<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 2000
REGISTRATION NO. 333-95677
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ARCH COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4812 31-1358569
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MASSACHUSETTS 01581
(508) 870-6700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
C. EDWARD BAKER, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ARCH COMMUNICATIONS GROUP, INC.
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MASSACHUSETTS 01581
(508) 870-6700
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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EDWARD YOUNG, ESQ. JOHN R. SCHMIDT
JAY E. BOTHWICK, ESQ. MAYER, BROWN & PLATT
DAVID A. WESTENBERG, ESQ. 190 SOUTH LASALLE STREET
HALE AND DORR LLP CHICAGO, ILLINOIS 60603-3441
60 STATE STREET (312) 782-0600
BOSTON, MASSACHUSETTS 02109
(617) 526-6000
</TABLE>
------------------------
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. [ ]
------------------------
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 2)
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
--------------------------------------------------------------------------------
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
ARCH COMMUNICATIONS GROUP, INC.
------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE> 3
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 2)
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
PAGING NETWORK, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act
Rule 0-11 (Set forth the amount on which the filing fee is calculated and
state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE> 4
[ARCH LOGO] [PAGENET LOGO]
PROPOSED MERGER - YOUR VOTE IS IMPORTANT
This joint proxy statement/prospectus describes the proposed merger of
Arch Communications Group, Inc. and Paging Network, Inc. and related financial
restructurings.
Through the merger, PageNet will become a wholly owned subsidiary of Arch.
PageNet's current stockholders will receive a total of 12,963,842 shares of Arch
common stock. This represents 0.1247 shares of Arch common stock for every share
of PageNet common stock they own. Concurrently:
- Arch is offering to exchange common stock for all of its outstanding
10 7/8% senior discount notes.
- PageNet is offering to exchange common stock which will convert into
Arch common stock in the merger, as well as common stock of Vast
Solutions, Inc., a PageNet subsidiary, for all of PageNet's
outstanding senior notes.
Following the merger, Arch's current stockholders will hold at least 42.4%
of the combined company's stock, and the current stockholders of PageNet will
hold at least 7.4%. They will hold correspondingly larger percentages if all of
the notes are not exchanged for stock in the exchange offers.
Arch's common stock is traded on the Nasdaq National Market under the
symbol "APGR". PageNet's common stock is traded on the Nasdaq SmallCap Market
under the symbol "PAGE".
The stockholders of Arch and PageNet will vote to approve matters related
to the merger on , 2000 and , 2000, respectively. EACH COMPANY'S
BOARD OF DIRECTORS UNANIMOUSLY URGES ITS STOCKHOLDERS TO VOTE IN FAVOR OF ALL
PROPOSALS.
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---------------------------------- --------------------------------------
NEITHER THE SECURITIES AND WE URGE YOU TO CAREFULLY READ THE
EXCHANGE COMMISSION NOR ANY "RISK FACTORS" SECTION
STATE SECURITIES REGULATORS BEGINNING ON PAGE 6 BEFORE YOU
HAVE APPROVED OR DISAPPROVED MAKE ANY INVESTMENT DECISION.
THE ARCH SHARES OR THE MERGER
OR DETERMINED IF THIS JOINT
PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANYONE
WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
---------------------------------- --------------------------------------
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THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS , 2000.
<PAGE> 5
WHAT YOU NEED TO DO
IF YOU ARE AN ARCH STOCKHOLDER, you only need to vote your shares. The only
document that you will receive is this joint proxy statement/prospectus. To vote
your shares, please use the enclosed proxy card. Please read the instructions on
the proxy card and fill out the proxy card accordingly. To approve the proposals
relating to the merger, you must vote "FOR" each proposal.
IF YOU ARE AN ARCH STOCKHOLDER AND AN ARCH NOTEHOLDER, you will need to:
- vote your shares; and
- respond to Arch's note exchange offer.
You will receive this joint proxy statement/prospectus and a separate note
exchange prospectus from Arch. To vote your shares, please use the enclosed
proxy card. Please read the instructions on the enclosed proxy card included in
the joint proxy statement/prospectus and fill out the proxy card accordingly. To
approve the proposals relating to the merger, you must vote "FOR" each proposal.
Also, in order to respond to Arch's note exchange offer, please read the
instructions on the letter of transmittal included in the note exchange
prospectus and fill out the letter of transmittal accordingly.
IF YOU ARE A PAGENET STOCKHOLDER, you will need to:
- vote your shares; and
- respond to PageNet's solicitation of consents to its prepackaged plan
of reorganization.
You will receive this joint proxy statement/prospectus and a separate prospectus
from PageNet. To vote your shares, please use the enclosed proxy card. Please
read the instructions on the enclosed proxy card and fill out the proxy card
accordingly. To approve the proposals relating to the merger, you must vote
"FOR" each proposal. Also, in order to respond to PageNet's consent solicitation
for the prepackaged plan of reorganization, please read "The Prepackaged
Bankruptcy Plan -- Voting Instructions and Procedures" of PageNet's separate
prospectus and fill out the appropriate ballot that accompanies PageNet's
prospectus.
IF YOU ARE A PAGENET STOCKHOLDER AND A PAGENET NOTEHOLDER, you will need to:
- vote your shares;
- respond to PageNet's solicitation of consents to its prepackaged plan
of reorganization; and
- respond to PageNet's note exchange offer.
You will receive this joint proxy statement/prospectus and a separate prospectus
from PageNet. To vote your shares, please use the enclosed proxy card. Please
read the instructions on the enclosed proxy card and fill out the proxy card
accordingly. To approve the proposals relating to the merger, you must vote
"FOR" each proposal. Also, in order to respond to PageNet's note exchange offer
and PageNet's consent solicitation for the prepackaged plan of reorganization,
please read "The Prepackaged Bankruptcy Plan -- Voting Instructions and
Procedures" of PageNet's separate prospectus and fill out the appropriate ballot
and letter of transmittal that accompany PageNet's prospectus.
<PAGE> 6
ARCH COMMUNICATIONS GROUP, INC.
1800 WEST PARK DRIVE, SUITE 250
WESTBOROUGH, MA 01581
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
To the Stockholders of
Arch Communications Group, Inc.:
We will hold a special meeting of stockholders of Arch on ,
2000 at 10:00 a.m., local time, at the offices of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109, for the following purposes:
1. To consider and vote upon a proposal to issue shares of Arch's common
stock, $.01 par value per share, pursuant to an agreement and plan of
merger, dated as of November 7, 1999, as subsequently amended, among
Arch, Paging Network, Inc. and a wholly owned subsidiary of Arch.
2. To consider and vote upon a proposal to amend Arch's restated
certificate of incorporation to increase the number of authorized
shares of Arch common stock from 150,000,000 to 300,000,000 shares.
3. To transact such other business as may properly come before the special
meeting or any adjournments or postponements of the special meeting.
Arch's board of directors has unanimously approved the merger and the
merger agreement and recommends that you vote FOR each of the proposals on which
you are entitled to vote. The approval of each of the first two proposals is
conditioned upon approval of the other proposal. Accordingly, a vote against
either of the first two proposals will have the same effect as a vote against
both.
We have described the transactions under the merger agreement in more
detail in the accompanying joint proxy statement/prospectus, which you should
read in its entirety before voting. A copy of the merger agreement is attached
as Annex A to the joint proxy statement/prospectus.
Only stockholders who hold shares of Arch stock at the close of business on
, 2000 will be entitled to notice of and to vote at the special
meeting or any adjournment or postponement of the special meeting. The complete
list of Arch stockholders entitled to vote at the special meeting will be
available for examination, for purposes pertaining to the special meeting, by
any stockholder of Arch entitled to vote at the special meeting, at the
principal executive offices of Arch, 1800 West Park Drive, Suite 250,
Westborough, Massachusetts 01581, for ten days prior to the special meeting.
Holders of shares of Arch common stock, Class B common stock, Series C
preferred stock and Series D preferred stock will vote together as a single
class on the proposals. Each share of Arch common stock is entitled to one vote
on the matters presented, each share of Class B common stock is entitled to
1/100th of one vote, each share of Series C preferred stock is currently
entitled to 7.1576 votes and each share of Series D preferred stock is entitled
to 6.61318 votes.
A quorum will exist for the proposals if a majority of the outstanding
shares of Arch common stock, Class B common stock, Series C preferred stock and
Series D preferred stock (calculated on an as-converted basis, assuming
conversion of all Class B common stock, Series C preferred stock and Series D
preferred stock, and voting together as a single class) entitled to vote at the
special meeting are present either in person or by proxy.
Assuming a quorum is present, the approval of the issuance of shares of
Arch common stock pursuant to the merger agreement will require the affirmative
vote of the holders of a majority of the votes which are entitled to be cast by
the holders of shares present and voting. The adoption of the amendments to the
certificate of incorporation will require the affirmative vote of the holders of
a majority of the votes which are entitled to be cast by the holders of all
shares of Arch common stock, Class B common stock, Series C preferred stock and
Series D preferred stock, whether present or not at the special meeting.
<PAGE> 7
Holders of Arch common stock, Class B common stock, Series C preferred stock and
Series D preferred stock, do not have rights of appraisal under Delaware law in
connection with the merger.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO
ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, WE URGE YOU TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. YOU MAY VOTE AT THE SPECIAL MEETING EVEN IF YOU HAVE RETURNED A PROXY.
By order of the Board of Directors,
/s/ C. Edward Baker, Jr.
C. Edward Baker, Jr.
Chairman of the Board and
Chief Executive Officer
, 2000
Westborough, MA
2
<PAGE> 8
PAGING NETWORK, INC.
14911 QUORUM DRIVE
DALLAS, TEXAS 75240
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
To the Stockholders of
Paging Network, Inc.:
We will hold a special meeting of stockholders of PageNet on ,
2000 at 10:00 a.m. local time, at [ADDRESS], for the following purposes:
1. To consider and vote upon a proposal to adopt a merger agreement among
PageNet, Arch Communications Group, Inc. and St. Louis Acquisition
Corp., a wholly owned subsidiary of Arch.
2. To consider and vote upon a proposal to amend PageNet's restated
certificate of incorporation to increase the number of authorized
shares of PageNet common stock from 250,000,000 to 750,000,000 shares.
3. To consider and vote upon a proposal to issue shares of PageNet's
common stock in an amount sufficient to complete the exchange offer to
holders of PageNet senior subordinated notes as contemplated by the
merger agreement.
4. To transact such other business as may properly come before the special
meeting or any adjournments or postponements of the special meeting.
PageNet's board of directors has unanimously approved the merger and the
merger agreement and recommends that you vote FOR each of the proposals on which
you are entitled to vote. The approval of each of the proposals is conditioned
upon approval of the others. Accordingly, a vote against any of the proposals
will have the same effect as a vote against all.
We have described the transactions under the merger agreement in more
detail in the accompanying joint proxy statement/prospectus, which you should
read in its entirety before voting. A copy of the merger agreement is attached
as Annex A to the joint proxy statement/prospectus.
Only stockholders who hold shares of PageNet common stock at the close of
business on , 2000 will be entitled to notice of and to vote at the
special meeting or any adjournment or postponement of the special meeting. The
complete list of PageNet stockholders entitled to vote at the special meeting
will be available for examination, for purposes pertaining to the special
meeting, by any stockholder of PageNet entitled to vote at the special meeting,
at the principal executive offices of PageNet, 14911 Quorum Drive, Dallas, Texas
75240, for ten days prior to the special meeting.
Each share of PageNet common stock is entitled to one vote on the matters
presented. A quorum will exist if a majority of the outstanding shares of
PageNet common stock entitled to vote at the special meeting are present either
in person or by proxy.
The adoption of the merger agreement and the adoption of the amendment to
the restated certificate of incorporation will require the affirmative vote of
the holders of a majority of all shares of PageNet common stock outstanding and
entitled to vote, whether present or not at the special meeting. Assuming a
quorum is present, the approval of the issuance of shares of PageNet common
stock in an amount sufficient to complete the PageNet exchange offer will
require the affirmative vote of the holders of a majority of the shares present.
PageNet stockholders who hold PageNet common stock at the time of the special
meeting of stockholders will be entitled to appraisal rights under Delaware law.
<PAGE> 9
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO
ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, WE URGE YOU TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE
SPECIAL MEETING. YOU MAY VOTE AT THE SPECIAL MEETING EVEN IF YOU HAVE RETURNED A
PROXY.
By order of the Board of Directors,
/s/ John P. Frazee, Jr.
John P. Frazee, Jr.
Chairman of the Board of Directors
and
Chief Executive Officer
, 2000
Dallas, TX
2
<PAGE> 10
TABLE OF CONTENTS
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PAGE
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<S> <C>
Summary............................... 1
The Merger.......................... 1
Arch and PageNet.................... 5
Risk Factors.......................... 6
Risks Related to the Merger and an
Investment in Arch's Common
Stock............................ 6
Risks Related to Arch's Business.... 9
Risks Related to PageNet's
Business......................... 13
Risks Related to Vast............... 14
Risks Related to PageNet's Possible
Prepackaged Bankruptcy Filing.... 14
Forward-Looking Statements............ 17
Selected Pro Forma Financial and
Operating Data...................... 18
The Merger............................ 20
General............................. 20
Background of the Merger............ 20
Arch's Reasons for the Merger;
Recommendation of Arch's Board of
Directors........................ 24
PageNet's Reasons for the Merger;
Recommendation of PageNet's Board
of Directors..................... 26
Opinion of Financial Advisor to
Arch............................. 28
Opinions of Financial Advisors to
PageNet.......................... 32
Opinion of Houlihan Lokey Howard
& Zukin Capital................ 32
Opinion of Goldman, Sachs &
Co............................. 38
Opinion of Morgan Stanley Dean
Witter......................... 49
Vast Valuation Analysis............. 58
Interests of Certain Persons in the
Merger........................... 69
Treatment of PageNet's Common
Stock............................ 62
Stock Ownership in the Combined
Company.......................... 62
The Exchange Offers................. 62
Regulatory Approvals................ 64
Material Federal Income Tax
Considerations................... 64
Accounting Treatment of the
Merger........................... 65
Quotation on Nasdaq National Market
System........................... 65
</TABLE>
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Resales of Arch Common Stock Issued
in Connection with the Merger;
Affiliate Agreements............. 65
Appraisal Rights.................... 65
PageNet Prepackaged Bankruptcy
Plan............................. 65
The Merger Agreement.................. 67
Structure of the Merger............. 67
The Exchange Ratio and Treatment of
PageNet Common Stock............. 67
Exchange Procedures................. 67
Treatment of PageNet Stock
Options.......................... 68
Representations and Warranties...... 69
Covenants........................... 69
Conditions to Completion of the
Merger........................... 74
Termination of the Merger
Agreement........................ 76
Termination Fee..................... 77
Modification or Amendment of the
Merger Agreement................. 79
The Vast Distribution................. 80
The Prepackaged Bankruptcy Plan....... 81
Classification of Claims and Equity
Interests under the Prepackaged
Bankruptcy Plan.................. 81
Material Federal Income Tax
Considerations...................... 85
Capitalization........................ 90
Unaudited Pro Forma Consolidated
Financial Data of the Combined
Company............................. 91
Unaudited Pro Forma Condensed
Consolidated Financial Statements... 94
Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements... 98
Selected Historical Consolidated
Financial and Operating
Data -- Arch........................ 102
Arch Management's Discussion and
Analysis of Financial Condition and
Results of Operations............... 105
Selected Historical Consolidated
Financial and Operating
Data -- PageNet..................... 117
PageNet Management's Discussion and
Analysis of Financial Condition and
Results of Operations............... 121
Market Price Information and Dividend
Policy.............................. 135
Comparative Price Information....... 135
</TABLE>
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<PAGE> 11
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Dividend Policy..................... 135
Comparative Historical and Unaudited
Pro Forma Per Share Data............ 136
Industry Overview..................... 137
Regulation.......................... 138
Arch's Business....................... 142
Business Strategy................... 142
Wireless Messaging Services,
Products and Operations.......... 143
Networks and Licenses............... 145
Subscribers and Marketing........... 146
Sources of Equipment................ 147
Competition......................... 147
Employees........................... 148
Trademarks.......................... 148
Properties.......................... 148
Litigation.......................... 148
The Company......................... 148
Arch's Management..................... 149
Arch's Principal Stockholders......... 156
PageNet's Business.................... 160
PageNet's Management.................. 165
PageNet's Principal Stockholders...... 173
The Combined Company.................. 175
Description of PageNet's Common
Stock............................... 178
Description of Arch's Equity
Securities.......................... 178
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Description of Indebtedness........... 186
Comparison of Rights of PageNet
Stockholders and Arch
Stockholders........................ 192
Arch's Special Meeting................ 198
PageNet's Special Meeting............. 201
Stockholder Proposals................. 206
Legal Matters......................... 207
Experts............................... 207
Where You Can Find More Information... 207
Index to Financial Statements......... F-1
Annex A -- Agreement and Plan of
Merger.............................. A-1
Annex B -- Opinion of Bear Stearns &
Co., Inc............................ B-1
Annex C -- Opinion of Houlihan Lokey
Howard & Zukin Capital.............. C-1
Annex D -- Opinion of Goldman, Sachs &
Co.................................. D-1
Annex E -- Opinion of Morgan Stanley &
Co. Incorporated.................... E-1
Annex F -- Prospectus of Vast
Solutions, Inc...................... F-1
Annex G -- Arch Credit Facilities Term
Sheet............................... G-1
Annex H -- Unaudited Combined Company
Projected Balance Sheets............ H-1
Annex I -- Text of Section 262 of the
Delaware General Corporation Law.... I-1
</TABLE>
ii
<PAGE> 12
TRANSACTION DIAGRAM
The following diagrams illustrate in general terms the pre-merger structure
and capital stock ownership percentages of Arch and PageNet prior to the
announcement of the merger and the post-merger structure and capital stock
ownership percentages of the combined company and Vast.
[CURRENT STRUCTURE AND STOCK OWNERSHIP PERCENTAGE GRAPH]
iii
<PAGE> 13
SUMMARY
This summary highlights selected information contained elsewhere in this
joint proxy statement/prospectus. It may not contain all of the information that
is important to you. We urge you to read the entire joint proxy
statement/prospectus, including "Risk Factors", and all of the information
incorporated by reference into the joint proxy statement/prospectus.
THE MERGER
STRUCTURE OF THE MERGER AND RELATED TRANSACTIONS (PAGE 20, ANNEX A)
Arch and PageNet have negotiated an agreement and plan of merger. Through
the merger, PageNet will become a wholly owned subsidiary of Arch and their
businesses will be combined. The merger agreement, as amended, is attached to
this joint proxy statement/prospectus as Annex A.
In order to strengthen the balance sheet of the combined company, the
merger will be accompanied by a recapitalization of Arch and PageNet involving
the exchange of common stock for outstanding debt. Under the merger agreement,
Arch must offer to exchange a total of 29,651,984 shares of its common stock for
all of its outstanding 10 7/8% senior discount notes that were outstanding on
November 7, 1999. Arch has already exchanged shares of its common stock for a
significant portion of these discount notes. Under the merger agreement, PageNet
must offer to exchange 616,830,757 shares of its common stock as well as Class B
common stock of its subsidiary, Vast, for all of its outstanding senior
subordinated notes.
In the merger, each share of PageNet common stock, including the shares
issued to PageNet noteholders in the PageNet exchange offer, will be converted
into 0.1247 shares of Arch common stock. This will result in the issuance of a
total of 119,569,755 new shares of Arch common stock to PageNet stockholders,
Arch noteholders and PageNet noteholders if all notes are exchanged. In addition
to Arch common stock, holders of PageNet common stock immediately prior to the
acceptance of notes in the PageNet exchange offer will receive approximately
.00742 shares of each class of Vast Class B common stock for each share of
PageNet 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
$0.84952 for 0.1247 shares of Arch common stock. On , 2000, the last
trading day for which information was available prior to the first mailing of
this joint proxy statement/prospectus, PageNet's common stock had a closing
price of $
per share, compared to $ for 0.1247 shares of Arch common stock.
The merger agreement also provides that PageNet will distribute 11.6% of
the total equity of Vast to its current stockholders. As a result of the related
exchange offer, PageNet's noteholders will receive 68.9% of the equity interest
in Vast. PageNet negotiated these provisions to enable its stockholders and
noteholders to retain a substantial portion of any future value in Vast. The
combined company will retain 19.5% of the equity interest in Vast following the
merger.
STOCK OWNERSHIP AND GOVERNANCE FOLLOWING THE MERGER (PAGE 62)
If all of the outstanding Arch and PageNet notes are exchanged, the merger
and the related exchange offers will result in Arch's outstanding common stock
being held
- 42.4% by Arch's existing stockholders, including former Arch noteholders
who have become Arch stockholders in the past several months by
exchanging their notes for stock in negotiated transactions;
- 6.5% by the existing holders of Arch's 10 7/8% senior discount notes;
- 43.7% by the existing holders of PageNet's senior subordinated notes; and
- 7.4% 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 the current capitalization
of Arch and PageNet. The merger and the
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exchange offers will reduce overall debt by approximately $1.6 billion and
increase stockholders equity by approximately $1.5 billion.
After the merger, the Arch board of directors will consist of 12 directors.
Six directors will be designated by the current Arch directors and three
directors will be designated by the current PageNet directors. Each of the three
largest holders of PageNet notes being exchanged for shares of PageNet common
stock may designate one director. To the extent any of these three largest
holders do not designate directors, the Arch directors will designate additional
directors.
REQUIRED STOCKHOLDER APPROVALS; STOCKHOLDER MEETINGS (PAGE 71)
Approval of various matters that must be submitted to a vote of
stockholders in order to effect the merger will require obtaining the
affirmative vote of the holders of a majority of the combined voting power of
all classes of Arch's outstanding capital stock and a majority of PageNet's
outstanding common stock. However, if PageNet files a bankruptcy plan under
chapter 11 of the United States Bankruptcy Code, the approval of the holders of
PageNet common stock would no longer be required.
Stockholder meetings for Arch and PageNet will be held on ,
2000 and , 2000, respectively. Officers and directors of Arch and
their affiliates who beneficially own a total of approximately 20.1% of the
outstanding voting power of Arch have indicated an intention to vote in favor of
all matters related to the merger. Officers and directors of PageNet and their
affiliates who beneficially own a total of approximately [ ]% of the
outstanding voting power of PageNet have indicated an intention to vote in favor
of all matters related to the merger.
BACKGROUND OF MERGER; RECOMMENDATION TO STOCKHOLDERS (PAGE 20)
THE ARCH AND PAGENET BOARDS OF DIRECTORS HAVE UNANIMOUSLY VOTED TO APPROVE
THE MERGER AGREEMENT AND THE MERGER. EACH BOARD OF DIRECTORS BELIEVES THAT THE
MERGER IS ADVISABLE AND IN THE BEST INTEREST OF ITS STOCKHOLDERS AND RECOMMENDS
THAT ITS STOCKHOLDERS VOTE TO APPROVE ALL MATTERS CONCERNING THE MERGER AND
RELATED TRANSACTIONS.
OPINIONS OF FINANCIAL ADVISORS (PAGE 28)
In deciding to approve the merger, Arch's board of directors received an
opinion from its financial advisor as to the fairness, from a financial point of
view, of the exchange ratio to be used in the merger to Arch and its
stockholders. The full text of the opinion of Bear, Stearns & Co., Inc. to Arch
is attached as Annex B to this joint proxy statement/prospectus.
In deciding to approve the merger, PageNet's board of directors received
the oral opinions of Houlihan, Lokey, Howard & Zukin Capital and Morgan Stanley
Dean Witter, subsequently confirmed in writing that, as of November 7, 1999 the
consideration to be received by the holders of PageNet common stock on such date
pursuant to the merger and the Vast distribution, taken as a whole, was fair
from a financial point of view to such holders and the oral opinion of Goldman,
Sachs & Co., subsequently confirmed in writing, that, as of November 7, the
exchange ratio pursuant to the merger agreement was fair from a financial point
of view to the holders of PageNet common stock as of such date. The full texts
of the opinions of each of Houlihan Lokey, Goldman Sachs and Morgan Stanley to
PageNet are attached as Annexes C, D and E, respectively.
Each opinion should be read carefully in its entirety. Each opinion is
addressed to Arch's or PageNet's board of directors and does not constitute a
recommendation to any stockholders with respect to matters relating to the
merger or any related matter.
The engagement letters for all of Arch's and PageNet's financial advisors
provide that part of their fees will not be paid unless the merger takes place.
Regardless of whether the merger is consummated, all of the financial advisors
will be reimbursed for reasonable fees and disbursements of counsel and
reasonable travel and other out-of-pocket expenses and indemnified to the full
extent of the law against
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certain liabilities, including liabilities under the federal securities laws,
arising out of their engagement or the merger.
CONDITIONS TO THE MERGER (PAGE 74)
The merger and the related exchange offers are conditioned upon:
- tender and non-withdrawal of at least 97.5% of the PageNet notes;
- approval of the transaction by Arch's stockholders;
- either:
- approval of the merger agreement and related matters by PageNet's
stockholders; or
- entry of a final confirmation order by the bankruptcy court
confirming the prepackaged plan;
- receipt of all necessary governmental approvals;
- receipt of legal opinions to be rendered as of the closing of the merger
regarding the treatment of the merger as a tax-free reorganization; and
- other customary contractual conditions specified in the merger agreement.
POSSIBLE PREPACKAGED BANKRUPTCY PLAN (PAGE 81)
PageNet has prepared a consensual or prepackaged bankruptcy plan as an
alternative means to implement the recapitalization and merger if less than
97.5% of PageNet's senior subordinated notes are tendered in the exchange offer.
PageNet is therefore soliciting the vote of its noteholders and its stockholders
in favor of its prepackaged bankruptcy plan by soliciting ballots being
distributed together with this joint proxy statement/prospectus. The prepackaged
bankruptcy plan provides for the merger of PageNet into Arch and the related
transactions on the same terms provided in the merger agreement. PageNet has
agreed that it will file a consensual or prepackaged bankruptcy plan under
chapter 11 of the Bankruptcy Code if the following conditions are met:
- Arch stockholders have approved the transaction;
- the holders of at least 66 2/3% in amount of the PageNet notes voted with
respect to the prepackaged bankruptcy plan and that constitute at least a
majority in number of all such voting holders, have voted to accept the
prepackaged bankruptcy plan;
- sufficient debt financing has been arranged to fund PageNet's operations
until the prepackaged bankruptcy plan is confirmed by the Bankruptcy
Court; and
- senior credit facilities of at least $1.3 billion have been secured or
can be secured through the prepackaged bankruptcy plan.
If PageNet elects to complete the merger through use of the chapter 11
process, it will file and seek to confirm and consummate the prepackaged
bankruptcy plan. The merger, if effected pursuant to the prepackaged plan, will
be implemented differently from the way it would be effected outside of the
chapter 11 process. However, the prepackaged bankruptcy plan will follow the
terms provided in the merger agreement unless the bankruptcy court refuses to
approve those terms.
If the prepackaged bankruptcy plan is not confirmed, PageNet would evaluate
its strategic alternatives while under the protection of the Bankruptcy Court.
These alternatives could include, but are not limited to, a stand-alone
restructuring, transactions with other merger partners, or liquidation.
NO SOLICITATION OF ALTERNATIVE OFFERS; TERMINATION FEE (PAGES 70 AND 77)
Both Arch and PageNet have agreed not to solicit or encourage any proposal
from a third party involving an acquisition, business combination or other
similar proposal, prior to the merger, subject to
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their boards of directors' fiduciary obligations to recommend any superior
proposal to their stockholders. Either Arch or PageNet may be required to pay a
termination fee of $40.0 million if the merger agreement is terminated after one
party pursues an alternative offer.
TERMINATION OF THE MERGER AGREEMENT (PAGE 76)
Arch and PageNet can mutually agree to terminate the merger agreement.
Either Arch or PageNet can terminate the merger agreement if:
- the other party breaches and fails to cure any material representation,
warranty or covenant in the merger agreement;
- the merger does not take place by September 30, 2000 or, if a prepackaged
bankruptcy plan is filed before September 30, 2000, the merger does not
take place within 150 days after such filing;
- the Arch stockholders do not approve the proposals relating to the
merger; or
- the PageNet stockholders do not approve the merger and no bankruptcy plan
is filed.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF PAGENET IN THE MERGER (PAGE 59)
In considering the recommendation of the PageNet board of directors, you
should be aware of the interests that PageNet executive officers and directors
have in the merger. These include:
- enhanced retention and severance benefits for certain executive officers;
- vesting of stock options, although all of such stock options currently
have no value; and
- customary rights to indemnification against specified liabilities.
These interests are different from and in addition to the interests of
PageNet stockholders. In considering the fairness of the merger to PageNet
stockholders, the PageNet board of directors took these interests into account.
ACCOUNTING TREATMENT (PAGE 65)
Arch will account for the merger using the purchase method of accounting,
which means that the assets and liabilities of PageNet, including intangible
assets, will be recorded at their fair value and the results of operations of
PageNet will be included in Arch's results beginning on the date of acquisition.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS (PAGE 64)
Arch's and PageNet's respective tax counsel are of the opinion that for
federal income tax purposes, the merger will qualify as a tax free
reorganization and that Arch, PageNet, and their stockholders will not recognize
gain or loss in connection with the merger except for cash received by PageNet
stockholders instead of fractional shares of Arch common stock. However, tax
counsel are also of the opinion that the distribution and receipt of Class B
common stock of Vast will be taxable to PageNet stockholders.
There is a risk, however, that the merger will not qualify as a tax-free
exchange. See "Risk Factors -- Volatility of Arch and Vast stock prices could
adversely affect tax consequences of the merger to PageNet stockholders and
noteholders." If, contrary to the opinion of PageNet's and Arch's tax counsel,
the merger does not qualify as a tax-free transaction, a PageNet stockholder
would recognize gain or loss in an amount equal to the difference between:
- the fair market value, as of the effective time of the merger, of the
Arch common stock received in exchange for PageNet common stock,
including cash received instead of fractional shares; and
- the PageNet stockholder's tax basis in PageNet common stock exchanged in
the merger, as reduced by reason of any allocation of such tax basis made
in connection with the taxable distribution of Class B common stock of
Vast.
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TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
STOCKHOLDERS WILL DEPEND ON THE FACTS OF THE STOCKHOLDER'S OWN SITUATION.
STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS FOR A FULL UNDERSTANDING OF THE
TAX CONSEQUENCES OF THE MERGER TO THEM.
PAGENET STOCKHOLDERS HAVE APPRAISAL RIGHTS BUT ARCH STOCKHOLDERS DO NOT (PAGE
65)
PageNet stockholders of record as of the time of the PageNet stockholder
meeting who do not vote in favor of the merger and who otherwise comply with the
applicable statutory procedures under Delaware law will be entitled to appraisal
rights and to receive cash for the fair market value of their shares as
determined by the Delaware Chancery Court. However, if PageNet files for
reorganization under chapter 11 of the Bankruptcy Code, appraisal rights would
no longer be available to stockholders.
Arch stockholders do not have appraisal rights.
HOW THE RIGHTS OF PAGENET STOCKHOLDERS WILL DIFFER AFTER THEY BECOME ARCH
STOCKHOLDERS (PAGE 192)
The rights of investors as stockholders of Arch after the merger will be
governed by Arch's charter and bylaws. Those rights differ from the rights of
PageNet stockholders under PageNet's charter and by-laws.
ARCH AND PAGENET
Arch. Arch is a leading provider of wireless messaging services in the
United States, with approximately 6.9 million units in service. 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 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 9.0 million units in service as
of December 31, 1999. 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. For a description of Vast, see the prospectus of
Vast attached as Annex A. 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 is traded on the Nasdaq Small Cap Market
under the Symbol "PAGE". PageNet's common stock was delisted from the Nasdaq
National Market System and the Chicago Stock Exchange earlier this year.
Arch's web site, www.arch.com, and PageNet's website, www.pagenet.com, are
not part of this joint proxy statement/prospectus. Arch has supplied all
information about Arch contained in this joint proxy statement/prospectus, and
PageNet has supplied all information about PageNet and its subsidiary, Vast.
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RISK FACTORS
RISKS RELATED TO THE MERGER AND AN INVESTMENT IN ARCH'S COMMON STOCK
The exchange ratio used in the merger may be unfavorable to PageNet
stockholders. The exchange ratio is fixed, and will not be adjusted to reflect
changes in the market price of Arch's common stock. The market value of Arch
common stock received may be less than the market value of the PageNet shares
exchanged for these Arch shares at the time of the exchange
The exchange ratio of 0.1247 shares of Arch common stock for each share of
PageNet common stock 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 other recognized criteria of value for common stock such as assets, net
worth or results of operations. The market value of the shares of Arch common
stock 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 vote on the merger and the time
common stock certificates are issued following the closing of the merger. Prices
may also fall at any time afterwards. Neither Arch nor PageNet may terminate the
merger agreement or resolicit the votes of its stockholders solely because of
changes in the trading price of the other company's common stock. A change in
the trading price of either company's common stock will not result in any change
in the exchange ratio.
Trading prices of Arch's common stock have fluctuated significantly in the past
and may continue to be volatile so that PageNet 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 June 30, 2000, the closing price of Arch's common stock was $6.50 per share.
The trading price of Arch common stock following the closing of the
exchange offers and the merger will be affected by the risk factors described in
this joint proxy statement/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. 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.
Challenges involved in integrating Arch and PageNet may strain Arch's
capacities and may prevent the combined company from achieving intended
synergies
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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 fact that Arch is still engaged in the process of
integrating the operations of MobileMedia Communications Inc., a paging and
wireless messaging company it acquired in June 1999 after MobileMedia had filed
a bankruptcy petition, into those of Arch will increase the difficulty of
integrating PageNet's 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 if and when PageNet makes a bankruptcy filing
Some customers and potential customers and vendors may be reluctant to do
business with PageNet if it commences a chapter 11 proceeding, as it expects to
do. 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 through
a chapter 11 proceeding. In addition, PageNet's level of employee turnover is
likely to increase as a result of a 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 H 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 H to this prospectus because
they are required for the filing under chapter 11 that PageNet may make in order
to implement the merger. 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 prepackaged bankruptcy plan on future
operations if the exchange offers and merger 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 and 100% of PageNet senior
subordinated notes will be tendered and accepted in the exchange offer. However,
the tender of the Arch notes is not a condition to the merger. Furthermore, the
merger may still take place if a smaller amount of PageNet notes are tendered.
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 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.
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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 June 30, 2000, the closing
market price of Arch's common stock was $6.50. 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.
Volatility of Arch and Vast stock prices could adversely affect tax
consequences of the merger to PageNet stockholders and noteholders
Stock prices of both Arch and Vast may be subject to high volatility. Tax
counsels' opinions that the merger will constitute a tax-free reorganization are
conditioned on the accuracy of representations from PageNet and Arch that the
value of the Arch common stock to be issued in the merger will represent more
than half of the value of all consideration to be received in the transaction,
considering the following factors:
- the value of the Class B common stock of Vast;
- cash paid to dissenters with respect to perfected appraisal rights;
- cash paid instead of fractional shares; and
- any other property received in connection with the merger.
If Arch common stock is materially less than 50% in value of the total
consideration, based on actual trading values on the closing date of the merger,
it is possible that the merger would be fully taxable to PageNet stockholders
and noteholders. Also, if values of Arch or Vast are higher than expected, tax
obligations of Arch and PageNet could be materially greater. See "Material
Federal Income Tax Considerations."
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The merger will probably eliminate corporate tax benefits that Arch might
otherwise utilize in the future
It is anticipated that the merger and the PageNet and Arch exchange offers
will result in the elimination of substantially all of the tax benefit of net
operating loss carryforwards and certain other tax attributes available to
PageNet and Arch, and also will result in some out-of-pocket tax liability. See
"Material Federal Income Tax Considerations." 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, PageNet will incur
substantial costs and will likely be required to file for protection under the
Bankruptcy Code without any prearranged or prepackaged plan in place
The merger will not take place unless many conditions are satisfied or
waived. These conditions include stockholder and noteholder approvals,
governmental approvals and the availability of senior credit facilities.
Moreover, PageNet will likely be required to file a prepackaged bankruptcy plan
to implement the merger. There can be no assurance that the prepackaged
bankruptcy plan would be approved by the bankruptcy court if filed. If the
merger does not take place, the contemplated benefits of the merger will not be
realized, and PageNet noteholders and stockholders will retain their interest as
senior subordinated noteholders or stockholders 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 PageNet pursues an
alternative acquisition proposal, PageNet may be required to pay a $40 million
termination fee to Arch.
In addition, if the merger is not consummated, PageNet will likely be
required to seek protection under bankruptcy laws, which could include
liquidation of PageNet under chapter 7 or chapter 11 of the Bankruptcy Code or
confirmation of an alternative plan of reorganization under chapter 11 of the
Bankruptcy Code. It is unlikely that any such filing will be made pursuant to
any prearranged or prepackaged plan of reorganization, which would likely
increase the amount of time that PageNet would be in bankruptcy and increase the
uncertainty of recovery to noteholders and stockholders.
RISKS RELATED TO ARCH'S BUSINESS
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. For the three
months ended March 31, 2000 Arch experienced a further decrease of 80,000 units
in service. 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
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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 PageNet's or
Arch'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 PageNet and Arch, 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 PageNet and Arch 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 PageNet
and Arch. If this occurs, PageNet's and Arch's market share will erode and
financial operations will be impaired.
Continued net losses are likely and Arch cannot predict whether it will ever
be profitable
PageNet and Arch 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.
10
<PAGE> 23
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
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 3.7 to 1 as of
March 31, 2000, assuming the exchange of all PageNet senior subordinated 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.
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
11
<PAGE> 24
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
PageNet and Arch that are leased to their subscribers. If PageNet's or Arch'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.
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.
In addition to the specific risks described above, an investment in Arch is
also subject to many risks which affect all companies, or all companies in its
industry.
12
<PAGE> 25
RISKS RELATED TO PAGENET'S BUSINESS
PageNet faces many of the same risks that Arch faces. In addition, PageNet
is subject to these particular risks:
Cash flow pressures may require PageNet to restructure its obligations under
the Bankruptcy Code
If PageNet is unable to improve its operating results, it may not have
sufficient cash to meet its obligations through the consummation of the merger.
While PageNet is currently managing its operations in an effort to ensure that
it has sufficient liquidity through the consummation of the merger, there can be
no assurance that this effort will succeed. If PageNet's strategies to maintain
liquidity do not succeed, or the merger is delayed, PageNet will likely commence
a proceeding under chapter 11 of the Bankruptcy Code to restructure its
obligations, including its obligations under the PageNet senior subordinated
notes. Such a proceeding would likely have a different result than the
prepackaged bankruptcy filing contemplated by the merger and prepackaged
bankruptcy plan.
Creditors may force PageNet to restructure its obligations under the
Bankruptcy Code
PageNet has been unable to make required payments under its senior
subordinated notes and is in default under covenants in its bank credit
facility. Therefore, PageNet's noteholders or banks may institute an involuntary
bankruptcy proceeding at any time. On February 2, 2000, PageNet failed to make
the semi-annual interest payments on two series of its senior subordinated
notes. As of March 2, 2000, the non-payment of interest constituted a default
under the indentures for those notes. On April 17, 2000, PageNet failed to make
the semi-annual interest payment on the other series of its senior subordinated
notes, and does not expect to make additional cash interest payments on any of
its senior subordinated notes. As a result of these defaults, the holders of the
senior subordinated notes could demand at any time that PageNet immediately pay
$1.2 billion of outstanding senior subordinated notes in full. Should this
happen, PageNet would be required to file for protection under chapter 11 of the
Bankruptcy Code.
PageNet is also is in default of several of the financial and other
covenants of its bank credit facility. As a result, the lenders have various
rights, including the right to accelerate all outstanding indebtedness and
institute an involuntary bankruptcy proceeding against PageNet.
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 8,424,000 units in service at March 31, 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 seven previous quarters ended March 31, 2000, and the amount of such
net reduction has increased during each quarter. Units in service further
declined significantly in the second quarter of 2000 and are expected to
continue to decline throughout 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.
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<PAGE> 26
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.
PageNet may be delisted from the Nasdaq SmallCap Market prior to the completion
of the merger, reducing trading liquidity for its shares of common stock
On April 20, 2000, PageNet was notified by Nasdaq that it would be delisted
from the Nasdaq SmallCap Market on May 1, 2000 unless its Form 10-K was filed
with the Securities and Exchange Commission by April 27, 2000. PageNet filed its
Form 10-K on May 4, 2000. PageNet requested an oral hearing before the Nasdaq
Listing Qualifications Panel and delisting was stayed pending the hearing on
June 1, 2000. Nasdaq notified PageNet on May 24, 2000 that it would also
consider at the hearing the additional delinquency of PageNet's failure to file
its Form 10-Q for the quarter ended March 31, 2000 on a timely basis. PageNet
subsequently filed its Form 10-Q on June 5, 2000. On June 21, 2000 Nasdaq
informed PageNet that it had remedied the filing delinquency and evidenced
compliance with all other quantitative criteria for continued listing. However,
the panel indicated that it lacked confidence in PageNet's ability to continue
to maintain compliance, and therefore applied certain conditions to a continued
listing, as follows:
- Consummation of the merger by September 30, 2000;
- Not filing for bankruptcy protection; and
- No material change in PageNet's financial or operational character.
Nasdaq indicated that if any of these events occur PageNet would not be
entitled to a new hearing and its securities could be immediately delisted from
the Nasdaq Stock Market. The hearing panel also reserved the right to reconsider
its own decision.
RISKS RELATED TO VAST
If PageNet completes its merger with Arch, PageNet stockholders will
receive Class B common stock of Vast, currently a wholly owned subsidiary of
PageNet. An investment in Vast involves numerous risks. These risks are
described under "Risk Factors" in the prospectus relating to Vast attached as
Annex F.
RISKS RELATED TO THE POSSIBLE PREPACKAGED BANKRUPTCY FILING
The prepackaged bankruptcy plan may be confirmed even if the noteholders and
stockholders do not vote to accept it
If PageNet's noteholders or stockholders do not vote, as classes, to
accept the prepackaged bankruptcy plan, PageNet nevertheless could seek to
confirm the prepackaged bankruptcy plan. The Bankruptcy Court may confirm
the prepackaged bankruptcy plan at PageNet's request pursuant to the
"cramdown" provisions of the Bankruptcy Code which allow the Bankruptcy
Court to confirm a plan that has been rejected by an impaired class of
claims or equity interests if it determines that the rejecting class is
being treated appropriately given the relative priority of the claims or
equity interests in such class. In order to confirm a plan against a
dissenting class, the Bankruptcy Court must also
14
<PAGE> 27
find that at least one impaired class has accepted the plan, with such
acceptance being determined without including the acceptance of any
"insider" in such class.
See "The Prepackaged Bankruptcy Plan -- Confirmation of the
Prepackaged Bankruptcy Plan Without Acceptance by All Classes of Impaired
Claims." There can be no assurance that the Bankruptcy Court will make the
factual findings and reach the legal conclusions required to permit
confirmation of the prepackaged bankruptcy plan through a cramdown.
If the prepackaged bankruptcy plan is not confirmed, the merger might not be
consummated and the ultimate recovery by noteholders and stockholders could be
adversely affected
If the prepackaged bankruptcy plan is not confirmed in a timely manner, the
merger might not be consummated and implemented. If the merger is not
consummated, PageNet will have to pursue other alternatives which would likely
consist of filing of an alternative plan of reorganization under chapter 11 of
the Bankruptcy Code or a liquidation of PageNet under chapter 7 or chapter 11 of
the Bankruptcy Code.
PageNet's ability to propose and confirm an alternative plan of
reorganization is uncertain. Confirmation of any alternative plan of
reorganization under chapter 11 of the Bankruptcy Code would likely take
significantly more time and result in delays in the ultimate distributions to
PageNet noteholders and stockholders.
If confirmation of an alternative plan of reorganization was not possible,
PageNet would likely be liquidated. Based upon PageNet's analysis, liquidation
under chapter 7 would result in no distributions to the noteholders and
stockholders. See "The Prepackaged Bankruptcy Plan -- Best Interests Test/The
Liquidation Analysis." In a liquidation under chapter 11, PageNet's assets could
be sold in an orderly fashion over a more extended period of time than in a
liquidation under chapter 7. However, no liquidation would realize the full
going concern value of PageNet's business. Instead, PageNet's assets would be
sold separately. Consequently, PageNet believes that a liquidation under chapter
11 would also result in smaller distributions to noteholders and stockholders
than those provided for in the prepackaged bankruptcy plan.
Confirmation of the prepackaged bankruptcy plan could be delayed, which could
delay, and could ultimately prevent, implementation of the merger
The Bankruptcy Code provides that votes by creditors and stockholders to
accept or reject a plan of reorganization obtained before the filing of a
chapter 11 case are binding so long as the solicitation of such votes complied
with applicable nonbankruptcy law governing the adequacy of disclosure in
connection with such solicitations. The Bankruptcy Court could conclude that
this prospectus does not meet the disclosure requirements of the Bankruptcy Code
and require PageNet to resolicit acceptances of the prepackaged bankruptcy plan
from PageNet noteholders and stockholders after PageNet's commencement of the
prepackaged chapter 11 case. In such event, confirmation of the prepackaged
bankruptcy plan, and the receipt by noteholders and stockholders of the
distributions to be made to them under the prepackaged bankruptcy plan, would be
delayed.
Unless the prepackaged bankruptcy plan, the merger agreement or the
termination fee provisions are approved by the bankruptcy court, they may not be
binding on PageNet.
If the PageNet bankruptcy cases are filed, the merger agreement and its
related provisions concerning a termination fee of $40.0 million, which would be
payable to Arch under certain conditions, 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 or the
termination fee provision is otherwise approved by order of the bankruptcy
court. In connection with the filing of its bankruptcy cases, PageNet has agreed
to seek approval by the bankruptcy court of the termination fee and certain
other provisions of the merger agreement. Approval of such provisions, however,
is subject to the discretion of the bankruptcy court, and there can be no
assurance that the bankruptcy court will approve that such provisions. If the
termination fee and certain other provisions are not approved by the bankruptcy
court
15
<PAGE> 28
within 30 days of the filing of the bankruptcy cases, Arch is entitled to
terminate the merger agreement without liability.
Additionally, the prepackaged bankruptcy plan provides that the merger
agreement is to be assumed by PageNet, thus becoming enforceable, in connection
with confirmation of the prepackaged bankruptcy plan. As discussed in this joint
proxy statement/prospectus, 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 prepackaged bankruptcy plan. If neither the
merger agreement nor the termination fee is approved, Arch may have only
unsecured damage claims against PageNet.
16
<PAGE> 29
FORWARD-LOOKING STATEMENTS
This joint proxy statement/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." If new information becomes available or other events occur in the
future, PageNet and Arch will update any forward-looking statements to the
extent required by the securities laws, but not otherwise.
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<PAGE> 30
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 March 31, 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 $154.6 million (accreted value at March 31, 2000) of Arch
discount notes for 11.4 million shares of Arch common stock in the
exchange offer made hereby;
- the exchange of $157.4 million (accreted value) of Arch discount notes
for 11.6 million shares of Arch common stock in February and March 2000;
- the exchange of $91.1 million (accreted value) of Arch discount notes for
$91.1 million of Arch Series D preferred stock in May 2000 and the
automatic conversion of $91.1 million of Series D preferred stock into
6.6 million shares of Arch common stock upon completion of the merger;
- the exchange of $1.2 billion of PageNet senior subordinated notes and
accrued interest thereon for 616.8 million shares of PageNet common stock
and 13.8 million shares of Vast Class B common stock;
- the distribution by PageNet of 2.3 million shares of Vast Class B common
stock to the current PageNet stockholders; 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
18
<PAGE> 31
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.
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
-------------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 MARCH 31, 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 $ 388,108
Product sales............................................... 152,017 36,699
----------- -----------
Total revenues.............................................. 1,803,519 424,804
Cost of products sold....................................... (113,891) (27,169)
----------- -----------
1,689,628 397,638
Operating expenses:
Service rental and maintenance.............................. 440,534 102,194
Selling..................................................... 204,777 45,146
General and administrative.................................. 573,294 127,370
Depreciation and amortization............................... 677,396 169,583
Restructuring charge........................................ (25,731) --
Provision for asset impairment.............................. 17,798 --
Bankruptcy related expenses................................. 14,938 --
----------- -----------
Operating income (loss)..................................... (213,378) (46,655)
----------- -----------
Interest and other income (expense)......................... (216,407) (46,233)
----------- -----------
Income (loss) before income tax provision................... (429,785) (92,888)
Income tax provision........................................ 209 --
----------- -----------
Net income (loss)........................................... $ (429,994) $ (92,888)
=========== ===========
Basic/diluted income (loss) per share....................... $ (2.53) $ (0.54)
=========== ===========
OTHER OPERATING DATA:
Adjusted earnings before interest, income taxes,
depreciation and amortization............................. $ 471,023 $ 122,928
Adjusted earnings before interest, income taxes,
depreciation and amortization margin...................... 28% 31%
Capital expenditures, excluding acquisitions................ $ 354,808 $ 35,336
Cash flows provided by operating activities................. 321,258 77,341
Cash flows used in investing activities..................... (420,044) (37,346)
Cash flows provided by financing activities................. 340,638 3,703
Units in service at end of period(1)........................ 15,500,000 14,800,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 2000
--------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets................................................................. $ 240,065
Total assets................................................................... 2,890,985
Long-term debt, less current maturities........................................ 1,799,021
Stockholders' equity........................................................... 659,476
</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>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
<S> <C> <C>
Net income (loss)........................................... $ (429,994) $ (92,888)
Interest and other (income) expense......................... 216,407 46,233
Income tax provision........................................ 209 --
Depreciation and amortization............................... 677,396 169,583
Provision for asset impairment.............................. 17,798 --
Restructuring and bankruptcy expenses....................... (10,793) --
----------- -----------
Adjusted earnings before interest, income taxes,
depreciation and amortization............................. $ 471,023 $ 122,928
=========== ===========
</TABLE>
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<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 PageNet and Arch
exchange offers.
The merger agreement provides that:
- PageNet will merge with a wholly owned subsidiary of Arch. In the merger,
each share of PageNet common stock, including shares issued to PageNet
senior subordinated noteholders in the PageNet exchange offer, will be
converted into 0.1247 shares of Arch common stock. 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 $0.84952 for 0.1247 shares
of Arch common stock. On , the last trading day for which
information was available prior to the first mailing of this prospectus,
PageNet's common stock had a trading value of $ per share compared to
$ for 0.1247 shares of Arch common stock.
- 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;
- PageNet will conduct the PageNet exchange offer, offering to exchange up
to 616,830,757 shares of PageNet common stock, which will be immediately
exchanged for 76,918,795 shares of Arch common stock in the merger, and
68.9% of the equity interest in Vast, for all of PageNet's outstanding
senior subordinated notes.
- PageNet will distribute 11.6% of the equity interest in Vast to the
holders of PageNet common stock in connection with the merger.
- The Arch board of directors, after the merger, will consist of 12
directors. Six directors will be designated by the current Arch directors
and three directors will be designated by the current PageNet directors.
Each of the three largest holders of PageNet notes being exchanged for
shares of PageNet common stock may also designate one director. To the
extent any of these three largest holders do not designate directors, the
current Arch directors will designate additional directors.
BACKGROUND OF THE MERGER
At a board of directors meeting on June 10, 1999, the directors of PageNet
discussed the possibility of a combination of PageNet with another major paging
company. The other paging company's chief executive office had indicated an
interest in pursuing a possible combination with PageNet in a conversation
initiated by John P. Frazee, Jr., PageNet's chief executive officer. During the
preceding year, Mr. Frazee had reported to the directors on preliminary
discussions about a possible combination of PageNet with two other major paging
companies and a paging equipment provider. The directors supported such
discussions, but the discussions did not proceed beyond a preliminary stage. Mr.
Frazee advised the directors that he believed such a combination with the
company which had now indicated interest in such a transaction could offer
synergies and cost savings. Mr. Frazee said he had discussed the possible
combination with representatives of Goldman, Sachs & Co. and Morgan Stanley Dean
Witter, which had been acting as PageNet's outside financial advisors with
respect to possible strategic options, and that representatives of both Goldman
Sachs and Morgan Stanley considered such a transaction to be
20
<PAGE> 33
possible. The directors supported continued discussion with the other paging
company about a possible combination.
On June 10, PageNet entered into a confidentiality agreement with the other
paging company permitting the exchange of confidential information. Management
personnel, lawyers and investment bankers from both companies subsequently met
during June and July to conduct mutual due diligence, to further evaluate and
analyze potential synergies and savings and to discuss various aspects of a
possible combination.
At a meeting on July 22, the PageNet directors again discussed the
possibility of a combination with the other paging company. Representatives of
Goldman Sachs and Morgan Stanley reviewed with the PageNet directors the overall
industry trends, PageNet's strategic and financial position and the prospective
combination. The directors concluded that a combination with the other paging
company appeared to be desirable if acceptable financial terms, which had not
yet been discussed, could be negotiated. After that meeting, due diligence and
other discussions with the other paging company continued.
In early August 1999, representatives of Goldman Sachs and Morgan Stanley
met with the financial advisors for the other paging company to discuss possible
financial and other terms of a combination and reported the outcome of such
discussions to Mr. Frazee. Mr. Frazee then reported the outcome of those
discussions to the directors. The directors concluded, based upon that meeting,
that the difference between the two companies' judgment on their relative
valuations was so great that agreement on acceptable terms would not be
possible. Mr. Frazee said that he continued to believe that a combination of
PageNet with another major paging company was highly desirable and he
recommended that PageNet approach Arch about a possible combination with
PageNet. Mr. Frazee said that he believed that Arch was the only other paging
company with operations of sufficient scale and comparability to PageNet to
offer the prospect for comparable synergies and cost savings. The directors
supported such an approach to Arch.
On August 6, Mr. Frazee met with C. Edward Baker, Jr., chief executive
officer of Arch, to discuss the possibility of a business combination between
Arch and PageNet.
At a meeting on August 10, the Arch directors discussed the possibility of
further consolidation within the wireless messaging industry and the role that
Arch might play in such consolidation. It was the consensus of the directors
that Mr. Baker should continue discussions with PageNet concerning a possible
business combination.
On August 17, Mr. Frazee, Edward W. Mullinix, Jr., chief operating officer
of PageNet, and Julian B. Castelli, senior vice president and chief financial
officer of PageNet, met with Mr. Baker and J. Roy Pottle, executive vice
president and chief financial officer of Arch. Mr. Baker and Mr. Frazee agreed
that the two companies should explore the possibility of a combination.
On August 26, Arch and PageNet entered into a confidentiality agreement
permitting the mutual exchange of confidential information. On that date
management of Arch and PageNet, together with representatives of Goldman Sachs
and Morgan Stanley and Arch's financial advisor, Bear Stearns & Co., as well as
outside counsel for both companies, met to review potential cost savings and
synergies and to discuss structural and legal aspects of a possible combination.
In early September, Mr. Frazee and Mr. Baker had further conversations about a
possible combination.
During the week of September 6, the chief executive officer of the other
paging company contacted Mr. Frazee and indicated a strong desire to resume
discussions of a possible combination. Mr. Frazee reported that contact to the
PageNet directors at a board meeting on September 13. Mr. Frazee said that
representatives of Goldman Sachs and Morgan Stanley had talked with the other
paging company's financial advisors and believed there was now serious interest
in a possible combination. The directors discussed the possible combination with
the other paging company and also reviewed the discussions which had occurred
with Arch.
At the meeting on September 13, PageNet's directors also discussed
PageNet's financial condition and concluded that PageNet needed additional
outside financial advice because the failure to reverse
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<PAGE> 34
continued declining revenues or sufficiently reduce operating costs, based upon
preliminary third quarter results of operations, potentially threatened
PageNet's liquidity and compliance with bank credit agreements and bond
indentures. After that meeting, PageNet engaged Houlihan Lokey Howard & Zukin
Capital as an additional financial advisor to advise PageNet with respect to the
possible need for a recapitalization or other form of debt restructuring on a
standalone basis or on the possibility that PageNet might seek to combine such a
recapitalization with a merger with the other paging company or with Arch.
Goldman Sachs, Morgan Stanley and Houlihan Lokey then resumed discussion with
the other paging company's financial advisors about the possible terms of a
combination.
At a meeting of the Arch directors on September 28, Mr. Baker reported on
the status of discussions with PageNet concerning a possible business
combination, noting that such discussions remained very general. It was the
consensus of the directors that Mr. Baker should continue such discussions.
At a meeting of the PageNet board on October 1, representatives of Goldman
Sachs, Morgan Stanley and Houlihan Lokey reviewed with the PageNet directors
various possible alternatives, including PageNet's going forward without
significant change in capital structure, the possibility of a stand-alone
recapitalization, a potential merger without a recapitalization and a potential
merger coupled with a recapitalization. The directors discussed the various
options and concluded that a merger coupled with a recapitalization appeared to
be the best alternative for all of PageNet's stakeholders, including its
noteholders and stockholders. The directors discussed with the financial
advisors the possible structure of such a transaction and the risks and other
difficulties associated with its consummation. The advisors indicated that they
had discussed the possibility of such a combined merger and recapitalization
with the other paging company, which was interested in pursuing such a
transaction. The directors authorized management and the advisors to seek to
negotiate such a transaction with the other paging company, recognizing that,
depending on the course of those negotiations, PageNet might also want to
discuss such a transaction with Arch.
Following that board meeting on October 1, PageNet's management, financial
advisors and lawyers met with management, financial advisors and lawyers for the
other paging company. Negotiations toward possible agreement on the terms of a
transaction that would combine a merger with a recapitalization through exchange
offers by both companies continued actively until the week of October 11, 1999.
During that week, the other paging company communicated to PageNet, through its
financial advisors, revised proposed financial terms of the transaction which
were different and less favorable to PageNet than the terms previously
discussed. In light of that change, and because of continuing uncertainty about
whether agreement on financial and other aspects of the transaction could be
reached and whether the transaction could be consummated, the directors decided
that PageNet should contact Arch to determine if a transaction with Arch might
be possible that would be more favorable to PageNet's stakeholders.
On October 15, Mr. Frazee, Mr. Castelli and representatives of Houlihan
Lokey met with Mr. Baker and representatives of Bear Stearns. Mr. Baker
indicated a strong desire to try to negotiate a combination between Arch and
PageNet. Following that meeting, the financial advisors for Arch and PageNet
continued to discuss proposed financial terms of such a combination transaction.
On an October 17 conference call, Mr. Baker provided an update to certain
Arch directors on discussions with PageNet and its financial advisors. Mr. Baker
noted that the financial advisors had discussed a business combination involving
a simultaneous merger and recapitalization of both companies to be accomplished
through exchange offers with certain existing noteholders. Mr. Baker reported
that no consensus as to the allocation of the equity of a combined entity
between the Arch and PageNet stockholders had emerged. Thereafter, Mr. Baker
contacted other Arch directors and provided similar updates.
At a board meeting on October 24, Goldman Sachs, Morgan Stanley and
Houlihan Lokey reviewed with the PageNet directors the proposed terms of a
possible merger with Arch and discussed various factors relating to the
likelihood of successfully consummating such a transaction. The directors
determined that the proposed merger with Arch appeared to be more favorable for
PageNet and all of its stakeholders than the proposed transaction with the other
paging company and also appeared to be more
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<PAGE> 35
likely to be consummated successfully. The directors directed management and
PageNet's legal and financial advisors to proceed as rapidly as possible to seek
to negotiate an agreement for such a merger with Arch.
At a meeting of the Arch directors on October 25, Mr. Baker reported on the
status of the continuing discussions with PageNet, including proposed terms of a
possible merger and recapitalization and the allocation of equity between the
Arch and PageNet stakeholders. The directors determined that management and
Arch's advisors should proceed with due diligence investigations and negotiation
of a merger agreement.
During the following week, management teams from Arch and PageNet met to
review potential cost savings and synergies. In addition, financial advisors,
legal counsel and management personnel from both companies carried out mutual
due diligence investigations. Negotiations by the respective managements,
financial advisors and counsel over the terms of a merger agreement between Arch
and PageNet then proceeded intensively until a proposed definitive agreement was
reached.
At meetings held on November 1 and 2, Arch's management, Bear Stearns and
Arch's counsel reviewed with the Arch directors the proposed terms of a business
combination with PageNet, including a draft of a proposed merger agreement. The
directors received a presentation from Bear Stearns concerning the potential
benefits and risks of a merger, a financial profile of PageNet, a pro forma
analysis of a combined entity, the relative contributions of Arch and PageNet in
relation to the proposed enterprise value allocation in the combined entity and
pro forma discounted cash flow equity values that might be realized by existing
Arch stockholders under the merger in comparison with the pro forma discounted
cash flow equity value to existing Arch stockholders on a standalone basis.
Management and the financial and legal advisors to Arch were directed to seek to
finalize the terms of a definitive agreement relating to the proposed merger.
The directors of PageNet met on November 7 to consider the proposed merger
agreement. At that meeting the directors reviewed:
- the potential benefits and risks associated with the merger;
- the estimated values to be realized by PageNet's stockholders and
bondholders under the merger in comparison to the possible transaction
with the other messaging company and standalone alternatives;
- the relative contributions of Arch and PageNet in relation to the shares
in the combined enterprise to be received by their respective
stakeholders;
- the likelihood of consummation of the merger;
- the future prospects of the combined company; and
- various other matters.
At the meeting, representatives of each of Goldman Sachs, Morgan Stanley and
Houlihan Lokey, provided their formal analysis regarding the proposed
transaction. After discussion, each of Houlihan Lokey and Morgan Stanley gave
its oral opinion that as of November 7, the consideration to be received by the
holders of PageNet common stock on such date pursuant to the merger and the Vast
distribution, taken as a whole, was fair from a financial point of view and
Goldman Sachs gave its oral opinion that as of November 7, 1999, the exchange
ratio pursuant to the merger agreement was fair from a financial point of view
to the holders of PageNet common stock as of such date. Goldman Sachs, Morgan
Stanley and Houlihan Lokey then indicated that they would confirm their opinions
in writing. Representatives of Mayer, Brown & Platt, outside counsel to PageNet,
reviewed with the PageNet directors the terms of the proposed merger agreement.
After receiving advice from their financial and legal advisors and further
deliberations, and taking into account the various factors described below under
"-- PageNet's Reasons for Merger," the directors unanimously approved the
proposed merger on the evening of November 7.
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<PAGE> 36
The directors of Arch met on November 7 to consider the proposed merger
agreement. At that meeting management and legal counsel reported on changes to
the merger agreement from the draft previously reviewed and the directors
received an update of the Bear Stearns presentation delivered at the November 2
meeting. After receiving further advice from its legal and financial advisors,
including an oral opinion (subsequently confirmed in writing) from Bear Stearns
that the exchange ratio as described in the merger agreement was fair, from a
financial point of view, to the stockholders of Arch, the Arch directors
unanimously approved the proposed merger in the evening of November 7.
Later in the evening of November 7, the merger agreement was executed by
Arch and PageNet.
On January 7, 2000 the parties amended the merger agreement (1) to reduce
the amount of senior secured debt financing that Arch and PageNet must obtain in
order to effect the merger from $1.5 billion to $1.3 billion, and (2) to
increase the percentage of its total common equity that Vast may set aside for
an employee stock option, stock ownership or other similar plan from 15% to 20%.
On May 10, 2000, PageNet and Arch entered into a further amendment of the
merger agreement which, among other things:
- extends the date on which either PageNet or Arch may terminate the merger
agreement if the merger has not been consummated from June 30, 2000 to
September 30, 2000, subject to further extension in certain
circumstances;
- eliminates the requirement that a specified percentage of Arch's 10 7/8%
discount notes due 2008 be exchanged for shares of Arch common stock as a
condition to the merger;
- eliminates the requirement that the outstanding shares of Arch's Series C
convertible preferred stock convert into shares of Arch common stock as a
condition to the merger;
- provides for the conversion, in Arch's discretion, of Arch's Class B
common stock into shares of Arch common stock upon the effectiveness of
the merger; and
- provides that holders of PageNet's common stock outstanding at the date
of the stockholders meeting at which the merger is approved shall have
appraisal rights as required by applicable law.
ARCH'S REASONS FOR THE MERGER; RECOMMENDATION OF ARCH'S BOARD OF DIRECTORS
Arch's board of directors believes that the merger represents a strategic
opportunity to significantly expand the size and scope of Arch's operations,
while substantially decreasing Arch's overall financial leverage. Together,
these two benefits should enable Arch to more quickly and efficiently begin to
offer new wireless communication products and services to its customers. The
board believes that, following the merger, Arch will have greater financial
strength, operational efficiencies and growth potential than either Arch or
PageNet would have on its own. This is because of the complementary nature of
PageNet's systems and software resources and Arch's customer base and marketing
abilities. Arch's board has identified a number of potential benefits of the
proposed merger that it believes will contribute to the success of the combined
entities, including the following:
- The combination of Arch and PageNet would create a company better able to
move into the emerging technologies that its competitors are utilizing
presently. Given high fixed infrastructure costs associated with building
out narrowband PCS networks, greater scale should permit increased
efficiencies and improved margins for the combined company allowing more
rapid and efficient transition into the provision of advanced
communications services.
- Arch would have access to PageNet's existing narrowband PCS network
which, in combination with Arch's customer base and marketing abilities,
should allow Arch to bring new narrowband PCS services to market and sell
them more quickly and effectively.
- Together Arch and PageNet should be better positioned to obtain
commitments from manufacturers such as Motorola to create devices capable
of functioning on the new narrowband PCS network.
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<PAGE> 37
- Arch's overall leverage should be reduced substantially as a result of
the merger. Arch's ratio of consolidated total debt to adjusted EBITDA,
based on annualized adjusted EBITDA for the three months ended December
31, 1999, was :1 as of December 31, 1999; on a pro forma basis, taking
into account the merger, but excluding the impact of expected operational
cost synergies, the leverage ratio for the combined company as measured
by the ratio of total debt to adjusted pro forma EBITDA for the year
ended December 31, 1999 would have been :1.
- Significant operational efficiencies could be realized by integrating and
combining operations and sharing outlays in future investments in
infrastructure.
- Greater scale should yield enhanced purchasing power and improved sales
distribution.
- Following the merger, Arch's significantly stronger capital structure and
financial resources should give Arch greater flexibility to implement
strategic initiatives in order to compete better in the constantly
evolving wireless communications industry.
- Arch's larger market capitalization and size may result in broader
research coverage and increased interest by institutional investors.
In reaching its decision to approve the merger agreement, the merger and
the other transactions contemplated by the merger agreement, Arch's board of
directors also considered, in addition to the factors described above:
- information concerning the financial performance and condition, business
operations, capital and prospects of each of Arch and PageNet on a
stand-alone basis as well as a combined basis;
- current industry, economic and market trends, including the likelihood of
increasing and broadening competition in the wireless communications
industry;
- the structure of the merger and the terms of the merger agreement;
- the opinion of Bear Stearns that the exchange ratio is fair, from a
financial point of view, to the stockholders of Arch;
- the importance of market position, significant scale and scope and
financial resources to Arch's ability to compete effectively in the
future;
- the valuation ascribed Arch's common stock in the merger agreement and
the valuation implied for the combined entity based on currently
prevailing market multiples; and
- the relative contributions of Arch and PageNet to the net revenues and
EBITDA of the combined company.
Arch's board also considered potential risks relating to the merger,
including:
- the risk that the benefits and synergies sought from the merger would not
be fully achieved;
- the management distraction inherent in integrating two business
operations;
- the risk that the merger would not be consummated and the possibility of
incurring a $40.0 million termination fee;
- the requirement that Arch's common stockholders, preferred stockholders
and discount noteholders and PageNet's stockholders and noteholders all
approve or elect to participate in one or more aspects of the
transaction;
- the possibility that holders of outstanding Arch debt securities might
object to the merger;
- the limitations imposed by the merger agreement on the conduct of Arch's
business prior to the merger, as well as the length of time projected for
satisfying all closing conditions; and
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<PAGE> 38
- the significant number of shares of Arch's common stock issuable in
connection with the merger and related transactions and the consequent
reduction in the voting power of Arch's current stockholders.
The Arch board believes that these risks were outweighed by the potential
benefits to be realized by the merger.
The foregoing discussion of the information and factors considered by the
Arch board is not intended to be exhaustive but includes all material factors
considered by the Arch board. In view of the wide variety of information and
factors considered, the board did not find it practical to, and did not, assign
any relative or special weights to the foregoing factors, and individual
directors may have given differing weights to different factors.
PAGENET'S REASONS FOR THE MERGER; RECOMMENDATION OF PAGENET'S BOARD OF DIRECTORS
PageNet's directors believe that the merger represents the best alternative
to maintain and realize value for PageNet and all of its stakeholders, including
its stockholders and noteholders. In reaching its decision to approve the
merger, the directors consulted with PageNet's financial and legal advisors and
took into account, without limitation, the following conclusions and factors:
- A combination of PageNet with another major paging company is highly
desirable, if not essential, to achieve cost savings and other synergies
needed to remain competitive in the wireless messaging industry. The
combined company will begin to achieve some savings from the Arch/PageNet
combination immediately. The full amount of such savings, which is
estimated to be approximately $100 million annually, is expected to be
achieved within 18 months after the merger.
- A substantial reduction of PageNet's outstanding debt is highly
desirable, if not essential, to enable PageNet to continue to have the
cash liquidity and other financial resources and flexibility needed to be
a viable enterprise and to compete effectively in the wireless messaging
industry. The combined company after the merger will have a substantially
lower ratio of total debt to cash flow.
- Achieving substantial debt reduction in conjunction with a combination
with another major paging company, because of the greater value achieved
through cost savings and synergies, is substantially more beneficial to
PageNet and all of its stakeholders than any reduction of debt on a
standalone basis.
- The combination with Arch is the best alternative available to PageNet
and its stakeholders based upon the financial, managerial and other
characteristics of the combined company and based upon the greater value
expected to be realized by PageNet's noteholders and stockholders under
the Arch transaction in comparison to any alternative.
- While subject to substantial risks and uncertainties, the merger with
Arch is more likely to be consummated than the possible combination
transaction with the other paging company.
- No prospective acquiror or other merger partner, other than Arch and the
other paging company, has expressed interest in discussing a possible
combination transaction with PageNet.
- PageNet's failure to reverse its continued decline in revenues, and its
resulting loss of liquidity, makes it critical for PageNet to move
forward to achieve a more viable capital structure.
- The structure of the transaction enables PageNet's current noteholders
and stockholders to retain an equity ownership in Vast, which may have
future value if its wireless solutions business is successful.
- The merger is structured as a "reorganization" for federal income tax
purposes so that stockholders of PageNet will not recognize gain on the
exchange of their shares for Arch's shares although it is expected that
the receipt of Class B common stock of Vast will be taxable.
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<PAGE> 39
- The oral opinions of Houlihan Lokey and Morgan Stanley, subsequently
confirmed in writing that, as of November 7, 1999, the consideration to
be received by the holders of PageNet common stock pursuant to the merger
and the Vast distribution, taken as a whole, was fair from a financial
point of view to such holders and the oral opinion of Goldman Sachs,
subsequently confirmed in writing, that, as of November 7, 1999, the
exchange ratio pursuant to the merger agreement was fair from a financial
point of view to the holders of PageNet common stock. While the Arch
shares being received had a market value less than the PageNet shares
being exchanged as of the time immediately prior to the announcement of
the merger, these values have fluctuated and will fluctuate over time. In
addition, PageNet stockholders will receive an 11.6% interest in Vast in
addition to their shares of Arch common stock.
In approving the merger, the directors also took into account factors such as:
- the relative contributions of PageNet and Arch to the revenues and cash
flow of the combined company;
- the historical and current trading prices of the common stock of PageNet
and Arch;
- valuations of other comparable companies; and
- overall trends in the paging business and the telecommunications
industry.
PageNet's directors also considered various potential risks relating to the
merger, including, without limitation, the following:
- Various conditions of the merger may not be satisfied, including the need
to consummate the exchange offers, to obtain continued bank financing
following the merger, and to receive required regulatory approvals, and
the merger may therefore not be consummated.
- It may be impossible to consummate the merger except through a
prepackaged chapter 11 bankruptcy plan, and such plan may require
consents which cannot be obtained or may not be approved by the
Bankruptcy Court or, even if successful, may cause serious disruption of
PageNet's business.
- PageNet may not have sufficient cash to maintain its operations during
the time necessary to consummate the merger.
- A termination fee of $40.0 million is payable to Arch if the agreement is
terminated as a result of a superior offer, potentially imposing a
substantial financial burden on PageNet.
- The anticipated cost savings and other synergies may not be achieved, or
management or other aspects of the two companies may not be successfully
integrated, resulting in substantial reduction in the projected value of
the combined enterprise.
- The merger agreement restricts some of PageNet's actions with respect to
conducting its business prior to the merger, which may make it more
difficult for PageNet to respond to changing competitive or financial
circumstances.
The directors concluded that the risks were outweighed by the advantages of the
merger.
The discussion of the information and factors considered by PageNet's board
of directors is not intended to be exhaustive but includes all material factors
considered by PageNet's board of directors. In reaching its determination to
adopt and recommend the merger, PageNet's board of directors did not assign any
relative or specific weights to these factors, and individual directors may have
given differing weights to differing factors.
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<PAGE> 40
OPINION OF FINANCIAL ADVISOR TO ARCH
Opinion of Bear, Stearns & Co. Inc.
Bear Stearns served as financial advisor to Arch in connection with the
merger. It delivered an oral opinion to Arch's board of directors on November 7,
1999, that, as of that date, the exchange ratio is fair, from a financial point
of view, to the stockholders of Arch. Bear Stearns subsequently confirmed its
opinion in writing. The opinion is based on and subject to several assumptions,
limitations and qualifications.
THE FULL TEXT OF BEAR STEARNS' OPINION IS ATTACHED AS ANNEX B TO THIS JOINT
PROXY STATEMENT/ PROSPECTUS. ARCH STOCKHOLDERS SHOULD READ THE ENTIRE BEAR
STEARNS OPINION.
Arch imposed no limitations on the scope of Bear Stearns' investigation or
the procedures that Bear Stearns could follow in rendering its opinion. Arch did
not request Bear Stearns to make, and Bear Stearns did not make, any
recommendation to Arch's board as to the form or amount of the consideration
Arch is to pay to PageNet stockholders, in the merger, after giving effect to
the PageNet exchange offer. That decision was determined through arm's-length
negotiations between the principal parties. In arriving at its opinion, Bear
Stearns did not ascribe a specific range of values to Arch or PageNet, but
instead made its determination as to the fairness to the stockholders of Arch,
from a financial point of view, of the exchange ratio, on the basis of the
financial and comparative analyses described below. Bear Stearns' opinion was
rendered to Arch's board for its information in connection with its
consideration of the merger. Bear Stearns' opinion is not intended to be and
does not constitute a recommendation to any holder of Arch common stock, Class B
common stock or Series C preferred stock as to how such stockholder should vote
on matters relating to the merger, or a recommendation as to any related
financing or restructuring transaction. Arch did not request that Bear Stearns
opine as to, and Bear Stearns' opinion does not address, Arch's underlying
business decision to proceed with or effect the merger. All parties should
understand that, although subsequent developments may affect the conclusions
reached in Bear Stearns' opinion, Bear Stearns does not have any obligation to,
and does not intend to, update, revise or reaffirm its opinion.
In arriving at its opinion, Bear Stearns, among other things:
- reviewed the merger agreement;
- reviewed Arch's and PageNet's recent filings with the Securities Exchange
Commission;
- reviewed certain operating and financial information, including
projections and estimates of combination benefits, provided to it by
Arch's and PageNet's management relating to the business and prospects of
Arch and PageNet, respectively;
- met with certain members of Arch's and PageNet's managements to discuss
the business, operations, historical and projected financial results and
prospects of Arch and PageNet, respectively, as well as the potential
combination benefits for the combined company resulting from the merger;
- reviewed the historical prices, trading multiples and trading volumes of
the Arch and PageNet common stock;
- reviewed publicly available financial data, stock market performance data
and trading multiples of companies which Bear Stearns deemed generally
comparable to Arch and PageNet, as appropriate;
- reviewed the terms of recent merger and acquisition transactions
involving companies which Bear Stearns deemed generally comparable to
Arch and PageNet;
- performed discounted cash flow analyses based on the projections for Arch
and the combined company furnished to it by Arch; and
- reviewed the pro forma financial results, financial condition and
capitalization of the combined company.
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<PAGE> 41
Arch and PageNet management made financial and other information available
to Bear Stearns, and Arch management made assurances to Bear Stearns that they
were not aware of any facts that would make financial or other information, the
combined company projections or the combination benefits that Bear Stearns used
to conduct its review incomplete or misleading in any material respect. In
arriving at its opinion, Bear Stearns relied without independent verification on
the assurances of management that the financial and other information provided
and the publicly available information were accurate and complete.
Bear Stearns relied without independent verification that management had
reasonably prepared the projections for the combined company and the combination
benefits on bases reflecting management's best currently available estimates and
judgments of the anticipated future performance of Arch and PageNet and of the
anticipated combination benefits that could be achieved within the time frames
forecast. Bear Stearns did not undertake an independent evaluation or appraisal
of any of the assets or liabilities of Arch or PageNet nor was Bear Stearns
furnished with any such evaluation or appraisal. Bear Stearns did not assume any
obligation to conduct, nor did it conduct, any physical inspection of the
properties or facilities of Arch or PageNet. Bear Stearns assumed that the
transactions will be consummated in accordance with the terms described in the
merger agreement, without any waiver of any material condition and with all
necessary material consents and approvals without any limitations, restrictions,
conditions, amendments or modifications that collectively would have a material
effect on Arch, PageNet or the combination benefits. Bear Stearns based its
opinion upon market, economic and other conditions as they existed on, and could
be evaluated as of, the date of its opinion.
The following is a summary of certain financial and comparative analyses
that Bear Stearns performed and presented to the Arch Board.
INCREMENTAL DISCOUNTED CASH FLOW EQUITY VALUE ANALYSIS
Bear Stearns used projections for Arch on a stand-alone basis and for the
combined company provided by Arch management and compared the discounted cash
flow equity value per existing Arch share based on the projected cash flows of
Arch, on a stand-alone basis, and of the combined company. In this analysis,
Bear Stearns compared the discounted cash flow equity value per Arch share after
giving effect to the proposed merger and the consideration with the standalone
discounted cash flow equity value per Arch share to determine whether the
transaction results in an increase or decrease in discounted cash flow equity
value per share to Arch shareholders. The comparative results indicate an
increase in discounted cash flow equity value per share to Arch shareholders
under a variety of assumptions used in the discounted cash flow analysis. A
discounted cash flow analysis is one measure used to determine the estimated
value of a company. Bear Stearns used the projected cash flows for both Arch and
the combined company plus the respective terminal values, values for each of the
companies at the end of the five-year period, calculated as multiples of 2004
projected earnings before interest, taxes, depreciation and amortization, and
"discounted" these cash flows to the present using a rate that corresponds to
the respective company's expected cost of capital during that period. Cash flows
for the five-year period beginning January 1, 2000 and ending December 31, 2004
were calculated as earnings before interest, depreciation and amortization less
changes in working capital and capital expenditures. The pro forma comparison
took into effect the restructurings including the exchange for equity of 100% of
the Arch 10 7/8% senior discount notes, the Arch Series C preferred stock and
all of the PageNet senior subordinated notes. Bear Stearns calculated the range
of discounted cash flow equity values per existing Arch share for both Arch on a
stand-alone basis and the pro forma combined company using a discount rate range
of 14% to 18% and using multiples of 2004 projected earnings before interest,
taxes, depreciation and amortization ranging between 5.0x and 7.0x to calculate
the terminal value. Bear Stearns presented the analysis to the Arch board of
directors and highlighted the comparative results, assuming 5.5x, 6.0x and 6.5x
terminal multiples of 2004 projected earnings before interest, taxes,
depreciation and amortization and 14% and 16% discount rates, and that Arch
stockholders would own 29.6% of the combined company (as determined by using the
negotiated exchange ratio). The discounted cash flow equity value per share of
Arch on a stand-alone basis resulted in the following range.
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<PAGE> 42
ARCH STAND-ALONE PER SHARE DISCOUNTED CASH FLOW EQUITY VALUES
<TABLE>
<CAPTION>
MULTIPLE OF 2004 EARNINGS BEFORE
INTEREST, TAXES, DEPRECIATION AND
AMORTIZATION
DISCOUNT -----------------------------------
RATE 5.5X 6.0X 6.5X
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
14% $6.64 $8.59 $10.16
16% $4.29 $6.07 $ 7.86
</TABLE>
The pro forma discounted cash flow equity value per existing Arch share of
the combined company resulted in the following range.
ARCH PER SHARE PRO FORMA DISCOUNTED CASH FLOW EQUITY VALUES(1)
<TABLE>
<CAPTION>
MULTIPLE OF 2004 EARNINGS
BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION
DISCOUNT -----------------------------
RATE 5.0X 6.0X 6.5X
--------- ------- ------- -------
<S> <C> <C> <C> <C>
14% $11.17 $12.25 $13.32
16% $ 9.87 $10.85 $11.84
</TABLE>
---------------
(1) Assumes Arch shareholders will own 29.6% of combined company.
Bear Stearns also performed the same analysis assuming that only 66 2/3% of
the Arch 10 7/8% senior discount noteholders and 66 2/3% of the Arch Series C
preferred stockholders exchanged their securities for combined company equity.
Based on this estimated amount of senior discount notes and Series C preferred
stock exchanged and the exchange ratio for PageNet shares, the existing Arch
stockholders would own 31.4% of the combined company. Based on these new
assumptions, the pro forma discounted cash flow equity values per existing Arch
share of the combined company resulted in the following range.
ARCH PER SHARE PRO FORMA DISCOUNTED CASH FLOW EQUITY VALUES(1)
<TABLE>
<CAPTION>
MULTIPLE OF 2004 EARNINGS
BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION
DISCOUNT -----------------------------
RATE 5.0X 6.0X 6.5X
--------- ------- ------- -------
<S> <C> <C> <C> <C>
14% $11.06 $12.19 $13.33
16% $ 9.68 $10.72 $11.76
</TABLE>
---------------
(1) Assumes Arch shareholders will own 31.4% of combined company.
CONTRIBUTION ANALYSIS
Bear Stearns used the projections for Arch on a stand-alone basis provided
by Arch management and for PageNet, as adjusted by Arch management, to perform a
contribution analysis. Bear Stearns analyzed the relative contribution to
combined estimated net revenues and earnings before interest, taxes,
depreciation and amortization for Arch and PageNet for the years 1999 through
2003. The following table sets forth the relative contributions to projected
revenues and earnings before interest, taxes, depreciation and amortization for
Arch, PageNet and the combination benefits.
RELATIVE CONTRIBUTION ANALYSIS
<TABLE>
<CAPTION>
NET REVENUE CONTRIBUTION
-----------------------------------------
1999E 2000P 2001P 2002P 2003P
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Arch................................................ 45% 48% 50% 51% 51%
PageNet............................................. 55% 52% 50% 49% 49%
</TABLE>
30
<PAGE> 43
<TABLE>
<CAPTION>
EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION CONTRIBUTION
----------------------------------------------
1999E 2000P 2001P 2002P 2003P
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Arch................................................ 49% 50% 49% 48% 49%
PageNet............................................. 51% 48% 46% 45% 44%
Merger Benefits..................................... 0% 2% 6% 7% 7%
</TABLE>
Bear Stearns compared the relative contributions of revenues and earnings
before interest, taxes, depreciation and amortization to the relative
contribution to the combined enterprise value. The relative enterprise value for
Arch and PageNet were calculated based on: (1) the value of Arch shares (based
on Arch common stock closing price on October 29, 1999) issued to PageNet
stakeholders plus the remaining PageNet net debt (assuming the effect of
restructuring) assumed by Arch; and (2) the value of Arch shares (as of October
29, 1999) outstanding plus the value of Arch shares (as of October 29, 1999)
issued in exchange for Arch 10 7/8% senior discount notes and Series C preferred
stock plus Arch's remaining net debt. The enterprise values were calculated
assuming both the current market value of remaining debt and the current book
value of remaining debt. Based on these two calculations, Arch stakeholders
would represent, assuming market value debt and book value of debt, 51% and 54%,
respectively, of the enterprise value of the combined company.
You should read the attached opinion in its entirety before deciding how to
vote in connection with this transaction. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial and comparative analysis and the application of those methods to
the particular circumstances and, therefore, a fairness opinion cannot easily be
described. Furthermore, in arriving at its opinion, Bear Stearns did not
attribute any particular weight to any analysis or factor considered by it, but
instead it made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, Bear Stearns believes that its analyses
must be considered as a whole and that considering any portion of such analyses
and factors, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, Bear Stearns made numerous assumptions about industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Arch and PageNet. Any estimates contained in these
analyses do not necessarily indicate actual values or predict future results or
values, which may be significantly more or less favorable than as described in
the opinion. In addition, analyses relating to the value of businesses are not
appraisals and do not reflect the prices at which businesses actually may be
sold.
Based on and subject to the foregoing, it is Bear Stearns' opinion that, as
of the date hereof, the exchange ratio is fair, from a financial point of view,
to the stockholders of Arch.
Bear Stearns is an internationally recognized investment banking firm and,
as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Arch's board selected Bear Stearns
because of its expertise, reputation, and familiarity with Arch in particular,
and the telecommunications industry in general, and because its investment
banking professionals have substantial experience in transactions similar to the
merger.
As compensation for its services in connection with the merger, Arch has
agreed to pay Bear Stearns fees for acting as financial advisor in connection
with the merger, including rendering its opinion. These fees include:
- $650,000 in retainer fees, a progress fee payment, and an opinion fee,
which have been paid to date
- An additional fee, currently estimated at $9.7 million, based on the
total transaction value, as defined; this fee is payable upon
consummation of the merger, and the fees described above will be credited
against it.
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<PAGE> 44
If the merger is not consummated, but Arch receives a "termination" fee or
other payment as a result of the termination or cancellation of Arch's efforts
to effect the merger, Arch will pay Bear Stearns a cash fee equal to the lesser
of $3.0 million or 20% of such fee or payment. In addition, Arch has agreed to
reimburse Bear Stearns for reasonable out-of-pocket expenses incurred in
connection with the merger and to indemnify Bear Stearns and certain related
persons for liabilities that may arise out of its engagement by Arch and the
rendering of its opinion.
In the ordinary course of its business, Bear Stearns may actively trade in
Arch and/or PageNet debt and equity securities for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
OPINIONS OF FINANCIAL ADVISORS TO PAGENET
The directors of PageNet received the opinions of their financial advisors
described below as to the fairness of the consideration to be received by the
current common stockholders of PageNet in the merger. The directors did not
receive any opinion as to the terms of the exchange offer to be offered to
PageNet noteholders but determined the exchange ratio of PageNet common stock
for senior subordinated notes and other terms of such offer, with the advice of
Houlihan Lokey, on a basis reasonably expected to result in the required level
of acceptance from the noteholders.
Opinion of Houlihan Lokey Howard & Zukin Capital
Under a letter agreement, dated September 22, 1999, the board of directors
of PageNet retained Houlihan Lokey to assist it in evaluating its strategic
alternatives. As part of this engagement, PageNet requested that Houlihan Lokey
evaluate whether the consideration to be received in the merger and the related
transactions by the common stockholders of PageNet, holding shares as of the
date of the opinion, was fair. At a special meeting of the board of directors of
PageNet held on November 7, 1999, Houlihan Lokey presented the financial
analyses it performed as part of its engagement. Houlihan Lokey also, at that
meeting, delivered its oral opinion that, as of that date, the aggregate
consideration to be received in the merger and related transactions by the
persons that held PageNet common stock as of that date was fair to those persons
from a financial point of view. Houlihan Lokey later confirmed its oral opinion
in writing. The written opinion dated November 7, 1999, stated the
considerations and assumptions upon which it was based.
Although Houlihan Lokey assisted the PageNet board of directors in
evaluating the terms of the financial restructuring, Houlihan Lokey was not
retained to provide, and Houlihan Lokey did not provide, to PageNet an opinion
that the financial restructuring, to be effected by exchanging new stock for old
notes, was fair or advisable to the noteholders or any other person. Nor did
Houlihan Lokey express an opinion on the relative values to be obtained by
PageNet's noteholders or stockholders or PageNet itself as a result of the
financial restructuring. In addition, Houlihan Lokey was not retained to
provide, and did not provide, an opinion regarding the underlying business
decision of PageNet to effect the merger or the financial restructuring.
A COPY OF THE HOULIHAN LOKEY OPINION IS ATTACHED AS ANNEX C TO THIS JOINT
PROXY STATEMENT/ PROSPECTUS. YOU ARE URGED TO READ THE OPINION IN ITS ENTIRETY
IN CONJUNCTION WITH YOUR REVIEW OF THIS DOCUMENT, ESPECIALLY THE SUMMARY OF THE
HOULIHAN LOKEY OPINION SET FORTH BELOW. HOULIHAN LOKEY'S OPINION IS FOR THE
INFORMATION AND ASSISTANCE OF PAGENET'S BOARD OF DIRECTORS. IT DOES NOT,
HOWEVER, CONSTITUTE A RECOMMENDATION TO ANY HOLDERS OF SHARES OF PAGENET AS TO
HOW THEY SHOULD VOTE WITH RESPECT TO THE MERGER OR TO ANY HOLDERS OF
INDEBTEDNESS OF PAGENET AS TO HOW THEY SHOULD VOTE WITH RESPECT TO THE FINANCIAL
RESTRUCTURING.
In arriving at its opinion, Houlihan Lokey, among other things:
- reviewed selected documents of PageNet filed with the SEC;
- reviewed selected documents of Arch filed with the SEC;
32
<PAGE> 45
- reviewed the merger agreement;
- reviewed the indentures and credit agreements to which PageNet is a
party;
- reviewed forecasts and projections for PageNet prepared by its
management;
- reviewed forecasts and projections for Arch prepared by its management;
- reviewed analyses prepared by and met with management of PageNet and Arch
to discuss expected cost savings and other expected synergies resulting
from the merger;
- reviewed the historical market prices and trading volume for PageNet's
publicly traded securities;
- reviewed other publicly available financial data for companies that
Houlihan Lokey considered comparable to PageNet, and publicly available
prices and premiums paid in other transactions that Houlihan Lokey
considered similar to the merger; and
- conducted other studies, analyses and inquiries, as Houlihan Lokey
considered appropriate.
In giving its opinion, Houlihan Lokey assumed and relied upon the accuracy
and completeness of all of the financial and other information that were
publicly available or supplied to Houlihan Lokey by PageNet without
independently verifying that information. Houlihan Lokey assumes no
responsibility with respect to that information. Houlihan Lokey also relied upon
the advice of management of PageNet that the financial forecasts and other
information provided to or discussed with Houlihan Lokey were reasonably
prepared and reflected the best currently available estimates of the future
financial results and condition of PageNet and that there has been no material
change in the assets, financial condition, business or prospects of PageNet
since the date of the most recent financial statements made available to
Houlihan Lokey.
Houlihan Lokey did not physically inspect or independently appraise any of
the properties or assets of PageNet. Houlihan Lokey's opinion is necessarily
based on business, economic, market and other conditions that existed on the
date of its opinion. Houlihan Lokey has no duty or obligation to advise PageNet
or any other person as to whether any change in any fact or matter that Houlihan
Lokey learns of after the date of its opinion would affect its opinion unless
applicable law would require that disclosure.
Houlihan Lokey also assumed that the merger would be completed according to
the terms of the merger agreement and that no condition contained in that
agreement would be waived and there would otherwise not be any material
modification to the terms of the agreement.
The following is a summary of the significant financial analyses performed
by Houlihan Lokey in preparing its opinion:
Stand-Alone Analysis. Houlihan Lokey analyzed the valuation of PageNet on
a stand-alone basis, which means the value of PageNet if it were to elect to
remain an independent entity by not merging with Arch. Houlihan Lokey performed
this analysis so that the PageNet board of directors could evaluate how the
company may be valued if it were to not merge with Arch.
Houlihan Lokey used the following three theoretical approaches commonly
used by investment banks to estimate this value:
- using multiples based on purchase prices of comparable companies that
have recently been acquired;
- using multiples based on stock prices of comparable publicly traded
companies; and
- using a discounted cash flow analysis.
Based on these analyses described below, Houlihan Lokey observed that the
enterprise value of PageNet was less than the amount of its total debt
obligations. Enterprise value is a term used to describe the total value of a
company. One can calculate the implied equity value by subtracting total debt
from the enterprise value. Thus, enterprise value represents the total value of
a company regardless of whether it
33
<PAGE> 46
has any debt, while the equity value represents the residual value left for the
stockholders after subtracting debt from the enterprise value. As such, it was
concluded that there was no equity value in PageNet remaining for its equity
holders in the event PageNet remained as a stand-alone operation, resulting in
an "equity shortfall." Houlihan Lokey performed the stand-alone analysis in
order to provide the board of directors of PageNet with a basis against which it
could compare the range of projected valuations offered by the combined entity
assuming completion of the proposed restructuring and merger.
STAND-ALONE ANALYSIS: COMPARABLE COMPANY AND COMPARABLE TRANSACTION ANALYSES
To arrive at a range of stand-alone valuations for PageNet, Houlihan Lokey
applied a range of multiples to representative financial statistics of PageNet,
such as net revenue, earnings before interest, income taxes, depreciation and
amortization, and total units in service or subscribers. Net revenue multiples
are stated as ratios, and therefore are followed by an "x" symbol. In order to
calculate the implied value of a company, one must multiply the net revenue
multiples by the subject company's net revenue figures. Earnings before
interest, income taxes, depreciation and amortization multiples are also stated
as ratios, and are also followed by an "x" symbol. In order to calculate the
implied value of a company, one must multiply the earnings before interest,
income taxes, depreciation and amortization multiples by the subject company's
earnings before interest, income taxes, depreciation and amortization.
Subscriber multiples, however, are stated in U.S. dollars. In order to calculate
the implied value of a company, one must multiply the subscriber multiples by
the subject company's number of subscribers. Houlihan Lokey selected these
multiples from two sources: stock price based multiples of other comparable
public companies, also known as trading multiples, and purchase price multiples
derived from comparable merger and acquisition transactions, also known as
transaction multiples.
In order to calculate the implied valued of PageNet, Houlihan Lokey
determined that it was appropriate to apply the following multiples to PageNet's
quarter ended September 30, 1999:
- net revenue multiplied by four;
- earnings before interest, income taxes, depreciation and amortization
multiplied by four; and
- total units in service or subscribers.
Net revenue and earnings before interest, income taxes, depreciation and
amortization were multiplied by four to annualize the numbers. The
representative financial statistics and ranges of multiples used by Houlihan
Lokey in these analyses are summarized below.
<TABLE>
<CAPTION>
PURCHASE PRICE
STOCK PRICE BASED TRANSACTION
STATISTICS MULTIPLES MULTIPLES
------------- ----------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Annualized net revenue......................... $932 1.40x to 1.60x 1.50x to 1.75x
Annualized earnings before interest, income
taxes, depreciation and amortization......... $278 4.0x to 5.0x 4.5x to 5.5x
Subscribers.................................... 9.3 $140 to $160 $150 to $170
</TABLE>
STAND-ALONE ANALYSIS: DISCOUNTED CASH FLOW ANALYSIS
Houlihan Lokey also performed a discounted cash flow analysis. This
analysis projects over a specified period of time, a future stream of cash flows
that the company may generate and then deducting or "discounting" those cash
flows to the present using a rate that typically corresponds to the company's
expected cost of capital during that period. As a result, the value that a third
party might pay today for those future cash flows can be determined. In the
discounted cash flow analysis Houlihan Lokey calculated the present value of the
estimated future cash flows of PageNet based on a range of terminal multiples of
4.5x to 5.5x earnings before interest, income taxes, depreciation and
amortization, that is, multiples used to measure the "value" of PageNet at the
end of a specified period, and a range of discount rates of 13.0% to 15.0%.
Houlihan Lokey then calculated a range of values for Vast based on a range of
revenue multiples
34
<PAGE> 47
derived from trading values for companies comparable to Vast. This analysis
indicated a range of value for Vast of $250 million to $350 million.
Based on the above analyses, Houlihan Lokey selected ranges for PageNet's
stand-alone enterprise and equity values, including the value of Vast. The
selected ranges were as follows:
STAND-ALONE ANALYSIS: SUMMARY VALUATION RANGES
($ IN MILLIONS)
<TABLE>
<CAPTION>
ENTERPRISE ENTERPRISE EQUITY EQUITY
VALUE VALUE SHORTFALL SHORTFALL
MULTIPLE CATEGORY (LOW) (HIGH) (LOW) (HIGH)
----------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Comparable companies................................ $1,450 $1,850 $(550) $(150)
Comparable transactions............................. 1,550 1,950 (450) (50)
Discounted cash flow................................ 1,574 1,844 (430) (160)
</TABLE>
Contribution Analysis. Houlihan Lokey also analyzed the percentage
contributions that PageNet and Arch would each make to the estimated net
revenue, earnings before interest, income taxes, depreciation and amortization,
capital expenditures and earnings before interest, income taxes, depreciation
and amortization minus capital expenditures of the combined company. A
contribution analysis is a way of measuring the relative "size" of one company
versus another company. In the context of this transaction, for example, a
contribution analysis could be used to determine whether the stakeholders of
PageNet would receive total consideration pursuant to the merger that is
indicative of its relative "size" as compared to Arch. Houlihan Lokey performed
this analysis for the third quarter of fiscal year 1999 based on management's
latest available estimates for third quarter results as of the date of its
opinion. The analysis indicated the following:
<TABLE>
<CAPTION>
CONTRIBUTION ANALYSIS
THIRD QUARTER 1999
-------------------------
ARCH
THIRD QUARTER 1999 PAGENET COMMUNICATIONS
------------------ ------- --------------
<S> <C> <C>
Annualized net revenue...................................... 54% 46%
Annualized earnings before interest, income taxes,
depreciation and amortization............................. 51% 49%
Annualized capital expenditures............................. 67% 33%
Annualized earnings before interest, income taxes,
depreciation and amortization, less capital
expenditures.............................................. 30% 70%
</TABLE>
Immediately following completion of the merger, the value of the new
combined company going to the stakeholders of PageNet and the stakeholders of
Arch would be approximately 51.4% and 48.6%, respectively. By applying the
mid-point of the earnings before interest, income taxes, depreciation and
amortization multiples on the combined company's earnings before interest,
income taxes, depreciation and amortization, Houlihan Lokey calculated the
enterprise value of the combined company. Houlihan Lokey then used the same
mid-point of the earnings before interest, income taxes, depreciation and
amortization multiples on both PageNet's and Arch's earnings before interest,
income taxes, depreciation and amortization figures separately to derive the
"relative enterprise value" of each company. Enterprise values derived in such a
fashion are "relative" because the values of two separate companies are derived
by using the same earnings before interest, income taxes, depreciation and
amortization multiples. Based on the above findings Houlihan Lokey concluded
that PageNet's stakeholders would receive approximately 51.4% of the value of
the combined company. Houlihan Lokey observed that the 51.4% share that
PageNet's stakeholders would receive in the transaction was comparable to its
earnings before interest, income taxes, depreciation and amortization
contribution of 51% as shown in the table above.
Combination Valuation Analysis. Houlihan Lokey also analyzed ranges of
value for the combined entity. To arrive at these ranges, 19.5% of the value of
Vast was included in this analysis, using the same underlying range of values
for Vast as determined in the stand-alone analysis. The 19.5% of the value of
35
<PAGE> 48
Vast represents the portion of Vast that is to be retained by the combined
entity. Houlihan Lokey performed a combination valuation analysis in order to
allow the PageNet board of directors to evaluate the value that the PageNet
shareholders would receive by completing a transaction with Arch.
COMBINATION VALUATION ANALYSIS: STOCK PRICE BASED MULTIPLES AND TRANSACTION
PURCHASE PRICE MULTIPLES APPROACHES
For the stock price based multiples approach, Houlihan Lokey used the pro
forma levels for third quarter 1999 and projected second quarter 2000 annualized
net revenue, earnings before interest, income taxes, depreciation and
amortization and subscriber value. For the transaction multiples approach,
Houlihan Lokey used the projected second quarter 2000 annualized net revenue,
earnings before interest, income taxes, depreciation and amortization and
subscriber value. Houlihan Lokey used the second quarter 2000 projected
statistics for the transaction purchase price multiples approach because it was
anticipated that the merger of PageNet and Arch would be consummated at or near
that time period.
Set forth below is a summary of the statistics and corresponding multiples
used by Houlihan Lokey for the combination valuation analysis:
<TABLE>
<CAPTION>
TRANSACTION
STOCK PRICE BASED PURCHASE PRICE
STATISTICS MULTIPLES MULTIPLES
------------- ----------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Third Quarter 1999
Annualized net revenue................... $1,715 1.50x to 1.75x NA
Annualized earnings before interest,
income taxes, depreciation and
amortization.......................... $ 540 5.0x to 6.0x NA
Subscribers.............................. 16.3 $150 to $175 NA
Second Quarter 2000
Annualized net revenue................... $1,679 1.50x to 1.75x 1.75x to 2.00x
Annualized earnings before interest,
income taxes, depreciation and
amortization.......................... $ 567 4.5x to 5.5x 5.5x to 6.5x
Earnings before interest, income taxes
depreciation and amortization with
synergies............................. $ 647 4.5x to 5.5x 5.5x to 6.5x
Subscribers.............................. 16.0 $150 to $175 $175 to $200
</TABLE>
COMBINATION VALUATION ANALYSIS: DISCOUNTED CASH FLOW APPROACH
In the discounted cash flow analysis, Houlihan Lokey calculated the present
value of the estimated future cash flows of the combined entity based on a range
of terminal multiples of 4.5x to 5.5x to earnings before interest, income taxes,
depreciation and amortization and a range of discount rates of 13.0% to 15.0%.
Based on these analyses Houlihan Lokey again selected a range of enterprise
values for the combined company, which after subtracting $1.8 billion of pro
forma debt and adding the 19.5% of the value of Vast to be retained by the
combined entity, yielded a range of equity values for the new company of $850
million to $2.0 billion. Houlihan Lokey then determined the range of value
available to holders of PageNet's common stock by multiplying their 7.5% pro
forma ownership of the combined company by the above range and adding the value
of their retained direct interest in Vast of 11.6%. This yielded a range of
equity values of $93 million to $193 million, or approximately $0.89 to $1.86
per share.
Pro Forma Credit Risk Analysis. Houlihan Lokey analyzed the pro forma
impact or the impact that the combined company would have going forward, of the
restructuring and the merger on various financial ratios used to determine a
company's creditworthiness. This analysis was necessary because the PageNet
board of directors needed to evaluate how much relative debt the combined entity
would have as compared to how much debt PageNet currently has. These analyses
demonstrated that based on the five categories listed below, the
creditworthiness of the combined company would improve significantly as a
36
<PAGE> 49
result of the proposed transactions over the station of PageNet on a stand-alone
basis. Set forth below is a summary of these financial ratios:
PRO FORMA CREDIT RISK ANALYSIS: CREDIT STATISTICS IMPACT
<TABLE>
<CAPTION>
PAGENET AND PAGENET AND
PAGENET ARCH ARCH
--------------- ------------------- ----------------
(WITHOUT SYNERGIES) (WITH SYNERGIES)
<S> <C> <C> <C>
Total debt to annualized earnings before interest,
income taxes, depreciation and amortization...... 7.3x 3.3x 2.9x
Total debt per subscriber.......................... $ 224 $ 113 $ 113
Earnings before interest, income taxes,
depreciation and amortization/pro forma interest
expense.......................................... 1.5x 2.5x 2.9x
(Earnings before interest, income taxes,
depreciation and amortization less capital
expenditures)/pro forma interest expense......... 0.7x 1.2x 1.6x
Representative latest quarter annualized free cash
flow stated in $ millions........................ $(62.2) $53.3 $133.2
</TABLE>
Alternatives Considered. In addition to considering the proposed
restructuring and merger transactions, Houlihan Lokey also reviewed with the
board of directors of PageNet the advantages and disadvantages of maintaining
the status quo or engaging in a stand-alone restructuring, an outright sale, or
merging with one or more paging or telecommunications companies in a similar
transaction. In assessing these alternatives, Houlihan Lokey considered, among
other things:
- likely financial impact on business operations;
- time and cost required to complete a transaction; and
- complexity and inherent risk of completing each alternative.
Though each alternative had advantages as well as disadvantages in comparison to
the merger with Arch, Houlihan Lokey concluded that the restructuring and merger
transactions with Arch was the best alternative available to PageNet's
stockholders.
Houlihan Lokey performed various financial and comparative analyses solely
for the purpose of providing its opinion to the PageNet board that the aggregate
consideration to be received in the merger and related transactions by the
common stockholders of PageNet is fair to those persons from a financial point
of view. This section includes only a summary of the Houlihan Lokey opinion and,
as a summary, it is not a substitute for the full text of the opinion. Preparing
a fairness opinion is a complete analytic process and is not readily susceptible
to partial analysis or summary description. Houlihan Lokey believes that its
analyses must be considered as a whole. Selecting portions of its analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the processes underlying the analyses and its opinion.
In its analyses, Houlihan Lokey made numerous assumptions with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of PageNet
and Arch. The estimates contained in these analyses and the valuation ranges
resulting from any particular analysis do not necessarily indicate actual values
or predict future results or values. These may be significantly more or less
favorable than those suggested by these analyses. In addition, analyses relating
to the value of the businesses or securities are not appraisals and do not
reflect the prices at which the businesses or securities may actually be sold or
the prices at which their securities may trade. As a result, these analyses and
estimates are inherently subject to substantial uncertainty.
Houlihan Lokey's opinion and financial analyses were not the only factors
considered by the PageNet board of directors in its evaluation of the merger and
should not be viewed as determinative of the views of the PageNet board of
directors or management.
37
<PAGE> 50
Under the terms of Houlihan Lokey's engagement, PageNet has agreed to pay
Houlihan Lokey an advisory fee estimated to be $12.1 million for the services
provided in connection with the merger and restructuring. A substantial portion
of this fee will not be paid unless and until the merger and related
transactions are completed. PageNet has agreed to reimburse Houlihan Lokey for
travel and other out-of-pocket expenses incurred in performing its services,
including the fees and expenses of Houlihan Lokey's legal counsel, and to
indemnify Houlihan Lokey and related persons against liabilities, including
liabilities under the federal securities laws, arising out of Houlihan Lokey's
engagement.
Houlihan Lokey is a nationally recognized investment banking firm and was
selected by PageNet based on Houlihan Lokey's experience and expertise with
respect to restructuring and merger and acquisition transactions. Houlihan Lokey
regularly engages in the valuation of businesses and their securities in
connection with restructuring and mergers and acquisitions.
Opinion of Goldman, Sachs & Co.
PageNet retained Goldman Sachs on August 1, 1999, to act as one of its
financial advisors in connection with the merger and the Vast distribution.
Goldman Sachs is an internationally recognized investment banking firm and was
selected by PageNet based on the firm's reputation and experience in investment
banking in general and its recognized expertise in the valuation of businesses,
as well as its prior investment banking relationship with PageNet. On November
7, 1999, at the meeting of PageNet's board of directors, Goldman Sachs delivered
to PageNet's board its oral opinion (which was subsequently confirmed in a
written opinion dated as of November 7, 1999) that, as of such date and based on
and subject to the matters set forth therein, the exchange ratio pursuant to the
merger agreement was fair from a financial point of view to the holders of
PageNet common stock as of the date of its opinion.
YOU SHOULD CONSIDER THE FOLLOWING WHEN READING THE DISCUSSION OF THE
GOLDMAN SACHS OPINION IN THIS DOCUMENT:
- THE FULL TEXT OF GOLDMAN SACH'S WRITTEN OPINION, DATED NOVEMBER 7, 1999,
WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IS ATTACHED AS ANNEX
D TO THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS SECTION INCLUDES ONLY A
SUMMARY OF THE GOLDMAN SACHS OPINION AND, AS A SUMMARY, IT IS NOT A
SUBSTITUTE FOR THE FULL TEXT OF THE OPINION. WE URGE YOU TO READ THE
GOLDMAN SACHS OPINION IN ITS ENTIRETY.
- GOLDMAN SACHS' ADVISORY SERVICES AND OPINION WERE PROVIDED TO PAGENET'S
BOARD FOR ITS INFORMATION IN ITS CONSIDERATION OF THE MERGER AND THE
OPINION WAS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A
FINANCIAL POINT OF VIEW TO THE HOLDERS OF PAGENET COMMON STOCK AS OF THE
DATE OF ITS OPINION.
- GOLDMAN SACHS' OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER
OF PAGENET COMMON STOCK AS TO HOW TO VOTE ON THE MERGER OR ANY RELATED
MATTER.
In connection with its opinion, Goldman Sachs reviewed among other things,
the following:
- the merger agreement;
- the annual reports to stockholders and annual reports on Form 10-K of
PageNet and Arch for each of the previous five years;
- certain interim reports to stockholders and quarterly reports on Form
10-Q of PageNet and Arch;
- certain other communications from PageNet and Arch to their respective
stockholders;
- certain historical financial information and other information for Vast;
and
- certain internal financial analyses and forecasts for PageNet, Vast and
Arch prepared by their respective managements, including certain cost
savings and operating synergies projected by the managements of PageNet
and Arch to result from the transactions contemplated by the merger
agreement.
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<PAGE> 51
Goldman Sachs also held discussions with members of the senior management
of PageNet and Arch regarding their assessment of the strategic rationale for,
and the potential benefits of, the transactions contemplated by the merger
agreement and with those persons and with members of the senior management of
Vast regarding the past and current business operations, financial condition and
future prospects of their respective companies. In addition, Goldman Sachs
reviewed the reported price and trading activity for the PageNet common stock
and the Arch common stock, compared certain financial and stock market
information for PageNet and Arch and certain financial information for Vast with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the paging and communications industry specifically and in other
industries generally and performed such other studies and analyses as it
considered appropriate.
At the direction of PageNet's board, Goldman Sachs also read certain
analyses performed on behalf of PageNet by Houlihan Lokey regarding
- the proposed financial restructuring, in which certain outstanding debt
securities of PageNet would be exchanged for 616.8 million shares of
PageNet common stock, and certain outstanding debt securities and
preferred stock of Arch would be exchanged for 31.7 million shares of
Arch common stock; and
- the possible restructuring of PageNet's outstanding debt on a stand-alone
basis.
Goldman Sachs also reviewed with PageNet and its other financial advisors,
including Houlihan Lokey, certain options available to PageNet, other than
alternative business combinations, for addressing PageNet's liquidity needs. In
addition, Goldman Sachs also reviewed the tax analysis prepared by the
management of PageNet and PageNet's accountants with respect to the transactions
contemplated by the merger agreement, including, without limitation, the
financial restructuring and the Vast distribution.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. In this regard, Goldman
Sachs assumed with the consent of PageNet's board that the financial forecasts,
including the underlying assumptions, provided to it and discussed with it with
respect to PageNet, Vast and Arch after giving effect to the transactions
contemplated by the merger agreement, including, without limitation, certain
cost savings and operating synergies projected by the managements of PageNet and
Arch to result from the transactions contemplated by the merger agreement have
been reasonably prepared on a basis reflecting the best currently available
judgments and estimates of PageNet, Vast and Arch, as applicable.
Without making an independent evaluation of the matters contained therein
and with the consent of PageNet's board, Goldman Sachs relied upon the certain
analyses prepared by Houlihan Lokey referenced above for, among other things,
purposes of analyzing the impact of the possible restructuring of PageNet's
outstanding debt on a stand-alone basis on the holders of the shares of PageNet
common stock on the date of its opinion. In that regard, Goldman Sachs also took
into account the view of the management of PageNet with respect to the likely
impact of a possible restructuring of PageNet's outstanding debt on a
stand-alone basis on the holders of the shares of PageNet common stock on the
date of its opinion. In addition, without making an independent evaluation of
the matters contained therein and with the consent of PageNet's board, Goldman
Sachs relied upon the tax analysis prepared by the management of PageNet and
PageNet's accountants referenced above.
Goldman Sachs did not make an independent evaluation or appraisal of the
assets and liabilities of PageNet, Vast or Arch or any of their subsidiaries and
Goldman Sachs was not furnished with any such evaluation or appraisal. Goldman
Sachs' opinion does not address the relative merits of the transactions
contemplated pursuant to the merger agreement as compared to any alternative
business transaction that might be available to PageNet. Goldman Sachs' opinion
was provided for the information and assistance of PageNet's board in connection
with its consideration of the transactions contemplated by the merger agreement
and such opinion does not constitute a recommendation as to how any holder of
PageNet common stock should vote with respect to such transactions. Goldman
Sachs' opinion was necessarily
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<PAGE> 52
based upon conditions as they existed and could be evaluated by it on the date
of its opinion and Goldman Sachs assumed no responsibility to update or revise
its opinion based upon circumstances and events occurring after the date of its
opinion. Goldman Sachs' opinion does not imply any conclusion as to the likely
trading range of Arch common stock or shares of Vast following consummation of
the transactions contemplated by the merger agreement, which may vary depending
upon, among other factors, changes in interest rates, dividend rates, market
conditions, general economic conditions and other factors that generally
influence the price of securities.
In rendering its opinion, Goldman Sachs assumed, with the consent of
PageNet's board, that the financial restructuring, the Vast distribution and the
other transactions contemplated by the merger agreement will be completed in the
manner set forth in the merger agreement, including without limitation, that an
aggregate of:
- 616.8 million shares of PageNet common stock will be issued pursuant to
the PageNet exchange offer; and
- 29.6 million shares of Arch common stock will be issued pursuant to the
Arch exchange offer and that the outstanding preferred stock of Arch will
be converted into 2.1 million shares of Arch common stock.
Goldman Sachs' opinion related solely to the fairness from a financial
point of view of the exchange ratio to the holders of shares of PageNet common
stock on the date of its opinion. Goldman Sachs did not express any opinion
concerning the consideration to be received by any other security holder of
PageNet pursuant to the financial restructuring, the Vast distribution or any
other transaction contemplated by the merger agreement or the fairness of the
financial restructuring to the holders of shares of PageNet common stock on the
date of its opinion.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with PageNet, having acted as its financial advisor from time to time,
including having acted as its managing underwriter in May 1992 in an offering of
approximately 6 million shares of PageNet common stock, as its private placement
agent for an aggregate of approximately $1.2 billion principal amount in senior
subordinated notes in three offerings, one each in 1994, 1995 and 1996, and
having acted as its financial advisor in connection with, and having
participated in certain of the negotiations leading to the merger agreement.
Goldman Sachs provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold securities, including derivative securities,
of PageNet or Arch for its own account and for the accounts of customers.
The following is a brief summary of certain financial analyses prepared by
Goldman Sachs and reviewed with the PageNet board on November 7, 1999, in
connection with Goldman Sachs' presentation and opinion to PageNet's board on
such date. Goldman Sachs performed its analysis under each of the following
scenarios:
- PageNet on a stand-alone basis;
- PageNet after the possible restructuring of PageNet's debt on a
stand-alone basis; and
- PageNet after the consummation of the proposed financial restructuring in
which certain outstanding debt securities of PageNet would be exchanged
for PageNet common stock and certain outstanding debt securities and
preferred stock of Arch would be exchanged for Arch common stock, and the
merger with Arch.
The following quantitative information, to the extent it is based on market
data, is based on market data as it existed at or about November 4, 1999 and is
not necessarily indicative of current market conditions. In the summaries below,
unless otherwise specifically noted, references to forecasted financial
information were derived from research analyst estimates. Readers should
understand that the order of
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<PAGE> 53
analyses and the results derived from these analyses described below do not
represent relative importance or weight given to these analyses by Goldman
Sachs. The summary of the financial analyses includes information presented in
tabular format. IN ORDER TO UNDERSTAND FULLY THE FINANCIAL ANALYSES USED BY
GOLDMAN SACHS, THESE TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY.
THE TABLES ALONE DO NOT DESCRIBE COMPLETELY THE FINANCIAL ANALYSES.
Historical and Comparative Common Stock Performance
Goldman Sachs reviewed and analyzed the daily closing per share market
prices and trading volume for PageNet common stock from November 4, 1998 to
November 4, 1999. In addition, Goldman Sachs reviewed and analyzed the
historical performance of PageNet common stock and Arch common stock based upon
their respective indexed closing prices from November 4, 1998 to November 4,
1999, and compared such performance to the S&P 500 and a group of publicly
traded paging companies as set forth in the table below.
The following table depicts the percentage increases or decreases in the
indexed prices of the referenced securities and indices for the period from
November 4, 1998 to November 4, 1999:
<TABLE>
<CAPTION>
% INCREASE/(DECREASE)
SINCE NOVEMBER 4, 1998
----------------------
<S> <C>
PageNet.................................................. (87)%
Arch..................................................... 42%
S&P 500.................................................. 22%
SkyTel Communications, Inc. ............................. 9%
WebLink Wireless, Inc. (formerly known as PageMart
Wireless, Inc.)........................................ 3%
Metrocall, Inc. ......................................... (54)%
</TABLE>
This information was presented to give the PageNet board background
information regarding the respective stock prices of PageNet and Arch over the
periods reviewed.
Stand-Alone Analysis
Discounted Cash Flow Analysis. Based on projections provided by the
management of PageNet, Goldman Sachs performed a discounted cash flow analysis
of PageNet on a stand-alone basis. A discounted cash flow analysis attempts to
value a company based on the net present value of future free cash flows using a
range of different discount rates and terminal multiples. The estimated future
cash flows were based on financial projections for PageNet for the years 2000
through 2004. To determine the present value of the cash flows, Goldman Sachs
discounted such cash flows at discount rates ranging from 14.0% to 16.0%. The
terminal values of PageNet were calculated based on projected EBITDA (earnings
before interest, income taxes, depreciation and amortization) multiples for 2004
of 5.0x to 7.0x. EBITDA (earnings before interest, income taxes, depreciation
and amortization) multiples are stated as ratios, and therefore are followed by
"x" symbol. Based on these parameters, Goldman Sachs calculated the equity
values per share of PageNet common stock to range from $(4.95) to $(0.77).
Selected Comparable Company Analysis. This analysis examines a company's
valuation in the public market as compared to the valuation in the public market
of other selected publicly traded companies. Goldman Sachs compared certain
financial information of PageNet to certain corresponding information of a group
of publicly traded paging companies set forth in the table below. Such financial
information included:
- levered value as a multiple of current subscribers,
- levered value as a multiple of estimated 1999 and estimated 2000 revenue,
and
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<PAGE> 54
- levered value as a multiple of annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization) for second quarter
1999, estimated 1999 and estimated 2000 EBITDA (earnings before interest,
income taxes, depreciation and amortization).
Levered value represents the market value of the common equity plus the
value of the debt (on a market or book value basis) less cash. Revenue and
EBITDA (earnings before interest, income taxes, depreciation and amortization)
multiples are stated as ratios, and therefore are followed by an "x" symbol.
Current subscribers multiples, however, are stated in U.S. dollars. Annualized
means, revenues or EBITDA (earnings before interest, income taxes, depreciation
and amortization) for a specific quarter, as the case may be, multiplied by
four.
The following tables present, as of November 4, 1999, the results of these
analyses. The first table assumes that each company's debt is valued at its
market value and the second assumes each company's debt is valued at its book
value:
<TABLE>
<CAPTION>
LEVERED VALUE
LEVERED VALUE TO EARNINGS BEFORE INTEREST,
TO CURRENT LEVERED VALUE INCOME TAXES, DEPRECIATION AND
SUBSCRIBERS TO REVENUE AMORTIZATION
------------- ------------- --------------------------------
2QA
COMPARABLE COMPANIES 1999E 2000E ANNUALIZED 1999E 2000E
-------------------- ----- ----- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Arch............................ $177 1.7x 1.6x 5.0x 5.2x 4.7x
Metrocall....................... 109 1.1 1.1 4.3 4.1 3.8
PageNet......................... 95 1.0 1.0 3.3 3.4 3.3
WebLink......................... 224 2.3 2.0 13.8 13.6 7.7
</TABLE>
---------------
* Market value of debt basis
<TABLE>
<CAPTION>
LEVERED VALUE
LEVERED VALUE TO EARNINGS BEFORE INTEREST,
TO CURRENT LEVERED VALUE INCOME TAXES, DEPRECIATION
SUBSCRIBERS TO REVENUE AND AMORTIZATION
------------- ------------- -----------------------------
2QA
COMPARABLE COMPANIES 1999E 2000E ANNUALIZED 1999E 2000E
-------------------- ----- ----- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Arch............................ $234 2.2x 2.1x 6.6x 6.8x 6.2x
Metrocall....................... 175 1.8 1.7 6.9 6.5 6.0
PageNet......................... 204 2.2 2.3 7.1 7.4 7.1
WebLink......................... 290 2.9 2.9 17.8 17.6 10.0
</TABLE>
---------------
* Book value of debt basis
Goldman Sachs calculated implied equity values per share of PageNet common
stock as follows:
- by applying a median annualized EBITDA (earnings before interest, income
taxes, depreciation and amortization) multiple of 4.7x, which represents
the median estimated multiple for these selected comparable companies on
a market value of debt basis, to
- PageNet's estimated annualized EBITDA (earnings before interest, income
taxes, depreciation and amortization) for third quarter 1999, fourth
quarter 1999, first quarter 2000, second quarter 2000, third quarter 2000
and fourth quarter 2000.
PageNet's estimated annualized EBITDA (earnings before interest, income
taxes, depreciation and amortization) for the periods described above was based
upon projections provided by the management of PageNet. Based on this analysis,
the implied equity values per share of PageNet common stock calculated by
Goldman Sachs were not meaningful.
No company utilized in Goldman Sachs' publicly traded comparable company
analysis is identical to PageNet. Accordingly, an analysis of the above results
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other factors
that could affect the public trading value of companies to which they are being
compared. Goldman Sachs made judgments and assumptions with regard to industry
performance, general business,
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<PAGE> 55
economic, market and financial conditions and other matters, many of which are
beyond the control of PageNet, such as industry growth, the impact of
competition on PageNet and the industry generally and the absence of any
material adverse change in the respective financial conditions and prospects of
PageNet or the industry or in the financial markets in general. Mathematical
analysis (such as determining the mean or median) is not, in itself, a
meaningful method of using publicly traded comparable company data.
Stand-Alone Restructuring Analysis
For purposes of the analysis of PageNet after the possible restructuring of
PageNet's debt on a stand-alone basis, Goldman Sachs relied on the analysis
prepared by Houlihan Lokey and assumed on that basis that the holders of PageNet
common stock as of the date of its opinion would receive 5% of the remaining
equity value of PageNet after the consummation of the possible restructuring of
PageNet's debt on a stand-alone basis.
Selected Comparable Company Analysis. As noted above, this analysis
examines a company's valuation in the public market as compared to the valuation
in the public market of other selected publicly traded companies. Goldman Sachs
compared certain financial information of PageNet to certain corresponding
information of Arch, Metrocall and WebLink. For each of these selected
comparable companies, Goldman Sachs calculated multiples of levered value (on a
market value of debt basis) to second quarter 1999 annualized EBITDA (earnings
before interest, income taxes, depreciation and amortization). The selected
comparable company analysis described above yielded a range of second quarter
1999 annualized EBITDA (earnings before interest, income taxes, depreciation and
amortization) multiples of 3.3x to 13.8x.
Goldman Sachs calculated implied equity values per share of PageNet common
stock as follows:
- by applying a median annualized EBITDA (earnings before interest, income
taxes, depreciation and amortization) multiple of 4.7x (which represents
the median estimated multiple for these selected comparable companies)
plus 0.5x (which represents an assumed multiple expansion due to the
improved credit profile of PageNet resulting from the possible
restructuring of PageNet's debt on a stand-alone basis) to
- PageNet's estimated annualized EBITDA (earnings before interest, income
taxes, depreciation and amortization) for third quarter 1999, fourth
quarter 1999, first quarter 2000, second quarter 2000, third quarter 2000
and fourth quarter 2000.
PageNet's estimated annualized EBITDA (earnings before interest, income
taxes, depreciation and amortization) for the periods described above was based
upon projections provided by the management of PageNet. Based on this analysis,
Goldman Sachs calculated the implied equity values per share of PageNet common
stock to range from $0.17 to $0.37.
As previously noted, an analysis of the above results involved complex
considerations and judgments on the part of Goldman Sachs because none of the
selected comparable companies is identical to PageNet.
Merger/Restructuring Analysis
As noted above, Goldman Sachs performed an analysis of PageNet after the
consummation of the proposed financial restructuring in which certain
outstanding debt securities of PageNet would be exchanged for PageNet common
stock and certain outstanding debt securities and preferred stock of Arch would
be exchanged for Arch common stock, and the merger with Arch. For purposes of
this analysis, Goldman Sachs relied on the analysis prepared by Houlihan Lokey
and assumed that, as set forth in the merger agreement, the holders of PageNet
common stock as of the date of its opinion would receive 7.5% of the remaining
equity value of the combined company after the consummation of such financial
restructuring and the merger.
Discounted Cash Flow Analysis. Based on projections provided by the
managements of PageNet and Arch, Goldman Sachs performed a discounted cash flow
analysis of the combined company, excluding the
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<PAGE> 56
value of Vast. As described above, a discounted cash flow analysis attempts to
value a company based on the net present value of future free cash flows using a
range of different discount rates and terminal multiples. The estimated future
cash flows were based on the financial projections for PageNet and Arch for the
years 2000 through 2004. To determine the present value of the cash flows,
Goldman Sachs discounted such cash flows at discount rates ranging from 13.0% to
18.0%. The terminal values of PageNet and Arch were calculated based on
projected EBITDA (earnings before interest, income taxes, depreciation and
amortization) multiples for 2004 of 4.0x to 8.0x.
Based on projections provided by the management of PageNet, Goldman Sachs
also performed a discounted cash flow analysis of Vast on a stand-alone basis.
The estimated future cash flows were based on the financial projections for Vast
for the years 2000 through 2004. To determine the present value of the cash
flows, Goldman Sachs discounted such cash flows at discount rates ranging from
20.0% to 35.0%. The terminal values of Vast were calculated based on projected
EBITDA (earnings before interest, income taxes, depreciation and amortization)
multiples for 2004 of 6.0x to 10.0x.
For purposes of this analysis, Goldman Sachs assumed that holders of
PageNet's common stock as of the date of its opinion would receive a 13.1%
interest in Vast consisting of the following:
- a 11.6% direct interest, as set forth in the merger agreement, after the
consummation of the financial restructuring and the Vast distribution,
and
- a 1.5% indirect interest as a result of the 7.5% of the remaining equity
value of the combined company to be received by holders of PageNet common
stock as of the date of its opinion after the consummation of the
financial restructuring and the merger.
For purposes of this analysis, Goldman Sachs also assumed that, as set
forth in the merger agreement, the combined company would retain a 19.5%
interest in Vast after the consummation of the merger, the financial
restructuring and the Vast distribution.
Based on these parameters, Goldman Sachs calculated the implied equity
values per share of PageNet common stock to range from $0.79 to $2.75.
Multiples Analysis of Selected Comparable Companies. As noted above, this
analysis examines a company's valuation in the public market as compared to the
valuation in the public market of other selected publicly traded companies.
Goldman Sachs compared certain financial information of PageNet to certain
corresponding information of Arch, Metrocall and WebLink. For each of these
selected comparable companies, Goldman Sachs calculated multiples of levered
value (on a market value of debt basis) to second quarter 1999 annualized EBITDA
(earnings before interest, income taxes, depreciation and amortization). The
selected comparable company analysis described above yielded a range of second
quarter 1999 annualized EBITDA (earnings before interest, income taxes,
depreciation and amortization) multiples of 3.3x to 13.8x.
Goldman Sachs then calculated the implied equity value of the combined
company as follows:
- by applying a median annualized EBITDA (earnings before interest, income
taxes, depreciation and amortization) multiple of 4.7x (which represents
the median estimated multiple for these selected comparable companies)
plus 0.5x (which represents an assumed multiple expansion due to the
improved credit profile of the combined company as a result of the
financial restructuring and the merger) to the combined company's
estimated second quarter 2000 annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization), plus estimated
synergies of $79 million,
- adding 19.5% of the assumed levered value of Vast, and
- deducting the amount of debt each of PageNet and Arch will contribute to
the combined company after the consummation of the financial
restructuring.
For purposes of this analysis, Goldman Sachs assumed that, as set forth in
the merger agreement, the combined company would retain a 19.5% interest in Vast
after the consummation of the merger, the
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<PAGE> 57
financial restructuring and the Vast distribution. The estimated second quarter
2000 annualized EBITDA (earnings before interest, income taxes, depreciation and
amortization) of the combined company was based on projections provided by
managements of PageNet and Arch. The estimated synergies of $79 million
represent certain cost savings and operating synergies projected by the
managements of PageNet and Arch to result from the transactions contemplated by
the merger agreement.
Goldman Sachs then calculated the implied equity values per share of
PageNet common stock by assuming that the holders of PageNet common stock as of
the date of its opinion would receive, after the consummation of the financial
restructuring, the Vast distribution and the merger:
- 7.5% of this implied equity value of the combined company; and
- an 11.6% direct interest in Vast.
Goldman Sachs then analyzed the implied equity value per share using a
range of EBITDA (earnings before interest, income taxes, depreciation and
amortization) multiples of 5.0x to 5.5x and a range of equity ownership
percentages of 5.0% to 7.5% that the holders of PageNet common stock as of the
date of its opinion would hold in the combined company. Based on this analysis,
Goldman Sachs calculated the implied equity values per share of PageNet common
stock to range from $0.92 to $1.51.
As previously noted, an analysis of the above results involved complex
considerations and judgments on the part of Goldman Sachs because none of the
selected comparable companies is identical to PageNet or Arch.
Contribution Analysis. Goldman Sachs compared certain financial information
of PageNet with that of Arch, Metrocall and WebLink. For each of these
comparable companies, Goldman Sachs calculated multiples of levered values (on a
market value of debt basis) to second quarter 1999 annualized EBITDA (earnings
before interest, income taxes, depreciation and amortization). The comparable
company analysis described above yielded a range of second quarter 1999
annualized EBITDA (earnings before interest, income taxes, depreciation and
amortization) multiples of 3.3x to 13.8x.
Goldman Sachs then calculated the implied enterprise value of the combined
company as follows:
- by applying a median annualized EBITDA (earnings before interest, income
taxes, depreciation and amortization) multiple of 4.7x (which represents
the median estimated multiple for these selected comparable companies)
plus 0.5x (which represents an assumed multiple expansion due to the
improved credit profile of the combined company as a result of the
financial restructuring and the merger) to the combined company's
estimated second quarter 2000 annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization) plus estimated
synergies of $79 million, and
- adding 19.5% of the assumed levered value of Vast.
For purposes of this analysis, Goldman Sachs assumed that, as set forth in
the merger agreement, the combined company would retain a 19.5% interest in Vast
after the consummation of the merger, the financial restructuring and the Vast
distribution. The estimated second quarter 2000 annualized EBITDA (earnings
before interest, income taxes, depreciation and amortization) of the combined
company was based on projections provided by managements of PageNet and Arch.
The estimated synergies of $79 million represent certain cost savings and
operating synergies projected by the managements of PageNet and Arch to result
from the transactions contemplated by the merger agreement.
This analysis analyzes the amount each company will contribute to the
combined company as compared with the amount of equity the stockholders will
have in the combined company. Goldman Sachs first calculated the relative
contributions of PageNet and Arch to the combined company based on the
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<PAGE> 58
current trading enterprise values of each of PageNet and Arch. Goldman Sachs
then calculated the implied equity value of PageNet and Arch each contributed to
the combined company as follows:
- by multiplying the implied enterprise value of the combined company by
the percentage value contributed by PageNet and Arch based on their
respective current trading enterprise values derived as described above,
and
- deducting the amount of debt each of PageNet and Arch will contribute to
the combined company after the consummation of the financial
restructuring.
This analysis indicated the following percentage contributions by PageNet
and Arch to the combined company:
<TABLE>
<CAPTION>
PERCENTAGE
CONTRIBUTION TO
COMBINED
COMPANY
----------------
EQUITY CONTRIBUTION BASED ON: PAGENET ARCH
----------------------------- -------- -----
<S> <C> <C>
Current Trading Enterprise Value............................ 42.6% 57.4%
Implied Relative Equity Value Contribution*................. 38.3% 61.7%
Merger Agreement............................................ 52.0% 48.0%
</TABLE>
---------------
* Adjusted debt contributed after the consummation of the financial
restructuring.
Equity Contribution Based on Operating Metrics Pre-Restructuring. This
analysis analyzes the amount each company will contribute to the combined
company as compared with the amount of equity the stockholders will have in the
combined company. Goldman Sachs analyzed the relative contributions of PageNet
and Arch to the combined company resulting from the merger (prior to the
consummation of the financial restructuring) based on selected historical and
estimated future operating and financial information for Arch and PageNet.
Goldman Sachs compared these values to the 52% equity value of the combined
company that PageNet's debt and equity holders are to receive pursuant to the
proposed merger and the financial restructuring. The results of these analyses,
which were based on PageNet's and Arch's managements' projections, are
summarized as follows:
<TABLE>
<CAPTION>
CONTRIBUTION OF PAGENET TO CONTRIBUTION OF ARCH TO
OPERATING METRIC: COMBINED COMPANY COMBINED COMPANY
----------------- -------------------------- -----------------------
<S> <C> <C>
2000 estimated revenue..................... 53% 47%
1999 estimated earnings before interest,
income taxes, depreciation and
amortization............................. 51% 49%
2000 estimated earnings before interest,
income taxes, depreciation and
amortization............................. 50% 50%
3Q 1999 annualized earnings before
interest, income taxes, depreciation and
amortization............................. 51% 49%
1Q 2000 annualized earnings before
interest, income taxes, depreciation and
amortization............................. 48% 52%
2Q 2000 annualized earnings before
interest, income taxes, depreciation and
amortization............................. 49% 51%
2000 estimated subscribers................. 55% 45%
1999 estimated earnings before interest,
income taxes, depreciation and
amortization minus capital
expenditures............................. 35% 65%
2000 estimated earnings before interest,
income taxes, depreciation and
amortization minus capital
expenditures............................. 42% 58%
</TABLE>
Equity Contribution Based on Operating Metrics Post-Restructuring. This
analysis analyzes the amount each company will contribute to the combined
company as compared with the amount of equity
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<PAGE> 59
the stockholders will have in the combined company. Goldman Sachs analyzed the
relative contributions of PageNet and Arch to the combined company resulting
from the merger (following the consummation of the financial restructuring)
based on selected historical and estimated future operating and financial
information for Arch and PageNet. Goldman Sachs adjusted these values to reflect
the change in leverage to be achieved following the proposed merger and the
financial restructuring. Goldman Sachs compared these values to the 52% equity
value of the combined company that PageNet's debt and equity holders are to
receive pursuant to the proposed merger and the financial restructuring. The
results of these analyses, which were based on PageNet's and Arch's managements'
projections, are summarized as follows:
<TABLE>
<CAPTION>
CONTRIBUTION OF PAGENET TO CONTRIBUTION OF ARCH TO
OPERATING METRIC: COMBINED COMPANY COMBINED COMPANY
----------------- -------------------------- -----------------------
<S> <C> <C>
2000 estimated revenue............................. 80% 20%
1999 estimated earnings before interest, income
taxes, depreciation and amortization............. 71% 29%
2000 estimated earnings before interest, income
taxes, depreciation and amortization............. 63% 37%
3Q 1999 annualized earnings before interest, income
taxes, depreciation and amortization............. 68% 32%
1Q 2000 annualized earnings before interest, income
taxes, depreciation and amortization............. 54% 46%
2Q 2000 annualized earnings before interest, income
taxes, depreciation and amortization............. 59% 41%
2000 estimated subscribers......................... 90% 10%
1999 estimated earnings before interest, income
taxes, depreciation and amortization minus
capital expenditures............................. (12)% 112%
2000 estimated earnings before interest, income
taxes, depreciation and amortization minus
capital expenditures............................. 23% 77%
</TABLE>
Exchange Ratio Analysis. Goldman Sachs analyzed the implied exchange ratio
by dividing
- the per share equity value of PageNet implied by a discounted cash flow
analysis of PageNet by
- the per share equity value of Arch implied by a discounted cash flow
analysis of Arch.
For purposes of these discounted cash flow calculations, the terminal
values of PageNet and Arch were calculated based on projected EBITDA (earnings
before interest, income taxes, depreciation and amortization) multiples for 2004
of 5.0x to 7.0x and a range of discount rates of 14.0% to 16.0%.
Goldman Sachs also assumed that
- PageNet numbers include 19.5% of the free cash flows of Vast; and
- consummation of the financial restructuring as set forth in the merger
agreement.
Free cash flows means EBITDA (earnings before interest, income taxes,
depreciation and amortization) minus capital expenditures, working capital and
cash taxes. Based on these parameters and assumptions, this analysis implied
exchange ratio ranging from 0.14 to 0.16.
Goldman Sachs further analyzed the percentage of PageNet's ownership in the
combined company by dividing
- the equity value of PageNet implied by the above described discounted
cash flow analysis by
- the total equity value of the combined company implied by the above
described discounted cash flow analysis.
Based on these parameters, Goldman Sachs calculated PageNet's percentage
ownership in the combined company to range from 56% to 59%.
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<PAGE> 60
Selected Transactions Analysis. Based on publicly available information,
Goldman Sachs analyzed information relating to six selected merger or
acquisition transactions in the paging industry since 1996, including:
- the acquisition of SkyTel by MCI WorldCom, Inc.;
- the acquisition of MobileMedia Corporation by Arch;
- the acquisition of the Wireless Services' Advanced Messaging Division of
AT&T Corp. by Metrocall;
- the acquisition of Wireless Access, Inc. by Glenayre Technologies, Inc.;
- the acquisition of ProNet, Inc. by Metrocall; and
- the acquisition of A+ Networks, Inc. by Metrocall.
For the selected transactions for which data was publicly available,
Goldman Sachs calculated multiples of
- the transaction consideration to annualized revenue for the latest
quarter preceding the announcement of the transaction,
- the transaction consideration to annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization) for the latest
quarter preceding the announcement of the transaction,
- the transaction consideration to revenue for the last twelve months
preceding the announcement of the transaction, and
- the transaction consideration to EBITDA (earnings before interest, income
taxes, depreciation and amortization) for the last twelve months
preceding the announcement of the transaction.
Goldman Sachs also calculated multiples of
- the consideration to be received in the merger to PageNet's third quarter
1999 annualized revenue and
- the consideration to be received in the merger to PageNet's third quarter
1999 annualized EBITDA (earnings before interest, income taxes,
depreciation and amortization).
This calculation yielded multiples of 2.2x and 7.5x, respectively.
The following table presents the results of the foregoing analyses for the
selected companies:
<TABLE>
<CAPTION>
MULTIPLE RANGE MEAN MEDIAN
-------- ----- ---- ------
<S> <C> <C> <C>
transaction consideration to annualized revenue......... 1.1x - 3.3x 2.1x 1.8x
transaction consideration to annualized earnings before
interest, income taxes, depreciation and
amortization.......................................... 3.9x - 16.7x 8.1x 6.4x
transaction consideration to revenue for the last twelve
months preceeding the announcement of the
transaction........................................... 1.1x - 5.6x 2.8x 2.4x
transaction consideration to earnings before interest,
income taxes, depreciation and amortization for the
last twelve months preceeding the announcement of the
transaction........................................... 3.8x - 12.3x 7.1x 6.6x
</TABLE>
The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, is not necessarily susceptible to partial analysis
or summary description. Selecting portions of the analyses or of the summary set
forth above, without considering the analysis as a whole, could create an
incomplete view of the processes underlying Goldman Sachs' opinion.
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<PAGE> 61
In arriving at its fairness determination, Goldman Sachs considered the results
of all such analyses and did not attribute any particular weight to any factor
or analysis considered by it; rather, Goldman Sachs made its determination as to
fairness on the basis of its experience and professional judgment after
considering the results of all such analyses. No company or transaction used in
the above analyses is directly comparable to PageNet or Arch or the contemplated
transaction.
In performing its analysis, Goldman Sachs made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of PageNet and Arch. Goldman
Sachs may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting for any particular
analysis described above should not be taken to be Goldman Sachs' view of the
actual value of PageNet or Arch.
The analyses were prepared solely for purposes of Goldman Sachs providing
its opinion to PageNet's board as to the fairness from a financial point of view
of the exchange ratio to the holders of PageNet common stock on the date of its
opinion, and do not purport to be appraisals or necessarily reflect the prices
at which businesses or securities actually may be sold. Analyses based on
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of PageNet, Goldman Sachs or any other person
assumes responsibility if future results are materially different from those
forecast.
The exchange ratio and the other terms of the merger agreement were
determined through arms length negotiations between PageNet and Arch and were
approved by PageNet's board. In addition, as described above, the opinion of
Goldman Sachs to PageNet's board was one of many factors taken into
consideration by PageNet's board in making its determination to approve the
merger agreement. Consequently, the Goldman Sachs analyses described above
should not be viewed as determinative of the opinion of PageNet's board or the
view of Arch's board of directors with respect to the value of Arch and PageNet
or of whether PageNet's board or Arch's board would have been willing to agree
to a different exchange ratio.
Pursuant to a letter agreement dated November 7, 1999, PageNet and its
wholly owned subsidiaries, PageNet, Inc. and Vast, formerly known as Silverlake
Communications, Inc., have agreed to pay Goldman Sachs the following fees:
- a fee of $2,250,000 upon the execution of the merger agreement, and
- a fee of $6,750,000 upon the consummation of the merger, less any fees
previously paid.
In addition, PageNet, PageNet, Inc. and Vast also agreed to pay Goldman
Sachs a fee ranging from $150,000 to $250,000 if the merger is not consummated.
PageNet, PageNet, Inc. and Vast have also agreed to pay Goldman Sachs its
reasonable out-of-pocket expenses, including the fees and disbursements of its
attorneys, and to indemnify Goldman Sachs and related persons against certain
liabilities, including certain liabilities arising under the federal securities
laws.
Opinion of Morgan Stanley Dean Witter
Pursuant to a letter agreement dated August 1, 1999, Morgan Stanley was
retained by PageNet to act as one of its financial advisors in connection with
the merger and the Vast distribution. Morgan Stanley is an internationally
recognized investment banking firm and was selected by PageNet based on Morgan
Stanley's qualifications, expertise and reputation, as well as its knowledge of
the paging industry. On November 7, 1999, Morgan Stanley delivered to PageNet's
board an oral opinion, subsequently confirmed in writing, to the effect that, as
of November 7, 1999, and based on and subject to certain matters stated in its
opinion, the 0.1247 of a share of Arch common stock and the pro rata portion of
the 11.6% of the equity interest in Vast (which we refer to in this description
of Morgan Stanley's opinion as the consideration) to be received by the holders
of PageNet common stock on such date pursuant to the merger and the Vast
distribution, taken as a whole, was fair from a financial point of view to such
holders.
49
<PAGE> 62
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION DATED NOVEMBER 7, 1999,
WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX E TO THIS
DOCUMENT. THIS SECTION INCLUDES ONLY A SUMMARY OF THE MORGAN STANLEY OPINION
AND, AS A SUMMARY, IT IS NOT A SUBSTITUTE FOR THE FULL TEXT OF THE OPINION. WE
URGE YOU TO READ THE MORGAN STANLEY OPINION IN ITS ENTIRETY. MORGAN STANLEY'S
OPINION ADDRESSES ONLY THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY
HOLDERS OF PAGENET COMMON STOCK ON SUCH DATE PURSUANT TO THE MERGER AND THE VAST
DISTRIBUTION, TAKEN AS A WHOLE, FROM A FINANCIAL POINT OF VIEW TO SUCH HOLDERS,
AND IT DOES NOT ADDRESS ANY OTHER ASPECTS OF THE MERGER, THE VAST DISTRIBUTION
OR THE FINANCIAL RESTRUCTURING, NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON THE MERGER OR ANY RELATED
MATTER.
In arriving at its opinion, Morgan Stanley, among other things:
- reviewed certain analysis prepared by Houlihan Lokey of the proposed
financial restructuring in which certain outstanding debt securities of
PageNet would be exchanged for PageNet common stock and certain
outstanding debt securities and preferred stock of Arch would be
exchanged for Arch common stock and the possible restructuring of
PageNet's debt on a stand-alone basis;
- reviewed certain publicly available financial statements and other
business and financial information of Arch and PageNet, respectively;
- reviewed certain internal financial statements and other financial and
operating data concerning Arch and PageNet, respectively;
- reviewed certain internal financial statements and other financial and
operating data concerning Vast prepared by the managements of PageNet and
Vast;
- analyzed certain financial forecasts prepared by the managements of Arch
and PageNet, respectively;
- analyzed certain financial forecasts for Vast prepared by the managements
of PageNet and Vast;
- discussed the past and current operations and financial condition and the
prospects of Arch with senior executives of Arch;
- discussed the past and current operations and financial condition and the
prospects of PageNet and Vast with senior executives of PageNet and Vast;
- discussed with the senior managements of Arch and PageNet their estimates
of the synergies and cost savings expected to be derived from the merger;
- reviewed and analyzed the pro forma impact of the merger on the
consolidated capitalization and financial ratios of the combined company;
- reviewed the reported prices and trading activity for the Arch common
stock and the PageNet common stock;
- compared the financial performance of Arch and PageNet (excluding Vast)
and the prices and trading activity of the Arch common stock and the
PageNet common stock and their respective debt securities with that of
certain other publicly traded companies and their securities;
- compared the financial performance of Vast with that of certain other
companies that are comparable to Vast and have publicly traded
securities;
- reviewed the tax analysis prepared by the management of PageNet with
respect to the tax treatment of the transactions contemplated by the
merger agreement;
- reviewed with PageNet and its other financial advisors, including
Houlihan Lokey, certain options available to PageNet, other than
alternative business combinations, for addressing PageNet's liquidity
needs;
50
<PAGE> 63
- reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions deemed relevant;
- participated in discussions and negotiations among representatives of
Arch and PageNet and their financial, restructuring and legal advisors;
- reviewed the draft merger agreement and certain related documents; and
- performed such other analyses and considered such other factors as Morgan
Stanley deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of all information
supplied or otherwise made available to it and reviewed by it for the purposes
of its opinion. Morgan Stanley also relied, without independent verification or
evaluation and with the consent of PageNet's board, on the analysis prepared by
Houlihan Lokey for, among other things, purposes of analyzing the impact of the
possible restructuring of PageNet's debt on a stand-alone basis on the holders
of the PageNet common stock on the date of its opinion. In addition, Morgan
Stanley also relied, without independent verification or evaluation and with the
consent of PageNet's board, on the tax analysis prepared by the management of
PageNet with respect to the tax treatment of the transactions contemplated by
the merger agreement. With respect to the financial forecasts, future prospects,
estimates of synergies and cost savings, Morgan Stanley assumed that they had
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of Arch, PageNet and
Vast. In addition, Morgan Stanley assumed that the merger will be consummated in
accordance with the terms set forth in the merger agreement, including, among
other things, that the merger will be treated as a tax-free reorganization
and/or exchange, each pursuant to Section 368(a) of the Internal Revenue Code of
1986, as amended. Morgan Stanley did not make any independent valuation or
appraisal of the assets or liabilities of PageNet, Arch or Vast, nor was it
furnished with any such appraisals. Morgan Stanley's opinion is necessarily
based on financial, economic, market and other conditions as in effect on, and
the information made available to it as of, the date of its opinion.
Morgan Stanley's opinion is limited to the fairness, from a financial point
of view, of the consideration to be received by the holders of PageNet common
stock on the date of its opinion pursuant to the merger and the Vast
distribution and Morgan Stanley is not expressing any opinion concerning the
consideration to be received by any other security holder of PageNet pursuant to
the financial restructuring, Vast distribution or any other transaction
contemplated by the merger agreement or the fairness of the financial
restructuring to the holders of PageNet common stock on the date of its opinion.
In rendering this opinion, Morgan Stanley assumed, with the consent of PageNet's
board, that the financial restructuring and the Vast distribution will be
completed in the manner set forth in the merger agreement.
Morgan Stanley also noted that trading in Arch common stock and shares of
Vast for a period of time following completion of the merger and the Vast
distribution may involve a redistribution of the Arch common stock and the
shares of Vast among the stockholders of the combined entity and other investors
and, accordingly, during such period, Arch common stock and the shares of Vast
may trade at prices below those at which they would trade on a fully distributed
basis after the Vast distribution. Morgan Stanley's opinion does not in any
manner address the prices at which Arch's common stock or the shares of Vast
will trade following consummation of the merger and the Vast distribution. In
addition, Morgan Stanley expressed no opinion or recommendation as to how the
stockholders of Arch or PageNet should vote at the stockholders' meetings held
in connection with the merger or any related matter.
The following is a brief summary of certain analyses performed by Morgan
Stanley and reviewed with the PageNet board on November 7, 1999 in connection
with Morgan Stanley's presentation and opinion to the PageNet board on such
date. Morgan Stanley performed its analysis under each of the following
scenarios:
- PageNet on a stand-alone basis;
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<PAGE> 64
- PageNet after the possible restructuring of PageNet's debt on a
stand-alone basis;
- PageNet after the consummation of the proposed financial restructuring in
which certain outstanding debt securities of PageNet would be exchanged
for PageNet common stock and certain outstanding debt securities and
preferred stock of Arch would be exchanged for Arch common stock, and the
merger with Arch; and
- PageNet after the consummation of the restructuring of the outstanding
debt securities of PageNet in connection with a merger with another
party.
Certain of these summaries of financial analyses include information
presented in tabular format. In order to fully understand the financial analyses
used by Morgan Stanley, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. In the summaries below, unless otherwise specifically noted,
references to forecasted financial information were derived from research
analyst estimates.
Historical and Comparative Common Stock Performance
Morgan Stanley reviewed and analyzed the daily closing per share market
prices and trading volume for PageNet common stock from November 5, 1998 to
November 5, 1999. In addition, Morgan Stanley reviewed and analyzed the
historical performance of PageNet common stock and Arch common stock based upon
their respective indexed closing prices from November 5, 1996 to November 5,
1999, and compared such performance to the NASDAQ composite and a Paging Index
consisting of WebLink Wireless, Inc. (formerly known as PageMart Wireless,
Inc.), PageNet, Metrocall, Inc. and Arch.
The following table depicts the percentage increases in the indexed prices
of the referenced securities and indices for the period from November 5, 1996 to
November 5, 1999:
<TABLE>
<CAPTION>
% INCREASE/(DECREASE)
SINCE NOVEMBER 5, 1996
----------------------
<S> <C>
PageNet......................................... (94.8)%
Arch............................................ (81.1)%
NASDAQ Composite................................ 152.4%
Paging Index.................................... (82.3)%
</TABLE>
This information was presented to give the PageNet board background
information regarding the respective stock prices of PageNet and Arch over the
periods reviewed.
Stand-Alone Analysis
Paging Industry Environment. Morgan Stanley reviewed the paging industry
environment and noted as follows:
- the share prices of publicly traded paging companies have significantly
underperformed over the past three years,
- the paging industry faces undesirable fundamentals regarding the
traditional paging services, and
- the industry participants are highly leveraged.
In addition, Morgan Stanley reviewed paging industry leverage and compared the
total debt to EBITDA (earnings before interest, income taxes, depreciation and
amortization) ratio and net debt to total value ratio for the publicly traded
industry participants. Total debt represents debt, preferred stock, and other
debt instruments; net debt represents total debt less cash and cash equivalents;
equity value represents total number of outstanding shares multiplied by the
price per share as of November 5, 1999; total value represents equity value plus
net debt.
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<PAGE> 65
The following table sets forth the total debt to EBITDA (earnings before
interest, income taxes, depreciation and amortization) ratio for each of the
companies listed below for the most recent available balance sheets.
<TABLE>
<CAPTION>
2ND QTR. 1999A ANNUALIZED MULTIPLE OF TOTAL DEBT TO
EARNINGS BEFORE INTEREST, EARNINGS BEFORE INTEREST,
INCOME TAXES, DEPRECIATION INCOME TAXES,
TOTAL DEBT* AND AMORTIZATION** DEPRECIATION AND
(IN MILLIONS) (IN MILLIONS) AMORTIZATION***
------------- -------------------------- -------------------------
<S> <C> <C> <C>
WebLink............................... $ 507 $ 42 12.1x
PageNet............................... 2,000 282 7.1x
Metrocall............................. 939 147 6.4x
Arch.................................. 1,334 251 5.3x
</TABLE>
---------------
* 2QA for Metrocall and WebLink; 3QA for Arch; 3QE for PageNet; calculated on
a face value basis.
** Based on publicly available information.
*** Total debt to EBITDA (earnings before interest, income taxes, depreciation
and amortization) multiples are stated as ratios, and therefore are
followed by an "x" symbol.
The following table sets forth the net debt to total value ratio for each
of the companies listed below, with most recent available balance sheets and
total values as of November 5, 1999.
<TABLE>
<CAPTION>
NET DEBT* TOTAL VALUE
(IN MILLIONS) (IN MILLIONS) %
------------- ------------- ---
<S> <C> <C> <C>
PageNet..................................................... $1,947 $2,048 95%
Metrocall................................................... 924 1,013 91%
Arch........................................................ 1,313 1,662 79%
WebLink..................................................... 494 748 66%
</TABLE>
---------------
* 2QA for Metrocall and WebLink; 3QA for Arch; 3QE for PageNet; calculated on
a face value basis.
Management Projections and PageNet's Prospects. Morgan Stanley analyzed
PageNet's stand-alone financial projections to determine the feasibility of
successfully executing a stand-alone option rather than a financial
restructuring which could include a bankruptcy, or a merger coupled with a
financial restructuring. This analysis was based on PageNet's quarterly
projections for 1999 and 2000 and annual projections from 2001 to 2004.
Morgan Stanley considered several qualitative factors such as PageNet's
current strategic situation, including such factors as the amount of its
indebtedness, its current restrictions on further indebtedness, its current
redundant costs associated with the delayed conclusion of PageNet's
restructuring plan consolidating its key support functions located in offices
throughout the country into centralized processing facilities, its high customer
churn rates and its projections of a liquidity shortfall in early to mid-2000.
Morgan Stanley also considered general macroeconomic factors such as paging
industry fundamentals, industry-wide share price declines, significant leverage
among the industry participants and investment analysts' views that
consolidation among the publicly traded paging companies would be required for
the industry's long-term survival.
Morgan Stanley also assessed PageNet's ability to meet its liquidity
shortfall. Based on PageNet's management projections, Morgan Stanley noted that,
with a status quo strategy, PageNet would likely need to address its liquidity
shortfall by taking steps such as selling certain assets, raising strategic
capital for Vast, pursuing an initial public offering of Vast, initiating a
drastic cost reduction program, and receiving waivers from the bank lending
group for certain covenants.
Discounted Cash Flow Analysis. Morgan Stanley performed discounted cash
flow analysis of the projected unlevered free cash flows of PageNet. A
discounted cash flow analysis attempts to value a company based on the net
present value of future free cash flows using a range of different discount
rates
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<PAGE> 66
and terminal multiples. This analysis was based on projections for fiscal years
1999 through 2004 prepared by the management of PageNet.
Morgan Stanley calculated implied equity values per share of PageNet common
stock by utilizing discount rates ranging from 13.0% to 15.0% and terminal value
multiples of estimated 2004 EBITDA (earnings before interest, income taxes,
depreciation and amortization) ranging from 5.0x to 7.0x. This analysis implied
equity values per share of PageNet common stock ranging from ($4.31) to $0.04.
Precedent Transactions Analysis. This analysis examines a company's
valuation in the public market as compared to the valuation placed by the
acquiror on selected companies that were acquired in recent years. Using
publicly available information, Morgan Stanley reviewed information relating to
two paging industry acquisitions, Arch's acquisition of MobileMedia
Communications, Inc. and Metrocall's acquisition of the Advanced Messaging
Division of AT&T Corp.
For the precedent transactions referred to above, Morgan Stanley calculated
multiples of
- total value to annualized EBITDA (earnings before interest, income taxes,
depreciation and amortization) of the acquired businesses for the quarter
preceding announcement, and
- total value to units in service at the time of announcement.
For purposes of this analysis, total value was calculated on a face value
of debt basis.
Morgan Stanley calculated implied equity values per share of PageNet common
stock by applying
- EBITDA (earnings before interest, income taxes, depreciation and
amortization) multiples implied by the precedent transactions referred to
above of 4.2x and 5.2x to PageNet's estimated fourth quarter 1999
annualized EBITDA (earnings before interest, income taxes, depreciation
and amortization), and
- units in service multiples implied by the precedent transactions referred
to above of $180 and $152 to PageNet's estimated units in service as of
the end of the fourth quarter of 1999.
EBITDA (earnings before interest, income taxes, depreciation and
amortization) multiples are stated as ratios, and therefore are followed by an
"x" symbol. Units in service multiples, however, are stated in U.S. dollars.
Annualized means, revenue or EBITDA (earnings before interest, income taxes,
depreciation and amortization) for a specified quarter, as the case may be,
multiplied by four.
The following table presents the ranges of equity values per share of
PageNet common stock implied by this analysis:
<TABLE>
<CAPTION>
IMPLIED EQUITY
VALUE
PER SHARE OF
PAGENET COMMON
STOCK
---------------
LOW HIGH
------ ------
<S> <C> <C>
Precedent Transactions Analysis
Total value* to annualized earnings before interest,
income taxes, depreciation and amortization............ $(6.22) $(3.68)
Total value* to units in service.......................... $(3.69) $(1.25)
</TABLE>
---------------
* Face value of debt basis
No transaction utilized in the precedent transaction analysis is identical
to the merger in both timing and size, and, accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
PageNet and other factors that would affect the acquisition value of the
companies to which it is being compared. In evaluating the precedent
transactions referred to above, Morgan Stanley made judgments and assumptions
with regard to industry performance, general business, economic, market and
financial
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<PAGE> 67
conditions and other matters, many of which are beyond the control of PageNet,
such as industry growth, the impact of competition on PageNet and the industry
generally and the absence of any material adverse change in the financial
conditions and prospects of PageNet or the industry or in the financial markets
in general.
Selected Comparable Company Analysis. This analysis examines a company's
valuation in the public market as compared to the valuation in the public market
of other selected publicly traded companies. Morgan Stanley compared certain
financial information of PageNet to certain corresponding information of a group
of publicly traded paging companies as set forth in the table below. Such
financial information included
- multiples of total value to second quarter 1999 annualized EBITDA
(earnings before interest, income taxes, depreciation and amortization)
and to forecasted 1999 and 2000 annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization), and
- multiples of total value to forecasted 1999 and 2000 revenue.
The following tables present, as of November 5, 1999, the range of
multiples for these selected comparable companies of each of
- total value to projected 1999 and 2000 revenue, and
- total value to second quarter 1999 annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization) and to projected
1999 and projected 2000 EBITDA (earnings before interest, income taxes,
depreciation and amortization). Revenue multiples are stated as ratios,
and therefore are followed by an "x" symbol.
The first table assumes that each company's debt is valued at its market
value and the second table assumes each company's debt is valued at its face
value:
<TABLE>
<CAPTION>
TOTAL VALUE*
TOTAL VALUE* TO EARNINGS BEFORE INTEREST, INCOME
TO REVENUE TAXES, DEPRECIATION AND AMORTIZATION
--------------- ------------------------------------
COMPARABLE COMPANIES 1999E 2000E 2QA ANNUALIZED 1999E 2000E
-------------------- ----- ----- ---------------- ------- -------
<S> <C> <C> <C> <C> <C>
Arch........................................... 1.7x 1.7x 5.2x 5.4x 4.9x
Metrocall...................................... 1.1 1.1 4.4 4.2 3.8
PageNet........................................ 1.3 1.4 4.2 4.3 4.2
WebLink........................................ 2.3 2.0 13.7 13.6 7.7
</TABLE>
---------------
* Market value of debt basis
<TABLE>
<CAPTION>
TOTAL VALUE*
TOTAL VALUE* TO EARNINGS BEFORE INTEREST, INCOME
TO REVENUE TAXES, DEPRECIATION AND AMORTIZATION
--------------- ------------------------------------
COMPARABLE COMPANIES 1999E 2000E 2QA ANNUALIZED 1999E 2000E
-------------------- ----- ----- ---------------- ------- -------
<S> <C> <C> <C> <C> <C>
Arch........................................... 2.2x 2.1x 6.6x 6.8x 6.2x
Metrocall...................................... 1.7 1.7 6.9 6.5 6.0
PageNet........................................ 2.2 2.4 7.3 7.6 7.3
WebLink........................................ 2.9 2.5 17.8 17.6 9.9
</TABLE>
---------------
* Face value of debt basis
Morgan Stanley calculated implied equity values per share of PageNet common
stock by applying the relevant second quarter 1999 annualized EBITDA (earnings
before interest, income taxes, depreciation and amortization) multiple range of
5.0x to 7.0x from the comparable companies to PageNet's estimated fourth quarter
1999 annualized EBITDA (earnings before interest, income taxes, depreciation and
amortization). This analysis implied equity values per share of PageNet common
stock ranging from $(4.18) to $0.91, assuming PageNet's debt is valued on a face
value basis.
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<PAGE> 68
No company utilized in Morgan Stanley's publicly traded comparable company
analysis is identical to PageNet. Accordingly, an analysis of the above results
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other factors
that could affect the public trading value of companies to which they are being
compared. Morgan Stanley made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of PageNet, such as industry
growth, the impact of competition on PageNet and the industry generally and the
absence of any material adverse change in the respective financial conditions
and prospects of PageNet or the industry or in the financial markets in general.
Mathematical analysis (such as determining the mean or median) is not, in
itself, a meaningful method of using publicly traded comparable company data.
Stand-Alone Restructuring Analysis
For purposes of the analysis of PageNet after the possible restructuring of
PageNet's debt on a stand-alone basis, Morgan Stanley relied on the analysis
prepared by Houlihan Lokey and assumed that the holders of PageNet common stock
as of the date of its opinion would receive a residual equity interest in
PageNet after the consummation of the possible restructuring of PageNet's debt
on a stand-alone basis.
Selected Comparable Company Analysis. As noted above, this analysis
examines a company's valuation in the public market as compared to the valuation
in the public market of other selected publicly traded companies. Morgan Stanley
compared certain financial information of PageNet (after consummation of the
possible restructuring of PageNet's debt on a stand-alone basis) to certain
corresponding information of Arch, WebLink and Metrocall. For each of these
selected comparable companies, Morgan Stanley calculated multiples of total
value (on a market value basis) to second quarter 1999 annualized EBITDA
(earnings before interest, income taxes, depreciation and amortization). The
comparable company analysis yielded a range of second quarter 1999 annualized
EBITDA (earnings before interest, income taxes, depreciation and amortization)
multiples of 4.0x to 5.0x.
Morgan Stanley calculated implied equity values per share of PageNet common
stock by applying second quarter 1999 annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization) multiples of 4.0x to 5.0x
to PageNet's estimated first quarter 2000 annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization), based upon projections
provided by the management of PageNet. This analysis implied equity values per
share of PageNet common stock ranging from $0.21 to $0.33.
As previously noted, an analysis of the above results involved complex
considerations and judgements on the part of Morgan Stanley because none of the
selected comparable companies is identical to PageNet.
Discounted Cash Flow Analysis. Morgan Stanley performed discounted cash
flow analysis of the projected unlevered free cash flows of PageNet. As
described above, a discounted cash flow analysis attempts to value a company
based on net present value of future free cash flows using a range of different
discount rates and terminal multiples. This analysis was based upon projections
for fiscal years 1999 through 2004 prepared by the management of PageNet.
Morgan Stanley calculated implied equity values per share of PageNet common
stock by utilizing discount rates ranging from 13.0% to 15.0% and terminal value
multiples of estimated 2004 EBITDA (earnings before interest, income taxes,
depreciation and amortization) ranging from 5.0x to 7.0x. Morgan Stanley relied
on the analysis prepared by Houlihan Lokey to calculate net debt, which was pro
forma for the possible restructuring of PageNet's debt on a stand-alone basis.
This analysis implied equity values per share of PageNet common stock ranging
from $0.42 to $0.48.
Merger with Arch/Restructuring Analysis
As noted above, Morgan Stanley performed an analysis of PageNet after the
consummation of the proposed financial restructuring in which certain
outstanding debt securities of PageNet would be
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<PAGE> 69
exchanged for PageNet common stock and certain outstanding debt securities and
preferred stock of Arch would be exchanged for Arch common stock and the merger
with Arch. For purposes of this analysis, Morgan Stanley relied on the analysis
prepared by Houlihan Lokey and assumed that, as set forth in the merger
agreement, the holders of PageNet common stock as of the date of its opinion
would receive 7.5% of the equity value of the combined company after the
consummation of such financial restructuring and the merger.
Selected Comparable Company Analysis. As noted above, this analysis
examines a company's valuation in the public market as compared to the valuation
in the public market of other selected publicly traded companies. Morgan Stanley
compared certain financial information of PageNet/Arch (after consummation of
the financial restructuring) to certain corresponding information of Arch,
WebLink and Metrocall. For each of these selected comparable companies, Morgan
Stanley calculated multiples of total value to second quarter 1999 annualized
EBITDA (earnings before interest, income taxes, depreciation and amortization).
The comparable company analysis yielded a range of second quarter 1999
annualized EBITDA (earnings before interest, income taxes, depreciation and
amortization) multiples of 4.5x to 5.5x for PageNet/Arch.
Morgan Stanley calculated implied equity values per share of PageNet common
stock by applying second quarter 1999 annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization) multiples of 4.5x to 5.5x
to PageNet/Arch's estimated first quarter 2000 annualized EBITDA (earnings
before interest, income taxes, depreciation and amortization). This analysis
implied equity values per share of PageNet common stock ranging from $0.85 to
$1.25.
As previously noted, an analysis of the above results involved complex
considerations and judgements on the part of Morgan Stanley because none of the
selected comparable companies is identical to PageNet or Arch.
Discounted Cash Flow Analysis. Morgan Stanley performed discounted cash
flow analysis of the projected unlevered free cash flows of PageNet/Arch after
the consummation of the merger and the other transactions contemplated by the
merger agreement. As described above, a discounted cash flow analysis attempts
to value a company based on the net present value of future free cash flows
using a range of different discount rates and terminal multiples. This analysis
was based on projections for fiscal years 1999 through 2004 prepared by the
management of each of PageNet and Arch.
Morgan Stanley calculated implied equity values per share of PageNet common
stock by utilizing discount rates ranging from 13.0% to 15.0% and terminal value
multiples of estimated 2004 EBITDA (earnings before interest, income taxes,
depreciation and amortization) ranging from 5.0x to 7.0x. This analysis implied
equity values per share of PageNet common stock ranging from $1.62 to $1.81.
Merger with Another Party/Restructuring Analysis
For purposes of the analysis of PageNet after the consummation of the
restructuring of the outstanding debt securities of PageNet in connection with a
merger with another party, Morgan Stanley relied on the analysis prepared by
Houlihan Lokey and assumed that the holders of PageNet common stock as of the
date of its opinion would receive a residual equity interest in PageNet after
the consummation of the restructuring of the outstanding debt securities of
PageNet in connection with the merger with another party.
Selected Comparable Company Analysis. As noted above, this analysis
examines a company's valuation in the public market as compared to the valuation
in the public market of other selected publicly traded companies. Morgan Stanley
compared certain financial information of PageNet/another party (after
consummation of the restructuring of the outstanding debt securities of PageNet
in connection with a hypothetical merger with another party) to certain
corresponding information of Arch, WebLink and Metrocall. For each of these
selected comparable companies, Morgan Stanley calculated multiples of total
value to second quarter 1999 annualized EBITDA (earnings before interest, income
taxes, depreciation
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<PAGE> 70
and amortization). The comparable company analysis yielded a range of second
quarter 1999 annualized EBITDA (earnings before interest, income taxes,
depreciation and amortization) multiples of 4.5x to 5.5x.
Morgan Stanley calculated implied equity values per share of PageNet common
stock by applying second quarter 1999 annualized EBITDA (earnings before
interest, income taxes, depreciation and amortization) multiples of 4.5x to 5.5x
to PageNet/another party's estimated first quarter 2000 annualized EBITDA
(earnings before interest, income taxes, depreciation and amortization). This
analysis implied equity values per share of PageNet common stock ranging from
$0.55 to $0.83.
As previously noted, an analysis of the above results involved complex
considerations and judgements on the part of Morgan Stanley because none of the
selected comparable companies is identical to PageNet or such other party.
Historical Exchange Ratio Analysis
Morgan Stanley reviewed and analyzed the historical ratio of the daily per
share market closing prices of PageNet common stock divided by the corresponding
prices of Arch common stock over varying intervals of time during the year
preceding the announcement of the merger. Morgan Stanley observed that such
average implied exchange ratios for the selected periods ended November 5, 1999
(the last trading day prior to the announcement of the merger) were as follows:
<TABLE>
<CAPTION>
AVERAGE
IMPLIED
PERIOD ENDING NOVEMBER 5, 1999 EXCHANGE RATIO
------------------------------ --------------
<S> <C>
Last 1 Year........................................... 0.774
Last 6 Months......................................... 0.466
Last 2 Months......................................... 0.258
Last 1 Month.......................................... 0.202
Last 1 Week........................................... 0.173
</TABLE>
Morgan Stanley observed that, based on the closing prices of PageNet common
stock and Arch common stock on November 5, 1999 of $0.97 and $6.81,
respectively, the implied exchange ratio was approximately 0.142x.
Morgan Stanley then compared such implied exchange ratio of 0.142x as of
November 5, 1999 to the exchange ratio implied by the merger/financial
restructuring as set forth in the merger agreement based on the consideration to
be received by holders of PageNet common stock. Morgan Stanley noted that, as of
November 5, 1999, the exchange ratio implied by the merger/financial
restructuring as set forth in the merger agreement of 0.166x, which includes
0.125 of a share of Arch common stock for each share of PageNet common stock, or
$0.85 per share, and 1.000 Vast share for each share of PageNet common stock,
equivalent to 0.041 of a share of Arch common stock or $0.28 per share,
represented $1.13 per share of PageNet common stock. In addition, Morgan Stanley
noted that the per share consideration implied by such exchange ratio
represented a 16.6% premium to the PageNet share price close on November 5,
1999.
Vast Valuation Analysis
For purposes of valuing PageNet's Vast subsidiary, Morgan Stanley compared
certain financial information of Vast with the following group of publicly
traded companies: Phone.com, Inc., Aether Systems, Inc., Spyglass, Inc. and Puma
Technology, Inc. Morgan Stanley considered Aether Systems to be the most
comparable publicly traded company. Such financial information included
multiples of total value (on a face value of debt basis) to projected 1999 and
2000 sales.
Morgan Stanley applied Aether Systems's multiples of total value to
projected 1999 sales and projected 2000 sales of 131.1x and 65.5x, respectively,
to Vast's projected 1999 and projected 2000 sales. To incorporate the customary
private market discount and a discount reflecting Vast's earlier stage in its
business development relative to Aether Systems, Morgan Stanley applied a
discount to Aether Systems of
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<PAGE> 71
75%. The resulting relevant Vast valuation range implied by this methodology is
$108.0 million to $497.2 million.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of its analysis
as a whole and did not contribute any particular weight to any analysis or
factor considered by it. Morgan Stanley believes that its analysis must be
considered as a whole and that selecting portions of its analysis, without
considering all analysis, would create an incomplete view of the process
underlying its opinion. In addition, Morgan Stanley may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting for any particular analysis described above should not be
taken to be Morgan Stanley's view of the actual value of PageNet or Arch.
In performing its analysis, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of PageNet and Arch. The
analysis performed by Morgan Stanley does not necessarily indicate actual value.
Actual value may be significantly more or less favorable than suggested by such
analysis. Such analyses were prepared solely as part of Morgan Stanley's
analysis of the fairness of the consideration to be received by the holders of
PageNet common stock on the date of its opinion, pursuant to the merger and Vast
distribution, taken as a whole, from a financial point of view and were provided
to PageNet's board in connection with the delivery of Morgan Stanley's written
opinion dated November 7, 1999. The analyses do not purport to be appraisals or
reflect the prices at which PageNet and Arch might actually be sold. The merger
consideration and the other terms of the merger agreement were determined
through arms length negotiations between PageNet and Arch and were approved by
PageNet's board. In addition, as described above, Morgan Stanley's opinion and
presentation to PageNet's board was one of many factors taken into consideration
by PageNet's board in making its determination to approve the merger.
Consequently, the Morgan Stanley analyses described above should not be viewed
as determinative of the opinion of PageNet's board or the view of the Arch's
board of directors with respect to the value of Arch and PageNet or of whether
PageNet's board or Arch's board would have been willing to agree to a different
merger consideration.
Morgan Stanley is an internationally recognized investment banking advisory
firm. Morgan Stanley, as part of its investment banking business, is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bidding, secondary
distributions of listed and unlisted securities, private placements and
valuation for corporate and other purposes. In the ordinary course of its
business, Morgan Stanley and its affiliates may actively trade the securities of
PageNet and Arch, for Morgan Stanley's account and for the account of customers.
Pursuant to a letter agreement dated August 1, 1999, PageNet and its
wholly-owned subsidiaries PageNet, Inc. and Vast, formerly known as Silverlake
Communications, Inc., agreed to pay Morgan Stanley the following fees:
- a fee of $2,250,000 upon the execution of the merger agreement, and
- a fee of $6,750,000 upon the consummation of the merger, less any fees
previously paid.
PageNet, PageNet, Inc. and Vast have also agreed to pay Morgan Stanley a fee
ranging from $200,000 to $300,000 if the merger is not consummated. PageNet,
PageNet, Inc. and Vast have agreed to reimburse Morgan Stanley for its expenses
incurred in performing its services. In addition, PageNet, PageNet, Inc. and
Vast have agreed to reimburse and to indemnify Morgan Stanley and related
persons against any liabilities and expenses arising out of the engagement and
any related transactions, including liabilities under federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of PageNet's board of directors to merge
with Arch, stockholders should be aware that some of the members of PageNet's
board of directors and some of PageNet's officers
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<PAGE> 72
have interests in the merger that are different from the interests of the
stockholders and senior subordinated noteholders of PageNet and that could
potentially represent conflicts of interest.
- All outstanding options granted to purchase PageNet common stock,
including those held by officers and directors of PageNet, will fully
vest at the effective time of the merger and, if not exercised at that
time, will be converted into fully vested options to purchase shares of
Arch common stock, subject to adjustment to reflect the exchange ratio.
All unvested options to purchase PageNet common stock held by PageNet's
officers and directors immediately prior to the merger will vest at the
effective time of the merger. However, all of such options currently have
exercise prices which are higher, and in some cases significantly higher,
than PageNet's current stock price, and, as a result of the exchange
ratio and the impact of the merger, PageNet's officers and directors will
hold fewer options to purchase shares at even higher exercise prices. As
a result of these circumstances, the options which will vest are likely
to have little or no value at the time of the merger.
- At the effective time of the merger, John P. Frazee, Jr. will, and other
current PageNet directors may, be appointed as additional members of
Arch's board of directors. Mr. Frazee will also be appointed Chairman of
the board of directors of the combined company. Additional information
about Mr. Frazee and the other current PageNet directors is contained in
"PageNet's Management."
- Some current officers of PageNet will be entitled to severance payments
if their employment ceases following the merger as part of a severance
plan established on January 20, 1999 to provide benefits to substantially
all of PageNet's employees upon a "change in control" of PageNet. The
severance plan provides for a severance payment ranging from 50% to 300%
of the employee's annual salary and annual target bonus compensation and
payment of a pro-rated portion of the employee's annual target bonus
compensation. In addition, the severance plan provides that the employee
will continue to receive substantially similar medical insurance,
disability income protection, life insurance protection and death
benefits, and perquisites for at least one year following the date of the
employee's termination of employment at no additional cost to the
employee above the cost paid by the employee for such benefits
immediately prior to the change of control. The severance plan provides
no special pension benefits. An employee is entitled to receive benefits
under the severance plan if PageNet or its successor in interest
terminates the employee without cause or the employee resigns for good
reason during the 12-month period immediately following a change in
control. Good reasons for an employee's resignation under the severance
plan include a reduction in the employee's compensation, a significant
change in the employee's duties, responsibilities, title or authorities,
relocation of the employee's office to a location more than 50 miles from
the location of the employee's office prior to the change in control, and
PageNet's failure to obtain the agreement from any successor to assume
and agree to perform the severance plan. The amount an employee will
receive depends upon the employee's position at PageNet. Payments under
the plan are made in one lump sum. At the time of its consideration of
the Arch merger, PageNet's board of directors made changes in the
severance plan to increase the number of employees entitled to severance
payments at the 200% level and to increase the severance percentages
applicable to John P. Frazee, Jr., Mark A. Knickrehm, Edward W. Mullinix,
Jr., Lynn A. Bace and Julian B. Castelli from 200% to 300% of their
annual salary and annual target bonus compensation. On May 26, Mark A.
Knickrehm resigned as President and Chief Operating Officer of Vast. Mr.
Knickrehm therefore has no right to receive any payments under PageNet's
severance plan.
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<PAGE> 73
The following table sets forth the estimated value of payments and
benefits that would be paid to each current executive officer of PageNet
under PageNet's severance plan if the executive officer's employment is
terminated within 12 months following the merger in accordance with the
severance plan:
<TABLE>
<CAPTION>
ESTIMATED VALUE OF PAYMENTS AND BENEFITS TO WHICH
PAGENET'S CURRENT EXECUTIVE OFFICERS WOULD BE
ENTITLED UPON TERMINATION OF EMPLOYMENT
NAME OF EXECUTIVE OFFICER IN ACCORDANCE WITH THE SEVERANCE PLAN(1)
------------------------- -------------------------------------------------
<S> <C>
Lynn A. Bace.......................... $ 1,811,487
Andreas Bremer........................ 261,774
Julian B. Castelli.................... 1,373,514
John P. Frazee, Jr. .................. 4,574,778
Jason G. Gillespie.................... 795,081
Edward W. Mullinix, Jr. .............. 2,108,766
Timothy J. Paine...................... 705,289
Douglas R. Ritter..................... 1,075,773
G. Robert Thompson.................... 744,385
Ruth Williams......................... 796,075
</TABLE>
-------------------------
(1) The portion of the severance plan payment that is attributable to
the pro-rated amount of the executive officer's target bonus
compensation is estimated based on the assumption that the
executive officer's employment is terminated on September 30,
2000, and would be greater if the executive officer's employment
terminates later in 2000. The portion of the severance plan
payment that is attributable to PageNet's continuation of benefits
and perquisites assumes that PageNet provides the same level of
benefits and perquisites to each executive officer for the full 12
month period following termination and the estimated value
attributed to such benefits and perquisites is based on the cost
incurred by PageNet to provide such benefits and perquisites in
1999.
On May 15, 2000, Arch announced the senior management team for the
combined company, which did not include any PageNet officers.
PageNet's and Arch's boards of directors were aware of these interests and
considered them, among other matters, when adopting the merger.
Indemnification and Insurance
The merger agreement provides that, for six years after the merger, Arch
will cause PageNet to indemnify and hold harmless each present and former
PageNet director and officer, when acting in such capacity, against any costs or
expenses, including judgments, fines, reasonable attorney's fees, losses,
claims, damages or liabilities incurred in connection with any claim, suit, or
civil, criminal, administrative or investigative proceeding or investigation
relating to matters existing or occurring at or before the merger, to the
fullest extent that PageNet would have been permitted to indemnify those persons
under Delaware corporate law and its certificate of incorporation or bylaws in
effect on November 7, 1999. PageNet will also advance expenses as incurred to
the fullest extent permitted under applicable law, provided the person to whom
expenses are advanced provides an undertaking to repay any advances if it is
ultimately determined that he or she is not entitled to indemnification.
The merger agreement also provides that, for a period of six years after
the merger, Arch will maintain a policy of officers' and directors' liability
insurance for acts and omissions occurring before the merger with coverage in
amount and scope at least as favorable as PageNet's directors' and officers'
liability insurance coverage on November 7, 1999. If that coverage expires, is
terminated or is canceled, or if the annual premium is increased to more than
200% of the last annual premium paid before November 7, 1999, Arch will use its
best efforts to obtain insurance in an amount and scope as great as can be
obtained for the remainder of the period for a premium not in excess of 200% of
the current premium on an annualized basis. In the alternative, PageNet can
obtain prepaid policies that provide such
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<PAGE> 74
directors and officers with coverage for six years against claims arising from
facts or events that occurred at or before the effective time of the merger,
including claims relating to the transactions contemplated by the merger
agreement. If PageNet obtains such prepaid policies, Arch has agreed to maintain
such policies in effect and continue to honor PageNet's obligation.
Furthermore, all directors and many officers of PageNet are entitled to
indemnification and insurance under an indemnity agreement with PageNet.
TREATMENT OF PAGENET'S COMMON STOCK
In the merger, each issued and outstanding share of PageNet common stock
will be converted into 0.1247 shares of Arch common stock. However, shares held
by Arch or any wholly owned subsidiary of Arch will be canceled without
conversion. The exchange ratio will be adjusted to eliminate the effect of any
stock split, stock dividend, stock distribution other than the Vast distribution
or other similar transaction by either PageNet or Arch that occurs before the
merger. The exchange ratio will not be adjusted for the distribution of Class B
common stock of Vast to holders of PageNet common stock.
HOLDERS OF PAGENET COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES
REPRESENTING PAGENET COMMON STOCK. FOLLOWING THE EFFECTIVE TIME OF THE MERGER,
HOLDERS OF PAGENET COMMON STOCK WILL RECEIVE INSTRUCTIONS FOR THE SURRENDER AND
EXCHANGE OF THEIR STOCK CERTIFICATES.
STOCK OWNERSHIP IN THE COMBINED COMPANY
The following table sets forth the expected beneficial ownership of Arch
common stock following the merger and the PageNet and Arch exchange offers,
assuming the conversion of all convertible preferred stock of Arch into common
stock:
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP OF
ARCH COMMON STOCK
OUTSTANDING
--------------------------
MAY 31, 2000 AS ADJUSTED
------------ -----------
<S> <C> <C>
Arch stockholders........................................... 100.0% 42.4%
Arch discount noteholders................................... -- 6.5%
PageNet stockholders........................................ -- 7.4%
PageNet senior subordinated noteholders..................... -- 43.7%
----- -----
100.0% 100.0%
===== =====
</TABLE>
Arch stockholders include former noteholders who have exchanged their notes for
common or preferred stock. This table assumes that all of Arch's discount notes
and all of PageNet's senior subordinated notes are exchanged for common stock
prior to the merger. The actual capitalization of Arch upon closing of the
merger may vary from the foregoing table. For example, if 1% of Arch's
outstanding discount notes were tendered and accepted, holders of Arch discount
notes would own 0.1% and the percentage ownership of the Arch stockholders and
the PageNet stockholders and noteholders would increase proportionately. See
"The Merger."
THE EXCHANGE OFFERS
Arch
Concurrently with the solicitation of proxies for approval of the merger,
Arch will conduct an exchange offer for all of its outstanding 10 7/8% senior
discount notes. In the exchange offer, Arch will issue 66.1318 shares of common
stock in exchange for each $1,000 principal amount at maturity of 10 7/8%
discount notes tendered pursuant to its exchange offer, together with all
accreted interest on such notes. As of the date of this joint proxy
statement/prospectus, $172.4 million in aggregate principal amount at maturity
of discount notes remain outstanding, excluding notes that have been exchanged.
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<PAGE> 75
Holders of the discount notes who tender in connection with the exchange
offer will be required to give their consent to:
- amend the indenture for the notes, if necessary, to permit completion of
the merger;
- amend the indenture to eliminate:
- any covenants which may be modified or eliminated by a majority vote
of the discount notes;
- any events of default which relate to:
-- the non-payment or acceleration of other indebtedness,
-- the failure to discharge judgments for the payment of money or
-- the bankruptcy or insolvency of any subsidiaries; and
- any provisions which condition mergers or consolidations on compliance
with any financial criteria.
In addition, each holder of discount notes will be required to waive any and all
existing defaults with respect to the discount notes and any and all rights to
rescind their acceptance of the exchange offer after the expiration date.
The expiration date will be 12:00 midnight, New York City time, on the 35th
day after the commencement of the exchange offer, or at a later date which is
mutually agreed upon by Arch and PageNet.
PageNet
Concurrently with the solicitation of proxies for approval of the merger,
PageNet will conduct an exchange offer for all of its outstanding 8.875%,
10.125% and 10% senior subordinated notes. In the exchange offer, PageNet will
issue a pro rata portion of 616,830,757 shares of PageNet common stock (which
will then be immediately convertible into Arch common stock at an exchange ratio
of 0.1247 shares of Arch common stock for each share of PageNet common stock)
and a pro rata portion of 13,780,000 shares of Class B common stock of Vast,
representing up to 68.9% of the equity ownership of Vast (subject to the
possibility of dilution), in exchange for each of PageNet's outstanding senior
subordinated notes surrendered pursuant to its exchange offer.
As of the date of this joint proxy statement/prospectus, $1.2 billion in
aggregate principal amount of senior subordinated notes are outstanding.
PageNet's obligation to consummate the exchange offer is contingent on the
valid tender of at least 97.5% of the outstanding aggregate principal amount of
the senior subordinated notes and at least a majority of the outstanding
principal amount of each series of PageNet senior subordinated notes in
accordance with the terms of its exchange offer. These tenders must be valid and
not withdrawn prior to the expiration date of the exchange offer.
To validly tender senior subordinated notes, holders must also consent to:
- amend the indentures, if necessary, to permit completion of the merger or
the prepackaged plan;
- amend the indentures to eliminate:
- any covenants which may be modified or eliminated by a majority vote
of the senior subordinated notes;
- any events of default which relate to:
-- the non-payment or acceleration of other indebtedness,
-- the failure to discharge judgments for the payment of money or
-- the bankruptcy or insolvency of any subsidiaries; and
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- any provisions which condition mergers or consolidations on compliance
with any financial criteria.
In addition, each holder will be required to waive any and all existing
defaults with respect to the senior subordinated notes and any and all rights to
rescind their acceptance of the exchange offer after the expiration date.
The expiration date will be 12:00 midnight, New York City time, on the
day after the commencement of the exchange offer, or at a later date which
is mutually agreed upon by PageNet and Arch.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, PageNet and
Arch could not merge until notifications were furnished to the Federal Trade
Commission and the Antitrust Division of the Department of Justice and the
waiting period requirements were satisfied. On April 7, 2000, the Antitrust
Division informed Arch and PageNet that it had closed its review of the merger
and all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 have expired.
On December 31, 1999, Arch and PageNet filed a Request for Approval of a
Transfer of Control of the Federal Communications Commission licenses held by
each of Arch's and PageNet's subsidiaries. By order dated April 25, 2000, the
Federal Communications Commission approved the merger of Arch and PageNet. The
Commission also required the combined company to divest two of its five
narrowband PCS licenses within 90 days of the merger occurring because it
appeared the combined company would hold five narrowband PCS licenses, in
violation of a Commission three-channel narrowband PCS limit; however, by order
dated May 5, 2000, the Federal Communications Commission eliminated its
three-channel narrowband PCS limit. Thus, the combined company will be able to
retain all five of its narrowband PCS licenses.
PageNet and Arch filed all necessary information concerning the merger, as
required by several state public utility commissions.
At any time before the effective time of the merger, the Antitrust
Division, the Federal Trade Commission, state attorneys general or a private
person or entity could seek under antitrust laws, among other things, to enjoin
the merger and, any time after the effective time of the merger, to cause Arch
to divest itself, in whole or in part, of the stock of PageNet or of businesses
conducted by PageNet in the merger. There can be no assurance that a challenge
to the merger will not be made or that, if such a challenge is made, Arch will
prevail.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
PageNet's and Arch's respective tax counsel are of the opinion that, for
federal tax purposes, the merger will qualify as a tax-free transaction to
Pagenet and Arch stockholders, except for cash received by PageNet stockholders
instead of fractional shares of Arch common stock. Such counsel are of the
opinion that the distribution of Class B common stock of Vast will be taxable to
PageNet stockholders, regardless of whether the merger qualifies as a tax-free
transaction.
There is risk, however, that the merger will not qualify as a tax-free
exchange. See "Risk Factors -- Volatility of Arch and Vast stock prices could
adversely affect tax consequences of the merger to PageNet stockholders and
noteholders." If, contrary to counsel's opinion, the merger does not qualify as
a tax-free transaction, a PageNet common stockholder would recognize gain or
loss in an amount equal to the difference between:
- the fair market value, as of the effective time of the merger, of the
Arch common stock received in exchange for PageNet common stock,
including cash received instead of fractional shares; and
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- The PageNet stockholder's tax basis in PageNet common stock exchanged
in the merger, as reduced by reason of any allocation of such tax
basis made in connection with the taxable distribution of Class B
common stock of Vast.
See "Material Federal Income Tax Considerations."
ACCOUNTING TREATMENT OF THE MERGER
Arch will account for the merger using the purchase method of accounting
for a business combination, in accordance with Accounting Principles Board
Opinion No. 16. The assets and liabilities of PageNet, including intangible
assets, will be recorded at their fair market values and included in the
financial statements of Arch. The results of operations and cash flows of
PageNet will be included in Arch's financial statements from the date of the
merger.
QUOTATION ON NASDAQ NATIONAL MARKET SYSTEM
It is a condition to the closing of the merger that Arch shall have filed a
notification for the shares of Arch common stock to be issued in the merger to
be listed on the Nasdaq National Market System.
RESALES OF ARCH COMMON STOCK ISSUED IN CONNECTION WITH THE MERGER; AFFILIATE
AGREEMENTS
Arch common stock issued in connection with the merger may be freely
transferred, except that shares of Arch common stock received by persons who are
deemed to be "affiliates," as such term is defined by Rule 144 under the
Securities Act of 1933, of PageNet at the effective time of the merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act of 1933 or as otherwise permitted under the
Securities Act of 1933. Under the terms of the merger agreement, PageNet will
use its reasonable best efforts to cause each executive officer and director and
each person who may be an affiliate of PageNet to execute a written affiliate
agreement providing, among other things, that such person will not offer, sell,
transfer or otherwise dispose of any of the shares of Arch common stock obtained
as a result of the merger except in compliance with the Securities Act of 1933
and related rules and regulations.
APPRAISAL RIGHTS
Arch stockholders do not have appraisal rights in connection with the
merger.
Appraisal rights will be available to pre-exchange offer PageNet
stockholders in connection with the merger. Appraisal rights will not be
available with respect to shares of PageNet common stock issued in exchange for
PageNet senior subordinated notes. Accordingly, a PageNet stockholder wishing to
exercise appraisal rights under Section 262 of the General Corporation Law of
Delaware as to eligible shares of common stock should follow the procedures
required by that section. This joint proxy statement/ prospectus contains a
summary description of Section 262 and the principal steps stockholders must
take to perfect their appraisal rights under that statute. Stockholders should
read "PageNet's Special Meeting -- Appraisal Rights" and should read Section 262
in its entirety, a copy of which is attached as Annex I to this joint proxy
statement/prospectus.
If PageNet files for reorganization under chapter 11 of the Bankruptcy
Code, appraisal rights would no longer be available and all stockholders who had
previously demanded appraisal would subsequently be entitled to receive the
consideration provided for in the prepackaged bankruptcy plan or such other plan
as may be confirmed by the Bankruptcy Court.
PAGENET PREPACKAGED BANKRUPTCY PLAN
If PageNet's board of directors determines to effect the merger through use
of the chapter 11 process, it will file and seek to confirm and consummate its
prepackaged bankruptcy plan. The merger, if effected pursuant to the prepackaged
bankruptcy plan, will be implemented differently from the way it would be
effected outside of the chapter 11 cases.
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The Plan provides for the conversion of the claims held by holders of
PageNet senior subordinated notes directly into Arch common stock upon
consummation of the merger. If the merger is completed outside of chapter 11,
the merger will be completed in a two step process. The claims of the holders of
senior subordinated notes will first be converted into PageNet common stock and
then such common stock will be converted to Arch common stock pursuant to the
merger agreement. In connection with the conversion of the PageNet senior
subordinated notes to PageNet common stock, holders of such notes will also
receive shares of Class B common stock of Vast.
If the merger is consummated pursuant to the prepackaged bankruptcy plan as
confirmed under chapter 11, all PageNet noteholders and stockholders will be
bound by the prepackaged bankruptcy plan and merger agreement regardless of
whether any individual noteholder or stockholder voted in favor of the plan. If
the merger is consummated pursuant to the merger agreement outside of
bankruptcy, the terms of the merger that relate to PageNet stockholders will be
binding only on those holders of PageNet's senior subordinated notes that
exchange their notes pursuant to the terms of the exchange offer. Also, if the
merger is consummated outside of bankruptcy, the holders of PageNet's senior
subordinated notes that do not exchange their notes pursuant to the terms of the
exchange offer will retain their notes but the terms of the indentures governing
their senior subordinated notes will be modified pursuant to the terms of the
exchange offer.
If the requisite number and amount of noteholders consent to the
prepackaged bankruptcy plan but holders of 66 2/3% of the PageNet common stock
voted with respect to the prepackaged bankruptcy plan do not consent, PageNet
nonetheless expects to file under chapter 11 and seek to confirm the prepackaged
bankruptcy plan over the dissent of the stockholders. In order to do so, PageNet
will be required to demonstrate that none of its creditors, including the
noteholders, will receive under the prepackaged bankruptcy plan property with a
value greater than the amount owed to them by PageNet. If the prepackaged
bankruptcy plan is not confirmed, PageNet would evaluate its strategic
alternatives while under the protection of the Bankruptcy Court. These
alternatives could include, but are not limited to, a stand-alone restructuring,
transactions with other merger partners, or liquidation.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Annex A to this joint proxy
statement/prospectus and is incorporated by reference into this summary. We urge
you to read the merger agreement in its entirety for a more complete description
of the terms and conditions of the merger and related matters.
STRUCTURE OF THE MERGER
Following the completion of the PageNet exchange offer and the satisfaction
or waiver of all other conditions to the merger, a wholly owned subsidiary of
Arch will merge into PageNet, and PageNet will become a wholly owned subsidiary
of Arch. Two business days after all conditions to the merger are fulfilled or
waived, or at such other time and date as Arch and PageNet agree, we will file a
certificate of merger with the Delaware Secretary of State. The phrase
"effective time of the merger" refers to the time of that filing, or any other
time that we agree upon and specify in the certificate of merger.
Immediately prior to the effective time of the merger, PageNet will
distribute 68.9% of the Class B common stock of Vast to its noteholders who
exchange their senior subordinated notes for PageNet common stock. PageNet will
also distribute 11.6% of the Class B common stock of Vast to persons who are
PageNet stockholders prior to the exchange offer. After the merger, the combined
company will retain 19.5% of the Class B common stock of Vast. These percentages
will be diluted proportionately if Vast issues additional equity before or after
the merger. See "The Vast Distribution".
THE EXCHANGE RATIO AND TREATMENT OF PAGENET COMMON STOCK
At the effective time of the merger each outstanding share of PageNet
common stock will be converted into 0.1247 shares of Arch common stock. Shares
of PageNet common stock owned by Arch or any direct or indirect wholly owned
subsidiary of Arch will be canceled and holders of shares exercising appraisal
rights will have the rights granted under Delaware law. If, before the effective
time of the merger, the issued and outstanding shares of Arch common stock are
changed into a different number of shares as a result of a reclassification,
stock split, reverse stock split, stock dividend or stock distribution, an
appropriate adjustment will be made to the number and kind of shares of Arch
common stock that PageNet stockholders are to receive in the merger.
For a description of Arch's common stock and a description of the
differences between the rights of holders of Arch common stock and PageNet
common stock, see "Comparison of Rights of PageNet Stockholders and Arch
Stockholders".
No fractional shares of Arch common stock will be issued in the merger.
Instead, Arch will pay cash to each holder of PageNet common stock who would
otherwise be entitled to receive a fraction of a share of Arch common stock, in
an amount equal to the fraction, rounded to the nearest one-hundredth of a
share, multiplied by the average closing price per share of Arch common stock as
reported in The Wall Street Journal, New York City edition, during the ten
trading days immediately prior to the effective time of the merger. No interest
will be paid or accrued on cash to be paid instead of fractional shares.
EXCHANGE PROCEDURES
At the effective time of the merger, Arch will deposit with Harris Trust
Company of New York for distribution to the holders of PageNet common stock,
certificates representing shares of Arch common stock issuable under the merger
agreement and an amount of cash sufficient to pay cash instead of fractional
shares. Arch will make sufficient funds available to the exchange agent from
time to time as needed to pay cash in respect of dividends or other
distributions on unexchanged shares.
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If a PageNet stockholder has a PageNet stock certificate, then promptly
after the merger takes place, the exchange agent will send the stockholder a
letter of transmittal and instructions for exchanging its PageNet common stock
certificates for:
- a certificate representing shares of Arch common stock;
- certificates representing shares of Class B common stock of Vast; and
- cash instead of any fractional shares of Arch common stock.
The surrendered PageNet common stock certificates will be canceled. YOU SHOULD
NOT SEND IN ANY PAGENET COMMON STOCK CERTIFICATES UNTIL YOU RECEIVE THE LETTER
OF TRANSMITTAL.
If a PageNet stockholder owns PageNet common stock through a broker,
PageNet's employee benefit plans or other arrangement where the stockholder does
not hold a PageNet certificate, then the stockholder's stock will be exchanged
for Arch common stock and cash in lieu of fractional shares based on the
exchange ratio without any action by the stockholder.
PageNet noteholders who participate in the exchange offer will receive
certificates for their shares of Arch common stock after the merger instead of
receiving certificates for the shares of PageNet common stock they are entitled
to receive in the exchange offer.
If any certificates for shares of Arch common stock are to be issued in a
name other than that in which the PageNet stock certificate surrendered in
exchange for them is registered, the person requesting such exchange must (1)
pay any associated transfer taxes or other taxes or (2) establish to the
satisfaction of Arch or the exchange agent that all taxes have been paid or are
not applicable.
The exchange agent will deduct and withhold from the consideration
otherwise payable under the merger agreement whatever amounts the exchange agent
is required to deduct and withhold under the Internal Revenue Code, or any
provision of state, local or foreign tax law, with respect to the making of such
payment. To the extent that amounts are withheld by the exchange agent, the
withheld amounts shall be treated for purposes of the merger agreement as having
been paid to the person for whom the deduction and withholding was made by the
exchange agent.
Registered holders of unsurrendered PageNet common stock certificates will
be entitled to vote at any meeting of Arch stockholders with a record date at or
after the effective time of the merger the number of whole shares of Arch common
stock represented by their PageNet common stock certificates, regardless of
whether such holders have exchanged their PageNet common stock. The time,
conditions and manner of the vote will be governed by Arch's certificate of
incorporation and bylaws.
After the effective time of the merger, the PageNet stock transfer books
will not reflect transfers of shares of PageNet common stock.
If a certificate for PageNet common stock has been lost, stolen or
destroyed, the PageNet stockholder must provide an appropriate affidavit of
fact. Arch will also require the PageNet stockholder to deliver a bond as
indemnity against any claim that may be made against Arch with respect to such
certificates alleged to have been lost, stolen or destroyed. Arch and the
exchange agent will then issue the consideration properly payable in accordance
with the merger agreement.
TREATMENT OF PAGENET STOCK OPTIONS
At the effective time of the merger, each unvested option to purchase
PageNet common stock previously granted under PageNet's stock plans will
automatically vest. We will then convert each outstanding PageNet option into an
option to purchase the same number of shares of Arch common stock that the
holder of the option would have received in the merger if the holder had
exercised the option immediately prior to the merger. The number of shares of
Arch common stock calculated in the conversion will be rounded down to the
nearest whole number. The exercise price per share of Arch common stock subject
to each option will equal the aggregate exercise price of the PageNet common
stock which would have been purchasable under the PageNet option, divided by the
number of shares of Arch
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common stock the holder of the option would have received in the merger if the
holder had exercised the option immediately prior to the merger, rounded down to
the nearest whole number.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties of PageNet and
Arch relating to:
- their organization, existence, good standing, corporate power,
qualification to do business and similar corporate matters;
- their capital structure;
- the authorization, execution, delivery and performance of the merger
agreement;
- the absence of any required governmental and third-party approvals other
than those specified in the merger agreement;
- the absence of breaches, violations or defaults under their corporate
charters and bylaws and other agreements and documents;
- the accuracy of their financial statements and any filings with the
Securities and Exchange Commission;
- the absence of certain changes in their businesses since the end of the
prior fiscal year;
- the absence of litigation and liabilities, including liabilities
associated with employee benefit plans;
- their compliance with applicable laws, including environmental and
regulatory laws;
- the absence of actions that would prevent the merger from being treated
as a tax-free reorganization under the Internal Revenue Code;
- the timely filing of all tax returns and payment of all taxes;
- the absence of undisclosed brokers and finders;
- the status of their preparedness with respect to Year 2000 compliance;
- the approval by each board of directors of the merger agreement and the
merger;
- the receipt by each board of directors of the opinions of their
respective financial advisors that the consideration for the merger is
fair to holders of PageNet common stock and Arch common stock from a
financial point of view;
- their employee benefits plans;
- the actions taken by each board of directors to make Delaware's
interested stockholder business combination law, other state takeover
statutes, each of their rights agreements and any other anti-takeover
provision in their certificates of incorporation or bylaws inapplicable
to the merger;
- their relationships with employees;
- environmental matters and compliance with environmental laws;
- their significant agreements; and
- their intellectual property.
COVENANTS
Conduct of Businesses Prior to the Merger
Except as contemplated by the merger agreement, PageNet and Arch have
agreed that they and their subsidiaries will conduct their businesses only in
the ordinary and usual course until the effective time of
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the merger. The merger agreement includes other limitations, prohibitions and
provisions relating to the conduct of their businesses before the effective time
of the merger concerning:
- charter and bylaw amendments;
- changes in capital stock and payment of dividends;
- actions that would prevent the merger from qualifying as a tax-free
reorganization under the Internal Revenue Code;
- increases in compensation, and amendments to employee benefit or
retirement plans;
- incurrence or repayment of indebtedness;
- capital expenditure levels;
- issuance of capital stock and convertible securities;
- acquisitions and dispositions;
- changes in accounting policies or procedures;
- settlement or release of claims in litigation; and
- tax elections.
Some of these limitations do not apply, however, with respect to Vast.
PageNet may, among other things:
- transfer or encumber shares of capital stock or securities convertible
into shares of capital stock of Vast;
- cause Vast to incur debt, so long as the borrowed funds are used solely
by Vast;
- transfer specified assets to Vast;
- establish the terms of the equity interest in Vast to be transferred to
the holders of PageNet common stock and PageNet notes; and
- establish an employee equity incentive plan for Vast.
Non-Solicitation of Competing Proposals
PageNet and Arch have agreed to restrictions concerning an "acquisition
proposal," which the merger agreement defines generally as a proposal of merger,
business combination or acquisition of more than 10% of their assets or 15% of
their stock. Specifically, each company has agreed that neither it nor its
agents will, directly or indirectly:
- initiate, solicit, encourage or otherwise facilitate any inquiries or the
making of any acquisition proposal with a third party;
- have any discussions with or provide any confidential information or data
to a third party in connection with an acquisition proposal; or
- engage in any negotiations concerning an acquisition proposal or
otherwise facilitate any acquisition proposal.
The merger agreement expressly allows PageNet and Arch to comply with
Securities and Exchange Commission rules regarding the publication of a board of
directors' recommendations with respect to tender offers, and, subject to some
limitations, expressly allows the board of directors of PageNet or Arch to:
- negotiate with, and provide information to, a third party in response to
an unsolicited bona fide written acquisition proposal, if the board of
directors concludes in good faith, after consulting
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outside counsel, that doing so is necessary to comply with the board's
fiduciary duty to its stockholders; and
- recommend an unsolicited proposal to its stockholders, if the board of
directors concludes in good faith, after consulting its legal and
financial advisors, that such transaction is reasonably capable of being
completed, and, if completed, would be more favorable to its stockholders
than the proposed transaction between Arch and PageNet.
PageNet and Arch have agreed to terminate all existing discussions and
negotiations with third parties concerning acquisition proposals. Each company
has agreed to notify the other as soon as reasonably practicable if it receives
any acquisition proposal, or if a third party seeks information from it or seeks
to engage it in discussions concerning an acquisition proposal. Each company has
also agreed to keep the other company informed of any such proposals or
inquiries on an ongoing basis.
Stockholders Meetings
The merger agreement requires both companies to convene stockholder
meetings as soon as reasonably practicable after the registration statement
containing the joint proxy statement/prospectus is declared effective.
PageNet has agreed that its board of directors will recommend that PageNet
stockholders vote to:
- adopt the merger agreement;
- approve the merger;
- approve an amendment to the PageNet certificate of incorporation to
increase the authorized number of PageNet shares to an amount sufficient
to complete the PageNet exchange offer and approve the issuance of such
common stock; and
- approve the other associated transactions.
The PageNet board of directors may withdraw or modify its recommendation if
it determines in good faith, after consultation with outside legal counsel, that
failing to do so would be reasonably likely to be inconsistent with its
fiduciary duties.
Even if the PageNet board of directors withdraws or modifies its
recommendation, it must convene and complete the stockholder meeting which
considers the merger. The PageNet board of directors is not required to convene
the stockholders meeting, however, if PageNet is in bankruptcy or if Arch
terminates the merger agreement.
Arch has agreed that its board of directors will recommend that Arch
stockholders vote to increase the authorized number of shares of Arch common
stock to an amount sufficient to complete the merger and the Arch exchange offer
and approve the issuance of such common stock.
The Arch board of directors may withdraw or modify its recommendation if it
determines in good faith, after consultation with outside legal counsel, that
failing to do so would be reasonably likely to be inconsistent with its
fiduciary duties.
Even if the Arch board of directors withdraws or modifies its
recommendation, it must convene and complete the stockholder meeting which
considers the transaction. The board of directors is not required to convene the
stockholders meeting, however, if PageNet terminates the merger agreement.
Filings and Other Actions
Arch and PageNet have agreed to cooperate with each other, and to use their
reasonable best efforts
- to deliver comfort letters from their respective independent public
accountants;
- to take all necessary, proper and advisable actions to complete the
merger, including obtaining opinions from their respective attorneys,
preparing and filing promptly all documentation necessary
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to complete the merger, and instituting any court action necessary to
obtain approval of the merger and defending any court action instituted
to prevent completion of the merger;
- to obtain promptly all approvals necessary or advisable to complete the
merger; and
- to share all information reasonably necessary and advisable in connection
with the merger.
Affiliates
All Arch common stock received by PageNet stockholders in the merger will
be freely transferable, except persons who are deemed to be "affiliates" of
PageNet, as defined under the Securities Act, who must resell their Arch common
stock only in transactions permitted by the resale provisions of Rule 145 under
the Securities Act, or Rule 144 in the case of such persons who become
affiliates of Arch, or as otherwise permitted under the Securities Act. Persons
who may be deemed to be affiliates of Arch or PageNet generally include
individuals or entities that control, are controlled by or are under common
control with such company and may include officers and directors of Arch or
PageNet, as well as significant stockholders.
Under the merger agreement, PageNet is required to use all reasonable
efforts to cause each of its affiliates to execute a written agreement
restricting the disposition by the affiliate of the shares of Arch common stock
to be received in the merger.
Indemnification; Director and Officer's Insurance
For a period of six years after the effective time of the merger, Arch has
agreed to indemnify each present and former director and officer of PageNet
against any costs or expenses incurred in connection with any proceeding or
investigation pertaining to matters occurring at or before the effective time of
the merger relating to the services the indemnified party performed for PageNet.
Arch will have the right to assume the defense of any claims. If it elects to
assume the defense, it will only be liable for the legal expenses of its counsel
and not those of any other counsel.
Arch will also, for a period of six years after the effective time of the
merger, maintain a policy of officers' and directors' liability insurance for
acts and omissions occurring prior to the effective time of the merger, with
coverage in amount and scope at least as favorable to the indemnified parties as
PageNet's existing coverage.
Bankruptcy Provisions
If less than 97.5% of the PageNet senior subordinated notes are tendered in
the PageNet exchange offer or if the stockholders of PageNet fail to approve the
merger agreement, PageNet and some of its operating subsidiaries have agreed to
either commence the chapter 11 case and file the prepackaged bankruptcy plan
under chapter 11 of the Bankruptcy Code or pay Arch a $40.0 million termination
fee if the following conditions to the filing of the prepackaged bankruptcy plan
are met:
- Arch stockholders have approved the transaction;
- the holders of at least 66 2/3% in amount of the PageNet senior
subordinated notes voted with respect to the prepackaged bankruptcy plan
and that constitute at least a majority in number of all such voting
noteholders, have voted to accept the prepackaged bankruptcy plan;
- sufficient debt financing has been arranged to fund PageNet's operations
until the prepackaged bankruptcy plan is approved by the Bankruptcy
Court; and
- senior credit facilities of at least $1.3 billion have been secured or
can be secured through the prepackaged bankruptcy plan.
If PageNet files the prepackaged bankruptcy plan, then Arch has agreed to
be bound by all of the terms of the merger agreement provided that the
prepackaged bankruptcy plan is confirmed by the Bankruptcy Court within 120 days
of the filing of the plan or such later date as is mutually agreed to in
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writing by Arch and PageNet. In the event the chapter 11 case is commenced and
the prepackaged bankruptcy plan is filed, Arch has agreed to take certain
actions to support confirmation of the prepackaged bankruptcy plan.
At any time, if the board of directors of PageNet determines that the
commencement of the chapter 11 case and the filing of prepackaged bankruptcy
plan is in the best interests of PageNet then:
- PageNet may commence the chapter 11 case and file the prepackaged
bankruptcy plan under chapter 11 of the Bankruptcy Code and shall seek to
satisfy its part of the prepackaged bankruptcy plan conditions and
otherwise seek confirmation of the prepackaged bankruptcy plan by the
Bankruptcy Court, and
- Arch shall
- seek to satisfy its conditions to PageNet's filing of the prepackaged
bankruptcy plan outlined above; and
- be bound by the terms of the merger agreement and consummate the
merger through the prepackaged bankruptcy plan if such plan is
confirmed by the Bankruptcy Court, provided that such confirmation is
entered by no later than December 31, 2000, or such later date as is
mutually agreed to by Arch and PageNet, and if the other conditions to
the merger have been satisfied.
If an involuntary bankruptcy petition is filed against PageNet or any of
its subsidiaries or a liquidator or trustee is appointed for any of them prior
to a voluntary commencement of PageNet's bankruptcy case and the date of such
involuntary action is prior to the date which is 60 days after the date that the
registration statements relating to the merger and the exchange offers are
declared effective by the Securities and Exchange Commission, PageNet shall have
up to 120 days after such involuntary action to obtain from the appropriate
court an order which dismisses such action, so that the exchange offers may be
completed, and during such 120-day period the merger agreement will remain in
effect and Arch will be bound by all its terms; or
- if such involuntary action is filed more than 60 days after the date that
the registration statements relating to the merger and the exchange
offers are declared effective by the Securities and Exchange Commission,
and as of such date of such involuntary action:
- at least 97.5% of the aggregate outstanding principal amount of the
PageNet senior subordinated notes and not less than a majority in
number of each series of PageNet senior subordinated notes have been
validly tendered and not withdrawn; and
- the PageNet and Arch stockholders have approved the transaction;
then PageNet shall have up to 120 days after such involuntary action to
obtain an order which dismisses such action, and the merger agreement will
remain in effect and Arch will consummate the merger outside of bankruptcy,
unless PageNet and Arch mutually consent to file PageNet's bankruptcy case,
provided that such order has been obtained before the expiration of such
120-day period.
If on such date of such involuntary action:
- less than 97.5% of the aggregate outstanding principal amount of the
PageNet senior subordinated notes or less than a majority in number of
each series of PageNet senior subordinated notes have been validly
tendered and not withdrawn, or the PageNet stockholders fail to
approve the transaction; but
- the conditions to the prepackaged bankruptcy plan have been satisfied,
then PageNet shall stipulate to bankruptcy relief under chapter 11 of the
Bankruptcy Code and Arch will be bound by all of the terms of the merger
agreement provided that the prepackaged bankruptcy
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plan is confirmed by the Bankruptcy Court within 120 days of the filing of
the plan or such later date as may be agreed by Arch and PageNet;
If on such date of such involuntary action:
- less than 97.5% of the aggregate outstanding principal amount of the
PageNet senior subordinated notes or less than a majority in number of
each series of PageNet senior subordinated notes have been validly
tendered and not withdrawn, or the PageNet stockholders fail to
approve the transaction; and
- the conditions to the prepackaged bankruptcy plan have not been
satisfied,
then PageNet may, but shall not be obligated to, stipulate to bankruptcy
relief under chapter 11 of the Bankruptcy Code and the provisions described
above relating to a voluntary filing by PageNet shall apply, including the
provisions requiring Arch to be obligated for a period of time to
consummate the merger pursuant under the prepackaged bankruptcy plan.
If PageNet's bankruptcy case is commenced, voluntarily or involuntarily,
PageNet has agreed to file a motion on the date such case commences seeking
expedited approval of certain sections of the merger agreement concerning
nonsolicitation of competing proposals and the payment by Arch and PageNet of
their respective termination fees. The merger agreement provides that Arch may
terminate the agreement if an order approving such motion is not entered within
30 days after the commencement of the Bankruptcy Case.
If PageNet's bankruptcy case commences, Arch may enter into another merger
or acquisition transaction, provided that such transaction would not prevent,
materially impair or materially delay its ability to consummate the merger. If
Arch enters into a merger or acquisition transaction following the commencement
of PageNet's bankruptcy case and as a result of such event PageNet is required
to amend its disclosure statement and resolicit the votes of its creditors, then
the time within which the order of the Bankruptcy Court confirming the
prepackaged bankruptcy plan must be obtained shall be extended for an additional
90 days.
CONDITIONS TO COMPLETION OF THE MERGER
We will complete the merger only if the conditions set forth in the merger
agreement are satisfied or waived. The conditions to each of Arch's and
PageNet's obligation to complete the merger include:
- stockholder approval of the transaction by Arch's stockholders;
- either:
- stockholder approval of the transaction by PageNet's stockholders; or
- entry of a confirmation order, not subject to a stay or injunction, by
the Bankruptcy Court confirming the prepackaged 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;
- 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 effectiveness of the registration statements related to the merger
and the PageNet exchange offer and the absence of any stop order
suspending the effectiveness of the registration statements with the SEC
or any instituted or threatened proceeding seeking a stop order;
- the availability of senior credit facilities in a minimum amount of $1.3
billion to Arch and its subsidiaries, including PageNet, after the
merger;
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- 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
- either:
- at least 97.5% of the aggregate outstanding principal amount of the
PageNet senior subordinated notes and not less than a majority of the
outstanding principal amount of each series of PageNet senior
subordinated notes has been validly tendered, without withdrawal, and
accepted in the PageNet exchange offer; or
- if the minimum required amount of PageNet senior subordinated notes
has not been tendered and accepted:
- the final confirmation order from the Bankruptcy Court confirming
the prepackaged bankruptcy plan has been entered; and
- all conditions under the prepackaged 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;
- Arch's receipt of a favorable tax opinion rendered as of the closing of
the merger from Hale and Dorr LLP to the effect described under "Material
Federal Income Tax Considerations;" and
- Arch's receipt of an unqualified certificate from PageNet that each of
the conditions described above has been satisfied, that the PageNet
stockholders meeting has been convened and PageNet stockholders have:
- adopted and approved the merger agreement and the merger;
- increased the authorized number of shares of PageNet common stock to
an amount sufficient to complete the PageNet exchange offer; and
- approved the issuance of such common stock;
except to the extent that stockholder approval is not required due to
the entry of the final confirmation order of a Bankruptcy Court.
The 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;
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- PageNet's receipt of a favorable tax opinion rendered as of the closing
of the merger from Mayer, Brown & Platt to the effect described under
"Material Federal Income Tax Considerations;"
- PageNet's receipt of an unqualified certificate from Arch that each of
the conditions described above has been satisfied, that the Arch
stockholders meeting has been convened and Arch stockholders have:
- increased the authorized number of shares of Arch common stock to an
amount sufficient to complete the merger;
- approved the issuance of such common stock; and
- the distribution of Vast common stock has been declared or the final
confirmation order of a Bankruptcy Court has been entered confirming the
prepackaged bankruptcy plan.
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 favorable tax
opinions, 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.
TERMINATION OF THE MERGER AGREEMENT
Arch and PageNet can mutually agree to terminate the merger agreement at
any time without completing the merger.
Also, either Arch or PageNet can, without the consent of the other,
terminate the merger agreement:
- if the merger is not completed:
- before September 30, 2000, if no bankruptcy case has been filed by
then, or
- if a bankruptcy case has been filed, 30 days following the date by
which a final confirmation order must be entered;
- if the PageNet and Arch stockholder meetings are held and PageNet's or
Arch's stockholders do not adopt the transaction; or
- if any order permanently restraining, enjoining or otherwise prohibiting
completion of the merger has become final and non-appealable.
Either party can extend the termination date for up to an additional 90
days if such extension is necessary in order to obtain governmental approvals of
the merger under applicable antitrust laws and if all other conditions to
completion of the merger are satisfied or are capable of being satisfied.
Neither party may terminate the merger agreement if such party has materially
breached the terms of the merger agreement and such breach contributed to the
failure of the merger to be completed.
In addition, PageNet can terminate the merger agreement before the
effective time of the merger if:
- the board of directors of Arch has withdrawn or adversely modified its
approval or recommendation of the merger;
- Arch has breached any representation, warranty, covenant or agreement in
the merger agreement, and the breach is both material and incurable prior
to the date at which either Arch or PageNet can, without the consent of
the other, terminate the merger agreement;
- PageNet receives an unsolicited proposal for a business combination
transaction with a third party that PageNet's board of directors
concludes is a superior proposal and PageNet provides Arch with all the
material terms of the proposal at least two business days prior to
termination and simultaneously with the termination pays the termination
fee to Arch; or
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- PageNet's minimum condition is not satisfied or PageNet's stockholders
have not adopted the merger agreement but the requisite conditions to the
prepackaged bankruptcy plan are satisfied, and PageNet does not file the
bankruptcy case and seek confirmation of the prepackaged bankruptcy plan,
provided that PageNet simultaneously pays the termination fee to Arch.
Finally, Arch can terminate the merger agreement if:
- the board of directors of PageNet has withdrawn or adversely modified its
approval or recommendation of the merger;
- PageNet has breached any representation, warranty, covenant or agreement
in the merger agreement, and the breach is both material and incurable
prior to the date at which either Arch or PageNet can, without the
consent of the other, terminate the merger agreement, but only if the
breach does not solely result from the filing or conduct of the
bankruptcy case or from the filing of an involuntary bankruptcy petition
against PageNet or any of its subsidiaries;
- an order of a Bankruptcy Court approving of the nonsolicitation of
competing proposals and the payment by PageNet of the termination fee has
not been entered within 30 days of the commencement of the bankruptcy
case;
- an order of a Bankruptcy Court confirming the prepackaged bankruptcy plan
is not entered within 120 days of the commencement of the bankruptcy case
or a later date mutually agreeable to Arch and PageNet;
- the prepackaged bankruptcy plan is amended, modified or added to in any
material respect without the written consent of Arch;
- Arch receives an unsolicited proposal for a business combination
transaction with a third party that Arch's board of directors concludes
is a superior proposal and Arch provides PageNet with all the material
terms of the proposal at least two business days prior to termination and
simultaneously with the termination pays the termination fee to PageNet.
TERMINATION FEE
Arch must pay PageNet a termination fee of $40.0 million by wire transfer
of same day funds if:
- Arch, its stockholders or its noteholders receives an acquisition
proposal from a third party or a third party publicly announces an
intention to make an acquisition proposal and:
- Arch's stockholders subsequently do not approve the merger;
- the merger agreement with PageNet is terminated; and
- Arch either executes and delivers an agreement with a third party
relating to an acquisition proposal or an acquisition with respect
to Arch is completed, in either case, within 12 months of the
termination of the merger agreement with PageNet;
- PageNet terminates the merger agreement with Arch because:
- the Arch board of directors has withdrawn or adversely modified its
approval or recommendation of the merger agreement;
- Arch has breached any representation, warranty, covenant or
agreement concerning:
- the restrictions on acquisition proposals; or
- Arch's board of directors taking all actions necessary to convene
a stockholders meeting to consider and vote upon and recommend
that the stockholders approve an increase in the authorized
number of shares of Arch common stock to an amount sufficient to
complete the merger and the issuance of such common stock; or
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- Arch terminates the merger agreement with PageNet in response to a
superior acquisition proposal by a third party.
PageNet must pay Arch a fee of $40.0 million by wire transfer of same day
funds if:
- PageNet, its stockholders or its noteholders receives an acquisition
proposal from a third party or a third party publicly announces an
intention to make an acquisition proposal and:
- PageNet's stockholders subsequently do not adopt the merger
agreement with Arch or PageNet's noteholders do not satisfy the
PageNet minimum condition with respect to the PageNet exchange
offer, and a Bankruptcy Court fails to enter the final confirmation
order;
- the merger agreement with Arch is terminated; and
- PageNet either executes and delivers an agreement with a third party
relating to an acquisition proposal or an acquisition with respect
to PageNet is completed, in either case, within 12 months of the
termination of the merger agreement;
- Arch terminates the merger agreement with PageNet because:
- the PageNet board of directors has withdrawn or adversely modified
its approval or recommendation of the merger agreement with Arch;
- PageNet has breached any representation, warranty, covenant or
agreement concerning:
- the restrictions on acquisition proposals; or
- PageNet's board of directors taking all actions necessary to
convene a stockholders meeting to consider and vote upon and
recommend that the stockholders approve, unless a bankruptcy case
has commenced, or PageNet has stipulated to bankruptcy relief
after the filing of an involuntary bankruptcy petition against it
or its subsidiaries:
- the adoption of the merger agreement with Arch;
- the merger with Arch; and
- an increase in the authorized number of shares of PageNet
common stock to an amount sufficient to complete the PageNet
exchange offer and the issuance of such common stock;
- the prepackaged bankruptcy 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
bankruptcy plan in each case without the prior written consent of Arch;
- any other plan of reorganization filed by a person other than PageNet is
confirmed by a Bankruptcy Court;
- PageNet files a motion to sell or otherwise transfer all or substantially
all of its assets as part of a sale under the Bankruptcy Code without the
prior written consent of Arch; or
- PageNet terminates the merger agreement with Arch in response to a
superior acquisition proposal by a third party; or
- the requisite conditions to the prepackaged plan are satisfied but
PageNet does not file the bankruptcy case and seek confirmation of the
prepackaged bankruptcy plan.
Subject to the possible payment of a termination fee, each of Arch and
PageNet will pay all expenses it incurs in connection with the merger and
related transactions, except that they will share fees paid to the SEC, the
Federal Trade Commission, the Federal Communications Commission and other
federal or state agencies, and all printing and mailing costs incurred in
connection with the merger, equally.
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MODIFICATION OR AMENDMENT OF THE MERGER AGREEMENT
At any time prior to the effective time, Arch and PageNet can modify or
amend the merger agreement if they both agree to do so. Each can waive its right
to require the other to comply with the merger agreement where the law allows.
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THE VAST DISTRIBUTION
GENERAL
The merger agreement provides that PageNet stockholders will receive a
distribution of 11.6% of the total equity of Vast. The PageNet board of
directors will distribute 2,320,000 shares of Class B common stock of Vast to
the persons who are PageNet stockholders immediately prior to the acceptance of
senior subordinated notes in the exchange offer. These shares of Class B common
stock will be divided as evenly as possible into shares of Class B1 common
stock, Class B2 common stock and Class B3 common stock. The Class B common stock
will automatically convert into shares of Class A common stock at specified
intervals following an underwritten public offering of Vast common stock with
net proceeds of at least $25 million. See Annex F to this proxy
statement/prospectus for a description of Vast and its capital stock.
The distribution will not be made unless all of the conditions to the
merger have been satisfied. Because the distribution will be made only to
persons who were PageNet stockholders prior to the acceptance of senior
subordinated notes in the exchange offer, noteholders who become stockholders of
PageNet in the exchange offer will not be entitled to receive any portion of
this distribution.
MANNER OF EFFECTING THE VAST DISTRIBUTION
If all of the conditions to the merger are satisfied, on the closing date
of the Arch merger, PageNet will deliver all 2,320,000 shares of Class B common
stock of Vast to a distribution agent. As soon as practicable after that date,
the distribution agent will mail certificates for such shares to the PageNet
stockholders entitled to receive these shares.
DETERMINATION OF THE DISTRIBUTION RATIO
PageNet estimates that the number of shares of Vast that PageNet
stockholders will receive as a result of the Vast distribution is approximately
0.00742 of a share of each class of Vast Class B common stock for each share of
PageNet common stock. For each 1,000 shares of PageNet common stock, a PageNet
stockholder will receive approximately 7.42 shares of Class B1 common stock,
approximately 7.42 shares of Class B2 common stock and approximately 7.42 shares
of Class B3 common stock. The fraction of a share of each class that PageNet
stockholders will receive will equal 2,320,000 divided by three and then divided
by the number of shares of PageNet common stock outstanding as of immediately
prior to the acceptance of senior subordinated notes in the exchange offer. The
0.00742 estimate is based on the 104,242,567 shares of PageNet common stock
outstanding on June 30, 2000. Issuance of additional shares before the merger is
effected, through stock option exercises or otherwise, would result in a
different ratio.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS OF THE VAST DISTRIBUTION
PageNet's tax counsel is of the opinion that the distribution of Class B
common stock of Vast will be taxable to PageNet stockholders. Counsel is of the
opinion that it is likely that the Class B common stock of Vast will be treated
as distributed in exchange for a portion of a stockholder's PageNet common
shares. However, it is possible that the distribution will be taxed as a
dividend. See "Material Federal Income Tax Considerations."
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THE PREPACKAGED BANKRUPTCY PLAN
In this section, we use the term "PageNet" to refer to Paging Network, Inc.
and its United States based operating subsidiaries, other than Vast Solutions,
Inc., that will become debtors in the prepackaged bankruptcy case.
In some circumstances, PageNet may commence a case under chapter 11 of the
Bankruptcy Code and seek to confirm a prepackaged bankruptcy plan and thereby
bind the PageNet's noteholders and stockholders to the terms of the merger and
the exchange offer. The following is a summary of some matters of significance
to Arch or PageNet stockholders that would occur either pursuant to or in
connection with the filing of the chapter 11 case and confirmation of the
prepackaged bankruptcy plan. Additional information about the prepackaged
bankruptcy plan is contained in a prospectus of PageNet, which has been
distributed to all PageNet stockholders and to PageNet noteholders.
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS UNDER THE PREPACKAGED BANKRUPTCY
PLAN
The Bankruptcy Code requires that the prepackaged bankruptcy plan classify
the claims against, and equity interests in PageNet. PageNet believes that all
claims and equity interests have been appropriately classified in the
prepackaged 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 prepackaged 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
the prepackaged bankruptcy plan complies with this requirement of equal
treatment.
A class of claims or equity interests that is impaired under the
prepackaged bankruptcy plan is entitled to vote to accept or reject the plan,
unless the class will not receive or retain any property under the prepackaged
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
prepackaged bankruptcy plan.
The prepackaged 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 PREPACKAGED BANKRUPTCY PLAN
The interests of PageNet stockholders are classified as Class 6 interests
under the prepackaged bankruptcy plan.
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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
Arch common stock available to Paging Network, Inc. stockholders under the
merger agreement, and the 2,320,000 shares of Class B common stock of Vast.
- Voting: Old stock interests are impaired and the holders of allowed old
stock interests are entitled to vote to accept or reject the prepackaged
bankruptcy plan.
The prepackaged 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. As of June 30, 2000, for each 1,000 shares of PageNet common
stock, the prepackaged bankruptcy plan provides for distribution of 124.7 shares
of Arch common stock and approximately 7.42 shares of each class of Vast Class B
common stock.
OTHER PROVISIONS OF THE PREPACKAGED BANKRUPTCY PLAN AND INTENDED ACTIONS DURING
THE CHAPTER 11 CASE
Releases
With some exceptions PageNet will release pursuant to the prepackaged
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 prepackaged 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
Under the merger agreement, upon the commencement of the chapter 11 case,
PageNet is required to seek bankruptcy court approval of the provisions of the
merger agreement that restrict the 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. PageNet intends to seek such approval from
the bankruptcy court pursuant to the terms of the merger agreement. In the event
such approval is not obtained within 30 days of the commencement of the chapter
11 case, Arch has the right to terminate the merger agreement without paying a
termination fee to PageNet.
In addition, the prepackaged 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 that may be 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
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will seek approval immediately upon the filing of their petitions to pay in full
in the ordinary course of business the pre-petition claims owing to general
unsecured creditors that were incurred in the ordinary course of PageNet's
business (not including claims under the senior subordinated notes). Management
anticipates that it will receive 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 intends to seek relief from the bankruptcy court so that salaries,
wages accrued and unpaid vacation, health benefits, severance benefits and
similar employee benefits will be unaffected by the filing of the chapter 11
case. PageNet intends to seek the approval of the bankruptcy court, immediately
upon commencement of the chapter 11 case, to honor payroll checks outstanding as
of the date of the 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 intends to seek the authority to honor its executive
retention program and employee retention program and assume employee contracts
with certain executives and key managers. There can be no assurance, however,
that all or part of such approval will be obtained. Employee claims and benefits
not paid or honored, as the case may be, prior to the consummation of the
prepackaged 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
prepackaged bankruptcy plan.
STANDARDS FOR CONFIRMATION OF THE PREPACKAGED 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 prepackaged bankruptcy plan.
Best Interests
The Bankruptcy Code requires that, with respect to each impaired class,
each member of such class either:
- accepts the prepackaged bankruptcy plan; or
- will receive or retain under the prepackaged 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 the prepackaged bankruptcy plan will provide members of
each impaired class with at least what they would receive in a chapter 7
liquidation, and therefore the prepackaged bankruptcy plan meets this test. For
further information on the liquidation analysis, we refer you to the filings by
PageNet with the Securities and Exchange Commission in connection with this
matter.
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Feasibility
The Bankruptcy Court must also determine that the prepackaged bankruptcy
plan is feasible and is not likely to be followed by liquidation or further
reorganization of PageNet. To determine whether the prepackaged 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 prepackaged bankruptcy plan.
Accordingly, PageNet will seek a ruling to that effect in connection with the
confirmation of the prepackaged bankruptcy plan.
Plan Acceptance
The Bankruptcy Code requires, subject to certain exceptions, that the
prepackaged 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 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 prepackaged bankruptcy plan by any impaired class. PageNet may, however,
request confirmation of the prepackaged bankruptcy plan even though some
impaired classes have not accepted the plan.
As part of the prepackaged bankruptcy plan, PageNet intends to solicit
acceptance of the prepackaged bankruptcy plan prior to the filing of the chapter
11 case. The Bankruptcy Code provides that acceptances obtained prior to the
filing of a petition will be effective in a chapter 11 case only if the
pre-petition solicitation of the acceptances complied with applicable
non-bankruptcy law governing the adequacy of disclosure, such as federal
securities laws and regulations. For example, under the Securities Act, no offer
to buy or sell a security may be made except pursuant to an effective
registration statement. If there is no such applicable non-bankruptcy law,
"adequate information" as defined under the Bankruptcy Code requires that
information sufficient to enable a hypothetical reasonable investor to make an
informed judgment with respect to the prepackaged bankruptcy plan be furnished
in connection with the solicitation. PageNet intends to use the ballots received
pursuant to the solicitation of PageNet's stockholders and noteholders pursuant
to a prospectus filed with the Securities and Exchange Commission on January 11,
2000 (as amended) to confirm the prepackaged bankruptcy plan if they file the
chapter 11 case. PageNet believes that this solicitation complies with such
applicable non-bankruptcy law and otherwise contains "adequate information" as
required under the Bankruptcy Code and will seek appropriate findings from the
bankruptcy court in this regard. If the bankruptcy court approves the
solicitation process and materials, then those holders of claims against and
interests in PageNet which were solicited prior to the filing of the chapter 11
case will be bound by their pre-chapter 11 case votes. If the bankruptcy court
does not approve the solicitation process and materials, PageNet may be required
to re-solicit such acceptances of the prepackaged bankruptcy plan with a
bankruptcy court-approved disclosure statement.
CONFIRMATION OF THE PREPACKAGED 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 prepackaged bankruptcy plan, the Bankruptcy Code allows PageNet
to confirm the prepackaged 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 the prepackaged bankruptcy plan satisfies the requirements
of the "cramdown" provision, each impaired class that voted to reject the
prepackaged bankruptcy plan would, nonetheless, be bound to the treatment
afforded to that class under the plan.
To obtain confirmation of the prepackaged bankruptcy plan using the
"cramdown" provision, PageNet must demonstrate to the Bankruptcy Court that, as
to each class that has rejected the prepackaged
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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 prepackaged 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 prepackaged 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 prepackaged 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 the prepackaged
bankruptcy plan, PageNet reserves the right to request that the bankruptcy court
confirm the prepackaged 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.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
SCOPE AND LIMITATION
This section describes all of the material federal income tax
considerations applicable to holders of Arch common stock and to PageNet
stockholders who, pursuant to the merger, exchange their PageNet common stock
for Arch common stock and receive the distribution of Class B common stock of
Vast pursuant to the merger agreement. The legal conclusions in this discussion
are based on the opinion of Mayer, Brown & Platt, counsel to PageNet, and the
opinion of Hale and Dorr LLP, counsel to Arch, as applicable. These opinions are
filed with the Securities and Exchange Commission as Exhibits 8.1 and 8.2 to
this registration statement.
Counsels' opinions are not binding on the Internal Revenue Service or the
courts. No rulings have been requested from the Internal Revenue Service
concerning any of the matters described in this prospectus. There is a risk that
the Internal Revenue Service could disagree with some of the conclusions set
forth in this discussion.
The opinions of counsel and this discussion are based upon the Internal
Revenue Code of 1986, as amended, Treasury Regulations, administrative
pronouncements and judicial decisions in effect as of the date of this
prospectus, all of which are subject to change, possibly with retroactive
effect.
In addition, the opinion of counsel is based on:
- customary factual representations made by PageNet and Arch, including
representations as to:
-- the nature and value of the securities and other consideration to
be exchanged in the transactions;
-- issuances, acquisitions, dispositions, and redemptions involving
the stock of PageNet and Arch before or after the merger;
-- the continuation, after the merger, of the historic business of
PageNet; and
-- the assets and liabilities of PageNet and Arch; and
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- customary factual assumptions set forth in the opinion, including
assumptions that:
-- the description of the transactions, representations and statements
set forth in the transaction agreements, this document and
accompanying exhibits are accurate, and that the transactions will
in fact occur as described in those documents;
-- any representation or statement that is anticipated to be true, is
made "to the best of knowledge," or is similarly qualified is in
fact correct; and
-- where a representation states that a person is not a party to, does
not have, or is not aware of any plan, intention, understanding or
agreement, there is in fact no such plan, intention understanding
or agreement.
- representations by Arch, as confirmed to Arch by Bear Stearns, Arch's
financial advisor, and PageNet, as confirmed to PageNet by Houlihan
Lokey, PageNet's financial advisor, as to the relative values of the Arch
common stock, Class B common stock of Vast and other consideration to be
issued to PageNet senior subordinated noteholders and PageNet
stockholders in the PageNet exchange offer and the merger.
Any material inaccuracy in the factual representations and assumptions could
alter the conclusions reached by counsel in its opinion. See discussion under
"Risk Factors -- Risks Related to the Merger -- Volatility of Arch and Vast
stock prices could adversely affect tax consequences of the merger to PageNet
stockholders and noteholders".
This discussion assumes that a PageNet stockholder is both:
- a citizen or resident of the United States for federal income tax
purposes; and
- holds PageNet common stock 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
stockholder in light of the stockholder's particular circumstances or to PageNet
stockholders subject to special treatment under federal income tax laws
including, without limitation:
- dealers in securities;
- financial institutions;
- life insurance companies;
- persons who acquired PageNet common stock as part of a straddle, hedge,
conversion transaction or other integrated transaction;
- tax-exempt entities;
- foreign individuals and entities;
- stockholders who acquired their PageNet stock through exercise of an
employee stock option or otherwise as compensation; and
- persons who hold PageNet stock through a partnership or other
pass-through entity.
EACH PAGENET STOCKHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING THE
SPECIFIC FEDERAL, FOREIGN, STATE, AND LOCAL TAX CONSEQUENCES APPLICABLE TO IT.
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<PAGE> 99
QUALIFICATION OF THE MERGER AS A TAX-FREE REORGANIZATION
PageNet's and Arch's respective counsel are of the opinion that the merger
will qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code, and that each of PageNet and Arch will be parties to that
reorganization within the meaning of Section 368(b) of the Code. In rendering
this opinion, counsel relied on factual representations made by the parties,
including the parties' representations, as supported by certificates given by
PageNet's investment banker and Arch's investment banker, that the value of the
Arch stock to be issued in the merger would represent more than half of the
value received in the transaction, taking into account the value of the Class B
common stock of Vast, cash paid to dissenters who perfect appraisal rights, cash
paid instead of fractional shares and any other property received in connection
with the merger. If, based upon actual values at the closing date of the merger,
the value of the Arch stock is less than half of the value of the total
consideration, it is possible that the merger would not qualify as a tax-free
reorganization. See "Risk Factors -- Risks Related to the Merger -- Volatility
of Arch and Vast stock prices could adversely affect tax consequences of the
merger to PageNet stockholders."
It is a condition to the completion of the merger that each of PageNet and
Arch receive from its respective counsel the opinion set forth above dated as of
the closing date of the transactions. In connection with these opinions, the
factual representations described above will be reconfirmed at the closing date
of the transactions.
The following description of material tax consequences to PageNet
stockholders reflects the opinions of counsel that the merger will qualify as a
tax-free reorganization. We also present an alternative discussion of the
material tax consequences if the merger does not so qualify.
FEDERAL INCOME TAX CONSEQUENCES TO PAGENET COMMON STOCKHOLDERS
Receipt of Class B Common Stock of Vast
The receipt of Class B common stock of Vast will be taxable to PageNet
stockholders. The receipt of Class B common stock of Vast will likely be treated
as a redemption of PageNet stock to which Section 302 of the Internal Revenue
Code applies. In this case, each PageNet common stockholder will be considered
for federal income tax purposes as exchanging:
- a portion of each share of the holder's PageNet common stock for shares
of Class B common stock of Vast received; and
- the remaining portion of each share for the Arch common stock received in
the merger.
Except as discussed below, PageNet stockholders would recognize capital
gain or loss equal to the difference between the fair market value of the Class
B common stock of Vast received and the stockholder's tax basis in the portion
of the PageNet shares treated as exchanged for the Vast stock. Such capital gain
or loss would be long-term capital gain or loss if the stockholder's holding
period for the PageNet common stock exceeds one year.
PageNet stockholders should determine the tax basis in shares treated as
exchanged for Vast stock by multiplying the basis of each PageNet share they
hold by the following fraction:
- the fair market value of the Class B common stock of Vast received,
divided by
- the fair market value of the Class B common stock of Vast plus the fair
market value of the Arch common stock received, including any amounts
received instead of fractional shares.
A PageNet stockholder's tax basis in the shares of Class B common stock of
Vast received in the exchange will equal the fair market value of the shares of
Class B common stock of Vast at the effective time of the merger, and its
holding period for shares of Class B common stock of Vast will commence on the
day after the exchange.
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<PAGE> 100
PageNet stockholders who own PageNet senior subordinated notes or Arch
senior discount notes or Arch common stock, either directly or indirectly under
the constructive ownership rules of Section 318 of the Internal Revenue Code,
may not receive this "exchange" treatment. Any stockholders in this situation
should consult their tax advisors to determine whether instead they would be
required to treat the receipt of Class B common stock of Vast stock as a
dividend, with the consequences described below.
Although counsel believes the foregoing treatment is likely, it is possible
that the distribution of the Class B common stock of Vast would be taxed as a
dividend to PageNet stockholders. In this case, each PageNet stockholder would
include as ordinary dividend income an amount equal to the fair market value of
the Class B common stock of Vast received, except to the extent, if any, that
the amount of the distribution was greater than PageNet's available earnings and
profits. To the extent the amount of distribution exceeds PageNet's available
earnings or profits, the excess amount would be applied first to reduce the tax
basis of the stockholder's PageNet shares, and to the extent basis is reduced to
zero, any remaining amount would be taxed as a capital gain. In the event this
treatment applied, a PageNet stockholder could not recognize a loss upon the
receipt of the Class B common stock of Vast, and all of the holder's PageNet
shares would be treated as exchanged for Arch stock in the merger.
Receipt of Arch Common Stock Pursuant to the Merger
A PageNet stockholder will not recognize any gain or loss on the exchange
of PageNet stock for Arch common stock, except for cash received instead of a
fractional share of Arch common stock. A PageNet common stockholder's aggregate
tax basis for the Arch common stock received, including any fractional share for
which cash is received, will equal such stockholder's aggregate tax basis in the
shares of PageNet common stock held immediately prior to the merger, as reduced,
as discussed above, by reason of the distribution of Class B common stock of
Vast. A PageNet common stockholder's holding period for the Arch common stock
received, including any fractional share for which cash is received, will
include the period during which the shares of PageNet common stock were held.
Receipt of Cash Instead of Fractional Shares
A holder of PageNet common stock that receives cash instead of a fractional
share of Arch common stock in the merger will generally recognize capital gain
or loss in an amount equal to the difference between:
- the amount of cash received for the fractional share; and
- such holder's adjusted tax basis allocable to the fractional share.
This treatment may not, however, apply to a PageNet stockholder who:
- is involved in directing corporate affairs of PageNet;
- holds more than a minimal interest in PageNet; or
- directly owns shares of Arch common stock immediately prior to the merger
or indirectly owns shares of PageNet common stock or Arch common stock
under the constructive ownership rules of Section 318 of the Internal
Revenue Code.
Failure to Qualify as a Reorganization
In the event that the merger does not qualify as a "reorganization" under
Section 368(a) of the Internal Revenue Code, a PageNet common stockholder would
recognize gain or loss with respect to the PageNet common stock surrendered in
the merger equal to the difference between:
- the fair market value, as of the effective time of the merger, of the
Arch common stock received in exchange for the PageNet common stock,
including cash received instead of fractional shares; and
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<PAGE> 101
- the stockholder's tax basis in the PageNet common stock exchanged in the
merger, as reduced by reason of any allocation of such tax basis made in
connection with the taxable distribution of the Class B common stock of
Vast as discussed above.
Any such gain or loss would be capital gain or loss. Such gain or loss would be
considered long-term capital gain or loss if the shareholder's holding period
for the share surrendered exceeds one year at the time of the merger. If this
treatment were to apply, a PageNet common stockholder's aggregate basis in the
Arch common stock received would equal its fair market value at the effective
time of the merger, and the stockholder's holding period for the Arch common
stock would begin the day after the effective time of the merger.
FEDERAL INCOME TAX CONSEQUENCES TO ARCH COMMON STOCKHOLDERS
Holders of Arch common stock will not recognize gain or loss for United
States federal income tax purposes as a result of the merger.
FEDERAL INCOME TAX CONSEQUENCES TO ARCH AND PAGENET
While it is the opinion of their respective counsel that the merger will be
tax-free to both Arch and PageNet, both companies expect to realize cancellation
of indebtedness income resulting from the elimination in the exchange offers of
indebtedness in exchange for consideration having a value less than the adjusted
issue price of the outstanding debt. In addition, PageNet expects to realize
income from the distribution of shares of Class B common stock of Vast.
The exact amount of the tax liability attributable to such income cannot be
determined precisely, because it depends on the values of the Arch common stock
and of the shares of Class B common stock of Vast distributed at the time of the
closing, and on certain other factors. See "Risk Factors -- Risks Related to the
Merger -- Volatility of Arch and Vast stock prices could adversely affect tax
consequences of the merger to PageNet stockholders." However, under the merger
agreement, neither Arch nor PageNet is obligated to complete the merger if the
reasonably expected amount of "out-of-pocket" tax liability exceeds $25 million
in the aggregate. Based on values of the combined companies and of Vast
reflected in the opinion of Houlihan Lokey, the companies expect that the tax
liability will be less than this amount, and that the liability would not be
material. See Annex C. In addition, again based on these expected values, the
parties expect that the merger and the exchange offers will result in the
elimination of substantially all of the tax benefit of the net operating loss
carryforwards and other tax attributes of each of PageNet and Arch which would
otherwise be available to offset future taxable income of the combined
companies.
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<PAGE> 102
CAPITALIZATION
The following table sets forth: (1) the capitalization of PageNet and Arch
at March 31, 2000; (2) the capitalization of PageNet as adjusted to give effect
to the PageNet exchange offer, assuming that 100% of the PageNet senior
subordinated notes are exchanged, and the Vast distribution; and (3) the
capitalization of Arch as adjusted to give effect to the Arch exchange offer and
merger, assuming 100% of the currently outstanding Arch discount notes are
exchanged and the repurchase of $91.1 million accreted value of Arch discount
notes that were under binding agreements at March 31, 2000. You should read this
table together with the other financial information appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED
----------------------- -----------------------
PAGENET ARCH PAGENET ARCH(1)
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ARCH CURRENT MATURITIES OF LONG-TERM DEBT................. $ -- $ 11,154 $ -- $ 11,154
---------- ---------- ---------- ----------
PAGENET LONG-TERM DEBT IN DEFAULT:
Credit agreement........................................ 745,000 -- 745,000 --
8.875% senior subordinated notes due February 1, 2006... 300,000 -- -- --
10.125% senior subordinated notes due August 1, 2007.... 400,000 -- -- --
10% senior subordinated notes due October 15, 2008...... 500,000 -- -- --
---------- ---------- ---------- ----------
1,945,000 -- 745,000 --
PAGENET OTHER LONG-TERM OBLIGATIONS....................... 59,753 -- 59,753 --
ARCH LONG-TERM DEBT, LESS CURRENT MATURITIES:
Senior bank debt........................................ -- 429,786 -- 1,244,786
10 7/8% senior discount notes due 2008.................. -- 245,686 -- --
6 3/4% convertible subordinated debentures due 2003..... -- 959 -- 959
12 3/4% senior notes due 2007........................... -- 127,957 -- 127,957
13 3/4% senior notes due 2008........................... -- 140,566 -- 140,566
9 1/2% senior notes due 2004............................ -- 125,000 -- 125,000
14% senior notes due 2004............................... -- 100,000 -- 100,000
Other................................................... -- -- -- 59,753
---------- ---------- ---------- ----------
Total long-term debt (including long-term debt in
default), less current maturities.............. 2,004,753 1,169,954 804,753 1,799,021
---------- ---------- ---------- ----------
PAGENET STOCKOWNERS' EQUITY:
Preferred stock -- $.01 par value, authorized 25,000,000
shares, no shares issued or outstanding................. -- -- -- --
Common stock -- $.01 par value, authorized 250,000,000
shares (no shares as adjusted), issued and outstanding
104,232,567 shares (721,063,324 as adjusted)............ 1,042 -- 7,210 --
Additional paid-in capital................................ 134,719 -- 676,423 --
Accumulated other comprehensive income.................... 804 -- 804 --
Accumulated deficit....................................... (975,013) -- (282,296) --
ARCH STOCKHOLDERS' EQUITY:
Preferred stock -- $.01 par value, authorized 10,000,000
shares, issued and outstanding 250,000 shares ($28,176
aggregate liquidation preference)....................... -- 3 -- 3
Common stock and Class B common stock.....................
$.01 par value, authorized 160,000,000 shares (225,000,000
as adjusted), issued and outstanding 63,157,700
(171,086,859 as adjusted)............................... -- 632 -- 1,711
Additional paid-in capital................................ -- 817,478 -- 1,466,131
Accumulated deficit....................................... -- (942,626) -- (808,369)
---------- ---------- ---------- ----------
Total stockholders' equity (deficit)............. (838,448) (124,513) 402,141 659,476
---------- ---------- ---------- ----------
Total capitalization............................. $1,166,305 $1,056,595 $1,206,894 $2,469,651
========== ========== ========== ==========
</TABLE>
---------------
(1) If 1% of the currently outstanding Arch discount notes are exchanged, total
long-term debt, less current maturities would be $2.0 billion, total
stockholders' equity would be $509.4 million and total capitalization would
be $2.5 billion.
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<PAGE> 103
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
March 31, 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 $154.6 million (accreted value at March 31, 2000) of Arch
discount notes for 11.4 million shares of Arch common stock in the
exchange offer made hereby;
- the exchange of $157.4 million (accreted value) of Arch discount notes
for 11.6 million shares of Arch common stock in February and March 2000;
- the exchange of $91.1 million (accreted value) of Arch discount notes for
$91.1 million of Arch Series D preferred stock in May 2000 and the
automatic conversion of $91.1 million of Series D preferred stock into
6.6 million shares of Arch common stock upon completion of the merger;
- the exchange of $1.2 billion of PageNet senior subordinated notes and
accrued interest thereon for 616.8 million shares of PageNet common stock
and 13.8 million shares of Vast Class B common stock;
- the distribution by PageNet of 2.3 million shares of Vast Class B common
stock to the current PageNet stockholders; 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 have
caused PageNet to be in default under its credit facilities and the covenants
relating to its senior subordinated notes. As a result of the defaults, PageNet
has no ability to borrow additional amounts to fund future operations.
As part of the merger, all or substantially 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. In addition, the restrictive covenants relating to any
untendered notes will be eliminated. 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.
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<PAGE> 104
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 March 31, 2000, the combined company would
have had approximately 14.8 million units in service, total assets of $2.9
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
$430.0 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 three months ended March 31, 2000, the
combined company would have had pro forma total revenues of $388.1 million,
adjusted pro forma earnings before interest, income taxes, depreciation and
amortization of $122.9 million and a net loss before extraordinary items and
cumulative effect of a change in accounting principle of $92.9 million. This pro
forma net loss excludes the effect of an extraordinary gain of $7.6 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 $321.3 million, $420.0 million and $340.6 million, respectively.
For the three months ended March 31, 2000, the combined company's pro forma cash
flows provided by operating activities used in investing activities and provided
by financing activities were $77.3 million, $37.3 million and $3.7 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
three months ended March 31, 2000 would have been 3.8 to 1.0 and 3.7 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 $58.5 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 three months ended March 31, 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 three months ended March 31, 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
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<PAGE> 105
predict the future operating results or financial position of Arch following the
merger and the MobileMedia acquisition.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Service, rental and maintenance revenues.................... $ 1,651,502 $ 388,108
Product sales............................................... 152,017 36,699
----------- -----------
Total revenues.................................... 1,803,519 424,807
Cost of products sold....................................... (113,891) (27,169)
----------- -----------
1,689,628 397,638
Operating Expenses:
Service, rental and maintenance........................... 440,534 102,194
Selling................................................... 204,777 45,146
General and administrative................................ 573,294 127,370
Depreciation and amortization............................. 677,396 169,583
Restructuring charge...................................... (25,731) --
Provision for asset impairment............................ 17,798 --
Bankruptcy related expenses............................... 14,938 --
----------- -----------
Operating income (loss)..................................... (213,378) (46,655)
Interest and other income (expense)......................... (216,407) (46,233)
----------- -----------
Income (loss) before income tax provision................... (429,785) (92,888)
Income tax provision........................................ 209 --
----------- -----------
Net income (loss)........................................... $ (429,994) $ (92,888)
=========== ===========
Basic/diluted income (loss) per share....................... $ (2.53) $ (0.54)
=========== ===========
Other Operating Data:
Capital expenditures, excluding acquisitions................ $ 354,808 $ 35,336
Units in service at end of period........................... 15,500,000 14,800,000
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 2000
--------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 240,065
Total assets................................................ 2,890,985
Long-term debt, less current maturities..................... 1,799,021
Stockholders' equity........................................ 659,476
</TABLE>
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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
March 31, 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 $154.6 million (accreted value) of Arch discount notes
for 11.4 million shares of Arch common stock;
- the exchange of $157.4 million (accreted value) of Arch discount notes
for 11.6 million shares of Arch common stock in February and March 2000;
- the exchange of $91.1 million (accreted value) of Arch discount notes for
$91.1 million of Arch Series D preferred stock in May 2000 and the
automatic conversion of $91.1 million of Series D preferred stock into
6.6 million shares of Arch common stock upon completion of the merger;
- the exchange of $1.2 billion of PageNet senior subordinated notes and
accrued interest thereon for 616.8 million shares of PageNet common stock
and 12.1 million shares of Vast Class B common stock;
- the distribution by PageNet of 4.0 million shares of Vast Class B common
stock to the current PageNet stockholders; 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.
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<PAGE> 107
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS FOR
ADJUSTMENTS FOR PAGENET EXCHANGE
ARCH EXCHANGE ADJUSTED AND VAST DISTRIBUTION
ARCH -------------------- ARCH PAGENET ---------------------
(HISTORICAL) DEBIT CREDIT PRO FORMA (HISTORICAL) DEBIT CREDIT
------------ -------- ------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 4,222 $ 4,222 $ 43,029 $ 7,463(2)
Accounts receivable, net.......... 59,071 59,071 99,365 381(2)
Inventories....................... 9,514 9,514 6,577
Prepaid expenses and other........ 12,772 12,772 13,450 91(2)
---------- ---------- ----------
Total current assets........ 85,579 85,579 162,421
Property and equipment, net....... 385,121 385,121 713,133 1,679(2)
Intangible and other assets....... 824,768 824,768 519,842 18,320(2)
1,107(3)
---------- ---------- ----------
$1,295,468 $1,295,468 $1,395,396
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt............................ $ 11,154 $ 11,154
Long-term debt in default......... $1,945,000 $1,200,000(2)
Accounts payable.................. 41,586 41,586 73,232 740(2)
Accrued expenses.................. 35,340 $ 3,000(1) 38,340 43,482 334(2)
Accrued interest.................. 31,322 31,322 72,322 68,205(2)
Customer deposits and deferred
revenue......................... 35,018 35,018 40,055 351(2)
Accrued restructuring, current
portion......................... 14,556 14,556 --
---------- ---------- ----------
Total current liabilities... 168,976 171,976 2,174,091
Long-term debt, less current
maturities...................... 1,169,954 $154,632(1) 924,268 59,753
91,054(18)
Accrued restructuring, non-current
portion......................... --
Other long-term liabilities....... 81,051 81,051
Series D Preferred Stock.......... 91,054(18) 91,054
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock................... 3 3 --
Common stock...................... 632 114(1) 746 1,042 6,168(2)
Additional paid-in capital........ 817,478 68,504(1) 885,982 134,719 1,107(3) 542,811(2)
Accumulated other comprehensive
income.......................... 804
Accumulated deficit............... (942,626) 83,014(1) (859,612) (975,013) 692,717(2)
---------- ---------- ----------
Total stockholders' equity
(deficit).................. (124,513) 27,119 (838,448)
---------- ---------- ----------
$1,295,468 $1,295,468 $1,395,396
========== ========== ==========
<CAPTION>
PRO FORMA
ADJUSTMENTS
ADJUSTED FOR MERGER
PAGE NET --------------------- PRO FORMA
PRO FORMA DEBIT CREDIT CONSOLIDATED
---------- -------- -------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 35,566 $ 39,788
Accounts receivable, net.......... 98,984 158,055
Inventories....................... 6,577 16,091
Prepaid expenses and other........ 13,359 26,131
---------- ----------
Total current assets........ 154,486 240,065
Property and equipment, net....... 711,454 1,096,575
Intangible and other assets....... 500,415 $237,157(4) $ 7,995(4) 1,554,345
---------- ----------
$1,366,355 $2,890,985
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt............................ $ 11,154
Long-term debt in default......... $ 745,000 $745,000(4) --
Accounts payable.................. 72,492 114,078
Accrued expenses.................. 43,148 81,488
Accrued interest.................. 4,117 35,439
Customer deposits and deferred
revenue......................... 39,704 74,722
Accrued restructuring, current
portion......................... -- 20,000(4) 34,556
---------- ----------
Total current liabilities... 904,461 351,437
Long-term debt, less current
maturities...................... 59,753 70,000(4) 1,799,021
745,000(4)
Accrued restructuring, non-current
portion......................... -- --
Other long-term liabilities....... -- 81,051
Series D Preferred Stock.......... 91,054(18) --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock................... -- 3
Common stock...................... 7,210 7,210(4) 899(4) 1,711
66(18)
Additional paid-in capital........ 676,423 676,423(4) 540,404(4) 1,466,131
39,745(18)
Accumulated other comprehensive
income.......................... 804 804(4) --
Accumulated deficit............... (282,296) 282,296(4) (808,369)
51,243(18)
---------- ----------
Total stockholders' equity
(deficit).................. 402,141 659,476
---------- ----------
$1,366,355 $2,890,985
========== ==========
</TABLE>
95
<PAGE> 108
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTED
ARCH MOBILEMEDIA FOR MOBILEMEDIA FOR ARCH ARCH
(HISTORICAL) (HISTORICAL) ACQUISITION EXCHANGE PRO FORMA
------------ ------------ --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Service, rental and maintenance
revenues................................. $ 591,389 $167,318 $ (3,521)(5) $ 755,186
Product sales............................. 50,435 9,207 59,642
---------- -------- ----------
Total revenues............................ 641,824 176,525 814,828
Cost of products sold..................... (34,954) (6,216) (41,170)
---------- -------- ----------
606,870 170,309 773,658
Operating expenses:
Service, rental and maintenance.......... 132,400 44,530 (3,521)(5) 173,409
Selling.................................. 84,249 23,115 107,364
General and administrative............... 180,726 51,562 232,288
Depreciation and amortization............ 309,434 45,237 2,958(6) 369,329
11,700(6)
Provision for asset impairment........... -- -- --
Restructuring charge..................... (2,200) -- (2,200)
Bankruptcy related expenses.............. -- 14,938 14,938
---------- -------- ----------
Total operating expenses.................. 704,609 179,382 895,128
---------- -------- ----------
Operating income (loss)................... (97,739) (9,073) (121,470)
Interest expense, net.................... (143,028) (17,660) 17,660(7) 15,031(8) (128,574)
(16,839)(7) 16,262(15)
Other income (expense)................... (48,421) 1,435 (46,986)
---------- -------- ----------
Income (loss) before income tax
provisions, extraordinary item and
cumulative effect of accounting change... (289,188) (25,298) (297,030)
Provision for income taxes................ -- 209 209
---------- -------- ----------
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................... $ (289,188) $(25,507) $ (297,239)
========== ======== ==========
Basic/diluted income (loss) per share
before extraordinary item and cumulative
effect of accounting change(18).......... $ (9.21) $ (4.04)
========== ==========
Weighted average common shares
outstanding(19).......................... 31,603,410 17,181,660(15) 11,640,321(17) 73,617,450
11,398,483(1)
1,793,576(16)
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR PAGENET
EXCHANGE ADJUSTED PRO FORMA
PAGENET AND PAGENET ADJUSTMENTS PRO FORMA
(HISTORICAL) VAST DISTRIBUTION PRO FORMA FOR MERGER CONSOLIDATED
------------ ----------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Service, rental and maintenance
revenues................................. $ 897,348 $ (1,032)(9) $ 896,316 $ 1,651,502
Product sales............................. 92,375 92,375 152,017
----------- ----------- -----------
Total revenues............................ 989,723 988,691 1,803,519
Cost of products sold..................... (57,901) (57,901) $ (14,820)(11) (113,891)
----------- ----------- -----------
931,822 930,790 1,689,628
Operating expenses:
Service, rental and maintenance.......... 267,043 82(9) 267,125 -- 440,534
Selling.................................. 97,413 97,413 204,777
General and administrative............... 361,386 (20,380)(9) 341,006 573,294
Depreciation and amortization............ 327,101 327,101 (77,559)(11) 677,396
58,525(12)
Provision for asset impairment........... 17,798 17,798 17,798
Restructuring charge..................... (23,531) (23,531) (25,731)
Bankruptcy related expenses.............. -- -- 14,938
----------- ----------- -----------
Total operating expenses.................. 1,047,210 1,026,912 1,903,006
----------- ----------- -----------
Operating income (loss)................... (115,388) (96,122) (213,378)
Interest expense, net.................... (150,921) 121,729(10) (29,192) (25,676)(13) (174,034)
9,408(18)
Other income (expense)................... 4,753 (140)(9) 4,613 (42,373)
----------- ----------- -----------
Income (loss) before income tax
provisions, extraordinary item and
cumulative effect of accounting change... (261,556) (120,701) (429,785)
Provision for income taxes................ -- -- 209
----------- ----------- -----------
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................... $ (261,556) $ (120,701) $ (429,994)
=========== =========== ===========
Basic/diluted income (loss) per share
before extraordinary item and cumulative
effect of accounting change(18).......... $ (2.52) $ (0.17) $ (2.53)
=========== =========== ===========
Weighted average common shares
outstanding(19).......................... 103,960,240 616,830,757(2) 720,790,997 89,917,496(4) 170,148,126
6,613,180(18)
(720,790,997)(4)
</TABLE>
96
<PAGE> 109
ARCH COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA FOR PAGENET
ADJUSTMENTS ADJUSTED EXCHANGE
ARCH FOR ARCH ARCH PAGENET AND
(HISTORICAL) EXCHANGE PRO FORMA (HISTORICAL) VAST DISTRIBUTION
------------ ----------- ---------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Service, rental and maintenance
revenues.......................... $ 177,660 $ 177,660 $ 211,273 $ (825)(9)
Product sales...................... 12,335 12,335 24,364
---------- ---------- -----------
Total revenues..................... 189,995 189,995 235,637
Cost of products sold.............. (8,880) (8,880) (13,193)
---------- ---------- -----------
181,115 181,115 222,444
Operating expenses:
Service, rental and maintenance... 39,115 39,115 62,699 380(9)
Selling........................... 25,045 25,045 20,101
General and administrative........ 53,934 53,934 79,770 (6,334)(9)
Depreciation and amortization..... 90,707 90,707 62,837
---------- ---------- -----------
Total operating expenses........... 208,801 208,801 225,407
---------- ---------- -----------
Operating income (loss)............ (27,686) (27,686) (2,963)
Interest expense, net............. (42,506) 6,544(8) (35,962) (46,241) 30,379(10)
Other income (expense)............ 7,615 7,615 (24) (110)(9)
---------- ---------- -----------
Income (loss) before income tax
provisions, extraordinary item and
cumulative effect of accounting
change............................ (62,577) (56,033) (49,228)
Provision for income taxes......... -- -- --
---------- ---------- -----------
Income (loss) before extraordinary
item and cumulative effect of
accounting change................. $ (62,577) $ (56,033) $ (49,228)
========== ========== ===========
Basic/diluted income (loss) per
share before extraordinary item
and cumulative effect of
accounting change (16)............ $ (1.25) $ (0.75) $ (0.47)
========== ========== ===========
Weighted average common shares
outstanding(19)................... 55,316,698 11,398,483(1) 74,405,476 104,232,567 616,830,757(2)
7,690,295(17)
<CAPTION>
ADJUSTED PRO FORMA
PAGENET ADJUSTMENTS PRO FORMA
PRO FORMA FOR MERGER CONSOLIDATED
----------- ------------ ------------
<S> <C> <C> <C>
Service, rental and maintenance
revenues.......................... $ 210,448 $ 388,108
Product sales...................... 24,364 36,699
----------- -----------
Total revenues..................... 234,812 424,807
Cost of products sold.............. (13,193) $ (5,096)(11) (27,169)
----------- -----------
221,619 397,638
Operating expenses:
Service, rental and maintenance... 63,079 -- 102,194
Selling........................... 20,101 45,146
General and administrative........ 73,436 127,370
Depreciation and amortization..... 62,837 1,388(11) 169,583
14,651(12)
----------- -----------
Total operating expenses........... 219,453 444,293
----------- -----------
Operating income (loss)............ 2,166 (46,655)
Interest expense, net............. (15,862) (4,504)(13) (53,714)
2,614(18)
Other income (expense)............ (134) 7,481
----------- -----------
Income (loss) before income tax
provisions, extraordinary item and
cumulative effect of accounting
change............................ (13,830) (92,888)
Provision for income taxes......... -- --
----------- -----------
Income (loss) before extraordinary
item and cumulative effect of
accounting change................. $ (13,830) $ (92,888)
=========== ===========
Basic/diluted income (loss) per
share before extraordinary item
and cumulative effect of
accounting change (16)............ $ (0.02) $ (0.54)
=========== ===========
Weighted average common shares
outstanding(19)................... 721,063,324 89,917,496(4) 170,936,152
6,613,180(18)
(721,063,324)(4)
</TABLE>
97
<PAGE> 110
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 $154.6 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 the February and March 2000 exchanges of debt for equity referred to in
note 15 of the notes to the unaudited pro forma condensed consolidated
financial statements and the exchange of debt for Series D preferred stock
in note 18 of the notes to the unaudited pro forma condensed consolidated
financial statements. The conversion of the Arch discount notes will result
in an extraordinary gain from the early extinguishment of debt of $83.0
million, net of tax of approximately $3.0 million.
2) To record the issuance of 616,830,757 shares of PageNet common stock valued
at $0.89 per share and 13,780,000 shares of Vast Class B common stock in
exchange for $1.2 billion principal amount of PageNet senior subordinated
notes plus accrued interest:
- This adjustment includes the elimination of all $68.2 million of accrued
interest on PageNet's senior subordinated notes and the write-off of
$19.9 million of deferred financing costs associated with PageNet's
senior subordinated notes.
- The conversion of the PageNet senior subordinated notes would result in
an extraordinary gain from the early extinguishment of debt of $692.7
million. There is no provision for income taxes on this gain as PageNet
expects to have sufficient net operating loss carryforwards (which have
been fully reserved in PageNet's financial statements) available at the
time of the exchange to fully offset the gain.
- This adjustment also includes the elimination of all consolidated amounts
related to Vast and the recording of PageNet'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, this also
reflects the forgiveness of $54.6 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.
- PageNet will not exchange the shares of its common stock and the common
stock of Vast for the senior subordinated notes unless the merger with
Arch is approved. The adjusted PageNet pro forma balance sheet column
included in the unaudited pro forma condensed consolidated financial
statements is an intermediate step in the overall merger transaction.
Holders of the PageNet senior subordinated notes cannot elect to exchange
their notes if the merger is not consummated and therefore cannot own an
equity interest in the pro forma company set forth in the adjusted
PageNet Pro Forma balance sheet column.
3) To record the distribution of 2,320,000 shares of Vast Class B common stock
to the current stockholders of PageNet.
4) To record:
- the issuance of 89,917,496 shares of Arch common stock to the
stockholders of PageNet, including the stockholders who previously held
the PageNet senior subordinated notes converted to PageNet common stock
as discussed in note 1 of the notes to the unaudited pro forma condensed
consolidated financial statements above. Each outstanding share of
PageNet common stock will be converted into 0.1247 shares of Arch common
stock;
- the elimination of $8.0 million in deferred financing costs related to
PageNet's domestic revolving credit agreement which Arch will not assume
as part of this transaction; and
- the excess of purchase price over the assumed fair value of the
identifiable assets required.
98
<PAGE> 111
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
(89,917,496 shares at $6.02 per share)................. $ 541,303
Liabilities Assumed:
Bank debt................................................. 745,000
Other long-term debt...................................... 59,753
Accounts payable.......................................... 72,492
Accrued expenses.......................................... 43,148
Accrued interest.......................................... 4,117
Customer deposits and deferred revenue.................... 39,704
PageNet closing costs..................................... 41,000(a)
----------
Total consideration exchanged............................... 1,546,517
Transaction costs........................................... 29,000(b)
Restructuring reserve....................................... 20,000(c)
----------
Total purchase price........................................ 1,595,517
Less fair value of tangible and intangible net assets
acquired:
Cash and cash equivalents................................. 35,566
Accounts receivable, net.................................. 98,984
Inventories............................................... 6,577
Prepaid expenses and other................................ 13,359
Property and equipment, net............................... 711,454
Intangible and other assets............................... 492,420(d)
----------
$1,358,360
==========
Excess of purchase price over tangible and intangible assets
acquired.................................................. $ 237,157
==========
</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 $8.0 million
elimination of deferred financing costs discussed earlier in this note 4.
5) To eliminate revenues and expenses between Arch and MobileMedia.
Revenues and expenses between Arch and PageNet were not material in 1998 or
1999.
6) 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
99
<PAGE> 112
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.
7) 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.
8) To remove the interest expense associated with Arch's discount notes
which will be converted into common stock in connection with the Arch exchange.
9) 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.
10) 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.
11) 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.
12) To record amortization of the excess of purchase price over the
tangible and intangible assets in the PageNet acquisition on a straight-line
basis of $23.7 million for the year ended December 31, 1999 and $5.9 million for
the three months ended March 31, 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 $455.3 million assumed fair
value of intangible assets consisting primarily of FCC licenses with an assumed
fair value of $429.6 million and goodwill with an assumed fair value of $25.7
million. PageNet's historical amortization was adjusted by $34.8 million for the
year ended December 31, 1999 and $8.7 million for the three months ended March
31, 2000 to conform PageNet's 40 year estimated useful life of FCC licenses and
goodwill to Arch's 10 year estimated useful life.
13) To record additional interest expense on pro forma consolidated bank
debt. Interest was calculated assuring a 10% interest rate on the average bank
debt outstanding for the year ended December 31, 1999. Additional interest
expense on bank borrowings would be as follows if interest rates were to
increase or decrease by 1/8 of a percent (in thousands):
<TABLE>
<CAPTION>
ASSUMED INTEREST EXPENSES
-----------------------------------------------
YEAR ENDED THREE MONTHS ENDED
ASSUMED CHANGE IN INTEREST RATE DECEMBER 31, 1999 MARCH 31, 2000
------------------------------- ------------------------- ------------------
<S> <C> <C>
Increase of 1/8%........................... $27,146 $4,900
Decrease of 1/8%........................... $24,206 $4,108
</TABLE>
100
<PAGE> 113
14) The pro forma financial statements of Arch assume 100% conversion of
Arch's $154.6 million (accreted value) discount notes. The following table
illustrates the impact on Arch's pro forma financial statements as of December
31, 1999 and March 31, 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............... $1,952,107
Total stockholders' equity.................................. $ 509,360
Interest expense, net
Year ended December 31, 1999.............................. $ (186,929)
Three months ended March 31, 2000......................... $ (60,192)
Income (loss) before extraordinary item and cumulative
effect of accounting change
Year ended December 31, 1999.............................. $ (442,889)
Three months ended March 31, 2000......................... $ (99,366)
Basic/diluted income (loss) per common share before
extraordinary item and cumulative effect of accounting
change
Year ended December 31, 1999.............................. $ (2.79)
Three months ended March 31, 2000......................... $ (0.62)
</TABLE>
15) To record issuance of Arch common stock in conjunction with the
MobileMedia acquisition.
16) To record issuance of Arch common stock in conjunction with the
repurchase of $16.3 million accreted value of discounts in October 1999.
17) To 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.
18) To record the exchange of $91.1 million ($100 million maturity value)
accreted value of Arch's discount notes in exchange for $91.1 million of Arch's
Series D preferred stock in May 2000 and to adjust related interest expense 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 conversion of the preferred stock will result in a gain of $51.2
million.
19) All share information reflects a 1-for-3 reverse stock split effected
by Arch during June 1999.
101
<PAGE> 114
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 three months ended March 31, 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 March 31, 2000 and for the three months ended March 31,
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.
102
<PAGE> 115
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- -----------------------
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 $ 90,529 $ 177,660
Product sales....................... 24,132 39,971 44,897 42,481 50,435 10,359 12,335
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues...................... 162,598 331,370 396,841 413,635 641,824 100,888 189,995
Cost of products sold............... (20,789) (27,469) (29,158) (29,953) (34,954) (6,926) (8,880)
---------- ---------- ---------- ---------- ---------- ---------- ----------
141,809 303,901 367,683 383,682 606,870 93,962 181,115
Operating expenses:
Service, rental and maintenance... 29,673 64,957 79,836 80,782 132,400 20,293 39,115
Selling........................... 24,502 46,962 51,474 49,132 84,249 13,011 25,045
General and administrative........ 40,448 86,181 106,041 112,181 180,726 25,626 53,934
Depreciation and amortization..... 60,205 191,871 232,347 221,316 309,434 51,118 90,707
Restructuring charge.............. -- -- -- 14,700 (2,200) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)............. (13,019) (86,070) (102,015) (94,429) (97,739) (16,086) (27,686)
Interest and non-operating expenses,
net............................... (22,522) (75,927) (97,159) (104,213) (188,249) (26,477) (42,506)
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) (45,763) (70,192)
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) (45,763) (70,192)
Extraordinary item.................. (1,684) (1,904) -- (1,720) 6,963 -- 7,615
Cumulative effect of accounting
change............................ -- -- -- -- (3,361) (3,361) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................... $ (36,602) $ (114,662) $ (181,874) $ (206,051) $ (285,586) $ (49,124) $ (62,577)
========== ========== ========== ========== ========== ========== ==========
Basic/diluted income (loss) per
common share before extraordinary
item and accounting change........ $ (7.79) $ (16.59) $ (26.31) $ (29.34) $ (9.21) $ (6.54) $ (1.28)
Extraordinary item per basic/diluted
common share...................... (0.37) (0.27) -- (0.25) 0.22 -- 0.14
Cumulative effect of accounting
change per basic/diluted common
share............................. -- -- -- -- (0.11) (0.48) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic/diluted net income (loss) per
common share...................... $ (8.16) $ (16.86) $ (26.31) $ (29.59) $ (9.10) $ (7.02) $ (1.14)
========== ========== ========== ========== ========== ========== ==========
OTHER OPERATING DATA:
Capital expenditures, excluding
acquisitions...................... $ 60,468 $ 165,206 $ 102,769 $ 113,184 $ 113,651 $ 25,528 $ 32,854
Cash flows provided by operating
activities........................ $ 14,749 $ 37,802 $ 63,590 $ 83,380 $ 99,536 $ 12,379 $ 31,915
Cash flows used in investing
activities........................ $ (192,549) $ (490,626) $ (102,769) $ (82,868) $ (627,166) $ (24,910) $ (32,854)
Cash flows provided by (used in)
financing activities.............. $ 179,092 $ 452,678 $ 39,010 $ (2,207) $ 529,158 $ 23,000 $ 2,000
Adjusted earnings before interest,
income taxes, depreciation and
amortization...................... $ 47,186 $ 105,801 $ 130,332 $ 141,587 $ 209,495 35,032 $ 63,021
Adjusted earnings before interest,
income taxes, depreciation and
amortization margin............... 33% 35% 35% 37% 35% 37% 35%
Units in service at end of period... 2,006,000 3,295,000 3,890,000 4,276,000 6,949,000 4,329,000 6,869,000
</TABLE>
103
<PAGE> 116
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
----------------------------------------------------------- ----------
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 $ 85,579
Total assets................ 785,376 1,146,756 1,020,720 904,285 1,353,045 1,295,468
Long-term debt, less current
maturities................ 457,044 918,150 968,896 1,001,224 1,322,508 1,169,954
Redeemable preferred
stock..................... 3,376 3,712 -- -- -- --
Stockholders' equity
(deficit)................. 246,884 147,851 (33,255) (213,463) (217,559) (124,513)
</TABLE>
The following table reconciles net income to the presentation of Arch's
adjusted earnings before interest, income taxes, depreciation and amortization:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- -------------------
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) $(49,124) $(62,577)
Interest and non-operating
expenses, net................ 22,522 75,927 97,159 104,213 188,249 26,477 42,506
Income tax benefit............. (4,600) (51,207) (21,172) -- -- -- --
Depreciation and
amortization................. 60,205 191,871 232,347 221,316 309,434 51,118 90,707
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) -- (7,615)
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 $ 35,032 $ 63,021
======== ========= ========= ========= ========= ======== ========
</TABLE>
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<PAGE> 117
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 dependant 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 three months ended March 31, 2000, units in
service decreased by a further 80,000 units. 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 units and messaging system equipment,
construction and expansion of messaging systems, and possible
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<PAGE> 118
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 March 31, 2000, the combined company would
have had approximately 14.8 million units in service, total assets of $2.9
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 $430.0 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 three months ended March 31, 2000, the combined
company would have had pro forma total revenues of $388.1 million, adjusted pro
forma earnings before interest, income taxes, depreciation and amortization of
$122.9 million and a net loss of $92.9 million. This pro forma net loss excludes
the effect of an extraordinary gain of $7.6 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 $321.3
million, $420.0 million and $340.6 million, respectively. For the three months
ended March 31, 2000, the combined company's pro forma cash flows provided by
operating activities used in investing activities and provided by financing
activities were $77.3 million, $37.3 million and $3.7 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 three
months ended March 31, 2000 would have been 3.8 to 1.0 and 3.7 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 $58.5 million per year.
The PageNet merger is subject to stockholder, noteholder and lender
consents 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 $10.0 million each for Arch and 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 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.
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<PAGE> 119
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.
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<PAGE> 120
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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -------------------
1997 1998 1999 1999 2000
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues............................ 107.9% 107.8% 105.8% 107.4% 104.9%
Cost of products sold..................... (7.9) (7.8) (5.8) (7.4) (4.9)
--------- -------- --------- -------- --------
Net revenues.............................. 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Service, rental and maintenance......... 21.7 21.1 21.8 21.6 21.6
Selling................................. 14.0 12.8 13.9 13.8 13.8
General and administrative.............. 28.8 29.2 29.8 27.3 29.8
Depreciation and amortization........... 63.2 57.7 51.0 54.4 50.1
Restructuring charge.................... -- 3.8 (0.4) -- --
--------- -------- --------- -------- --------
Operating income (loss)................... (27.7)% (24.6)% (16.1)% (17.1)% (15.3)%
========= ======== ========= ======== ========
Net income (loss)......................... (49.5)% (53.7)% (47.1)% (52.3)% (34.6)%
========= ======== ========= ======== ========
Cash flows provided by operating
activities.............................. $ 63,590 $ 83,380 $ 99,536 $ 12,379 $ 31,915
Cash flows used in investing activities... $(102,769) $(82,868) $(627,166) $(24,910) $(32,854)
Cash flows provided by (used in) financing
activities.............................. $ 39,010 $ (2,207) $ 529,158 $ 23,000 $ 2,000
Adjusted earnings before interest, income
taxes, depreciation and amortization.... 35.4% 36.9% 34.5% 37.3% 34.8%
========= ======== ========= ======== ========
Annual service, rental and maintenance
expenses per unit in service............ $ 22 $ 20 $ 23 $ 19 $ 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.
108
<PAGE> 121
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.
Three Months Ended March 31, 2000 Compared with Three Months Ended March 31,
1999
Total revenues increased $89.1 million, or 88.3%, to $190.0 million in the
three months ended March 31, 2000 from $100.9 million in the three months ended
March 31, 1999, as the number of units in service increased from 4.3 million at
March 31, 1999 to 6.9 million at March 31, 2000 entirely due to the MobileMedia
acquisition in June 1999. Net revenues (total revenues less cost of products
sold) increased to $181.1 million, a 92.8% increase, in the three months ended
March 31, 2000 from $94.0 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
which led to a decrease of 80,000 units in service during the three months ended
March 31, 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 $177.7 million in the three months ended March 31, 2000 from $90.5
million in the three months ended March 31, 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 three
months ended March 31, 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 $39.1
million, 21.6% of net revenues, in the three months ended March 31, 2000 from
$20.3 million, 21.6% of net revenues, in the three months ended March 31, 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 three months ended March 31, 2000 from
$19 in the three months ended March 31, 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 $25.0 million, 13.8% of net revenues, in the
three months ended March 31, 2000 from $13.0 million, 13.8% of net revenues, in
the three months ended March 31, 1999 due primarily to the MobileMedia
acquisition. However, the per unit costs should decrease in the future if
expected synergies are achieved and as existing systems become more populated
through the addition of new units and the fixed costs of operating these systems
are spread over a larger unit base.
General and administrative expenses increased to $53.9 million, 29.8% of
net revenues, in the three months ended March 31, 2000 from $25.6 million, 27.3%
of net revenues, in the three months ended March 31, 1999. The increase was due
primarily to the MobileMedia acquisition.
Depreciation and amortization expenses increased to $90.7 million in the
three months ended March 31, 2000 from $51.1 million in the three months ended
March 31, 1999. The increase in these
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<PAGE> 122
expenses was principally attributable to additional depreciation associated with
assets purchased in the MobileMedia acquisition and amortization expense
associated with intangibles which resulted from the MobileMedia acquisition.
Operating loss increased to $27.7 million in the three months ended March
31, 2000 from $16.1 million in the three months ended March 31, 1999 as a result
of the factors outlined above.
Net interest expense increased to $42.5 million in the three months ended
March 31, 2000 from $26.5 million in the three months ended March 31, 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 three months ended March 31, 2000 and 1999 includes approximately
$9.4 million and $9.9 million, respectively, of non-cash interest accretion on
Arch's notes.
In the three months ended March 31, 2000, Arch recognized an extraordinary
gain of $7.6 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 $62.6 million in the three months ended March 31,
2000 from $49.1 million in the three months ended March 31, 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.
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
110
<PAGE> 123
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.
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
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<PAGE> 124
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 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.
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<PAGE> 125
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, THREE MONTHS
-------------------------- ENDED
1997 1998 1999 MARCH 31, 2000
------- ------ ------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities..... $ 63.6 $ 83.4 $ 99.5 $ 31.9
Net cash used for investing activities........ $(102.8) $(82.9) $(627.2) $(32.9)
Net cash provided by (used in) financing
activities.................................. $ 39.0 $ (2.2) $ 529.2 $ 2.0
</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 $32.9 million in the three months ended March 31, 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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<PAGE> 126
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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<PAGE> 127
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 (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.
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, 2001, with an ultimate maturity date of June 30, 2006.
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
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<PAGE> 128
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 second 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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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 three months ended March 31, 1999 and 2000,
and as of March 31, 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 three months ended March 31, 1999 and 2000, and as of
March 31, 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 quarter ended March 31, 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
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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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- --------------------
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 $241,868 $211,273
Product sales............. 113,943 136,527 142,515 100,503 92,375 21,692 24,364
-------- --------- --------- ---------- ---------- -------- --------
Total revenues............ 646,022 822,487 960,976 1,046,027 989,723 263,560 235,637
Cost of products sold..... (93,414) (116,647) (121,487) (77,672) (57,901) (16,177) (13,193)
-------- --------- --------- ---------- ---------- -------- --------
552,608 705,840 839,489 968,355 931,822 247,383 222,444
Services, rent and
maintenance expenses.... 109,484 146,896 173,058 210,480 267,043 66,890 62,699
Selling expenses.......... 67,561 82,790 102,995 104,350 97,413 24,030 20,101
General and administrative
expenses................ 174,432 219,317 253,886 320,586 361,386 88,290 79,770
Depreciation and
amortization expense.... 148,997 213,440 289,442 281,259 327,101 66,880 62,837
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 1,047,210 263,888 225,407
-------- --------- --------- ---------- ---------- -------- --------
Operating income (loss)... 52,134 20,897 7,508 (22,320) (115,388) (16,505) (2,963)
Interest expense.......... (102,846) (128,014) (151,380) (143,762) (150,921) (36,031) (46,355)
Interest income........... 6,511 3,679 3,689 2,070 3,902 590 114
Other non-operating income
(expense)............... -- (882) (1,220) 2,003 851 188 (24)
-------- --------- --------- ---------- ---------- -------- --------
Loss before extraordinary
item and cumulative
effect of a change in
accounting principle.... (44,201) (104,320) (141,403) (162,009) (261,556) (51,758) (49,228)
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) $(89,204) $(49,228)
======== ========= ========= ========== ========== ======== ========
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) $ (0.50) $ (0.47)
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) $ (0.86) $ (0.47)
======== ========= ========= ========== ========== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -----------------------
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 $ 98,410 $ 4,778
Cash flows provided by
operating
activities........... 160,629 110,382 150,503 248,101 77,866 60,765 13,974
Cash flows used in
investing
activities........... (589,387) (601,122) (459,929) (285,586) (237,319) (99,631) (4,792)
Cash flows provided by
financing
activities........... 624,489 296,335 308,573 37,638 188,520 53,368 1,703
Earnings before
interest, income
taxes, depreciation
and amortization..... 201,131 233,455 280,186 260,942 175,118 13,117 59,850
Adjusted earnings
before interest,
income taxes,
depreciation and
amortization......... 201,131 256,837 309,550 332,939 205,980 68,173 59,874
Adjusted earnings
before interest,
income taxes,
depreciation and
amortization
margin............... 36.4% 36.4% 36.9% 34.4% 22.1% 27.6% 26.9%
Units in service at end
of period............ 6,738,000 8,588,000 10,344,000 10,110,000 8,991,000 9,930,000 8,424,000
</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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ --------------------
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) $(89,204) $(49,228)
Interest expense........... 102,846 128,014 151,380 143,762 150,921 36,031 46,355
Interest income............ (6,511) (3,679) (3,689) (2,070) (3,902) (590) (114)
Depreciation and
amortization expense..... 148,997 213,440 289,442 281,259 327,101 66,880 62,837
-------- --------- --------- --------- --------- -------- --------
Earnings before interest,
income taxes,
depreciation and
amortization............. 201,131 233,455 280,186 260,942 175,118 13,117 59,850
Other non-operating
(income) expense......... -- 882 1,220 (2,003) (851) (188) 24
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 $ 68,173 $ 59,874
======== ========= ========= ========= ========= ======== ========
</TABLE>
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<TABLE>
<CAPTION>
AS OF
DECEMBER 31, MARCH 31,
------------------------------------------------------------------ ----------
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 $ 162,421
Total assets......... 1,228,338 1,439,613 1,597,233 1,581,244 1,422,560 1,395,396
Long-term obligations
in default......... -- -- -- -- 1,945,000 1,945,000
Long-term
obligations, less
current
maturities......... 1,150,000 1,459,188 1,779,491 1,815,137 58,127 59,753
Total shareowners'
deficit............ (80,784) (182,175) (337,931) (490,419) (789,839) (838,448)
</TABLE>
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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 early 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, up to 80.5% of PageNet's advanced wireless data and
wireless solutions business will be distributed to PageNet's noteholders
and stockholders. See discussion under "The Merger Agreement" and "The
Vast Distribution."
- PageNet's deteriorating financial results and defaults under its debt
agreements have resulted in significant liquidity constraints. The report
of PageNet's independent auditors expresses substantial doubt about its
ability to continue as a going concern. See "-- Liquidity and Capital
Resources."
- In February and April 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."
- 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 platforms. 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, a decline of approximately 567,000 units in the first
quarter of 2000. Units in service declined significantly in the second
quarter of 2000 and are expected to continue to decline throughout 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. In
1999 and the first quarter of 2000, Vast had only $1 million of total
revenues in each period and incurred operating losses of approximately
$35 million and $8 million, respectively, 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 $49 million for the three months ended March 31, 2000. The
net loss for 1999 includes an increase in depreciation expense of $78
million resulting from changes in the depreciable lives of subscriber
devices and network equipment and a charge of $37 million for the
cumulative effect of adopting a new accounting standard. See "Results of
Operations."
MERGER AGREEMENT
On November 7, 1999, PageNet signed a definitive agreement to merge with
Arch. Under the terms of the merger agreement, each share of PageNet's common
stock will be exchanged for 0.1247 share of Arch common stock. Under the terms
of the merger agreement, PageNet's senior subordinated notes along
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with all accrued interest thereon, will be exchanged in a registered exchange
offer under which the holders of each $1,000 of outstanding principal of senior
subordinated notes will receive, upon consummation of the merger, approximately
64 shares of common stock of Arch.
As part of the merger, PageNet intends to distribute 80.5% of its interest
in Vast, a wholly owned subsidiary of PageNet, to holders of its senior
subordinated notes and PageNet's common stock. Holders of the senior
subordinated notes will receive a 68.9% interest in Vast, while holders of
PageNet's common stock will receive an 11.6% interest. The remaining interest
will be held by the combined company following the merger.
The merger agreement requires 97.5% acceptance by the holders of the senior
subordinated notes and affirmative votes of a majority of PageNet's and Arch's
stockholders to complete the merger. Consent of the lenders under PageNet's
credit agreement is also required. The merger agreement also provides for
PageNet to file a "pre-packaged" chapter 11 reorganization plan if the level of
acceptances from the holders of the senior subordinated notes is below 97.5%,
but greater than 66 2/3% in amount and a majority in number required under the
Bankruptcy Code for the noteholder class to accept the "pre-packaged" chapter 11
reorganization plan.
Consummation of the merger is subject to customary regulatory review,
certain third-party consents, including PageNet's lenders, and the approvals
noted above. PageNet has received approval from the Department of Justice and
the Federal Communications Commission to proceed with the merger, and
anticipates completing the merger during the fourth quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
General
PageNet's deteriorating financial results and liquidity have caused PageNet
to be in default of the covenants of all of its domestic debt agreements. On
February 2, 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. As a result of this default, PageNet's
bondholders could demand at any time that PageNet immediately pay $1.2 billion
of its senior subordinated notes in full. Should this happen, PageNet would
immediately file for protection under chapter 11 of the United States Bankruptcy
Code. PageNet is also in default of several of the financial and other covenants
of its credit agreement. As a result of these defaults, the lenders under the
credit agreement could demand at any time that PageNet immediately pay the $745
million outstanding under the credit agreement in full. Should this happen,
PageNet would also immediately file for protection under chapter 11 of the
Bankruptcy Code.
PageNet is prohibited from additional borrowings 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 March 31,
2000. As of July 5, 2000, PageNet had approximately $63 million in cash. PageNet
believes that this cash, plus the cash expected to be generated from operations,
is sufficient to meet its obligations, except for the cash interest payments due
under its senior subordinated notes, into the fourth quarter of 2000. However,
if PageNet's financial results continue to deteriorate, PageNet may not have
enough cash to meet such obligations through the end of 2000. PageNet is
considering alternatives to ensure that it has sufficient liquidity through the
completion of the merger. However, there can be no assurance that PageNet's
efforts to obtain additional liquidity will be timely or successful or that the
merger will be completed. Furthermore, PageNet expects to commence a proceeding
under chapter 11 to complete the merger. If the merger is not completed, PageNet
will also likely seek protection under chapter 11 to evaluate its alternatives,
including, but not limited to, a stand-alone restructuring, transactions with
other potential merger parties, or liquidation. PageNet is negotiating a
debtor-in-possession loan facility with its lenders to be made available in the
event it commences a chapter 11 case.
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Filing for bankruptcy would have a material impact on PageNet's results of
operations and financial position.
PageNet's deteriorating financial condition and lack of additional
liquidity indicate that PageNet may not be able to continue as a going concern
for a reasonable period of time. PageNet's ability to continue as a going
concern is dependent upon several factors, including, but not limited to, the
continued non-demand for immediate payment of outstanding indebtedness by the
holders of the senior subordinated notes and the lenders under its credit
agreement and PageNet's ability to (1) generate sufficient cash flows to meet
its obligations, other than the cash interest payments due under the senior
subordinated notes, on a timely basis, (2) obtain additional or restructured
financing, including potential debtor-in-possession borrowings if PageNet is
required to file for protection under chapter 11, (3) continue to obtain
uninterrupted supplies and services from its vendors, and (4) reduce capital
expenditures and operating expenses. PageNet is proceeding with these
initiatives as well as also proceeding with its plan to complete the merger
described above.
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 or
substantially 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. In addition, the
restrictive covenants relating to any untendered notes will be eliminated. 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.
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 is prohibited from providing any additional
funding to Vast. Of PageNet's cash on hand at July 5, 2000, approximately $6
million was held by Vast. Vast believes this cash is sufficient to meet its
obligations through the date at which PageNet expects to commence a proceeding
under chapter 11 of the Bankruptcy Code in order to complete the merger or
otherwise restructure its obligations. Furthermore, PageNet is negotiating with
its lenders to allow PageNet to provide additional funding to Vast should it be
required prior to the date on which PageNet commences a proceeding under chapter
11. While PageNet believes it is likely that permission to provide funding to
Vast will be obtained, there can be no assurances that PageNet will obtain that
permission from its lenders. Additionally, PageNet expects to be able to provide
funding to Vast during a bankruptcy proceeding under the terms of the
debtors-in-possession loan facility currently being negotiated. However, there
can be no assurance that these efforts will prove successful or that Vast will
have adequate liquidity to meet its obligations through the date of the Vast
distribution. Furthermore, the financial position and debt defaults of PageNet
make it difficult for Vast to obtain separate debt or equity financing prior to
the completion of the merger and Vast distribution. 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.
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 $61 million and $14 million, respectively, for the three months ended
March 31, 1999 and 2000. The decrease in cash provided by
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operating activities of $47 million for the three months ended March 31, 2000
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 quarter
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 quarter of 2000 was the result of reduced cash collections during the
first quarter caused by issues associated with PageNet's new billing and
customer service platforms, employee turnover, and PageNet's proposed merger
with Arch, which has 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 $53 million and $2 million, respectively, for the three months ended
March 31, 1999 and 2000. The primary source of financing for each period except
for the first quarter 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 of March 31,
2000, PageNet had $745 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 $745 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 $100
million and $5 million, respectively, for the three months ended March 31, 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 $98 million and $5 million, respectively,
for the three months ended March 31, 1999 and 2000, and consisted primarily of
expenditures
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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 $1 million for the three months ended March 31,
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, and $33 million for the three months ended March 31, 1999.
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 $57 million and $2 million, respectively,
during the three months ended March 31, 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 the
first half of 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 $8 million and $3 million, respectively, for the three months ended March
31, 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 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 approximately $75 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
potential debtor-in-possession borrowings if PageNet is required to file for
protection under chapter 11 of the Bankruptcy Code.
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.
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Credit Agreements
As of April 11, 2000, PageNet has agreed to reduce its total maximum
commitment under the credit agreement to approximately $747 million. PageNet's
maximum borrowings under the credit agreement are to be 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 credit agreement expires on December 31, 2004. PageNet does not
anticipate being able to make additional borrowings under the credit agreement
in the future. As of March 31, 2000, there were $745 million of outstanding
borrowings under the credit agreement.
Under the credit agreement, PageNet 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. As of March 31, 2000, PageNet had designated all
$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%. The interest rates for the $745 million of London interbank offered rate
loans as of March 31, 2000 ranged from 8.00% to 8.44%. 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 is currently
negotiating with its lenders and expects to receive relief from this default
interest rate as part of its efforts associated with the merger. The credit
agreement prohibits PageNet from paying cash dividends or other cash
distributions to stockholders. The credit agreement also prohibits PageNet from
paying more than a total of $2 million in connection with the purchase of common
stock owned by employees whose employment is terminated. The credit agreement
contains other covenants that, among other things, limit the ability of PageNet
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 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. 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 September 30, 2000. However, as a
result of the above described defaults, PageNet is precluded from providing any
additional funding on behalf of its Canadian subsidiaries. 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 likely failure of PageNet to provide the required cash
collateral. However, there 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 March 31, 2000, approximately $58 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
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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 the Company'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 (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
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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.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
Services, Rent and Maintenance Revenues
Revenues from services, rent and maintenance, which PageNet considers its
primary business, decreased 12.6% to $211 million for the three months ended
March 31, 2000, compared to $242 million for the three months ended March 31,
1999. The average revenue per unit for PageNet's traditional paging domestic
operations decreased to $8.00 for the three months ended March 31, 2000,
compared to $8.04 for the corresponding period of 1999. The decrease in revenues
from services, rent and maintenance was primarily due to the 15.2% reduction in
number of units in service from March 31, 1999 to March 31, 2000.
The number of units in service with subscribers at March 31, 2000 was
8,424,000, compared to 8,991,000 and 9,930,000 units in service with subscribers
at December 31, 1999 and March 31, 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 in lieu of one-way messaging services such as those
offered by PageNet. Many of the factors that reduced PageNet's units in service
in the first quarter of 2000 have continued to exist in the second quarter of
2000. As a result, units in service declined significantly in the second quarter
of 2000 and are expected to decline throughout 2000.
Product Sales
Product sales increased 12.3% to $24 million for the three months ended
March 31, 2000, compared to $22 million for the same period in 1999.
Services, Rent and Maintenance Expenses
Services, rent and maintenance expenses decreased 6.3% to $63 million for
the three months ended March 31, 2000, compared to $67 million for the three
months ended March 31, 1999. The decrease in services, rent and maintenance
expenses was primarily attributable to a decrease in pager parts, repairs and
scrap expense of approximately $4 million, 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.
Selling Expenses
Selling expenses decreased 16.4% to $20 million for the first quarter of
2000, compared to $24 million for the same period in 1999. The decrease in
selling expenses for the first quarter of 2000 was primarily due to a decrease
in salaries and payroll costs of approximately $3 million, mainly due to lower
amounts of sales commissions incurred in conjunction with decreased revenue
levels. Marketing research, development costs, and advertising expenses
associated with PageNet's traditional paging and advanced messaging operations
are expected to continue to be reduced in future periods.
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General and Administrative Expenses
General and administrative expenses decreased 9.7% to $80 million for the
first quarter of 2000, compared to $88 million for the first quarter of 1999.
The decrease in general and administrative expenses was primarily due to:
- decreased salaries and payroll costs of approximately $4 million, mainly
due to PageNet's decreased employee headcount related to the higher than
normal employee turnover associated with PageNet's Restructuring and
Merger.
- decreased contract labor and outside consulting expense of approximately
$4 million, primarily related to decreased levels of contract labor and
outside consulting incurred during the first three months of 2000 as
PageNet suspended its restructuring in January 2000. During the first
quarter of 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 quarter of 1999.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased 6.0% to $63 million for the
three months ended March 31, 2000, compared to $67 million for the three months
ended March 31, 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 $5 million during the three
months ended March 31, 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
first quarter of 2000 by approximately $2 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 $4 million during the first quarter of 2000, and 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 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 $46 million for the first
quarter of 2000, compared to $36 million for the first quarter of 1999. Interest
expense increased in the first three months of 2000 primarily due to a decrease
in capitalized interest during the first quarter of 2000 and a higher level of
indebtedness outstanding during the first quarter of 2000. The amount of
interest capitalized decreased by $5 million as a result of the completion of
the build-out of PageNet's advanced wireless network during the first quarter of
2000. The average level of indebtedness outstanding during the first three
months of 2000 was $2.0 billion, compared to $1.8 billion outstanding during the
corresponding period of 1999.
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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 12.2% to $60
million for the first quarter of 2000, compared to $68 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 first three months of 2000 were negatively
impacted by PageNet's declining revenues (negative $28 million and negative
11.9%, respectively) and its advanced messaging operations (negative $7 million
and negative 3.4%, 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 first three months of 1999 were negatively
impacted by PageNet's advanced messaging operations (negative $8 million and
negative 3.3%, 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 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.
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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;
- 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
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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.
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
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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.
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.
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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 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
COMPARATIVE PRICE INFORMATION
Arch common stock is traded on the Nasdaq National Market System under the
symbol "APGR." PageNet common stock is traded on the Nasdaq SmallCap Market
under the symbol "PAGE." The following table sets forth the high and low trading
prices per share of Arch common stock and PageNet common stock for the quarterly
periods indicated, which correspond to the companies' respective quarterly
fiscal periods for financial reporting purposes.
<TABLE>
<CAPTION>
ARCH PAGENET
COMMON STOCK COMMON STOCK
---------------------- ----------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fiscal Year Ended December 31, 1998:
First Quarter............................. $18.37500 $ 9.00000 $16.37500 $ 9.50000
Second Quarter............................ $20.81250 $10.50000 $16.62500 $12.50000
Third Quarter............................. $15.00000 $ 5.06250 $14.62500 $ 4.81250
Fourth Quarter............................ $ 5.43750 $ 2.06250 $ 7.37500 $ 3.56250
Fiscal Year Ended December 31, 1999:
First Quarter............................. $ 7.50000 $ 3.18750 $ 7.00000 $ 3.87500
Second Quarter............................ $11.62500 $ 3.37500 $ 4.93750 $ 3.00000
Third Quarter............................. $ 8.87500 $ 3.90625 $ 6.87500 $ 0.71875
Fourth Quarter............................ $ 7.75000 $ 3.50000 $ 1.71875 $ 0.59375
Fiscal Year Ended December 31, 2000:
First Quarter............................. $16.25000 $ 5.56250 $ 6.03125 $ 0.71875
Second Quarter............................ $ 8.50000 $ 4.00000 $ 3.00000 $ 0.62500
--------- --------- --------- ---------
Third Quarter (through July 6, 2000)...... $ 7.12500 $ 6.31250 $ 2.00000 $ 0.71875
========= ========= ========= =========
</TABLE>
The following table presents trading information for PageNet common stock
and Arch common stock for November 5, 1999 and , 2000. November 5,
1999 was the last full trading day prior to the public announcement of the
proposed merger. , 2000 was the last practicable trading day for
which information was available prior to the date of the first mailing of this
prospectus. The table provides trading information for (1) one share of PageNet
common stock, (2) one share of Arch common stock and (3) 0.1247 shares of Arch
common stock, which is the equivalent of one share of PageNet common stock based
on the exchange ratio to be used in the merger, exclusive of the value of shares
of Vast to be received by PageNet stockholders.
<TABLE>
<CAPTION>
ARCH PAGENET ARCH
COMMON STOCK COMMON STOCK PRO FORMA EQUIVALENT
-------------------------- ------------------------------ ------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE HIGH LOW CLOSE
------- ------ ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 5, 1999..... $ 7.125 $6.375 $6.8125 $1.03125 $0.90625 $0.96875 $0.88849 $0.79496 $0.84952
, 2000....
</TABLE>
DIVIDEND POLICY
Neither Arch nor PageNet has ever declared or paid any cash dividends on
its common stock. Arch anticipates that substantially all of its earnings in the
foreseeable future will be used to finance the continued growth and development
of its business and has no current intention to pay cash dividends. Arch's
future dividend policy will depend on its earnings, capital requirements and
financial condition, as well as requirements of its financing agreements and
other factors that Arch's board of directors considers relevant. Arch's secured
credit facility prohibits declaration or payment of cash dividends to Arch
stockholders without the written consent of a majority of the lenders. The terms
of other outstanding indebtedness only permit the declaration or payment of cash
dividends if specified leverage and cash flow requirements are met. Arch does
not currently meet these requirements. See "Description of Arch's Equity
Securities" and "Description of Indebtedness".
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COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth historical per share data of Arch and
PageNet and combined per share data on an unaudited pro forma basis after giving
effect to the merger based on the purchase method of accounting. This data
should be read in conjunction with the selected financial data and the
historical financial statements of Arch and PageNet and notes. The pro forma
information is presented for informational purposes only and is not necessarily
indicative of the financial position or results of operations that would have
occurred if Arch and PageNet had been a single entity during the period
presented nor is it necessarily indicative of the results of operations which
may occur in the future.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- ---------
PAGENET ARCH COMBINED
------- ------- ---------
<S> <C> <C> <C>
As of and for the year ended December 31, 1999:
Net loss per share before extraordinary items and
cumulative effect of a change in accounting
principle -- basic and diluted......................... $(2.52) $ (9.21) $(2.53)
Book value per common share............................... $(7.60) $ (4.25) $ 4.18
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- ---------
PAGENET ARCH COMBINED
------- ------- ---------
<S> <C> <C> <C>
As of and for the three months ended March 31, 2000:
Net loss per share before extraordinary items and
cumulative effect of a change in accounting
principle -- basic and diluted......................... $(0.47) $ (1.28) $(0.54)
Book value per common share............................... $(8.04) $ (1.97) $ 3.85
</TABLE>
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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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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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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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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".
BUSINESS STRATEGY
Arch's strategic objective is to strengthen its position as one of the
leading providers of wireless messaging services in the United States and at the
same time begin to position itself to remain competitive in the rapidly
expanding wireless communications market which now includes major
telecommunications companies such as MCI/Worldcom, AT&T and SBC Communications.
Arch is committed to continuing to provide high-quality service to its
current customers while at the same time working to expand the wireless
messaging choices it provides them. Arch has already begun to offer advanced
messaging services and seeks to continue that development. Arch has recognized
that in order to fully serve its current customers Arch needs to maintain access
to the type of radio spectrum, such as narrowband PCS spectrum, that will enable
Arch to quickly expand even further its present messaging service offerings. The
wireless messaging industry is expected to continue to change and Arch seeks to
position itself to offer wireless communication options that are broad enough to
meet the needs of most potential customers. At the same time, Arch recognizes
the need to offer a good value to customers, letting them utilize the services
they need at economical prices. This means providing its messaging services on a
local, regional and nationwide basis so that customers can choose the type of
coverage that they require. Arch is aggressively seeking cost savings and
working to continue to operate more efficiently.
Operating Strategy. Arch's operating objectives are to increase its
adjusted earnings before interest, income taxes, depreciation and amortization,
deploy its capital efficiently, reduce its financial leverage and expand its
customer relationships. Arch will pursue the following strategies to achieve its
operating objectives:
- Low-Cost Operating Structure. Arch has selected a low-cost
operating strategy as its principal competitive tactic. Management believes
that a low-cost operating structure, compared to differentiated premium
pricing and niche positioning, the other two fundamental competitive
tactics in the wireless messaging industry, will maximize its flexibility
to offer competitive prices while still achieving target margins and
adjusted earnings before interest, income taxes, depreciation and
amortization. Arch will continue to improve its low-cost operating
structure by consolidating some operating functions, including centralized
purchases from key vendors, to achieve economies of scale, and installing
technologically advanced and reliable transmission systems.
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- Efficient Capital Deployment. Arch's principal financial objective
is to reduce financial leverage by reducing capital requirements and
increasing adjusted earnings before interest, income taxes, depreciation
and amortization. To reduce capital expenditures, Arch has already
implemented a company-wide focus on the sale, rather than lease, of pagers.
This is because subscriber-owned units require a lower level of capital
investment than company-owned units.
- Balanced Distribution. Arch's combination of direct sales,
company-owned stores and third party resellers are supplemented by its
local market direct sales force and its distribution agreements with
third-party regional and national retailers. In addition, Arch's national
accounts sales force is enabling Arch to improve distribution to nationwide
customers.
- Capitalize on Revenue Enhancement Opportunities. Arch has one of
the broadest product offerings in the industry, including messaging
services, advanced messaging services and enhanced wireless messaging
services such as wireless e-mail and content delivery services. Arch has
entered into strategic alliances to accelerate delivery of these new
services, and provide Arch with more economical and broader access to
higher average revenue per unit nationwide, regional or text messaging
services. To date, Arch has marketed these services only on a limited basis
through the resale of other carriers' services on less attractive terms.
Arch believes there will be a number of new revenue opportunities
associated with its approximately 6.9 million units in service at March 31,
2000, including selling enhanced services which add value such as voice
mail, resale of long distance service and fax storage and retrieval. See
"-- Wireless Messaging Services, Products and Operations" and "-- Networks
and Licenses".
Arch's strategic plans following the PageNet merger are described under
"The Combined Company -- Strategy".
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
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
<S> <C> <C> <C> <C>
2000......................... 6,949,000 (80,000) -- 6,869,000
</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
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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.
The following table summarizes the types of Arch's units in service at
specified dates:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
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% 5,110,000 74%
Local Alphanumeric................ 524,000 13 621,000 14 1,215,000 18 1,362,000 20
Tone-only......................... 82,000 2 69,000 2 48,000 1 41,000 1
Nationwide Numeric................ -- -- -- -- 219,000 3 188,000 3
Nationwide Alphanumeric........... -- -- -- -- 168,000 2 168,000 2
--------- --- --------- --- --------- --- --------- ---
Total.................... 3,890,000 100% 4,276,000 100% 6,949,000 100% 6,869,000 100%
========= === ========= === ========= === ========= ===
</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, MARCH 31,
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% 3,640,000 53%
Subscriber-owned.................. 1,087,000 28 1,135,000 27 1,518,000 22 1,467,000 21
Reseller-owned.................... 1,063,000 27 1,284,000 30 1,826,000 26 1,762,000 26
--------- --- --------- --- --------- --- --------- ---
Total.................... 3,890,000 100% 4,276,000 100% 6,949,000 100% 6,869,000 100%
========= === ========= === ========= === ========= ===
</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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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 4,840 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.................. 49 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).................... 37 Director
R. Schorr Berman(2).................. 51 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 June 30, 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 and all of PageNet's
outstanding notes are tendered.
Beneficial ownership is determined in accordance with the rules of the SEC
based upon voting or investment power over the securities. The number of shares
of common stock outstanding that is used in calculating the percentage for each
listed person includes any shares that person has the right to acquire through
exercise of warrants or options within 60 days after June 30, 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> 169
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 15.1% 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 17.6% 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
JUNE 30, AUGUST 29, BENEFICIALLY JUNE 30, AS
NAME 2000 2000 OWNED 2000 ADJUSTED
---- -------------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
C. Edward Baker, Jr. ....................... 37,434 187,862 225,296 * *
Lyndon R. Daniels........................... -- 41,669 41,669 * *
John B. Saynor.............................. 64,642 124,425 189,067 * *
J. Roy Pottle............................... -- 28,334 28,334 * *
Paul H. Kuzia............................... 1,320 28,974 30,294 * *
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)........................... 1,835,166 2,864,989 4,700,155 6.1% 2.5%
Allan L. Rayfield........................... 334 7,576 7,910 * *
John A. Shane(4)............................ 6,856 18,519 25,375 * *
Edwin M. Banks(5)........................... 8,345,429 572,002 8,917,431 11.8% 4.9%
H. Sean Mathis.............................. -- 4,000 4,000 * *
Sandler Capital Management(6)............... 1,753,938 2,722,110 4,476,048 5.8% 2.4%
W.R. Huff Asset Management Co., L.L.C.(7)... 8,345,429 568,002 8,913,431 11.8% 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 21.3% 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)........... 10,987,048 5,105,440 16,092,488 20.1% 8.6%
</TABLE>
---------------
* Less than 1%
(1) Based upon ownership of Arch discount notes, PageNet common stock and
PageNet senior subordinated notes, to the extent Arch is aware of that
ownership.
(2) Includes 649,337 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 1,753,938 shares and 2,722,110 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> 170
(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 104,000 of such shares
and 171,116 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> 171
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> 172
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 March 31, 2000, numeric pagers represented approximately 83% of PageNet's
total units in service with subscribers and alphanumeric pagers represented
approximately 16% 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 decline significantly in 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> 173
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 the first
half of 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 three months ended March 31,
2000, Vast had only $1 million of total revenues in each period and incurred
operating losses of approximately $35 million and $8 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.
Annex A to this prospectus describes Vast's business in detail.
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 first quarter of 2000, and this trend is expected to continue
through 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. 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 March 31, 2000, direct sales accounted for approximately 48% of
PageNet's overall units in service, and the indirect sales channel accounted for
approximately 52%. In the direct channel, PageNet charges a monthly fee and
either leases or sells its messaging devices to its customers. In the indirect
channel, PageNet provides services to resellers under marketing agreements at
wholesale service rates.
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PageNet sells or leases messaging devices to resellers, who sell PageNet's
services to end users. Resellers 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 March 31, 2000, PageNet owned messaging devices having a net book
value of approximately $130 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 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 March 31, 2000. Of these
employees, approximately 1,800 were engaged in administrative, customer service,
and technical capacities at PageNet's headquarters and its centralized
processing facilities. Approximately 2,400, including approximately 1,050 sales
personnel, were employed in PageNet's domestic and international offices. In
addition to its 4,200 employees, PageNet had approximately 950 temporary workers
in various customer service and administrative roles as of March 31, 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 6, 2000, PageNet leased office space in 107 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 6, 2000, PageNet leased
transmitter sites for between 10,000 and 12,000 transmitters. A few local
municipalities have suspended on 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.
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PAGENET'S MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of PageNet's
directors and executive officers as of June 30, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard C. Alberding................. 69 Director (1)(2)
Lynn A. Bace......................... 47 Executive Vice President and Chief Administrative
Officer
Andreas K. Bremer.................... 43 Vice President of Finance and Treasurer
Hermann Buerger...................... 56 Director (1)(4)(5)
Julian B. Castelli................... 32 Senior Vice President and Chief Financial Officer and
Acting Chief Financial Officer of Vast
Jeffrey M. Cunningham................ 47 Director (3)
Gary J. Fernandes.................... 56 Director (3)(4)(5)
John P. Frazee, Jr. ................. 55 Chairman of the Board of Directors and Chief Executive
Officer of PageNet and Vast (4)
Jason G. Gillespie................... 39 Senior Vice President and Chief Technology Officer
John S. Llewellyn, Jr. .............. 65 Director (2)(3)(5)
Robert J. Miller..................... 55 Director (2)(3)
Edward W. Mullinix, Jr. ............. 46 President and Chief Operating Officer
Timothy J. Paine..................... 45 Senior Vice President -- Customer Service
Douglas R. Ritter.................... 42 Senior Vice President -- Sales
G. Robert Thompson................... 38 Senior Vice President -- Operations Staff
Ruth Williams........................ 43 Senior Vice President, General Counsel and Assistant
Secretary
</TABLE>
---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Board Affairs Committee of the Board of Directors.
(3) Member of the Compensation and Management Development Committee of the Board
of Directors.
(4) Member of the Executive Committee of the Board of Directors.
(5) Member of the Finance Committee of the Board of Directors.
RICHARD C. ALBERDING has been a director of PageNet since 1994. From 1958
through 1991, Mr. Alberding held various management positions with
Hewlett-Packard Co., including Executive Vice President. Mr. Alberding also
serves as a director of Digital Microwave Corporation, Kennametal, Inc., Sybase,
Inc., Walker Interactive Systems, Inc., JLK Direct, Inc. and PCTel, Inc.
LYNN A. BACE has served as Executive Vice President and Chief
Administrative Officer of PageNet since June 1999. She served as Executive Vice
President -- Sales and Marketing of PageNet from December 1998 through June
1999, and as Senior Vice President -- Marketing of PageNet from August 1998 to
December 1998. Prior to that, Ms. Bace was employed in several executive
positions with Kraft Foods, Inc. from September 1993 to April 1997, most
recently as Executive Vice President and General Manager for a division of
Kraft.
ANDREAS K. BREMER has served as Vice President of Finance and Treasurer of
PageNet since February 2000, and as Vice President and Treasurer since joining
PageNet in August 1999. Prior to that time, Mr. Bremer served in various
executive positions with Commerzbank AG from 1986 to 1999, most recently as
Senior Vice President and General Manager of various branches in the United
States and Germany.
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HERMANN BUERGER has been a director of PageNet since 1998. Mr. Buerger has
held the position of Executive Vice President and General Manager of North
American Operations for Commerzbank AG since 1989. Mr. Buerger also serves as a
director of Security Capital Group, Inc. and United Dominion Industries.
JULIAN B. CASTELLI has served as Senior Vice President and Chief Financial
Officer of PageNet since June 1999. He also serves as Acting Chief Financial
Officer of Vast, a position he has held since December 1999. Mr. Castelli served
as Vice President and Treasurer for PageNet from July 1998 to June 1999. Prior
to joining PageNet, Mr. Castelli was employed by McKinsey & Company, an
international consulting firm, from August 1995 to July 1998, serving as
Engagement Manager from June 1997. Mr. Castelli served in the Corporate Finance
Department of Goldman, Sachs & Co. as an analyst from 1990 to 1993.
JEFFREY M. CUNNINGHAM has been a director of PageNet since 1998. Mr.
Cunningham currently serves as Chairman of ILIFE Holdings. Mr. Cunningham served
as the President of Planet Direct, an internet media company and majority owned
subsidiary of CMGI, Inc., from December 1998 to March 2000. Previously, Mr.
Cunningham served as President and Chief Executive Officer of Knowledge
Universe, an internet media company, from July 1998 through December 1998. From
June 1993 through July 1998, Mr. Cunningham was the Group Publisher for Forbes,
Inc. Mr. Cunningham also serves as a director of Countrywide Credit, Inc., Data
General Corp. and Schindler Holdings.
GARY J. FERNANDES has been a director of PageNet since 1999. Mr. Fernandes
is Chairman of the Board of Directors and Chief Executive Officer of
GroceryWorks.com, a Dallas-based Internet home fulfillment service specializing
in groceries since January 2000. Previously, Mr. Fernandes served as Managing
Partner of Convergent Partners LLC, a private equity capital investment firm
from January 1999 to January 2000. Mr. Fernandes previously held the position of
Vice Chairman as well as other senior management positions with Electronic Data
Systems Corporation from 1969 through 1998. Mr. Fernandes also serves as a
director of 7-Eleven Inc. and John Wiley & Sons, Inc.
JOHN P. FRAZEE, JR. has been a director of PageNet since 1995 and has
served as Chairman of the Board of Directors and Chief Executive Officer of
PageNet since June 1999 and of Vast since December 1999. From August 1997
through June 1999, Mr. Frazee served as Chairman of the Board, President and
Chief Executive Officer of PageNet. Mr. Frazee was a private investor from
August 1993 to August 1997. Mr. Frazee also serves as a director of Security
Capital Group, Inc., Dean Foods Company, Cabet Microelectronics Corporation and
Homestead Village Incorporated.
JASON G. GILLESPIE has served as Senior Vice President and Chief Technology
Officer of PageNet since February 2000. From October 1999 through February 2000
Mr. Gillespie served as Senior Vice President of Network Services, and from June
1999 to October 1999 he served as Vice President of Network Services of PageNet.
From December 1997 to June 1999 Mr. Gillespie was Vice President of Field
Operations of PageNet. Mr. Gillespie was a Vice President and General Manager of
PageNet prior to December 1997 and has been employed by PageNet for eight years.
JOHN S. LLEWELLYN, JR. has been a director of PageNet since 1997. From 1982
to his retirement in 1997, Mr. Llewellyn held various management positions with
Ocean Spray Cranberries, Inc., including Chief Executive Officer. Mr. Llewellyn
also serves as a director of Dean Foods Company.
ROBERT J. MILLER has been a director of PageNet since 1999. From 1989 to
January 1999, Mr. Miller served as the Governor of Nevada. Upon his retirement
as Governor, Mr. Miller became a Senior Partner in the law firm of Jones Vargas
in Las Vegas, Nevada and Reno, Nevada. Mr. Miller also serves as a director of
America West Airlines, International Game Technology, Newmont Mining
Corporation, Zenith Insurance Corp., National Center for Missing & Exploited
Children and the American Cancer Society Foundation; and as a member of the
Advisory Board of the Secretary of Energy, Americans for Technology Leadership
and Com-Net Ericsson.
EDWARD W. MULLINIX, JR. has served as President and Chief Operating Officer
of PageNet since June 1999. He served as Executive Vice President -- Operations
for PageNet from February 1998 through June
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<PAGE> 179
1999, and as Senior Vice President -- Strategic Planning for PageNet from
November 1997 to February 1998. From September 1995 to October 1997, Mr.
Mullinix served as Senior Vice President of Finance and Administration and Chief
Financial Officer of The Haskell Company. He was Vice President -- Finance for
LCI, Ltd. from August 1994 to April 1995.
TIMOTHY J. PAINE has served as Senior Vice President -- Customer Service
for PageNet since March 1998. Prior to joining PageNet, Mr. Paine served in
various positions for American Express Travel Related Services, Inc. from 1982
to March 1998, most recently as Vice President of Credit and Operations for the
new accounts branch of American Express Centurion Bank.
DOUGLAS R. RITTER has served as Senior Vice President -- Sales for PageNet
since January 1999. Mr. Ritter served as Senior Vice President -- Corporate
Development for PageNet from February 1998 to January 1999 and as Vice
President -- Corporate Development for PageNet from December 1997 to February
1998. Mr. Ritter served as Vice President -- Business Planning for PageNet from
January 1996 to December 1997 and as Vice President -- New Business Development
for PageNet from July 1993 to January 1996.
G. ROBERT THOMPSON has served as Senior Vice President -- Operations Staff
for PageNet since June 1999. He also served as Senior Vice President -- Process
Improvement for PageNet from November 1998 to June 1999. Mr. Thompson served as
Vice President -- Finance for PageNet from February 1995 to November 1998 and
was Corporate Controller for PageNet from 1990 to 1995.
RUTH WILLIAMS has served as Senior Vice President, General Counsel and
Assistant Secretary for PageNet since May 1997. Prior to joining PageNet, Ms.
Williams was Associate General Counsel for First Data Corporation from September
1996 to April 1997. Ms. Williams was employed by Automatic Data Processing, Inc.
from 1986 to 1996, most recently as Staff Vice President and Associate General
Counsel.
COMPENSATION OF DIRECTORS
Directors that are also full-time officers of PageNet do not receive any
additional compensation for serving on the board or its committees. Directors
who are not full-time officers receive an annual retainer of $20,000, plus
$1,500 for each meeting they attend in person, $1,000 for each teleconference
meeting in which they participate, and reimbursement for traveling costs and
other out-of-pocket expenses incurred. Directors who serve on one or more
committees receive $5,000 per year for their service. Directors who serve as a
chairman of one or more of these committees receive an additional $5,000 per
year.
In addition, pursuant to PageNet's 1992 director compensation plan, each
non-employee director is granted an option to purchase 45,000 shares of PageNet
common stock. The exercise price is the fair market value on the date of grant.
The options vest in five equal annual installments so long as the person remains
a director of PageNet. In addition to these initial grants, subsequent grants to
purchase an additional 45,000 shares are made to each director on the date that
the options granted to such director under the 1992 director compensation plan
become fully exercisable. The exercise price for these options is also the fair
market value on the date of the grant. These options vest in five equal annual
installments so long as the person remains a director of PageNet.
The 1992 director compensation plan also allows a director to waive his or
her right to the cash retainer and meeting fees and instead:
- receive the number of shares of PageNet common stock equal to the dollar
amount of the annual retainer, meeting and other fees due for such year;
- defer receipt of all compensation until a designated future date, and
invest such compensation in an interest-bearing account; or
- defer receipt of all compensation until a designated future date, and
invest such compensation in a phantom stock account whose value will
increase and decrease with the value of PageNet's stock.
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<PAGE> 180
A director who elects to defer receipt of his or her cash retainer and
meeting fees and invest such compensation in a phantom stock plan will be
credited with share units, with one share unit being equivalent to a share of
PageNet common stock. The number of share units deposited in a director's
deferred compensation account is equal to the amount of compensation deferred
divided by the then current trading price of PageNet common stock. Although no
actual shares of PageNet common stock are transferred into the director's
deferred compensation account, the value of the director's share units equal the
trading price of PageNet's common stock from time to time. Directors elect the
form, method and timing of the distribution of the deferred compensation.
Directors may elect to receive distributions of the amounts credited with share
units in the form of cash, shares of PageNet common stock, or in any combination
of cash and shares of PageNet common stock.
In 1998, each director waived his rights to cash payments and elected to
receive deferred shares of PageNet common stock. Messrs. Alberding, Buerger,
Fernandes, Llewellyn, and Mitchell elected to defer their compensation to
phantom stock units in 1999. Messrs. Cunningham and Miller elected to receive
their 1999 compensation in cash. All directors have elected to receive their
2000 compensation in cash.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation paid by PageNet for services rendered in all capacities
for the years ended December 31, 1999, 1998 and 1997 of PageNet's chief
executive officer, and those persons who were, at December 31, 1999, the other
four most highly compensated executive officers of PageNet. Positions indicated
are as of December 31, 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- ------------------------
SECURITIES
RESTRICTED UNDERLYING ALL
STOCK OPTIONS OTHER
YEAR SALARY BONUS OTHER AWARDS($) (SHARES) COMPENSATION(1)
---- -------- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
John P. Frazee, Jr. ............ 1999 $640,385 $ -- $ 95,958(2) $ -- 311,500 $ 2,229
Chairman and 1998 671,875 430,000 90,706(3) -- 100,000 2,333
Chief Executive Officer of 1997 279,571(4) 150,000 50,938(5) 100,000(6) 600,000 20,000(7)
PageNet and Vast
Mark A. Knickrehm(8)............ 1999 299,038 -- 4,172(9) -- 165,000 3,875
President and Chief 1998 266,036 230,000(10) 43,573(11) -- 300,000 --
Operating Officer of Vast 1997 -- -- -- -- -- --
Edward W. Mullinix, Jr.(12)..... 1999 292,949 -- 4,928(13) -- 165,000 4,825
President and Chief 1998 247,916 120,000 41,589(14) -- 50,000 3,750
Operating Officer 1997 45,337 60,000 7,837(15) -- 250,000 --
Lynn A. Bace(16)................ 1999 216,218 -- 2,742(17) -- 115,000 --
Executive Vice President and 1998 93,750 51,000 -- -- 250,000 --
Chief Administrative Officer 1997 -- -- -- -- -- --
William G. Scott(18)............ 1999 213,462 -- 2,043(19) -- 25,000 5,000
Senior Vice President -- Chief 1998 224,583 72,000 -- -- 20,000 5,000
Technology Officer of Vast 1997 215,000 80,000 -- 55,313(20) 113,464 4,750
</TABLE>
---------------
(1) Represents matching contributions to PageNet's 401(k) Plan, except where
noted.
(2) Includes housing allowance of $61,069.
(3) Includes housing allowance of $66,158.
(4) Annual compensation for 1997 represents compensation for the period from
August 4, 1997, when Mr. Frazee became Chairman, President and Chief
Executive Officer of PageNet, through December 31, 1997.
(5) Includes payment of $23,214 to defray Mr. Frazee's expenses associated with
relocation to the Dallas, Texas area.
(6) Represents the fair market value on the date of grant of 11,510 shares of
PageNet common stock awarded to Mr. Frazee on August 4, 1997.
(7) Represents compensation for services rendered as a non-employee director of
PageNet.
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<PAGE> 181
(8) Annual compensation for 1998 represents compensation for the period from
February 4, 1998, when Mr. Knickrehm became employed with PageNet as its
Executive Vice President and Chief Financial Officer, through December 31,
1998. On June 2, 1999, Mr. Knickrehm was promoted to President and Chief
Operating Officer of Vast. On May 26, 2000, Mr. Knickrehm resigned as
President and Chief Operating Officer of Vast.
(9) Includes $4,928 of long-term disability insurance premiums paid by PageNet.
(10) Includes a $100,000 employment bonus and $130,000 paid as an annual bonus
for performance in 1998.
(11) Includes payments of $43,573 made to defray Mr. Knickrehm's expenses
associated with relocation to the Dallas, Texas area.
(12) Mr. Mullinix joined PageNet on November 3, 1997 as Senior Vice President of
Strategic Planning, and was promoted to Executive Vice President --
Operations of PageNet on February 4, 1998. On June 2, 1999, Mr. Mullinix
was promoted to President and Chief Operating Officer of PageNet.
(13) Includes $4,928 of long-term disability insurance premiums paid by PageNet.
(14) Includes payment of $41,589 made to defray Mr. Mullinix's expenses
associated with relocation to the Dallas, Texas area.
(15) Includes payments of $7,837 made to defray Mr. Mullinix's expenses
associated with relocation to the Dallas, Texas area.
(16) Ms. Bace joined PageNet on August 19, 1998 as Senior Vice President of
Marketing and was promoted to Executive Vice President and Chief
Administrative Officer of PageNet on June 2, 1999.
(17) Includes $2,742 of long-term disability insurance premiums paid by PageNet.
(18) Mr. Scott served as Senior Vice President and Chief Technology Officer of
PageNet from June 1999 through December 1999. Upon Mr. Scott's change to
his current position with Vast, he was no longer an executive officer of
PageNet; therefore, Mr. Scott is not listed as an executive officer of
PageNet in "PageNet's Management."
(19) Includes $2,043 of long-term disability insurance premiums paid by PageNet.
(20) Represents the fair market value on the date of grant of 5,000 shares of
PageNet common stock awarded to Mr. Scott on February 2, 1997, vesting at
the rate of 20% per year beginning on February 2, 1998 through 2002,
contingent upon meeting performance goals.
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<PAGE> 182
OPTION GRANTS IN 1999
The following table sets forth information on grants of options to purchase
PageNet common stock during the year ended December 31, 1999, to PageNet's chief
executive officer and those persons who were, at December 31, 1999, the other
most highly compensated executive officers of PageNet.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO PRESENT VALUE
OPTIONS EMPLOYEES ON DATE
NAME GRANTED (1) IN 1999 EXERCISE PRICE EXPIRATION DATE OF GRANT(2)
---- ----------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
John P. Frazee, Jr. ......... 311,500 7.54% $6.1250 01/20/09 $1,907,938
Mark A. Knickrehm(3)......... 65,000 6.1250 01/20/09 398,125
100,000 3.3438 06/10/09 334,380
------- ----------
Subtotal........... 165,000 3.99% 732,505
------- ----------
Edward W. Mullinix, Jr. ..... 65,000 6.1250 01/20/09 398,125
100,000 3.3438 06/10/09 334,380
------- ----------
Subtotal........... 165,000 3.99% 732,505
------- ----------
Lynn A. Bace................. 65,000 6.1250 01/20/09 398,125
50,000 3.3438 06/10/09 167,190
------- ---- ------- ----------
Subtotal........... 115,000 2.78% 565,315
------- ----------
William G. Scott............. 25,000 * 6.1250 01/20/09 153,125
</TABLE>
---------------
* Less than 1%
(1) All options are exercisable only so long as employment continues or within
limited periods following termination of employment. All options have a term
of 10 years. All options vest in five equal annual installments beginning on
the date of the grant, except that all of such options would vest at the
closing of the merger by virtue of a change in control of the ownership of
PageNet.
(2) The determination of the present value of PageNet common stock on the date
of the grant is based on the Black-Scholes pricing model. Estimated values
under the Black-Scholes model are based on standard assumptions as to
variables in the model such as stock price volatility, projected future
dividend yield and interest rates. In addition, the estimated value is
discounted for potential forfeiture due to vesting schedules. The discount
rate is consistent with PageNet's employment turnover experience over time.
The estimated Black-Scholes values above are based on a range of values for
the key variable. The range reflects different values in effect on the grant
date of the option: volatility -- ranged from .559 to .583; dividend
yield -- 0%; turnover -- 8% per year; risk-free interest rate -- yield to
maturity of 10-year treasury note at grant date (rates ranged from 5.41% to
5.56%). The actual value, if any, that an executive may realize will depend
on the excess of the stock price over the exercise price on the date the
option is exercised. There is no assurance that the value realized by an
executive will be at or near the value estimated using a Black-Scholes
model. Currently, all such stock options have no value because the trading
price of PageNet shares is below the option exercise prices.
(3) On May 26, 2000, Mr. Knickrehm resigned as President and Chief Operating
Officer of Vast.
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<PAGE> 183
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
The following table sets forth information related to the unexercised
options to purchase PageNet common stock that were granted during the year ended
December 31, 1999, and prior years under PageNet's 1991 stock option plan to the
named officers and held by them at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD IN-THE-MONEY OPTIONS HELD
SHARES AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
ACQUIRED ON --------------------------- ----------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John P. Frazee, Jr...... 0 0 820,600 235,900 0 0
Mark A. Knickrehm(2).... 0 0 226,000 239,000 0 0
Edward W. Mullinix,
Jr.................... 0 0 226,000 239,000 0 0
Lynn A. Bace............ 0 0 136,000 229,000 0 0
William G. Scott........ 0 0 105,464 53,000 0 0
</TABLE>
---------------
(1) Based on the difference between the exercise price of each option and
$0.8130, the last reported sales price of PageNet common stock on the Nasdaq
National Market on December 31, 1999, the last trading date in PageNet's
1999 fiscal year.
(2) On May 26, 2000, Mr. Knickrehm resigned as President and Chief Operating
Officer of Vast, and forfeited all options.
CONTRACTS RELATED TO EMPLOYMENT
PageNet and Mr. Frazee entered into an employment agreement on August 4,
1997. This agreement provides that Mr. Frazee is to be employed until July 31,
1998. The agreement is automatically extended for one-year periods unless either
PageNet or Mr. Frazee notifies the other party of termination not less than 90
days prior to the beginning of any one-year renewal period. The employment
agreement provided for a base salary of $650,000 and a target bonus of $350,000
if PageNet achieved the objectives established by the board of directors during
the initial one-year term of the contract, and allowed the board to change Mr.
Frazee's compensation during subsequent one-year terms. Mr. Frazee's current
base salary is $675,000 and current target bonus is $675,000 if PageNet achieves
the objectives established by the board of directors. The employment agreement
also provides that at least 40% of the bonus is to be paid in shares of PageNet
common stock. The board of directors gave Mr. Frazee his 1997 and 1998 bonuses
in cash, with the understanding that he would use 40% or more of the bonus to
purchase PageNet common stock in the public market. No bonus was awarded in
1999. Mr. Frazee has purchased shares in excess of this requirement. Upon
signing the employment agreement, Mr. Frazee was granted options to purchase
600,000 shares of common stock, all of which have vested. Mr. Frazee also was
awarded 11,510 shares of PageNet common stock under PageNet's 1997 restricted
stock plan. In addition, PageNet provides Mr. Frazee with transportation to and
from his residence in Florida.
CHANGE OF CONTROL SEVERANCE PLAN
On January 20, 1999, the board of directors approved a severance plan which
would provide benefits to substantially all of PageNet's employees in the event
of a "change of control" of PageNet. "Change of control" is defined as any
merger, sale or other transaction which results in 35% or more of PageNet common
stock being held by an outsider, or any change in the composition of a majority
of the board of directors. This definition is consistent with the change of
control provisions that trigger accelerated vesting under PageNet's 1991
employee stock option plan. The severance plan provides for severance amounts
ranging from 50% to 300% of an employee's annual salary and annual target bonus
compensation and payment of a pro-rated portion of the employee's annual target
bonus compensation. In addition, the severance plan provides that the employee
will continue to receive substantially similar medical insurance, disability
income protection, life insurance protection and death benefits, and perquisites
for at least one year following the date of the employee's termination of
employment at no additional cost to the employee above the cost paid by the
employee for such benefits immediately prior to the change of control. The
severance plan provides no special pension benefits. An employee is entitled to
receive benefits under the severance plan if PageNet or its successor in
interest terminates the employee without cause or the
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<PAGE> 184
employee resigns for good reason during the 12-month period immediately
following a change in control. Good reasons for an employee's resignation under
the severance plan include a reduction in the employee's compensation, a
significant change in the employee's duties, responsibilities, title or
authorities, relocation of the employee's office to a location more than 50
miles from the location of the employee's office prior to the change in control,
and PageNet's failure to obtain the agreement from a successor to assume and
agree to perform the severance plan. The amount an employee will receive depends
upon the employee's position at PageNet. Payments under the plan are made in one
lump sum. At the time of its consideration of the Arch merger, PageNet's board
of directors approved an increase in the severance percentages applicable to
John P. Frazee, Jr., Mark A. Knickrehm, Edward W. Mullinix, Jr., Lynn A. Bace
and Julian B. Castelli from 200% to 300% of their annual salary and annual
target bonus compensation. See "The Merger -- Interests of Certain Persons in
the Merger."
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<PAGE> 185
PAGENET'S PRINCIPAL STOCKHOLDERS
The following table sets forth information on the beneficial ownership of
PageNet's common stock as of June 30, 2000 by:
- each person who is known by PageNet to beneficially own more than 5% of
its outstanding shares of common stock;
- each current director of PageNet;
- PageNet's chief executive officer and the other named executive officers
of PageNet; and
- all of PageNet's current executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND
NATURE OF BENEFICIAL PERCENT OF
NAME OWNERSHIP(1) COMMON STOCK(2)
---- -------------------- ---------------
<S> <C> <C>
Wellington Management Company, LLP....................... 9,711,400(3) 9.3%
75 State Street, Boston, MA 02109
Richard C. Alberding..................................... 47,307(4) *
Lynn A. Bace............................................. 201,000(5) *
Hermann Buerger.......................................... 50,810(6) *
Jeffrey M. Cunningham.................................... 27,000(7) *
Gary J. Fernandes........................................ 18,000(8) *
John P. Frazee, Jr....................................... 952,760(9) *
Mark A. Knickrehm........................................ 226,000(10) *
John S. Llewellyn, Jr.................................... 27,437(11) *
Robert J. Miller......................................... 18,000(12) *
Edward W. Mullinix, Jr................................... 247,000(13) *
William G. Scott......................................... 113,368(14) *
All executive officers and directors as a group (16
persons)............................................... 2,028,204(15) 1.9%
</TABLE>
---------------
* Less than 1%
(1) Unless otherwise indicated, each person has sole voting and investment
power over the shares listed. These numbers include options vested and
exercisable as of June 30, 2000 or within 60 days after such date.
(2) The total number of shares of PageNet common stock outstanding as of June
30, 2000 is 104,242,567.
(3) Information has been obtained from the Form 13G filed by Wellington
Management Company, LLP on February 10, 2000. Wellington, in its capacity
as investment advisor, may be deemed to beneficially own the shares of
PageNet common stock which are held of record by clients of Wellington.
Wellington has shared voting power and shared investment discretion with
Wellington Trust Company, NA for 6,427,100 shares and 9,711,400 shares
respectively.
(4) Includes 45,000 shares subject to options that are vested and exercisable
within 60 days.
(5) Includes 196,000 shares subject to options that are vested and exercisable
within 60 days.
(6) Includes 27,000 shares subject to options that are vested and exercisable
within 60 days.
(7) Includes 27,000 shares subject to options that are vested and exercisable
within 60 days.
(8) Includes 18,000 shares subject to options that are vested and exercisable
within 60 days.
(9) Includes 829,600 shares subject to options that are vested and exercisable
within 60 days.
(10) Includes 226,000 shares subject to options that are vested and exercisable
within 60 days.
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<PAGE> 186
(11) Includes 27,000 shares subject to options that are vested and exercisable
within 60 days.
(12) Includes 18,000 shares subject to options that are vested and exercisable
within 60 days.
(13) Includes 246,000 shares subject to options that are vested and exercisable
within 60 days.
(14) Includes 105,464 shares subject to options that are vested and exercisable
within 60 days.
(15) Includes 1,780,190 shares subject to options that are vested and
exercisable within 60 days.
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THE COMBINED COMPANY
BUSINESS
The combined company to be formed by the merger of Arch and PageNet will be
one of the leading wireless messaging companies in the United States.
PageNet and Arch believe that the combined company will be better
positioned than either company is currently to compete effectively with other
paging companies as well as with cellular, PCS and other wireless messaging
companies which are increasingly offering services that compete with traditional
paging services. The combination of PageNet's broad range of wireless messaging
products and new advanced wireless messaging network with Arch's extensive
national accounts and strong 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 and seek to offset decline in demand
for traditional paging services by increased demand for advanced
messaging services;
- create significant economic efficiencies which will help the combined
company to continue to price its services and products competitively; and
- create a financially stronger 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.
STRATEGY
Arch expects the combined company to execute the following strategy:
The combined company will offer expanded products and services. The
combined company plans to immediately offer a broader variety of products and
services to a larger number of customers than either Arch or PageNet currently
offers alone. Furthermore, the combination of PageNet's existing nationwide
network operating on radio frequencies called narrowband PCS frequencies,
together with Arch's customer base, marketing abilities, and innovative customer
service and support platform should facilitate the development,
commercialization and introduction of advanced communications products and
services. Arch's management believes that these advanced communications products
and services are necessary for Arch to compete effectively in the fast-paced,
constantly changing wireless messaging industry in which traditional paging
companies have been experiencing reduced units in service and reduced market
share.
Arch intends to combine its expertise in direct marketing and retail
distribution with a technologically-advanced network over which PageNet plans to
offer an expanding array of advanced messaging services. PageNet has invested
heavily in infrastructure and software development in order to develop new
services in order to compete with cellular telephones. The combined company will
apply Arch's marketing skill and PageNet's advanced service capabilities to
expand the number of customers using these advanced services. Arch and PageNet
believe that the size of their combined customer base will create greater
incentives for equipment manufacturers to engage in research and development and
to deploy new equipment for its subscribers.
The combination will create significant economic efficiencies. The
combined company will work to identify redundant managerial and administrative
functions that can be eliminated without a material impact on customer service.
In addition, the combined company should be able to reduce its costs by
gradually improving the operating processes of the combined company and by
taking advantage of opportunities to obtain efficiency gains.
The merger will result in a financially stronger company. The combined
company will be financially stronger than Arch or PageNet individually. As of
March 31, 2000, PageNet and Arch had leverage ratios of 8.4 and 4.7 times
earnings before interest, income taxes, depreciation and amortization
respectively based on each company's annualized adjusted earnings before
interest, income taxes, depreciation and amortization for the three months ended
March 31, 2000. As part of the merger, as much as $1.4 billion of Arch and
PageNet debt will be converted into Arch common stock, assuming 100% of the Arch
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<PAGE> 188
discount notes and PageNet senior subordinated notes are exchanged. As a result,
the combined company will have a significantly lower overall leverage ratio. The
combined company projects $1.7 billion in annualized revenue and annualized
earnings before interest, income taxes, depreciation and amortization of $446.2
million. The combined company's leverage ratio would be reduced to less than 4.0
times earnings before interest, income taxes, depreciation and amortization.
This leverage ratio is lower than the leverage ratio for the combined company's
competitors, Aquis Communications Group, Inc., Metrocall, Inc. and WebLink
Wireless, Inc., which have leverage ratios of 5.7, 5.0 and 11.9 times adjusted
earnings before interest, income taxes, depreciation and amortization,
respectively, and should assist the combined company in making the capital
investments necessary to execute its strategy, although additional amounts of
equity capital will also be needed to take full advantage of expansion
opportunities.
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 $14.2
million in estimated severance benefits. See "PageNet's Management -- Change of
Control Severance Plan."
PRO FORMA INFORMATION, UNAUDITED FINANCIAL PROJECTIONS AND OPERATIONAL COST
SYNERGIES
On a pro forma basis at March 31, 2000, the combined company would have had
approximately 14.8 million units in service, total assets of $2.9 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 $430.0. 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 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 three months ended March 31, 2000, the combined company
would have had pro forma total revenues of $388.1 million, adjusted pro forma
earnings before interest, income taxes, depreciation and amortization of $122.9
million and a net loss of $92.9 million. This pro forma net loss excludes the
effect of an extraordinary gain of $7.6 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 $321.3 million, $420.0
million and $340.6 million, respectively. For the three months ended March 31,
2000, the combined company's pro forma cash flows provided by operating
activities used in investing activities, and provided by financing activities
were $77.3 million, $37.3 million and $3.7 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 three months ended March 31, 2000, would
have been 3.8 to 1.0 and 3.7 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
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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 E. The projections consist of projected operating and
financial results for the six months ending December 31, 2000 and the year
ending December 31, 2001. The projections assume that the merger and related
transactions will take place as of July 1, 2000. The projections have been
prepared for filing with the bankruptcy court if PageNet commences a bankruptcy
case and 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 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 PAGENET'S COMMON STOCK
PageNet's authorized capital stock consists of 250,000,000 shares of common
stock and 25,000,000 shares of preferred stock. Each share has a par value of
$.01 per share. On June 30, 2000, there were 104,242,567 shares of common stock
outstanding held by approximately 923 stockholders of record and no shares of
preferred stock issued and outstanding.
To learn how to obtain copies of PageNet's certificate of incorporation and
bylaws. See "Where You Can Find More Information."
Holders of common stock are entitled to one vote per share. They are
entitled to receive dividends when and if declared by PageNet's board of
directors and to share, on the basis of their shareholdings, in the assets of
PageNet that are available for distribution to its stockholders in the event of
liquidation. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. Holders of common stock do not have cumulative
voting rights.
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
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- 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 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
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$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.
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
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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.
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
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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.
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, Arch amended the preferred stock rights plan to permit
each standby purchaser to acquire, without becoming an acquiring person, up to
(1) the number of shares distributed to it or purchased by it in connection with
the MobileMedia acquisition, plus (2) an additional 5% of the outstanding common
stock, but in no event more than a total of 33% of such outstanding stock for
W.R. Huff, 27% for Whippoorwill, 26% for CS First Boston, 15.5% for Northwestern
Mutual or 19.0% for Resurgence. The standby purchasers will not be considered to
be a group for purposes of the preferred stock rights plan solely because of
performance of their contractual commitments as standby purchasers.
Arch has further amended the plan to permit the PageNet merger to take
place without causing the purchase rights to become exercisable.
Classified Board of Directors
Arch's certificate of incorporation and 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
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than 15 nor less than three directors. A majority of the board of directors then
in office has the sole authority to fill in any vacancies on the board of
directors. The certificate of incorporation provides that directors may be
removed only by the affirmative vote of holders of at least 80% of the voting
power of all then outstanding shares of stock, voting together as a single
class.
Stockholder Actions and Meetings
Arch's certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The certificate of
incorporation and by-laws provide that special meetings of stockholders can be
called by the chairman of the board, pursuant to a resolution approved by a
majority of the total number of directors which Arch would have if there were no
vacancies on the board of directors, or by stockholders owning at least 20% of
the stock entitled to vote at the meeting. The business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting by the chairman of the board, or at the request of a
majority of the members of the board of directors, or as specified in the
stockholders' call for a meeting.
The by-laws set forth an advance notice procedure with regard to the
nomination of candidates for election as directors who are not nominees of the
board of directors. The by-laws provide that any stockholder entitled to vote in
the election of directors generally may nominate one or more persons for
election as directors only if detailed written notice has been given to the
Secretary of Arch within specified time periods.
Amendment of Certain Provisions of Arch's Certificate of Incorporation and
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;
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- 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.
"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.
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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 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 INDEBTEDNESS
ARCH
Arch and its principal operating subsidiaries each have substantial amounts
of outstanding indebtedness that provide necessary funding and impose various
limitations on Arch's operations.
Secured Credit Facility
A principal operating subsidiary has a secured credit facility 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.
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 11.6% on March 31, 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;
- acquisitions that exceed certain dollar limitations without the lenders'
prior approval; and
- prepayment of indebtedness other than indebtedness under the secured
credit facility.
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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>
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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
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- the holder of any secured indebtedness aggregating at least $5.0 million
in principal amount seeks foreclosure, set-off or other recourse against
assets of the borrowers having an aggregate fair market value of more
than $5.0 million.
Arch's Discount Notes
In March 1996, Arch issued 10 7/8% discount notes representing $467.4
million in aggregate principal amount at maturity. The discount notes are
scheduled to mature on March 15, 2008. The discount notes were issued at a
substantial discount from the principal amount due at maturity. As of June 30,
2000, Arch has outstanding $172.4 principal amount at maturity of discount
notes. Interest does not accrue on the discount notes prior to March 15, 2001.
After that date, interest will accrue at the rate of 10 7/8% per year, payable
semi-annually on March 15 and September 15, commencing September 15, 2001.
Arch may choose to redeem any amount of discount notes on or after March
15, 2001 at the following redemption prices, together with accrued and unpaid
interest to the redemption date:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------------------
<S> <C>
March 15, 2001 to March 14, 2002 104.078% of principal amount
March 15, 2002 to March 14, 2003 102.719% of principal amount
March 15, 2003 to March 14, 2004 101.359% of principal amount
On or after March 15, 2004 100.000% of principal amount
</TABLE>
The indenture for the discount notes contains restrictive covenants, change
in control provisions and events of default that are generally comparable to
those of the senior notes described above.
Arch's Convertible Debentures
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
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<PAGE> 202
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.
PAGENET
Senior Subordinated Notes
Because the exchange offer and the merger is subject to the requirement
that at least 97.5% of the PageNet senior subordinated notes are tendered and
not withdrawn in the exchange offer, the maximum aggregate principal amount of
the senior subordinated notes that may remain outstanding after the merger is
$30,000,000. Alternatively, if the merger is approved in accordance with the
terms of the prepackaged bankruptcy plan under chapter 11 of the Bankruptcy
Code, none of the senior subordinated notes will be outstanding after the
merger. If any senior subordinated notes remain outstanding after the merger,
they will remain obligations of PageNet, which will become a wholly owned
subsidiary of Arch in the merger.
The terms of the senior subordinated notes that are the subject of the
exchange offer made by this prospectus are as follows:
8.875% senior subordinated notes due 2006
The 8.875% notes are limited in aggregate principal amount to $300,000,000
and bear interest at the rate of 8.875% per annum, payable semi-annually on
February 1 and August 1 of each year. The 8.875% notes are subject to
redemption, as a whole or in part, at any time after February 1, 1999, at the
following redemption prices: 104.438% of the face amount in 1999, 102.959% of
the face amount in 2000, 101.479% of the face amount in 2001 and at 100% of the
face amount each year thereafter, together with accrued interest up to the date
of the redemption.
10.125% senior subordinated notes due 2007
The 10.125% notes are limited in aggregate principal amount to $400,000,000
and bear interest at the rate of 10.125% per annum, payable semi-annually on
February 1 and August 1 of each year. The 10.125%
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notes are subject to redemption, as a whole or in part, at any time after August
1, 2000, at the following redemption prices: 105.0625% of the face amount in
2000, 103.3750% of the face amount in 2001, 101.6875% of the face amount in 2002
and at 100% of the face amount each year thereafter, together with accrued
interest up to the date of the redemption.
10% senior subordinated notes due 2008
The 10% notes are limited in aggregate principal amount to $500,000,000 and
bear interest at the rate of 10% per annum, payable semi-annually on April 15
and October 15 of each year. The 10% notes are subject to redemption, as a whole
or in part, at any time after October 15, 2001, at the following redemption
prices: 105% of the face amount in 2001, 103.333% of the face amount in 2002,
101.667% of the face amount in 2003 and at 100% of the face amount each year
thereafter, together with accrued interest up to the date of the redemption.
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<PAGE> 204
COMPARISON OF RIGHTS OF
PAGENET STOCKHOLDERS AND ARCH STOCKHOLDERS
The rights of PageNet stockholders are currently governed by Delaware
corporate law and PageNet's certificate of incorporation and bylaws. Upon
completion of the merger, PageNet's stockholders will become stockholders of
Arch and their rights as Arch stockholders will be governed by Delaware
corporate law and Arch's certificate of incorporation and bylaws. There are a
number of differences between the rights of PageNet stockholders and Arch
stockholders. The following is a brief summary of the material differences
between the rights of Arch stockholders and the rights of PageNet stockholders.
AUTHORIZED CAPITAL
PageNet
PageNet is authorized to issue 275,000,000 shares of all classes of stock,
250,000,000 of which are shares of common stock, par value $.01 per share, and
25,000,000 of which are shares of preferred stock, par value $.01 per share. As
of June 30, 2000, there were 104,242,567 shares of common stock issued and
outstanding and no shares of preferred stock issued and outstanding.
Arch
Arch is authorized to issue 170,000,000 shares of all classes of stock,
150,000,000 of which are shares of common stock, par value $.01 per share,
10,000,000 of which are shares of Class B common stock, par value $.01 per
share, and 10,000,000 of which are shares of preferred stock, par value $.01 per
share. Arch's board of directors is authorized, subject to Delaware corporate
law and without further approval of its stockholders, to issue shares of
preferred stock from time to time in one or more series and to fix the
designations, powers, preferences and other rights and qualifications,
limitations and restrictions on any series of preferred stock. As of June 30,
2000, there were 63,938,687 shares of common stock issued and outstanding,
2,531,962 shares of Class B common stock issued and outstanding, no shares of
Series B preferred stock issued and outstanding, 250,000 shares of Series C
convertible preferred stock issued and outstanding and 1,000,000 shares of
Series D convertible preferred stock issued and outstanding.
STOCKHOLDERS RIGHTS AGREEMENT
PageNet
Under PageNet's stock purchase rights plan, each outstanding share of
PageNet common stock has attached to it one common share purchase right. Each
purchase right entitles its holder to purchase from PageNet one share of PageNet
common stock at a cash purchase price of $150.00 per share. The purchase rights
automatically attach to and trade together with each share of PageNet common
stock.
The purchase rights are not exercisable or transferable separately from the
shares of PageNet common stock to which they are attached until ten business
days following the earlier of:
- a public announcement that an acquiring person, or group of affiliated or
associated acquiring persons, has acquired, or obtained the right to
acquire, beneficial ownership of 20%;
- the commencement or announcement of a tender offer or exchange offer that
would result in a person or group individually owning 20% or more of the
then outstanding shares of PageNet common stock; or
- the declaration of the board of directors that a person which has become
the beneficial owner of more than 10% of PageNet's then outstanding
shares of common stock is an adverse person. A person may be deemed an
adverse person if
-- the board determines, after a reasonable inquiry, that such person's
ownership is likely to cause PageNet to either repurchase such shares
or place pressure on PageNet to enter into a transaction that not serve
the long term best interests of PageNet but would provide such person
with a short term financial gain or
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-- such ownership is likely to have a material adverse impact on the
business or prospects of PageNet.
PageNet's board of directors may redeem the rights at a price of $.01 per
right, in whole or in part, at any time prior to ten business days following:
- the first public announcement that a person has become an acquiring
person;
- the declaration by the board of directors that a person is an adverse
person; or
- the expiration of the rights on September 24, 2004.
Thereafter, the rights may be redeemed in connection with acquisitions not
involving any acquiring person or adverse person or following a disposition of
shares by the acquiring person or adverse person.
If a purchase right becomes exercisable, each holder of a purchase right,
other than an acquiring person, will have the right to purchase at an exercise
price of $150.00, shares of PageNet common stock at a price equal to one-half of
their current market price. All purchase rights that are beneficially owned by
an acquiring person will become null and void in such circumstances.
If an acquiring person acquires common stock and:
- PageNet is acquired in a merger or other business combination transaction
in which PageNet is not the surviving corporation or the common stock is
changed or exchanged; or
- 50% or more of PageNet's assets or earning power is sold or transferred;
each holder of a purchase right, other than the acquiring person, will have the
right to use the $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.
Arch
Under Arch's preferred stock rights plan, each outstanding share of common
stock has attached to it one purchase right. Each purchase right entitles its
holder to purchase from Arch a unit consisting of one one-thousandth of a share
of Series B preferred stock at a cash purchase price of $150.00 per preferred
stock unit, subject to adjustment. The purchase rights automatically attach to
and trade together with each share of common stock.
The purchase rights are not exercisable or transferable separately from the
shares of common stock to which they are attached until ten business days
following the earlier of:
- a public announcement that an acquiring person, or group of affiliated or
associated acquiring persons, has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of
the common stock, or up to 33% in certain specified circumstances
described below, or
- the commencement of a tender offer or exchange offer that would result in
a person or group individually owning 30% or more of then outstanding
shares of common stock.
The purchase rights will not become exercisable, however, if the acquiring
person offers to purchase all outstanding shares of common stock and Arch's
independent directors determine that such offer is fair to Arch's stockholders
and in their best interests.
If the purchase rights become exercisable, each holder of a purchase right,
other than the acquiring person, will have the right to use the $150.00 exercise
price of the purchase right to purchase shares of common stock at one-half of
their then current market price. All purchase rights that are beneficially owned
by an acquiring person will become null and void in such circumstances.
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If an acquiring person acquires common stock and either:
- Arch is acquired in a merger or other business combination transaction in
which Arch is not the surviving corporation or the common stock is
changed or exchanged, except for a merger that follows an offer
determined to be fair by Arch's independent directors as described above,
or
- 50% or more of Arch's assets or earning power is sold or transferred,
then each holder of a purchase right, other than the acquiring person, will have
the right to use the $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.
BOARDS OF DIRECTORS
PageNet
PageNet's certificate of incorporation divides its board of directors into
three classes of directors that are as nearly equal in number as possible with
three-year terms. As a result, approximately one-third of PageNet's board of
directors is elected each year. A quorum of directors consists of a majority of
PageNet's directors then in office.
Arch
Arch's certificate of incorporation divides its board of directors, not
including any directors that may be elected by the preferred stockholders, into
three classes of directors that are as nearly equal in number as possible with
three-year terms. As a result, approximately one-third of PageNet's directors,
not including the directors elected by preferred stockholders, if any, are
elected each year. A quorum of directors consists of a majority of Arch's board
of directors.
NUMBER, FILLING OF VACANCIES AND REMOVAL OF DIRECTORS
PageNet
Currently, PageNet has eight members on its board of directors. Directors
can be removed, with or without cause, at any annual or special meeting of
stockholders, the notice for which must state that the removal of a director is
among the purposes of the meeting, by the vote of stockholders holding at least
80% of the voting power of PageNet's outstanding stock entitled to vote
generally in the election of directors, voting together as a single class.
Arch
Currently, Arch's board of directors has nine members. Directors can be
removed, with or without cause, at any annual or special meeting of
stockholders, the notice for which must state that the removal of a director is
among the purposes of the meeting, by the vote of stockholders holding at least
80% of the voting power of Arch's outstanding stock entitled to vote generally
in the election of directors, voting together as a single class.
Directors elected to Arch's board of directors by the series B preferred
stockholders can be removed, with or without cause, only by the series B
preferred stockholders entitled to vote in the election of those directors.
Vacancies created by the resignation, death or removal of a director elected by
the series B preferred stockholders will be filled at a special meeting called
for that purpose by the series B preferred stockholders.
The holders of Series C preferred stock have the right, voting as a
separate class, to elect one member of Arch's board of directors, and such
director has the right to be a member of any committee of the board.
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SPECIAL MEETINGS OF STOCKHOLDERS
PageNet
PageNet's certificate of incorporation provides that only the chairman of
the board or the president may call a special meeting of stockholders, within
ten days after receipt of a written request of a majority of PageNet's board of
directors. The business permitted to be conducted at any special stockholders'
meeting is limited to business brought before the meeting by the chairman of the
board, the president, or at the request of a majority of the board of directors.
Arch
Arch's certificate of incorporation provides that only the chairman of the
board, a majority of the total number of directors which Arch would have if
there were no vacancies or holders of not less than 20% of the shares of Arch's
outstanding stock entitled to vote generally in the election of directors,
voting together as a single class, may call a special meeting of stockholders.
The business permitted to be conducted at any special stockholders' meeting is
limited to business brought before the meeting by the chairman of the board, at
the request of a majority of the board of directors or as specified in a written
request by the holders of 20% of the shares of Arch's outstanding stock entitled
to vote generally in the election of directors, voting together as a single
class.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS OTHER THAN ELECTION OF
DIRECTORS AT AN ANNUAL MEETING
PageNet
PageNet's bylaws provide that a stockholder may propose that business be
brought before an annual stockholders' meeting if written notice of such
proposal is delivered to and received by PageNet's senior vice president,
general counsel and assistant secretary at PageNet's principal executive office
not more than 120 days nor less than 80 days prior to the anniversary date of
the preceding year's annual meeting. If the date of the meeting has changed more
than 30 days from the preceding year, then the stockholder's notice must be
received not later than the 15th day following the date on which notice of the
meeting was mailed or was publicly announced, whichever occurred first.
Arch
Arch's bylaws provide that a stockholder may propose that business be
brought before an annual stockholders' meeting if written notice of such
proposal is delivered to and received by Arch's secretary at Arch's principal
executive office not less than 80 days prior to the annual meeting. If notice of
the date of the annual meeting or public disclosure of the date of the annual
meeting is given less than 90 days prior to the date of the annual meeting, then
the stockholder's notice must be received not later than the 10th day following
the date on which notice of the meeting was mailed or was publicly announced.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS OF DIRECTORS
PageNet
PageNet's bylaws provide that a stockholder may nominate a person for
election to the board of directors at an annual or special stockholders' meeting
if written notice is delivered to and received by PageNet's senior vice
president, general counsel and assistant secretary at PageNet's principal
executive office not more than 120 days nor less than 80 days prior to the
anniversary date of the preceding year's annual meeting or the date of the
special meeting. If the date of the annual meeting has changed more than 30 days
from the preceding year or the date of the special meeting was not publicly
announced more than 90 days prior to the meeting, then the stockholder's notice
must be received not later than the 15th day following the date on which notice
of the annual or special meeting was mailed or was publicly announced, whichever
occurred first.
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Arch
Arch's bylaws provide that a stockholder may nominate a person for election
to the board of directors at an annual or special stockholders' meeting if
written notice is delivered to and received by Arch's secretary at Arch's
principal executive office not less than 80 days prior to the annual or special
meeting. If notice of the date of the annual or special meeting or public
disclosure of the date of the meeting is given less than 90 days prior to the
date of the annual or special meeting, then the stockholder's nomination must be
received not later than the 10th day following the date on which the
announcement of the meeting date was communicated to stockholders.
LIQUIDATION
PageNet
PageNet's certificate of incorporation provides that any vote authorizing
liquidation of PageNet or proceedings for its dissolution may provide, subject
to the rights of creditors and the rights expressly provided for particular
classes or series of stock, for the pro rata distribution of PageNet's assets to
its stockholders, wholly or in part in kind, whether in cash or other property.
The vote may also authorize PageNet's board of directors to determine the
valuation of PageNet's assets for the purpose of liquidation and may divide, or
authorize the board of directors to divide, PageNet's assets, or any part of
them, among its stockholders in a manner that each stockholder will receive a
proportionate amount in value of PageNet's cash or property upon liquidation or
dissolution, even though each stockholder may not receive a strictly
proportionate share of each asset.
Arch
Arch's certificate of incorporation contains no liquidation provision.
AMENDMENTS TO BYLAWS
PageNet
The provisions in PageNet's certificate of incorporation relating to the
amendment of PageNet's bylaws are similar to those in Arch's certificate of
incorporation, except that, PageNet's certificate of incorporation does not
require an 80% vote of PageNet's outstanding shares of capital stock to amend,
repeal or adopt provisions inconsistent with the bylaws related to when and
where stockholders' meetings may be held, the business permitted to be conducted
at annual meetings of stockholders or the voting procedures at meetings of
stockholders and the use of inspectors of election.
Arch
Arch's certificate of incorporation provides that its board of directors is
authorized to adopt, amend or repeal Arch's bylaws. Bylaws adopted by Arch's
board of directors may be amended or repealed by the board of directors or by a
majority stockholder vote, except that Arch's certificate of incorporation
requires the vote of at least 80% of Arch's outstanding shares of capital stock
entitled to vote generally in the election of directors, voting together as a
single class, to amend, repeal or adopt any provisions inconsistent with the
bylaws related to:
- when and where stockholders' meetings may be held and the business
permitted to be conducted at annual meetings of stockholders;
- the business permitted to be conducted at special meetings of
stockholders and who may call those special meetings;
- the notice and quorum requirements for stockholder meetings;
- the requirements for stockholders to bring proposals before an annual
meeting of stockholders;
- the voting procedures at meetings of stockholders and the use of
inspectors of election;
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- the requirements for stockholders to nominate persons for election as
directors;
- the size of the board of directors;
- the election and classification of directors;
- the removal of directors and the filling of vacancies on the board of
directors; and
- the amendment of Arch's bylaws.
REDEMPTION
PageNet
Shares of PageNet's common stock are not subject to redemption by PageNet.
Shares of any series of PageNet's preferred stock will be subject to redemption
by PageNet as set forth in the resolutions adopted by PageNet's board of
directors that authorize the issuance of that series of preferred stock.
Arch
Outstanding shares of Arch's stock are always subject to redemption by
Arch, by action of Arch's board of directors, if, in the judgment of the board
of directors, the action should be taken to prevent the loss of, or to secure
the reinstatement of, any license or franchise from any governmental agency that
is held by Arch or any of its subsidiaries to conduct any portion of their
business and which license or franchise is conditioned upon some or all of
Arch's stockholders possessing prescribed qualifications. The terms and
conditions of any such redemption will be as follows:
- the redemption price will equal the lesser of (i) the average closing
price for the shares of stock for the 45 days preceding the notice of
redemption, or (ii) the purchase price of shares of stock, if the shares
were purchased within one year of the redemption date by a person whose
stockholdings, either individually or taken together with the
stockholdings of any other person, may result in the loss of, or the
failure to secure the reinstatement of, any license or franchise from any
governmental agency;
- the redemption price may be paid in cash, in debt or equity securities of
Arch or any of its subsidiaries or in any combination of cash and
securities;
- if Arch is to redeem less than all the shares of stock held by a person
whose stockholdings, either individually or taken together with the
stockholdings of any other person, may result in the loss of, or the
failure to secure the reinstatement of, any license or franchise from any
governmental agency, the selection of the shares to be redeemed will be
determined by Arch's board of directors;
- at least 30 days' written notice of the redemption date must be given to
the holders of the shares of stock to be redeemed, provided that the date
of the written notice may be the redemption date if the cash and/or
securities used effect the redemption are placed in trust for the benefit
of the holders of the shares of stock to be redeemed and are subject to
immediate withdrawal upon surrender of the stock certificates;
- from and after the redemption date, any and all rights of the holders of
the shares of stock to be redeemed will terminate and the holders will
only be entitled to receive the cash and/or securities payable upon
redemption; and
- any other terms and conditions as Arch's board of directors may
determine.
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ARCH'S SPECIAL MEETING
We are furnishing this joint proxy statement/prospectus to the holders of
Arch common stock, Class B common stock, Series C preferred stock and Class D
preferred stock in connection with the solicitation of proxies by the Arch board
of directors for use at the special meeting of Arch stockholders to be held on
[DAY], [DATE], 2000, and any adjournment or postponement of the meeting. We have
included a form of proxy for use at the special meeting with each copy of this
joint proxy statement/prospectus.
This joint proxy statement/prospectus and the accompanying form of proxy
are first being furnished to the Arch stockholders on or about [DATE], 2000.
This joint proxy statement/prospectus is also being furnished to PageNet
stockholders as a proxy statement of PageNet and as a prospectus of Arch in
connection with the issuance by Arch of shares of Arch common stock as
contemplated by the merger agreement.
DATE, TIME AND PLACE
The special meeting will be held on [DATE], 2000 at 10:00 a.m., local time,
at the offices of Hale and Dorr LLP, 60 State Street, Boston, MA 02109.
MATTERS TO BE CONSIDERED
At the special meeting and any adjournment or postponement of the special
meeting, Arch stockholders will be asked:
- to consider and vote upon a proposal to issue shares of Arch's common
stock pursuant to the agreement and plan of merger, dated as of November
7, 1999, as subsequently amended, among Arch, PageNet and a wholly owned
subsidiary of Arch;
- to consider and vote upon a proposal to amend Arch's restated certificate
of incorporation to: increase the number of authorized shares of Arch
common stock from 150,000,000 to 300,000,000 shares; and
- to transact such other business as may properly come before the special
meeting.
The approval of each of the first two proposals is conditioned upon
approval of the other proposal. Accordingly, a vote against either of the first
two proposals will have the same effect as a vote against both proposals.
VOTING AND REVOCATION OF PROXIES
If you attend the special meeting, you may vote by ballot. The Arch board
of directors is soliciting proxies, however, to ensure that Arch stockholders
have the opportunity to vote on the proposals to be considered at the special
meeting if they are unable to attend. Accordingly, we request that you complete,
date and sign the accompanying proxy and promptly return it in the accompanying
postage-paid envelope or otherwise mail it to Arch. Brokers holding shares in
"street name" as nominees for their clients may vote the shares only if the
beneficial stockholder provides instructions on how to vote. Brokers will
provide beneficial owners instructions on how to direct the brokers to vote the
shares. All properly executed proxies that Arch receives prior to the vote at
the special meeting that are not revoked will be voted in accordance with the
instructions indicated on the proxies. If no direction is indicated, the proxies
will be voted to approve each of the proposals.
The Arch board of directors does not currently intend to bring any other
business before the special meeting and, so far as the Arch board of directors
knows, no other matters are to be brought before the special meeting. If any
other matters are properly presented for consideration, including, among other
things, consideration of a motion to adjourn or postpone such meeting to another
time and/or place for the purposes of soliciting additional proxies or allowing
additional time for the satisfaction of conditions to the merger agreement, the
persons named in the enclosed form of proxy and acting thereunder generally will
have discretion to vote on such matters in accordance with their best judgment.
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Stockholders may revoke their proxies at any time prior to its use by
- delivering to the secretary of Arch a signed notice of revocation or a
later-dated, signed proxy; or
- attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
VOTE REQUIRED
At the close of business on [RECORD DATE], 2000, the record date, there
were shares of Arch common stock outstanding and entitled to one vote
per share; shares of Class B common stock outstanding and entitled to
1/100th of one vote per share, 250,000 shares of Series C preferred stock
outstanding and entitled to 7.1576 votes per share and 1,000,000 shares of
Series D preferred stock outstanding and entitled to 6.61318 votes per share.
Holders of shares of Arch common stock, Class B common stock, Series C
preferred stock and Series D preferred stock will vote together as a single
class on each of the proposals.
The approval of the issuance of shares of Arch common stock pursuant to the
merger agreement will require the affirmative vote of the holders of a majority
of the shares present and entitled to vote. The approval of this proposal is
required by the rules of the NASD governing corporations with securities
approved for quotation on the Nasdaq National Market System. Under Delaware law,
the adoption of the amendment to the certificate of incorporation will require
the affirmative vote of the holders of a majority of all shares of Arch common
stock, Class B common stock, Series C preferred stock and Series D preferred
stock, whether present or not at the special meeting.
The special meeting may be adjourned, and additional proxies may be
solicited, if the vote necessary to approve a proposal has not been obtained.
Any adjournment of the special meeting will require the affirmative vote of the
holders of the shares represented, whether in person or by proxy, of the special
meeting (regardless of whether these shares constitute a quorum).
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the special meeting
is a majority of the outstanding shares of Arch common stock, Class B common
stock, Series C preferred stock and Series D preferred stock (calculated on an
as-converted basis, assuming conversion of all Class B common stock, Series C
preferred stock and Series D preferred stock, and voting together as a single
class) entitled to vote at the special meeting. Abstentions and broker non-votes
will be counted for purposes of determining the presence of a quorum. In
determining whether the proposal to issue shares of Arch's common stock pursuant
to the merger agreement has received the requisite number of affirmative votes
for approval, abstentions and broker non-votes will not be counted as votes in
favor of the proposal, and also will not be counted as shares voting on the
proposal. Accordingly, abstentions and broker non-votes will have no effect on
the outcome of the proposal. Because approval of the proposed charter amendment
requires the affirmative vote of a majority of the shares entitled to vote on
the proposal, abstentions and broker non-votes will not be counted as votes in
favor of the proposal. Accordingly, abstentions and broker non-votes will have
the same effect as a vote against the proposal. In addition, the failure of an
Arch stockholder to return a proxy or vote in person will have the effect of a
vote against the proposal. Brokers holding shares for a beneficial owner in
"street" name cannot vote on the actions proposed in the joint proxy
statement/prospectus without the beneficial owner's specific instructions. Arch
stockholders therefore are urged to return the enclosed proxy card marked to
indicate their vote, if the proxy card is in their name, or to give instructions
to their broker, if their shares are held in "street" name.
SOLICITATION OF PROXIES AND EXPENSES
All expenses of Arch's solicitation of proxies will be paid by Arch. The
cost of preparing and mailing this joint proxy statement/prospectus will be
shared equally by Arch and PageNet. In addition to
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solicitation by mail, proxies may be solicited by directors, officers and
employees of Arch in person or by telephone, facsimile, email or other means of
communication. Any directors, officers and employees soliciting proxies will not
be additionally compensated, but may be reimbursed for reasonable expenses
incurred in connection with the solicitation.
Arch has retained [PROXY FIRM], to assist in the solicitation of proxies
from its stockholders. The fees to be paid to [PROXY FIRM] for its services are
expected to be $[PROXY FIRM FEES], plus reasonable expenses. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy materials to beneficial owners.
APPRAISAL RIGHTS
Holders of Arch common stock, Class B common stock, Series C preferred
stock and Series D preferred stock will not be entitled to any appraisal rights
in connection with the matters to be voted upon at the special meeting.
RECOMMENDATION OF THE ARCH BOARD OF DIRECTORS
THE ARCH BOARD OF DIRECTORS HAS DETERMINED THAT EACH OF THE PROPOSALS IS
FAIR TO, AND IN THE BEST INTERESTS OF, ARCH AND ITS STOCKHOLDERS. ACCORDINGLY,
THE ARCH BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND RECOMMENDS THAT YOU
VOTE FOR EACH OF THE PROPOSALS ON WHICH YOU ARE ENTITLED TO VOTE.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE ARCH STOCKHOLDERS. ACCORDINGLY, ARCH STOCKHOLDERS ARE URGED TO READ AND
CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
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PAGENET'S SPECIAL MEETING
We are furnishing this proxy statement/prospectus to the holders of PageNet
common stock in connection with the solicitation of proxies by the PageNet board
of directors for use at the special meeting of PageNet stockholders to be held
on [DAY], [DATE], 2000, and any adjournment or postponement of the meeting. We
have included a form of proxy for use at the special meeting with each copy of
this joint proxy statement/prospectus.
This joint proxy statement/prospectus and the accompanying form of proxy
are first being furnished to the PageNet stockholders on or about [DATE], 2000.
DATE, TIME AND PLACE
The special meeting will be held on [DATE], 2000 at 10:00 a.m., local time,
at [ADDRESS].
MATTERS TO BE CONSIDERED
At the special meeting and any adjournment or postponement of the special
meeting, PageNet stockholders will be asked:
- to consider and vote upon a proposal to adopt the merger agreement and
approve the merger;
- to consider and vote upon a proposal to amend PageNet's restated
certificate of incorporation to increase the number of authorized shares
of PageNet common stock from 250,000,000 to 750,000,000 shares;
- to consider and vote upon a proposal to issue shares of PageNet's common
stock in an amount sufficient to complete the PageNet exchange offer; and
- to transact such other business as may properly come before the special
meeting.
The approval of each of the proposals is conditioned upon approval of the
others. Accordingly, a vote against any of the proposals will have the same
effect as a vote against all.
VOTING AND REVOCATION OF PROXIES
If you attend the special meeting, you may vote by ballot. The PageNet
board of directors is soliciting proxies, however, to ensure that PageNet
stockholders have the opportunity to vote on the proposals to be considered at
the special meeting if they are unable to attend.
Accordingly, we request that you complete, date and sign the accompanying
proxy and promptly return it in the accompanying postage-paid envelope or
otherwise mail it to PageNet. Brokers holding shares in "street name" may vote
the shares only if the beneficial stockholder provides instructions on how to
vote. Brokers will provide beneficial owners instructions on how to direct the
brokers to vote the shares. All properly executed proxies that PageNet receives
prior to the vote at the special meeting that are not revoked will be voted in
accordance with the instructions indicated on the proxies. If no direction is
indicated, the proxies will be voted to approve each of the proposals.
The PageNet board of directors does not currently intend to bring any other
business before the special meeting and, so far as the PageNet board of
directors knows, no other matters are to be brought before the special meeting.
If any other matters are properly presented for consideration, including, among
other things, consideration of a motion to adjourn or postpone such meeting to
another time and/or place for the purposes of soliciting additional proxies or
allowing additional time for the satisfaction of conditions to the merger
agreement, the persons named in the enclosed form of proxy and acting thereunder
generally will have discretion to vote on such matters in accordance with their
best judgment.
Stockholders may revoke their proxies at any time prior to its use by
- delivering to the secretary of PageNet a signed notice of revocation or a
later-dated, signed proxy; or
- attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
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VOTE REQUIRED
At the close of business on [RECORD DATE], 2000, the record date, there
were [ ] shares of PageNet common stock outstanding and entitled to vote.
Each share of PageNet common stock is entitled to one vote on the matters
presented.
Under Delaware law, the adoption of the merger agreement and the adoption
of the amendment to the restated certificate of incorporation will require the
affirmative vote of the holders of a majority of all shares of PageNet common
stock outstanding and entitled to vote, whether present or not at the special
meeting.
The approval of the issuance of shares of PageNet common stock in an amount
sufficient to complete the PageNet exchange offer will require the affirmative
vote of the holders of a majority of the shares present. The approval of this
proposal is required by the rules of the NASD governing corporations with
securities approved for quotation on the Nasdaq SmallCap Market System.
The chairman of the board of directors or the president may adjourn the
special meeting, and additional proxies may be solicited, if the vote necessary
to approve a proposal has not been obtained.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the special meeting
is a majority of the outstanding shares of PageNet common stock entitled to vote
at the special meeting. Abstentions and broker non-votes will be counted for
purposes of determining the presence of a quorum. In determining whether the
proposal to issue shares of PageNet's common stock pursuant to the merger
agreement has received the requisite number of affirmative votes for approval,
abstentions and broker non-votes will not be counted as votes in favor of the
proposal, and also will not be counted as shares voting on the proposals.
Accordingly, abstentions and broker non-votes will have the same effect as a
vote against those proposals. In addition, the failure of a PageNet stockholder
to return a proxy or vote in person will have the effect of a vote against the
proposals. Brokers holding shares for a beneficial owner cannot vote on the
actions proposed in the proxy statement/prospectus without the beneficial
owner's specific instructions. PageNet stockholders therefore are urged to
return the enclosed proxy card marked to indicate their vote.
SOLICITATION OF PROXIES AND EXPENSES
All expenses of PageNet's solicitation of proxies will be paid by PageNet.
The cost of preparing and mailing this proxy statement/prospectus, will be
shared equally by Arch and PageNet. In addition to solicitation by mail, proxies
may be solicited by directors, officers and employees of PageNet in person or by
telephone, facsimile, e-mail or other means of communication. Any directors,
officers and employees soliciting proxies will not be additionally compensated,
but may be reimbursed for reasonable expenses incurred in connection with the
solicitation.
PageNet has retained [PROXY FIRM], to assist in the solicitation of proxies
from its stockholders. The fees to be paid to [PROXY FIRM] for its services are
expected to be $[PROXY FIRM FEES], plus reasonable expenses. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting material to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy materials to beneficial owners.
APPRAISAL RIGHTS
Appraisal rights will be available to PageNet stockholders in connection
with the merger, other than with respect to shares of PageNet common stock
acquired in exchange for PageNet senior subordinated notes. Accordingly, a
PageNet stockholder wishing to exercise appraisal rights under Section 262 of
the General Corporation Law of Delaware as to shares of common stock should
follow the procedure required by that section. Set forth below is a summary
description of Section 262 and the principal steps stockholders must take to
perfect their appraisal rights under that statute. Shareholders should read
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Section 262 in its entirety, a copy of which is attached as Annex I to this
joint proxy statement/prospectus to be received by all PageNet shareholders in
connection with the shareholder meeting. All references in this summary to a
"stockholder" are to the record holder of the shares of PageNet common stock on
the record date. A person having a beneficial interest in shares that are held
in "street name" or otherwise held of record in the name of another person, such
as a broker or nominee, is responsible for ensuring that a demand for appraisal
is made by the record holder and must act promptly to cause the record holder to
properly follow the steps summarized below in a timely manner to exercise
whatever appraisal rights the beneficial owner may have.
This summary and Section 262 should be reviewed carefully by any holder who
wishes to exercise statutory appraisal rights or who wishes to preserve the
right to do so. Failure to comply strictly with the procedures set forth in this
joint proxy statement/prospectus and in Section 262 will result in the loss of
appraisal rights.
Under Section 262, in order for appraisal rights to be available in
connection with the merger, you must follow the procedures set forth below.
Section 262 provides a procedure by which persons who were holders of
PageNet common stock on the effective date of the merger who have neither voted
in favor of the merger nor consented to the merger in writing may seek an
appraisal of their shares in lieu of accepting the consideration to be received
in the merger. In an appraisal proceeding, the Delaware Court of Chancery would
determine the "fair value" of the PageNet common stock, exclusive of any element
of value arising from the accomplishment or expectation of the merger.
Stockholders of PageNet should recognize that appraisal under Section 262 may
result in a determination of value higher or lower than or equivalent to the
consideration provided for in the merger. Following an appraisal proceeding, the
Delaware Court of Chancery would direct PageNet, pursuant to Section 262, to
make payment of the determined fair value of the PageNet common stock together
with a fair interest rate, if any, to the former stockholders of PageNet
entitled to the merger consideration who properly demanded appraisal.
In accordance with Section 262, before the vote at the special meeting upon the
proposal to approve the merger, any PageNet stockholder may deliver to PageNet a
demand in writing for the appraisal of the fair value of the stockholder=s
shares. The demand must reasonably inform PageNet of the identity of the
stockholder and that the stockholder intends to demand the appraisal of the
stockholder's shares. In order to be entitled to appraisal rights with respect
to any shares, a stockholder must:
- be the record holder of the shares on the record date and the date of
the making of a demand pursuant to Section 262;
- continuously hold the shares through the effective time of the merger;
- properly demand an appraisal as described in Section 262; and
- not vote in favor of the proposal to approve the merger.
A stock holder who elects to exercise appraisal rights must mail or deliver
a written demand to:
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attention: Corporate Secretary
A proxy or vote against the merger or a failure to vote for the merger
shall not by itself constitute sufficient notice of a stockholder=s election to
exercise appraisal rights. A stockholder seeking to exercise appraisal rights
must use a separate written demand as provided in Section 262 and as summarized
in this section. A PageNet stockholder who makes a demand for appraisal will be
deemed to have elected to receive cash consideration despite any other election
of the form of merger consideration the stockholder may have made, regardless of
whether the stockholder later withdraws the demand for appraisal.
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Any stockholder, other than a record owner who is acting as a nominee
holder for different beneficial owners, seeking to exercise appraisal rights for
a portion, but not all, of the stockholder=s shares should consult with legal
counsel before taking action. PageNet believes that Delaware law has not clearly
addressed the ability of a stockholder to exercise appraisal rights with respect
to a portion, but not all, of stockholder=s shares. Should a stockholder, other
than a record owner who is acting as a nominee holder for different beneficial
owners, seek to exercise appraisal rights with respect to a portion, but not
all, of the stockholder=s shares, PageNet presently intends to assert that by
doing so the stockholder has waived appraisal rights. Stockholders should be
aware that a Delaware court may find that the stockholder has so waived the
stockholder=s appraisal rights.
A written demand for appraisal must be executed by or for the stockholder
of record as the stockholders name appears on the certificate or certificates
representing his or her shares. If the shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, the demand must be
executed by the fiduciary. If the shares are owned of record by more than one
person, as in a joint tenancy or tenancy in common, the demand must be executed
by all joint owners. An authorized agent, including an agent for two or more
joint owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, he or she is acting as agent for the record
owner. A record owner, such as a broker, who holds shares as a nominee for
others may exercise appraisal rights with respect to the shares held for all or
less than all beneficial owners of shares as to which the person is the record
owner. In this case, the written demand must set forth the number of shares
covered by the demand.
Where the number of shares is not expressly stated, the demand will be
presumed to cover all shares outstanding in the name of the record owner.
Beneficial owners who are not record owners and who intend to exercise appraisal
rights should instruct the record owner to comply strictly with the statutory
requirements with respect to the exercise of appraisal rights.
From and after the effective date of the merger, no stockholder who has
duly demanded appraisal in compliance with Section 262 will be entitled to vote
for any purpose the shares subject to the demand or to receive payment of
dividends or other distributions on the shares, except for dividends or
distributions payable to stockholders of record at a date before the effective
date of the merger.
At any time within 60 days after the effective date of the merger, any
stockholder shall have the right to withdraw the stockholder=s demand for
appraisal in writing and to accept the terms offered in the merger agreement;
after this period, a stockholder may withdraw the stockholder=s demand for
appraisal only with the written consent of PageNet.
Within 120 days after the effective date of the merger, either PageNet or
any stockholder who has complied with the required conditions of Section 262, if
appraisal rights are available in connection with the merger, and who otherwise
is entitled to appraisal may file a petition in the Delaware Court of Chancery
demanding a determination of the fair value of the shares of the dissenting
stockholders. Within 120 days after the effective date of the merger, any
stockholder who has complied with the requirements of Section 262, upon written
request, will be entitled to receive from PageNet a statement setting forth the
total number of shares of PageNet common stock not voted in favor of the merger
and with respect to which demands for appraisal have been received and the total
number of holders of these shares. The written statement must be mailed to the
stockholder within 10 days after the stockholder=s written request for this
statement is received by PageNet or 10 days after the date of the special
meeting, whichever is later. If a petition for appraisal is timely filed, if
appraisal rights are available in connection with the merger, and copy thereof
is delivered to PageNet, PageNet will then be obligated to provide within 20
days to the Register in Chancery a duly verified list containing the names and
addresses of all former stockholders of PageNet who have demanded an appraisal
of their common stock. If a petition for an appraisal is timely filed, and,
after notice to these stockholders, after a hearing on the petition, the Court
of Chancery will determine the stockholders who have complied with Section 262
and which stockholders have become entitled to appraisal rights and will
appraise the shares formerly owned by these stockholders, determining the fair
value of their shares, exclusive of any element of value arising from the
204
<PAGE> 217
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value. In
determining the fair value, the Court of Chancery is to take into account all
relevant factors. The Delaware Court of Chancery may require the stockholders
who have demanded appraisal for their shares of PageNet stock to submit their
stock certificates to the Register in Chancery for notation thereon of the
percentage of appraisal proceedings.
The cost of the appraisal proceeding may be determined by the Court of
Chancery and taxed against the parties as the Court of Chancery deems equitable
in the circumstances. Upon application of a dissenting stockholder, the Court of
Chancery may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged in proportion against the value of all shares entitled to
appraisal.
If no petition for appraisal is filed with the Court of Chancery within 120
days after the effective time of the merger, stockholders= rights to appraisal
shall cease, and all stockholders who had previously demanded appraisal shall
thereafter be entitled to receive the merger consideration received by
stockholders not electing upon valid surrender of the certificates that formerly
represented their shares. Because PageNet has no obligation to file a petition
and has not present intention to do so, any stockholder who desires a petition
to be filed is advised to file it on a timely basis.
If PageNet files for reorganization under chapter 11 of the Bankruptcy
Code, appraisal rights would no longer be available and all stockholders who had
previously demanded appraisal shall thereafter be entitled to receive the
consideration determined by the Bankruptcy Court.
RECOMMENDATION OF THE PAGENET BOARD OF DIRECTORS
THE PAGENET BOARD OF DIRECTORS HAS DETERMINED THAT EACH OF THE PROPOSALS IS
FAIR TO, AND IN THE BEST INTERESTS OF, PAGENET AND ITS STOCKHOLDERS.
ACCORDINGLY, THE PAGENET BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND
RECOMMENDS THAT YOU VOTE FOR EACH OF THE PROPOSALS ON WHICH YOU ARE ENTITLED TO
VOTE.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE PAGENET STOCKHOLDERS. ACCORDINGLY, PAGENET STOCKHOLDERS ARE URGED TO READ
AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
205
<PAGE> 218
STOCKHOLDER PROPOSALS
Arch expects to hold its 2001 annual meeting of stockholders on or about
, 2001. Stockholder proposals for inclusion in the proxy materials
for Arch's 2001 annual meeting of stockholders, including stockholder
nominations for election to Arch's board of directors, must be submitted to the
secretary of Arch in writing and received at the executive offices of Arch by
, 2001. Any proposals must meet the requirements of the rules of the
Securities and Exchange Commission relating to stockholder proposals and must
satisfy the notice requirements of procedures for stockholder proposals set
forth in the Arch bylaws.
Arch's bylaws require that a stockholder's notice to the secretary include
a brief description of the stockholder's proposal, the reasons for the proposal,
the name and address, as they appear on Arch's stock ledger, of the stockholder
making the proposal, the number of Arch shares beneficially owned by the
stockholder and any material interest of the stockholder in the proposal.
PageNet has not set a date for its 2000 annual meeting. Stockholder
proposals for inclusion in the proxy materials for PageNet's 2000 annual meeting
of stockholders must be submitted to the senior vice president, general counsel
and assistant secretary of PageNet in writing and received at the principal
executive offices of PageNet not more than 120 days and not less than 80 days
prior to the first anniversary date of the preceding year's annual meeting. If
the date of the meeting has changed more than 30 days from the preceding year,
then the stockholder's notice must be received not later than the 15th day
following the date on which notice of the meeting was mailed or was publicly
announced, whichever occurred first. The written notice must include a brief
description of the proposal to be brought before the meeting, the reasons for
the proposal, the name and address as they appear on PageNet's stock ledger of
the stockholder making the proposal, the number and class of shares beneficially
owned by the stockholder and any material interest of the stockholder in the
proposal.
Stockholders of PageNet may nominate one or more persons for election as a
director at a meeting only if written notice of such stockholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the senior vice president, general
counsel and assistant secretary of PageNet not more than 120 days and not less
than 80 days prior to the first anniversary of the preceding year's annual
meeting. If the date of the annual meeting has changed more than 30 days from
the preceding year, then the stockholder's notice must be received not later
than the 15th day following the date on which notice of the annual meeting was
mailed or was publicly announced, whichever occurred first. The written notice
must include the stockholder's name and address, the nominee's name and address,
a representation that the stockholder is a holder of PageNet stock entitled to
vote at the meeting and intends to appear in person or by proxy at the meeting,
a description of all arrangements between the stockholder and the nominee
pursuant to which the nomination is being made, any other information regarding
the nominee that would be required under the proxy rules of the Securities and
Exchange Commission had the person been nominated by PageNet's board of
directors and the nominee's written consent to be named as a nominee and to
serve as a director if elected.
206
<PAGE> 219
LEGAL MATTERS
The validity of the common stock offered by Arch in the merger 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 joint proxy
statement/prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports which are included in this
joint proxy statement/prospectus in reliance upon their authority as experts in
accounting and auditing in giving those reports.
The consolidated financial statements of PageNet at December 31, 1998 and
1999, and for each of the three years in the period ended December 31, 1999,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report, which contains an explanatory paragraph describing conditions that
raise substantial doubt about PageNet's ability to continue as a going concern
as described in Note 2 to PageNet's consolidated financial statements, which is
included in this prospectus. Such consolidated financial statements are included
in reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of MobileMedia at December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998,
included in this joint proxy statement/prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
MobileMedia's ability to continue as a going concern as described in Note 1 of
MobileMedia's Notes to the consolidated financial statements) 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 proxy
statement/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. Stockholders 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 joint proxy statement/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
207
<PAGE> 220
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 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 trades 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
joint proxy statement/prospectus.
Arch has filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act to register the common stock
offered by this joint proxy statement/prospectus. This joint proxy
statement/prospectus does not contain all the information you can find in the
registration statement or the exhibits and schedules to the registration
statement. For further information about Arch, PageNet, MobileMedia
Communications, Inc., MobileMedia Corporation and Arch's and PageNet's common
stock, please refer to the registration statement, including its exhibits and
schedules. You may inspect and copy the registration statement, including
exhibits and schedules, as described above.
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
208
<PAGE> 221
INCORPORATION OF DOCUMENTS BY REFERENCE
All documents and reports filed by Arch or PageNet pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date
of this joint proxy statement/prospectus are incorporated by reference in this
joint proxy statement/prospectus and will be deemed a part of this joint proxy
statement/prospectus from the dates of filing of such documents or reports.
Statements contained in subsequently filed documents incorporated or deemed
to be incorporated by reference will modify and supersede statements in the
joint proxy statement/prospectus or in any previously filed documents to the
extent the new information differs from the old information. Any statements
modified or superseded will no longer constitute a part of this joint proxy
statement/prospectus in their original form.
209
<PAGE> 222
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
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
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-56
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (unaudited)............................ F-57
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1998 and for the
Three Months Ended March 31, 1998 and 1999 (unaudited).... F-58
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for Each of the Three Years in the Period Ended
December 31, 1998 and for the Three Months Ended March 31,
1999 (unaudited).......................................... F-59
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998 and for the
Three Months Ended March 31, 1998 and 1999 (unaudited).... F-60
Notes to Consolidated Financial Statements.................. F-61
</TABLE>
F-1
<PAGE> 223
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> 224
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> 225
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> 226
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> 227
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> 228
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> 229
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> 230
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> 231
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> 232
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> 233
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> 234
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> 235
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> 236
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> 237
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> 238
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> 239
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> 240
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> 241
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> 242
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> 243
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> 244
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,161 $ 4,222
Accounts receivable, net.................................. 61,167 59,071
Inventories............................................... 9,101 9,514
Prepaid expenses and other................................ 11,874 12,772
---------- ----------
Total current assets.............................. 85,303 85,579
---------- ----------
Property and equipment, at cost............................. 714,644 742,440
Less accumulated depreciation and amortization.............. (314,445) (357,319)
---------- ----------
Property and equipment, net................................. 400,199 385,121
---------- ----------
Intangible and other assets, net............................ 867,543 824,768
---------- ----------
$1,353,045 $1,295,468
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt...................... $ 8,060 $ 11,154
Accounts payable.......................................... 30,016 41,586
Accrued restructuring..................................... 17,111 14,556
Accrued interest.......................................... 30,294 31,322
Accrued expenses and other liabilities.................... 79,330 70,358
---------- ----------
Total current liabilities......................... 164,811 168,976
---------- ----------
Long-term debt, less current maturities..................... 1,322,508 1,169,954
---------- ----------
Other long-term liabilities................................. 83,285 81,051
---------- ----------
Stockholders' equity (deficit):
Preferred stock -- $.01 par value......................... 3 3
Common stock -- $.01 par value............................ 512 632
Additional paid-in capital................................ 661,413 817,478
Accumulated deficit....................................... (879,487) (942,626)
---------- ----------
Total stockholders' equity (deficit).............. (217,559) (124,513)
---------- ----------
$1,353,045 $1,295,468
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-23
<PAGE> 245
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
---------- -----------
<S> <C> <C>
Service, rental, and maintenance revenues................... $ 90,529 $ 177,660
Product sales............................................... 10,359 12,335
---------- -----------
Total revenues.................................... 100,888 189,995
Cost of products sold....................................... (6,926) (8,880)
---------- -----------
93,962 181,115
---------- -----------
Operating expenses:
Service, rental, and maintenance............................ 20,293 39,115
Selling..................................................... 13,011 25,045
General and administrative.................................. 25,626 53,934
Depreciation and amortization............................... 51,118 90,707
---------- -----------
Total operating expenses.......................... 110,048 208,801
---------- -----------
Operating income (loss)..................................... (16,086) (27,686)
Interest expense, net....................................... (26,477) (42,506)
Equity in loss of affiliate................................. (3,200) --
---------- -----------
Income (loss) before extraordinary item and accounting
change.................................................... (45,763) (70,192)
Extraordinary gain from early extinguishment of debt........ -- 7,615
Cumulative effect of accounting change...................... (3,361) --
---------- -----------
Net income (loss)........................................... (49,124) (62,577)
Preferred stock dividend.................................... (513) (562)
---------- -----------
Net income (loss) to common stockholders.................... $ (49,637) $ (63,139)
========== ===========
Basic/diluted net income (loss) per common share before
extraordinary item and accounting change.................. $ (6.54) $ (1.28)
Extraordinary gain per basic/diluted common share........... -- 0.14
Cumulative effect of accounting change per basic/diluted
common share.............................................. (0.48) --
---------- -----------
Basic/diluted net income (loss) per common share............ $ (7.02) $ (1.14)
========== ===========
Basic/diluted weighted average number of common shares
outstanding............................................... 7,071,861 55,316,698
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-24
<PAGE> 246
ARCH COMMUNICATIONS GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
------- --------
<S> <C> <C>
Net cash provided by operating activities................... $12,379 $ 31,915
Cash flows from investing activities:
Additions to property and equipment, net.................. (21,125) (30,858)
Additions to intangible and other assets.................. (4,403) (1,996)
Net proceeds from sale of tower site assets............... 618 --
------- --------
Net cash used for investing activities...................... (24,910) (32,854)
------- --------
Cash flows from financing activities:
Issuance of long-term debt................................ 23,000 18,000
Repayment of long-term debt............................... -- (16,000)
------- --------
Net cash provided by financing activities................... 23,000 2,000
------- --------
Net increase in cash and cash equivalents................... 10,469 1,061
Cash and cash equivalents, beginning of period.............. 1,633 3,161
------- --------
Cash and cash equivalents, end of period.................... $12,102 $ 4,222
Supplemental disclosure:
Interest paid............................................. $20,212 $ 29,057
======= ========
Accretion of discount on senior notes..................... $ 9,942 $ 9,428
Issuance of common stock in exchange for debt............. $ -- $155,623
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-25
<PAGE> 247
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>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Goodwill.............................................. $238,149 $249,010
Purchased FCC licenses.............................. 341,419 354,246
Purchased subscriber lists.......................... 219,947 239,114
Deferred financing costs............................ 20,293 19,915
Other............................................... 4,960 5,258
-------- --------
$824,768 $867,543
======== ========
</TABLE>
(c) Divisional Reorganization - As of March 31, 2000, 423 employees had
been terminated due to the divisional reorganization and restructuring. The
Company's restructuring activity as of March 31, 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 $159 $ 871
Lease obligation costs................ 5,198 585 4,613
------ ---- ------
Total......................... $6,228 $744 $5,484
====== ==== ======
</TABLE>
(d) MobileMedia Acquisition Reserve - As of March 31, 2000, 229 former
MobileMedia employees had been terminated. The Company's restructuring activity
as of March 31, 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 $1,339 $1,339
Lease obligation costs................ 7,828 454 7,374
Other costs........................... 377 18 359
------- ------ ------
Total......................... $10,883 $1,811 $9,072
======= ====== ======
</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> 248
ARCH COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Resurgence has agreed to sell approximately $53.9 million maturity value of
senior discount notes to a third party to be selected by Resurgence that will,
in turn, exchange such notes for 3,562,189 shares of common stock at an exchange
ratio of 66.1318 shares per $1,000 note. This transaction is expected to be
completed in mid-June.
F-27
<PAGE> 249
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, 1999 and 1998, 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, 1999 and 1998, 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 that the
Company will continue as a going concern. As more fully described in Note 2, the
Company is in default on $1.9 billion of debt as a result of the non-payment of
interest on the Company's public notes and the violation of various financial
covenants in the Company's revolving credit agreement. The Company is also
precluded from any additional borrowings under the terms of its debt agreements,
and expects to commence a proceeding under Chapter 11 of the Bankruptcy Code to
complete the merger described in Note 1. If such merger is not completed, the
Company is also likely to seek protection under Chapter 11 of the Bankruptcy
Code to evaluate its alternatives, including, but not limited to, a stand-alone
restructuring, transactions with other potential merger parties, or liquidation.
These events and circumstances raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The accompanying financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
/S/ ERNST & YOUNG LLP
Dallas, Texas
May 3, 2000, except for Note 2, as
to which the date is July 7, 2000
F-28
<PAGE> 250
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> 251
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> 252
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> 253
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> 254
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND MERGER AGREEMENT
Paging Network, 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 8, 1999, the Company announced that it had signed a definitive
agreement (the Merger Agreement) to merge (the Merger) with Arch Communications
Group, Inc. (Arch). Under the terms of the Merger Agreement, each share of the
Company's common stock will be exchanged for 0.1247 share of Arch common stock.
Under the terms of the Merger Agreement, the Company's 8.875% senior
subordinated notes due 2006, its 10% senior subordinated notes due 2008, and its
10.125% senior subordinated notes due 2007 (collectively, the Notes), along with
all accrued interest thereon, will be exchanged in a registered exchange offer
under which the holders of each $1,000 of outstanding principal of Notes will
receive, upon consummation of the Merger, approximately 64 shares of common
stock of Arch.
As part of the Merger, the Company intends to distribute 80.5% of its
interest in Vast Solutions, Inc. (Vast), a wholly-owned subsidiary of the
Company, to holders of the Notes and the Company's common stock. Holders of the
Notes will receive a 68.9% interest in Vast, while holders of the Company's
common stock will receive an 11.6% interest. The remaining interest will be held
by the combined company following the Merger.
The Merger Agreement requires 97.5% acceptance by the holders of the Notes
and affirmative votes of a majority of the Company's and Arch's stockholders to
complete the Merger. Consent of the lenders under the Company's revolving credit
facility (the Credit Agreement) is also required. The Merger Agreement also
provides for the Company to file a "pre-packaged" Chapter 11 reorganization plan
if the level of acceptances from the holders of the Notes is below 97.5%, but
greater than 66 2/3% in amount and at least a majority in number required under
the Bankruptcy Code for the noteholder class to accept the "pre-packaged"
Chapter 11 reorganization plan. 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.
Consummation of the Merger is subject to customary regulatory review,
certain third-party consents, including the Company's lenders, and the approvals
noted above. The Company has received approval from the Department of Justice
and the Federal Communications Commission to proceed with the Merger, and
anticipates completing the Merger during the fourth quarter of 2000.
2. LIQUIDITY AND GOING CONCERN MATTERS
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 have
caused it to be in default of the covenants of all of its domestic debt
agreements. On February 2, 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). As of
March 2, 2000, the non-payment of interest constituted a default under the
indentures of the 8.875% Notes and the 10.125% Notes. On April 17, 2000, the
Company failed to make the semi-annual interest payment on its 10% senior
subordinated notes due 2008 (10% Notes). As a result of these defaults, the
holders of the Notes could demand at any time that
F-33
<PAGE> 255
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company immediately pay $1.2 billion of outstanding Notes in full. Should
this happen, the Company would be forced to immediately file for protection
under Chapter 11 of the United States Bankruptcy Code (Chapter 11). The Company
is also in default of several of the financial and other covenants of the Credit
Agreement. As a result of these defaults, the lenders under the Credit Agreement
could demand at any time that the Company immediately pay the $745 million
outstanding under the Credit Agreement in full. Should this happen, the Company
would also immediately file for protection under Chapter 11.
The Company is prohibited from additional borrowings and has classified all
of its outstanding indebtedness under the Credit Agreement and the Notes as a
current liability as of December 31, 1999. As of July 5, 2000, the Company has
approximately $63 million in cash. The Company believes that this cash, plus the
cash expected to be generated from operations, is sufficient to meet its
obligations, except for the cash interest payments due under the Notes, into the
fourth quarter of 2000. However, if the Company's financial results continue to
deteriorate, it may not have sufficient cash to meet such obligations through
the year ending December 31, 2000. As discussed below, the Company is
considering alternatives to ensure that it has sufficient liquidity through the
completion of the Merger. However, there can be no assurance that the Company's
efforts to ensure that it has adequate liquidity will be timely or successful or
that the Merger will be completed. Furthermore, as discussed in Note 1, the
Company expects to commence a proceeding under Chapter 11 to complete the
Merger. If the Merger is not completed, the Company will also likely seek
protection under Chapter 11 of the Bankruptcy Code to evaluate its alternatives,
including, but not limited to, a stand-alone restructuring, transactions with
other potential merger parties, or liquidation. The Company is negotiating a
debtor-in-possession loan facility with its lenders to be made available in the
event it commences a Chapter 11 case. Filing for bankruptcy would have a
material impact on the Company's results of operations and financial position.
In addition, if the Merger is not completed, the Company will 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
Company file for protection under Chapter 11 and/or be unable to continue as a
going concern.
The Company's deteriorating financial results and lack of additional
liquidity indicate that the Company may not be able to continue as a going
concern for a reasonable period of time. The Company's ability to continue as a
going concern is dependent upon several factors, including, but not limited to,
the continued non-demand for immediate payment of outstanding indebtedness by
the holders of the Notes and the lenders under the Credit Agreement and the
Company's ability to (i) generate sufficient cash flows to meet its obligations,
other than the semi-annual interest payments due under the Notes, on a timely
basis, (ii) obtain additional or restructured financing, including potential
debtor-in-possession borrowings if the Company is required to file for
protection under Chapter 11, (iii) continue to obtain uninterrupted supplies and
services from its vendors, and (iv) reduce capital expenditures and operating
expenses. The Company is proceeding with these initiatives as well as also
proceeding with its plan to complete the Merger described above.
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.
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.
F-34
<PAGE> 256
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-35
<PAGE> 257
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-36
<PAGE> 258
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-37
<PAGE> 259
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-38
<PAGE> 260
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-39
<PAGE> 261
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-40
<PAGE> 262
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Merger 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.
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
F-41
<PAGE> 263
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-42
<PAGE> 264
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-43
<PAGE> 265
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-44
<PAGE> 266
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
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<PAGE> 267
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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<PAGE> 268
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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-47
<PAGE> 269
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 32,144 $ 43,029
Accounts receivable, less allowance for doubtful
accounts............................................... 84,476 99,365
Inventories............................................... 8,687 6,577
Prepaid expenses and other assets......................... 5,623 13,450
---------- ----------
Total current assets................................... 130,930 162,421
Property, equipment, and leasehold improvements, at cost.... 1,451,761 1,419,705
Less accumulated depreciation............................. (684,648) (706,572)
---------- ----------
Net property, equipment, and leasehold improvements.... 767,113 713,133
Other non-current assets, at cost........................... 609,014 609,683
Less accumulated amortization............................. (84,497) (89,841)
---------- ----------
Net other non-current assets........................... 524,517 519,842
---------- ----------
$1,422,560 $1,395,396
========== ==========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Long-term debt in default................................. $1,945,000 $1,945,000
Accounts payable.......................................... 80,889 73,232
Accrued expenses.......................................... 50,146 43,482
Accrued interest.......................................... 42,532 72,322
Customer deposits......................................... 15,927 14,953
Deferred revenue.......................................... 19,778 25,102
---------- ----------
Total current liabilities.............................. 2,154,272 2,174,091
---------- ----------
Long-term obligations, non-current portion.................. 58,127 59,753
Commitments and contingencies
Shareowners' deficit:
Common Stock -- $.01 par, authorized 250,000,000 shares;
103,960,240 and 104,232,567 shares issued and
outstanding as of December 31, 1999 and March 31, 2000,
respectively........................................... 1,040 1,042
Paid-in capital........................................... 134,161 134,719
Accumulated other comprehensive income.................... 745 804
Accumulated deficit....................................... (925,785) (975,013)
---------- ----------
Total shareowners' deficit............................. (789,839) (838,448)
---------- ----------
$1,422,560 $1,395,396
========== ==========
</TABLE>
See accompanying notes
F-48
<PAGE> 270
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
-------- --------
<S> <C> <C>
Services, rent and maintenance revenues..................... $241,868 $211,273
Product sales............................................... 21,692 24,364
-------- --------
Total revenues............................................ 263,560 235,637
Cost of products sold....................................... (16,177) (13,193)
-------- --------
247,383 222,444
Operating expenses:
Services, rent and maintenance............................ 66,890 62,699
Selling................................................... 24,030 20,101
General and administrative................................ 88,290 79,770
Depreciation and amortization............................. 66,880 62,837
Provision for asset impairment............................ 17,798 --
-------- --------
Total operating expenses............................... 263,888 225,407
-------- --------
Operating loss.............................................. (16,505) (2,963)
Other income (expense):
Interest expense.......................................... (36,031) (46,355)
Interest income........................................... 590 114
Other non-operating income (expense)...................... 188 (24)
-------- --------
Total other expense.................................... (35,253) (46,265)
-------- --------
Loss before cumulative effect of a change in accounting
principle................................................. (51,758) (49,228)
Cumulative effect of a change in accounting principle....... (37,446) --
-------- --------
Net loss.................................................... $(89,204) $(49,228)
======== ========
Net loss per share (basic and diluted):
Loss before cumulative effect of a change in accounting
principle................................................. $ (0.50) $ (0.47)
Cumulative effect of a change in accounting principle....... (0.36) --
-------- --------
Net loss per share.......................................... $ (0.86) $ (0.47)
======== ========
</TABLE>
See accompanying notes
F-49
<PAGE> 271
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(89,204) $(49,228)
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......................................... 63,116 58,609
Amortization......................................... 3,764 4,228
Provision for doubtful accounts...................... 6,006 5,490
Amortization of debt issuance costs.................. 1,117 1,152
Other................................................ (188) 24
Changes in operating assets and liabilities:
Accounts receivable.................................. 5,744 (20,379)
Inventories.......................................... (6,258) 2,110
Prepaid expenses and other assets.................... 1,471 (7,827)
Accounts payable..................................... 35,376 (7,657)
Accrued expenses and accrued interest................ (15,661) 23,102
Accrued restructuring costs.......................... (140) --
Customer deposits and deferred revenue............... 378 4,350
-------- --------
Net cash provided by operating activities................... 60,765 13,974
-------- --------
Investing activities:
Capital expenditures...................................... (98,410) (4,778)
Payments for spectrum licenses............................ (575) --
Restricted cash invested in money market instruments...... -- (617)
Other, net................................................ (646) 603
-------- --------
Net cash used in investing activities....................... (99,631) (4,792)
-------- --------
Financing activities:
Borrowings of long-term obligations....................... 92,146 1,843
Repayments of long-term obligations....................... (39,979) (700)
Proceeds from exercise of stock options................... 1,201 560
-------- --------
Net cash provided by financing activities................... 53,368 1,703
-------- --------
Net increase in cash and cash equivalents................... 14,502 10,885
Cash and cash equivalents at beginning of period............ 3,077 32,144
-------- --------
Cash and cash equivalents at end of period.................. $ 17,579 $ 43,029
======== ========
</TABLE>
See accompanying notes
F-50
<PAGE> 272
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 communications
company in Brazil.
On November 8, 1999, the Company announced that it had signed a definitive
agreement (the Merger Agreement) to merge (the Merger) with Arch Communications
Group, Inc. (Arch). Under the terms of the Merger Agreement, each share of the
Company's common stock will be exchanged for 0.1247 share of Arch common stock.
Under the terms of the Merger Agreement, the Company's 8.875% senior
subordinated notes due 2006, its 10% senior subordinated notes due 2008, and its
10.125% senior subordinated notes due 2007 (collectively, the Notes), along with
all accrued interest thereon, will be exchanged in a registered exchange offer
under which the holders of each $1,000 of outstanding principal of Notes will
receive, upon consummation of the Merger, approximately 64 shares of common
stock of Arch.
As part of the Merger, the Company intends to distribute 80.5% of its
interest in Vast Solutions, Inc. (Vast), a wholly-owned subsidiary of the
Company, to holders of the Notes and the Company's common stock. Holders of the
Notes will receive a 68.9% interest in Vast, while holders of the Company's
common stock will receive an 11.6% interest. The remaining interest will be held
by the combined company following the Merger.
The Merger Agreement requires 97.5% acceptance by the holders of the Notes
and affirmative votes of a majority of the Company's and Arch's stockholders to
complete the Merger. Consent of the lenders under the Company's revolving credit
facility (the Credit Agreement) is also required. The Merger Agreement also
provides for the Company to file a "pre-packaged" Chapter 11 reorganization plan
if the level of acceptances from the holders of the Notes is below 97.5%, but
greater than 66 2/3% in amount and 50% in number required under the Bankruptcy
Code for the noteholder class to accept the "pre-packaged" Chapter 11
reorganization plan. 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.
Consummation of the Merger is subject to customary regulatory review,
certain third-party consents, including the Company's lenders, and the approvals
noted above. The Company has received approval from the Department of Justice
and the Federal Communications Commission to proceed with the Merger, and
anticipates completing the Merger during the fourth quarter of 2000.
2. LIQUIDITY AND GOING CONCERN MATTERS
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 $49 million during the three months
ended March 31, 2000. The Company's deteriorating financial results and
liquidity have caused it to be in default of the covenants of all of its
domestic debt agreements. On February 2, 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). As of March 2, 2000, the non-payment of interest constituted a default
under the indentures of the 8.875% Notes and the 10.125% Notes. On
F-51
<PAGE> 273
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
April 17, 2000, the Company failed to make the semi-annual interest payment on
its 10% senior subordinated notes due 2008 (10% Notes). As a result of these
defaults, the holders of the Notes could demand at any time that the Company
immediately pay $1.2 billion of outstanding Notes in full. Should this happen,
the Company would be forced to immediately file for protection under Chapter 11
of the United States Bankruptcy Code (Chapter 11). The Company is also in
default of several of the financial and other covenants of the Credit Agreement.
As a result of these defaults, the lenders under the Credit Agreement could
demand at any time that the Company immediately pay the $745 million outstanding
under the Credit Agreement in full. Should this happen, the Company would also
immediately file for protection under Chapter 11.
The Company is prohibited from additional borrowings and has classified all
of its outstanding indebtedness under the Credit Agreement and the Notes as a
current liability as of December 31, 1999 and March 31, 2000, respectively. As
of July 5, 2000, the Company has approximately $63 million in cash. The Company
believes that this cash, plus the cash expected to be generated from operations,
is sufficient to meet its obligations, except for the cash interest payments due
under the Notes, into the fourth quarter of 2000. However, if the Company's
financial results continue to deteriorate, it may not have sufficient cash to
meet such obligations through the year ending December 31, 2000. As discussed
below, the Company is considering alternatives to ensure that it has sufficient
liquidity through the completion of the Merger. However, there can be no
assurance that the Company's efforts to ensure that it has adequate liquidity
will be timely or successful or that the Merger will be completed. Furthermore,
as discussed in Note 1, the Company expects to commence a proceeding under
Chapter 11 to complete the Merger. If the Merger is not completed, the Company
will also likely seek protection under Chapter 11 of the Bankruptcy Code to
evaluate its alternatives, including, but not limited to, a stand-alone
restructuring, transactions with other potential merger parties, or liquidation.
The Company is negotiating a debtor-in-possession loan facility with its lenders
to be made available in the event it commences a Chapter 11 case. Filing for
bankruptcy would have a material impact on the Company's results of operations
and financial position. In addition, if the Merger is not completed, the Company
will 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 Company file for protection under Chapter 11
and/or be unable to continue as a going concern.
The Company's deteriorating financial results and lack of additional
liquidity indicate that the Company may not be able to continue as a going
concern for a reasonable period of time. The Company's ability to continue as a
going concern is dependent upon several factors, including, but not limited to,
the continued non-demand for immediate payment of outstanding indebtedness by
the holders of the Notes and the lenders under the Credit Agreement and the
Company's ability to (i) generate sufficient cash flows to meet its obligations,
other than the semi-annual interest payments due under the Notes, on a timely
basis, (ii) obtain additional or restructured financing, including potential
debtor-in-possession borrowings if the Company is required to file for
protection under Chapter 11, (iii) continue to obtain uninterrupted supplies and
services from its vendors, and (iv) reduce capital expenditures and operating
expenses. The Company is proceeding with these initiatives as well as also
proceeding with its plan to complete the Merger described above.
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
F-52
<PAGE> 274
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, the net loss decreased by $5 million, or $0.05 per share (basic
and diluted), during the three months ended March 31, 2000.
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 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.
6. INCOME TAXES
For the three months ended March 31, 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.
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<PAGE> 275
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 March 31, 1999 and 2000, were 104
million. The average number of options to purchase shares of the Company's
Common Stock during the three months ended March 31, 1999 was 9 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 months ended March 31, 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.
On May 17, 2000, in anticipation of the Company's merger with Arch, the
Board of Directors of the Company approved the suspension of all stock option
grants as of June 15, 2000.
The Company has 275 million authorized shares, of which 250 million are
Common Stock and 25 million are preferred stock. As of March 31, 2000, there
were no preferred shares issued or outstanding.
8. COMPREHENSIVE LOSS
Comprehensive loss for the three months ended March 31, 1999 and 2000, is
as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
-------- --------
<S> <C> <C>
Net loss........................................... $(89,204) $(49,228)
Foreign currency translation adjustments........... (841) 59
-------- --------
Total comprehensive loss......................... $(90,045) $(49,169)
======== ========
</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 March 31, 2000, cash
equivalents also include investments in money market instruments, which are
carried at fair value. Cash payments made for interest during the three months
ended March 31, 1999 and 2000, were approximately $39 million and $15 million,
respectively, net of interest capitalized during the three months ended March
31, 1999 and 2000 of $6 million and $1 million, respectively. There were no
significant federal or state income taxes paid or refunded for the three months
ended March 31, 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 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.
F-54
<PAGE> 276
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents certain information related to the Company's
business segments for the three months ended March 31, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
-------- --------
<S> <C> <C>
Total Revenues:
Traditional Paging(1)............................... $260,666 $228,485
Advanced Messaging.................................. 2,894 7,152
-------- --------
$263,560 $235,637
======== ========
Operating loss:
Traditional Paging(1)............................... $ (7,721)(2) $ 13,101
Advanced Messaging.................................. (8,784) (16,064)
-------- --------
$(16,505) $ (2,963)
======== ========
Adjusted EBITDA(3):
Traditional Paging(1)............................... $ 76,351 $ 67,348
Advanced Messaging.................................. (8,178) (7,474)
-------- --------
$ 68,173 $ 59,874
======== ========
</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
quarter 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-55
<PAGE> 277
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MobileMedia Communications, Inc.
We have audited the accompanying consolidated balance sheets of MobileMedia
Communications, Inc. and Subsidiaries ("MobileMedia") as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MobileMedia Communications, Inc. and Subsidiaries at December 31, 1997 and 1998
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
MobileMedia will continue as a going concern. As more fully described in Note 1,
on January 30, 1997, MobileMedia Corporation and substantially all of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the Bankruptcy Court). Additionally, as more fully
described in Note 11, on April 8, 1997, the Federal Communications Commission
("FCC") issued a Public Notice commencing an administrative hearing into the
qualification of MobileMedia to remain a licensee. These events, and
circumstances relating to the Chapter 11 filing with the Bankruptcy Court,
including MobileMedia's highly leveraged financial structure, non-compliance
with certain covenants of loan agreements with banks and note indentures, net
working capital deficiency and recurring losses from operations, raise
substantial doubt about MobileMedia's ability to continue as a going concern.
Although MobileMedia is currently operating the business as a debtor-in-
possession under the jurisdiction of the Bankruptcy Court, the continuation of
the business as a going concern is contingent upon, among other things, the
ability to (a) gain approval of the creditors and confirmation by the Bankruptcy
Court of a plan of reorganization, (b) maintain compliance with all covenants
under the debtor-in-possession financing agreement, (c) achieve satisfactory
levels of future operating profit and (d) retain FCC qualification as a
licensee. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of these uncertainties.
/S/ ERNST & YOUNG LLP
MetroPark, New Jersey
February 12, 1999, except for the eighth paragraph of Note 1 and
the second paragraph of Note 6, as to which the date is March 26, 1999
and the ninth paragraph of Note 1, as to which the date is April 12, 1999
F-56
<PAGE> 278
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................... $ 10,920 $ 1,218 $ --
Accounts receivable (less allowance for uncollectible
accounts of $26,500, $15,000 and $14,893 in 1997,
1998 and 1999, respectively)......................... 55,432 38,942 37,270
Inventories............................................. 868 2,192 1,609
Prepaid expense......................................... 5,108 5,523 5,261
Other current assets.................................... 2,783 4,855 4,900
----------- ----------- -----------
Total current assets............................... 75,111 52,730 49,040
----------- ----------- -----------
Investment in net assets of equity affiliate................ 1,788 1,400 --
Property and equipment, net................................. 257,937 219,642 225,566
Intangible assets, net...................................... 295,358 266,109 258,793
Other assets................................................ 24,940 21,573 20,610
----------- ----------- -----------
Total assets....................................... $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise
Debtor-In-Possession (DIP) credit facility.............. $ 10,000 $ -- $ 5,000
Accrued restructuring costs............................. 4,897 5,163 7,197
Accrued wages, benefits and payroll..................... 11,894 12,033 9,944
Book cash overdraft..................................... -- -- 1,255
Accounts payable--post petition......................... 2,362 1,703 7,334
Accrued interest........................................ 4,777 3,692 3,566
Accrued expenses and other current liabilities.......... 35,959 35,735 30,061
Current income taxes payable............................ -- 2,871 1,200
Advance billing and customer deposits................... 34,252 28,554 28,892
Deferred gain on tower sale............................. -- 68,444 67,278
----------- ----------- -----------
Total liabilities not subject to compromise........ 104,141 158,195 161,727
----------- ----------- -----------
Liabilities subject to compromise
Accrued wages, benefits and payroll taxes............... 562 647 476
Accrued interest........................................ 18,450 17,579 17,578
Accounts payable--pre petition.......................... 19,646 15,410 15,351
Accrued expenses and other current liabilities.......... 20,663 15,285 12,231
Debt.................................................... 1,075,681 905,681 905,681
Other liabilities....................................... 2,915 -- --
----------- ----------- -----------
Total liabilities subject to compromise............ 1,137,917 954,602 951,317
----------- ----------- -----------
Deferred tax liabilities................................ 2,655 2,655 2,655
Stockholders' deficit
Common stock (1 share, no par value, issued and
outstanding at December 31, 1997 and 1998 and March
31, 1999)............................................ -- -- --
Additional paid-in-capital.................................. 676,025 676,025 676,025
Accumulated deficit--pre petition........................... (1,154,420) (1,154,420) (1,154,420)
Accumulated deficit--post petition.......................... (111,184) (75,603) (83,295)
----------- ----------- -----------
Total stockholders' deficit........................ (589,579) (553,998) (561,690)
----------- ----------- -----------
Total liabilities and stockholders' deficit........ $ 655,134 $ 561,454 $ 554,009
=========== =========== ===========
</TABLE>
See accompanying notes.
F-57
<PAGE> 279
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- -------------------
1996 1997 1998 1998 1999
----------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Services, rents and maintenance..... $ 568,892 $ 491,174 $423,059 $108,542 $100,631
Product sales....................... 71,818 36,218 26,622 6,621 5,193
----------- --------- -------- -------- --------
Total revenues................. 640,710 527,392 449,681 115,163 105,824
Cost of products sold.................... (72,595) (35,843) (22,162) (5,513) (3,516)
----------- --------- -------- -------- --------
568,115 491,549 427,519 109,650 102,308
Operating expenses
Services, rents and maintenance..... 144,050 139,333 111,589 28,899 27,077
Selling............................. 96,817 69,544 61,106 15,703 14,136
General and administrative.......... 218,607 179,599 133,003 34,908 31,481
Reduction of liabilities subject to
compromise........................ -- -- (10,461) -- (3,050)
Impairment of long-lived assets..... 792,478 -- -- -- --
Restructuring costs................. 4,256 19,811 18,624 4,558 5,067
Depreciation........................ 136,434 110,376 86,624 24,193 20,501
Amortization........................ 212,264 29,862 29,835 7,478 7,468
Amortization of deferred gain on
tower sale........................ -- -- (1,556) -- (1,167)
----------- --------- -------- -------- --------
Total operating expenses....... 1,604,906 548,525 428,764 115,739 101,513
----------- --------- -------- -------- --------
Operating Income (loss).................. (1,036,791) (56,976) (1,245) (6,089) 795
Other income (expense)
Interest expense, net............... (92,663) (67,611) (53,043) (14,626) (10,018)
Gain (loss) on sale/disposal of
assets............................ 68 3 94,165 1 (323)
Other............................... -- -- (338) -- 2,063
----------- --------- -------- -------- --------
Total other expense............ (92,595) (67,608) 40,784 (14,625) (8,278)
----------- --------- -------- -------- --------
Income (loss) before income taxes
(benefit).............................. (1,129,386) (124,584) 39,539 (20,714) (7,483)
Income taxes (benefit)................... (69,442) -- 3,958 -- 209
----------- --------- -------- -------- --------
Net income (loss)........................ $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
=========== ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-58
<PAGE> 280
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED ACCUMULATED
PAID IN DEFICIT DEFICIT
CAPITAL PRE-PETITION POST-PETITION TOTAL
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................... $659,829 $ (81,076) $ 0 $ 578,753
Capital contribution from MobileMedia.......... 12,800 -- -- 12,800
Net loss....................................... -- (1,059,944) -- (1,059,944)
-------- ----------- --------- -----------
Balance at December 31, 1996................... 672,629 (1,141,020) 0 (468,391)
Capital contribution from MobileMedia.......... 3,396 -- -- 3,396
Net loss....................................... -- (13,400) (111,184) (124,584)
-------- ----------- --------- -----------
Balance at December 31, 1997................... 676,025 (1,154,420) (111,184) (589,579)
Net income..................................... -- -- 35,581 35,581
-------- ----------- --------- -----------
Balance at December 31, 1998................... 676,025 (1,154,420) (75,603) (553,998)
Net loss (unaudited)........................... -- -- (7,692) (7,692)
-------- ----------- --------- -----------
Balance at March 31, 1999 (unaudited).......... $676,025 $(1,154,420) $ (83,295) $ (561,690)
======== =========== ========= ===========
</TABLE>
See accompanying notes.
F-59
<PAGE> 281
MOBILEMEDIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- -------------------
1996 1997 1998 1998 1999
----------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)........................ $(1,059,944) $(124,584) $ 35,581 $(20,714) $ (7,692)
Adjustments to reconcile net loss to net cash
provided by (used in) Operating activities:
Depreciation and amortization............ 348,698 140,238 116,459 31,672 27,969
Amortization of deferred gain on tower
sale.................................. -- -- (1,556) -- (1,167)
Income tax benefit....................... (69,442) -- -- -- --
Accretion of note payable discount....... 16,792 1,485 -- -- --
Provision for uncollectible accounts..... 56,556 65,181 14,841 4,981 2,131
Reduction of liabilities subject to
compromise............................ -- -- (10,461) -- (3,050)
Recognized gain on sale of tower
assets................................ -- -- (94,165) -- --
Impairment of long-lived assets.......... 792,478 -- -- -- --
Undistributed earnings of affiliate,
net................................... 160 69 (87) 22 --
Change in operating assets and liabilities:
Accounts receivable...................... (55,965) (53,904) 1,649 2,813 (459)
Inventories.............................. 2,433 12,514 (1,324) 407 583
Prepaid expenses and other assets........ 12,145 (686) 590 (1,052) 1,028
Accounts payable, accrued expenses and
other liabilities..................... 13,283 (25,393) (7,065) 1,413 (1,791)
----------- --------- --------- -------- --------
Net cash provided by (used in) operating
activities............................ 57,194 14,920 54,462 19,542 17,552
----------- --------- --------- -------- --------
Investing activities:
Construction and capital expenditures,
including net changes in pager
assets................................ (161,861) (40,556) (53,867) (4,854) (26,806)
Net proceeds from the sale of tower
assets................................ -- -- 169,703 -- --
Net proceeds from the sale of investment
in Abacus............................. -- -- -- -- 1,400
Net loss on the disposal of fixed
assets................................ -- -- -- -- 381
Acquisition of businesses................ (866,460) -- -- -- --
----------- --------- --------- -------- --------
Net cash provided by (used in) investing
activities................................. (1,028,321) (40,556) 115,836 (4,854) (25,025)
----------- --------- --------- -------- --------
Financing activities:
Book cash overdraft...................... -- -- -- -- 1,255
Capital contribution by MobileMedia
Corporation........................... 12,800 3,396 -- -- --
Payment of debt issue costs.............. (6,939) -- -- -- --
Borrowing from revolving credit
facilities............................ 580,250 -- -- -- --
Repayments on revolving credit
facilities............................ -- -- (170,000) -- --
Borrowing from DIP credit facilities..... -- 47,000 -- -- 5,000
Repayments on DIP credit facilities...... -- (37,000) (10,000) (10,000) --
----------- --------- --------- -------- --------
Net cash provided by (used in) financing
activities................................. 586,111 13,396 (180,000) (10,000) 6,255
----------- --------- --------- -------- --------
Net (decrease) increase in cash, cash
equivalents designated and cash designated
for the MobileComm acquisition............. (385,016) (12,240) (9,702) 4,688 (1,218)
Cash and cash equivalents at beginning of
period..................................... 408,176 23,160 10,920 10,920 1,218
----------- --------- --------- -------- --------
Cash and cash equivalents at end of period... $ 23,160 $ 10,920 $ 1,218 $ 15,608 $ 0
=========== ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-60
<PAGE> 282
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-61
<PAGE> 283
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-62
<PAGE> 284
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-63
<PAGE> 285
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
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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
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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>
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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.
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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).
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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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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
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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.
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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.
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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-73
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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
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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.
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<PAGE> 297
ANNEX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
AND
MAY 10, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 298
TABLE OF CONTENTS
ARTICLE I.
The Merger; Closing; Effective Time
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1.1. The Merger.................................................. A-1
1.2. Closing..................................................... A-1
1.3. Effective Time.............................................. A-1
ARTICLE II.
Certificate of Incorporation and Bylaws of the Surviving Corporation
2.1. The Certificate of Incorporation............................ A-2
2.2. The Bylaws.................................................. A-2
ARTICLE III.
Directors & Officers
3.1. Directors of Arch........................................... A-2
3.2. Directors of the Surviving Corporation...................... A-2
3.3. Officers of the Surviving Corporation....................... A-2
ARTICLE IV.
Effect of the Merger on Capital Stock; Exchange of Certificates
4.1. Effect on Capital Stock..................................... A-2
4.2. Exchange of Certificates for Shares......................... A-3
4.3. Dissenters' Rights.......................................... A-5
4.4. Adjustments to Prevent Dilution............................. A-5
4.5. Alternate Transaction Structure............................. A-5
ARTICLE V.
Representations and Warranties
5.1. Representations and Warranties of PageNet, Arch and Merger
Sub......................................................... A-6
ARTICLE VI.
Covenants
6.1. Interim Operations.......................................... A-16
6.2. Acquisition Proposals....................................... A-20
6.3. The Certificate Amendments.................................. A-21
6.4. Information Supplied........................................ A-21
6.5. Stockholders Meetings....................................... A-21
6.6. Filings; Other Actions; Notification........................ A-23
6.7. Access; Consultation........................................ A-24
6.8. Affiliates.................................................. A-24
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
6.9. Stock Exchange Listing...................................... A-25
6.10. Publicity................................................... A-25
6.11. Benefits.................................................... A-25
6.12. Expenses.................................................... A-26
6.13. Indemnification; Directors' and Officers' Insurance......... A-26
6.14. Takeover Statute............................................ A-27
6.15. Confidentiality............................................. A-27
6.16. Tax-Free Reorganization..................................... A-27
6.17. Senior Credit Facilities.................................... A-27
6.18. The Exchange Offers......................................... A-27
6.19. Bankruptcy Provisions....................................... A-31
6.20. Rights Agreement............................................ A-35
6.21. Payment of Dissenters' Rights............................... A-35
6.22. Distribution of Interests in Vast to PageNet Shareholders... A-35
ARTICLE VII.
Conditions
7.1. Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-35
7.2. Conditions to Obligations of Arch and Merger Sub............ A-36
7.3. Conditions to Obligation of PageNet......................... A-37
ARTICLE VIII.
Termination
8.1. Termination by Mutual Consent............................... A-38
8.2. Termination by Either Arch or PageNet....................... A-38
8.3. Termination by PageNet...................................... A-39
8.4. Termination by Arch......................................... A-39
8.5. Effect of Termination and Abandonment....................... A-39
ARTICLE IX.
Miscellaneous and General
9.1. Survival.................................................... A-41
9.2. Modification or Amendment................................... A-41
9.3. Waiver of Conditions........................................ A-41
9.4. Counterparts................................................ A-41
9.5. Governing Law and Venue; Waiver of Jury Trial............... A-41
9.6. Notices..................................................... A-42
9.7. Entire Agreement............................................ A-43
9.8. No Third Party Beneficiaries................................ A-43
9.9. Obligations of Arch and of PageNet.......................... A-43
9.10. Severability................................................ A-43
9.11. Interpretation.............................................. A-43
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9.12. Captions.................................................... A-43
9.13. Assignment.................................................. A-43
</TABLE>
<TABLE>
<S> <C>
Exhibits
Certificate of Incorporation of the Surviving Corporation... Exhibit A
Arch Rights Agreement Amendment............................. Exhibit B
PageNet Affiliates Agreement................................ Exhibit C
</TABLE>
iii
<PAGE> 301
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Acquisition Proposal........................................ 6.2(a)
Agreement................................................... preamble
Alternative Merger.......................................... 4.5
Alternative Merger Notice................................... 4.5
Arch........................................................ preamble
Arch Class B Common Stock................................... .51(b)(ii)
Arch Common Stock........................................... 4.1(a)
Arch Companies.............................................. 4.1(a)
Arch Disclosure Letter...................................... 5.1
Arch Exchange Offer......................................... 6.18(a)
Arch Exchange Prospectus.................................... 6.18(d)
Arch Exchange Registration Statement........................ 6.18(d)
Arch Notes.................................................. 6.18(a)
Arch Preferred Shares....................................... .51(b)(ii)
Arch Required Consents...................................... 5.1(d)(i)
Arch Requisite Vote......................................... .51(c)(ii)
Arch Rights Agreement....................................... .51(b)(ii)
Arch Series B Preferred Share............................... .51(b)(ii)
Arch Series C Preferred Share............................... .51(b)(ii)
Arch Stock Plans............................................ .51(b)(ii)
Arch Stockholders Approval.................................. 6.5(b)
Arch Stockholders Meeting................................... 6.5(b)
Arch Termination Fee........................................ 8.5(c)
Audit Date.................................................. 5.1(f)
Bankruptcy and Equity Exception............................. 5.1(c)(i)
Bankruptcy Case............................................. 6.19
Bankruptcy Code............................................. 6.19
Bankruptcy Court............................................ 6.19
Bylaws...................................................... 2.2
Certificate................................................. 4.1(a)
Certificate Amendments...................................... recitals
Certificate of Merger....................................... 1.3
Charter..................................................... 2.1
Closing..................................................... 1.2
Closing Date................................................ 1.2
Code........................................................ recitals
Communications Act.......................................... 5.1(d)(i)
Compensation and Benefit Plans.............................. 5.1(h)(i)
Confidentiality Agreement................................... 6.15
Contracts................................................... .51(d)(ii)
Costs....................................................... 6.13(a)
Current Premium............................................. 6.13(c)
D&O Insurance............................................... 6.13(c)
</TABLE>
iv
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<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Delaware Courts............................................. 9.5(a)
DGCL........................................................ 1.1
Disclosure Letter........................................... 5.1
Dismissal Order............................................. .619(a)(v)
Dissenting Shares........................................... 4.3
Distributed Interests....................................... 6.22
Distributed Subsidiary...................................... 6.22
Effective Time.............................................. 1.3
Environmental Law........................................... 5.1(n)
ERISA....................................................... 5.1(h)(i)
ERISA Affiliate............................................. 5.1(h)(i)
Exchange Act................................................ 5.1(b)(i)
Exchange Agent.............................................. 4.2(a)
Exchange Offers............................................. 6.18(a)
Exchange Offers Expiration Date............................. 6.18(h)
Exchange Ratio.............................................. 4.1(a)
Exchange Prospectus......................................... 6.18(d)
Exchange Registration Statements............................ 6.18(d)
Excluded PageNet Shares..................................... 4.1(a)
Exclusivity Provision....................................... 6.19(d)
Exit Financing.............................................. 6.19
Extended Determination Date..................................169(a)(iii)
FCC......................................................... 5.1(d)(i)
FCC Regulations............................................. 5.1(d)(i)
Final Confirmation Order.................................... 6.19
Final Order................................................. 7.1(c)
GAAP........................................................ 5.1(e)
Governmental Entity......................................... 5.1(d)(i)
Governmental Regulations.................................... 5.1(d)(i)
Hazardous Substance......................................... 5.1(n)
HSR Act..................................................... 5.1(d)(i)
Indemnified Parties......................................... 6.13(a)
Indenture Amendments........................................ 6.18(c)
Initial Determination Date.................................. 6.19
Initial Merger Motion....................................... 6.19(d)
Initial Merger Order........................................ 6.19(d)
Interim Financing........................................... 6.19
Involuntary Insolvency Event................................ .619(a)(v)
Involuntary Insolvency Event Date........................... .619(a)(v)
IRS......................................................... .51(h)(ii)
Knowledgeable Executives.................................... 5.1(g)
Laws........................................................ 5.1(i)
Material Adverse Effect..................................... 5.1(a)
Merger...................................................... recitals
</TABLE>
v
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<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Merger Consideration........................................ 4.1(a)
Merger Sub.................................................. preamble
NASDAQ...................................................... 6.9
Note Consents............................................... 6.18(b)
Note Waivers................................................ 6.18(c)
Notes....................................................... 6.18(a)
Notes Exchange Agent........................................ 6.18(i)
Order....................................................... 7.1(d)
PageNet..................................................... preamble
PageNet Affiliates Agreement................................ 6.8
PageNet Conditions to the Prepackaged Plan.................. 6.19
PageNet Disclosure Letter................................... 5.1
PageNet Exchange Offer...................................... 6.18(a)
PageNet Exchange Prospectus................................. 6.18(d)
PageNet Minimum Condition................................... 6.18(b)
PageNet Notes............................................... 6.18(a)
PageNet Option.............................................. .611(a)(i)
PageNet Required Consents................................... 5.1(d)(i)
PageNet Rights Agreement.................................... 5.1(b)(i)
PageNet Secured Creditors................................... 6.17
PageNet Share............................................... 4.1(a)
PageNet Stock Plans......................................... 5.1(b)(i)
PageNet Stockholders Approval............................... 6.5(a)
PageNet Stockholders Meeting................................ 6.5(a)
PageNet Termination Fee..................................... 8.5(b)
Pension Plan................................................ .51(h)(ii)
Permits..................................................... 5.1(i)
Person...................................................... 4.2(a)
Prepackaged Plan............................................ 6.19
Prospectus/Proxy Statement.................................. 6.4
PUC......................................................... 5.1(d)(i)
Reports..................................................... 5.1(e)
Representatives............................................. 6.2(a)
Requisite Bankruptcy Vote of the PageNet Notes.............. 6.19
Requisite Bankruptcy Vote of the PageNet Secured
Creditors................................................. 6.19
Requisite Conditions to the Prepackaged Plan................ 6.19
Rule 145 Affiliates......................................... 6.8
S-4 Registration Statement.................................. 6.4
SEC......................................................... 5.1(e)
Section 16 Person............................................161(a)(iii)
Securities Act.............................................. 5.1(d)(i)
Significant Investees....................................... .51(d)(ii)
Significant Subsidiaries.................................... 5.1(b)(i)
State Laws.................................................. 5.1(d)(i)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Subsidiary.................................................. 5.1(a)
Substitute Option........................................... .611(a)(i)
Superior Proposal........................................... 6.2(a)
Surviving Corporation....................................... 1.1
Takeover Statute............................................ 5.1(j)
Tax......................................................... 5.1(l)
Tax Return.................................................. 5.1(l)
Taxable..................................................... 5.1(l)
Termination Date............................................ 8.2
Vast Distribution........................................... 6.22
Vast Distribution Record Date............................... 6.22
</TABLE>
vii
<PAGE> 305
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement"), dated as of November 7,
1999, as amended by the Amendment dated January 7, 2000 and May 10, 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> 306
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") or Dissenting Shares (as defined
below)), shall be converted into and become exchangeable for 0.1247 of a
share (the "Exchange Ratio") of common stock, par value $0.01 per share, of
Arch (the "Arch Common Stock"), subject to adjustment as provided in
Section 4.4, (the "Merger Consideration"). At the Effective Time, all
PageNet Shares shall no longer be outstanding, shall be canceled and
retired and shall cease to exist, and each certificate (a
A-2
<PAGE> 307
"Certificate") formerly representing any of such PageNet 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.
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<PAGE> 308
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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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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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 stockholders from a
financial point of view than the transaction contemplated by this Agreement (any
such Acquisition Proposal being referred to herein as a "Superior Proposal");
(ii) its Board of Directors determines in good faith after consultation with
outside legal counsel that such action is necessary for the Board of Directors
to comply with its fiduciary duty to its stockholders under applicable Law; and
(iii) prior to providing any information or data to any Person in connection
with a Superior Proposal by any such Person, its Board of Directors shall
receive from such Person an executed confidentiality agreement on terms
substantially similar to those contained in the Confidentiality Agreement (as
defined in Section 6.15); provided, that such confidentiality agreement shall
contain terms that allow it to comply with its obligations under this Section
6.2.
(b) PageNet and Arch each agree that it will immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any Acquisition Proposal. PageNet
and Arch each agree that it will take the necessary steps to promptly inform
each of its Representatives of the obligations undertaken in Section 6.2(a).
PageNet and Arch each agree that it will notify the other party immediately if
any such inquiries, proposals or offers are received by, any such information is
requested from, or any such discussions or negotiations are sought to
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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 "Prospectus/Proxy
Statement") constituting a part thereof) (the "S-4 Registration Statement")
will, at the time the S-4 Registration Statement becomes effective under the
Securities Act; and (ii) the Prospectus/Proxy Statement and any amendment or
supplement thereto will, at the date of mailing to stockholders and at the time
of each of the PageNet Stockholders Meeting and the Arch Stockholders Meeting to
be held in connection with the Merger, in any such case, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. If at any time
prior to the Effective Time any information relating to Arch or PageNet, or any
of their respective affiliates (as defined in SEC Rule 12b-2), officers or
directors, is discovered by Arch or PageNet which should be set forth in an
amendment or supplement to any of the S-4 Registration Statement or the
Prospectus/Proxy Statement, so that any of such documents would not include any
misstatement of a material fact or would omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, the
party which discovers such information shall promptly notify the other parties
to this Agreement and an appropriate amendment or supplement describing such
information shall be promptly filed with the SEC and, to the extent required by
law, disseminated to the stockholders of PageNet and Arch.
6.5. Stockholders Meetings.
(a) PageNet will take, in accordance with applicable Law and its
certificate of incorporation and bylaws, all action necessary to convene a
meeting of its stockholders (the "PageNet Stockholders Meeting") as promptly as
practicable after the S-4 Registration Statement is declared effective to
consider and vote upon the adoption of this Agreement, and to approve the
Merger, an amendment to the PageNet certificate of incorporation to increase the
number of PageNet Shares authorized to an amount sufficient to complete the
transactions contemplated by this Agreement and the other transactions
contemplated by this Agreement. PageNet will take all necessary action to obtain
the adoption of this Agreement, the approval of the Merger, the amendment to the
PageNet certificate of incorporation to increase the number of PageNet Shares
authorized to the amount sufficient to complete the transactions contemplated by
this Agreement and the other transactions contemplated by this Agreement by the
holders of the PageNet Shares (the "PageNet Stockholders Approval"). The Board
of Directors of PageNet shall: (i) recommend that the stockholders adopt this
Agreement and thereby approve the Merger and the other transactions contemplated
by this Agreement (including without limitation adoption of the Prepackaged Plan
and authorization of the Bankruptcy Case) and the amendment to the PageNet
certificate of incorporation to
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increase the number of PageNet Shares authorized to the amount sufficient to
complete the transactions contemplated by this Agreement; and (ii) take all
lawful action to solicit such adoption and approval; provided, however, that
PageNet's Board of Directors may, at any time prior to the Effective Time,
withdraw, modify or change any such recommendation to the extent that PageNet's
Board of Directors determines in good faith, after consultation with outside
legal counsel, that such withdrawal, modification or change of its
recommendation is required by its fiduciary duties to PageNet's stockholders
under applicable Law; provided, further, that, unless this Agreement is
terminated by Arch pursuant to Section 8.4, PageNet shall, as promptly as
practicable after the S-4 Registration Statement is declared effective, duly
convene and complete the PageNet Stockholders Meeting regarding the adoption of
this Agreement and the approval of the Merger, the amendment to the PageNet
certificate of incorporation set forth above and the other transactions
contemplated by this Agreement, regardless of whether PageNet's Board of
Directors has withdrawn, modified, or changed its recommendation to the
stockholders regarding the adoption of this Agreement or the approval of the
Merger, the amendment to the PageNet certificate of incorporation set forth
above or the other transactions contemplated by this Agreement prior to such
PageNet Stockholders Meeting. Notwithstanding the foregoing or any other
provision of this Agreement to the contrary, PageNet shall not be required to
convene a PageNet Stockholders Meeting after (x) the Bankruptcy Case has
commenced or (y) PageNet stipulates to bankruptcy relief after the occurrence of
an Involuntary Insolvency Event pursuant to Section 6.19(a)(v) hereof.
(b) Arch will take, in accordance with applicable Law and its certificate
of incorporation and bylaws, all action necessary to convene a meeting of its
stockholders (the "Arch Stockholders Meeting") as promptly as practicable after
the S-4 Registration Statement is declared effective to (i) consider and vote
upon (A) the Certificate Amendments and the issuance of shares of Arch Common
Stock pursuant to the Merger, the conversion of the Arch 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
Prospectus/Proxy Statement, and Arch shall prepare and file with the SEC the S-4
Registration Statement as promptly as practicable. Arch and PageNet each shall
use its reasonable best efforts to have the S-4 Registration Statement declared
effective under the Securities Act as promptly as practicable and on the same
day as each of the Exchange Registration Statements, and promptly thereafter
mail the Prospectus/Proxy Statement to the stockholders of Arch and PageNet.
Arch shall also use its reasonable best efforts to obtain prior to the effective
date of the S-4 Registration Statement all necessary state securities law or
"blue sky" permits and approvals required in connection with the Merger and the
other transactions contemplated by this Agreement and will pay all expenses
incident thereto. Each party shall notify the other of the receipt of the
comments of the SEC and of any requests by the SEC for amendments or supplements
to the Prospectus/Proxy Statement or the S-4 Registration Statement or for
additional information and shall promptly supply one another with copies of all
correspondence between any of them (or their Representatives) and the SEC (or
its staff) with respect thereto. If, at any time prior to either of the Arch
Stockholders Meeting or the PageNet Stockholders Meeting, any event shall occur
relating to or affecting Arch, PageNet, or their respective officers or
directors, which event should be described in an amendment or supplement to the
Prospectus/Proxy Statement or the S-4 Registration Statement, the parties shall
promptly inform one another and shall cooperate in promptly preparing filing and
clearing with the SEC and, if required by applicable securities laws, mailing to
Arch' or PageNet's stockholders, as the case may be, such amendment or
supplement.
(b) PageNet and Arch each shall use its respective reasonable best efforts
to cause to be delivered to the other party and its directors a letter of its
independent auditors, dated: (i) the date on which the S-4 Registration
Statement and the Exchange Registration Statements shall become effective; and
(ii) the Closing Date, and addressed to the other party and its directors, in
form and substance customary for "comfort" letters delivered by independent
public accountants in connection with registration statements similar to the S-4
Registration Statement and the Exchange Registration Statements.
(c) PageNet and Arch shall cooperate with each other and use (and shall
cause their respective Subsidiaries to use) their respective reasonable best
efforts: (i) to take or cause to be taken all actions, and do or cause to be
done all things, necessary, proper or advisable on its part under this Agreement
and applicable Laws to consummate and make effective the Merger, the Exchange
Offers and the other transactions contemplated by this Agreement (including, if
necessary, the Prepackaged Plan) as soon as practicable, including: (A)
obtaining opinions of their respective attorneys referred to in Article VII
below; (B) preparing and filing as promptly as practicable all documentation to
effect all necessary applications, notices, petitions, filings and other
documents; and (C) instituting court actions or other proceedings necessary to
obtain the approvals required to consummate the Merger, the Exchange Offers or
the other transactions contemplated by this Agreement or defending or otherwise
opposing all court actions or other proceedings instituted by a Governmental
Entity or other Person under the Governmental Regulations for purposes of
preventing the consummation of the Merger, the Exchange Offers and the other
transactions contemplated by this Agreement; and (ii) to obtain as promptly as
practicable all consents, registrations, approvals, permits and authorizations
necessary or advisable to be obtained from any third party and/or any
Governmental Entity in order to consummate the Merger, the Exchange Offers or
any of the other transactions contemplated by this Agreement; provided, however,
that nothing in this Section 6.5 shall require either Arch or PageNet to agree
to any divestitures or hold separate or similar arrangements if such
divestitures or arrangements would reasonably be expected to have a material
adverse effect on Arch or PageNet, or a material adverse effect on the expected
benefits of the Merger to it. Neither Arch nor PageNet will agree to any
divestitures or hold separate or similar arrangements without the prior written
approval of the other party. Subject to applicable laws relating to the exchange
of information, Arch and PageNet shall have the right to review in advance, and
to the extent practicable each will consult the other party on, all the
information relating to Arch or PageNet, as the case may be, and any of their
respective
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Subsidiaries, that appear in any filing made with, or written materials
submitted to, any third party and/or any Governmental Entity in connection with
the Merger and the other transactions contemplated by this Agreement. In
exercising the foregoing right, each of PageNet and Arch shall act reasonably
and as promptly as practicable.
(d) PageNet and Arch each shall, upon request by the other party, furnish
the other party with all information concerning itself, its Subsidiaries,
directors, officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Prospectus/Proxy Statement, the
S-4 Registration Statement, the Exchange Registration Statements or any other
statement, filing, notice or application made by, or on behalf of, Arch, PageNet
or any of their respective Subsidiaries to any third party and/or any
Governmental Entity in connection with the Merger, the Exchange Offers and the
transactions contemplated by this Agreement.
(e) PageNet and Arch each shall keep the other party apprised of the status
of matters relating to completion of the transactions contemplated by this
Agreement, including promptly furnishing the other party with copies of notices
or other communications received by Arch or PageNet, as the case may be, or any
of its Subsidiaries, from any third party and/or any Governmental Entity with
respect to the Merger, the Exchange Offers and the other transactions
contemplated by this Agreement. Each of PageNet and Arch shall give prompt
notice to the other party of any change that is reasonably likely to result in a
Material Adverse Effect on it or of any failure of any conditions to the other
party's obligations to effect the Merger set forth in Article VII.
(f) Each of PageNet and Arch agrees that if a bona fide Acquisition
Proposal is made to acquire shares of the other party to this Agreement, then
upon the request of the party not receiving the Acquisition Proposal, the party
receiving the Acquisition Proposal will cooperate with the other party to 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
Prospectus/Proxy Statement, the S-4 Registration Statement and the Exchange
Registration Statements, and the filing fees under the HSR Act, any other
filings fees under any Governmental Regulations, and any filings fees in
connection with obtaining approvals under the Communications Act, FCC
Regulations and State Laws shall be shared equally by Arch and PageNet.
6.13. Indemnification; Directors' and Officers' Insurance.
(a) For six years from and after the Effective Time, Arch will indemnify
and hold harmless each present and former director and officer of PageNet
(solely when acting in such capacity) determined as of the Effective Time (the
"Indemnified Parties"), against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to matters existing or occurring at,
or prior to, the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent that PageNet would have been
permitted under Delaware law and its certificate of incorporation or bylaws in
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
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provide such directors and officers with coverage for an aggregate period of six
years with respect to claims arising from facts or events that occurred on, or
prior to, the Effective Time, including, without limitation, with respect to the
transactions contemplated by this Agreement. If such prepaid policies shall have
been obtained by PageNet prior to the Closing, then Arch shall maintain such
policies in full force and effect and shall continue to honor PageNet's
obligations thereunder.
(d) If Arch or any of its successors or assigns: (i) shall consolidate
with, or merge into, any other corporation or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger;
or (ii) shall transfer all or substantially all of its properties and assets to
any individual, corporation or other entity, then and in each such case, proper
provisions shall be made so that the successors and assigns of Arch shall assume
all of the obligations set forth in this section. At the Effective Time, Arch
shall assume and be bound by all of PageNet's indemnity obligations with respect
to officers, directors and employees of corporations it previously acquired that
are identified in the corresponding section of the PageNet Disclosure Letter.
(e) The provisions of this section are intended to be for the benefit of,
and shall be enforceable by, each of the Indemnified Parties, their heirs and
their representatives.
6.14. Takeover Statute. If any Takeover Statute or similar statute or
regulation is or may become applicable to this Agreement or to the other
transactions contemplated hereby or thereby, each of the parties and its Board
of Directors shall grant such approvals and take all such actions as are legally
permissible so that the transactions contemplated under such agreements may be
consummated as promptly as practicable on the terms contemplated under such
agreements and otherwise act to eliminate or minimize the effects of any such
statute or regulation on the transactions contemplated under such agreements.
6.15. Confidentiality. PageNet and Arch each acknowledges and confirms
that it has entered into a Confidentiality Agreement, dated as of August 26,
1999 (the "Confidentiality Agreement"), and that the Confidentiality Agreement
shall remain in full force and effect in accordance with its terms.
6.16. Tax-Free Reorganization. Arch, Merger Sub and PageNet shall each
use its best efforts to cause the Merger to be treated as a reorganization with
the meaning of Section 368(a) of the Code and to obtain an opinion of its
respective counsel as contemplated by Sections 7.2(d) and 7.3(d), respectively.
6.17. Senior Credit Facilities. PageNet and Arch shall use their
reasonable best efforts to secure, through the amendment or restatement of their
respective current credit facilities, through a new credit facility or through
the operation of the Prepackaged Plan, or any combination of the foregoing,
senior secured debt financing in an amount not less than $1.3 billion on terms
reasonably acceptable to the parties to this Agreement. Simultaneously with the
Exchange Offers, PageNet shall solicit the consent of the holders of PageNet's
senior credit facilities (the "PageNet Secured Creditors") to the Prepackaged
Plan. The solicitation of the PageNet Secured Creditors shall be made in
accordance with the standards and requirements set forth in Section 6.18(e).
6.18. The Exchange Offers.
(a) Provided that nothing shall have occurred that would result in a
failure to satisfy any other conditions set forth in Section 6.18(b) of this
Agreement, Arch and PageNet shall, as promptly as practicable, commence separate
exchange offers (the "Arch Exchange Offer" and the "PageNet Exchange Offer" and
together, the "Exchange Offers") to issue an aggregate of up to: (i) 29,651,984
shares of Arch Common Stock in exchange for the $448.4 million in aggregate
principal amount of Arch' 10 7/8% Senior Discount Notes due March 15, 2008
issued under and pursuant to an Indenture, dated as of March 12, 1996, between
Arch and IBJ Schroder Bank & Trust Company, as Trustee (the "Arch Notes"); and
(ii) in the case of PageNet, 616,830,757 PageNet Shares and, subject to Section
6.1(d) of this Agreement, Distributed Interests representing 68.9% of the equity
ownership in the Distributed Subsidiary in exchange for the $1.2 billion in
aggregate principal amount, together with all accrued interest thereon, of: (x)
10% Senior Subordinated Notes Due October 15, 2008 issued under and pursuant to
an Indenture, dated as of July 15, 1995, between PageNet and Shawmut Bank, N.A.,
as Trustee, as supplemented by a
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Second Supplemental Indenture, dated as of October 15, 1996, between PageNet and
Fleet National Bank; (y) 10.125% Senior Subordinated Notes Due August 1, 2007
issued under and pursuant to an Indenture, dated as of July 15, 1995, between
PageNet and Shawmut Bank, N.A., as Trustee, as supplemented by a First
Supplemental Indenture, dated as of July 15, 1995, between PageNet and Shawmut
Bank, N.A.; and (z) 8.875% Senior Subordinated Notes Due February 1, 2006 issued
under and pursuant to an Indenture, dated as of January 15, 1994, between
PageNet and Shawmut Bank, N.A., as Trustee, as supplemented by a First
Supplemental Indenture, dated as of January 15, 1994, between PageNet and
Shawmut Bank, N.A. (collectively, the "PageNet Notes" and together with the Arch
Notes, the "Notes"). In the Exchange Offers, (i) Arch will offer to exchange
66.1318 shares of Arch Common Stock for each $1,000 principal amount, together
with all accreted or accrued interest thereon, of outstanding Arch Notes and
(ii) PageNet will offer to exchange a pro rata portion of 616,830,757 PageNet
Shares and, subject to Section 6.1(d) of this Agreement, Distributed Interests
representing the portion of such equity ownership in the Distributed Subsidiary
equal to 68.9% of the total equity ownership of the Distributed Subsidiary for
each PageNet Note (such pro rata portion to be computed immediately prior to the
Effective Time by dividing the principal amount, together with all accrued
interest thereon, of each PageNet Note by the principal amount, together with
all accrued interest thereon, of all PageNet Notes). Calculations of share
amounts for such purpose will be rounded down to the nearest whole share and no
fractional shares of Arch Common Stock or PageNet Shares will be issued for
Notes.
(b) The obligations of 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,
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based on any possible future judicial, administrative or other governmental or
legal determination that the Note Consents or the adoption of any of the
Indenture Amendments are invalid or unenforceable. Notwithstanding anything to
the contrary herein, the Note Waivers shall not be deemed to cover claims for
violations of federal or state securities laws relating to the Exchange Offers.
(d) PageNet and Arch each agrees, as to itself and its Subsidiaries, that
none of the information supplied or to be supplied by it or its Subsidiaries for
inclusion or incorporation by reference in: (i) (x) the Registration Statement
on Form S-4 to be filed with the SEC by Arch in connection with the issuance of
shares of Arch Common Stock in the Arch Exchange Offer (including the consent
solicitation and prospectus (the "Arch Exchange Prospectus" constituting a part
thereof) (the "Arch Exchange Registration Statement")) and (y) the Registration
Statement on Form S-4 to be filed with the SEC by 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
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tendered and not withdrawn, Notes that are not tendered into or accepted in the
Exchange Offers will remain outstanding as obligations of Arch or the Surviving
Corporation, as the case may be, after consummation of the Merger and Arch or
the Surviving Corporation, as the case may be, alone shall be obligated to
comply with the terms thereof, except as may otherwise be provided in the
Prepackaged Plan or the Final Confirmation Order (as defined in Section 6.19) if
the Bankruptcy Case (as defined in Section 6.19) is commenced. Such Notes shall
be modified only to the extent provided in the Indenture Amendments and the Note
Consents.
(h) The Exchange Offers will expire at 12:00 midnight, New York City time,
on the 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.
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6.19. Bankruptcy Provisions. As used in this Agreement, the term:
"Bankruptcy Case" shall mean the bankruptcy case filed or stipulated to by
PageNet and its Subsidiaries under Chapter 11 of the Bankruptcy Code pursuant to
the terms hereof;
"Bankruptcy Code" shall mean Title 11 of the United States Code, 11
U.S.C.sec.101 et seq., as now in effect or hereafter amended;
"Bankruptcy Court" shall mean the court in which the Bankruptcy Case may be
filed or otherwise administered, including any court to which the Bankruptcy
Case may be transferred at any time under applicable law. PageNet and Arch
hereby agree that the U.S. Bankruptcy Court for the District of Delaware is the
appropriate venue for the Bankruptcy Case and that if the Bankruptcy Case is
filed by PageNet it will be filed in the District of Delaware;
"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
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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.
(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
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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 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
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Prospectus, the solicitation materials sent to the PageNet Secured Creditors,
and (to the extent PageNet and Arch deem necessary) in any materials sent to the
holders of PageNet Shares. PageNet and Arch shall cooperate to ensure that the
Exchange Offers, including the disclosures to holders of PageNet Notes made in
connection therewith, and the solicitation of PageNet Secured Creditors comply
with the disclosure requirements of the Bankruptcy Code and applicable law. The
Prepackaged Plan may not be amended, modified or added to in any material
respect without the written consent of PageNet and Arch.
(c) Notwithstanding any other provision hereof to the contrary, (i) the
filing of the Bankruptcy Case, the operation of PageNet's business in accordance
with the Bankruptcy Code or the pendency of the Bankruptcy Case, or (ii) the
occurrence of an Involuntary Insolvency Event with respect to PageNet shall not
be considered in and of itself a Material Adverse Effect for purposes of this
Agreement.
(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.
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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.
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), 11.6% 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
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petition is passed; (iii) the Governmental Entity does not have the action
or order under reconsideration on its own motion and the time for such
reconsideration has passed; (iv) the action or order is not then under
active judicial review, there is no notice of appeal or other application
for judicial review pending, and the deadline for filing such notice of
appeal or other application for judicial review has passed; and (v) with
respect to an action taken or order issued by the Governmental Entity
granting consent to the Merger, such consent shall be without material
adverse conditions, other than conditions that have been agreed to by
PageNet and Arch or that are routine conditions with respect to transfer of
this nature.
(d) Laws and Orders. No Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any Law
(whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the Merger, the
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)
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as of the Closing Date as though made on and as of the Closing Date, and
Arch shall have received a certificate signed on behalf of PageNet by an
executive officer of PageNet to such effect.
(b) Performance of Obligations of PageNet. PageNet shall have
performed in all material respects all of its covenants, agreements and
obligations set forth in this Agreement at or prior to the Closing Date,
and Arch shall have received a certificate signed on behalf of PageNet by
an executive officer of PageNet to such effect.
(c) Consents Under Agreements. PageNet shall have obtained the
consent or approval of each Person whose consent or approval shall be
required in order to consummate the transactions contemplated by this
Agreement under any Contract to which PageNet or any of its Subsidiaries is
a party (other than consents or waivers relating to the Bankruptcy Case or
the occurrence of an Involuntary Insolvency Event), except those for which
the failure to obtain such consent or approval, individually or in the
aggregate, is not reasonably likely to have, a Material Adverse Effect on
PageNet or a material adverse effect on the expected benefits of the Merger
to Arch.
(d) Tax Opinion. Arch shall have received the opinion of Hale and
Dorr LLP, counsel to Arch, dated the Closing Date, to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and that each of Arch,
Merger Sub and PageNet will be a party to that reorganization within the
meaning of Section 368(b) of the Code. Such opinion shall be based on
certain assumptions concerning the fair market value of stock and
securities to be surrendered and issued in the Merger, the Exchange Offers
and the 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, Arch and Merger Sub.
(e) Certificate. PageNet shall have delivered to Arch a certificate
(without qualification as to knowledge or materiality or otherwise) to the
effect that each of the conditions specified in Section 7.2 is satisfied in
all respects, that the PageNet Stockholders Meeting has been convened
(unless the Bankruptcy Case precedes the scheduled date of such meeting),
and that the actions set forth in Section 6.5(a) of this Agreement have
been adopted and approved in accordance with such section (except to the
extent such approval is not required by reason of the entry of the Final
Confirmation Order).
7.3. Conditions to Obligation of PageNet. The obligation of PageNet to
effect the Merger is also subject to the satisfaction or waiver by PageNet at or
prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Arch and Merger Sub set forth in this Agreement: (i) to the
extent qualified by materiality, shall be true and correct; and (ii) to the
extent not qualified by materiality, shall be true and correct (except that
this clause (ii) shall be deemed satisfied so long as any failures of such
representations and warranties to be true and correct, taken together,
would not reasonably be expected to have a Material Adverse Effect and
would not reasonably be expected to have a material adverse effect on the
expected benefits of the Merger to PageNet), in the case of each of clauses
(i) and (ii), as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, and PageNet
shall have received a certificate signed on behalf of Arch and Merger Sub
by an executive officer of Arch to such effect.
(b) Performance of Obligations of Arch. Each of Arch and Merger Sub
shall have performed in all material respects all of its covenants,
agreements and obligations set forth in this Agreement at or prior 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
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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.
(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
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material respect its obligations under this Agreement in any manner that shall
have proximately contributed to the failure of the Merger to be consummated.
8.3. Termination by PageNet. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the PageNet Stockholder Approval referred to in Section 7.1(a), by action of the
Board of Directors of PageNet if:
(a) the Board of Directors of Arch shall have withdrawn or adversely
modified its approval or recommendation of this Agreement;
(b) there has been a breach by Arch or Merger Sub of any
representation, warranty, covenant or agreement contained in this Agreement
which both: (i) would result in a failure of a condition set forth in
Section 7.3(a) or 7.3(b); and (ii) cannot be or is not cured prior to the
Termination Date;
(c) PageNet has received a Superior Proposal, has otherwise complied
with the requirements of Section 6.2, provides Arch with all of the
material terms of Superior Proposal at least two business days prior to
termination and simultaneously with such termination pays to Arch the Arch
Termination Fee required by Section 8.5(c); or
(d) pursuant to Section 6.19(a)(ii), PageNet shall not file the
Bankruptcy Case and seek confirmation of the Prepackaged Plan by the
Bankruptcy Court and simultaneously pays to Arch the Arch Termination Fee.
8.4. Termination by Arch. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
Arch Stockholder Approval referred to in Section 7.1(a), by action of the Board
of Directors of Arch if:
(a) the Board of Directors of PageNet shall have withdrawn or
adversely modified its approval or recommendation of this Agreement to do
so;
(b) there has been a breach by PageNet of any representation,
warranty, covenant or agreement contained in this Agreement which both: (i)
would result in a failure of a condition set forth in Section 7.2(a) or
7.2(b); and (ii) cannot be or is not cured prior to the Termination Date,
other than a breach that results solely from the filing or conduct of the
Bankruptcy Case consistent with the terms of this Agreement or solely from
the occurrence of an Involuntary Insolvency Event with respect to PageNet;
(c) the Initial Merger Order has not been entered within 30 days of
the commencement of the Bankruptcy Case;
(d) the Final Confirmation Order is not entered within the time
permitted by Section 6.19(a);
(e) the Prepackaged Plan is amended, modified or added to in violation
of Section 6.19(b); or
(f) Arch has received a Superior Proposal, has otherwise complied with
the requirements of Section 6.2, provides PageNet with all of the material
terms of the Superior Proposal at least two business days prior to such
termination and simultaneously pays to PageNet the PageNet Termination Fee
required by Section 8.5(b).
8.5. Effect of Termination and Abandonment.
(a) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Article VIII, this Agreement (other than as
set forth in Section 9.1) shall become void and of no effect with no
liability (other than as set forth in Section 8.5(b) or (c), or in the
proviso at the end of this sentence) on the part of any party to this
Agreement or of any of its directors, officers, employees, agents, legal or
financial advisors or other representatives; provided, however, no such
termination shall relieve any party to this Agreement from any liability
for damages resulting from any breach of this Agreement.
(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
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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 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
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simultaneously with (and such payment shall be a condition of) termination
pursuant to Section 8.3(c) or (d). PageNet acknowledges that the agreements
contained in this Section 8.5(c) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, Arch
and Merger Sub would not enter into this Agreement. Accordingly, if PageNet
fails to pay promptly the amount due pursuant to this Section 8.5(c) (and
in any case in which the Bankruptcy Case has been commenced, the Initial
Merger Order approves this provision), and, in order to obtain such
payment, Arch commences a suit which results in a judgment against PageNet
for the fee set forth in this paragraph (c), PageNet shall pay to Arch its
costs and expenses (including attorneys' fees) in connection with such
suit, together with interest on the amount of the fee at the prime rate of
Citibank N.A. in effect on the date such payment was required to be made.
ARTICLE IX.
MISCELLANEOUS AND GENERAL
9.1. Survival. Article II, Article III, Article IV and this Article IX
(other than Section 9.4 (Counterparts)), and the agreements of PageNet, Arch and
Merger Sub contained in Sections 6.8 (Affiliates), 6.11 (Benefits), 6.12
(Expenses) and 6.13 (Indemnification; Directors' and Officers' Insurance) shall
survive the consummation of the Merger. This Article IX (other than Section 9.2
(Modification or Amendment), Section 9.3 (Waiver of Conditions) and Section 9.13
(Assignment)) and the agreements of PageNet, Arch and Merger Sub contained in
Section 6.12 (Expenses), Section 6.14 (Takeover Statute), Section 6.15
(Confidentiality) and Section 8.5 (Effect of Termination and Abandonment) shall
survive the termination of this Agreement. All other representations,
warranties, covenants and agreements in this Agreement shall not survive the
consummation of the Merger or the termination of this Agreement.
9.2. Modification or Amendment. Subject to the provisions of the
applicable law, at any time prior to the Effective Time, the parties to this
Agreement may modify or amend this Agreement, by written agreement executed and
delivered by duly authorized officers of the respective parties.
9.3. Waiver of Conditions.
(a) Any provision of this Agreement may be waived prior to the
Effective Time if, and only if, such waiver is in writing and signed by an
authorized representative or the party against whom the waiver is to be
effective.
(b) No failure or delay by any party in exercising any right, power or
privilege under this Agreement shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
Except as otherwise provided in this Agreement, the rights and remedies
herein provided shall be cumulative and not exclusive of any rights or
remedies provided by Law.
9.4. Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
9.5. Governing Law and Venue; Waiver of Jury Trial.
(a) This Agreement shall be deemed to be made in and in all respects
shall be interpreted, construed, and governed by, and in accordance with,
the substantive laws of the State of Delaware, without regard to the
conflict of law principles thereof. The parties hereby irrevocably and
unconditionally consent to submit to the exclusive jurisdiction of the
courts of the State of Delaware and of the United States of America located
in Wilmington, Delaware, including the U.S. Bankruptcy Court for the
District of Delaware (the "Delaware Courts"), for any litigation arising
out of or relating to this Agreement or the Prepackaged Plan and the
transactions contemplated by this Agreement (and agree not to commence any
litigation relating thereto except in such Delaware Courts), waive any
objection to the laying of venue of any such litigation in the Delaware
Courts and
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agree not to plead or claim in any Delaware Court that such litigation
brought therein has been brought in an inconvenient forum.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE, EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY
WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, OR
RELATING TO, THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT: (i) NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER; (ii) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER; (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY; AND (iv) EACH SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.5.
9.6. Notices. Notices, requests, instructions or other documents to be
given under this Agreement shall be in writing and shall be deemed given: (i)
when sent if sent by facsimile, provided that receipt of the fax is promptly
confirmed by telephone; (ii) when delivered, if delivered personally to the
intended recipient; and (iii) one business day later, if sent by overnight
delivery via a national courier service, and in each case, addressed to a party
at the following address for such party:
If to Arch or Merger Sub:
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Attention: Chief Executive Officer
Fax: (508) 870-6076
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Jay E. Bothwick
Fax: (617) 526-5000
and if to PageNet:
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Attention: Chief Executive Officer
Fax: (972) 801-8950
and
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
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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 EXECUTION AND DELIVERY OF THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, NOTWITHSTANDING THE DELIVERY OR
DISCLOSURE TO THE OTHER PARTY OR THE OTHER PARTY'S REPRESENTATIVES OF ANY
DOCUMENTATION OR OTHER INFORMATION WITH RESPECT TO ANY ONE OR MORE OF THE
FOREGOING.
9.8. No Third Party Beneficiaries. Except as provided in Section 6.11
(Benefits), and Section 6.13 (Indemnification; Directors' and Officers'
Insurance), this Agreement is not intended to confer upon any Person other than
the parties to this Agreement any rights or remedies under this Agreement.
9.9. Obligations of Arch and of PageNet. Whenever this Agreement requires
a Subsidiary of Arch to take any action, such requirement shall be deemed to
include an undertaking on the part of Arch to cause such Subsidiary to take such
action. Whenever this Agreement requires a Subsidiary of PageNet to take any
action, such requirement shall be deemed to include an undertaking on the part
of PageNet to cause such Subsidiary to take such action and, after the Effective
Time, on the part of the Surviving Corporation to cause such Subsidiary to take
such action.
9.10. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions of this Agreement.
If any provision of this Agreement, or the application thereof to any Person or
any circumstance, is invalid or unenforceable: (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision; and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.11. Interpretation. Where a reference in this Agreement is made to a
section or exhibit, such reference shall be to a section of, or exhibit or annex
to this Agreement unless otherwise indicated. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
9.12. Captions. The table of contents, article, section, and paragraph
captions in this Agreement are for convenience of reference only, do not
constitute part of this Agreement and shall not be deemed to limit or otherwise
affect any of the provisions of this Agreement.
9.13. Assignment. This Agreement shall not be assignable by operation of
law or otherwise, provided, that the parties agree that this Agreement may be
assumed by PageNet as a debtor-in-possession in the Bankruptcy Case and may be
assumed by Arch should Arch become a debtor in any bankruptcy case under the
Bankruptcy Code. Any assignment in contravention of the preceding sentence shall
be null and void.
* * * * *
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties to this Agreement as of the date
first written above.
PAGING NETWORK, INC.
By: /s/ JOHN P. FRAZEE, JR.
----------------------------------
Name: John P. Frazee, Jr.
Title: Chairman of the Board and
Chief Executive Officer
ARCH COMMUNICATIONS GROUP, INC.
By: /s/ C.E. BAKER, JR.
----------------------------------
Name: C.E. Baker, Jr.
Title: Chairman of the Board and
Chief Executive Officer
ST. LOUIS ACQUISITION CORP.
By: /s/ C.E. BAKER, JR.
----------------------------------
Name: C.E. Baker, Jr.
Title: Chief Executive Officer
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ANNEX B
[LETTERHEAD OF BEAR STEARNS]
November 7, 1999
The Board of Directors
Arch Communications Group, Inc.
1800 West Park Drive, Suite 250
Westborough, Massachusetts 01581
Gentlemen:
We understand that Arch Communications Group, Inc. ("Arch"), St. Louis
Acquisition Corp., a wholly owned subsidiary of Arch ("Merger Sub") and Paging
Network, Inc. ("PageNet") have entered into an Agreement and Plan of Merger (the
"Agreement") dated November 7, 1999, pursuant to which Merger Sub shall merge
with and into PageNet (the "Merger") and each PageNet Share (other than the
Excluded PageNet Shares) shall be converted into and become exchangeable for
0.124677 of a share (the "Exchange Ratio") of Arch Common Stock, subject to
adjustment as set forth in the Agreement. You have provided us with a copy of
the Agreement; all capitalized terms in this letter have the meanings assigned
to them in the Agreement, unless otherwise defined in this letter.
You have asked us to render our opinion as to whether the Exchange Ratio is
fair, from a financial point of view, to the stockholders of Arch as of the date
of this letter.
In the course of performing our review and analyses for rendering this
opinion, we have:
- reviewed the Agreement;
- reviewed Arch's and PageNet's Annual Reports to Stockholders and Annual
Reports on Form 10-K for the years ended December 31, 1996 through 1998,
and their Quarterly Reports on Form 10-Q for the periods ended March 31
and June 30, 1999;
- reviewed all Reports on Form 8-K of Arch and PageNet for the period
commencing January 1, 1996 through the date hereof;
- reviewed certain operating and financial information, including
projections and synergy estimates, provided to us by Arch's and PageNet's
management relating to the business and prospects of Arch and PageNet,
respectively;
- met with certain members of Arch's and PageNet's management to discuss
the business, operations, historical and projected financial results and
prospects of Arch and PageNet, respectively, as well as the potential
synergies for the combined company resulting from the Merger (the
"Combined Company");
- reviewed the historical prices, trading multiples and trading volumes of
the Arch Common Stock and the PageNet Shares;
- reviewed publicly available financial data, stock market performance data
and trading multiples of companies which we deemed generally comparable
to Arch and PageNet, as appropriate;
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Arch Communications Group, Inc.
November 7, 1999
Page 2
- reviewed the terms of recent merger and acquisition transactions
involving companies which we deemed generally comparable to Arch and
PageNet;
- performed discounted cash flow analyses based on the projections for Arch
and the Combined Company furnished to us by Arch;
- reviewed the pro forma financial results, financial condition and
capitalization of the Combined Company; and
- conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
We have relied upon and assumed, with your permission, without independent
verification, the accuracy and completeness of the financial and other
information, including without limitation the projections and synergy estimates,
provided to us by Arch and PageNet. With respect to Arch's and PageNet's
projected financial results and the potential synergies that could be achieved
upon consummation of the Merger, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of Arch and PageNet as to the expected future
performance of Arch, PageNet and the Combined Company. We have not assumed any
responsibility for the independent verification of any such information or of
the projections and synergy estimates provided to us, and we have further relied
upon the assurances of the managements of Arch and PageNet that they are unaware
of any facts that would make the information, projections and synergy estimates
provided to us incomplete or misleading.
In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets or liabilities of Arch and PageNet, nor have
we been furnished with any such appraisals. We have assumed that the Merger will
qualify as a tax-free "reorganization" within the meaning of Section 368(a) of
the Internal Revenue Code. We have assumed that the Merger will be consummated
without any regulatory limitations, restrictions, conditions, amendments or
modifications that collectively would have a material effect on Arch, PageNet or
the Combined Company. We have assumed that the other transactions contemplated
in connection with the Merger are in fact consummated as described in the
Agreement. Our opinion is necessarily based on economic, market and other
conditions, and the information made available to us, as of the date hereof.
We do not express any opinion as to the price or range of prices at which
the shares of Arch Common Stock and the PageNet Shares may trade subsequent to
the announcement of the Merger or as to the price or range of prices at which
the shares of common stock of the Combined Company may trade subsequent to the
consummation of the Merger.
We have acted as a financial advisor to Arch in connection with the Merger
and will receive a customary fee for such services. Bear Stearns has been
previously engaged by Arch to provide certain investment banking and financial
advisory services in connection with Arch's acquisition of MobileMedia
Communications, Inc. and Arch's issuance of 12 3/4% Senior Notes, 13 3/4% Senior
Notes and Series C Preferred Stock, for which transactions Bear Stearns received
customary fees. In the ordinary course of business, Bear Stearns may actively
trade the equity and debt securities of Arch and/or PageNet for our own account
and for the account of our customers and, accordingly, may at any time hold a
long or short position in such securities.
It is understood that this letter is intended for the benefit and use of
the Board of Directors of Arch and does not constitute a recommendation to the
Board of Directors of Arch or any holders of Arch Common Stock as to how to vote
in connection with the Merger. This letter is not intended for the benefit or
use of the holders of the Arch Notes. This opinion does not address Arch's
underlying business decision to pursue the Merger. This letter is not to be used
for any other purpose, or reproduced, disseminated, quoted to or referred to at
any time, in whole or in part, without our prior written consent; provided,
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Arch Communications Group, Inc.
November 7, 1999
Page 3
however, that this letter may be included in its entirety in any joint proxy
statement/prospectus to be distributed to the holders of Arch Common Stock in
connection with the Merger.
Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
stockholders of Arch.
Very truly yours,
BEAR, STEARNS & CO. INC.
By:
------------------------------------
Senior Managing Director
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ANNEX C
November 7, 1999
Board of Directors
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Members of the Board:
We understand that Paging Network, Inc., a Delaware corporation ("PageNet"
or the "Company"), St. Louis Acquisition Corp., a Delaware corporation ("Merger
Sub"), and Arch Communications Group, Inc., a Delaware corporation ("Arch
Communications") have entered into an Agreement and Plan of Merger, dated as of
November 7, 1999 (the "Merger Agreement"), which provides, among other things,
for the merger (the "Merger") of PageNet with and into Arch Communications. All
capitalized terms used herein and not defined herein shall have the same
meanings herein as ascribed thereto in the Merger Agreement. Pursuant to the
Merger, (i) Merger Sub shall be merged with and into PageNet, with the separate
corporate existence of Merger Sub ceasing thereupon and (ii) PageNet will become
a wholly-owned subsidiary of Arch Communications and each issued and outstanding
PageNet Share, other than the Excluded PageNet Shares, will be converted into
and exchangeable for 0.1247 shares of Arch Communications, which constitutes the
Merger Consideration.
We also understand that, pursuant to the Merger Agreement, Arch
Communications and PageNet have agreed to commence the Exchange Offers as
promptly as practicable after the date hereof. Immediately following the
Exchange Offers, PageNet Shares will be converted into the Merger Consideration
under the Merger Agreement. Our opinion expressed below relates solely to the
Merger Consideration and the Distributed Interests, taken together as a whole,
to be received by the holders of PageNet Shares, as of the date of this opinion,
in the Merger and related transactions. Nothing stated herein shall be construed
or interpreted as our providing an opinion as to the fairness, advisability or
relative values to be achieved as a result of the Exchange Offers.
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address PageNet's underlying business decision to
effect the Merger. We have not been requested to, and did not, solicit third
party indications of interest in acquiring all or any part of PageNet.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders and on Form 10-K
for the fiscal year ended 1998, quarterly reports on Form 10-Q for the
two quarters ended March 31, 1999 and June 30, 1999, Company-prepared
interim financial statements for the period ended September 30, 1999,
which the Company's management has identified as being the most current
financial statements available, Proxy Statement dated April 12, 1999,
and certain other documents filed with the Securities and Exchange
Commission;
2. reviewed Arch Communications' annual reports to Arch Communications'
shareholders and on Form 10-K for the fiscal years ended 1998 and 1997,
certain interim reports to shareholders on Form 10-Q of Arch
Communications, and certain documents filed with the SEC by Arch
Communications regarding its acquisition of MobileMedia;
3. reviewed copies of the Merger Agreement;
4. reviewed the Indenture dated July 15, 1995 of the 10% Senior
Subordinated Notes Due October 15, 2008, supplemented by a Second
Supplemental Indenture dated October 15, 1996;
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Board of Directors
Paging Network, Inc.
November 7, 1999 - 2-
5. reviewed the Indenture dated July 15, 1995 of 10.125% Senior
Subordinated Notes due August 1, 2007, supplemented by a First
Supplemental Indenture dated July 15, 1995;
6. reviewed the Indenture dated January 15, 1994 of 8.875% Senior
Subordinated Notes Due February 1, 2006, supplemented by a First
Supplemental Indenture dated January 15, 1994;
7. reviewed the Second Amended and Restated Credit Agreement of Paging
Network, Inc. and certain of its Subsidiaries;
8. reviewed the Amended and Restated Loan Agreement of Paging Network of
Canada Inc., and certain other documents;
9. met with certain members of the senior management of the Company to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company, and met with
representatives of the Company's independent accounting firm, other
investment bankers and counsel to discuss certain matters;
10. visited certain facilities and business offices of the Company;
11. reviewed forecasts and projections prepared by the Company's management
with respect to the Company for the years ended December 31, 1999
through 2004 and for the quarters ended September 30, 1999 through
December 31, 2000;
12. reviewed certain forecasts and projections for Arch Communications
prepared by its management;
13. reviewed analyses prepared by and met with management of both companies
to discuss expected cost savings and other expected synergies resulting
from the business combination;
14. reviewed the historical market prices and trading volume for the
Company's and Arch Communications' publicly traded securities;
15. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company, and publicly
available prices and premiums paid in other transactions that we
considered similar to the Merger;
16. reviewed drafts of certain documents to be delivered at the closing of
the Merger; and
17. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of PageNet. Our opinion
is necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter, and we have no
obligation to update this opinion. Our advisory services and the opinion
expressed herein are for the information and assistance of the Board of
Directors of the Company in connection with its consideration of the Merger and
related transactions and do not constitute a recommendation as to how any
security holder of the Company should vote with respect to such transactions.
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Board of Directors
Paging Network, Inc.
November 7, 1999 - 3-
PageNet, like other companies and any business entities analyzed by
Houlihan Lokey Howard & Zukin Capital ("Houlihan Lokey") or which are otherwise
involved in any manner in connection with this Opinion, could be materially
affected by complications that may occur, or may be anticipated to occur, in
computer-related applications as a result of the year change from 1999 to 2000
(the "Y2K Issue"). In accordance with long-standing practice and procedure,
Houlihan Lokey's services are not designed to detect the likelihood and extent
of the effect of the Y2K Issue, directly or indirectly, on the financial
condition and/or operations of a business. Further, Houlihan Lokey has no
responsibility with regard to PageNet's efforts to make its systems, or any
other systems (including its vendors and service providers), Year 2000 compliant
on a timely basis. Accordingly, Houlihan Lokey shall not be responsible for any
effect of the Y2K Issue on the matters set forth in this Opinion.
Based upon the foregoing, and in reliance thereon, it is our opinion that,
as of the date hereof, the Merger Consideration and the Distributed Interests,
taken together as a whole, to be received by the holders of PageNet Shares, as
of the date of this opinion, in the Merger and related transactions, is fair to
such holders from a financial point of view.
/s/ HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL
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ANNEX D
[GOLDMAN SACHS LETTERHEAD]
PERSONAL AND CONFIDENTIAL
----------------------------------------
November 7, 1999
Board of Directors
Paging Network, Inc.
14911 Quorum Drive
Dallas, TX 75240
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders on the date hereof of the outstanding shares of Common
Stock, par value $0.01 per share (the "Shares") of Paging Network, Inc. (the
"Company") of the 0.1247 shares of Common Stock, par value $0.01 per share (the
"Arch Common Stock") of Arch Communications Group Inc. ("Arch Communications")
to be received for each Share (the "Exchange Ratio") pursuant to the Agreement
and Plan of Merger, dated as of November 7, 1999, among Arch Communications,
Arch Communications Merger Sub Inc. ("Merger Sub", and together with Arch
Communications "Arch") and the Company (the "Agreement"). Pursuant to the
Agreement, the Company will merge with and into Merger Sub, a wholly owned
subsidiary of Arch Communications (the "Merger"). The Agreement also provides
for, immediately prior to the Merger, (A) a financial restructuring (the
"Financial Restructuring"), in which (i) certain outstanding debt securities of
the Company would be exchanged for 616.7 million Shares and (ii) certain
outstanding debt securities and preferred stock of Arch would be exchanged for
31.7 million shares of Arch Common Stock, and (B)immediately subsequent to the
Financial Restructuring and prior to the Merger, 80.5% of the outstanding shares
of Common Stock, par value $0.01 (the "Silverlake Shares"), of Silverlake
Communications, Inc. ("Silverlake") then owned by the Company will be
distributed (the "Spinoff") to the holders of Shares on a pro rata basis,
including the holders of debt securities who will receive Shares in the
Financial Restructuring.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company, having acted as its financial advisor from time to
time, including having acted as its managing underwriter in May 1992 in an
offering of approximately 6 million Shares, as its private placement agent for
an aggregate of approximately $1.2 billion principal amount in Senior
Subordinated Notes in three offerings, one each in 1994, 1995 and 1996, and
having acted as its financial advisor in connection with, and having
participated in certain of the negotiations leading to the Agreement, Goldman,
Sachs & Co. provides a full range of financial advisory and securities services
and, in the course of its normal trading activities, may from time to time
effect transactions and hold securities, including derivative securities, of the
Company or Arch for its own account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company and Arch for the five years ended December 31, 1998; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of the Company and
Arch; certain other communications from the Company and Arch to their respective
stockholders; certain historical financial information and other information for
Silverlake; and certain internal financial analyses and forecasts for the
Company, Silverlake and Arch prepared by their respective managements, including
certain cost savings and operating synergies projected by the managements of the
Company and Arch to result from the transactions contemplated by the Agreement
(the "Synergies"). We also have held discussions with members of the senior
management of the Company and Arch regarding
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their assessment of the strategic rationale for, and the potential benefits of,
the transaction contemplated by the Agreement and with those persons and with
members of the senior management of Silverlake regarding the past and current
business operations, financial condition and future prospects of their
respective companies. In addition, we have reviewed the reported price and
trading activity for the Shares and the Arch Common Stock, compared certain
financial and stock market information for the Company and Arch and certain
financial information for Silverlake with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the paging and communications
industry specifically and in other industries generally and performed such other
studies and analyses as we considered appropriate. At your direction, we have
also read certain analyses performed on behalf of the Company by Houlihan Lokey
Howard & Zukin Capital regarding the Financial Restructuring and the possible
restructuring of the Company's outstanding debt on a stand-alone basis (the
"Stand Alone Restructuring"). We also reviewed with the Company and its other
financial advisors, including Houlihan Lokey Howard & Zukin Capital, certain
options available to the Company, other than alternative business combinations,
for addressing the Company's liquidity needs. In addition, we have also reviewed
the tax analysis prepared by the management of the Company and the Company's
accountants with respect to the transactions contemplated by the Agreement,
including, without limitation, the Financial Restructuring and the Spinoff.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In this regard, we have
assumed with your consent that the financial forecasts, including the underlying
assumptions, provided to us and discussed with us with respect to the Company,
Silverlake and Arch after giving effect to the transactions contemplated by the
Agreement, including, without limitation, the Synergies, have been reasonably
prepared on a basis reflecting the best currently available judgments and
estimates of the Company, Silverlake and Arch, as applicable. Without making an
independent evaluation of the matters contained therein and with your consent,
we have relied upon the certain analyses prepared by Houlihan Lokey Howard &
Zukin Capital referenced in the third paragraph of this letter for, among other
things, purposes of analyzing the impact of the Stand Alone Restructuring on the
holders of the Shares on the date hereof. In that regard, we have also taken
into account the view of the management of the Company with respect to the
likely impact of a Stand Alone Restructuring on the holders of the Shares on the
date hereof. In addition, without making an independent evaluation of the
matters contained therein and with your consent, we have relied upon the tax
analysis prepared by the management of the Company and the Company's accountants
referenced in the third paragraph of this letter. In addition, we have not made
an independent evaluation or appraisal of the assets and liabilities of the
Company, Silverlake or Arch or any of their subsidiaries and we have not been
furnished with any such evaluation or appraisal. Our opinion does not address
the relative merits of the transactions contemplated pursuant to the Agreement
as compared to any alternative business transaction that might be available to
the Company. Our advisory services and the opinion expressed herein are provided
for the information and assistance of the Board of Directors of the Company in
connection with its consideration of the transactions contemplated by the
Agreement and such opinion does not constitute a recommendation as to how any
holder of Shares should vote with respect to such transactions. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and we assume no responsibility to update or revise our opinion based
upon circumstances and events occurring after the date hereof. Our opinion as
expressed below does not imply any conclusion as to the likely trading range of
Arch Common Stock or Silverlake Shares following consummation of the
transactions contemplated by the Agreement, which may vary depending upon, among
other factors, changes in interest rates, dividend rates, market conditions,
general economic conditions and other factors that generally influence the price
of securities. In rendering this opinion, we have assumed, with your consent,
that the Financial Restructuring, the Spinoff and the other transactions
contemplated by the Agreement will be completed in the manner set forth in the
Agreement, including without limitations, that an aggregate of (i) 616.8 million
Shares will be issued pursuant to the PageNet Exchange Offer (as defined in the
Agreement) and (ii) 29.6 million shares of Arch Common Stock will be issued
pursuant to the Arch Exchange Offer (as defined in the Agreement)
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and that the outstanding preferred stock of Arch will be converted into 2.1
million shares of Arch Common Stock.
Our opinion set forth below relates solely to the fairness from a financial
point of view of the Exchange Ratio to the holders of the Shares on the date
hereof. We are not expressing any opinion concerning the consideration to be
received by any other security holder of the Company pursuant to the Financial
Restructuring, the Spinoff or any other transaction contemplated by the
Agreement or the fairness of the Financial Restructuring to the holders of the
Shares on the date hereof.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that the Exchange Ratio pursuant to
the Agreement is fair from a financial point of view to the holders of Shares as
of the date hereof.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
--------------------------------------
(GOLDMAN, SACHS & CO.)
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ANNEX E
[MORGAN STANLEY DEAN WITTER LETTERHEAD]
November 7, 1999
Board of Directors
Paging Network, Inc.
14911 Quorum Drive
Dallas, Texas 75240
Members of the Board:
We understand that Arch Communications Group, Inc.("Arch"), Arch Merger
Sub, Inc., a wholly owned subsidiary of Arch ("Merger Sub") and Paging Network,
Inc. ("PageNet" or the "Company") propose to enter into an Agreement and Plan of
Merger substantially in the form of the draft, dated November 7, 1999 (the
"Merger Agreement"), which provides, among other things, for the merger (the
"Merger") of Merger Sub with and into PageNet. Pursuant to the Merger Agreement,
each outstanding share of Common Stock, par value $0.01 per share (the "PageNet
Common Stock") of PageNet, other than shares held by Arch, Merger Sub or any
direct or indirect subsidiaries of Arch or Merger Sub, will be converted into
the right to receive 0.125 shares (the "Exchange Ratio") of common stock, par
value $0.01 per share of Arch (the "Arch Common Stock"), subject to adjustment
in certain circumstances. The Merger Agreement also provides for (i) a financial
restructuring (the "Financial Restructuring"), in which (a) certain outstanding
debt securities of PageNet would be exchanged for PageNet Common Stock and (b)
certain outstanding debt securities of Arch and the outstanding Series C
Convertible Preferred Stock, par value $0.01 per share of Arch ("Arch Preferred
Stock") would be exchanged for Arch Common Stock and (ii) a spinoff (the
"Spinoff"), in which PageNet will distribute interests (the "Distributed
Interests," together with the Exchange Ratio, the "Consideration") representing
11.6% of the outstanding capital stock of Silverlake Communications, Inc. (the
"Spinoff Subsidiary"), to the holders of shares of PageNet Common Stock on the
date hereof, on a pro rata basis. The terms and conditions of the Merger, the
Financial Restructuring and the Spinoff are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether the Consideration to be
received by holders of shares of Common Stock on the date hereof pursuant to the
Merger and the Spinoff, taken as a whole, is fair to such holders from a
financial point of view.
For purposes of the opinion set forth herein, we have;
(i) reviewed certain analyses (the "Houlihan Lokey Analysis") prepared
by the Company's restructuring advisor, Houlihan Lokey Howard &
Zukin Capital of the Financial Restructuring and the possible
restructuring of the Company's outstanding debt on a stand-alone
basis (the "Stand Alone Restructuring");
(ii) reviewed certain publicly available financial statements and other
business and financial information of Arch and PageNet,
respectively;
(iii) reviewed certain internal financial statements and other financial
and operating data concerning Arch and PageNet, respectively;
(iv) reviewed certain internal financial statements and other financial
and operating data concerning the Spinoff Subsidiary prepared by the
managements of PageNet and the Spinoff Subsidiary;
(v) analyzed certain financial forecasts prepared by the managements of
Arch and PageNet, respectively;
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(vi) analyzed certain financial forecasts for the Spinoff Subsidiary
prepared by the managements of PageNet and the Spinoff Subsidiary;
(vii) discussed the past and current operations and financial condition
and the prospects of Arch with senior executives of Arch;
(viii) discussed the past and current operations and financial condition
and the prospects of PageNet and the Spinoff Subsidiary with senior
executives of PageNet and the Spinoff Subsidiary;
(ix) discussed with the senior managements of Arch and PageNet their
estimates of the synergies and cost savings expected to be derived
from the Merger;
(x) reviewed and analyzed the pro forma impact of the Merger on the
consolidated capitalization and financial ratios of the combined
company;
(xi) reviewed the report prices and trading activity for the Arch Common
Stock and the PageNet Common Stock;
(xii) compared the financial performance of Arch and PageNet (excluding
the Spinoff Subsidiary) and the prices and trading activity of the
Arch Common Stock and the PageNet Common Stock and their respective
debt securities with that of certain other publicly-traded companies
and their securities;
(xiii) compared the financial performance of the Spinoff Subsidiary with
that of certain other companies that are comparable to the Spinoff
Subsidiary and have publicly-traded securities;
(xiv) reviewed the tax analysis prepared by the management of PageNet with
respect to the tax treatment of the transactions contemplated by the
Merger Agreement;
(xv) reviewed with the Company and its other financial advisors,
including Houlihan Lokey Howard & Zukin Capital, certain options
available to the Company, other than alternative business
combinations, for addressing the Company's liquidity needs;
(xvi) reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions deemed relevant;
(xvii) participated in discussions and negotiations among representatives
of Arch and PageNet and their financial, restructuring and legal
advisors;
(xviii) reviewed the draft Merger Agreement and certain related documents;
(xix) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of all information supplied or otherwise made
available to us and reviewed by us for the purposes of this opinion. We have
also relied, without independent verification or evaluation and with your
consent, on the Houlihan Lokey Analysis for, among other things, purposes of
analyzing the impact of the Stand Alone Restructuring on the holders of the
PageNet Common Stock on the date hereof. In addition, we have also relied,
without independent verification or evaluation and with your consent, on the tax
analysis prepared by management of PageNet with respect to the tax treatment of
the transactions contemplated by the Merger Agreement. With respect to the
financial forecasts, future prospects, estimates of synergies and cost savings,
we have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the future financial
performance of Arch, PageNet and the Spinoff Subsidiary. In addition, we have
assumed that the Merger will be consummated in accordance with the terms set
forth in the Merger Agreement, including, among other things, that the Merger
will be treated as a tax-free reorganization and/or exchange, each pursuant to
Section 368(a) of the Internal Revenue Code of 1986, as amended. We have not
made any independent valuation or appraisal of the assets or liabilities of
PageNet, Arch or the Spinoff Subsidiary, nor have we been furnished with any
such
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appraisals. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
It is understood that this letter is for the information of the Board of
Directors of the Company, except that this opinion may be included in its
entirety in any filing made with the Securities and Exchange Commission by the
Company in respect of the Merger.
This opinion is limited to the fairness, from a financial point of view, of
the Consideration to be received by holders of shares of PageNet Common Stock on
the date hereof pursuant to the Merger and the Spinoff and we are not expressing
any opinion concerning the consideration to be received by any other security
holder of the Company pursuant to the Financial Restructuring, Spinoff or any
other transaction contemplated by the Merger Agreement or the fairness of the
Financial Restructuring to the holders of the Shares on the date hereof. In
rendering this opinion, we have assumed, with your consent, that the Financial
Restructuring and the Spinoff will be completed in the manner set forth in the
Merger Agreement.
We note that trading in the Arch Common Stock and shares of the Spinoff
Subsidiary for a period of time following completion of the Merger and the
Spinoff may involve a redistribution of the Arch Common Stock and the shares of
the Spinoff Subsidiary among the stockholders of the combined entity and other
investors and, accordingly, during such period, Arch Common Stock and the shares
of the Spinoff Subsidiary may trade at prices below those at which they would
trade on a fully distributed basis after the Spinoff. This opinion does not in
any manner address the prices at which Arch's Common Stock or the shares of the
Spinoff Subsidiary will trade following consummation of the Merger and the
Spinoff. In addition, we express no opinion or recommendation as to how the
shareholders of Arch or PageNet should vote at the shareholders' meetings held
in connection with the Merger.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the ordinary course of business Morgan Stanley & Co. Incorporated and its
affiliates may from time to time trade in the debt and equity securities or
senior loans of Arch and PageNet.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Consideration to be received by holders of shares of PageNet
Common Stock on the date hereof pursuant to the Merger and the Spinoff, taken as
a whole, is fair to such holders from a financial point of view.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ R. BRADFORD EVANS
------------------------------------
R. Bradford Evans
Managing Director
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The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
ANNEX F
SUBJECT TO COMPLETION, DATED JULY , 2000
PROSPECTUS
VAST LOGO
16,100,000 SHARES
VAST SOLUTIONS, INC.
CLASS B COMMON STOCK
-------------------------
Of the 16,100,000 shares of our Class B common stock covered by this
prospectus, 13,780,000 are being offered by Paging Network, Inc. in exchange for
its outstanding senior subordinated indebtedness and 2,320,000 are being
distributed by PageNet to its stockholders. PageNet currently owns all of our
outstanding Class B common stock.
Neither our Class A nor our Class B common stock is listed on any
securities exchange. We do not intend to apply for listing of our Class B common
stock on any securities exchange or quotation system.
AN INVESTMENT IN OUR CLASS B COMMON STOCK INVOLVES RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE FF-6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
The date of this prospectus is , 2000.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................................... F-3
Risk Factors................................................ F-6
Dividend Policy............................................. F-9
Use of Proceeds............................................. F-10
Selected Financial Data..................................... F-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. F-13
Business.................................................... F-17
Management.................................................. F-26
Arrangements Between Vast and PageNet....................... F-30
Principal Stockholders...................................... F-32
Security Ownership of Management............................ F-33
Description of Vast Capital Stock........................... F-34
Shares Eligible for Future Sale............................. F-39
Legal Matters............................................... F-40
Experts..................................................... F-40
Where You Can Find More Information......................... F-40
Index to Financial Statements............................... FF-1
</TABLE>
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us, our Class B common stock being offered by this
prospectus and our financial statements and notes relating to those financial
statements appearing elsewhere in this prospectus.
THE COMPANY AND ITS BUSINESS
We provide standardized and customized software and a variety of wireless
hardware devices, together with the integration and related support services to
wirelessly connect our software and hardware to the information systems of our
customers. We provide wireless products and services to our customers, using
cellular, PCS and paging networks, based on customers' specific needs.
Some of our target customers are companies which have mobile work forces
and need to be able to stay in touch with their traveling employees and have
their employees be able to remotely access information from their offices. For
instance, one of our current pilot test customers is a major life insurance
company that uses our software on a Palm device, together with wireless network
services, to provide its insurance agents with wireless access to client policy
records and home office programs which calculate policy quotes.
Other targeted customers have operations in remote locations, and our
software and hardware can enable them to obtain information and send information
and commands to these remote locations over a wireless network. For instance,
one of our pilot customers is a transmission tower management company which owns
and manages transmission towers throughout the U.S. for its clients, which are
telecommunications carriers subject to certain Federal Aviation Administration
safety regulations. This customer has ordered hardware units that we designed
and had manufactured for us, together with software, maintenance and wireless
network services, to monitor and in some cases remotely repair various
malfunctions on its transmission towers, such as lights and power, ensuring that
the customer is in compliance with certain safety regulations.
We are a development stage company and, since our inception, have been
engaged primarily in product research and development and developing markets for
our products and services. Many of our present customer relationships are in the
pilot test stage. We have incurred significant operating losses as a result of
these startup activities and the sufficiency of future funding for our
operations is uncertain. As a result of these and other factors, the report of
our independent auditors for the year ended December 31, 1999 expresses
substantial doubt about our ability to continue operating as a going concern for
a reasonable period of time.
We are currently a wholly owned subsidiary of PageNet and certain assets
and third-party agreements on which our business is substantially dependent are
owned or controlled by PageNet. The assets include intellectual property
contained in our Viaduct technology and other products. PageNet intends to
transfer or license these assets to us in connection with the consummation of
the Arch merger and the Vast distribution, subject to approval of its lenders.
In some cases, we will have to enter into new agreements directly with third
parties. If the Arch merger does not occur, we will remain a wholly owned
subsidiary of PageNet and PageNet noteholders and stockholders will not receive
any interest in Vast.
Our historical revenues through year-end 1999 consisted primarily of sales
of software developed by Silverlake Communications, Inc., which PageNet acquired
in December 1998. Silverlake's Airsource(R) product line is a suite of software
products focusing on alphanumeric paging services. Although we intend to
maintain both sales and service of this product line, the Silverlake marketing
and development personnel will focus on other areas. We do not expect the
Silverlake product line to be a material part of our future growth strategy, and
during the first quarter of 2000, Silverlake revenues accounted for only 30% of
our total revenues.
We were incorporated in Delaware in 1999. Our operations include the
activities of PageNet's wireless solutions division since its formation in
September 1998, as well as the operations of Silverlake. Our
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principal executive offices are located at 14131 Midway Road, Suite 500,
Addison, Texas 75001, telephone number: (972) 801-8800.
THE CLASS B COMMON STOCK
The shares of Class B common stock we are offering consist of Class B1
common stock, Class B2 common stock and Class B3 common stock, none of which
will be listed on a public stock exchange at the time of the Vast Distribution.
We refer to these classes together as the Class B common stock. All of the
shares of Class B common stock are identical except for the dates on which they
are scheduled to convert into Class A common stock. Shares of Class B common
stock automatically convert into shares of Class A common stock at the following
times after we complete an underwritten public offering of common stock with net
proceeds of at least $25,000,000:
Class B1 -- one year after the offering;
Class B2 -- eighteen months after the offering; and
Class B3 -- two years after the offering.
Our board of directors may decide at any time before these time periods
elapse to convert all of the shares of Class B common stock of any class into
Class A common stock. Any shares of Class B common stock still outstanding will
convert into Class A common stock three years from the date of the Arch merger.
THE EXCHANGE OFFER
PageNet is offering to exchange a pro rata portion of 616,830,757 shares of
PageNet common stock and a pro rata portion of 13,780,000 shares of our Class B
common stock for each of PageNet's:
- 8.875% senior subordinated notes due 2006;
- 10.125% senior subordinated notes due 2007; and
- 10% senior subordinated notes due 2008.
The pro rata portion will be computed immediately prior to the time when
the Arch merger occurs by dividing
- the principal amount, together with all accrued interest through the
expiration of the exchange offer, of each PageNet senior subordinated
note validly tendered and not withdrawn; by
- the principal amount, together with all accrued interest through the
expiration of the exchange offer, of all outstanding PageNet senior
subordinated notes.
The shares of Class B common stock received by each exchanging noteholder
will be divided as evenly as possible into shares of Class B1 common stock,
Class B2 common stock and Class B3 common stock.
As of the date of this prospectus, $1.2 billion in aggregate principal
amount at maturity of senior subordinated notes are outstanding. As of June 30,
2000, accrued and unpaid interest on the senior subordinated notes totalled
$98,345,942.
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THE VAST DISTRIBUTION
The merger agreement between PageNet and Arch provides that PageNet
stockholders will receive a distribution of 11.6% of our total equity. To
satisfy the merger agreement, the PageNet board of directors will distribute
2,320,000 shares of our Class B common stock to the persons who are PageNet
stockholders immediately prior to the acceptance of senior subordinated notes in
the exchange offer. These shares of Class B common stock will be divided as
evenly as possible into shares of Class B1 common stock, Class B2 common stock
and Class B3 common stock. The distribution will not be made unless all of the
conditions to the merger have been satisfied. Because the distribution will be
made only to persons who were PageNet stockholders prior to the acceptance of
senior subordinated notes in the exchange offer, noteholders who become
stockholders of PageNet in the exchange offer will not be entitled to receive
any portion of this distribution.
PREPACKAGED BANKRUPTCY PLAN
PageNet is soliciting the vote of its noteholders and its stockholders to a
consensual or "prepackaged" bankruptcy plan of PageNet. If PageNet files a
prepackaged bankruptcy plan under Chapter 11 of the United States Bankruptcy
Code and the prepackaged bankruptcy plan is confirmed by the bankruptcy court
and consummated, then 100% of the senior subordinated notes will be converted
into shares of Arch common stock and our Class B common stock. The number of
shares of our Class B common stock which the holders of PageNet senior
subordinated notes will receive under the prepackaged plan and the exchange
offer are the same. PageNet stockholders will also receive the same number of
shares of our Class B common stock under the prepackaged bankruptcy plan as they
would receive pursuant to the Vast distribution.
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RISK FACTORS
You should carefully consider the following factors as well as other
information contained in this prospectus before deciding whether to participate
in the PageNet exchange offer or to vote in favor of the PageNet plan of
reorganization.
WE HAVE NOT OPERATED PROFITABLY TO DATE AND EXPECT TO MAKE SIGNIFICANT
ADDITIONAL INVESTMENTS THAT ARE LIKELY TO PRECEDE THE REVENUES GENERATED FROM
THE INCREASED SPENDING, WHICH MAY AFFECT OUR ABILITY TO ACHIEVE PROFITABILITY.
We commenced operations in September 1998 as the wireless solutions
division of PageNet. Accordingly, we have a very limited operating history,
which makes it difficult to forecast future revenues and expenses. We have not
operated profitably to date. We incurred net losses during our development stage
of $4,163,733 for the four months we operated in 1998, $34,745,574 for the year
ended December 31, 1999, and $7,534,350 for the three months ended March 31,
2000. At March 31, 2000, we had accumulated losses since inception of
$46,443,657. We intend to make significant investments in our research and
development, marketing, services and sales operations. We anticipate that these
expenses could significantly precede any revenues generated by the increased
spending. As a result, we are likely to continue to experience losses and
negative cash flow from operations in future periods.
FOLLOWING THE ARCH MERGER, WE WILL RECEIVE ONLY LIMITED ADDITIONAL FINANCING
FROM ARCH AND MAY NEED TO REDUCE OUR CURRENT OPERATIONS IF WE ARE UNABLE TO FIND
ADEQUATE ADDITIONAL FINANCING FROM OTHER SOURCES.
To date our operations have been funded exclusively through investments by
PageNet. Arch has committed to loan us $7.5 million effective upon the closing
of the merger, with interest at 10% per annum and repayable within one year or
upon our receipt of additional debt or equity financing from other sources. Arch
has also committed to loan an additional $2.5 million on the same terms, if
necessary, to fund our operations over the nine months following the merger,
subject to our obtaining a matching amount from other sources. We may be
required to reduce our current level of operations unless we are able to obtain
capital through additional debt or equity financings within a short period of
time after the Arch merger. We cannot assure you that debt or equity financings
will be available as required. Even if financing is available, it may not be on
terms that are favorable to us or sufficient for our needs. If we are unable to
obtain sufficient financing, we may be unable to continue our current
operations.
A LIQUID TRADING MARKET FOR OUR CLASS B COMMON STOCK LIKELY WILL NOT DEVELOP AND
THE MARKET PRICE OF OUR CLASS B COMMON STOCK COULD BE ADVERSELY AFFECTED.
There is no established trading market for our Class B common stock. A
liquid trading market likely will not develop for our Class B common stock,
which would adversely impact its market price. We do not intend to apply for
listing of our Class B common stock on any securities exchange, or for quotation
through any quotation system. Further, unless our board of directors otherwise
decides, our Class B common stock will not begin to be converted into shares of
our Class A common stock until one year following the completion of an
underwritten public offering of common stock by us in which the net proceeds of
the offering is at least $25 million. It is likely that an underwritten public
offering, if made, would be of our Class A common stock.
The liquidity of any market and the market price for our Class B common
stock will depend on, among other things:
- the number of holders of the Class B common stock;
- our performance;
- the market for similar securities;
- the desire of former stockholders and debtholders of PageNet to continue
to hold our Class B common stock; and
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- the interest of securities dealers in making a market in our Class B
common stock.
Even if a market for our Class B common stock does develop there can be no
assurance that it will continue.
IF WE ARE UNABLE TO OBTAIN A LICENSE FROM TIBCO SOFTWARE, INC. FOR SOFTWARE THAT
WE RELY ON FOR OUR BUSINESS, WE WOULD BE UNABLE TO CONTINUE OUR CURRENT
OPERATIONS UNTIL WE ARE ABLE TO INTEGRATE THE REPLACEMENT SOFTWARE.
Elements of software owned by TIBCO Software, Inc. constitute significant
components of the Viaduct technology, which is the foundation of many of our
services. This software is currently licensed to PageNet. In January of this
year, TIBCO and PageNet agreed in principle to permit the transfer and
assignment of the software license from PageNet to us. The failure to consummate
this transfer and assignment, or to enter into a new agreement with TIBCO, would
render us unable to continue many of our current operations until we are able to
purchase and install replacement software from another licensor or build it
ourselves. We are in negotiations with TIBCO to obtain contractual commitments
to continue the license of its software past December 31, 2000, the license
expiration date. We have evaluated alternatives to the TIBCO software in the
event that we are unable to come to agreement with TIBCO, and we will begin
implementing contingency plans during the third quarter of 2000 to avoid any
risk of disruption to our customers. We estimate that the TIBCO software can be
replaced within a 180-day period, if necessary.
TURNOVER IN SENIOR MANAGEMENT AND/OR THE LACK OF A COMPLETE MANAGEMENT TEAM MAY
AFFECT OUR ABILITY TO RAISE FUTURE FINANCING AND GROW OUR BUSINESS.
Our ability to raise future financing and, therefore, grow our business may
be impaired unless we are able to put a complete management team in place and
retain our existing team. In May 2000 we entered into two-year employment
agreements with Chris Sanders, President and Chief Operating Officer, William G.
Scott, our Chief Technology Officer, and Steve Leggett, our Senior Vice
President -- Sales. These agreements are designed to reduce the risk of senior
management turnover. We have yet to hire a permanent Chief Financial Officer.
MOST OF OUR OPERATIONS ARE DEPENDENT UPON OUR DATA OPERATIONS CENTER AND,
THEREFORE, A FAILURE IN THAT CENTER WOULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, OUR OPERATING RESULTS AND OUR FINANCIAL CONDITION.
Most of our operations are dependent upon our ability to prevent or recover
from interruptions at our data operations center due to fire, power loss,
natural disaster or a similar event. A substantial portion of the computer
equipment that is essential to the operation of our data operations center is
located at PageNet's technical operations center in Richardson, Texas. We
believe our data operations center is supported by sufficient available backup
computing and electric power sources on site to maintain the provision of our
services without interruption. Although we intend to establish a second data
operations center at a remote location, we currently do not have the financial
resources to create or operate a second facility. We would be materially
adversely affected by substantial damage to our current data operations center
or other catastrophic failure that causes significant interruption in our
operations. Although we intend to purchase property and business interruption
insurance, any recovery under such a policy may not be adequate to compensate us
for all losses that may occur.
MANY OF OUR PRODUCTS AND SERVICES ARE CURRENTLY IN DEVELOPMENT OR PILOT TESTING
AND ARE NOT IN COMMERCIAL USE BY ANY OF OUR CUSTOMERS AND, THEREFORE, OUR FUTURE
REVENUES ARE SUBJECT TO THE SUCCESSFUL COMPLETION OF TESTING AND OUR ABILITY TO
SELL OUR PRODUCTS AND SERVICES TO ADDITIONAL CUSTOMERS.
Many of our products and services are in various stages of development and
pilot testing with our customers. Only one of our wireless products and services
is currently being used on a commercial basis. Therefore, all of our future
revenues are subject to the success of current customer pilot tests. In
addition, our ability to sell to additional customers will be subject to the
degree of success we achieve in converting
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our current pilot test customers into satisfied, referenceable customers.
Further, if we are unable to achieve market acceptance of our products and
services, our business would be materially adversely affected.
SINCE THE MARKETS FOR OUR PRODUCTS AND SERVICES ARE CHARACTERIZED BY RAPID
TECHNOLOGICAL CHANGE, OUR PRODUCTS AND SERVICES MAY BE RENDERED OBSOLETE BY NEW
AND COMPETING TECHNOLOGIES AND WE MAY NOT ACHIEVE THE EXPECTED LEVELS OF DEMAND
AND MARKET ACCEPTANCE FOR OUR PRODUCTS AND SERVICES.
The markets for our products and services are rapidly evolving. A viable
market may fail to emerge or be sustainable, so we cannot predict the level of
demand and market acceptance for our products and services. The markets for our
wireless products and services are characterized by rapid technological change,
frequent new product and service introductions and enhancements, uncertain
product life cycles and changing customer demands. For example, some of our
current services face barriers of excessive operational cost and lack of
wireless service availability in certain regions, which may prevent their
widespread roll-out and use. In addition, the introduction of products and
services embodying new technologies could render our existing products and
services obsolete or unmarketable and cause us to incur significant development
costs to create new or modify our existing products and services to utilize new
technologies.
UNLESS PAGENET IMPROVES ITS OPERATING RESULTS, IT MAY BE REQUIRED TO REDUCE ITS
OPERATIONS, INCLUDING THOSE OF VAST, PRIOR TO THE COMPLETION OF THE ARCH MERGER,
WHICH WOULD ADVERSELY AFFECT THE DEVELOPMENT OF OUR BUSINESS.
If PageNet is unable to improve its operating results, it may not have
sufficient cash to sustain operations through the consummation of the Arch
merger. While PageNet is currently exploring various alternatives to ensure that
it has sufficient liquidity through the consummation of the merger, there can be
no assurance that such efforts will be timely or successful. Further, there can
be no assurance that the merger will not be substantially delayed. If PageNet's
strategies to maintain sufficient liquidity are not successful, or the merger is
delayed, PageNet may be required to reduce the level of its operations,
including the operations of Vast. Any reduction of operations would hinder the
development of our business.
OUR LENGTHY SALES CYCLE LEADS TO UNPREDICTABLE SALES GROWTH, WHICH MAY ADVERSELY
AFFECT OUR OPERATING RESULTS.
We have generally experienced a lengthy sales cycle, averaging
approximately four to nine months. The lengthy sales cycle is one of the factors
that may cause our revenues and operating results to vary significantly from
quarter to quarter. Because of the unique characteristics of our products and
services, our prospective customers' decisions to license our products and/or
purchase our services often require significant investment and executive level
decision making. In addition, the length and success of our sales cycle for
customer orders depends on a number of other factors over which we have little
or no control, including:
- a customer's budgetary constraints;
- the timing of a customer's budget cycles;
- concerns by customers about the introduction of new products or services
by us or our competitors; and
- potential downturns in general economic conditions, including reductions
in demand for wireless data services.
We also believe that many companies are not aware of the potential benefits
of our wireless products and services. For this reason, we must provide a
significant level of education and information to prospective customers about
the use and benefits of our products and services. This lengthy process can
cause potential customers to take many months to make these decisions. As a
result, sales cycles for customer orders vary substantially from customer to
customer. Excessive delays in acquiring new
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customers or completing sales could reduce our revenue in any given period and
cause our operating results to vary significantly from quarter to quarter.
WE MAY BE UNSUCCESSFUL IN OUR EFFORTS TO EXPAND OUR SALES, MARKETING AND
DISTRIBUTION CAPABILITIES IN ORDER TO INCREASE MARKET AWARENESS OF OUR PRODUCTS
AND GENERATE INCREASED REVENUE.
We must expand our direct and indirect sales operations to increase market
awareness of our products and services and generate increased revenue. We have
very limited experience in direct sales and cannot be certain that we will be
successful in these efforts. We have recently enhanced our direct sales force
and plan to hire additional sales personnel. Our products and services require a
sophisticated sales effort targeted at the senior management of our prospective
customers. New hires will require training and take time to achieve full
productivity. We cannot be certain that our hires will become as productive as
necessary or that we will be able to hire enough qualified individuals in the
future. As a result, we may be unable to expand our direct sales operations to
the extent necessary for us to maintain or grow our business.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF COMMON STOCK FOR SALE BY FORMER PAGENET
SECURITYHOLDERS COULD ADVERSELY AFFECT THE PRICE OF YOUR CLASS B COMMON STOCK.
Following the Arch merger, all of the shares of Class B common stock
offered by this prospectus, which will represent 80.5% of our outstanding common
stock, will be held by former PageNet noteholders and stockholders. In the
absence of demand by other potential investors in our common stock, sales, or
the availability for sale, of a substantial number of these shares of Class B
common stock by former PageNet securityholders in the public market or otherwise
following the merger could adversely affect the market price for our Class B
common stock and make it more difficult for us to sell common stock in the
future at an appropriate time and price.
ANTI-TAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAKE
ANY CHANGE IN CONTROL OF US MORE DIFFICULT, MAY DISCOURAGE BIDS AT A PREMIUM
OVER THE MARKET PRICE AND MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR STOCK.
Our certificate of incorporation and bylaws contain provisions that may
have the effect of delaying, deferring or preventing a change in control of
Vast, may discourage bids at a premium over the market price of our common stock
and may adversely affect the market price of our common stock, and the voting
and other rights of the holders of our common stock. These provisions include:
- the division of our board of directors into three classes serving
staggered three-year terms;
- removal of directors only for cause and only upon a 66 2/3% stockholder
vote;
- prohibiting stockholders from taking action by written consent or calling
a special meeting of stockholders;
- the ability to issue shares of our preferred stock without stockholder
approval; and
- advance notice requirements for raising business or making nominations at
stockholders' meetings.
Delaware corporation law also contains provisions that may delay, deter or
inhibit a future acquisition of Vast. See "Description of Vast Capital Stock"
for a description of these provisions.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. Further,
we do not anticipate paying any dividends on our common stock in the foreseeable
future and intend to retain all available funds for use in the operation and
development of our business.
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USE OF PROCEEDS
We will not receive any proceeds from the PageNet exchange offer or the
distribution of shares of our Class B common stock by PageNet to its
stockholders.
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SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial data as of
December 31, 1999 and March 31, 2000, and for the four month period from
September 1, 1998 (inception) through December 31, 1998, the year ended December
31, 1999 and the quarters ended March 31, 1999 and 2000 and our unaudited pro
forma financial data as of March 31, 2000 and for the year ended December 31,
1999 and the three months ended March 31, 2000. The selected historical
financial data for the four months ended December 31, 1998, and as of and for
the year ended December 31, 1999 has been derived from our audited financial
statements and notes. The selected historical financial data as of March 31,
2000 and for the three months ended March 31, 1999 and 2000 has been derived
from our unaudited financial statements and notes. The unaudited selected pro
forma financial data gives effect to the following transactions as if they were
consummated as of March 31, 2000 with respect to the unaudited pro forma
condensed balance sheet, and as of January 1, 1999 with respect to the unaudited
pro forma statements of operations:
- the anticipated contribution by PageNet of assets comprising a portion of
the Viaduct to Vast;
- the anticipated forgiveness by PageNet of the $30.0 million, non-interest
bearing note payable to PageNet and the elimination of related interest
expense; and
- the anticipated forgiveness by PageNet of other amounts due PageNet and
the elimination of related interest expense.
We expect the contribution of the assets comprising the Viaduct and the
forgiveness of the $30.0 million, non-interest bearing note payable and other
amounts due PageNet to occur simultaneously with the completion of the Arch
merger and the Vast distribution by PageNet. These transactions, together with
all other aspects of the Arch merger and Vast distribution, are subject to
approval by PageNet's lenders under its domestic credit facility. To date, the
lending group has expressed its intent to support the merger and Vast
distribution. If PageNet does not forgive these amounts, we will not be able to
repay them unless we obtain other sources of financing. Forgiveness of this
intercompany indebtedness is required under the merger agreement between PageNet
and Arch and is a condition to the consummation of the Vast distribution.
The following unaudited selected pro forma financial data is presented for
illustrative purposes only and does not necessarily predict the operating
results or financial position that would have occurred if the transactions had
been consummated on the dates indicated above, nor is it necessarily indicative
of future results of operations. You should read the following financial
information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------------------------------- ---------------------------
SEPTEMBER 1
(INCEPTION) YEAR QUARTER QUARTER YEAR QUARTER
THROUGH ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 1999 2000 1999 2000
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA
Total operating
revenues............... $ 90,035 $ 1,113,847 $ 309,961 $ 1,205,817 $ 1,113,847 $ 1,205,817
Total operating costs and
expenses............... 4,163,149 33,992,608 4,344,171 7,767,775 33,992,608 7,767,775
Loss from operations..... (4,073,114) (32,878,761) (4,034,210) (6,561,958) (32,878,761) (6,561,958)
Net loss................. (4,163,733) (34,745,574) (4,201,109) (7,534,350) (32,739,180) (6,451,912)
Loss per common share --
basic and diluted...... (0.21) (1.74) (0.21) (0.38) (1.64) (0.32)
</TABLE>
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<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------ ------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1998 1999 2000 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets.................................... $ 220,110 $ 10,495,039 $ 7,462,943 $ 7,462,943
Total assets...................................... 2,355,685 13,523,703 11,004,651 14,154,651
Amounts due PageNet............................... 6,302,220 20,293,452 24,589,687 --
Note payable to PageNet........................... -- 30,000,000 30,000,000 --
Stockholders' equity (deficit).................... (3,963,733) (38,115,307) (45,043,657) 9,546,030
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and notes appearing elsewhere in this prospectus. See
"Forward-Looking Statements."
BACKGROUND
We began operation in September 1998, when PageNet formed a wireless
solutions division. Our historical financial results consist primarily of the
results of operations of Silverlake, which PageNet acquired in December 1998,
and the losses we have accumulated during the development and initial marketing
of the wireless solutions products and services we began offering on a limited
basis in late 1999. Silverlake's product line is a suite of software products
focusing on wireless messaging. Although we intend to maintain both sales and
service of this product line, the Silverlake marketing and development personnel
will focus on other areas. We do not expect the Silverlake product line to be a
material part of our future growth strategy.
We intend to derive future revenue from the sale of wireless solutions
products and services which include custom software development, wireless
access, software licenses, software and hardware maintenance contracts and
monthly service fees. Software maintenance fee revenue will be based on a
percentage of software license fees. Development revenue will come from the
development of customized software and hardware applications for specific
customers. Monthly service revenue will be associated with airtime on wireless
networks, transaction processing and outsourced customer support.
Since our inception, we have been engaged primarily in product research and
development and developing markets for products and services. We have incurred
significant operating losses as a result of these start-up activities. However,
we began offering some of these products and services in a pilot test mode in
late 1999.
RESULTS OF OPERATIONS
Our historical financial statements include our results of operations from
September 1, 1998 and the results of operations of Silverlake from the date of
its acquisition, December 9, 1998. The assets and liabilities of PageNet
transferred to us have been accounted for on the basis of their historical cost.
Since our historical financial statements reflect our results of operations,
financial condition and cash flows as a component of PageNet, they may not be
indicative of our results of operations and financial position as an independent
company. As a result of our relationship with PageNet and its affiliates, we
have extensive related party transactions. These transactions have been
recognized on a basis determined by PageNet and Vast, which may not be
representative of the terms we could have negotiated with third parties.
Management believes the historical financial results include a reasonable
allocation of research and overhead costs incurred by PageNet on our behalf.
However, these amounts may not be indicative of the costs we would incur if
these services were performed by us or obtained from an independent third party.
Because of our limited operating history, comparisons with prior periods
are not meaningful.
Revenues. Total revenues were $90,035 for the four months ended December
31, 1998 and $1,113,847 for the year ended December 31, 1999. Total revenues
were $309,961 for the three months ended March 31, 1999 and $1,205,817 for the
three months ended March 31, 2000. Revenues through December 31, 1999 consisted
primarily of the sale of AirSource(TM) products. Revenues through March 31, 2000
consisted of $336,439 for the sale of AirSource(TM) products, $380,109 for
services provided to PageNet for the use of the Viaduct services and sale of
AirSource products, $214,090 for custom development recognized on the
percentage-of-completion method, $62,500 for license fees, $53,951 for devices
delivered and $158,728 for monthly service fees, maintenance contracts and
access to Viaduct services.
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Costs of revenues. Costs of revenues generally consisted of packaging,
material, compensation and related costs from our technical area relating to
custom development and other costs associated with our software products and
amortization of acquired developed technology which had been capitalized as a
result of the Silverlake acquisition. Costs of revenue were $23,963 for the four
months ended December 31, 1998 and $1,307,229 for the year ended December 31,
1999 and $103,822 and $751,702 for the three months ended March 31, 1999 and
2000, respectively.
Selling, general and administrative expenses. Selling, general and
administrative expenses primarily consisted of personnel costs associated with
selling, marketing, general management and software management, as well as fees
for professional services and other related costs. Selling, general and
administrative expenses were $2,204,673 for the four months ended December 31,
1998 and $15,777,021 for the year ended December 31, 1999 and $2,024,817 and
$5,117,558 for the three months ended March 31, 1999 and 2000, respectively.
Selling, general and administrative expenses consisted primarily of salaries and
benefits for our direct sales force, our customer service and distribution
personnel, and our non-research and development technical and corporate staff.
Salaries and benefits for our corporate personnel, which include our executive
officers, and our business development, financial planning and human resource
staff, are also included. Other items included are professional fees, rent,
travel, marketing and trade shows.
Research and development expenses. Research and development expenses
consist primarily of compensation and related costs from our technical area, for
both employees and outside consultants engaged in research and development
activities and to a lesser extent, costs of material relating to these
activities. We expense research and development costs as they are incurred.
Research and development costs were $340,013 for the four months ended December
31, 1998 and $3,295,479 for the year ended December 31, 1999 and $719,037 and
$464,912 for the three months ended March 31, 1999 and 2000, respectively.
Allocated research and development expenses. PageNet allocates expenses
for information technology support, management services, accounting, marketing,
customer service and order fulfillment. Amounts allocated to us for information
technology included services such as research and development activities,
maintenance of the Viaduct and other technology used by us and other information
technology services used by us. Amounts allocated to us for management services
included charges for executive functions, human resources, legal services,
purchasing, treasury and other administrative functions. The allocations are
generally based on employee headcount or estimated usage of the services
provided by PageNet. In January 2000, we began providing services on behalf of
PageNet such as access to the Viaduct services, maintenance of certain billing
interfaces, and additional development required by PageNet. PageNet reimburses
us for such services at our cost. Amounts allocated by PageNet are as follows:
<TABLE>
<CAPTION>
4 MONTHS 3 MONTHS 3 MONTHS
ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
CATEGORY 1998 1999 1999 2000
-------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Information technology support......... $ 115,000 $ 6,318,921 $ 674,540 $ 1,321,019
Accounting............................. 184,000 4,040,258 207,404 477,541
Management services.................... 1,071,000 1,510,257 347,965 433,356
Marketing.............................. 27,000 655,944 63,488 77,863
Customer service....................... 45,000 515,670 33,649 159,956
Order fulfillment...................... -- 571,829 169,449 113,868
Expense reimbursement.................. -- -- -- (1,150,000)
---------- ----------- ---------- -----------
Total.................................. $1,442,000 $13,612,879 $1,496,495 $ 1,433,603
========== =========== ========== ===========
</TABLE>
We believe the expenses we have recognized for the research and overhead
services performed for us by PageNet are a reasonable allocation of the costs
incurred by PageNet on our behalf. However, these amounts may not be indicative
of the costs we would incur if we performed these services or obtained them from
an independent third party.
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Purchased in-process research and development. In connection with the
acquisition of Silverlake, we recorded a charge of $152,500 during the four
months ended December 31, 1998 for research and development activities in
process at the date of the acquisition. We used an independent third-party
appraiser to assess and value the in-process research and development. The
amount of the Silverlake purchase price allocated to in-process research and
development represents the estimated fair value, based on risk-adjusted cash
flows, of the one in-process research project that had not yet reached
technological feasibility and for which no alternative future use existed at the
date of the acquisition. The value assigned to the purchased in-process research
and development was determined by estimating the costs to develop Silverlake's
purchased in-process research and development into a commercially viable
product, estimating the resulting net cash flows from the project and
discounting the net cash flows to their present value. At the acquisition date,
the one in-process research and development project underway was approximately
60% complete, and total continuing costs to complete the project were expected
to be approximately $45,000. The project was successfully completed during 1999.
The rate utilized to discount the net cash flows to their present value was
based on Silverlake's weighted average cost of capital. However, given the
nature of the risks associated with the estimated growth, profitability and
developmental projects, Silverlake's weighted average cost of capital was
adjusted. The discount rate of 23% was intended to be commensurate with
Silverlake's corporate maturity and the uncertainties in the economic estimates
described above. The revenue estimates used to value the in-process research and
development were based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions. The estimates we used in valuing in-process research and
development were based upon assumptions we believe to be reasonable but which
are inherently uncertain and unpredictable. However, our assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur.
Other income and expense. Other income and expense consists primarily of
interest expense on amounts due to PageNet. Interest expense on amounts due
PageNet was $90,621 for the four months ended December 31, 1998, $2,006,394 for
the year ended December 31, 1999 and $166,899 and $1,082,438 for the three
months ended March 31, 1999 and 2000, respectively. Since our inception, PageNet
has funded the majority of our disbursements, transferred assets used in our
business to us, funded the acquisition of Silverlake, and performed various
administrative services for us. To the extent that PageNet has provided funds,
paid expenses and performed services on our behalf, we have been charged
interest at the rate PageNet pays under its domestic credit facility. The
weighted average interest rate on the amounts due PageNet, which is reset
monthly, was 7.59%, 7.60%, 7.35% and 8.09% during the four months ended December
31, 1998, the year ended December 31, 1999, and the three months ended March 31,
1999 and 2000, respectively. This arrangement resulted in interest expense that
may not be representative of what we would have paid if we were not affiliated
with PageNet.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, PageNet has funded our operations. However, PageNet is
currently prohibited from advancing any additional funds to us as a result of
its defaults of various covenants of its domestic credit agreement. As of July
5, 2000, we had approximately $5.8 million in cash, which we believe is
sufficient to meet our obligations through the date at which PageNet expects to
commence a proceeding under chapter 11 of the United States Bankruptcy Code in
order to complete its proposed merger with Arch or otherwise restructure its
obligations. Furthermore, PageNet is currently negotiating with its lenders so
that it can provide additional funding to us should it be required prior to the
date on which PageNet commences a proceeding under chapter 11. While PageNet
management believes that it is likely that they will receive permission to
provide us funding in this manner, there can be no assurances that it will be
successful in obtaining that permission from its lenders. PageNet is currently
negotiating a debtor-in-possession loan facility with its lenders which would
become available upon the commencement of a chapter 11 proceeding by PageNet.
PageNet expects to be able to provide us funds during the PageNet bankruptcy
proceeding under the terms of the debtor-in-possession loan facility currently
being negotiated. Arch has committed to provide us, following the close of the
PageNet bankruptcy proceeding, with a loan of $7.5 million effective upon the
merger of PageNet and Arch. Interest under the Arch loan will bear
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interest at a rate of 10% per annum and be repayable within one year or upon our
receipt of additional debt or equity financing from other sources. Arch has also
committed to loan us, on the same terms, an additional $2.5 million over the
nine months following the merger, subject to our obtaining a matching amount
from other sources. We believe these sources of liquidity are adequate to allow
us to operate as a going concern through the end of 2000 and into early 2001.
However, there can be no assurance that these sources of liquidity will be
adequate to meet our needs through such dates.
Net cash used in operating activities was $4,040,335 for the four months
ended December 31, 1998, $31,913,320 for the year ended December 31, 1999, and
$4,109,351 and $6,675,539 for the quarters ended March 31, 1999 and 2000,
respectively. The principal use of cash in operating activities for the periods
was to fund our losses from operations. Net cash used in investing activities
was $2,419,179 for the four months ended December 31, 1998 and $2,009,167 for
the year ended December 31, 1999 and $269,204 for the quarter ended March 31,
2000. Cash used in investing activities for the four months ended December 31,
1998 was primarily for the purchase of Silverlake and includes the cash portion
of the purchase price along with the reimbursement to PageNet of the value of
the PageNet common stock issued in connection with the acquisition. Cash used in
investing activities for the periods also includes the acquisition of property
and equipment to support the expansion of our operations. As of March 31, 2000,
we owed PageNet $24,589,687 for funds provided, expenses paid and services
performed by PageNet on our behalf.
On September 30, 1999, we borrowed $30.0 million from PageNet under a
promissory note agreement. The PageNet note is due on demand by PageNet, has no
stated maturity, and does not bear interest. For financial reporting purposes,
we will recognize interest expense on the PageNet note in subsequent periods
based on the interest rate PageNet pays under its domestic credit facility, with
a corresponding increase to stockholders' equity. As the PageNet note is payable
on demand by PageNet, it has been classified as a current liability in our
December 31, 1999 and March 31, 2000 balance sheets.
In connection with the Vast distribution, we anticipate that PageNet will
forgive all amounts owed by Vast, including the $30.0 million, non-interest
bearing note. The forgiveness of the amounts we owe PageNet is subject to the
approval of PageNet's lenders under its domestic credit facility, which approval
is a condition to the Vast distribution. If PageNet does not forgive these
amounts, we will not be able to repay them unless we obtain other sources of
financing. Forgiveness of this intercompany indebtedness is required under the
merger agreement between PageNet and Arch and is also a condition to the
consummation of the Vast distribution.
Our survival and the successful implementation of our growth strategy will
likely require access to additional capital in the future. We currently have no
credit facilities or sources of additional capital in place other than our
relationship with PageNet. Our ability to continue our current operations and to
grow our business could be limited unless we are able to obtain additional
capital through future debt or equity financings.
INFLATION
We do not believe that the relatively moderate rates of inflation over the
past two years have had a significant effect on our revenues or our financial
results.
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BUSINESS
OVERVIEW
We provide standardized and customized software and a variety of wireless
hardware devices, together with the integration and related support services to
wirelessly connect our software and hardware to the information systems of our
customers. We provide wireless products and services to our customers, using a
variety of cellular, PCS and paging networks, based on their specific needs.
Some of our target customers are companies that have mobile work forces and
need to be able to stay in touch with their traveling employees and have their
employees be able to remotely access information from their offices. For
instance, one of our current pilot test customers is a major life insurance
company that uses our software on a Palm device, together with wireless network
services, to provide its insurance agents with wireless access to client policy
records and home office programs which calculate policy quotes.
Other targeted customers have operations in remote locations, and our
software and hardware can enable them to obtain information and send information
and commands to these remote locations over a wireless network. For instance,
one of our pilot customers is a transmission tower management company which owns
and manages over 10,000 transmission towers throughout the U.S. for its clients,
which are telecommunications carriers subject to certain Federal Aviation
Administration safety regulations. This customer has ordered 1,000 hardware
units that we designed and had manufactured for us, together with software,
maintenance and wireless network services, to monitor the status of certain
systems, such as lights and power systems, on its transmission towers. Our
software and hardware will alert the customer's dispatch center as well as
notify field service personnel of the problem. In some cases, our software and
hardware will enable the field service personnel to repair the problem remotely,
as would be possible in the case of a power supply that needs to be reset. These
services ensure that our customer is in compliance with certain safety
regulations which have fines and penalties associated with them. Our customer
has accepted delivery of the first 200 units and has installed about 10 of these
units to date; we expect that this customer may roll out our products and
services to more of its towers if this initial deployment is successful.
PRODUCTS
Viaduct Software Services
Viaduct is a set of software development tools and software products
that support the creation of wireless data and messaging applications that
solve specific customer needs and that we therefore call "wireless
solutions". Viaduct is used by Vast engineers as the foundation of many of
the wireless solutions that we build for our customers. Viaduct handles
many of the more difficult aspects of building wireless solutions such as
interfacing to otherwise incompatible wireless networks, and reconciling
the many differences in the display and keyboard characteristics of
hand-held devices. We believe that Viaduct will also help protect our
wireless solutions from the impact of future technological changes because
it is easily adaptable to changes in the configuration of the components.
For instance, if a customer would like to switch the type of wireless
network used, the type of hand-held wireless devices used, or the
methodology of data encryption, Viaduct can support these changes without
the need to rewrite all of the solution software.
Viaduct has several underlying characteristics that benefit us in
providing outsourced wireless services to our customers. These include:
- Open architecture. Viaduct supports connection to a variety of wireless
data networks and the Internet using software interfaces that are
commonly supported by many industry vendors.
- Powerful tool set. Viaduct includes a suite of tools that allows us to
rapidly create new services, applications and Web interfaces that build
on Viaduct capabilities.
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- Ability to grow with customer's needs. Viaduct is built on a foundation
of software from TIBCO Software, Inc. that enables Viaduct to process and
distribute a high volume of transactions rapidly and reliably, without
significant degradation of performance.
- Flexibility. Viaduct is built to accommodate new technologies and
devices as they become available. We expect this feature will enable our
customers to take advantage of technological advancements with minimal
impact on their software development costs.
- Ability to be integrated with customer's other software. The components
of Viaduct software can be easily integrated with other software used by
our customers to provide fully integrated wireless solutions with a
common format.
Viaduct is currently being used as part of wireless solutions created for
PageNet and six other customers and is supporting more than 5,000 wireless
users.
[LINKING COMPUTER PRODUCTS GRAPHIC]
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Mobile Resource Management. Some of our products are used to extend the
availability of our customers' corporate information systems to their remote
employees through wireless connections. For instance, one of our customers
enables its salesforce to access customer records and to place sales orders
wirelessly while meeting with a customer. There are two products in this
category: Volley and @ware.
Volley. Volley is software that makes it easier for mobile workers to
access and use the application software programs located at their company's
central computer facilities or headquarters. As these application software
programs form the core of a company's information systems, and enable a
company to run its critical business operations, they are sometimes
referred to as "enterprise software". For example, one version of Volley is
designed to let our customer's dispatching departments send trouble alerts
to field service personnel via a wireless data network for receipt on a
hand-held wireless device. Field service personnel can acknowledge receipt
of the trouble alert back to the dispatcher, request further information
about the customer, and update the trouble log with status information for
the central computer when the repair is complete.
Volley uses the Viaduct software and two additional software
components, one of which is located on and interacts with the customer's
server and its main enterprise software application database, and one of
which is built into the hand-held wireless device and allows the user to
inquire and update the enterprise application database, receive information
and alerts, and respond. We have created specific versions of Volley that
provide mobile resource management functions which work in conjunction with
the products of two companies which provide enterprise software
applications: Siebel Systems and Computer Associates. We have also used
Volley to interface with some of our customers' proprietary application
software systems. To date, we have four customers who are using solutions
based on the Volley product.
@ware. @ware is a new product that we plan to release for commercial
use in the third quarter 2000. @ware is software that makes it possible for
mobile workers to receive, create and send email messages from a hand-held
wireless device to their corporate email system. This software provides an
encrypted connection to protect the confidentiality of email messages.
@ware also provides access to Internet content such as weather information,
airline flight schedules, and express package tracking information. @ware
is based, in part, on software we have licensed from Motorola.
Tracking and Monitoring Products. Some of our products are used to create
solutions that track the location of our customers' remote assets or monitor the
status of their remote devices. These solutions typically consist of a wireless
hardware device that is capable of relaying its location or the status of a
connected circuit to a central processing center such as a dispatch center.
These solutions interpret the information and are capable of alerting personnel
based on pre-defined rules. In some cases, we design and have manufactured for
us the wireless hardware devices used in these solutions. In other cases, the
hardware devices we use are designed and manufactured by other companies and we
integrate them into our solution.
Our tracking and monitoring products currently include:
RBR-2000, which is a hardware device we have manufactured for us that
has a programmable microcomputer and a wireless transmitter that can
monitor the status of a device. For example, an RBR-2000 can be mounted on
a chemical storage tank to monitor the position of a valve -- such as
whether it is open or closed -- and report that status periodically to a
central office wirelessly. This product is currently released for
commercial use, and we currently have received orders for more than 1,000
RBR-2000 units in conjunction with various customer projects.
Vast Tracks, which is a software product that displays the current
location of a remote asset such as a car or truck on an accurate map of the
area. This product is designed for use by the dispatch center of any
customer that has a fleet of vehicles. The product processes data received
from hardware devices that report their location using a technology called
Global Positioning System (GPS). GPS is a system of satellites that
transmit radio signals to special hardware devices on the ground with
latitude and longitude coordinates, enabling the determination of a
device's location with
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great accuracy. Vast Tracks was developed by Vast in anticipation of our
customers' needs and will be released for commercial use in the third
quarter. We recently received our first three orders to implement pilot
projects based on this product.
Advanced Paging Software Products. We currently have two advanced paging
software products that provide for message and information delivery to mobile
users, known as Airsource and MarketTrax:
AirSource is a software product that simplifies communications with
alphanumeric pagers and paging-enabled cell phones by enabling the routing
of messages from a Windows-based personal computer or from an Internet Web
site to paging devices. AirSource is distributed by major paging companies
and other paging carriers, such as Arch Communications, AT&T, PageNet,
Sprint Corporation, Verizon Wireless, and WebLink Wireless.
MarketTrax is a financial information delivery and management product
that allows traders to monitor a portfolio of financial instruments from a
variety of wireless hand-held devices. MarketTrax supports delayed or
optional real-time data feeds from most major exchanges, including the
Chicago Board of Trade and the Chicago Mercantile Exchange. MarketTrax
functionality includes alarms to notify users of significant movement in
their portfolios, and performance graphs.
SERVICES
We seek to offer our customers a number of services in which Vast engineers
and consultants will work to apply wireless technology and our products to
customer needs. We plan to charge for these services on either a fixed-price
quote or an hourly rate basis. These services will generally fall into two
categories: software development and integration services, and wireless
outsourcing services.
Software Development; Integration Services
We offer software development, wireless networking, and consulting services
relating to the determination of and integration of the software and hardware
components that are necessary to meet customer-specific needs. These
capabilities represent skills that our customers may lack internally. Our
experience helps us to bring together and adapt our own products with software
and hardware from other vendors into a complete solution.
Examples of software development and integration services we have provided
include:
- developing wireless strategy recommendations for a major device
manufacturer;
- conducting an analysis of the opportunities to use wireless technology
for a major public utility;
- developing software to be used to enable a device manufacturer's product
to communicate wirelessly; and
- developing a wireless software application for a major insurance company.
Wireless Outsourcing Services
Once a solution has been developed and tested, we have the capability to
assist our customers in deploying and managing that solution in the field. While
many companies will prefer to handle these aspects of the solution themselves,
some will choose to rely on us for this service. As with any decision to
outsource, customers do so because they have decided that they do not have the
necessary skills internally and that it would not be cost-efficient or
strategically important for them to acquire those skills internally.
For example, we handled all aspects of deploying, operating and supporting
the wireless solution for one customer, including:
- hosting the customer's wireless server software on our servers at our
data operations center;
- helping the users to decide what hand-held wireless device will be best
for them;
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- providing wireless network usage by reselling airtime from major
carriers;
- supplying the device and activating each user's wireless service account;
- monitoring the wireless network being used by the customer for outages
and performance issues;
- providing single consolidated billing for all operational expenses;
- providing toll free number support for the customer's users; and
- creating and maintaining a support Web site for users.
Currently, there are eight customers of our wireless outsourcing services.
MARKET OPPORTUNITY
Emergence of the Wireless Data Market.
As businesses and individuals have become increasingly dependent on e-mail,
Internet-based services and corporate data networks, demand for wireless access
to these resources has increased dramatically. We believe that four factors are
driving the development of the wireless data market:
Growth of the Internet and Corporate Data Networks. The Internet and
corporate data networks are emerging as important business tools that allow
users to communicate and conduct transactions electronically over a large
geographic area. Investments in corporate data networks are growing as
businesses equip their employees with tools and information designed to increase
their productivity. As a result, the volume of information being exchanged is
growing significantly and we believe that workers will seek wireless
connectivity to have access to this information whenever and wherever it is
needed.
Growth of Mobile Workforce and Increased Personal Mobility. The number of
employees who work away from the traditional office environment is growing. We
believe that workers and customers are growing increasingly dependent upon
critical business information and enterprise applications that deliver
information and support conducting business from wherever they are located. In
most cases, users of corporate data networks are currently limited to wired
connections. We believe increasing reliance on the exchange and availability of
critical information will drive businesses to seek out and implement wireless
solutions.
Proliferation of Wireless Devices. There are an increasing number of
devices, including personal digital assistants, pagers and mobile phones, which
are now capable of sending and receiving data wirelessly. These devices are
smaller and less expensive, and have longer battery life and more features than
earlier devices. We believe that improvements in the capabilities of hand-held
devices with wireless data access capability will lead to an increased demand
for use of these devices and for the development of customer-specific business
applications for these devices.
Build-Out of Wireless Data Networks. Anticipating the accelerated adoption
of mobile Internet devices, digital wireless carriers worldwide are in the
process of upgrading their networks to support the transmission of increased
volumes of data. These carriers are also expanding the geographic coverage of
their networks. Several major wireless carriers have recently launched or
announced the availability of data service in addition to their existing voice
service capabilities. Likely future enhancements to the wireless networks will
lead to significant improvements in the speed at which data can be transmitted.
Based on historical trends, the cost to use these networks is expected to
decrease as network capacity increases. We believe that the availability of
high-speed, high capacity, reliable wireless data networks and decreased usage
costs will occur, and will lead to greater demand for specialized business
applications that connect the growing number of mobile workers.
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BENEFITS OF VAST'S WIRELESS SOLUTIONS
We believe that our products and services provide the following key
benefits:
Our Viaduct Software Provides Flexibility and Performance Enhancement.
Viaduct, our software for building effective wireless applications, manages
the connections between wireless networks and devices, providing a single,
standard interface to the corporate enterprise software applications. Our
software adapts and translates data transmissions for many wireless network
protocols, formats the transmissions for effective user presentation on a
particular user device and prepares the data for transmission over a wireless
network in a manner that uses spectrum efficiently. We believe that Viaduct has
the ability to enhance the performance of our customers' wireless solutions, to
reduce the expense associated with operating a wireless access solution, and to
facilitate changing networks or devices.
Our Outsourced Wireless Solution Approach Saves Time and Expense.
We can eliminate the need for our customers to hire, train and maintain
staff with knowledge in wireless systems and technology. Vast has engineering
staff who can deploy new wireless technologies, analyze and correct system and
network failures and maintain network and system security. We maintain a data
operations center to host our customers' wireless solutions. In addition, we
offer a toll free phone number as well as Web-based support services that
includes credit card billing, e-mail customer support, online training and
software downloads for our customers. We can also provide our customers with a
privately branded Web site that allows users to order wireless devices and
contact customer support over the Internet. We believe that these capabilities
allow Vast to offer our customers time and expense savings.
Lower Total Cost of Ownership.
Our customers do not need to lease, buy or continually upgrade existing
hardware and software or recruit and retain wireless systems engineers and
administrative personnel for their wireless data services if they choose to use
our data operations center. Our data operations center, which consists of
network servers running our software, is maintained at a secure facility, not at
customers' facilities, and we employ systems administrators to monitor the
service 24 hours a day, seven days a week. Our service is designed to reduce a
customer's administrative burden by eliminating the cycle of purchasing,
installing, testing, debugging and deploying a wireless data system.
Our Solutions Are Designed to Support Growing Numbers of Users.
Viaduct has been designed to allow applications to continue working without
any reduction in speed or results as our customers' businesses and numbers of
users grow. In addition, Viaduct supports the addition of servers and bandwidth
to handle growing traffic load when a customer elects to have its operations
hosted at our data operations center.
STRATEGY
Our objective is to be a leading provider of software and services that use
wireless connections to link mobile workers and remote assets with corporate
data networks. We plan to achieve this by using our Viaduct software as a
platform for creating solutions faster and at less cost for our customers. The
key elements of our strategy are to:
Continue to Develop New Software Products and Services To Drive Future Growth.
We are seeking to develop new products and services that we believe will
create new market opportunities. Some of this development is done at the request
of customers who retain us to develop a custom solution, and some of it is done
by Vast in anticipation of market needs. We retain ownership or license rights
to most of the software we develop, even when it is custom development, and, in
this way,
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each project we do adds to our library of potentially reusable intellectual
property. Some examples of current new product and service development efforts
include:
- In-Vehicle Information Delivery Service. We are working with a large
supplier of automotive components and integrated systems to design and
build a wireless service to provide e-mail messages and Internet
information content, such as weather, traffic conditions and travel
assistance, to some vehicles equipped with in-vehicle personal computers.
This service is expected to be operational in the third quarter of this
year and we will operate this service for the customer.
- Telemetry Monitoring Services. Telemetry refers to communication between
machines rather than machines and human beings. Telemetry monitoring
services are services that we will offer to companies that wish to
deploy, manage and monitor large numbers of wireless sensor units. A
wireless sensor unit is a type of hardware that is able to "sense" the
status or location of a device, such as whether a switch is "on" or
"off", and then send that status information to a central site via a
wireless network. For example, a chemical manufacturer may have several
thousand sensors deployed to monitor the level of fluids in its storage
containers. Telemetry monitoring services are built on the capabilities
of Viaduct, and add a variety of capabilities to manage communications
with these devices and notification of our customers of certain events.
This service is scheduled to be operational in the third quarter of this
year. We currently have no customers for this service, but have made
proposals to several prospects that are based on it.
- Law Enforcement Services. We are working on the development of a
wireless information service that is targeted to the needs of law
enforcement organizations in the U.S. This service is designed to support
both hand-held wireless devices as well as in-vehicle personal computers
that are wirelessly enabled. The service will allow law enforcement
officers in supported jurisdictions to obtain access to state and federal
criminal information databases, and to state department of motor vehicles
databases. This service will also allow wireless messaging between a
dispatch center and an officer in the field, or from one officer to
another. Some hand-held wireless hardware devices supported by this
service will allow the display of the location of an officer or vehicle
and provide an emergency location feature for officer safety. This
service is currently being developed for one of our customers and we
expect it to be in pilot testing by the fourth quarter of this year.
Seek Pilot Stage Projects To Drive Future Revenue Growth.
We believe that most customers will choose to conduct a pilot test of any
new wireless solution prior to making a commitment to roll it out to their
employees. We have produced five standard products and four custom products that
are currently in the pilot stage of testing. Only one of our customers has made
a decision to accept and deploy our software on a commercial rollout basis. We
plan to continue to increase the number of such pilot projects in progress
during the rest of 2000 in the hopes that many of them will turn into commercial
rollout projects of large numbers of users that will drive our growth in 2001.
Expand Our Sales Channels and Marketing Activities.
We plan to expand and enhance our direct sales organization to improve our
ability to take our products and services directly to market and to establish a
presence with major U.S. users of wireless technology. This direct sales
capability expansion will continue throughout the rest of the current year and
will be in place to support the sales of new products and services as they
become available. As this capability matures, our ability to drive revenue
growth should improve. We have also taken steps to create an indirect channel
sales capability that will attempt to utilize co-selling relationships with
carriers, device manufacturers and enterprise software vendors to provide an
alternative means of selling our products and services.
We plan to begin using a variety of traditional marketing approaches to
create awareness of Vast and generate new business leads. We intend to actively
participate in trade shows, deploy Web marketing, and advertise to gain
visibility and generate sales leads. However, these marketing activities will be
limited in scope until our separation from PageNet is completed and new funding
sources are obtained.
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COMPETITION
The emerging wireless data market in which we compete is intensely
competitive and is characterized by evolving technology and industry standards.
We compete in this emerging market and it is difficult to assess the full extent
of our competition. There are many small companies that are building
capabilities to deliver wireless data services, as well as many larger ones that
are increasingly focused on this market. In many cases, we will have
opportunities to partner with some of these companies and in others we will be
direct competitors.
We assess potential competitors based primarily on their management,
functionality, and range of services, the security and expandability of their
architecture, and their customer base, geographic focus and capitalization.
We believe that our competitors and potential competitors fall into three
general categories:
- Wireless data services providers and software companies such as Wireless
Knowledge, a joint venture between Microsoft Corporation and QUALCOMM
Incorporated, Aether Systems, Inc., Go America, Inc., InfoSpace.com,
Inc., Phone.com, Inc., AvantGo, Inc., Nettech Systems Inc., Dynamic
Mobile Data, Mobimagic Co., a newly formed joint venture between
Microsoft and NTT Mobile Communications Network, Inc., Spyglass, Inc. and
724 Solutions Inc.
- Traditional Systems Integrators such as Andersen Consulting LLP,
Electronic Data Systems Corp. and Computer Sciences Corporation.
- Wireless network carriers, such as AT&T Wireless Group, Cellco
Partnership d/b/a Bell Atlantic Mobile, Sprint PCS Group, Nextel
Communications, Inc., Vodafone AirTouch, Omnipoint Corporation, Metricom,
Inc., BellSouth, MCI Worldcom and WebLink Wireless.
Many of our existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we do. Many of
these companies have greater name recognition and more established relationships
with our target customers. Furthermore, these competitors may be able to adopt
more aggressive pricing policies and offer customers more attractive terms than
we can.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of copyright, trademark, service mark, trade
secret laws and contractual restrictions to establish and protect the
proprietary rights in our services. PageNet holds a preliminary patent
application on the architecture for message processing and routing used in our
Viaduct technology. PageNet has agreed to transfer this patent application to us
at the closing of the Arch merger, subject to the approval of PageNet's lenders
under its domestic credit facility. Such approvals have not yet been obtained
and there can be no assurance that they will be obtained. In addition, we may
need the consent of the bankruptcy court to legally transfer this patent
application.
We own one federal trademark, Airsource(R), and have applications for
federal registration in several other trademarks.
We rely on technologies that we license from third parties, including
Viaduct software currently licensed by PageNet from TIBCO, as well as
third-party software contained in administrative systems operated by PageNet.
TIBCO has agreed in principle to the assignment of a portion of PageNet's
license to us. We have also evaluated alternatives to the TIBCO software in the
event we are unable to come to agreement with TIBCO, and will begin implementing
contingency plans during the third quarter of 2000 to avoid any risk of
disruption to our customers. We estimate that the TIBCO software can be replaced
within a 180-day period, if necessary. We will also rely on data feeds and
related software from Reuters and other information content aggregators. Other
third-party technology licenses may not continue to be available to us on
commercially attractive terms. The loss of the ability to use such technology
could require us to obtain the rights to use substitute technology, which could
be more expensive or offer lower quality or performance, and therefore have a
material adverse effect on our business, financial condition or results of
operations.
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Third parties could claim infringement by us with respect to current or
future services. We expect that participants in our markets will be increasingly
subject to infringement claims as the number of services and competitors in our
industry segment grows. Any such claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause service installation delays
or require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any such claim could have a material adverse effect upon our
business, financial condition or results of operations.
GOVERNMENTAL REGULATION
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. The
wireless network carriers we contract with to provide airtime are subject to
regulation by the Federal Communications Commission. Changes in Federal
Communications Commission regulations could affect the availability of wireless
coverage these carriers are willing or able to sell to us. We could also be
adversely affected by developments in regulations that govern or may in the
future govern the Internet, the allocation of radio frequencies or the placement
of cellular towers. Also, changes in these regulations could create uncertainty
in the marketplace that could reduce demand for our services or increase the
cost of doing business as a result of costs of litigation or increased service
delivery cost or could in some other manner have a material adverse effect on
our business, financial condition or results of operations.
We currently do not collect sales or other taxes with respect to the sales
of services or products in states and countries where we believe we are not
required to do so. We do collect sales and other taxes in the states where we
have offices and believe we are required by law to do so. One or more
jurisdictions have sought to impose sales or other tax obligations on companies
that engage in online commerce within their jurisdictions. A successful
assertion by one or more jurisdictions that we should collect sales or other
taxes on our products and services, or remit payment of sales or other taxes for
prior periods, could have a material adverse effect on our business, financial
condition or results of operations.
Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could have an adverse effect on our business.
FACILITIES
Our principal offices cover 24,606 square feet in an office complex located
in Addison, Texas. Under the current lease, which commenced on May 10, 1999 and
expires on May 31, 2004, we pay an annual base rent of $516,726. We have the
right to extend the term of the lease for up to an additional 60 months. We have
the right of first refusal on additional space in the building. Although this
facility is adequate for our current needs, we expect that we will need
additional space in the future.
In addition to our offices in Addison, we rent office space in the Los
Angeles area. Our current office is 11,381 square feet. We pay an annual base
rent of $261,926 and the lease will expire in March 2007.
EMPLOYEES
As of June 30, 2000, our workforce was comprised of 89 full-time employees.
We also utilize the services of 32 independent contractors through relationships
with various third parties. None of our employees are covered by a collective
bargaining agreement. We believe that our relations with our employees are good.
LEGAL PROCEEDINGS
We are not currently subject to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND SOLE DIRECTOR
The following table describes our executive officers and our current sole
director. Prior to the completion of the Arch merger, we expect to add four
directors designated by the holders of a majority in principal amount of
PageNet's senior subordinated notes and two other directors, in addition to Mr.
Frazee, designated by Arch and PageNet to our board of directors. At the time of
the Arch merger, our board of directors will consist of seven directors.
Although Vast was incorporated in Delaware in December 1999, our operations
continue the activities of PageNet's wireless solutions division and the
relevant experience of many of our executive officers includes the management of
those operations.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John P. Frazee, Jr. ...................... 55 Chairman of the Board and Chief Executive Officer
Christopher C. Sanders.................... 47 President and Chief Operating Officer
Julian B. Castelli........................ 32 Acting Chief Financial Officer
Steve Leggett............................. 51 Senior Vice President-Sales
William G. Scott.......................... 43 Chief Technology Officer
</TABLE>
John P. Frazee, Jr., has been our Chairman of the Board and Chief Executive
Officer since December 1999. He has been a Director of PageNet since 1995 and
has served as Chairman of the Board of Directors and Chief Executive Officer of
PageNet since June 1999. From August 1997 through June 1999, Mr. Frazee served
as Chairman of the Board, President and Chief Executive Officer of PageNet. Mr.
Frazee was a private investor from August 1993 to August 1997 and served as
President and Chief Operating Officer of Sprint Corporation from March 1993 to
August 1993. Prior to that time, Mr. Frazee had been Chairman and Chief
Executive Officer of Centel Corporation, a telecommunications company, from
April 1988 to January 1993. Mr. Frazee also serves as a director of Security
Capital Group, Inc., Dean Foods Company, Homestead Village Incorporated and
Cabot Microelectronics, Inc.
Christopher C. Sanders has been our President and Chief Operating Officer
since May 2000. From December 1999 to May 2000, Mr. Sanders served as our Senior
Vice President-Marketing. From January 1999 to December 1999, Mr. Sanders was an
Internet-related marketing consultant, doing business as Neteligence. From
September 1997 to January 1999, he served as Senior Vice President of Merant,
Inc., formerly known as Micro Focus, Inc., a software vendor of enterprise
applications. From 1995 to September 1997, he served as Vice President of
Platinum Technology, Inc., a software vendor. Prior to that, Mr. Sanders served
as Vice President and General Manager of Locus Computing Corporation, a software
developer.
Julian B. Castelli has been our acting Chief Financial Officer since
December 1999. He has also served as Senior Vice President and Chief Financial
Officer of PageNet since June 1999. Mr. Castelli served as Vice President and
Treasurer of PageNet from July 1998 to June 1999. Prior to joining PageNet, Mr.
Castelli was employed by McKinsey & Company, an international consulting firm,
from August 1995 to July 1998, serving as Engagement Manager from June 1997. Mr.
Castelli served in the Corporate Finance Department of Goldman, Sachs & Co. as
an analyst from 1990 to 1993.
Steve Leggett has been our Senior Vice President-Sales since December 1999
and served in a similar capacity for the wireless solutions operations of
PageNet from September 1999 through December 1999. From January 1995 to July
1999, he served in various sales positions with Platinum Technology, Inc., a
software consulting firm, serving most recently as Senior Vice President,
Northeast Region. Prior to that time, Mr. Leggett was Executive Vice President
of Marketing and Sales for the Meta Group, an information technology analytical
and consulting firm.
William G. Scott has been our Chief Technology Officer since December 1999
and served in a similar capacity for the wireless solutions operations of
PageNet from June 1999 through December 1999. He served as Senior Vice
President-Systems and Technology for PageNet from February 1997 through June
1999 and as Vice President-Systems and Technology for PageNet from December 1995
to February 1997. Before that, Mr. Scott served as President of Lion Software,
Inc. from 1993 to 1995.
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BOARD COMMITTEES
We plan to establish an audit committee and a compensation committee. The
audit committee will review our internal accounting procedures and consider and
report to our board of directors on other auditing and accounting matters,
including the selection of our independent auditors, the scope of annual audits,
fees to be paid to our independent auditors and the performance of our
independent auditors. The audit committee will be composed solely of directors
who are not our employees or affiliated with our management. The compensation
committee will review and recommend to our board of directors the salaries,
benefits and stock option grants of all employees, consultants, directors and
other individuals we compensate. The compensation committee will also administer
our stock option and other employee benefits plans. Our board of directors may
from time to time establish other committees.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to our Chief Executive
Officer and other executive officers whose total annual salary and bonus during
the period they were dedicated to the activities of Vast or PageNet's wireless
solutions division exceeded $100,000 for the fiscal year ended December 31,
1999. These persons are referred to in this prospectus as the named executive
officers.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
NAME AND ---------------------
PRINCIPAL OTHER ANNUAL SECURITIES UNDERLYING
POSITION SALARY BONUS COMPENSATION (5)($) OPTIONS (#)
--------- -------- ------- ------------------- ---------------------
<S> <C> <C> <C> <C>
John P. Frazee, Jr. (1)............... $128,077 -- $19,192 --
Chairman and Chief
Executive Officer
Mark A. Knickrehm (2)................. 164,423 -- 2,169 --
President and Chief
Operating Officer
Scott D. Grimes (3)................... 199,680 -- 5,316(6) 30,000(8)
Senior Vice President-
Business Development
William G. Scott (4).................. 112,500 -- 2,776(7) --
Chief Technology Officer
</TABLE>
---------------
(1) These amounts reflect an allocation of 20% of Mr. Frazee's time to his role
as Chairman and Chief Executive Officer of Vast from January 1999, and are
included in Mr. Frazee's compensation as Chairman of PageNet. Mr. Frazee was
elected as Chairman and Chief Executive Officer of Vast in December 1999.
(2) Represents compensation from June 1999. This amount is included in, and is
not in addition to, the $299,038 disclosed in the PageNet prospectus as
total 1999 salary received by Mr. Knickrehm from PageNet. Mr. Knickrehm
resigned as President and Chief Operating Officer in May 2000.
(3) Represents compensation from January 1999. Mr. Grimes resigned as Senior
Vice President-Business Development in February 2000.
(4) Represents compensation from June 1999. This amount is included in, and is
not in addition to, the $213,462 disclosed in the PageNet prospectus as
total 1999 salary received by Mr. Scott from PageNet.
(5) Except where noted, represents premiums paid under Executive Long Term
Disability Plan.
(6) Includes a matching contribution of $5,000 to Mr. Grimes' 401(k) plan.
(7) Includes a matching contribution of $1,714 to Mr. Scott's 401(k) plan.
(8) Options represent options to purchase PageNet common stock.
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<PAGE> 388
2000 LONG TERM STOCK INCENTIVE PLAN
Our board of directors has adopted our 2000 Long Term Stock Incentive Plan.
Under our incentive plan, we may grant stock options, stock appreciation rights,
shares of common stock and performance units to our employees and consultants.
The total number of shares of our Class A common stock that we may award under
our incentive plan is 5,000,000 shares, which may be adjusted in some cases. The
shares may be newly issued shares or shares purchased in the open market or in
private transactions. We anticipate granting options to acquire shares of our
Class A common stock only.
Our compensation committee will administer our incentive plan. Prior to the
creation of our compensation committee, our incentive plan will be administered
by PageNet's compensation committee. Our incentive plan essentially gives the
compensation committee sole discretion and authority to:
- select those employees and consultants to whom awards will be made;
- designate the number of shares covered by each award;
- establish vesting schedules and terms of each award;
- specify all other terms of awards; and
- interpret the plan.
Options awarded under our incentive plan may be either incentive stock
options or nonqualified stock options. Incentive stock options are intended to
satisfy the requirements of Section 422 of the Internal Revenue Code, while
nonqualified stock options are not. We may grant stock appreciation rights in
connection with options, or as freestanding awards. If a participant exercises
an option, he or she will surrender the related stock appreciation right. At a
minimum, the exercise price of an option or stock appreciation right must be at
least 100% of the fair market value of a share of Class A common stock on the
date on which we grant the option or stock appreciation right. Options and stock
appreciation rights will be exercisable and will expire in accordance with the
terms set by the compensation committee. Under our incentive plan, all options
and stock appreciation rights must expire within ten years after they are
granted. If a stock appreciation right is issued in connection with an option,
the stock appreciation right will expire when the related option expires.
Special rules and limitations apply to stock options which are intended to be
incentive stock options. Our compensation committee also may impose restrictions
on shares of our common stock that are issued upon the exercise of options and
stock appreciation rights under our incentive plan.
Under our incentive plan, our compensation committee may grant common stock
awards to participants. During the period that a stock award is subject to
restrictions or limitations, the participants may receive dividend rights awards
relating to the shares.
Our compensation committee may award plan participants performance units
which entitle them to receive value for the units at the end of a performance
period, if and to the extent the award so provides. Our compensation committee
will establish the number of units and the performance measures and periods at
the time it makes an award.
All awards under our incentive plan will accelerate and become fully vested
if a change in control, as defined under our incentive plan, of Vast occurs.
On February 16, 2000, our board of directors authorized an initial grant of
options to acquire a total of 1,620,000 shares of our common stock, at an
exercise price of $1.60 per share. Option grants were made to certain of our
named executive officers and 87 other employees. On May 17, 2000, the board of
directors authorized additional option grants for 300,000 shares of our common
stock, at an exercise price of $2.50 per share. All option grants authorized by
our board of directors were approved by PageNet's compensation committee.
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<PAGE> 389
Prior to completion of the Arch merger, we may grant additional options to
purchase shares of our Class A common stock to other employees or to the initial
members of the Vast board of directors. These option grants will be reviewed and
authorized by PageNet's compensation committee.
Our incentive plan also contains an optional employee stock purchase plan
component. We do not intend to implement this purchase plan until such time as
our Class A common stock is listed on a securities exchange or quoted on Nasdaq.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Some of our employees received grants of options to purchase PageNet common
stock during 1999 at a time when they were primarily involved in Vast
activities. The following table summarizes all such option grants to the named
executive officers for the year ended December 31, 1999.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SHARES GRANTED TO PRESENT
UNDERLYING EMPLOYEES VALUE
OPTIONS IN EXERCISE EXPIRATION ON DATE
NAME GRANTED FISCAL YEAR(1) PRICE DATE OF GRANT(2)
---- ---------- -------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Scott D. Grimes......................... 30,000 0.74% $6.125 01/20/09 $142,200
</TABLE>
---------------
(1) As a percent of options granted to all PageNet employees in fiscal year.
(2) The determination of the present value of this option to purchase PageNet
common stock on the date of the grant was based on the Black-Scholes pricing
model. The estimated value under the Black-Scholes model was based on
standard assumptions as to variables in the model such as stock price
volatility, projected future dividend yield and interest rates. In addition,
the estimated value was discounted for potential forfeiture due to vesting
schedules. The estimated Black-Scholes value was based on the following key
variables: volatility -- 67.05%; dividend yield -- 0%; risk-free interest
rate -- yield to maturity of 10-year treasury note at grant date -- 4.745%.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Each of Mr. Sanders, Mr. Scott and Mr. Leggett have entered into employment
agreements with Vast. The agreements have substantially similar terms and have a
term of twenty-four months, which will be automatically extended for additional
twenty-four month periods, unless either party gives notice of non-renewal at
least six months prior to the end of the term. Mr. Sanders and Mr. Scott receive
an initial salary of $225,000 per year and Mr. Leggett receives an initial
salary of $200,000 per year. The salaries are subject to increase based on an
annual review by the board of directors. In addition, Mr. Sanders received
options to purchase 200,000 shares of our common stock at an exercise price of
$2.50 per share. Mr. Scott and Mr. Leggett each received options to purchase
50,000 shares of our common stock at an exercise price of $2.50 per share.
In connection with his resignation in May 2000, Mr. Knickrehm entered into
a severance agreement with Vast. Under this agreement, Mr. Knickrehm received a
payment of $100,000 and agreed to provide certain consulting and other services
and to accept certain restrictions on competitive conduct. In addition, all of
his outstanding stock options were cancelled.
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<PAGE> 390
ARRANGEMENTS BETWEEN VAST AND PAGENET
Since our inception, there have been significant transactions between us
and PageNet involving services such as information technology support,
management services, accounting, marketing, customer service and order
fulfillment. See Note 3 to the Notes to Financial Statements. For purposes of
governing the on-going relationships between us and PageNet, we and PageNet have
or will enter into the following agreements.
LICENSE AGREEMENT
On May 11, 2000, we entered into a license agreement with PageNet. Pursuant
to the terms of the license agreement, PageNet granted to us an exclusive,
except as to PageNet, non-transferable license to use all of PageNet's software,
trademarks, tradenames and other intellectual property which is, or may be, used
by us in our business. In addition, PageNet granted to us an exclusive, except
as to PageNet, non-transferable sublicense to use all of the software and
related intellectual property licensed to PageNet by any third party and which
is used by us in our business. The license and sublicense are granted royalty
free for so long as we remain a wholly owned subsidiary of PageNet. The license
agreement will terminate on the earlier to occur of:
- the effective date of fully executed intercompany agreements between
PageNet and us with respect to the intellectual property licensed under
this agreement;
- the close of the Arch merger and the Vast distribution; or
- as to any specific software sublicensed from a third-party provider, our
entering into a new software license agreement with such third-party
provider.
SEPARATION AGREEMENT
On or prior to the Arch merger, we will enter into a separation agreement
with PageNet pursuant to which PageNet will agree to transfer and assign to us
all of the assets used in our business on or prior to the closing of the Arch
merger. Under the terms of the agreement, PageNet will also agree to cancel the
promissory note in the amount of $30 million owed by us to PageNet, along with
all of our other intercompany payables due to PageNet. Each party will also
agree to provide, or cause to be provided, to the other party, at any time
before or after the closing date of the transfer of assets and as soon as
reasonably practicable after written request therefor, any information in its
possession or under its control that the requesting party reasonably needs:
- to comply with reporting, disclosure, filing or other requirements
imposed upon the requesting party, including under applicable securities
or tax laws, by a governmental authority having jurisdiction over the
requesting party;
- for use in any judicial, regulatory, administrative, tax or other
proceeding or in order to satisfy audit, accounting, claims, regulatory,
litigation, tax or other similar requirements; or
- to comply with its obligations under this agreement or any of the
agreements described below,
provided, however, that if either party determines that the provision of
information could be commercially detrimental, violate any law or agreement, or
waive any attorney-client privilege, the parties will take reasonable measures
to permit compliance in a manner that avoids the harm or consequence.
TAX ALLOCATION AGREEMENT
Since our inception, Vast has also been included in the filing of
consolidated federal income tax returns filed by PageNet as the common parent of
a consolidated group consisting of Vast and other various subsidiaries. In light
of the separation of Vast and PageNet, which will result in Vast no longer being
included in PageNet's consolidated return, we and PageNet will enter into a tax
allocation agreement in which PageNet will indemnify and hold harmless Vast
against any and all liability for any
F-30
<PAGE> 391
federal, state, and local taxes, including interest and penalties, for which
Vast may be held liable pursuant to any law, attributable to periods through and
including the distribution date of Class B common stock of Vast to shareholders
and creditors of PageNet. Under such agreement, PageNet will be entitled to the
benefits of any net operating losses or other tax attributes generated by Vast
while a member of the consolidated group that are absorbed by PageNet in any
taxable year prior to and including the taxable year of the distribution of
Class B common stock of Vast to shareholders and creditors of PageNet. After the
date of such distribution, Vast will be responsible for its own taxes and may
also benefit from any net operating loss or other tax attribute it has. In the
event of a dispute with any governmental authority concerning tax liability
issues, PageNet and Vast agree to cooperate by furnishing to the other party all
records and documents and to make personnel available for testimony they may be
necessary or helpful with the negotiation or settlement of such dispute.
ADMINISTRATIVE SERVICES AGREEMENT
On or prior to the Arch merger, we will enter into an administrative
services agreement with PageNet with a term of ninety days, pursuant to which
PageNet will provide us with certain administrative services. The services to be
provided are:
- after hours monitoring of the National Operations Center, at the rate of
$500 per month;
- human resources services, including stock option plan and 401(k) plan
administration, at the rate of $75 per hour; and
- corporate purchasing services, charged at the actual cost of our
purchases.
We will be able to cancel any or all of these services at any time by
providing not less than thirty days prior written notice and specifying the
service or services to be canceled and the requested termination date(s).
TECHNOLOGY SERVICES AGREEMENT
On or prior to the Arch merger, we will enter into a two year agreement to
provide PageNet with various technology services. The technology services that
we will provide to PageNet are:
- Viaduct services, including access through our Viaduct for advanced
messaging services such as text to voice and text to fax, and for which,
beginning July 1, 2000, we will guarantee a monthly uptime rate of 99.9%
on each separate service component of our Viaduct;
- IPS Viaduct services, including connectivity for PageNet to the BellSouth
Mobitex network;
- Web services, including web site development;
- Customer Support for PageNet customers, including unlimited calls from
PageNet to our Call Center or Technical Center, at no charges, and the
ability to transfer or refer PageNet customers directly to us for
customer support, at the rate of $15.00 per call; and
- Software sublicensing, including providing PageNet with the right to use
and sublicense our alpha paging application software to PageNet's
customers on a private label basis.
PageNet will be able to terminate this agreement (1) as to the IPS Viaduct
services, at any time on not less than one hundred eighty days notice in the
event that the agreement between PageNet and BellSouth for the resale of IPS
services by PageNet is terminated or is amended in a manner that would impact
PageNet's decision to use the IPS Viaduct services; and (2) upon not less than
sixty days notice if we fail to meet the Viaduct uptime rate for two consecutive
months.
RESELLER AGREEMENT
On or prior to the Arch merger, we will enter into PageNet's standard form
reseller agreement in order to enable us to resell airtime on PageNet's paging
network to our customers. The reseller agreement
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<PAGE> 392
has a one year term, which is automatically extended, unless either party
terminates the agreement upon not less than sixty days notice to the other.
FACILITY ACCESS AGREEMENT
On or prior to the Arch merger, we will enter into a two year agreement to
allow us to maintain our current level of equipment and employees at some of
PageNet's facilities. PageNet will continue to grant us the same level of access
to these facilities as we have on the date of the Vast distribution. PageNet
will use reasonable efforts to provide us with additional space at these
facilities upon our request. We will be charged rent and expenses, including
maintenance and operations, each month, in advance, in an amount equal to our
pro-rata portion of the total square footage of each facility, multiplied by an
applicable lease rate. Under this agreement, we will have access to:
- PageNet's Technical Center of Excellence, located in Plano, Texas;
- PageNet's Southern Technical Operation Center, located in Richardson,
Texas;
- PageNet's Central Region headquarters office, located in Oakbrook
Terrace, Illinois; and
- PageNet's Manhattan office, located in New York, New York.
We may terminate this agreement with respect to any or all of the
facilities at any time upon not less than sixty days notice to PageNet.
PRINCIPAL STOCKHOLDERS
As of the date of this prospectus, PageNet owns all 20,000,000 outstanding
shares of our Class B common stock. None of our Class A common stock is
outstanding. Following the exchange by PageNet of 13,780,000 shares of our Class
B common stock and 616,830,757 shares of PageNet common stock for up to $1.2
billion of PageNet's senior subordinated indebtedness and the distribution by
PageNet of 2,320,000 shares of our Class B common stock to its stockholders
immediately prior to the merger of PageNet into a subsidiary of Arch, PageNet
will own 3,900,000 shares of our Class B common stock. These 3,900,000 shares of
Class B common stock will be beneficially owned by Arch and will constitute
19.5% of our outstanding common stock.
The address of PageNet is 14911 Quorum Drive, Dallas, Texas 75240. The
address of Arch is 1800 West Park Drive, Suite 250, Westborough, Massachusetts
01581.
Other than Arch, we are not aware of any person who will beneficially own
more than 5% of the outstanding shares of our Class B common stock after the
merger.
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<PAGE> 393
SECURITY OWNERSHIP OF MANAGEMENT
OWNERSHIP OF VAST COMMON STOCK
The following table sets forth information with respect to the expected
beneficial ownership of our Class B common stock by each of our directors, by
each of our named executive officers and by all directors and executive officers
as a group based on their ownership as of July 3, 2000 of PageNet common stock.
Except as indicated in the footnotes to the table, the persons named in the
table will have sole voting and investment power with respect to all shares of
Class B common stock beneficially owned by them. None of our directors or
executive officers beneficially own any shares of our Class A common stock.
<TABLE>
<CAPTION>
SHARES OF CLASS B
COMMON STOCK
NAME BENEFICIALLY OWNED PERCENT OF CLASS
---- ------------------ ----------------
<S> <C> <C>
John P. Frazee, Jr. ........................................ 2,746 *
Mark A. Knickrehm(1)........................................ -- *
Scott D. Grimes............................................. -- *
William G. Scott............................................ 176 *
All directors and executive officers as a group (5
persons).................................................. 2,971 *
</TABLE>
---------------
* Represents less than 1%
(1) Mr. Knickrehm resigned on May 26, 2000.
OWNERSHIP OF PAGENET COMMON STOCK
The following table sets forth information as of July 3, 2000 with respect
to the beneficial ownership of PageNet common stock by each of our directors,
each of our named executive officers and by all of our directors and executive
officers as a group. Except as indicated in the footnotes to the table, the
persons named in the table have sole voting and investment power with respect to
all shares of PageNet common stock beneficially owned by then. The number of
shares beneficially owned includes shares covered by options that are vested and
exercisable as of July 3, 2000 or within 60 days of such date.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
NAME BENEFICIALLY OWNED PERCENT OF CLASS
---- ------------------ ----------------
<S> <C> <C>
John P. Frazee, Jr. ........................................ 952,760(1) *
Mark A. Knickrehm........................................... --(2) *
Scott D. Grimes............................................. -- *
William G. Scott............................................ 113,368(3) *
All directors and executive officers as a group (5
persons).................................................. 1,150,328(4) 1.1%
</TABLE>
---------------
* Represents less than 1%
(1) Includes 829,600 shares subject to options.
(2) Mr. Knickrehm resigned on May 26, 2000 and, as a result thereof, all of his
options were cancelled.
(3) Includes 105,464 shares subject to options.
(4) Includes 1,017,064 shares subject to options.
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<PAGE> 394
DESCRIPTION OF VAST CAPITAL STOCK
The following description summarizes some of the general terms and
provisions of our capital stock and our certificate of incorporation and bylaws.
This description is not complete and you should refer to our certificate of
incorporation and bylaws and to Delaware law for more information.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock consists of:
- 50,000,000 shares of Class A common stock, par value $0.01 per share;
- 16,666,666 shares of Class B1 common stock, par value $0.01 per share;
- 16,666,667 shares of Class B2 common stock, par value $0.01 per share;
- 16,666,667 shares of Class B3 common stock, par value $0.01 per share;
and
- 25,000,000 shares of preferred stock, par value $0.01 per share.
Immediately following the Arch merger, approximately 6,666,667 shares of each of
our Class B1, Class B2 and Class B3 common stock will be outstanding. We do not
expect that any shares of our Class A common stock or our preferred stock will
be outstanding.
COMMON STOCK
Voting Rights
The holders of Class A common stock and Class B common stock generally have
identical voting rights, with each holder entitled to one vote for each share of
common stock owned. Generally, matters to be voted on by stockholders, including
amendments to the certificate of incorporation, must be approved by a majority
vote of the holders of our common stock, voting together as a single class,
subject to any voting rights granted to holders of any preferred stock. However,
a majority vote of the affected class, voting separately, is also necessary for
amendments of the certificate of incorporation that would adversely affect the
rights of the Class A common stock or the Class B common stock. Any amendment to
the certificate of incorporation to increase the authorized shares of any class
of our capital stock requires the approval only of a majority of the votes
entitled to be cast by the holders of our common stock voting together as a
single class.
Holders of shares of our common stock may not cumulate their votes in the
election of directors. In cumulative voting, a stockholder has a number of votes
equal to the number to which his stockholdings would entitle him, multiplied by
the number of directors being elected. A stockholder can then vote all of those
votes in favor of one or more directors. This improves a minority stockholder's
ability to influence the election of specific directors.
Dividends
In the event dividends are paid with respect to the Class A common stock
while the Class B common stock remains outstanding, then holders of shares of
Class B common stock will be entitled to receive, when, as and if declared by
the board of directors, cumulative dividends at the annual rate of 8% per share
on the liquidation preference of $45 per share of Class B common stock, subject
to the rights of any holders of preferred stock. Dividends on the Class B common
stock will be payable solely in additional shares of Class B common stock, and
shall accrue from the most recent date as to which dividends have been paid or,
if no dividends have been paid, from the date of the Vast distribution.
Accumulations of dividends on shares of Class B common stock will not bear
interest. Dividends payable on the Class B common stock for any period greater
or less than a full quarterly dividend period will be computed on the basis of a
360-day year consisting of twelve 30-day months.
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<PAGE> 395
The holders of Class B common stock are also entitled to share equally and
ratably with the holders of Class A common stock in any dividend or distribution
declared on the Class A common stock.
We may not reclassify, subdivide or combine shares of any class of common
stock without simultaneously doing the same to shares of the other classes.
Redemption
We may not redeem either the Class A common stock or the Class B common
stock.
Conversion
Holders of Class A common stock may not convert their shares into any other
securities.
Shares of Class B common stock automatically convert into shares of Class A
common stock at the following times after we complete an underwritten public
offering of common stock with net proceeds of at least $25,000,000:
Class B1 -- one year after the offering;
Class B2 -- eighteen months after the offering; and
Class B3 -- two years after the offering.
Our board of directors may decide at any time before these time periods
elapse to convert all of the shares of Class B common stock of any class into
Class A common stock. Any shares of Class B common stock still outstanding will
convert into Class A common stock three years from the date of the Arch merger.
No payment on account of any accumulated and unpaid dividends on the Class
B common stock will be made at the time the Class B common stock is converted
into Class A common stock.
Liquidation Preference
Upon the voluntary or involuntary liquidation, dissolution or winding-up of
Vast, and subject to the rights of the creditors of Vast and holders of
preferred stock, each holder of Class B common stock will be entitled to be
paid, out of the assets of Vast available for distribution to stockholders, an
amount equal to the liquidation preference of $45 per share of Class B common
stock held by such holder, plus accumulated and unpaid dividends to the date
fixed for liquidation, dissolution or winding-up, before any distribution is
made on any of our Class A common stock. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of Vast, the amounts payable with respect
to the Class B common stock are not paid in full, the holders of the Class B
common stock will share equally and ratably in any distribution of the assets of
Vast in proportion to the respective amounts to which they are entitled. After
payment of the full amount of the liquidation preference of the Class B common
stock, and, if applicable, an amount equal to any accumulated and unpaid
dividends, the holders of shares of Class B common stock will be entitled to
share equally and ratably with holders of the Class A common stock in any
distribution of the remaining assets of Vast.
Other Rights
If we merge or consolidate with another corporation and shares of our
common stock are converted into or exchangeable for shares of stock, other
securities or property, all holders of our common stock, regardless of class,
will be entitled to receive the same kind and amount of payment for their
shares. This requirement can be waived by a majority vote of each class of
holders of our common stock.
No shares of any class of common stock have any right to purchase
additional shares of common stock or other securities of ours.
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<PAGE> 396
All outstanding shares of our common stock, including all shares of common
stock issued in the distribution and the exchange offer, are or will be, when
issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
Our board of directors can issue shares of our preferred stock, in one or
more series, without stockholder approval. For each series of our preferred
stock, our board of directors can determine the powers, preferences, rights,
qualifications, limitations and restrictions, including the dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares in the series. As a result, our board of directors can
authorize and issue shares of preferred stock with voting or conversion rights
which may adversely affect the voting or other rights of holders of our common
stock. In addition, the issuance of preferred stock may delay or prevent a
transaction which would cause a change in our control, because the rights given
to the holders of a series of preferred stock may prohibit a merger,
reorganization, sale of all or substantially all of our assets, liquidation or
other extraordinary corporate transaction.
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation will provide that our board of directors
may establish the number of our directors, provided that we must have at least
three directors and may not have more than 15. We intend to increase the size of
our board of directors to approximately seven directors before the closing of
the Arch merger. A majority of the remaining directors may fill any vacancy in
our board of directors, including a vacancy resulting from an increase in the
size of our board of directors. Our certificate of incorporation divides our
board of directors into three classes of directors, with approximately one-third
of our directors serving in each class. As the term of each class expires, the
directors elected to that class will hold office for three years, unless they
die or resign or are removed before that time. As a result, at least two annual
meetings of stockholders, instead of one, will generally be required to change a
majority of our directors. Also, our stockholders can only remove directors for
cause by the affirmative vote of the holders of 66 2/3% or more of the
outstanding shares of capital stock entitled to vote in the election of
directors.
We believe that our classified board of directors and the inability of our
stockholders to remove directors without cause or to fill vacancies on our board
of directors will help ensure the continuity and stability of our business
strategy and policies from year to year. However, it also makes the removal of
incumbent directors more time-consuming and difficult. This may discourage third
parties from attempting to obtain control of our company, even if the change in
control would be in the best interests of our stockholders.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND BUSINESS PROPOSALS
We have adopted advance notice provisions in our bylaws which require our
stockholders to present their nominations for directors or other business
proposals for our annual meeting within a specified time frame. In general,
stockholders must deliver their notice of nominations or business proposals to
our Secretary not less than 60 days nor more than 90 days before the first
anniversary of the prior year's annual meeting of stockholders. Any nominations
must include all information relating to the nominated person which is required
to be disclosed in proxy statements under the Securities Act. Any business
proposals must include:
- a brief description of the business proposal;
- the reason for conducting that business at the annual meeting;
- any material interest of the proposing stockholder in that business; and
- the name, address and number of shares owned by the proposing
stockholder.
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These requirements make the election of new directors not nominated by our
board of directors more time-consuming and difficult, which may discourage third
parties from attempting to obtain control of our company, even if the change in
control would be in the best interests of our stockholders.
SPECIAL MEETINGS
Our certificate of incorporation and our bylaws provide that only the
chairman of the board or the board of directors may call special meetings of
stockholders and stockholders may not call special meetings. In addition, our
certificate of incorporation and our bylaws provide that stockholders may only
act at an annual or special meeting of stockholders and not by written consent.
No business other than that stated in the notice of such meeting may be
transacted at any special meeting.
AMENDMENT OF BYLAWS AND CERTIFICATE OF INCORPORATION
Our certificate of incorporation requires the approval of 66 2/3% or more
of the outstanding shares of capital stock entitled to vote to amend our bylaws
or the provisions of our certificate of incorporation relating to the
classification and composition of our board of directors, stockholder action by
written consent and the right to call special meetings of stockholders. This
requirement may discourage third parties from attempting to obtain control of
our company.
DELAWARE BUSINESS COMBINATION STATUTE
We are organized under Delaware law. Some provisions of Delaware law may
delay or prevent a transaction which would cause a change in our control. In
addition, our certificate of incorporation contains some provisions which may
delay or prevent this type of transaction, even if our stockholders consider the
transaction to be in their best interests.
After the merger, we will be subject to Delaware's anti-takeover laws.
Delaware law prohibits a publicly held corporation from engaging in a "business
combination" with an "interested stockholder" for three years after the
stockholder becomes an interested stockholder, unless the corporation's board of
directors and stockholders approve the business combination in a prescribed
manner. Generally, an "interested stockholder" is a person who directly or
indirectly owns 15% or more of the corporation's outstanding voting stock. A
"business combination" includes a merger, asset sale or other transaction which
results in a financial benefit to the interested stockholder. Delaware law does
not prohibit these business combinations if:
(1) the corporation's board approves either the business combination
or the transaction which results in the stockholder becoming an interested
stockholder, before the stockholder becomes an interested stockholder;
(2) after the transaction which results in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
corporation's outstanding stock; or
(3) the corporation's board approves the business combination and the
holders of at least two-thirds of the corporation's outstanding voting
stock which the interested stockholder does not own, authorize the business
combination.
Although following the Arch merger Arch will indirectly own 3,900,000
shares of our Class B common stock, which will constitute approximately 19.5% of
all of our outstanding common stock, Arch will not be an "interested
stockholder."
F-37
<PAGE> 398
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for:
(1) any breach of the director's duty of loyalty to us or our
stockholders;
(2) misconduct or a knowing violation of law;
(3) liability under Delaware corporate law for an unlawful payment of
dividends or an unlawful stock purchase or redemption of stock; or
(4) any transaction from which the director derives an improper
personal benefit;
Our certificate of incorporation and bylaws require us to indemnify and
advance expenses to our directors and officers to the fullest extent permitted
by Delaware law. Our certificate of incorporation and bylaws also permit us to
indemnify and advance expenses to our employees and agents if our board of
directors approves it.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Registrar and
Transfer Company. Its address is 10 Commerce Drive, Cranford, New Jersey 07016.
F-38
<PAGE> 399
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the exchange offer with PageNet noteholders, and the
distribution to PageNet stockholders, we will have no shares of Class A common
stock and 20,000,000 million shares of Class B common stock outstanding, without
taking into account any outstanding options or options which may be granted in
the future. Of these shares, the shares of Class B common stock offered by this
prospectus will be freely tradeable without restriction or further registration
under the Securities Act of 1933, unless they are held by persons deemed to be
"affiliates" of Vast as that term is defined in Rule 144 under the Securities
Act of 1933. Shares acquired by our affiliates may generally be sold in
compliance with the requirements of Rule 144.
Although the shares of Class B common stock held by persons who are not our
affiliates will be freely tradeable under the Securities Act of 1933, we do not
intend to apply for listing of our Class B common stock on any securities
exchange, or for quotation through any quotation system. Accordingly, a liquid
trading market for the Class B common stock is not likely to develop. See "Risk
Factors -- A liquid trading market for our Class B common stock likely will not
develop and the market price of our Class B common stock could be adversely
affected."
The 3,900,000 million shares of Class B common stock that will be owned
indirectly by Arch will be "restricted" securities within the meaning of Rule
144 under the Securities Act of 1933 and may not be sold in the absence of
registration under the Securities Act or unless an exemption from registration
is available, including the exemption contained in Rule 144 under the Securities
Act of 1933.
In general, under Rule 144, a stockholder who has owned Class A or Class B
common stock for at least one year may, within any three-month period, sell up
to the greater of:
- 1% of the total number of shares of the applicable class of common stock
then outstanding; and
- the average weekly trading volume of the applicable class of common stock
on the national securities exchange and/or automated quotation system on
which the common stock is traded during the four weeks before the person
files a notice on Form 144 of that sale.
Sales of shares under Rule 144 are also subject to manner of sale and
notice requirements and requirements as to the availability of current public
information about us. Under Rule 144, a stockholder who has not been an
affiliate of Vast for at least 90 days and who has beneficially owned shares of
common stock for at least two years may sell those shares without complying with
the volume limitations or other requirements of Rule 144.
There are currently options to purchase approximately 1,400,000 shares of
our Class A common stock outstanding. After the merger, we plan to file a
registration statement on Form S-8 under the Securities Act covering the
5,000,000 shares of Class A common stock which are reserved for issuance under
our long term stock incentive plan. This registration statement will become
effective automatically upon filing. Shares of Class A common stock registered
under this registration statement will be available for sale in the open market,
subject to vesting restrictions. Any sales of these shares will be subject to
the volume limitations of Rule 144 described above if sold by affiliates.
Prior to the exchange offer and distribution, there has been no market for
our Class B common stock, and no predictions can be made of the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of our common stock in the public market, or the possibility
of those sales, may have an adverse effect on the market price of our common
stock and may make it more difficult for us to raise capital by issuing
additional common stock. See "Risk Factors -- Availability of significant
amounts of common stock for sale by former PageNet securityholders could
adversely affect the price of your Class B common stock."
F-39
<PAGE> 400
LEGAL MATTERS
The validity of the shares of Class B common stock being offered hereby
will be passed upon for us by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The financial statements of Vast Solutions, Inc. as of December 31, 1998
and December 31, 1999, and for the period September 1, 1998 (inception) through
December 31, 1998, and the year ended December 31, 1999, appearing in this
prospectus have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon (which contains explanatory paragraphs describing
the conditions that raise substantial doubt about the ability of Vast Solutions,
Inc. to continue as a going concern as described in Note 1 to the financial
statements and the dependence of Vast on PageNet for certain activities and
assets necessary for the operation of its business) appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The financial statements of Silverlake Communications, Inc. as of December
31, 1997 and December 9, 1998, and for the year ended December 31, 1997 and the
period January 1, 1998 through December 9, 1998, appearing in this prospectus
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
Class B common stock offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to us and
our Class B common stock offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed with the
registration statement. A copy of the registration statement may be inspected
without charge at the Securities and Exchange Commission's public reference
facilities in Washington, D.C., New York, New York or Chicago, Illinois. You may
also copy any document we file with the Securities and Exchange Commission at
prescribed rates by writing to the Public Reference Section of the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the operation of the public reference facilities. The Securities
and Exchange Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as Vast, that file electronically with the Securities and
Exchange Commission.
F-40
<PAGE> 401
INDEX TO FINANCIAL STATEMENTS
VAST SOLUTIONS, INC.
<TABLE>
<S> <C>
Report of Independent Auditors.............................. FF-2
Balance Sheets as of December 31, 1998, December 31, 1999
and March 31, 2000 (unaudited)............................ FF-3
Statements of Operations for the period September 1, 1998
(inception) through December 31, 1998, the year ended
December 31, 1999, the three months ended March 31, 1999
and 2000 (unaudited), and the period September 1, 1998
(inception) through March 31, 2000 (unaudited)............ FF-4
Statements of Stockholder's Deficit for the period September
1, 1998 (inception) through December 31, 1998, the year
ended December 31, 1999, and the three months ended March
31, 2000 (unaudited)...................................... FF-5
Statements of Cash Flows for the period September 1, 1998
(inception) through December 31, 1998, the year ended
December 31, 1999, the three months ended March 31, 1999
and 2000 (unaudited), and the period September 1, 1998
(inception) through March 31, 2000 (unaudited)............ FF-6
Notes to Financial Statements............................... FF-7
</TABLE>
SILVERLAKE COMMUNICATIONS, INC.
<TABLE>
<S> <C>
Report of Independent Auditors.............................. FF-17
Balance Sheets as of December 9, 1998 and December 31,
1997...................................................... FF-18
Statements of Operations for the year ended December 31,
1997 and the period ended December 9, 1998................ FF-19
Statements of Stockholders' Equity for the year ended
December 31, 1997 and the period ended December 9, 1998... FF-20
Statements of Cash Flows for the year ended December 31,
1997 and the period ended December 9, 1998................ FF-21
Notes to Financial Statements............................... FF-22
</TABLE>
FF-1
<PAGE> 402
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Vast Solutions, Inc.
We have audited the accompanying balance sheets of Vast Solutions, Inc.
(the Company), a company in the development stage and a wholly-owned subsidiary
of Paging Network, Inc., (PageNet) as of December 31, 1998 and December 31,
1999, and the related statements of operations, stockholder's deficit, and cash
flows for the period September 1, 1998 (inception) through December 31, 1998 and
the year 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vast Solutions, Inc. as of
December 31, 1998 and December 31, 1999, and the results of its operations and
its cash flows for the period September 1, 1998 (inception) through December 31,
1998 and the year ended December 31, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has accumulated losses of
$38.9 million since its inception and has negative working capital of $41.1
million as of December 31, 1999. As more fully described in Note 1, the Company
may not have sufficient liquidity to meet its obligations or fund its operations
through the year ending December 31, 2000. The Company currently does not have
any available borrowing facilities and does not anticipate any additional
financing from its parent company, PageNet. Furthermore, the financial position
of its parent company makes it difficult for the Company to obtain separate debt
or equity financing prior to the planned spinoff of the Company by its parent as
part of a larger transaction, the completion of which is subject to various
approvals and consents and not expected to occur until fourth quarter of 2000.
These events raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
As described in Notes 1 and 3, the Company is a wholly-owned subsidiary of
PageNet and is dependent upon PageNet for financing, management and other
activities necessary for the operation of its business. In addition, the Company
is dependent upon PageNet for certain licenses, hardware and other assets
necessary for the conduct of its business, and PageNet will require approval
from its creditors to transfer these assets to the Company.
/s/ ERNST & YOUNG LLP
Dallas, Texas
May 3, 2000, except for the fifth
paragraph of Note 1, as to
which the date is July 7, 2000
FF-2
<PAGE> 403
VAST SOLUTIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 42,706 $ 10,111,451 $ 7,462,943
Accounts receivable........................... 108,688 282,141 381,450
Accounts receivable from PageNet.............. 56,232 58,551 33,428
Prepaid expenses and other current assets..... 12,484 42,896 90,763
---------- ------------ ------------
Total current assets............................ 220,110 10,495,039 7,968,584
Property and equipment:
Computer equipment............................ 100,006 1,279,129 1,294,808
Furniture and fixtures........................ 21,970 622,632 673,860
Leasehold improvements........................ -- 193,843 288,424
Other property and equipment.................. -- 100,194 227,910
Accumulated depreciation...................... (9,487) (661,837) (785,940)
---------- ------------ ------------
Total property and equipment.................... 112,489 1,533,961 1,679,062
Other non-current assets:
Goodwill...................................... 1,135,039 1,135,039 1,135,039
Software development costs.................... 727,600 727,600 727,600
Other intangible assets....................... 217,500 217,500 217,500
Accumulated amortization...................... (57,053) (585,436) (723,134)
---------- ------------ ------------
Total other non-current assets.................. 2,023,086 1,494,703 1,357,005
---------- ------------ ------------
Total assets.................................... $2,355,685 $ 13,523,703 $ 11,004,651
========== ============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.............................. $ 2,113 $ 162,555 $ 773,792
Accrued compensation.......................... -- 95,019 255,227
Other accrued liabilities..................... 15,085 786,277 78,850
Amounts due PageNet........................... 6,302,220 20,293,452 24,589,687
Deferred revenue.............................. -- 301,707 350,752
Note payable to PageNet....................... -- 30,000,000 30,000,000
---------- ------------ ------------
Total current liabilities....................... 6,319,418 51,639,010 56,048,308
Commitments and contingencies
Stockholder's deficit:
Preferred stock ($.01 par value; 25,000,000
shares authorized; no shares issued or
outstanding)............................... -- -- --
Common stock ($.01 par value; 50,000,000
shares authorized; 20,000,000 shares issued
and outstanding)........................... 200,000 200,000 200,000
Paid-in capital............................... -- 594,000 1,200,000
Deficit accumulated during the development
stage...................................... (4,163,733) (38,909,307) (46,443,657)
---------- ------------ ------------
Total stockholder's deficit..................... (3,963,733) (38,115,307) (45,043,657)
---------- ------------ ------------
Total liabilities and stockholder's deficit..... $2,355,685 $ 13,523,703 $ 11,004,651
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FF-3
<PAGE> 404
VAST SOLUTIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 1 CUMULATIVE FROM
(INCEPTION) SEPTEMBER 1, 1998
THROUGH YEAR ENDED (INCEPTION)
DECEMBER 31, DECEMBER 31, QUARTER ENDED QUARTER ENDED THROUGH
1998 1999 MARCH 31, 1999 MARCH 31, 2000 MARCH 31, 2000
------------ ------------ -------------- -------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
External customers............. $ 43,563 $ 1,031,874 $ 277,951 $ 825,708 $ 1,901,145
PageNet........................ 46,472 81,973 32,010 380,109 508,554
----------- ------------ ----------- ----------- ------------
Total revenues................... 90,035 1,113,847 309,961 1,205,817 2,409,699
Operating costs and expenses:
Costs of revenues.............. 23,963 1,307,229 103,822 751,702 2,082,894
Selling, general and
administrative expenses...... 2,204,673 15,777,021 2,024,817 5,117,558 23,099,252
Research and development
activities................... 340,013 3,295,479 719,037 464,912 4,100,404
Allocated research and overhead
expenses..................... 1,442,000 13,612,879 1,496,495 1,433,603 16,488,482
Purchased in-process research
and development.............. 152,500 -- -- -- 152,500
----------- ------------ ----------- ----------- ------------
Total operating costs and
expenses....................... 4,163,149 33,992,608 4,344,171 7,767,775 45,923,532
----------- ------------ ----------- ----------- ------------
Loss from operations............. (4,073,114) (32,878,761) (4,034,210) (6,561,958) (43,513,833)
Other income (expense):
Interest expense on amounts due
PageNet...................... (90,621) (2,006,394) (166,899) (1,082,438) (3,779,453)
Other income (expense)......... 2 139,581 -- 110,046 249,629
----------- ------------ ----------- ----------- ------------
Net loss......................... $(4,163,733) $(34,745,574) $(4,201,109) $(7,534,350) $(46,443,657)
=========== ============ =========== =========== ============
Loss per common share -- basic
and diluted.................... $ (0.21) $ (1.74) $ (0.21) $ (0.38)
=========== ============ =========== ===========
Weighted averaged number of
common shares outstanding...... 20,000,000 20,000,000 20,000,000 20,000,000
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FF-4
<PAGE> 405
VAST SOLUTIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
COMMON PAID-IN DEVELOPMENT STOCKHOLDER'S
STOCK CAPITAL STAGE DEFICIT
-------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at September 1, 1998
(inception)......................... $200,000 $ -- $ -- $ 200,000
Net loss............................ -- -- (4,163,733) (4,163,733)
-------- ---------- ------------ ------------
Balance at December 31, 1998.......... 200,000 -- (4,163,733) (3,963,733)
Capital contribution from PageNet --
imputed interest on note
payable.......................... -- 594,000 -- 594,000
Net loss............................ -- -- (34,745,574) (34,745,574)
-------- ---------- ------------ ------------
Balance at December 31, 1999.......... $200,000 $ 594,000 $(38,909,307) $(38,115,307)
Capital contribution from PageNet --
imputed interest on note payable
(unaudited)...................... -- 606,000 -- 606,000
Net loss (unaudited)................ -- -- (7,534,350) (7,534,350)
-------- ---------- ------------ ------------
Balance at March 31, 2000
(unaudited)......................... $200,000 $1,200,000 $(46,443,657) $(45,043,657)
======== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FF-5
<PAGE> 406
VAST SOLUTIONS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 1 CUMULATIVE FROM
(INCEPTION) YEAR SEPTEMBER 1, 1998
THROUGH ENDED QUARTER ENDED QUARTER ENDED (INCEPTION)
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, THROUGH
1998 1999 1999 2000 MARCH 31, 2000
------------ ------------ -------------- -------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................... $(4,163,733) $(34,745,574) $(4,201,109) $(7,534,350) $(46,443,657)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Non-cash interest on note
payable to PageNet............ -- 594,000 -- 606,000 1,200,000
Depreciation.................... 9,487 587,695 6,743 124,103 721,285
Amortization.................... 57,053 528,383 135,234 137,698 723,134
Provision for doubtful
accounts...................... -- 25,000 -- 60,000 85,000
Purchased in-process research
and development............... 152,500 -- -- -- 152,500
Changes in operating assets and
liabilities:
Accounts receivable........... (68,934) (200,772) (36,655) (134,186) (403,892)
Prepaid expenses and other
current assets.............. 2,037 (30,412) (1,864) (47,867) (76,242)
Accounts payable and accrued
liabilities................. (28,745) 1,026,653 (11,700) 64,018 1,061,926
Deferred revenue.............. -- 301,707 -- 49,045 350,752
----------- ------------ ----------- ----------- ------------
Net cash used in operating
activities...................... (4,040,335) (31,913,320) (4,109,351) (6,675,539) (42,629,194)
INVESTING ACTIVITIES:
Capital expenditures.............. (79,291) (2,009,167) (239,552) (269,204) (2,357,662)
Acquisition of Silverlake
Communications, Inc., net of
cash acquired................... (2,339,888) -- -- -- (2,339,888)
----------- ------------ ----------- ----------- ------------
Net cash used in investing
activities...................... (2,419,179) (2,009,167) (239,552) (269,204) (4,697,550)
FINANCING ACTIVITIES:
Proceeds from note payable to
PageNet......................... -- 30,000,000 -- -- 30,000,000
Increase in amounts due to
PageNet......................... 6,502,220 13,991,232 4,455,889 4,296,235 24,789,687
----------- ------------ ----------- ----------- ------------
Net cash provided by financing
activities...................... 6,502,220 43,991,232 4,455,889 4,296,235 54,789,687
----------- ------------ ----------- ----------- ------------
Net increase (decrease) in cash
and cash equivalents............ 42,706 10,068,745 106,986 (2,648,508) 7,462,943
Cash and cash equivalents at
beginning of period............. -- 42,706 42,706 10,111,451 --
----------- ------------ ----------- ----------- ------------
Cash and cash equivalents at end
of period....................... $ 42,706 $ 10,111,451 $ 149,692 $ 7,462,943 $ 7,462,943
=========== ============ =========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the
period.......................... $ 90,621 $ 1,412,394 $ 166,899 $ 476,438 $ 1,979,453
Cash paid for taxes during the
period.......................... -- -- -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
FF-6
<PAGE> 407
VAST SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
Vast Solutions, Inc. (the Company) was formed in September 1998 by its
parent company, Paging Network, Inc. (PageNet), to develop three principal
businesses: (1) wireless information services, (2) customized wireless
solutions for business customers, and (3) wireless Internet gateway
services. The Company initially operated as a division of PageNet and had
no separate legal status or existence. On December 9, 1998, PageNet
acquired Silverlake Communications, Inc. (Silverlake) for a total purchase
price of approximately $2.4 million, comprised of cash consideration of
$1.75 million and 100,000 shares of common stock of PageNet (the
Acquisition). The Acquisition, additional terms of which are discussed in
Note 4, was carried out by PageNet to provide additional in-house software
development capabilities for the Company. On June 22, 1999, PageNet
publicly announced the organization of the Company as an operating unit to
be known as Vast Solutions to focus on the emerging market for wireless
information services. PageNet further announced that the Company would
include several parts of PageNet's then current organization; however, the
Company continued to operate as a division of PageNet following the June
1999 announcement. During the third quarter of 1999, PageNet determined
that the optimal structure for the Company would be for its operations to
be combined with those of Silverlake, which had remained a separate
subsidiary of PageNet following the Acquisition, as the activities of
Silverlake related directly to the operations of the Company. On September
13, 1999, the board of directors of PageNet authorized (i.) a capital
investment in the form of a promissory note, of $30 million in Silverlake,
and (ii.) the operation of the activities of the Company within Silverlake.
On December 29, 1999, Silverlake merged into a wholly-owned subsidiary of
Silverlake, Vast Solutions, Inc., primarily to change the Company's state
of incorporation from California to Delaware.
On November 8, 1999, PageNet and Arch Communications Group, Inc. (Arch)
announced a merger agreement under which the common stock and public
indebtedness of PageNet will be exchanged for Arch common stock (the
Arch-PageNet Merger). Under the terms of the Arch-PageNet Merger, holders
of PageNet's public indebtedness will receive a 68.9% direct interest in
the Company, while holders of PageNet's common stock will receive a 11.6%
direct interest (the Vast Distribution). The remaining 19.5% interest will
be held by Arch following the Arch-PageNet Merger. The Company will account
for the Vast Distribution on a historical cost carryover basis.
Consummation of the Arch-PageNet Merger is subject to the approval of the
stockholders of Arch and PageNet, completion of a recapitalization of Arch
and PageNet, customary regulatory review, and certain third-party consents.
Arch and PageNet anticipate the Arch-PageNet Merger will be completed
during the second or third quarter of 2000.
In May 2000, the Company entered into a royalty free licensing arrangement
with PageNet for the exclusive rights to certain hardware, proprietary
software technology and licensed software technology which together
comprise the Company's Viaduct while the Company remains a wholly-owned
subsidiary of PageNet. In order for PageNet to convey these assets to the
Company simultaneously with the Vast Distribution, the Arch-PageNet Merger
must be approved by PageNet's creditors. There are no assurances such
approval will be obtained.
The Company is in the development stage, and, since inception, has been
engaged primarily in product research and development and developing
markets for its products and services. The Company has had minimal revenues
from operations and in the course of its start-up activities has sustained
significant operating losses. The Company does not expect to generate
significant revenues until such time as it successfully completes its
development and marketing activities. Subsequent to the Acquisition, the
Company's revenues have been derived primarily from the sale of software
from
FF-7
<PAGE> 408
Silverlake's Airsource suite of products. However, the Company's primary
operations in the future will be comprised of the following integrated
wireless solutions:
- Viaduct. The Company will provide solutions enabled through its
expandable software platform (Viaduct), which allows the Company to
deliver data services across multiple network technologies. Through the
Viaduct, the Company will provide a single, transparent bridge between
the Internet and corporate data networks and wireless devices, managing
the complexities associated with wireless networks, protocols, and data
management. The Company's Viaduct technology consists of network servers
running proprietary software. The Viaduct manages the differences
between individual networks and devices, providing a single, standard
interface to the corporate enterprise. The Viaduct adapts and translates
data transmissions for many wireless network protocols, formats the
transmissions for particular user devices and optimizes the data in a
bandwidth efficient manner for transmission over a wireless network. The
Viaduct also facilitates wireless extensions of corporate e-mail
applications and the delivery of personalized wireless content, such as
news and sports.
- Wireless Software System Design and Development. The Company is
designing and developing software to allow corporations and enterprise
application providers to extend Internet and corporate enterprise
applications to most available wireless devices. The Company will
develop, implement, support, and manage wireless software applications
for use on multiple device platforms.
- Wireless Device Development and Integration. The Company is designing
and developing custom wireless devices for unique telemetry applications
that connect a business to its remote assets, such as vending machines,
automobiles and storage tanks. These devices are integrated with
commercially available wireless modems designed for the appropriate
network technology.
- Internet-based Provisioning and Customer Support. The Company will
offer a privately branded web-portal that allows users to order wireless
devices and contact customer support over the Internet. This web-based
support model includes credit card billing, e-mail customer support,
on-line training and software downloads. The Company also will operate a
customer support center to manage all operational components of their
wireless solution including distribution, coverage, billing and
technical support.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has accumulated
losses of $38.9 million since its inception and has negative working
capital of $41.1 million as of December 31, 1999. Since its inception,
PageNet has funded the Company's operations. However, PageNet is currently
prohibited from advancing any additional funds to the Company as a result
of its defaults of various covenants of its domestic credit agreement. As
of July 3, 2000, the Company had approximately $5.8 million in cash, which
the Company believes is sufficient to meet its obligations through the date
at which PageNet expects to commence a proceeding under chapter 11 of the
United States Bankruptcy Code in order to complete the Arch-PageNet Merger
or otherwise restructure its obligations. Furthermore, PageNet is currently
negotiating with its lenders so that it can provide additional funding to
the Company should it be required prior to the date on which PageNet
commences a proceeding under chapter 11. While PageNet management believes
that it is likely that they will receive permission to provide funding to
the Company in this manner, there can be no assurances that it will be
successful in obtaining that permission from its lenders. PageNet is
currently negotiating a debtor-in-possession loan facility with its lenders
which would become available upon the commencement of a chapter 11
proceeding by PageNet. PageNet expects to be able to provide funds to the
Company during the PageNet bankruptcy proceeding under the terms of the
debtor-in-possession loan facility currently being negotiated. Arch has
committed to provide, following the close of the PageNet bankruptcy
proceeding, a loan of $7.5 million to the Company effective upon the
Arch-PageNet Merger. Interest under the Arch loan will bear interest at a
rate of 10% per annum and be repayable within one year or upon the
Company's receipt of additional debt or equity financing from other
sources. Arch has also committed to loan the Company, on the same terms, an
additional $2.5 million over the nine months following
FF-8
<PAGE> 409
the Arch-PageNet Merger, subject to the Company obtaining a matching amount
from other sources. Management believes these sources of liquidity are
adequate to allow the Company to continue to operate as a going concern
through the end of 2000 and into early 2001. However, there can be no
assurance that these sources of liquidity will be adequate to meet the
Company's needs through such dates. These events raise substantial doubt
about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result
from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accompanying financial statements have been prepared using PageNet's
historical basis in the assets and liabilities of the Company. The
financial statements reflect the results of operations, financial condition
and cash flows of the Company as a component of PageNet and may not be
indicative of the Company's results of operations and financial position as
a separate, stand-alone entity. Management believes the accompanying
financial statements include a reasonable allocation of administrative
costs, which are described in Note 3, incurred by PageNet on behalf of the
Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues since the Company's inception have been derived primarily from the
sale of Airsource software licenses. The Company has also generated
revenues from sales of wireless communication devices; however, revenues
from such sales have been insignificant since the Company's inception.
Revenue for software sales is recognized in accordance with the provisions
of American Institute of Certified Public Accountants' Statement of
Position (SOP) 97-2, Software Revenue Recognition. Under SOP 97-2, software
sales are recognized upon execution of a contract and delivery of software,
provided that the license fee is fixed and determinable, no significant
production, modification or customization of the software is required, and
collection is considered probable by management. The Company provides free
telephone customer and technical support and software upgrades on its
Airsource software products as an accommodation to purchasers of these
products as a means of fostering customer satisfaction. The majority of
such services are provided during the first 30 days of ownership of the
Company's products. The costs associated with these services, which are
insignificant in relation to product sales value, are accrued. Maintenance
revenue on sales of wireless devices and related software is recognized
over the term of the maintenance contract.
Sales of wireless communication devices are recognized upon delivery to the
customer. Revenue for custom development services is recognized as services
are performed and after obtaining an executed contract from the customer.
Revenue for development services which have deliverables which are subject
to customer acceptance is recognized as services are performed if
management believes it is probable that development work will be completed
to customer specification set forth in the development arrangement and
acceptance by the customer is considered to be probable. Revenue for custom
development services for which management believes there is uncertainty
regarding customer acceptance is recognized when the services have been
completed and acceptance has been obtained from the customer. Custom
development revenues derived from fixed-fee contracts are recognized on the
percentage-of-completion method based on costs incurred in relation to
total estimated costs. The percentage-of-completion method is used when
acceptance is considered to be probable and the Company has a reasonable
basis to estimate costs to complete. Anticipated contract losses are
FF-9
<PAGE> 410
recognized when they can be estimated. Revenue for time-and-materials
contracts is recognized as services are performed.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents consists primarily of depository and money market accounts.
PROPERTY AND EQUIPMENT
Property and equipment is stated at original cost less accumulated
depreciation. Property and equipment transferred from PageNet is recorded
at PageNet's net book value on the date of the transfer. Expenditures for
normal maintenance and repairs are charged to expense as incurred.
Depreciation of property and equipment is computed using the straight-line
method over the estimated lives of the assets which range from five to
seven years. Property and equipment transferred from PageNet is depreciated
over the remainder of its original estimated useful life.
INTANGIBLE ASSETS
All intangible assets were recorded upon the acquisition of Silverlake by
the Company in December 1998. The acquisition of Silverlake is discussed in
Note 4. Intangible assets are amortized on a straight-line basis over the
following lives:
<TABLE>
<S> <C>
Goodwill.............................................. 5 years
Software development costs............................ 3 years
Other intangible assets............................... 3 years
</TABLE>
Other intangible assets consist of the value of Silverlake's trademarks and
workforce as of the date of the Acquisition.
DEFERRED REVENUE
Deferred revenue represents amounts billed to customers under terms
specified in consulting, software licensing, and maintenance contracts for
which completion of contractual terms or delivery of the software has not
occurred.
RESEARCH AND DEVELOPMENT COSTS
Research and product development costs, which are not subject to Statement
of Financial Accounting Standards No. 86, Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed, are expensed
as incurred and relate mainly to the development of new products and the
ongoing maintenance of existing products. Software development costs are
expensed as incurred until technological feasibility has been established,
at which time such costs are capitalized until the point at which the
product is available for general release to customers. Since the Company's
inception, the establishment of technological feasibility of the Company's
products and general release of such software have substantially coincided.
As a result, software development costs qualifying for capitalization have
been insignificant and, therefore, the Company has historically expensed
all software development costs.
EMPLOYEE STOCK OPTIONS
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No compensation expense
was recognized for any period presented for stock option
FF-10
<PAGE> 411
grants since the exercise price of PageNet's stock option grants to
personnel of the Company was equal to the fair market value of the
underlying stock on the date of grant.
3. RELATED PARTY TRANSACTIONS
As a result of its relationship with PageNet and its affiliates, the
Company has extensive related party transactions. These transactions have
been recognized on a basis determined by the parties, which may not be
representative of the terms the Company might have negotiated with third
parties.
Revenues from PageNet consist of sales of software from the Company's
Airsource product line to PageNet. Sales to PageNet are typically made on
terms and conditions similar to those of transactions with non-affiliates.
Research and overhead expenses are charged to the Company by PageNet for
information technology support, management services, and accounting,
marketing, customer service and order fulfillment. Amounts allocated for
information technology support included services such as research and
development activities, maintenance of the Viaduct and other technology
used by us. The amounts are allocated on the same proportion of Vast's
direct expenses to PageNet's direct expenses applied to the technology cost
centers. Amounts allocated for accounting services are based on the number
of Vast departments as a percent of PageNet total departments. Amounts
allocated to us for management services include charges for executive
functions, human resources, legal services, purchasing, treasury and other
administrative functions. The human resource costs are allocated based on
Vast's headcount as a percent of total PageNet headcount. The executive
functions and legal services are based on an estimated portion of their
time spent on Vast business. The remaining expenses are allocated based on
the same proportion of Vast's direct expenses to PageNet's direct expenses
applied to those cost centers. The marketing and customer service expense
are allocated on the same proportion of Vast's direct expenses to PageNet's
direct expenses applied to those cost centers. The order fulfillment
expenses are allocated based on a percent of square footage used by Vast as
a percent of the total. Management of PageNet and the Company believe such
amounts are a reasonable allocation of the costs incurred by PageNet on
behalf of the Company. However, such amounts may not be indicative of the
costs the Company would incur if such services were performed internally or
obtained from an independent third party.
Expenses charged to the Company by PageNet are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 1
(INCEPTION) YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ -------------
<S> <C> <C>
Information technology support.............................. $ 115,000 $ 6,319,000
Accounting services......................................... 184,000 4,040,000
Management services......................................... 1,071,000 1,510,000
Marketing................................................... 27,000 656,000
Order fulfillment........................................... -- 572,000
Customer support............................................ 45,000 516,000
---------- -----------
$1,442,000 $13,613,000
========== ===========
</TABLE>
In connection with the Vast Distribution, the Company will enter into
various agreements with PageNet and Arch for certain of the services
described above. The Company is currently negotiating the terms of these
agreements with PageNet and Arch and it is currently not practical to
determine the related expense as if the Company was operating on a
stand-alone basis. Certain of the services currently provided by PageNet
will be performed by the Company or obtained from third parties following
the Vast Distribution.
FF-11
<PAGE> 412
Through the first quarter of 2000, PageNet funded certain disbursements on
behalf of the Company, with a corresponding increase in amounts due
PageNet. In addition, amounts due PageNet are immediately credited or
charged upon the recording of certain transactions, including the
recognition of certain sales to PageNet and the payment of certain expenses
by PageNet on behalf of the Company. Accordingly, no receivables or
payables for these transactions are reflected on the Company's balance
sheet. For purposes of the statement of cash flows, amounts paid by PageNet
on behalf of the Company and expenses allocated to the Company by PageNet
are presented as cash used in operating or investing activities and changes
in the amount due PageNet are presented as financing activities. To the
extent that PageNet has provided funds to the Company and paid expenses on
behalf of the Company in excess of the amounts transferred to PageNet, the
Company is charged interest at the rate PageNet pays under its domestic
credit facility. The weighted average interest rate on the amounts due
PageNet, which is reset monthly, was 7.59% and 7.60% during the period
September 1, 1998 (inception) through December 31, 1998, and the year ended
December 31, 1999, respectively. This arrangement resulted in interest
expense that may not be representative of what the Company would have paid
if it were not affiliated with PageNet.
On September 30, 1999, the Company borrowed $30.0 million from PageNet
under a promissory note agreement between PageNet and the Company (the
PageNet Note). The PageNet Note is due on demand by PageNet, has no stated
maturity, and does not bear interest. For financial reporting purposes,
interest expense is recognized by the Company on the PageNet Note based on
the interest rate PageNet pays under its domestic credit facility, which
was the source of the funds loaned to the Company by PageNet, with a
corresponding increase to paid-in-capital. As the PageNet Note is payable
on demand by PageNet, it has been classified as a current liability in the
accompanying balance sheet as of December 31, 1999.
4. SILVERLAKE ACQUISITION
On December 9, 1998, PageNet completed the acquisition of all the
outstanding stock of Silverlake for a total purchase price of $2.4 million,
comprised of cash consideration of $1.75 million and 100,000 shares of
common stock of PageNet (the Acquisition). The Acquisition of Silverlake
was accounted for as a purchase. The Company has not provided pro forma
information as if Silverlake had been acquired on September 1, 1998, due to
the insignificance of Silverlake to the total operations of the Company for
the period September 1, 1998 to December 31, 1998.
FF-12
<PAGE> 413
The purchase price has been allocated to the assets and liabilities
acquired based upon their fair values at the date of acquisition, as
follows:
<TABLE>
<S> <C>
Consideration:
Cash...................................................... $1,750,000
Common stock of PageNet................................... 612,500
Acquisition costs......................................... 18,000
----------
Total consideration............................... $2,380,500
==========
Assets acquired and liabilities assumed:
Cash...................................................... $ 40,612
Accounts receivable....................................... 95,986
Prepaid expenses and other assets......................... 14,521
Property and equipment.................................... 42,685
Developed technology...................................... 727,600
Goodwill.................................................. 1,135,039
Other intangible assets................................... 217,500
Accounts payable.......................................... (11,225)
Accrued liabilities....................................... (34,718)
----------
Total assets acquired and liabilities assumed............... 2,228,000
In-process research and development costs................. 152,500
----------
Total....................................................... $2,380,500
==========
</TABLE>
In connection with the acquisition of Silverlake, the Company recorded a
charge of $152,500 for research and development activities in process at
the date of the acquisition. The Company used an independent third-party
appraiser to assess and value the in-process research and development. The
amount of the Silverlake purchase price allocated to in-process research
and development represents the estimated fair market value, based on
risk-adjusted cash flows, of the one in-process research project that had
not yet reached technological feasibility and for which no alternative
future use existed at the date of the acquisition. The value assigned to
the purchased in-process research and development was determined by
estimating the costs to develop Silverlake's purchased in-process research
and development into a commercially viable product, estimating the
resulting net cash flows from the project and discounting the net cash
flows to their present value.
The terms of the Acquisition also provided for additional consideration of
up to $4.0 million payable at various dates through March 31, 2001, if
certain conditions were met. The additional consideration is equal to
twenty-five percent of revenues derived from purchasers and licensees of
Silverlake's products existing on December 1, 1998 during the six month
periods ended June 30, 1999 and December 31, 1999, and fifty percent of
such revenues during the six month periods ended June 30, 2000 and December
31, 2000. Any additional consideration due is payable by the Company three
months following the end of the respective valuation period. The payment of
the additional consideration is contingent upon the continued employment of
the former owners of Silverlake. As a result, any consideration due to the
former owners of Silverlake is recorded as an expense over the respective
valuation period. The Company recorded expense of $173,500 under this
arrangement for the additional consideration earned during the year ended
December 31, 1999.
5. CONCENTRATIONS OF RISK
A significant portion of the Company's revenues consists of licensing
software to companies in the U.S. paging industry, which gives rise to a
concentration of credit risk in receivables. As of December 31, 1999,
amounts receivable from companies in the U.S. paging industry represented
approximately 11% of gross accounts receivable from non-affiliates.
Revenues from companies in the
FF-13
<PAGE> 414
U.S. paging industry represented approximately 25% of revenues from
external customers for the year ended December 31, 1999. The Company
performs on-going credit evaluations of its customers' financial condition
and generally requires no collateral. The Company maintains an allowance
for doubtful accounts based on the expected collectability of its accounts
receivable. The allowance for doubtful accounts as of December 31, 1998 and
December 31, 1999 and write-offs of accounts receivable during 1998 and
1999 were insignificant.
6. INCOME TAXES
The Company is included in the consolidated U.S. federal and various state
income tax returns of PageNet. Under the terms of PageNet's tax sharing
policy, income taxes are allocated to the Company as if the Company was a
separate taxable entity. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted
tax rates.
For the period September 1, 1998 (inception) through December 31, 1998, and
the year ended December 31, 1999, the Company had no provision or benefit
for income taxes because the deferred benefit from the operating losses was
offset by an increase in the valuation allowance on deferred tax assets of
$1.6 million, and $13.4 million, respectively. The income tax provision
differed from amounts computed at the federal statutory income tax rate as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 1
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ -------------
<S> <C> <C>
Income tax benefit at the federal statutory rate........... $(1,457,307) $(12,160,951)
Increase in income taxes resulting from:
Non-recognition of tax benefit of current year
losses.............................................. 1,644,296 13,773,046
Amortization of intangible assets..................... 6,621 88,130
Meals and entertainment expenses...................... 14,577 37,054
State income tax provision, net of federal benefit.... (208,187) (1,737,279)
----------- ------------
Income tax provision (benefit)............................. $ -- $ --
=========== ============
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 and December 31, 1999, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 1,535,431 $ 14,738,383
Intangible assets........................................ 71,970 151,543
Deferred revenue......................................... -- 117,665
Accounts receivable...................................... -- 9,750
Accrued liabilities...................................... 7,020 7,020
Valuation allowance...................................... (1,607,255) (15,016,431)
----------- ------------
Total deferred tax assets.................................. 7,166 7,930
Deferred tax liabilities:
Depreciation............................................. (7,166) (7,930)
----------- ------------
Net deferred tax asset (liability)......................... $ -- $ --
=========== ============
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $33.9 million available under the terms of PageNet's tax
sharing policy. These net operating loss
FF-14
<PAGE> 415
carryforwards expire in 2018 and 2019. There were no significant federal or
state income taxes paid or refunded during 1998 or 1999.
Following the Spinoff, the Company will file separate U.S. federal and
state income tax returns. The net operating loss carryforwards retained by
the Company following the Spinoff may differ from the amounts presented
above.
7. STOCK OPTIONS
The Company participates in PageNet's 1991 Stock Option Plan (1991 Plan),
whereby officers and key employees of PageNet and its affiliates may be
granted incentive stock options and non-statutory options to purchase
common stock of PageNet at not less than 100% of the fair market value of
PageNet's common stock on the date the options are granted. The 1991 Plan
is administered by the Compensation and Management Development Committee of
the Board of Directors of PageNet (the Committee). Options granted under
the 1991 Plan are non-transferable except by the laws of descent and
distribution and are exercisable upon vesting, which occurs in installments
as determined by the Committee at the time it grants such options.
Options to purchase shares of PageNet have been granted to officers and key
employees of the Company. Options granted are exercisable at the market
value upon grant, become exercisable over one to five years following the
date of grant, and expire ten years from the date of grant. As of December
31, 1999, there were approximately 1.4 million outstanding options to
purchase shares of PageNet common stock held by officers and key employees
of the Company, of which approximately 440,000 were exercisable. These
options have exercise prices ranging from $1.03 to $17.13 per share of
PageNet common stock, with a total exercise value of approximately $12.0
million. Upon the consummation of the Arch-PageNet Merger, all outstanding
options to purchase shares of PageNet common stock, including those held by
officers and key employees of the Company, will be converted into options
to purchase shares of Arch common stock.
The Company has adopted the pro forma disclosure features of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123). As required by FAS 123, pro forma information
regarding net income has been determined as if the Company had accounted
for grants of stock options and awards by PageNet to employees of the
Company using the fair value method prescribed by FAS 123. For purposes of
the pro forma disclosures, the estimated fair market value of the options
is amortized to expense over the vesting period. The Company's pro forma
net loss for the period September 1, 1998 (inception) through December 31,
1998, and the year ended December 31, 1999 is $4,168,879 and $34,761,012,
respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities and certain equipment under operating
leases for various periods. Leases that expire are generally expected to be
renewed or replaced by other leases. Rental expense was $524,753 for the
year ended December 31, 1999. Future minimum base rents under terms of non-
cancellable operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000................................................. $ 755,250
2001................................................. 813,829
2002................................................. 817,808
2003................................................. 827,481
2004................................................. 498,141
Thereafter........................................... 614,556
----------
Total........................................ $4,327,065
==========
</TABLE>
FF-15
<PAGE> 416
9. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim financial information as of March 31, 2000, and for the three
months ended March 31, 1999 and 2000, is unaudited but, in the opinion of
management, includes all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The
interim financial information has been prepared in accordance with
generally accepted accounting principles for interim financial information
and, accordingly, does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Results of operations for the periods presented are not
necessarily indicative of results of operations that may be expected for
the year.
During the first quarter of 2000, the Company's board of directors adopted
the Vast Solutions, Inc. 2000 Long-Term Stock Incentive Plan (the Plan).
Under the Plan, the Company may grant stock options, stock appreciation
rights, shares of common stock, and performance units to officers, key
employees, and consultants of the Company. The total number of shares of
common stock that may be awarded under the Plan is 5.0 million shares,
which may be adjusted in certain cases. Options awarded under the Plan may
be either incentive stock options or nonqualified stock options. Options
and stock appreciation rights will be exercisable and will expire in
accordance with the terms set by the Company's compensation committee.
Under the Plan, all options and stock appreciation rights must expire
within ten years after they are granted. If a stock appreciation right is
issued in connection with an option, the stock appreciation right will
expire when the related option expires. All awards under the Plan will
accelerate and become fully vested if a change in control, as defined under
the Plan, of the Company occurs.
On February 16, 2000, the Company granted options to purchase approximately
1.6 million shares of its Class A common stock at an exercise price of
$1.60 per share. Such options were vested 20% on the date of grant, and
will vest 20% on the earlier of (i) the one-year anniversary of the date of
grant or (ii) the date on which the Company closes the first public sale of
its common stock (the Initial Vesting Date). The remaining options will
vest in 20% increments at the first, second, and third anniversary dates of
the Initial Vesting Date. Options granted under the Plan are not
exercisable until the earlier of (i) 180 days after the date on which the
Company closes the first public sale of its common stock, or (ii) a change
in control of the Company, as defined under the Plan. No compensation
expense has been recognized upon the issuance of such options as the
Company believes the exercise price for the options is equal to the fair
market value of a share of the Company's Class A common stock as of the
grant date.
FF-16
<PAGE> 417
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Silverlake Communications, Inc.
We have audited the accompanying balance sheets of Silverlake
Communications, Inc. (the Company) as of December 31, 1997 and December 9, 1998,
and the related statements of operations, stockholders' equity, and cash flows
for the year ended December 31, 1997, and the period January 1, 1998 through
December 9, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Silverlake Communications,
Inc. as of December 31, 1997 and December 9, 1998, and the results of its
operations and its cash flows for the year ended December 31, 1997, and the
period January 1, 1998 through December 9, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 23, 1999
FF-17
<PAGE> 418
SILVERLAKE COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 9,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $172,513 $ 40,612
Accounts receivable....................................... 75,580 95,986
Prepaid expenses and other current assets................. 2,400 5,405
-------- --------
Total current assets........................................ 250,493 142,003
Property and equipment, at cost............................. 77,526 84,345
Accumulated depreciation.................................... (29,151) (41,660)
-------- --------
Total property and equipment................................ 48,375 42,685
-------- --------
Total assets................................................ $298,868 $184,688
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,801 $ 11,225
Accrued compensation...................................... 39,711 18,694
Other accrued liabilities................................. 23,481 16,024
-------- --------
Total current liabilities................................... 68,993 45,943
Stockholders' equity:
Common stock ($1.00 par value; 100,000 shares authorized;
100 shares issued and outstanding)..................... 100 100
Retained earnings......................................... 229,775 138,645
-------- --------
Total stockholders' equity.................................. 229,875 138,745
-------- --------
Total liabilities and stockholders' equity.................. $298,868 $184,688
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FF-18
<PAGE> 419
SILVERLAKE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 1
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 9,
1997 1998
------------ -----------
<S> <C> <C>
Revenues.................................................... $896,166 $897,379
Operating costs and expenses:
Costs of revenues......................................... 145,618 157,149
Selling, general and administrative....................... 538,142 610,560
Research and development activities....................... 75,500 68,750
-------- --------
Total operating costs and expenses.......................... 759,260 836,459
-------- --------
Income from operations...................................... 136,906 60,920
Interest income............................................. 3,893 1,891
-------- --------
Income before taxes......................................... 140,799 62,811
Provision for income taxes.................................. (2,112) (941)
-------- --------
Net income.................................................. $138,687 $ 61,870
======== ========
Pro forma information (Note 4):
Income before taxes....................................... $140,799 $ 62,811
Provision for income taxes................................ (60,112) (31,501)
-------- --------
Net income................................................ $ 80,687 $ 31,310
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FF-19
<PAGE> 420
SILVERLAKE COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------ --------- -------------
<S> <C> <C> <C>
Balance at January 1, 1997............................. $100 $ 109,088 $ 109,188
Net income........................................... -- 138,687 138,687
Dividends declared................................... -- (18,000) (18,000)
---- --------- ---------
Balance at December 31, 1997........................... 100 229,775 229,875
Net income........................................... -- 61,870 61,870
Dividends declared................................... -- (153,000) (153,000)
---- --------- ---------
Balance at December 9, 1998............................ $100 $ 138,645 $ 138,745
==== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FF-20
<PAGE> 421
SILVERLAKE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 9,
1997 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $138,687 $ 61,870
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 10,348 12,509
Changes in operating assets and liabilities:
Accounts receivable.................................... 33,955 (20,406)
Prepaid expenses and other current assets.............. (1,614) (3,005)
Accounts payable and accrued liabilities............... 34,296 (23,050)
-------- ---------
Net cash provided by operating activities................... 215,672 27,918
INVESTING ACTIVITIES:
Capital expenditures........................................ (48,620) (6,819)
FINANCING ACTIVITIES:
Repayment of note receivable from officer................... 20,210 --
Cash dividends paid......................................... (18,000) (153,000)
-------- ---------
Net cash provided by (used in) financing activities......... 2,210 (153,000)
-------- ---------
Net increase in cash and cash equivalents................... 169,262 (131,901)
Cash and cash equivalents at beginning of period............ 3,251 172,513
-------- ---------
Cash and cash equivalents at end of period.................. $172,513 $ 40,612
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FF-21
<PAGE> 422
SILVERLAKE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Silverlake Communications, Inc. (the Company) was incorporated as a
California corporation on June 9, 1995. Prior to June 9, 1995, the Company
operated as partnership from its inception in 1993. The Company has created
and markets a sophisticated suite of software products focusing on wireless
communications management for mobile professionals. The Company's Airsource
suite of products spans from stand-alone one-way wireless messaging to
advanced two-way local area and wide area network solutions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
For software sales transactions entered into subsequent to December 31,
1997, revenue is recognized in accordance with the provisions of American
Institute of Certified Public Accountants' Statement of Position (SOP)
97-2, Software Revenue Recognition. Under SOP 97-2, software license
revenues are recognized upon execution of a contract and delivery of
software, provided that the license fee is fixed and determinable, no
significant production, modification or customization of the software is
required, and collection is considered probable by management.
For software sales transactions entered into prior to December 31, 1997,
revenues were recognized in accordance with SOP 91-1, Software Revenue
Recognition. Under SOP 91-1, software license revenues were recognized upon
execution of a contract and shipment of the software and after any customer
cancellation right had expired, provided that no significant vendor
obligations remained outstanding, amounts were due within one year, and
collection was considered probable by management. The application of SOP
97-2 did not have a material impact on the Company's consolidated financial
statements for the period ended December 9, 1998.
The Company provides free telephone customer and technical support and
software upgrades as an accommodation to purchasers of its products as a
means of fostering customer satisfaction. The majority of such services are
provided during the first 30 days of ownership of the Company's products.
The costs associated with these services, which are insignificant in
relation to product sales value, are accrued.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents consists primarily of depository and money market accounts.
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture and fixtures, computer
equipment, and computer software and is stated at original cost less
allowance for accumulated depreciation. Expenditures for normal maintenance
and repairs are charged to expense as incurred. Depreciation of property
and equipment is computed using the straight-line method over the estimated
lives of the assets which range from five to seven years.
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The Company leased its office facilities under an operating lease expiring
on December 31, 1998. Rental expense was $54,375 and $70,498 for the year
ended December 31, 1997 and the period ended December 9, 1998,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and product development costs, which are not subject to Statement
of Financial Accounting Standards No. 86, Accounting for the Cost of
Computer Software to be Sold, Leased, or Otherwise Marketed, are expensed
as incurred and relate mainly to the development of new products and the
ongoing maintenance of existing products. Software development costs are
expensed as incurred until technological feasibility has been established,
at which time such costs are capitalized until the point at which the
product is available for general release to customers. Since the Company's
inception, the establishment of technological feasibility of the Company's
products and general release of such software have substantially coincided.
As a result, software development costs qualifying for capitalization have
been insignificant and, therefore, the Company has historically expensed
all software development costs.
3. CONCENTRATIONS OF RISK
A significant portion of the Company's revenues consists of licensing
software and providing consulting services to the U.S. paging industry,
which gives rise to a concentration of credit risk in receivables. The
Company performs on-going credit evaluations of its customers' financial
condition and generally requires no collateral. Revenues from companies in
the U.S. paging industry represented approximately 59% and 42% of total
revenues during the year ended December 31, 1997 and the period January 1,
1998 through December 9, 1998, respectively. Paging Network, Inc. (PageNet)
represented 45% and 25% of revenues during the year ended December 31, 1997
and the period January 1, 1998 through December 9, 1998, respectively. One
other customer represented 13% of revenues during the period January 1,
1998 through December 9, 1998.
4. INCOME TAXES
Effective at its incorporation on June 9, 1995, the Company elected to be
treated as an S Corporation for federal and California state tax purposes.
As a result of this election, the Company was not a taxable entity for
federal tax purposes from June 9, 1995, through December 9, 1998, and,
accordingly, the Company's net income was includable in the Federal income
tax returns of the Company's stockholders. No provision for federal income
taxes has been made in the accompanying financial statements for the period
from January 1, 1997, through December 9, 1998. Also as a result of this
election, the Company was taxed for California state income tax purposes at
the S Corporation state tax rate of 1.5% through December 9, 1998. The
accompanying financial statements include a provision of 1.5% of income
before taxes for California state income taxes for the year ended December
31, 1997, and the period ended December 9, 1998. Deferred income tax assets
and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities and are measured
using the California S Corporation state tax rate of 1.5%. The net deferred
tax asset or liability as of each balance sheet date, which is not
material, has been included in prepaid expenses and other current assets
and accrued liabilities in the accompanying balance sheet.
The pro forma provision for income taxes and net income presented in the
accompanying financial statements has been determined as if the Company
were taxed as a C Corporation for federal and state tax purposes. The pro
forma net deferred tax asset or liability as of each balance sheet date is
not material.
5. EMPLOYEE BENEFITS
The Company maintains a Section 401(k) Salary Deferral Plan (the Plan).
Employees 21 years of age or older and with one or more years of service to
the Company are eligible to participate in the Plan. Under the Plan, the
Company makes an annual contribution of a portion of the Company's
FF-23
<PAGE> 424
profits for the benefit of participating employees. The Company's expenses
under the Plan were $35,149 for the year ended December 31, 1997 and
$21,517 for the period January 1, 1998 through December 9, 1998. The Plan
was terminated on December 9, 1998.
6. ACQUISITION OF THE COMPANY
On December 9, 1998, all of the outstanding stock of the Company was
acquired by PageNet for a total purchase price of approximately $2.4
million, comprised of cash consideration of $1.75 million and 100,000
shares of common stock of PageNet. The terms of the acquisition also
provide for additional consideration of up to $4.0 million payable at
various dates through March 31, 2001, if certain conditions are met.
FF-24
<PAGE> 425
ANNEX G
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, 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
immediately after the time of the effectiveness of the Merger (the "Merger
Effective Time"), the
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<PAGE> 426
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, a recapitalization of
the Parent, PageNet and their respective Subsidiaries are contemplated as
follows:
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 will 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"). It is a condition to the PageNet Exchange Offer that at least
97.5% of the aggregate outstanding principal amount of the PageNet Notes and not
less than 50% of the aggregate outstanding principal amount of each series of
PageNet Notes shall have been validly tendered and not withdrawn prior to the
expiration thereof. As a condition to the acceptance of the PageNet Exchange
Offer, PageNet Noteholders will be 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. In the event that the minimum percentages set forth above are
not satisfied but the conditions to a prepackaged bankruptcy proceeding (the
"Bankruptcy Proceeding") have been satisfied, PageNet will commence the
Bankruptcy Proceeding and, in connection therewith, shall submit a plan of
reorganization (the "Plan of Reorganization") for confirmation. See "Additional
Conditions Precedent -- Bankruptcy Proceeding" below.
Third, PageNet will 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 will 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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<PAGE> 427
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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<PAGE> 428
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:
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".
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.
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 Bank of America,
N.A., as the letter of credit issuer under
the Existing PageNet Credit Agreement, will
continue to
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<PAGE> 429
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.
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 the Parent in the
Stock of Arch and intercompany notes
made by Arch, the Borrower and the ACE
Subsidiaries
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<PAGE> 430
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 such time shall
have been taken (including the making of
all required filings), then so long as no
default or event of
G-6
<PAGE> 431
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
December such that the following annual
percentages of the Tranche B-1 Facility are
payable:
G-7
<PAGE> 432
<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:
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>
G-8
<PAGE> 433
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.
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, deter-
G-9
<PAGE> 434
mined on the basis of the Pricing Leverage
Ratio, as follows:
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>
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 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
G-10
<PAGE> 435
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:
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"):
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 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.
Asset Sales -- 100% of the net cash
proceeds received from asset sales,
other than those in the ordinary
G-11
<PAGE> 436
course of business, subject to
customary reinvestment provisions.
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.
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.
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.
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.
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.
G-12
<PAGE> 437
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 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
G-13
<PAGE> 438
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:
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.
Replacement of certain Schedules to the
Credit Agreement and related collateral
documents, in form and substance acceptable
to the Managing Agents.
Execution and delivery of promissory notes
for the Lenders (other than Tranche A
Lenders, Tranche B Lenders and Tranche C
Lenders).
Execution and delivery of joinder
supplements to the subsidiary guaranty and
applicable collateral documents by PageNet,
its domestic Subsidiaries and its Material
Foreign Subsidiaries.
(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.
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
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
G-14
<PAGE> 439
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.
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.
(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 in form and
substance satisfactory to the Managing
Agents.
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.
G-15
<PAGE> 440
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.
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.
(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 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.
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.
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
G-16
<PAGE> 441
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.
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 defaults 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.
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.
G-17
<PAGE> 442
(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 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
G-18
<PAGE> 443
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.
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.
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.
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
G-19
<PAGE> 444
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.
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, 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.
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.
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.
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,
G-20
<PAGE> 445
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.
The Administrative Agent shall have
received, in form and substance
satisfactory to the Managing Agents, 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.
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.
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.
The Merger shall occur on or before
September 30, 2000.
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.
G-21
<PAGE> 446
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.
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.
The Spin-Off shall have occurred.
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.
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.
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.
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
G-22
<PAGE> 447
consummation of the Merger Transactions the
following additional conditions precedent
shall have been satisfied:
PageNet shall have submitted to the court
the Plan of Reorganization which shall be
acceptable in all respects to the Managing
Agents.
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
terminated, and the Administrative Agent
shall have received evidence, in form and
substance satisfactory to the Managing
Agents, to such effect.
The Administrative Agent shall have
received a court certified copy of a 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:
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.
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
G-23
<PAGE> 448
(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>
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 INTEREST COVERAGE 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 INTEREST COVERAGE RATIO
------ -----------------------
<S> <C>
Merger Effective Date through
9/30/01........................ 2.00:1.00
12/31/01 and thereafter.......... 2.25:1.00
</TABLE>
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.
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.
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.
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.
G-24
<PAGE> 449
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;
compliance with environmental and other
laws, regulations and material agreements;
and the following:
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.
Limitation on Indebtedness -- Arch and its
Subsidiaries will not incur any
Indebtedness, except:
Indebtedness arising under the Credit
Facilities,
Indebtedness of Arch arising under the
Arch Senior Notes,
Indebtedness under intercompany notes,
existing Indebtedness as set forth on
a schedule to the Credit Agreement,
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
G-25
<PAGE> 450
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),
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"),
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,
(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,
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
G-26
<PAGE> 451
guaranties thereof by PageNet and its
Subsidiaries which are in effect on
the Merger Effective Date, and
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.
Limitation on Investments -- The
Borrower and its Subsidiaries shall
not make any investments, loans or
other advances other than:
investments in cash equivalents and
investments existing at closing (as
set forth on a schedule to the Credit
Agreement),
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),
investments by the Borrower in Benbow
Investments consisting solely of the
ACE Subordinated Note,
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;
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 Additional
Benbow Investments and provided
further that the amount of such
Additional Benbow
G-27
<PAGE> 452
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,
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;
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,
Investments consisting of intercompany
notes, and
the Merger Transactions upon
satisfaction of the conditions set
forth under the headings "Conditions
Precedent to Merger" and, if
applicable, "Additional Conditions
Precedent -- Bankruptcy Proceeding",
above.
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
G-28
<PAGE> 453
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;
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;
Restricted Payments -- Prohibition on
distributions, including dividends and
other restricted payments ("Restricted
Payments"), except:
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 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
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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.
On and After the Existing Arch Senior
Note Termination Date -- On and after
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 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,
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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 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 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.
Additional Restricted Payments to the
Parent -- So long as any of the Parent
Discount Notes are outstanding or the
Parent Discount Notes Indenture is
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<PAGE> 456
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.
Prohibition on Mergers or other Fundamental
Changes -- except that:
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,
on and after the Existing Arch Senior
Note Termination Date, the Borrower or
any Subsidiary Guarantor may merge or
consolidate with, or 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,
at all times, mergers involving
Subsidiaries of the Borrower as part
of an Acquisition permitted by
Covenant 5, and
the Merger, provided that the
conditions thereto set forth in this
Term Sheet have been satisfied.
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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:
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
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<PAGE> 458
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 TO ANNEX G
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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(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 H
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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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 --
Extraordinary gain from early extinguishment of debt........ 95.3 (397.1)
------- --------
Net income (loss)........................................... $ (30.7) $ (397.1)
======= ========
</TABLE>
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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 if PageNet commences a bankruptcy
case.
The projections, which were developed by management of each of Arch and
PageNet, are based on:
- Arch's projected financial results, as developed by the
management of Arch, taking into account anticipated cost
reductions associated with its integration of MobileMedia;
- PageNet's projected financial results, as developed by the
management of PageNet, taking into account anticipated cost
reductions associated with the restructuring of its domestic
operations and divestiture of 80.5% of its interest in Vast;
Certain adjustments to PageNet's projected results were made by the
management of Arch to reflect more conservative assumptions with regard to
expected subscriber additions, subscriber turnover and net revenues. Such
adjustments were intended to reflect the continuing potential impact from the
effects of a bankruptcy case and the integration of Arch's and PageNet's
operations.
ASSUMPTIONS USED IN THE UNAUDITED FINANCIAL PROJECTIONS
A number of important assumptions are reflected in the projections. No
assurance can be given that such assumptions will be realized. See "Risk
Factors" for a discussion of various factors that could materially affect the
combined company's financial condition, results of operations, business,
prospects and securities.
1. The projections assume the merger will take place on October 1,
2000.
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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 and 100% of PageNet's senior subordinated notes.
Interest also includes the amortization of any original issue discounts.
8. The projections have been prepared in accordance with applicable
principles of purchase accounting. Under purchase accounting principles,
the combined company will record an intangible asset equal to the excess,
if any, of the purchase price paid by Arch in the merger over the net fair
market value allocated to the identifiable assets and liabilities of
PageNet. We refer to any such excess as goodwill. The projections assume
that goodwill will be amortized ratably on a straight-line basis over a
period of 10 years. The actual calculation of goodwill will depend upon the
actual price of Arch's common stock at the time of the merger. The
projections assume a value of $6.02 per share of Arch common stock to
calculate the purchase accounting adjustment and an assumption that the
historical, restated book value of PageNet's assets and liabilities
generally approximates fair value.
Arch and PageNet have made these assumptions and resultant
computations solely for the purpose of preparing the projections. The
combined company will be required to determine the actual amount of
goodwill and the appropriate amortization period when the merger takes
place. Such determination will be based on the fair values of PageNet's net
assets and other relevant information
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<PAGE> 470
when the merger takes place. Although these determinations are not
currently expected to result in the actual amount of goodwill and related
amortization being materially greater or less than the amounts assumed for
purposes of the projections, there can be no assurance in that regard. Any
increase in the amount of amortization of goodwill would reduce periodic
income before taxes and net income.
9. Projections of changes in certain balance sheet accounts such as
accounts receivable and accounts payable are based on historic ratios of
such accounts to other accounts such as revenue. These projections have
been modified, where deemed appropriate, to recognize any adjustment or
balance sheet item changes necessary to reflect the business combination.
Arch assumed approximately 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."
H-5
<PAGE> 471
ANNEX I
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 other than a merger effected pursuant to
Section 251(g) of this title, Section 252, Section 254, Section 257, Section
258, Section 263 Or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the
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facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
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submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROXY STATEMENT/PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arch Certificate provides that Arch will, to the fullest extent
permitted by the Delaware corporations statute, indemnify all persons whom it
has the power to indemnify against all costs, expenses and liabilities incurred
by them by reason of having been officers or directors of Arch, any subsidiary
of Arch or any other corporation for which such persons acted as an officer or
director at the request of Arch.
The Arch Certificate also provides that the directors of Arch will not be
personally liable for monetary damages to Arch or its stockholders for any act
or omission provided that the foregoing shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
Arch or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware corporations statute (relating to illegal dividends
or stock redemptions) or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware corporations statute is
amended to permit further elimination or limitation of the personal liability of
directors, then the liability of a director of Arch shall be eliminated or
limited to the fullest extent permitted by the Delaware corporations statute as
so amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
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.
3.1 Restated Certificate of Incorporation.(3)
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.(4)
3.3 Certificate of Correction, filed with the Secretary of State
of Delaware on February 15, 1996.(3)
3.4 Certificate of Designations establishing the Series C
Convertible Preferred Stock, filed with the Secretary of
State of Delaware on June 29, 1998.(5)
3.5 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on June 4, 1996.(6)
3.6 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on May 27, 1999.(7)
3.7 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on June 16, 1999.(7)
3.8 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on April 3, 2000.
3.9 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on April 28, 2000.
3.10 By-laws, as amended.(3)
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.(8)
</TABLE>
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<TABLE>
<C> <S>
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.(9)
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.(5)
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.(10)
5.1* Opinion of Hale and Dorr LLP
8.1 Tax opinion of Hale and Dorr LLP
8.2 Tax opinion of Mayer, Brown & Platt LLP
10.1 Second Amended and Restated Credit Agreement (Tranche A and
Tranche C (Facilities), dated June 29, 1998, among Arch
Paging, Inc., the Lenders party thereto, The Bank of New
York, Royal Bank of Canada and Toronto Dominion (Texas),
Inc.(5)
10.2 Second Amended and Restated Credit Agreement (Tranche B
Facility), dated June 29, 1998, among Arch Paging, Inc., the
Lenders party thereto. The Bank of New York, Royal Bank of
Canada and Toronto Dominion (Texas), Inc.(5)
10.3 Amendment No. 1 and Amendment No. 2 to the Second Amended
and Restated Credit Agreement (Tranche A and Tranche C
Facilities).(11)
10.4 Amendment No. 1 and Amendment No. 2 to the Second Amended
and Restated Credit Agreement (Tranche B Facility).(11)
10.5 Amendment No. 4 to the Second Amended and Restated Credit
Agreement (Tranche A and Tranche C Facilities).(12)
10.6 Amendment No. 4 to the Second Amended and Restated Credit
Agreement (Tranche B Facility).(12)
10.7 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.(12)
+10.8 Amended and Restated Stock Option Plan(14)
+10.9 Non-Employee Directors' Stock Option Plan(15)
+10.10 1989 Stock Option Plan, as amended(3)
+10.11 1995 Outside Directors' Stock Option Plan(16)
+10.12 1996 Employee Stock Purchase Plan(17)
+10.13 1997 Stock Option Plan(18)
+10.14 1999 Employee Stock Purchase Plan(19)
+10.15 Deferred Compensation Plan for Nonemployee Directors(20)
+10.16 Form of Executive Retention Agreement by and between Messrs.
Baker, Daniels, Kuzia, Pottle and Saynor(20)
10.17 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(5)
</TABLE>
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<TABLE>
<S> <C>
10.18 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(5)
10.19 Exchange Agreement, dated June 29, 1998, between Adelphia Communications Corporation and Benbow PCS
Ventures, Inc.(5)
10.20 Promissory Note, dated June 29, 1998, in the Principal amount of $285,015, issued by Benbow PCS
Ventures, Inc. to Lisa-Gaye Shearing(5)
10.21 Guaranty, dated June 29, 1998, given by Arch Communications Group, Inc. to Adelphia Communications
Corporation(5)
10.22 Guaranty, dated June 29, 1998, given by Arch Communications Group, Inc. to Lisa-Gaye Shearing(5)
10.23 Registration Rights Agreement, dated June 29, 1998, among Arch Communications Group, Inc., Adelphia
Communications Corporation and Lisa-Gaye Shearing(5)
10.24 Preferred Distributor Agreement dated June 1, 1998 by and between Arch Communications Group, Inc. and
NEC America, Inc.(11)(21)
10.25 Paging Products Sales Agreement, dated March 17, 1999, by and between Motorola, Inc. and Arch
Communications Group, Inc.(12)(21)
10.26 Satellite Services Agreement, dated September 1, 1998, between AvData Systems, Inc., and MobileMedia
Communications, Inc.(12)(21)
10.27 Master Lease For Transmitter Systems Space by and between Pinnacle Towers, Inc. and MobileMedia
Communications, Inc.(12)
10.28 Letter Agreement, dated March 23, 2000, between Arch Communications Group, Inc. and Resurgence Asset
Management, L.L.C.(19)
21.1* Subsidiaries of the Registrant
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)
23.5* Consent of Mayer, Brown & Platt LLP (contained in its opinion filed as Exhibit 8.2)
23.6* Consent of Bear, Stearns & Co.
23.7* Consent of Houlihan Lokey Howard & Zukin Capital
23.8* Consent of Goldman, Sachs & Co.
23.9* Consent of Morgan Stanley Dean Witter
24.1 Power of Attorney (previously filed)
27.1* Financial Data Schedule
99.1* Form of Proxy for Arch Annual Meeting
</TABLE>
---------------
* To be filed by amendment.
** Filed herewith.
+ 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.
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<PAGE> 478
(3) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-542) of Arch Communications Group, Inc.
(4) 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.
(5) 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.
(6) Incorporated by reference from the Registration Statement on Form S-8 (File
No. 333-07333) of Arch Communications Group, Inc.
(7) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-62211) of Arch Communications Group, Inc.
(8) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-72646) of Arch Communications, Inc.
(9) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-85580) of Arch Communications, Inc.
(10) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-83027) of Arch Communications Group, Inc.
(11) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1998.
(12) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
Communications Group, Inc. for the quarter ended June 30, 1999.
(13) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-63519) of Arch Communications Group, Inc.
(14) 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.
(15) 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).
(16) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-87474) of Arch Communications Group, Inc.
(17) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1995.
(18) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1996.
(19) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1999.
(20) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1997.
(21) A Confidential Treatment Request has been filed with respect to portions of
this exhibit so incorporated 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 joint proxy statement/prospectus required by
Section 10(a)(3) of the Securities Act;
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<PAGE> 479
(ii) To reflect in the joint proxy statement/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 joint proxy
statement/prospectus filed with the SEC pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
do not apply if the registration statement is on Form S-3, Form S-8 or
Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the SEC by the registrant pursuant to
Section 13 or 15(d) of the Exchange Act that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registration is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of this chapter at the start of
any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Securities Act need not be furnished, provided, that the registrant
includes in the joint proxy statement/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 joint proxy statement/prospectus is at least as current
as the date of those financial statements. Notwithstanding the foregoing,
with respect to registration statements on Form F-3, a post-effective
amendment need not be filed to include financial statements and information
required by Section 10(a)(3) of the Securities Act or Rule 3-19 of this
chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the SEC by the registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the Form F-3.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
joint proxy statement/prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such offering joint proxy
statement/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 joint proxy statement/prospectus:
(1) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act and
is used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
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<PAGE> 480
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of a registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(f) The registrant undertakes to respond to requests for information that
is incorporated by reference into the joint proxy statement/prospectus pursuant
to Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
(g) The registrant undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
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<PAGE> 481
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 July 10, 2000.
Arch Communications Group, Inc.
By: *
------------------------------------
C. Edward Baker, Jr. Chairman of
The Board and Chief Executive
Officer
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 on July 10, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board and Chief Executive
--------------------------------------------------- Officer, Director (principal executive officer)
C. Edward Baker, Jr.
* Executive Vice President and Chief Financial
--------------------------------------------------- Officer (principal financial officer and
J. Roy Pottle principal accounting officer)
* Director
---------------------------------------------------
R. Schorr Berman
Director
---------------------------------------------------
James S. Hughes
* Director
---------------------------------------------------
John Kornreich
* Director
---------------------------------------------------
Allan L. Rayfield
* Director
---------------------------------------------------
John B. Saynor
* Director
---------------------------------------------------
John A. Shane
* Director
---------------------------------------------------
Edwin M. Banks
</TABLE>
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<PAGE> 482
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Director
---------------------------------------------------
H. Sean Mathis
</TABLE>
*By: /s/ GERALD J. CIMMINO
---------------------------------
Gerald J. Cimmino
Attorney-in-fact
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<PAGE> 483
EXHIBIT INDEX
(A) Exhibits
<TABLE>
<C> <S>
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.
3.1 Restated Certificate of Incorporation.(3)
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.(4)
3.3 Certificate of Correction, filed with the Secretary of State
of Delaware on February 15, 1996.(3)
3.4 Certificate of Designations establishing the Series C
Convertible Preferred Stock, filed with the Secretary of
State of Delaware on June 29, 1998.(5)
3.5 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on June 4, 1996.(6)
3.6 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on May 27, 1999.(7)
3.7 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on June 16, 1999.(7)
3.8 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on April 3, 2000.
3.9 Certificate of Amendment of Restated Certificate of
Incorporation, filed with the Secretary of State of Delaware
on April 28, 2000.
3.10 By-laws, as amended.(3)
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.(8)
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.(9)
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.(5)
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.(10)
5.1* Opinion of Hale and Dorr LLP
8.1 Tax opinion of Hale and Dorr LLP
8.2 Tax opinion of Mayer, Brown & Platt LLP
10.1 Second Amended and Restated Credit Agreement (Tranche A and
Tranche C (Facilities), dated June 29, 1998, among Arch
Paging, Inc., the Lenders party thereto, The Bank of New
York, Royal Bank of Canada and Toronto Dominion (Texas),
Inc.(5)
10.2 Second Amended and Restated Credit Agreement (Tranche B
Facility), dated June 29, 1998, among Arch Paging, Inc., the
Lenders party thereto. The Bank of New York, Royal Bank of
Canada and Toronto Dominion (Texas), Inc.(5)
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<PAGE> 484
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10.3 Amendment No. 1 and Amendment No. 2 to the Second Amended
and Restated Credit Agreement (Tranche A and Tranche C
Facilities).(11)
10.4 Amendment No. 1 and Amendment No. 2 to the Second Amended
and Restated Credit Agreement (Tranche B Facility).(11)
10.5 Amendment No. 4 to the Second Amended and Restated Credit
Agreement (Tranche A and Tranche C Facilities).(12)
10.6 Amendment No. 4 to the Second Amended and Restated Credit
Agreement (Tranche B Facility).(12)
10.7 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.(12)
+10.8 Amended and Restated Stock Option Plan(14)
+10.9 Non-Employee Directors' Stock Option Plan(15)
+10.10 1989 Stock Option Plan, as amended(3)
+10.11 1995 Outside Directors' Stock Option Plan(16)
+10.12 1996 Employee Stock Purchase Plan(17)
+10.13 1997 Stock Option Plan(18)
+10.14 1999 Employee Stock Purchase Plan(19)
+10.15 Deferred Compensation Plan for Nonemployee Directors(20)
+10.16 Form of Executive Retention Agreement by and between Messrs.
Baker, Daniels, Kuzia, Pottle and Saynor(20)
10.17 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(5)
10.18 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(5)
10.19 Exchange Agreement, dated June 29, 1998, between Adelphia
Communications Corporation and Benbow PCS Ventures, Inc.(5)
10.20 Promissory Note, dated June 29, 1998, in the Principal
amount of $285,015, issued by Benbow PCS Ventures, Inc. to
Lisa-Gaye Shearing(5)
10.21 Guaranty, dated June 29, 1998, given by Arch Communications
Group, Inc. to Adelphia Communications Corporation(5)
10.22 Guaranty, dated June 29, 1998, given by Arch Communications
Group, Inc. to Lisa-Gaye Shearing(5)
10.23 Registration Rights Agreement, dated June 29, 1998, among
Arch Communications Group, Inc., Adelphia Communications
Corporation and Lisa-Gaye Shearing(5)
10.24 Preferred Distributor Agreement dated June 1, 1998 by and
between Arch Communications Group, Inc. and NEC America,
Inc.(11)(21)
10.25 Paging Products Sales Agreement, dated March 17, 1999, by
and between Motorola, Inc. and Arch Communications Group,
Inc.(12)(21)
10.26 Satellite Services Agreement, dated September 1, 1998,
between AvData Systems, Inc., and MobileMedia
Communications, Inc.(12)(21)
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<PAGE> 485
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10.27 Master Lease For Transmitter Systems Space by and between Pinnacle Towers, Inc. and MobileMedia
Communications, Inc.(12)
10.28 Letter Agreement, dated March 23, 2000, between Arch Communications Group, Inc. and Resurgence Asset
Management, L.L.C.(19)
21.1* Subsidiaries of the Registrant
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)
23.5* Consent of Mayer, Brown & Platt LLP (contained in its opinion filed as Exhibit 8.2)
23.6* Consent of Bear, Stearns & Co.
23.7* Consent of Houlihan Lokey Howard & Zukin Capital
23.8* Consent of Goldman, Sachs & Co.
23.9* Consent of Morgan Stanley Dean Witter
24.1 Power of Attorney (previously filed)
27.1* Financial Data Schedule
99.1* Form of Proxy for Arch Annual Meeting
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---------------
* To be filed by amendment.
** Filed herewith.
+ 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-3 (File
No. 333-542) of Arch Communications Group, Inc.
(4) 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.
(5) 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.
(6) Incorporated by reference from the Registration Statement on Form S-8 (File
No. 333-07333) of Arch Communications Group, Inc.
(7) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-62211) of Arch Communications Group, Inc.
(8) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-72646) of Arch Communications, Inc.
(9) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 33-85580) of Arch Communications, Inc.
(10) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-83027) of Arch Communications Group, Inc.
(11) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1998.
(12) Incorporated by reference from the Quarterly Report on Form 10-Q of Arch
Communications Group, Inc. for the quarter ended June 30, 1999.
<PAGE> 486
(13) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333-63519) of Arch Communications Group, Inc.
(14) 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.
(15) 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).
(16) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-87474) of Arch Communications Group, Inc.
(17) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1995.
(18) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1996.
(19) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1999.
(20) Incorporated by reference from the Annual Report on Form 10-K of Arch
Communications Group, Inc. for the fiscal year ended December 31, 1997.
(21) A Confidential Treatment Request has been filed with respect to portions of
this exhibit so incorporated by reference.
