combined company will
successfully meet the challenges posed by declining demand for traditional
paging services and increasing competition from large telephone, cellular and
PCS providers.
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.
None of PageNet's three largest noteholders has informed Arch or PageNet
whether it intends to designate a director. PageNet's board has not yet
designated its three directors to the board of the combined company. Arch's
board has not yet designated its six directors to the board of the combined
company.
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. Arch has announced the
senior management team for the combined company, which does not include any
PageNet officers. If all of the officers wished to continue but were terminated
or constructively terminated, they would receive a total of approximately $18.5
million in estimated severance benefits.
PRO FORMA INFORMATION, UNAUDITED FINANCIAL PROJECTIONS AND OPERATIONAL COST
SYNERGIES
On a pro forma basis at June 30, 2000, the combined company would have had
approximately 14.0 million units in service, total assets of $2.8 billion and
total long-term debt of $1.8 billion, assuming that all of the outstanding
discount notes are exchanged for common stock. For the year ended December 31,
1999, the combined company would have had pro forma total revenues of $1.7
billion, adjusted pro forma earnings before interest, income taxes, depreciation
and amortization of $471.0 million and net loss of $435.0. This pro forma net
loss excludes the effects of an extraordinary gain relating to the
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extinguishment of debt of $7.0 million and the negative $40.8 million cumulative
effect of accounting change relating to Arch's and PageNet's original
application of Statement of Position 98-5 "Reporting on The Costs of Start-Up
Activities." For the six months ended June 30, 2000, the combined company would
have had pro forma total revenues of $814.5 million, adjusted pro forma earnings
before interest, income taxes, depreciation and amortization of $215.4 million
and a net loss of $228.6 million. This pro forma net loss excludes the effect of
an extraordinary gain of $52.1 million relating to the extinguishment of Arch
debt. These amounts also excludes the impact of expected operational cost
synergies. For the year ended December 31, 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 $325.2 million, $894.7
million and $717.7 million, respectively. For the six months ended June 30,
2000, the combined company's pro forma cash flows provided by operating
activities, used in investing activities, and provided by financing activities
were $159.4 million, $82.3 million and $27.9 million, respectively. The adjusted
pro forma cash flow information assumes that the merger and related transactions
had been effected as of January 1, 1999. Leverage for the combined company on a
pro forma basis, as measured by the ratio of total debt to adjusted pro forma
earnings before interest, income taxes, depreciation and amortization for the
year ended December 31, 1999 and the six months ended June 30, 2000, would have
been 3.8 to 1.0 and 4.3 to 1.0, respectively. This also excludes the impact of
expected operational cost synergies. Adjusted pro forma earnings before
interest, income taxes, depreciation and amortization is earnings before
interest, income taxes, depreciation and amortization, net of restructuring
charges, bankruptcy related expenses, equity in loss of affiliates, income tax
benefit, interest and non-operating expenses (net) and extraordinary items. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements."
Arch and PageNet have developed the unaudited combined company projections
contained in Annex D. The projections consist of projected operating and
financial results for the three 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 October 1, 2000. The projections have been
prepared for filing with the bankruptcy court following the methodology
customarily used by companies in preparing projections for filing with a
bankruptcy court.
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. HOWEVER, TO THE EXTENT THEY BELIEVE
THAT THE SECURITIES LAWS REQUIRE, ARCH AND PAGENET WILL:
- 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 SECURITIES LAWS REQUIRE FULL AND PROMPT DISCLOSURE OF MATERIAL FACTS,
BOTH FAVORABLE AND UNFAVORABLE, REGARDING ARCH'S AND PAGENET'S FINANCIAL
CONDITION AND MAY EXTEND TO SITUATIONS WHERE MANAGEMENT KNOWS OR HAS REASON TO
KNOW ITS PREVIOUSLY DISCLOSED PROJECTIONS NO LONGER HAVE A REASONABLE BASIS.
MANAGEMENT OF ARCH AND PAGENET BELIEVE THAT THE PROJECTED AMOUNTS ARE THE MOST
PROBABLE SPECIFIC AMOUNTS THAT THEY CAN FORECAST AND THAT THE ESTIMATES AND
ASSUMPTIONS THEY HAVE MADE IN ARRIVING AT THESE AMOUNTS ARE REASONABLE. THE
ESTIMATES AND ASSUMPTIONS MAY NOT BE REALIZED, HOWEVER, AND ARE INHERENTLY
SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF ARCH AND PAGENET. NO
REPRESENTATIONS CAN BE OR ARE MADE AS TO WHETHER ACTUAL RESULTS WILL MEET THE
RESULTS SET FORTH IN THE COMBINED COMPANY
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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
THEREFORE MAY AFFECT FINANCIAL RESULTS IN A MATERIAL AND POSSIBLY ADVERSE
MANNER. THE PROJECTIONS, THEREFORE, ARE NOT A GUARANTEE OR OTHER ASSURANCE THAT
THE ACTUAL RESULTS THAT WILL OCCUR, AS PROJECTED. SEE "FORWARD-LOOKING
STATEMENTS."
The projections contemplate that Arch should be able to operate its
business, fund its foreseeable capital commitments and service its debt for the
three months ending December 31, 2000 and the year ending December 31, 2001. The
projections contemplate that, for the three months ending December 31, 2000,
Arch will borrow approximately $10.0 million under its available line of credit
so that, together with its projected opening cash balance of $49.2 million and
projected adjusted earnings before interest, income taxes, depreciation and
amortization of $112.5 million, it will have sufficient cash to pay projected
interest of $50.8 million, capital expenditures of $59.0 million, transaction
costs and working capital requirements relating to the merger of $52.4 million
and reduce borrowings by a projected $5.6 million. During 2001, the projections
contemplate that adjusted earnings before interest, income taxes, depreciation
and amortization of $507.0 million will be sufficient to pay projected interest
of $192.0 million, income taxes of $15.0 million, capital expenditures of $232.3
million, working capital requirements of $10.3 million and reduce borrowings by
a projected $54.2 million.
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DESCRIPTION OF ARCH'S EQUITY SECURITIES
Arch's authorized capital stock consists of 150,000,000 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, 1,000,000 shares of Series D
preferred stock, 1,000,000 shares of Series E preferred stock and 7,450,000
additional shares of preferred stock. Each share has a par value of $.01. On
June 30, 2000, there were 63,938,687 outstanding shares of common stock held by
approximately 1,600 stockholders of record, 2,531,962 outstanding shares of
Class B common stock held by three stockholders of record, 250,000 outstanding
shares of Series C preferred stock held by nine stockholders of record,
1,000,000 shares of Series D convertible preferred stock held by 10 stockholders
of record and no outstanding shares of Series E convertible preferred stock.
To learn how to obtain copies of the certificate of incorporation and
bylaws, 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. Holders of common stock do not have cumulative voting rights.
CLASS B COMMON STOCK
Shares of Arch's Class B common stock are identical in all respects to
shares of Arch's common stock, except that:
- a holder of Class B common stock is not entitled to vote in the election
of directors and is entitled to 1/100th vote per share of common stock on
all other matters voted on by Arch's stockholders;
- shares of Class B common stock will automatically convert into an
identical number of shares of common stock upon the transfer of Class B
common shares to any person or entity, other than a Class B holder. A
Class B holder is:
- any person or entity that received shares of Class B common stock in
the initial distribution of those shares;
- any person or entity that, when taken together with any person or
entity that received shares of Class B common stock in the initial
distribution, constitutes a "person" or "group," as defined in
sections 13(d) and 14(d) of the Securities and Exchange Act of 1934;
or
- any affiliate of the preceding persons or entities.
The holder that is transferring its shares of Class B common stock must
certify to Arch:
- the number of shares of Class B common stock being transferred; and
- that, to its knowledge, after due inquiry, the shares of Class B
common stock are not being transferred to a Class B holder.
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. Class B Common
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Stock was 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 Arch's
outstanding indebtedness. See "Description of Indebtedness -- Arch."
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 and Series D preferred stock currently outstanding
and the possible issuance of Series E preferred stock as described below.
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 October 1, 2000, the conversion rate will be
7.1576-to-1, so that 1,789,400 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 35,000 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 (7.1576 prior to October 1, 2000).
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 preference to
the holders of Series C preferred stock, then the assets will be distributed pro
rata among the holders of the Series C, Series D and Series E preferred stock.
Redemption. Holders of Series C preferred stock may require Arch to redeem
the Series C preferred stock in the year 2005 for an amount equal to the amount
of the liquidation preference of the Series C preferred stock. 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.
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SERIES D PREFERRED STOCK
The Series D preferred stock has the rights and preferences summarized
below:
Conversion. Each share of Series D preferred stock is convertible into Arch
common stock at any time, at the option of the holder thereof, into 6.61318
shares of common stock. Upon completion of the merger of Arch and PageNet, each
share of Series D preferred stock will automatically convert into 6.61318 shares
of common stock of Arch.
Dividends. If not earlier converted, Series D preferred stock bears
dividends commencing March 15, 2001 at the rate of 10 7/8% per annum. At Arch's
option, dividends are payable in cash at the rate of $10.875 per share per annum
or through the issuance of one-tenth of one share of Arch's Series E preferred
stock per share per annum. The Series E preferred stock, if issued, will have
the rights and preferences summarized below. If not paid semi-annually,
dividends accumulate and become payable upon redemption of the Series D
preferred stock or upon liquidation of Arch.
Voting Rights. Except as required by law, the Series D preferred stock and
the common stock vote together as a single class. Each share of Series D
preferred stock is entitled to as many votes as the number of shares of common
stock into which it is convertible (currently 6.61318 shares).
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 D preferred stock an amount equal to (1)
$90.943977 per share, plus (2) 10.875% per annum on such amount through March
15, 2001, plus (3) any accrued and unpaid dividends on the Series D preferred
stock. If all mandatory dividends on the Series D preferred stock accrue and are
paid upon liquidation, the liquidation preference of the Series D preferred
stock will be $176.125 per share. If the assets of Arch are insufficient to
permit full payment of such liquidation preference to the holders of Series D
preferred stock, then the assets will be distributed pro rata among the holders
of the Series C, Series D and Series E preferred stock.
Redemption. Arch is required to redeem all outstanding shares of Series D
preferred stock on March 15, 2008 at a cash redemption price equal to the amount
of the liquidation preference of the Series D preferred stock.
SERIES E PREFERRED STOCK
If issued as dividends on the Series D preferred stock, the Series E
preferred stock will have the rights and preferences summarized below:
Conversion. Series E preferred stock is not convertible into Arch
common stock.
Dividends. Series E preferred stock does not bear dividends.
Voting Rights. Except as required by law, the Series E preferred stock
has no voting rights.
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 E preferred stock an amount
equal to $108.75 per share. If the assets of Arch are insufficient to
permit full payment of such liquidation preference to the holders of Series
E preferred stock, then the assets will be distributed pro rata among the
holders of the Series C, Series D and Series E preferred stock.
Redemption. Arch is required to redeem all outstanding shares of
Series E preferred stock on March 15, 2008 at a cash redemption price equal
to the amount of the liquidation preference of the Series E preferred
stock.
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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 14,890,202 shares of common stock to persons
who were holders of record of common stock and Series C preferred stock
on January 27, 1999.
The warrant exercise price is $9.03 per share. This exercise price was
determined by negotiations between Arch and MobileMedia. These warrants will
expire on September 1, 2001.
In connection with the issuance of common stock for convertible
subordinated debentures in October 1999, Arch issued warrants to purchase
540,487 shares of common stock at $9.03 per share. These warrants also expire on
September 1, 2001.
The warrant exercise price or the number of shares purchasable upon
exercise of the warrants is subject to adjustment from time to time upon the
occurrence of stock dividends, stock splits, reclassifications, issuances of
stock or options at prices below prevailing market prices and other events
described in the warrant agreement. Arch may irrevocably reduce the warrant
exercise price for any period of at least 20 calendar days to any amount that
exceeds the par value of common stock.
FOREIGN OWNERSHIP RESTRICTIONS
Under the Communications Act of 1934, 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 Federal
Communications Commission 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 holders if the continued ownership of such stock by
such holders, because of their foreign citizenship or otherwise, would place the
Federal Communications Commission 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
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 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 fractional share of Series B preferred stock of
Arch at a cash purchase price of $150.00 per fractional share of preferred
stock, subject to adjustment. The purchase rights automatically attach to and
trade together with each share of common stock.
Each fractional share of preferred stock has voting, dividend and
liquidation rights equivalent to one share of Arch's common stock. As a result,
an Arch stockholder who purchases all of the preferred stock fractional shares
that it is entitled to purchase will double its voting power, dividend rights
and liquidation rights.
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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 $150.00 exercise
price of the purchase right to purchase fractional shares of preferred stock.
All purchase rights that are beneficially owned by an acquiring person will
become null and void in such circumstances. Therefore, the acquiring person will
not increase its voting, dividend or liquidation rights.
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 $150.00 exercise price of the purchase right 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 and subsequent securities transactions, Arch amended the
preferred stock rights plan to permit each standby purchaser and other
significant Arch shareholders to acquire, prior to the consummation of the
PageNet merger and without becoming an acquiring person, shares of the Company's
outstanding stock but in no event more than a total of 23.9% of such outstanding
stock for W.R. Huff, 21.3% for Whippoorwill, 18% for Citigroup, Inc. or 25.0%
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 bylaws provide that Arch's board of
directors is divided into three classes, with the terms of each class expiring
in a different year. The bylaws provide that the number of directors is 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.
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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
Bylaws
Arch's certificate of incorporation requires the affirmative vote of the
holders of at least 80% of the voting power of all then outstanding shares of
stock, voting together as a single class, to amend specified provisions of the
certificate of incorporation. These include provisions relating to the removal
of directors, the prohibition on stockholder action by written consent instead
of a meeting, the procedural requirements of stockholder meetings and the
adoption, amendment and repeal of certain articles of the bylaws.
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:
- 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;
- the impact of such a transaction on the subscribers and employees of Arch
and its effect on the communities in which Arch operates; and
- 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:
- 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;
- 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;
- any purchase of Arch's stock in accordance with the terms of any stock
option or employee benefit plan; or
- any purchase at prevailing marketing prices pursuant to a stock
repurchase program.
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"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 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. Section 203 may make 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 bylaws which becomes effective twelve months
after adoption. Arch's certificate of incorporation and by-laws do not exclude
Arch from the restrictions imposed by Section 203. It is anticipated that the
provisions of Section 203 may encourage companies interested in acquiring Arch
to negotiate in advance with Arch's board of directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for common stock is Equiserve Trust
Company, N.A., 150 Royall Street, Canton, MA 02021.
REGISTRATION RIGHTS
Purchasers of Class B common stock have demand registration rights which
may be exercised no more than twice. These demand rights entitle the purchasers
of Class B common stock to require Arch to register all or any portion of their
shares of Arch common stock for public resale by the holders. Arch has also
agreed to provide the same stockholders "piggyback" registration rights with
respect to other offerings filed by Arch. These piggyback rights entitle any
purchaser of Class B common stock to include their shares of Arch common stock
in a registration statement for shares that Arch wishes to sell, unless the
underwriters for Arch's shares believe that the number of shares included in the
registration statement should be limited for marketing reasons. In that case,
purchasers of Class B common stock would be entitled to include the same
percentage of the shares they own as the percentage that any other stockholder
participating in the offering is entitled to include.
The holders of Series C preferred stock and the former stockholders of
PageCall are also entitled to demand rights and piggyback registration rights.
The demand rights entitle the holders of at least 25% of the outstanding shares
of Series C preferred stock to require Arch to register their shares of Arch
common stock in a public resale having an aggregate offering price exceeding $1
million. The piggyback rights entitle all holders of Series C preferred stock to
include their shares of Arch common stock in a registration statement for shares
that Arch wishes to sell, unless the underwriters for Arch's shares believe that
the number of shares included in the registration statement should be limited
for marketing reasons. In that case, Series C preferred stockholders would be
entitled to include the same percentage of the
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shares they own as the percentage that any other stockholder participating in
the offering is entitled to include.
Certain funds affiliated with Resurgence Asset Management which own, in the
aggregate, approximately 16 million shares of Arch common stock are also
entitled to demand rights and piggyback registration rights. The demand rights
entitle these stockholders to require Arch to register all or any portion of
their shares of Arch common stock in a public resale having an aggregate
offering price exceeding $1 million. The piggyback rights entitle these
stockholders to include their shares of Arch common stock in a registration
statement for shares that Arch wishes to sell, unless the underwriters for
Arch's shares believe that the number of shares included in the registration
statement should be limited for marketing reasons. In that case, the
stockholders would be entitled to include the same percentage of the shares they
own as the percentage that any other stockholder participating in the offering
is entitled to include.
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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 that remained outstanding at June 30, 2000 had accreted an
aggregate principal amount of $159.6 million at that date and will have an
aggregate principal amount of $172.4 million at March 15, 2001 and an identical
aggregate principal amount when they mature on March 15, 2008. These amounts
reflect repurchases made in negotiated transactions through June 30, 2000. 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 $1.0 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 June
30, 2000, 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 do 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>
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 those 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 that 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 prohibit 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:
- all overdue interest on all notes,
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- 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 some 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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<PAGE> 147
DESCRIPTION OF OTHER INDEBTEDNESS
Arch and its principal operating subsidiaries each have substantial amounts
of outstanding indebtedness that provide necessary funding and impose various
limitations on Arch's operations.
Secured Credit Facility
A principal operating subsidiary has a secured credit facility that
currently permits it to borrow up to $577.9 million from The Bank of New York,
Royal Bank of Canada, Toronto Dominion (Texas), Inc., Barclays Bank, PLC and
other financial institutions. At December 31, 1999, $438.9 million of borrowings
were outstanding.
The facility consists of a $175.0 million reducing revolving Tranche A
facility, a $100.0 million Tranche B facility and a $302.9 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 began amortizing in annual installments
commencing December 31, 1999, with an ultimate maturity date of June 30, 2006.
On March 23, 2000, the senior credit facility was amended to add a $746.6
million Tranche B-1 term loan to be used to assume obligations under PageNet's
existing credit facility upon completion of the pending PageNet merger. The
Tranche B-1 term loan will be amortized in quarterly installments commencing
March 31, 2001, with an ultimate maturity date of June 30, 2006. For more
details, see Annex C to this prospectus. PageNet's bankruptcy plan requires Arch
to amend its secured credit facility to require a reduction of between $110.0
million and $130.0 million in Arch's outstanding borrowings within one year
after the merger takes place.
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 some 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 announced alternate base rate plus a margin of
between 0.75% and 5.625%, determined by comparing total debt to
annualized earnings before interest, income taxes, depreciation and
amortization;
- The Bank of New York's announced LIBOR rate, plus a margin of between
2.0% and 6.875%, determined by comparing total debt to annualized
earnings before interest, income taxes, depreciation and amortization.
The weighted average interest rate was 11.5% on June 30, 2000 and has
varied from 10.7% to 11.6% since the facility was comprehensively amended in
June 1999.
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 earnings before
interest, income taxes, depreciation and amortization.
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;
144
<PAGE> 148
- 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 financial covenants, including ratios of earnings before interest,
income taxes, depreciation and amortization to fixed charges, earnings before
interest, income taxes, depreciation and amortization to debt service, earnings
before interest, income taxes, depreciation and amortization to interest service
and total indebtedness to earnings before interest, income taxes, depreciation
and amortization.
Subsidiary's Senior Notes
Another principal operating subsidiary of Arch has the following issues of
unsecured senior notes outstanding:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT INTEREST
ACCRETED AT 9/30/99 RATE MATURITY DATE INTEREST PAYMENT DATES
------------------- -------- ---------------- ----------------------
<S> <C> <C> <C>
$125.0 million 9 1/2% February 1, 2004 February 1, August 1
$100.0 million 14% November 1, 2004 May 1, November 1
$127.5 million 12 3/4% July 1, 2007 January 1, July 1
$139.8 million 13 3/4% April 15, 2008 April 15, October 1
</TABLE>
Redemption. The subsidiary may choose to redeem any amounts of these
senior notes during the periods indicated in the following table. The redemption
prices will equal the indicated percentages of the principal amount of the
notes, together with accrued and unpaid interest to the redemption date:
<TABLE>
<CAPTION>
9 1/2% SENIOR NOTES
------------------------------------------------------
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
<S> <C>
February 1, 1999 to January 31, 2000 104.750%
February 1, 2000 to January 31, 2001 103.167%
February 1, 2001 to January 31, 2002 101.583%
On or after February 1, 2002 100.000%
</TABLE>
<TABLE>
<CAPTION>
14% SENIOR NOTES
------------------------------------------------------
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
<S> <C>
November 1, 1999 to October 31, 2000 107.000%
November 1, 2000 to October 31, 2001 104.625%
November 1, 2001 to October 31, 2002 102.375%
On or after November 1, 2002 100.000%
</TABLE>
<TABLE>
<CAPTION>
12 3/4% SENIOR NOTES
------------------------------------------------------
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
<S> <C>
July 1, 2003 to June 30, 2004 106.375%
July 1, 2004 to June 30, 2005 104.250%
July 1, 2005 to June 30, 2006 102.125%
On or after July 1, 2006 100.000%
</TABLE>
<TABLE>
<CAPTION>
13 3/4% SENIOR NOTES
------------------------------------------------------
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
<S> <C>
April 15, 2004 to April 14, 2005 106.875%
April 15, 2005 to April 14, 2006 104.583%
April 15, 2006 to April 14, 2007 102.291%
On or after April 15, 2007 100.000%
</TABLE>
145
<PAGE> 149
In addition, until July 1, 2001, the subsidiary may elect to use the
proceeds of a qualifying equity offering to redeem up to 35% in principal amount
of the 12 3/4% senior notes until July 1, 2001, or up to 35% in principal amount
of the 13 3/4% senior notes until April 15, 2002, at a redemption price equal to
112.75% of the principal amount of the 12 3/4% senior notes or 113.75% of the
principal amount of the 13 3/4% senior notes, together with accrued interest.
The subsidiary may make such redemption, however, only if 12 3/4% senior notes
with an aggregate principal amount of at least $84.5 million remain outstanding
immediately after giving effect to any such redemption of 12 3/4% senior notes,
and only if 13 3/4% senior notes with an aggregate principal amount of at least
$95.6 million remain outstanding immediately after giving effect to any such
redemption of 13 3/4% senior notes. Arch is not, however, obligated to redeem
any 12 3/4% senior notes or 13 3/4% senior notes with the proceeds of any equity
offering.
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.
Arch does not believe that the merger will result in a change in control,
as defined.
Events of Default. The following constitute events of default under the
indentures:
- a default in the timely payment of interest on the senior notes if such
default continues for 30 days;
- a default in the timely payment of principal of, or premium, if any, on
any of the senior notes either at maturity, upon redemption or
repurchase, by declaration or otherwise;
- the borrowers' failure to observe or perform any of their other covenants
or agreements in the senior notes or in the indenture, but generally only
if the failure continues for a period of 30 or 60 days after written
notice of default;
- specified events of bankruptcy, insolvency or reorganization involving
the borrowers;
- a default in timely payment of principal, premium or interest on any
indebtedness for borrowed money aggregating $5.0 million or more in
principal amount;
- the occurrence of an event of default as defined in any indenture or
instrument involving at least $5.0 million aggregate principal amount of
indebtedness for borrowed money that gives rise to the acceleration of
such indebtedness;
- the entry of one or more judgments, orders or decrees for the payment of
more than a total of $5.0 million, net of any applicable insurance
coverage, against the borrowers or any of their properties; or
- the holder of any secured indebtedness aggregating at least $5.0 million
in principal amount seeks foreclosure, set-off or other recourse against
assets of the borrowers having an aggregate fair market value of more
than $5.0 million.
146
<PAGE> 150
Arch's Convertible Debentures
As of June 30, 2000, Arch has outstanding $1.0 million in principal amount
of 6 3/4% convertible subordinated debentures due 2003. Interest is payable
twice a year on June 1 and December 1. The convertible debentures are scheduled
to mature on December 1, 2003. The principal amount of the convertible
debentures is currently convertible into common stock at a conversion price of
$50.25 per share at any time prior to redemption or maturity.
Arch may choose to redeem any amount of the convertible debentures at any
time, at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------------------
<S> <C>
December 1, 1997 to November 30, 1998 104.050% of principal amount
December 1, 1998 to November 30, 1999 103.375% of principal amount
December 1, 1999 to November 30, 2000 102.700% of principal amount
December 1, 2000 to November 30, 2001 102.025% of principal amount
December 1, 2001 to November 30, 2002 101.350% of principal amount
December 1, 2002 to November 30, 2003 100.675% of principal amount
On or after December 1, 2003 100.000% of principal amount
</TABLE>
The convertible debentures represent senior unsecured obligations of Arch
and are subordinated to senior indebtedness of Arch, as defined in the
indenture. The indenture does not contain any limitation or restriction on the
incurrence of senior indebtedness or other indebtedness or securities of Arch or
its subsidiaries.
Upon the occurrence of a fundamental change, as defined in the indenture,
each holder of convertible debentures has the right to require Arch to
repurchase its convertible debentures for cash, at a repurchase price of 100% of
the principal amount of the convertible debentures, plus accrued interest to the
repurchase date. The following constitute fundamental changes:
- acquisition by a person or a group of beneficial ownership of stock of
Arch entitled to exercise a majority of the total voting power of all
capital stock, unless such beneficial ownership is approved by the board
of directors;
- specified types of changes in Arch's board of directors;
- any merger, share exchange, or sale or transfer of all or substantially
all of the assets of Arch to another person, with specified exceptions;
- the purchase by Arch of beneficial ownership of shares of its common
stock if the purchase would result in a default under any senior debt
agreements to which Arch is a party; or
- distributions of common stock by Arch to its stockholders in specified
circumstances.
The following constitute events of default under the indenture:
- a default in the timely payment of any interest on the convertible
debentures if such default continues for 30 days;
- a default in the timely payment of principal or premium on any
convertible debenture at maturity, upon redemption or otherwise;
- a default in the performance of any other covenant or agreement of Arch
that continues for 30 days after written notice of such default;
- a default under any indebtedness for money borrowed by Arch that results
in more than $5.0 million of indebtedness being accelerated; or
- the occurrence of events of bankruptcy, insolvency or reorganization with
respect to Arch.
147
<PAGE> 151
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 PageNet as of December 31, 1998
and 1999, and for each of the three years in the period ended December 31, 1999,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about PageNet's ability to continue as a going concern as
described in Note 2 to PageNet's consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of MobileMedia as of December 31,
1997 and 1998, and for each of the three years in the period ended December 31,
1998, appearing in this prospectus and registration statement have also been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon (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 to MobileMedia's consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The descriptions of the regulatory requirements under the Communications
Act and associated regulations set forth under "The Merger -- Regulatory
Approvals" and "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. Discount
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 Securities and Exchange Commission as required by the Exchange Act.
MobileMedia Communications, Inc. and MobileMedia Corporation were also
subject to the informational requirements of the Securities Exchange Act of 1934
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 Securities and Exchange Commission at the public reference
facilities maintained by the Securities and Exchange Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Securities and
Exchange Commission'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
148
<PAGE> 152
by Arch with the Securities and Exchange Commission at prescribed rates by
writing to the Securities and Exchange Commission's Public Reference Section,
450 Fifth Street, N.W., Washington, D.C. 20549. You can call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information 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 Securities and Exchange Commission's world wide
web site at http://www.sec.gov. Arch's common stock trades on the Nasdaq
National Market under the symbols "APGR," PageNet's common stock was traded on
the Nasdaq SmallCap Market under the symbol "PAGE". 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.
YOU MAY REQUEST A COPY OF ARCH'S, PAGENET'S AND MOBILEMEDIA'S FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION, 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
149
<PAGE> 153
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, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1999............... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for Each of the Three Years in the Period Ended December
31, 1999.................................................. F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1999............... F-6
Notes to Consolidated Financial Statements.................. F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Condensed Balance Sheets as of December 31,
1999 and June 30, 2000.................................... F-23
Consolidated Condensed Statements of Operations for Three
and Six Months Ended June 30, 1999 and 2000............... F-24
Consolidated Condensed Statements of Cash Flows for Six
Months Ended June 30, 1999 and 2000....................... F-25
Notes to Consolidated Condensed Financial Statements........ F-26
PAGING NETWORK, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-28
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-29
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1999............... F-30
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1999............... F-31
Consolidated Statements of Shareowners' Deficit for each of
the Three Years in the Period Ended December 31, 1999..... F-32
Notes to Consolidated Financial Statements.................. F-33
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets as of December 31, 1999 and June
30, 2000.................................................. F-49
Consolidated Statements of Operations for Three and Six
Months Ended June 30, 1999 and 2000....................... F-50
Consolidated Statements of Cash Flows for Six Months Ended
June 30, 1999 and 2000.................................... F-51
Notes to Consolidated Financial Statements.................. F-52
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-57
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (unaudited)............................ F-58
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-59
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-60
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-61
Notes to Consolidated Financial Statements.................. F-62
</TABLE>
F-1
<PAGE> 154
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, 1998 and 1999, 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, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Arch Communications Group, Inc. and subsidiaries as of December 31, 1998 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 16, 2000 (except with respect to the matters discussed
in Note 3 as to which the date is March 16, 2000)
F-2
<PAGE> 155
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,633 $ 3,161
Accounts receivable (less reserves of $6,583 and
$16,473 in 1998 and 1999, respectively)............... 30,753 61,167
Inventories............................................ 10,319 9,101
Prepaid expenses and other............................. 8,007 11,874
---------- ----------
Total current assets.............................. 50,712 85,303
---------- ----------
Property and equipment, at cost:
Land, buildings and improvements....................... 10,480 20,503
Messaging and computer equipment....................... 400,312 667,820
Furniture, fixtures and vehicles....................... 17,381 26,321
---------- ----------
428,173 714,644
Less accumulated depreciation and amortization......... 209,128 314,445
---------- ----------
Property and equipment, net............................ 219,045 400,199
---------- ----------
Intangible and other assets (less accumulated amortization
of $372,122 and $515,195 in 1998 and 1999,
respectively)............................................. 634,528 867,543
---------- ----------
$ 904,285 $1,353,045
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt................... $ 1,250 $ 8,060
Accounts payable....................................... 25,683 30,016
Accrued restructuring charges.......................... 11,909 17,111
Accrued expenses....................................... 11,689 43,629
Accrued interest....................................... 20,997 30,294
Customer deposits...................................... 4,528 7,526
Deferred revenue....................................... 10,958 28,175
---------- ----------
Total current liabilities......................... 87,014 164,811
---------- ----------
Long-term debt, less current maturities..................... 1,001,224 1,322,508
---------- ----------
Other long-term liabilities................................. 29,510 83,285
---------- ----------
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 and $28,176 in 1998 and 1999,
respectively)......................................... 3 3
Common stock--$.01 par value, authorized 65,000,000
shares, issued and outstanding: 7,071,861 and
47,263,500 shares in 1998 and 1999, respectively...... 71 472
Class B common stock--$.01 par value, authorized
10,000,000 shares; issued and outstanding: no shares
in 1998 and 3,968,164 shares in 1999.................. -- 40
Additional paid-in capital............................. 378,218 661,413
Accumulated deficit.................................... (591,755) (879,487)
---------- ----------
Total stockholders' equity (deficit).............. (213,463) (217,559)
---------- ----------
$ 904,285 $1,353,045
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 156
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Service, rental and maintenance revenues................. $ 351,944 $ 371,154 $ 591,389
Product sales............................................ 44,897 42,481 50,435
--------- --------- -----------
Total revenues................................. 396,841 413,635 641,824
Cost of products sold.................................... (29,158) (29,953) (34,954)
--------- --------- -----------
367,683 383,682 606,870
--------- --------- -----------
Operating expenses:
Service, rental and maintenance..................... 79,836 80,782 132,400
Selling............................................. 51,474 49,132 84,249
General and administrative.......................... 106,041 112,181 180,726
Depreciation and amortization....................... 232,347 221,316 309,434
Restructuring charge................................ -- 14,700 (2,200)
--------- --------- -----------
Total operating expenses....................... 469,698 478,111 704,609
--------- --------- -----------
Operating income (loss).................................. (102,015) (94,429) (97,739)
Interest expense......................................... (96,482) (104,019) (144,924)
Interest income.......................................... 904 1,766 1,896
Other expense............................................ (1,581) (1,960) (45,221)
Equity in loss of affiliate.............................. (3,872) (5,689) (3,200)
--------- --------- -----------
Income (loss) before income tax benefit, extraordinary
items and accounting change............................ (203,046) (204,331) (289,188)
Benefit from income taxes................................ 21,172 -- --
--------- --------- -----------
Income (loss) before extraordinary items and
accounting change...................................... (181,874) (204,331) (289,188)
Extraordinary gain (loss) from early extinguishment of
debt................................................... -- (1,720) 6,963
Cumulative effect of accounting change................... -- -- (3,361)
--------- --------- -----------
Net income (loss)........................................ (181,874) (206,051) (285,586)
Accretion of redeemable preferred stock.................. (32) -- --
Preferred stock dividend................................. -- (1,030) (2,146)
--------- --------- -----------
Net income (loss) applicable to common stockholders...... $(181,906) $(207,081) $ (287,732)
========= ========= ===========
Basic/diluted income (loss) per common share before
extraordinary item and accounting change............... $ (26.31) $ (29.34) $ (9.21)
Extraordinary gain (loss) from early extinguishment of
debt per basic/diluted common share.................... -- (0.25) 0.22
Cumulative effect of accounting change per basic/diluted
common share........................................... -- -- (0.11)
--------- --------- -----------
Basic/diluted net income (loss) per common share......... $ (26.31) $ (29.59) $ (9.10)
========= ========= ===========
Basic/diluted weighted average number of common shares
outstanding............................................ 6,915,413 6,997,730 31,603,410
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 157
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
CLASS B ADDITIONAL STOCKHOLDERS'
PREFERRED COMMON COMMON PAID-IN ACCUMULATED EQUITY
STOCK STOCK STOCK CAPITAL DEFICIT (DEFICIT)
--------- ------ ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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)
Issuance of 30,847,004 shares of
common stock and 5,360,261 of
Class B common stock in rights
offering....................... -- 308 54 216,881 -- 217,243
Issuance of 4,781,656 shares of
common stock to acquire
company........................ -- 48 -- 20,035 -- 20,083
Shares to be issued in connection
with the Benbow settlement..... -- -- -- 22,836 -- 22,836
Issuance of 3,136,665 shares of
common stock in exchange for
debt........................... -- 31 -- 21,106 -- 21,137
Issuance of 34,217 shares of
common stock under Arch's
employee stock purchase plan... -- -- -- 191 -- 191
Conversion of Class B common
stock into common stock........ -- 14 (14) -- -- --
Preferred stock dividend......... -- -- -- 2,146 (2,146) --
Net loss......................... -- -- -- -- (285,586) (285,586)
---- ---- ---- -------- --------- ---------
Balance, December 31, 1999............ $ 3 $472 $ 40 $661,413 $(879,487) $(217,559)
==== ==== ==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 158
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $(181,874) $(206,051) $(285,586)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization........................ 232,347 221,316 309,434
Deferred income tax benefit.......................... (21,172) -- --
Extraordinary loss (gain) from early extinguishment
of debt............................................ -- 1,720 (6,963)
Cumulative effect of accounting change............... -- -- 3,361
Equity in loss of affiliate.......................... 3,872 5,689 3,200
Accretion of discount on senior notes................ 33,259 37,115 41,566
Other non-cash interest expense...................... -- -- 2,904
Gain on Tower Site Sale.............................. -- (1,859) (1,871)
Write-off of N-PCS investments....................... -- -- 37,498
Accounts receivable loss provision................... 7,181 8,545 15,265
Changes in assets and liabilities, net of effect from
acquisition of company:
Accounts receivable............................. (11,984) (9,151) (18,369)
Inventories..................................... (2,394) 2,314 1,728
Prepaid expenses and other...................... (386) (3,090) 7,000
Accounts payable and accrued expenses........... 3,683 24,649 (2,986)
Customer deposits and deferred revenue.......... 1,058 549 (7,554)
Other long-term liabilities..................... -- 1,634 909
--------- --------- ---------
Net cash provided by operating activities................. 63,590 83,380 99,536
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net............. (87,868) (79,249) (95,208)
Additions to intangible and other assets............. (14,901) (33,935) (18,443)
Net proceeds from tower site sale.................... -- 30,316 3,046
Acquisition of company, net of cash acquired......... -- -- (516,561)
--------- --------- ---------
Net cash used for investing activities.................... (102,769) (82,868) (627,166)
--------- --------- ---------
Cash flows from financing activities:
Issuance of long-term debt........................... 91,000 460,964 473,783
Repayment of long-term debt.......................... (49,046) (489,014) (162,059)
Repayment of redeemable preferred stock.............. (3,744) -- --
Net proceeds from sale of preferred stock............ -- 25,000 --
Net proceeds from sale of common stock............... 800 843 217,434
--------- --------- ---------
Net cash provided by (used in) financing activities....... 39,010 (2,207) 529,158
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents...... (169) (1,695) 1,528
Cash and cash equivalents, beginning of period............ 3,497 3,328 1,633
--------- --------- ---------
Cash and cash equivalents, end of period.................. $ 3,328 $ 1,633 $ 3,161
========= ========= =========
Supplemental disclosure:
Interest paid........................................ $ 62,231 $ 57,151 $ 91,151
========= ========= =========
Issuance of common stock for debt.................... $ -- $ -- $ 21,137
========= ========= =========
Issuance of common stock for acquisition of
company............................................ $ -- $ -- $ 20,083
========= ========= =========
Liabilities assumed in acquisition of company........ $ -- $ -- $ 134,429
========= ========= =========
Preferred stock dividend............................. $ -- $ 1,030 $ 2,146
========= ========= =========
Accretion of redeemable preferred stock.............. $ 32 $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 159
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.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition--Arch recognizes revenue under rental and service
agreements with customers as the related services are performed. Maintenance
revenues and related costs are recognized ratably over the respective terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions are
recognized as an expense when incurred. The Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements", on December 3, 1999. This SAB provides additional
guidance on the accounting for revenue recognition, including both broad
conceptual discussions as well as certain industry-specific guidance. The
guidance is effective for the second quarter of fiscal 2000. Arch does not
expect SAB 101 to have a material impact on its results of operations upon
adoption.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents--Cash equivalents include short-term, interest-bearing
instruments purchased with remaining maturities of three months or less. The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
Inventories--Inventories consist of new messaging devices which are held
primarily for resale. Inventories are stated at the lower of cost or market,
with cost determined on a first-in, first-out basis.
Property and Equipment--Leased messaging devices sold or otherwise retired
are removed from the accounts at their net book value using the first-in,
first-out method. Property and equipment is stated at cost and is depreciated
using the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
<S> <C>
Buildings and improvements................................. 20 Years
Leasehold improvements..................................... Lease Term
Messaging devices.......................................... 3 Years
Messaging and computer equipment........................... 5-8 Years
Furniture and fixtures..................................... 5-8 Years
Vehicles................................................... 3 Years
</TABLE>
Depreciation and amortization expense related to property and equipment
totaled $108.0 million, $101.1 million and $144.9 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
F-7
<PAGE> 160
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,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Purchased Federal Communications Commission
licenses.......................................... $256,519 $354,246
Goodwill............................................ 271,808 249,010
Purchased subscriber lists.......................... 56,825 239,114
Deferred financing costs............................ 22,072 19,915
N-PCS investments................................... 17,847 --
Other............................................... 9,457 5,258
-------- --------
$634,528 $867,543
======== ========
</TABLE>
Amortization expense related to intangible and other assets totaled $124.3
million, $120.2 million and $164.6 million for the years ended December 31,
1997, 1998 and 1999, respectively.
Subscriber lists, Federal Communications Commission licenses and goodwill
are amortized over their estimated useful lives, ranging from five to ten years
using the straight-line method. Non-competition agreements are amortized over
the terms of the agreements using the straight-line method. Other assets consist
of contract rights, organizational and Federal Communications Commission
application and development costs which are amortized using the straight-line
method over their estimated useful lives, not exceeding ten years.
In April 1998, the Accounting Standards Executive Committee of the
Financial Accounting Standards Board issued Statement of Position (SOP) 98-5
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred.
Development and start up costs include nonrecurring, direct costs incurred in
the development and expansion of messaging systems. Arch adopted SOP 98-5
effective January 1, 1999. Initial application of SOP 98-5 resulted in a $3.4
million charge, which was reported as the cumulative effect of a change in
accounting principle. This charge represents the unamortized portion of start-up
and organization costs, which had been deferred in prior years.
Deferred financing costs incurred in connection with Arch's credit
agreements (see Note 3) are being amortized over periods not to exceed the terms
of the related agreements. As credit agreements are amended and restated,
unamortized deferred financing costs are written off as an extraordinary charge.
During 1998, a charge of $1.7 million was recognized in connection with the
closing of a new credit facility.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To
Be Disposed Of" Arch evaluates the recoverability of its carrying value of the
Company's long-lived assets and certain intangible assets based on estimated
undiscounted cash flows to be generated from each of such assets 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 fair
value based on estimated discounted future cash flows. To date, Arch has not had
any such impairments except as described below.
N-PCS Investments--In connection with Arch's May 1996 acquisition of
Westlink Holdings, Inc., Arch acquired Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. Benbow holds exclusive rights to a 50kHz
outbound/12.5kHz inbound narrowband personal communications services license in
each of the five regions of the United States. Arch was formerly obligated to
advance Benbow sufficient funds to service debt obligations incurred by Benbow
in connection with its acquisition of its narrowband PCS licenses and to finance
construction of a narrowband PCS system unless funds were available to Benbow
from other sources. This obligation was subject to the approval of Arch's
designee on
F-8
<PAGE> 161
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Benbow's board of directors. Arch's investment in Benbow was accounted for under
the equity method whereby Arch's share of Benbow's losses, since the acquisition
date of Westlink, are recognized in Arch's accompanying consolidated statements
of operations under the caption equity in loss of affiliate.
In June 1999, Arch, Benbow and Benbow's controlling stockholder, agreed
that:
- 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 Federal Communications Commission
payments and will not pursue construction of a narrowband PCS system;
- Arch will not be obligated to fund Federal Communications Commission
payments or construction of a narrowband PCS system by Benbow;
- the parties will seek Federal Communications Commission approval of the
forgiveness of Benbow's remaining payment obligations and the transfer of
the controlling stockholder's equity interest in Benbow to Arch;
- the closing of the transaction will occur on the earlier of January 23,
2001 or receipt of Federal Communications Commission approval;
- Arch will pay the controlling stockholder, in installments, an aggregate
amount of $3.5 million (if the transaction closes before January 23,
2001) or $3.8 million (if the transaction closes on January 23, 2001).
As a result of these arrangements, Benbow will not have any meaningful
business operations and is unlikely to retain its narrowband personal
communications services licenses. Therefore, Arch has written off substantially
all of its investment in Benbow in the amount of $8.2 million. Arch has also
accrued the payment to the controlling stockholder of $3.8 million and legal and
other expenses of approximately $1.0 million which is included in accrued
expenses. In addition, Arch guaranteed Benbow's obligations in conjunction with
Benbow's June 1998 purchase of the stock of PageCall. Since it is unlikely that
Benbow will be able to meet these obligations and Arch is currently required to
settle the obligation in its stock, Arch has recorded the issuance of $22.8
million of its common stock in additional paid-in capital and as a charge to
operations, to satisfy the obligation in April 2000.
On November 8, 1994, CONXUS Communications, Inc. was successful in
acquiring the rights to an interactive messaging license in five designated
regions in the United States in the Federal Communications Commission narrowband
wireless spectrum auction. On May 18, 1999, CONXUS filed for Chapter 11
protection in the U.S. Bankruptcy Court in Delaware, which case was converted to
a case under Chapter 7 on August 17, 1999. In June 1999, Arch wrote-off its $6.5
million investment in CONXUS. On November 3, 1999, in order to document its
disposition of any interest it has, if any, in CONXUS, Arch offered to transfer
to CONXUS its shares in CONXUS for no consideration. Which was accepted by the
Chapter 7 trustee on December 9, 1999.
All of the above charges, totaling $42.3 million, are included in other
expense in 1999 in the accompanying statement of operations.
Fair Value of Financial Instruments--Arch's financial instruments, as
defined under SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", include its cash, its debt financing and interest rate protection
agreements. The fair value of cash is equal to the carrying value at December
31, 1998 and 1999.
As discussed in Note 3, Arch's debt financing primarily consists of (1)
senior bank debt, (2) fixed rate senior notes and (3) convertible subordinated
debentures. Arch considers the fair value of senior bank
F-9
<PAGE> 162
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------- ---------------------
CARRYING CARRYING
-------- --------
DESCRIPTION VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----- ---------- ----- ----------
<S> <C> <C> <C> <C>
10 7/8% Senior Discount Notes
due 2008..................... $369,506 $221,704 $393,917 $173,323
9 1/2% Senior Notes due 2004... 125,000 112,500 125,000 95,000
14% Senior Notes due 2004...... 100,000 103,000 100,000 83,000
12 3/4% Senior Notes due
2007......................... 127,604 127,604 127,887 101,030
13 3/4% Senior Notes due
2008......................... -- -- 140,365 113,685
6 3/4% Convertible Subordinated
Debentures due 2003.......... 13,364 6,682 4,459 1,812
</TABLE>
Arch had off-balance-sheet interest rate protection agreements consisting
of interest rate swaps and interest rate caps with notional amounts of $265.0
million and $40.0 million, respectively, at December 31, 1998 and $107.0 million
and $10.0 million, respectively, at December 31, 1999. The cost to terminate the
outstanding interest rate swaps and interest rate caps at December 31, 1998 and
1999 would have been $6.4 million and $4.5 million, respectively. See Note 3.
Basic/Diluted Net Income (Loss) Per Common Share--On June 28, 1999, Arch
effected a one for three reverse stock split. All share and per share data for
all periods presented have been adjusted to give effect to this reverse split.
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized in earnings. Arch intends to adopt this standard effective January 1,
2001. Arch has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements; however, adopting SFAS No. 133 could increase volatility
in earnings and other comprehensive income.
Reclassifications--Certain amounts of prior periods were reclassified to
conform with the 1999 presentation.
2. ACQUISITIONS
On June 3, 1999 Arch completed its acquisition of MobileMedia
Communications, Inc. for $671.1 million, consisting of cash paid of $516.6
million, including direct transaction costs, 4,781,656 shares of Arch common
stock valued at $20.1 million and the assumption of liabilities of $134.4
million. The cash payments were financed through the issuance of approximately
36.2 million shares of Arch common stock (including approximately 5.4 million
shares of Arch Class B common
F-10
<PAGE> 163
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares) in a rights offering for $6.00 per share, the issuance of $147.0 million
principal amount of 13 3/4% senior notes due 2008 (see Note 3) and additional
borrowings under the Company's credit facility.
Arch issued to four unsecured creditors, who had agreed to act as standby
purchasers and to purchase shares not purchased by other unsecured creditors in
the rights offering, warrants to acquire 1,225,219 shares of its common stock on
or before September 1, 2001 for $9.03 per share. The fair value of these
warrants was determined to be immaterial.
The purchase price was allocated based on the fair values of assets
acquired and liabilities assumed. The acquisition has been accounted for as a
purchase, and the results of MobileMedia's operations have been included in the
consolidated financial statements from the date of the acquisition. Goodwill
resulting from the acquisition is being amortized over a ten-year period using
the straight-line method.
The liabilities assumed, referred to above, include an unfavorable lease
accrual related to MobileMedia's rentals on communications towers which were in
excess of market rental rates. This accrual amounted to approximately $52.9
million and is included in other long-term liabilities. This accrual will be
amortized over the remaining lease term of 13 3/4 years. Concurrent with the
consummation of the acquisition, Arch commenced the development of a plan to
integrate the operations of MobileMedia. The liabilities assumed, referred to
above, also includes a $14.5 million restructuring accrual to cover the costs to
eliminate redundant headcount and facilities in connection with the overall
integration of operations (see Note 9).
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of the period
presented, after giving effect to certain adjustments, including depreciation
and amortization of acquired assets and interest expense on acquisition debt.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been completed at the beginning of the period presented, or of results that may
occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
(UNAUDITED AND IN THOUSANDS EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues...................................... $ 854,862 $ 817,686
Income (loss) before extraordinary item....... (193,151) (316,590)
Net income (loss)............................. (194,871) (309,627)
Basic/diluted net income (loss) per common
share....................................... (4.09) (6.39)
</TABLE>
Pending Acquisition--In November 1999, Arch signed a definitive agreement
with Paging Network, Inc. (PageNet) pursuant to which PageNet will merge with a
wholly-owned subsidiary of Arch. Each outstanding share of PageNet common stock
will be converted into 0.1247 share of Arch common stock in the merger.
Under the merger agreement, PageNet is required to make an exchange offer
of PageNet common stock to holders of its outstanding 8.875% senior subordinated
notes due 2006, its 10.125% senior subordinated notes due 2007 and its 10%
senior subordinated notes due 2008 (collectively, the "PageNet Notes"), having
an aggregate outstanding principal amount of $1.2 billion. Under the PageNet
exchange offer, an aggregate of 616,830,757 shares of PageNet common stock,
together with 68.9% of the equity interest in PageNet's subsidiary, Vast
Solutions, would be exchanged for all of the PageNet Notes, in the aggregate. In
connection with the Merger, PageNet would distribute to its stockholders (other
than holders who received shares in the PageNet exchange offer), 11.6% of the
equity interests in Vast Solutions. After the merger, PageNet would retain a
19.5% equity interest in Vast Solutions.
Under the merger agreement Arch is required to make an exchange offer of up
to 29,651,984 shares of its common stock (in the aggregate) for all of its
10 7/8% senior discount notes due 2008.
F-11
<PAGE> 164
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Arch expects the merger, which has been approved by the boards of directors
of Arch and PageNet, but is subject to regulatory review, shareholder approval,
other third-party consents and the completion of the exchange offers and
preferred stock conversion, to be completed in the second or third quarter of
2000. Each of the PageNet exchange offer and the Arch exchange offer is
conditioned upon acceptance by the holders of 97.5% of the PageNet Notes and the
Arch senior discount notes, respectively, subject to reduction under specified
circumstances.
The merger agreement provides that under certain circumstances a fee may be
payable by Arch or PageNet upon termination of the agreement. These
circumstances include withdrawal of the recommendation or approval of the merger
agreement or the merger by the 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 bankruptcy plan in certain circumstances. The
termination fee payable by Arch or PageNet under the merger agreement is $40.0
million.
The merger agreement provides that either party may terminate the
agreement, without paying the above fee, if the merger is not consummated by
June 30, 2000. This termination date is subject to extension for 90 days for
regulatory approval and is subject to extension to as late as December 31, 2000
under certain circumstances where PageNet files for protection under the U.S.
Bankruptcy Code.
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Senior Bank Debt..................................... $ 267,000 $ 438,940
10 7/8% Senior Discount Notes due 2008............... 369,506 393,917
9 1/2% Senior Notes due 2004......................... 125,000 125,000
14% Senior Notes due 2004............................ 100,000 100,000
12 3/4% Senior Notes due 2007........................ 127,604 127,887
13 3/4% Senior Notes due 2008........................ -- 140,365
Convertible Subordinated Debentures.................. 13,364 4,459
---------- ----------
1,002,474 1,330,568
Less -- Current maturities........................... 1,250 8,060
---------- ----------
Long-term debt....................................... $1,001,224 $1,322,508
========== ==========
</TABLE>
Senior Bank Debt--The Company, through its operating subsidiary, Arch
Paging, Inc. (API) has a senior credit facility in the current amount of $577.9
million consisting of (i) a $175.0 million reducing revolving tranche A
facility, (ii) a $100.0 million tranche B term loan and (iii) a $302.9 million
tranche C term loan.
The tranche A facility will be reduced on a quarterly basis commencing on
September 30, 2000 and will mature on June 30, 2005. The tranche B term loan
will be amortized in quarterly installments commencing September 30, 2000, with
an ultimate maturity date of June 30, 2005. The tranche C term loan began
amortizing in annual installments on December 31, 1999, with an ultimate
maturity date of June 30, 2006.
API's obligations under the senior credit facility are secured by its
pledge of its interests in certain of its operating subsidiaries. The senior
credit facility is guaranteed by Arch and certain of Arch's operating
subsidiaries. Arch's guarantee is secured by a pledge of Arch's stock and notes
in its wholly-owned
F-12
<PAGE> 165
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiary Arch Communications Inc. (ACI), and the guarantees of the operating
subsidiaries are secured by a security interest in certain assets of those
operating subsidiaries.
Borrowings under the senior credit facility bear interest based on a
reference rate equal to either the agent bank's alternate base rate or LIBOR, in
each case plus a margin based on specified ratios of debt to annualized earnings
before interest, taxes, depreciation and amortization (EBITDA).
The senior credit facility requires payment of fees on the daily average
amount available to be borrowed under the tranche A facility. These fees vary
depending on specified ratios of total debt to annualized EBITDA.
The senior credit facility requires that at least 50% of total ACI debt,
including outstanding borrowings under the senior credit facility, be subject to
a fixed interest rate or interest rate protection agreements. Entering into
interest rate protection agreements involves both the credit risk of dealing
with counterparties and their ability to meet the terms of the contracts and
interest rate risk. In the event of nonperformance by the counterparty to these
interest rate protection agreements, Arch would be subject to the prevailing
interest rates specified in the senior credit facility.
Under the interest rate swap agreements, the Company will pay the
difference between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR,
and the Company will receive the difference between LIBOR and the fixed swap
rate if LIBOR exceeds the swap rate. Settlement occurs on the quarterly reset
dates specified by the terms of the contracts. No interest rate swaps on the
senior credit facility were outstanding at December 31, 1999. At December 31,
1998, the Company had a net payable of $47,000, on the interest rate swaps.
The interest rate cap agreements will pay the Company the difference
between LIBOR and the cap level if LIBOR exceeds the cap levels at any of the
quarterly reset dates. If LIBOR remains below the cap level, no payment is made
to the Company. The total notional amount of the interest rate cap agreements
was $10.0 million with a cap level of 8% at December 31, 1999. The transaction
fees for these instruments are being amortized over the terms of the agreements.
The senior credit facility contains restrictions that limit, among other
things, Arch's operating subsidiaries' ability to:
- 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;
- alter its lines of business or accounting methods.
In addition, the senior credit facility requires Arch and its subsidiaries
to meet certain financial covenants, including ratios of EBITDA to fixed
charges, EBITDA to debt service, EBITDA to interest service and total
indebtedness to EBITDA. As of December 31, 1999, Arch and its operating
subsidiaries were in compliance with the covenants of the senior credit
facility.
F-13
<PAGE> 166
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, $438.9 million was outstanding and $139.0 million
was available under the senior credit facility. At December 31, 1999, such
advances bore interest at an average annual rate of 11.62%.
Senior Notes--Interest on Arch's 10 7/8% senior discount notes due 2008
does not accrue 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 maturity value of the senior discount notes outstanding at December
31, 1999 was $448.4 million.
On June 3, 1999, 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 were sold at an initial price
to investors of 95.091% for proceeds of $139.8 million less offering expenses of
$5.2 million. The 13 3/4% notes mature on April 15, 2008 and bear interest at a
rate of 13 3/4% per annum, payable semi-annually in arrears on April 15 and
October 15 of each year, commencing October 15, 1999.
Interest on the 13 3/4% notes, ACI's 12 3/4% senior notes due 2007, ACI's
14% senior notes due 2004 and ACI's 9 1/2% senior notes due 2004 (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;
- make certain investments.
Arch has entered into interest rate swap agreements in connection with the
ACI 14% Notes. Under the interest rate swap agreements, Arch 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, Arch would be subject to the 14% interest rate
specified on the notes. As of December 31, 1999, Arch had received $6.8 million
in excess of the amounts paid under the swap agreements, which is included in
other long-term liabilities in the accompanying balance sheet.
Convertible Subordinated Debentures--The Arch convertible debentures are
convertible at their principal amount into shares of Arch common stock at any
time prior to redemption or maturity at an initial conversion price of $50.25
per share, subject to adjustment. 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
bear interest at a rate of 6 3/4% per annum, payable semiannually on June 1 and
December 1. The Arch convertible debentures are unsecured and are subordinated
to all existing indebtedness of Arch.
Debt Exchanged for Equity--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
F-14
<PAGE> 167
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 convertible debentures. Arch recorded $2.9 million of non-cash interest
expense in conjunction with these transactions. 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 senior
discount notes. Arch recorded an extraordinary gain of $7.0 million on the early
extinguishment of debt as a result of these transactions.
In February and March 2000, Arch completed transactions in which Arch
issued an aggregate of 11,926,036 shares of Arch common stock in exchange for
approximately $160.9 million accreted value of debt securities. Under one of the
exchange agreements, Arch issued 285,715 shares of Arch common stock in exchange
for $3.5 million principal amount of Arch convertible debentures. Under the
other exchange agreements, Arch issued 11,640,321 shares of Arch common stock in
exchange for $157.4 million accreted value ($176.0 million maturity value) of
its senior discount notes.
Maturities of Debt--Scheduled long-term debt maturities at December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 8,060
2001........................................................ 15,560
2002........................................................ 20,560
2003........................................................ 30,019
2004........................................................ 274,060
Thereafter.................................................. 982,309
----------
$1,330,568
==========
</TABLE>
4. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Redeemable Preferred Stock--In connection with the its merger with USA
Mobile Communications Holdings, Inc., Arch assumed the obligations associated
with 22,530 outstanding shares of Series A Redeemable Preferred Stock issued by
USA Mobile. The preferred stock was 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, 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. The Series C Preferred Stock: (i) is
convertible into Arch common stock at a conversion price of $16.38 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 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 common stock
valued at 95% of the then prevailing market price of Arch common stock; (iv) is
subject to redemption for cash or conversion into Arch common stock at Arch's
option in certain circumstances; (v) in the event of a "Change of Control" as
defined in the indenture governing the senior discount notes, requires Arch, at
its option, to redeem the Series C Preferred Stock for cash or convert such
shares into Arch common stock valued at 95% of the then prevailing market price
of Arch 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
F-15
<PAGE> 168
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Class B Common Stock--Shares of Arch Class B common stock are identical in
all respects to shares of Arch common stock, except that a holder of Class B
common stock is not entitled to vote in the election of directors and is
entitled to 1/100th vote per share on all other matters voted on by Arch
stockholders. Shares of class B common stock will automatically convert into an
identical number of shares of common stock upon transfer of Class B common
shares to any person or entity, other than any person or entity that received
shares of Class B common stock in the initial distribution of those shares or
any affiliate of such person or entity.
Warrants--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.
Stock Options--Arch has stock option plans which provide for the grant of
incentive and nonqualified stock options to key employees, directors and
consultants to purchase Arch common stock. Incentive stock options are granted
at exercise prices not less than the fair market value on the date of grant.
Options generally vest over a five-year period from the date of grant. However,
in certain circumstances, options may be immediately exercisable in full.
Options generally have a duration of 10 years. The plans provide for the
granting of options to purchase a total of 2,304,135 shares of common stock.
On December 16, 1997, the Compensation Committee of the board of directors
of 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.
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, 1996............. 349,065 $34.11
Granted......................................... 166,785 20.03
Exercised....................................... -- --
Terminated...................................... (62,207) 31.97
--------- ------
Options Outstanding at December 31, 1997............. 453,643 29.22
Granted......................................... 656,096 14.27
Exercised....................................... (31,344) 9.38
Terminated...................................... (429,627) 28.54
--------- ------
Options Outstanding at December 31, 1998............. 648,768 15.51
Granted......................................... 1,295,666 7.80
Exercised....................................... -- --
Terminated...................................... (109,672) 13.89
--------- ------
Options Outstanding at December 31, 1999............. 1,834,762 10.16
========= ======
Options Exercisable at December 31, 1999............. 255,264 $17.00
========= ======
</TABLE>
F-16
<PAGE> 169
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, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 4.31 - $ 6.31 26,400 9.58 $ 5.70 7,900 $ 5.46
7.83 - 7.83 1,263,266 9.42 7.83 2,000 7.83
10.69 - 15.19 500,954 8.09 14.33 210,996 14.49
18.75 - 23.63 32,974 5.99 20.76 23,516 21.03
37.50 - 82.68 11,168 5.52 66.56 10,852 66.99
--------------- --------- ---- ------ ------- ------
$ 4.31 - $82.68 1,834,762 8.98 $10.16 255,264 $17.00
=============== ========= ==== ====== ======= ======
</TABLE>
Employee Stock Purchase Plans--The Company's employee stock purchase plans
allow 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 1997, 1998 and 1999, 50,447, 85,996 and 34,217 shares were issued at an
average price per share of $15.87, $6.39 and $5.60, respectively. At December
31, 1999, 465,783 shares are available for future issuance.
Accounting for Stock-Based Compensation--Arch accounts for its stock option
and stock purchase plans under APB Opinion No. 25 "Accounting for Stock Issued
to Employees." Since all options have been issued at a grant price equal to fair
market value, no compensation cost has been recognized in the statements of
operations. Had compensation cost for these plans been determined consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation", Arch's net income
(loss) and income (loss) per share would have been increased to the following
pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss): As reported.................. $(181,874) $(206,051) $(285,586)
Pro forma.................... (183,470) (208,065) (288,070)
Basic net income (loss)
per common share: As reported.................. (26.31) (29.59) (9.10)
Pro forma.................... (26.55) (29.88) (9.18)
</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%-87%.
The weighted average fair values (computed consistent with SFAS No. 123) of
options granted under all plans in 1997, 1998 and 1999 were $10.11, $8.34 and
$5.56, respectively. The weighted average fair value of shares sold under the
employee stock purchase plans in 1997, 1998 and 1999 was $8.49, $5.64 and $3.13,
respectively.
Deferred Compensation Plan for Nonemployee Directors--Under the deferred
compensation plan for nonemployee directors, 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.
F-17
<PAGE> 170
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 Arch 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 Arch
common stock.
Stockholders Rights Plan--In October 1995, Arch's board of directors
adopted a stockholders rights plan and declared a dividend of one preferred
stock purchase 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, 1998 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets............................... $ 179,484 $ 312,527
Deferred tax liabilities.......................... (67,652) (41,617)
--------- ---------
111,832 270,910
Valuation allowance............................... (111,832) (270,910)
--------- ---------
$ -- $ --
========= =========
</TABLE>
The approximate effect of each type of temporary difference and
carryforward at December 31, 1998 and 1999 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Net operating losses.................................. $ 128,213 $ 174,588
Intangibles and other assets.......................... (62,084) 36,029
Depreciation of property and equipment................ 39,941 42,703
Accruals and reserves................................. 5,762 17,590
--------- ---------
111,832 270,910
Valuation allowance................................... (111,832) (270,910)
--------- ---------
$ -- $ --
========= =========
</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 2014. The Internal Revenue
Code contains provisions that may limit the NOL carryforwards available to be
used in any given year if certain events occur, including significant changes in
ownership, as defined.
F-18
<PAGE> 171
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has established a valuation reserve against its net deferred
tax asset until it becomes more likely than not that this asset will be realized
in the foreseeable future. Of the valuation allowance at December 31, 1999,
approximately $60.3 million will be recorded to goodwill when realized.
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 or results of operations of the Company.
Arch has operating leases for office and transmitting sites with lease
terms ranging from one month to approximately fifty years. In most cases, Arch
expects that, in the normal course of business, leases will be renewed or
replaced by other leases.
Future minimum lease payments under noncancellable operating leases at
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 51,091
2001........................................................ 42,611
2002........................................................ 35,957
2003........................................................ 29,457
2004........................................................ 22,969
Thereafter.................................................. 143,426
--------
Total............................................. $325,511
========
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1997, 1998 and 1999 approximated $19.8 million, $19.6 million and $48.3 million,
respectively.
7. EMPLOYEE BENEFIT PLANS
Retirement Savings Plans--Arch has retirement savings plans, qualifying
under Section 401(k) of the Internal Revenue Code covering eligible employees,
as defined. Under the plans, a participant may elect to defer receipt of a
stated percentage of the compensation which would otherwise be payable to the
participant for any plan year (the deferred amount) provided, however, that the
deferred amount shall not exceed the maximum amount permitted under Section
401(k) of the Internal Revenue Code. The plans provide for employer matching
contributions. Matching contributions for the years ended December 31, 1997,
1998 and 1999 approximated $302,000, $278,000 and $960,000, respectively.
8. LONG-TERM LIABILITIES
During 1998 and 1999, Arch sold communications towers, real estate, site
management contracts and/or leasehold interests involving 133 sites in 22 states
and leased space on the towers on which it currently operates communications
equipment to service its own messaging network. Net proceeds from the sales were
approximately $33.4 million, Arch used the net proceeds to repay indebtedness
under its credit facility.
Arch entered into options to repurchase each site and until this continuing
involvement ends the gain on the sale of the tower sites is deferred and
included in other long-term liabilities. At December 31, 1999, approximately
$24.9 million of the gain is deferred and approximately $1.9 million of this
gain has been recognized in the statement of operations and is included in
operating income for each of the years ended December 31, 1998 and 1999,
respectively.
F-19
<PAGE> 172
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also included in other long-term liabilities is an unfavorable lease
accrual related to MobileMedia's rentals on communications towers which were in
excess of market rental rates (see Note 2). At December 31, 1999, the remaining
balance of this accrual was approximately $51.5 million. This accrual is being
amortized over the term of the leases with approximately 13 3/4 years remaining
at December 31, 1999.
9. RESTRUCTURING RESERVES
Divisional reorganization--In June 1998, Arch's board of directors approved
a reorganization of Arch's operations. As part of the divisional reorganization,
Arch is in the process of consolidating certain regional administrative support
functions, such as customer service, collections, inventory and billing, to
reduce redundancy and take advantage of various operating efficiencies. In
connection with the divisional reorganization, Arch:
- anticipates a net reduction of approximately 10% of its workforce;
- is closing certain office locations and redeploying other assets; and
- recorded a restructuring charge of $14.7 million in 1998.
In conjunction with the completion of the MobileMedia merger in June 1999,
the timing and implementation of the divisional reorganization announced in June
1998 was reviewed by Arch management. The plan was reviewed within the context
of the combined company integration plan which was approved by the Company in
the third quarter of 1999. After this review it was determined that significant
changes needed to be made to the divisional reorganization plan. In the quarter
ended September 30, 1999, the Company identified certain of its facilities and
network leases that will not be utilized following the integration of the
Company and MobileMedia, resulting in an additional charge of $2.6 million. This
charge was offset by reductions to previously provided severance and other costs
of $4.8 million.
The provision for lease obligations and terminations relates primarily to
future lease commitments on local, regional and divisional office facilities
that will be closed as part of this reorganization. The charge represents future
lease obligations, on such leases past the dates the offices will be closed by
the Company, or for certain leases, the cost of terminating the leases prior to
their scheduled expiration. Cash payments on the leases and lease terminations
will occur over the remaining lease terms, the majority of which expire prior to
2001.
Through the elimination of certain local and regional administrative
operations and the consolidation of certain support functions, the Company will
eliminate approximately 280 net positions. As a result of eliminating these
positions approximately 900 employees will be effected. The majority of the
positions which have been or will be eliminated are related to customer service,
collections, inventory and billing functions in local and regional offices which
will be closed. As of December 31, 1998 and 1999, 217 employees and 414
employees, respectively, had been terminated due to the divisional
reorganization. The remaining severance and benefits costs will be paid during
2000.
The Company's restructuring activity as of December 31, 1999 is as follows
(in thousands):
<TABLE>
<CAPTION>
RESERVE
INITIALLY RESERVE AMOUNTS REMAINING
ESTABLISHED ADJUSTMENT PAID RESERVE
----------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Severance costs..................... $ 9,700 $(3,547) $5,123 $1,030
Lease obligation costs.............. 3,500 2,570 872 5,198
Other costs......................... 1,500 (1,223) 277 --
------- ------- ------ ------
Total............................... $14,700 $(2,200) $6,272 $6,228
======= ======= ====== ======
</TABLE>
F-20
<PAGE> 173
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MobileMedia Acquisition Reserve--On June 3, 1999, Arch completed its
acquisition of MobileMedia and commenced the development of plans to integrate
the operations of MobileMedia. During the third quarter of 1999, Arch's board of
directors approved plans covering the elimination of redundant headcount and
facilities in connection with the overall integration of operations. It is
expected that the integration activity relating to the MobileMedia merger, will
be completed by December 31, 2000.
In connection with the MobileMedia acquisition, Arch anticipates a net
reduction of approximately 10% of MobileMedia's workforce and the closing of
certain facilities and tower sites. This resulted in the establishment a $14.5
million acquisition reserve which is included as part of the purchase price of
MobileMedia. The initial acquisition reserve consisted of approximately (i) $6.1
million for employee severance, (ii) $7.9 million for lease obligations and
terminations and (iii) $0.5 million of other costs.
The provision for lease obligations and terminations relates primarily to
future lease commitments on local, regional and divisional office facilities
that will be closed as part of this reorganization. The charge represents future
lease obligations, on such leases past the dates the offices will be closed by
the Company, or for certain leases, the cost of terminating the leases prior to
their scheduled expiration. Cash payments on the leases and lease terminations
will occur over the remaining lease terms, the majority of which expire prior to
2003.
Through the elimination of redundant management, administrative, customer
service, collections and inventory functions, the Company will eliminate
approximately 500 positions. As of December 31, 1999, 174 former MobileMedia
employees had been terminated.
The MobileMedia acquisition reserve activity as of December 31, 1999 was as
follows (in thousands):
<TABLE>
<CAPTION>
RESERVE
INITIALLY AMOUNTS REMAINING
ESTABLISHED PAID RESERVE
----------- ------- ---------
<S> <C> <C> <C>
Severance costs............................... $ 6,058 $3,380 $ 2,678
Lease obligation costs........................ 7,950 122 7,828
Other costs................................... 500 123 377
------- ------ -------
Total......................................... $14,508 $3,625 $10,883
======= ====== =======
</TABLE>
10. SEGMENT REPORTING
The Company operates in one industry: providing wireless messaging
services. On December 31, 1999, the Company operated approximately 375 retail
stores in the United States.
F-21
<PAGE> 174
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the years ended December 31, 1998 and
1999 is summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Revenues.............................. $102,039 $103,546 $104,052 $103,998
Operating income (loss)............... (19,418) (33,956) (20,783) (20,272)
Income (loss) before extraordinary
item................................ (45,839) (60,877) (47,994) (49,621)
Extraordinary charge.................. -- (1,720) -- --
Net income (loss)..................... (45,839) (62,597) (47,994) (49,621)
Basic/diluted net income (loss) per
common share:
Income (loss) before
extraordinary
item........................... (6.59) (8.71) (6.91) (7.14)
Extraordinary charge............. -- (0.25) -- --
Net income (loss)................ (6.59) (8.96) (6.91) (7.14)
YEAR ENDED DECEMBER 31, 1999:
Revenues.............................. 100,888 133,493 206,189 201,254
Operating income (loss)............... (16,086) (34,546) (27,075) (20,032)
Income (loss) before extraordinary
item and accounting change.......... (45,763) (110,728) (67,739) (64,958)
Extraordinary gain.................... -- -- -- 6,963
Cumulative effect of accounting
change.............................. (3,361) -- -- --
Net income (loss)..................... (49,124) (110,728) (67,739) (57,995)
Basic/diluted net income (loss) per
common share:
Income (loss) before
extraordinary item and
accounting change.............. (6.54) (5.65) (1.42) (1.29)
Extraordinary gain............... -- -- -- 0.14
Cumulative effect of accounting
change......................... (0.48) -- -- --
Net income (loss)................ (7.02) (5.65) (1.42) (1.15)
</TABLE>
F-22
<PAGE> 175
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,161 $ 3,858
Accounts receivable, net.................................. 61,167 63,368
Inventories............................................... 9,101 7,246
Prepaid expenses and other................................ 11,874 16,306
---------- ----------
Total current assets.............................. 85,303 90,778
---------- ----------
Property and equipment, at cost............................. 714,644 781,021
Less accumulated depreciation and amortization.............. (314,445) (398,783)
---------- ----------
Property and equipment, net................................. 400,199 382,238
---------- ----------
Intangible and other assets, net............................ 867,543 778,210
---------- ----------
$1,353,045 $1,251,226
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt...................... $ 8,060 $ 14,310
Accounts payable.......................................... 30,016 48,122
Accrued restructuring..................................... 17,111 12,754
Accrued interest.......................................... 30,294 30,200
Accrued expenses and other liabilities.................... 79,330 64,235
---------- ----------
Total current liabilities......................... 164,811 169,621
---------- ----------
Long-term debt, less current maturities..................... 1,322,508 1,104,011
---------- ----------
Other long-term liabilities................................. 83,285 78,772
---------- ----------
Redeemable convertible preferred stock...................... -- 43,953
---------- ----------
Stockholders' equity (deficit):
Preferred stock -- $.01 par value......................... 3 3
Common stock -- $.01 par value............................ 512 661
Additional paid-in capital................................ 661,413 817,116
Accumulated deficit....................................... (879,487) (962,911)
---------- ----------
Total stockholders' equity (deficit).............. (217,559) (145,131)
---------- ----------
$1,353,045 $1,251,226
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-23
<PAGE> 176
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 2000 1999 2000
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Service, rental, and maintenance
revenues............................... $ 122,280 $ 175,631 $ 212,809 $ 353,291
Product sales............................ 11,213 12,221 21,572 24,556
----------- ----------- ----------- -----------
Total revenues................. 133,493 187,852 234,381 377,847
Cost of products sold.................... (7,603) (8,381) (14,529) (17,261)
----------- ----------- ----------- -----------
125,890 179,471 219,852 360,586
----------- ----------- ----------- -----------
Operating expenses:
Service, rental, and maintenance......... 28,093 37,839 48,386 76,954
Selling.................................. 18,033 24,333 31,044 49,378
General and administrative............... 37,395 55,362 63,021 109,296
Depreciation and amortization............ 76,915 89,882 128,033 180,589
----------- ----------- ----------- -----------
Total operating expenses....... 160,436 207,416 270,484 416,217
----------- ----------- ----------- -----------
Operating income (loss).................. (34,546) (27,945) (50,632) (55,631)
Interest expense, net.................... (33,373) (35,399) (59,187) (76,699)
Other expense............................ (42,809) (804) (43,472) (2,010)
Equity in loss of affiliate.............. -- -- (3,200) --
----------- ----------- ----------- -----------
Income (loss) before extraordinary item
and accounting change.................. (110,728) (64,148) (156,491) (134,340)
Extraordinary gain from early
extinguishment of debt................. -- 44,436 -- 52,051
Cumulative effect of accounting change... -- -- (3,361) --
----------- ----------- ----------- -----------
Net income (loss)........................ (110,728) (19,712) (159,852) (82,289)
Accretion of redeemable preferred
stock.................................. -- (1,261) -- (1,261)
Preferred stock dividend................. (530) (573) (1,043) (1,135)
----------- ----------- ----------- -----------
Net income (loss) to common
stockholders........................... $ (111,258) $ (21,546) $ (160,895) $ (84,685)
=========== =========== =========== ===========
Basic/diluted net income (loss) per
common share before extraordinary
charge and accounting change........... $ (5.65) $ (1.01) $ (11.75) $ (2.26)
Extraordinary item per basic/diluted
common share........................... -- 0.68 -- 0.86
Cumulative effect of accounting change
per basic/diluted common share......... -- -- (0.25) --
----------- ----------- ----------- -----------
Basic/diluted net income (loss) per
common share........................... $ (5.65) $ (0.33) $ (12.00) $ (1.40)
=========== =========== =========== ===========
Basic/diluted weighted average number of
common shares outstanding.............. 19,683,837 65,794,673 13,412,689 60,555,685
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-24
<PAGE> 177
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 2000
--------- --------
<S> <C> <C>
Net cash provided by operating activities................... $ 36,378 $ 53,006
Cash flows from investing activities:
Additions to property and equipment, net.................. (38,685) (74,061)
Additions to intangible and other assets.................. (18,679) (3,602)
Net proceeds from sale of tower site assets............... 3,041 --
Acquisition of company, net of cash acquired.............. (519,105) --
--------- --------
Net cash used for investing activities...................... (573,428) (77,663)
--------- --------
Cash flows from financing activities:
Issuance of long-term debt................................ 466,058 58,000
Repayment of long-term debt............................... (125,999) (33,000)
Net proceeds from sale of common stock.................... 217,243 354
--------- --------
Net cash provided by financing activities................... 557,302 25,354
--------- --------
Net increase in cash and cash equivalents................... 20,252 697
Cash and cash equivalents, beginning of period.............. 1,633 3,161
--------- --------
Cash and cash equivalents, end of period.................... $ 21,885 $ 3,858
Supplemental disclosure:
Interest paid............................................. $ 35,809 $ 60,461
========= ========
Accretion of discount on senior notes..................... $ 20,316 $ 14,696
Issuance of common stock in exchange for debt............. $ -- $155,624
Issuance of preferred stock in exchange for debt.......... $ -- $ 42,692
Accretion of redeemable preferred stock................... $ -- $ 1,261
Issuance of common stock in acquisition of company........ $ 20,083 $ --
Liabilities assumed in acquisition of company............. $ 122,543 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-25
<PAGE> 178
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. 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, 1999, 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, 1999
has been derived from, but does not include all the disclosures contained in,
the audited consolidated financial statements for the year ended December 31,
1999. 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, 1999. 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>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Goodwill.............................................. $227,760 $249,010
Purchased FCC licenses.............................. 328,663 354,246
Purchased subscriber lists.......................... 201,749 239,114
Deferred financing costs............................ 15,391 19,915
Other............................................... 4,647 5,258
-------- --------
$778,210 $867,543
======== ========
</TABLE>
(c) Divisional Reorganization - As of June 30, 2000, 428 employees had been
terminated due to the divisional reorganization and restructuring. The Company's
restructuring activity as of June 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
RESERVE BALANCE AT UTILIZATION OF
DECEMBER 31, RESERVE IN REMAINING
1999 2000 RESERVE
------------------ -------------- ---------
<S> <C> <C> <C>
Severance costs....................... $1,030 $ 265 $ 765
Lease obligation costs................ 5,198 1,148 4,050
------ ------ ------
Total......................... $6,228 $1,413 $4,815
====== ====== ======
</TABLE>
(d) MobileMedia Acquisition Reserve - As of June 30, 2000, 261 former
MobileMedia employees had been terminated. The Company's restructuring activity
as of June 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
RESERVE BALANCE AT UTILIZATION OF
DECEMBER 31, RESERVE IN REMAINING
1999 2000 RESERVE
------------------ -------------- ---------
<S> <C> <C> <C>
Severance costs....................... $ 2,678 $1,882 $ 796
Lease obligation costs................ 7,828 1,023 6,805
Other costs........................... 377 39 338
------- ------ ------
Total......................... $10,883 $2,944 $7,939
======= ====== ======
</TABLE>
(e) Debt Exchanged for Equity - In February and March 2000, Arch completed
transactions in which Arch issued an aggregate of 11,926,036 shares of Arch
common stock in exchange for approximately $160.9 million accreted value of debt
securities. Under one of the exchange agreements,
F-26
<PAGE> 179
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Arch issued 285,715 shares of common stock in exchange for $3.5 million
principal amount of Arch convertible debentures. Arch recorded $2.4 million of
non-cash interest expense in conjunction with this transaction. Under the other
exchange agreements, Arch issued 11,640,321 shares of common stock in exchange
for $157.4 million accreted value ($176.0 million maturity value) of its senior
discount notes. Arch recorded an extraordinary gain of $7.6 million on the early
extinguishment of debt as a result of these transactions.
(f) Subsequent Event - On May 10, 2000, Arch announced it had completed its
agreement with Resurgence Asset Management L.L.C. for the exchange of $91.1
million accreted value ($100.0 million maturity value) of senior discount notes
held by various Resurgence entities for 1,000,000 shares of a new class of
Arch's preferred stock to be called Series D preferred stock. The Series D
preferred stock will:
- be convertible at the holder's option, at any time, into an aggregate of
6,613,180 shares of common stock;
- be subject to mandatory conversion into an aggregate of 6,613,180 shares
of common stock upon completion of Arch's pending merger with PageNet;
- if not earlier converted, commencing March 15, 2001, bear semi-annual
dividends at the rate of 10 7/8% per annum, payable at Arch's option in
cash or through the issuance of a new class of Arch's preferred stock to
be called Series E preferred stock;
- be subject to mandatory redemption on March 15, 2008 if redemption is
then permitted by applicable law;
- vote with the common stock on an as converted basis; and
- rank upon liquidation senior to the common stock and on a parity with
Arch's existing Series C preferred stock.
If Arch issues Series E preferred stock as a dividend on the Series D
preferred stock, the Series E preferred stock will be identical to the Series D
preferred stock except that it will not (1) be subject to conversion into common
stock, (2) have any voting rights as required by law or (3) bear dividends.
Arch recorded an extraordinary gain of $44.4 million on the early
extinguishment of debt as a result of this transaction based on the difference
between the carrying value of the exchanged debt and the fair value of the
preferred stock issued. As of June 30, 2000, the Series D preferred stock is
stated at its accreted redemption value after recording $1.3 million of
accretion in the quarter ended June 30, 2000.
F-27
<PAGE> 180
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. (the Company) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, cash flows and shareowners' deficit for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Paging Network,
Inc. at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 2, on
July 24, 2000, the Company and all of its wholly-owned domestic subsidiaries
except for Vast Solutions, Inc. commenced a proceeding under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. This event, and circumstances relating to the
non-compliance with certain covenants of loan agreements with banks and note
indentures and recurring losses from operations, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans with
regard to these matters are also described in Note 2. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or amounts and classification
of liabilities that may result from the outcome of these uncertainties.
/S/ ERNST & YOUNG LLP
Dallas, Texas
May 3, 2000, except for Notes 1 and 2,
as to which the date is September 7, 2000
F-28
<PAGE> 181
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,077 $ 32,144
Accounts receivable (less allowance for doubtful
accounts of $11,119 and $17,399 in 1998 and 1999,
respectively)......................................... 84,440 84,476
Inventories............................................ 6,379 8,687
Prepaid expenses and other assets...................... 15,065 5,623
---------- ----------
Total current assets.............................. 108,961 130,930
Property, equipment, and leasehold improvements, at cost.... 1,452,870 1,451,761
Less accumulated depreciation.......................... (547,599) (684,648)
---------- ----------
Net property, equipment, and leasehold
improvements.................................... 905,271 767,113
Other non-current assets, at cost........................... 629,372 609,014
Less accumulated amortization.......................... (62,360) (84,497)
---------- ----------
Net other non-current assets...................... 567,012 524,517
---------- ----------
$1,581,244 $1,422,560
========== ==========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Long-term debt in default.............................. $ -- $1,945,000
Accounts payable....................................... 96,478 80,889
Accrued expenses....................................... 49,692 50,146
Accrued interest....................................... 43,209 42,532
Accrued restructuring costs, current portion........... 8,256 --
Customer deposits...................................... 22,735 15,927
Deferred revenue....................................... 15,874 19,778
---------- ----------
Total current liabilities......................... 236,244 2,154,272
---------- ----------
Long-term obligations, non-current portion.................. 1,815,137 58,127
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 103,640,554 shares at
December 31, 1998 and 103,960,240 shares at December
31, 1999.............................................. 1,036 1,040
Paid-in capital........................................ 132,950 134,161
Accumulated other comprehensive income................. 2,378 745
Accumulated deficit.................................... (626,783) (925,785)
---------- ----------
Total shareowners' deficit........................ (490,419) (789,839)
---------- ----------
$1,581,244 $1,422,560
========== ==========
</TABLE>
See accompanying notes
F-29
<PAGE> 182
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Services, rent and maintenance revenues.................... $ 818,461 $ 945,524 $ 897,348
Product sales.............................................. 142,515 100,503 92,375
--------- ---------- ----------
Total revenues................................... 960,976 1,046,027 989,723
Cost of products sold...................................... (121,487) (77,672) (57,901)
--------- ---------- ----------
839,489 968,355 931,822
Operating expenses:
Services, rent and maintenance........................ 173,058 210,480 267,043
Selling............................................... 102,995 104,350 97,413
General and administrative............................ 253,886 320,586 361,386
Depreciation and amortization......................... 289,442 281,259 327,101
Provision for asset impairment........................ 12,600 -- 17,798
Restructuring charge.................................. -- 74,000 (23,531)
--------- ---------- ----------
Total operating expenses......................... 831,981 990,675 1,047,210
--------- ---------- ----------
Operating income (loss).................................... 7,508 (22,320) (115,388)
Other income (expense):
Interest expense...................................... (151,380) (143,762) (150,921)
Interest income....................................... 3,689 2,070 3,902
Other non-operating income (expense).................. (1,220) 2,003 851
--------- ---------- ----------
Total other expense.............................. (148,911) (139,689) (146,168)
--------- ---------- ----------
Loss before extraordinary item and cumulative effect of a
change in accounting principle........................... (141,403) (162,009) (261,556)
Extraordinary loss......................................... (15,544) -- --
Cumulative effect of a change in accounting principle...... -- -- (37,446)
--------- ---------- ----------
Net loss................................................... $(156,947) $ (162,009) $ (299,002)
========= ========== ==========
Net loss per share (basic and diluted):
Loss before extraordinary item and cumulative effect of a
change in accounting principle........................... $ (1.38) $ (1.57) $ (2.52)
Extraordinary loss......................................... (0.15) -- --
Cumulative effect of a change in accounting principle...... -- -- (0.36)
--------- ---------- ----------
Net loss per share......................................... $ (1.53) $ (1.57) $ (2.88)
========= ========== ==========
</TABLE>
See accompanying notes
F-30
<PAGE> 183
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $(156,947) $(162,009) $(299,002)
Adjustments to reconcile net loss to cash provided by
operating activities:
Provision for asset impairment....................... 12,600 -- 17,798
Cumulative effect of a change in accounting
principle......................................... -- -- 37,446
Restructuring charge................................. -- 74,000 (23,531)
Extraordinary loss................................... 15,544 -- --
Depreciation......................................... 258,798 252,234 307,536
Amortization......................................... 30,644 29,025 19,565
Provision for doubtful accounts...................... 18,343 20,516 28,189
Amortization of debt issuance costs.................. 8,418 4,430 4,574
Other non-operating (income) expense................. 1,220 (2,003) (851)
Changes in operating assets and liabilities:
Accounts receivable.................................. (21,542) (35,081) (29,438)
Inventories.......................................... (1,302) 18,349 (2,506)
Prepaid expenses and other assets.................... (6,016) 9,133 9,270
Accounts payable..................................... (18,397) 22,768 14,963
Accrued expenses and accrued interest................ 4,286 16,203 247
Accrued restructuring costs.......................... -- (1,979) (3,490)
Customer deposits and deferred revenue............... 4,854 2,515 (2,904)
--------- --------- ---------
Net cash provided by operating activities................... 150,503 248,101 77,866
--------- --------- ---------
Investing activities:
Capital expenditures................................... (328,365) (268,183) (234,926)
Payments for spectrum licenses......................... (92,856) (13,065) (3,768)
Restricted cash invested in money market instruments... (6,422) -- (1,024)
Business acquisitions and joint venture investments.... (7,253) (7,322) --
Deposits for purchase of subscriber devices............ (13,493) -- --
Other, net............................................. (11,540) 2,984 2,399
--------- --------- ---------
Net cash used in investing activities....................... (459,929) (285,586) (237,319)
--------- --------- ---------
Financing activities:
Borrowings of long-term obligations.................... 558,317 305,587 325,280
Repayments of long-term obligations.................... (39,000) (275,555) (137,966)
Proceeds from exercise of stock options................ 87 7,606 1,206
Redemption of $200 million senior subordinated notes... (211,750) -- --
Other, net............................................. 919 -- --
--------- --------- ---------
Net cash provided by financing activities................... 308,573 37,638 188,520
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (853) 153 29,067
Cash and cash equivalents at beginning of year.............. 3,777 2,924 3,077
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 2,924 $ 3,077 $ 32,144
========= ========= =========
</TABLE>
See accompanying notes
F-31
<PAGE> 184
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' DEFICIT
YEAR ENDED DECEMBER 31, 1997, 1998 AND 1999
(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, 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)
Net loss............................ -- -- -- (299,002) (299,002)
Foreign currency translation
adjustments....................... -- -- (1,633) -- (1,633)
---------
Total comprehensive loss....... (300,635)
Issuance of 319,686 shares of
Common stock pursuant to stock
option and compensation
plans.......................... 4 1,211 -- -- 1,215
------ -------- ------- --------- ---------
Balance, December 31, 1999............... $1,040 $134,161 $ 745 $(925,785) $(789,839)
====== ======== ======= ========= =========
</TABLE>
See accompanying notes
F-32
<PAGE> 185
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND MERGER AGREEMENT
PagingNetwork, Inc. (the "Company") is a provider of wireless
communications services throughout the United States and the U.S. Virgin
Islands, Puerto Rico, and Canada. The Company provides service in all 50 states
and the District of Columbia, including service in the 100 most populated
markets in the United States. The Company also owns a minority interest in a
wireless communications company in Brazil.
On November 7, 1999, the Company signed a definitive agreement (the "Merger
Agreement") to merge (the "Merger") with Arch Communications group, Inc.
("Arch"). The Merger Agreement was subsequently amended on January 7, 2000, May
10, 2000, July 23, 2000 and September 7, 2000. Under the Merger Agreement, as
amended, the Company's senior subordinated notes, along with all accrued
interest thereon, will be exchanged for common stock of Arch representing 48.2%
of the common stock of the combined company and the Company's common stock will
be converted into common stock representing 2.9% of the common stock of the
combined company. The Merger Agreement also provides for the Company to
distribute 80.5% of its interest in Vast Solutions, Inc. ("Vast"), a
wholly-owned subsidiary of the Company, to holders of the Company's senior
subordinated notes and common stock. Holders of the senior subordinated notes
will receive common stock of Vast representing 60.5% of the equity of Vast,
while holders of the Company's common stock will receive common stock of Vast
representing 20% of the equity of Vast. The remaining interest in Vast will be
held by the combined company following the Merger.
As more fully discussed in Note 2, the Company will seek to complete the
Merger through the Company's plan of reorganization resulting from the Company's
bankruptcy filing in July 2000. Consummation of the Merger is also subject to
customary regulatory review. The Company has received approval from the
Department of Justice and the Federal Communications Commission to proceed with
the Merger. If the Merger Agreement is terminated after one party pursues an
alternative offer, a plan of reorganization of the Company other than the one
contemplated in the Merger Agreement is filed by the Company and/or confirmed by
a bankruptcy court, or under other specified circumstances, either the Company
or Arch may be required to pay a termination fee of $40 million.
2. CHAPTER 11 REORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company incurred losses of $157 million, $162 million,
and $299 million during the years ended December 31, 1997, 1998, and 1999,
respectively. The Company's deteriorating financial results and liquidity caused
it to be in default of the covenants of all of its domestic debt agreements. On
February 2, 2000 and August 1, 2000, the Company failed to make the semi-annual
interest payments on its 8.875% Senior Subordinated notes due 2008 (the "8.875%
Notes") and its 10.125% senior subordinated notes due 2007 (the "10.125%
Notes"), and on April 17, 2000, the Company failed to make the semi-annual
interest payment on its 10% senior subordinated notes due 2008 (the "10%
Notes"). The Company also violated several of the financial and other covenants
of the Credit Agreement. As a result, on July 14, 2000, three senior
subordinated noteholders commenced an involuntary proceeding against the Company
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code").
On July 24, 2000 (the "Petition Date"), the Company consented to an order
for relief which, in effect, converted the bankruptcy case filed on July 14 to a
voluntary Chapter 11 case. Also on the Petition Date, the Company's domestic
subsidiaries except for Vast filed voluntary petitions for relief under the
Bankruptcy Code (such subsidiaries and the Company are hereafter referred to
collectively as the "Debtors"). Subsequent to the Petition Date, 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
F-33
<PAGE> 186
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"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 pre-petition obligations owed to continuing vendors as such obligations
come due.
On July 25, 2000, the Debtors filed a Joint Plan of Reorganization and
disclosure statement which provide for the implementation of the Merger as the
Debtors' plan of reorganization. The Bankruptcy Court approved the disclosure
statement on September 7, 2000, and authorized the Debtors to submit the Joint
Plan of Reorganization to the Company's creditors and stockholders for approval.
The Bankruptcy Court has scheduled a hearing on the confirmation of the Joint
Plan of Reorganization for October 26, 2000.
As of July 31, 2000, the Company has approximately $66.0 million in cash.
Upon commencement of the Chapter 11 case, the Company obtained
debtor-in-possession loan facility (the "DIP Facility") from the current lenders
under the Credit Agreement which provided for additional secured borrowings by
both PageNet and Vast not to exceed $50 million in the aggregate, subject to
certain limitations as set forth in the loan agreement. Borrowings under the DIP
Facility bear interest at prime plus 2.5% for outstanding borrowings up to $15
million, and at prime plus 3.0% for outstanding borrowings in excess of $15
million, due monthly. All amounts outstanding under the DIP Facility are due the
earlier of (i) the confirmation of the Debtors' Joint Plan of Reorganization, or
(ii) November 30, 2000. The Company believes that its existing cash, the cash
expected to be generated from operations, and the cash available under the DIP
Facility is sufficient to meet its obligations, except for the cash interest
payments due under the Notes, through the completion of the Merger. However, if
the Company's financial results continue to deteriorate, the Merger is delayed,
or other unforeseen events occur, the Company may not have sufficient liquidity
to meet its obligations through the completion of the Merger. If the Merger is
not completed, the Company would likely be required to consider a stand-alone
restructuring, asset sales, transactions with other potential merger parties or
acquirors, or liquidation. In addition, if the Merger is not completed, the
Company would likely incur significant charges for asset impairments and
restructuring its obligations. The accompanying financial statements do not
include any adjustments relating to the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Merger not be completed.
3. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of all of its wholly and majority-owned subsidiaries. All intercompany
transactions have been eliminated. Certain amounts from prior years have been
reclassified to conform with the current year presentation.
F-34
<PAGE> 187
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 10 years(1)
Subscriber devices.......................................... 2 years(1)(2)
Furniture and fixtures...................................... 7 years
Leasehold improvements...................................... 5 years(3)
Building and building improvements.......................... 20 years
</TABLE>
---------------
(1) Effective April 1, 1999, the Company changed the depreciable lives of its
subscriber devices from 3 years to 2 years and the depreciable life of
certain of its network equipment from 7 years to 10 years (see Note 5).
(2) Effective January 1, 1997, the Company changed the depreciable life of its
subscriber devices from 4 years to 3 years, with estimated residual value
ranging up to $20 (see Note 5).
(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.
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 equaled the market price of the underlying stock on the
date of grant, no compensation expense has been recognized.
F-35
<PAGE> 188
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising costs -- The Company expenses the costs of advertising as
incurred. Advertising expense for the years ended December 31, 1997, 1998, and
1999, was $22 million, $19 million, and $17 million, respectively.
Comprehensive income (loss) -- Other comprehensive income as of December
31, 1997, 1998, and 1999, consists solely of foreign currency translation
adjustments.
Capitalization of internally developed software -- The Company adopted the
provisions of Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed For or Obtained for Internal Use" (SOP 98-1), effective
January 1, 1999. SOP 98-1 requires the capitalization of certain costs of
developing or acquiring computer software for internal use. The adoption of SOP
98-1 did not have a material impact on the Company's results of operations or
financial position as the Company's previous policy for accounting for the costs
of developing or acquiring computer software for internal use was generally
consistent with the provisions of SOP 98-1.
4. RESTRUCTURING CHARGE
In February 1998, the Company's Board of Directors approved the
restructuring of the Company's domestic operations (the Restructuring). The
Company's Restructuring plan called for the elimination of redundant
administrative operations through the consolidation of key support functions
located in local and regional offices throughout the country into central
processing facilities. The Restructuring plan specified local and regional
office closures, the disposition of certain furniture, fixtures and equipment
and the termination of approximately 1,950 employees by job function and
location. Having adopted a formal plan of restructuring, the Company recorded a
$74 million charge, 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, 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.
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 were expected to occur over the
remaining lease terms, the majority of which were to expire prior to 2003.
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
F-36
<PAGE> 189
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 million for the year ended December 31, 1998.
The Company's restructuring activity from initial charge through December
31, 1998, was 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 --
------- ------- ------ ------- -------
Total........................ $74,000 $ -- $1,979 $45,000 $27,021
======= ======= ====== ======= =======
</TABLE>
While progress in establishing the centralized processing facilities was
made during 1998 and early 1999, the Company's efforts to convert its offices to
its new billing and customer service software platforms fell behind the
Company's original schedule of being completed during the second quarter of
1999. Billing software and system implementation problems surfaced during the
first office conversions, and as a result, the Company had to postpone the
conversion of many of its other offices. These postponements resulted in delays
in office closures which deferred the payments of amounts accrued for lease
obligations and terminations and severance and related benefits. Additional
implementation problems surfaced during 1999 and caused further delays.
In November 1999 and in conjunction with the announcement of the Merger, as
discussed in Note 1, the Company decided to suspend further conversions after
January 2000 pending the decisions as to which operating platforms will be used
by the combined company. As a result of the decision to suspend the
Restructuring indefinitely, the Company recorded a reversal of the unused
portion of the original restructuring charge of $24 million, or $0.23 per share
(basic and diluted), during the quarter ended December 31, 1999.
The Company's restructuring activity from January 1, 1999 through December
31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
UTILIZATION OF RESERVE
BEGINNING ---------------------- REVERSAL REMAINING
RESERVE CASH NON-CASH OF CHARGE RESERVE
--------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Lease obligation costs................ $16,917 $ 755 $ -- $(16,162) $ --
Severance costs....................... 10,104 2,735 -- (7,369) --
------- ------ ---- -------- ----
Total....................... $27,021 $3,490 $ -- $(23,531) $ --
======= ====== ==== ======== ====
</TABLE>
As a result of the Restructuring, the Company eliminated approximately 325
positions and involuntarily terminated approximately 1,150 employees during 1998
and 1999.
F-37
<PAGE> 190
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
The cost of property, equipment, and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
1998 1999
(IN THOUSANDS) DECEMBER 31, ---------- ----------
<S> <C> <C>
Machinery and equipment............................. $ 871,870 $ 956,122
Subscriber devices.................................. 497,238 407,188
Furniture and fixtures.............................. 59,996 61,801
Leasehold improvements.............................. 20,609 23,489
Land, buildings, and building improvements.......... 3,157 3,161
---------- ----------
Total cost................................ $1,452,870 $1,451,761
========== ==========
</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 primarily from
Motorola. The Company anticipates that subscriber devices will continue to be
available for purchase from Motorola and other sources, consistent with normal
manufacturing and delivery lead times.
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. During third quarter of
1999, all operations of the Company's majority-owned Spanish subsidiaries were
ceased. The Company's interest in its Spanish subsidiaries was sold in the first
quarter of 2000 for minimal proceeds. As a result of the Company's decision to
sell or otherwise dispose of its Spanish subsidiaries, the Company recorded a
provision of $18 million during the year ended December 31, 1999, for the
impairment of the assets of the Company's majority-owned subsidiaries, the
effect of which was to write-off the Company's net investment in its Spanish
subsidiaries. The amount of the provision was based on the Company's estimate of
the value of its net investment in the Spanish subsidiaries, which did not
materially differ from the proceeds received upon the sale of the subsidiaries
in the first quarter of 2000. 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, and no additional charges are expected to be required.
Effective April 1, 1999, the Company changed the depreciable lives for its
subscriber devices and certain network equipment. The Company changed the
depreciable lives of its subscriber devices from three years to two years and
the depreciable life of certain of its network equipment from seven years to ten
years. The changes resulted from a review by the Company of the historical usage
periods of its subscriber devices and its network equipment and the Company's
expectations regarding future usage periods for subscriber devices considering
current and projected technological advances. The Company has determined that
the appropriate useful life of its subscriber devices is two years as a result
of technological advances, customer desire for new pager technology, and the
Company's decreasing ability to redeploy older pager models. As a result of
these changes, the net loss increased by $78 million, or $0.75 per share (basic
and diluted), during the year ended December 31, 1999.
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 $17 million and net loss per share by $0.16 (basic and diluted).
During the year ended December 31, 1997, the Company recorded a provision
of $13 million to write down certain subscriber devices to their net realizable
value.
F-38
<PAGE> 191
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER NON-CURRENT ASSETS
The cost of other non-current assets consisted of the following:
<TABLE>
<CAPTION>
1998 1999
(IN THOUSANDS) DECEMBER 31, -------- --------
<S> <C> <C>
Licenses and frequencies................................ $473,211 $477,659
Goodwill................................................ 50,495 37,922
Restricted cash invested in money market instruments, at
fair value (Note 7)................................... 33,461 34,485
Other intangible assets................................. 13,920 7,647
Other non-current assets................................ 58,285 51,301
-------- --------
Total cost.................................... $629,372 $609,014
======== ========
</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 two-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.
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 the
writing off of 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 net loss of $21 million, or $0.20 per share
(basic and diluted), for the year ended December 31, 1999.
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
1998 1999
------------------------- -------------------------
(CARRYING (ESTIMATED (CARRYING (ESTIMATED
(IN THOUSANDS) DECEMBER 31, VALUE) FAIR VALUE) VALUE) FAIR VALUE)
<S> <C> <C> <C> <C>
Borrowings under Credit Agreement................. $ 565,000 $ -- $ 745,000 $ --
10% Senior Subordinated Notes due October 15,
2008............................................ 500,000 477,473 500,000 145,000
10.125% Senior Subordinated Notes due August 1,
2007............................................ 400,000 382,964 400,000 116,000
8.875% Senior Subordinated Notes due February 1,
2006............................................ 300,000 292,484 300,000 87,000
Other............................................. 50,137 -- 58,127 --
---------- ----------
1,815,137 2,003,127
Obligations in default and classified as current
(Note 2)........................................ -- 1,945,000
---------- ----------
$1,815,137 $ 58,127
========== ==========
</TABLE>
F-39
<PAGE> 192
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, PageNet had $ 745 million of borrowings
outstanding under its Credit Agreement. The Company's maximum borrowings under
the Credit Agreement are permanently reduced beginning on June 30, 2001, by the
following amounts: 2001 -- $150 million; 2002 -- $200 million; 2003 -- $250
million; and 2004 -- $147 million. The Company's Credit Agreement expires on
December 31, 2004. As discussed in Note 2, the Company is in default of the
covenants of its domestic debt agreements and is precluded from any additional
borrowings under the Credit Agreement.
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, 1999, the Company had
designated all $745 million of borrowings as LIBOR loans, which bear interest at
a rate equal to LIBOR plus a spread of 2.00%. The interest rates for the $745
million of LIBOR loans as of December 31, 1999 ranged from 7.94% to 8.17%. As a
result of the defaults described in Note 2, the Company's lenders have the right
to collect default interest up to 12.00% for the Company's outstanding balances
under its Credit Agreement.
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 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 without the prior
written consent of its lenders. 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 (other than the international subsidiaries and Vast).
The two credit agreements of the Company's Canadian subsidiaries provide
for total borrowings of approximately $75 million. As of December 31, 1999,
approximately $56 million of borrowings were outstanding under the credit
facilities. Such borrowings were collateralized by $34 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. Maximum borrowings that may be outstanding
under the credit facilities are permanently reduced beginning on March 31, 2002,
by the following amounts: 2002 -- $1 million; 2003 -- $6 million; and
2004 -- $68 million. Both credit agreements expire on December 31, 2004.
The 8.875% Notes, the 10.125% Notes, and the 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 without the prior written consent of its lenders. 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. The fair values of the amounts
outstanding under the Credit Agreement and other indebtedness cannot be
reasonably estimated due to the debt defaults and covenant violations of the
Company.
F-40
<PAGE> 193
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 14, 1997, PageNet redeemed all $200 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
$16 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 $12
million and the write-off of unamortized issuance costs of $4 million.
8. INCOME TAXES
For the years ended December 31, 1997, 1998, and 1999, the Company had no
provision or benefit for income taxes because of the Company's inability to
benefit from its net operating losses. The valuation allowance for deferred tax
assets increased by $56 million, $58 million, and $109 million during the years
ended December 31, 1997, 1998, and 1999, respectively. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1999
(IN THOUSANDS) DECEMBER 31, --------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 197,983 $ 294,580
Deferred revenue................................ 5,982 7,411
Provision for asset impairment.................. -- 6,941
Bad debt reserve................................ 3,768 6,670
Other tax credit carryforwards.................. 679 664
Other........................................... 28,482 18,405
--------- ---------
Total deferred tax assets.................. 236,894 334,671
Valuation allowance............................. (201,496) (310,909)
--------- ---------
Net deferred tax assets.................... 35,398 23,762
Deferred tax liabilities:
Depreciation.................................... (23,450) (3,977)
Amortization.................................... (11,948) (19,785)
--------- ---------
Total deferred tax liabilities............. (35,398) (23,762)
--------- ---------
$ -- $ --
========= =========
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $755 million that expire in years 2001 through 2019. Of such
amounts, $5 million expire in 2001 and $3 million expire in 2002. The bankruptcy
proceeding is expected to result in the elimination of substantially all of the
tax benefit of the net operating loss carryforwards and certain other tax
attributes of the Company. Loss before income taxes attributable to the
Company's foreign operations was $14 million, $12 million, and $11 million for
the years ended December 31, 1997, 1998, and 1999.
9. 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, 1999, options for 228,487 shares
were exercisable under the 1982 Plan. All options outstanding and exercisable
under the 1982 Plan are fully vested.
F-41
<PAGE> 194
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 3 million shares remained available for grant under the 1991 Plan
as of December 31, 1999. A total of 4,034,671 shares were vested and exercisable
under the 1991 Plan as of December 31, 1999. 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, PageNet granted approximately 2 million 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. Since that time, grants of stock options to eligible new employees have
been made the first day of the next quarter after the quarter in which they were
hired.
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 300,000 shares remain available for grant under the
Directors' Plan as of December 31, 1999. A total of 225,000 shares were vested
and exercisable as of December 31, 1999. Options granted under the Directors'
Plan are non-transferable except by the laws of descent and distribution and are
exercisable upon vesting, which occurs in installments, as the Board of
Directors or the Committee may determine at the time it grants such options.
With respect to the 1991 Plan and the Directors' Plan, notwithstanding the
above, ten business days before a merger or a change in the ownership control of
the Company or a sale of substantially all the assets of the Company, all
options issued vest immediately and become exercisable in full; upon a merger or
a change in ownership control of the Company or the sale of substantially all
the assets of the Company, all options issued under the 1991 Plan and Directors'
Plan which have not been exercised terminate. The Merger Agreement provides that
all the Company's stock options will be converted into options for shares of
Arch at a formula which would reduce the number of options outstanding by
8,944,792 and increase the exercise price range by $6.18 to $120.24.
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, PageNet canceled approximately 3 million
of options with exercise prices ranging from $13.69 to $26.50 and granted
approximately 1 million of options to the same optionees with an exercise price
of $8.25 per share.
F-42
<PAGE> 195
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning options as of December 31, 1997, 1998, and 1999 is
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at January 1.................... 5,968,605 5,687,335 8,579,568
Granted................................ 3,435,873 5,066,000 4,214,987
Canceled............................... (3,705,609) (1,241,982) (2,505,716)
Exercised.............................. (11,534) (931,785) (69,724)
------------ ------------ ------------
Outstanding at December 31.................. 5,687,335 8,579,568 10,219,115
============ ============ ============
Exercisable at December 31.................. 2,450,795 3,253,511 4,588,158
============ ============ ============
Option price range-options outstanding...... $2.67-$25.50 $2.67-$25.50 $0.88-$17.13
Option price range-options exercised........ $2.73-$ 9.25 $2.67-$14.38 $2.67-$ 5.13
</TABLE>
Weighted-average exercise prices are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Outstanding at January 1.................................... $15.90 $ 9.47 $10.98
Granted................................................ 9.54 12.59 4.54
Canceled............................................... 19.89 12.79 10.17
Exercised.............................................. 7.49 8.16 3.12
Outstanding at December 31.................................. 9.47 10.98 8.56
Exercisable at December 31.................................. 9.12 9.85 9.31
</TABLE>
Certain information is being presented based on a range of exercise prices
as of December 31, 1999, as follows:
<TABLE>
<CAPTION>
$0.88-$6.00 $6.03-$8.13 $8.25-$12.63 $12.94-$17.13
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Number of shares outstanding.......... 2,567,374 2,308,960 2,338,101 3,004,680
Weighted-average exercise price....... $ 3.40 $ 6.43 $ 9.83 $ 13.62
Weighted-average remaining contractual
life................................ 8.55 8.01 7.23 8.01
Number of shares exercisable.......... 792,465 800,140 1,632,993 1,362,560
Weighted-average exercise price of
shares exercisable.................. $ 3.63 $ 6.89 $ 9.63 $ 13.66
</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 1997,
1998, and 1999 was $5.98, $7.21, and $1.22, respectively. The fair value for the
stock options granted to officers and key employees of the Company after January
1, 1995 was estimated at the date of the grant using the Black-Scholes option
pricing model with the following assumptions: risk-free interest ranging from
5.46% to 6.89% for 1997, ranging from 4.09% to 5.72% for 1998, and ranging from
4.54% to 6.13% for 1999; a dividend yield of 0%; volatility factors of the
expected market price of the Company's Common Stock ranging from 54.4% to 57.6%
for 1997, ranging from 56.8% to 60.0% for 1998, and 75.0% for 1999; and a
weighted average expected life of each option ranging from 5.5 years to 6.7
years for 1997 and 1998, and ranging from 2.0 years to 6.0 years for 1999.
F-43
<PAGE> 196
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C> <C>
Net loss As reported $(156,947) $(162,009) $(299,002)
Pro forma $(172,884) $(179,834) $(301,586)
Net loss per common share As reported $ (1.53) $ (1.57) $ (2.88)
(basic and diluted) Pro forma $ (1.68) $ (1.74) $ (2.90)
</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.
10. 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 1997, 1998, and
1999 was approximately $70 million, $81 million, and $101 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, 1999.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: (IN THOUSANDS)
---------------------------------------
<S> <C>
2000.............................................. $27,997
2001.............................................. 19,788
2002.............................................. 14,855
2003.............................................. 10,229
2004.............................................. 7,080
Later years....................................... 8,163
-------
Total minimum payments required......... $88,112
=======
</TABLE>
11. 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 PageNet's business, financial position, or
results of operations.
12. 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, 1997, 1998, and 1999, was 103
million, 103 million, and 104 million, respectively. The average number of
options to purchase shares of the Company's Common Stock during the years ended
December 31, 1997, 1998, and 1999, were 6 million, 8 million, and 10 million,
respectively, at exercise prices ranging from $0.88 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 million authorized shares, of which 250 million are
Common Stock and 25 million are preferred stock. As of December 31, 1999,
approximately 15 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,
1999, there were no preferred shares issued or outstanding.
F-44
<PAGE> 197
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 23, 1996, the Company's shareowners approved an employee stock
purchase plan of up to 2 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. The Company discontinued the employee stock purchase plan
effective December 31, 1999.
13. 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, 1999, 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, 1997, 1998, and 1999 were approximately $144 million, $136
million, and $147 million, respectively, net of $16 million, $22 million, and
$24 million, respectively, of interest capitalized during the years ended
December 31, 1997, 1998 and 1999. During the year ended December 31, 1998,
PageNet utilized $13 million of deposits made in 1998 for the purchase of
subscriber devices. There were no significant federal or state income taxes paid
or refunded for the years ended December 31, 1997, 1998, and 1999.
14. 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 $2 million in 1997, $3 million in 1998, and $2 million in 1999.
15. 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. The Company's Board of Directors can waive the application of the stock
purchase rights under certain circumstances. In connection with the approval of
the Merger Agreement, the Company's Board of Directors waived such application
as it would have related to the Merger.
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
F-45
<PAGE> 198
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
16. SEGMENT INFORMATION
The Company has determined that it has two reportable segments, traditional
paging operations and advanced messaging operations. The Company's basis for the
segments relates to the types of products and services each segment provides.
The traditional paging segment consists of 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 the operations of Vast,
which includes wireless integration products, consumer content, and wireless
software development and sales.
F-46
<PAGE> 199
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, 1997, 1998, and 1999 or for the years ended
December 31, 1997, 1998, and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
(IN THOUSANDS) ---------- ---------- ----------
<S> <C> <C> <C>
Total Revenues:
Traditional Paging(1)........................... $ 960,290 $1,041,603 $ 973,658
Advanced Messaging.............................. 686 4,424 16,065
---------- ---------- ----------
$ 960,976 $1,046,027 $ 989,723
========== ========== ==========
Depreciation and amortization:
Traditional Paging(1)........................... $ 276,590 $ 266,319 $ 310,347
Advanced Messaging.............................. 12,852 14,940 16,754
---------- ---------- ----------
$ 289,442 $ 281,259 $ 327,101
========== ========== ==========
Operating income (loss):
Traditional Paging(1)........................... $ 31,399(2) $ 17,406(3) $ (41,190)(4)
Advanced Messaging.............................. (23,891) (39,726) (74,198)
---------- ---------- ----------
$ 7,508 $ (22,320) $ (115,388)
========== ========== ==========
Adjusted EBITDA(5):
Traditional Paging(1)........................... $ 320,589 $ 357,725 $ 263,424
Advanced Messaging.............................. (11,039) (24,786) (57,444)
---------- ---------- ----------
$ 309,550 $ 332,939 $ 205,980
========== ========== ==========
Capital expenditures:
Traditional Paging(1)........................... $ 224,459 $ 193,234 $ 121,779
Advanced Messaging.............................. 103,906 74,949 113,147
---------- ---------- ----------
$ 328,365 $ 268,183 $ 234,926
========== ========== ==========
Net interest expense(6):
Traditional Paging(1)........................... $ 90,458 $ 74,729 $ 65,107
Advanced Messaging.............................. 57,233 66,963 81,912
---------- ---------- ----------
$ 147,691 $ 141,692 $ 147,019
========== ========== ==========
Total assets:
Traditional Paging(1)........................... $1,047,246 $ 945,621 $ 746,515
Advanced Messaging.............................. 549,987 635,623 676,045
---------- ---------- ----------
$1,597,233 $1,581,244 $1,422,560
========== ========== ==========
</TABLE>
---------------
(1) The international operations of the Company currently consist entirely of
traditional paging services and accordingly are included in PageNet's
traditional paging business segment.
(2) Operating income for the traditional paging business segment for 1997
includes a $13 million provision to write down certain subscriber devices to
their net realizable value. See Note 5.
(3) Operating income for the traditional paging business segment for 1998
includes a restructuring charge of $74 million. See Note 4.
(4) Operating loss for the traditional paging business segment for 1999 includes
a partial reversal of the restructuring charge of $24 million and a
provision for asset impairment of $18 million. See Notes 4 and 5,
respectively.
F-47
<PAGE> 200
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) Adjusted EBITDA, as determined by the Company, does not reflect other
non-operating (income) expense, provision for asset impairment,
restructuring charge, extraordinary items, and cumulative effect of a change
in accounting principle.
(6) Net interest expense is interest expense less interest income.
Adjusted EBITDA is not defined in generally accepted accounting principles
and should not be considered in isolation or as a substitute for a measure of
performance in accordance with generally accepted accounting principles.
17. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the two years ended December 31, 1999
is summarized below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- --------- --------- ---------
<S> <C> <C> <C> <C>
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)(1) 19,803 17,998 (3,516)
Net loss.................................. (92,372)(1) (15,619) (16,428) (37,590)
Net loss per share (basic and diluted).... (0.90)(1) (0.15) (0.16) (0.36)
1999
Services, rent, and maintenance
revenues................................ $ 241,868 $ 231,635 $ 223,063 $ 200,782
Product sales............................. 21,692 22,930 24,347 23,406
--------- --------- --------- ---------
Total revenues....................... 263,560 254,565 247,410 224,188
Cost of products sold..................... (16,177) (10,462) (16,374) (14,888)
--------- --------- --------- ---------
247,383 244,103 231,036 209,300
Operating income (loss)................... (16,505)(2) (58,248) (13,499) (27,136)(3)
Loss before cumulative effect of a change
in accounting principle................. (51,758)(2) (95,311) (49,488) (64,999)(3)
Cumulative effect of a change in
accounting principle.................... (37,446) -- -- --
Net loss.................................. (89,204)(2) (95,311) (49,488) (64,999)(3)
Net loss per share (basic and diluted):...
Loss before cumulative effect of a change
in accounting principle................. (0.50)(2) (0.92) (0.48) (0.64)(3)
Cumulative effect of a change in
accounting principle.................... (0.36) -- -- --
Net loss per share........................ (0.86)(2) (0.92) (0.48) (0.64)(3)
</TABLE>
---------------
(1) Operating loss for the first quarter of 1998 includes a restructuring charge
of $74 million. See Note 4.
(2) Operating loss for the first quarter of 1999 includes a provision for asset
impairment of $18 million. See Notes 5 and 6.
(3) Operating loss for the fourth quarter of 1999 includes a partial reversal of
the restructuring charge of $24 million. See Note 4.
F-48
<PAGE> 201
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 32,144 $ 71,111
Accounts receivable, less allowance for doubtful
accounts............................................... 84,476 82,782
Inventories............................................... 8,687 6,340
Prepaid expenses and other assets......................... 5,623 15,810
---------- -----------
Total current assets................................... 130,930 176,043
Property, equipment, and leasehold improvements, at cost.... 1,451,761 1,394,510
Less accumulated depreciation............................. (684,648) (735,119)
---------- -----------
Net property, equipment, and leasehold improvements.... 767,113 659,391
Other non-current assets, at cost........................... 609,014 610,734
Less accumulated amortization............................. (84,497) (94,949)
---------- -----------
Net other non-current assets........................... 524,517 515,785
---------- -----------
$1,422,560 $ 1,351,219
========== ===========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Long-term debt in default................................. $1,945,000 $ 1,946,450
Accounts payable.......................................... 80,889 70,813
Accrued expenses.......................................... 50,146 46,153
Accrued interest.......................................... 42,532 99,185
Customer deposits......................................... 15,927 14,296
Deferred revenue.......................................... 19,778 24,837
---------- -----------
Total current liabilities.............................. 2,154,272 2,201,734
---------- -----------
Long-term obligations, non-current portion.................. 58,127 59,507
Commitments and contingencies
Shareowners' deficit:
Common Stock -- $.01 par, authorized 250,000,000 shares;
103,960,240 and 104,242,567 shares issued and
outstanding as of December 31, 1999 and June 30, 2000,
respectively........................................... 1,040 1,042
Paid-in capital........................................... 134,161 134,742
Accumulated other comprehensive income.................... 745 1,614
Accumulated deficit....................................... (925,785) (1,047,420)
---------- -----------
Total shareowners' deficit............................. (789,839) (910,022)
---------- -----------
$1,422,560 $ 1,351,219
========== ===========
</TABLE>
See accompanying notes
F-49
<PAGE> 202
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
1999 2000 1999 2000
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues....... $231,635 $184,884 $ 473,503 $ 396,157
Product sales................................. 22,930 18,635 44,622 42,999
-------- -------- --------- ---------
Total revenues........................... 254,565 203,519 518,125 439,156
Cost of products sold......................... (10,462) (13,043) (26,639) (26,236)
-------- -------- --------- ---------
244,103 190,476 491,486 412,920
Operating expenses:
Services, rent and maintenance.............. 63,782 62,541 130,672 125,240
Selling..................................... 21,962 15,221 45,992 35,322
General and administrative.................. 87,939 80,164 176,229 159,934
Depreciation and amortization............... 128,668 58,988 195,548 121,825
Provision for asset impairment.............. -- -- 17,798 --
-------- -------- --------- ---------
Total operating expenses................. 302,351 216,914 566,239 442,321
-------- -------- --------- ---------
Operating loss................................ (58,248) (26,438) (74,753) (29,401)
Other income (expense):
Interest expense............................ (37,770) (46,768) (73,801) (93,123)
Interest income............................. 715 824 1,305 938
Other non-operating income (expense)........ (8) (25) 180 (49)
-------- -------- --------- ---------
Total other expense...................... (37,063) (45,969) (72,316) (92,234)
-------- -------- --------- ---------
Loss before cumulative effect of a change in
accounting principle........................ (95,311) (72,407) (147,069) (121,635)
Cumulative effect of a change in accounting
principle................................... -- -- (37,446) --
-------- -------- --------- ---------
Net loss...................................... $(95,311) $(72,407) $(184,515) $(121,635)
======== ======== ========= =========
Net loss per share (basic and diluted):
Loss before cumulative effect of a change in
accounting principle........................ $ (0.92) $ (0.69) $ (1.42) $ (1.17)
Cumulative effect of a change in accounting
principle................................... -- -- (0.36) --
-------- -------- --------- ---------
Net loss per share.......................... $ (0.92) $ (0.69) $ (1.78) $ (1.17)
======== ======== ========= =========
</TABLE>
See accompanying notes
F-50
<PAGE> 203
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 2000
--------- ---------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(184,515) $(121,635)
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 --
Depreciation......................................... 186,545 112,641
Amortization......................................... 9,003 9,184
Provision for doubtful accounts...................... 12,630 14,698
Amortization of debt issuance costs.................. 2,260 2,304
Other................................................ (180) 49
Changes in operating assets and liabilities:
Accounts receivable.................................. 3,155 (13,004)
Inventories.......................................... (4,194) 2,347
Prepaid expenses and other assets.................... 1,762 (10,187)
Accounts payable..................................... 26,911 (10,076)
Accrued expenses and accrued interest................ (6,160) 52,611
Accrued restructuring costs.......................... (933) --
Customer deposits and deferred revenue............... (12) 3,428
--------- ---------
Net cash provided by operating activities................... 101,516 42,360
--------- ---------
Investing activities:
Capital expenditures...................................... (134,814) (6,727)
Payments for spectrum licenses............................ (2,546) --
Restricted cash invested in money market instruments...... -- (655)
Other, net................................................ (6,749) 1,406
--------- ---------
Net cash used in investing activities....................... (144,109) (5,976)
--------- ---------
Financing activities:
Borrowings of long-term obligations....................... 144,637 3,640
Repayments of long-term obligations....................... (94,979) (1,640)
Proceeds from exercise of stock options................... 1,201 583
--------- ---------
Net cash provided by financing activities................... 50,859 2,583
--------- ---------
Net increase in cash and cash equivalents................... 8,266 38,967
Cash and cash equivalents at beginning of period............ 3,077 32,144
--------- ---------
Cash and cash equivalents at end of period.................. $ 11,343 $ 71,111
========= =========
</TABLE>
See accompanying notes
F-51
<PAGE> 204
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. THE COMPANY AND MERGER AGREEMENT
Paging Network, Inc. (the Company) is a provider of wireless messaging
services throughout the United States and the U.S. Virgin Islands, Puerto Rico,
and Canada. The Company provides service in all 50 states and the District of
Columbia, including service in the 100 most populated markets in the United
States. The Company also owns a minority interest in a wireless messaging
company in Brazil.
On November 7, 1999, the Company signed a definitive agreement (the Merger
Agreement) to merge (the Merger) with Arch Communications Group, Inc. (Arch).
The Merger Agreement was subsequently amended on January 7, 2000, May 10, 2000,
July 23, 2000, and September 7, 2000. Under terms of the Merger Agreement, as
amended, the Company's senior subordinated notes, along with all accrued
interest thereon, will be exchanged for common stock of Arch representing 48.2%
of the common stock of the combined company, and the Company's common stock will
be converted into common stock representing 2.9% of the common stock of the
combined company. The Merger Agreement also provides for the Company to
distribute 80.5% of its interest in Vast Solutions, Inc. (Vast), a wholly-owned
subsidiary of the Company, to holders of the Company's senior subordinated notes
and common stock. Holders of the senior subordinated notes will receive common
stock of Vast representing 60.5% of the equity of Vast, while holders of the
Company's common stock will receive common stock of Vast representing 20% of the
equity of Vast. The remaining interest in Vast will be held by the combined
company following the Merger.
As more fully discussed in Note 2, the Company will seek to complete the
Merger through the Company's plan of reorganization filed in conjunction with
the Company's bankruptcy filing in July 2000. Consummation of the Merger is also
subject to customary regulatory review. The Company and Arch have received
approval from the Department of Justice and the Federal Communications
Commission to proceed with the Merger. If the Merger Agreement is terminated
after one party pursues an alternative offer, a plan of reorganization of the
Company other than the one contemplated in the Merger Agreement is filed by the
Company and/or confirmed by a bankruptcy court, or under other specified
circumstances, either the Company or Arch may be required to pay a termination
fee of $40 million.
2. CHAPTER 11 REORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred losses of
$157 million, $162 million, and $299 million during the years ended December 31,
1997, 1998, and 1999, respectively, and $72 million and $122 million,
respectively, during the three and six months ended June 30, 2000. The Company's
deteriorating financial results and liquidity caused it to be in default of the
covenants of all of its domestic debt agreements. On February 2, 2000 and August
1, 2000, the Company failed to make the semi-annual interest payments on its
8.875% senior subordinated notes due 2006 (8.875% Notes) and its 10.125% senior
subordinated notes due 2007 (10.125% Notes), and on April 17, 2000, the Company
failed to make the semi-annual interest payment on its 10% senior subordinated
notes due 2008 (10% Notes). The Company also violated several of the financial
and other covenants of its domestic revolving credit facility (the Credit
Agreement). As a result of these defaults, the Company's bondholders and the
lenders under the Credit Agreement had the right to demand at any time that the
Company immediately pay its outstanding indebtedness in full. On July 14, 2000,
three senior subordinated noteholders commenced an involuntary proceeding
against the Company under Chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code).
On July 24, 2000 (the Petition Date), the Company consented to an order for
relief which, in effect, converted the bankruptcy case filed on July 14, 2000 to
a voluntary Chapter 11 case. Also on the Petition
F-52
<PAGE> 205
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
Date, the Company's domestic subsidiaries except for Vast filed voluntary
petitions for relief under the Bankruptcy Code (such subsidiaries and the
Company are hereafter referred to collectively as the "Debtors"). Subsequent to
the Petition Date, 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 pre-petition obligations owed to continuing vendors as such obligations
come due.
On July 25, 2000, the Debtors filed a Joint Plan of Reorganization and
disclosure statement which provide for the implementation of the Merger as the
Debtors' plan of reorganization. The Bankruptcy Court approved the disclosure
statement on September 7, 2000, and authorized the Debtors to submit the Joint
Plan of Reorganization to the Company's creditors and stockholders for approval.
The Bankruptcy Court has scheduled a hearing on the confirmation of the Joint
Plan of Reorganization for October 26, 2000.
As of July 31, 2000, the Company had approximately $66 million in cash.
Upon commencement of the Chapter 11 case, the Company obtained a
debtor-in-possession loan facility (the DIP Facility) from the current lenders
under the Credit Agreement which provided for additional secured borrowings by
both the Company and Vast not to exceed $50 million in the aggregate, subject to
certain limitations as set forth in the loan agreement. Borrowings under the DIP
Facility bear interest at prime plus 2.5% for outstanding borrowings up to $15
million, and at prime plus 3.0% for outstanding borrowings in excess of $15
million, due monthly. All amounts outstanding under the DIP Facility are due the
earlier of (i) the confirmation of the Debtors' Joint Plan of Reorganization, or
(ii) November 30, 2000. The Company believes that its existing cash, the cash
expected to be generated from operations, and the cash available under the DIP
Facility is sufficient to meet its obligations, except for the cash interest
payments due under the Notes, through the completion of the Merger. However, if
the Company's financial results continue to deteriorate, the Merger is delayed,
or other unforeseen events occur, the Company may not have sufficient liquidity
to meet its obligations through the completion of the Merger. If the Merger is
not completed, the Company would likely be required to consider a stand-alone
restructuring, asset sales, transactions with other potential merger parties or
acquirers, or liquidation. In addition, if the Merger is not completed, the
Company would likely incur significant charges for asset impairments and
restructuring its obligations. The accompanying financial statements do not
include any adjustments relating to the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Merger not be completed.
F-53
<PAGE> 206
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
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 and the provision for asset impairment
discussed in Note 5, 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 accounting principles
generally accepted in the United States 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 accounting principles generally accepted in the United States for
complete financial statements. The balance sheet as of December 31, 1999, 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, 1999.
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.
Effective April 1, 1999, the Company changed the depreciable lives for its
subscriber devices and certain network equipment. The Company changed the
depreciable lives of its subscriber devices from three years to two years and
the depreciable life of certain of its network equipment from seven years to ten
years. The changes resulted from a review by the Company of the historical usage
periods of its subscriber devices and its network equipment and the Company's
expectations regarding future usage periods for subscriber devices considering
current and projected technological advances. The Company has determined that
the appropriate useful life of its subscriber devices is two years as a result
of technological advances, customer desire for new pager technology, and the
Company's decreasing ability to redeploy older pager models. As a result of
these changes, net loss increased by $69 million, or $0.66 per share (basic and
diluted), for the three and six months ended June 30, 1999.
5. PROVISION FOR ASSET IMPAIRMENT
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. During the third
quarter of 1999, all operations of the Company's majority-owned Spanish
subsidiaries were ceased. The Company's interest in its Spanish subsidiaries was
sold in the first quarter of 2000 for minimal proceeds. As a result of the
Company's decision to sell or otherwise dispose of its Spanish subsidiaries, the
Company recorded a provision of $18 million during the six months ended June 30,
1999, for the impairment of the assets of the Company's majority-owned
subsidiaries, the effect of which was to write-off the Company's net investment
in its Spanish subsidiaries. The amount of the provision was based on the
Company's estimate of the value of its net investment in the Spanish
subsidiaries, which did not materially differ from the proceeds received upon
the sale of the subsidiaries in the first quarter of 2000. No cash costs have
been incurred or are expected as a result of the provision for
F-54
<PAGE> 207
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
the impairment of the assets of the Company's Spanish subsidiaries, and no
additional charges are expected to be required.
6. INCOME TAXES
For the three and six months ended June 30, 1999 and 2000, the Company had
no provision or benefit for income taxes because of the Company's inability to
benefit from its net operating losses.
7. 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 three months ended June 30, 1999 and 2000, were 104
million. The number of shares used to compute per share amounts for the six
months ended June 30, 1999 and 2000, were 104 million. The average number of
options to purchase shares of the Company's Common Stock during the three and
six months ended June 30, 1999 was 10 million, at exercise prices ranging from
$2.73 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 six months ended June
30, 2000, was 10 million, at exercise prices ranging from $0.81 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 June 30, 2000, there were
no preferred shares issued or outstanding.
8. COMPREHENSIVE LOSS
Comprehensive loss for the three and six months ended June 30, 1999 and
2000, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ----------------------
1999 2000 1999 2000
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net loss...................................... $(95,311) $(72,407) $(184,515) $(121,635)
Foreign currency translation adjustments...... (166) 810 (1,007) 869
-------- -------- --------- ---------
Total comprehensive loss............ $(95,477) $(71,597) $(185,522) $(120,766)
======== ======== ========= =========
</TABLE>
9. 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 June 30, 2000, cash equivalents
also include investments in money market instruments, which are carried at fair
market value. Cash payments made for interest during the six months ended June
30, 1999 and 2000, were approximately $70 million and $34 million, respectively,
net of interest capitalized during the six months ended June 30, 1999 and 2000
of $11 million and $1 million, respectively. There were no significant federal
or state income taxes paid or refunded for the six months ended June 30, 1999
and 2000.
10. SEGMENT INFORMATION
The Company has two reportable segments, traditional paging operations and
advanced messaging operations. The Company's basis for the segments relates to
the types of products and services each
F-55
<PAGE> 208
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
segment provides. The traditional paging segment includes the traditional
display and alphanumeric services, which are basic one-way services, and
1 1/2-way paging services. The advanced messaging segment consists of the
Company's new 2-way wireless messaging services, VoiceNow service, and the
operations of Vast, which include wireless integration products and wireless
software development and sales.
The following table presents certain information related to the Company's
business segments for the three and six months ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ---------------------
1999 2000 1999 2000
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Total Revenues:
Traditional Paging(1)........................ $251,142 $196,170 $ 511,808 $424,655
Advanced Messaging........................... 3,423 7,349 6,317 14,501
-------- -------- --------- --------
$254,565 $203,519 $ 518,125 $439,156
======== ======== ========= ========
Operating income (loss):
Traditional Paging(1)........................ $(46,525) $ (1,000) $ (54,246)(2) $ 12,101
Advanced Messaging........................... (11,723) (25,438) (20,507) (41,502)
-------- -------- --------- --------
$(58,248) $(26,438) $ (74,753) $(29,401)
======== ======== ========= ========
Adjusted EBITDA (3):
Traditional Paging(1)........................ $ 81,506 $ 47,186 $ 157,857 $114,534
Advanced Messaging........................... (11,086) (14,636) (19,264) (22,110)
-------- -------- --------- --------
$ 70,420 $ 32,550 $ 138,593 $ 92,424
======== ======== ========= ========
</TABLE>
---------------
(1) The international operations of the Company currently consist entirely of
traditional paging services and accordingly are included in the Company's
traditional paging business segment.
(2) Operating loss for the traditional paging business segment for the first six
months of 1999 includes a provision for asset impairment of $18 million. See
Note 5.
(3) Adjusted EBITDA, as determined by the Company, does not reflect other
non-operating income (expense), provision for asset impairment, and
cumulative effect of a change in accounting principle.
Adjusted EBITDA is not defined in generally accepted accounting principles
and should not be considered in isolation or as a substitute for a measure of
performance in accordance with generally accepted accounting principles.
F-56
<PAGE> 209
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-57
<PAGE> 210
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-58
<PAGE> 211
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-59
<PAGE> 212
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-60
<PAGE> 213
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-61
<PAGE> 214
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-62
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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-63
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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-64
<PAGE> 217
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-65
<PAGE> 218
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-66
<PAGE> 219
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-67
<PAGE> 220
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-68
<PAGE> 221
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-69
<PAGE> 222
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 liquidation
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>
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<PAGE> 223
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>
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
F-71
<PAGE> 224
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
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),
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.
F-72
<PAGE> 225
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
On January 13, 1997, the FCC issued a Public Notice relating to the status
of certain FCC authorizations held by MobileMedia. Pursuant to the Public
Notice, the FCC announced that it had (i) automatically terminated approximately
185 authorizations for paging facilities that were not constructed by the
expiration date of their construction permits and remained unconstructed, (ii)
dismissed as defective approximately 94 applications for fill-in sites around
existing paging stations because they were predicated upon unconstructed
facilities and (iii) automatically terminated approximately 99 other
authorizations for paging facilities that were constructed after the expiration
date of their construction permits. However, the FCC granted MobileMedia interim
operating authority to operate transmitters in this last category subject to
further action by the FCC.
On April 8, 1997, the FCC adopted an order commencing an administrative
hearing into the qualification of MobileMedia to remain a licensee. The order
directed an Administrative Law Judge to take evidence and develop a full factual
record on directed issues concerning MobileMedia's filing of false forms and
applications. MobileMedia was permitted to operate its licensed facilities and
provide service to the public during the pendency of the hearing.
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.
F-73
<PAGE> 226
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
In addition to the New Jersey Actions, two lawsuits (together, the
"California Actions" and, together with the New Jersey Actions, the "Securities
Actions") were filed in September 1997 in the United States District Court for
the Northern District of California and the Superior Court of California naming
as defendants certain former officers and certain present and former directors
of MobileMedia, certain investment entities and the Debtors' independent
auditors. None of the Debtors is named as defendant in the California Actions.
On November 4, 1997, the Debtors commenced an adversary proceeding in the
Bankruptcy Court seeking to stay the prosecution of the California Actions
against the named defendants. At hearings held on December 10, 1997 and May 29,
1998, the Bankruptcy Court enjoined the plaintiffs in the California Actions
until September 15, 1998 from taking certain actions in connection with the
California Actions, with certain exceptions.
The plaintiffs in both the New Jersey Actions and California Actions are
currently conducting discovery of MobileMedia in connection with their
prosecution of the actions against the named defendants. Following consummation
of the Plan of Reorganization, the Company may be subject to further discovery
in these proceedings.
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
F-74
<PAGE> 227
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
need to be reviewed, evaluated and, if and where necessary, modified or replaced
to ensure that all financial, information and operating systems are Year 2000
compliant.
State of Readiness
MobileMedia has formed an internal task force comprised of representatives
of its various relevant departments to address Year 2000 compliance matters. The
task force has undertaken a preliminary review of internal and external areas
that are likely to be affected by Year 2000 compliance matters and has
classified the various areas as mission critical, important or
non-critical/non-important. MobileMedia also expects to hire outside consultants
to review MobileMedia's testing methodology and test results, to assess its
contingency planning and to provide general oversight relating to Year 2000
compliance matters.
With respect to internal matters, MobileMedia has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, pager activation, purchasing and sales/marketing) will be Year 2000
compliant. In addition, in the last quarter of 1998, programs designed to
identify Year 2000 problems associated with dates embedded in certain
business-related files were created and executed to identify any Year 2000
compliance issues. The testing unearthed a few Year 2000 problems all of which
have been addressed and retested for Year 2000 readiness. Additional testing
took place the first quarter of 1999, which included testing of 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
F-75
<PAGE> 228
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
by Year 2000 compliance problems. With respect to external matters, due to the
multi-dependent and interdependent issues raised by Year 2000 compliance,
including many factors beyond its control, MobileMedia may face the possibility
that one or more of its mission-critical vendors, such as its utilities,
telephone carriers, equipment manufacturers or satellite carriers, may not be
Year 2000 compliant on a timely basis. Because of the unique nature of such
vendors, alternate providers may not be available. Finally, MobileMedia does not
manufacture any of the pagers, paging-related hardware or network equipment used
by MobileMedia or its customers in connection with MobileMedia's paging
operations. Although MobileMedia has tested such equipment, it has also relied
upon the representations of its vendors with respect to their Year 2000
readiness. MobileMedia can give no assurance as to the accuracy of such vendors'
representations.
Contingency Planning
MobileMedia has begun the process of assessing contingency plans that might
be available in the event of either internal or external Year 2000 compliance
problems. To this end, MobileMedia's various internal departments have begun to
prepare assessments of potential contingency alternatives. The task force will
undertake a review of these assessments on a department-by-department basis and
on a company-wide basis. MobileMedia intends to complete its contingency
planning during the second quarter of 1999.
F-76
<PAGE> 229
ANNEX A
LETTER OF TRANSMITTAL/CONSENT FORM
to tender for exchange and give consents in respect of
10 7/8% Senior Discount Notes due 2008
of
ARCH COMMUNICATIONS GROUP, INC.
Pursuant to the Prospectus
Dated September , 2000
THE WITHDRAWAL DEADLINE FOR THE EXCHANGE OFFER IS 11:59 P.M.,
NEW YORK CITY TIME, ON , 2000. THE EXCHANGE
OFFER WILL EXPIRE AT 11:59 P.M., NEW YORK CITY TIME
ON , 2000, UNLESS EXTENDED.
THE EXCHANGE AGENT:
Harris Trust Company of New York will act as exchange agent for the
exchange offer. All correspondence in connection with the exchange offer and the
letter of transmittal should be addressed to the exchange agent as follows:
<TABLE>
<S> <C>
By Mail: By Hand and Overnight Courier:
Harris Trust Company of New York Harris Trust Company of New York
Wall Street Station 88 Pine Street
P.O. Box 1023 19th Floor
New York, New York 10268-1023 New York, New York 10005
</TABLE>
By Facsimile Transmission: (212) 701-7636 or (212) 701-7637
(For Eligible Institutions Only)
Confirm Facsimile by Telephone: (212) 701-7624
For Information Call: (212) 701-7624
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE, OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA A FACSIMILE
NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This letter of transmittal is to be used (A) to tender 10 7/8% Senior
Discount Notes due 2008 of Arch Communications Group, Inc., a Delaware
corporation, which are enclosed herewith, or (B) to tender discount notes in
accordance with the guaranteed delivery procedures set forth in the prospectus
dated August , 2000 under "Procedure for Tendering Discount Notes and Delivery
of Consents -- Guaranteed Delivery Procedures."
A VALID TENDER OF DISCOUNT NOTES WILL CONSTITUTE CONSENT TO THE PROPOSED
AMENDMENTS TO THE INDENTURE, AS SUCH PROPOSED AMENDMENTS ARE DESCRIBED IN THE
PROSPECTUS.
<PAGE> 230
The undersigned acknowledges receipt of the prospectus and this letter of
transmittal, which together constitute the offer by Arch to exchange 66.1318
shares of Arch common stock for each $1,000 principal amount (at maturity) of
discount notes.
The exchange offer is not being made to, and tenders will not be accepted
from or on behalf of, holders of discount notes in any jurisdiction in which the
making or acceptance of the exchange offer would not be in compliance with the
laws of such jurisdiction.
The undersigned has completed, signed and delivered this letter of
transmittal and checked the appropriate box(es) below to indicate the action the
undersigned desires to take with respect to the exchange offer.
Holders of discount notes who wish to tender their discount notes must, at
a minimum, complete columns (1), (2) and (3) in the "Description of Discount
Notes" table. If only those columns are completed, such holder will have
tendered all discount notes listed in column (2). If the holder of discount
notes wishes to tender less than all of such discount notes, column (4) must be
completed in full. A partial tender of discount notes will constitute consent to
the proposed amendments to the indenture to the extent of the principal amount
of discount notes being tendered.
Holders of discount notes who wish to tender their discount notes must also
complete both the "Signature of Holder" and the "Consent of Registered Holder to
Proposed Amendments" boxes and the Substitute Form W-9.
BOOK-ENTRY TRANSFER FACILITY
The exchange agent will establish an account with respect to the discount
notes at the book-entry transfer facility promptly after the date of the
prospectus. A financial institution that is a participant in the book-entry
transfer facility's system may make book-entry delivery of discount notes by
causing the book-entry transfer facility to transfer such discount notes into
the exchange agent's account at the book-entry transfer facility in accordance
with the book-entry transfer facility's procedures for such transfer. Although
delivery of such discount notes may be effected through book-entry delivery at
the book-entry transfer facility, in any case either (A) the letter of
transmittal (or manually-signed facsimile thereof), with any required signature
guarantees, or an agent's message, in the case of a book-entry transfer, and any
other required documents, must be transmitted to and received by the exchange
agent on or prior to the expiration date of the exchange offer or (B) the
guaranteed delivery procedure set forth in the prospectus under "Procedure for
Tendering Discount Notes and Delivery of Consents -- Guaranteed Delivery
Procedures" must be followed.
2
<PAGE> 231
Delivery of documents to the book-entry transfer facility in accordance with the
book-entry transfer facility's procedure does not constitute delivery to the
exchange agent.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF DISCOUNT NOTES
------------------------------------------------------------------------------------------------------------------------
(1) (2) (4)
CERTIFICATES (3)
NUMBER(S) OF AGGREGATE
DISCOUNT PRINCIPAL
NOTES AMOUNT PRINCIPAL
(ATTACH SIGNED (AT MATURITY) AMOUNT
NAME(S) AND ADDRESS(ES) LIST IF REPRESENTED BY (AT MATURITY)
OF REGISTERED HOLDER(S) NECESSARY)(a) CERTIFICATE(S) TENDERED(b)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
(a) Need not be completed by holders tendering by book-entry transfer.
(b) Need not be completed by holders who wish to tender the entire principal amount of discount notes listed in column
(3). Completion of column (4) will indicate that the holder wishes to tender only the principal amount of discount
notes indicated in column (4). The valid tender of any of your discount notes will constitute a consent to the
proposed amendments to the indenture to the extent of the principal amount of such discount notes validly tendered.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Holders of discount notes may elect to tender their discount notes in whole
or in part. See Instruction 5. A holder of discount notes who tenders only a
portion of such holder's discount notes will have consented to the proposed
amendments to the indenture to the extent of the principal amount of discount
notes being tendered.
Holders of the discount notes who desire to tender their discount notes and
who cannot deliver their discount notes and any other documents required hereby
to the exchange agent prior to the expiration of the exchange offer, may tender
their discount notes according to the guaranteed delivery procedures set forth
in the prospectus under "Procedures for Tendering Discount Notes and Delivery of
Consents -- Guaranteed Delivery Procedures." See Instruction 2.
3
<PAGE> 232
(THE BOX BELOW IS FOR USE BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED DISCOUNT NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF A GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s):
-------------------------------------------------------------------------------
Window Ticket Number (if any):
-----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
--------------------------------------------------------
Name of Eligible Institution which Guaranteed Delivery:
----------------------------------------------------
If Delivered by Book-Entry Transfer:
Account Number with DTC:
--------------------------------------------------------------------------------
Transaction Code Number:
--------------------------------------------------------------------------------
4
<PAGE> 233
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
The undersigned hereby tenders to Arch the principal amount of discount
notes indicated above, in accordance with and upon the terms and subject to the
conditions set forth in the exchange offer and, if the undersigned has elected
to so condition this tender, upon the consummation of the PageNet merger. The
proper execution and delivery of this letter of transmittal, together with the
delivery of discount notes pursuant to the instructions set forth herein will
constitute a valid tender of discount notes to Arch of the principal amount of
discount notes indicated above. A VALID TENDER OF DISCOUNT NOTES CONSTITUTES
CONSENT TO THE PROPOSED AMENDMENTS TO THE INDENTURE TO THE EXTENT OF THE
PRINCIPAL AMOUNT OF DISCOUNT NOTES TENDERED.
The undersigned hereby consents to the proposed amendments to the indenture
with respect to the discount notes tendered hereby and subject to, and effective
upon, the acceptance for exchange and exchange of the discount notes tendered
herewith in accordance with the terms of the exchange offer, the undersigned
hereby sells, assigns and transfers to Arch all right, title and interest in and
to all such discount notes as are being tendered hereby. The undersigned hereby
irrevocably constitutes and appoints the exchange agent as the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that the
exchange agent also acts as the agent of Arch), with respect to the discount
notes tendered hereby and accepted for exchange pursuant to the exchange offer,
with full power of substitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest) to deliver the discount notes
tendered hereby to Arch or cause ownership of such discount notes to be
transferred to Arch on Arch's books and deliver all accompanying evidences of
transfer and authenticity to or upon the order of Arch upon receipt by the
exchange agent, as the undersigned's agent, of common stock to which the
undersigned is entitled upon the acceptance for exchange by Arch of such
discount notes pursuant to the exchange offer.
The name and address of the holder(s) should be printed above under
"Description of Discount Notes" exactly as they appear on the discount notes
tendered hereby. The certificate number(s) and the principal amount of discount
notes to which this letter of transmittal relates, together with the principal
amount of discount notes that the undersigned wishes to tender, should be
indicated in the appropriate boxes above under "Description of Discount Notes."
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer any discount notes
tendered hereby, that the undersigned has full power and authority to consent to
the proposed amendments to the indenture and that when the discount notes are
accepted for exchange by Arch, that Arch will acquire good, indefeasible and
unencumbered title thereto, free and clear of all liens, restrictions, claims
and encumbrances and not subject to any adverse claim. The undersigned, upon
request, will execute and deliver any additional documents deemed by the
exchange agent or Arch to be necessary or desirable to complete the sale,
assignment and transfer of the discount notes tendered hereby and the valid
giving of consents to the proposed amendments with respect hereto.
All authority conferred or agreed to be conferred in this letter of
transmittal shall not be affected by, and shall survive, the death or incapacity
of the undersigned and any obligation of the undersigned hereunder shall be
binding upon the heirs, executors, administrators, legal representatives,
successors and assigns of the undersigned. Any tender of discount notes
hereunder may be withdrawn only in accordance with the procedures set forth in
the instructions contained in this letter of transmittal. See Instruction 4.
For the proposed amendments to the indenture to become effective with
respect to the discount notes, Arch must obtain consents and valid tenders that
are not withdrawn from the holders of a majority of the outstanding discount
notes. The proposed amendments would, among other things, eliminate
substantially all restrictive covenants and events of default currently
contained in the indenture. If the registered holders of not less than a
majority in
5
<PAGE> 234
aggregate principal amount of the discount notes consent to the proposed
amendments, Arch will, together with the trustee, execute an amendment to the
indenture, which will amend and restate the indenture in its entirety. The
amendment to the indenture will be executed promptly after the expiration date.
Following completion of the exchange offer, any non-tendering holders of
discount notes will be bound by the amendments to the indenture regardless of
whether they consent to the proposed amendments.
Pursuant to the indenture, any registered holder of discount notes who has
consented to the proposed amendments by validly tendering such holder's discount
notes may effectively revoke such consent by filing written notice with the
exchange agent as described in the prospectus under "Procedure for Tendering
Discount Notes and Delivery of Consents -- Revocation of Consents" at any time
prior to (but not after) the expiration date. THE VALID REVOCATION OF CONSENT TO
THE PROPOSED AMENDMENTS WILL CONSTITUTE THE VALID WITHDRAWAL OF THE TENDER OF
THE DISCOUNT NOTES.
Prior to the execution of the amendment to the indenture, Arch intends to
consult with the exchange agent and the trustee to determine whether either the
exchange agent or the trustee shall have received any revocations of consents to
the proposed amendments previously obtained through a valid tender of discount
notes, whether such revocations are valid and whether Arch shall have received
the requisite consents to effect the proposed amendments. Arch reserves the
right to contest the validity of any such revocations. A purported notice of
revocation which is not received by the exchange agent in a timely fashion will
not be effective to revoke a consent previously given.
The undersigned understands that the tender of discount notes pursuant to
one of the procedures described in the prospectus under "Procedure for Tendering
Discount Notes and Delivery of Consents" and the instructions to this letter of
transmittal will constitute the tendering holder's acceptance of the terms and
the conditions of the exchange offer. The undersigned acknowledges that by
tendering discount notes to Arch the undersigned is releasing Arch and certain
other parties from certain claims and liabilities, as set forth in the
prospectus under "The Exchange Offer -- Release of Claims by Tendering Holders
of Discount Notes." Arch's acceptance for exchange of discount notes tendered
pursuant to the exchange offer will constitute a binding agreement between the
tendering holder and Arch upon the terms and subject to the conditions of the
exchange offer.
Unless otherwise indicated below under "Special Issuance Instructions,"
please issue the Arch common stock with respect to discount notes accepted for
exchange, and/or principal amount of discount notes not tendered or not accepted
for exchange, in the name of the registered holder(s) appearing above under
"Description of Discount Notes." In addition, unless otherwise indicated below
under "Special Delivery Instructions," please mail the Arch common stock with
respect to discount notes accepted for exchange, and/or any discount notes for
any principal amount not tendered or not accepted for exchange (and accompanying
documents, as appropriate), to the registered holder(s) at the address(es)
appearing above under "Description of Discount Notes." If the "Special Issuance
Instructions" and/or "Special Delivery Instructions" are completed, please issue
the Arch common stock with respect to discount notes accepted for exchange,
and/or any discount notes for any principal amount not tendered or accepted for
exchange, in the name of, and/or send Arch common stock and/or discount notes
to, the person(s) so indicated. The undersigned recognizes that Arch has no
obligation pursuant to the "Special Issuance Instructions" to transfer any
discount notes from the name(s) of the registered holder(s) thereof if Arch does
not accept for exchange any of the discount notes so tendered.
6
<PAGE> 235
------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 6 and 7)
To be completed ONLY if the Arch common stock with respect to
discount notes accepted for exchange is to be issued, or certificates for
discount notes for principal amounts not tendered or not accepted for
exchange are to be reissued, in the name of someone other than the
undersigned.
Issue:
[ ] Arch common stock and/or
[ ] Discount notes
To:
Name
----------------------------------------------
(Please Type or Print)
Address
--------------------------------------------
------------------------------------------------------
------------------------------------------------------
(Zip Code)
------------------------------------------------------
------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 7)
To be completed ONLY if the Arch common stock with respect to
discount notes accepted for exchange, or any certificates for discount
notes for principal amounts not tendered or not accepted for exchange, are
to be sent to someone other than the undersigned or to the undersigned at
an address other than that appearing above under "Description of Discount
Notes."
Mail:
[ ] Arch common stock and/or
[ ] Discount notes
To:
Name
----------------------------------------------
(Please Type or Print)
Address
--------------------------------------------
------------------------------------------------------
------------------------------------------------------
(Zip Code)
------------------------------------------------------
7
<PAGE> 236
SIGNATURE OF HOLDER
(COMPLETE THIS SECTION AND SUBSTITUTE FORM W-9 BELOW)
---------------------------------------------------
SIGNATURE(S) OF HOLDER(S)
---------------------------------------------------
SIGNATURE(S) OF HOLDER(S)
(Must be signed by registered holder(s) exactly as name(s) appear(s) on discount
notes or on a security position listing or by the person(s) authorized to become
registered holder(s) by certificates and documents transmitted herewith.)
---------------------------------------------------
NAME OF HOLDER(S) -- PLEASE TYPE OR PRINT
---------------------------------------------------
NAME OF HOLDER(S) -- PLEASE TYPE OR PRINT
---------------------------------------------------
ADDRESS -- STREET
---------------------------------------------------
ADDRESS -- CITY, STATE AND ZIP CODE
---------------------------------------------------
( )
AREA CODE AND TELEPHONE NUMBER
---------------------------------------------------
TAX IDENTIFICATION OR SOCIAL SECURITY NO.
DATED:
--------------------------------------------
(If signature is by an officer of a corporation, attorney-in-fact, executor,
trustee, administrator, guardian or other person(s) acting in a fiduciary or
representative capacity, please set forth full title and see Instruction 6.)
---------------------------------------------------
CAPACITY (FULL TITLE)
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 1 AND 6)
---------------------------------------------------
AUTHORIZED SIGNATURE
---------------------------------------------------
TYPE OR PRINT NAME
---------------------------------------------------
DATED
---------------------------------------------------
NAME OF FIRM
---------------------------------------------------
ADDRESS -- STREET
---------------------------------------------------
ADDRESS -- CITY, STATE AND ZIP CODE
---------------------------------------------------
( )
AREA CODE AND TELEPHONE NUMBER
8
<PAGE> 237
CONSENT OF REGISTERED HOLDER TO PROPOSED AMENDMENTS
If certificates for discount notes are being delivered and the holder signing
above is not the registered holder of such discount notes, the registered
holder(s) must complete the applicable information above and sign below.
Pursuant to the exchange offer the undersigned registered holder(s) of the
discount notes indicated above hereby consent(s) to the proposed amendments to
the indenture in response of such discount notes.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Signature(s) of Registered Holder(s)
Dated:
------------------------------------
(Must be signed by registered holder(s) exactly as name(s) appear(s) on discount
notes or on a security position listing. If signature is by an officer of a
corporation, attorney-in-fact, executor, administrator, trustee, guardian or
other person(s) acting in a fiduciary or representative capacity, please set
forth full title and see Instruction 6.)
Name(s)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Please Type or Print)
Capacity (full title)
--------------------------------------------------------------------------------
Address
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Zip Code)
Area Code and Telephone No.
--------------------------------------------------------------------------
Tax Identification or Social Security No.
---------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 1 AND 6)
Authorized Signature
--------------------------------------------------------------------------------
Name
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Please Type or Print)
Name of Firm
--------------------------------------------------------------------------------
Address
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Zip Code)
Area Code and Telephone No.
--------------------------------------------------------------------------
Dated
------------------------------------
9
<PAGE> 238
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Guarantee of Signatures. Signatures on this letter of transmittal must
be guaranteed by an eligible institution unless (A) the discount notes tendered
hereby are tendered by a registered holder(s) of the discount notes who has
(have) not completed either the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on this letter of transmittal or (B) the
discount notes are tendered for the account of an eligible institution.
2. Delivery of this Letter of Transmittal and discount notes. This letter
of transmittal is to be used if discount notes tendered hereby are enclosed
herewith. A valid tender of discount notes shall constitute a consent to the
proposed amendments to the indenture. CERTIFICATES FOR ALL PHYSICALLY DELIVERED
DISCOUNT NOTES, OR A CONFIRMATION OF A BOOK-ENTRY TRANSFER INTO THE EXCHANGE
AGENT'S ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY OF ALL DISCOUNT NOTES
DELIVERED ELECTRONICALLY, AS WELL AS A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL (OR MANUALLY-SIGNED FACSIMILE THEREOF) OR, IN THE CASE OF
A BOOK-ENTRY TRANSFER, AN AGENT'S MESSAGE, AND ANY OTHER DOCUMENTS REQUIRED BY
THIS LETTER OF TRANSMITTAL, MUST BE RECEIVED BY THE EXCHANGE AGENT AT ONE OF ITS
ADDRESSES SET FORTH ON THE FRONT PAGE OF THIS LETTER OF TRANSMITTAL PRIOR TO THE
EXPIRATION DATE. The "expiration date" will be 11:59 P.M. New York City time, on
, 2000 unless extended by PageNet and Arch, in their sole
discretion, in which event the term "expiration date" shall mean the latest time
and date as so extended. PageNet and Arch expressly reserve the right, at any
time or from time to time, to extend the expiration date by giving oral or
written notice of such extension to the exchange agent and by making a public
announcement of such extension.
Holders whose discount notes are not immediately available or who cannot
deliver discount notes and all other required documents to the Exchange Agent
prior to the expiration date may tender their discount notes by properly
completing, and duly executing, the Notice of Guaranteed Delivery pursuant to
the guaranteed delivery procedures set forth in the prospectus under "Procedure
for Tendering Discount Notes and Delivery of Consents -- Guaranteed Delivery
Procedures." Pursuant to such procedures, (A) such tender must be made by or
through an eligible institution, (B) a properly completed and duly executed
Notice of Guaranteed Delivery must be received by the exchange agent prior to
the expiration date and (C) all tendered discount notes, or a confirmation of a
book-entry transfer into the exchange agent's account at the book-entry transfer
facility of all discount notes delivered electronically, as well as a properly
completed and duly executed letter of transmittal (or manually- signed facsimile
thereof) or, in the case of a book-entry transfer, an agent's message, with any
required signature guarantees and all other required documents, must be received
by the exchange agent within three New York Stock Exchange trading days after
the date of execution of the Notice of Guaranteed Delivery, all as provided in
the prospectus under "Procedure for Tendering Discount Notes and Delivery of
Consents."
Unless the discount notes tendered are deposited with the exchange agent
prior to the expiration date (accompanied by a properly completed letter of
transmittal and any other documents required by this letter of transmittal) or
tendered pursuant to the guaranteed delivery procedures set forth above, Arch
may, at its option, reject such tender. Issuance of Arch common stock in
exchange for discount notes will be made only against deposit of the tendered
discount notes. If less than the entire principal amount of any discount notes
evidenced by a submitted certificate is tendered, the tendering holder of
discount notes should fill in the principal amount tendered in the appropriate
box above with respect to the deposit being made, but only to the extent of the
principal amount of discount notes being tendered. The exchange agent will then
return to the tendering holder (unless otherwise requested by the holder under
"Special Delivery Instructions" above), as promptly as practicable following the
expiration date, discount notes in principal amount equal to the portion of such
delivered discount notes not tendered. The entire principal amount of all
discount notes, as the case may be, deposited with the exchange agent will be
deemed to have been tendered unless otherwise indicated.
The method of delivery of discount notes, this letter of transmittal (or
manually-signed facsimile hereof) and any other required documents is at the
option and risk of the tendering holder, but, except as otherwise provided
below, the delivery will be deemed made only when actually received by the
exchange
10
<PAGE> 239
agent. Instead of delivery by mail, we recommend that you use an overnight or
hand delivery service. If sent by mail, registered mail with return receipt
requested, properly insured, is recommended. In all cases, sufficient time
should be allowed to assure timely delivery.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders, by execution of this letter of transmittal (or
manually-signed facsimile hereof), waive any right to receive notice of
acceptance of their discount notes for exchange.
Only a registered holder of discount notes may consent to the proposed
amendments to the indenture. Any beneficial owner of discount notes who is not
the registered holder must arrange with the registered holder to execute and
deliver the consent on his or her behalf. The registered holder may provide such
consent either by executing the "Consent of Registered Holder to Proposed
Amendments" box provided herein or by executing a separate consent substantially
in the form of such "Consent of Registered Holder to Proposed Amendments." In
either case, the signature of the registered holder must be guaranteed by an
eligible institution.
3. Inadequate Space. If the space provided herein is inadequate, the
certificate numbers and the principal amount of the discount notes to which this
letter of transmittal relates should be listed on a separate signed schedule
attached hereto.
4. Withdrawal of Tender. Holders who tender discount notes pursuant to the
exchange offer may withdraw tenders of discount notes at any time before 11:59
p.m., on the expiration date, except as otherwise provided below.
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 11:59 p.m., 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.
If discount notes have been tendered pursuant to the procedures for
book-entry transfers any notice of withdrawal must specify the name and number
of the account at The Depository Trust Company to be credited with the withdrawn
discount notes and must otherwise comply with The Depository Trust Company's
procedures.
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 not be deemed to be 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 one of the procedures described
herein at any time before the expiration date.
PRIOR TO THE EXPIRATION DATE A WITHDRAWAL OF THE TENDER OF A DISCOUNT NOTE
WILL ALSO EFFECT A REVOCATION OF A CONSENT TO THE PROPOSED AMENDMENTS. Consents
to the proposed amendments to the indentures cannot be revoked after the
expiration date.
5. Partial Tenders. Holders may elect to tender their discount notes in
whole or in part. A partial tender shall constitute consent to the proposed
amendments to the extent of the principal amount of discount notes being
tendered. If less than the entire principal amount of discount notes evidenced
by a certificate is to be tendered, fill in the principal amount that is to be
tendered in part in the box entitled
11
<PAGE> 240
"Principal Amount Tendered" above. In such case, a new certificate for the
principal amount of discount notes not so tendered will be sent to such holder,
unless otherwise provided in the appropriate box of this letter of transmittal,
as soon as practicable after the expiration date. The entire principal amount of
discount notes represented by a certificate delivered to the exchange agent will
be deemed to have been tendered unless otherwise indicated.
6. Signatures on this Letter of Transmittal; Bond Powers and
Endorsements. If this letter of transmittal is signed by the registered
holder(s) of the discount notes tendered hereby, the signature must correspond
with the name as written on the face of the discount notes without alteration,
enlargement or any change whatsoever.
If any of the discount notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this letter of transmittal.
If any discount notes tendered hereby are registered in different names, it
will be necessary to complete, sign and submit as many separate copies of this
letter of transmittal and any necessary accompanying documents as there are
different registrations.
If the certificates for discount notes are registered in the name of a
person other than the signer of a letter of transmittal, then, in order to
tender such notes pursuant to the exchange offer, the certificates representing
such discount notes must be endorsed or accompanied by appropriate bond powers,
signed exactly as the name or names of such holder or holders appear on the
certificates, with the signatures on the certificates or bond powers guaranteed
as provided below.
If this letter of transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and proper evidence satisfactory to Arch of their
authority so to act must be submitted.
7. Special Issuance and Delivery Instructions. Tendering holders should
indicate in the applicable box the name and address to which the Arch common
stock, with respect to discount notes accepted for exchange, or discount notes
for principal amounts not exchanged or not tendered, are to be issued or sent,
if different from the name and address of the person signing this letter of
transmittal. In the case of issuance in a different name, the tax identification
or Social Security number of the person named must also be indicated.
8. Tender Not Conditioned on Consummation of the PageNet Merger. By
tendering discount notes, each tendering holder consents to exchange of its note
even if the PageNet merger never occurs.
9. Waiver of Conditions. Arch reserves the right upon certain limited
conditions specified in the prospectus under the heading "The Exchange Offer
-- Conditions," to waive certain of the specified conditions of the exchange
offer, in whole at any time or in part from time to time, in the case of any
discount notes tendered hereby. See "The Exchange Offer -- Conditions" in the
prospectus.
10. Transfer Taxes. Arch shall pay all transfer taxes, if any, applicable
to the transfer and exchange of discount notes to it or its order pursuant to
the exchange offer. If, however, delivery of Arch common stock with respect to
discount notes accepted for such exchange and/or discount notes for principal
amounts not tendered are to be made to, or are to be registered or issued in the
name of, any person other than the registered holder of the discount notes
tendered hereby, or if tendered discount notes are registered in the name of any
person other than the person signing this letter of transmittal, or if a
transfer tax is imposed for any reason other than the transfer and exchange of
discount notes to Arch or its order pursuant to the exchange offer, the amount
of any such transfer taxes (whether imposed on the registered holder or any
other person) will be payable by the tendering holder.
12
<PAGE> 241
11. Replacement Notes. If a holder desires to tender discount notes
pursuant to the exchange offer but is unable to locate the discount notes to be
tendered, such holder should write to or telephone the trustee under the
indenture, The Bank of New York, 101 Barclay Street, New York, New York 10286,
Attn: Tolutope Adeyoju, (212) 815-3728, about procedures for replacing discount
notes or arranging for indemnification. Letters of transmittal should not be
sent to the trustee under the indenture but to the exchange agent as described
above.
12. Substitute Form W-9. Each tendering holder is required to provide the
exchange agent with a correct taxpayer identification number on Substitute Form
W-9 which is provided under "Important Tax Information" below, and, if
applicable, to indicate that the holder is not subject to backup withholding.
Failure to provide the information on the form for an adequate basis for
exemption may subject the tendering holder to a $50 (or greater) penalty imposed
by the Internal Revenue Service, and 31% backup withholding on the payments made
to the holder or other payee with respect to discount notes exchanged pursuant
to the exchange offer. The box in Part 3 of the Form W-9 may be checked if the
tendering holder has not been issued a taxpayer identification number and has
applied for a number or intends to apply for a number in the near future. If the
box in Part 3 is checked and the exchange agent is not provided with a taxpayer
identification number within sixty days, 31% of any payments may be withheld
until a taxpayer identification number is provided to the exchange agent.
13. Requests for Assistance and Additional Copies. Request for assistance
or for additional copies of the prospectus, this letter of transmittal, the
Notice of Guaranteed Delivery and/or Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9, may be directed to the information
agent at the address and telephone numbers set forth below:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
Phone: 1-800-322-2885
Fax: (212) 929-0308
Important: For a tender of discount notes to be valid, this letter of
transmittal (or manually-signed facsimile hereof), together with the discount
notes and all other required documents, or a Notice of Guaranteed Delivery, must
be received by the exchange agent prior to the expiration date.
IMPORTANT TAX INFORMATION
Under federal income tax law, a holder whose tendered discount notes are
accepted for exchange is required by law to provide the exchange agent with such
holder's correct taxpayer identification number on Substitute Form W-9 below. If
the exchange agent is not provided with the correct taxpayer identification
number, the holder or other payee may be subject to a $50 (or greater) penalty
imposed by the Internal Revenue Service. In addition, payments that are made to
such holder or other payee with respect to discount notes exchanged pursuant to
the exchange offer may be subject to backup withholding at a rate of 31%.
Certain holders of discount notes (including, among others, all
corporations and certain foreign individuals) are not generally subject to these
backup withholding and reporting requirements. In order for a foreign person to
qualify for exemption from U.S. withholding taxes, that holder must submit to
the exchange agent a properly completed Internal Revenue Service Form W-8,
signed under penalties of perjury, attesting to that person's exemption from
withholding taxes. Forms W-8 can be obtained from the exchange agent. See the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional instructions.
By tendering discount notes pursuant to the exchange offer, a holder that
does not comply with the conditions described above authorizes the exchange
agent to withhold payment otherwise due so as to
13
<PAGE> 242
enable it to satisfy its backup withholding obligation. Pursuant to the backup
withholding provisions of federal income tax law, unless the conditions
described above are satisfied, the exchange agent will withhold an amount of any
cash payable to a tendering holder of discount notes pursuant to the exchange
offer that will enable the exchange agent to remit the appropriate amount of
backup withholding due to the Internal Revenue Service with respect to the
exchange. Backup withholding is not an additional tax. Rather, the federal
income tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be sought from the Internal Revenue Services.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made to a holder or other payee
with respect to discount notes exchanged pursuant to the exchange offer, the
holder is required to notify the exchange agent of the holder's correct taxpayer
identification number by completing the form below, certifying that the taxpayer
identification number provided on Substitute From W-9 is correct (or that such
holder is awaiting a taxpayer identification number) and that (i) the holder has
not been notified by the Internal Revenue Service that the holder is subject to
backup withholding as a result of failure to report all interest or dividends or
(ii) the Internal Revenue Service has notified the holder that the holder is no
longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The holder is required to give the exchange agent the taxpayer
identification number (e.g., Social Security number or employer identification
number) of the registered holder of the discount notes. If the discount notes
are in more than one name are not in the name of the actual owner, consult the
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9, included in the materials sent herewith, for additional guidance on
which number to report.
14
<PAGE> 243
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SUBSTITUTE PART I -- Taxpayer Identification Number -- For -------------------------------
FORM W-9 all accounts, enter your taxpayer Social Security Number
DEPARTMENT OF THE identification number in the box at right. (For or
TREASURY most individuals, this is your social security
INTERNAL REVENUE SERVICE number. If you do not have a number, see -------------------------------
"Obtaining a Number" in the enclosed Employer identification number
PAYER'S REQUEST FOR TAXPAYER Guidelines.) Certify by signing and dating (If awaiting TIN write "Applied For")
IDENTIFICATION NUMBER ("TIN") below. Note: If the account is in more than one
name, see the chart in the enclosed Guidelines
to determine which number to give the payer.
----------------------------------------------------------------------------------------
PART II -- For Payees Exempt From Backup Withholding, see the enclosed Guidelines and
complete as instructed therein.
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be
issued to me), and
(2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been
notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of
failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to
backup withholding.
CERTIFICATE INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you are
currently subject to backup withholding because of underreporting interest or dividends on your tax return.
However, if after being notified by the IRS that you were subject to backup withholding, you received another
notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). (Also
see instructions in the enclosed Guidelines.)
---------------------------------------------------------------------------------------------------------------------
Signature Date ____________ , 2000
---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THIS OFFER. PLEASE REVIEW
THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
NOTE: YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING A TAXPAYER
IDENTIFICATION NUMBER.
--------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all reportable payments made to me thereafter will be
withheld until I provide a taxpayer identification number.
------------------------------------ ------------------------------------
Signature Date
--------------------------------------------------------------------------------
15
<PAGE> 244
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.
Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
------------------------------------------------------------
GIVE THE
SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF:
------------------------------------------------------------
<C> <S> <C>
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, the
first individual on
the account(1)
3. Husband and wife (joint account) The actual owner of
the account or, if
joint funds, the
first individual on
the account(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor (joint account) The adult, or, if
the minor is the
only contributor,
the minor(1)
6. Account in the name of guardian or The ward, minor, or
committee for a designated ward, incompetent
minor or incompetent person person(3)
7. (a) The usual revocable savings The grantor-
trust account (grantor is also trustee(1)
trustee)
(b) So-called trust account that The actual owner
is not a legal or valid trust
under State law
8. Sole proprietorship account The owner(4)
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
GIVE THE EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF:
------------------------------------------------------------
<C> <S> <C>
9. A valid trust, estate, or pension The legal entity
trust (Do not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity itself
is not designated
in the account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization account
12. Partnership account held in the The partnership
name of the business
13. Association, club, or other tax- The organization
exempt organization
14. A broker or registered nominee The broker or
nominee
15. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a State or
local government, school district,
or prison) that receives
agricultural program payments
------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 245
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number (for businesses and all
other entities), at the local office of the Social Security Administration or
the Internal Revenue Service and apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following (Section references are to the Internal Revenue Code:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under section 403(b)(7).
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
- An international organization or any agency, or instrumentality thereof.
- A registered dealer in securities or commodities registered in the U.S. or
possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a).
- An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
- An entity registered at all times under the Investment Company Act of 1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441.
- Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid in
money.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- Payments described in section 6049(b)(5) to nonresident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER, IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends that
are not subject to information reporting are also not subject to backup
withholding. For details, see sections 6041, 6041A(a), 6042, 6044, 6045, 6049
and 6050A and 6050N, and the regulations under those sections.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes and to help verify the accuracy of tax returns. Payers
must be given the numbers whether or not recipients are required to file a tax
return. Payers must generally withhold 31% of taxable interest, dividend, and
certain other payments to a payee who does not furnish a taxpayer identification
number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS.--If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure is strong evidence of
negligence. If negligence is shown, you will be subject to a penalty of 20% on
any portion of an underpayment attributable to that failure.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE
<PAGE> 246
NOTICE OF GUARANTEED DELIVERY
With Respect to 10 7/8% Senior Discount Notes due 2008
of
ARCH COMMUNICATIONS GROUP, INC.
This form or one substantially equivalent hereto must be used to accept the
exchange offer if any 10 7/8% Senior Discount Notes due 2008 of Arch
Communications Group, Inc. are not lost but are not immediately available or
time will not permit all required documents to reach the exchange agent by the
expiration date. Such form may be delivered by telegram, telex, facsimile
transmission, mail or hand delivery to the exchange agent. See "Procedure for
Tendering Discount Notes and Delivery of Consents -- Guaranteed Delivery
Procedures" in the prospectus dated as of August , 2000. All correspondence
should be addressed to the exchange agent as follows:
<TABLE>
<S> <C>
By Mail: By Hand and Overnight Courier:
Harris Trust Company of New York Harris Trust Company of New York
Wall Street Station 88 Pine Street
P.O. Box 1023 19th Floor
New York 10268-1023 New York, New York 10005
</TABLE>
By Facsimile Transmission: (212) 701-7636 or (212) 701-7637
(For Eligible Institutions Only)
Confirm Facsimile by Telephone: (212) 701-7624
For Information Call: (212) 701-7624
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF THIS
INSTRUMENT VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
<PAGE> 247
Ladies and Gentlemen:
The undersigned hereby tenders to Arch Communications Group, Inc., upon
terms and subject to the conditions set forth in the prospectus and the
accompanying Letter of Transmittal/Consent Form receipt of which is hereby
acknowledged, the principal amount of senior discount notes specified below,
pursuant to the guaranteed delivery procedures set forth in the prospectus under
"Procedure for Tendering Discount Notes and Delivery of Consents -- Guaranteed
Delivery Procedures."
The undersigned hereby tenders the discount notes listed below and
acknowledges that such tender also constitutes a consent to the proposed
amendments to the indenture, as such proposed amendments are described in the
prospectus.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
DISCOUNT NOTES CERTIFICATE NUMBERS (IF AVAILABLE) PRINCIPAL AMOUNT TENDERED
--------------------------------------------------------------------------------------------------
<S> <C> <C>
--------------------------------------------------------------------------------------------------
</TABLE>
SIGN HERE
--------------------------------------------------------------------------------
Signature(s)
--------------------------------------------------------------------------------
Name(s) (Please Print)
--------------------------------------------------------------------------------
Address
--------------------------------------------------------------------------------
Zip Code
--------------------------------------------------------------------------------
Area Code & Tel. No.
Dated:
--------------------------------------------------------------------------
2
<PAGE> 248
GUARANTEE
(Not to Be Used for Signature Guarantee)
The undersigned, an eligible institution, guarantees that the certificates
representing the principal amount of discount notes tendered hereby in proper
form for transfer, or timely confirmation of the book-entry transfer of such
discount notes into the exchange agent's account at The Depository Trust Company
pursuant to the procedures set forth in the "Procedure for Tendering Discount
Notes and Delivery of Consents -- Book-Entry Transfers" section of the
prospectus, together with a properly completed and duly executed letter of
transmittal (or manually-signed facsimile thereof or agent's message in lieu
thereof) and any required signature guarantee and any other documents required
by the letter of transmittal, will be received by the exchange agent at the
address set forth above, no later than three New York Stock Exchange trading
days after the date of execution of the Notice of Guaranteed Delivery.
<TABLE>
<S> <C>
Name of Firm: ------------------------------------- Title:
-----------------------------------------------
Authorized Signature: ----------------------------- Address: --------------------------------------------
----------------------------------------------------- -----------------------------------------------------
Zip Code
Area Code and Telephone Number:
Name: ---------------------------------------------- -----------------------------------------------------
Dated: ----------------------------------------------
</TABLE>
NOTE: DO NOT SEND CERTIFICATES WITH THIS FORM. CERTIFICATES SHOULD BE SENT WITH
THE LETTER OF TRANSMITTAL.
3
<PAGE> 249
ANNEX B
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
PAGING NETWORK, INC.,
ARCH COMMUNICATIONS GROUP, INC.
AND
ST. LOUIS ACQUISITION CORP.
DATED AS OF NOVEMBER 7, 1999
AND AMENDED AS OF
JANUARY 7, 2000
MAY 10, 2000
JULY 23, 2000
AND
SEPTEMBER 7, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 250
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement"), dated as of November 7,
1999, as amended by the Amendments dated as of January 7, 2000, May 10, 2000,
July 23, 2000 and September 7, 2000, among Paging Network, Inc., a Delaware
corporation ("PageNet"), Arch Communications Group, Inc., a Delaware corporation
("Arch"), and St. Louis Acquisition Corp., a Delaware corporation that is a
wholly owned subsidiary of Arch ("Merger Sub").
RECITALS
WHEREAS, the respective Boards of Directors of each of Arch, Merger Sub and
PageNet have approved, recommended and declared advisable this Agreement and the
merger of Merger Sub with and into PageNet (the "Merger") upon the terms and
subject to the conditions set forth in this Agreement;
WHEREAS, the parties hereto intend, by executing and delivering this
Agreement, to adopt a plan of reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and to
cause the Merger and the other transactions which are part of this plan of
reorganization to qualify as a "reorganization" as therein defined;
WHEREAS, the Arch Board of Directors has approved, recommended and declared
advisable certain amendments to its Certificate of Incorporation to effectuate
the actions described herein (the "Certificate Amendments"), contemporaneously
upon and in connection with the Merger;
WHEREAS, Arch, Merger Sub and PageNet desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained in this
Agreement, the parties hereto agree as follows:
ARTICLE I.
THE MERGER; CLOSING; EFFECTIVE TIME
1.1. The Merger. Upon the terms and subject to the conditions set forth
in this Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub
shall be merged with and into PageNet and the separate corporate existence of
Merger Sub shall thereupon cease. PageNet shall be the surviving corporation in
the Merger (sometimes referred to as the "Surviving Corporation") and shall
continue to be governed by the laws of the State of Delaware, and the separate
corporate existence of PageNet with all its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger, except as set
forth in Articles II and 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> 251
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 0.04796505 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
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<PAGE> 252
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; (B) with respect to holders of PageNet Shares at the Vast
Distribution Record Date (as defined in Section 6.22), the Distributed
Interests (as defined in Section 6.22), and (C) any unpaid dividends and
other distributions due to such holder with respect to such shares. Subject
to Sections 4.2(g) and 4.3, 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 Vast Distribution 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. Notwithstanding the
foregoing, a holder of Dissenting Shares shall not be required to surrender
a Certificate in order to receive Distributed Interests with respect to the
PageNet Shares represented by such Certificate, provided that Arch has
confirmed to the Exchange Agent that such holder has taken all necessary
steps to perfect appraisal rights pursuant to Section 4.3 hereof and the
DGCL. 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 Vast Distribution 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 (and/or Distributed Interests) 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.
B-3
<PAGE> 253
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, if Arch elects to convert shares of Arch
Class B Common Stock (as defined below) into shares of Arch Common Stock at
the Effective Time, Arch Class B Common Stock 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
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<PAGE> 254
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. Any Distributed
Interests, and any portion of the dividends or other distributions with
respect to the Distributed Interests deposited by PageNet 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 the Distributed Subsidiary. Any holders of
Certificates who have not theretofore complied with this Article IV shall
thereafter be entitled to look only to the Distributed Subsidiary for the
Distributed Interests, and any dividends and other distributions with
respect thereto issuable and/or payable pursuant to Section 4.1, Section
4.2(b), and Section 6.22 upon due surrender of their Certificates (or
affidavits of loss in lieu thereof), in each case, without any interest
thereon. Notwithstanding the foregoing, none of Arch, the Distributed
Subsidiary, 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 and PageNet will
issue the shares of Arch Common Stock and the Distributed Interests 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), Section
4.2(d), and Section 6.22, 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. Notwithstanding anything to the contrary,
PageNet Shares outstanding immediately prior to the Effective Time and held by a
stockholder of record as of the time of the PageNet Stockholders Meeting who has
not voted in favor of the Merger or consented thereto in writing and who has
delivered a written demand for appraisal of such shares at or before the PageNet
Stockholders Meeting in accordance with Section 262 of the DGCL ("Dissenting
Shares"), shall not be converted into the right to receive the Merger
Consideration unless such holder fails to perfect or withdraws or otherwise
loses his right to appraisal and payment under the DGCL. If, after the Effective
Time, any such holder fails to perfect or effectively withdraws or loses his
right to appraisal and payment, such Dissenting Shares shall thereupon be
treated as if they had been converted as of the Effective Time into the right to
receive the Merger Consideration to which such holder is entitled, without
interest or dividends thereon.
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 Common Stock, or securities convertible or exchangeable into, or
exercisable for, PageNet Shares or Arch Common Stock issued and outstanding, the
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
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<PAGE> 255
Arch Common Stock offered to holders of Arch Notes in the Exchange Offers (with
a corresponding reduction in the number of shares of Arch Common Stock (or
Distributed Interests) offered to the holders of PageNet Shares or the holders
of Arch Common Stock, respectively). Upon delivery of the Alternative Merger
Notice, the parties to this Agreement shall cooperate with each other and use
their respective reasonable best efforts to determine the manner in which the
Merger, the Agreement and the transactions contemplated hereby shall be
restructured (the Merger, restructured as contemplated by the parties pursuant
to this Section 4.5, shall be referred to herein as the "Alternative Merger").
With the written consent of each of the parties to this Agreement (such consent
not to be unreasonably withheld), the Merger, this Agreement and the other
transactions contemplated hereby may be modified to reflect the Alternative
Merger with a view to ensuring that the parties hereto are not adversely
affected by the restructuring.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
5.1. Representations and Warranties of PageNet, Arch and Merger Sub.
Except as set forth in the corresponding sections or subsections of the
respective disclosure letters, dated as of the date of this Agreement, and
delivered by PageNet to Arch or by Arch to PageNet (each a "Disclosure Letter,"
and the "Pagenet Disclosure Letter" and the "Arch Disclosure Letter,"
respectively), as the case may be, PageNet (except for subparagraphs (b)(ii),
(c)(ii), (j)(ii) and (o)(ii) below and references in subparagraphs (a) and (e)
below to documents made available by Arch to PageNet) represents and warrants to
Arch and Merger Sub, and Arch, on behalf of itself and Merger Sub (except for
subparagraphs (b)(i), (c)(i), (j)(i), and (o)(i) below, and references in
subparagraphs (a) and (e) below to documents made available by PageNet to Arch)
represents and warrants to PageNet, that:
(a) Organization, Good Standing and Qualification. Each of it and its
Subsidiaries is a corporation duly organized, validly existing, and in good
standing under the laws of its respective jurisdiction of organization and
has all requisite corporate or similar power and authority to own and
operate its properties and assets and to carry on its business as presently
conducted, and is qualified to do business 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.
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(b) Capital Structure.
(i) The authorized capital stock of PageNet consists of 250,000,000
PageNet Shares, of which 103,960,240 PageNet Shares were issued and
outstanding and no PageNet Shares were held in treasury as of the close of
business on November 5, 1999, and 25,000,000 shares of preferred stock, of
which no shares were issued and outstanding as of the close of business on
November 5, 1999. All of the outstanding PageNet Shares have been duly
authorized and are validly issued, fully paid and nonassessable. There are
no PageNet Shares reserved for issuance pursuant to the Shareholder Rights
Agreement, dated as of September 8, 1994, between PageNet and The First
National Bank of Boston, as Rights Agent, as amended (the "PageNet Rights
Agreement"), and PageNet Shares subject to issuance as set forth below, as
of the date of this Agreement, and PageNet has no PageNet Shares or
preferred stock reserved for, or subject to, issuance. As of November 5,
1999, there were 9,887,588 PageNet Shares that PageNet was obligated to
issue pursuant to PageNet's stock plans, at a weighted average exercise
price of $9.2637 per PageNet Share, and each of such plans is listed in
Section 5.1(b)(i) of the PageNet Disclosure Letter (collectively, the
"PageNet Stock Plans"). Each of the outstanding shares of capital stock or
other securities of each of PageNet's "Significant Subsidiaries" (as
defined in Rule 1.02(w) of Regulation S-X promulgated pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including
any Subsidiaries that, if aggregated, would together constitute a
Significant Subsidiary) is duly authorized, validly issued, fully paid and
nonassessable and owned by PageNet or a direct or indirect wholly owned
subsidiary of PageNet, free and clear of any lien, pledge, security
interest, claim or other encumbrance. Except as set forth above, as of the
date of this Agreement there are no preemptive or other outstanding rights,
options, warrants, conversion rights, stock appreciation rights, redemption
rights, repurchase rights, agreements, arrangements or commitments to issue
or to sell any shares of capital stock or other securities of PageNet or
any of its Significant Subsidiaries or any securities or obligations
convertible or exchangeable into, or exercisable for, or giving any Person
a right to subscribe for or acquire, any securities of PageNet or any of
its Significant Subsidiaries, and no securities or obligation evidencing
such rights are authorized, issued or outstanding. As of the date hereof,
PageNet does not have outstanding any bonds, debentures, notes or other
debt obligations, the holders of which have the right to vote (or
convertible into or exercisable for securities having the right to vote)
with the stockholders of PageNet on any matter. No PageNet Shares are held
by a Subsidiary of PageNet.
(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
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Stock, each of such plans is listed in Section 5.1(b)(ii) of the Arch
Disclosure Letter (collectively the "Arch Stock Plans"), and 5,902,702
shares of Arch Common Stock that Arch was obligated to issue pursuant to
outstanding warrants having an expiration date of September 1, 2001 and an
effective exercise price of $9.03 per Share of Arch Common Stock. As of the
date hereof, each outstanding Arch Series C Preferred Share is convertible
into 6.7444 shares of Arch Common Stock. Each of the outstanding shares of
capital stock or other securities of each of Arch' Significant Subsidiaries
is duly authorized, validly issued, fully paid and nonassessable and owned
by Arch or a direct or indirect wholly owned Subsidiary of Arch, free and
clear of any lien, pledge, security interest, claim, or other encumbrance.
Except as set forth above and except pursuant to the Arch Series B
Preferred Shares or the Arch Series C Preferred Shares, there are no
preemptive or other outstanding rights, options, warrants, conversion
rights, stock appreciation rights, redemption rights, repurchase rights,
agreements, arrangements or commitments to issue or sell any shares of
capital stock or other securities of Arch or any of its Significant
Subsidiaries or any securities or obligations convertible or exchangeable
into, or exercisable for, or giving any Person a right to subscribe for or
acquire, any securities of Arch or any of its Significant Subsidiaries, and
no securities or obligations evidencing such rights are authorized, issued
or outstanding. Arch does not have outstanding any bonds, debentures, notes
or other debt obligations, the holders of which have the right to vote (or
convertible into or exercisable for securities having the right to vote)
with the stockholders of Arch on any matter. No shares of Arch Common Stock
or Arch Preferred Shares are held by a Subsidiary of Arch. The authorized
capital stock of Merger Sub consists of 1,000 shares of Common Stock, par
value $0.01 per share, all of which are validly issued and outstanding. All
of the issued and outstanding capital stock of Merger Sub is, and at the
Effective Time will be, owned by Arch, and there are (i) no other shares of
capital stock or other voting securities of Merger Sub, (ii) no securities
of Merger Sub convertible into or exchangeable for shares of capital stock
or other voting securities of Merger Sub and (iii) no options or other
rights to acquire from Merger Sub, and no obligations of Merger Sub to
issue, any capital stock, other voting securities or securities convertible
into or exchangeable for capital stock or other voting securities of Merger
Sub. Merger Sub has not conducted any business prior to the date of this
Agreement and has no, and prior to the Effective Time will have no, assets,
liabilities or obligations of any nature other than those incident to its
formation and pursuant to this Agreement and the Merger and the other
transactions contemplated by this Agreement.
(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.
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(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, 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 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 other transactions contemplated
by this Agreement; and (B) has received the opinion of its financial
advisor, Bear, Stearns & Co. Inc., in a customary form and to the effect
that the Exchange Ratio, as of the date of such opinion, is fair to the
public stockholders of Arch from a financial point of view. The shares of
Arch Common Stock, when issued pursuant to this Agreement or the Arch
Exchange Offer, will be validly issued, fully paid and nonassessable, and
no stockholder of Arch will have any preemptive right of subscription or
purchase with respect thereto.
(d) Government Filings; No Violations.
(i) Other than the filings, notices and/or approvals: (A) pursuant to
Section 1.3 of this Agreement, or, in connection with the Bankruptcy Case
and the Prepackaged Plan, the Final Confirmation Order; (B) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Exchange Act, and the Securities Act of 1933, as amended (the
"Securities Act"); (C) of the Federal Communications Commission (the "FCC")
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"), or the rules, regulations, and policies of the FCC (the "FCC
Regulations"); (D) of any state public utility commissions or similar state
regulatory bodies (each, a "PUC") identified in its respective Disclosure
Letter pursuant to applicable state laws (as defined in Section 5.1(i))
regulating the paging or other telecommunications business ("State Laws");
(E) to comply with state securities or "blue-sky" laws; and (F) of any
local, state or federal governmental 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
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acceleration of any obligations or the creation of a lien, pledge, security
interest or other encumbrance on its assets or the assets of any of its
Significant Investees (with or without notice, lapse of time or both)
pursuant to, any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation ("Contracts") binding upon it or any of its
Significant Investees or any Law or governmental or non-governmental permit
or license to which it or any of its Significant Investees is subject or is
a party; or (C) any change in the rights or obligations of any party under
any Contracts to which it or any of its Significant Investees is subject or
is a party, except for such defaults, breaches, violations or accelerations
as may result from the Bankruptcy Case or the Prepackaged Plan, and except,
in the case of clauses (B) or (C) above for any breach, violation, default,
acceleration, creation or change that, individually or in the aggregate, is
not reasonably likely to have a Material Adverse Effect on it or prevent,
materially delay or materially impair its ability to (x) consummate the
transactions contemplated by this Agreement or (y) operate its business
following the Effective Time. The PageNet Disclosure Letter, with respect
to PageNet, and the Arch Disclosure Letter, with respect to Arch, sets
forth a correct and complete list of Contracts to which it or any of its
Significant Investees is a party, pursuant to which consents or waivers are
or may be required prior to consummation of the transactions contemplated
by this Agreement, other than as may be required in connection with the
Bankruptcy Case or the Prepackaged Plan, or those where the failure to
obtain such consents or waivers is not, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect on it or prevent or
materially impair its (x) ability to consummate the transactions
contemplated by this Agreement or (y) operate its business following the
Effective Time.
(e) Reports; Financial Statements. It has made available to the other
party each registration statement, report, proxy statement or information
statement prepared by it since December 31, 1996, including without
limitation its Annual Report on Form 10-K for the years ended December 31,
1996, December 31, 1997 and December 31, 1998 in the form (including
exhibits, annexes and any amendments thereto) filed with the Securities and
Exchange Commission (the "SEC") (collectively, including any such reports
filed subsequent to the date of this Agreement, its "Reports"). As of their
respective dates, its Reports complied, as to form, with all applicable
requirements under the Securities Act, the Exchange Act, and the rules and
regulations thereunder, and (together with any amendments thereto filed
prior to the date hereof) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading. Each of the
consolidated balance 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,
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franchises and other intangible assets), financial condition and results of
operations of it and its Subsidiaries, except those changes that are not,
individually or in the aggregate, reasonably likely to have a Material
Adverse Effect on it; (ii) any damage, destruction or other casualty loss
with respect to any asset or property owned, leased or otherwise used by it
or any of its Subsidiaries, whether or not covered by insurance, which
damage, destruction or loss is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on it; (iii) any declaration,
setting aside or payment of any dividend or other distribution with respect
to its capital stock; or (iv) any change by it in accounting principles,
practices or methods, except as required by GAAP. Since the Audit Date,
except as provided for in this Agreement, in its respective Disclosure
Letter, or as disclosed in its Reports filed prior to the date of this
Agreement, there has not been any increase in the salary, wage, bonus,
grants, awards, benefits or other compensation payable or that could become
payable by it or any of its respective Subsidiaries, to directors, officers
or key employees as identified in the corresponding section of each party's
Disclosure Letter or any amendment of any of its Compensation and Benefit
Plans (as defined in Section 5.1(h)(i)), other than increases or amendments
in the ordinary and usual course of its business (which may include normal
periodic performance reviews and related compensation and benefit increases
and the provision of new individual compensation and benefits for promoted
or newly hired officers and employees on terms consistent with past
practice).
(g) Litigation and Liabilities. Except as disclosed in its Reports
filed prior to the date of this Agreement, there are no: (x) (i) civil,
criminal or administrative actions, suits, claims, hearings, investigations
or proceedings pending or, to the actual knowledge of its executive
officers identified in the corresponding section of each party's Disclosure
Letter ("Knowledgeable Executives"), threatened against it or any of its
Affiliates (as defined in Rule 12b-2 under the Exchange Act); or (ii)
obligations or liabilities, whether or not accrued, contingent or
otherwise, and whether or not required to be disclosed, including those
relating to matters involving any Environmental Law, or (y) any other facts
or circumstances, in any such case, of which the Knowledgeable Executives
have actual knowledge and that are reasonably likely to result in any
claims against or obligations or liabilities of it or any of its
Affiliates, except, in the case of (x) or (y), those that are not,
individually or in the aggregate, reasonably likely to have a Material
Adverse Effect on it or prevent, materially delay or materially impair its
ability to consummate the transactions contemplated by this Agreement.
(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
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PageNet or Arch, as applicable, is a member of a controlled group of
Persons or a group of trades or businesses under common control with
PageNet or Arch, as applicable, within the meaning of Sections 414(b),
(c), (m) or (o) of the Code.
(ii) All Compensation and Benefit Plans, other than a multiemployer
plan (as defined in Section 3(37) of ERISA), are in substantial
compliance with all requirements of applicable law, including the Code
and ERISA and no event has occurred which will or could cause any such
Compensation and Benefit Plan to fail to comply with such requirements
and no notice has been issued by any governmental authority questioning
or challenging such compliance. There have been no acts or omissions by
it or any of its respective ERISA Affiliates, which have given rise to
or may give rise to material fines, penalties, taxes or related charges
under Section 502 of ERISA or Chapters 43, 47, 68 or 100 of the Code for
which PageNet, Arch, as applicable, or any of its respective ERISA
Affiliates may be liable. Each of the Compensation and Benefit Plans
that is an "employee pension benefit plan" within the meaning of Section
3(2) of ERISA, other than a multiemployer plan (each a "Pension Plan"),
and that is intended to be qualified under Section 401(a) of the Code
has received a favorable determination letter from the Internal Revenue
Service (the "IRS") which covers all changes in law for which the
remedial amendment period (within the meaning of Section 401(b) of the
Code and applicable regulations) has expired and neither it, nor any of
its respective ERISA Affiliates is aware of any circumstances reasonably
likely to result in revocation of any such favorable determination
letter. There is no pending or, to the actual knowledge of PageNet's or
Arch', as applicable, Knowledgeable Executives, threatened material
litigation relating to its Compensation and Benefit Plans. Neither it,
nor any of its respective ERISA Affiliates, has engaged in a transaction
with respect to any of the Compensation and Benefit Plans that, assuming
the taxable period of such transaction expired as of the date of this
Agreement, would subject it or any of the ERISA Affiliates to a material
tax or penalty imposed by either Section 4975 of the Code or Section 502
of ERISA.
(iii) As of the date of this Agreement, no liability under Title IV
of ERISA (other than the payment of prospective premium amounts to the
Pension Benefit Guaranty Corporation in the normal course) has been or
is expected to be incurred by it or any of its respective ERISA
Affiliates with respect to any Compensation and Benefit Plan. No notice
of a "reportable event," within the meaning of Section 4043 of ERISA for
which the 30-day reporting requirement has not been waived, has been
required to be filed for any Pension Plans within the 12-month period
ending on the 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.
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(vi) Neither it, nor any of its respective ERISA Affiliates, have
any obligations for post-termination health and life benefits under any
of the Compensation and Benefit Plans, except as set forth in its
Reports filed prior to the date of this Agreement or as required by
applicable law.
(vii) The consummation of the Merger (or the approval thereof by
its respective stockholders) and the other transactions contemplated by
this Agreement, will not (except as may result from, or be contemplated
by, the Bankruptcy Case or the Prepackaged Plan): (x) entitle any of its
employees or directors or any employees of any of its ERISA Affiliates,
as applicable, to severance pay, directly or indirectly, upon
termination of employment or otherwise; (y) accelerate the time of
payment or vesting or trigger any payment of compensation or benefits
under, or increase the amount payable or trigger any other material
obligation pursuant to, any of the Compensation and Benefit Plans; or
(z) result in any breach or violation of, or a default under, any of the
Compensation and Benefit Plans.
(viii) None of the Compensation and Benefit Plans is a
multiemployer plan and neither it, nor any of its respective ERISA
Affiliates, have contributed or been obligated to contribute to a
multiemployer plan at any time.
(i) Compliance with Laws. Except as set forth in its Reports filed
prior to the date of this Agreement, the businesses of each of it and its
Subsidiaries have not been, and are not being, conducted in violation of
any law, statute, ordinance, regulation, judgment, order, decree,
injunction, arbitration award, license, authorization, opinion, agency
requirement or permit of any Governmental Entity or common law
(collectively, "Laws"), except for violations or possible violations that
are not, individually or in the aggregate, reasonably likely to have a
Material Adverse Effect on it or prevent, materially delay or materially
impair its ability to consummate the transactions contemplated by this
Agreement. Except as set forth in its Reports filed prior to the date of
this Agreement, no investigation or review by any Governmental Entity with
respect to it or any of its Subsidiaries is pending or, to the actual
knowledge of the Knowledgeable Executives, threatened, nor has any
Governmental Entity indicated an intention to conduct the same, except for
those the outcome of which are not, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect on it or prevent,
materially delay or materially impair its ability to consummate the
transactions contemplated by this Agreement. To the actual knowledge of the
Knowledgeable Executives, no material change is required in its or any of
its Subsidiaries' processes, properties or procedures in connection with
any such Laws, and it has not received any notice or communication of any
material noncompliance with any such Laws that has not been cured as of the
date of this Agreement, except for such changes and noncompliance that are
not, individually or in the aggregate, reasonably likely to have a Material
Adverse Effect on it or prevent, materially delay or materially impair its
ability to consummate the transactions contemplated by this Agreement. Each
of it and its Subsidiaries has all permits, licenses, franchises,
variances, exemptions, orders, operating rights, 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
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hereby and thereby, (II) no Distribution Date (as defined in the PageNet
Rights Agreement) shall be deemed to have occurred as a result of this
Agreement or the transactions contemplated hereby and (III) the rights
issuable pursuant to the PageNet Rights Agreement will not separate from
the shares of PageNet Common Stock, as a result of the approval,
execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby, and (C) render any anti-takeover or
other provision contained in the certificate of incorporation or by-laws
of PageNet inapplicable to the Merger, this Agreement and the other
transactions contemplated hereby.
(ii) The Arch Board of Directors has taken all appropriate and
necessary actions to exempt the Merger, this Agreement and the
transactions contemplated hereby from the restrictions of Section 203 of
the DGCL. No other Takeover Statute applies to this Agreement or any of
the transactions contemplated hereby. Arch and the Arch Board of
Directors have taken all appropriate and necessary actions to (A) amend
the Arch Rights Agreement as set forth in Exhibit B to this Agreement,
(B) provide that (I) PageNet shall not be deemed an Acquiring Person (as
defined in the Arch Rights Agreement) as a result of this Agreement or
the transactions contemplated thereby, (II) no Distribution Date (as
defined in the Arch Rights Agreement) shall be deemed to have occurred
as a result of this Agreement or the transactions contemplated thereby
unless the ownership threshold set forth in Exhibit B shall be exceeded,
and (III) the rights issuable pursuant to the Arch Rights Agreement will
not separate from the shares of Arch Common Stock, as a result of the
approval, execution or delivery of this Agreement or the consummation of
the transactions contemplated hereby unless the ownership threshold set
forth in Exhibit B shall be exceeded, and (C) render any anti-takeover
or other provision contained in the certificate of incorporation or by-
laws of Arch inapplicable to the Merger, this Agreement and the other
transactions contemplated hereby.
(k) Tax Matters. As of the date of this Agreement, neither it nor any
of its Subsidiaries has taken or agreed to take any action, nor do the
Knowledgeable Executives have any actual knowledge of any fact or
circumstance (excluding possible uncertainties regarding valuation of
securities to be issued in the Merger and Exchange Offers), that would
prevent the Merger and the other transactions contemplated by this
Agreement from qualifying as a "reorganization" within the meaning of
Section 368(a) of the Code.
(l) Taxes. It and each of its Subsidiaries have prepared in good
faith and duly and timely filed (taking into account any extension of time
within which to file) all material Tax Returns required to be filed by any
of them at or before the Effective Time and all such filed Tax Returns are
complete and accurate in all material respects. It and each of its
Subsidiaries as of the Effective Time: (x) will have paid all Taxes and
estimated Taxes (including all amounts shown to be due on all filed Tax
Returns) that they are required to pay prior to the Effective Time; and (y)
will have withheld or collected all federal, state and local income taxes,
FICA, FUTA and other Taxes, including, without limitation, similar foreign
Taxes, required to be withheld from amounts owing to any employee,
creditor, or third party, and to the extent required, will have paid such
amounts to the proper governmental authority. As of the date of this
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
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agreement; or (B) is liable for the Tax obligations of any person other
than it or one of its Subsidiaries.
The term "Tax" (including, with correlative meaning, the terms "Taxes," and
"Taxable") includes all federal, state, local and foreign income, profits,
franchise, gross receipts, environmental, customs duty, capital stock,
severance, stamp, payroll, sales, employment, unemployment, disability, use,
property, withholding, excise, production, value added, occupancy and other
taxes, duties, charges, fees, or assessments of any nature whatsoever, together
with all interest, penalties and additions imposed with respect to such amounts
and any interest with respect to such penalties and additions. The term "Tax
Return" includes all federal, state, local and foreign returns and reports
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be supplied to a Tax authority relating to
Taxes.
(m) Labor Matters. Neither it nor any of its Subsidiaries is the
subject of any material proceeding asserting that it or any of its
Subsidiaries has committed an unfair labor practice or is seeking to compel
it to bargain with any labor union or labor organization, nor is there
pending or, to the actual knowledge of its Knowledgeable Executives,
threatened, nor has there been for the past five years, any labor strike,
dispute, walkout, work stoppage, slow-down or lockout involving it or any
of its Subsidiaries, except in each case as is not, individually or in the
aggregate, reasonably likely to have a Material Adverse Effect on it. None
of the employees of PageNet or Arch or any of their respective Subsidiaries
is subject to a collective bargaining agreement, no collective bargaining
agreement is currently being negotiated, and no attempt is currently being
made or during the past three (3) years has been made to organize any of
its employees to form or enter into any labor union or similar
organization.
(n) Environmental Matters. Except as disclosed in its Reports filed
prior to the date of this Agreement and except for such matters that,
individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect on it: (i) each of it and its Subsidiaries has
complied with all applicable Environmental Laws; (ii) the properties
currently owned or operated by it or any of its Subsidiaries (including
soils, groundwater, surface water, buildings, or other structures) do not
contain any Hazardous Substances; (iii) the properties formerly owned or
operated by it or any of its Subsidiaries did not contain any Hazardous
Substances during the period of ownership or operation by it or any of its
Subsidiaries; (iv) neither it nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any
third party property; (v) neither it nor any Subsidiary has been associated
with any release or threat of release of any Hazardous Substance; (vi)
neither it nor any Subsidiary has received any notice, demand, letter,
claim, or request for information alleging that it or any of its
Subsidiaries may be in violation of or liable under any Environmental Law;
(vii) neither it nor any of its Subsidiaries is subject to any orders,
decrees, injunctions, or other arrangements with any Governmental Entity or
is subject to any indemnity or other agreement with any third party
relating to liability under any Environmental Law or relating to Hazardous
Substances; and (viii) there are no circumstances or conditions involving
it or any of its Subsidiaries that could reasonably be expected to result
in any claims, liability, investigations, costs, or restrictions on the
ownership, use, or transfer of any of its properties pursuant to any
Environmental Law.
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.
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(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, except that: (i) PageNet has employed Houlihan Lokey Howard &
Zukin Capital, Goldman, Sachs & Co. and Morgan Stanley Dean Witter as its
financial advisors, the arrangements with which have been disclosed to Arch
prior to the date of this Agreement; and (ii) Arch has employed Bear,
Stearns & Co. Inc. as its financial advisor, the arrangements with which
have been disclosed to PageNet prior to the date of this Agreement.
(p) Computer Systems. Except as set forth in its Reports: (i) its
computer system performs and shall perform properly all date-sensitive
functions with respect to dates prior to and after December 31, 1999; and
(ii) it has developed feasible contingency plans to ensure uninterrupted
and unimpaired business operation in the event of a failure of its own or a
third party's computer system or equipment on or about January 1, 2000
(including, those of vendors, customers, and suppliers, and a general
failure of, or interruption in, its communications and delivery
infrastructure).
(q) FCC Licenses. Each of Arch and PageNet, and each of its
respective Subsidiaries, is the authorized and legal holder of, or
otherwise has all rights to, all Permits issued under or pursuant to the
Communications Act, the FCC Regulations, and State Laws which are necessary
for the operation of their respective businesses as presently operated,
except as would not, individually or in aggregate, have a Materially
Adverse Effect on it. All such Permits and licenses are validly issued and
in full force and effect, except as would not, individually or in the
aggregate, have a Material Adverse Effect on it. Each of Arch and PageNet,
and each of its respective Subsidiaries, is in compliance in all respects
with the terms and conditions of each such Permit and with all applicable
Governmental Regulations, except where the failure to be in compliance
would not have a Material Adverse Effect on it. There is not pending, and
to the actual knowledge of the Knowledgeable Executives of Arch and
PageNet, as applicable, any threatened, action by or before the FCC or any
governmental or regulatory authority to revoke, suspend, cancel, rescind,
or modify in any material respect any of such party's Permits rights under
the Communications Act, the FCC Regulations or State Laws. Each party has
made all regulatory filings required, and paid all fees and assessments
imposed, by any Governmental Entity, and all such filings and the
calculation of such fees, are accurate in all material respects, except
where the failure to make such filing or pay such fees or assessments would
not have a Material Adverse Effect on such party.
ARTICLE VI.
COVENANTS
6.1. Interim Operations.
(a) PageNet covenants and agrees as to itself and its Subsidiaries that,
from and after the date of this Agreement and prior to the Effective Time
(unless Arch shall otherwise approve in writing, and except as 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
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Subsidiaries to purchase or otherwise acquire, any shares of its capital
stock or any securities convertible into, or exchangeable or exercisable
for, any shares of its capital stock;
(iii) Neither it nor any of its Subsidiaries shall take any action
that would prevent the Merger from qualifying as a "reorganization" within
the meaning of Section 368(a) of the Code or that would cause any of its
representations and warranties in this Agreement to become untrue in any
material respect;
(iv) Neither it nor any of its ERISA Affiliates shall: (A) accelerate,
amend or change the period of exercisability of or terminate, establish,
adopt, enter into, make any new grants or awards of stock-based
compensation or other benefits under any Compensation and Benefit Plans;
(B) amend or otherwise modify any Compensation and Benefit Plan; or (C)
increase the salary, wage, bonus or other compensation of any directors,
officers or key employees, except: (x) for grants or awards to directors,
officers and employees of it or its Subsidiaries under existing
Compensation and Benefit Plans in such amounts and on such terms as are
consistent with past practice; (y) in the ordinary and usual course of its
business (which may include normal periodic performance reviews and related
compensation and benefit increases and the provision of individual PageNet
Compensation and Benefit Plans consistent with past practice for promoted
or newly hired officers and employees on terms consistent with past
practice);or (z) for actions necessary to satisfy existing contractual
obligations under Compensation and Benefit Plans existing as of the date of
this Agreement;
(v) Neither it nor any of its Subsidiaries shall incur, repay or
retire prior to maturity or refinance any indebtedness for borrowed money
or guarantee any such indebtedness or issue, sell, repurchase or redeem
prior to maturity any debt securities or warrants or rights to acquire any
debt securities or guarantee any debt securities of others, except (A) in
the ordinary and usual course of its business, (B) for any refinancing of
such indebtedness or debt securities on terms no less favorable in the
aggregate to PageNet and which would not prevent, materially delay or
materially impair PageNet's ability to consummate the transactions
contemplated by this Agreement, and (C) for any retirement in exchange for
PageNet Shares consistent with past practice;
(vi) Neither it nor any of its Subsidiaries shall make any capital
expenditures in an aggregate amount in excess of the aggregate amount
reflected in PageNet's capital expenditure budget for the fiscal years
ending December 31, 1999 and 2000, a copy of which has been provided to
Arch;
(vii) Neither it nor any of its Subsidiaries shall issue, deliver,
sell, pledge or encumber shares of any class of its capital stock or any
securities convertible or exchangeable into, or any rights, warrants or
options to acquire, or any bonds, debentures, notes, or other debt
obligations having the right to vote or that are convertible or exercisable
for, any such shares, except PageNet may issue PageNet Shares in exchange
for indebtedness or debt securities pursuant to clause (v) above;
(viii) Neither it nor any of its Subsidiaries shall authorize, propose
or announce an intention to authorize or propose, or enter into an
agreement with respect to, any merger, consolidation or business
combination (other than the Merger), or any purchase, sale, lease, license
or other acquisition or disposition of any business or of a material amount
of assets or securities, except for transactions entered 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
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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.
(b) Arch covenants and agrees as to itself and its Subsidiaries that, from
and after the date of this Agreement and prior to the Effective Time (unless
PageNet shall otherwise approve in writing and except as otherwise expressly
contemplated by this Agreement, disclosed in the Arch Disclosure Letter, or
required by applicable Law):
(i) Its business and the business of its Subsidiaries shall be
conducted only in the ordinary and usual course and, to the extent
consistent therewith, it and its Subsidiaries shall use their reasonable
best efforts to preserve their respective business organizations intact and
maintain their respective existing relations and goodwill with customers,
suppliers, regulators, distributors, creditors, lessors, employees and
business associates;
(ii) It shall not: (A) amend its certificate of incorporation or
bylaws; (B) split, combine, subdivide or reclassify its outstanding shares
of capital stock; (C) declare, set aside or pay any dividend payable in
cash, stock or property with respect to any capital stock, except for a
dividend that would be received by holders of PageNet Shares on an
equivalent post-Merger basis per share of Arch Common Stock after the
Effective Time; or (D) repurchase, redeem or otherwise acquire, except in
connection with existing commitments under Arch Stock Plans but subject to
Arch' obligations under subparagraph (iii) below, or permit any of its
Subsidiaries to purchase or otherwise acquire, any shares of its capital
stock or any securities convertible into, or exchangeable or exercisable
for, any shares of its capital stock;
(iii) Neither it nor any of its Subsidiaries shall take any action
that would prevent the Merger from qualifying as a "reorganization" within
the meaning of Section 368(a) of the Code or that would cause any of its
representations and warranties in this Agreement to become untrue in any
material respect;
(iv) Neither it nor any of its ERISA Affiliates shall: (A) accelerate,
amend or change the period of exercisability of or terminate, establish,
adopt, enter into, make any new grants or awards of stock-based
compensation or other benefits under any Compensation and Benefit Plans;
(B) amend or otherwise modify any Compensation and Benefit Plan; or (C)
increase the salary, wage, bonus or other compensation of any directors,
officers or key employees, except: (x) for grants or awards to directors,
officers and employees of it or its Subsidiaries under existing
Compensation and Benefit Plans in such amounts and on such terms as are
consistent with past practice; (y) in the ordinary and usual course of its
business (which may include normal periodic performance reviews and related
compensation and benefit increases and the provision of individual Arch
Compensation and Benefit Plans consistent with past practice for promoted
or newly hired officers and employees on terms consistent with past
practice); or (z) for actions necessary to satisfy existing contractual
obligations under its Compensation and Benefit Plans existing as of the
date of this Agreement;
(v) Neither it nor any of its Subsidiaries shall incur, repay or
retire prior to maturity or refinance any indebtedness for borrowed money
or guarantee any such indebtedness or issue, sell, repurchase or redeem
prior to maturity any debt securities or warrants or rights to acquire any
debt securities or guarantee any debt securities of others, except in (A)
the ordinary and usual course of its business, (B) for any refinancing of
such indebtedness or debt securities on terms no less favorable in the
aggregate 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
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or options to acquire, or any bonds, debentures, notes, or other debt
obligations having the right to vote or that are convertible or exercisable
for, any such shares, except Arch may issue shares of Arch Common Stock
issued in exchange for indebtedness or debt securities pursuant to clause
(v) above;
(viii) Neither it nor any of its Subsidiaries shall authorize, propose
or announce an intention to authorize or propose, or enter into an
agreement with respect to, any merger, consolidation or business
combination (other than the Merger), or any purchase, sale, lease, license
or other acquisition or disposition of any business or of a material amount
of assets or securities, except for transactions entered into in the
ordinary and usual course of its business, except for any acquisition of
assets or any investment having a cash purchase price of $25,000,000 or
less in any single instance and $50,000,000 or less in the aggregate where
such acquisition or investment would not prevent, materially delay or
materially impair Arch' or Merger Sub's ability to consummate the
transactions contemplated by this Agreement;
(ix) Arch shall not make any material change in its accounting
policies or procedures, other than any such change that is required by
GAAP;
(x) Arch shall not release, assign, settle or compromise any material
claims or litigation in excess of $300,000 or make any material tax
election or settle or compromise any material federal, state, local or
foreign tax liability; and
(xi) Neither it nor any of its Subsidiaries shall authorize or enter
into any agreement to do any of the foregoing.
(c) Arch and PageNet agree that any written approval obtained under this
Section 6.1 must be signed, if on behalf of Arch, by the Chief Executive Officer
or the Chief Financial Officer of Arch, or if on behalf of PageNet, by the
Chairman of the Board and Chief Executive Officer or President and Chief
Operating Officer of PageNet.
(d) Notwithstanding any other provision hereof to the contrary, PageNet
may, after the date hereof (i) issue, deliver, sell, pledge or encumber in
arms-length transactions with unaffiliated third parties shares of any class of
capital stock of the Distributed Subsidiary or any securities convertible or
exchangeable into, or any rights, warrants or options to acquire, or any bonds,
debentures, notes, or other debt obligations having the right to vote or that
are convertible or exercisable for, any such shares of the Distributed
Subsidiary, (ii) cause the Distributed Subsidiary to incur any indebtedness for
borrowed money, if all proceeds thereof are used solely by the Distributed
Subsidiary, (iii) transfer the assets set forth in the corresponding section of
the PageNet Disclosure Letter to the Distributed Subsidiary, (iv) determine the
form of security or securities representing the equity ownership of the
Distributed Subsidiary to be distributed to the holders of PageNet Shares or
PageNet Notes pursuant to Sections 6.18 and 6.22 of this Agreement and designate
the rights and restrictions applicable to such securities, (v) establish an
employee stock option, stock ownership or other similar plan and set aside
common equity (of the same type as the Distributed Interests or any securities
underlying such Distributed Interests) representing up to 20% of the equity
ownership of the Distributed Subsidiary for such purpose, or (vi) enter into
such transactions, arrangements or agreements with the Distributed Subsidiary on
terms and conditions approved by Arch or cause the Distributed Subsidiary to
enter into arms-length transactions, arrangements or agreements with third
parties, in each case, as are reasonably necessary and appropriate to permit the
Distributed Subsidiary to continue its business and operations in the ordinary
course following the Merger; provided, that the taking of such action shall not
cause Arch or the Surviving Corporation (other than through its ownership of
capital stock in the Distributed Subsidiary after 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 Vast Distribution Record Date and holders of
PageNet Notes immediately prior to the Effective Time receive 80.5% of the
remaining interests
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in the Distributed Subsidiary and the Surviving Corporation receives 19.5% of
the remaining interests in the Distributed Subsidiary.
6.2. Acquisition Proposals.
(a) Except as set forth in Section 6.1(d) of this Agreement, PageNet and
Arch each agree that neither it nor any of its Subsidiaries nor any of the
officers and directors of it or its Subsidiaries shall, and that each shall
direct and use its best efforts to cause its and its Subsidiaries' employees,
agents and representatives (including any investment banker, attorney or
accountant retained by it or any of its Subsidiaries) (PageNet or Arch, as the
case may be, its respective Subsidiaries and their officers, directors,
employees, agents and representatives being referred to as its
"Representatives") not to, directly or indirectly, initiate, solicit, encourage
or otherwise facilitate any inquiries or the making of any proposal or offer
with respect to a merger, reorganization, acquisition, share exchange,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving it, or any purchase or sale of the consolidated
assets (including without limitation stock of Subsidiaries) of it or any of its
Subsidiaries, taken as a whole, having an aggregate value equal to 10% or more
of its assets, or any purchase or sale of, or tender or exchange offer for, 15%
or more of its equity securities (any such proposal or offer being referred to
as an "Acquisition Proposal"). PageNet and Arch further agree that neither it
nor any of its Subsidiaries nor any of the officers and directors of it or its
Subsidiaries shall, and that it shall direct and use its best efforts to cause
its Representatives not to, directly or indirectly, have any discussion with, or
provide any confidential information or data to, any Person relating to, or in
contemplation of, an Acquisition Proposal or engage in any negotiations
concerning an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; provided, however, that
nothing contained in this Agreement shall prevent PageNet, Arch or their
respective Board of Directors from: (A) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to an Acquisition Proposal; (B) engaging in
any discussions or negotiations with or providing any information to, any Person
in response to an unsolicited bona fide written Acquisition Proposal by any such
Person; or (C) subject to the obligation of (x) PageNet pursuant to Section
6.5(a) to duly convene a PageNet Stockholders Meeting at which a vote of the
stockholders of PageNet shall be taken regarding the adoption of this Agreement
and the approval of the Merger and the other transactions contemplated by this
Agreement, and (y) Arch pursuant to Section 6.5(b) to duly convene a Arch
Stockholders Meeting at which a vote of the stockholders of Arch shall be taken
with respect to the matters set forth in Section 6.5(b) of this Agreement,
recommending such an unsolicited bona fide written Acquisition Proposal to its
stockholders if, and only to the extent that, with respect to the actions
referred to in clauses (B) or (C): (i) its Board of Directors concludes in good
faith (after consultation with its outside legal counsel and its financial
advisor) that such Acquisition Proposal is reasonably capable of being
completed, taking into account all legal, financial, regulatory and other
aspects of the proposal and the Person making the proposal, and would, if
consummated, result in a transaction more favorable to its stakeholders 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 stakeholders 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
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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 an increase
in the authorized number of shares of Arch Common Stock to an amount sufficient
to effectuate the actions contemplated hereby and, if Arch so elects, may
provide for the conversion of each share of Arch Class B Common Stock into one
share of Arch Common Stock. Some or all of the Certificate Amendments may, in
the discretion of Arch, be made contingent upon the consummation of the Merger
or the Alternative Merger (as the case may be).
6.4. Information Supplied. PageNet and Arch each agrees, as to itself and
its Subsidiaries, that none of the information supplied or to be supplied by it
or its Subsidiaries for inclusion or incorporation by reference in: (i) the
Registration Statement on Form S-4 to be filed with the SEC by Arch in
connection with the issuance of shares of Arch Common Stock in the Merger
(including the joint proxy statement and prospectus (the "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 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 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
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contemplated by this Agreement; and (ii) take all lawful action to solicit such
adoption and approval; provided, however, that PageNet's Board of Directors may,
at any time prior to the Effective Time, withdraw, modify or change any such
recommendation to the extent that PageNet's Board of Directors determines in
good faith, after consultation with outside legal counsel, that such withdrawal,
modification or change of its recommendation is required by its fiduciary duties
to PageNet's stockholders under applicable Law; provided, further, that, unless
this Agreement is terminated by Arch pursuant to Section 8.4, PageNet shall, as
promptly as practicable after the S-4 Registration Statement is declared
effective, duly convene and complete the PageNet Stockholders Meeting regarding
the adoption of this Agreement and the approval of the Merger, the amendment to
the PageNet certificate of incorporation set forth above and the other
transactions contemplated by this Agreement, regardless of whether PageNet's
Board of Directors has withdrawn, modified, or changed its recommendation to the
stockholders regarding the adoption of this Agreement or the approval of the
Merger, the amendment to the PageNet certificate of incorporation set forth
above or the other transactions contemplated by this Agreement prior to such
PageNet Stockholders Meeting. Notwithstanding the foregoing or any other
provision of this Agreement to the contrary, PageNet shall not be required to
convene a PageNet Stockholders Meeting after (x) the Bankruptcy Case has
commenced or (y) PageNet stipulates to bankruptcy relief after the occurrence of
an Involuntary Insolvency Event pursuant to Section 6.19(a)(v) hereof.
(b) Arch will take, in accordance with applicable Law and its certificate
of incorporation and bylaws, all action necessary to convene a meeting of its
stockholders (the "Arch Stockholders Meeting") as promptly as practicable after
the S-4 Registration Statement is declared effective to (i) consider and vote
upon (A) the Certificate Amendments and the issuance of shares of Arch Common
Stock pursuant to the Merger, the conversion of the Arch Class B Common Stock
(if Arch elects to have such shares converted pursuant to the Certificate
Amendments) 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 (with
respect to all matters other than the approval of the conversion of the Arch
Class B Common Stock pursuant to the Certificate Amendment, the "Arch
Stockholder 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 Class B
Common Stock (if Arch elects to have such shares converted pursuant to the
Certificate Amendments) 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 Class B Common Stock
(if Arch elects to have such shares converted pursuant to the Certificate
Amendments) 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 Class B
Common Stock (if Arch elects to have such shares converted pursuant to the
Certificate Amendments) and the Arch Exchange Offer (or this Agreement and the
Alternative Merger if Arch is a
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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 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 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 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 Proxy Statement or the S-4
Registration Statement, the parties shall promptly inform one another and shall
cooperate in promptly preparing filing and clearing with the SEC and, if
required by applicable securities laws, mailing to Arch' or PageNet's
stockholders, as the case may be, such amendment or supplement.
(b) PageNet and Arch each shall use its respective reasonable best efforts
to cause to be delivered to the other party and its directors a letter of its
independent auditors, dated: (i) the date on which the S-4 Registration
Statement and the Exchange Registration Statements shall become effective; and
(ii) the Closing Date, and addressed to the other party and its directors, in
form and substance customary for "comfort" letters delivered by independent
public accountants in connection with registration statements similar to the S-4
Registration Statement and the Exchange Registration Statements.
(c) PageNet and Arch shall cooperate with each other and use (and shall
cause their respective Subsidiaries to use) their respective reasonable best
efforts: (i) to take or cause to be taken all actions, and do or cause to be
done all things, necessary, proper or advisable on its part under this Agreement
and applicable Laws to consummate and make effective the Merger, the Exchange
Offers and the other transactions contemplated by this Agreement (including, if
necessary, the Prepackaged Plan) as soon as practicable, including: (A)
obtaining opinions of their respective attorneys referred to in Article VII
below; (B) preparing and filing as promptly as practicable all documentation to
effect all necessary applications, notices, petitions, filings and other
documents; and (C) instituting court actions or other proceedings necessary to
obtain the approvals required to consummate the Merger, the Exchange Offers or
the other transactions contemplated by this Agreement or defending or otherwise
opposing all court actions or other proceedings instituted by a Governmental
Entity or other Person under the Governmental Regulations for purposes of
preventing the consummation of the Merger, the Exchange Offers and the other
transactions contemplated by this Agreement; and (ii) to obtain as promptly as
practicable all consents, registrations, approvals, permits and authorizations
necessary or advisable to be obtained from any third party and/or any
Governmental Entity in order to consummate the Merger, the Exchange Offers or
any of the other transactions contemplated by this Agreement; provided, however,
that nothing in this Section 6.5 shall require either Arch or PageNet to agree
to any divestitures or hold separate or similar arrangements if such
divestitures or arrangements would reasonably be expected to have a material
adverse effect on Arch or PageNet, or a material adverse effect on the expected
benefits of the Merger to it. Neither Arch nor PageNet will agree to any
divestitures or hold separate or similar arrangements without the prior written
approval of the other party. Subject to applicable laws relating to the exchange
of information, Arch and PageNet shall have the right to review in advance, and
to the extent practicable each will consult the other party on, all the
information relating to Arch or PageNet, as the case may be, and any of their
respective Subsidiaries, that appear in any filing made with, or written
materials submitted to, any third party and/or
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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 Proxy Statement, the S-4
Registration Statement, the Exchange Registration Statements or any other
statement, filing, notice or application made by, or on behalf of, Arch, PageNet
or any of their respective Subsidiaries to any third party and/or any
Governmental Entity in connection with the Merger, the Exchange Offers and the
transactions contemplated by this Agreement.
(e) PageNet and Arch each shall keep the other party apprised of the status
of matters relating to completion of the transactions contemplated by this
Agreement, including promptly furnishing the other party with copies of notices
or other communications received by Arch or PageNet, as the case may be, or any
of its Subsidiaries, from any third party and/or any Governmental Entity with
respect to the Merger, the Exchange Offers and the other transactions
contemplated by this Agreement. Each of PageNet and Arch shall give prompt
notice to the other party of any change that is reasonably likely to result in a
Material Adverse Effect on it or of any failure of any conditions to the other
party's obligations to effect the Merger set forth in Article VII.
(f) Each of PageNet and Arch agrees that if a bona fide Acquisition
Proposal is made to acquire shares of the other party to this Agreement, then
upon the request of the party not receiving the Acquisition Proposal, the party
receiving the Acquisition Proposal will cooperate with the other party to this
Agreement to make such filings and take such other actions as may be permitted
or required under the FCC's Policy Statement in Tender Offers and Proxy
Contests, in order to allow the parties to this Agreement to take all steps as
are necessary to consummate the transactions contemplated hereby pending FCC
approval of the transaction.
6.7. Access; Consultation. Upon reasonable notice, and except as may be
prohibited by applicable Law, PageNet and Arch each shall (and shall cause its
Subsidiaries to) afford the other and its respective Representatives, reasonable
access, during normal business hours throughout the period prior to the
Effective Time, to its properties, books, contracts and records and, during such
period, each shall (and shall cause its Subsidiaries to) furnish promptly to the
other party all information concerning its business, properties and personnel as
may reasonably be requested; provided that no investigation pursuant to this
section shall affect or be deemed to modify any representation or warranty made
by PageNet or Arch under this Agreement; and provided, further, that the
foregoing shall not require PageNet or Arch to permit any inspection, or to
disclose any information, that in the reasonable judgment of PageNet or Arch, as
the case may be, would result in the disclosure of any trade secrets of it or
third parties, or violate any of its obligations with respect to confidentiality
if PageNet or Arch, as the case may be, shall have used all reasonable efforts
to obtain the consent of such third party to such inspection or disclosure. All
requests for information made pursuant to this section shall be directed to an
executive officer of PageNet or Arch, as the case may be, or such Person as may
be designated by any such executive officer, as the case may be.
6.8. Affiliates. PageNet shall deliver to Arch a letter identifying all
Persons whom PageNet believes to be, at the date of its Stockholders Meeting,
affiliates of PageNet for purposes of Rule 145 under the Securities Act ("Rule
145 Affiliates"). PageNet shall use all reasonable efforts to cause each Person
who is identified as a Rule 145 Affiliate in the letter referred to above to
deliver to Arch on or prior to the date of such party's respective Stockholders
Meeting a written agreement, in the form attached as Exhibit C (the "PageNet
Affiliates Agreement"). Prior to the Effective Time, PageNet shall use all
reasonable efforts to cause each additional Person who is identified as a Rule
145 Affiliate after the date of its Stockholders Meeting to execute the
applicable written agreement as set forth in this Section 6.8, as soon as
practicable after such Person is identified.
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6.9. Stock Exchange Listing. Arch shall use its reasonable best efforts
to file a notification for listing of additional shares with respect to the
shares of Arch Common Stock to be issued pursuant to the Merger, Arch Exchange
Offer and pursuant to the Certificate Amendments with the Nasdaq Stock Market
("NASDAQ") on or 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 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
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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 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
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
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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 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
within the meaning of Section 368(a) of the Code and, with respect to PageNet,
to obtain an opinion of its counsel as contemplated by Section 7.3(d).
6.17. Senior Credit Facilities. PageNet and Arch shall use their
reasonable best efforts to secure, through the amendment or restatement of their
respective current credit facilities, through a new credit facility or through
the operation of the Prepackaged Plan, or any combination of the foregoing,
senior secured debt financing in an amount not less than $1.3 billion on terms
reasonably acceptable to the parties to this Agreement. Simultaneously with the
Exchange Offers, PageNet shall solicit the consent of the holders of PageNet's
senior credit facilities (the "PageNet Secured Creditors") to the Prepackaged
Plan. The solicitation of the PageNet Secured Creditors shall be made in
accordance with the standards and requirements set forth in Section 6.18(e).
6.18. The Exchange Offers.
(a) Provided that nothing shall have occurred that would result in a
failure to satisfy any other conditions set forth in Section 6.18(b) of this
Agreement, Arch and PageNet shall, as promptly as practicable, commence separate
exchange offers (the "Arch Exchange Offer" and the "PageNet Exchange Offer" and
together, the "Exchange Offers") to issue an aggregate of up to: (i) 29,651,984
shares of Arch Common Stock in exchange for the $448.4 million in aggregate
principal amount of Arch' 10 7/8% Senior Discount Notes due March 15, 2008
issued under and pursuant to an Indenture, dated as of March 12, 1996, between
Arch and IBJ Schroder Bank & Trust Company, as Trustee (the "Arch Notes"); and
(ii) in the case of PageNet, 616,830,757 PageNet Shares and, subject to Section
6.1(d) of this Agreement, Distributed Interests representing 68.9% of the equity
ownership in the Distributed Subsidiary in exchange for the $1.2 billion in
aggregate principal amount, together with all accrued interest thereon, of: (x)
10% Senior Subordinated Notes Due October 15, 2008 issued under and pursuant to
an Indenture, dated as of July 15, 1995, between PageNet and Shawmut Bank, N.A.,
as Trustee, as supplemented by a Second Supplemental Indenture, dated as of
October 15, 1996, between PageNet and Fleet National
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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 PageNet under the PageNet Exchange Offer shall be
subject to the satisfaction of the conditions to the consummation of the Merger
set forth in Article VII of this Agreement and shall be subject to the further
condition that 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 not 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").
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
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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 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
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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 thirty-fifth calendar day after such commencement, or, consistent with
this Agreement and the provisions of Section 6.19, at such later time and date
as PageNet and Arch shall select consistent with applicable law and regulations
(the "Exchange Offers Expiration Date").
(i) The Arch Common Stock or PageNet Shares and Distributed Interests, as
the case may be, to be issued in exchange for the Notes tendered and accepted in
the Exchange Offers will be so issued only after timely receipt by the exchange
agent selected jointly by Arch and PageNet (the "Notes Exchange Agent") of: (i)
certificates for all physically delivered Notes in proper form for transfer, or
timely confirmation of book-entry transfer of such Notes for such purposes; (ii)
a properly completed and duly executed letter of transmittal in the form
provided on behalf of Arch or the Surviving Corporation, as the case may be, for
such purpose; (iii) a duly executed form of Note Consent and Note Waiver; and
(iv) any other documents required by the letter of transmittal.
(j) For purposes of the Exchange Offers, Arch or PageNet, as the case may
be, shall be deemed to have accepted for exchange the tendered Notes as, if and
when Arch or PageNet, as the case may be, gives oral or written notice to the
Notes Exchange Agent of such party's acceptance of such Notes for exchange. Each
of Arch and PageNet agree to simultaneously accept for exchange the Notes
pursuant to their respective Exchange Offers. The Notes Exchange Agent will act
as agent for the tendering holders for the purpose of receiving the Notes and
transmitting the Arch Common Stock, PageNet Shares or Distributed Interests, as
the case may be, in exchange therefor.
(k) Arch and PageNet shall jointly establish such additional procedures and
requirements with respect to the conduct of the Exchange Offers and shall cause
the same to be communicated to holders of the Notes in such manner as they shall
determine to be necessary or appropriate, including procedures and requirements
as may be necessary to obtain confirmation of the Prepackaged Plan if the
Bankruptcy Case is commenced. All questions concerning the timeliness, validity,
form, eligibility, and acceptance for exchange or withdrawal of any tender of
the Notes pursuant to any of the procedures described herein or any additional
procedures established by the parties shall be determined jointly by the
parties, whose determinations shall be final and binding. Arch and PageNet, as
the case may be, also reserve in connection with their respective Exchange
Offers, the absolute right to: (i) waive any defect or irregularity in any
tender with respect to any particular Note or any particular holder; (ii) permit
a defect or irregularity to be corrected within such time as it may determine;
or (iii) reject the purported tender of any Note and interest coupons
appertaining thereto. Tenders shall not be deemed to have been received or
accepted until all defects and irregularities have been cured or waived within
such time as Arch or PageNet, as the case may be, may determine in its sole
discretion. None of Arch, PageNet or the Notes Exchange Agent or any other
person shall be under any duty to give notification of any defects or
irregularities relating to tenders or incur any liability for failure to give
such notification.
(l) Each of PageNet and Arch shall accept the Notes tendered in their
respective Exchange Offer as of immediately prior to the Effective Time.
(m) Promptly upon receipt of the consents of the holders of at least a
majority of the outstanding principal amount of a series of Notes, Arch or
PageNet, as the case may be, shall execute the applicable supplemental indenture
to be effective as of the Effective Time.
6.19. Bankruptcy Provisions. As used in this Agreement, the term:
"Bankruptcy Case" shall mean the bankruptcy case filed or stipulated to by
PageNet and its Subsidiaries under Chapter 11 of the Bankruptcy Code pursuant to
the terms hereof;
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"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;
"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 35 calendar days
after the date upon which the S-4 Registration Statement and the PageNet
Exchange Registration Statement 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 Stockholders Approval, and
(iii) that either the Exit Financing has been obtained or upon entry of the
Final Order will be obtained.
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(a) Notwithstanding any other provision of this Agreement to the contrary,
in the event that:
(i) prior to or at the Initial Determination Date the PageNet Minimum
Condition is satisfied, and the PageNet Stockholders Approval and the Arch
Stockholders Approvals are obtained, then the Exchange Offers shall be
consummated pursuant to the terms hereof, the Bankruptcy Case shall not be
filed and the Prepackaged Plan shall be abandoned, unless PageNet and Arch
agree that the filing of the Bankruptcy Case and the confirmation of the
Prepackaged Plan are in the best interests of PageNet and Arch,
notwithstanding satisfaction of the PageNet Minimum Condition;
(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 is 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) September 30, 2000 (the "Extended Determination Date").
If the PageNet Minimum Condition is satisfied and the PageNet Stockholders
Approval and the Arch Stockholders Approval are obtained prior to September
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 September 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
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Stockholders Approval and (y) be bound by all of the terms hereof, and
shall consummate the Merger through the Prepackaged Plan if such plan is
confirmed by the Bankruptcy Court by a Final Confirmation Order (provided
that such Final Confirmation Order shall be entered by no later than
December 31, 2000, or such later date as is mutually agreed to by Arch and
PageNet) and if the other conditions to the Merger set forth in Article VII
hereof (other than Section 7.1(a)(2) and 7.1(g)(ii), which shall have been
satisfied by entry of the Final Confirmation Order) are satisfied after
entry of the Final Confirmation Order but prior to the Termination Date, as
such date may be extended in accordance with Section 8.2;
(v) an Involuntary Insolvency Event occurs prior to a voluntary
commencement of the Bankruptcy Case pursuant to Sections 6.19(a)(ii), (iii)
or (iv), (1) (A) if the date of the Insolvency Event (the "Involuntary
Insolvency Event Date") is prior to the Initial Determination Date, PageNet
shall have up to 120 days after such Involuntary Insolvency Event Date to
obtain from the appropriate court an order which dismisses such Involuntary
Insolvency Event (including, with respect to an involuntary petition filed
in any bankruptcy court, an order which holds or requires that the court
abstain from adjudicating the petition pursuant to 11 U.S.C. sec.305) and
which order is not subject to a stay or injunction and is not subject to an
appeal and all periods for taking an appeal shall have expired (the
"Dismissal Order"), so that the Exchange Offers may be completed, and this
Agreement shall remain in full force and effect and Arch shall be bound by
all of the terms hereof or (B) if an Involuntary Insolvency Event occurs
after the Initial Determination Date, and as of the Involuntary Insolvency
Event Date the PageNet Minimum Condition has been satisfied and the PageNet
Stockholders Approval and Arch Stockholders Approval have been obtained,
then (x) PageNet shall have up to 120 days after such Involuntary
Insolvency Event Date to obtain entry of the Dismissal Order, and (y) this
Agreement shall remain in full force and effect and Arch shall consummate
the Merger (outside of bankruptcy, unless PageNet and Arch mutually consent
to file the Bankruptcy Case as contemplated by Section 6.19(a)(i) hereof)
pursuant to the terms hereof provided that such Dismissal Order has been
obtained before the expiration of such 120-day period, (2) if on the
Involuntary Insolvency Event Date the PageNet Minimum Condition has not
been satisfied or PageNet Stockholders Approval has not been obtained but
the Requisite Conditions to the Prepackaged Plan have been satisfied, then
PageNet shall stipulate to bankruptcy relief under Chapter 11 of the
Bankruptcy Code and the provisions of Section 6.19(a)(ii)(x)(1) of this
Agreement shall apply (including the provisions therein requiring Arch to
be obligated to consummate the Merger pursuant to the Prepackaged Plan);
and (3) if on the Involuntary Insolvency Event Date the PageNet Minimum
Condition has not been satisfied or PageNet Stockholders Approval or Arch
Stockholders Approval has not been obtained and the Requisite Conditions to
the Prepackaged Bankruptcy have not been obtained, then PageNet may (but
shall not be obligated to) stipulate to bankruptcy relief under Chapter 11
of the Bankruptcy Code and the provisions of Section 6.19(a)(iv) of this
Agreement shall apply (including the provisions therein requiring Arch to
be obligated for a period of time to consummate the Merger pursuant to the
Prepackaged Plan). For purposes hereof, an "Involuntary Insolvency Event"
shall mean any filing of an involuntary bankruptcy petition against PageNet
or any of its Subsidiaries by any party, or the appointment under other
applicable state or federal law of a liquidator or a trustee for PageNet or
any of its Subsidiaries.
(b) As soon as practicable after entering into this Agreement, PageNet and
Arch shall jointly prepare the Prepackaged Plan in form and substance
satisfactory to PageNet and Arch. PageNet shall include the Prepackaged Plan and
related solicitation materials (including a ballot) in the PageNet Exchange
Prospectus, the solicitation materials sent to the PageNet Secured Creditors,
and (to the extent PageNet and Arch deem necessary) in any materials sent to the
holders of PageNet Shares. PageNet and Arch shall cooperate to ensure that the
Exchange Offers, including the disclosures to holders of PageNet Notes made in
connection therewith, and the solicitation of PageNet Secured Creditors comply
with the disclosure requirements of the Bankruptcy Code and applicable law. The
Prepackaged Plan may not be amended, modified or added to in any material
respect without the written consent of PageNet and Arch.
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(c) Notwithstanding any other provision hereof to the contrary, (i) the
filing of the Bankruptcy Case, the operation of PageNet's business in accordance
with the Bankruptcy Code or the pendency of the Bankruptcy Case, or (ii) the
occurrence of an Involuntary Insolvency Event with respect to PageNet shall not
be considered in and of itself a Material Adverse Effect for purposes of this
Agreement.
(d) On the same day that the Bankruptcy Case is filed, an order for relief
is consented to under Section 6.19(a)(v) of this Agreement or an order for
relief is entered, as applicable, PageNet shall file a motion (the "Initial
Merger Motion") for expedited determination of approval of Section 6.2 hereof
concerning Acquisition Proposals (the "Exclusivity Provision"), Section 8.5(c)
concerning the Arch Termination Fee and Section 8.5(b) concerning the PageNet
Termination Fee in form and substance acceptable to Arch, PageNet shall use its
best efforts to obtain an order approving the Initial Merger Motion (the
"Initial Merger Order") within 15 days of the commencement of the Bankruptcy
Case, but in no event not later than 30 days after the commencement thereof,
which order shall be in form and substance acceptable to Arch.
(e) PageNet shall promptly provide to Arch with drafts of all documents,
motions, orders, filings or pleadings that PageNet proposes to file with the
Bankruptcy Court and will provide Arch with reasonable opportunity prior to the
filing thereof to review such filings to the extent reasonably practicable.
PageNet shall consult and cooperate with Arch with respect to all such filings.
(f) PageNet and Arch shall use their best efforts to cause the transactions
contemplated by this Agreement and the Prepackaged Plan to be consummated in
accordance with the terms hereof and thereof, and without limiting the
generality of the foregoing shall use their best efforts to obtain all necessary
approvals, waivers, consents, permits, licenses, registrations and other
authorizations required in connection with this Agreement and the Prepackaged
Plan and the transactions contemplated hereby and thereby, including without
limitation, entry of the Final Confirmation Order.
(g) PageNet shall cause its Subsidiaries to take all actions and to execute
all agreements and documents which are necessary or useful in the preparation of
and commencement of the Bankruptcy Case, the preparation, filing and prosecution
of the Prepackaged Plan and the entry of the Final Confirmation Order.
(h) Concurrent with the commencement of the Exchange Offers, PageNet shall
send solicitation and disclosure materials to its creditors as would bind such
creditors to the Prepackaged Plan under the provisions of the Bankruptcy Code.
PageNet shall make such solicitations of its creditors (in addition to
solicitations of holders of the PageNet Notes) as PageNet and Arch determine is
necessary to facilitate and expedite the confirmation of the Prepackaged Plan in
the event of any potential Bankruptcy Case.
(i) If the Bankruptcy Case is commenced pursuant to Section 6.19(a)(iv) or
(v), then Arch shall not be subject to the restrictions set forth in Section 6.2
or the restrictions on the conduct of its business set forth in Section
6.1(b)(viii) with respect to merger or acquisition transactions or the other
restrictions set forth in Section 6.1(b), to the extent such restrictions would
impede or prohibit Arch from entering into another merger or acquisition
transaction; provided, however, that Arch may not enter into another merger or
acquisition transaction that would prevent, materially impair or materially
delay its ability to consummate the Merger or the other transactions
contemplated hereby; provided, further, that if Arch enters into a merger or
acquisition transaction following the commencement of the Bankruptcy Case
pursuant to Section 6.19(a)(iv) or (v) and as a result of such event PageNet is
required to amend its disclosure statement and resolicit the votes of its
creditors, then the time within which the Final Confirmation Order must be
obtained shall be extended for an additional 90 days.
6.20. Rights Agreement. At or prior to the Effective Time, the Arch Board
of Directors shall take all action required to render inapplicable the Arch
Rights Agreement to the Merger and the transactions contemplated by this
Agreement. At or prior to the Effective Time, the Arch Board of Directors shall
take all action required by Section 5.1(j)(ii) of this Agreement and the PageNet
Board of Directors shall take all action required by Section 5.1(j)(i) of this
Agreement.
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6.21. Payment of Dissenters' Rights. Following the Effective Time, any
payment made with respect to a holder of Dissenting Shares entitled to payment
under the DGCL will be made solely from the assets of the Surviving Corporation.
Arch shall not make any payments to holders of Dissenting Shares and shall not
directly or indirectly reimburse the Surviving Corporation for the payments made
with respect to Dissenting Shares.
6.22. Distribution of Interests in Vast to PageNet Shareholders. Prior to
the Closing, the Board of Directors of PageNet will set aside for distribution,
solely to those holders of PageNet Shares immediately prior to the acceptance of
PageNet Notes in the PageNet Exchange Offer (the "Vast Distribution Record
Date"), with respect to each PageNet Share issued and outstanding at such date,
interests (the "Distributed Interests") representing the portion of such equity
ownership in Vast Solutions, Inc. (the "Distributed Subsidiary") equal to (x)
subject to Section 6.1(d), up to 20.0% of the total equity ownership of the
Distributed Subsidiary divided by (y) the number of PageNet Shares issued and
outstanding at the Vast Distribution Record Date (the distribution of the
Distributed Interests shall be referred to herein as the "Vast Distribution").
The distribution of the Distributed Interests 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 Vast Distribution. Upon satisfaction of the
conditions to the Vast Distribution, Arch shall, in accordance with Section 4.2
of this Agreement and in connection with the exchange of PageNet certificates,
use its reasonable best efforts to consummate, or cause to be consummated the
Vast Distribution 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 notification for listing of additional shares
with respect to all shares of Arch Common Stock issuable pursuant to this
Agreement shall have been filed with NASDAQ.
(c) Governmental Regulations. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated, and all other consents, permits, licenses, and 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
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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
PageNet Exchange Offer, the Vast Distribution 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 PageNet Exchange
Registration Statement shall have become effective under the Securities
Act. No stop order suspending the effectiveness of the S-4 Registration
Statement or the PageNet Exchange Registration Statement shall have been
issued, and no proceedings for that purpose shall have been initiated or be
threatened by the SEC.
(f) Senior Credit Facilities. Arch and its subsidiaries, including
PageNet after giving effect to the Merger, will have senior credit
facilities in an amount not less than $1.3 billion.
(g) Exchange Offers/Bankruptcy. Either (i) the PageNet Minimum
Condition 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 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 Vast
Distribution in excess of $25 million in the aggregate. In making this
determination the following shall be taken into account: (1) the amount of
cancellation of indebtedness income, if any, includible in gross income,
(2) gain, if any, incurred as a result of the distribution or transfer of
appreciated assets, and (3) the amount of losses, credits or deductions,
including both available net operating loss or credit carryforwards and
losses, deductions or credits expected to be generated in the taxable
periods which include the Effective Time, but excluding any expected
carrybacks from subsequent taxable periods.
7.2. Conditions to Obligations of Arch and Merger Sub. The obligations of
Arch and Merger Sub to effect the Merger are also subject to the satisfaction or
waiver by Arch at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of PageNet set forth in this Agreement (other than those
representations and warranties which would be breached as a result of 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
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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) Intentionally Omitted.
(e) Certificate. PageNet shall have delivered to Arch a certificate
(without qualification as to knowledge or materiality or otherwise) to the
effect that each of the conditions specified in Section 7.2 is satisfied in
all respects, that the PageNet Stockholders Meeting has been convened
(unless the Bankruptcy Case precedes the scheduled date of such meeting),
and that the actions set forth in Section 6.5(a) of this Agreement have
been adopted and approved in accordance with such section (except to the
extent such approval is not required by reason of the entry of the Final
Confirmation Order).
7.3. Conditions to Obligation of PageNet. The obligation of PageNet to
effect the Merger is also subject to the satisfaction or waiver by PageNet at or
prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Arch and Merger Sub set forth in this Agreement: (i) to the
extent qualified by materiality, shall be true and correct; and (ii) to the
extent not qualified by materiality, shall be true and correct (except that
this clause (ii) shall be deemed satisfied so long as any failures of such
representations and warranties to be true and correct, taken together,
would not reasonably be expected to have a Material Adverse Effect and
would not reasonably be expected to have a material adverse effect on the
expected benefits of the Merger to PageNet), in the case of each of clauses
(i) and (ii), as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, and PageNet
shall have received a certificate signed on behalf of Arch and Merger Sub
by an executive officer of Arch to such effect.
(b) Performance of Obligations of Arch. Each of Arch and Merger Sub
shall have performed in all material respects all of its covenants,
agreements and obligations set forth in this Agreement at or prior 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 Vast Distribution, 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.
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(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) [Intentionally Omitted]
(g) Vast Distribution. The Board of Directors of PageNet shall have
set aside Distributed Interests 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 September 30, 2000 if no Bankruptcy
Case has been filed by that date or 30 days following the date by which the
Final Confirmation Order must be entered under Section 6.19(a) (the "Termination
Date"); provided, however, that either party shall have the option, in its sole
discretion, to extend the Termination Date for an additional period of time not
to exceed 90 days if the sole reason that the Merger has not been consummated by
such date is that the condition set forth in Section 7.1(c) has not been
satisfied due to the failure to obtain the necessary consents and approvals
under applicable Governmental Regulations and Arch or PageNet are still
attempting to obtain such necessary consents and approvals under applicable
Governmental Regulations or are contesting the refusal of the relevant
Government Entities to give such consents or approvals in court or through other
applicable proceedings; (ii) the PageNet Stockholders Meeting and the Arch
Stockholders Meeting shall have been held and completed, but the PageNet
Stockholders Approval or the Arch Stockholders Approval, to the extent 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
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(d) pursuant to Section 6.19(a)(ii), PageNet shall not file the
Bankruptcy Case and seek confirmation of the Prepackaged Plan by the
Bankruptcy Court and simultaneously pays to Arch the Arch Termination Fee.
8.4. Termination by Arch. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
Arch Stockholder Approval referred to in Section 7.1(a), by action of the Board
of Directors of Arch if:
(a) the Board of Directors of PageNet shall have withdrawn or
adversely modified its approval or recommendation of this Agreement to do
so;
(b) there has been a breach by PageNet of any representation,
warranty, covenant or agreement contained in this Agreement which both: (i)
would result in a failure of a condition set forth in Section 7.2(a) or
7.2(b); and (ii) cannot be or is not cured prior to the Termination Date,
other than a breach that results solely from the filing or conduct of the
Bankruptcy Case consistent with the terms of this Agreement or solely from
the occurrence of an Involuntary Insolvency Event with respect to PageNet;
(c) the Initial Merger Order has not been entered within 30 days of
the commencement of the Bankruptcy Case;
(d) the Final Confirmation Order is not entered within the time
permitted by Section 6.19(a);
(e) the Prepackaged Plan is amended, modified or added to in violation
of Section 6.19(b); or
(f) Arch has received a Superior Proposal, has otherwise complied with
the requirements of Section 6.2, provides PageNet with all of the material
terms of the Superior Proposal at least two business days prior to such
termination and simultaneously pays to PageNet the PageNet Termination Fee
required by Section 8.5(b).
8.5. Effect of Termination and Abandonment.
(a) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Article VIII, this Agreement (other than as
set forth in Section 9.1) shall become void and of no effect with no
liability (other than as set forth in Section 8.5(b) or (c), or in the
proviso at the end of this sentence) on the part of any party to this
Agreement or of any of its directors, officers, employees, agents, legal or
financial advisors or other representatives; provided, however, no such
termination shall relieve any party to this Agreement from any liability
for damages resulting from any breach of this Agreement.
(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; (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
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Section 8.5(b) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, PageNet would not enter
into this Agreement. Accordingly, if Arch fails to pay promptly the amount
due pursuant to this Section 8.5(b), and, in order to obtain such payment,
PageNet commences a suit which results in a judgment against Arch for the
fee set forth in this paragraph (b), Arch shall pay to PageNet its costs
and expenses (including attorneys' fees) in connection with such suit,
together with interest on the amount of the fee at the prime rate of
Citibank N.A. in effect on the date such payment was required to be made.
(c) In the event that: (i) an Acquisition Proposal shall have been
made to PageNet or have been made directly to PageNet's stockholders or
noteholders generally or any Person shall have publicly announced an
intention (whether or not conditional) to make an Acquisition Proposal and
thereafter: (A) PageNet's stockholders do not adopt this Agreement or the
other transactions contemplated hereby at the PageNet Stockholders Meeting
or PageNet's noteholders do not satisfy the PageNet Minimum Condition with
respect to the PageNet Notes, and the Bankruptcy Court fails to enter the
Final Confirmation Order which would otherwise enable the transactions set
forth in this Agreement to occur without approval by the holders of PageNet
Shares; (B) this Agreement is terminated by either Arch or PageNet pursuant
to the terms of this Agreement and (C) either (x) PageNet executes and
delivers an agreement with respect to an Acquisition Proposal or (y) an
Acquisition Proposal with respect to PageNet is consummated, in either
case, within 12 months of the date this Agreement is terminated; (ii) this
Agreement is terminated by Arch pursuant to Section 8.4(a) or (b) provided
that, with respect to Section 8.4(b), it is terminated solely with respect
to a breach of (A) Section 6.2 or (B) Section 6.5 (but, only with respect
to PageNet's obligation in accordance with such Section to duly convene and
complete the PageNet Stockholders Meeting (unless the Bankruptcy Case has
commenced or PageNet has stipulated to bankruptcy relief after the
occurrence of an Involuntary Insolvency Event pursuant to Section
6.19(a)(iv) hereof) regarding the adoption of this Agreement and the
approval of the matters set forth in Section 6.5(a) of this Agreement);
(iii) the Prepackaged Plan is withdrawn without the prior written consent
of Arch, or PageNet files any other plan of reorganization or amends,
modifies or adds to any material provision of the Prepackaged Plan in each
case without the prior written consent of Arch; (iv) any other plan of
reorganization filed by a person other than PageNet is confirmed by the
Bankruptcy Court; (v) PageNet files a motion to sell or otherwise transfer
all or a substantial portion of its assets as part of a sale pursuant to
Section 363 of the Bankruptcy Code without the prior written consent of
Arch; or (vi) this Agreement is terminated by PageNet pursuant to Section
8.3(c) or (d), then PageNet and its Subsidiaries (jointly and severally)
shall pay Arch a fee equal to $40.0 million (the "Arch Termination Fee"),
which amount shall be in addition to any expenses to be paid pursuant to
Section 6.12, payable by wire transfer of same day funds. A Arch
Termination Fee payable pursuant to Section 8.5(c)(i), (ii), (iii), (iv) or
(v) shall be paid no later than two days after the date of termination and
a Arch 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.
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ARTICLE IX.
MISCELLANEOUS AND GENERAL
9.1. Survival. Article II, Article III, Article IV and this Article IX
(other than Section 9.4 (Counterparts)), and the agreements of PageNet, Arch and
Merger Sub contained in Sections 6.8 (Affiliates), 6.11 (Benefits), 6.12
(Expenses) and 6.13 (Indemnification; Directors' and Officers' Insurance) shall
survive the consummation of the Merger. This Article IX (other than Section 9.2
(Modification or Amendment), Section 9.3 (Waiver of Conditions) and Section 9.13
(Assignment)) and the agreements of PageNet, Arch and Merger Sub contained in
Section 6.12 (Expenses), Section 6.14 (Takeover Statute), Section 6.15
(Confidentiality) and Section 8.5 (Effect of Termination and Abandonment) shall
survive the termination of this Agreement. All other representations,
warranties, covenants and agreements in this Agreement shall not survive the
consummation of the Merger or the termination of this Agreement.
9.2. Modification or Amendment. Subject to the provisions of the
applicable law, at any time prior to the Effective Time, the parties to this
Agreement may modify or amend this Agreement, by written agreement executed and
delivered by duly authorized officers of the respective parties.
9.3. Waiver of Conditions.
(a) Any provision of this Agreement may be waived prior to the
Effective Time if, and only if, such waiver is in writing and signed by an
authorized representative or the party against whom the waiver is to be
effective.
(b) No failure or delay by any party in exercising any right, power or
privilege under this Agreement shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
Except as otherwise provided in this Agreement, the rights and remedies
herein provided shall be cumulative and not exclusive of any rights or
remedies provided by Law.
9.4. Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
9.5. Governing Law and Venue; Waiver of Jury Trial.
(a) This Agreement shall be deemed to be made in and in all respects
shall be interpreted, construed, and governed by, and in accordance with,
the substantive laws of the State of Delaware, without regard to the
conflict of law principles thereof. The parties hereby irrevocably and
unconditionally consent to submit to the exclusive jurisdiction of the
courts of the State of Delaware and of the United States of America located
in Wilmington, Delaware, including the U.S. Bankruptcy Court for the
District of Delaware (the "Delaware Courts"), for any litigation arising
out of or relating to this Agreement or the Prepackaged Plan and the
transactions contemplated by this Agreement (and agree not to commence any
litigation relating thereto except in such Delaware Courts), waive any
objection to the laying of venue of any such litigation in the Delaware
Courts and agree not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
(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
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WAIVER VOLUNTARILY; AND (iv) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO
THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.5.
9.6. Notices. Notices, requests, instructions or other documents to be
given under this Agreement shall be in writing and shall be deemed given: (i)
when sent if sent by facsimile, provided that receipt of the fax is promptly
confirmed by telephone; (ii) when delivered, if delivered personally to the
intended recipient; and (iii) one business day later, if sent by overnight
delivery via a national courier service, and in each case, addressed to a party
at the following address for such party:
If to Arch or Merger Sub:
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Attention: Chief Executive Officer
Fax: (508) 870-6076
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Jay E. Bothwick
Fax: (617) 526-5000
and if to PageNet:
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attention: Chief Executive Officer
Fax: (972) 801-8950
and
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attention: Senior Vice President and General Counsel
Fax: (972) 801-8978
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603-3441
Attention: John R. Schmidt
Fax: (312) 701-7711
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7. Entire Agreement. This Agreement (including any exhibits and annexes
to this 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
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EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER PARTY OR
THE OTHER PARTY'S REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH
RESPECT TO ANY ONE OR MORE OF THE FOREGOING.
9.8. No Third Party Beneficiaries. Except as provided in Section 6.11
(Benefits), and Section 6.13 (Indemnification; Directors' and Officers'
Insurance), this Agreement is not intended to confer upon any Person other than
the parties to this Agreement any rights or remedies under this Agreement.
9.9. Obligations of Arch and of PageNet. Whenever this Agreement requires
a Subsidiary of Arch to take any action, such requirement shall be deemed to
include an undertaking on the part of Arch to cause such Subsidiary to take such
action. Whenever this Agreement requires a Subsidiary of PageNet to take any
action, such requirement shall be deemed to include an undertaking on the part
of PageNet to cause such Subsidiary to take such action and, after the Effective
Time, on the part of the Surviving Corporation to cause such Subsidiary to take
such action.
9.10. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions of this Agreement.
If any provision of this Agreement, or the application thereof to any Person or
any circumstance, is invalid or unenforceable: (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision; and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.11. Interpretation. Where a reference in this Agreement is made to a
section or exhibit, such reference shall be to a section of, or exhibit or annex
to this Agreement unless otherwise indicated. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
9.12. Captions. The table of contents, article, section, and paragraph
captions in this Agreement are for convenience of reference only, do not
constitute part of this Agreement and shall not be deemed to limit or otherwise
affect any of the provisions of this Agreement.
9.13. Assignment. This Agreement shall not be assignable by operation of
law or otherwise, provided, that the parties agree that this Agreement may be
assumed by PageNet as a debtor-in-possession in the Bankruptcy Case and may be
assumed by Arch should Arch become a debtor in any bankruptcy case under the
Bankruptcy Code. Any assignment in contravention of the preceding sentence shall
be null and void.
* * * * *
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<PAGE> 293
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 dates
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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<PAGE> 294
ANNEX C
ARCH PAGING, INC.
SUMMARY OF PRINCIPAL TERMS OF THE
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
PRELIMINARY STATEMENT
This Summary (the "Term Sheet") sets forth the principal terms of the Third
Amended and Restated Credit Agreement, dated as of March 23, 2000, by and among
Arch Paging, Inc. (the "Borrower"), the Lenders party thereto, The Bank of New
York ("BNY"), Royal Bank of Canada ("RBC"), Toronto Dominion (Texas), Inc.
("TD"), Barclays Bank plc ("Barclays") and Fleet National Bank ("Fleet"), as
Managing Agents, RBC, as Documentation Agent, Barclays and Fleet, as Co-
Documentation Agents, TD, as Syndication Agent, and BNY, as Administrative Agent
(as amended by Amendment No. 1, dated as of May 19, 2000, the "Credit
Agreement"). Appendix A hereto contains a list of definitions which are used in
this Term Sheet. The lenders under the Credit Agreement having a Tranche A
Commitment and/or Tranche A Loans, Tranche B Loans and/or Tranche C Loans are
referred to as the "API Lenders". The terms of the Credit Agreement are not
limited to those set forth herein but rather are set forth in full in the Credit
Agreement and the collateral and other documents relating thereto (together with
the Credit Agreement, the "Loan Documents").
The Credit Agreement was adopted in connection with the proposed
acquisition (the "Acquisition") of Paging Network, Inc., a Delaware corporation
("PageNet") and its Subsidiaries. The Acquisition is to be effected by the
merger (the "Merger") of PageNet with St. Louis Acquisition Corp., a newly
created direct wholly-owned Subsidiary ("Merger Sub") of Arch Communications
Group, Inc. (the "Parent") with PageNet as the survivor. Prior to the Merger,
one or more of PageNet's existing domestic Subsidiaries may be merged into
PageNet or one or more of its other existing domestic Subsidiaries. As a result
of the Merger, PageNet and its Subsidiaries will become wholly-owned
Subsidiaries of the Parent. It is contemplated that immediately after the
Merger, the Parent will contribute, directly or indirectly, all of the Stock of
PageNet to the Borrower (the "Dropdown").
The Second Amended and Restated Credit Agreement, dated as of June 5, 1996,
as amended, among PageNet, its Subsidiaries party thereto, the lenders party
thereto (the "PageNet Lenders"), the Co-Agents party thereto, Bank of America,
N.A. (formerly, NationsBank of Texas, N.A.), as Documentation Agent, TD, as
Administrative Agent, and BankBoston, N.A. (formerly, The First National Bank of
Boston) and Chase Securities, Inc., as Co-Syndication Agents, and Bank of
Montreal, First Union National Bank (formerly, First Union National Bank of
North Carolina), Mercantile Bank National Association (formerly, Mercantile Bank
of St. Louis National Association), The Mitsubishi Trust and Banking
Corporation, Chicago Branch and Societe Generale, as Lead Managers (the
"Existing PageNet Credit Agreement") will be amended and restated in connection
with the Merger to become a part of the Credit Agreement and the outstanding
principal balance of the loans made under the Existing PageNet Credit Agreement
and the outstanding exposure of letters of credit issued under the Existing
PageNet Credit Agreement will be assumed by the Borrower and will be designated
as the Tranche B-1 Facility under the Credit Agreement. PageNet and its
Subsidiaries (other than certain of its Foreign Subsidiaries) which are
currently co-borrowers under the Existing PageNet Credit Agreement will become
Guarantors under the Credit Agreement.
MERGER; RECAPITALIZATION AND EXCHANGE OFFERS
The Merger will be effected pursuant to the Agreement and Plan of Merger,
dated as of November 7, 1999, as amended by Amendment No. 1, dated as of January
7, 2000, Amendment No. 2, dated as of May 10, 2000, and Amendment No. 3, dated
as of July 24, 2000, by and among the Parent, Merger Sub and PageNet (as amended
from time to time with the consent of Required Lenders, the "Merger Agreement").
On the date of the consummation of the Merger (the "Merger Effective Date") and
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immediately after the time of the effectiveness of the Merger (the "Merger
Effective Time"), the Dropdown shall take place. All documents executed and
delivered in connection with the Merger (including, without limitation, the
Merger Agreement), the Parent Exchange Offer (as defined below), the PageNet
Exchange Offer (as defined below), the Parent Preferred Stock Conversion (as
defined below), the amendments to the Parent's certificate of incorporation, the
Spin-Off (as defined below), the Dropdown, the PageNet Noteholder Consents (as
defined below), the Parent Noteholder Consents (as defined below), the
amendments to the PageNet Indentures and the Parent Discount Note Indenture, any
PageNet Subsidiary Mergers and the amended and restatement of the Existing
PageNet Credit Agreement and related collateral documents are referred to
collectively as the "Merger Documents" and the transactions contemplated thereby
are referred to collectively as the "Merger Transactions".
In connection with the consummation of the Merger, the Merger Agreement
contemplated a recapitalization of the Parent, PageNet and their respective
Subsidiaries as described in items First through Fifth below. The commencement
of an involuntary bankruptcy proceeding against PageNet and the commencement of
voluntary proceedings by certain of its Subsidiaries (the "Bankruptcy
Proceeding") has eliminated the need to comply with steps Second through Fourth
below as the exchange will be determined pursuant to a plan of reorganization
(the "Plan of Reorganization") to be submitted by PageNet for confirmation. The
order confirming the Plan of Reorganization is herein referred to as the
"Confirmation Order").
First, the Parent will make an offer (the "Parent Exchange Offer") to
holders of the Parent Discount Notes to exchange such Parent Discount Notes for
common Stock of the Parent (the "Parent Exchange"). It is a condition to the
Parent Exchange Offer that at least 97.5% of the aggregate outstanding principal
amount of the Parent Discount Notes shall have been validly tendered and not
withdrawn prior to the expiration of the Parent Exchange Offer, provided that
PageNet has the right to reduce such minimum percentage to any specified level
prior to such expiration or to waive such requirement in its entirety and, under
certain circumstances, the Parent has the right to reduce such minimum
percentage to a percentage not less than 67%. As a condition to the acceptance
of the Parent Exchange Offer, holders thereof will be required to consent (the
"Parent Noteholder Consents") to certain amendments to the Parent Discount Notes
Indenture.
Second, PageNet was to make an offer (the "PageNet Exchange Offer"and
together with the Parent Exchange Offer, the "Exchange Offers") to holders (the
"PageNet Noteholders") of the 10% Senior Subordinated Notes due October 15,
2008, the 10.125% Senior Subordinated Notes due August 1, 2007 and the 8.875%
Senior Subordinated Notes due February 1, 2006, each issued by PageNet
(collectively, the "PageNet Notes") to exchange (collectively, the "PageNet
Exchange") such PageNet Notes for (i) shares of its common Stock and (ii) up to
68.9% of its equity ownership in VAST Solutions, Inc. (the "Distributed
Subsidiary"). As a condition to the acceptance of the PageNet Exchange Offer,
PageNet Noteholders would have been required to consent (the "PageNet Noteholder
Consents") to certain amendments to the indentures under which the PageNet Notes
were issued (collectively, the "PageNet Indentures") to, among other things,
permit the Merger. As a result of the commencement of the Bankruptcy Proceeding
the PageNet Exchange Offer will not be made. See "Additional Conditions
Precedent -- Bankruptcy Proceeding" below.
Third, PageNet was to distribute (the "Spin-Off") to the holders of its
common Stock who hold such shares prior to the acceptance of the PageNet
Exchange Offer (as defined above) up to 11.6% of its equity ownership in the
Distributed Subsidiary.
Fourth, the Parent was to seek the agreement of the holders of its Series C
Convertible Preferred Stock to, among other things, support an amendment to the
Parent's certificate of incorporation providing for the conversion of such
preferred Stock to common Stock of the Parent according to the ratio set forth
in the Merger Agreement (the "Parent Preferred Stock Conversion").
Fifth, one or more of PageNet's existing domestic Subsidiaries may be
merged into PageNet or one or more of its other existing domestic Subsidiaries.
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COLLATERAL
Prior to the merger (the "ACE Merger") of Arch Communications Enterprises,
Inc. ("ACE") into the Borrower on June 29, 1998, the API Lenders were granted a
first priority security interest in (i) the Stock of Arch Communications, Inc.
("Arch"), (ii) intercompany notes made by ACE and ACE's Subsidiaries, Arch
Connecticut Valley, Inc. and Arch Communications Enterprises, LLC (the "ACE
Subsidiaries") to the Parent and (iii) all assets of the ACE Subsidiaries,
including intercompany notes made by the Borrower and the Parent to the ACE
Subsidiaries and by ACE Subsidiaries to other ACE Subsidiaries, and the Stock of
the ACE Subsidiaries, in each case to the extent such assets, notes and Stock
existed at the time of the ACE Merger and such security interest was in effect
at the time of the ACE Merger (the "Existing API Collateral"). Under the terms
of the Existing Arch Indentures, the API Lenders are not required to share the
Existing API Collateral with the holders of the Existing Arch Senior Notes
("Existing Arch Senior Noteholders"). On a vote of Minority Lenders, the API
Lenders have a right to require a grant of a security interest in all other
assets of Arch and its Subsidiaries. However, under the terms of the Existing
Arch Indentures, if the API Lenders exercise this right, the Existing Arch
Senior Noteholders must be equally and ratably secured by such assets. Such
assets would include, for example, accounts receivable and inventory of the ACE
Subsidiaries which arose or were acquired after the ACE Merger, all of the
assets of the Borrower (which consist primarily of the assets of the former USA
Mobile companies), all of the assets of the MobileMedia companies, etc.
The PageNet Lenders will be entitled to maintain their security interest in
the assets of PageNet and its Subsidiaries (including the Stock of such
Subsidiaries) existing at the time of the Merger (the "Existing PageNet
Collateral") but would be required to equally and ratably secure the Existing
Arch Senior Noteholders with any other assets in which the PageNet Lenders were
granted a security interest. The assets of the Canadian Subsidiaries of PageNet
will not constitute Existing PageNet Collateral or collateral to be shared with
the API Lenders and the Existing Arch Senior Noteholders for so long as the
existing Canadian credit facilities for such Subsidiaries remain in place.
On the Merger Effective Date and immediately after the Merger Effective
Time, a security interest will be granted by Arch, the Borrower, PageNet and
each of their respective Subsidiaries that is a Guarantor in all of their
respective present and after acquired assets (other than the Existing API
Collateral, the Existing PageNet Collateral and the assets of the Canadian
Subsidiaries of PageNet for so long as the Canadian Subsidiaries' Canadian
credit facilities remain in place and, with respect to the Stock owned by such
Person of any Foreign Subsidiary that is not a Material Foreign Subsidiary,
limited to 65% of the Stock of such Foreign Subsidiary) for the equal and
ratable benefit of the API Lenders, the PageNet Lenders and the Existing Arch
Senior Noteholders.
Following is a summary of the credit facilities under the Credit Agreement
(the "Credit Facilities") and the principal terms of the Credit Agreement and
the collateral and other documents relating thereto (the "Loan Documents").
BORROWER: Arch Paging, Inc., a Delaware corporation.
MANAGING AGENTS: BNY, TD, RBC, Barclays and Fleet.
ADMINISTRATIVE AGENT: BNY.
DOCUMENTATION AGENT: RBC.
CO-DOCUMENTATION AGENTS: Barclays and Fleet.
SYNDICATION AGENT: TD.
LEAD ARRANGERS AND BOOK RUNNERS: BNY Capital Markets, Inc. and TD Securities
(USA) Inc.
LENDERS: The API Lenders and, after the consummation
of the Merger, the PageNet Lenders
(together with the API Lenders, the
"Lenders").
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LETTER OF CREDIT ISSUING BANK: BNY. The Administrative Agent, the Lenders
and the Letter of Credit Issuing Bank are
referred to collectively as the "Credit
Parties").
COLLATERAL AGENTS: BNY, on behalf of the Lenders and the
Applicable Arch Indenture Trustees, on
behalf the Existing Arch Senior
Noteholders.
TYPE OF FACILITIES: An aggregate of $1,327,555,000 (less the
Tranche C amortization payment in the
amount of $3,060,000 made on or about
December 31, 1999) of senior Credit
Facilities comprised of the following:
1. Tranche A: A $175,000,000 reducing
revolving credit facility (the "Tranche
A Facility") pursuant to which revolving
loans (the "Tranche A Loans") may be
borrowed, prepaid and reborrowed and
pursuant to which letters of credit may
be issued as set forth below. The
commitments of the Lenders under the
Tranche A Facility are referred to as
the "Tranche A Commitments", each a
"Tranche A Commitment".
The Borrower may request the issuance of
letters of credit (each a "Letter of
Credit") with a face amount not in excess
of $5,000,000, subject to Tranche A
Commitment reductions. Each such Letter
of Credit shall have an expiry date of
one year or less and with a final expiry
date at least ten business days prior to
the Final Maturity Date for the Tranche A
Facility. The issuance of a Letter of
Credit will be deemed a utilization of
the Tranche A Facility. The outstanding
principal balance of the Tranche A Loans
plus the exposure in respect of Letters
of Credit are referred to collectively as
the "Tranche A Exposure".
2. Tranche B: A $100,000,000 amortizing
term loan facility (the "Tranche B
Facility"), the loans under which are
referred to as the "Tranche B Loans".
The outstanding principal amount of the
Tranche B Loans will amortize as set
forth below.
3. Tranche B-1: A $746,555,000 (less any
Replaced Letters of Credit, as defined
below) amortizing term loan facility
(the "Tranche B-1 Facility"), consisting
of (i) term loans in the aggregate
principal amount of $745,000,000 plus
any additional loans made in connection
with the PageNet Letters of Credit as
discussed below (the "Tranche B-1
Loans") and (ii) letters of credit
issued by Bank of America, N.A. under
the Existing PageNet Credit Agreement
(the "PageNet Letters of Credit")
outstanding on the Merger Effective Date
(currently in the face amount of
$1,555,000) less any PageNet Letters of
Credit replaced by Letters of Credit
under the Tranche A Facility on the
Merger Effective Date (the "Replaced
Letters of Credit"). The reimbursement
obligations of the PageNet Lenders to
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Bank of America, N.A., as the letter of
credit issuer under the Existing PageNet
Credit Agreement, will continue to be
governed by the provisions of the
Existing PageNet Credit Agreement as if
such Existing PageNet Credit Agreement
was still in effect. If (i) any PageNet
Letter of Credit is drawn before, on or
after the Merger Effective Date, (ii) the
issuer thereof is not reimbursed by
PageNet, and (iii) the issuer thereof is
reimbursed by the PageNet Lenders in
accordance with the provisions of the
Existing PageNet Credit Agreement, then
the amount so reimbursed will be deemed
to be additional Tranche B-1 Loans made
by the PageNet Lenders. The PageNet
Letters of Credit cannot be renewed but,
subject to availability, can be replaced
by Letters of Credit issued under the
Tranche A Facility. The outstanding
principal amount of the Tranche B-1 Loans
will amortize as set forth below.
4. Tranche C: A $306,000,000 (less the
Tranche C amortization payment in the
amount of $3,060,000 made on or about
December 31, 1999) amortizing term loan
facility (the "Tranche C Facility"), the
loans under which are referred to as the
"Tranche C Loans". The outstanding
principal amount of the Tranche C Loans
will amortize as set forth below.
The Tranche A Loans, the Tranche B Loans,
the Tranche B-1 Loans and the Tranche C
Loans are referred to collectively as the
"Loans".
CLOSING DATE: March 23, 2000.
FINAL MATURITY DATE: Tranche A Facility and Tranche B
Facility -- the earlier to occur of (i)
June 30, 2005, and (ii) the Adjusted
Indenture Maturity Date.
Tranche B-1 Facility and Tranche C
Facility -- the earlier of (i) June 30,
2006 and (ii) the Adjusted Indenture
Maturity Date.
PURPOSE: For general corporate purposes of the
Borrower and its Subsidiaries, including
(i) capital expenditures, (ii) working
capital, (iii) to finance permitted
acquisitions, (iv) to make permitted
Restricted Payments, (v) to make
investments in PageNet's Canadian
Subsidiaries in an aggregate amount not in
excess of $2,000,000, (vi) in the event of
the commencement of the Bankruptcy
Proceeding, to repay the DIP Facility,
provided that the aggregate amount of such
repayment shall not exceed $50,000,000 and
provided further that the conditions set
forth in item 10 of "Condition Precedent to
Merger" are satisfied, and (vii) to pay
transactions costs.
SECURITY: 1. The API Lenders will be entitled to
continue their first priority perfected
security interest in all Existing API
Collateral, provided that the security
interest granted by
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the Parent in the Stock of Arch and
intercompany notes made by Arch, the
Borrower and the ACE Subsidiaries to the
Parent shall be subject to release as
currently provided in the Loan Documents.
2. The PageNet Lenders will be entitled to
continue their first priority perfected
security interest in the Existing
PageNet Collateral, including 100% of
its retained interest in the Distributed
Subsidiary to the extent it constitutes
Existing PageNet Collateral.
3. On the Merger Effective Date and
immediately after the Merger Effective
Time, a first priority perfected
security interest will be granted by
Arch, the Borrower, PageNet and each of
their respective Subsidiaries that is a
Guarantor to the Collateral Agents for
the equal and ratable benefit of the API
Lenders, the PageNet Lenders and the
Existing Arch Senior Noteholders in all
of their respective present and after
acquired assets (other than the Existing
API Collateral, the Existing PageNet
Collateral and the assets of any
Canadian Subsidiary of PageNet which is
a party to a loan document relating to a
Canadian credit facility which is then
in effect), provided that the percentage
of Stock owned by such Person in any
Foreign Subsidiary that is not a
Material Foreign Subsidiary shall be
limited to 65% of the Stock of such
Foreign Subsidiary.
4. The Credit Agreement provides for an
intercreditor arrangement covering the
Existing API Collateral and the Existing
PageNet Collateral. The arrangement
shall provide, among other things, for
the ratable sharing of the proceeds of
such collateral, provided, however, that
the amount of the secured claim with
respect to the Existing API Collateral
and the Existing PageNet Collateral
shall not be increased.
GUARANTORS: Guaranties of (i) all present and future
direct and indirect Subsidiaries of the
Parent, including on and after the Merger
Effective Date, PageNet and its
Subsidiaries, but excluding the Borrower,
the Borrower's Foreign Subsidiaries which
are not Material Foreign Subsidiaries and,
until the Benbow Guaranty Date (as defined
below), Benbow Investments, Inc. ("Benbow
Investments") and Benbow PCS Ventures, Inc.
("Benbow") (if it is a Subsidiary at such
time) and (ii) the Parent shall be provided
to the Credit Parties. The guaranty of the
Parent referred to in clause (ii) above
shall be subject to release as currently
provided in the Loan Documents.
RELEASE OF SECURITY; GUARANTORS: At such time as (i) the Existing Arch
Senior Note Termination Date has occurred
and (ii) all action required to be taken to
grant to the Administrative Agent a first
perfected security interest in the
collateral to be granted at
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such time shall have been taken (including
the making of all required filings), then
so long as no default or event of default
exists or would be continuing before and
after giving effect thereto and provided
that the Administrative Agent shall have
received a favorable opinion of counsel to
the Borrower (in form and substance
satisfactory to the Administrative Agent)
as to the grant and perfection of such
security interests, the Administrative
Agent shall take such reasonable actions as
requested by, and at the expense of, the
Borrower, to release the Parent from its
guaranty and the security interest in the
collateral pledged to the Administrative
Agent by the Parent thereunder.
SCHEDULED TRANCHE A COMMITMENT
REDUCTIONS: Commencing September 30, 2000, the Tranche
A Commitment shall reduce through equal
quarterly reductions occurring on the last
business day of each March, June, September
and December such that the following annual
reductions occur:
<TABLE>
<CAPTION>
% REDUCTION IN
YEAR ENDING TRANCHE A COMMITMENT
----------- --------------------
<S> <C>
12/31/00......................... 10.0%
12/31/01......................... 20.0%
12/31/02......................... 20.0%
12/31/03......................... 20.0%
12/31/04......................... 20.0%
12/31/05......................... 10.0%
====
</TABLE>
AMORTIZATION OF TRANCHE B
FACILITY: Commencing September 30, 2000, the Tranche
B Facility shall amortize in equal
quarterly installments occurring on the
last business day of each March, June,
September and December such that the
following annual percentages of the Tranche
B Facility are payable:
<TABLE>
<CAPTION>
YEAR ENDING % OF TRANCHE B FACILITY
----------- -----------------------
<S> <C>
12/31/00......................... 5.0%
12/31/01......................... 12.5%
12/31/02......................... 17.5%
12/31/03......................... 22.5%
12/31/04......................... 27.5%
12/31/05......................... 15.0%
</TABLE>
AMORTIZATION OF TRANCHE B-1
FACILITY: Commencing March 31, 2001, the Tranche B-1
Facility shall amortize in equal quarterly
installments occurring on the last business
day of each March, June, September and
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<PAGE> 301
December such that the following annual
percentages of the Tranche B-1 Facility are
payable:
<TABLE>
<CAPTION>
YEAR ENDING % OF TRANCHE B-1 FACILITY
----------- -------------------------
<S> <C>
12/31/01....................... 2.5%
12/31/02....................... 15.0%
12/31/03....................... 20.0%
12/31/04....................... 22.5%
12/31/05....................... 25.0%
</TABLE>
The remaining 15% of the Tranche B-1
Facility will amortize in two equal
installments on 3/31/06 and 6/30/06.
AMORTIZATION OF TRANCHE C
FACILITY: Commencing December 31, 1999, the Tranche C
Facility shall amortize in annual
installments occurring on the last business
day of each year such that the following
annual percentages of the Tranche C
Facility are payable:
<TABLE>
<CAPTION>
YEAR ENDING % OF TRANCHE C FACILITY
----------- -------------------------
<S> <C>
12/31/99....................... 1.0%
12/31/00....................... 1.0%
12/31/01....................... 1.0%
12/31/02....................... 1.0%
12/31/03....................... 1.0%
12/31/04....................... 1.0%
12/31/05....................... 1.0%
12/31/06....................... 93.0%
</TABLE>
INTEREST RATES: At the Borrower's option, the Loans will
bear interest at either (i) the Applicable
Margin plus, the greater of (a) the Federal
Funds Effective Rate plus 1/2 of 1% and (b)
BNY's prime commercial lending rate as
publicly announced to be in effect from
time to time (the "Alternate Base Rate"),
or (ii) subject to legality and
availability, the Administrative Agent's
reserve-adjusted LIBOR interest rate plus
the Applicable Margin. Interest periods for
the LIBOR interest rate option shall be for
periods of one, two, three or six months.
APPLICABLE MARGIN: Tranche A and Tranche B -- The Applicable
Margin with respect to any interest rate
option under the Tranche A Facility and the
Tranche B Facility shall be determined on
the basis of the Pricing Leverage Ratio as
follows:
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Prior to the Merger Effective Date:
<TABLE>
<CAPTION>
PRICING LEVERAGE RATIO ABR LIBOR
---------------------- ----- -----
<S> <C> <C>
(greater than or equal to) 4.50:1.00.............. 1.875% 3.125%
(greater than or equal to) 4.00:1.00 (less than)
4.50:1.00....................................... 1.500% 2.750%
(greater than or equal to) 3.00:1.00 (less than)
4.00:1.00....................................... 1.125% 2.375%
(less than) 3.00:1.00............................. 0.750% 2.000%
</TABLE>
On and after the Merger Effective Date:
<TABLE>
<CAPTION>
PRICING LEVERAGE RATIO ABR LIBOR
---------------------- ----- -----
<S> <C> <C>
(greater than or equal to) 3.50:1.00.............. 2.125% 3.375%
(greater than or equal to) 3.00:1.00 (less than)
3.50:1.00....................................... 1.875% 3.125%
(greater than or equal to) 2.50:1.00 (less than)
3.00:1.00....................................... 1.500% 2.750%
(less than) 2.50:1.00............................. 1.125% 2.375%
</TABLE>
Tranche B-1 -- The Applicable Margin with
respect to any interest rate option under
the Tranche B-1 Facility shall be
determined on the basis of the Pricing
Leverage Ratio as follows:
<TABLE>
<CAPTION>
PRICING LEVERAGE RATIO ABR LIBOR
---------------------- ----- -----
<S> <C> <C>
(greater than or equal to) 3.50:1.00........................ 2.125% 3.375%
(greater than or equal to) 3.00:1.00 (less than)
3.50:1.00................................................. 1.875% 3.125%
(greater than or equal to) 2.50:1.00 (less than)
3.00:1.00................................................. 1.500% 2.750%
(less than) 2.50:1.00....................................... 1.125% 2.375%
</TABLE>
Changes in the Applicable Margin with
respect to the Tranche A Facility, the
Tranche B Facility and the Tranche B-1
Facility shall become effective two
business days after the date of delivery of
a compliance certificate required to be
delivered by the Borrower, provided,
however, that in the event the Borrower
fails to deliver a compliance certificate
on a timely basis, the Pricing Leverage
Ratio shall be deemed to be greater than
the highest pricing level under each of the
above grids until a compliance certificate
is delivered which shows a lower Pricing
Leverage Ratio.
Tranche C -- The Applicable Margin with
respect to any interest rate option under
the Tranche C Facility shall be 6.875% with
respect to borrowings bearing interest
based upon LIBOR ("LIBOR Advances") and
5.625% with respect to ABR Advances.
DEFAULT RATE OF INTEREST: Following the occurrence of and during the
continuation of an Event of Default,
interest on the outstanding principal
balance of the Loans shall accrue at then
applicable interest rates plus 2.00% per
annum. If any amount payable under the Loan
Documents (other than the principal of the
Loans) is not paid when due, such amount
shall bear interest at the Alternate Base
Rate plus the Applicable Margin plus 2.00%
per annum from the date of nonpayment until
paid in full. All such interest shall be
payable on demand.
C-9
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COMMITMENT FEES: A non-refundable per annum fee payable to
the Administrative Agent for pro-rata
distribution to the Lenders with Tranche A
Commitments shall accrue on the average
daily unused portion of the Tranche A
Commitments, determined on the basis of the
Pricing Leverage Ratio, as follows:
1. Prior to the Merger Effective Date:
<TABLE>
<CAPTION>
PRICING LEVERAGE RATIO COMMITMENT FEE
---------------------- --------------
<S> <C> <C>
(greater than or equal to) 4.00:1.00.............. 0.500%
(less than) 4.00:1.00............................. 0.375%
</TABLE>
2. On and after the Merger Effective Date:
<TABLE>
<CAPTION>
PRICING LEVERAGE RATIO COMMITMENT FEE
---------------------- --------------
<S> <C> <C>
(greater than or equal to) 3.00:1.00.............. 1.00%
(less than) 3.00:1.00............................. 0.75%
</TABLE>
Changes in the applicable commitment fee
percentage shall become effective two
business days after the date of delivery of
a compliance certificate required to be
delivered by the Borrower, provided,
however, that in the event the Borrower
fails to deliver a compliance certificate
on a timely basis, the Pricing Leverage
Ratio shall be deemed to be greater than
the highest pricing level under each of the
above grids until a compliance certificate
is delivered which shows a lower Pricing
Leverage Ratio. Commitment Fees shall be
computed on the basis of the actual number
of days elapsed in a year comprised of 365
days or, if appropriate, 366 days and shall
be payable quarterly in arrears on the last
day of March, June, September and December.
LETTER OF CREDIT FEES: A non-refundable per annum fee payable to
the Administrative Agent for pro-rata
distribution to the Lenders having Tranche
A Commitments, shall accrue on the face
amount of each Letter of Credit equal to
the Applicable Margin in effect for the
LIBOR interest rate option under the
Tranche A Facility. Letter of Credit Fees
shall be computed on the basis of the
actual number of days elapsed in a year
comprised of 360 days and shall be payable
quarterly in arrears on the last day of
March, June, September and December.
CLOSING FEE FOR EXISTING PAGENET
LENDERS: A non-refundable fee of $5,000,000 payable
to the Administrative Agent for the pro
rata account of each Existing PageNet
Lender which executes and delivers the
Joinder and Assumption Agreement described
in the Credit Agreement, payable on the
Merger Effective Date.
CALCULATION AND PAYMENT OF
INTEREST: Interest shall be computed on the basis of
the actual number of days elapsed in a year
comprised of 360 days (or, in the case of
Loans bearing interest at the Alternate
Base Rate based on the prime rate, 365 days
or, if appropriate, 366 days). Except as
provided under the
C-10
<PAGE> 304
heading "Default Rate of Interest", above,
interest at (i) the Alternate Base Rate
shall be payable quarterly in arrears on
the last day of each March, June, September
and December and (ii) LIBOR shall be
payable on the last day of the applicable
interest period, provided that if the
applicable interest period is greater than
three months, interest shall be payable on
the last day of each three month interval
occurring during such interest period and
the last day of such interest period.
PREPAYMENTS & COMMITMENT
REDUCTIONS: Voluntary Commitment Reductions -- The
Borrower may terminate or permanently
reduce the unused portion of the Tranche A
Commitment. All such reductions must be in
a minimum amount of $1,000,000 and $100,000
multiples thereof.
Voluntary Prepayments -- The Borrower may
prepay Loans (subject to break funding
indemnities and the prepayment fee
described under the heading "Prepayment Fee
on Prepayments of Tranche C Loans" below),
subject to a minimum prepayment of
$1,000,000 plus $100,000 multiples thereof.
The Borrower shall designate the Tranche to
which each prepayment shall apply and any
voluntary prepayments made on the Tranche B
Facility, the Tranche B-1 Facility or the
Tranche C Facility shall be applied
respectively to the remaining amortization
installments thereof on a pro rata basis.
Mandatory Commitment Reductions and
Prepayments:
1. On or before each date set forth below,
the Borrower shall prepay the Tranche B
Loans, the Tranche B-1 Loans and the
Tranche C Loans (and, if no Tranche B
Loans are outstanding, the Tranche A
Commitment is to be reduced) as set
forth below by an amount equal to the
amount set forth in subparagraphs (a)
through (d) below and applicable to
such date (the "Aggregate
Prepayment/Reduction Amount"):
(a) Excess Cash Flow -- For each
fiscal year prior to the fiscal
year in which the Existing Arch
Senior Note Termination Date
occurs, commencing with the
fiscal year ended December 31,
1999, and effective on March
31st of each immediately
succeeding fiscal year, in an
aggregate amount equal to the
following: (i) if the Total
Leverage Ratio at the end of
such fiscal year is greater
than 4.00:1.00, the lesser of
(A) 80% of Excess Cash Flow
(the "Maximum Excess Cash Flow
Amount") and (B) an amount
equal to the sum of (1) the
portion of the Maximum Excess
Cash Flow Amount which will
reduce the Total Leverage Ratio
to 4.00:1:00 at the end of such
fiscal year, plus (2) 50% of
the amount equal to
C-11
<PAGE> 305
Excess Cash Flow minus such
portion referred to in clause
(B)(1) above, or (ii) if the Total
Leverage Ratio at the end of such
fiscal year is less than or equal
to 4.00:1.00, 50% of Excess Cash
Flow.
(b) Asset Sales -- 100% of the net
cash proceeds received from
asset sales, other than those
in the ordinary course of
business, subject to customary
reinvestment provisions.
(c) Insurance and Condemnation
Awards -- 100% of all property
insurance recoveries and
condemnation awards in excess
of amounts used to replace or
restore any properties, subject
to customary reinvestment
provisions.
(d) Breakup Fee -- 100% of any
breakup or similar fee received
by the Parent or any of its
Affiliates under the Merger
Agreement in the event that the
Merger is not consummated less
the amount thereof used by the
Parent or Arch during the six
month period following the
receipt thereof to repay,
redeem or otherwise retire any
of the Parent Discount Notes,
the Parent Subordinated
Debentures or the Existing Arch
Senior Notes, such prepayment
to be made on the last day of
such period.
2. In addition to the Scheduled Tranche A
Commitment Reduction, the Tranche A
Commitment shall be permanently reduced
as described under the heading
"Application of Mandatory Prepayments &
Commitment Reductions", below. The
Borrower shall prepay the Tranche A
Loans so that the Tranche A Exposure
does not exceed the Tranche A
Commitment as so reduced.
3. The Tranche A Loans shall be due and
payable on the termination of the
Tranche A Commitment.
Simultaneously with the termination and
each reduction of the Aggregate Tranche A
Commitments, the Borrower shall pay to the
Administrative Agent, for the pro rata
account of the Lenders holding Tranche A
Commitments, accrued Commitment Fees (to
the date of termination or reduction) on
the terminated or reduced portion thereof.
APPLICATION OF MANDATORY
PREPAYMENTS & COMMITMENT
REDUCTIONS: The Aggregate Prepayment/Reduction Amount
to be applied on any date shall be applied
as follows:
Tranche B Facility -- The Tranche B Loans
shall be prepaid in an amount equal to the
product of (i) Aggregate
Prepayment/Reduction Amount to be applied
and (ii) the Aggregate Tranche B
Percentage.
C-12
<PAGE> 306
Tranche B-1 Facility -- The Tranche B-1
Loans shall be prepaid in an amount equal
to the product of (i) Aggregate
Prepayment/Reduction Amount to be applied
and (ii) the Aggregate Tranche B-1
Percentage.
Tranche C Facility -- The Tranche C Loans
shall be repaid in an amount equal to the
product of (i) Aggregate
Prepayment/Reduction Amount to be applied
and (ii) the Aggregate Tranche C
Percentage.
Tranche A Facility -- If as of any date
after applying all or any portion of the
Aggregate Prepayment/Reduction Amount to
the Tranche B Loans, the Tranche B Loans
shall have been paid in full, the Tranche A
Facility shall be permanently reduced in an
amount equal to the Aggregate
Prepayment/Reduction Amount to be applied
as of such date minus the sum of (i) the
product of the Aggregate Tranche B-1
Percentage and the Aggregate
Prepayment/Reduction Amount to be applied
as of such date and (ii) the product of the
Aggregate Tranche C Percentage and the
Aggregate Prepayment/Reduction Amount to be
applied as of such date.
Each reduction of the Tranche A Commitment
shall be applied to the remaining Scheduled
Tranche A Commitment Reductions on a pro
rata basis.
Prepayments of the Tranche B Loans, the
Tranche B-1 Loans and Tranche C Loans shall
be applied on a pro rata basis to the
remaining respective amortization
installments of such Loans.
PREPAYMENT FEE: If the Borrower makes a voluntary
prepayment of Tranche C Loans during the
periods set forth below, the Borrower shall
pay to each Tranche C Lender together with
the prepayment, a prepayment fee equal to
the following percentages of the principal
amount of such prepayment:
<TABLE>
<CAPTION>
PERIOD FEE
------ ----
<S> <C>
6/3/99 -- 11/30/99........................... 2.00%
12/1/99 -- 5/29/00........................... 1.50%
5/30/00 -- 11/26/00.......................... 1.00%
11/27/00 -- 5/26/01.......................... 0.50%
5/27/01 and thereafter....................... 0.00%
</TABLE>
REPRESENTATIONS & WARRANTIES: Customary for the type of transaction
proposed and others to be reasonably
specified by the Managing Agents, in each
case to be applied to Arch and its
Subsidiaries, including, without
limitation, representations and warranties
relating to: Subsidiaries and
capitalization; the existence,
qualification and good standing of the Loan
Parties; authorization; title to
properties; liens; employee benefits; the
accuracy and fair presentation of financial
statements; absence material adverse change
in the financial condition, business
operations or properties of the Borrower
and its Subsidiaries, if any, since
December 31, 1998; the noncontravention
C-13
<PAGE> 307
of organizational documents, laws and
material agreements; the absence of
litigation; the payment of taxes and other
material obligations; compliance with
environmental and other laws; receipt of
necessary approvals; insurance; validity of
licenses, permits and franchises, including
FCC licenses; and the power and authority
of the Loan Parties to execute, deliver and
perform obligations pursuant to the Loan
Documents. In addition, the Parent's
guaranty contains comparable
representations and warranties.
CONDITIONS PRECEDENT TO MERGER: Customary for the type of transaction
proposed, and others to be reasonably
specified by the Managing Agents,
including, without limitation:
1. Execution and delivery of definitive
documentation relating to the amendment
and restatement of the Existing PageNet
Credit Agreement and related collateral
documents and the assumption of the
loans thereunder by the Borrower,
signed by the Borrower and each Person
then a party to the Existing PageNet
Credit Agreement or related collateral
documents; and other documentation,
including, without limitation, a
joinder and assumption agreement.
2. Replacement of certain Schedules to the
Credit Agreement and related collateral
documents, in form and substance
acceptable to the Managing Agents.
3. Execution and delivery of promissory
notes for the Lenders (other than
Tranche A Lenders, Tranche B Lenders
and Tranche C Lenders).
4. Execution and delivery of joinder
supplements to the subsidiary guaranty
and applicable collateral documents by
PageNet, its domestic Subsidiaries and
its Material Foreign Subsidiaries.
5. (a) The stockholders of the Parent
shall have approved the Merger
Transactions, (b) either (i) the
stockholders of PageNet shall have
approved the Merger Transactions, or
(ii) the conditions precedent under the
heading "Additional Conditions
Precedent -- Bankruptcy Proceeding"
below shall have been satisfied, and
(c) the Administrative Agent shall have
received a certificate of the secretary
or assistant secretary of the Parent to
the foregoing effects.
6. The receipt by the Administrative Agent
of a certificate, dated as of the
Merger Effective Date, of the Secretary
or Assistant Secretary of each of
PageNet and each of its Subsidiaries
that is a party to a Transaction
Document (1) either (x) attaching a
true and complete copy of the
resolutions of its Board of Directors
or other managing body or Person and of
all documents evidencing other
necessary corporate or other action (in
form and substance satisfactory to the
C-14
<PAGE> 308
Administrative Agent) taken by it to
authorize the Transaction Documents to
which it is a party and the consummation
of the Transactions or (y) the
conditions precedent under the heading
"Additional Conditions
Precedent--Bankruptcy Proceeding" below
shall have been satisfied, (2) attaching
a true and complete copy of its
certificate of incorporation and by-laws
or other organizational documents, (3)
setting forth the incumbency of its
officer or officers who may sign such
Transaction Documents, including therein
a signature specimen of such officer or
officers and (4) attaching a certificate
of good standing of the Secretary of
State of the jurisdiction of its
incorporation and of each other state in
which it is qualified to do business,
together with such other documents as
the Administrative Agent shall require.
7. The Administrative Agent shall have
received a certificate, dated as of the
Merger Effective Date, of the Secretary
or Assistant Secretary of each of the
Parent and each of its Subsidiaries
that is a party to a Transaction
Document (1) certifying that there have
been no amendments, supplements or
other modifications to the resolutions,
the certificate of incorporation or
by-laws delivered on the Closing Date
or if so, setting forth the same, and
(2) setting forth the incumbency of its
officer or officers who may sign such
Transaction Documents, including
therein a signature specimen of such
officer or officers, together with such
other documents as the Administrative
Agent shall require.
8. (a) The Operating Cash Flow of PageNet
for the three month period ending on
the Merger Effective Date or, if the
Merger Effective Date is not the last
day of a month, for the immediately
preceding three month period,
multiplied by 4 shall not be less than
$175,000,000, and the sum of (i)
Annualized Operating Cash Flow of the
Borrower plus (ii) Operating Cash Flow
of PageNet for the three month period
ending on the Merger Effective Date (or
if the Merger Effective Date is not the
last day of a month, for the
immediately preceding three month
period) multiplied by 4 shall not be
less than $400,000,000, (b) the
aggregate number of Pagers in Service
of (i) PageNet and its Subsidiaries as
of the Merger Effective Date shall not
be less than 7,250,000 and (ii) the
Borrower and its Subsidiaries and
PageNet and its Subsidiaries on a
combined basis as of the Merger
Effective Date shall not be less than
13,175,000, and (c) the Administrative
Agent shall have received a certificate
of a financial officer of the Borrower
(including calculations in reasonable
detail) to the foregoing effect
C-15
<PAGE> 309
in form and substance satisfactory to
the Managing Agents.
9. The corporate, tax, capital and
ownership structure (including articles
of incorporation and by-laws),
shareholders agreements and management
of the Parent and its Subsidiaries
before and after the consummation of
the Transactions shall be satisfactory
to the Managing Agents and the
aggregate tax liability reasonably
expected to be incurred by PageNet and
its Subsidiaries and the Parent and its
Subsidiaries as a result of the
Transactions shall not exceed
$15,000,000 in the aggregate and the
Administrative Agent shall have
received a certificate of a financial
officer of the Borrower to the
foregoing effect in form and substance
satisfactory to the Managing Agents.
10. Immediately after the consummation of
the Merger Transactions and the
repayment in full of the DIP Facility,
the Borrower shall have availability
under the Tranche A Commitments in an
amount not less than the sum of
$85,000,000 minus an amount equal to
the outstanding principal amount of the
DIP Facility immediately prior to the
consummation of the PageNet Merger in
excess of $15,000,000 (but not more
than $35,000,000) plus, without
duplication, the amount of any fees or
expenses incurred by the Parent or any
of its Subsidiaries in connection with
the Merger Transactions which are not
paid on the Merger Effective Date.
11. The Parent shall have completed the
Parent Exchange Offer on terms
satisfactory to the Managing Agents, at
least 50% of the aggregate principal
amount of the Parent Discount Notes
outstanding on January 1, 2000 shall
have been validly tendered and not
withdrawn or shall have been exchanged
for common Stock of the Parent or other
Stock of the Parent which, by its
terms, converts to common Stock of the
Parent on the Merger Effective Date,
and the Administrative Agent shall have
received a certificate of a financial
officer of the Parent to the foregoing
effects in form and substance
satisfactory to the Managing Agents.
12. (a) PageNet shall have completed the
PageNet Exchange on terms satisfactory
to the Managing Agents, at least 97.5%
of the aggregate outstanding principal
amount of PageNet Notes and at least
50% of the aggregate principal amount
of each series of PageNet Notes shall
have been validly tendered and not
withdrawn, PageNet Noteholder Consents
shall have been received from PageNet
Noteholders holding at least such
percentages of the aggregate
outstanding principal amount of PageNet
Notes, the PageNet Indentures shall
have been either terminated or amended
on terms satisfactory to the Managing
C-16
<PAGE> 310
Agents, and the Administrative Agent
shall have received a certificate of a
financial officer of the Parent to the
foregoing effects in form and substance
satisfactory to the Managing Agents, or
(b) the conditions precedent under the
heading "Additional Conditions
Precedent--Bankruptcy Proceeding" below
shall have been satisfied.
13. PageNet's shareholders' rights plan
shall be inapplicable to the Merger
Transactions and the Administrative
Agent shall have received a certificate
of a financial officer of the Parent to
the foregoing effects in form and
substance satisfactory to the Managing
Agents.
14. Except for the Bankruptcy Proceeding
and orders issued by the court therein,
there shall be no injunction, writ,
preliminary restraining order or other
order of any nature issued by any
governmental body in any respect
affecting the Transactions and no
action or proceeding by or before any
governmental body shall have been
commenced and be pending or, to the
knowledge of the Parent, the Borrower
or Arch, be threatened, seeking to
prevent or delay the Transactions or
challenging any terms and provisions
thereof or seeking any damages in
connection therewith which would in the
reasonable opinion of the Parent (or in
the opinion of the Managing Agents in
their sole discretion with respect to
which written notice has been provided
to the Parent by one or more of the
Managing Agents), individually or in
the aggregate, have a material adverse
effect on (w) the business, property,
financial condition, operations,
projections or prospects of the Parent
and its Subsidiaries on a consolidated
basis, Arch and its Subsidiaries on a
consolidated basis, the Borrower and
its Subsidiaries on a consolidated
basis or PageNet and its Subsidiaries
on a consolidated basis; (x) the
legality, validity or enforceability of
any of the Transaction Documents, (y)
the ability of the Borrower or any
other Loan Party to perform its
obligations under the Loan Documents,
or (z) the rights and remedies of the
Credit Parties under the Loan
Documents, and the Administrative Agent
shall have received a certificate of a
financial officer of the Parent to the
foregoing effects in form and substance
satisfactory to the Managing Agents,
provided that to the extent such
certificate relates to PageNet, such
certificate shall be to the best of the
knowledge of such financial officer.
15. The consummation of the Transactions
shall not (i) constitute a default
under any material agreement of the
Parent, PageNet or any of their
respective Subsidiaries (other than
defaults resulting from the
commencement of the Bankruptcy
Proceeding or de-
C-17
<PAGE> 311
faults nullified by the Plan of
Reorganization or the Confirmation
Order), (ii) require the prepayment,
repurchase, redemption or defeasance
(other than pursuant to the Exchange
Offers or requirements nullified by the
Plan of Reorganization or the
Confirmation Order) of any indebtedness
of the Parent, PageNet or any of their
respective Subsidiaries prior to its
scheduled maturity, including, without
limitation, under any change of control
or similar provision, or (iii)
constitute a Change of Control, and the
Administrative Agent shall have received
a certificate of a financial officer of
the Parent to the foregoing effects in
form and substance satisfactory to the
Managing Agents.
16. The Administrative Agent shall have
received a certificate of a financial
officer of the Parent, dated the Merger
Effective Date, in all respects
satisfactory to the Administrative
Agent certifying that as of the Merger
Effective Date (i) no default or Event
of Default exists and (ii) the
representations and warranties
contained in the Loan Documents are
true and correct.
17. (a) (1) Neither the Parent, Arch, the
Borrower nor any of their respective
Subsidiaries shall have sustained since
December 31, 1998 any loss or
interference with its respective
business from fire, explosion, flood or
other calamity, whether or not covered
by insurance or from any labor dispute
or court or governmental action order,
or decree, (2) except for the
Additional Tranche C Loans (as defined
in and made under the Existing Tranche
A and Tranche C Credit Agreement) and
the Arch 13 3/4% Notes, since such date
there shall not have been a material
increase in short-term debt or long-
term debt of the Parent, Arch, the
Borrower or any of their respective
Subsidiaries (other than debt
contemplated by this Agreement), and
(3) since such date there shall not
have been any change, or any
development involving a prospective
change, that could in the reasonable
opinion of the Parent reasonably be
expected to result (or in the opinion
of the Managing Agents in their sole
discretion with respect to which
written notice has been provided to the
Parent by one or more of the Managing
Agents be expected to result) in a
material adverse effect on (i) the
business, property, financial
condition, operations, projections or
prospects of the Parent and its
Subsidiaries on a consolidated basis or
Arch and its Subsidiaries on a
consolidated basis; (ii) the legality,
validity or enforceability of any of
the Loan Documents, (iii) the ability
of the Borrower to repay its
obligations under the Loan Documents or
of any other Loan Party to perform its
obligations under the Loan Documents,
or (iv) the
C-18
<PAGE> 312
rights and remedies of the Credit
Parties under the Loan Documents.
(b) (1) Except to the extent publicly
disclosed by PageNet prior to the Closing
Date, neither PageNet nor any of its
Subsidiaries shall have sustained since
December 31, 1998, any loss or interference
with its respective business from fire,
explosion, flood or other calamity, whether
or not covered by insurance or from any
labor dispute or court or governmental
action order, or decree (other than, in the
event of the commencement of the Bankruptcy
Proceeding, litigation before the
Bankruptcy Court which litigation is
disposed of pursuant to the Confirmation
Order (described under the heading
"Additional Conditions
Precedent -- Bankruptcy Proceeding" below)
other than as set forth in its audited
financial statements as of that date, (2)
since such date, except for borrowings
under the Existing PageNet Credit Agreement
and borrowings under the DIP Facility,
there shall not have been a material
increase in short-term debt or long-term
debt of PageNet or any of its Subsidiaries
(other than, in the event of the
commencement of the Bankruptcy Proceeding,
pursuant to the DIP Loan Documents, as
permitted in the PageNet Merger Documents),
and (3) except to the extent publicly
disclosed by PageNet prior to the Closing
Date, since such date there shall not have
been any change, or any development
involving a prospective change (other than
the commencement of the Bankruptcy
Proceeding), that could in the reasonable
opinion of the Parent reasonably be
expected to result (or in the opinion of
the Managing Agents in their sole
discretion with respect to which written
notice has been provided to the Parent by
one or more of the Managing Agents be
expected to result) in a material adverse
effect on (i) the business, property,
financial condition, operations,
projections or prospects of PageNet and its
Subsidiaries on a consolidated basis; (ii)
the legality, validity or enforceability of
any of the Loan Documents, (iii) the
ability of the Borrower to repay its
obligations under the Loan Documents or of
any other Loan Party to perform its
obligations under the Loan Documents, or
(iv) the rights and remedies of the Credit
Parties under the Loan Documents.
(c) The Administrative Agent shall have
received a certificate of a financial
officer of the Parent, dated the Merger
Effective date, in all respects
satisfactory to the Managing Agents
certifying to clauses (a) and (b) above,
provided, that with respect to clause (b),
such certificate shall be to the best of
the knowledge of such financial officer.
The filing of the Bankruptcy Proceeding
shall not, in and of itself, be deemed to
be a material adverse change with respect
to PageNet and its Subsidiaries.
C-19
<PAGE> 313
18. The Administrative Agent shall have
received financial projections (giving
effect to the Merger) of (i) the Parent
and its Subsidiaries on a consolidated
basis, (ii) Arch and its Subsidiaries
on a consolidated basis, (iii) the
Borrower and its Subsidiaries on a
consolidated basis, and (iv) PageNet
and its Subsidiaries on a consolidated
basis, in each case after giving effect
to the Merger, for the period through
the Tranche C Maturity Date, each in
form and substance satisfactory to the
Managing Agents.
19. The Administrative Agent shall have
received a certified copy of a final
order of the FCC approving the transfer
of control of such of PageNet and its
Subsidiaries which hold FCC licenses to
the Parent or any of its Subsidiaries.
20. All approvals and consents of all
Persons required to be obtained prior
to the Merger Effective Date in
connection with the consummation of the
Transactions (including, without
limitation, the lenders under the
Existing PageNet Credit Agreement and
the noteholders under the PageNet
Indentures and the Existing Arch
Indentures, to the extent required)
shall have been obtained and all
required notices shall have been given
and all required waiting periods shall
have expired, including, without
limitation, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as
amended (or expiration of applicable
waiting periods), and no provision of
any applicable statute, law, rule or
regulation of any governmental body
will prevent the execution, delivery or
performance of, or affect the validity
of, the Transaction Documents, and the
Administrative Agent shall have
received a certificate of an officer of
the Parent in form and substance
satisfactory to the Administrative
Agent to the foregoing effects.
21. The Administrative Agent shall have
received (i) such UCC, tax, patent,
trademark and judgment lien search
reports with respect to such applicable
public offices where Liens are filed,
as shall be acceptable to the
Administrative Agent, disclosing that
there are no Liens of record in such
official's office covering any
collateral or showing the Parent,
PageNet or any of their respective
Subsidiaries as a debtor thereunder
(other than liens permitted by the Loan
Documents), (ii) a certificate of the
Parent, dated the Merger Effective
Date, certifying that, as of the Merger
Effective Date, there will exist no
Liens on the Collateral (other than
liens permitted by the Loan Documents),
and (iii) such Uniform Commercial Code
financing statements or financing
statement amendments, executed by the
appropriate Loan Parties,
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as shall be reasonably requested by the
Administrative Agent, together with
either (x) satisfactory evidence that
all taxes payable in connection with the
filing of the UCC-1 financing statements
have been paid or (y) a check payable to
each applicable governmental body in
payment of each such tax.
22. Each of the conditions precedent
contained in the Merger Documents to
the consummation of the Merger
Transactions shall have been satisfied
(with no waiver of any condition
thereof without the prior written
consent of the Managing Agents), and
the Merger Transactions (other than the
Dropdown) shall have been consummated
in accordance with the terms of the
Merger Documents (with no amendment,
supplement or other modification to any
term or provision contained therein
without the prior written consent of
the Required Lenders (other than any
amendment, supplement or other
modification to any nonmaterial term or
provision contained therein or any
amendment, supplement or other
modification which is not adverse to
the Lenders which may be made with the
prior written consent of the Managing
Agents)) and all applicable laws,
governmental policies, rules and
regulations.
23. All representations and warranties made
in the Merger Documents by the Parent,
Merger Sub and PageNet shall be true
and correct in all material respects.
24. The Administrative Agent shall have
received a certificate of the Secretary
or Assistant Secretary of the Parent,
in all respects satisfactory to the
Administrative Agent, (a) attaching a
true and complete copy of each of the
fully executed Merger Documents
(including, without limitation, the
Merger Agreement, the amendments to the
PageNet Indentures and the Parent
Discount Notes Indenture, the
registration statements with respect to
the Parent Exchange Offer and the
PageNet Exchange Offer as filed with
the SEC, all of which shall be
satisfactory to the Managing Agents),
and (b) certifying that (i) each Merger
Document is in full force and effect,
(ii) no default or event of default by
the Parent or the Borrower or, to the
best of the knowledge of the Parent and
the Borrower, any other party, has
occurred and is continuing thereunder
and (iii) each of the conditions
specified in paragraphs 22 and 23 above
have been satisfied, provided, however,
that with respect to the
representations and warranties made in
the Merger Documents by PageNet or any
of its Subsidiaries, such certification
shall be made to the best knowledge of
the Parent.
25. The Administrative Agent shall have
received, in form and substance
satisfactory to the Managing Agents,
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such amendments, waivers or consents to
the Transactions from the lenders under
the documentation for the existing
PageNet Canadian credit facilities,
including, without limitation,
amendments to limit the collateral
thereunder to the assets of the PageNet
Canadian Subsidiaries existing on the
Merger Effective Date in which a Lien
was granted prior to such date, as the
Managing Agents shall require.
26. The Administrative Agent shall have
received a compliance certificate
signed by a financial officer of the
Borrower, in all respects reasonably
satisfactory to the Administrative
Agent, dated the Merger Effective Date,
and (i) stating that the Borrower is in
compliance with all covenants on a
pro-forma basis after giving effect to
the Transactions, and (ii) attaching a
copy of a pro-forma Consolidated
balance sheet of the Borrower utilized
for purposes of preparing such
compliance certificate, which pro-forma
Consolidated balance sheet presents the
Borrower's good faith estimate of its
pro-forma Consolidated financial
condition at the date thereof, after
giving effect to the Transactions.
27. Either (i) all of the Existing PageNet
Lenders shall have consented to the
consummation of the Merger Transactions
and the Administrative Agent shall have
received a Certificate of the Secretary
or Assistant Secretary of the Parent to
the foregoing effect or (ii) the
conditions set forth under the heading
"Additional Conditions
Precedent -- Bankruptcy Proceeding"
shall have been satisfied.
28. The Merger shall occur on or before
December 31, 2000.
29. A certificate of merger shall have been
filed with the Secretary of State of
the State of Delaware, which
certificate shall comply as to form and
substance with the General Corporation
Law of Delaware, and the Administrative
Agent shall have received a certified
copy thereof.
30. With respect to each PageNet Subsidiary
Merger, if any, a PageNet Subsidiary
Merger Certificate shall have been
filed with the applicable governmental
body, each of which shall comply as to
form and substance with applicable
state law, and the Administrative Agent
shall have received a certified copy
thereof.
31. The API Lenders' due diligence
investigations with respect to the
Parent, Arch, the Borrower and their
respective Subsidiaries, PageNet and
its Subsidiaries, the Acquisition and
the other Transactions shall be
satisfactory in all respects to
Required Lenders.
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32. The Spin-Off shall have occurred.
33. The Administrative Agent shall have
received satisfactory legal opinions of
counsel to the Loan Parties, including,
without limitation, with respect to the
tax treatment of the Merger
Transactions and FCC matters, addressed
to the Administrative Agent and the
other Credit Parties, dated the Merger
Effective Date and in form and
substance satisfactory to the
Administrative Agent.
34. The percentage of shares of Stock of
PageNet with respect to which the
holders thereof shall have perfected
their appraisal rights shall not exceed
5% of the outstanding shares of
PageNet, the holders of which are
entitled to appraisal rights, and the
Administrative Agent shall have a
received a certificate of a financial
officer of the Parent, in form and
substance satisfactory to the
Administrative Agent, as to the
foregoing, which certificate shall
specify the number of such shares.
35. All fees and expenses payable to the
Agents and the Lenders on the Merger
Effective Date shall have been paid,
including the reasonable fees and
expenses of counsel to the
Administrative Agent.
36. The Administrative Agent shall have
received such other documents and
assurances as the Managing Agents shall
reasonably require.
ADDITIONAL CONDITIONS
PRECEDENT --
BANKRUPTCY PROCEEDING: In the event that (i) a vote in favor of
the Plan of Reorganization by (A) PageNet
Noteholders holding at least two-thirds of
the aggregate principal amount of the
PageNet Notes that are actually voted and
by a majority in number of the PageNet
Noteholders that actually vote and (B)
lenders holding at least two-thirds of the
aggregate principal amount of the
indebtedness under the Existing PageNet
Credit Agreement that are actually voted
and by a majority in number of such lenders
that actually vote, and (ii) certain other
conditions set forth in the Merger
Agreement are satisfied, PageNet will
commence the Bankruptcy Proceeding. In the
event that the Bankruptcy Proceeding has
been commenced, as a condition to the
consummation of the Merger Transactions the
following additional conditions precedent
shall have been satisfied:
1. PageNet shall have submitted to the
court the Plan of Reorganization which
shall be acceptable in all respects to
the Managing Agents.
2. The DIP Facility shall have been repaid
in full (including, subject to Item 10
of "Conditions Precedent to Merger",
with the proceeds of Tranche A Loans),
and all Liens in respect thereof shall
have been
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<PAGE> 317
terminated, and the Administrative Agent
shall have received evidence, in form and
substance satisfactory to the Managing
Agents, to such effect.
3. The Administrative Agent shall have
received a court certified copy of the
final Confirmation Order issued by the
bankruptcy court confirming the Plan of
Reorganization in form and substance
satisfactory to the Managing Agents.
FINANCIAL COVENANTS: Customary for the type of transaction
proposed, including, without limitation,
the following:
1. Total Leverage Ratio -- At all times
prior to the Existing Arch Senior Note
Termination Date, during the periods set
forth below the Total Leverage Ratio
shall not exceed the following:
(a) prior to the Merger Effective Date:
<TABLE>
<CAPTION>
PERIOD TOTAL LEVERAGE RATIO
------ --------------------
<S> <C>
Closing Date through 6/29/00...... 4.50:1.00
6/30/00 through 6/29/01........... 4.25:1.00
6/30/01 through 6/29/02........... 4.00:1.00
6/30/02 and thereafter............ 3.50:1.00
</TABLE>
(b) on and after the Merger Effective
Date:
<TABLE>
<CAPTION>
PERIOD TOTAL LEVERAGE RATIO
------ --------------------
<S> <C>
Merger Effective Date through
6/29/01......................... 4.25:1.00
6/30/01 through 9/29/01........... 4.00:1.00
9/30/01 through 12/30/01.......... 3.75:1.00
12/31/01 and thereafter........... 3.50:1.00
</TABLE>
At all times on and after the Existing Arch
Senior Note Termination Date, the Total
Leverage Ratio shall not exceed 4.00:1.00.
2. API Leverage Ratio -- At all times the
API Leverage Ratio shall be less than or
equal to:
(a) prior to the Merger Effective Date,
2.50:1.00; and
(b) on and after the Merger Effective
Date during the periods set forth
below the following:
<TABLE>
<CAPTION>
PERIOD TOTAL LEVERAGE RATIO
------ --------------------
<S> <C>
Merger Effective Date through
6/29/01......................... 3.00:1.00
6/30/01 through 12/30/01.......... 2.75:1.00
12/31/01 through 6/29/02.......... 2.50:1.00
6/30/02 and thereafter............ 2.00:1.00
</TABLE>
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<PAGE> 318
3. Interest Coverage Ratio -- As of the
last day of each fiscal quarter during
the periods set forth below, the
Interest Coverage Ratio shall exceed the
following:
(a) prior to the Merger Effective Date:
<TABLE>
<CAPTION>
PERIOD TOTAL LEVERAGE RATIO
------ --------------------
<S> <C>
Closing Date through 9/30/00...... 2.00:1.00
12/31/00 and thereafter........... 2.25:1.00
</TABLE>
(b) on and after the Merger Effective
Date:
<TABLE>
<CAPTION>
PERIOD TOTAL LEVERAGE RATIO
------ --------------------
<S> <C>
Merger Effective Date through
9/30/01......................... 2.00:1.00
12/31/01 and thereafter........... 2.25:1.00
</TABLE>
4. Pro Forma Debt Service Coverage
Ratio -- As of the last day of each
fiscal quarter, the Pro Forma Debt
Service Coverage Ratio shall exceed
1.25:1.00.
5. Fixed Charge Coverage
Ratio -- Commencing June 30, 2001, as of
the last day of each fiscal quarter, the
Fixed Charge Coverage Ratio shall exceed
1.00:1.00.
6. Minimum Net Revenues -- As of the last
day of each full fiscal quarter during
the period from Merger Effective Date
until the last day of the fiscal quarter
ending on the second anniversary thereof
(or if such anniversary is not the last
day of a fiscal quarter, the last day of
the fiscal quarter in which such
anniversary occurs), the net revenues of
the Borrower and its Subsidiaries on a
consolidated basis for such fiscal
quarter shall be greater than
$325,000,000.
7. Maximum Capital Expenditures -- Capital
Expenditures made or obligated to be
made in respect of each fiscal quarter
set forth below shall not exceed the
amount set forth below with respect to
such fiscal quarter:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING AMOUNT
--------------------- ------------
<S> <C>
9/30/00................................ $ 75,000,000
12/31/00............................... $ 75,000,000
3/31/01................................ $ 70,000,000
</TABLE>
Capital Expenditures shall be calculated on
a non-cumulative basis so that amounts not
used in a fiscal quarter may not be carried
over and used in a subsequent fiscal
quarter.
OTHER COVENANTS: Customary affirmative and negative
covenants for the type of transaction
proposed, in each case (except where
otherwise provided) to be applied to Arch
and its Subsidiaries, including, without
limitation, the periodic delivery of
financial statements and other information;
the payment and performance of taxes and
other material obligations; the maintenance
of existence, qualification, good standing,
properties, licenses and insurance; compli-
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<PAGE> 319
ance with environmental and other laws,
regulations and material agreements; and
the following:
1. Limitations on Liens -- Arch and its
Subsidiaries will not incur any liens,
except (i) existing liens securing
specified Indebtedness as set forth on a
schedule to the Credit Agreement, (ii)
liens for capital leases, taxes,
assessments or governmental charges,
mechanics, carriers, warehousemen or
materialmen arising in the ordinary
course of business not yet not
delinquent or, if delinquent, being
contested in good faith and by
appropriate proceedings diligently
conducted and for which such reserve or
other appropriate provision as shall be
required by the Borrower's accountants
in accordance with GAAP shall have been
made, (iii) liens created or existing
under the Credit Agreement and the
collateral documents executed in
connection therewith, (iv) equal and
ratable liens in favor of the Collateral
Agents in the Collateral (other than the
Existing API Collateral and the Existing
PageNet Collateral) as described in
paragraph 3 of "Security" above, (v)
liens on property existing on the Merger
Effective Date under the Canadian credit
facilities of PageNet's Canadian
Subsidiaries provided that such liens do
not extend to any other property of the
Borrower and its Subsidiaries, and (vi)
other liens securing Indebtedness
(including purchase money obligations)
of the Borrower and the Subsidiary
Guarantors not exceeding 2.5% of Maximum
Permitted Indebtedness.
2. Limitation on Indebtedness -- Arch and
its Subsidiaries will not incur any
Indebtedness, except:
(a) Indebtedness arising under the
Credit Facilities,
(b) Indebtedness of Arch arising under
the Arch Senior Notes,
(c) Indebtedness under intercompany
notes,
(d) existing Indebtedness as set forth
on a schedule to the Credit
Agreement,
(e) prior to the Existing Arch Senior
Note Termination Date, unsecured
Indebtedness (A) between the
Borrower and Arch, provided that
written notice thereof is given 120
days prior thereto and (B) among the
Borrower and its Subsidiaries (other
than Benbow Investments until such
time as Benbow Investments ceases to
be an Unrestricted Subsidiary under
and as defined in the Arch
Indentures, has become a Subsidiary
Guarantor and has granted a security
interest to the Collateral Agents in
its assets),
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<PAGE> 320
(f) on and after the Existing Arch
Senior Note Termination Date,
unsecured and subordinated
Indebtedness (i) between the
Borrower and Arch, (ii) between the
Borrower and any Subsidiary
Guarantor, and (iii) between any
Subsidiary Guarantor and any other
any Subsidiary Guarantor which shall
be subordinated to the Borrower's or
such Subsidiary Guarantor's
obligations under the Credit
Facilities on terms and conditions
acceptable to the Administrative
Agent and the Required Lenders
("Intercompany Subordinated Debt"),
(f) Indebtedness of the Borrower in
respect of a subordinated promissory
note (the "ACE Subordinated Note"),
made by ACE (the Borrower's
predecessor) to The Westlink Company
II (subsequently merged into Benbow
Investments, Inc.), in a principal
amount not in excess of $50,000,000,
(h) (i) prior to the Existing Arch
Senior Note Termination Date,
Contingent Obligations of Arch, the
Borrower or any Subsidiary of the
Borrower (other than Benbow
Investments until such time as
Benbow Investments ceases to be an
Unrestricted Subsidiary under and as
defined in the Arch Indentures, has
become a Subsidiary Guarantor and
has granted a security interest to
the Collateral Agents in its assets)
incurred to, or for the benefit of,
Arch, the Borrower or any of its
Subsidiaries (other than Benbow
Investments until such time as
Benbow Investments ceases to be an
Unrestricted Subsidiary under and as
defined in the Arch Indentures, has
become a Subsidiary Guarantor and
has granted a security interest to
the Collateral Agents in its assets)
and (ii) on and after the Arch
Senior Note Termination Date,
guarantees by the Borrower of
Indebtedness of any Subsidiary
Guarantor, by any Subsidiary
Guarantor of Indebtedness of the
Borrower and by any Subsidiary
Guarantor of Indebtedness of any
other Subsidiary Guarantor, provided
that the Indebtedness would be
permitted under Covenant 2 above if
it was directly incurred,
(i) on and after the Merger Effective
Date, Indebtedness (including,
without duplication, guaranties) of
PageNet's Canadian Subsidiaries in
an aggregate principal amount not in
excess of (A) in the case of the
Paging Network of Canada, Inc.
credit facility, Canadian
$64,350,000, (B) in the case of the
Madison Telecommunications Holdings,
Inc. credit facility, Canadian
$28,500,000, and (C) without
duplication, the guaranties thereof
by
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<PAGE> 321
PageNet and its Subsidiaries which
are in effect on the Merger Effective
Date, and
(j) other Indebtedness of the Borrower
and the Subsidiary Guarantors
(including purchase money and
capitalized lease obligations and
Indebtedness in respect of
non-competition agreements) not
exceeding 2.5% of Maximum Permitted
Indebtedness.
3. Limitation on Investments -- The
Borrower and its Subsidiaries shall not
make any investments, loans or other
advances other than:
(a) investments in cash equivalents and
investments existing at closing (as
set forth on a schedule to the
Credit Agreement),
(b) prior to the Existing Arch Senior
Note Termination Date, loans or
advances by the Borrower or any of
its Subsidiaries to Arch, the
Borrower or any of its Subsidiaries
(other than Benbow Investments until
such time as Benbow Investments
ceases to be an Unrestricted
Subsidiary under and as defined in
the Arch Indentures, has become a
Subsidiary Guarantor and has granted
a security interest to the
Collateral Agents in its assets),
(c) investments by the Borrower in
Benbow Investments consisting solely
of the ACE Subordinated Note,
(d) Investments by the Borrower or any
Subsidiary Guarantor in Intercompany
Subordinated Debt, provided,
however, that (A) any such loan is
evidenced by a subordinated
promissory note in form and
substance satisfactory to the
Administrative Agent which is
delivered to the Appropriate Party
under the applicable Collateral
Document, and (B) no default or
event of default would exist before
or after giving effect thereto;
(e) investments ("Additional Benbow
Investments") by Benbow Investments
in Benbow, provided that (i)
immediately before and after giving
effect to any such Additional Benbow
Investment, no default or event of
default shall exist, (ii) prior to
the Existing Arch Senior Note
Termination Date, the amount of such
Additional Benbow Investments
(exclusive of Parent common Stock
contributed to Benbow Investments
and advanced by Benbow Investments
to Benbow to enable Benbow to
satisfy its obligations under the
Page Call Purchase Agreement or to
satisfy the Parent's guaranty
thereof) shall not exceed
$10,000,000 in the aggregate in any
one fiscal year of the Borrower and
$25,000,000 in the aggregate for all
such
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<PAGE> 322
Additional Benbow Investments and
provided further that the amount of
such Additional Benbow Investments
shall in no event exceed the amount
required to be paid by Benbow
Investments to June Walsh pursuant to
the Purchase Agreement, dated as of
June 24, 1999, among the Parent,
Benbow, Benbow Investments and June
Walsh (the "Benbow Purchase
Agreement") plus the amount required
to be advanced by Benbow Investments
to Benbow to enable Benbow to make
payments to Lisa-Gaye Shearing under
the Page Call Purchase Documents, and
(ii) on and after the Existing Arch
Senior Note Termination Date,
Additional Benbow Investments may be
made so long as before and after
giving effect thereto, the API
Leverage Ratio is less than or equal
to 2:00:1.00 provided that the amount
of such Additional Benbow Investments
shall in no event exceed the amount
required to be paid by Benbow
Investments to June Walsh pursuant to
the Benbow Purchase Agreement plus
the amount required to be advanced by
Benbow Investments to Benbow to
enable Benbow to make payments to
Lisa-Gaye Shearing under the Page
Call Purchase Documents,
(f) payments by the Borrower in respect
of the ACE Subordinated Note,
provided that (i) no default or
event of default would exist and be
continuing immediately before and
after giving effect thereto, (ii)
the amount of any such payment shall
not exceed the amount of Additional
Benbow Investments permitted to be
made to Benbow pursuant clause (e)
above as of the date such payment is
made, and (iii) the proceeds of any
such payment shall be used promptly
and solely as an Additional Benbow
Investment;
(g) other investments, provided that (i)
no default or event of default shall
exist before and after giving effect
thereto, (ii) the Borrower shall
have delivered the required annual
and quarterly financial statements
that demonstrate that the Total
Leverage Ratio has been less than
3.00:1:00 for the immediately
preceding two consecutive fiscal
quarters, and (iii) the Total
Leverage Ratio would be less than or
equal to 3.00:1.00 after giving
effect thereto,
(h) Investments consisting of
intercompany notes, and
(i) the Merger Transactions upon
satisfaction of the conditions set
forth under the headings "Conditions
Precedent to Merger" and, if
applicable, "Additional
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<PAGE> 323
Conditions Precedent - Bankruptcy
Proceeding", above.
4. Limitation on the Sale/Exchange of
Assets -- Arch and its Subsidiaries may
not sell, assign, exchange, lease or
otherwise dispose of any assets, except
(i) sales, assignments, exchanges,
leases or other dispositions of property
in the ordinary course of business, (ii)
prior to the Existing Arch Senior Note
Termination Date, sales or other
dispositions of property between Arch,
the Borrower or any Subsidiary of Arch,
provided that written notice thereof is
given 120 days prior thereto, (iii)
other sales, assignments, exchanges,
leases or other dispositions not
exceeding $25,000,000 individually or
$50,000,000 collectively during any 24
month period; provided, however, that
both before and after giving effect
thereto (a) no default or event of
default shall exist, and (b) the
proceeds derived therefrom are used to
prepay loans as described in Mandatory
Prepayments, above;
5. Limitation on Acquisitions -- The Parent
and its Subsidiaries may not make
acquisitions (other than the Merger
pursuant to the terms contained herein)
except that the Borrower and its
Subsidiaries may make acquisitions,
provided (i) both before and after
giving effect to any acquisition no
default or event of default exists, (ii)
acquisitions are limited to the wireless
messaging industry, (iii) such
acquisitions do not exceed $25,000,000
individually or $50,000,000 collectively
during any 24 month period, (iv) the
Total Leverage Ratio is less than or
equal to 4.75:1.00 both before and after
such acquisition and (v) the API
Leverage Ratio is less than or equal to
2.50:1.00 both before and after such
acquisition;
6. Restricted Payments -- Prohibition on
distributions, including dividends and
other restricted payments ("Restricted
Payments"), except:
(a) Prior to the Existing Arch Senior
Note Termination Date -- Prior to the
Existing Arch Senior Note Termination
Date, whether or not any of the
Parent Discount Notes are outstanding
or the Parent Discount Notes
Indenture is in effect, the following
Restricted Payments shall be
permitted:
(i) any Subsidiary of Arch may,
directly or indirectly, make
Restricted Payments to Arch,
the Borrower or any of its
Subsidiaries (other than Benbow
Investments until such time as
Benbow Investments ceases to be
an Unrestricted Subsidiary
under and as defined in the
Arch Indentures, has become a
Subsidiary Guarantor and has
granted a security interest
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<PAGE> 324
to the Collateral Agents in its
assets), provided that with respect
to any Restricted Payment to Arch
written notice thereof is given 120
days prior thereto (other than with
respect to a Restricted Payment to
Arch on a day on which Arch is
obligated to make a payment in
respect of Required Obligations so
long as the amount thereof does not
exceed the amount of the Required
Obligation payable on such date);
(ii) Arch and its Subsidiaries may
make Restricted Payments to
the Parent for purposes of
enabling the Parent, as a
consolidated taxpayer to pay
taxes, pursuant to the terms
set forth in the Tax Sharing
Agreement;
(iii) the Borrower and its
Subsidiaries may pay
management fees to Arch in any
fiscal quarter (in an
aggregate amount not exceeding
1.5% of the net revenue of
Arch and its Subsidiaries for
the immediately preceding four
fiscal quarters ending with
the latest fiscal quarter for
which Arch has filed a
quarterly report with the SEC
on form 10-Q or an annual
report on form 10-K) in
accordance with the terms set
forth in the Management
Agreement for services
rendered to the Borrower or
any of its Subsidiaries,
provided that (i) no default
or event of default has
occurred or is continuing
(provided that during the
continuance of a default or an
event of default, the
management fee may be accrued,
but not paid) and (ii) any
such management fee accrued or
paid shall be treated as an
operating expense and deducted
from the calculation of
Operating Cash Flow of the
Borrower; and
(iv) provided that no default or
event of default shall exist
both before and after giving
effect thereto, after the
Borrower has delivered the
required annual and quarterly
financial statements that
demonstrate that the Total
Leverage Ratio has been less
than 3.00:1:00 for the
immediately preceding two
consecutive fiscal quarters,
and provided that the Total
Leverage Ratio would be less
than or equal to 3.00:1.00
after giving effect thereto,
(A) Arch may make any
Restricted Payments to the
Parent, and (B) the Parent may
make any Restricted Payments to
its shareholders.
(b) On and After the Existing Arch Senior
Note Termination Date -- On and after
the Existing Arch Senior Note
Termination Date, whether or
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<PAGE> 325
not any of the Parent Discount Notes
are outstanding or the Parent
Discount Notes Indenture is in
effect, the following Restricted
Payments shall be permitted:
(i) any Subsidiary of the Borrower
may make a Restricted Payment
to its parent;
(ii) provided that no default or
event of default shall exist
both before and after giving
effect thereto, a Subsidiary
of Arch may make a Restricted
Payment (other than any
payment under the Tax Sharing
Agreement or the Management
Agreement) to Arch (A) on a
day on which Arch is obligated
to make a payment in respect
of Required Obligations so
long as the amount thereof
does not exceed the amount of
the Required Obligation
payable on such date, and (B)
for any other purpose so long
as after giving effect
thereto, the API Leverage
Ratio does not exceed
2.00:1.00;
(iii) Arch and its Subsidiaries may
make Restricted Payments to
the Parent for purposes of
enabling the Parent, as a
consolidated taxpayer to pay
taxes, pursuant to the terms
set forth in the Tax Sharing
Agreement;
(iv) the Borrower and its
Subsidiaries may pay Management
Fees to Arch in any fiscal
quarter (in an aggregate amount
not exceeding 1.5% of the net
revenue of arch and its
Subsidiaries for the
immediately preceding four
fiscal quarters ending with the
latest fiscal quarter for which
Arch has filed a quarterly
report with the SEC on form
10-Q or an annual report on
form 10-K) in accordance with
the terms set forth in the
Management Agreement for
services rendered to the
Borrower or any of its
Subsidiaries, provided that (i)
no default or event of default
has occurred or is continuing
(provided that during the
continuance of a default or an
event of default, the
management fee may be accrued,
but not paid) and (ii) any such
management fee accrued or paid
shall be treated as an
operating expense and deducted
from the calculation of
Operating Cash Flow of the
Borrower; and
(v) provided that no default or
event of default shall exist
both before and after giving
effect thereto, after the
Borrower has delivered the
required annual and quarterly
financial state-
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ments that demonstrate that the
Total Leverage Ratio has been less
than 3.00:1:00 for the immediately
preceding two consecutive fiscal
quarters, and provided that the
Total Leverage Ratio would be less
than 3.00:1.00 after giving effect
thereto, (A) Arch may make any
Restricted Payments to the Parent,
and (B) the Parent may make any
Restricted Payments to its
shareholders.
(c) Additional Restricted Payments to the
Parent -- So long as any of the
Parent Discount Notes are outstanding
or the Parent Discount Notes
Indenture is in effect, and provided
that immediately before or after
giving effect to such declaration and
payment no default or event of
default shall exist, in addition to
any payments permitted under clauses
(a) and (b) above, Arch may make
Restricted Payments to the Parent (A)
on any day in an amount not in excess
of the amount of interest due and
payable on the Parent Discount Notes
on such day, (B) to enable the Parent
to repurchase shares of its Stock in
an aggregate amount not exceeding
$1,000,000 minus amounts expended for
such purpose on or after March 12,
1996 and (C) to enable the Parent to
make payments (not exceeding $189,282
in any fiscal year) when due under
the Consulting Agreement with Lisa
Gaye Shearing.
7. Prohibition on Mergers or other
Fundamental Changes -- except that:
(a) prior to the Existing Arch Senior
Note Termination Date, Arch, the
Borrower or any of its Subsidiaries
(other than Benbow Investments until
such time as Benbow Investments
ceases to be an Unrestricted
Subsidiary under and as defined in
the Arch Indentures, has become a
Subsidiary Guarantor and has granted
a security interest to the Collateral
Agents in its assets) may merge or
consolidate with, or transfer all or
substantially all of its assets to,
Arch, the Borrower or any of its
Subsidiaries (other than Benbow
Investments until such time as Benbow
Investments ceases to be an
Unrestricted Subsidiary under and as
defined in the Arch Indentures, has
become a Subsidiary Guarantor and has
granted a security interest to the
Collateral Agents in its assets),
provided that (i) written notice
thereof is given 120 days prior
thereto and (ii) in any merger
involving the Borrower, the Borrower
shall be the survivor,
(b) on and after the Existing Arch Senior
Note Termination Date, the Borrower
or any Subsidiary Guarantor may merge
or consolidate with, or
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transfer all or substantially all of
its assets to, the Borrower or any
such Subsidiary Guarantor, provided
that (A) the Administrative Agent
shall have received ten days' prior
written notice thereof, (B)
immediately before and after giving
effect thereto no default or event of
default shall exist and (C) in any
merger involving the Borrower, the
Borrower shall be the survivor,
(c) at all times, mergers involving
Subsidiaries of the Borrower as part
of an Acquisition permitted by
Covenant 5, and
(d) the Merger, provided that the
conditions thereto set forth in this
Term Sheet have been satisfied.
ADDITIONAL COVENANTS APPLICABLE
TO THE PARENT: Customary affirmative and negative
covenants for the type of transaction
proposed, including, without limitation:
(i) a limitation of the Parent's business
and activities to the ownership of Arch and
certain activities directly related
thereto, (ii) a prohibition on incurring,
assuming or creating any Indebtedness other
than in respect of its guaranty of the
Credit Facility, the Parent Discount Notes
and its existing convertible subordinated
notes, (iii) a limitation on its
investments to investment grade securities
and certain other investments which shall
be satisfactory to the Administrative
Agent, (iv) a prohibition against the
issuance of any Stock other than common
Stock and other perpetual Stock, provided
that no such Stock shall provide for
mandatory dividends (except for dividends
payable solely in such Stock), mandatory
redemptions or other similar payments,
including, without limitation, the Series D
and Series E Preferred Stock of the Parent
to be issued in exchange for Parent
Discount Notes, and (v) an affirmative
covenant providing that immediately after
the consummation of the Merger, the Parent
shall contribute all of the Stock of
PageNet to the Borrower.
EVENTS OF DEFAULT: Customary for the type of transaction
proposed, including, without limitation,
nonpayment of principal, interest or other
fees when due; breach of representations,
warranties or covenants; breach of other
material agreements; material undischarged
judgments; bankruptcy or insolvency; change
of control; and, cross default to other
Indebtedness (including mandatory
redemption of Existing Notes or Replacement
Notes) of the Borrower, the Parent and Arch
in excess of $10,000,000.
REQUIRED LENDERS: Lenders having more than (a) 50% of
Tranches A, B, B-1 and C, taken as a whole
and (b) 50% of Tranches A, B and C, taken
as a whole.
MISCELLANEOUS: Customary for the type of transaction
proposed and others to be reasonably
specified by the Managing Agents,
including, without limitation, the
following:
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1. Standard provisions for illegality,
inability to determine rate,
indemnification for break funding and
increased costs or reduced return
including, without limitation, those
arising from reserve requirements, taxes
and capital adequacy.
2. Amendments and waivers will be permitted
with the consent of Required Lenders,
provided, however, that amendments and
waivers relating to interest rates,
fees, payment amounts and dates and
releases of any security shall require
the consent of all Lenders;
3. The Lenders will be permitted to sell
assignments and participations in loans,
notes, and commitments with, in the case
of assignments to Persons other than
existing Lenders or their affiliates,
the consent of the Borrower, the
Administrative Agent and the Letter of
Credit Issuing Bank, provided, however,
(i) such consents shall not be
unreasonably withheld and, in the case
of the consent of the Borrower, not be
required during the continuance of an
Event of Default and (ii) the assignor
or the assignee pays a service fee to
the Administrative Agent of $3,500 for
each assignment;
4. Standard provisions for indemnification
of the Managing Agents, the
Administrative Agent, the Letter of
Credit Issuing Bank, BNY, as a
Collateral Agent, the Bank Collateral
Agent, and the Security Agent, each of
the Lenders and each of their respective
affiliates, directors, officers, agents
and employees; and
5. The Borrower will pay all reasonable
legal fees and other reasonable
out-of-pocket expenses of the Managing
Agents in connection with the
transactions contemplated hereby whether
or not consummated.
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APPENDIX A
DEFINITIONS
"Adjusted Indenture Maturity Date" means the earlier to occur of (i) if the
Arch 9 1/2% Indenture is in effect, August 1, 2003, and (ii) if the Arch 14%
Indenture is in effect, May 1, 2004.
"Aggregate Tranche B Percentage" means, on any date of determination, the
percentage equal to a fraction (i) the numerator of which is the sum of (1) the
aggregate outstanding principal amount of the Tranche B Loans on such date, plus
(2) (A) prior to the termination (or other nonexistence) of the Aggregate
Tranche A Commitments, the Aggregate Tranche A Commitments on such date, and (B)
on and after the termination (or other nonexistence) of the Aggregate Tranche A
Commitments, the Aggregate Tranche A Exposure on such date, and (ii) the
denominator of which is the sum of (1) the amount determined under clause (i) of
this definition on such date, plus (2) the aggregate outstanding principal
amount of the Tranche B-1 Loans on such date, plus (3) the aggregate outstanding
principal amount of the Tranche C Loans on such date.
"Aggregate Tranche B-1 Percentage" means, on any date of determination on
and after the Merger Effective Date, the percentage equal to a fraction (i) the
numerator of which is the aggregate outstanding principal amount of the Tranche
B-1 Loans on such date and (ii) the denominator of which is the sum of (1) the
amount determined under clause (i) of this definition on such date, plus (2) the
aggregate outstanding principal amount of the Tranche B Loans on such date plus
(3) the aggregate outstanding principal amount of the Tranche C Loans on such
date, plus (4) (A) prior to the termination (or other nonexistence) of the
Aggregate Tranche A Commitments, the Aggregate Tranche A Commitments on such
date, and (B) on and after the termination (or other nonexistence) of the
Aggregate Tranche A Commitments, the Aggregate Tranche A Exposure on such date.
"Aggregate Tranche C Percentage" means, on any date of determination, the
percentage equal to a fraction (i) the numerator of which is the aggregate
unpaid principal balance of the Tranche C Loans on such date, and (ii) the
denominator of which is the sum of (1) the amount determined under clause (i) of
this definition on such date, plus (2), the aggregate outstanding principal
amount of the Tranche B Loans on such date, plus (3), the aggregate outstanding
principal amount of the Tranche B-1 Loans on such date, plus (4) (A) prior to
the termination (or other nonexistence) of the Aggregate Tranche A Commitments,
the Aggregate Tranche A Commitments on such date and (B) on and after the
termination (or other nonexistence) of the Aggregate Tranche A Commitments, the
Aggregate Tranche A Exposure on such date.
"Annualized Operating Cash Flow" means, as to any Person on any date of
determination, an amount equal to (i) Operating Cash Flow of such Person and its
Subsidiaries (determined on a consolidated basis in accordance with GAAP) for
the fiscal quarter ending on such date or, if such date is not a fiscal quarter
ending date, the immediately preceding fiscal quarter, multiplied by (ii) four.
"API Debt" means, at any date of determination, the sum of all Indebtedness
of the Borrower and its Subsidiaries, determined on a consolidated basis in
accordance with GAAP.
"API Leverage Ratio" means, at any date of determination, the ratio of API
Debt to Annualized Operating Cash Flow of the Borrower.
"Applicable Arch Indenture Trustees" means, at any time, (i) if the Arch
9 1/2% Indenture is in effect and has not been satisfied, defeased or
discharged, United States Trust Company of New York or its successor as trustee
under the Arch 9 1/2% Indenture, and (ii) if the Arch 14% Indenture is in effect
and has not been satisfied, defeased or discharged, United States Trust Company
of New York or its successor as trustee under the Arch 14% Indenture.
"Arch 14% Indenture" means the Indenture, dated as of December 15, 1994,
between Arch and United States Trust Company of New York or its successor, as
trustee, pursuant to which Arch issued the Arch 14% Senior Notes.
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"Arch 14% Senior Notes" means the 14% Senior Notes due 2004 issued by Arch
pursuant to the Arch 14% Indenture.
"Arch Indentures": collectively, the Existing Arch Indentures, the Arch
12 3/4% Indenture, the Arch 13 3/4% Indenture and any Replacement Indenture (if
existing).
"Arch 9 1/2% Indenture" means the Indenture, dated as of February 7, 1994,
between Arch and United States Trust Company of New York or its successor, as
trustee, pursuant to which Arch issued the Arch 9 1/2% Senior Notes.
"Arch 9 1/2% Senior Notes" means the 9 1/2% Senior Notes due 2004 issued by
Arch pursuant to the Arch 9 1/2% Indenture.
"Arch Senior Notes": collectively, the Existing Arch Senior Notes, the Arch
13 3/4% Senior Notes, the Arch 12 3/4% Senior Notes and any Replacement Notes
(if existing).
"Arch 13 3/4% Indenture" means the Indenture, dated as of April 9, 1999,
between Arch (as successor by merger to Arch Escrow Corp.) and IBJ Whitehall
Bank & Trust Company, or its successor, as trustee, pursuant to which Arch
issued the Arch 13 3/4% Senior Notes.
"Arch 13 3/4% Senior Notes" means the 13 3/4% Senior Notes due 2008 issued
by Arch pursuant to the Arch 13 3/4% Indenture.
"Arch 12 3/4% Indenture" means the Indenture, dated as of June 29, 1998,
between Arch and U.S. Bank Trust National Association or its successor, as
trustee, pursuant to which Arch issued the Arch 12 3/4% Senior Notes.
"Arch 12 3/4% Senior Notes" means the 12 3/4% Senior Notes due 2007 issued
by Arch pursuant to the Arch 12 3/4% Indenture.
"Bank Collateral Agent": The Bank of New York, in its capacity as
collateral agent under the Borrower Pledge Agreement, the Restricted Subsidiary
Security Agreement and the Amended PageNet Collateral Documents.
"Benbow Guaranty Date": the earlier to occur of (i) the Existing Arch
Senior Note Termination Date and (ii) the date on which the last to occur of the
following events has occurred: (A) Benbow Investments ceases to be an
Unrestricted Subsidiary under and as defined in each of the Existing Arch
Indentures, (B) the consummation of the pending purchase of June Walsh's
interest in Benbow and (C) the redemption of the Benbow Stock received by
Adelphia Communications Corporation pursuant to the Page Call Purchase Agreement
has been consummated.
"Capital Expenditures": any expenditures made or costs incurred that are
required or permitted to be capitalized for financial reporting purposes in
accordance with GAAP other than deferred financing fees.
"Cash Interest Expense": for any period, the sum of (i) cash interest
expense on Total Debt (adjusted to give effect to all Interest Rate Protection
Agreements (including Interest Hedge Agreements (as defined in the Existing
PageNet Credit Agreement) which are assumed by the Borrower) and fees and
expenses paid in connection with the same, all as determined in accordance with
GAAP) during such period as determined in accordance with GAAP, (ii) Commitment
Fees, Letter of Credit Fees and fees in respect of PageNet Letters of Credit
during such period and (iii) without duplication, Restricted Payments made to
the Parent during such period to the extent made to enable the Parent to satisfy
its interest obligations under the Parent Discount Notes Indenture.
"Collateral Agents": collectively, (i) BNY in its capacity as collateral
agent for the Lenders under the Security and Intercreditor Agreement and (ii)
the Applicable Arch Indenture Trustees in their capacities as collateral agents
for the Existing Arch Senior Noteholders under the Security and Intercreditor
Agreement.
"Consolidated Total Assets" means, at any date of determination, the total
assets of the Borrower and its Subsidiaries determined on a consolidated basis
in accordance with GAAP as at such date.
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"Contingent Obligation": as to any Person, any obligation of such Person
guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or
other obligations ("primary obligations") of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including any
obligation of such Person, whether or not contingent, (a) to purchase any such
primary obligation or any Property constituting direct or indirect security
therefor, (b) to advance or supply funds (i) for the purchase or payment of any
such primary obligation or (ii) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain net worth, solvency or other
financial statement condition of the primary obligor, (c) to purchase Property,
securities or services primarily for the purpose of assuring the beneficiary of
any such primary obligation of the ability of the primary obligor to make
payment of such primary obligation or (d) otherwise to assure, protect from
loss, or hold harmless the beneficiary of such primary obligation against loss
in respect thereof; provided, however, that the term Contingent Obligation shall
not include the indorsement of instruments for deposit or collection in the
ordinary course of business. The term Contingent Obligation shall also include
the liability of a general partner in respect of the recourse liabilities of the
partnership in which it is a general partner. The amount of any Contingent
Obligation of a Person shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof as determined by such Person
in good faith.
"DIP Facility" means, in the event of the commencement of the Bankruptcy
Proceeding, any debtor in possession financing facility extended by one or more
lenders to PageNet and its Subsidiaries which are debtors in such proceeding.
"Excess Cash Flow" means, with respect to any fiscal year, Operating Cash
Flow of the Borrower for such fiscal year less the sum of, without duplication
(i) the amount, if positive, equal to (a) the amount of the Tranche A Loans
outstanding at the beginning of such fiscal year minus (b) the Aggregate Tranche
A Commitments at the end of such fiscal year (without giving effect to mandatory
reductions thereof (other than scheduled reductions) during such period, (ii)
payments of the principal of the Tranche B Loans, the Tranche B-1 Loans and the
Tranche C Loans during such fiscal year (other than mandatory prepayments
thereof, (iii) scheduled payments of principal of other Indebtedness of the
Borrower and its Subsidiaries on a consolidated basis made during such fiscal
year (including Indebtedness in respect of Capital Leases), (iv) Capital
Expenditures made by the Borrower and its Subsidiaries on a consolidated basis
during such fiscal year, (v) without duplication, taxes and payments under the
Tax Sharing Agreement paid by the Borrower and its Subsidiaries in cash during
such period, and (vi) Cash Interest Expense for such fiscal year.
"Existing Arch Indentures" means, collectively, the Arch 9 1/2% Indenture
and the Arch 14% Indenture.
"Existing Arch Senior Noteholders" means, collectively, the holders of the
Existing Arch Senior Notes.
"Existing Arch Senior Notes" means, collectively, (i) the 9 1/2% Senior
Notes and (ii) the 14% Senior Notes.
"Existing Arch Senior Note Termination Date" means the first date on which
none of the Existing Arch Senior Notes remain outstanding and neither of the
Existing Arch Indentures is in effect. For purposes of this definition, the
Existing Arch Senior Notes issued under an Existing Arch Indenture shall no
longer be deemed to be outstanding and such Existing Arch Indenture shall no
longer be deemed to be in effect if Arch has elected in accordance with the
provisions of such Existing Arch Indenture to have the defeasance and discharge
or covenant defeasance provisions thereof apply and has complied with the
requirements thereof.
"Fixed Charge Coverage Ratio" means, as of the last day of any fiscal
quarter, the ratio of (i) Annualized Operating Cash Flow to (ii) Fixed Charges
for the Four Quarter Trailing Period.
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"Fixed Charges" means for any period, the sum of (i) scheduled payments of
principal on Total Debt made or required to be made during such period, (ii) the
amount, if positive, equal to (a) the amount of the Tranche A Loans outstanding
at the beginning of such period minus (b) the Aggregate Tranche A Commitments at
the end of such period (without giving effect to reductions thereof during such
period required as a result of asset sales, the receipt of insurance proceeds or
condemnation awards or the receipt of a breakup or similar fee), (iii) Capital
Expenditures made by Arch and its Subsidiaries on a consolidated basis during
such period, (iv) payments under Capital Leases made or required to be made by
Arch and its Subsidiaries on a consolidated basis during such period, (v)
without duplication, taxes and payments under the Tax Sharing Agreement, in each
case paid or required to be paid in cash made by Arch and its Subsidiaries on a
consolidated basis during such period, and (vi) Cash Interest Expense.
"Foreign Subsidiary" means any Subsidiary that is a "controlled foreign
corporation" within the meaning of Section 957 of the Internal Revenue Code.
"Four Quarter Trailing Period" means, at any date of determination, the
period of the four fiscal quarters ending on such date, or, if such date is not
the last day of a fiscal quarter, the period of the most immediately completed
four fiscal quarters.
"Indebtedness" means, as to any Person, at a particular time, all items
which constitute, without duplication, (i) Indebtedness for borrowed money or
the deferred purchase price of Property (other than trade payables incurred in
the ordinary course of business), (ii) Indebtedness evidenced by notes, bonds,
debentures or similar instruments, (iii) obligations with respect to any
conditional sale or title retention agreement, (iv) Indebtedness arising under
acceptance facilities and the amount available to be drawn under all letters of
credit issued for the account of such Person and, without duplication, all
drafts drawn thereunder to the extent such Person shall not have reimbursed the
issuer in respect of the issuer's payment of such drafts, (v) all liabilities
(excluding liabilities under Secured Hedging Agreements) secured by any Lien on
any Property owned by such Person even though such Person has not assumed or
otherwise become liable for the payment thereof (other than carriers',
warehousemen's, mechanics', repairmen's or other like non-consensual Liens
arising in the ordinary course of business), (vi) obligations under Capital
Leases, (vii) all Contingent Obligations and (viii) obligations under the
Non-Competition Agreements.
"Loan Parties" -- means, collectively, the Borrower and the Guarantors.
"Interest Coverage Ratio": as of the last day of (i) any fiscal quarter
occurring on or before the Merger Effective Date and the fiscal quarter in which
the Merger Effective Date occurs, the ratio of Operating Cash Flow of the
Borrower to Cash Interest Expense, in each case for the Four Quarter Trailing
Period, (ii) the first full fiscal quarter ending after the Merger Effective
Date, the ratio of Operating Cash Flow of the Borrower to Cash Interest Expense
in each case for such fiscal quarter, (iii) the second full fiscal quarter
ending after the Merger Effective Date, the ratio of Operating Cash Flow of the
Borrower to Cash Interest Expense, in each case for the first and second full
fiscal quarters ending after the Merger Effective Date, (iv) the third full
fiscal quarter ending after the Merger Effective Date, the ratio of Operating
Cash Flow of the Borrower to Cash Interest Expense in each case for the first,
second and third full fiscal quarters ending after the Merger Effective Date,
and (v) the fourth full fiscal quarter ending after the Merger Effective Date
and each fiscal quarter thereafter, the ratio of Operating Cash Flow of the
Borrower to Cash Interest Expense for the Four Quarter Trailing Period.
"Management Agreement" means the Amended and Restated Management Services
Agreement, dated as of June 29, 1998, by and among Arch and its Subsidiaries.
"Material Foreign Subsidiary" means, as to any Person, a Foreign Subsidiary
of such Person which, as of the last day of the most recently completed fiscal
quarter, satisfied any one or more of the following three tests: (i) the
Borrower and its other Subsidiaries' investments in and advances made on or
after the Closing Date (or, in the case of a PageNet Canadian Subsidiary, the
Merger Effective Date) to (x) such Foreign Subsidiary and its Subsidiaries
exceed $15,000,000 in the aggregate or (y) all Foreign Subsidiaries which are
not Subsidiary Guarantors exceeds $25,000,000 in the aggregate, (ii) the
Borrower and its other
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Subsidiaries' proportionate share of Consolidated Total Assets (after
intercompany eliminations) consisting of the Property of such Foreign Subsidiary
exceeds 5% of Consolidated Total Assets or (iii) the Borrower and the other
Subsidiaries' equity in the income (not to include losses) from continuing
operations before income taxes, extraordinary items and the cumulative effect of
a change in accounting principles of such Foreign Subsidiary exceeds 5% of the
income (not to include losses) from continuing operations before income taxes,
extraordinary items and the cumulative effect of a change in accounting
principles of the Borrower and its Subsidiaries determined on a consolidated
basis in accordance with GAAP. Notwithstanding the foregoing, a PageNet Canadian
Subsidiary that is a party to one or more of the PageNet Canadian Loan Documents
shall not be a Material Foreign Subsidiary by reason of the satisfaction of the
tests set forth in clause (ii) or (iii) of the preceding sentence until the
PageNet Canadian Loan Documents to which it is a party have been terminated.
"Maximum Permitted Indebtedness" means, on any date of determination, the
maximum Total Leverage Ratio permitted on such date multiplied by Annualized
Operating Cash Flow.
"Minority Lenders" means, on any date of determination, Lenders under this
Agreement having Tranche A Commitments (or, if no Tranche A Commitments are in
effect, Tranche A Exposure), Tranche B Loans and Tranche C Loans aggregating not
less than 40% of the sum of (i) the Aggregate Tranche A Commitments (or, if no
Tranche A Commitments are in effect, Aggregate Tranche A Exposure), (ii) the
aggregate outstanding principal balance of the Tranche B Loans, and (iii) the
aggregate outstanding principal balance of the Tranche C Loans.
"Operating Cash Flow" means as to any Person for any period, total revenue
of such Person and its Subsidiaries on a consolidated basis for such period,
determined in accordance with GAAP, without giving effect to extraordinary gains
and losses from sales, exchanges and other dispositions of Property not in the
ordinary course of business, and non-recurring items, less the sum of, without
duplication, the following for such Person and its Subsidiaries on a
consolidated basis for such period, determined in accordance with GAAP: (i)
operating expenses (exclusive of depreciation, amortization and other non-cash
items included therein), and (ii) corporate office, general and administrative
expenses (exclusive of depreciation, amortization and other non-cash items
included therein). With respect to the Borrower and its Subsidiaries, any
Management Fees paid or accrued will be treated as an administrative expense.
Solely for purposes of calculating the API Leverage Ratio and the Total Leverage
Ratio, Operating Cash Flow of the Borrower shall be adjusted on a consistent
basis satisfactory to the Administrative Agent to give pro-forma effect to any
acquisition, sale, exchange or disposition of Property.
"Parent Discount Noteholders" means, collectively, the holders of Parent
Discount Notes.
"Parent Discount Notes" means the 10 7/8% Senior Parent Discount Notes, due
2008, issued by the Parent pursuant to the Parent Discount Notes Indenture.
"Parent Discount Notes Indenture" means the Indenture, dated as of March
12, 1996, between the Parent and IBJ Schroder Bank & Trust Company or its
successor, as trustee, pursuant to which the Parent issued the Parent Discount
Notes.
"Parent Subordinated Debentures" means the 6 3/4% Convertible Subordinated
Debentures, due 2003, issued by the Parent pursuant to the Parent Subordinated
Indenture.
"Parent Subordinated Indenture" means the Indenture, dated as of December
1, 1993, between the Parent and BNY or its successor, as trustee, pursuant to
which the Parent issued the Parent Subordinated Debentures.
"Person" means an individual, a partnership, a corporation, a business
trust, a joint stock company, a trust, an unincorporated association, a joint
venture, a Governmental Body or any other entity of whatever nature.
"Pricing Leverage Ratio" means (i) prior to the Existing Arch Senior Note
Termination Date, the Total Leverage Ratio, and (ii) at all other times, the API
Leverage Ratio.
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"Pro-forma Debt Service" means, at any date of determination, the sum of
(i) Cash Interest Expense for the period of the four fiscal quarters immediately
succeeding such date of determination, (ii) all current maturities of all
Indebtedness of Arch and its Subsidiaries (determined on a consolidated basis in
accordance with GAAP) for such four fiscal quarter period and (iii) the amount,
if positive, equal to (a) the amount of the Tranche A Loans outstanding at the
beginning of such period minus (b) the Aggregate Tranche A Commitments at the
end of such period (after giving effect to any mandatory reductions (other than
scheduled reductions during such period). Where any item of interest varies or
depends upon a variable rate of interest (or other rate of interest which is not
fixed for such entire four fiscal quarter period), such rate, for purposes of
calculating Pro-forma Debt Service, shall be assumed to equal the Alternate Base
Rate plus the Applicable Margin in effect on the date of such calculation, or,
if such rate is a Eurodollar Rate, the applicable Eurodollar Rate plus the
Applicable Margin in effect on the date of such calculation. Also, for purposes
of calculating Pro-forma Debt Service, the principal amount of Total Debt
outstanding on the date of any calculation of Pro-forma Debt Service shall be
assumed to be outstanding during the entire four fiscal quarter period
immediately succeeding such date, except to the extent that such Indebtedness is
subject to mandatory payment of principal during such period.
"Pro-forma Debt Service Coverage Ratio" means, as of the last day of any
fiscal quarter, the ratio of Annualized Operating Cash Flow to Pro-forma Debt
Service as of such date.
"Replacement Notes" means any senior note issue of Arch in an amount and on
terms and conditions satisfactory to the Required Lenders.
"Required Lenders": on any date of determination, Lenders satisfying both
clauses (a) and (b) below:
(a) Lenders having Tranche A Commitments (or, if no Tranche A
Commitments are in effect, Tranche A Exposure), Tranche B Loans and Tranche
C Loans aggregating more than 50% of the sum of (i) the Aggregate Tranche A
Commitments (or, if no Tranche A Commitments are in effect, Aggregate
Tranche A Exposure), (ii) the aggregate outstanding principal balance of
the Tranche B Loans, and (iii) the aggregate outstanding principal balance
of the Tranche C Loans, and
(b) Lenders having Tranche A Commitments (or, if no Tranche A
Commitments are in effect, Tranche A Exposure), Tranche B Loans, Tranche
B-1 Loans and Tranche C Loans aggregating more than 50% of the sum of (i)
the Aggregate Tranche A Commitments (or, if no Tranche A Commitments are in
effect, Aggregate Tranche A Exposure), (ii) the aggregate outstanding
principal balance of the Tranche B Loans, (iii) the aggregate outstanding
principal balance of the Tranche B-1 Loans and (iv) the aggregate
outstanding principal balance of the Tranche C Loans.
"Required Obligations" means, on any date, interest due and payable on such
date on the Arch Senior Notes.
"Restricted Payment": as to any Person, (i) the payment or declaration by
such Person of any dividend on any class of Stock (other than dividends payable
solely in common Stock of the such Person or other Stock to the extent the same
is permitted to be issued pursuant to the Credit Agreement), or warrants, rights
or options to acquire common Stock of such Person (or other Stock to the extent
the same is permitted to be issued pursuant to the Credit Agreement) or the
making of any other distribution on account of any class of its Stock, (ii) the
retirement, redemption, purchase or acquisition, directly or indirectly, of (a)
any shares of the Stock of such Person (except shares acquired solely upon the
conversion thereof into other shares of its Stock) and (b) any security
convertible into, or any option, warrant or other right to acquire, shares of
the Stock of such Person, or (iii) the payment of any management fees or any
payment under the Tax Sharing Agreement or the Management Agreement.
"Security Agent": The Bank of New York, in its capacity as security agent
under the Security and Intercreditor Agreement.
"Stock" means, as to any Person, all shares, interests, partnership
interests, limited liability company interests, participations, rights in or
other equivalents (however designated) of such Person's equity
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<PAGE> 335
(however designated) and any rights, warrants or options exchangeable for or
convertible into such shares, interests, participations, rights or other equity.
"Subsidiary" means, as to any Person (the "parent") at any date, any
corporation, limited liability company, partnership, association or other entity
the accounts of which would be consolidated with those of the parent in the
parent's consolidated financial statements if such financial statements were
prepared in accordance with GAAP as of such date, as well as any other
corporation, limited liability company, partnership, association or other entity
of which securities or other ownership interests representing more than 50% of
the equity or more than 50% of the ordinary voting power is or, in the case of a
partnership, more than 50% of the general partnership interests are, as of such
date, owned, controlled or held by the parent or one or more Subsidiaries of the
parent.
"Tax Sharing Agreement" means the Tax Sharing Agreement, dated as of May 5,
1995, between the Parent and certain of its Subsidiaries.
"Total Debt" means, at any date of determination, the sum of all
Indebtedness (other than Intercompany Subordinated Debt) of Arch and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP.
"Total Leverage Ratio" means, at any date of determination, the ratio of
Total Debt to Annualized Operating Cash Flow.
"Tranche A Lenders": each Lender having a Tranche A Commitment (or, if no
Tranche A Commitments are in effect, a Tranche A Exposure).
"Tranche B Lenders": each Lender having a Tranche B Loan outstanding and
its successors and assigns.
"Tranche B-1 Lenders": each Lender having a Tranche B-1 Loan outstanding
and its successors and assigns.
"Transactions" collectively, the transactions contemplated by the
Transaction Documents.
"Transaction Documents" collectively, the Loan Documents and the Merger
Documents.
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ANNEX D
UNAUDITED COMBINED COMPANY PROJECTED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
2000 2001
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3.9 $ 7.1
Accounts receivable, net.................................. 152.4 155.7
Inventories............................................... 17.5 19.4
Prepaid expenses and other................................ 28.0 28.6
-------- ---------
Total current assets................................... 201.8 210.8
Property and equipment, net................................. 960.1 775.0
Intangible and other assets, net............................ 1,387.5 1,093.9
-------- ---------
$2,549.4 $2,079.07
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 34.2 $ 132.6
Accounts payable.......................................... 95.9 93.2
Accrued expenses.......................................... 63.1 81.8
Accrued interest.......................................... 53.7 52.4
Customer deposits and deferred revenue.................... 71.4 74.2
Accrued restructuring charges............................. 27.0 --
-------- ---------
Total current liabilities.............................. 345.3 434.2
Long-term debt, less current maturities..................... 1,680.5 1,529.0
Other long-term liabilities................................. 67.6 57.6
Stockholders' equity........................................ 456.0 58.9
-------- ---------
$2,549.4 $ 2,079.7
======== =========
</TABLE>
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<PAGE> 337
UNAUDITED COMBINED COMPANY PROJECTED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
<S> <C> <C>
Service, rental and maintenance revenues.................... $ 347.6 $1,421.3
Product sales............................................... 35.2 143.3
------- --------
Total revenues............................................ 382.8 1,564.6
Cost of products sold....................................... (24.0) (105.1)
------- --------
358.8 1,459.5
------- --------
Operating expenses:
Service, rental and maintenance........................... 94.8 365.3
Selling................................................... 43.2 184.4
General and administrative................................ 108.3 402.8
Depreciation and amortization............................. 173.9 711.0
------- --------
Total operating expenses............................... 420.2 1,663.5
------- --------
Operating income (loss)..................................... (61.4) (204.0)
Interest expense, net....................................... 49.6 193.1
------- --------
Income (loss) before income tax provision and extraordinary
item...................................................... (111.0) (397.1)
Provision for income taxes.................................. 15.0 --
------- --------
Income (loss) before extraordinary item..................... (126.0) (397.1)
Extraordinary gain from early extinguishment of debt........ 95.3 --
------- --------
Net income (loss)........................................... $ (30.7) $ (397.1)
======= ========
</TABLE>
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<PAGE> 338
UNAUDITED COMBINED COMPANY PROJECTED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
<S> <C> <C>
Net cash provided by operating activities................... $ 9.3 $ 289.7
------- -------
Cash flow from investing activities:
Additions to property and equipment, net.................. (56.5) (221.3)
Additions to intangible and other assets.................. (2.5) (11.0)
------- -------
Net cash used from investing activities..................... (59.0) (232.3)
------- -------
Cash flows from financing activities:
Increase in long-term debt................................ 10.0 --
Repayment of long-term debt............................... (5.6) (54.2)
------- -------
Net cash from (used for) financing activities............... 4.4 (54.2)
------- -------
Net increase in cash and cash equivalents................... (45.3) 3.2
Cash and cash equivalents, beginning of period.............. 49.2 3.9
------- -------
Cash and cash equivalents, end of period.................... $ 3.9 $ 7.1
======= =======
EBITDA...................................................... $ 112.5 $ 507.0
======= =======
</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 three 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 October 1, 2000. The projections have been
prepared for filing with the bankruptcy court in connection with PageNet's
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 October 1,
2000.
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<PAGE> 339
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 $100 million in operating
cost reductions annually after the consummation of the merger. However, due
to the time involved in implementing these cost savings, the projections
assume that the combined company would recognize only $15 million in
operating cost reductions for the three months ended December 31, 2000, and
$95 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 to
decrease by 11.7% for 2000 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 8.0% from 1999, while PageNet's service revenues were
projected to decrease by approximately 14.8% from 1999. The combined
company's service revenues for 2001 were projected to decreased by 2.5% 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 actual 1999 operating results for
the individual companies. The cost margins used for 2000 assume a reduction
in the historical cost margins (approximately 1.2% of net revenue) for
Arch's base business and assume a reduction in the historical cost margins
(approximately 2.2% 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. 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
D-4
<PAGE> 340
the actual amount of goodwill and related amortization being materially
greater or less than the amounts assumed for purposes of the projections,
there can be no assurance in that regard. Any increase in the amount of
amortization of goodwill would reduce periodic income before taxes and net
income.
9. Projections of changes in certain balance sheet accounts such as
accounts receivable and accounts payable are based on historic ratios of
such accounts to other accounts such as revenue. These projections have
been modified, where deemed appropriate, to recognize any adjustment or
balance sheet item changes necessary to reflect the business combination.
Arch assumed approximately 40 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. HOWEVER, TO THE EXTENT THEY BELIEVE
THAT THE SECURITIES LAWS REQUIRE, ARCH AND PAGENET WILL:
- 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 SECURITIES LAWS REQUIRE FULL AND PROMPT DISCLOSURE OF MATERIAL FACTS,
BOTH FAVORABLE AND UNFAVORABLE, REGARDING ARCH'S AND PAGENET'S FINANCIAL
CONDITION AND MAY EXTEND TO SITUATIONS WHERE MANAGEMENT KNOWS OR HAS REASON TO
KNOW ITS PREVIOUSLY DISCLOSED PROJECTIONS NO LONGER HAVE A REASONABLE BASIS.
MANAGEMENT OF ARCH AND PAGENET BELIEVE THAT THE PROJECTED AMOUNTS ARE THE MOST
PROBABLE SPECIFIC AMOUNTS THAT THEY CAN FORECAST AND THAT THE ESTIMATES AND
ASSUMPTIONS THEY HAVE MADE IN ARRIVING AT THESE AMOUNTS ARE REASONABLE. THE
ESTIMATES AND ASSUMPTIONS MAY NOT BE REALIZED, HOWEVER, AND ARE INHERENTLY
SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF ARCH AND PAGENET. NO
REPRESENTATIONS CAN BE OR ARE MADE AS TO WHETHER ACTUAL RESULTS WILL MEET THE
RESULTS SET FORTH IN THE COMBINED COMPANY PROJECTIONS. SOME ASSUMPTIONS
INEVITABLY WILL NOT MATERIALIZE, AND EVENTS AND CIRCUMSTANCES OCCURRING
SUBSEQUENT TO THE DATE ON WHICH THE PROJECTIONS WERE PREPARED MAY BE DIFFERENT
FROM THOSE ASSUMED OR MAY BE UNANTICIPATED, AND THEREFORE MAY AFFECT FINANCIAL
RESULTS IN A MATERIAL AND POSSIBLY ADVERSE MANNER. THE PROJECTIONS, THEREFORE,
MAY NOT BE RELIED UPON AS A GUARANTEE OR OTHER ASSURANCE OF THE ACTUAL RESULTS
THAT WILL OCCUR. SEE "FORWARD-LOOKING STATEMENTS."
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<PAGE> 341
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arch Certificate of Incorporation 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 of Incorporation 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
<TABLE>
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of November 7, 1999,
among Paging Network, Inc., Arch Communications Group, Inc.
and St. Louis Acquisition Corp.(1)
2.2 Amendment to Agreement and Plan of Merger, dated as of
January 7, 2000, between Paging Network, Inc., Arch
Communications Group, Inc. and St. Louis Acquisition
Corp.(2)
2.3 Amendment No. 2 to Agreement and Plan of Merger dated as of
May 10, 2000 by and among Paging Network, Inc., Arch
Communications Group, Inc. and St. Louis Acquisition
Corp.(3)
2.4 Amendment No. 3 to Agreement and Plan of Merger dated as of
July 23, 2000 by and among Paging Network, Inc., Arch
Communications Group, Inc. and St. Louis Acquisition
Corp.(4)
2.5* Amendment No. 4 to Agreement and Plan of Merger dated as of
September 7, 2000 by and among Paging Network, Inc., Arch
Communications Group, Inc. and St. Louis Acquisition Corp.
3.1 Restated Certificate of Incorporation.(5)
3.2 Certificate of Designations establishing the Series B Junior
Participating Preferred Stock, filed with the Secretary of
State of Delaware on October 19, 1995.(6)
3.3 Certificate of Correction, filed with the Secretary of State
of Delaware on February 15, 1996.(5)
3.4 Certificate of Designations establishing the Series C
Convertible Preferred Stock, filed with the Secretary of
State of Delaware on June 29, 1998.(7)
3.5 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on June 4, 1996.(8)
</TABLE>
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<PAGE> 342
<TABLE>
<S> <C> <C>
3.6 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on May 27, 1999.(9)
3.7 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on June 16, 1999.(9)
3.8 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on April 3, 2000.(10)
3.9 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on April 28, 2000.(10)
3.10 By-laws, as amended.(5)
4.1 Indenture, dated February 1, 1994, between Arch
Communications, Inc. (formerly known as USA Mobile
Communications, Inc. II) and United States Trust Company of
New York, as Trustee, relating to the 9 1/2% Senior Notes
due 2004 of Arch Communications, Inc.(11)
4.2 Indenture, dated December 15, 1994, between Arch
Communications, Inc. (formerly known as USA Mobile
Communications, Inc. II) and United States Trust Company of
New York, as Trustee, relating to the 14% Senior Notes due
2004 of Arch Communications, Inc.(12)
4.3 Indenture, dated June 29, 1998, between Arch Communications,
Inc. and U.S. Bank Trust National Association, as Trustee,
relating to the 12 3/4% Senior Notes due 2007 of Arch
Communications, Inc.(7)
4.4 Indenture, dated April 9, 1999, between Arch Communications,
Inc. and IBJ Whitehall Bank & Trust Company, as Trustee,
relating to the 13 3/4% Senior Notes due 2008.(13)
4.5 Rights Agreement, dated October 13, 1995, between Arch
Communications Group, Inc. and The Bank of New York, as
Rights Agent.(12)
4.6 Amendment No. 1 to Rights Agreement, dated June 29, 1998,
amending the Rights Agreement between Arch Communications
Group, Inc. and The Bank of New York.(7)
4.7 Amendment No. 2 to Rights Agreement, dated as of August 18,
1998, amending the Rights Agreement between Arch
Communications Group, Inc. and The Bank of New York.(9)
4.8 Amendment No. 3 to Rights Agreement, dated September 3,
1998, amending the Rights Agreement between Arch
Communications Group, Inc. and The Bank of New York.(9)
4.9 Amendment No. 4 to Rights Agreement, dated May 14, 1999,
amending the Rights Agreement between Arch Communications
Group, Inc. and The Bank of New York.(14)
4.10 Amendment No. 5 to Rights Agreement, dated November 15,
1999, amending the Rights Agreement between Arch
Communications Group, Inc. and The Bank of New York.(1)
4.11 Amendment No. 6 to Rights Agreement, dated April 12, 2000,
amending the Rights Agreement between Arch Communications
Group, Inc. and The Bank of New York.(15)
5.1** Opinion of Hale and Dorr LLP.
8.1** Tax opinion of Hale and Dorr LLP.
</TABLE>
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<PAGE> 343
<TABLE>
<S> <C> <C>
10.1* Third Amended and Restated Credit Agreement, dated as of
March 23, 2000, by and among Arch Paging, Inc., the Lenders
party thereto, The Bank of New York, Royal Bank of Canada,
Toronto Dominion (Texas), Inc., Barclays Bank PLC and Fleet
National Bank.
10.2* Amendment No. 1 to Third Amended and Restated Credit
Agreement, dated as of May 19, 2000.
10.3* Amendment No. 2 to Third Amended and Restated Credit
Agreement, dated as of August 15, 2000.
10.4 Amendment No. 1 to Registration Rights Agreement, dated
August 19, 1998, amending the Registration Rights Agreement
dated as of June 29, 1998 by and among Arch Communications
Group, Inc. and the Sandler Capital Partners IV, LP, Sandler
Capital Partners IV, FTE LP, South Fork Partners, The
Georgica International Fund Limited, Aspen Partners and
Consolidated Press International Limited.(16)
+10.5 Amended and Restated Stock Option Plan.(17)
+10.6 Non-Employee Directors' Stock Option Plan.(18)
+10.7 1989 Stock Option Plan, as amended.(5)
+10.8 1995 Outside Directors' Stock Option Plan.(19)
+10.9 1996 Employee Stock Purchase Plan.(20)
+10.10 1997 Stock Option Plan.(21)
+10.11 1999 Employee Stock Purchase Plan.(22)
+10.12 Deferred Compensation Plan for Nonemployee Directors.(23)
+10.13 Form of Executive Retention Agreement by and between Messrs.
Baker, Daniels, Kuzia, Pottle and Saynor.(23)
10.14 Stock Purchase Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV,
L.P., Sandler Capital Partners IV FTE, L.P., Harvey Sandler,
John Kornreich, Michael J. Marocco, Andrew Sandler, South
Fork Partners, the Georgica International Fund Limited,
Aspen Partners and Consolidated Press International
Limited.(7)
10.15 Registration Rights Agreement, dated June 29, 1998, among
Arch Communications Group, Inc., Sandler Capital Partners
IV, L.P., Sandler Capital Partners IV FTE, L.P., Harvey
Sandler, John Kornreich, Michael J. Marocco, Andrew Sandler,
South Fork Partners, The Georgica International Fund
Limited, Aspen Partners and Consolidated Press International
Limited.(7)
10.16 Exchange Agreement, dated June 29, 1998, between Adelphia
Communications Corporation and Benbow PCS Ventures, Inc.(7)
10.17 Promissory Note, dated June 29, 1998, in the Principal
amount of $285,015, issued by Benbow PCS Ventures, Inc. to
Lisa-Gaye Shearing.(7)
10.18 Guaranty, dated June 29, 1998, given by Arch Communications
Group, Inc. to Adelphia Communications Corporation(7)
10.19 Guaranty, dated June 29, 1998, given by Arch Communications
Group, Inc. to Lisa-Gaye Shearing.(7)
10.20 Registration Rights Agreement, dated June 29, 1998, among
Arch Communications Group, Inc., Adelphia Communications
Corporation and Lisa-Gaye Shearing.(7)
10.21 Preferred Distributor Agreement dated June 1, 1998 by and
between Arch Communications Group, Inc. and NEC America,
Inc.(24)(25)
10.22 Paging Products Sales Agreement, dated March 17, 1999, by
and between Motorola, Inc. and Arch Communications Group,
Inc.(16)(25)
</TABLE>
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<PAGE> 344
<TABLE>
<S> <C> <C>
10.23 Satellite Services Agreement, dated September 1, 1998,
between AvData Systems, Inc., and MobileMedia
Communications, Inc.(16)(25)
10.24 Master Lease For Transmitter Systems Space by and between
Pinnacle Towers, Inc. and MobileMedia Communications,
Inc.(16)
10.25 Letter Agreement, dated March 23, 2000, between Arch
Communications Group, Inc. and Resurgence Asset Management,
L.L.C.(22)
21.1 Subsidiaries of the Registrant.(22)
23.1* Consent of Arthur Andersen LLP.
23.2* Consent of Ernst & Young LLP.
23.3* Consent of Wilkinson, Barker, Knauer & Quinn, LLP.
23.4** Consent of Hale and Dorr LLP. (contained in its opinion
filed as Exhibits 5.1 and 8.1)
24.1** Power of Attorney.
99.1 Form of Letter of Transmittal.(26)
99.2 Form of Notice of Guaranteed Delivery for Letter of
Transmittal.(26)
</TABLE>
---------------
* Filed herewith.
** Previously filed.
+ Identifies exhibits constituting a management contract or compensation plan.
(1) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated November 7, 1999 and filed on November 19,
1999.
(2) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated January 7, 2000 and filed January 21,
2000.
(3) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-94403-02) of Arch Communications Group, Inc.
(4) Incorporated by reference from the Current Report of Form 8-K of Arch
Communications Group, Inc. dated July 28, 2000 and filed on July 28, 2000.
(5) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-542) of Arch Communications Group, Inc.
(6) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated October 13, 1995 and filed on October 24,
1995.
(7) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998 and filed on July 23, 1998.
(8) Incorporated by reference from the Registration Statement on Form S-8 (File
No. 333-07333) of Arch Communications Group, Inc.
(9) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-62211) of Arch Communications Group, Inc.
(10) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-95677) of Arch Communications Group, Inc.
(11) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-72646) of Arch Communications, Inc.
(12) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-85580) of Arch Communications, Inc.
(13) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-83027) of Arch Communications Group, Inc.
(14) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated May 14, 1999 and filed on May 20, 1999.
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(15) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated April 12, 2000 and filed on April 26,
2000.
(16) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
Communications Group, Inc. for the quarter ended June 30, 1999.
(17) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group. Inc. (then known as USA Mobile Communications, Inc.
II) for the fiscal year ended December 31, 1994.
(18) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-83648) of Arch (then known as USA Mobile Communications, Inc. II).
(19) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-87474) of Arch Communications Group, Inc.
(20) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1995.
(21) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1996.
(22) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1999.
(23) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1997.
(24) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1998.
(25) A Confidential Treatment Request has been filed with respect to portions of
this exhibit so incorporated by reference.
(26) Included as Annex A to the prospectus forming a part of this Registration
Statement and incorporated herein by reference.
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 of 1933;
(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.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the
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<PAGE> 346
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 registrant 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 Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the 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 reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall 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 of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered 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 of 1933 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 Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 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, 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 of 1933 and will be governed by the final adjudication of such issue.
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<PAGE> 347
(f) The undersigned 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 undersigned 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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<PAGE> 348
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 September 12, 2000.
Arch Communications Group, Inc.
By: *
------------------------------------
C. Edward Baker, Jr. Chairman of
The Board and Chief Executive
Officer
SIGNATURES AND POWER OF ATTORNEY
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>
* Chairman of the Board and Chief September 12, 2000
--------------------------------------------- Executive Officer, Director
C. Edward Baker, Jr. (principal executive officer)
* Executive Vice President and Chief September 12, 2000
--------------------------------------------- Financial Officer (principal
J. Roy Pottle financial officer and principal
accounting officer)
* Director September 12, 2000
---------------------------------------------
R. Schorr Berman
* Director September 12, 2000
---------------------------------------------
James S. Hughes
* Director September 12, 2000
---------------------------------------------
John Kornreich
* Director September 12, 2000
---------------------------------------------
Allan L. Rayfield
* Director September 12, 2000
---------------------------------------------
John B. Saynor
* Director September 12, 2000
---------------------------------------------
John A. Shane
Director
---------------------------------------------
Edwin M. Banks
</TABLE>
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<PAGE> 349
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director
---------------------------------------------
H. Sean Mathis
*By: /s/ GERALD CIMMINO
----------------------------------------
Attorney in fact
</TABLE>
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<PAGE> 350
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of November 7, 1999,
among Paging Network, Inc., Arch Communications Group, Inc.
and St. Louis Acquisition Corp.(1)
2.2 Amendment to Agreement and Plan of Merger, dated as of
January 7, 2000, between Paging Network, Inc., Arch
Communications Group, Inc. and St. Louis Acquisition
Corp.(2)
2.3 Amendment No. 2 to Agreement and Plan of Merger dated as of
May 10, 2000 by and among Paging Network, Inc., Arch
Communications Group, Inc. and St. Louis Acquisition
Corp.(3)
2.4 Amendment No. 3 to Agreement and Plan of Merger dated as of
July 23, 2000 by and among Paging Network, Inc., Arch
Communications Group, Inc. and St. Louis Acquisition
Corp.(4)
2.5* Amendment No. 4 to Agreement and Plan of Merger dated as of
September 7, 2000 by and among Paging Network, Inc., Arch
Communications Group, Inc. and St. Louis Acquisition Corp.
3.1 Restated Certificate of Incorporation.(5)
3.2 Certificate of Designations establishing the Series B Junior
Participating Preferred Stock, filed with the Secretary of
State of Delaware on October 19, 1995.(6)
3.3 Certificate of Correction, filed with the Secretary of State
of Delaware on February 15, 1996.(5)
3.4 Certificate of Designations establishing the Series C
Convertible Preferred Stock, filed with the Secretary of
State of Delaware on June 29, 1998.(7)
3.5 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on June 4, 1996.(8)
3.6 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on May 27, 1999.(9)
3.7 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on June 16, 1999.(9)
3.8 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on April 3, 2000.(10)
3.9 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on April 28, 2000.(10)
3.10 By-laws, as amended.(5)
4.1 Indenture, dated February 1, 1994, between Arch
Communications, Inc. (formerly known as USA Mobile
Communications, Inc. II) and United States Trust Company of
New York, as Trustee, relating to the 9 1/2% Senior Notes
due 2004 of Arch Communications, Inc.(11)
4.2 Indenture, dated December 15, 1994, between Arch
Communications, Inc. (formerly known as USA Mobile
Communications, Inc. II) and United States Trust Company of
New York, as Trustee, relating to the 14% Senior Notes due
2004 of Arch Communications, Inc.(12)
4.3 Indenture, dated June 29, 1998, between Arch Communications,
Inc. and U.S. Bank Trust National Association, as Trustee,
relating to the 12 3/4% Senior Notes due 2007 of Arch
Communications, Inc.(7)
4.4 Indenture, dated April 9, 1999, between Arch Communications,
Inc. and IBJ Whitehall Bank & Trust Company, as Trustee,
relating to the 13 3/4% Senior Notes due 2008.(13)
4.5 Rights Agreement, dated October 13, 1995, between Arch
Communications Group, Inc. and The Bank of New York, as
Rights Agent.(12)
4.6 Amendment No. 1 to Rights Agreement, dated June 29, 1998,
amending the Rights Agreement between Arch Communications
Group, Inc. and The Bank of New York.(7)
</TABLE>
<PAGE> 351
<TABLE>
<S> <C> <C>
4.7 Amendment No. 2 to Rights Agreement, dated as of August 18,
1998, amending the Rights Agreement between Arch
Communications Group, Inc. and The Bank of New York.(9)
4.8 Amendment No. 3 to Rights Agreement, dated September 3,
1998, amending the Rights Agreement between Arch
Communications Group, Inc. and The Bank of New York.(9)
4.9 Amendment No. 4 to Rights Agreement, dated May 14, 1999,
amending the Rights Agreement between Arch Communications
Group, Inc. and The Bank of New York.(14)
4.10 Amendment No. 5 to Rights Agreement, dated November 15,
1999, amending the Rights Agreement between Arch
Communications Group, Inc. and The Bank of New York.(1)
4.11 Amendment No. 6 to Rights Agreement, dated April 12, 2000,
amending the Rights Agreement between Arch Communications
Group, Inc. and The Bank of New York.(15)
5.1** Opinion of Hale and Dorr LLP.
8.1** Tax opinion of Hale and Dorr LLP.
10.1* Third Amended and Restated Credit Agreement, dated as of
March 23, 2000, by and among Arch Paging, Inc., the Lenders
party thereto, The Bank of New York, Royal Bank of Canada,
Toronto Dominion (Texas), Inc., Barclays Bank PLC and Fleet
National Bank.
10.2* Amendment No. 1 to Third Amended and Restated Credit
Agreement, dated as of May 19, 2000.
10.3* Amendment No. 2 to Third Amended and Restated Credit
Agreement, dated as of August 15, 2000.
10.4 Amendment No. 1 to Registration Rights Agreement, dated
August 19, 1998, amending the Registration Rights Agreement
dated as of June 29, 1998 by and among Arch Communications
Group, Inc. and the Sandler Capital Partners IV, LP, Sandler
Capital Partners IV, FTE LP, South Fork Partners, The
Georgica International Fund Limited, Aspen Partners and
Consolidated Press International Limited.(16)
+10.5 Amended and Restated Stock Option Plan.(17)
+10.6 Non-Employee Directors' Stock Option Plan.(18)
+10.7 1989 Stock Option Plan, as amended.(5)
+10.8 1995 Outside Directors' Stock Option Plan.(19)
+10.9 1996 Employee Stock Purchase Plan.(20)
+10.10 1997 Stock Option Plan.(21)
+10.11 1999 Employee Stock Purchase Plan.(22)
+10.12 Deferred Compensation Plan for Nonemployee Directors.(23)
+10.13 Form of Executive Retention Agreement by and between Messrs.
Baker, Daniels, Kuzia, Pottle and Saynor.(23)
10.14 Stock Purchase Agreement, dated June 29, 1998, among Arch
Communications Group, Inc., Sandler Capital Partners IV,
L.P., Sandler Capital Partners IV FTE, L.P., Harvey Sandler,
John Kornreich, Michael J. Marocco, Andrew Sandler, South
Fork Partners, the Georgica International Fund Limited,
Aspen Partners and Consolidated Press International
Limited.(7)
10.15 Registration Rights Agreement, dated June 29, 1998, among
Arch Communications Group, Inc., Sandler Capital Partners
IV, L.P., Sandler Capital Partners IV FTE, L.P., Harvey
Sandler, John Kornreich, Michael J. Marocco, Andrew Sandler,
South Fork Partners, The Georgica International Fund
Limited, Aspen Partners and Consolidated Press International
Limited.(7)
10.16 Exchange Agreement, dated June 29, 1998, between Adelphia
Communications Corporation and Benbow PCS Ventures, Inc.(7)
10.17 Promissory Note, dated June 29, 1998, in the Principal
amount of $285,015, issued by Benbow PCS Ventures, Inc. to
Lisa-Gaye Shearing.(7)
</TABLE>
<PAGE> 352
<TABLE>
<S> <C> <C>
10.18 Guaranty, dated June 29, 1998, given by Arch Communications
Group, Inc. to Adelphia Communications Corporation(7)
10.19 Guaranty, dated June 29, 1998, given by Arch Communications
Group, Inc. to Lisa-Gaye Shearing.(7)
10.20 Registration Rights Agreement, dated June 29, 1998, among
Arch Communications Group, Inc., Adelphia Communications
Corporation and Lisa-Gaye Shearing.(7)
10.21 Preferred Distributor Agreement dated June 1, 1998 by and
between Arch Communications Group, Inc. and NEC America,
Inc.(24)(25)
10.22 Paging Products Sales Agreement, dated March 17, 1999, by
and between Motorola, Inc. and Arch Communications Group,
Inc.(16)(25)
10.23 Satellite Services Agreement, dated September 1, 1998,
between AvData Systems, Inc., and MobileMedia
Communications, Inc.(16)(25)
10.24 Master Lease For Transmitter Systems Space by and between
Pinnacle Towers, Inc. and MobileMedia Communications,
Inc.(16)
10.25 Letter Agreement, dated March 23, 2000, between Arch
Communications Group, Inc. and Resurgence Asset Management,
L.L.C.(22)
21.1 Subsidiaries of the Registrant.(22)
23.1* Consent of Arthur Andersen LLP.
23.2* Consent of Ernst & Young LLP.
23.3* Consent of Wilkinson, Barker, Knauer & Quinn, LLP.
23.4** Consent of Hale and Dorr LLP. (contained in its opinion
filed as Exhibits 5.1 and 8.1)
24.1** Power of Attorney.
99.1 Form of Letter of Transmittal.(26)
99.2 Form of Notice of Guaranteed Delivery for Letter of
Transmittal.(26)
</TABLE>
---------------
* Filed herewith.
** Previously filed.
+ Identifies exhibits constituting a management contract or compensation plan.
(1) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated November 7, 1999 and filed on November 19,
1999.
(2) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated January 7, 2000 and filed January 21,
2000.
(3) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-94403-02) of Arch Communications Group, Inc.
(4) Incorporated by reference from the Current Report of Form 8-K of Arch
Communications Group, Inc. dated July 28, 2000 and filed on July 28, 2000.
(5) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-542) of Arch Communications Group, Inc.
(6) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated October 13, 1995 and filed on October 24,
1995.
(7) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated June 26, 1998 and filed on July 23, 1998.
(8) Incorporated by reference from the Registration Statement on Form S-8 (File
No. 333-07333) of Arch Communications Group, Inc.
(9) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-62211) of Arch Communications Group, Inc.
<PAGE> 353
(10) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-95677) of Arch Communications Group, Inc.
(11) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-72646) of Arch Communications, Inc.
(12) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-85580) of Arch Communications, Inc.
(13) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-83027) of Arch Communications Group, Inc.
(14) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated May 14, 1999 and filed on May 20, 1999.
(15) Incorporated by reference from the Current Report on Form 8-K of Arch
Communications Group, Inc. dated April 12, 2000 and filed on April 26,
2000.
(16) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
Communications Group, Inc. for the quarter ended June 30, 1999.
(17) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group. Inc. (then known as USA Mobile Communications, Inc.
II) for the fiscal year ended December 31, 1994.
(18) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-83648) of Arch (then known as USA Mobile Communications, Inc. II).
(19) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-87474) of Arch Communications Group, Inc.
(20) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1995.
(21) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1996.
(22) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1999.
(23) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1997.
(24) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1998.
(25) A Confidential Treatment Request has been filed with respect to portions of
this exhibit so incorporated by reference.
(26) Included as Annex A to the prospectus forming a part of this Registration
Statement and incorporated herein by reference.
