SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: (Date of Earliest Event Reported)
November 10, 1999
ARCH WIRELESS COMMUNICATIONS, INC.
----------------------------------------
(Exact Name of Registrant as Specified in its Charter
Delaware
---------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
033-72646 31-1236804
----------------------------------- -------------------------------
(Commission File Numbers) (IRS Employer Identification No.)
1800 West Park Drive, Suite 250, Westborough, MA 01581
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(Address of principal executive offices) (Zip Code)
(508) 870-6700
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Registrant's Telephone Number, Including Area Code
Not Applicable
------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 2. Acquisition or Disposition of Assets
Description of Transaction
On November 10, 2000, Arch Wireless, Inc. ("Parent") completed its
acquisition of Paging Network, Inc., a Delaware corporation ("PageNet"),
pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), dated as
of November 7, 1999, and amended as of January 7, 2000, May 10, 2000, July 23,
2000 and September 7, 2000, by and among Parent, St. Louis Acquisition Corp., a
wholly owned subsidiary of Arch Wireless Communications, Inc. ("Arch"), and
PageNet. A copy of the press release announcing the completion of the merger is
attached as Exhibit 99.1 hereto and is incorporated herein by reference.
Pursuant to the Merger Agreement and the Plan, in connection with the
merger, Parent issued approximately 84.9 million shares of Parent common stock
to PageNet's noteholders and 5.0 million shares of Parent common stock to
PageNet's stockholders. Additionally, upon consummation of the merger, each
outstanding option to purchase PageNet common stock was converted into an option
to purchase the same number of shares of Parent 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 acquisition of PageNet by Parent was originally announced on November
7, 1999. In July 2000, PageNet and all of its wholly owned domestic
subsidiaries, except for Vast Solutions, Inc. ("Vast"), became parties to a
proceeding under Chapter 11 of the U.S. Bankruptcy Code filed with the U.S.
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On July
25, 2000, PageNet filed a Plan of Reorganization (the "Plan") with the
Bankruptcy Court that provided for the merger of PageNet into Arch and the
related transactions on the same terms as are provided in the Merger Agreement.
Accordingly, PageNet's ability to consummate the merger was subject to the
approval of the Plan by the Bankruptcy Court, which was obtained on October 26,
2000. The shareholders of Parent approved the issuance of shares of Parent
common stock in the merger at a meeting held on October 5, 2000.
As provided in the Merger Agreement and the Plan, immediately prior to the
consummation of the merger, 80.5% of the total equity of Vast was distributed to
PageNet's existing stockholders and noteholders (the "Vast Distribution"), while
PageNet retained ownership of the remaining 19.5% of Vast's equity. Immediately
following the Vast Distribution, Arch's wholly owned subsidiary, St. Louis
Acquisition Corp., was merged with and into PageNet, and PageNet became a wholly
owned subsidiary of Arch.
Also pursuant to the Merger Agreement, Parent increased the size of its
board of directors to 12 members, and the board of directors elected Joseph A.
Bondi, Gregg R. Daugherty, John P. Frazee, Jr. and John H. Gutfreund and to
serve on the board. Mr. Frazee was also elected as Chairman of the board of
directors.
Mr. Bondi is a managing director of Alvarez & Marsal, Inc., a firm that
provides financial and operational services to companies experiencing financial
problems. Mr. Bondi also currently serves as Chief Restructuring Officer of
Integrated Health Systems, Inc. Mr. Bondi has served as Chief Restructuring
Officer of Iridium, LLC; Chairman - Restructuring of MobileMedia Corporation.;
Chief Executive Officer of Phillips Colleges, Inc.; Senior Vice President and
2
<PAGE>
Chief Administrative Officer of Phar-Mor, Inc. and Republic Health Corporation;
and as a director of Republic Health Corporation.
Mr. Daugherty has been a Business Development manager at Microsoft
Corporation since 1997. In 1997, Mr. Daugherty was self-employed as an analyst
and consultant specializing in communications and Internet business related
fields.
Mr. Frazee had been a director of PageNet since 1995 and served as Chairman
of the Board of Directors and Chief Executive Office of PageNet since August
1999 and has served as Chief Executive Officer of Vast since December 1999. Mr.
Frazee also serves as a director of Security Capital Group, Inc. Dean Foods
Company, Cabot Microelectronics Corporation and Homestead Village Incorporated.
Mr. Gutfreund has been the president of Gutfreund & Company, Inc., an
investment banking and consulting firm, for more than five years. He is the
former chairman and chief executive officer of Salomon Inc., and past vice
chairman of the New York Stock Exchange and a past board member of the
Securities Industry Association. Mr. Gutfreund is also a director of Ambi, Inc.,
Ascent Assurance, Inc., Baldwin Piano & Organ Company, Evercel Inc., Foamex
International Inc., LCA-Vision, Inc., Maxicare Health Plans, Inc., and The
Universal Bond Fund.
The terms of the Merger Agreement and the merger were determined on the
basis of arms' length negotiations. Prior to the execution of the Merger
Agreement, neither Parent nor any of its affiliates had any material
relationships with PageNet.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired
The required financial statements are attached hereto on pages
F-1 through F-29
(b) Pro forma Financial Statements
The required pro forma financial statements are attached
hereto on pages F-30 through F-37.
3
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 13, 2000 ARCH WIRELESS COMMUNICATIONS, INC.
By: /s/ J. Roy Pottle
----------------------------------
J. Roy Pottle
Executive Vice President and
Chief Financial Officer
4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
Paging Network, Inc.
We have audited the accompanying consolidated balance sheets of Paging
Network, Inc. (the Company) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, cash flows and shareowners' deficit for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Paging Network,
Inc. at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 2, on
July 24, 2000, the Company and all of its wholly-owned domestic subsidiaries
except for Vast Solutions, Inc. commenced a proceeding under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. This event, and circumstances relating to the
non-compliance with certain covenants of loan agreements with banks and note
indentures and recurring losses from operations, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans with
regard to these matters are also described in Note 2. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or amounts and classification
of liabilities that may result from the outcome of these uncertainties.
/S/ ERNST & YOUNG LLP
Dallas, Texas
May 3, 2000, except for Notes 1 and 2,
as to which the date is September 7, 2000
F-1
<PAGE>
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
ASSETS
<S> <C> <C>
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-2
<PAGE>
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-3
<PAGE>
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-4
<PAGE>
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-5
<PAGE>
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 7, 1999, the Company signed a definitive agreement (the "Merger
Agreement") to merge (the "Merger") with Arch Communications group, Inc.
("Arch"). The Merger Agreement was subsequently amended on January 7, 2000, May
10, 2000, July 23, 2000 and September 7, 2000. Under the Merger Agreement, as
amended, the Company's senior subordinated notes, along with all accrued
interest thereon, will be exchanged for common stock of Arch representing 48.2%
of the common stock of the combined company and the Company's common stock will
be converted into common stock representing 2.9% of the common stock of the
combined company. The Merger Agreement also provides for the Company to
distribute 80.5% of its interest in Vast Solutions, Inc. ("Vast"), a
wholly-owned subsidiary of the Company, to holders of the Company's senior
subordinated notes and common stock. Holders of the senior subordinated notes
will receive common stock of Vast representing 60.5% of the equity of Vast,
while holders of the Company's common stock will receive common stock of Vast
representing 20% of the equity of Vast. The remaining interest in Vast will be
held by the combined company following the Merger.
As more fully discussed in Note 2, the Company will seek to complete the
Merger through the Company's plan of reorganization resulting from the Company's
bankruptcy filing in July 2000. Consummation of the Merger is also subject to
customary regulatory review. The Company has received approval from the
Department of Justice and the Federal Communications Commission to proceed with
the Merger. If the Merger Agreement is terminated after one party pursues an
alternative offer, a plan of reorganization of the Company other than the one
contemplated in the Merger Agreement is filed by the Company and/or confirmed by
a bankruptcy court, or under other specified circumstances, either the Company
or Arch may be required to pay a termination fee of $40 million.
2. CHAPTER 11 REORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company incurred losses of $157 million, $162 million,
and $299 million during the years ended December 31, 1997, 1998, and 1999,
respectively. The Company's deteriorating financial results and liquidity caused
it to be in default of the covenants of all of its domestic debt agreements. On
February 2, 2000 and August 1, 2000, the Company failed to make the semi-annual
interest payments on its 8.875% Senior Subordinated notes due 2008 (the "8.875%
Notes") and its 10.125% senior subordinated notes due 2007 (the "10.125%
Notes"), and on April 17, 2000, the Company failed to make the semi-annual
interest payment on its 10% senior subordinated notes due 2008 (the "10%
Notes"). The Company also violated several of the financial and other covenants
of the Credit Agreement. As a result, on July 14, 2000, three senior
subordinated noteholders commenced an involuntary proceeding against the Company
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code").
On July 24, 2000 (the "Petition Date"), the Company consented to an order
for relief which, in effect, converted the bankruptcy case filed on July 14 to a
voluntary Chapter 11 case. Also on the Petition Date, the Company's domestic
subsidiaries except for Vast filed voluntary petitions for relief under the
Bankruptcy Code (such subsidiaries and the Company are hereafter referred to
collectively as the "Debtors"). Subsequent to the Petition Date, the Debtors are
operating as debtors-in-possession and are subject to the jurisdiction of the
United States Bankruptcy Court for the district of Delaware (the "Bankruptcy
F-6
<PAGE>
Court"). Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business for the benefit of its creditors and stockholders. In
addition to permitting rehabilitation of the debtor, another goal of Chapter 11
is to promote equality of treatment of creditors and equity security holders of
equal rank with respect to the restructuring of debt. In furtherance of these
two goals, upon the filing of a petition for reorganization under Chapter 11,
section 362(a) of the Bankruptcy Code generally provides for an automatic stay
of substantially all acts and proceedings against the debtor and its property,
including all attempts to collect claims or enforce liens that arose prior to
the commencement of the debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations
of the Debtors with respect to the employment of attorneys, investment bankers
and other professionals, and transactions out of the Debtors' ordinary course of
business or otherwise requiring bankruptcy court approval under the Bankruptcy
Code. The Debtors have been paying undisputed obligations that have arisen
subsequent to the Petition Date on a timely basis. Since the Petition Date, the
Bankruptcy Court has entered orders, among other things, allowing the Debtors
(i) to pay certain customer refunds and deposits in the ordinary course of
business, (ii) to pay wages, salaries and benefits owing to employees, and (iii)
to pay pre-petition obligations owed to continuing vendors as such obligations
come due.
On July 25, 2000, the Debtors filed a Joint Plan of Reorganization and
disclosure statement which provide for the implementation of the Merger as the
Debtors' plan of reorganization. The Bankruptcy Court approved the disclosure
statement on September 7, 2000, and authorized the Debtors to submit the Joint
Plan of Reorganization to the Company's creditors and stockholders for approval.
The Bankruptcy Court has scheduled a hearing on the confirmation of the Joint
Plan of Reorganization for October 26, 2000.
As of July 31, 2000, the Company has approximately $66.0 million in cash.
Upon commencement of the Chapter 11 case, the Company obtained
debtor-in-possession loan facility (the "DIP Facility") from the current lenders
under the Credit Agreement which provided for additional secured borrowings by
both PageNet and Vast not to exceed $50 million in the aggregate, subject to
certain limitations as set forth in the loan agreement. Borrowings under the DIP
Facility bear interest at prime plus 2.5% for outstanding borrowings up to $15
million, and at prime plus 3.0% for outstanding borrowings in excess of $15
million, due monthly. All amounts outstanding under the DIP Facility are due the
earlier of (i) the confirmation of the Debtors' Joint Plan of Reorganization, or
(ii) November 30, 2000. The Company believes that its existing cash, the cash
expected to be generated from operations, and the cash available under the DIP
Facility is sufficient to meet its obligations, except for the cash interest
payments due under the Notes, through the completion of the Merger. However, if
the Company's financial results continue to deteriorate, the Merger is delayed,
or other unforeseen events occur, the Company may not have sufficient liquidity
to meet its obligations through the completion of the Merger. If the Merger is
not completed, the Company would likely be required to consider a stand-alone
restructuring, asset sales, transactions with other potential merger parties or
acquirors, or liquidation. In addition, if the Merger is not completed, the
Company would likely incur significant charges for asset impairments and
restructuring its obligations. The accompanying financial statements do not
include any adjustments relating to the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Merger not be completed.
3. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of all of its wholly and majority-owned subsidiaries. All intercompany
transactions have been eliminated. Certain amounts from prior years have been
reclassified to conform with the current year presentation.
F-7
<PAGE>
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Inventories -- Inventories consist of subscriber devices which are held
specifically for resale. Inventories are stated at the lower of cost or market,
with cost determined on a first-in, first-out basis.
Property, equipment, and leasehold improvements -- Property, equipment, and
leasehold improvements are stated at cost, less accumulated depreciation.
Expenditures for maintenance are charged to expense as incurred. Upon retirement
of units of equipment, the costs of units retired and the related accumulated
depreciation amounts are removed from the accounts. Depreciation is computed
using the straight-line method based on the following estimated useful lives:
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
---------------
(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:
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
Deferred revenues and customer deposits -- Deferred revenues represent
billing to customers in advance for services not yet performed and are
recognized as revenue in the month the service is provided. Deposits are
received from some customers at the time a service agreement is signed and are
recognized as a liability of the Company until such time as the deposits are
applied, generally against the customer's final bill.
Revenue recognition -- Services, rent and maintenance revenues are
recognized in the month the related services are performed. Product sales are
recognized upon delivery of product to the customer.
Employee stock options -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee stock option
plans. Under APB 25, because the exercise price of the Company's employee stock
options has historically equaled the market price of the underlying stock on the
date of grant, no compensation expense has been recognized.
F-8
<PAGE>
Advertising costs -- The Company expenses the costs of advertising as
incurred. Advertising expense for the years ended December 31, 1997, 1998, and
1999, was $22 million, $19 million, and $17 million, respectively.
Comprehensive income (loss) -- Other comprehensive income as of December
31, 1997, 1998, and 1999, consists solely of foreign currency translation
adjustments.
Capitalization of internally developed software -- The Company adopted the
provisions of Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed For or Obtained for Internal Use" (SOP 98-1), effective
January 1, 1999. SOP 98-1 requires the capitalization of certain costs of
developing or acquiring computer software for internal use. The adoption of SOP
98-1 did not have a material impact on the Company's results of operations or
financial position as the Company's previous policy for accounting for the costs
of developing or acquiring computer software for internal use was generally
consistent with the provisions of SOP 98-1.
4. RESTRUCTURING CHARGE
In February 1998, the Company's Board of Directors approved the
restructuring of the Company's domestic operations (the Restructuring). The
Company's Restructuring plan called for the elimination of redundant
administrative operations through the consolidation of key support functions
located in local and regional offices throughout the country into central
processing facilities. The Restructuring plan specified local and regional
office closures, the disposition of certain furniture, fixtures and equipment
and the termination of approximately 1,950 employees by job function and
location. Having adopted a formal plan of restructuring, the Company recorded a
$74 million charge, or $0.72 per share (basic and diluted), during the quarter
ended March 31, 1998. The components of the charge included (in thousands):
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
=======
The writedown of property and equipment related to a non-cash charge to
reduce the carrying amount of certain machinery and equipment, furniture and
fixtures, and leasehold improvements that the Company would not continue to
utilize following the Restructuring to their estimated net realizable value as
of the date such assets were projected to be disposed of or abandoned, allowing
for the recognition of normal depreciation expense on such assets through their
projected disposal date. The net realizable value of these assets was determined
based on management estimates, which considered such factors as the nature and
age of the assets to be disposed of, the timing of the assets' disposal, and the
method and potential costs of the disposal.
The provision for lease obligations and terminations related primarily to
future lease commitments on local and regional office facilities that would be
closed as part of the Restructuring. The charge represented future lease
obligations, net of projected sublease income, on such leases past the dates the
offices would be closed by the Company, or, for certain leases, the cost of
terminating the leases prior to their scheduled expiration. Projected sublease
income was based on management estimates, which are subject to change. Cash
payments on the leases and lease terminations were expected to occur over the
remaining lease terms, the majority of which were to expire prior to 2003.
During the fourth quarter of 1998, the Company identified additional
furniture, fixtures, and equipment that would not be utilized following the
Restructuring, resulting in an additional non-cash charge of $3 million. This
charge was offset by reductions in the provisions for lease obligations and
F-9
<PAGE>
terminations and severance costs as a result of refinements to the Company's
schedule for local and regional office closures. Also as a result of the
refinements to the office closing schedule, the Company adjusted, effective
October 1, 1998, the depreciable lives of certain of the assets written down in
the first quarter of 1998, resulting in a decrease in depreciation expense of
approximately $3 million for the year ended December 31, 1998.
The Company's restructuring activity from initial charge through December
31, 1998, was as follows (in thousands):
<TABLE>
<CAPTION>
UTILIZATION OF RESERVE
INITIAL ADJUSTMENTS ---------------------- REMAINING
CHARGE TO CHARGE CASH NON-CASH RESERVE
------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Fixed assets impairments. $38,900 $ 2,600 $ -- $41,500 $ --
Lease obligation costs... 18,900 (1,300) 683 -- 16,917
Severance costs.......... 12,700 (1,300) 1,296 -- 10,104
Other.................... 3,500 -- -- 3,500 --
------- ------- ------ ------- -------
Total.......... $74,000 $ -- $1,979 $45,000 $27,021
======= ======= ====== ======= =======
</TABLE>
While progress in establishing the centralized processing facilities was
made during 1998 and early 1999, the Company's efforts to convert its offices to
its new billing and customer service software platforms fell behind the
Company's original schedule of being completed during the second quarter of
1999. Billing software and system implementation problems surfaced during the
first office conversions, and as a result, the Company had to postpone the
conversion of many of its other offices. These postponements resulted in delays
in office closures which deferred the payments of amounts accrued for lease
obligations and terminations and severance and related benefits. Additional
implementation problems surfaced during 1999 and caused further delays.
In November 1999 and in conjunction with the announcement of the Merger, as
discussed in Note 1, the Company decided to suspend further conversions after
January 2000 pending the decisions as to which operating platforms will be used
by the combined company. As a result of the decision to suspend the
Restructuring indefinitely, the Company recorded a reversal of the unused
portion of the original restructuring charge of $24 million, or $0.23 per share
(basic and diluted), during the quarter ended December 31, 1999.
The Company's restructuring activity from January 1, 1999 through December
31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
UTILIZATION OF RESERVE
BEGINNING ---------------------- REVERSAL REMAINING
RESERVE CASH NON-CASH OF CHARGE RESERVE
--------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Lease obligation costs... $16,917 $ 755 $ -- $(16,162) $ --
Severance costs.......... 10,104 2,735 -- (7,369) --
------- ------ ---- -------- ----
Total........ . $27,021 $3,490 $ -- $(23,531) $ --
======= ====== ==== ======== ====
</TABLE>
As a result of the Restructuring, the Company eliminated approximately 325
positions and involuntarily terminated approximately 1,150 employees during 1998
and 1999.
F-10
<PAGE>
5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
The cost of property, equipment, and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
1998 1999
(IN THOUSANDS) DECEMBER 31, ---------- ----------
<S> <C> <C>
Machinery and equipment............................. $ 871,870 $ 956,122
Subscriber devices.................................. 497,238 407,188
Furniture and fixtures.............................. 59,996 61,801
Leasehold improvements.............................. 20,609 23,489
Land, buildings, and building improvements.......... 3,157 3,161
---------- ----------
Total cost................................ $1,452,870 $1,451,761
========== ==========
</TABLE>
The Company does not manufacture any of the subscriber devices or related
transmitting and computerized terminal equipment used in the Company's
operations. The Company purchases its subscriber devices primarily from
Motorola. The Company anticipates that subscriber devices will continue to be
available for purchase from Motorola and other sources, consistent with normal
manufacturing and delivery lead times.
During the first quarter of 1999, the Company made the decision to narrow
its focus to its North American operations and, as a result, made the decision
to sell or otherwise dispose of its operations in Spain. During third quarter of
1999, all operations of the Company's majority-owned Spanish subsidiaries were
ceased. The Company's interest in its Spanish subsidiaries was sold in the first
quarter of 2000 for minimal proceeds. As a result of the Company's decision to
sell or otherwise dispose of its Spanish subsidiaries, the Company recorded a
provision of $18 million during the year ended December 31, 1999, for the
impairment of the assets of the Company's majority-owned subsidiaries, the
effect of which was to write-off the Company's net investment in its Spanish
subsidiaries. The amount of the provision was based on the Company's estimate of
the value of its net investment in the Spanish subsidiaries, which did not
materially differ from the proceeds received upon the sale of the subsidiaries
in the first quarter of 2000. No cash costs have been incurred or are expected
as a result of the provision for the impairment of the assets of the Company's
Spanish subsidiaries, and no additional charges are expected to be required.
Effective April 1, 1999, the Company changed the depreciable lives for its
subscriber devices and certain network equipment. The Company changed the
depreciable lives of its subscriber devices from three years to two years and
the depreciable life of certain of its network equipment from seven years to ten
years. The changes resulted from a review by the Company of the historical usage
periods of its subscriber devices and its network equipment and the Company's
expectations regarding future usage periods for subscriber devices considering
current and projected technological advances. The Company has determined that
the appropriate useful life of its subscriber devices is two years as a result
of technological advances, customer desire for new pager technology, and the
Company's decreasing ability to redeploy older pager models. As a result of
these changes, the net loss increased by $78 million, or $0.75 per share (basic
and diluted), during the year ended December 31, 1999.
Effective January 1, 1997, the Company shortened the depreciable lives of
its subscriber devices from four to three years, and revised the related
residual values. This change increased net loss for the year ended December 31,
1997 by $17 million and net loss per share by $0.16 (basic and diluted).
During the year ended December 31, 1997, the Company recorded a provision
of $13 million to write down certain subscriber devices to their net realizable
value.
F-11
<PAGE>
6. OTHER NON-CURRENT ASSETS
The cost of other non-current assets consisted of the following:
<TABLE>
<CAPTION>
1998 1999
(IN THOUSANDS) DECEMBER 31, -------- --------
<S> <C> <C>
Licenses and frequencies........................... $473,211 $477,659
Goodwill........................................... 50,495 37,922
Restricted cash invested in money market instruments,
at fair value (Note 7)..................... ..... 33,461 34,485
Other intangible assets............................ 13,920 7,647
Other non-current assets........................... 58,285 51,301
-------- --------
Total cost............................... $629,372 $609,014
======== ========
</TABLE>
Licenses and frequencies consist of amounts paid in conjunction with the
purchase of three nationwide narrowband personal communications services (PCS)
frequencies at a Federal Communications Commission (FCC) auction held in 1994,
amounts paid in conjunction with the purchase of blocks of two-way 900 MHz
specialized mobile radio (SMR) major trading area based licenses, amounts paid
to purchase exclusive rights to certain of the SMR frequencies from incumbent
operators, and amounts paid to secure other licenses.
The Company adopted the provisions of Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" (SOP 98-5), effective January 1, 1999. SOP
98-5 requires the expensing of all start-up costs as incurred, as well as the
writing off of the remaining unamortized balance of capitalized start-up costs
at the date of adoption of SOP 98-5. The impact of the Company's adoption of SOP
98-5 was a charge of $37 million representing the cumulative effect of a change
in accounting principle to write-off all unamortized start-up costs as of
January 1, 1999, and an increase in net loss of $21 million, or $0.20 per share
(basic and diluted), for the year ended December 31, 1999.
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
1998 1999
------------------------- -------------------------
(CARRYING (ESTIMATED (CARRYING (ESTIMATED
THOUSANDS) DECEMBER 31, VALUE) FAIR VALUE) VALUE) FAIR VALUE)
<S> <C> <C> <C> <C>
Borrowings under Credit Agreement. . $ 565,000 $ -- $ 745,000 $ --
10% Senior Subordinated Notes due
October 15, 2008.. ............... 500,000 477,473 500,000 145,000
10.125% Senior Subordinated Notes due
August 1, 2007.................... 400,000 382,964 400,000 116,000
8.875% Senior Subordinated Notes due
February 1, 2006.................. 300,000 292,484 300,000 87,000
Other............................... 50,137 -- 58,127 --
---------- ----------
1,815,137 2,003,127
Obligations in default and classified
as current (Note 2)............... -- 1,945,000
---------- ----------
$1,815,137 $ 58,127
========== ==========
</TABLE>
F-12
<PAGE>
As of December 31, 1999, PageNet had $ 745 million of borrowings
outstanding under its Credit Agreement. The Company's maximum borrowings under
the Credit Agreement are permanently reduced beginning on June 30, 2001, by the
following amounts: 2001 -- $150 million; 2002 -- $200 million; 2003 -- $250
million; and 2004 -- $147 million. The Company's Credit Agreement expires on
December 31, 2004. As discussed in Note 2, the Company is in default of the
covenants of its domestic debt agreements and is precluded from any additional
borrowings under the Credit Agreement.
Under the Credit Agreement, the Company may designate all or a portion of
outstanding borrowings to be either a Base Rate Loan or a loan based on the
London Interbank Offered Rate (LIBOR). As of December 31, 1999, the Company had
designated all $745 million of borrowings as LIBOR loans, which bear interest at
a rate equal to LIBOR plus a spread of 2.00%. The interest rates for the $745
million of LIBOR loans as of December 31, 1999 ranged from 7.94% to 8.17%. As a
result of the defaults described in Note 2, the Company's lenders have the right
to collect default interest up to 12.00% for the Company's outstanding balances
under its Credit Agreement.
The Credit Agreement prohibits the Company from paying cash dividends or
other cash distributions to shareowners. The Credit Agreement also prohibits the
Company from paying more than a total of $2 million in connection with the
purchase of Common Stock owned by employees whose employment with the Company is
terminated. The Credit Agreement contains other covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
indebtedness, engage in transactions with affiliates, dispose of assets, and
engage in mergers, consolidations, and other acquisitions without the prior
written consent of its lenders. Amounts owing under the Credit Agreement are
secured by a security interest in substantially all of the Company's assets, the
assets of the Company's subsidiaries, and the capital stock of the subsidiaries
of the Company (other than the international subsidiaries and Vast).
The two credit agreements of the Company's Canadian subsidiaries provide
for total borrowings of approximately $75 million. As of December 31, 1999,
approximately $56 million of borrowings were outstanding under the credit
facilities. Such borrowings were collateralized by $34 million of restricted
cash included in other non-current assets. Additional borrowings are available
under these facilities, provided such borrowings are either collaterized or
certain financial conditions are met. Maximum borrowings that may be outstanding
under the credit facilities are permanently reduced beginning on March 31, 2002,
by the following amounts: 2002 -- $1 million; 2003 -- $6 million; and 2004 --
$68 million. Both credit agreements expire on December 31, 2004.
The 8.875% Notes, the 10.125% Notes, and the 10% Notes are redeemable on or
after February 1, 1999; August 1, 2000; and October 15, 2001; respectively, at
the option of the Company, in whole or in part from time to time, at certain
prices declining annually to 100 percent of the principal amount on or after
February 1, 2002; August 1, 2003; and October 15, 2004; respectively, plus
accrued interest. The 8.875% Notes, the 10.125% Notes, and the 10% Notes are
subordinated in right of payment to all senior debt, and contain various
covenants that, among other things, limit the ability of the Company and its
subsidiaries to incur indebtedness, pay dividends, engage in transactions with
affiliates, sell assets, and engage in mergers, consolidations, and other
acquisitions without the prior written consent of its lenders. The fair values
of the 8.875% Notes, the 10.125% Notes, and the 10% Notes were based on quoted
market prices and discounted cash flow analyses. The fair values of the amounts
outstanding under the Credit Agreement and other indebtedness cannot be
reasonably estimated due to the debt defaults and covenant violations of the
Company.
F-13
<PAGE>
On May 14, 1997, PageNet redeemed all $200 million of its outstanding
11.75% Senior Subordinated Notes (11.75% Notes), utilizing funds borrowed under
the Company's Credit Agreement. The Company recorded an extraordinary loss of
$16 million in the second quarter of 1997 on the early retirement of the 11.75%
Notes. The extraordinary loss was comprised of the redemption premium of $12
million and the write-off of unamortized issuance costs of $4 million.
8. INCOME TAXES
For the years ended December 31, 1997, 1998, and 1999, the Company had no
provision or benefit for income taxes because of the Company's inability to
benefit from its net operating losses. The valuation allowance for deferred tax
assets increased by $56 million, $58 million, and $109 million during the years
ended December 31, 1997, 1998, and 1999, respectively. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1999
(IN THOUSANDS) DECEMBER 31, --------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 197,983 $ 294,580
Deferred revenue................................ 5,982 7,411
Provision for asset impairment.................. -- 6,941
Bad debt reserve................................ 3,768 6,670
Other tax credit carryforwards.................. 679 664
Other........................................... 28,482 18,405
--------- ---------
Total deferred tax assets.................. 236,894 334,671
Valuation allowance............................. (201,496) (310,909)
--------- ---------
Net deferred tax assets.................... 35,398 23,762
Deferred tax liabilities:
Depreciation.................................... (23,450) (3,977)
Amortization.................................... (11,948) (19,785)
--------- ---------
Total deferred tax liabilities............. (35,398) (23,762)
--------- ---------
$ -- $ --
========= =========
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $755 million that expire in years 2001 through 2019. Of such
amounts, $5 million expire in 2001 and $3 million expire in 2002. The bankruptcy
proceeding is expected to result in the elimination of substantially all of the
tax benefit of the net operating loss carryforwards and certain other tax
attributes of the Company. Loss before income taxes attributable to the
Company's foreign operations was $14 million, $12 million, and $11 million for
the years ended December 31, 1997, 1998, and 1999.
9. STOCK OPTIONS
The 1982 Incentive Stock Option Plan, as amended (1982 Plan), for officers
and key employees of the Company provides for the granting of stock options
intended to qualify as Incentive Stock Options (ISOs) to purchase Common Stock
at not less than 100% of the fair market value on the date the option is
granted, as determined by the Board of Directors. No further options may be
granted under the 1982 Plan. As of December 31, 1999, options for 228,487 shares
were exercisable under the 1982 Plan. All options outstanding and exercisable
under the 1982 Plan are fully vested.
F-14
<PAGE>
Options granted were exercisable immediately, or in installments as the
Board of Directors determined at the time it granted such options, and have a
duration of ten years from the date of grant. Any stock issued is subject to
repurchase at the option of the Company, which occurs at the exercise price for
the unvested portion of the shares issued and at fair market value, as defined
or allowed in the Stock Option Agreement, for the vested portion. Such options
vest ratably over a five-year period from the date they first become
exercisable. However, in the event of a change in ownership control of the
Company, all options vest immediately.
The 1991 Stock Option Plan (1991 Plan) for officers and key employees of
the Company provides for the granting of ISOs and non-statutory options to
purchase Common Stock at not less than 100% of the fair market value on the date
the options are granted. The 1991 Plan is administered by the Compensation and
Management Development Committee of the Board of Directors (the Committee).
Approximately 3 million shares remained available for grant under the 1991 Plan
as of December 31, 1999. A total of 4,034,671 shares were vested and exercisable
under the 1991 Plan as of December 31, 1999. Options granted under the 1991 Plan
are non-transferable except by the laws of descent and distribution and are
exercisable upon vesting, which occurs in installments, as the Board of
Directors or the Committee may determine at the time it grants such options.
On May 21, 1998, the Company's shareowners approved an amendment to its
1991 Plan to broaden the group of employees eligible to receive stock options
under such plan to include all employees of the Company and its subsidiaries. On
May 22, 1998, PageNet granted approximately 2 million options under the 1991
Plan to approximately 2,700 employees at an exercise price of $13.94 per share,
which represented the market price of the Company's Common Stock at the date of
grant. Since that time, grants of stock options to eligible new employees have
been made the first day of the next quarter after the quarter in which they were
hired.
The Amended and Restated 1992 Directors Compensation Plan (Directors'
Plan), for non-employee Directors of the Company, provides for the granting of
non-statutory options to purchase Common Stock at not less than 100% of the fair
market value on the date the options are granted. The Directors' Plan is
administered by the Committee. The total number of shares of Common Stock with
respect to which options may be granted under the Directors' Plan may not exceed
750,000. Approximately 300,000 shares remain available for grant under the
Directors' Plan as of December 31, 1999. A total of 225,000 shares were vested
and exercisable as of December 31, 1999. Options granted under the Directors'
Plan are non-transferable except by the laws of descent and distribution and are
exercisable upon vesting, which occurs in installments, as the Board of
Directors or the Committee may determine at the time it grants such options.
With respect to the 1991 Plan and the Directors' Plan, notwithstanding the
above, ten business days before a merger or a change in the ownership control of
the Company or a sale of substantially all the assets of the Company, all
options issued vest immediately and become exercisable in full; upon a merger or
a change in ownership control of the Company or the sale of substantially all
the assets of the Company, all options issued under the 1991 Plan and Directors'
Plan which have not been exercised terminate. The Merger Agreement provides that
all the Company's stock options will be converted into options for shares of
Arch at a formula which would reduce the number of options outstanding by
8,944,792 and increase the exercise price range by $6.18 to $120.24.
On June 12, 1997, the Company offered an election to its employees with
options granted during 1995 and 1996 under the 1991 Plan to cancel such options
and accept a lesser number of new options at a lower exercise price, with the
vesting dates being restarted with the new grant dates. As a result of the
election by certain of its employees, PageNet canceled approximately 3 million
of options with exercise prices ranging from $13.69 to $26.50 and granted
approximately 1 million of options to the same optionees with an exercise price
of $8.25 per share.
F-15
<PAGE>
Information concerning options as of December 31, 1997, 1998, and 1999 is
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at January 1........... 5,968,605 5,687,335 8,579,568
Granted....................... 3,435,873 5,066,000 4,214,987
Canceled...................... (3,705,609) (1,241,982) (2,505,716)
Exercised..................... (11,534) (931,785) (69,724)
------------ ------------ ------------
Outstanding at December 31......... 5,687,335 8,579,568 10,219,115
============ ============ ============
Exercisable at December 31......... 2,450,795 3,253,511 4,588,158
============ ============ ============
Option price range-options outstanding.. $2.67-$25.50 $2.67-$25.50 $0.88-$17.13
Option price range-options exercised... $2.73-$ 9.25 $2.67-$14.38 $2.67-$ 5.13
</TABLE>
Weighted-average exercise prices are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C> <C>
Outstanding at January 1.............................. $15.90 $ 9.47 $10.98
Granted.......................................... 9.54 12.59 4.54
Canceled......................................... 19.89 12.79 10.17
Exercised........................................ 7.49 8.16 3.12
Outstanding at December 31............................ 9.47 10.98 8.56
Exercisable at December 31............................ 9.12 9.85 9.31
</TABLE>
Certain information is being presented based on a range of exercise prices
as of December 31, 1999, as follows:
<TABLE>
<CAPTION>
$0.88-$6.00 $6.03-$8.13 $8.25-$12.63 $12.94-$17.13
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Number of shares outstanding.......... 2,567,374 2,308,960 2,338,101 3,004,680
Weighted-average exercise price....... $ 3.40 $ 6.43 $ 9.83 $ 13.62
Weighted-average remaining contractual
life................................ 8.55 8.01 7.23 8.01
Number of shares exercisable.......... 792,465 800,140 1,632,993 1,362,560
Weighted-average exercise price of
shares exercisable.................. $ 3.63 $ 6.89 $ 9.63 $ 13.66
</TABLE>
The Company adopted the pro forma disclosure provisions of the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) in 1996. As required by SFAS 123, pro forma information
regarding net loss and net loss per share has been determined as if the Company
had accounted for employee stock options and stock-based awards granted
subsequent to December 31, 1994 under the fair value method provided for under
SFAS 123. The weighted-average fair value of stock options granted during 1997,
1998, and 1999 was $5.98, $7.21, and $1.22, respectively. The fair value for the
stock options granted to officers and key employees of the Company after January
1, 1995 was estimated at the date of the grant using the Black-Scholes option
pricing model with the following assumptions: risk-free interest ranging from
5.46% to 6.89% for 1997, ranging from 4.09% to 5.72% for 1998, and ranging from
4.54% to 6.13% for 1999; a dividend yield of 0%; volatility factors of the
expected market price of the Company's Common Stock ranging from 54.4% to 57.6%
for 1997, ranging from 56.8% to 60.0% for 1998, and 75.0% for 1999; and a
weighted average expected life of each option ranging from 5.5 years to 6.7
years for 1997 and 1998, and ranging from 2.0 years to 6.0 years for 1999.
F-16
<PAGE>
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>
Net loss As reported $(156,947) $(162,009) $(299,002)
Pro forma $(172,884) $(179,834) $(301,586)
Net loss per common share As reported $ (1.53) $ (1.57) $ (2.88)
(basic and diluted) Pro forma $ (1.68) $ (1.74) $ (2.90)
</TABLE>
Because SFAS 123 is applicable only to options and stock-based awards
granted subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 2001.
10. COMMITMENTS
The Company has operating leases for office and transmitting sites with
lease terms ranging from a month to approximately ten years. There are no
significant renewal or purchase options. Total rent expense for 1997, 1998, and
1999 was approximately $70 million, $81 million, and $101 million, respectively.
The following is a schedule by year of future minimum rental payments
required under operating leases that have remaining noncancelable lease terms in
excess of one year as of December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: (IN THOUSANDS)
---------------------------------------
<S> <C>
2000.............................................. $27,997
2001.............................................. 19,788
2002.............................................. 14,855
2003.............................................. 10,229
2004.............................................. 7,080
Later years....................................... 8,163
-------
Total minimum payments required......... $88,112
=======
</TABLE>
11. CONTINGENCIES
The Company is involved in various lawsuits arising in the normal course of
business. In management's opinion, the ultimate outcome of these lawsuits will
not have a material adverse effect on PageNet's business, financial position, or
results of operations.
12. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted average
number of common shares outstanding. The number of shares used to compute per
share amounts for the years ended December 31, 1997, 1998, and 1999, was 103
million, 103 million, and 104 million, respectively. The average number of
options to purchase shares of the Company's Common Stock during the years ended
December 31, 1997, 1998, and 1999, were 6 million, 8 million, and 10 million,
respectively, at exercise prices ranging from $0.88 per share to $25.50 per
share. These stock options were not included in the computation of diluted
earnings per share because the effect of assuming their exercise would have been
antidilutive.
The Company has 275 million authorized shares, of which 250 million are
Common Stock and 25 million are preferred stock. As of December 31, 1999,
approximately 15 million shares of Common Stock were reserved for the issuance
of shares under the Company's stock option and other plans. As of December 31,
1999, there were no preferred shares issued or outstanding.
F-17
<PAGE>
On May 23, 1996, the Company's shareowners approved an employee stock
purchase plan of up to 2 million shares of the Company's Common Stock. Under the
employee stock purchase plan, an employee may elect to purchase shares of the
Company's Common Stock at the end of a predetermined period at a price equal to
85% of the fair market value of the Company's Common Stock at the beginning or
end of such period, whichever is lower. The Company implemented two-year
employee stock purchase plans on January 1, 1997 and 1998, and a one-year plan
on January 1, 1999. The Company discontinued the employee stock purchase plan
effective December 31, 1999.
13. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less. As of December 31, 1999, cash
equivalents also include investments in money market instruments, which are
carried at fair market value. Cash payments made for interest for the years
ended December 31, 1997, 1998, and 1999 were approximately $144 million, $136
million, and $147 million, respectively, net of $16 million, $22 million, and
$24 million, respectively, of interest capitalized during the years ended
December 31, 1997, 1998 and 1999. During the year ended December 31, 1998,
PageNet utilized $13 million of deposits made in 1998 for the purchase of
subscriber devices. There were no significant federal or state income taxes paid
or refunded for the years ended December 31, 1997, 1998, and 1999.
14. EMPLOYEE BENEFIT PLANS
The Company has adopted a plan to provide retirement benefits under the
provisions of Section 401(k) of the Internal Revenue Code (the Code) for all
employees who have completed a specified term of service. Effective January 1,
1996, Company contributions equal 50% of employee contributions up to a maximum
of 6% of the employee's compensation. Employees may elect to contribute up to
15% of their compensation on a pre-tax basis, not to exceed the maximum amount
allowed as determined by the Code. The Company's contributions aggregated
approximately $2 million in 1997, $3 million in 1998, and $2 million in 1999.
15. STOCK PURCHASE RIGHTS
In September 1994, the Board of Directors of the Company adopted a Stock
Purchase Rights Plan and declared a distribution of one common share purchase
right for each outstanding share of the Company's Common Stock. As of September
28, 1994, certificates representing shares of the Company's Common Stock also
represent ownership of one common share purchase right. In January 1999, the
Board of Directors of the Company amended the Rights Plan to eliminate certain
provisions held to be unenforceable under Delaware law.
Generally, the rights will become exercisable only if a person or group (i)
acquires 20% or more of the Company's Common Stock or (ii) announces a tender
offer that would result in ownership of 20% or more of the Company's Common
Stock or (iii) is declared to be an "Adverse Person" by the Board of Directors.
Adverse Person includes any person or group who owns at least 10% of the
Company's Common Stock and attempts an action that would adversely impact the
Company. The Company's Board of Directors can waive the application of the stock
purchase rights under certain circumstances. In connection with the approval of
the Merger Agreement, the Company's Board of Directors waived such application
as it would have related to the Merger.
Once a person or group has acquired 20% or more of the outstanding Common
Stock of the Company, each right may entitle its holder (other than the 20%
person or group) to purchase, at an exercise price of $150, shares of Common
Stock of the Company (or of any company that acquires the Company) at a price
F-18
<PAGE>
equal to 50% of their current market price. Under certain circumstances, the
Board of Directors may exchange the rights for Common Stock (or equivalent
securities) on a one-for-one basis.
Until declaration of an Adverse Person, or ten (10) days after public
announcement that any person or group has acquired 20% or more of the Common
Stock of the Company, the rights are redeemable at the option of the Board of
Directors. Thereafter, they may be redeemed by the Board of Directors in
connection with certain acquisitions not involving any acquiring person or
Adverse Person or in certain circumstances following a disposition of shares by
the acquiring person or Adverse Person. The redemption price is $0.01 per right.
The rights will expire on September 27, 2004, unless redeemed prior to that
date.
16. SEGMENT INFORMATION
The Company has determined that it has two reportable segments, traditional
paging operations and advanced messaging operations. The Company's basis for the
segments relates to the types of products and services each segment provides.
The traditional paging segment consists of the traditional display and
alphanumeric services, which are basic one-way services, and 1 1/2-way paging
services. The advanced messaging operating segment consists of the Company's new
2-way wireless messaging services, VoiceNow service, and the operations of Vast,
which includes wireless integration products, consumer content, and wireless
software development and sales.
F-19
<PAGE>
The following table presents certain information related to the Company's
business segments as of December 31, 1997, 1998, and 1999 or for the years ended
December 31, 1997, 1998, and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
(IN THOUSANDS) ---------- ---------- ----------
<S> <C> <C> <C>
Total Revenues:
Traditional Paging(1)...... $ 960,290 $1,041,603 $ 973,658
Advanced Messaging......... 686 4,424 16,065
---------- ---------- ----------
$ 960,976 $1,046,027 $ 989,723
========== ========== ==========
Depreciation and amortization:
Traditional Paging(1)...... $ 276,590 $ 266,319 $ 310,347
Advanced Messaging......... 12,852 14,940 16,754
---------- ---------- ----------
$ 289,442 $ 281,259 $ 327,101
========== ========== ==========
Operating income (loss):
Traditional Paging(1)...... $ 31,399(2) $ 17,406(3) $ (41,190)(4)
Advanced Messaging......... (23,891) (39,726) (74,198)
---------- ---------- ----------
$ 7,508 $ (22,320) $ (115,388)
========== ========== ==========
Adjusted EBITDA(5):
Traditional Paging(1)...... $ 320,589 $ 357,725 $ 263,424
Advanced Messaging......... (11,039) (24,786) (57,444)
---------- ---------- ----------
$ 309,550 $ 332,939 $ 205,980
========== ========== ==========
Capital expenditures:
Traditional Paging(1)...... $ 224,459 $ 193,234 $ 121,779
Advanced Messaging......... 103,906 74,949 113,147
---------- ---------- ----------
$ 328,365 $ 268,183 $ 234,926
========== ========== ==========
Net interest expense(6):
Traditional Paging(1)...... $ 90,458 $ 74,729 $ 65,107
Advanced Messaging......... 57,233 66,963 81,912
---------- ---------- ----------
$ 147,691 $ 141,692 $ 147,019
========== ========== ==========
Total assets:
Traditional Paging(1)...... $1,047,246 $ 945,621 $ 746,515
Advanced Messaging......... 549,987 635,623 676,045
---------- ---------- ----------
$1,597,233 $1,581,244 $1,422,560
========== ========== ==========
</TABLE>
---------------
(1) The international operations of the Company currently consist entirely of
traditional paging services and accordingly are included in PageNet's
traditional paging business segment.
(2) Operating income for the traditional paging business segment for 1997
includes a $13 million provision to write down certain subscriber devices
to their net realizable value. See Note 5.
(3) Operating income for the traditional paging business segment for 1998
includes a restructuring charge of $74 million. See Note 4.
(4) Operating loss for the traditional paging business segment for 1999
includes a partial reversal of the restructuring charge of $24 million and
a provision for asset impairment of $18 million. See Notes 4 and 5,
respectively.
F-20
<PAGE>
(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-21
<PAGE>
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 32,144 $ 71,111
Accounts receivable, less allowance for doubtful
accounts............................................... 84,476 82,782
Inventories............................................... 8,687 6,340
Prepaid expenses and other assets......................... 5,623 15,810
---------- -----------
Total current assets................................... 130,930 176,043
Property, equipment, and leasehold improvements, at cost.... 1,451,761 1,394,510
Less accumulated depreciation............................. (684,648) (735,119)
---------- -----------
Net property, equipment, and leasehold improvements.... 767,113 659,391
Other non-current assets, at cost........................... 609,014 610,734
Less accumulated amortization............................. (84,497) (94,949)
---------- -----------
Net other non-current assets........................... 524,517 515,785
---------- -----------
$1,422,560 $ 1,351,219
========== ===========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Long-term debt in default................................. $1,945,000 $ 1,946,450
Accounts payable.......................................... 80,889 70,813
Accrued expenses.......................................... 50,146 46,153
Accrued interest.......................................... 42,532 99,185
Customer deposits......................................... 15,927 14,296
Deferred revenue.......................................... 19,778 24,837
---------- -----------
Total current liabilities.............................. 2,154,272 2,201,734
---------- -----------
Long-term obligations, non-current portion.................. 58,127 59,507
Commitments and contingencies
Shareowners' deficit:
Common Stock -- $.01 par, authorized 250,000,000 shares;
103,960,240 and 104,242,567 shares issued and
outstanding as of December 31, 1999 and June 30, 2000,
respectively........................................... 1,040 1,042
Paid-in capital........................................... 134,161 134,742
Accumulated other comprehensive income.................... 745 1,614
Accumulated deficit....................................... (925,785) (1,047,420)
---------- -----------
Total shareowners' deficit............................ (789,839) (910,022)
---------- -----------
$1,422,560 $ 1,351,219
========== ===========
</TABLE>
See accompanying notes
F-22
<PAGE>
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
1999 2000 1999 2000
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues.. $231,635 $184,884 $ 473,503 $ 396,157
Product sales............................ 22,930 18,635 44,622 42,999
-------- -------- --------- ---------
Total revenues...................... 254,565 203,519 518,125 439,156
Cost of products sold.................... (10,462) (13,043) (26,639) (26,236)
-------- -------- --------- ---------
244,103 190,476 491,486 412,920
Operating expenses:
Services, rent and maintenance......... 63,782 62,541 130,672 125,240
Selling................................ 21,962 15,221 45,992 35,322
General and administrative............. 87,939 80,164 176,229 159,934
Depreciation and amortization.......... 128,668 58,988 195,548 121,825
Provision for asset impairment......... -- -- 17,798 --
-------- -------- --------- ---------
Total operating expenses............ 302,351 216,914 566,239 442,321
-------- -------- --------- ---------
Operating loss........................... (58,248) (26,438) (74,753) (29,401)
Other income (expense):
Interest expense....................... (37,770) (46,768) (73,801) (93,123)
Interest income........................ 715 824 1,305 938
Other non-operating income (expense)... (8) (25) 180 (49)
-------- -------- --------- ---------
Total other expense................. (37,063) (45,969) (72,316) (92,234)
-------- -------- --------- ---------
Loss before cumulative effect of a change
in accounting principle................ (95,311) (72,407) (147,069) (121,635)
Cumulative effect of a change in accounting
principle.............................. -- -- (37,446) --
-------- -------- --------- ---------
Net loss................................. $(95,311) $(72,407) $(184,515) $(121,635)
======== ======== ========= =========
Net loss per share (basic and diluted):
Loss before cumulative effect of a change
in accounting principle................ $ (0.92) $ (0.69) $ (1.42) $ (1.17)
Cumulative effect of a change in accounting
principle.............................. -- -- (0.36) --
-------- -------- --------- ---------
Net loss per share..................... $ (0.92) $ (0.69) $ (1.78) $ (1.17)
======== ======== ========= =========
</TABLE>
See accompanying notes
F-23
<PAGE>
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 2000
--------- ---------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(184,515) $(121,635)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Provision for asset impairment....................... 17,798 --
Cumulative effect of a change in accounting
principle........................................... 37,446 --
Depreciation......................................... 186,545 112,641
Amortization......................................... 9,003 9,184
Provision for doubtful accounts...................... 12,630 14,698
Amortization of debt issuance costs.................. 2,260 2,304
Other................................................ (180) 49
Changes in operating assets and liabilities:
Accounts receivable.................................. 3,155 (13,004)
Inventories.......................................... (4,194) 2,347
Prepaid expenses and other assets.................... 1,762 (10,187)
Accounts payable..................................... 26,911 (10,076)
Accrued expenses and accrued interest................ (6,160) 52,611
Accrued restructuring costs.......................... (933) --
Customer deposits and deferred revenue............... (12) 3,428
--------- ---------
Net cash provided by operating activities................... 101,516 42,360
--------- ---------
Investing activities:
Capital expenditures...................................... (134,814) (6,727)
Payments for spectrum licenses............................ (2,546) --
Restricted cash invested in money market instruments...... -- (655)
Other, net................................................ (6,749) 1,406
--------- ---------
Net cash used in investing activities....................... (144,109) (5,976)
--------- ---------
Financing activities:
Borrowings of long-term obligations....................... 144,637 3,640
Repayments of long-term obligations....................... (94,979) (1,640)
Proceeds from exercise of stock options................... 1,201 583
--------- ---------
Net cash provided by financing activities................... 50,859 2,583
--------- ---------
Net increase in cash and cash equivalents................... 8,266 38,967
Cash and cash equivalents at beginning of period............ 3,077 32,144
--------- ---------
Cash and cash equivalents at end of period.................. $ 11,343 $ 71,111
========= =========
</TABLE>
See accompanying notes
F-24
<PAGE>
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
1. THE COMPANY AND MERGER AGREEMENT
Paging Network, Inc. (the Company) is a provider of wireless messaging
services throughout the United States and the U.S. Virgin Islands, Puerto Rico,
and Canada. The Company provides service in all 50 states and the District of
Columbia, including service in the 100 most populated markets in the United
States. The Company also owns a minority interest in a wireless messaging
company in Brazil.
On November 7, 1999, the Company signed a definitive agreement (the Merger
Agreement) to merge (the Merger) with Arch Communications Group, Inc. (Arch).
The Merger Agreement was subsequently amended on January 7, 2000, May 10, 2000,
July 23, 2000, and September 7, 2000. Under terms of the Merger Agreement, as
amended, the Company's senior subordinated notes, along with all accrued
interest thereon, will be exchanged for common stock of Arch representing 48.2%
of the common stock of the combined company, and the Company's common stock will
be converted into common stock representing 2.9% of the common stock of the
combined company. The Merger Agreement also provides for the Company to
distribute 80.5% of its interest in Vast Solutions, Inc. (Vast), a wholly owned
subsidiary of the Company, to holders of the Company's senior subordinated notes
and common stock. Holders of the senior subordinated notes will receive common
stock of Vast representing 60.5% of the equity of Vast, while holders of the
Company's common stock will receive common stock of Vast representing 20% of the
equity of Vast. The remaining interest in Vast will be held by the combined
company following the Merger.
As more fully discussed in Note 2, the Company will seek to complete the
Merger through the Company's plan of reorganization filed in conjunction with
the Company's bankruptcy filing in July 2000. Consummation of the Merger is also
subject to customary regulatory review. The Company and Arch have received
approval from the Department of Justice and the Federal Communications
Commission to proceed with the Merger. If the Merger Agreement is terminated
after one party pursues an alternative offer, a plan of reorganization of the
Company other than the one contemplated in the Merger Agreement is filed by the
Company and/or confirmed by a bankruptcy court, or under other specified
circumstances, either the Company or Arch may be required to pay a termination
fee of $40 million.
2. CHAPTER 11 REORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred losses of
$157 million, $162 million, and $299 million during the years ended December 31,
1997, 1998, and 1999, respectively, and $72 million and $122 million,
respectively, during the three and six months ended June 30, 2000. The Company's
deteriorating financial results and liquidity caused it to be in default of the
covenants of all of its domestic debt agreements. On February 2, 2000 and August
1, 2000, the Company failed to make the semi-annual interest payments on its
8.875% senior subordinated notes due 2006 (8.875% Notes) and its 10.125% senior
subordinated notes due 2007 (10.125% Notes), and on April 17, 2000, the Company
failed to make the semi-annual interest payment on its 10% senior subordinated
notes due 2008 (10% Notes). The Company also violated several of the financial
and other covenants of its domestic revolving credit facility (the Credit
Agreement). As a result of these defaults, the Company's bondholders and the
lenders under the Credit Agreement had the right to demand at any time that the
Company immediately pay its outstanding indebtedness in full. On July 14, 2000,
three senior subordinated noteholders commenced an involuntary proceeding
against the Company under Chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code).
On July 24, 2000 (the Petition Date), the Company consented to an order for
relief which, in effect, converted the bankruptcy case filed on July 14, 2000 to
F-25
<PAGE>
a voluntary Chapter 11 case. Also on the Petition Date, the Company's domestic
subsidiaries except for Vast filed voluntary petitions for relief under the
Bankruptcy Code (such subsidiaries and the Company are hereafter referred to
collectively as the "Debtors"). Subsequent to the Petition Date, the Debtors are
operating as debtors-in- possession and are subject to the jurisdiction of the
United States Bankruptcy Court for the District of Delaware (the Bankruptcy
Court). Chapter 11 is the principal Business reorganization chapter of the
Bankruptcy Code. Under Chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business for the benefit of its creditors and stockholders. In
addition to permitting rehabilitation of the debtor, another goal of Chapter 11
is to promote equality of treatment of creditors and equity security holders of
equal rank with respect to the restructuring of debt. In furtherance of these
two goals, upon the filing of a petition for reorganization under Chapter 11,
section 362(a) of the Bankruptcy Code generally provides for an automatic stay
of substantially all acts and proceedings against the debtor and its property,
including all attempts to collect claims or enforce liens that arose prior to
the commencement of the debtor's case under Chapter 11.
The Bankruptcy Court has exercised supervisory powers over the operations
of the Debtors with respect to the employment of attorneys, investment bankers
and other professionals, and transactions out of the Debtors' ordinary course of
business or otherwise requiring Bankruptcy Court approval under the Bankruptcy
Code. The Debtors have been paying undisputed obligations that have arisen
subsequent to the Petition Date on a timely basis. Since the Petition Date, the
Bankruptcy Court has entered orders, among other things, allowing the Debtors
(i) to pay certain customer refunds and deposits in the ordinary course of
business, (ii) to pay wages, salaries and benefits owing to employees, and (iii)
to pay pre-petition obligations owed to continuing vendors as such obligations
come due.
On July 25, 2000, the Debtors filed a Joint Plan of Reorganization and
disclosure statement which provide for the implementation of the Merger as the
Debtors' plan of reorganization. The Bankruptcy Court approved the disclosure
statement on September 7, 2000, and authorized the Debtors to submit the Joint
Plan of Reorganization to the Company's creditors and stockholders for approval.
The Bankruptcy Court has scheduled a hearing on the confirmation of the Joint
Plan of Reorganization for October 26, 2000.
As of July 31, 2000, the Company had approximately $66 million in cash.
Upon commencement of the Chapter 11 case, the Company obtained a
debtor-in-possession loan facility (the DIP Facility) from the current lenders
under the Credit Agreement which provided for additional secured borrowings by
both the Company and Vast not to exceed $50 million in the aggregate, subject to
certain limitations as set forth in the loan agreement. Borrowings under the DIP
Facility bear interest at prime plus 2.5% for outstanding borrowings up to $15
million, and at prime plus 3.0% for outstanding borrowings in excess of $15
million, due monthly. All amounts outstanding under the DIP Facility are due the
earlier of (i) the confirmation of the Debtors' Joint Plan of Reorganization, or
(ii) November 30, 2000. The Company believes that its existing cash, the cash
expected to be generated from operations, and the cash available under the DIP
Facility is sufficient to meet its obligations, except for the cash interest
payments due under the Notes, through the completion of the Merger. However, if
the Company's financial results continue to deteriorate, the Merger is delayed,
or other unforeseen events occur, the Company may not have sufficient liquidity
to meet its obligations through the completion of the Merger. If the Merger is
not completed, the Company would likely be required to consider a stand-alone
restructuring, asset sales, transactions with other potential merger parties or
acquirers, or liquidation. In addition, if the Merger is not completed, the
Company would likely incur significant charges for asset impairments and
restructuring its obligations. The accompanying financial statements do not
include any adjustments relating to the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Merger not be completed.
F-26
<PAGE>
3. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments, which are
of a normal recurring nature, except for the cumulative effect of a change in
accounting principle discussed in Note 4 and the provision for asset impairment
discussed in Note 5, necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods presented. These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
these financial statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. The balance sheet as of December 31, 1999, has
been derived from the audited financial statements as of that date. Results of
operations for the periods presented herein are not necessarily indicative of
results of operations for the entire year. These financial statements and
related notes should be read in conjunction with the financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
4. ACCOUNTING CHANGES
The Company adopted the provisions of Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" (SOP 98-5), effective January 1, 1999. SOP
98-5 requires the expensing of all start-up costs as incurred, as well as
writing off the remaining unamortized balance of capitalized start-up costs at
the date of adoption of SOP 98-5. The impact of the Company's adoption of SOP
98-5 was a charge of $37 million representing the cumulative effect of a change
in accounting principle to write-off all unamortized start-up costs as of
January 1, 1999.
Effective April 1, 1999, the Company changed the depreciable lives for its
subscriber devices and certain network equipment. The Company changed the
depreciable lives of its subscriber devices from three years to two years and
the depreciable life of certain of its network equipment from seven years to ten
years. The changes resulted from a review by the Company of the historical usage
periods of its subscriber devices and its network equipment and the Company's
expectations regarding future usage periods for subscriber devices considering
current and projected technological advances. The Company has determined that
the appropriate useful life of its subscriber devices is two years as a result
of technological advances, customer desire for new pager technology, and the
Company's decreasing ability to redeploy older pager models. As a result of
these changes, net loss increased by $69 million, or $0.66 per share (basic and
diluted), for the three and six months ended June 30, 1999.
5. PROVISION FOR ASSET IMPAIRMENT
During the first quarter of 1999, the Company made the decision to narrow
its focus to its North American operations and, as a result, made the decision
to sell or otherwise dispose of its operations in Spain. During the third
quarter of 1999, all operations of the Company's majority-owned Spanish
subsidiaries were ceased. The Company's interest in its Spanish subsidiaries was
sold in the first quarter of 2000 for minimal proceeds. As a result of the
Company's decision to sell or otherwise dispose of its Spanish subsidiaries, the
Company recorded a provision of $18 million during the six months ended June 30,
1999, for the impairment of the assets of the Company's majority-owned
subsidiaries, the effect of which was to write-off the Company's net investment
in its Spanish subsidiaries. The amount of the provision was based on the
Company's estimate of the value of its net investment in the Spanish
subsidiaries, which did not materially differ from the proceeds received upon
the sale of the subsidiaries in the first quarter of 2000. No cash costs have
been incurred or are expected as a result of the provision for the impairment of
F-27
<PAGE>
the assets of the Company's Spanish subsidiaries, and no additional charges are
expected to be required.
6. INCOME TAXES
For the three and six months ended June 30, 1999 and 2000, the Company had
no provision or benefit for income taxes because of the Company's inability to
benefit from its net operating losses.
7. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted average
number of common shares outstanding. The number of shares used to compute per
share amounts for the three months ended June 30, 1999 and 2000, were 104
million. The number of shares used to compute per share amounts for the six
months ended June 30, 1999 and 2000, were 104 million. The average number of
options to purchase shares of the Company's Common Stock during the three and
six months ended June 30, 1999 was 10 million, at exercise prices ranging from
$2.73 per share to $25.50 per share. The average number of options to purchase
shares of the Company's Common Stock during the three and six months ended June
30, 2000, was 10 million, at exercise prices ranging from $0.81 per share to
$17.13 per share. These stock options were not included in the computation of
diluted earnings per share because the effect of assuming their exercise would
have been antidilutive.
The Company has 275 million authorized shares, of which 250 million are
Common Stock and 25 million are preferred stock. As of June 30, 2000, there were
no preferred shares issued or outstanding.
8. COMPREHENSIVE LOSS
Comprehensive loss for the three and six months ended June 30, 1999 and
2000, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ----------------------
1999 2000 1999 2000
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net loss................................... $(95,311) $(72,407) $(184,515) $(121,635)
Foreign currency translation adjustments... (166) 810 (1,007) 869
-------- -------- --------- ---------
Total comprehensive loss......... $(95,477) $(71,597) $(185,522) (120,766)
======== ======== ========= =========
</TABLE>
9. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less. As of June 30, 2000, cash equivalents
also include investments in money market instruments, which are carried at fair
market value. Cash payments made for interest during the six months ended June
30, 1999 and 2000, were approximately $70 million and $34 million, respectively,
net of interest capitalized during the six months ended June 30, 1999 and 2000
of $11 million and $1 million, respectively. There were no significant federal
or state income taxes paid or refunded for the six months ended June 30, 1999
and 2000.
10. SEGMENT INFORMATION
The Company has two reportable segments, traditional paging operations and
advanced messaging operations. The Company's basis for the segments relates to
F-28
<PAGE>
the types of products and services each segment provides. The traditional aging
segment includes the traditional display and alphanumeric services, which are
basic one-way services, and 1 1/2-way paging services. The advanced messaging
segment consists of the Company's new 2-way wireless messaging services,
VoiceNow service, and the operations of Vast, which include wireless integration
products and wireless software development and sales.
The following table presents certain information related to the Company's
business segments for the three and six months ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ---------------------
1999 2000 1999 2000
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Total Revenues:
Traditional Paging(1)....................... $251,142 $196,170 $ 511,808 $424,655
Advanced Messaging.......................... 3,423 7,349 6,317 14,501
-------- -------- --------- --------
$254,565 $203,519 $ 518,125 $439,156
======== ======== ========= ========
Operating income (loss):
Traditional Paging(1)...................... $(46,525) $ (1,000) $ (54,246)(2) $ 12,101
Advanced Messaging.......................... (11,723) (25,438) (20,507) (41,502)
-------- -------- --------- --------
$(58,248) $(26,438) $ (74,753) $(29,401)
======== ======== ========= ========
Adjusted EBITDA (3):
Traditional Paging(1)....................... $ 81,506 $ 47,186 $ 157,857 $114,534
Advanced Messaging.......................... (11,086) (14,636) (19,264) (22,110)
-------- -------- --------- --------
$ 70,420 $ 32,550 $ 138,593 $ 92,424
======== ======== ========= ========
</TABLE>
---------------
(1) The international operations of the Company currently consist entirely of
traditional paging services and accordingly are included in the Company's
traditional paging business segment.
(2) Operating loss for the traditional paging business segment for the first
six months of 1999 includes a provision for asset impairment of $18
million. See Note 5.
(3) Adjusted EBITDA, as determined by the Company, does not reflect other
non-operating income (expense), provision for asset impairment, and
cumulative effect of a change in accounting principle.
Adjusted EBITDA is not defined in generally accepted accounting principles
and should not be considered in isolation or as a substitute for a measure of
performance in accordance with generally accepted accounting principles.
F-29
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements of Arch and PageNet
give effect to the following transactions as if they were consummated as of June
30, 2000 with respect to the unaudited pro forma balance sheet, except for
Arch's acquisition of MobileMedia which closed prior to December 31, 1999, and
on January 1, 1999 with respect to the unaudited pro forma statements of
operations:
o Arch's acquisition of MobileMedia, which closed on June 3, 1999;
o the exchange of $7.6 million (accreted value at June 30, 2000) of
Arch discount notes for 542 thousand shares of Arch common stock;
o the conversion of $44.0 million of Arch Series D preferred stock into
approximately 6.6 million shares of Arch common stock upon completion
of the merger; and
o 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.
F-30
<PAGE>
ARCH WIRELESS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS
ARCH EXCHANGE ADJUSTED FOR MERGER
ARCH -------------------- ARCH PAGENET --------------------- PRO FORMA
(HISTORICAL) DEBIT CREDIT PRO FORMA (HISTORICAL) DEBIT CREDIT CONSOLIDATED
------------ ----- ------ --------- ------------ ----- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 3,858 $ 3,858 $ 71,111 $ 5,733(2) $ 69,236
Accounts receivable, net...... 63,368 63,368 82,782 1,797(2) 144,353
Inventories................... 7,246 7,246 6,340 13,586
Prepaid expenses and other.... 16,306 16,306 15,810 271(2) 31,845
---------- ---------- ----------- ----------
Total current assets.... 90,778 90,778 176,043 259,020
Property and equipment, net... 382,238 382,238 659,391 2,586(2) 1,039,043
Intangible and other assets... 778,210 778,210 515,785 $ 332,232(2) 26,162(2) 1,600,065
---------- ---------- ----------- ----------
$1,251,226 $1,251,226 $ 1,351,219 $2,898,128
========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIT)
Current liabilities:
Current maturities of
long-term debt.............. $ 14,310 $ 14,310 $ 14,310
Long-term debt in default..... $ 1,946,450 $1,946,450(2) --
Accounts payable.............. 48,122 48,122 70,813 1,364(2) 117,571
Accrued expenses.............. 32,607 $ 3,000(1) 35,607 46,153 501(2) 81,259
Accrued interest.............. 30,200 30,200 99,185 96,948(2) 32,437
Customer deposits and
deferred revenue............ 31,628 31,628 39,133 381(2) 70,380
Accrued restructuring,
current portion............. 12,754 12,754 -- 75,000(2) 87,754
---------- ---------- ----------- ----------
Total current liabilities 169,621 172,621 2,201,734 403,711
Long-term debt,
less current maturities..... 1,104,011 $7,593(1) 1,096,418 59,507 70,000(2) 1,970,925
Accrued restructuring, 745,000(2)
non-current portion......... -- --
Other long-term liabilities... 78,772 78,772 78,772
Redeemable convertible
preferred stock............. 43,953 43,953 43,953(16) --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock............... 3 3 -- 3
Common stock.................. 661 5(1) 666 1,042 1,042(2) 899(2) 1,631
66(16)
Additional paid-in capital.... 817,116 1,335(1) 818,451 134,742 134,742(2) 540,406(2) 1,402,744
43,887(16)
Accumulated other
comprehensive income........ 1,614 1,614(2) --
Accumulated deficit........... (962,911) 3,253(1) (959,658) (1,047,420) 1,047,420(2) (959,658)
---------- ---------- ----------- ----------
Total stockholders'
equity (deficit)......... (145,131) (140,538) (910,022) 444,720
---------- ---------- ----------- ----------
$1,251,226 $1,251,226 $ 1,351,219 $2,898,128
========== ========== =========== ==========
</TABLE>
F-31
<PAGE>
ARCH WIRELESS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTED PRO FORMA
ARCH MOBILEMEDIA FOR MOBILEMEDIA FOR ARCH ARCH PAGENET ADJUSTMENTS PRO FORMA
(HISTORICAL) (HISTORICAL) ACQUISITION EXCHANGE PRO FORMA (HISTORICAL) FOR MERGER CONSOLIDATED
------------ ------------ --------------- ------------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service, rental and
maintenance revenues.. $ 591,389 $167,318 $ (3,521)(3) $ $ 755,186 $ 897,348 $ (1,032)(7) $ 1,651,502
Product Sales.......... 50,435 9,207 59,642 92,375 152,017
---------- -------- ---------- ----------- -----------
Total Revenues......... 641,824 176,525 814,828 989,723 1,803,519
Cost of products sold.. (34,954) (6,216) (41,170) (57,901) (14,820)(9) (113,891)
---------- -------- ---------- ----------- -----------
606,870 170,309 773,658 931,822 1,689,628
Operating Expenses:
Service, rental and
maintenance.......... 132,400 44,530 (3,521)(3) 173,409 267,043 82 (7) 440,534
Selling............... 84,249 23,115 107,364 97,413 204,777
General and
administrative....... 180,726 51,562 232,288 361,386 (20,380)(7) 573,294
Depreciation and
amortization......... 309,434 45,237 2,958 (4) 369,329 327,101 (77,559)(9) 686,994
11,700 (4) 68,123 (10)
Provision for asset
impairment........... 17,798 17,798
Restructuring charge.. (2,200) (2,200) (23,531) (25,731)
Bankruptcy related
expense.............. 14,938 14,938 14,938
---------- -------- ---------- ----------- -----------
Total operating expense 704,609 179,382 895,128 1,047,210 1,912,604
---------- -------- ---------- ----------- -----------
Operating income(loss). (97,739) (9,073) (121,470) (115,388) (222,976)
Interest expense, net. (143,028) (17,660) 17,660 (5) 715(6) (142,890) (150,921) 121,729 (8) (188,350)
(16,839)(5) 16,262(15) (25,676)(11)
9,408 (16)
Other income(expense). (48,421) 1,435 (46,986) 4,753 (140)(7) (42,373)
---------- -------- ---------- ----------- -----------
Income(loss) before
income tax provisions,
extraordinary item and
cumulative effect of
accounting change..... (289,188) (25,298) (311,346) (261,556) (453,699)
Provision for income
taxes................. -- 209 209 -- 209
---------- -------- ---------- ----------- -----------
Income(loss) before
extraordinary item and
cumulative effect of
accounting change..... $ (289,188) $(25,507) $ (311,555) $ (261,556) $ (453,908)
========== ======== ========== =========== ===========
Basic/diluted income
(loss) per share before
extraordinary item and
cumulative effectof
accounting change(17). $ (9.21) $ (4.96) $ (2.52) $ (2.85)
========== ========== =========== ===========
1,793,576(14) 6,613,180 (16)
542,347(1) (103,960,240)(2)
Weighted average common
shares outstanding(17) 31,603,410 17,181,660(13) 11,640,321(15) 62,761,314 103,960,240 89,917,844 (2) 159,292,338
</TABLE>
F-32
<PAGE>
ARCH WIRELESS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Six Months Ended June 30, 2000
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS ADJUSTED PRO FORMA
ARCH FOR ARCH ARCH PAGENET ADJUSTMENTS PRO FORMA
(HISTORICAL) EXCHANGE PRO FORMA (HISTORICAL) FOR MERGER CONSOLIDATED
------------ -------- --------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Service, rental and maintenance
revenues....................... $ 353,291 $ 353,291 $ 396,157 $ (2,515)(7) $ 746,933
Product sales................... 24,556 24,556 42,999 67,555
----------- ---------- ------ -----------
Total revenues.................. 377,847 377,847 439,156 814,488
Costs of products sold.......... (17,261) (17,261) (26,236) (9,907)(9) (53,404)
----------- ---------- ----------- -----------
360,586 360,586 412,920 761,084
Operating Expenses:
Service, rental and maintenance 76,954 76,954 125,240 770 (7) 202,964
Selling........................ 49,378 49,378 35,322 84,700
General and administrative..... 109,296 109,296 159,934 (11,198)(7) 258,032
Depreciation and amortization.. 180,589 180,589 121,825 4,459 (9) 340,935
34,062 (10)
----------- ---------- ----------- -----------
Total operating expenses........ 416,217 416,217 442,321 886,631
----------- ---------- ----------- -----------
Operating income (loss)......... (55,631) (55,631) (29,401) (125,547)
Interest expense, net.......... (76,699) 493(6) (76,206) (93,123) 60,760 (8) (114,253)
(9,108)(11)
3,424 (16)
Other income (expense)......... (2,010) (2,010) 889 (187)(7) (1,308)
----------- ---------- ----------- -----------
Income (loss) before income tax
provisions, extraordinary item
and cumulative effect of
accounting change.............. (134,340) (133,847) (121,635) (241,108)
Provision for income taxes...... -- -- -- --
----------- ---------- ----------- -----------
Income (loss) before extraordinary
item and cumulative effect of
accounting change.............. $ (134,340) $ (133,847) $ (121,635) $ (241,108)
=========== ========== =========== ===========
Basic/diluted income (loss) per
share before extraordinary item
and cumulative effect of
accounting change (17)......... $ (2.26) $ (2.06) $ (1.17) $ (1.49)
=========== ========== =========== ============
6,613,180 (16)
542,347(1) (104,242,567)(2)
Weighted average common shares
outstanding (17).............. 60,555,685 3,845,148(15) 64,943,180 104,242,567 89,917,844 (2) 161,474,204
</TABLE>
F-33
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1) To record the issuance of 542,347 shares of Arch common stock valued at
$2.47 per share in exchange for $7.6 million (accreted value, representing $8.2
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 as of June 30, 2000 which were exchanged as part of
the tender offer in connection with the merger transaction.
2) To record the issuance of 84,917,844 shares of Arch common stock and
12,100,000 shares of Vast Class B common stock in exchange for $1.2 billion
principal amount of PageNet senior subordinated notes plus accrued interest and
5,000,000 shares of Arch common stock and the distribution of 4,000,000 shares
of Vast Class B common stock in exchange for all of the outstanding common stock
of PageNet:
o This adjustment includes the elimination of all of approximately $96.9
million of accrued interest on PageNet's senior subordinated notes and
the write-off of $19.2 million and $7.6 million of deferred financing
costs associated with PageNet's senior subordinated notes and its
domestic revolving credit agreement, respectively, which Arch will not
assume as part of this transaction.
o This adjustment also includes the elimination of all consolidated
amounts Related to Vast and the recording of Arch's net investment in
Vast as a component of intangible and other assets following the
reduction of PageNet's ownership of Vast to below 50%. Additionally,
the adjustment reflects the forgiveness of $59.1 million of
intracompany indebtedness between PageNet and Vast, which is required
under the merger agreement and is a condition to the consummation of
the Vast distribution.
F-34
<PAGE>
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):
Consideration Exchanged:
Fair value of shares issued to PageNet stockholders
and noteholders (approximately 89,917,844 shares
at $6.02 per share)................................ $ 541,305
Liabilities Assumed:
Bank debt.......................................... 745,000
Other long-term debt............................... 59,507
Accounts payable................................... 69,449
Accrued expenses................................... 45,652
Accrued interest................................... 2,237
Customer deposits and deferred revenue............. 38,752
PageNet closing costs.............................. 41,000(a)
----------
Total consideration exchanged......................... 1,542,902
Transaction costs..................................... 29,000(b)
Restructuring reserve................................. 75,000(c)
----------
Total purchase price.................................. 1,646,902
Less fair value of tangible and intangible net assets
acquired:
Cash and cash equivalents.......................... 65,378
Accounts receivable, net........................... 80,985
Inventories........................................ 6,340
Prepaid expenses and other......................... 15,539
Property and equipment, net........................ 656,805
Intangible and other assets........................ 489,623(d)
----------
$1,314,670
==========
Excess of purchase price over tangible and intangible
assets acquired....................................... $ 332,232
==========
---------------
(a) PageNet closing costs consist primarily of investment banking,
financing and other costs which will be paid to PageNet's financial
advisors by Arch at the time of closing.
(b) Transaction costs include legal, investment banking, financing,
accounting and other costs incurred by Arch to consummate the PageNet
merger.
(c) Restructuring reserve consists of severance costs related
primarily to duplicative general and administrative functions at the
corporate, regional and market levels of PageNet, such as technical,
marketing, finance, and other support functions to be recorded in
accordance with Emerging Issue Task Force Consensus 95-3. These
terminations will occur as operations of PageNet are integrated into those
of Arch and are based on management's preliminary review of synergies that
exist between the two companies. The analysis is expected to be finalized
after consummation of the PageNet acquisition and may result in additional
amounts to be reserved but is not expected to be materially different from
the amount disclosed above.
(d) Intangible and other assets are shown net of the $7.6 million
elimination of deferred financing costs discussed earlier in this note 2.
3) To eliminate revenues and expenses between Arch and MobileMedia.
Revenues and expenses between Arch and PageNet were not material in 1999 or
2000.
4) To record amortization on the excess of purchase price over the tangible
and intangible assets in the MobileMedia acquisition on a straight-line basis in
the amount of $7.1 million for the year ended December 31, 1998 and $3.0 million
for the period ended June 3, 1999, the closing date of the MobileMedia
F-35
<PAGE>
acquisition. The amortization relates to $400.4 million assumed fair value of
intangible assets, consisting primarily of customer lists with an assumed fair
value of $239.7 million and FCC licenses with an assumed fair value of $143.0
million. The MobileMedia historical amortization was adjusted by $11.7 million
for the period ended June 3, 1999, the closing date of the MobileMedia
acquisition, to conform MobileMedia's 25 year estimated useful life for FCC
licenses to Arch's 10 year estimated useful life and to conform MobileMedia's 2
year estimated useful life for acquired customer lists to Arch's 5 year
estimated useful life.
5) To remove the interest expense associated with the various MobileMedia
credit facilities and notes terminated as a result of its insolvency proceedings
and to record the interest associated with Arch's additional borrowings to
finance the MobileMedia acquisition. Interest was calculated using an 11% rate
on $181.0 million of bank borrowings and a 14.75% rate on $139.0 million senior
discount notes.
6) To remove the interest expense associated with Arch's discount notes
which will be converted into common stock in connection with the Arch exchange
offer.
7) To remove the operating results of Vast, which shares will be
distributed as part of the overall transaction involving Arch and PageNet. This
adjustment removes only the direct expenses of Vast, as no expenses allocated to
Vast by PageNet were assumed to be eliminated as a result of the distribution.
8) To remove the interest expenses associated with PageNet's senior
subordinated notes which will be converted into common stock as part of the
PageNet exchange as well as the amortization of PageNet's deferred financing
costs which are included in interest expenses.
9) To adjust PageNet's 1999 and 2000 cost of sales and depreciation to be
consistent with Arch's pager useful life of three years per unit.
10) To record amortization of the excess of purchase price over the
tangible and intangible assets in the PageNet acquisition on a straight-line
basis of $33.2 million for the year ended December 31, 1999 and $16.6 million
for the six months ended June 30, 2000. It is Arch's policy to amortize goodwill
on a straight-line basis over 10 (ten) years. The actual amortization recorded
after consummation of the PageNet transaction may differ from these amounts due
to the full allocation of purchase price to assets and liabilities assumed
pursuant to APB No. 16. The amortization relates to $450.9 million assumed fair
value of intangible assets consisting primarily of FCC licenses with an assumed
fair value of $425.7 million and goodwill with an assumed fair value of $25.2
million. PageNet's historical amortization was adjusted by $34.9 million for the
year ended December 31, 1999 and $17.5 million for the six months ended June 30,
2000 to conform PageNet's 40 year estimated useful life of FCC licenses and
goodwill to Arch's 10 year estimated useful life.
11) To record additional interest expense on pro forma consolidated bank
debt. Interest was calculated assuming a 10% interest rate on the average bank
debt outstanding for the periods indicated. Additional interest expense on bank
borrowings would be as follows if interest rates were to increase or decrease by
1/8 of a percent (in thousands):
ASSUMED INTEREST EXPENSES
---------------------------------------
YEAR ENDED SIX MONTHS ENDED
ASSUMED CHANGE IN INTEREST RATE DECEMBER 31, 1999 JUNE 30, 2000
------------------------------------ ----------------- -----------------
Increase of 1/8%................... $27,146 $9,907
Decrease of 1/8%................... $24,206 $8,309
F-36
<PAGE>
12) Not Used.
13) To record issuance of Arch common stock in conjunction with the
MobileMedia acquisition.
14) To record issuance of Arch common stock in conjunction with the
repurchase of $16.3 million accreted value of discount notes in October 1999.
15) To remove interest expense and record issuance of Arch common stock in
conjunction with the repurchase of $157.4 million accreted value of discount
notes in February and March 2000.
16) To record the exchange of $91.1 million ($100 million maturity value)
accreted value of Arch's discount notes in exchange for $44.0 million of Arch's
Series D preferred stock in May 2000 and to adjust related interest expense and
debt issuance costs for the discount notes exchanged. The Series D preferred
stock was issued to Resurgence Asset Management and will be convertible into
6,613,180 shares of Arch common stock at any time at the option of Resurgence or
will be subject to mandatory conversion into common stock upon the completion of
the PageNet merger. The exchange of the discount notes resulted in a gain of
$44.4 million.
17) All share information reflects a 1-for-3 reverse stock split effected
by Arch during June 1999.
F-37
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
99.1 Press release announcing the completion of the merger