<PAGE>
Filed Pursuant to Rule 424(b)(3)
File No. 333-35021
PROSPECTUS
TELETRAC, INC.
OFFER TO EXCHANGE ITS
14% EXCHANGE B SENIOR NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING
14% ORIGINAL A SENIOR NOTES DUE 2007
---------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON DECEMBER 18, 1997.
Teletrac, Inc., a Delaware corporation ("Teletrac" or the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange $1,000 principal amount of its 14% Exchange
Senior Notes due 2007 (the "New Notes"), which will have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its issued and outstanding 14% Original Senior Notes due
2007 (the "Old Notes" and, collectively with the New Notes, the "Notes"), of
which $105,000,000 aggregate principal amount is outstanding, from the holders
(the "Holders") thereof. The Company will not receive any proceeds from the
Exchange Offer and has agreed to pay "all the expenses incident to the Exchange
Offer. The Company is a wholly owned subsidiary of Teletrac Holding, Inc.
("Holdings").
The terms of the New Notes are identical in all material respects (including
principal amount, interest rate and maturity) to the terms of the Old Notes,
except for certain transfer restrictions and registration rights relating to the
Old Notes. The Notes are unsecured obligations of the Company, rank PARI PASSU
with all present and future senior subordinated debt of the Company, and rank
senior to all present and future subordinated debt of the Company. As of
September 30, 1997, the aggregate amount of outstanding indebtedness (excluding
the Notes) of the Company was approximately $2.0 million. See "Description of
the New Notes." The Company may incur up to $30 million of secured indebtedness
under its Credit Facility (as defined herein) and currently has no outstanding
indebtedness under such Credit Facility. See "Description of Certain
Indebtedness--Credit Facility." Upon a Change of Control (as defined herein),
each Holder of the Notes may require the Company to repurchase all or a portion
of such Holder's Notes at an offer price in cash equal to 101% of the principal
amount thereof, together with accrued and unpaid interest to the date of
repurchase. In the event of a Change of Control, the Company may not have
sufficient funds to satisfy its obligation to repurchase the Notes and other
debt that may come due as a result thereof. See "Description of the New Notes."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the registration rights agreement
relating to the Old Notes. Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), the Company believes that
the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by Holders thereof
(other than any such Holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such Holders'
business and such Holders have no arrangement with any person to participate in
the distribution of such New Notes. Each broker-dealer that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. See "Plan of Distribution."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires, which will be December 18, 1997 (the
"Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer."
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and will be subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Old Notes will continue to be subject to the
existing restrictions upon transfer thereof and the Company will have no further
obligation to such holders to provide for registration under the Securities Act
of the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors--Consequences of the Exchange
Offer to Non-Tendering Holders of the Old Notes" and "Exchange Offer--Terms of
the Exchange Offer."
The New Notes will be available initially only in book-entry form. The
Company expects that the New Notes issued pursuant to this Exchange Offer will
be issued in the form of one or more Global Notes (as defined herein), which
will be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in a Global Note representing the New Notes will
be shown on, and transfers thereof will be effected through, records maintained
by the Depositary and its participants. After the initial issuance of the Global
Notes, New Notes in certificated form will be issued in exchange for a Global
Note only on the terms set forth in the Indenture. See "Description of Exchange
Notes--Book Entry, Delivery and Form."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of November 19, 1997.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with this
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of the Old Notes in any jurisdiction in which the
making of the Exchange Offer or acceptance thereof would no be in compliance
with the laws of such jurisdiction or would otherwise not be in compliance with
any provision of any applicable security law.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DESCRIPTION OF CERTAIN RISKS
TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
The Date of this Prospectus is November 19, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Information................................................................ 2
Summary of the Prospectus............................................................. 4
Risk Factors.......................................................................... 13
The Company........................................................................... 21
Use of Proceeds....................................................................... 21
The Exchange Offer.................................................................... 22
Capitalization........................................................................ 27
Selected Financial Data............................................................... 28
Supplemental Financial Data...........................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 30
Business.............................................................................. 37
Management............................................................................ 55
Securities Ownership.................................................................. 60
Certain Relationships and Related Transactions........................................ 63
Description of Certain Indebtedness................................................... 67
Description of the New Notes.......................................................... 68
Certain Federal Income Tax Considerations............................................. 95
Plan of Distribution.................................................................. 95
Legal Matters......................................................................... 96
Independent Auditors.................................................................. 96
Index to Financial Statements......................................................... F-1
</TABLE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
New Notes being offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. The Registration Statement
and the exhibits and schedules thereto may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, New York, New York 10048 and at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a web site that contains reports, proxy
statements and other information regarding registrants, including the Company,
that file such information electronically with the Commission. The address of
the Commission's web site is http://www.sec.gov.
As a result of the filing of the Registration Statement with the Commission,
the Company will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. The Company's obligation to file periodic
reports with the Commission pursuant to the Exchange Act may be suspended if the
New Notes are held of record by fewer than 300 holders at the beginning of any
fiscal year of the Company, other than the fiscal year in which such
registration statement or registered exchange offer for the New Notes becomes
effective. However, the indenture dated August 6, 1997 (the "Indenture") between
the Company and Norwest Bank Minnesota, National Association, as trustee (the
"Trustee"), provides that the Company must file with the Commission and provide
the holders of the Notes with copies of annual reports and other information,
documents and reports specified in Sections 13 and 15(d) of the Exchange Act as
long as the Notes are outstanding.
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER
OF TRANSMITTAL OR BOTH TOGETHER CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITY OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY
OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL OR BOTH TOGETHER,
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
Certain market data used throughout this Prospectus were obtained from
industry and government sources. The Company has not independently verified this
market data and makes no representations as to its accuracy.
------------------------
The following trademarks owned by the Company are used in this Prospectus:
Fleet Director-Registered Trademark-, Fleet Reporter-TM-,
OZZ-Registered Trademark-, Winfleet-TM- and Teletracer-TM-.
3
<PAGE>
SUMMARY OF THE PROSPECTUS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, THE AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO, AND THE FINANCIAL PROJECTIONS
INCLUDED ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE TERMS "TELETRAC" AND THE "COMPANY" INCLUDE
TELETRAC, INC., ITS PREDECESSORS, ITS SUBSIDIARY AND TELETRAC HOLDINGS, INC., A
HOLDING COMPANY WHOSE SOLE ASSET IS ALL OF THE ISSUED AND OUTSTANDING CAPITAL
STOCK OF TELETRAC, INC. SEE "GLOSSARY" FOR DEFINITIONS OF CERTAIN TERMS USED IN
THIS PROSPECTUS.
THE COMPANY
Teletrac is a leading provider of vehicle location and fleet management
services, including associated two-way digital wireless messaging, to commercial
fleet operators. The Company has developed a proprietary land-based location
technology that provides customers with a low-cost, accurate and reliable real-
time method of locating vehicles in selected metropolitan areas. The Company's
system is designed to enable customers to better manage their mobile workforce,
provide security for their property and personnel and communicate more
effectively with mobile workers.
As of December 31, 1996, the Company operated in six metropolitan markets:
Los Angeles, Miami, Chicago, Detroit, Dallas and Houston. The Company commenced
operations in Orlando in March 1997 and plans to begin providing vehicle
location and fleet management services in eight additional markets by the end of
1998, giving the Company operations in 15 of the largest metropolitan
statistical areas ("MSAs") in the United States, including New York and Boston.
As of September 30, 1997, the Company served over 2,000 commercial fleet
accounts, more than any other provider of fleet vehicle location services, and
had 61,369 location and messaging units in service with commercial fleet
customers, including Emery Air Freight, Inc., Tele-Communications, Inc., Budget
Rent-a-Car Corporation, Brinks Incorporated and the Dallas Independent School
District. In its Miami and Los Angeles markets, the Company also uses its
proprietary location systems to provide vehicle location and stolen vehicle
recovery services to consumers. As of September 30, 1997, the Company had 10,176
consumer units in service.
An investor group led by management formed the Company in August 1995 to
acquire the assets of AirTouch Teletrac (as defined below). AirTouch Teletrac
was established to develop land-based 900 MHz radio networks for wireless
location monitoring and related two-way wireless messaging services. AirTouch
Teletrac developed the technology and software for such networks and constructed
operational systems in six metropolitan markets. The Company acquired the assets
of AirTouch Teletrac in January 1996 (the "Acquisition"). To date, the Company
has placed approximately $58 million in private equity capital. Investors in
such private equity include BancBoston Ventures, Inc.; Burr, Egan, Deleage
Funds; Eos Partners; GCC Investments, Inc.; Kingdon Capital; Toronto Dominion
Capital (U.S.A.), Inc.; and TruePosition, Inc. (formerly Associated RT, Inc.).
COMMERCIAL FLEET MANAGEMENT
Market studies indicate that there are approximately 7.6 million total
commercial fleet vehicles in the 15 markets in which the Company operates or
plans to operate. The Company believes that there is substantial demand for
cost-effective communications services that offer both reliable location
tracking and two-way wireless messaging in metropolitan areas. The Company's
products can be used either alone or in conjunction with other communications
technologies. The Company believes that the majority of its target customers'
vehicles are currently equipped with wireless communications devices that do not
provide automatic location features, such as two-way radio, specialized mobile
radio ("SMR"), pagers and cellular devices. The Company's products and services
allow commercial fleet operators to (i) increase driver productivity and fleet
efficiency, (ii) improve customer service, (iii) limit unauthorized vehicle use,
and (iv) reduce driver overtime. The Company's customers include metropolitan
commercial fleets (such as trade service providers, delivery services, bus and
taxi fleets, ambulance companies, telecommunications
4
<PAGE>
companies, utility companies, municipal government vehicles and law enforcement
agencies) and long-haul trucking fleets when operating within metropolitan
markets.
The Company offers a range of fleet management solutions, depending on the
customer's budget and location and messaging needs. All of these solutions
require the installation of a vehicle location unit ("VLU") in each vehicle. The
VLU is a radio transceiver that receives and transmits signals used to determine
a vehicle's location. In addition to the VLU, commercial fleet customers
generally purchase software or location services from the Company. The Company's
primary software product for commercial fleet operators is Fleet
Director-Registered Trademark-, a proprietary software application that provides
real-time 24-hour-a-day vehicle location through a digitized map displayed on
the customer's dedicated personal computer, which is connected to the Company's
networks. Fleet Director-Registered Trademark- can be complemented with the
Company's messaging units, which allow two-way messaging between the fleet
dispatcher and drivers directly from the Fleet Director-Registered Trademark-
screen. The Company also offers Fleet Reporter-TM-, a lower cost alternative to
Fleet Director-Registered Trademark- that provides fleet operators with daily
printed reports of vehicle locations and access to real-time location
information through OZZ-Registered Trademark-, a telephone-operated information
system. In the second half of 1997, the Company intends to introduce
Winfleet-TM-, a Microsoft Windows-Registered Trademark--based application based
on Fleet Director-Registered Trademark- that will not require a dedicated
computer.
The Company believes that its wireless location and related two-way
messaging technology can serve its customers more reliably and more
cost-effectively than competing systems, including those which rely on global
positioning satellite ("GPS") technology combined with other forms of wireless
communication. The Company's location technology, which consists of proprietary
software and land-based transmitters and receivers that are licensed to operate
in the 904-909.75 and 927.75-928 MHz bandwidth, operates reliably in a high-rise
urban setting. GPS-based systems, on the other hand, can lose accuracy in areas
where high-rise buildings or other large structures obstruct the signal between
the satellite and the vehicle. To provide location services for fleet
management, GPS-based systems must also be coupled with a wireless communication
system that transmits location information to the fleet operator. The other
forms of wireless communication used in conjunction with GPS technology, such as
cellular and SMR, generally make the incremental cost of determining and
transmitting a vehicle's location to a fleet operator more expensive than the
Company's technology.
The Company derives its revenues from (i) monthly service fees and (ii)
equipment sales, including sales of VLUs, messaging units and fleet management
software. Once the Company's system is installed in a customer's fleet, the
Company benefits from recurring monthly service fees with minimal additional
selling or other expenses. The total number of the Company's commercial VLUs and
messaging units in service increased from 35,465 as of December 31, 1995 to
43,156 as of December 31, 1996 and to 61,369 as of September 30, 1997.
CONSUMER VEHICLE SERVICES
In its Miami and Los Angeles markets, the Company also uses its proprietary
location systems to provide vehicle location and stolen vehicle recovery
services to consumers. The Company's service locates and tracks stolen vehicles
in real-time and its equipment can be integrated with a vehicle's alarm system
and/or ignition so that it is automatically activated if the vehicle is stolen.
The Company's service also allows a subscriber to initiate vehicle location in
other emergency or roadside assistance situations or remotely unlock the vehicle
doors through the OZZ-Registered Trademark- system.
In 1995, prior to the Acquisition, the Company's predecessor ceased to
actively market its consumer vehicle services. The Company has continued
providing consumer service as a legacy of the business acquired from AirTouch
Teletrac but has not launched any new marketing efforts. While the Company
intends to focus on its commercial business, it is currently exploring various
potential strategies for marketing and distributing its products to consumers,
including through strategic partnerships or third-
5
<PAGE>
party reseller arrangements, and expects to begin expanding its consumer
operations in late 1997 or early 1998.
BUSINESS STRATEGY
The Company's objective is to enhance its position as the leading national
provider of vehicle location and fleet management services in metropolitan areas
by exploiting its proprietary technology and systems. The key elements of the
Company's strategy are:
INCREASE MARKET PENETRATION. In its six original markets, the Company is
rapidly building a trained sales force to market its products and services to
operators of commercial fleets. Prior to the Acquisition, AirTouch Teletrac
terminated all of its active sales and marketing efforts. Since the Acquisition,
the Company has hired approximately 90 direct sales representatives to service
its six original metropolitan markets and the Company believes that it will more
effectively exploit opportunities in its existing markets as its sales force
gains experience. The Company believes it requires a modest penetration of its
target markets to achieve its business plan.
EXPAND GEOGRAPHIC COVERAGE AREAS. In 1996, the Company began constructing
the network infrastructure to expand its coverage from six to 15 metropolitan
markets. In March 1997, the Company introduced commercial fleet services in
Orlando, and the Company expects to introduce commercial fleet services in two
additional markets by the end of 1997 and a further six markets by the end of
1998. In connection with the roll-out of its commercial fleet services, the
Company plans to add over 150 new sales representatives in its new markets by
2001. The Company also holds Federal Communications Commission licenses in 11
additional markets, but the Company expects that it would have to obtain
additional licenses in certain of such 11 markets before it could commence
commercial operations.
CAPITALIZE ON LOW-COST SERVICE. The Company believes that its proprietary
location solutions permit lower cost operation than most competing technologies,
which generally require more expensive hardware, more expensive airtime, or
both. With the Company's technology, the incremental cost of locating a vehicle
and transmitting its location to the fleet operator is nominal, which permits
the Company to provide services for a relatively low monthly fee. This price
structure permits customers to locate all their vehicles simultaneously and
frequently throughout the day (typically, every 15 minutes), which the Company
believes substantially improves the customer's ability to increase fleet
efficiency and monitor driver compliance.
EXTEND PRODUCT OFFERINGS. The Company believes that its ability to expand
and maintain its customer base depends on its continued marketing of
highly-functional, low-cost and user-friendly solutions for fleet management.
The Company plans to offer the first generation of Winfleet-TM-, a
Windows-Registered Trademark--based solution, in the second half of 1997 and has
commenced development of a second generation product. The Company is also
exploring technological improvements that would expand the Company's messaging
capabilities to include additional services such as free text return messaging,
wireless e-mail, fax, database queries, credit card verification and inventory
management.
EXPLOIT NEW BUSINESS OPPORTUNITIES. In conjunction with certain strategic
suppliers, the Company is currently developing a portable miniaturized device
that would permit personal location through the Company's existing networks. In
addition, the Company has discussed joint arrangements with several companies
providing vehicle location coverage in rural locations, which arrangements would
provide cost-effective and reliable coverage nationwide, and has explored other
approaches to providing service to customers operating outside of covered
metropolitan areas.
6
<PAGE>
THE OLD NOTES OFFERING
<TABLE>
<S> <C>
OLD NOTES......................... The Old Notes were sold by the Company on August 6, 1997
to Donaldson, Lufkin & Jenrette Securities Corporation
and TD Securities (USA) Inc. (the "Initial Purchasers")
pursuant to a Purchase Agreement dated July 31, 1997
(the "Purchase Agreement"). The Old Notes were sold to
the Initial Purchasers (the "Unit Offering") together
with certain warrants (the "Warrants") to purchase
shares of the Company's Class A Common Stock ("Common
Stock") in the form of units (the "Units"). The Initial
Purchasers subsequently resold the Old Notes (in the
form of the Units) to qualified institutional buyers
pursuant to Rule 144A under the Securities Act and
pursuant to offers and sales that occurred outside the
United States within the meaning of Regulation S under
the Securities Act.
REGISTRATION RIGHTS AGREEMENT..... Pursuant to the Purchase Agreement, the Company,
Holdings and the Initial Purchasers entered into a
Registration Rights Agreement dated August 6, 1997 (the
"Registration Rights Agreement"), which grants the
holders of the Old Notes certain exchange and
registration rights. The Exchange Offer is intended to
satisfy such exchange rights, which terminate upon the
consummation of the Exchange Offer.
</TABLE>
SUMMARY OF THE EXCHANGE OFFER
<TABLE>
<S> <C>
THE EXCHANGE OFFER................ The Company is offering to exchange up to $105,000,000
aggregate principal amount of its 14% Exchange Senior
Subordinated Notes due 2007 (the "New Notes") for a like
principal amount of its 14% Original Senior Subordinated
Notes due 2007 (the "Old Notes", and collectively with
the New Notes, the "Notes"). The terms of the New Notes
are identical in all material respects (including
principal amount, interest rate and maturity) to the
terms of the Old Notes, except for certain transfer
restrictions and registration rights relating to the Old
Notes. See "Description of the New Notes." The issuance
of the New Notes is intended to satisfy obligations of
the Company contained in the registration rights
agreement relating to the Old Notes.
EXPIRATION DATE; WITHDRAWAL OF
TENDER.......................... The Exchange Offer will expire at 5:00 p.m. New York
City time, on December 18, 1997. The tender of Old Notes
pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
ACCRUED INTEREST ON THE NEW
NOTES AND THE OLD NOTES......... Each New Note will bear interest from the most recent
date to which interest has been paid or duly provided
for on the Old Note surrendered in exchange for such New
Note or, if no interest has been paid or duly provided
for on such Old Note,
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
from August 6, 1997. Holders of Old Notes whose Old
Notes are accepted for exchange will not receive accrued
interest on such Old Notes for any period from and after
the last date to which interest has been paid or duly
provided for on the Old Notes prior to the original
issue date of the New Notes or, if no such interest has
been paid or duly provided for, will not receive any
accrued interest on such Old Notes, and will be deemed
to have waived, the right to receive any interest on
such Old Notes accrued from and after the last date to
which interest has been paid or duly provided for on the
Old Notes or, if no such interest has been paid or duly
provided for, from and after August 6, 1997.
PROCEDURES FOR TENDERING.......... Each Holder wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions
contained herein and therein and mail or otherwise
deliver such Letter of Transmittal, or such facsimile,
together with any other required documentation, to
Norwest Bank of Minnesota, National Association, as
Exchange Agent, at the address set forth therein. The
Letter of Transmittal will include a representation by
the tendering Holder that, among other things, (i) the
New Notes to be received pursuant to the Exchange Offer
are being acquired in the ordinary course of the
business of the person receiving such New Notes, (ii)
such holder has no arrangement with another person to
participate in the distribution of such New Notes, (iii)
such holder is not an "affiliate" (as defined in Rule
405 under the Securities Act) of the Company and (iv) if
the tendering Holder is a broker or a dealer (as defined
in the Exchange Act), it acquired the Old Notes for its
own account as a result of market-making activities or
other trading activities and that it has not entered
into any arrangement with the Company or any "affiliate"
of the Company to distribute the New Notes to be
received in the Exchange Offer. In the case of a
broker-dealer that receives New Notes for its own
account in exchange for Old Notes which were acquired by
it as a result of market-making or other trading
activities, the Letter of Transmittal will also include
an acknowledgment that the broker-dealer will deliver a
copy of this Prospectus in connection with the resale by
it of New Notes received pursuant to the Exchange Offer.
See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES.... Holders who wish to accept the Exchange Offer and cannot
complete the procedures for tendering on a timely basis,
may effect a tender according to the guaranteed delivery
procedures set forth in "The Exchange Offer--Procedures
for Tendering."
FEDERAL INCOME TAX CONSEQUENCES... The exchange pursuant to the Exchange Offer will not
result in any income, gain or loss to the Holders or the
Company for Federal income tax purposes. See "Certain
Federal Income Tax Considerations."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
EXCHANGE AGENT.................... Norwest Bank Minnesota, National Association is serving
as Exchange Agent in connection with the Exchange Offer.
The address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer--Exchange Agent".
CONSEQUENCES OF EXCHANGING OLD
NOTES PURSUANT TO THE EXCHANGE
OFFER........................... Generally, based on interpretations by the staff of the
Securities and Exchange Commission, the Company believes
that Holders of Old Notes (other than any Holder which
is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act of 1933, as amended)
who exchange their Old Notes for New Notes pursuant to
the Exchange Offer may offer such New Notes for resale,
resell such New Notes, and otherwise transfer such New
Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act;
provided that such New Notes are acquired in the
ordinary course of such Holder's business and such
Holders have no arrangement with any person to
participate in the distribution of such New Notes. Each
broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution." To
comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale
or register the New Notes prior to offering or selling
such New Notes. The Company does not currently intend to
register or qualify the sale of the New Notes in any
such jurisdictions.
UNTENDERED OLD NOTES.............. Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but who do
not tender their Notes will not have any further
exchange rights and such Old notes will contintue to be
subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old
Notes could be adversely affected.
CONSEQUENCES OF FAILURE TO
EXCHANGE........................ If a Holder of Old Notes does not exchange such Old
Notes for New Notes pursuant to the Exchange Offer, such
Old Notes will continue to be subject to the
restrictions on transfer contained in the legend
thereon. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act of 1933,
as amended, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act of
1933, as amended, and applicable state securities laws.
See "The Exchange Offer--Consequences of Failure to
Exchange."
</TABLE>
9
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The form and terms of the New Notes are identical in all material respects
to the Old Notes, except for certain transfer restrictions and registration
rights relating to the Old Notes. The Old Notes will evidence the same debt as
the New Notes and both series of Notes will be entitled to the benefits of the
Indenture and treated as a single class of debt securities thereunder. See
"Description of the New Notes."
<TABLE>
<S> <C>
SECURITIES OFFERED................ $105,000,000 principal amount of 14% Senior Notes due
2007.
MATURITY.......................... August 1, 2007.
INTEREST.......................... Interest on the Notes will accrue at the rate of 14% per
annum and will be payable semi-annually in arrears on
February 1 and August 1 of each year, commencing on
February 1, 1998.
RANKING........................... The Notes will represent senior, unsecured obligations
of the Company, will rank PARI PASSU in right of payment
with all existing and future senior indebtedness of the
Company and will rank senior in right of payment to all
existing and future subordinated indebtedness of the
Company. The Company currently has no indebtedness that
is expressly subordinated in right of payment to the
Notes. Although the Indenture will limit the ability of
the Company and its subsidiaries to incur additional
indebtedness, the Indenture will permit the Company to
incur secured indebtedness under the Credit Facility (as
defined herein), which, if incurred, will effectively
rank senior to the Notes with respect to the assets
securing such indebtedness. See "Risk
Factors--Substantial Leverage and Ability to Service
Debt," "Possible Incurrence of Secured Indebtedness" and
"Description of Certain Indebtedness" As of June 30,
1997, the aggregate amount of outstanding indebtedness
(excluding the Notes) of the Company, on a consolidated
basis, was approximately $1.7 million.
SECURITY.......................... The Company has purchased certain Pledged Securities,
representing funds sufficient to pay the first six
semi-annual interest payments on the Notes (estimated at
approximately $39.9 million), as security for repayment
of the first six interest payments on the Notes. See
"Description of Notes--Security." The Pledged Securities
will be held by the Collateral Agent (as defined herein)
under the Pledge Agreement (as defined herein) pending
disbursement.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
OPTIONAL REDEMPTION............... The Notes will not be redeemable prior to August 1,
2002. Thereafter, the Notes will be redeemable at the
option of the Company, in whole or in part, at the
redemption prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon
to the applicable redemption date. See "Description of
Notes--Optional Redemption." Notwithstanding the
foregoing, prior to August 1, 2000, the Company may
redeem outstanding Notes with the net proceeds of one or
more sales of Capital Stock (other than Disqualified
Stock) of the Company or Holdings to one or more persons
at a redemption price equal to 114% of the principal
amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the redemption
date; provided that not less than $68.3 million
aggregate principal amount of Notes remain outstanding
immediately after any such redemption; and such
redemption shall occur within 30 days after the date of
the closing of such sale of Capital Stock.
CHANGE OF CONTROL................. Upon the occurrence of a Change of Control (as defined
herein), each holder of the Notes will have the right to
require the Company to repurchase all or any part of
such holder's Notes at an offer price in cash equal to
101% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if
any, thereon to the date of purchase. A Change of
Control will not occur if any of the Existing
Stockholders (as defined below) becomes the benficial
owner of more than 50% of the total voting power of the
Voting Equity Interests (as defined below) of the
Company. See "Description of Notes--Repurchase at the
Option of Holders--Change of Control."
CERTAIN COVENANTS................. The Indenture governing the Notes (the "Indenture")
contains certain covenants that limit the ability of the
Company and its Restricted Subsidiaries (as defined
herein) to, among other things, incur additional
Indebtedness (as defined herein), pay dividends or make
other distributions, repurchase Equity Interests (as
defined herein) or subordinated Indebtedness, make
certain other Restricted Payments (as defined herein),
create certain liens, enter into certain transactions
with affiliates, sell assets, issue or sell Equity
Interests or enter into certain mergers and
consolidations. See "Description of Notes--Certain
Covenants." The Credit Facility contains similar
covenants. See "Description of Certain Indebtedness."
</TABLE>
RISK FACTORS
Holders of the Old Notes should consider carefully all of the information
contained in this Prospectus prior to tendering their Old Notes in the Exchange
Offer. In particular, Holders should consider the factors set forth under "Risk
Factors."
11
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
Set forth below is selected historical financial and operating data of the
Company and its predecessors. Certain of such historical financial and operating
data have been derived from the audited consolidated financial statements of the
Company and its predecessors as of and for the periods noted. The financial
information of the Company as of and for the nine months ended September 30,
1996 and 1997 is unaudited and is derived from the unaudited consolidated
financial statements of the Company which include all adjustments management
considers necessary for a fair presentation of the Company's financial position
and results of operations in accordance with generally accepted accounting
principles, subject to normal recurring year-end adjustments. The results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1997. The data
contained in the following table should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Company's and its predecessors' audited consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996(2) 1996(2) 1997
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT UNIT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................................. $ 15,336 $ 13,244 $ 15,957 $ 10,330 $ 18,688
Operating loss........................................................... (24,473) (36,114) (13,854) (8,358) (18,799)
Net loss................................................................. (39,824) (57,380) (13,792) (8,307) (20,077)
OTHER DATA:
EBITDA(3)................................................................ $ (19,255) $ (14,753) $ (11,260) $ (6,797) $ (17,045)
Commercial units in service at end of period............................. 30,283 35,465 43,156 40,589 61,369
Consumer units in service at end of period............................... 10,618 13,814 11,717 11,741 10,176
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
-------------------------
<S> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................. $ 53,733
Restricted cash and investments(4).................................................................... 42,042(5)
Total assets.......................................................................................... 138,276
Long-term debt(5)..................................................................................... 100,103(6)
Redeemable preferred stock............................................................................ 37,053
Stockholders' deficit................................................................................. (9,640)
</TABLE>
- ------------------------
(1) Represents financial and operating data of AirTouch Teletrac for the year
ended December 31, 1994 and for the period January 1, 1995 through December
28, 1995, the date on which AirTouch Teletrac was dissolved.
(2) The Company acquired the assets of the business on January 17, 1996, the
effective date of the Acquisition. From December 29, 1995 to January 16,
1996, the business was operated by AirTouch Services, successor to AirTouch
Teletrac. The results of operations of AirTouch Services for such period
were not material and are not included herein.
(3) EBITDA consists of operating income (loss) before interest, taxes,
depreciation and amortization. EBITDA also excludes refrequencing costs
accrued in the fiscal years ended December 31, 1995 and 1996 and an asset
impairment charge taken in the fiscal year ended December 31, 1995. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Background" and "Business--Regulation--Frequency Conversion."
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA, however, is not a
measure determined in accordance with generally accepted accounting
principles ("GAAP") and should not be considered in isolation or as a
substitute for or an alternative to net income (loss), cash flow from
operating activities or other income or cash flow data prepared in
accordance with GAAP or as a measure of a company's operating performance or
liquidity.
(4) Includes the aggregate principal amount of the Pledged Securities, estimated
at approximately $39.9 million. See "Description of Notes--Security."
(5) The Company received gross proceeds from the Unit Offering of $105 million.
The estimated value of the Warrants ($7.0 million) has been reflected as a
debt discount. However, the actual aggregate principal amount of the Notes
is $105 million.
12
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE TENDERING THEIR OLD NOTES IN
THE EXCHANGE OFFER.
This Prospectus contains statements that constitute forward-looking
statements. Those statements appear in a number of places in this Prospectus and
include statements regarding the intent, belief or current expectations of the
Company or its management primarily with respect to the future operating
performance of the Company. Prospective Holders of the Notes are cautioned that
any such forward-looking statements are not guarantees of future performance and
may involve risks and uncertainties, and that actual results may differ from
those in the forward-looking statements as a result of various factors, many of
which are beyond the control of the Company. The information set forth below and
the information under the heading "Management's Discussion and Analysis of
Results of Operations and Financial Condition" identify important factors that
could cause such differences (the "Cautionary Statements"). All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements. The Company does not intend to update any of its
forward-looking statements.
NET LOSSES AND NEGATIVE EBITDA
The Company and its predecessors have had losses in each year of their
operations, including net losses of $39.8 million, $57.4 million and $13.8
million for the fiscal years ended December 31, 1994, 1995, and 1996,
respectively. For the nine months ended September 30, 1996 and 1997, the Company
had losses of $8.3 million and $20.1 million, respectively. In addition, the
Company had an EBITDA deficiency (excluding refrequencing costs and asset
impairment) of $19.3 million, $14.8 million and $11.3 million for such years and
$6.8 million and $17.0 million for such nine-month periods. The Company also
expects that operating and net losses and negative EBITDA will increase as the
Company completes its market build-out and that, under its current business
plan, operating and net losses and negative EBITDA will continue at least
through year-end 1998. As of September 30, 1997, the Company had a stockholders'
deficit of approximately $9.6 million and an accumulated deficit of
approximately $38.7 million.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
As of September 30, 1997, the Company's total outstanding long-term
indebtedness was approximately $100 million (which excludes the portion of the
Unit Offering allocated to the Warrants) and its total long-term
indebtedness-to-total capitalization ratio would have been 0.74 to 1.0.
See "Description of Certain Indebtedness." Substantial borrowings under the
Credit Facility (as defined herein) would have the effect of increasing the
Company's total long-term indebtedness-to-total capitalization ratio, resulting
in a more highly leveraged company than existed prior to the Units Offering. As
of September 30, 1997, no borrowings had been made under the Credit Facility.
The ability of the Company to meet its debt service requirements will depend
upon achieving significant and sustained growth in cash flow. The Company
currently anticipates that earnings generated from operations should be
sufficient, together with the Pledged Securities, to provide enough cash flow to
make principal and interest payments on the Notes as they become due. However,
the Company's ability to generate such cash flow is subject to a number of risks
and contingencies. Included among these risks are the possibility that the
Company may not complete its planned geographic expansion on a timely basis,
that the Company's software products or vehicle location system could experience
performance problems or that utilization could be lower than anticipated.
Accordingly, there can be no assurance as to whether the Company will at any
time have sufficient resources to meet all of its debt service obligations as
they become due.
13
<PAGE>
The Company's current and future debt service requirements could have
important consequences to holders of the Notes, including the following: (i) the
Company's ability to obtain additional financing for future working capital
needs or financing for acquisitions or other purposes will be limited; (ii) a
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of principal and interest on its indebtedness, thereby reducing
funds available for operations; and (iii) the Company may be more vulnerable to
adverse economic conditions than less leveraged competitors and, thus, its
ability to withstand competitive pressures may be limited. The discretion of the
Company's management with respect to certain business matters will be limited by
covenants contained in the Indenture and future debt instruments. Among other
things, the covenants contained in the Indenture restrict, condition or prohibit
the Company from incurring additional indebtedness, creating liens on its
assets, making certain asset dispositions, conducting certain other business and
entering into transactions with affiliates and other related persons. There can
be no assurance that the Company's leverage and such restrictions will not
materially and adversely affect the Company's ability to finance its future
operations or capital needs or to engage in other business activities. Moreover,
a failure to comply with the obligations contained in the Indenture or any
agreements with respect to additional financing could result in an event of
default under such agreements, which could permit acceleration of the related
debt and acceleration of debt under future debt agreements that may contain
cross-acceleration or cross-default provisions. See "Description of the New
Notes."
POSSIBLE INCURRENCE OF SECURED INDEBTEDNESS
The New Notes will represent senior, unsecured obligations of the Company,
will rank PARI PASSU in right of payment with all existing and future senior
indebtedness of the Company and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Company. Although the
Indenture will limit the ability of the Company and its subsidiaries to incur
additional indebtedness, the Indenture will permit the Company to incur secured
indebtedness under the Credit Facility which, if incurred, will effectively rank
senior to the Notes with respect to the assets securing such indebtedness. In
such a case, if the Company's indebtedness under the Credit Facility were to be
accelerated, the holders of such secured indebtedness would be entitled to
payment in full out of the assets securing such indebtedness prior to payment to
holders of the Notes. If the lenders party to, or the holders of, any such
secured indebtedness were to foreclose on the collateral securing the Company's
obligations to them, subject to FCC approval if required, there can be no
assurance that there would be sufficient assets remaining after payment of all
such secured indebtedness to satisfy the claims of holders of the Notes in full.
See "Description of Notes--Certain Covenants" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity and Capital
Resources--Credit Facility."
RISKS OF EXPANSION AND MANAGEMENT OF GROWTH
The Company is currently operating in seven markets across the United States
and intends to commence commercial operations in an additional two markets in
1997 and six additional markets in 1998. The Company also holds Federal
Communications Commission ("FCC") licenses in 11 additional markets, for a total
of 26 markets, but the Company expects that it would have to obtain additional
licenses in certain of such 11 markets before it could commence commercial
operations. In the future, the Company may acquire FCC licenses to operate in
additional markets. Depending on the development of the Company's business plan,
the geographic scope of the Company's operations may continue to expand rapidly
for the next several years. A portion of the net proceeds of the Unit Offering
will be applied to expand the Company's current operations. There can be no
assurance as to whether, when, or on what terms the Company will be able to
construct its additional networks or that the construction will prove beneficial
to it. If the Company encounters delays or difficulties in a particular market,
it may redirect its expansion to one or more other markets. The Company may
encounter delays in the construction of its networks, including delays caused by
weather and late delivery or installation of equipment. In addition, the Company
will be subject to challenges inherent to companies experiencing rapid growth.
The
14
<PAGE>
Company's ability to market its products on a larger scale while maintaining
competitive pricing and customer service will depend on its ability to implement
and continually expand its operational systems and to recruit, train, manage and
motivate both current and new employees. There can be no assurance that the
Company will be able to effectively expand its operations or manage its expanded
operations. Failure to successfully expand its operations and effectively manage
the growth of the Company could have a material adverse effect on the Company's
business.
POTENTIAL FUTURE CAPITAL NEEDS
Based upon its current operating plan, the Company anticipates that the net
proceeds to the Company from the Unit Offering, together with its existing cash
balances and cash flow from operations, will be sufficient to meet the Company's
cash requirements for the foreseeable future. However, the Company's long-term
capital requirements will depend upon numerous factors, including the size and
success of the Company's marketing, sales and customer support efforts, the
demand for the Company's products and services, the pace of the Company's
expansion to new markets, the need for funds to participate and prevail in any
competitive-bidding auctions that the FCC may hold for licenses in any of the
markets in which the Company currently operates or in any of the markets which
the Company wishes to enter, the impact of regulatory requirements (such as the
required conversion of VLUs to a new FCC-mandated frequency band plan), the
scope of the Company's product development efforts and the continuing growth of
the Company's industry. To the extent that the funds generated by the Unit
Offering, together with existing resources and any future earnings or borrowings
under credit facilities, are insufficient to fund the Company's activities, the
Company may need to raise additional funds through public or private financings.
The issuance of additional equity, and the incurrence of additional
indebtedness, by the Company is subject, under certain circumstances, to the
prior approval of the holders of Holdings' Preferred Stock, which may affect the
Company's ability to raise capital in the future. See "Certain Relationships and
Related Transactions." No assurance can be given that additional financing will
be available or that, if available, it will be obtained on terms favorable to
the Company. If adequate funds are not available, the Company may have to reduce
or eliminate expenditures for product development, the marketing of its services
and its market build-out, which would have a material adverse effect on the
Company's business.
RELIANCE ON SOLE SUPPLIER
The Company purchases its VLUs and Base Station Units ("BSUs") from Tadiran
Telematics, Ltd. ("Tadiran"), a leading Israeli technology supplier and a
wholly-owned subsidiary of Tadiran Limited, a publicly traded Israeli company, a
majority of the stock of which is owned by Koor Industries Ltd. The Company's
ability to develop, construct and implement its networks and products on
schedule may be adversely affected by Tadiran's development, manufacturing and
delivery capabilities. While a limited number of other suppliers are available
for these products, management believes that it would take at least a year
before a new supplier could reach full production of these products. There can
be no assurance that alternate suppliers of the Company's equipment and products
will be available in the future or that such suppliers, if available, would be
able to manufacture such equipment and products at an acceptable price. The loss
of Tadiran as a supplier or the inability of another supplier to supply such
equipment would have a material adverse effect on the Company's business.
GOVERNMENT REGULATION
The Company and the wireless telecommunications industry are subject to
federal, state and local regulation with respect to licensing, service
standards, land use and tower site location and other matters. The Company's
operations are subject to recently adopted rules of the FCC that have not been
significantly interpreted by the FCC and that remain subject to reconsideration.
Several parties, including the Company, have requested that the FCC reconsider
various aspects of the newly-adopted rules governing Location and Monitoring
Service ("LMS"). In some cases, the reconsideration requests, if granted
15
<PAGE>
by the FCC, could have a material adverse effect on the Company's business.
There can be no assurance that governmental authorities will not propose or
adopt legislation or regulations that would have a material adverse effect on
the Company's business. Under existing FCC regulations, operating licenses are
issued for five-year terms, subject to renewal by application upon expiration of
their initial terms. Renewal is not automatic, although current FCC regulations
provide that renewal applications may be denied only for specific causes. There
can be no assurance that the Company will continue to hold its operating
licenses in the future.
FACTORS AFFECTING GRANDFATHERED SYSTEMS
FCC rules regulating LMS, adopted in 1995 and modified in March 1996 and
September 1997, established that LMS licenses would be granted on a geographic
basis. At the time that it adopted the new rules governing LMS, the FCC ceased
to accept applications for authorizations for new LMS transmitters. LMS licenses
granted prior to the 1995 rules, including those under which the Company
operates its systems, were granted for individual transmitter sites. In its 1995
rules, the FCC established procedures for the "grandfathering" of those LMS
systems that were in operation or authorized as of February 3, 1995. In order to
retain authorization for grandfathered systems that were authorized by the FCC
but not yet constructed as of February 3, 1995, however, each such grandfathered
system must have been built to the capability of locating a vehicle and
otherwise in compliance with the 1995 rules (as modified) by a deadline date
that was ultimately extended to January 1, 1997. The Company completed
construction of multilateration LMS stations in 26 markets prior to the January
1, 1997 deadline, submitted modification applications and associated waivers to
reflect minor parameter variations, and obtained special temporary authority
from the FCC to operate the newly constructed stations. The Company recently
discovered additional minor parameter variations and has submitted additional
modification applications and requests for special temporary authority relating
to the operation of those facilities. There can be no assurance that the FCC
will grant such applications or requests. The Company believes that it has met
all requirements of the FCC to retain the grandfathered multilateration LMS
systems it has constructed. The FCC's rules, however, contain no provision for
receiving a formal declaration from the FCC that the Company has met all of the
requirements for a grandfathered LMS licensee.
In addition, the FCC has further required that all LMS systems must conform
the LMS transmitters that had been constructed and that were in operation on
February 3, 1995 to the new LMS frequency band plan by April 1, 1998, the date
on which authority to operate on the previous LMS frequencies will expire. While
the Company already has constructed facilities in all of its markets to comply
with the new band plan and is currently converting the VLUs owned by its current
customers to the new band, there can be no assurance that the Company's systems
constructed prior to February 3, 1995 will comply with the new LMS spectrum band
plan by April 1, 1998. Non-multilateration LMS systems that were operating on
segments of the frequency band that the FCC allocated for multilateration LMS
use in 1995 were grandfathered until April 1, 1998. This means that
multilateration LMS systems such as the Company's may be required to share their
frequencies with non-multilateration systems until next April. See
"Business--Regulation-- Construction and Operation of Grandfathered Systems."
FCC rules also provide that additional licenses to operate an LMS system in
the markets in which a grandfathered system operates may be allocated by
auction. The Company intends to participate in future auctions of LMS spectrum,
including in those markets in which it has a grandfathered system. Management
expects that such auctions will occur in early 1998, and the Company may require
additional funds to participate in such auctions. See "Use of Proceeds" and
"Business--Regulation--LMS Spectrum Auctions." In the event that the Company
does not submit the winning bid in a market in which it operates a grandfathered
system, it will have to cooperate with the winning bidder and will be precluded
from further expanding such grandfathered system. There can be no assurance that
in any such auction the Company will acquire a license to operate its system in
each market in which it currently holds grandfathered licenses, or that its
failure to do so would not require the Company to modify its existing technology
to
16
<PAGE>
avoid interference with the winning bidder or otherwise delay or increase the
cost of its planned market build-out. See "Business--Regulation--LMS Spectrum
Auctions." In addition, if the Company acquires licenses in the auction, it
would be obligated under present rules to build out the systems for those
markets under deadlines set by the FCC.
FOREIGN OWNERSHIP
The FCC has not declared whether multilateration LMS will be classified as a
private mobile radio service (PMRS) or as a commercial mobile radio service
(CMRS), but has proposed to classify LMS providers on a case-by-case basis. If
the Company's services were reclassified as CMRS rather than as PMRS, the
Company, which holds its FCC authorizations through a wholly-owned subsidiary,
Teletrac License, Inc., would be subject to the foreign ownership restrictions
under the Communications Act that apply to the parent corporations of CMRS
licensees. Under this restriction, non-U.S. persons would not be permitted to
hold, directly or indirectly, in the aggregate, more than 25% of the ownership
or 25% of the voting rights in the Company, absent a waiver or determination by
the FCC that a higher level of foreign ownership would be in the public
interest. Although, as of October 15, 1997, the Company was controlled by U.S.
citizens, non-U.S. persons held slightly more than 25% of the ownership of the
Company. If the FCC were to reclassify its multilateration LMS as CMRS at a time
when the Company's level of foreign ownership or foreign voting rights exceeded
25%, the Company would be required to obtain a public interest determination
from the FCC approving its level of foreign ownership or to restructure its
ownership to meet the 25% benchmark.
RADIO FREQUENCY INTERFERENCE
The FCC allocated radio frequencies to multilateration LMS on a secondary
basis. This means that LMS operations cannot cause interference to, and may be
required to accept interference from, users of those same or adjacent
frequencies in the Industrial, Scientific, and Medical radio service and in the
Federal government's radiolocation service. In addition, under Part 15 of the
FCC's rules, certain unlicensed radio devices (such as spread spectrum devices
used for local area networks) operate on the same or adjacent frequencies as LMS
systems. Although multilateration LMS systems generally have priority in the use
of their frequencies over such Part 15 devices, the FCC's rules provide a
"safe-harbor" for the operation of Part 15 devices in LMS spectrum. If a Part 15
device is operated in a manner that satisfies those safe-harbor requirements
(which are designed to avoid or minimize the risk of interference to LMS
services), an LMS system that nonetheless suffers interference from such a Part
15 device may have no recourse other than to negotiate with the Part 15 user on
methods for eliminating or reducing the interference. See
"Business--Regulation--Technical Requirements."
The Company's location and communication technology operates through radio
signals, which may experience interference from radio signals on adjacent
frequencies. Interference can reduce system effectiveness. So long as other
users comply with the regulations applicable to their devices or services, the
Company may have no legal recourse even if it experiences significant
interference from other radio signals. In developing or expanding a system in a
metropolitan market, the Company tests for interference and generally expects
that a certain amount of system modification will be required to minimize
interference. There can be no assurance that the Company will not encounter
significant interference with its systems in some or all of its new markets,
which could impair the functioning of its system in such markets and/or increase
the cost of subscriber equipment or system build-out.
In certain portions of its Los Angeles market area, the Company has
experienced interference from paging networks operating on frequencies adjacent
to the new LMS frequency band. Such interference has impaired service to certain
customers, although it has not materially affected the Company's operating
results in Los Angeles. Such interference would be minimized by the installation
of additional transmitters or by enhancement of the filtering capabilities of
the VLU. The Company has applied for waivers to permit the installation of
additional transmitters in Los Angeles and other markets, but there can be no
assurance
17
<PAGE>
that the Company will obtain such waivers and the Company's request for such
waivers has been opposed in filings by other parties. Tadiran has also developed
and is testing an enhanced filter in the VLU that is expected to reduce
interference from out-of-band transmissions, but there can be no assurance that
the filter will be effective in the field or will be available at acceptable
cost. In testing its system in San Francisco, the Company has experienced
interference from Part 15 devices at several of its receiver installations. The
Company believes that such interference is primarily caused by devices that do
not comply with the safe-harbor provisions for Part 15 devices operating in the
LMS spectrum. There can be no assurance that such interference can be minimized
in a timely manner, or that interference would not be experienced in other
existing or new markets. There can be no assurance, if such interference is the
result of devices not in compliance with safe-harbor provisions, that the
interference can be minimized in a timely manner.
NETWORK BUILD-OUT
The Company is engineering and designing its own network of transmitters and
receivers. While the Company has secured transmitter sites for each of its
licensed transmitters and has constructed all such transmitters in compliance
with FCC regulations, there can be no assurance that the Company will be able to
secure leases for the receiver sites necessary to construct and operate its
networks within its budgeted time frames and costs. Part of this process
involves identification of the optimal number of sites to receive signals
necessary to deliver the Company's location and associated messaging services.
In this identification process, known as radio frequency ("RF") propagation
analysis, engineers utilize computer software programs to analyze terrain,
topography, building penetration, population concentrations and other factors.
Once sites are identified in the network design process, the Company must secure
leases for the sites upon which it will install antennae, receivers and other
infrastructure equipment. The site acquisition process requires the negotiation
of site leases and verification by the Company that the site owner has obtained
the necessary governmental approvals and permits. The location and development
of sites that are considered desirable from the perspective of maximizing signal
coverage and penetration has become more difficult, due in part to the
saturation of such sites by other wireless service providers. In addition to
site identification and acquisition, the construction of the Company's networks
will require equipment installation and systems testing. Each stage involves
various risks and contingencies, many of which are not within the control of the
Company and any of which could adversely affect the implementation of the
Company's proposed networks.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company is facing increasing competition in the vehicle location and
fleet management industries. The Company faces competition for its services from
companies using GPS technology, as well as cellular, SMR and paging technology.
In addition, a variety of wireless two-way communication technologies are under
development and could result in increased competition for the Company. Certain
of the Company's competitors are larger and have substantially greater financial
and research and development resources and more extensive marketing and selling
organizations than the Company. There can be no assurance that additional
competitors will not enter markets that the Company plans to serve or that the
Company will be able to withstand the competition. Moreover, changes in
technology could lower the cost of competitive services to a level where the
Company's services would become less competitive or where the Company would need
to reduce its service prices in order to remain competitive, which could have a
material adverse effect on the Company's business. See "Business--Competition."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will be
entitled to require the Company to purchase any or all of the Notes held by such
holder at the prices stated herein. In the event that a Change of Control
occurs, the Company would likely be required to refinance the indebtedness
18
<PAGE>
outstanding under the Notes. In addition, the Credit Facility provides that, if
a change of control (as defined therein) occurs, the Company would be required
to repay the indebtedness outstanding under the Credit Facility and the Company
may be required to repay the Notes. There can be no assurance that the Company
would be able to refinance either such indebtedness or, if such refinancing were
to occur, that such refinancing would be on terms favorable to the Company. See
"Description of Notes--Repurchase at the Option of Holders--Change of Control."
RELIANCE ON KEY PERSONNEL
The Company's business is managed by a small group of key executive
officers, the loss of any of whom could have a material adverse effect on the
Company's business. The Company believes that its continued success will depend
in large part on its ability to attract and retain highly skilled and qualified
personnel.
PROPRIETARY RIGHTS AND PATENTS; CERTAIN PENDING LITIGATION
The Company's success will depend in part upon its ability to protect the
confidentiality of its proprietary technology. The Company currently holds no
material patents and generally seeks to protect its software products and trade
secrets by requiring that its consultants, employees and others with access to
its trade secrets sign nondisclosure and confidentiality agreements. Management
believes that these actions provide appropriate legal protection for the
Company's intellectual property rights in its software products, but there can
be no assurance that such measures will be sufficient. There also can be no
assurance that others will not independently develop similar technologies,
duplicate the Company's technologies or design around aspects of any
technologies developed by the Company. See "Business-- Product Protection."
AirTouch Teletrac brought an action before the United States Patent and
Trademark Trial and Appeal Board against T.A.B. Systems ("TAB") opposing TAB's
registration of the mark "Teletrak." The Trademark Trial and Appeal Board
granted AirTouch Teletrac's motion for summary judgment, but summary judgment
was reversed by the U.S. Court of Appeals for the Federal Circuit. Under the
terms of the Asset Purchase Agreement between AirTouch Teletrac and the Company,
AirTouch Teletrac must pay the costs of any litigation relating to this matter
and must indemnify the Company against any losses relating thereto. AirTouch
Teletrac has notified the Company that it intends to continue to litigate this
matter on its own behalf, as well as on behalf of the Company, and that it will
bear the cost of such litigation. There can be no assurance that AirTouch
Teletrac will be successful in such litigation or will honor its indemnification
obligations (including any costs or losses relating to a change of name, if
required).
DEPENDENCE ON NETWORK OPERATIONS
The Company's operations are dependent upon its ability to protect its
computer and network equipment against damage that may be caused by equipment
failure, fire, weather, earthquakes, power loss or similar events. There can be
no assurance that such events would not disable one or more of the Company's
networks. Because each metropolitan area has its own network control center,
damage to any network control center would disrupt service for the entire
metropolitan area serviced by such control center. Any significant damage to any
one of the Company's networks could have a material adverse effect on the
Company's business. The Company is currently enhancing its location monitoring
system hardware and software to enable it to reduce its number of network
control centers from one in each metropolitan market to three of four regional
network control centers. If such improvements are made, damage to any network
control center would disrupt service for several metropolitan markets serviced
by such control center.
19
<PAGE>
ABSENCE OF A PUBLIC MARKET FOR THE NEW NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued in August 1997 to certain Qualified Institutional Buyers (as
defined in Rule 144A under the Securities Act) and pursuant to offers and sales
outside the United States within the meaning of Regulation S under the
Securities Act and are eligible for trading in the Private Offerings, Resale and
Trading through Automatic Linkages (PPORTAL) market. The New Notes are
securities for which there currently is no market. If the New Notes are traded,
they may trade at a discount from their face value, depending upon prevailing
interest rates, the market for similar securities and other factors. The Company
does not currently intend to list the New Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. Accordingly,
there can be no assurance as the development or liquidity of any trading market
for the New Notes.
CONSEQUENCES OF THE EXCHANGE OFFER TO NON-TENDERING HOLDERS OF THE OLD NOTES
In the event the Exchange Offer is consummated, the company will not be
required to register the Old Notes. In such event, the New Notes would rank PARI
PASSU with the Old Notes and holders of Old Notes seeking liquidity in their
investment would have to rely on exemptions to registration requirements under
the securities laws, including the Securities Act. A reduction of the principal
amount of the Old Notes as a result of this Exchange Offer may have an adverse
effect on the ability of holders of the Old Notes to transfer such Old Notes.
20
<PAGE>
THE COMPANY
An investor group led by management formed Teletrac, Inc. in August 1995 to
acquire the assets of AirTouch Teletrac. AirTouch Teletrac was established in
1988 to develop land-based 900 MHz radio networks for wireless location
monitoring and related two-way wireless messaging services. Over an eight year
period, AirTouch Teletrac developed the technology and software for such
networks and constructed operational systems in six metropolitan markets.
Teletrac, Inc. acquired the assets of AirTouch Teletrac on January 17, 1996.
The current management of Teletrac has had significant experience in the
wireless communications industry. James A. Queen, the Company's Chief Executive
Officer, together with several members of the Company's current management,
founded and managed Premiere Page, Inc. ("Premiere Page"), a paging company with
operations in Alabama, Illinois and surrounding markets. Premiere Page was
established in 1988, completed an initial public offering of its stock in 1993,
and in 1994 was merged into another paging company, forming the fifth largest
paging company in the nation at the time, based on units in service.
To create a holding company structure, Holdings, Teletrac and all of the
stockholders of Teletrac entered into an Exchange Agreement. Under the terms of
such Exchange Agreement, all of Teletrac's stockholders exchanged their shares
of Common Stock and Preferred Stock of Teletrac for substantially similar shares
of the Common Stock and Preferred Stock of Holdings (the "Exchange"). See
"Certain Relationships and Related Transactions--Exchange Agreement." As a
result of the Exchange, Holdings owns all the outstanding capital stock of
Teletrac, which constitutes its sole asset.
The principal executive offices of Teletrac and Holdings are located at 2323
Grand Street, Suite 1100, Kansas City, Missouri 64108, and its telephone number
is (816) 474-0055.
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of New Notes
pursuant to the Exchange Offer. The proceeds to the Company and Holdings from
the Unit Offering was approximately $100 million, net of discounts and
commissions and estimated offering expenses. The Company used approximately
$39.9 million of such proceeds to purchase the Pledged Securities. See
"Description of Notes-- Security." The Company intends to use the net proceeds
from the Unit Offering (i) to fund expenditures for the continued construction,
development and roll-out of its networks and services, including site
construction, marketing costs and the purchase of system hardware, and (ii) for
general corporate purposes, including the funding of operating losses, working
capital requirements and the possible acquisition of additional radio spectrum
in metropolitan markets. The Company believes that the net proceeds of the Unit
Offering, together with its current cash reserves and cash flow from operations,
are sufficient to build out its operations in the new markets to be opened in
1997 and 1998 and to fund its operations in fifteen markets for the foreseeable
future.
The Company may require additional financing in order to complete the
build-out of its networks in additional markets beyond the markets scheduled to
open in 1997 and 1998. See "Risk Factors--Potential Future Capital Needs" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
21
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
The Holders of the Old Notes currently are entitled to certain registration
rights under the Registration Rights Agreement dated August 6, 1997 (the
"Registration Rights Agreement") among the Company, Donaldson, Lufkin & Jenrette
Securities Corporation and TD Securities (USA) Inc. Pursuant thereto, the
Company became obligated to file with the Commission an Exchange Offer
Registration Statement covering the offer by the Company to the Holders of the
Old Notes to exchange all of the Old Notes for the New Notes. The Exchange Offer
being made hereby, if consummated, will satisfy the Company's obligations under
the Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
New Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by the holders thereof
(other than any such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such Holders'
business and such Holders have no arrangement with any person to participate in
the distribution of such New Notes. See MORGAN STANLEY & CO., INC., SEC
No-Action Letter (available June 5, 1991), EXXON CAPITAL HOLDINGS CORPORATION,
SEC No-Action Letter (available May 13, 1988) and SHEARMAN & STERLING, SEC No-
Action Letter (available July 2, 1993).
If any person were to be participating in the Exchange Offer for the
purposes of distributing securities in a manner not permitted by the
Commission's interpretation, such person (i) could not rely on the position of
the staff of the Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION or
similar interpretive letters and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. See "Plan of Distribution."
As of the date of this Prospectus, there was $105,000,000 aggregate
principal amount of the Old Notes outstanding. This Prospectus, together with
the Letter of Transmittal, is being sent to all such registered holders as of
the date of this Prospectus.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes from the Company and
delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
22
<PAGE>
If Old Notes are not tendered, they shall remain outstanding and shall
accrue interest from their date of issue, August 6, 1997, at a rate of 14% per
annum.
In the event the Exchange Offer is consummated, the Company will not be
required to register the Old Notes. In such event, holders of Old Notes seeking
liquidity in their investment would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act. See "Risk
Factors--Consequences of the Exchange Offer to Non-Tendering Holders of the Old
Notes."
The term "Expiration Date" shall mean the expiration date set forth on the
Cover Page of this Prospectus.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from August 6, 1997, payable semiannually
on February 1 and August 1 of each year, commencing February 1, 1998, at a rate
of 14% per annum.
PROCEDURES FOR TENDERING
The tender to the Company of Old Notes by a holder thereof pursuant to one
of the procedures set forth below will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees,
to the Exchange Agent at its address set forth on the back cover of this
Prospectus on or prior to the Expiration Date (or complying with the procedure
for book-entry transfer described below) or (ii) complying with the guaranteed
delivery procedures described below.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the New Notes to be issued in exchange therefor are to be
issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
book-entry transfer facility) whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a commercial bank or trust company located or
having an office or correspondent in the United States, or by a member firm of a
national securities exchange or of the National Association of Securities
Dealers, Inc., which firm must also be a member of or participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or the Stock Exchanges Medallion Program (any of the
foregoing hereinafter referred to as an "Eligible Institution"). If the New
Notes and/or Old Notes not exchanged are to be delivered to an address other
than that of the registered holder appearing on the note register for the Notes,
the signature in the Letter of Transmittal must be guaranteed by an Eligible
Institution.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSTANCE OBTAINED,
AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Old Notes at the book-entry
transfer facility for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of Old Notes by causing such book-
23
<PAGE>
entry, transfer facility to transfer such Old Notes into the Exchange Agent's
account with respect to the Old Notes in accordance with the book-entry transfer
facility's procedures for such transfer. Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's accounts at the
book-entry transfer facility, an appropriate Letter of Transmittal with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at its address
set forth on the back cover page of this Prospectus on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its office listed on the back cover hereof on or prior to the Expiration Date a
letter, telegram or facsimile transmission from an Eligible Institution setting
forth the name and address of the tendering holder, the names in which the Old
Notes are registered and, if possible, the certificate numbers of the Notes to
be tendered, and stating that the tender is being made thereby and guaranteeing
that within five New York Stock Exchange trading days after the date of
execution of such letter, telegram or facsimile transmission by the Eligible
Institution, the Old Notes, in proper form for transfer (or a confirmation of
book-entry transfer of such Old Notes into the Exchange Agent's account at the
book-entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Old Notes being tendered by the above-
described method are deposited with the Exchange Agent within the time period
set forth above (accompanied or preceded by a properly completed Letter of
Transmittal and any other required documents), the Company may, at its option,
reject the tender. Copies of a Notice of Guaranteed Delivery which may be used
by Eligible Institutions for the purposes described in this paragraph are
available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of New
Notes in exchange for Old Notes tendered pursuant to a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) by an Eligible Institution will be made only against deposit of
the Letter of Transmittal (and any other required documents) and the tendered
Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of the Company, the Exchange Agent or any
other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give such
notification.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of such holder's business, (ii) such holder has
no arrangement with any person to participate in the distribution of such New
Notes, (iii) such holder is not an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company and (iv) if such holder is a broker or a dealer
(as defined in the Exchange Act), that it acquired the Old Notes for its own
account as a result of market-making activities on other trading activities and
24
<PAGE>
that it has not entered into any arrangement or understanding with the Company
or any "affiliate" of the Company to distribute the New Notes received in the
Exchange Offer.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written
transmission notice of withdrawal via telegram, telex, facsimile transmission or
letter must be received by the Exchange Agent at its address set forth herein
prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice
of withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the depositor
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. All questions as to
the validity, form and eligibility (including time of receipt) of such
withdrawal notices will be determined by the Registrants, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no New Notes will be issued with respect thereto unless the Old Notes so
withdrawn are validly retendered. Any Old Notes which have been tendered but
which are not accepted for exchange will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may
be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
The Exchange Offer is not subject to any conditions other than that the
Exchange Offer does not violate applicable law or any applicable interpretation
of the staff of the Commission.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal and
deliveries of completed Letters of Transmittal with tendered Old Notes should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT EXPRESS: BY MAIL:
Norwest Bank Minnesota, National Association
Norwest Bank Minnesota, National Association Corporate Trust Operations
Corporate Trust Operations Norwest Center
P.O. Box 1517 Sixth and Marquette
Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and their affiliates in person, by
telegraph or telephone.
25
<PAGE>
The Company will not make any payments to brokers, dealers, or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes, and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees, but not including transfer taxes, if any, relating to the sale or
disposition of the Old Notes by a holder of the Old Notes, will be paid by the
Company, and are estimated in the aggregate to be approximately $500,000.
26
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of Teletrac,
Inc. as of September 30, 1997, as adjusted to give effect to the sale of the
Notes. The table should be read in conjunction with the audited consolidated
financial statements of the Company and its predecessors and the related notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
--------------
<S> <C>
(IN THOUSANDS)
Cash and cash equivalents......................................................................... $ 53,733
--------------
--------------
Restricted cash and investments(1)................................................................ 42,042
--------------
--------------
Long-term debt:
Notes(2)........................................................................................ $ 98,077
Long-term leases payable........................................................................ 2,026
--------------
Total long-term debt.............................................................................. 100,103
Series A Redeemable Preferred Stock, $.01 par value, 190,477 shares authorized and 190,476.19
shares issued and outstanding................................................................... 37,053
Undesignated Preferred Stock, $.01 par value, 190,477 shares authorized and none issued and
outstanding..................................................................................... --
Stockholders' equity (deficit):
Class A Common Stock, $.01 par value, 1,000,000 shares authorized and 249,000 shares issued and
outstanding..................................................................................... 2
Class B Common Stock, $.01 par value, 70,000 shares authorized and none issued and outstanding.... --
Additional paid-in capital........................................................................ 29,062
Accumulated deficit............................................................................... (38,705)
--------------
Stockholders' deficit............................................................................. (9,640)
--------------
Total capitalization.............................................................................. $ 127,515
--------------
--------------
</TABLE>
- ------------------------
(1) Includes the aggregate principal amount of the Pledged Securities, estimated
at approximately $39.9 million. See "Description of Notes--Security."
(2) The Company anticipates gross proceeds from the Unit Offering of $105
million. The estimated value of the Warrants ($7.0 million) has been
reflected as a debt discount. However, the actual aggregate principal amount
of the Notes is $105 million. The cash proceeds from the Unit Offering for
the value of the Warrants has not been reflected in cash and cash
equivalents since the Warrants were sold by Teletrac Holdings, Inc.
27
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
Set forth below are selected historical financial and operating data of the
Company and its predecessors. Certain of such historical financial and operating
data have been derived from the audited consolidated financial statements of the
Company and its predecessors as of and for the periods noted. The financial
information of the Company as of and for the nine months ended September 30,
1996 and 1997 is unaudited and is derived from the unaudited consolidated
financial statements of the Company which include all adjustments management
considers necessary for a fair presentation of the Company's financial position
and results of operations in accordance with generally accepted accounting
principles subject to normal recurring year-end adjustments. The results for the
nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1997. The data
contained in the following table should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Company's and its predecessors' audited consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PREDECESSORS(1) THE COMPANY
---------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996(2) 1996(2) 1997
---------- ---------- ---------- ---------- ---------- --------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT UNIT DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:................................ $ 6,805 $ 11,550 $ 15,336 $ 13,244 $ 15,957 $ 10,330 $ 18,688
Operating Expenses
Cost of revenues....................... 7,212 5,748 6,357 4,323 7,031 3,735 4,036
Selling, general and administrative.... 44,336 40,272 28,234 23,674 20,186 13,392 23,823
Research and development costs......... -- -- -- -- -- -- 2,873
Refrequencing costs(3)................. -- -- -- 5,936 1,340 677 --
Depreciation and amortization.......... 3,844 5,155 5,218 4,458 1,254 884 1,754
Asset impairment(4).................... -- -- -- 10,967 -- -- --
---------- ---------- ---------- ---------- ---------- --------- ----------
Total operating expenses................. 55,392 51,175 39,809 49,358 29,811 18,688 *37,486
---------- ---------- ---------- ---------- ---------- --------- ----------
Operating Loss........................... (48,587) (39,625) (24,473) (36,114) (13,854) (8,358) *(18,798)
Interest Expense....................... (7,154) (10,318) (15,610) (21,239) (109) (33) (2,530)
Other.................................. (166) 16 259 (27) 171 87 125
---------- ---------- ---------- ---------- ---------- --------- ----------
Net Loss................................. $ (55,907) $ (49,927) $ (39,824) $ (57,380) $ (13,792) $ (8,307) $ (20,077)
---------- ---------- ---------- ---------- ---------- --------- ----------
---------- ---------- ---------- ---------- ---------- --------- ----------
Other Data:
EBITDA(5)................................ $ (44,743) $ (34,470) $ (19,225) $ (14,753) $ (11,260) $ (6,797) $ *(17,044)
Deficiency of earnings to fixed charges
(6).................................... 55,907 49,927 39,824 57,380 14,132 8,307 23,790
Commercial units in service at end of
period................................. 9,426 23,903 30,283 35,465 43,156 40,589 61,369
Consumer units in service at end of
period................................. 4,367 6,688 10,618 13,814 11,717 11,741 10,176
</TABLE>
- ------------------------
* with R&D
28
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------- AS OF
1992 1993 1994 1995 1996 SEPTEMBER 30, 1997
--------- ---------- ---------- ---------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (UNAUDITED)
Balance Sheet Data:
Cash and cash equivalents:................... $ 3,253 $ 1,586 $ 546 -- $ 27,639 $ 53,733
Restricted cash and investments.............. -- -- -- -- 1,256 42,042
Total assets................................. 42,968 37,392 28,852 11,137 53,713 138,276
Long-term debt............................... 129,250 170,653 203,285 226,101 1,615 100,103
Redeemable preferred stock................... -- -- -- -- 33,340 37,053
Partners'/Stockholders' equity (deficit)..... (94,786) (144,713) (184,038) (241,418) 7,111 (9,640)
</TABLE>
- ------------------------
(1) Represents financial and operating data of PacTel Teletrac for the years
ended December 31, 1992 and 1993 and AirTouch Teletrac for the year ended
December 31, 1994 and for the period January 1, 1995 through December 28,
1995, the date on which AirTouch Teletrac was dissolved.
(2) The Company acquired the assets of the business on January 17, 1996, the
effective date of the Acquisition. From December 29, 1995 to January 16,
1996, the business was operated by AirTouch Services, successor to AirTouch
Teletrac. The results of operations of AirTouch Services for such period
were not material and are not included herein.
(3) Refrequencing costs are certain costs accrued in connection with the
conversion of vehicle location units to a new frequency band plan mandated
by the FCC. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Background" and
"Business--Regulation--Frequency Conversion."
(4) Asset impairment for 1995 resulted from the Acquisition, in which the assets
of AirTouch Teletrac were sold for approximately $11.0 million less than the
historical book value of such assets recorded by AirTouch Teletrac. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Background."
(5) EBITDA consists of operating income (losses) before interest, taxes,
depreciation and amortization. EBITDA excludes the accrued refrequencing
costs and asset impairment charge described above. EBITDA is presented
because it is a widely accepted financial indicator of a company's ability
to incur and service debt. EBITDA, however, is not a measure determined in
accordance with GAAP and should not be considered in isolation or as a
substitute for or an alternative to net income (loss), cash flow from
operating activities or other income or cash flow data prepared in
accordance with GAAP or as a measure of a company's operating performance or
liquidity.
(6) For purposes of calculation, earnings consist of the Company's loss before
income taxes and fixed charges. Fixed charges consist of gross interest
expense plus the portion of rental expense under operating leases which has
been deemed by the Company to be representative of interest factor. The
deficiency of earnings to fixed charges represents the additional earnings
required to bring the ratio of earnings to fixed charges to 1.00.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO OF THE COMPANY AND ITS PREDECESSORS AND
"SELECTED FINANCIAL AND OPERATING DATA" APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS THAT INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. SEE "RISK FACTORS."
BACKGROUND
AIRTOUCH TELETRAC OPERATIONS. The Company's vehicle location business was
established in 1988 by PacTel Teletrac, a California partnership whose majority
partner was a wholly-owned subsidiary of Pacific Telesis Group. The partnership
changed its name to AirTouch Teletrac in connection with the spin-off by Pacific
Telesis Group of its wireless operations to AirTouch Communications, Inc.
AirTouch Teletrac was established to develop land-based 900 MHz radio networks
for wireless location monitoring and two-way wireless messaging services. Over
an eight-year period, AirTouch Teletrac developed the technology and software
for such networks, obtained FCC licenses and constructed operational systems in
six metropolitan markets. In addition, AirTouch Teletrac developed the Company's
proprietary software and other products and built a sales and marketing
organization in the six metropolitan markets in which it had operational
networks. Development costs and operating losses were primarily funded through
the issuance of convertible debt of the partnership to the majority partner, a
subsidiary of AirTouch Communications, Inc.
In 1995, AirTouch Teletrac determined to sell its business and, in
connection with that decision, substantially curtailed its marketing efforts.
FORMATION OF THE COMPANY. Teletrac was formed in August 1995 to acquire the
assets of the AirTouch Teletrac business. From its inception in August 1995
through December 31, 1995 the Company's expenses were nominal and the Company
had no revenues.
ACQUISITION OF ASSETS OF AIRTOUCH TELETRAC. On January 17, 1996, the
Company acquired the assets of AirTouch Teletrac in the Acquisition. In
connection with the Acquisition, the Company assumed certain liabilities of
AirTouch Teletrac, but did not assume its long-term debt. The Company accounted
for the Acquisition as a purchase and allocated the purchase price to the assets
purchased and the liabilities assumed. As a result of the sale of the assets for
less than book value, an asset impairment charge of approximately $11.0 million
was recorded by AirTouch Teletrac in 1995.
CHANGES IN BUSINESS STRATEGY. Management has significantly changed the
Company's business strategy since the Acquisition. The primary change has been
to shift the focus of the Company from engineering and product development to
sales and marketing. During 1995, in anticipation of the sale of its business,
AirTouch Teletrac substantially curtailed its marketing efforts. The Company
began increasing sales and marketing activity immediately upon completing the
Acquisition in order to increase market penetration and restore revenue growth.
To date, management has focused the Company's sales efforts exclusively on sales
of commercial fleet equipment and services. The Company has continued providing
consumer service and has allowed dealer arrangements in place at the Acquisition
to continue, but has not launched any new marketing efforts. The Company is
currently exploring various potential strategies for marketing and distributing
its products to consumers, including through strategic partnerships or
third-party reseller arrangements, and expects to begin expanding its consumer
operations in late 1997 or early 1998.
In addition, over the next 18 months, the Company expects to continue
expanding its operations beyond the six markets operating at the time of the
Acquisition. As of December 31, 1996, the Company operated in six metropolitan
markets: Los Angeles, Miami, Chicago, Detroit, Dallas and Houston. The Company
commenced operations in Orlando in March 1997 and plans to initiate commercial
fleet service in San Francisco and San Diego before the end of 1997 and a
further six markets (Washington, D.C./ Baltimore, New York, Boston,
Philadelphia, Indianapolis and Columbus) before the end of 1998. The
30
<PAGE>
Company made capital expenditures and incurred expenses in 1996 and the first
six months of 1997 in connection with network build-out in these markets. The
Company also incurred expenses in connection with the network build-out required
to grandfather its FCC licenses in 11 other metropolitan markets in which it may
commence offering commercial fleet services in the future. See
"Business--Regulation-- Construction and Operation of Grandfathered Systems."
REFREQUENCING COSTS. The FCC has required all LMS systems that were
constructed and in operation as of February 3, 1995 to conform their
already-constructed facilities to a new LMS frequency band plan. The frequency
conversion must be completed by April 1, 1998, the date on which authority to
operate on the previous LMS frequencies will expire. The Company has begun an
active program of converting installed VLUs to operate within the new frequency
band plan. The Company anticipates that the frequency conversion process for its
existing markets will be completed prior to the April 1, 1998 deadline. The
Company estimates that the total cost of such conversion will be approximately
$7.2 million. Approximately $5.9 million of such estimated cost was accrued in
1995 to account for VLUs installed prior to the Acquisition, and the remainder
was accrued in 1996 to account for VLUs installed after the Acquisition that
operated on the old frequency. New markets are being opened with equipment that
conforms to the new band plan requirements and all VLUs sold after December 31,
1996 operate on the new frequency. See "Business--Regulation--Frequency
Conversion."
OPERATING LOSSES. The Company has experienced significant operating and net
losses and negative EBITDA in connection with the build-out of its networks and
the operation of its business, and expects to continue to experience operating
and net losses and negative EBITDA until such time as it develops a
revenue-generating customer base sufficient to fund its operating expenses. See
"Risk Factors--Net Losses and Negative EBITDA." The Company expects to build its
customer base over time by (i) increasing the number of markets in which it
operates from six, as of December 31, 1996, to 15 by the end of 1998 and (ii)
increasing its market penetration by building a larger and more productive sales
force. The Company anticipates that revenues will increase in 1997. The
Company's operations in Los Angeles are currently generating positive EBITDA
(excluding corporate overhead). The Company's management expects several
additional markets to begin generating positive EBITDA (excluding corporate
overhead) by the end of 1997 and the Company as a whole to achieve positive
EBITDA in 1999. However, the Company also expects that operating and net losses
and negative EBITDA will increase as the Company completes its market build-out
and that, under its current business plan, operating and net losses and negative
EBITDA will continue at least through the end of fiscal 1998. See "--Liquidity
and Capital Resources" and "Projected Financial Information."
FINANCIAL STATEMENT PRESENTATION. The audited consolidated financial
statements of Teletrac, Inc. for 1996 include the period prior to the
Acquisition, from January 1, 1996 through January 16, 1996. During such period,
Teletrac, Inc. had no revenues and nominal expenses. No information with respect
to the operations of the fleet management and vehicle location business by
AirTouch Teletrac during such period is included in the financial statements of
Teletrac, Inc.
COMPONENTS OF REVENUES. The Company's revenues are generated from two
primary sources: monthly service fees from customers and the sale of equipment
and software to customers. Commercial customers are charged flat monthly service
fees for vehicle location and related communication services and consumer
customers are charged flat monthly service fees for vehicle location services.
The Company sells VLUs, messaging terminals, personal computers and its
proprietary software to commercial fleet customers, and sells VLUs to consumer
customers. See "Business--Commercial Fleet Management" and "Business--Consumer
Vehicle Services." For the year ended December 31, 1996 and the six months ended
June 30, 1997, service revenues represented approximately 55.9% and 50.8% of
total revenues, respectively, and revenues from equipment sales represented the
remaining 44.1% and 49.2%, respectively. The Company expects that, as it builds
its customer base by expanding into new markets and increasing penetration of
its existing markets, the percentage of its revenues generated by equipment
sales will
31
<PAGE>
initially increase. Over time, as the monthly service fee base grows, the
Company expects that revenues from equipment sales will decrease, and service
revenues will increase, as a percentage of total revenues.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES. Total revenues for the nine months ended September 30, 1997 were
$18.7 million, compared to $10.3 million for the nine months ended September 30
1996, an increase of 82%.
Equipment revenues increased to $9.6 million for the nine months ended
September 30, 1997 from $3.9 million for the nine months ended September 30,
1996, an increase of 146%, principally due to an increase in gross commercial
installations to 23,371 units for the nine months ended September 30, 1997 from
9,170 units for the nine months ended September 30, 1996.
Service revenues increased to $9.1 million for nine months ended September
30, 1997 from $6.5 million for nine months ended September 30, 1996, an increase
of 40%, primarily due to an increase in the number of commercial units in
service, to 61,369 at September 30, 1997 from 40,589 at September 30, 1996.
Also, the average commercial service revenue per unit increased to $16.93 in
September 1997 from $15.55 in September 1996.
COST OF REVENUES. Costs of revenues includes the cost of equipment and the
direct cost of providing service (network telephone, billing, roadside
assistance and bad debt expense). Cost of revenues increased to $9.0 million for
the nine months ended September 30, 1997 from $3.7 million for the nine months
ended September 30, 1996 primarily as a result of the higher number of new units
sold. In addition, the Company incurred $0.7 million for the nine months ended
September 30, 1997 on telephone costs associated with installing and maintaining
its networks in markets that are not yet opened.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $13.3 million, to $26.7 million for the
nine months ended September 30, 1997 from $13.4 million for the nine months
ended September 30, 1996. The increase was primarily related to increased sales
personnel for the commercial operations, the funding of new product development
and increased support for the growth of the customer base. The Company expensed
$2.9 million in the nine months ended September 30, 1997 that primarily relates
to research and development for its new IBSU.
REFREQUENCING COSTS. Refrequencing costs were not accrued for the nine
months ended September 30, 1997 since all units placed in service in 1997 are
operating on the new frequency.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization increased for
the nine months ended September 30, 1997 to $1.8 million from $0.9 million for
the nine months ended September 30, 1996, primarily due to depreciation on
additional assets related to the new market build-out and additional
infrastructure in existing markets.
OPERATING LOSSES. Operating losses incurred by the Company were $18.8
million for the nine months ended September 30, 1997, as compared to $8.4
million for the nine months ended September 30, 1996, for the reasons discussed
above.
NET LOSS. For the reasons discussed above, net loss increased to $20.1
million for nine months ended September 30, 1997 from $8.3 million for nine
months ended September 30, 1996. No tax benefit has been recognized for any
period due to the uncertainty of net operating loss carry-forward utilization.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995.
REVENUES. Total revenues increased to $16.0 million for 1996 from $13.2
million for 1995, an increase of 21.2%.
32
<PAGE>
Equipment revenues increased to $7.0 million for 1996 from $4.0 million for
1995, an increase of 75.0%, principally due to an increase in the Company's
sales efforts. Commercial equipment sales increased to $6.9 million for 1996
from $2.6 million for 1995, and the number of gross commercial units added
during 1996 increased to approximately 14,500 units from approximately 8,500
units for 1995. Consumer equipment sales declined to $152,000 for 1996 from $1.4
million for 1995 as a result of the Company's decision not to recommence the
marketing of consumer services during the year.
Service revenues increased to $8.9 million for 1996 from $8.6 million for
1995, an increase of 3.5%, primarily due to an increase in the number of
commercial units in service, to 43,156 at December 31, 1996 from 35,465 at
December 28, 1995. The increase in commercial fleet service revenues was
partially offset by a decline in consumer vehicle service revenues for the
reasons discussed above.
COST OF REVENUES. Cost of revenues increased to $7.0 million for 1996 from
$4.3 million for 1995, primarily as a result of the higher number of new units
sold and the larger customer base. In addition, the Company incurred costs
associated with building and maintaining its networks in markets that are not
yet opened.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses declined by $3.5 million, to $20.2 million for 1996 from
$23.7 million for 1995. Selling, general and administrative expenses also
decreased as a percentage of revenues, from 179% for 1995 to 127% for 1996. The
decline was primarily due to $3.2 million in severance and retention payment
expenses incurred by AirTouch Teletrac for 1995 and to decreases in overhead and
administrative costs.
REFREQUENCING COSTS. Refrequencing costs accrued for 1996 were $1.3
million, compared to $5.9 million accrued for 1995. The 1996 accrual reflects
the estimated cost of conversion of VLUs placed in service after the
Acquisition. The 1995 accrual reflects the estimated cost of conversion of VLUs
in service with customers at the time of the Acquisition.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization declined by
$3.2 million to $1.3 million for 1996 from $4.5 million for 1995, primarily due
to the lower book value recorded by the Company for the assets acquired in the
Acquisition as compared to the historical cost recorded by AirTouch Teletrac.
The Company expects depreciation to increase for 1997 as assets acquired in
connection with the Company's planned market expansion, which are currently
classified as construction in progress, are placed in service during the year.
ASSET IMPAIRMENT. Because the purchase price paid for the assets of
AirTouch Teletrac was $11.0 million less than the historical cost of such assets
recorded by AirTouch Teletrac, AirTouch Teletrac recorded an asset impairment of
$11.0 million for 1995.
OPERATING LOSSES. Operating losses incurred by the Company were $13.9
million for 1996, compared to $36.1 million for 1995, a reduction of 61%, for
the reasons discussed above.
EBITDA. EBITDA, which excludes refrequencing costs and asset impairment,
was $(11.3) million for 1996 and $(14.8) million for 1995, an improvement of
24%, for the reasons discussed above.
INTEREST EXPENSE. Interest expense was $108,600 for 1996, compared to $21.2
million for 1995. This decline reflects the fact that the Company did not assume
the approximately $226.1 million of long-term debt of AirTouch Teletrac. The
Company's interest expense for 1996 related to $2.0 million of long-term lease
commitments.
NET LOSS. For the reasons discussed above, net loss decreased to $13.8
million for 1996 from $57.4 million for 1995.
33
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994.
REVENUES. Total revenues decreased to $13.2 million for 1995 from $15.3
million for 1994.
Equipment revenues declined to $4.0 million for 1995 from $5.8 million for
1994. As a result of the reduction in sales force implemented by AirTouch
Teletrac in 1995, the gross number of units sold declined to approximately
14,700 for 1995 from approximately 17,700 for 1994.
Service revenues increased to $8.6 million for 1995 from $7.4 million for
1994, an increase of 16.2%. The increase in service revenues is primarily
attributable to the increase in units in service to 49,279 at December 31, 1995
from 40,901 at December 31, 1994.
Revenues for 1995 and 1994 also included $681,000 and $2.1 million,
respectively, of revenues attributable to an engineering consulting contract
between AirTouch Teletrac and Ituran Location and Control Ltd., an Israeli
licensee ("Ituran"), relating to the construction in Israel of a network similar
to the Company's. Construction began in 1994 and was completed in 1995.
COST OF REVENUES. Cost of revenues declined to $4.3 million for 1995 from
$6.4 million for 1994. As indicated above, equipment sales decreased for 1995 as
compared to 1994, which led to a decrease in equipment costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses declined by $4.5 million, to $23.7 million for 1995 from
$28.2 million for 1994. During 1995, AirTouch Teletrac's management made the
decision to sell its assets, at which point AirTouch Teletrac began to reduce
its expenses. The number of employees was reduced from 197 at December 31, 1994
to 117 at December 31, 1995. Reductions were also made in certain administrative
expenses.
REFREQUENCING COSTS. Refrequencing costs accrued for 1995 are the estimated
costs for the conversion of VLUs in service with customers at the time of the
Acquisition. Because the change in frequency was mandated by a 1995 order of the
FCC, there was no expense recorded in 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
declined to $4.5 million for 1995 from $5.2 million for 1994. This decline was
due to a reduction in the aggregate value of the Company's plant, property and
equipment as certain assets became fully depreciated and additional assets were
not acquired.
OPERATING LOSSES. AirTouch Teletrac incurred operating losses of $36.1
million for 1995, compared to $24.5 million for 1994, for the reasons discussed
above.
EBITDA. EBITDA, which excludes refrequencing costs and asset impairment,
was $(14.8) million for 1995 and $(19.3) million for 1994, for the reasons
discussed above.
INTEREST EXPENSE. Interest expense increased to $21.2 million for 1995 from
$15.6 million for 1994 due to the increase in AirTouch Teletrac's long-term debt
to $226.1 million for 1995 from $203.3 million for 1994.
NET LOSS. Net loss increased to $57.4 million for 1995 from $39.8 million
for 1994, for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has required a substantial investment of capital in order to
fund the Acquisition, its subsequent operating losses and the build-out of its
networks in new markets. During 1996, the Company used $16.2 million of cash in
its operating activities, $7.1 million for purchases of property, plant and
equipment and $2.1 million to acquire the assets of AirTouch Teletrac. For the
six months ended June 30, 1997, the Company used $16.5 million of cash for
operating activities and $5.9 million for purchases of
34
<PAGE>
property, plant and equipment. These cash outflows were financed through private
equity placements of common and preferred stock. From November 14, 1995 through
December 6, 1996, the Company issued and sold 244,000 shares of its Class A
Common Stock for an aggregate purchase price of $24.4 million pursuant to the
terms of a Stock Purchase Agreement, dated November 14, 1995, among the Company
and certain investors. From March 29, 1996 through December 6, 1996, the Company
issued and sold 5,000 shares of its Class A Common Stock for an aggregate
purchase price of $500,000 pursuant to a Subscription Agreement, dated March 29,
1996, among the Company and certain other investors. On December 6, 1996, the
Company issued and sold 190,476.19 shares of its Series A Redeemable Convertible
Participating Preferred Stock for an aggregate purchase price of $33.0 million
pursuant to the terms of a Stock Purchase Agreement, dated December 6, 1996,
among the Company and certain investors. At June 30, 1997, the Company had
working capital of $5.3 million and restricted cash of $1.8 million.
On August 6, 1997, the Company sold 105,000 Units, consisting of an
aggregate $105,000,000 of its 14% Senior Notes due 2007 and 105,000 Warrants,
for an aggregate purchase price of $101,325,000. The Company has purchased $39.9
million of government securities (the "Pledged Securities") which it has pledged
to Norwest Bank, National Association as Collateral Agent to secure the payment
of the first six semi-annual payments of interest on the Notes. The Company
intends to use the net proceeds of such Units Offering (i) to fund expenditures
for the continued construction, development and roll-out of its networks and
services, including site construction, marketing costs and the purchase of
system hardware and (ii) for general corporate purposes, including the funding
of operating losses, working capital requirements and the possible acquisition
of additional radio spectrum in metropolitan markets.
As indicated above, capital expenditures were $7.1 million for 1996 and $5.9
million for the first six months of 1997, primarily for the build-out of the
Company's networks in new markets. The Company currently expects that its
aggregate capital expenditures (excluding the acquisition of spectrum rights)
will be $14.8 million for 1997 and an aggregate $17 million for both 1998 and
1999 combined. These capital expenditures will consist primarily of costs
associated with the opening of new markets in 1997 and 1998. In addition, the
Company's capital expenditure plans also include network design and development,
the maintenance of existing markets and other capital improvements.
CREDIT FACILITY
On September 18, 1997, Teletrac, Inc. entered into a bank credit facility
(the "Credit Facility") pursuant to which Banque Paribas, Fleet National Bank
and certain other banks (the "Banks") have agreed to provide the Company a five
and one-half $30 million secured revolving line of credit. The loans under the
Credit Facility are, at the election of the Company, domestic loans or
Eurodollar loans. During the first year of the facility, loans bear interest (i)
in the case of domestic loans, at 2.50% per annum plus a reference rate (which
is the prime rate) and (ii) in the case of Eurodollar loans, at 3.50% per annum
plus a reference Eurodollar loan rate. For the remaining term of the facility,
the applicable margin rates may be increased or decreased quarterly depending
upon the Company's debt to operating cash flow ratio.
The maximum aggregate commitment of the Banks under the Credit Facility is
reduced each quarter, beginning December 31, 1999, until all amounts borrowed
thereunder are paid in full on March 31, 2003. All amounts outstanding in excess
of the commitment as so reduced must be paid by the Company in full. The
aggregate commitment of the Banks under the Credit Facility will be reduced by a
total of $6.0 million over the four quarters ended September 30, 2000, by a
total of $9.0 million over each of the four quarters ended September 30, 2001
and 2002, and by a total of $6.0 million over the two quarters ended March 31,
2003.
The Credit Facility contains restrictive covenants that, among other things,
impose limitations on the Company and its subsidiaries with respect to (i) the
incurrence and maintenance of indebtedness, including guarantees, (ii) the
incurrence, creation or maintenance of liens, (iii) the making of dividends and
certain payments, (iv) transactions with affiliates, (v) the disposition of
assets, (vi) the types of acquisitions that
35
<PAGE>
can be made and the amount which can be invested in acquisitions, (vii) the
amount of rental payments that can be incurred, and (viii) consolidations and
mergers. The Credit Facility also provides for events of default customary in
facilities of its type.
AGREEMENTS WITH TADIRAN
The Company has entered into a contract with Tadiran to purchase 200,000
VLUs between October 1996 and October 1998. The agreement permits the Company to
effectively double the period of time in which it takes delivery of VLUs and to
cancel its order at any time, subject to payment of a nominal fee per VLU not
purchased and certain other expenses. In addition, the Company has funded
approximately $2.0 million of research and development costs with Tadiran
related to the Integrated Base Station Unit ("IBSU"), and expects to fund an
additional $2.5 million in the future on this project. See "Business-- Network
and Subscriber Equipment." Although the Company does not have any other material
commitments to fund research and development, such expenditures may occur from
time to time. See "Business-- Network and Subscriber Equipment."
CAPITAL NEEDS FOR NETWORK BUILD-OUT
During 1996 and the first nine months of 1997, the Company experienced
significant operating and net losses and negative EBITDA in connection with the
build-out of its networks and the operation of its business. Management
anticipates that such losses and negative EBITDA will continue for the remaining
portion of 1997 and for 1998 as the Company implements its growth strategy. The
Company's Los Angeles operations are currently generating positive EBITDA
(excluding corporate overhead). Management believes that the Company as a whole
will achieve positive EBITDA in 1999 and positive net income in 2000. However,
due to the high level of risk in the Company's industry and in its current
growth strategy, the risk that the Company will not be able to complete its
market build-out on time and within budget, and other risks identified elsewhere
herein, there can be no assurance that such results will be realized. See "Risk
Factors" and "Projected Financial Information."
FCC rules currently provide that additional licenses to operate LMS systems,
including licenses to operate additional LMS systems in the markets in which the
Company operates, may be allocated by auction. The Company intends to
participate in future auctions of LMS spectrum, including in those markets in
which it currently operates. Management expects that such auctions will occur in
early 1998, and the Company may require additional funds to participate in such
auctions. See "Risk Factors," "Use of Proceeds" and "Business--Regulation--LMS
Spectrum Auctions."
Based on its current operating plan, which includes the expansion of the
Company's operations to 15 markets, management anticipates that the net proceeds
to the Company from the Unit Offering, together with its existing cash balances
and cash flow from operations, will be sufficient to build out its operations in
the new markets planned to open in 1997 and 1998 and meet its other cash
requirements for at least the next 18 to 24 months. However, the Company
believes that it may have opportunities to expand its business significantly and
that access to capital would enable it to expand more quickly and effectively.
See "Risk Factors--Risks of Expansion and Management of Growth." If the
assumptions underlying the current operating plan are not met, or if the Company
expands its operations beyond the 15 planned markets, the Company would need
additional capital. There can be no assurance that additional financing would be
available or that, if available, it would be obtained on terms favorable to the
Company. See "Risk Factors--Potential Future Capital Needs."
36
<PAGE>
BUSINESS
Teletrac is a leading provider of vehicle location and fleet management
services, including associated two-way digital wireless messaging, to commercial
fleet operators. The Company has developed a proprietary land-based location
technology that provides customers with a low-cost, accurate and reliable real-
time method of locating vehicles in selected metropolitan areas. The Company's
system is designed to enable customers to better manage their mobile workforce,
provide security for their property and personnel and communicate more
effectively with mobile workers.
As of December 31, 1996, the Company operated in six metropolitan markets:
Los Angeles, Miami, Chicago, Detroit, Dallas and Houston. The Company commenced
operations in Orlando in March 1997 and plans to begin providing vehicle
location and fleet management services in eight additional markets by the end of
1998, giving the Company operations in 15 of the largest MSAs in the United
States, including New York and Boston. As of September 30, 1997, the Company
served over 2,000 commercial fleet accounts, more than any other provider of
fleet vehicle location services, and had 61,369 units in service with commercial
customers. In its Miami and Los Angeles markets, the Company also uses its
proprietary location systems to provide vehicle location and stolen vehicle
recovery services to consumers. As of September 30, 1997, the Company had 10,176
consumer units in service.
Market studies indicate that there are approximately 7.6 million total
commercial fleet vehicles in the 15 markets in which the Company operates or
plans to operate. The Company believes that there is substantial demand for
cost-effective communications services that offer both reliable location
tracking and two-way wireless messaging in metropolitan areas. The Company's
products can be used either alone or in conjunction with other communications
technologies. The Company believes that the majority of its target customers'
vehicles are currently equipped with wireless communications devices that do not
provide automatic location features, such as two-way radio, specialized mobile
radio ("SMR"), pagers and cellular devices. The Company's products and services
allow commercial fleet operators to (i) increase driver productivity and fleet
efficiency, (ii) improve customer service, (iii) limit unauthorized vehicle use,
and (iv) reduce driver overtime. The Company's customers include metropolitan
commercial fleets (such as trade service providers, delivery services, bus and
taxi fleets, ambulance companies, telecommunications companies, utility
companies, municipal government vehicles and law enforcement agencies) and
long-haul trucking fleets when operating within metropolitan markets.
The Company offers a range of fleet management solutions, depending on the
customer's budget and location and messaging needs. All of these solutions
involve the installation of a VLU in each vehicle. The VLU is a radio
transceiver that receives and transmits signals used to determine a vehicle's
location. In addition to the VLU, commercial fleet customers generally purchase
software or location services from the Company. The Company's primary product
for commercial fleets is Fleet Director-Registered Trademark-, a proprietary
software application that permits simultaneous location of all fleet vehicles on
a real-time 24-hour-a-day basis through a digitized map displayed on the
customer's dedicated personal computer, which is connected to the Company's
networks. Fleet Director-Registered Trademark- can be complemented with the
Company's messaging units, which allow two-way messaging between the fleet
dispatcher and drivers directly from the Fleet Director-Registered Trademark-
screen. The Company also offers Fleet Reporter-TM-, a lower cost alternative to
Fleet Director-Registered Trademark- that provides fleet operators with daily
printed reports of vehicle locations and access to real-time location
information through OZZ-Registered Trademark-, a telephone-operated information
system. In the second half of 1997, the Company intends to introduce
Winfleet-TM-, a Microsoft Windows-Registered Trademark--based application based
on Fleet Director-Registered Trademark- that will not require a dedicated
computer.
The Company believes that its wireless location and two-way messaging
technology can serve its customers more reliably and more cost-effectively than
competing systems, including those which rely on GPS technology combined with
other forms of wireless communication. The Company's location technology, which
consists of proprietary software and land-based transmitters and receivers that
are licensed to operate in the 904-909.75 and 927.75-928 MHz bandwidth, operates
reliably in a high-rise urban setting.
37
<PAGE>
GPS-based systems, on the other hand, can lose accuracy in areas where high-rise
buildings or other large structures obstruct the signal between the satellite
and the vehicle. Unlike the Company's technology, GPS-based location systems
must be coupled with a wireless communication system to transmit location
information to a fleet operator. The other forms of wireless communication used
in conjunction with GPS technology, such as cellular and SMR, generally make the
incremental cost of determining and transmitting a vehicle's location to a fleet
operator more expensive than the Company's technology.
In its Miami and Los Angeles markets, the Company also uses its proprietary
location systems to provide vehicle location and stolen vehicle recovery
services to consumers. The Company's service locates and tracks stolen vehicles
in real time and its equipment can be integrated with a vehicle's alarm system
and/or ignition so that it is automatically activated if the vehicle is stolen.
The Company's service also allows a subscriber to initiate vehicle location in
other emergency or roadside assistance situations.
In 1995, prior to the Acquisition, the Company's predecessor ceased to
actively market its consumer vehicle services. The Company has continued
providing consumer service as a legacy of the business acquired from AirTouch
Teletrac but has not launched any new marketing efforts. While the Company
intends to focus on its commercial business, it is currently exploring various
potential strategies for marketing and distributing its products to consumers,
including through strategic partnerships or third-party reseller arrangements,
and expects to begin expanding its consumer operations in late 1997 or early
1998.
BUSINESS STRATEGY
The Company's objective is to enhance its position as the leading national
provider of vehicle location and fleet management services in metropolitan areas
by exploiting its proprietary technology and systems. The key elements of the
Company's strategy are:
INCREASE MARKET PENETRATION. In its six original markets, the Company is
rapidly building a trained sales force to market its products and services to
operators of commercial fleets. Prior to the Acquisition, AirTouch Teletrac
terminated all of its active sales and marketing efforts. Since the Acquisition,
the Company hired approximately 90 direct sales representatives to service its
six original metropolitan markets and the Company believes that it will more
effectively exploit opportunities in its existing markets as its sales force
gains experience. See "Commercial Fleet Management--Sales, Marketing and
Customer Service." The Company believes it requires a modest penetration of its
target markets to achieve its business plan.
EXPAND GEOGRAPHIC COVERAGE AREAS. In 1996, the Company began constructing
the network infrastructure to expand its coverage from six to 15 metropolitan
markets. In March 1997, the Company introduced commercial fleet services in
Orlando, and the Company expects to introduce commercial fleet services in two
additional U.S. markets by the end of 1997 and a further six markets by the end
of 1998. The Company expects to begin offering commercial fleet service in San
Francisco and San Diego in the third quarter of 1997, and in the remaining
markets during 1998. Management believes that, in addition to providing services
to local fleet operators in its new markets, the planned geographic expansion
will make the Company's services more appealing to regional and national
customers that have fleets in several metropolitan areas. In connection with the
roll-out of its commercial fleet services, the Company plans to add over 150 new
sales representatives in its new markets by 2001. The Company also holds FCC
licenses in 11 additional markets, but the Company expects that it would have to
obtain additional licenses in certain of such 11 markets before it could
commence commercial operations.
CAPITALIZE ON LOW-COST SERVICE. The Company believes that its proprietary
location solutions permit lower cost operation than most competing technologies,
which generally require more expensive hardware, more expensive airtime, or
both. With the Company's technology, the incremental cost of locating a vehicle
and transmitting its location to the fleet operator is nominal, which permits
the Company to provide
38
<PAGE>
services for a relatively low monthly fee. This price structure permits
customers to locate their vehicles frequently throughout the day (typically,
every 15 minutes), which the Company believes substantially improves the
customer's ability to increase fleet efficiency and monitor driver compliance.
The Company believes that the low cost of its products and services also enables
its customers to quickly recover the cost of their purchase by reducing overtime
costs and increasing fleet efficiency. The Company intends to pursue a larger
market share by emphasizing its cost advantage and rapid return on investment.
EXTEND PRODUCT OFFERINGS. The Company believes that its ability to expand
and maintain its customer base depends on its continued marketing of low-cost
and user-friendly solutions for fleet management. The Company plans to offer the
first generation of Winfleet-TM-, a Windows-Registered Trademark--based
solution, in the second half of 1997. The first generation product is a
simplified version of Fleet Director-Registered Trademark- that does not require
a dedicated computer. The second generation of Winfleet-TM- is being designed
with an open client server architecture to permit it to operate on a variety of
hardware platforms and to be integrated with the customer's other management
information systems to serve the needs of customers with more sophisticated
information needs and capabilities. The Company is also developing an Internet
version of its fleet management software. In addition, the Company is exploring
technological improvements that would expand the Company's messaging
capabilities to include additional services such as free text return messaging,
wireless e-mail, fax, database queries, credit card verification and inventory
management.
EXPLOIT NEW BUSINESS OPPORTUNITIES. The Company is considering entering
into a number of strategic alliances and partnerships to develop and offer new
products. In conjunction with certain strategic suppliers, the Company is
currently developing a portable miniaturized device that would permit personal
location through the Company's vehicle location networks. The Company also
licenses its technology to Ituran, which provides location information and
wireless messaging services in Israel, and is pursuing additional opportunities
to license its technology abroad. In addition, the Company has discussed joint
arrangements with several companies providing vehicle location coverage in rural
locations. The Company has developed, and is currently testing, a prototype
hybrid device that combines a VLU for use in covered metropolitan areas and a
GPS location device and a cellular modem that can operate on a cellular digital
packet data ("CDPD") network and/or a traditional cellular system for use
outside the Company's system coverage areas. Such a device could permit
customers to locate vehicles between covered markets (such as Los Angeles and
San Francisco) on long-haul routes or in other areas where the Company does not
currently operate.
COMMERCIAL FLEET MANAGEMENT
TARGET MARKETS
The Company believes that there is substantial demand in metropolitan
markets for cost-effective communications services that offer both reliable
location tracking and two-way wireless messaging for metropolitan fleets and for
long-haul fleets when operating within metropolitan areas. Commercial fleet
operators need a location and messaging solution that can accurately locate
vehicles in urban settings in order to (i) increase driver productivity and
fleet efficiency, (ii) improve customer service, (iii) limit unauthorized
vehicle use, and (iv) reduce driver overtime. Commercial fleet operators also
demand security systems for fleet drivers, vehicles and cargo.
The Company's commercial fleet services provide reliable, low-cost location
information, two-way messaging and fleet management services in real time. The
Company markets its fleet management products both to metropolitan fleets and
long-haul trucking fleets, which may desire to optimize driver efficiency in
metropolitan areas because of the impact on customer service and overall fleet
productivity. The Company believes that urban commercial fleets represent the
largest market for its products. Market studies indicate that there are
approximately 7.6 million total commercial fleet vehicles in the 15 markets in
which the Company currently operates or plans to operate.
39
<PAGE>
Many metropolitan commercial fleet operators have not employed location
information or messaging services because of the lack of low-cost, reliable
location and messaging alternatives. Two-way voice services (such as cellular,
SMR and two-way radio) cost significantly more to provide a similar level of
location services and rely on the driver to report vehicle location. Although
these two-way voice services may also be integrated with GPS-based technologies
to provide location information, these integrated solutions can be unreliable in
a high-rise urban setting and generally require more expensive equipment and/or
higher service fees for a level of service comparable to the Company's. A
significant number of metropolitan fleet vehicles utilize lower-cost one-way
paging services, but such services lack both location tracking and two-way
messaging capabilities. Management believes its commercial fleet service
generates demonstrable cost benefits and efficiency gains for its metropolitan
fleet customers.
The Company believes that its cost-effective network allows it to provide
more comprehensive fleet management services than are available at a competitive
price using another technology. To provide effective fleet monitoring and
management services in an urban or suburban environment, fleet operators need to
frequently update the location of their vehicles. The Company's commercial fleet
customers typically locate every vehicle simultaneously every 15 minutes
throughout the day and send messages to the drivers as needed. Competitive
systems, which rely on more expensive cellular or SMR communications coupled
with a GPS system, generally do not offer a similar level of service at a
similar price. The Company believes that less frequent location information
reduces the effectiveness of fleet management in metropolitan markets.
Due to the diversity of metropolitan commercial fleets, the Company's
customer base ranges from independent plumbers with one or two vehicles to large
municipal bus and ambulance fleets and national delivery companies. The
Company's range of products allows it to provide a fleet management solution to
meet each segment of this market. However, the Company has recently determined
to target marketing and sales efforts primarily at fleets of at least ten
vehicles, which it believes it can service more cost-effectively than smaller
fleets. The Company believes that the expansion of its networks to its new
metropolitan markets will allow it to attract nationwide customers with fleet
operations in a number of metropolitan markets. Among the Company's current
customers are Emery Air Freight, Inc., Budget Rent-a-Car Corporation, Brinks
Incorporated (security transportation), Roto Rooter Corp., Tele-Communications,
Inc., department stores such as Target, and the Dallas Independent School
District.
PRODUCTS AND SERVICES
The Company offers its customers a range of fleet management, communications
and security products. All of the Company's products rely on its networks of
radio transmitters and receivers. Each customer must equip its vehicles with a
VLU in order to use the location and communication features of the Company's
products.
FLEET MANAGEMENT. The Company's fleet management software products and
services are designed to address the needs of a wide range of customers. The
Company believes that software solutions that must be customized to the needs of
individual fleet customers are too expensive and time-consuming to be sold
effectively to any but the largest fleets. By emphasizing its off-the-shelf,
user-friendly software, the Company believes it can attract a wide range of
customers, many of whom would otherwise use less sophisticated communication and
management systems, if any.
FLEET DIRECTOR-REGISTERED TRADEMARK- is a proprietary software application
that provides fleet customers accurate fleet vehicle location through the
customer's detailed digitized map of a metropolitan area displayed on the
customer's dedicated personal computer, which is connected to the Company's
networks. Fleet Director-Registered Trademark- displays the position of all
VLU-equipped vehicles at periodic intervals determined by the customer
(typically every 15 minutes), at the time of each communication with a vehicle
and otherwise as specified by the customer. Customers can adjust the level of
map detail through a zoom in/zoom out feature, allowing a customer to
simultaneously view the location of all fleet vehicles or to focus in on a
single vehicle. Fleet operators can
40
<PAGE>
establish "zones of compliance" around their customers' locations, their
drivers' homes, or other locations to detect whether vehicles enter or leave
specific areas. Fleet Director-Registered Trademark- also produces reports that
detail a driver's route and the time of each stop and provides documentation for
customers who require verification of deliveries. Such reports are produced on
screen in real-time and can be faxed or electronically transmitted daily to the
customer by the Company. Real-time location reports can also be saved on the
customer's computer to be retrieved and reviewed on-screen or printed at a later
time.
Fleet Director-Registered Trademark- can also act as a platform from which
the customer can use the Company's two-way communications products (discussed
below) to send and receive messages to and from drivers. Customers can type
messages directly to drivers from the computer on which Fleet
Director-Registered Trademark- operates and send the messages to a single
vehicle, several vehicles or the entire fleet.
Fleet Director-Registered Trademark- operates in a DOS environment on a
dedicated personal computer located in the customer's office. The customer may
maintain a dedicated line to the Company's local network control center to
continually track vehicles and communicate with drivers. Alternatively, the
Fleet Director-Registered Trademark- system may connect with the Company's
system only as needed.
The Company had approximately 1,800 Fleet Director-Registered Trademark-
customer accounts as of June 30, 1997, constituting 90% of its commercial
service customer accounts.
Fleet Reporter-TM- is a lower cost alternative service to Fleet
Director-Registered Trademark- that provides customers with daily hard-copy
reporting of vehicle locations and OZZ-Registered Trademark- mobile information,
but does not require the customer to use a computer. The Company's local network
will periodically (typically every 15 minutes) locate each vehicle in a fleet
and send the Fleet Reporter-TM- customer a daily fax detailing the location of
each vehicle throughout the day. The customer can compare the report to each
driver's time card or delivery log for compliance purposes, or otherwise use
such data to manage its fleet more efficiently. Each customer who subscribes to
Fleet Reporter-TM- can also use the OZZ-Registered Trademark- mobile information
service (discussed below) to locate specific vehicles in real-time using a
telephone, and has access to all of the security features of the Company's
system. Fleet Reporter-TM- does not require the customer to have a computer and
does not provide customers with a communications system. The Company had
approximately 200 Fleet Reporter-TM- customer accounts at June 30, 1997,
constituting 10% of its commercial service customer accounts. WINFLEET-TM- is
the first generation of a Microsoft Windows-Registered Trademark--based software
system that the Company is currently developing. The first generation product,
which would not require a dedicated computer, is a simplified version of Fleet
Director-Registered Trademark-. The second generation of Winfleet-TM- is being
designed with an open client server architecture to permit it to operate on a
variety of hardware platforms and to be integrated with the customer's other
management information systems (such as billing, accounting and human
resources), allowing the customer to use location information to measure and
improve productivity in the field. The Company plans to introduce first
generation Winfleet-TM- to customers in the second half of 1997.
INTERNET SERVICES are currently being developed by the Company to allow
customers to monitor vehicle locations on a detailed map in real-time, but would
not allow communications between a customer and its drivers. This product would
be a lower cost alternative similar to Fleet Reporter-TM-, but would be marketed
to customers with existing computer and Internet capabilities. The Company plans
to introduce an Internet-based product in 1997.
COMMUNICATIONS. The Company offers two communication systems to its Fleet
Director-Registered Trademark- customers. The Mobile Data Terminal ("MDT") is
the Company's more advanced two-way messaging system. It allows for alphanumeric
communications from the fleet operator to its drivers and up to thirty-five pre-
programmed messages from the drivers to the fleet operator. The Status Messaging
Terminal ("SMT") is a low-cost alternative to the MDT. The SMT allows for four
pre-programmed messages which may be sent from the customer to the drivers and
eight pre-programmed messages which may be sent from the drivers to the
customer. The MDT and the SMT are both small terminals typically mounted on the
fleet vehicle's dashboard and are connected to the VLU.
41
<PAGE>
Both the MDT and the SMT automatically provide customers with an electronic
"receipt" when the message is received and therefore do not rely on drivers for
vehicle locations or message delivery. As a result, the Company's system
provides more reliable location information and messages than many competing
technologies. The Company's communication applications generally have lower
service costs than conventional real-time, two-way communication services, such
as cellular, SMR and ESMR services. In 1996, the Company sold approximately
3,200 MDTs and approximately 1,300 SMTs, and approximately 30% of all new units
sold to commercial customers in 1996 were SMTs or MDTs. In the first six months
of 1997, the Company sold approximately 3,900 MDTs and approximately 2,300 SMTs,
and approximately 40% of all new units sold to commercial customers in the
period were SMTs or MDTs.
Upon installation of the IBSU currently under development by Tadiran, the
Company's system will support two-way free text alphanumeric messaging between
the customer and its drivers. In order to offer two-way free text alphanumeric
messaging, however, the Company will also need to develop a new messaging unit
capable of composing free text alphanumeric messages. See "--Network and
Subscriber Equipment".
The following chart sets forth the list price of the Company's commercial
fleet equipment, software and services:
<TABLE>
<CAPTION>
LIST PRICE FOR MONTHLY SERVICE
FUNCTION PRODUCT EQUIPMENT FEE
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Vehicle Location (required Vehicle Location Unit (VLU) $595 per vehicle $25 per vehicle
for all customers)
Fleet Management Fleet $2,695 for Fleet None
Director-Registered Trademark- Director-Registered Trademark-
Software
Fleet Reporter-TM- None $4 per vehicle
Communications Mobile Data Terminal (MDT) $300 per vehicle $14 per vehicle
Status Messaging Terminal $150 per vehicle $4 per vehicle
(SMT)
</TABLE>
SECURITY SERVICES. The Company offers its commercial fleet customers
several vehicle security and driver safety options that operate through the
Company's location networks. A VLU can be connected directly to a vehicle's
alarm system, triggering the Company's security system when the alarm is set
off, or connected to an alarm button either located in the vehicle or carried
remotely by the driver. Customers with Fleet Director-Registered Trademark- may
also establish a "zone of compliance" that activates the Company's security
system when vehicles leave the zone. When the security system is activated, a
signal is sent by the VLU to the Company's local network system which
automatically alerts the customer through Fleet Director-Registered Trademark-.
If the customer does not respond, or if the customer subscribes to Fleet
Reporter-TM-, the Company will telephone the customer directly. If the customer
believes that the vehicle has been stolen or a driver is in danger, the Company
will work directly with the local law enforcement authorities to track the
location of the vehicle in real-time. Many customers also attach VLUs directly
to valuable cargo or to expensive equipment such as construction equipment. The
Company believes it has developed excellent relations with local law enforcement
officials due to the past performance of the Company's location system, and that
such relations contribute to its ability to quickly recover stolen vehicles and
equipment.
SALES AND MARKETING; CUSTOMER SERVICE
The Company uses a direct sales force to sell its commercial vehicle
location and fleet management services, and has a sales force located in each
market where it operates. The Company's sales efforts rely on sales managers who
supervise the sales activities of sales representatives, contact and negotiate
with
42
<PAGE>
larger potential customers, and have authority to negotiate prices within
defined parameters. Sales commissions generally are directly linked to the
number of units a sales person sells.
Following a review conducted by outside consultants, the Company is refining
its sales and marketing efforts in certain respects. To reduce the incremental
cost of sales and customer service, sales representatives are now focusing
marketing and sales efforts primarily on fleets of at least ten vehicles. The
Company has also established a telemarketing staff to help target customers for
potential sales calls and, in a pilot program in its Chicago market, is
developing a customer service staff separate from the sales force to improve
customer support while allowing the sales force to focus efforts exclusively on
selling. In the Company's other markets, sales representatives continue to
participate in ongoing customer service. The Company expects that it will
significantly increase its sales force as it expands into new markets and offer
new services. As of September 30, 1997, the Company's direct sales force
consisted of approximately 85 employees and the Company expects that, as it
expands into new markets, the sales force will grow to approximately 130
employees by the end of 1997 and to approximately 200 employees by the end of
1998.
The Company's advertising and marketing efforts are generally directed to
local and regional markets and its strategy has focused on print advertising in
industry journals, direct mail, videos, telemarketing, industry trade shows and
on-site marketing promotions and demonstrations.
CONSUMER VEHICLE SERVICES
The Company is currently focusing on its core business of commercial fleet
management. As a legacy of the business acquired from AirTouch Teletrac, the
Company has continued providing consumer service (now sold under the name
Teletracer-TM-) and has allowed dealer arrangements in place at the time of the
Acquisition to continue, but has not launched any new marketing efforts. The
Company is exploring various potential strategies for marketing and distributing
its products to consumers, including through strategic partnerships or
third-party reseller arrangements, and expects to begin expanding its consumer
operations in late 1997 or early 1998.
TARGET MARKET
The demand for vehicle security products and services has grown as consumers
have become increasingly concerned with vehicle theft. The consumer vehicle
security industry encompasses a number of security products and services,
including mechanical theft-prevention devices such as The
Club-Registered Trademark-, installed automated vehicle alarms and vehicle
recovery services such as LoJack-Registered Trademark-.
The vehicle security industry has developed rapidly since the late 1970s, as
motor vehicle theft increased dramatically. According to industry sources, an
estimated 22% of all new automobiles (or approximately 2.26 million new
automobiles in 1994) and 62% of luxury vehicles purchased in the United States
are equipped with an electronic car alarm. Vehicle theft and the demand for
vehicle security are particularly high in the metropolitan centers and
surrounding suburbs serviced by the Company.
PRODUCTS AND SERVICES
The Company's proprietary location technology and VLU equipment can be used
for consumer applications without modification. A VLU is installed in a
consumer's vehicle and is generally connected to a security alarm and/or
integrated with the vehicle's internal ignition system. By connecting the unit
to a vehicle security alarm, vehicle recovery service can be initiated
automatically. If the vehicle alarm is triggered, the unit emits an emergency
locate signal, notifying the Company's control center of a potential vehicle
theft. Each regional control center is staffed twenty-four hours a day, seven
days a week with Company employees who contact local law enforcement authorities
and direct them to the location of the stolen vehicle. The Company currently
distributes its consumer product and services through auto dealers, electronic
retailers and other distributors.
43
<PAGE>
The Company's ability to offer automated, reliable and real-time service
differentiates its stolen vehicle recovery service from other available
services. The VLU provides automatic vehicle tracking at the time of theft. This
is in contrast to other vehicle recovery services, such as
LoJack-Registered Trademark-, that require a subscriber to report a vehicle
stolen in order to begin the tracking process. As a result, over the past two
years, of the approximately 214 Teletracer-TM--equipped vehicles that have been
stolen to date in Los Angeles and Miami, approximately 75% were recovered within
two hours of theft and approximately 90% were recovered overall.
The Company also offers a proprietary telephone-operated mobile information
service called OZZ-Registered Trademark-. This service allows its subscribers
telephone access to a computer that will locate a subscriber's vehicle in
real-time and report its location for compliance, security and convenience
purposes. The subscriber calls the Teletrac OZZ-Registered Trademark- telephone
number, enters a personal identification number for the vehicle to be located
and within seconds receives an automated voice response indicating the location
of the vehicle at that time. In addition to providing the customer with the
location of the vehicle, OZZ-Registered Trademark- is a "mobile yellow pages"
that provides the customer the location of nearby prominent businesses or
landmarks from a menu of choices. The customer can call
OZZ-Registered Trademark- and obtain information such as the location of the
nearest fast food restaurant, automatic teller machine, gas station, hospital,
police station, or interstate on-ramp. Teletrac offers OZZ-Registered Trademark-
to both consumer and commercial customers. The OZZ-Registered Trademark- service
can also be used to remotely instruct the VLU to lock/unlock the doors of the
vehicle. The firm that has contracted to provide roadside assistance service for
the Company estimates that 25% of roadside assistance calls are for keys locked
in the vehicle.
All of the Company's consumer customers can also telephone the Company's
call-in Roadside Assistance Program, through which the Company will have a tow
truck sent to the caller's location. Under its Automated Roadside Assistance
Program, offered to its customers at a higher monthly fee, the Company can
direct a tow truck directly to a subscribing customer's location when the
customer presses a roadside assistance button installed in his or her vehicle.
Monthly consumer service fees and equipment sales accounted for $2.5
million, or 16%, of the Company's revenues for 1996 and $1.7 million, or 9%, of
the Company's revenues for the first nine months of 1997. The Company had 10,176
consumer VLUs in operation as of September 30, 1997.
POTENTIAL DISTRIBUTION STRATEGIES
AirTouch Teletrac distributed its consumer vehicle recovery system through
indirect channels such as car dealerships and electronics retailers. Before the
Acquisition, AirTouch Teletrac had scaled back its consumer sales efforts.
Current management stopped actively supporting consumer selling efforts in order
to concentrate its sales efforts on commercial markets. The Company is currently
exploring a variety of possible marketing and distribution strategies for a
consumer service, primarily focusing on third-party reseller arrangements or
strategic partnerships with businesses such as home security companies, alarm
companies and large regional auto dealerships. The Company believes such
third-party arrangements would require less overhead than previous distribution
efforts and could permit more cost-effective consumer operations.
TECHNOLOGY
The Company has developed a proprietary, accurate and reliable spread
spectrum-based wireless network architecture that provides for both location
determination and two-way messaging. The Company's low-cost wireless network
architecture permits cost-effective and accurate location and messaging services
in metropolitan areas. The Company's networks use multilateration-based
techniques and land-based receivers for position determination, avoiding the
"line-of-sight" problems that may arise for satellite-based systems in urban
areas where tall buildings can block a satellite's view of a vehicle. The
Company believes that its land-based multilateration techniques are uniquely
appropriate for precise
44
<PAGE>
location determination in urban settings and that it can accurately locate a
vehicle equipped with its equipment in real-time within a range of less than
one-half of an average city block (approximately 150 feet).
In order to locate a subscriber vehicle, the Company's local network
broadcasts a "paging" transmission (the "Forward Link") simultaneously from each
transmitter on the network. The Forward Link is used to transmit both location
commands and alphanumeric messages to the VLU. Each subscriber's vehicle is
equipped with a VLU, a videocassette-sized "transceiver" unit which responds to
the location command of the Forward Link by emitting a response signal (the
"Reverse Link"). The Reverse Link is received by at least four nearby BSU's
which calculate both the time of transmission of the Forward Link and the time
of arrival of the Reverse Link and relay this data, via wireline telephone
networks, to the Network Control Center ("NCC"), the local network's data
processing center. The NCC uses the Company's proprietary network software to
calculate the location of the VLU from the information received by the BSUs. The
NCC consists of the Company's radio-frequency control equipment,
telecommunication access connection computers, proprietary software and the
Company's customer database. The NCC is staffed twenty-four hours a day, seven
days a week by operators who are responsible for location monitoring, system
support and customer service. The NCC instantaneously relays the location
information to a subscriber's Fleet Director-Registered Trademark- software
application or OZZ-Registered Trademark-call-in request (via automated response)
and stores all location information for daily reports to Fleet Reporter-TM- and
Fleet Director-Registered Trademark- subscribers.
The Company's customers can also use the Forward Link to transmit
alphanumeric messages from their centralized dispatch office to their fleet
vehicles and the Reverse Link to transmit more limited messages from vehicles to
the centralized dispatch office. The network system can transmit alphanumeric
messages at a transmission speed of 2,400 bits per second. While the Company's
current networks' capacity is more than sufficient to support its existing
services, the Company's networks may be reconfigured in the future to permit
increased transmission speed and messaging and location capacity. For example,
the messaging capability of the Reverse Link is currently limited by the BSU,
which does not permit alphanumeric messaging. The Company is, however,
developing an advanced version of the BSU, the IBSU, which will permit
alphanumeric messaging through the Reverse Link. See "--Network and Subscriber
Equipment."
45
<PAGE>
TELETRAC NETWORK
The following diagram illustrates the sequence of events that occur when a
customer utilizes the Company's vehicle location and messaging network:
[Schematic chart illustrating the operation of Teletrac's Network.]
NETWORK AND SUBSCRIBER EQUIPMENT
The Company has established a strategic relationship with Tadiran for the
development and supply of several network components, including the VLUs and
BSUs. Tadiran is an Israeli technology company and defense contractor which
specializes in the development and production of communications equipment and
products and is a leading manufacturer of location equipment. Tadiran and the
Company are currently developing a miniaturized version of the VLU for use as a
portable location device. As part of such development, the Company and Tadiran
are also developing a simpler and lower cost VLU.
The Company currently acquires its BSUs exclusively from Tadiran and is
working with Tadiran to develop an upgrade for the BSU, the IBSU, which will
offer significant advantages over current BSUs. The IBSU is expected to
integrate a number of enhanced features, including multichannel capability, and
will permit the Company to use its spectrum more efficiently, increase its
overall network capacity, reduce site operating and build-out costs and permit
longer alphanumeric messages. The Company expects to begin the installation of
the IBSU in its current and planned markets in the second quarter of 1998. There
can be
46
<PAGE>
no assurance that the Company and Tadiran will successfully develop the IBSU or
that, if they do, it will be introduced on the current schedule. See "Risk
Factors--Reliance on Sole Supplier."
The Company's network also includes a number of components that are used in
the wireless messaging industry. The Company purchases standard transmitters
from Glenayre Technologies, Inc. and Motorola, Inc. The transmitters, which are
similar to transmitters used in one-way paging networks, transmit the Forward
Link in a manner similar to a paging network. Much of the Company's
communications equipment, its antennas and many other components of its networks
are also available through a number of existing suppliers of wireless messaging
equipment.
As part of ongoing capital improvements, the Company is working on several
enhancements of its operating systems. The Company is enhancing its location
monitoring system hardware and software to improve the operating networks'
functionality and generate overall network operating savings. The planned
network enhancements include a nationwide database to provide vehicle roaming
capabilities between markets. Additionally, the Company's network enhancements
will enable it to reduce its number of NCCs from one in each metropolitan market
to three to four regional NCCs.
COMPETITION
The Company currently faces competition for each type of service it offers.
The Company expects that in the future it will face competition from new
technologies as well as from existing products. Certain of the Company's
competitors are larger and have substantially greater financial and research and
development resources and more extensive marketing and selling organizations
than the Company. There can be no assurance that additional competitors will not
enter markets that the Company already serves or plans to serve or that the
Company will be able to withstand such competition. Moreover, changes in
technology could lower the cost of competitive services to a level where the
Company's services would become less competitive or where the Company would need
to reduce its service prices in order to remain competitive, which could have a
material adverse effect on the Company's business. See "Risk
Factors--Competition and Technological Change."
COMMERCIAL VEHICLE MARKET
The Company knows of three basic classes of products that offer commercial
location and messaging capabilities competitive with the Company's products: (i)
GPS, private satellite and Loran-C systems, (ii) LMS systems and (iii)
traditional wireless communication.
GPS, PRIVATE SATELLITE AND LORAN-C SYSTEMS. GPS, certain private satellite
networks and Loran-C can provide location information, and when paired with a
communications system, may provide a system competitive with the Company's
products. GPS systems receive signals from NAVSTAR satellites, U.S.
government-funded satellites used for position location. GPS systems and certain
private satellite systems use satellite ranging techniques to measure a GPS
device's distance relative to a group of satellites in space. Typically, a GPS
device must be in "sight" of several satellites to receive adequate transmission
data for the determination of relative location on earth. The Loran-C system
uses land-based transmitting stations to send a low-frequency radio signal which
is used by a vehicle to calculate its position relative to the location of other
Loran-C transmitters. Satellite and Loran-C systems are generally not as
effective as LMS networks such as the Company's in metropolitan areas. Because
GPS and other satellite services require "line of sight" to the orbiting
satellite, dense metropolitan areas, parking garages, tunnels or other covered
areas can impact the system's effectiveness and reliability. Loran-C systems
also frequently have difficulty penetrating "metropolitan canyons" and therefore
may provide inaccurate position readings in urban areas.
In most GPS, private satellite and Loran-C vehicle location systems,
vehicle-mounted equipment gathers location data and transmits it by a wireless
communication system to a dispatch center. There are a
47
<PAGE>
number of wireless systems that can be linked to a satellite system or a Loran-C
system to transmit location information to a dispatch center:
- CELLULAR AND PCS COMMUNICATION SYSTEMS--Cellular and PCS systems can
provide local or nationwide networks to transmit location information to a
dispatcher. However, cellular and PCS operators generally price their
airtime at price levels that do not allow for frequent location
information transmittals by vehicles equipped with GPS, private satellite
or Loran-C systems to dispatchers on a cost-basis competitive with the
Company. Most vehicle location systems that link a satellite or Loran-C
location system with a cellular or PCS communication system, such as
HighwayMaster, are best-suited for long-haul trucking fleets. In addition,
in certain U.S. markets, some cellular operators have added a data service
over their existing cellular infrastructure that can improve the cost and
delivery of location information over existing cellular networks. The data
service, called CDPD, is an overlay of a packet switched data service on a
traditional cellular system. CDPD is available in approximately 80
metropolitan markets throughout the U.S., including all the markets, other
than Los Angeles, in which the Company is currently operating or plans to
operate.
- SMR/ESMR--SMR has traditionally been used to serve the needs of local
dispatch services, such as taxis and couriers, which typically broadcast
short messages to a large number of units. Several SMR operators are
constructing Enhanced Specialized Mobile Radio ("ESMR") digital systems
that offer mobile telephone services. Some SMR and ESMR providers are
beginning to integrate GPS with their systems to determine location and
transmit the location information back to the subscriber via the SMR or
ESMR communications network. An ESMR system with GPS location features has
been developed by Geotek Communications, Inc. Geotek is offering an
automatic vehicle location service using its own dedicated ESMR network to
transmit location information. As of June 30, 1997, Geotek was available
in nine metropolitan markets in the U.S. In certain markets, Geotek has
developed a fleet management program incorporating GPS location
information, which is being marketed with monthly service fees compatible
with the Company's standard pricing.
- SATELLITE-BASED COMMUNICATIONS--Satellite-based communication is
accomplished through transmission of a signal from a vehicle-based
transmitter to a satellite, which automatically retransmits the signal to
a dispatcher. Such systems provide seamless nationwide service for
transmitting location information, but do not currently transmit location
data at a cost competitive with the Company's system. Vehicle location
products with satellite-based communications are currently offered by
Orbcomm Global, L.P. and Qualcomm, Inc.
- DEDICATED WIRELESS NETWORKS--ARDIS and RAM are dedicated wireless two-way
data networks that also can be used to transmit location information
through integration with GPS. ARDIS is owned by Motorola and RAM is owned
by a joint venture between RAM Broadcasting Corp. and BellSouth. Both
wireless providers cover primarily metropolitan markets. ARDIS covers
approximately the top 400 markets in the United States, and RAM reports
coverage in approximately the top 100 markets (in both cases, including
all the markets in which the Company currently operates or plans to
operate).
LMS SYSTEMS. The Company knows of other companies that are developing
competitive LMS location and messaging systems. Pinpoint Communications Inc.,
METS Inc./MobileVision, L.P. and Comtrak Inc. each have developed technologies
that use LMS spectrum to provide both location information and messaging. Such
alternative LMS systems are also land-based wireless systems suited for
providing accurate and cost-effective service in metropolitan areas. Current LMS
operators and prospective LMS operators may also benefit from an FCC auction of
three frequency bands, including the band on which the Company's system
operates, for LMS purposes. The Company believes that to date it is the only
company that has established a commercially operational LMS network in the U.S.
48
<PAGE>
TRADITIONAL WIRELESS COMMUNICATION. Many fleet managers use existing SMR,
ESMR, two-way radio, cellular or paging systems to communicate with vehicles and
obtain their location. Such systems are less reliable than the Company's
products, however, because they rely exclusively on drivers to accurately
identify their location.
CONSUMER VEHICLE MARKET
LOJACK-REGISTERED TRADEMARK-. The Company's principal competitor to date in
the consumer vehicle market has been LoJack-Registered Trademark-. The
LoJack-Registered Trademark- system is based on a VHF transponder (essentially a
homing device) with a range of approximately two miles. The
LoJack-Registered Trademark- vehicle recovery system requires a customer to
report a stolen vehicle to LoJack-Registered Trademark-in order to initiate the
location process. Once a stolen vehicle report is received,
LoJack-Registered Trademark- personnel activate the transponder unit located in
the stolen vehicle by transmitting a signal across the area in which the vehicle
was stolen. Police equipped with LoJack-Registered Trademark- equipment track
the signal from the stolen vehicle by the strength of the signal. The
LoJack-Registered Trademark- system is not an automatic, real-time, screen-based
tracking system, and it does not provide the service features of the Company's
OZZ-Registered Trademark- and roadside assistance products.
GPS/CELLULAR SYSTEMS. Several companies have begun to link GPS location
technology with cellular communications to create emergency location systems for
consumer vehicles. Carcop-Registered Trademark-, Onstar-TM- and Lincoln
Rescu-TM- all rely on this technology to provide emergency roadside assistance
and/or stolen car recovery. Such systems, because they are based on GPS locating
technology, can be less effective in metropolitan areas where most auto thefts
occur.
THEFT DETERRENTS. A number of products are currently sold for vehicle theft
deterrence. Consumer products range from The Club-Registered Trademark- to
automatic alarm systems. While such systems do not provide the location
information or range of services of the Company's consumer products, they are
often available at a significantly lower cost.
PRODUCT PROTECTION
The Company currently has no material patents and generally seeks to protect
its proprietary network software, software products and trade secrets by
requiring that its consultants, employees and others with access to such
software and trade secrets sign nondisclosure and confidentiality agreements.
Management believes that these actions provide appropriate legal protection for
the Company's intellectual property rights in its software and products.
Furthermore, management believes that the competitive position of the Company
depends primarily on the technical competence and creative ability of its
personnel and that its business is not materially dependent on patents,
copyright protection or trademarks. See "Risk Factors-- Proprietary Rights and
Patents."
MIS, ADMINISTRATIVE AND BILLING SYSTEMS
During 1996, the Company centralized all of its accounting, payables,
billing and management information systems in its corporate headquarters in
Kansas City, Missouri, and based its nationwide inventory and order fulfillment
operations at its Los Angeles office. The Company recently converted to a new
billing system which centralizes customer billing to one location, yet allows
the local offices the flexibility to handle customer data input and inquiry,
thus allowing for quicker and more efficient response for sales and customer
service. The Company has also implemented a wide-area network architecture to
provide quick and easy communication and transfer of data among all employees of
the Company.
REGULATION
The construction, operation and acquisition of radio-based systems in the
LMS industry in the U.S. are subject to regulation by the FCC under the
Communications Act. Multilateration LMS is a service operating under new FCC
rules. As such, the LMS rules have not been subject to any significant
49
<PAGE>
interpretation by the FCC in written decisions and remain subject to further
reconsideration. Several parties, including the Company, requested that the FCC
reconsider various aspects of the newly-adopted rules governing LMS. In some
cases, the reconsideration requests, if granted by the FCC, could have a
material adverse effect on the Company's business. In September 1997, the FCC
rejected most of the reconsideration requests and reaffirmed its existing rules,
but the decision remains subject to further reconsideration. As a pioneer in
this new service, the Company may operate under rules with significant
ambiguities. The application of largely uninterpreted rules in situations that
the Company may encounter will present matters of first impression to the FCC's
staff. The Company cannot predict how changes to or interpretations of these
rules may affect its operations or its business plans.
The FCC regulates LMS services pursuant to rules adopted in a February 1995
LMS Order and modified in a March 1996 LMS Reconsideration Order and in a
September 1997 LMS Clarification Order. The February 1995 LMS Order, the March
1996 LMS Reconsideration Order, and the September 1997 LMS Clarification Order
are hereinafter together referred to as the "LMS Order."
CONSTRUCTION AND OPERATION OF GRANDFATHERED SYSTEMS
The FCC's 1995 LMS Order established that LMS licenses would be granted in
the future on a geographic basis. LMS licenses granted prior to the 1995 rules,
including those under which the Company operates its system, were granted for
individual transmitter sites. The FCC announced that no further applications for
authorizations for new multilateration LMS transmitter sites will be accepted,
pending its development of rules and procedures for auctioning the LMS spectrum.
In its 1995 rules, the FCC established procedures for the "grandfathering" of
LMS systems that were in operation or authorized as of February 3, 1995. In
order to maintain grandfathered status, the Company was required, among other
things, to complete its construction of licensed transmitter sites by January 1,
1997, to a level where each system would be capable of locating a vehicle and
otherwise in compliance with the 1995 rules (as modified). By December 31, 1996,
the Company had constructed LMS systems capable of locating a vehicle in 26
markets, including the six markets in which the Company had systems operating
prior to the adoption of the LMS Order.
The grandfathered authorizations issued to the Company allow the operation
of multilateration LMS base stations at particular sites specified in the
authorization. Under present rules, the FCC will not authorize the relocation of
a base station to a site more than two kilometers from an initially authorized
site. To the extent that a previously authorized base site becomes unavailable
or is no longer suitable because of potential interference from nearby radio
facilities, the two-kilometer restriction will limit the ability of the Company
to find optimal alternative sites and, in some instances, could require that the
Company abandon the opportunity to construct or operate a previously authorized
site, or require that the Company accept diminished performance from some sites.
In a few instances, the Company has obtained waivers from the FCC to permit the
relocation of a transmitter site to a location more than two kilometers from the
original site. Due to minor variations in certain parameters for sites noted
during construction, the Company has submitted applications to the FCC for
correction or modification of its authorizations for such sites. At the
Company's request, the FCC granted special temporary authority for the operation
of those sites pending the processing of the applications, which the Company
anticipates will be processed in the normal course. The Company recently
discovered additional minor parameter violations and has submitted modification
applications and requests for special temporary authority relating to the
operation of these facilities.
To prevent grandfathered LMS licensees from expanding coverage into
auctionable territory, current FCC rules do not permit those licensees to
construct additional LMS transmitters. Consequently, grandfathered licensees are
prevented from adding supplemental, or "fill-in," transmitters in locations
where it is discovered that, due to terrain or other obstructions, gaps in
service coverage exists. The Company filed requests for the FCC to change and/or
waive those rules to allow grandfathered LMS licensees to construct "fill-in"
transmitters where the aggregate service territory boundaries are not
50
<PAGE>
increased. The inability of the Company to use "fill-in" transmitters could
create less than optimal signal coverage and penetration in certain of the
Company's markets. In the 1997 Clarification Order, the FCC declined to adopt a
general rule allowing fill-in transmitters, but said that it would accept
applications for fill-in transmitters on a case-by-case basis, so long as the
coverage footprint was not increased, a standard which the Company believes its
pending waiver request would meet. There is no assurance that the Company's
requests for waivers to use "fill-in" transmitters will be granted, and it has
been opposed in filings by other parties. There is also no assurance that the
petitions for reconsideration of the FCC's rules for multilateration LMS that
were filed by parties advocating changes that could have a material adverse
effect on the Company's business, though not granted in the 1997 Clarification
Order, will not be granted in whole or in part by the FCC after final review.
FREQUENCY CONVERSION
Grandfathered multilateration LMS systems that were constructed and in
operation as of February 3, 1995, must conform their already-constructed
facilities to a new radio frequency band plan established by the LMS Order. To
comply, the Company is required to change the frequency on which the Forward
Link operates and modify system equipment accordingly. The frequency conversion
must be complete by April 1, 1998, the date on which the authority to operate on
the previous LMS frequencies will expire. Although the frequency conversion only
affects the Company's Forward Link, transition of the Company's operating
facilities to the new band plan will require the modification of both
transmitting and subscriber equipment. The Company constructed transmission
equipment in 1996 that modified the frequency on which the Forward Link operates
in all of its existing markets. The Company's Forward Link in the existing
markets now operates on both the old and the new frequencies, but the Company
still must convert its existing customers' VLUs to conform to the new spectrum
band plan. The Company has begun an active program of converting its existing
customers' VLUs to operate within the new spectrum band plan. The Company
anticipates that the frequency conversion process for existing markets will be
completed prior to the April 1, 1998 deadline. The Company estimates that the
total cost of such conversion will be approximately $7.2 million. There can be
no assurance that the Company will complete its frequency conversion by April 1,
1998 or that the cost to the Company will not exceed $7.2 million. In addition,
non-multilateration LMS systems that were operating on segments of the frequency
band that the FCC allocated for multilateration LMS use in 1995 were
grandfathered until April 1, 1998. This means that multilateration LMS systems
may be required to share their frequencies with such non-multilateration LMS
systems until April 1998.
LMS SPECTRUM AUCTION
In the LMS Order, the FCC concluded that it would award the remaining
spectrum for multilateration LMS through competitive bidding in an auction, a
procedure that the FCC is using for other wireless communications services. The
FCC intends to auction one license in each of three spectrum bands allotted for
multilateration LMS on an "Economic Areas" (EAs) basis. There are 172 EAs
covering the continental United States. The FCC dropped its plans in the
September 1997 LMS Clarification Order to license spectrum using the larger
Major Trading Area geographic basis. Procedures for the LMS auctions that
generally conform with previously proposed generic competitive bidding rules
were proposed in the LMS Clarification Order, and the FCC has requested public
comment on the proposed rules for multilateration LMS auction. Members of the
FCC staff have told the Company that they expect such auctions to be held in
early 1998, although the schedule for such auctions has been subject to repeated
delays. The Company expects to participate in the auction process and to bid on
specific licenses to acquire the additional spectrum necessary to establish
coverage in major metropolitan areas nationwide. The extent of funding that may
be needed by the Company for a successful outcome in these auctions is not yet
known by the Company. The Company understands that the FCC will expect
cooperative arrangements for sharing between grandfathered licensees and the
eventual EA licensees resulting from the auction. To the extent that the Company
does not submit the winning bid for a license in an EA in which it operates a
51
<PAGE>
grandfathered system, the Company would be permitted to continue operating its
grandfathered facilities in that EA, but it would be precluded from expanding
its coverage area within such EA.
PERMISSIBLE USE RESTRICTIONS AND INTERCONNECTION
In the LMS Order, the FCC stated that it did not intend that LMS be used for
"general messaging purposes." The FCC did modify the existing permissible use
definition, however, so as to authorize multilateration LMS systems to transmit
status and instructional messages, either voice or non-voice, so long as they
are related to the location or monitoring functions of the system. This
restriction precludes the Company from offering messaging services other than as
part of its location and monitoring services.
The LMS Order also expanded the permissible use definition to include
location of non-vehicular traffic by multilateration LMS systems whose primary
operations involve location of vehicles. The requirement that an LMS system's
primary operations be location of vehicular traffic may preclude the Company
from having a majority of customers who have subscribed to non-vehicular
location or monitoring services, such as personal location services, and may be
interpreted to impose other restrictions on non-vehicular location and
monitoring services.
In addition, the FCC order requires that interconnection to the public
switched telephone network be on a "store and forward" basis. This requirement
limits the Company's ability to offer real-time voice communications services,
except with respect to emergency communications. LMS customers may engage in
delayed voice or data messaging over the telephone system. The FCC set a
thirty-second delay as the "safe harbor" for store-and-forward interconnection,
but acknowledged that other approaches may also be acceptable depending upon the
configuration of the system..
FOREIGN OWNERSHIP
The FCC has not declared whether multilateration LMS will be classified as a
private mobile radio service (PMRS) or as a commercial mobile radio service
(CMRS), but has proposed to classify LMS providers on a case-by-case basis. This
implies that the greater the level and nature of interconnection with the public
switched telephone network offered by the LMS provider, the more likely the
provider would be classified as CMRS. Because multilateration LMS is offered on
a for-profit basis and can be connected with the public switched telephone
network, however, the Company believes that it is likely that the FCC will
classify multilateration LMS as CMRS. If the Company's services were
reclassified as CMRS rather than as PMRS, the Company, which holds its FCC
authorizations through a wholly-owned subsidiary, Teletrac License, Inc., would
be subject to the foreign ownership restrictions under the Communications Act
that apply to the parent corporations of CMRS licensees. Under this restriction,
non-U.S. persons would not be permitted to hold, directly or indirectly, in the
aggregate, more than 25% of the ownership or 25% of the voting rights in the
Company, absent a waiver or determination by the FCC that a higher level of
foreign ownership would be in the public interest.
Although the Company is controlled by U.S. citizens, non-U.S. persons
currently hold slightly more than 25% of the ownership of the Company. If the
FCC were to reclassify its multilateration LMS as CMRS at a time when the
Company's level of foreign ownership or foreign voting rights exceeded 25%, the
Company would be required to obtain a public interest determination from the FCC
approving its level of foreign ownership or to restructure its ownership to meet
the 25% benchmark. The FCC recently instituted a rule making proceeding to
develop rules to implement the World Trade Organization ("WTO") agreements
scheduled to become effective January 1, 1998. It is anticipated that the WTO
agreements and the FCC's implementing rules will open additional opportunities
for foreign investment in U.S. entities that control CMRS licensees. However, it
is not clear that any relief granted as a result of the FCC's implementation of
the WTO agreements would necessarily exempt the Company from the requirement to
secure a public interest determination from the FCC approving its level of
foreign ownership or to restructure its ownership to meet the 25% benchmark if
the FCC should reclassify its service as CMRS.
52
<PAGE>
TECHNICAL REQUIREMENTS
Multilateration LMS systems must use equipment that is "type-accepted" by
the FCC. Under the type-acceptance procedure, the FCC confirms that the model of
equipment proposed for use in a particular radio service conforms to the
technical requirements for the service as specified in the FCC's rules. All
equipment used by the Company that is required to be type-accepted has been
type-accepted.
Multilateration LMS systems operate on frequencies that have been allocated
to LMS by the FCC on a secondary basis. This means that LMS operations cannot
cause interference to, and may be required to accept interference from, users of
those same or adjacent frequencies in the Industrial, Scientific, and Medical
radio service and in the Federal government's radiolocation service. In
addition, under Part 15 of the FCC's rules, certain unlicensed radio devices
(such as spread spectrum devices used for local area networks) operate on the
same or adjacent frequencies as LMS systems. Although multilateration LMS
systems generally have priority in the use of their frequencies over such Part
15 devices, the FCC's rules provide a "safe harbor" for the operation of Part 15
devices in LMS spectrum. If a Part 15 device is operated in a manner that
satisfies those safe harbor requirements (which were designed to avoid or
minimize the risk of interference to LMS services), an LMS system that
nonetheless suffers interference from such a Part 15 device may have no recourse
other than to negotiate with the Part 15 user on methods for eliminating or
reducing the interference. In addition, as a condition of the LMS license, the
FCC has stated that operators of new LMS systems must perform testing to
demonstrate that the system does not cause unacceptable interference to Part 15
devices. To date, the FCC has specifically declined to specify the nature of
such testing and how they might be used to determine whether the multilateration
LMS system is causing unacceptable interference to Part 15 devices. The FCC has
indicated that the purpose of the testing is to insure that multilateration LMS
licensees take efforts to minimize interference to existing Part 15 devices when
designing and constructing their systems; Part 15 devices remain secondary to
multilateration LMS operations. An association of entities operating Part 15
devices has asked that the Company engage in cooperative testing in certain of
the markets in which the Company is operating to ascertain the existence of any
potential for interference, and the Company has expressed its willingness to
cooperate in a testing program.
CURRENT FCC APPLICATIONS AND PROCEEDINGS
PENDING APPLICATIONS. The Company has pending before the FCC a request for
waiver to permit the addition of fill-in transmitter sites within the present
coverage area of its grandfathered facilities. In addition, the Company has
pending before the FCC various site-specific applications (together with related
waivers and request for special temporary authority) for minor corrections of
operating parameters and for the relocation of sites within the two kilometer
relocation restriction because of site unavailability and other causes. It is
anticipated that the Company will have other such applications from time to time
in the ordinary course of business.
RECONSIDERATION PROCEEDINGS FOR THE LMS RULES. The FCC released its
September 1997 LMS Clarification Order which clarified and modified various
issues relating to the provision of LMS and grandfathered operation. Interested
parties may seek further reconsideration of the order.
OTHER PROCEEDINGS. Other proceedings pending from time to time at the FCC
may affect the business and operations of the Company. These proceedings
include, but are not limited to, (i) pending proceedings to modify rules for low
power transmitters operating under Part 15 of the FCC's rules that also operate
in the 902-928 MHz frequency band in which the Company operates its LMS systems;
(ii) changes in spectrum allotments and usage restrictions that may permit the
operation of terrestrial location-related services in other bands; (iii) changes
in FCC rules and policies governing interconnection with the switched telephone
network; (iv) the anticipated institution of rule making proceedings to develop
the rules and policies that will govern the auction of the LMS spectrum; (v)
changes in the general licensing rules and policies of the FCC affecting LMS
applications; and (vi) changes in FCC regulatory policies generally
53
<PAGE>
governing the CMRS services (which would affect the Company, to the extent that
the FCC classified multilateration LMS as CMRS).
The Company cannot predict when the FCC will act on any of these matters or
what effect such action may have on its business.
LEGAL PROCEEDINGS
Prior to the Acquisition, PacTel Teletrac (predecessor to AirTouch Teletrac)
brought an action before the United States Patent and Trademark Trial and Appeal
Board against T.A.B. Systems ("TAB") opposing TAB's registration of the mark
"Teletrak." The Trademark Trial and Appeal Board granted PacTel Teletrac's
motion for summary judgment, but summary judgment was reversed by the U.S. Court
of Appeals for the Federal Circuit. Under the terms of the Asset Purchase
Agreement between AirTouch Teletrac and the Company, AirTouch Teletrac must pay
the costs of any litigation relating to this matter and must indemnify the
Company against any losses relating thereto. AirTouch Teletrac has notified the
Company that it intends to continue to litigate this matter on its own behalf as
well as on behalf of the Company, and that it will bear the cost of such
litigation. There can be no assurance that AirTouch Teletrac will be successful
in such litigation or that AirTouch Teletrac will honor its indemnification
obligations (including any costs or losses relating to a change of name, if
required as a result of the litigation).
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. The Company is not currently a party to any
proceeding which, in management's opinion, is likely to have a material adverse
effect on the Company's business.
EMPLOYEES
On September 30, 1997, the Company had 309 employees. Substantially all of
the Company's employees are full-time. The Company's employees are not unionized
and the Company believes that its relations with its employees are good.
FACILITIES AND EQUIPMENT
The Company currently leases approximately 12,800 square feet of office
space in Kansas City, Missouri for its headquarters facility for a term expiring
in 2002. As of September 1997, the Company leased approximately 28,000 square
feet in Garden Grove, California for a term expiring in 2002, as well as office
space in Rolling Meadows, Illinois; Farmington Hills, Michigan; Arlington,
Texas; Fort Lauderdale, Florida; Houston, Texas; Orlando, Florida; San
Francisco, California; and San Diego, California.
As of September 30, 1997, the Company had approximately 415 site and tower
leases for the operation of its transmitters and other equipment on commercial
broadcast towers and at other fixed sites. The Company believes that in general
the terms of its leases are competitive based on market conditions. The Company
believes its facilities are suitable and adequate for its purposes. The Company
relocates its transmission and receiver sites from time to time and does not
anticipate any material problems in obtaining and retaining site and tower
leases in the future.
54
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
James A. Queen....................................... 46 Chairman of the Board, Chief Executive Officer and
Director
Lawrence P. Jennings................................. 42 Vice President of Operations
Alan B. Howe......................................... 36 Vice President of Finance and Corporate Development
Steven D. Scheiwe.................................... 36 General Counsel and Secretary
James E. Seng........................................ 52 Vice President of Engineering
Sanford Anstey....................................... 50 Director
Robert Benbow........................................ 60 Director
David J. Berkman..................................... 34 Director
Michael A. Greeley................................... 33 Director
Michael Markbreiter.................................. 34 Director
Marc H. Michel....................................... 36 Director
Brian A. Rich........................................ 36 Director
</TABLE>
Each Director of the Company has been elected pursuant to the terms of the
Stockholders' Agreement. See "Certain Relationships and Related
Transactions--Stockholders' Agreement."
Each Director of the Company is also a Director of Holdings. Mr. Queen is
also Chairman of the Board and Chief Executive Officer of Holdings. Mr. Howe and
Mr. Scheiwe are also Vice Presidents of Holdings and are the Treasurer and
Secretary of Holdings, respectively.
JAMES A. QUEEN has been Chairman of the Board, Chief Executive Officer and
Director of the Company since November 1995. From February through November
1995, Mr. Queen was Chief Executive Officer of Pentapage Inc. ("Pentapage"), a
company formed by Messrs. Queen, Jennings and Scheiwe to pursue business
opportunities in the communications industry. Pentapage was dissolved in
connection with the initial capitalization of the Company. Mr. Queen served as
Chairman of the Board and Chief Executive Officer of Premiere Page from its
inception in 1988 through December 1994.
LAWRENCE P. JENNINGS has been Vice President of Operations of the Company
since November 1995. From February through November 1995, Mr. Jennings was a
Vice President of Pentapage. Mr. Jennings served as Vice President of Operations
of Premiere Page from July 1992 through December 1994. Prior to joining Premiere
Page, Mr. Jennings was General Manager for Centel Cellular/United Telespectrum,
Inc. in Charleston, South Carolina.
ALAN B. HOWE has been Vice President of Finance and Corporate Development of
the Company since November 1995. From April through November 1995, Mr. Howe was
Chief Financial Officer of Pentapage. Mr. Howe served as a Director of Corporate
Development for Sprint Corp. as well as in various finance positions within
Sprint Corp.'s Wireless Task Force and Corporate Treasury Group. Mr. Howe's last
position at Sprint Corp. was with WirelessCo, L.P., the PCS joint venture among
Sprint Corp., Tele-Communications, Inc., Comcast Corporation and Cox
Communications, Inc.
STEVEN D. SCHEIWE has been General Counsel and Secretary of the Company
since November 1995. From February through November 1995, Mr. Scheiwe was a Vice
President of Pentapage. Mr. Scheiwe had served as General Counsel and Secretary
to Premiere Page and its predecessor companies from their inception in 1988.
JAMES E. SENG has been Vice President of Engineering of the Company since
February 1996. Prior to joining the Company, Mr. Seng was President of Project
Group 2000, an engineering consulting firm. From 1990 to 1994, Mr. Seng was Vice
President of Engineering at Premiere Page.
SANFORD ANSTEY has been a Director of the Company since December 6, 1996.
Mr. Anstey is Managing Director of BancBoston Capital, BancBoston's private
equity investing subsidiary, and is head of the firm's media and communications
investments team. Mr. Anstey has been employed by BancBoston Capital since
55
<PAGE>
1988 and is currently a member of the Advisory Board of Baring Communications
Equity, the Board of Directors of Six Flags Entertainment and the Board of
Advisors of Prime Enterprises.
ROBERT BENBOW has been a Director of the Company since November 1995. Mr.
Benbow has been a Vice President of Burr, Egan, Deleage & Co. and a General
Partner in certain funds affiliated with Burr, Egan, Deleage & Co. since 1990.
Mr. Benbow serves as a director of ST Enterprises, a local exchange company;
Golden Sky Systems, Inc.; Incom Communications Corp.; and Brooks Fiber
Properties, Inc. Mr. Benbow also served as a director of U.S. One Communications
Corp., which filed for bankruptcy in 1997, after Mr. Benbow had resigned from
the Board of Directors thereof.
DAVID J. BERKMAN has been a Director of the Company since November 1995.
Since 1994, Mr. Berkman has served as Executive Vice President and a member of
the Board of Directors of The Associated Group, Inc. For the prior fifteen
years, Mr. Berkman was employed by Associated Communications Corporation, the
predecessor of the Associated Group, Inc., most recently as a Vice President.
Mr. Berkman is currently Vice Chairman of the Board of Portatel del Sureste,
Mexico and Associated Communications, L.L.C. Mr. Berkman is a former member of
the Board of Directors, and a former member of the Executive Committee, of the
Cellular Telephone Industry Association.
MICHAEL A. GREELEY has been a Director of the Company since December 6,
1996. Mr. Greeley is the Senior Vice President of GCC Investments, the
investment arm of GC Companies, which operates General Cinema Theatres.
Additionally, Mr. Greeley serves as the Senior Investment Officer of GC
Companies, Inc. From June 1989 to June 1994, Mr. Greeley was a Vice President of
Wasserstein Perella & Co., Inc. Mr. Greeley is currently a director of Global
TeleSystems, Inc. and Crescent Communications.
MICHAEL MARKBREITER has been a Director of the Company since its formation
in November 1995. Mr. Markbreiter has been a portfolio manager at Kingdon
Capital Management Corp. for private equity investments since August 1995. Mr.
Markbreiter co-founded Ram Investment Corp., a venture capital company, from
March 1994 through March 1995, and had previously been a portfolio manager for
Asia at Kingdon Capital Management Corp. from February 1993 through January
1994.
MARC H. MICHEL has been a Director of the Company since its formation in
November 1995. Mr. Michel is currently a General Partner of Eos Partners SBIC,
L.P. and a Managing Director of Eos Partners, L.P. Prior to joining Eos in 1994,
Mr. Michel was a Vice President of Merrill Lynch Interfunding Inc., a subsidiary
of Merrill Lynch & Co. Mr. Michel is a director of a number of companies,
including Intervest Holdings.
BRIAN A. RICH has been a Director of the Company since its formation in
November 1995. Mr. Rich is Managing Director of Toronto Dominion Capital
(U.S.A.), Inc., Toronto Dominion Bank's U.S. merchant bank. Prior to this
position, Mr. Rich had been an investment banker in Toronto Dominion's
Communications Finance Group since 1991.
The Company's former Chief Financial Officer resigned in June 1997. During
the search for a replacement, Alan B. Howe, the Company's Vice President of
Finance and Corporate Development, is acting Chief Financial Officer of the
Company.
The executive officers of the Company are elected by the Board of Directors
and serve at its discretion.
All directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified. Directors do not receive an annual retainer or meeting attendance
fees. However, the Company reimburses non-management directors for expenses
incurred in attending meetings of the Board of Directors.
During 1996, the Board of Directors of the Company held eight meetings. The
only standing committees of the Board of Directors are the Audit Committee and
the Compensation Committee. The current members of the Audit Committee are
Messrs. Benbow, Greeley and Michel. The Audit Committee periodically consults
with the Company's management and independent public accountants on financial
matters, including the Company's internal financial controls and procedures. The
Audit Committee held one meeting in 1996. The current members of the
Compensation Committee are Messrs. Anstey, Berkman and Rich. The Compensation
Committee approves compensation arrangements for the Company's executive
officers and administers the Company's stock option plans. The Compensation
Committee held two meetings in 1996.
56
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information as to the
Chief Executive Officer and the four other highest paid executive officers of
the Company for the fiscal year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
------------------------------------------------------ UNDERLYING
NAME AND OTHER ANNUAL OPTIONS
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION (#)
- ---------------------------------------------- --------- ----------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
James A. Queen Chairman of the Board Chief
Executive Officer........................... 1996 201,000 38,000 -- 24,671
James E. Seng Vice President of Engineering... 1996 87,500 18,500 -- 1,699
Lawrence P. Jennings Vice President of
Operations.................................. 1996 158,000 29,000 -- 3,876
Alan B. Howe Vice President of Finance and
Corporate Development....................... 1996 106,000 19,000 -- 1,699
Steven D. Scheiwe General Counsel and
Secretary................................... 1996 117,000 21,000 -- 4,442
<CAPTION>
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION (1) ($)
- ---------------------------------------------- ---------------
<S> <C>
James A. Queen Chairman of the Board Chief
Executive Officer........................... 1,000
James E. Seng Vice President of Engineering... 1,000
Lawrence P. Jennings Vice President of
Operations.................................. 1,000
Alan B. Howe Vice President of Finance and
Corporate Development....................... 1,000
Steven D. Scheiwe General Counsel and
Secretary................................... 1,000
</TABLE>
- ------------------------
(1) Amounts shown for each officer consist of amounts accrued by the Company for
contribution to the Company's 401(k) Savings Plan that are allocable to such
officer.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants of
stock options to the named executive officers during the fiscal year ended
December 31, 1996:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- ----------------------------- ------------------- ------------------------- --------------- ------------- --------- ----------
James A. Queen............... 8,224 57.3% 100 2003 464,000 1,724,000
8,224 125
8,223 150
James E. Seng................ 567 3.9% 100 2003 32,000 119,000
566 125
566 150
Lawrence P. Jennings......... 1,292 9.0% 100 2003 73,000 271,000
1,292 125
1,292 150
Alan B. Howe................. 567 3.9% 100 2003 32,000 119,000
566 125
566 150
Steven D. Scheiwe............ 1,481 10.3% 100 2003 84,000 310,000
1,481 125
1,480 150
</TABLE>
- ------------------------
(1) See "--Stock Option Plans."
57
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth the number of options exercised and the value
realized upon exercise by the named executive officers during the fiscal year
ended December 31, 1996 and the value of outstanding options held by such
executive officers as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
NUMBER OF SHARES YEAR AT FISCAL YEAR END
ACQUIRED ON EXERCISE END EXERCISABLE/ EXERCISABLE/
NAME OF OPTIONS VALUE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------------------- ------------------------- ------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
James A. Queens...................... -- -- 0/24,671 0/$ 1,190,400
James E. Seng........................ -- -- 0/1,699 0/$ 82,000
Lawrence P. Jennings................. -- -- 0/3,876 0/$ 187,000
Alan B. Howe......................... -- -- 0/1,699 0/$ 82,000
Steven D. Scheiwe.................... -- -- 0/4,442 0/$ 214,400
</TABLE>
- ------------------------
(1) Assumes a price per share of $173.25, the price per share of the Preferred
Stock sold on December 6, 1996.
EMPLOYMENT AGREEMENTS
In November 1995, the Company and Mr. Queen entered into an agreement
pursuant to which Mr. Queen agreed to serve as the Chief Executive Officer of
the Company through December 31, 1998. Under the agreement, Mr. Queen is paid
compensation of $200,000 per year (plus the cost of health insurance) and is
eligible to receive a bonus of up to 25% of his base salary at the discretion of
the Board of Directors. In addition, in 1996 Mr. Queen was granted options to
purchase 24,671 shares of Class A Common Stock at prices ranging from $100 to
$150 per share. One-third of the options granted vest on each of the following
three one-year anniversaries of the date of grant. The agreement also includes a
confidentiality provision and a non-compete provision.
In January 1996, the Company and Mr. Scheiwe entered into an agreement
pursuant to which Mr. Scheiwe agreed to serve as the General Counsel and
Secretary of the Company through December 31, 1998. Under the agreement, Mr.
Scheiwe is paid compensation of $114,200 per year (plus the cost of health
insurance) and is eligible to receive a bonus of up to 20% of his base salary at
the discretion of the Board of Directors. In addition, in 1996 Mr. Scheiwe was
granted options to purchase 4,442 shares of Class A Common Stock at prices
ranging from $100 to $150 per share. One-third of the options granted vest on
each of the following three one-year anniversaries of the date of grant. The
agreement also includes a confidentiality provision and a non-compete provision.
In January 1996, the Company and Mr. Jennings entered into an agreement
pursuant to which Mr. Jennings agreed to serve as the Vice President of
Operations of the Company through December 31, 1998. Under the agreement, Mr.
Jennings is paid compensation of $154,000 per year (plus the cost of health
insurance) and is eligible to receive a bonus of up to 20% of his base salary at
the discretion of the Board of Directors. In addition, in 1996 Mr. Jennings was
granted options to purchase 3,876 shares of Common Stock at prices ranging from
$100 to $150 per share. One-third of the options granted vest on each of the
following three one-year anniversaries of the date of grant. The agreement also
includes a confidentiality provision and a non-compete provision.
STOCK OPTION PLANS
In November 1995, the Company adopted a Stock Option Plan (the "1995 Stock
Plan") which provides for the granting of options to purchase up to 43,060
shares of Class A Common Stock to qualified employees of the Company, all of
which were granted by November 1996. Under the terms of Option Agreements
between the Company and each of Messrs. Queen, Seng, Jennings, Howe and Scheiwe
to date, the Company has granted each of them the right to purchase from the
Company up to 24,671; 1,699; 3,876; 1,699; and 4,442 shares of Class A Common
Stock, respectively, under the terms of the 1995 Stock Plan. In each case,
one-third of the shares may be purchased at an option price of $100 per share,
one-third may be purchased at $125 per share, and the final one-third may be
purchased at $150 per share. One-third of the options granted vest on each of
the following three one-year anniversaries of the date of grant. The
58
<PAGE>
Company also has Option Agreements with certain other employees with similar
terms under which it has granted options to purchase an additional 4,599 shares
of Class A Common Stock pursuant to the 1995 Stock Plan.
In November 1996, the Company adopted the Teletrac, Inc. and its
Subsidiaries 1996 Stock Option and Restricted Stock Purchase Plan (the "1996
Stock Plan") so as to promote the interests of the Company and its stockholders
by providing an opportunity to selected employees, officers and directors of the
Company or any subsidiary thereof to purchase Class A Common Stock of the
Company. The 1996 Stock Plan provides for the granting of non-qualified stock
options and/or incentive stock options ("ISOs") to acquire Class A Common Stock
of the Company and/or by the granting of rights to purchase Class A Common Stock
of the Company subject to certain restrictions ("Restricted Stock").
The 1996 Stock Plan is administered by the Compensation Committee of the
Board of Directors of the Company (the "Compensation Committee"). The
Compensation Committee, upon the approval of the Board of Directors, has the
discretion under the Plan (i) to select the employees who will be granted an
option or right to purchase Class A Common Stock of the Company; (ii) to
designate whether the options will be granted as ISOs or as non-qualified stock
options; (iii) to establish the number of shares of Class A Common Stock of the
Company that may be issued under each option or right; (iv) to determine the
time and the conditions subject to which options may be exercised in whole or in
part; (v) to determine the form of consideration that may be used to purchase
shares of Class A Common Stock of the Company issued upon exercise of an option
or right; (vi) to impose restrictions and/or conditions upon shares of Class A
Common Stock of the Company acquired upon exercise of an option or right; (vii)
to determine the circumstances under which shares of Class A Common Stock of the
Company acquired upon exercise of any option or right may be subject to
repurchase by the Company; (viii) to determine the circumstances under which
shares acquired upon exercise of an option or right may be sold or transferred;
(ix) to establish a vesting provision for any option relating to the time, or
circumstance, when the option may be exercised by a participant; and (x) to
accelerate the time when outstanding options may be exercised.
The Company is currently authorized to issue up to 25,397 shares of Class A
Common Stock under the 1996 Stock Plan. As of September 30, 1997, options to
purchase 1,250 shares of Class A Common Stock were outstanding under the 1996
Stock Plan, all of which were ISOs. Of such options granted, one-third of the
shares may be purchased at an option price of $175.00 per share, one-third may
be purchased at $218.75 per share, and the final one-third may be purchased at
$262.50 per share. None of the named officers has received stock options under
the 1996 Stock Plan. The Company has not issued any Restricted Stock under the
Plan.
In connection with the creation of a holding company structure for the
Company, the 1995 Stock Plan and the 1996 Stock Plan assumed by Holdings and all
of the outstanding options granted under such Plans were converted to options to
purchase shares of the Class A Common Stock of Holdings on identical terms and
conditions.
401(K) PLAN
The Company maintains a 401(k) Savings Plan for its full-time employees
which permits employee contributions up to 15% of annual compensation to the
plan on a pre-tax basis. In addition, the Company may make a matching
contribution of up to 50% of each participating employee's annual compensation,
not to exceed $1,000, before taxes. The Company may also make additional
discretionary contributions to the Plan in any plan year up to the annual 401(k)
plan contribution limits as defined in the Internal Revenue Code of 1986, as
amended (the "Code"). The Plan is administered by the Compensation Committee.
For the plan year ended December 31, 1996, the Company has accrued an
aggregate of $121,000 for contributions to the Plan in 1997, of which $1000 was
accrued on behalf of each of Messrs. Queen, Seng, Jennings, Howe and Scheiwe,
and all of which has been contributed.
59
<PAGE>
SECURITIES OWNERSHIP
Holdings owns all the issued and outstanding capital stock of Teletrac. The
following table sets forth certain information regarding the beneficial
ownership of Holdings' Class A Common Stock and Preferred Stock as of the
Closing by (i) certain stockholders or groups of related stockholders who,
individually or as a group, are the beneficial owners of 5% or more of any class
of Holdings Common Stock, (ii) the executive officers and directors of Holdings
and (iii) the executive officers and directors of Holdings as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A COMMON STOCK(1)
PREFERRED STOCK
------------------------- -------------------------
<CAPTION>
NUMBER OF PERCENT NUMBER OF PERCENT
NAME(2) SHARES OF CLASS SHARES OF CLASS
- ------------------------------------------------------------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
Burr, Egan, Deleage Funds(3)...................................... 73,088.02 28.0% 23,088.02 12.2%
c/o Burr, Egan Deleage & Co.
One Post Office Square
Boston, MA 02109
Alta Communications Funds(4)...................................... 23,088.01 8.5 23,088.01 12.1
c/o Alta Communications, Inc.
One Embarcadero Center,
Suite 4050
San Francisco, CA 94111
Kingdon Associates, L.P. ......................................... 13,398.99 5.3 5,898.99 3.1
Kingdon Partners, L.P............................................. 13,435.06 5.4 935.06 *
M. Kingdon Offshore NV............................................ 52,025.97 19.2 22,025.97 11.6
52 West 57th Street
New York, NY 10019
Toronto Dominion Capital (U.S.A.), Inc............................ 55,772.01 21.9 5,772.01 3.0
31 West 52nd Street
20th Floor
New York, NY 10019
TruePosition, Inc................................................. 55,772.01 21.9 5,772.01 3.0
3 Bala Plaza East
Suite 502
Bala Cynwyd, PA 19004
Eos Partners SBIC, L.P............................................ 34,772.01 13.6 5,772.01 3.0
320 Park Avenue
22nd Floor
New York, NY 10022
BancBoston Ventures Inc........................................... 34,632.03 12.2 34,632.03 18.2
100 Federal Street
Boston, MA 02110
Chestnut Hill Wireless, Inc....................................... 40,404.04 14.0 40,404.04 21.2
1300 Boylston Street
Chestnut Hill, MA 02167
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------------------
CLASS A COMMON STOCK(1)
PREFERRED STOCK
------------------------- -------------------------
NUMBER OF PERCENT NUMBER OF PERCENT
NAME(2) SHARES OF CLASS SHARES OF CLASS
- ------------------------------------------------------------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS:
<S> <C> <C> <C> <C>
James A. Queen(5)................................................. 18,023.00 7.2 0 0
Steven D. Scheiwe(5).............................................. 3,135.00 * 0 0
Lawrence P. Jennings(5)........................................... 2,351.00 * 0 0
James E. Seng(5).................................................. 404.00 * 0 0
Alan B. Howe(5)................................................... 404.00 * 0 0
Sanford Anstey(6)................................................. 34,632.03 13.9 34,632.03 18.2
Robert Benbow(7).................................................. 96,176.03 32.6 46,176.03 15.2
David J. Berkman(8)............................................... 55,772.01 22.4 5,772.01 3.0
Michael A. Greeley(9)............................................. 40,404.04 16.2 40,404.04 21.2
Michael Markbreiter(10)........................................... 78,860.02 31.7 28,860.02 15.2
Marc H. Michel(11)................................................ 34,772.01 14.0 5,772.01 3.0
Brian A. Rich(12)................................................. 55,772.01 22.4 5,772.01 3.0
All executives officers and directors as a group 323,394.12 76.2 167,388.15 63.6
(14 persons)(13)................................................
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes all shares issuable upon conversion of the Preferred Stock.
(2) Except as otherwise noted below, the persons named in the table have sole
voting power and investment power with respect to all shares set forth in
the table. The shares listed include shares of Class A Common Stock that may
be acquired upon exercise of presently exercisable options, or options that
will become exercisable within 60 days from the date hereof.
(3) Includes (i) 18,525, shares of Common Stock and 8,554.11 shares of
Preferred Stock owned by Alta Subordinated Debt Partners III, L.P., (ii)
31,145 shares of Common Stock and 14,381.53 shares of Preferred Stock owned
by Alta V Limited Partnership and (iii) 330 shares of Common Stock and
152.38 shares of Preferred Stock owned by Customs House Partners. Alta
Subordinated Debt Partners III, L.P., Alta V Limited Partnership and Customs
House Partners are part of an affiliated group of investment funds referred
to, collectively, as the Burr, Egan, Deleage Funds. The general partner of
Alta Subordinated Debt Partners III, L.P. is Alta Subordinated Debt
Management III, L.P. The general partner of Alta V Limited Partnership is
Alta V Management Partners, L.P. Each of Alta Subordinated Debt Management
III, L.P. and Alta V Management Partners, L.P. exercises sole voting and
investment power with respect to all of the shares held of record by the
investment fund for which it serves as general partner. Burr, Egan, Deleage
& Co., directly or indirectly, provides investment advisory services to each
of the investment funds comprising the Burr, Egan, Deleage Funds. Certain of
the principals of Burr, Egan, Deleage & Co. are partners in Alta
Subordinated Debt Management III, L.P. and Alta V Management Partners, L.P.
and, as such, may be deemed to have or share voting or investment power with
respect to the shares held by the investment fund for which such entity
serves as general partner. The principals of Burr, Egan, Deleage & Co.
disclaim beneficial ownership of all of such shares except to the extent of
their proportionate pecuniary interests therein. Certain principals of Burr,
Egan, Deleage & Co. are general partners of Customs House Partners and may
be deemed to share voting and investment power with respect to the shares
held of record by Customs House Partners. Such principals of Burr, Egan,
Deleage & Co. disclaim beneficial ownership of all of such shares except to
the extent of their proportionate pecuniary interests therein. In addition,
certain principals of Burr, Egan, Deleage & Co. are affiliated with Alta
Communications, Inc.
61
<PAGE>
(4) Includes (i) 22,574.16 shares of Preferred Stock owned by Alta
Communications VI, L.P. and (ii) 513,85 shares of Preferred Stock owned by
Alta Comm S by S, L.L.C. Alta Communications VI, L.P. and Alta Comm S by S
are part of an affiliated group of investment funds referred to,
collectively, as the Alta Communications Funds. The general partner of Alta
Communications VI, L.P. is Alta Communications VI Management Partners, L.P.
Alta Communications VI Management Partners, L.P., exercises sole voting and
investment power with respect to all of the shares held of record by Alta
Communications VI, L.P. Alta Communications, Inc. provides investment
advisory services to each of the funds comprising the Alta Communications
Funds. Certain of the principals of Alta Communications, Inc. are partners
of Alta Communications VI Management Partners, L.P. and as such may be
deemed to have or share voting or investment power with respect to the
shares held by Alta Communications VI, L.P. The principals of Alta
Communications, Inc. disclaim beneficial ownership of all of such shares
except to the extent of their proportionate pecuniary interests therein.
Certain principals of Alta Communications, Inc. are members of Alta Comm S
by S and may be deemed to share voting and investment power with respect to
the shares held of record by Alta Comm S by S. Such principals of Alta
Communications, Inc. disclaim beneficial ownership of such shares except to
the extent of their proportionate pecuniary interests therein. In addition,
certain principals of Alta Communications, Inc. are affiliated with Burr,
Egan, Deleage & Co.
(5) Includes options to purchase shares of Common Stock that are presently
exercisable, or that will become exercisable within 60 days from the date
hereof.
(6) Mr. Anstey may be deemed to beneficially own the shares of capital stock
owned by BancBoston Ventures. Mr. Anstey disclaims beneficial ownership of
such shares.
(7) Mr. Benbow is a general partner of Alta Subordinated Debt Management III,
L.P., Alta V Management Partners, L.P. and Alta Communications VI Management
Partners, L.P. As a general partner of these funds, he may be deemed to
share voting and investment power with respect to the shares of Common Stock
and Preferred Stock owned by the investment funds for which these funds
serve as general partner. Mr. Benbow disclaims beneficial ownership to such
shares except to the extent of his proportionate pecuniary interests
therein. In addition, Mr. Benbow disclaims all beneficial ownership to all
the shares held by Customs House Partners and Alta Comm S by S, L.L.C.
(8) Mr. Berkman may be deemed to beneficially own the shares of capital stock
owned by TruePosition, Inc., a subsidiary of the Associates Group, Inc. Mr.
Berkman disclaims beneficial ownership of such shares.
(9) Mr. Greeley may be deemed to beneficially own the shares of capital stock
owned by Chestnut Hill Wireless, Inc., a subsidiary of GCC Investments, Inc.
Mr. Greeley disclaims beneficial ownership of such shares.
(10) Mr. Markbreiter may be deemed to beneficially own the shares of capital
stock owned by Kingdon Associates, L.P., Kingdon Partners, L.P. and M.
Kingdon Offshore NV. Mr. Markbreiter disclaims beneficial ownership of such
shares.
(11) Mr. Michel may be deemed to beneficially own the shares of capital stock
owned by Eos Partners SBIC, Inc. Mr. Michel disclaims beneficial ownership
of such shares.
(12) Mr. Rich may be deemed to beneficially own the shares of capital stock
owned by Toronto Dominion Capital (U.S.A.), Inc. Mr. Rich disclaims
beneficial ownership of such shares.
(13) Includes shares held by (i) BancBoston Ventures Inc. that may be deemed to
be beneficially owned by Mr. Anstey, (ii) TruePosition, Inc. that may be
deemed to be beneficially owned by Mr. Berkman, (iii) Chestnut Hill
Wireless, Inc. that may be deemed to be beneficially owned by Mr. Greeley,
(iv) Kingdon Associates, L.P., Kingdon Partners, L.P. and M. Kingdon
Offshore NV that may be deemed to be beneficially owned by Mr. Markbreiter,
(v) Eos Partners SBIC, L.P. that may be deemed to be beneficially owned by
Mr. Michel and (vi) Toronto Dominion Capital (U.S.A.), Inc. that may be
deemed to be beneficially owned by Mr. Rich. Does not include shares held by
Alta Subordinated Debt Partners III, L.P., Alta V Limited Partnership,
Customs House Partners, Alta Communications VI, L.P. and Alta Comm S by S
that may be deemed to be beneficially owned by Mr. Benbow.
62
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PREFERRED STOCK PURCHASE AGREEMENT
In December 1996, the Company sold 190,476.19 shares of Series A Redeemable
Convertible Participating Preferred Stock to Alta Subordinated Debt Partners,
L.P., Alta V Limited Partnership, Customs House Partners, Alta Communications
VI, L.P., Alta Comm S by S, LLC, Kingdon Associates, L.P., Kingdon Partners
L.P., M. Kingdon Offshore NV, Toronto Dominion Capital (U.S.A), Inc., Associated
RT, Inc. (the predecessor of TruePosition, Inc.), Eos Partners SBIC, L.P.,
BancBoston Ventures Inc., Northwood Ventures, Chestnut Hill Wireless, Inc.,
Westbury Capital Partners, L.P., Boston Capital Ventures III, L.P., High Point
Keller Limited Partnership, R.B. Keller and Richard B. Keller II (the "Preferred
Investors") pursuant to a Stock Purchase Agreement (the "Preferred Stock
Purchase Agreement") dated December 6, 1996 for an aggregate purchase price of
$33.0 million. The Preferred Stock Purchase Agreement was amended and assigned
by the Company to, and assumed by, Holdings pursuant to the terms of the
Exchange Agreement discussed below.
In the Preferred Stock Purchase Agreement assumed by Holdings, Holdings made
certain covenants to the Preferred Investors which survive until such time as
all of the shares of Preferred Stock have either been redeemed or converted to
shares of Common Stock. Such covenants include, among others, a covenant by
Holdings not to declare or pay any dividends or make any distributions of cash,
property or securities of Holdings with respect to any shares of its capital
stock, or directly or indirectly redeem, purchase, or otherwise acquire for
consideration any shares of its capital stock, except as expressly provided in
the Preferred Stock Purchase Agreement or Holdings' Certificate of Incorporation
and except for repurchases of Common Stock at cost by Holdings under employee
stock plans and programs. Holdings also covenanted that, until February 1, 2008
it will not, and will not permit any subsidiary to, without the consent of the
holders of a majority of the outstanding shares of Preferred Stock: (i) issue
any shares of its capital stock senior to or on parity with the Preferred Stock
with respect to dividends, conversions, liquidation, redemptions or special
voting rights, (ii) create, incur, assume, become liable for, or permit to exist
any indebtedness for borrowed money, capital leases, or other similar
commitments or obligations which, for any one such borrowing or series of
related borrowings, is in excess of $250,000, except under the Indenture or the
Credit Facility or as permitted by the Indenture as in effect on the Closing
Date or by the Credit Facility as in effect on the date of execution and
delivery of definitive documentation with respect thereto or indebtedness
incurred to refinance any of the same; PROVIDED, that any such refinancing
indebtedness (a) shall not have an original principal amount exceeding the sum
of the aggregate principal amount of indebtedness refinanced thereby, plus
accrued interest and any applicable premiums, penalties, fees and costs payable
in respect of the indebtedness refinanced thereby, plus out-of-pocket expenses
payable as a result of such refinancing; and (b) having a maturity later than
February 1, 2008 shall not by its terms expressly restrict payments due to the
holders of the Series A Preferred Stock in connection with redemption of such
shares at the option of such holders on or after February 1, 2008 (any such
refinancing indebtedness being hereinafter called "Refinancing Indebtedness"),
(iii) grant or permit to exist any material liens, security interests or
encumbrances on any of Holdings' assets or properties, except under the
Indenture or the Credit Facility or as permitted by the terms of the Indenture
or the Credit Facility (including, without limitation, under any Refinancing
Indebtedness), (iv) enter into any agreement with any party which by its terms
restricts the payments due to the holders of the Preferred Stock as set forth in
Holdings' Certificate of Incorporation, except under the Indenture or the Credit
Facility or as permitted by the Indenture or the Credit Facility (including,
without limitation, under any Refinancing Indebtedness), or (v) authorize any
merger or consolidation of Holdings with or into any other corporation,
partnership or entity (with the result that less than a majority of the
outstanding voting power of the surviving corporation is held by persons who
were stockholders of Holdings immediately prior to such event) or permit the
sale of all or any material portion of the capital stock or assets of Holdings
(other than sales in the ordinary course of business and consistent with past
practices). Holdings also covenanted to the Preferred Investors that it will
not, without the consent of the holders of 66 2/3% of the outstanding shares of
Preferred Stock, authorize or permit the voluntary bankruptcy, reorganization,
liquidation, dissolution or winding up of
63
<PAGE>
Holdings. Furthermore, Holdings covenanted not to make any amendment to its
Certificate of Incorporation or By-laws (a) so as to adversely affect the rights
of the holders of the Preferred Stock with respect to dividends, liquidation
preferences or redemption without the consent of 80% of the outstanding shares
of Preferred Stock, or (b) that adversely affects any other preference, powers,
rights or privileges of holders of the Preferred Stock without the consent of
holders of at least 66 2/3% in interest of the Preferred Stock. Holdings also
covenanted that it would not make any expenditures for fixed or capital assets,
or any commitments for such expenditures, in excess of $1.0 million for a single
or series or related expenditures without the prior approval of the Board of
Directors. Following February 1, 2008, if any shares of Preferred Stock remain
outstanding, the amendments to the Preferred Stock Purchase Agreement effected
by the Exchange Agreement will be of no further force and effect, and certain of
the covenants discussed above will be modified.
In addition, Holdings made certain affirmative covenants to the Preferred
Investors pursuant to the terms of the Preferred Stock Purchase Agreement. Such
covenants include covenants to provide the Preferred Investors with the
financial statements and budget forecasts of Holdings, to pay all taxes owed by
Holdings, to comply with applicable laws and regulations, and to keep its
property insured by financially sound and reputable insurers.
Certain of the Preferred Investors are Small Business Investment Companies
(each an "SBIC") licensed by the Small Business Administration pursuant to 13
C.F.R. Parts 107 and 121 (the "SBIC Regulations"). In the event that, prior to
December 7, 1997, Holdings changes its principal business activity to an
ineligible business activity (within the meaning of the SBIC Regulations),
Holdings will be required to repurchase each share of Preferred Stock held by an
SBIC at the purchase price under the Preferred Stock Purchase Agreement plus all
accrued and unpaid dividends thereon.
STOCKHOLDERS' AGREEMENT
The Company and the current holders of its issued and outstanding capital
stock (the "Stockholders") have entered into a Stockholders' Agreement, dated as
of December 6, 1996 (the "Stockholders' Agreement"). The Stockholders' Agreement
was amended and assigned by the Company to Holdings pursuant to the terms of the
Exchange Agreement described below.
Under the terms of the Stockholders' Agreement, the Stockholders have
certain rights of last refusal and co-sale rights with respect to sales of
Common Stock and/or Preferred Stock of Holdings by other Stockholders. In
addition, the Stockholders' Agreement creates drag-along obligations in the
event that the holders of specified percentages of Common Stock and Preferred
Stock agree to (i) sell or otherwise dispose of the assets of Holdings or a
majority of its capital stock to a non-affiliate of Holdings or certain
Stockholders or (ii) merge Holdings with or into a non-affiliate of Holdings or
certain Stockholders.
Under the Stockholders' Agreement, Holdings also granted the Stockholders
preemptive rights to purchase their pro rata portion of the issuance by Holdings
of (i) shares of capital stock of Holdings, (ii) securities convertible into or
exchangeable for capital stock of Holdings, or (iii) options, warrants or rights
carrying any rights to purchase capital stock of Holdings, all except in
connection with an acquisition or joint venture with a non-affiliate, an
issuance under a Holdings stock option plan, or certain other issuances. The
Stockholders have waived all such preemptive rights with respect to the issuance
of the Warrants (and underlying shares) and certain additional warrants
(including any underlying shares) issued (or which the Company has committed to
issue) at any time within 90 days of the Closing Date.
The Stockholders' Agreement has fixed the number of directors of the Board
of Directors of Holdings at eight and will require each of the Stockholders to
vote their shares of Preferred Stock and/or Common Stock for the election to the
Board of Directors of: one individual nominated by certain members of
management, one individual nominated by Burr, Egan, Deleage & Co. and its
affiliates, one individual nominated by Eos Partners SBIC, L.P., one individual
nominated by Kingdon Associates, L.P. and its affiliates, one individual
nominated by TruePosition, Inc. and one individual nominated by Toronto Dominion
Capital (U.S.A.), Inc. In addition, the Stockholders who are holders of
Preferred Stock further agreed to vote their shares of Preferred Stock for the
election to the Board of Directors, as representatives
64
<PAGE>
of the holders of Preferred Stock, one individual nominated by BancBoston
Ventures Inc. and one individual nominated by GCC Investments, Inc. As soon as
practicable after the effective date of the registration statement filed with
the Commission in connection with the Exchange Offer, the number of directors
shall be increased to nine and each of the Stockholders will be required to vote
its shares of Common Stock and/or Preferred Stock to elect to the Board of
Directors an outside nominee selected by a majority of the Board of Directors.
The consent of a majority of the holders of Holdings' Common Stock and
Preferred Stock, voting as a single class, is required under the Stockholders'
Agreement for Holdings to: (i) authorize or issue any equity security senior to
or on parity with the Preferred Stock, (ii) incur, create, assume, become or be
liable in any manner with respect to, or permit to exist, any new or additional
indebtedness or liability except as permitted by the Preferred Stock Purchase
Agreement, as amended, (iii) redeem, purchase or otherwise acquire for value any
shares of Common Stock or of any class of capital stock of Holdings or any of
its outstanding options, warrants or convertible or exchangeable securities,
except for repurchases of Common Stock at cost by Holdings under employee stock
plans and programs, (iv) enter into any transaction or agreement with any
officer, director or shareholder of Holdings, or any wholly or partially owned
subsidiary of Holdings, or any other affiliate of Holdings, except transactions
that are on terms no less favorable than would be available in an arms-length
transaction and that are approved by the Audit Committee, (v) authorize any
merger or consolidation of Holdings with or into any other corporation,
partnership or entity (with the result that less than a majority of the
outstanding voting power of the surviving corporation is held by persons who
were stockholders of Holdings immediately prior to such event) or permit the
sale of all or any material portion of the capital stock or assets of Holdings
(other than sales in the ordinary course of business and consistent with past
practices), or (vi) increase or decrease the total number of authorized shares
of Preferred Stock.
The consent of both the holders of a majority of the issued and outstanding
shares of Common Stock and Preferred Stock voting together as a single class,
and the holders of 66 2/3% of the issued and outstanding shares of Preferred
Stock, is required for Holdings to permit or authorize the voluntary
reorganization, liquidation, dissolution or winding up of Holdings. Furthermore,
Holdings is not permitted to amend its Certificate of Incorporation or By-laws
(a) so as to adversely affect the rights of the holders of the Preferred Stock
with respect to dividends, liquidation preferences or redemption without the
consent of the holders of a majority of the issued and outstanding shares of
Common Stock and Preferred Stock, voting together as a single class, and the
consent of the holders of 80% of the outstanding shares of Preferred Stock, or
(b) so as to adversely affect any other preference, powers, rights or privileges
of holders of the Preferred Stock without the consent of holders of a majority
of the issued and outstanding shares of Common Stock and Preferred Stock, voting
together as a single class, and the consent of the holders of at least 66 2/3%
of the outstanding shares of Preferred Stock.
The rights and obligations of Holdings and the Stockholders pursuant to the
Stockholders' Agreement will remain in effect until the earlier of the sale of
the Company and certain qualified public offerings of the Company's Common
Stock.
REGISTRATION RIGHTS AGREEMENT
The Company and the Stockholders have also entered into an Amended and
Restated Registration Rights Agreement, dated December 6, 1996 (the
"Registration Agreement"). The Registration Agreement was amended and assigned
by the Company to Holdings pursuant to the terms of the Exchange Agreement
described below.
Under the Registration Agreement, the Holdings has agreed, subject to
certain conditions, to effect up to three demand registrations of the Common
Stock held by the Stockholders for a sale to the public under applicable federal
and state securities laws. In addition, the Stockholders have certain
"piggy-back" registration rights and rights to registration on Form S-3. In
consideration for such registration rights, under the Registration Agreement the
Stockholders have agreed not to sell or otherwise dispose of shares of Holdings'
Common Stock for seven days prior to and 180 days following any initial public
offering by
65
<PAGE>
Holdings without the prior written approval of the underwriter for such
offering. The addition of any new holders of Holdings' securities as parties to
the Registration Agreement will require the approval of 75% of existing holders
of Common Stock (or securities exchangeable therefor or convertible thereto).
The approval of the holders of a majority of the shares of Holdings' capital
stock will be required under the Registration Agreement in order for Holdings to
grant registration rights to any other person that are superior to the
registration rights contained in the Registration Agreement. The Registration
Agreement will terminate as to any party thereto (other than Holdings) after an
initial public offering of Holdings' securities at such time as such party holds
less than one percent of Holdings' outstanding Common Stock. The Stockholders
have waived all such registration rights with respect to any registration of the
Notes or Warrants.
EXCHANGE AGREEMENT
The Company, Holdings and the Stockholders have entered into an Exchange
Agreement establishing the holding company structure. Under the terms of the
Exchange Agreement, each of the Stockholders has exchanged their shares of
Company Common Stock and Preferred Stock for substantially similar shares of
Holdings Common Stock and Preferred Stock. The Exchange Agreement also assigned
the Preferred Stock Purchase Agreement, the Stockholders' Agreement and the
Registration Agreement from the Company to Holdings and released the Company
from any liabilities thereunder arising after the date of assignment. Certain
provisions of the Stockholders' Agreement, the Registration Agreement and the
Preferred Stock Purchase Agreement have also been amended to facilitate the Unit
Offering, as described above. Under the Exchange Agreement, each Stockholder has
also subordinated the payment of any amount due to such Stockholder, and all
other rights and claims of such Stockholder, arising under the Exchange
Agreement, the Preferred Stock Purchase Agreement, the Stockholders' Agreement
or the Registration Agreement to the indebtedness of the Company under or
relating to the Notes or otherwise arising under the Indenture or the Credit
Facility.
Under the terms of the Exchange Agreement, Holdings has filed an amendment
to its Certificate of Incorporation. Such amendment extends to February 1, 2008
the date on which the holders of a majority in interest of the Series A
Preferred Stock may require Holdings to redeem all of the outstanding shares of
Series A Preferred Stock. In addition, such amendment includes certain
provisions requiring the affirmative vote of the holders of a majority of the
shares of Preferred Stock, voting as a single class on an as-converted basis,
for Holdings to: (i) authorize or issue, or obligate itself to issue, any equity
security senior to or on parity with the Series A Preferred Stock, (ii) incur,
create, assume, become or be liable in any manner with respect to any new or
additional indebtedness or liability, except under the Indenture or the Credit
Facility, or as permitted by the Indenture as in effect on the Closing Date or
the Credit Facility as in effect on the date of execution and delivery of a
definitive agreement with respect thereto and Refinancing Indebtedness, (iii)
redeem, purchase or otherwise acquire for value any shares of Common Stock or of
any class of capital stock of Holdings, or any of its outstanding options,
warrants or convertible or exchangeable securities, except for repurchases of
shares of Common Stock at cost by Holdings under employee stock plans and
programs, (iv) enter into any transaction or agreement with any officer,
director or stockholder of Holdings, or any wholly or partially owned subsidiary
of Holdings, or any other affiliate of Holdings, except in an arms-length
transaction approved by the Audit Committee, (v) authorize any merger or
consolidation of Holdings with or into any other corporation, partnership or
entity (with the result that less than a majority of the outstanding voting
power of the surviving corporation is held by persons who were stockholders of
Holdings immediately prior to such event) or permit the sale of all or any
material portion of the capital stock or assets of Holdings (other than sales in
the ordinary course of business and consistent with past practices), or (vi)
increase or decrease the total number of authorized shares of Preferred Stock.
In addition, the consent of the holders of 66 2/3% of the issued and outstanding
shares of Preferred Stock is required for Holdings to permit or authorize the
voluntary reorganization, liquidation, dissolution or winding up of Holdings.
Furthermore, Holdings is not permitted to amend its Certificate of Incorporation
or By-laws (a) so as to adversely affect the rights of the holders of the
Preferred Stock with respect to dividends, liquidation preferences or redemption
without the consent of
66
<PAGE>
80% of the outstanding shares of Preferred Stock, or (b) so as to adversely
affect any other preference, powers, rights or privileges of holders of the
Preferred Stock without the consent of holders of at least 66 2/3% of the
outstanding shares of Preferred Stock.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary of the agreements governing the outstanding long-term
indebtedness of the Company and its subsidiaries does not purport to be complete
and is qualified in its entirety by reference to the various agreements
described herein.
CREDIT FACILITY
On September 18, 1997, Teletrac, Inc. entered into a bank credit facility
(the "Credit Facility") pursuant to which Banque Paribas, Fleet National Bank
and certain other banks (the "Banks") have agreed to provide the Company a five
and one-half year $30 million secured revolving line of credit.
The loans under the Credit Facility are, at the election of the Company,
domestic loans or Eurodollar loans. During the first year of the facility, loans
bear interest (i) in the case of domestic loans, at 2.50% per annum plus a
reference rate (which is the prime rate) and (ii) in the case of Eurodollar
loans, at 3.50% per annum plus a reference Eurodollar loan rate. For the
remaining term of the facility, the applicable margin rates may be increased or
decreased quarterly depending upon the Company's debt to operating cash flow
ratio. The applicable margins may range between 1.00% and 2.50% for domestic
loans and 2.00% and 3.50% for Eurodollar loans. The Company will also be
required to pay a commitment fee for all unused committed amounts under the
facility. During the period from November 15, 1997 through February 14, 1998,
the commitment fee will be 0.50% per annum, and the commitment rate may be
increased or decreased thereafter, and may range between 0.375% and 0.50%,
depending upon the Company's debt to operating cash flow ratio.
The maximum aggregate commitment of the Banks under the Credit Facility is
reduced each quarter, beginning December 31, 1999, until all amounts borrowed
thereunder are paid in full on March 31, 2003. All amounts outstanding in excess
of the commitment as so reduced must be paid by the Company in full. The
aggregate commitment of the Banks under the Credit Facility will be reduced by a
total of $6.0 million over the four quarters ended September 30, 2000, by a
total of $9.0 million over each of the four quarters ended September 30, 2001
and 2002, and by a total of $6.0 million over the two quarters ended March 31,
2003.
The Credit Facility contains restrictive covenants that, among other things,
impose limitations on the Company and its subsidiaries with respect to (i) the
incurrence and maintenance of indebtedness, including guarantees, (ii) the
incurrence, creation or maintenance of liens, (iii) the making of dividends and
certain payments, (iv) transactions with affiliates, (v) the disposition of
assets, (vi) the types of acquisitions that can be made and the amount which can
be invested in acquisitions, (vii) the amount of rental payments that can be
incurred, and (viii) consolidations and mergers.
The obligations of the Company under the Credit Facility are secured by a
first priority security interest in and a lien upon all of the assets of the
Company. Furthermore, the obligations of the Company have been fully guaranteed
by Teletrac Holdings, Inc., which has secured such guarantee with a pledge of
all of the capital stock of Teletrac, Inc.
The Credit Facility provides for events of default customary in facilities
of its type, including, among others: (i) failure by the Company to make
payments thereunder when due, (ii) failure by the Company or any subsidiary to
perform or observe covenants, (iii) breach of representations or warranties in
any material respect when made, (iv) failure by the Company or any of its
subsidiaries to make payments or observe covenants in respect of certain
indebtedness, (v) change of ownership or control, (vi) bankruptcy, insolvency or
similar events with respect to Holdings or any of its subsidiaries, (vii)
judgments in excess of certain threshold amounts with respect to the Company or
any of its subsidiaries which remain unsatisfied or unstayed for a certain
period of time, (viii) ERISA defaults with respect to the Company or any of its
subsidiaries, and (ix) impairment of loan documentation or security.
67
<PAGE>
DESCRIPTION OF NEW NOTES
GENERAL
The New Notes will be issued pursuant to the Indenture between the Company
and Norwest Bank Minnesota, National Association, as trustee (the "Trustee").
The terms of the New Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The New Notes are subject to all such
terms, and Holders of New Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the New Notes, the Indenture, the Registration Rights Agreement
and the Pledge Agreement does not purport to be complete and is qualified in its
entirety by reference to the New Notes, the Indenture, the Registration Rights
Agreement and the Pledge Agreement, including the definitions in each of such
instruments and agreements of certain terms used below. Copies of the Indenture,
Registration Rights Agreement and Pledge Agreement will be made available to
purchasers of New Notes upon request. The definitions of certain terms as used
in the following summary are set forth below under "--Certain Definitions."
The New Notes will represent senior, unsecured obligations of the Company,
will rank PARI PASSU in right of payment with all existing and future senior
indebtedness of the Company and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Company. Although the
Indenture will limit the ability of the Company and its subsidiaries to incur
additional indebtedness, the Indenture will permit the Company to incur secured
indebtedness under the Credit Facility which, if incurred, will effectively rank
senior to the New Notes with respect to the assets securing such indebtedness.
In such a case, if the Company's debt under the Credit Facility were to be
accelerated, subject to FCC approval if required, the holders of such secured
indebtedness would be entitled to payment in full out of the assets securing
such indebtedness prior to payment to holders of the New Notes. If the lenders
party to, or the holders of, any such secured indebtedness were to foreclose on
the collateral securing the Company's obligations to them, there can be no
assurance that there would be sufficient assets remaining after payment of all
such secured indebtedness to satisfy the claims of holders of the New Notes in
full. The Company currently has no indebtedness that is expressly subordinated
in right and priority of payment to the New Notes.
Under certain circumstances, the Company will be able to designate future
Subsidiaries that it creates or acquires as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to the restrictive covenants set
forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The New Notes will be issued in an aggregate principal amount of $105
million. The New Notes will mature on August 1, 2007. Interest on the New Notes
will accrue at the rate of 14% per annum and will be payable semi-annually in
arrears on February 1 and August 1 of each year, commencing on February 1, 1998,
to Holders of record on the immediately preceding January 15 and July 15.
Interest on the New Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from August 6, 1997
(the "Issue Date"). Interest on the New Notes will be computed on the basis of a
360-day year comprised of twelve 30-day months.
Principal of, premium (if any), interest and Liquidated Damages (if any) on,
the New Notes will be payable at the office or agency of the Company maintained
for such purpose within the City and the State of New York or, at the option of
the Company, payment of interest and Liquidated Damages (if any) may be made by
check mailed to the Holders of the New Notes at their respective addresses set
forth in the register of Holders of the New Notes; provided that if the Holder
of any New Notes has given wire transfer instructions to the Company, the
Company will be required to make all payments with respect to such New Notes by
wire transfer of immediately available funds to the account specified by such
Holder. Until otherwise designated by the Company, the Company's office or
agency will be the office of the Trustee
68
<PAGE>
maintained for such purpose. The New Notes will be issued in registered form,
without coupons, in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The New Notes will not be redeemable prior to August 1, 2002. Thereafter,
the New Notes will be subject to redemption at the option of the Company, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest and Liquidated Damages (if any) thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on August 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- -------------------------------------------------------------------------------- ----------------
<S> <C>
2002............................................................................ 107.000%
2003............................................................................ 104.667%
2004............................................................................ 102.333%
2005 and thereafter............................................................. 100.000%
</TABLE>
Notwithstanding the foregoing, prior to August 1, 2000, the Company may
redeem outstanding New Notes with the net proceeds of one or more sales of
Capital Stock (other than Disqualified Stock) of the Company or Holdings
(provided that, in the case of Holdings, proceeds from the sale of such Capital
Stock shall have been contributed to the capital of the Company other than as
Disqualified Stock or Indebtedness) to one or more Persons at a redemption price
equal to 114% of the principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages (if any) thereon to the redemption date; provided,
however, that: (i) not less than $68.3 million aggregate principal amount of New
Notes remain outstanding immediately after any such redemption; and (ii) such
redemption shall occur within 30 days after the date of closing of such sale of
Capital Stock.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the New Notes. However, as described below, the
Company may be obligated, under certain circumstances, to make an offer to
purchase: (i) all outstanding New Notes at a redemption price of 101% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages (if any) thereon to the date of purchase, upon a Change of Control; and
(ii) outstanding New Notes with a portion of the Net Proceeds of Asset Sales at
a redemption price of 100% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages (if any) thereon to the date of purchase.
See "-- Repurchase at the Option of Holders--Change of Control" and
"--Limitation on Sales of Assets and Subsidiary Interests."
SECURITY
In accordance with the terms of the Indenture, the Company has purchased and
pledged the Pledged Securities to the Trustee as Collateral Agent ("Collateral
Agent") pursuant to a Pledge Agreement ("Pledge Agreement") for the benefit of
the Holders of the Notes in such amount as will be sufficient upon receipt of
scheduled interest and principal payments of such securities, in the opinion of
a nationally recognized firm of independent certified public accountants
selected by the Company, to provide for payment in full of the first six
scheduled interest payments due on the Notes. The Company used $39.9 million of
the net proceeds of the Unit Offering to acquire the Pledged Securities. The
Pledged Securities were pledged by the Company to the Collateral Agent for the
benefit of the Holders of Notes pursuant to the Pledge Agreement and will be
held by the Collateral Agent in the Pledge Account. Pursuant to the Pledge
Agreement, immediately prior to an interest payment date on the Notes, the
Company may either deposit with the Collateral Agent from funds otherwise
available to the Company cash sufficient to pay the
69
<PAGE>
interest scheduled to be paid on such date or the Company may direct the
Collateral Agent to release from the Pledge Account proceeds sufficient to pay
interest then due. In the event that the Company exercises the former option,
the Company may thereafter direct the Collateral Agent to release to the Company
from the Pledge Account proceeds or Pledged Securities in like amount.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally recognized
firm of independent certified public accountants selected by the Company, to
provide for payment in full of the first six scheduled interest payments due on
the Notes (or, in the event an interest payment or payments have been made, an
amount sufficient to provide for payment in full of any interest payments
remaining, up to and including the sixth scheduled interest payment) the
Collateral Agent will be permitted to release to the Company at the Company's
request any such excess amount. The New Notes are secured by a first priority
security interest in the Pledged Securities and in the Pledge Account and,
accordingly, the Pledged Securities and the Pledge Account also secure repayment
of the principal amount of the New Notes to the extent of such security.
Under the terms of the Pledge Agreement, assuming that the Company makes the
first six scheduled interest payments on the Notes in a timely manner, all of
the Pledged Securities will be released from the Pledge Account.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of New Notes will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's New Notes pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages (if any) thereon to the date of purchase
(the "Change of Control Payment"). Within 20 days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase New Notes pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the New Notes as a result of a Change of Control.
On the Change of Control Payment date, the Company will, to the extent
lawful:
(i) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
(ii) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all New Notes or portions thereof so tendered;
and
(iii) deliver or cause to be delivered to the Trustee the New Notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of New Notes or portions thereof being purchased by the
Company.
The Paying Agent will promptly mail to each Holder of New Notes so tendered
the Change of Control Payment for such New Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new New Note equal in principal amount to any unpurchased portion of the New
Note surrendered, if any; provided that each such new New Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
70
<PAGE>
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the time and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all New Notes validly tendered and not withdrawn under such Change of
Control Offer.
Subject to the limitations discussed below, the Company could in the future
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit ratings.
Due to the highly leveraged structure of the Company, the Company may not have
sufficient funds to be able to repurchase all of the New Notes tendered in a
Change of Control Offer. The failure of the Company to purchase any New Notes
tendered in a Change of Control Offer will constitute an Event of Default under
the Indenture. See "--Events of Default and Remedies."
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of New Notes to require the Company to repurchase such New Notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of the assets of the Company to another Person may be uncertain.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY INTERESTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in an Asset Sale unless:
(i) the Company or such Restricted Subsidiary, as the case may be,
engaging in such Asset Sale receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the assets sold or otherwise
disposed of; and
(ii) at least 80% of the consideration therefor received by the Company
or such Restricted Subsidiary is in the form of cash or Cash Equivalents;
provided, however, that any notes or similar obligations received by any of
the Company or such Restricted Subsidiaries from such transferees that are
immediately converted by the Company or such Restricted Subsidiaries into
cash, shall be deemed to be cash (to the extent of the net cash received)
for purposes of this clause (ii).
Within 180 days after the receipt of any Net Proceeds, the Company may apply
such Net Proceeds to: (i) repay, and thereby permanently reduce the commitments
or amounts available to be reborrowed under, the Bank Credit Facility pursuant
to clause (vi) of the covenant entitled "Incurrence of Indebtedness or Issuance
of Disqualified Stock;" or (ii) an investment in Related Assets or a Related
Business. Pending the final application of any such Net Proceeds, the Company
may temporarily invest such Net Proceeds in any manner that is not prohibited by
the Indenture. Any Net Proceeds that are not applied or invested as provided in
the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate cumulative amount of Excess Proceeds exceeds $5
million, the Company will be required to make an offer to all Holders of New
Notes (an "Asset Sale Offer") to purchase the maximum principal amount of New
Notes that may be purchased out of the Excess Proceeds (and not solely the
amount in excess of $5 million), at an offer price in cash in an amount equal to
100% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages (if any) thereon to the date of purchase, in accordance with
the procedures set forth in the Indenture. To the extent that the aggregate
amount of New Notes tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes in any manner provided by the Indenture. If the aggregate
amount of New Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee will select the New Notes to be purchased on a pro rata
basis. Upon completion of
71
<PAGE>
such offer to purchase, on a pro rata basis the amount of Excess Proceeds will
be reset at zero. The Asset Sale Offer shall remain open for a period of 20
business days or such longer period as may be required by law.
The foregoing provisions will not apply to the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company,
which will be governed by the provisions of the Indenture described below in
"--Merger, Consolidation or Sale of Assets."
SELECTION AND NOTICE OF NEW NOTES FOR REDEMPTION OR REPURCHASE
If less than all of the New Notes are to be redeemed or repurchased pursuant
to any purchase offer required under the Indenture at any time, selection of New
Notes for redemption or repurchase will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the New Notes are listed or, if the New Notes are not so listed, on a pro
rata basis; provided that no New Note with a principal amount of $1,000 or less
shall be redeemed or repurchased in part.
Notices of redemption or repurchase shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption or repurchase date to
each Holder of New Notes to be redeemed or repurchased at its registered
address. If any New Note is to be redeemed or repurchased in part only, the
notice that relates to such New Note shall state the portion of the principal
amount thereof to be redeemed or repurchased. A new New Note in principal amount
equal to the unredeemed or unrepurchased portion will be issued in the name of
the Holder thereof upon cancellation of the original New Note. On and after the
redemption or repurchase date (unless the Company shall default in the payment
of the redemption price, together with accrued and unpaid interest and
Liquidated Damages (if any) to the redemption date), interest will cease to
accrue on the New Notes or portions thereof called for redemption or repurchase.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any distribution on account of
Equity Interests (including, without limitation, any payment in connection
with any merger or consolidation involving the Company or any of its
Restricted Subsidiaries), other than dividends or distributions payable (a)
in Equity Interests (other than Disqualified Stock) of the Company or (b) to
the Company or to any Restricted Subsidiary of the Company;
(ii) purchase, redeem, defease, retire or otherwise acquire or return
for value any Equity Interests of the Company or any Affiliate of the
Company, other than any such Equity Interests owned by the Company or any
Wholly Owned Restricted Subsidiary of the Company;
(iii) make any principal payment on (including at maturity) or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness
that is subordinated (whether pursuant to its terms, by operation of law,
structurally or otherwise) to the New Notes; or
(iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
72
<PAGE>
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the immediately preceding fiscal quarter, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Indebtedness to Cash Flow Ratio test set forth in the first paragraph of the
covenant entitled "Incurrence of Indebtedness or Issuance of Disqualified
Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Issue Date (excluding Restricted Payments permitted by clause
(iii) of the next succeeding paragraph), is less than the sum of:
(1) (without duplication) 50% of the Consolidated Net Income of the
Company (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the Issue Date to the end of the
Company's most recently ended fiscal quarter for which financial
statements are available at the time of such Restricted Payment (or, if
such aggregate Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus
(2) 100% of the aggregate net cash proceeds received by the Company
from the issue or sale since the Issue Date of Equity Interests of the
Company or Holdings or of debt securities of the Company or Holdings that
have been converted into such Equity Interests (other than (A) Equity
Interests (or convertible debt securities) sold to a Subsidiary of the
Company and (B) Disqualified Stock or debt securities that have been
converted into Disqualified Stock; and provided that, in the case of
Holdings, proceeds from the sale of Equity Interests shall have been
contributed to the capital of the Company other than as Disqualified
Stock or Indebtedness), plus
(3) to the extent that any Restricted Investment that was made after
the Issue Date is sold for cash or otherwise liquidated or repaid for
cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition and taxes, if any)
and (B) the initial amount of such Restricted Investment.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such proceeds that are
utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (2) of the preceding paragraph;
(iii) the repayment, defeasance, redemption or repurchase of
Intercompany Indebtedness (as defined in clause (iv) of the covenant
entitled "Incurrence of Indebtedness or Issuance of Disqualified Stock") or
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to
a Subsidiary of the Company) of Equity Interests of the Company or Holdings
(other than Disqualified Stock ); provided that the amount of any such net
cash proceeds that are utilized for any such repayment, defeasance,
redemption or repurchase shall be excluded from clause (2) of the preceding
paragraph;
(iv) payments by the Company to Holdings pursuant to the terms of the
Tax Sharing Agreement; and
(v) the purchase of employee stock or incentive options, or capital
stock issued pursuant to the exercise of employee stock or incentive
options, in an aggregate amount not to exceed $500,000 in any calendar year
and in an aggregate amount not to exceed $2.0 million since the date of the
Indenture;
73
<PAGE>
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (i), (ii) and (v), no Default or
Event of Default shall have occurred and be continuing.
The Company may designate any of its Restricted Subsidiaries to be an
Unrestricted Subsidiary if such designation would not cause a Default and, at
the time of and after giving effect to such designation, the Company could incur
$1.00 of additional Indebtedness under the applicable provisions of the first
paragraph of the covenant entitled "Incurrence of Indebtedness or Issuance of
Disqualified Stock;" provided that (i) in no event shall all or any portion of
the material assets or properties (other than cash) owned by the Company on the
Issue Date be transferred to or held by an Unrestricted Subsidiary of the
Company and (ii) notwithstanding the foregoing, the Company may designate any
Restricted Subsidiary which receives the proceeds of an Investment made pursuant
to clause (v) of the definition of Permitted Investments as an Unrestricted
Subsidiary if (1) such designation would not cause a Default and (2) prior to
the date on which such Investment is made, the Company shall not have
transferred to such Subsidiary all or any portion of its material assets as of
the Issue Date. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of:
(i) the net book value of such Investments at the time of such
designation;
(ii) the Fair Market Value of such Investments at the time of such
designation; and
(iii) the original Fair Market Value of such Investments at the time
they were made.
Such designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments, if not made in cash, shall be the
Fair Market Value on the date of the Restricted Payment of the asset(s) proposed
to be transferred by the Company or such Restricted Subsidiary, as the case may
be, pursuant to the Restricted Payment. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this covenant were computed,
which calculations may be based upon the latest available financial statements
of the Company.
INCURRENCE OF INDEBTEDNESS OR ISSUANCE OF DISQUALIFIED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, "incur") any Indebtedness
(including, without limitation, Acquired Debt) and that the Company and its
Restricted Subsidiaries will not issue any Disqualified Stock and will not
permit any of their respective Subsidiaries (other than their Unrestricted
Subsidiaries) to issue any shares of preferred Equity Interests; provided,
however, that the Company may incur Indebtedness (including, without limitation,
Acquired Debt) or issue Disqualified Stock if, after giving pro forma effect to
the incurrence of such Indebtedness or the issuance of such Disqualified Stock
and the use of proceeds thereof, the aggregate Indebtedness to Cash Flow Ratio
of the Company does not exceed 5.0 to 1.
The foregoing limitations will not apply to:
(i) Indebtedness represented by the New Notes and the Indenture and any
guarantees of the New Notes issued by any Subsidiary under the terms of the
Indenture;
(ii) Existing Indebtedness;
74
<PAGE>
(iii) Indebtedness incurred by the Company under (A) Hedging
Obligations, provided that (1) the notional principal amount of any interest
rate protection agreement does not significantly exceed the principal amount
of the Indebtedness to which such interest rate protection agreement relates
and (2) any agreements related to fluctuations in currency rates do not
increase the outstanding Indebtedness other than as result of fluctuations
in foreign currency exchange rates, and (B) performance, surety and workers'
compensation bonds or other obligations of a like nature incurred in the
ordinary course of business consistent with past practice;
(iv) Indebtedness of the Company owed to and held by any of its Wholly
Owned Restricted Subsidiaries and Indebtedness of any Wholly Owned
Restricted Subsidiary of the Company owed to and held by the Company or any
of its Wholly Owned Restricted Subsidiaries (the Indebtedness incurred
pursuant to this clause (iv) being hereafter referred to as "Intercompany
Indebtedness"); provided that an incurrence of Indebtedness shall be deemed
to have occurred upon (i) any sale or other disposition of Intercompany
Indebtedness to a Person other than the Company or any of its Restricted
Subsidiaries, (ii) any sale or other disposition of Equity Interests of any
Restricted Subsidiary of the Company which holds Intercompany Indebtedness
such that such Restricted Subsidiary ceases to be a Restricted Subsidiary
after such sale or other disposition or (iii) designation of a Restricted
Subsidiary as an Unrestricted Subsidiary;
(v) Non-Recourse Debt by the Company incurred to finance purchase money
obligations;
(vi) Indebtedness incurred by the Company under a Bank Credit Facility,
provided that the aggregate principal amount at any time outstanding under
this clause (vi) does not exceed $30.0 million less the amount of any such
Indebtedness retired with the Net Cash Proceeds from any Asset Sale (or less
the permanent reduction of any commitments under the Bank Credit Facility),
and less the aggregate principal amount of Indebtedness under this clause
(vi) which is refinanced under clause (vii) below;
(vii) Indebtedness incurred by the Company ("Permitted Refinancing
Indebtedness") incurred to refinance, replace or refund Indebtedness
("Refinanced Indebtedness") incurred pursuant to the Indebtedness to Cash
Flow Ratio test set forth in the first paragraph of this covenant or
pursuant to clauses (i), (ii) or (vi) of this covenant; provided that:
(a) the aggregate principal amount of such Permitted Refinancing
Indebtedness does not exceed the aggregate principal amount of the
Refinanced Indebtedness (including accrued and unpaid interest thereon)
plus the amount of fees and reasonable expenses incurred in connection
therewith;
(b) such Permitted Refinancing Indebtedness shall have a final
maturity equal to or later than, and a Weighted Average Life to Maturity
equal to or greater than, the final maturity and Weighted Average Life to
Maturity of the Refinanced Indebtedness, respectively; and
(c) such Permitted Refinancing Indebtedness shall rank no higher
relative to the New Notes than the Refinanced Indebtedness and in no
event may any Indebtedness of the Company be refinanced with Indebtedness
of any Restricted Subsidiary under this clause (vii);
(viii)Indebtedness incurred by the Company in respect of Capital Lease
Obligations in an aggregate principal amount for all such Persons not to
exceed $10.0 million at any one time outstanding; and
(ix) other Indebtedness of the Company in an aggregate principal amount
not to exceed $5.0 million at any one time outstanding.
75
<PAGE>
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom, or assign or convey any right to receive income
therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to:
(i) pay dividends or make any other distributions to the Company or any
of its Restricted Subsidiaries on its Capital Stock or with respect to any
other interest or participation in, or measured by, its profits;
(ii) pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries;
(iii) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(iv) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
(a) the Indenture, the Pledge Agreement and the New Notes;
(b) Existing Indebtedness;
(c) applicable law;
(d) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as
in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired;
(e) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practice;
(f) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (iv) above on the property so acquired;
(g) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in
the agreements governing the Refinanced Indebtedness; or
(h) in the case of clauses (a), (b), (d), (e), (f) and (g) above, any
amendments, modifications, restatements, renewals, increases,
supplements, modifications, restatements or refinancings thereof,
provided that such amendments, modifications, restatements or
refinancings are not materially more restrictive with respect to such
dividend and other payment restrictions than those contained in such
instruments as in effect on the date of their incurrence.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company may not, and may not permit any Restricted Subsidiary to, issue,
transfer, convey, sell or otherwise dispose of any shares of Capital Stock of a
Restricted Subsidiary or securities convertible or exchangeable into, or
options, warrants, rights or any other interest with respect to, Capital Stock
of a Restricted Subsidiary to any person other than the Company or a
Wholly-Owned Restricted Subsidiary except (i) in a transaction consisting of a
sale of all the Capital Stock of such Restricted Subsidiary and that complies
with the provisions described under"--Limitation on Sales of Assets and
Subsidiary Interests" above to the extent such provisions apply; (ii) if
required, the issuance, transfer, conveyance, sale or other
76
<PAGE>
disposition of directors' qualifying shares; and (iii) in a transaction in
which, or in connection with which, the Company or a Restricted Subsidiary
acquires at the same time sufficient Capital Stock of such Restricted Subsidiary
to at least maintain the same percentage ownership interest it had prior to such
transaction (and provided that the terms of such Capital Stock, and under which
such Capital Stock is held, are not more disadvantageous to the Company).
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving Person), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, another Person
unless:
(i) the Company is the surviving Person or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized and existing
under the laws of the United States, any state thereof or the District of
Columbia;
(ii) the Person formed by or surviving any such consolidation or merger
(if other than the Company) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
assumes all the obligations of the Company under the New Notes, the Pledge
Agreement and the Indenture pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee;
(iii) immediately after such transaction, no Default or Event of Default
exists; and
(iv) the Company or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (a) will have Consolidated Net Worth immediately after the transaction
but prior to any purchase accounting adjustments resulting from the
transaction equal to or greater than the Consolidated Net Worth of the
Company immediately preceding the transaction; and (b) will, at the time of
such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the immediately preceding
fiscal quarter, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Indebtedness to Cash Flow Ratio test set forth
in the first paragraph of the covenant entitled "Incurrence of Indebtedness
or Issuance of Disqualified Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or directly, sell, lease, license,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless:
(i) such Affiliate Transaction is on terms that are no less favorable to
the Company or such Restricted Subsidiary than those that would have been
obtained in a comparable arms' length transaction by the Company or such
Restricted Subsidiary with an unrelated Person; and
(ii) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $2.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and such Affiliate
Transaction is approved by a majority of the disinterested members of the
Board of Directors; and
(b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $5.0 million (other than the execution of a
Bank Credit Facility if Toronto Dominion Capital (U.S.A.), Inc., or an
Affiliate thereof, is a lender thereunder), an opinion as to the fairness
of such Affiliate Transaction to the Company or Restricted Subsidiary
involved in such Affiliate
77
<PAGE>
Transaction from a financial point of view issued by an Independent
Financial Advisor or, with respect to communications-related matters, a
recognized expert in the communications industry;
provided that the following shall be deemed not to be Affiliate Transactions:
(1) any reasonable employment agreement or stock option agreement
entered into by the Company or any of its Restricted Subsidiaries with any
of their respective employees in the ordinary course of business;
(2) transactions between or among the Company and its Wholly Owned
Restricted Subsidiaries;
(3) Restricted Payments permitted by clauses (i) and (ii) of the second
paragraph of the covenant entitled "Restricted Payments" and Permitted
Investments of a type referred to in clauses (i) and (iii) of the definition
of Permitted Investments;
(4) the payment of reasonable fees to directors of the Company or any of
its Restricted Subsidiaries; and
(5) Affiliate Transactions pursuant to agreements in effect on the date
of the Indenture and described in this Prospectus and renewals and
extensions of such agreements on terms no less favorable to the Holders than
the terms of such original agreements and transactions.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES AND HOLDINGS
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the New Notes by such Restricted
Subsidiary and (ii) such Restricted Subsidiary waives, and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; PROVIDED that this paragraph shall
not be applicable to any Guarantee of any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the New Notes,
then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the New Notes,
then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the New Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
that resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Holdings will not, directly or indirectly, Guarantee any Indebtedness of the
Company unless (i) Holdings simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee of payment of the New Notes
by Holdings and (ii) Holdings waives and will not in any manner whatsoever claim
to take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any Restricted Subsidiary
as a result of any payment by Holdings under its Guarantee. If the Guaranteed
Indebtedness is (A) PARI PASSU with the New Notes, then the Guarantee of such
Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the
Holdings Guarantee or (B) subordinated to the New Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Holdings Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated to the New
Notes.
78
<PAGE>
BUSINESS ACTIVITIES
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in any business other than that which is
related to the design, development, procurement, installation, operation or
marketing of location, fleet management or related two-way messaging systems and
businesses and reasonably related extensions thereof.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Notes are outstanding, the
Company will furnish to the Holders of New Notes:
(i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations
of the Company and its Restricted Subsidiaries and, with respect to the
annual information only, a report thereon by the Company's independent
certified public accountants; and
(ii) all information that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports.
In addition, together with the information provided in clauses (i) and (ii)
above, the Company will provide supplemental financial information to the extent
permitted by the Commission in the Management's Discussion and Analysis of
Financial Condition and Results of Operations section of such reports or other
section of such reports as appropriate consisting of revenue, expense, earnings
before interest and taxes, net income, capital expenditures, cash, debt,
depreciation and amortization and units in service data for the Company. In the
event the Commission does not permit such supplemental financial information to
be included in such reports, then the Company will supply such information
supplementally to the registered Holders, unless providing such information
supplementally would, in the reasonable judgment of counsel to the Company,
violate applicable law.
In addition, whether or not required by the rules and regulations of the
Commission, but only if then permitted by the Commission, the Company will file
a copy of all such information and reports with the Commission for public
availability and make such information available to securities analysts,
investors and prospective investors upon request. The Company will furnish to
the Holders or beneficial holders of New Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d) (4) under the Securities Act until such time
as the Company either exchanges all of the New Notes for the Exchange New Notes
or has registered all of the New Notes for resale under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest on, or
Liquidated Damages (if any) with respect to, any of the New Notes;
(ii) default in payment when due (whether at maturity, upon redemption
or repurchase, or otherwise) of the principal of or premium (if any) on any
of the New Notes;
(iii) failure to comply with the provisions described under the captions
"--Repurchase at the Option of Holders--Change of Control," "--Repurchase at
the Option of Holders--Limitations on Sales of Assets and Subsidiary
Interests" or "--Certain Covenants--Merger, Consolidation or Sale of
Assets;"
(iv) failure by the Company or any of its Restricted Subsidiaries for 30
days after notice to comply with any of their other covenants in the
Indenture or the New Notes other than those referred to in clauses (i), (ii)
and (iii) above;
79
<PAGE>
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries), whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default:
(a) is caused by a failure to pay principal of, or premium, if any,
or interest on, such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness (a "Payment Default"); or
(b) results in the acceleration (which acceleration has not been
rescinded) of such Indebtedness prior to its express maturity, and, in
each case described in clauses (a) and (b) of this clause (v), the
principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated,
aggregates $3.5 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments (other than any judgments as to which a reputable insurance
company has accepted full liability and whose bond, premium or similar
charge therefor is not in excess of $3.5 million) aggregating in excess of
$3.5 million, which judgments are not paid, discharged or stayed within 60
days after their entry;
(vii) breach by the Company of any representation or warranty set forth
in the Pledge Agreement, or default by the Company in the performance of any
covenant set forth in the Pledge Agreement, or repudiation by the Company of
any of its obligations under the Pledge Agreement or the unenforceability of
the Pledge Agreement against the Company for any reason which in any one
case or in the aggregate results in a material impairment of the rights
intended to be afforded thereby;
(viii)termination or loss, for any reason, of any material FCC license
or permit necessary for the operation of the Company's business in the
manner and in accordance with the plan of operations described in this
Prospectus (unless (i) the Company or any of its Subsidiaries is contesting
in good faith the loss of such license or permit at the FCC and has not
exhausted its remedies at the FCC; and (ii) the Company (together with any
Subsidiary) continues to have the right to use such license or permit if
previously obtained); and
(ix) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing with respect to the New
Notes, the Trustee or the Holders of at least 25% of the aggregate principal
amount of the then outstanding New Notes may declare all the New Notes to be due
and payable immediately. Notwithstanding the foregoing, in the case of an Event
of Default arising from certain events of bankruptcy or insolvency with respect
to the Company, any Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding New Notes will become due and payable without further action or
notice. Holders of the New Notes may not enforce the Indenture or the New Notes
except as provided in the Indenture. Subject to certain limitations, Holders of
a majority in principal amount of the then outstanding New Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the New Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal,
premium, interest or Liquidated Damages, if any) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the New Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable upon the acceleration of the New
Notes. If an Event of Default occurs prior to August 1, 2002 by reason of any
such willful action (or inaction), by or on behalf of the Company with the
intention of avoiding the prohibition on redemption of the New Notes prior to
August 1, 2002, then the
80
<PAGE>
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the New Notes.
The Holders of a majority in aggregate principal amount of the New Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the New Notes waive any existing Default or Event of Default and its
consequences under the Indenture, except a continuing Default or Event of
Default in the payment of principal, premium, interest or Liquidated Damages, if
any, on the New Notes.
The Company is required to deliver to the Trustee quarterly a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company, as such, shall have any liability for any
obligations of the Company under the New Notes, the Indenture or the Pledge
Agreement or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of New Notes, by accepting a New
Note, waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the New Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding New Notes ("Legal
Defeasance") except for:
(i) the rights of Holders of outstanding New Notes to receive payments
in respect of the principal of, premium (if any), interest and Liquidated
Damages (if any) on, such New Notes when such payments are due from the
trust referred to below;
(ii) the Company's obligations with respect to the New Notes concerning
issuing temporary New Notes, registration of New Notes, mutilated,
destroyed, lost or stolen New Notes and the maintenance of an office or
agency for payment and money for security payments held in trust;
(iii) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the New Notes. In the event Covenant Defeasance
occurs, certain events (other than non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "--Events of Default and
Remedies" will no longer constitute an Event of Default with respect to the New
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the New Notes:
(i) the Company must irrevocably deposit with the Trustee, in trust for
the benefit of the Holders of the New Notes, cash in U.S. dollars,
non-callable Government Securities or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent certified public accountants, to pay the principal of, premium
(if any), interest and Liquidated Damages (if any) on, the outstanding New
Notes on the stated maturity or on the applicable redemption date, as the
case may be, and the Company must specify whether the New Notes are being
defeased to maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that:
81
<PAGE>
(A) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling, or
(B) since the date of the Indenture, there has been a change in the
applicable federal income tax law,
in either case to the effect, and based thereon such opinion of counsel shall
confirm, that the Holders of the outstanding New Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding New Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had
not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day (or such other applicable
date) following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally;
(vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of New Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(viii)the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any New Notes selected for redemption. Also, the Company is not required to
transfer or exchange any New Notes for a period of 15 days before a selection of
New Notes to be redeemed.
The registered Holder of a New Note will be treated as the owner of such New
Note for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the Indenture, the New
Notes and the Pledge Agreement may be amended or supplemented with the consent
of the Holders of at least a majority in principal amount of the New Notes then
outstanding (including consents obtained in connection with a purchase of, or
tender offer or exchange offer for, New Notes), and any existing default or
compliance with
82
<PAGE>
any provision of the Indenture, the New Notes or the Pledge Agreement may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding New Notes (including consents obtained in connection with a
tender offer or exchange offer for New Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any New Note held by a non-consenting Holder):
(i) reduce the principal amount of New Notes whose Holders must consent
to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any New
Note or alter the provisions with respect to the redemption of the New Notes
(other than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders") or reduce the prices at
which the Company shall offer to purchase such New Notes pursuant to the
covenants described above under the caption "--Repurchase at the Option of
Holders";
(iii) reduce the rate of or change the time for payment of interest on
any New Note;
(v) make any New Note payable in money other than that stated in the New
Notes;
(vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of New Notes to receive
payments of principal of, premium (if any), interest or Liquidated Damages
(if any) on, the New Notes;
(vii) waive a redemption payment with respect to any New Note; or
(viii)make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of New
Notes, the Company and the Trustee may amend or supplement the Indenture, the
New Notes or the Pledge Agreement to cure any ambiguity, defect or
inconsistency, to provide for uncertificated New Notes in addition to or in
place of certificated New Notes, to provide for the assumption of the Company's
obligations to Holders of New Notes in the case of a merger or consolidation, to
make any change that would provide any additional rights or benefits to the
Holders of New Notes or that does not adversely affect the legal rights under
the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if the Trustee acquires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding New
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of New Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
83
<PAGE>
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person:
(i) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted Subsidiary of such
specified Person, including, without limitation, Indebtedness incurred in
connection with, or in contemplation of, such other Person merging with or
into or becoming a Restricted Subsidiary of such specified Person; and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities (or the equivalent)
of a Person shall be deemed to be control.
"ASSET SALE" means:
(i) the sale, lease, conveyance or other disposition (collectively,
"dispositions") of any assets (including, without limitation, by way of a
sale and leaseback) in one or a series of related transactions; and
(ii) the issuance by any of the Company's Restricted Subsidiaries of
Equity Interests or the disposition by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of their Subsidiaries;
in the case of either clause (i) or (ii) above, whether in a single transaction
or a series of related transactions: (a) that have a Fair Market Value in excess
of $5.0 million; or (b) for net proceeds in excess of $5.0 million.
Notwithstanding the foregoing: (i) the sale of inventory in the ordinary course
of business; (ii) a disposition of assets by the Company to a Wholly Owned
Restricted Subsidiary of the Company or by a Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of the
Company; (iii) an issuance of Equity Interests by a Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of the
Company; (iv) a Restricted Payment that is permitted by the covenant entitled
"Restricted Payments"; and (v) the sale of assets that have become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Company will be deemed not to be Asset Sales. A disposition of
all or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the covenants described above
under the captions "--Repurchase at the Option of Holders--Change of Control"
and/or "-- Certain Covenants--Merger, Consolidation or Sale of Assets" and not
by the provisions of the covenant described under the caption "--Repurchase at
the Option of Holders--Limitation on Sales of Assets and Subsidiary Interests."
"BANK CREDIT FACILITY" means one or more credit facilities (whether a term
or a revolving facility) of the type customarily entered into with commercial
banks, between the Company, on the one hand, and any commercial banks, financial
institutions or other lenders, on the other hand, which Bank Credit Facilities
are by their terms designated as a "Bank Credit Facility" for purposes of the
Indenture.
84
<PAGE>
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(iii) in the case of a partnership, partnership interests (whether
general or limited); and
(iv) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"CASH CONSIDERATION" means any consideration received from an Asset Sale in
the form of cash or Cash Equivalents, in either case in U.S. dollars or freely
convertible into U.S. dollars.
"CASH EQUIVALENTS" means:
(i) United States dollars;
(ii) Government Securities;
(iii) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any Eligible Institution;
(iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any Eligible Institution;
(v) commercial paper having the highest rating obtainable from Moody's
or S&P and in each case maturing within six months after the date of
acquisition; and
(vi) shares of any mutual funds or other pooled investment vehicles, in
each case having assets in excess of $500 million, investing solely in
investment of the types described in (i) through (v) above.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition, in one
transaction or a series of related transactions, directly or indirectly,
including through a liquidation or dissolution, of all or substantially all
of the assets of the Company and its Restricted Subsidiaries to any Person
or group (as such term is used in Section 13(d) of the Exchange Act);
(ii) the adoption of a plan relating to the liquidation or dissolution
of the Company;
(iii) any Person or group (as defined above), other than any of the
Existing Stockholders or their respective Affiliates, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except
that a Person shall be deemed to have "beneficial ownership" of all shares
that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of the Voting Equity
Interests of the Company, including by way of merger, consolidation or
otherwise; or
(iv) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"COLLATERAL AGENT" means the collateral agent under the Pledge Agreement.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period, plus, to the extent
deducted or otherwise excluded in computing such Consolidated Net Income:
85
<PAGE>
(i) an amount equal to any extraordinary loss plus any net loss realized
in connection with a sale of assets;
(ii) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period;
(iii) Consolidated Interest Expense less consolidated interest income of
such Person and its Restricted Subsidiaries for such period; and
(iv) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash charges (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve
for cash charges in any future period or amortization of a prepaid cash
expense that was paid in a prior period) of such Person and its Restricted
Subsidiaries for such period; in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Restricted Subsidiary shall be
added to Consolidated Net Income to compute Consolidated Cash Flow only to
the extent (and in the same proportion) that the Net Income of such
Restricted Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted
at the date of determination to be distributed by dividend to such Person by
such Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Restricted Subsidiary or its stockholders.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, noncash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financing, and net payments (if any) pursuant
to Hedging Obligations).
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that:
(i) the Net Income of any Person that is accounted for by the equity
method of accounting shall be included, but only to the extent of the amount
of dividends or distributions actually paid in cash to the referent Person
or a Wholly Owned Restricted Subsidiary thereof;
(ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such Net Income is not at the
date of determination permitted without any prior governmental approval
(which has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary or its stockholders;
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(iv) the cumulative effect of a change in accounting principles shall be
excluded; and
(v) the Net Income of any Unrestricted Subsidiary shall be included only
to the extent of the amount of dividends or distributions actually paid in
cash to the referent Person or a Restricted Subsidiary thereof.
86
<PAGE>
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date:
(i) the consolidated equity of the equity holders of such Person and its
consolidated Restricted Subsidiaries as of such date; plus
(ii) the respective amounts reported on such Person's balance sheet as
of such date with respect to any series of preferred Equity Interests (other
than Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to
the extent of any cash received by such Person upon issuance of such
preferred stock; minus
(iii) all write-ups (other than write-ups resulting from foreign currency
translations and write-ups of tangible assets of a going-concern business
made within 12 months after the acquisition of such business) subsequent to
the date of the Indenture in the book value of any asset owned by such
Person or a consolidated Subsidiary of such Person; minus
(iv) all investments as of such date in unconsolidated Subsidiaries and
in Persons that are not Restricted Subsidiaries; minus
(v) all unamortized debt discount and expense and unamortized deferred
charges as of such date.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock
that, by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable), or upon the happening of any event: (i)
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise; or (ii) is redeemable or is convertible or exchangeable for
Indebtedness at the option of the Holder thereof, in whole or in part, on or
prior to the date on which the New Notes mature.
"ELIGIBLE INSTITUTION" means a domestic commercial banking institution that
has combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "A" or higher according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of the Company in existence on
the Issue Date, until such amounts are repaid.
"EXISTING STOCKHOLDERS" means any stockholder of the Company who or which
beneficially owned more than 5.0% of the Class A Common Stock as of the date of
the Indenture.
"FAIR MARKET VALUE" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arms'-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction; provided that the Fair Market Value of
any such asset or assets shall be determined by the Board of Directors of the
Company, acting in good faith, and which determination shall be evidenced by an
Officers' Certificate delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements
87
<PAGE>
by such other entity as have been approved by a significant segment of the
accounting profession and which are in effect on the Issue Date.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" OR "GUARANTEE" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under: (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements; (ii) foreign currency hedge
obligations; and (iii) other agreements or arrangements designed to protect such
Person against fluctuations in interest and foreign currency rates.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable to the
extent that any such accrued expense or trade payable is not more than 90 days
overdue or is otherwise being contested in good faith by appropriate proceedings
promptly instituted and diligently conducted, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all indebtedness of others secured by a Lien on
any asset of such Person (whether or not such indebtedness is assumed by such
Person and, in the event such indebtedness is not assumed by, and is otherwise
non-recourse to, such Person, the amount of such indebtedness shall be deemed to
equal the greater of book value or Fair Market Value of such asset) and, to the
extent not otherwise included, the Guarantee by such Person of any indebtedness
of any other Person.
"INDEBTEDNESS TO CASH FLOW RATIO" means, with respect to any Person as of
any date of determination, the ratio of:
(i) total Indebtedness of such Person and its Restricted Subsidiaries as
of such date to;
(ii) four times Consolidated Cash Flow of such Person and its Restricted
Subsidiaries for the most recently ended fiscal quarter for which financial
statements of such Person are available (the "Measurement Period");
provided, however, that: (a) in making such computation, the total Indebtedness
of such Person and its Restricted Subsidiaries shall include the total amount of
funds outstanding and available under any credit facilities; and (b) in the
event such Person or any of its Restricted Subsidiaries consummates a material
acquisition or sale of assets subsequent to the commencement of the Measurement
Period, then the Indebtedness to Cash Flow Ratio shall be calculated giving pro
forma effect to such material acquisition or sale of assets as if the same had
occurred at the beginning of the Measurement Period.
"INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal or investment
banking firm of nationally recognized standing that is, in the good faith
judgment of the Board of Directors of the Company (evidenced by a unanimous
resolution of the Board of Directors of the Company as set forth in an Officers'
Certificate delivered to the Trustee), qualified to perform the task for which
it has been engaged and is disinterested and independent with respect to the
Company and its Affiliates.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans, Guarantees, advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course
88
<PAGE>
of business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"JOINT VENTURE" means a Person in a Related Business in which the Company
holds 50% or less of the Voting Equity Interests.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"MOODY'S" means Moody's Investors Service, Inc.
"NET INCOME" means, with respect to any Person, the net income (or loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however;
(i) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with:
(a) any sale of assets (including, without limitation, dispositions
pursuant to sale and leaseback transactions); or
(b) the disposition of any securities by such Person or any of its
Subsidiaries or the extinguishment of any Indebtedness of such Person or
any of its Subsidiaries; and
(ii) any extraordinary or nonrecurring gain (but not loss), together
with any related provision for taxes on such extraordinary or nonrecurring
gain (but not loss).
"NET PROCEEDS" means the aggregate cash consideration received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale in
the form of cash or Cash Equivalents (including, without limitation, any cash
received upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees,
and sales commissions) and any relocation expenses incurred as a result thereof,
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements and
provided that any such amount not so required to be paid for taxes shall be
deemed to constitute Net Proceeds at the time such amount is not retained for
such purpose), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets (including Equity Interests) that were
the subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or asset (including Equity Interests) established in
accordance with GAAP (provided that the amount of any such reserve shall be
deemed to constitute Net Proceeds at the time such reserve shall have been
released or is not otherwise required to be retained for such purpose).
"NON-RECOURSE DEBT" means Indebtedness:
(i) as to which neither the Company nor any of its Restricted
Subsidiaries:
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness);
(b) is directly or indirectly liable (as a guarantor or otherwise);
or
(c) constitutes the lender;
(ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time
89
<PAGE>
or both) any holder of any other Indebtedness of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and
(iii) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICERS' CERTIFICATE" means, with respect to any Person, a certificate
signed by the Chief Executive Officer or President and the chief financial
and/or accounting officer of such Person.
"PERMITTED INVESTMENT" means:
(i) any Investment in the Company or in any Wholly Owned Restricted
Subsidiary of the Company;
(ii) any Investments in cash or Cash Equivalents;
(iii) Investments by the Company or any of its Restricted Subsidiaries in
a Person if, as a result of such Investment:
(a) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company; or
(b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or any Wholly Owned Restricted Subsidiary of
the Company;
(iv) any Investment made solely as a result of the receipt of non-Cash
Consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "Repurchase at the
Option of Holders--Limitation on Sales of Assets and Subsidiary Interests;"
and
(v) any Investment made by the Company or any of its Restricted
Subsidiaries in a Related Business; provided that at the time any such
Investment is made, such Investment will not cause the aggregate amount of
Investments at any one time outstanding under this clause (v) to exceed $6.0
million.
"PERMITTED LIENS" means:
(i) Liens securing the New Notes;
(ii) Liens in favor of the Company;
(iii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any of its Restricted
Subsidiaries; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company or such Restricted Subsidiary;
(iv) Liens on property existing at the time of acquisition thereof by
the Company or any of its Restricted Subsidiaries, provided that such Liens
were in existence prior to the contemplation of such acquisition;
(v) Liens to secure the performance of statutory obligations, surety,
appeal or performance bonds or other obligations of a like nature or
mechanics' or purchase money Liens incurred in the ordinary course of
business;
(vi) Liens existing on the Issue Date;
(vii) Liens on inventory or accounts receivable securing Indebtedness
incurred under clause (vi) of the covenant entitled "Incurrence of
Indebtedness or Issuance of Disqualified Stock," or
90
<PAGE>
securing Permitted Refinancing Indebtedness incurred pursuant to the
Indenture to refinance Indebtedness incurred under clause (vi) of the
covenant entitled "Incurrence of Indebtedness or Issuance of Disqualified
Stock;"
(viii) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(ix) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries; and
(x) Liens securing Indebtedness under the Bank Credit Facility incurred
in accordance with clause (vi) of the covenant entitled "Incurrence of
Indebtedness or Issuance of Disqualified Stock."
"PERSON" means any individual, corporation, limited liability company,
limited liability partnership, partnership (general or limited), joint venture,
association, joint stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"PLEDGE ACCOUNT" means the account established with the Collateral Agent
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities.
"PLEDGE AGREEMENT" means the Pledge Agreement dated as of the date of the
Indenture by and between the Company and the Collateral Agent governing the
Pledge Account.
"PLEDGED SECURITIES" means the U.S. government securities purchased by the
Company with a portion of the net proceeds from the Unit Offering to be
deposited in the Pledge Account and pledged as security for the New Notes.
"RELATED ASSETS" means all assets used in connection with the design,
development, procurement, installation, operation or marketing of location or
related two-way messaging systems and any activities or assets ancillary
thereto.
"RELATED BUSINESS" means any business relating to the design, procurement,
installation and operation of location, fleet management or related two-way
messaging systems and business and reasonably related extensions thereof.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of such Person that
is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article I, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture.
"SUBSIDIARY" means, with respect to any Person:
(i) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of such Person (or a combination thereof); and
(ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
91
<PAGE>
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement between the Company
and Holdings as in effect on the date of the Indenture.
"UNRESTRICTED SUBSIDIARY" of a Person means any Subsidiary of such Person
that is designated by such Person as an Unrestricted Subsidiary pursuant to a
resolution of its Board of Directors, but only if and for so long as such
Subsidiary:
(i) has no Indebtedness other than Non-Recourse Debt;
(ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company;
(iii) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation:
(1) to subscribe for additional Equity Interests; or
(2) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results;
(iv) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and
(v) in the case of a corporate entity or limited liability company, has
at least one director on its board of directors and at least one executive
officer, in each case who is not a director or executive officer of the
Company or any of its Restricted Subsidiaries.
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee within 45 days of such
designation a certified copy of the resolution of the Board of Directors giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant entitled "Incurrence
of Indebtedness or Issuance of Disqualified Stock," the Company shall be in
default of such covenant). The Board of Directors of the Company may at any time
designate an Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if:
(i) such Indebtedness is permitted under the covenant entitled
"Incurrence of Indebtedness or Issuance of Disqualified Stock;" and
(ii) no Default or Event of Default would be in existence following such
designation.
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee within 45 days of such
designation a certified copy of the resolution of the Board of Directors giving
effect to such designation and an Officers' Certificate that such designation
complied with the conditions of the immediately preceding sentence.
"VOTING EQUITY INTERESTS" means the Equity Interests in a corporation or
other Person with voting power under ordinary circumstances entitling the
holders thereof to elect or appoint the board of directors, executive committee
or other governing body of such corporation or Person, whether at all times or
only so long as no senior class of securities has such voting power by reason of
any contingency.
92
<PAGE>
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(i) the sum of the products obtained by multiplying: (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(ii) the then outstanding principal of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person and one or more other Wholly Owned Restricted
Subsidiaries of such Person.
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes were initially issued in the form of one or more global notes
(the "Global Note"). The Global Note was deposited on the date of the closing of
the sale of the Old Notes, or on behalf of, the Depositary and registered in the
name of Cede & Co., as nominee of the Depositary (such nominee being referred to
herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company which was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Purchasers),
banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participant") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of New Notes by the Depositary, or for maintaining, supervising or reviewing any
records of the Depositary relating to such New Notes.
Payments in respect of the principal of, premium, if any, and interest on
any New Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the Persons in
whose names the New Notes, including the Global Note, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, none of the Company or the Trustee has
or will have any responsibility or liability for the payment of such amounts to
beneficial owners of New Notes (including principal, premium, if any, and
interest), although the Company understands that it is the Depositary's practice
to immediately credit the accounts of the relevant Participants with such
payment in accounts proportionate to their respective holdings in principal
amount of beneficial interests in the relevant security as shown on the records
of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of the New Notes
will be governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED SECURITIES
An entire Global Security may be exchanged for definitive New Notes in
registered, certificated form ("Certificated Securities") if (i) DTC (x)
notifies the Issuers that it is unwilling or unable to continue as
93
<PAGE>
depositary for the Global Securities and the Issuers thereupon fail to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Issuers, at their option, notify the
Trustee in writing that they elect to cause the issuance of Certificated
Securities or (iii) there shall have occurred and be continuing to occur a
Default or an Event of Default with respect to the New Notes. In any such case,
the Issuers will notify the Trustee in writing that, upon surrender by the
Participant and Indirect Participants of their interest in such Global Security,
Certificated Securities will be issued to each person that such Participant and
Indirect Participants and DTC identify as being the beneficial owner of the
related New Notes. In addition, subject to certain conditions, any Person having
a beneficial interest in the Global Note may, upon request to the Trustee,
exchange such beneficial interest for New Notes in definitive form. Upon any
such issuance, the Trustee is required to register such New Notes in the name
of, and cause the same to be delivered to, such Person or Persons (or the
nominee of any thereof). Such New Notes would be issued in fully registered
form.
Neither the Issuers nor the Trustee will be liable for any delay by the
holder of the Global Securities or DTC in identifying the beneficial owners of
New Notes, and the Issuers and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Security or
DTC for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the New Notes (including
principal, premium, if any, and interest) be made in immediately available
funds. Secondary trading in long-term notes and debentures of corporate issuers
is generally settled in clearing-house or next-day funds. In contrast, the New
Notes are expected to be eligible to trade in the PORTAL Market and to trade in
the Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in the New Notes will therefore be required by the
Depositary to be settled in immediately available funds. No assurance can be
given as to the effect, if any, of such settlement arrangements on trading
activity in the New Notes.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the New Notes in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents, and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar is not required to
transfer or exchange any New Note selected for redemption. Also, the Registrar
is not required to transfer or exchange any New Note for a period of 15 days
before a selection of the New Notes to be redeemed.
The registered holder of a New Note will be treated as the owner of it for
all purposes.
GOVERNING LAW
The Indenture and the New Notes are governed by and construed in accordance
with the laws of the State of New York.
THE TRUSTEE
The Trustee acts as trustee under the Indenture and may, from time to time,
act as depositary for funds of, make loans to, and perform other services for,
the Company in the ordinary course of business.
94
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
consequences of the exchange of Old Notes for New Notes as of the date hereof.
The discussion below is based upon the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax consequences
different from those discussed below. PERSONS CONSIDERING THE EXCHANGE OF OLD
NOTES FOR NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not be treated as an "exchange" for federal income tax purposes because the New
Notes will not be considered to differ materially in kind or extent from the Old
Notes. Rather, the New Notes received by a holder of Old Notes will be treated
as a continuation of the Old Notes in the hands of such holder. As a result,
there will be no federal income tax consequences to a holder exchanging Old
Notes for the New Notes pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 90 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. In
addition for a period of 90 days after the Expiration Date, all dealers
effecting transactions in the New Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may, receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such person may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has no
arrangement or understanding with any broker or dealer to distribute the New
Notes received in the Exchange Offer.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal.
95
<PAGE>
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Reboul, MacMurray, Hewitt, Maynard & Kristol, New York, New York. Reboul,
MacMurray, Hewitt, Maynard & Kristol owns an aggregate 458 shares of Class A
Common Stock of Holdings, constituting less than 1% of the outstanding shares of
Class A Common Stock of Holdings.
INDEPENDENT AUDITORS
The consolidated balance sheets of AirTouch Teletrac General Partnership as
of December 28, 1995 and Teletrac, Inc. as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity (partners'
capital/deficiency) and cash flows for the years then ended included in this
Prospectus and elsewhere in this Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent auditors, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated balance sheet of AirTouch Teletrac General Partnership as
of December 31, 1994 and the related consolidated statements of operations,
partners' capital/deficiency and cash flows for the year then ended included in
this Prospectus and elsewhere in this Registration Statement have been audited
by Coopers & Lybrand LLP, independent auditors.
96
<PAGE>
GLOSSARY
ACQUISITION--the purchase of the assets of AirTouch Teletrac by the Company
on January 17, 1996.
AIRTOUCH TELETRAC--AirTouch Teletrac, a California general partnership, its
predecessor, PacTel Teletrac, and its successor, AirTouch Services.
RPU--Average revenue per subscriber unit per month.
BSU--Base Station Unit, a wireless transmission receiver which records the
Reverse Link communications from a VLU.
CMRS--Commercial Mobile Radio Service, a FCC classification of wireless
telecommunications services.
COMMON STOCK--Class A Common Stock, par value $.01 per share, and Class B
Common Stock, par value $.01 per share, of the Company.
COMPANY--Teletrac, Inc., its predecessors and its subsidiary, Teletrac
License, Inc.
COMMUNICATIONS ACT--The Communications Act of 1934, as amended.
ESMR--Enhanced Specialized Mobile Radio, an advanced, digital version of
Specialized Mobile Radio ("SMR").
FCC--The Federal Communications Commission.
FLEET DIRECTOR-REGISTERED TRADEMARK---A product of the Company that allows
fleet customers to track the real-time location of fleet vehicles and
communicate with those vehicles. Fleet Director-Registered Trademark- can be
combined with a Mobile Data Terminal ("MDT") or a Status Messaging Terminal
("SMT") to provide two-way communication between a customer and its drivers.
FLEET REPORTER-TM---A lower cost alternative to Fleet
Director-Registered Trademark-, Fleet Reporter-TM- is a service offered by the
Company to provide daily vehicle location reports to customers.
FORWARD LINK--A wireless digital radio transmission, emitted simultaneously
from each transmitter on the Company's network, which transmits location
commands and/or messages to a VLU.
GPS--The Global Positioning Satellite system, which uses U.S.
government-funded satellites to provide location information.
IBSU--Integrated Base Station Unit, an advanced version of the BSU receiver,
currently under development, which will permit multichannel capability and
free-text alphanumeric messaging.
LMS--Location and Monitoring Services.
LORAN-C--A system that uses land-based transmitting stations emitting
low-frequency radio signals to provide location information.
MDT--Mobile Data Terminal, the Company's more advanced two-way messaging
system, is a small terminal, connected to the VLU, and typically mounted on a
vehicle's dashboard.
MSA--Metropolitan Statistical Area, as defined in the 1993 Rand-McNally
Commercial Atlas.
MTA--Major Trading Area, as defined in the 1993 Rand-McNally Commercial
Atlas.
MULTILATERATION--a technique that locates a transceiver by measuring its
distance from a number of known locations.
NCC--the local Network Control Center located in each metropolitan market,
which consists of RF control equipment, telecommunications access connection
computers and the Company's data base. The
97
<PAGE>
NCC uses algorithms and multilateration techniques to determine the location of
VLUs and relays the information to the subscriber.
OZZ-REGISTERED TRADEMARK---A product of the Company marketed to both
consumer and commercial customers, which provides a telephone-operated mobile
information service. In addition, OZZ-Registered Trademark- provides a "mobile
yellow pages," informing the customer of the prominent businesses or landmarks
near a vehicle's location.
PCS--A type of wireless telephone system that uses light-weight, inexpensive
handheld sets and communicates via low power antennas.
PMRS--Private Mobile Radio Service, a FCC classification of wireless
telecommunications services.
PORTAL--The Private Offering, Resale and Trading through Automated Linkages
market.
PREFERRED STOCK--The Series A Redeemable Convertible Participating Preferred
Stock, par value $.01 per share, of the Company or Holdings, as applicable, and
one or more series of undesignated preferred stock, par value $.01 per share, of
the Company or Holdings, as applicable, which has been reserved for issuance
upon automatic conversion of the Series A Preferred Stock as provided in the
Certificate of Incorporation.
REVERSE LINK--A response signal, providing location and messaging
information, emitted from a VLU after the receipt of a Forward Link.
SMR--Specialized Mobile Radio, a two-way wireless voice communications
system.
SMT--Status Messaging Terminal, the Company's lower cost two-way messaging
system offered as an alternative to the MDT, is a small terminal, connected to
the VLU and typically mounted on a vehicle's dashboard.
TADIRAN--Tadiran Telematics, Ltd., a leading Israeli technology supplier and
a wholly-owned subsidiary of Tadiran Limited, a publicly traded Israeli company
a majority of the stock of which is owned by Koor Industries Ltd.
TELETRACER-TM---The name under which the Company markets its consumer
product.
VLU--Vehicle Location Unit, a "transceiver" unit which receives location
commands and messages, transmits response signals to the base stations
indicating its location and initiates preprogrammed messages.
WINFLEET-TM---A product currently under development by the Company, expected
to be introduced in the second half of 1997. Winfleet-TM- is a Microsoft
Windows-Registered Trademark--based application similar to Fleet
Director-Registered Trademark-, but which does not require a dedicated computer.
98
<PAGE>
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TELETRAC, INC.
- -----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
Condensed Consolidated Balance Sheet as of September 30, 1997 (unaudited).................................. F-2
Condensed Consolidated Statements of Operations for the nine months ended September 30, 1996 and 1997
(unaudited).............................................................................................. F-4
Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 1996 and 1997
(unaudited).............................................................................................. F-5
Consolidated Statement of Stockholder's Equity (Deficit)................................................... F-6
Notes to Condensed Consolidated Financial Statements....................................................... F-7
FISCAL YEAR 1996
Report of Arthur Andersen LLP, Independent Auditors........................................................ F-9
Consolidated Balance Sheet as of December 31, 1996......................................................... F-10
Consolidated Statement of Operations for the year December 31, 1996........................................ F-11
Consolidated Statement of Stockholder Equity for the year ended December 31, 1996.......................... F-12
Consolidated Statement of Cash Flows for the year ended December 31, 1996.................................. F-13
Notes to Consolidated Financial Statements................................................................. F-14
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
FISCAL YEAR 1995
Report of Arthur Andersen LLP, Independent Auditors........................................................ F-20
Balance Sheet as of December 28, 1995...................................................................... F-21
Statement of Operations for the period from January 1, 1995 through December 28, 1995...................... F-22
Statement of Cash Flows for the period from January 1, 1995 through December 28, 1995...................... F-23
Notes to Financial Statements.............................................................................. F-24
FISCAL YEAR 1994
Report of Coopers & Lybrand LLP, Independent Auditors...................................................... F-29
Balance Sheet as of December 31, 1994...................................................................... F-30
Statement of Operations for the year ended December 31, 1994............................................... F-31
Statement of Partners' Deficit............................................................................. F-32
Statement of Cash Flows for the year ended December 31, 1994............................................... F-32
Notes to Financial Statements.............................................................................. F-32
</TABLE>
F-1
<PAGE>
TELETRAC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 27,639,168 $ 53,733,172
Accounts receivable, net................................................. 2,504,173 5,034,407
Inventories (note 3)..................................................... 2,782,932 3,338,475
Prepaid expenses and other............................................... 2,113,076 3,830,477
----------------- ------------------
Total current assets................................................... 35,039,349 65,936,531
----------------- ------------------
RESTRICTED CASH............................................................ 1,256,285 1,756,327
RESTRICTED INVESTMENTS..................................................... -- 40,285,811
PROPERTY AND EQUIPMENT,
net of depreciation...................................................... 16,845,801 24,567,356
LICENSES AND OTHER,
net of amortization...................................................... 571,899 5,729,494
----------------- ------------------
Total assets........................................................... $ 53,713,334 $ 138,275,519
----------------- ------------------
----------------- ------------------
</TABLE>
F-2
<PAGE>
TELETRAC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................................... $ 1,900,168 $ 1,057,135
Current portion of long-term obligations................................... 1,382,340 491,007
Interest payable on senior notes........................................... -- 2,245,833
Accrued expenses........................................................... 664,675 1,618,081
Unearned revenue and contracts............................................. 250,053 1,126,427
Refrequency liability...................................................... 7,234,158 3,807,876
Other current liabilities.................................................. 216,008 413,338
----------------- ------------------
Total current liabilities.................................................. 11,647,402 10,759,697
----------------- ------------------
SENIOR NOTES, 14% due 8/1/2007 (note 2).................................... -- 98,077,379
OTHER LONG-TERM OBLIGATIONS................................................ 1,615,344 2,025,942
PREFERRED STOCK, redeemable cumulative,
15% dividend, 190,477 shares authorized
and 190,476.19 shares issued and outstanding............................. 33,340,000 37,052,500
PREFERRED STOCK, undesignated, 190,477
shares authorized, none issued or outstanding............................ -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, Class A, $.01 par value,
1,000,000 shares authorized
and 249,000 issued and outstanding..................................... 2,490 2,490
Common stock, Class B, $.01 par value, 70,000 shares authorized and none
issued or outstanding.................................................. -- --
Paid-in-capital.......................................................... 22,024,094 29,062,610
Accumulated deficit...................................................... (14,915,996) (38,705,099)
----------------- ------------------
Total stockholders' deficit............................................ 7,110,589 (9,639,999)
----------------- ------------------
Total liabilities and stockholders' deficit............................ $ 53,713,334 $ 138,275,519
----------------- ------------------
----------------- ------------------
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements
F-3
<PAGE>
TELETRAC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
<S> <C> <C> <C> <C>
1996 1997 1996 1997
------------- -------------- ------------- -------------
OPERATING REVENUES.................................. $ 10,329,584 $ 18,687,936 $ 4,388,534 $ 7,318,012
Cost of revenues.................................. 3,735,357 9,036,378 1,977,942 3,834,315
Selling and advertising........................... 3,538,524 8,872,007 1,708,122 2,661,294
General and administrative........................ 9,853,082 14,951,434 3,619,346 4,915,253
Research & development costs...................... -- 2,873,084 -- 833,038
Refrequency costs................................. 677,114 -- 271,474 --
Depreciation and amortization..................... 883,763 1,754,243 340,333 755,008
------------- -------------- ------------- -------------
Loss from operations.............................. (8,358,256) (18,799,210) (3,528,683) (5,680,896)
OTHER EXPENSE (INCOME):
Interest expense.................................. 33,461 2,527,979 23,387 2,441,545
Interest and other income......................... (86,546) (1,250,586) (12,070) (845,800)
------------- -------------- ------------- -------------
Loss before income taxes............................ (8,307,171) (20,076,603) (3,540,000) (7,276,641)
PROVISION FOR INCOME TAXES.......................... -- -- -- --
NET LOSS............................................ $ (8,307,171) $ (20,076,603) $ (3,540,000) (7,276,641)
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
F-4
<PAGE>
TELETRAC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
<S> <C> <C>
1996 1997
------------- --------------
OPERATING ACTIVITIES:
Net Loss......................................................................... $ (8,307,171) $ (20,076,603)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization.................................................. 883,763 1,754,243
Accretion of discount on senior notes.......................................... -- 117,333
Changes in working capital and other assets and liabilities, net of acquisition
and refrequency.............................................................. (2,463,131) (3,610,634)
Restricted cash................................................................ (722,114) (500,042)
Refrequency liability.......................................................... 677,113 (3,426,282)
Accrued interest on senior notes............................................... -- 2,245,833
------------- --------------
Total Adjustments............................................................ (1,624,369) (3,419,549)
------------- --------------
Cash used in operating activities.......................................... (9,931,540) (23,496,152)
------------- --------------
INVESTING ACTIVITIES:
Acquisition of property and equipment............................................ (6,460,339) (8,854,274)
Acquisition of other intangible assets........................................... -- (62,002)
Acquisition of Airtouch Teletrac................................................. (2,098,875) (1,000,000)
------------- --------------
Cash used in investing activities.......................................... (8,559,214) (9,916,276)
------------- --------------
FINANCING ACTIVITIES:
Issuance of common stock, net.................................................... 18,838,627 --
Proceeds from issuance of senior notes and warrants, net......................... -- 100,607,766
Restricted investments........................................................... (40,285,811)
Cost of credit facility.......................................................... -- (815,523)
------------- --------------
Cash provided by financing activities...................................... 18,838,627 59,506,432
------------- --------------
NET CHANGE IN CASH................................................................. 347,873 26,094,004
CASH AND CASH EQUIVALENTS, beginning of period..................................... 310,564 27,639,168
------------- --------------
CASH AND CASH EQUIVALENTS, end of period........................................... $ 658,437 $ 53,733,172
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
F-5
<PAGE>
TELETRAC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID-IN ACCUMULATED
CLASS A CLASS B CAPITAL DEFICIT
--------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996..................................... $ 2,490 $ -- $ 22,024,094 $ (14,915,996)
Issuance of warrants related to senior debt.................... -- -- -- --
Cost of issuance of preferred stock............................ -- -- (1,438)
Pushdown of warrant costs related to senior debt............... -- -- 7,039,954 --
Net loss....................................................... -- -- -- (20,076,603)
Preferred stock dividends...................................... -- -- -- (3,712,500)
BALANCE, September 30, 1997.................................... $ 2,490 $ -- $ 29,062,610 $ (38,705,099)
--------- --- ------------- --------------
--------- --- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
F-6
<PAGE>
TELETRAC, INC.
NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION.
The condensed consolidated interim financial statements of Teletrac, Inc.
and subsidiary ("Teletrac" or the "Company") included herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission") and reflect all
adjustments that are, in the opinion of management, necessary to fairly present
the financial position, results of operations, and cash flows for the interim
periods. Teletrac Holdings, Inc. and Teletrac, Inc. completed an exchange
agreement on August 6, 1997, whereby stockholders of Teletrac, Inc. exchanged
common and preferred stock of Teletrac, Inc. for common and preferred stock of
Teletrac Holdings, Inc. This transaction was accounted for as a combining of
interests under common control, similar to a pooling of interests. Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules and regulations.
Management believes that the disclosures made are adequate to make the
information presented not misleading. The results for interim periods are not
necessarily indicative of the results for the full year. The interim financial
statements should be read in conjunction with the financial statements and notes
thereto contained in the Company's Registration Statement on Form S-4.
NOTE 2 -- LONG-TERM DEBT
In August 1997, the Company issued $105.0 million of 14% Senior Notes due
August 1, 2007 (the "Notes"). Gross proceeds of the Notes were approximately
$61.4 million in unrestricted funds and $39.9 million in restricted funding
allocated for the first three years of interest payments on the Notes. The Notes
were issued with 105,000 detachable warrants (the "Warrants"). Each Warrant
entitles the holder to purchase .537495 shares (collectively, the "Warrant
Shares") of the Company's Class A Common Stock at an exercise price of $.01 per
share, currently representing 10% of the Class A Common Stock on a fully diluted
basis. The Warrants have been valued at $7.04 million. The discount of $7.04
million is being accreted over the life of the Notes. The Company has recorded
in other assets approximately $4.4 million of deferred financing costs which are
being amortized over the life of the Notes. The Notes accrue interest until
maturity at a rate of 14% per annum. Interest on the Notes will be payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998.
In September 1997, the Company entered into an agreement to establish
revolving credit facilities (the "Revolvers") in the aggregate principal amount
of $30.0 million expiring on March 31, 2003. Pursuant to this agreement, the
Company issued 5,707 warrants to purchase one share each of the Company Class A
Common Stock at an exercise price of $202 per share. The Company has recorded in
other assets approximately $816,000 of deferred financing costs which are being
amortized over the life of the Revolvers. The Revolvers have a .500% commitment
fee rate based on the total principal amount, paid quarterly. To date, the
Company has made no draws against the Revolvers.
In September 1997, the Company increased the Warrant Shares of the Senior
Notes to purchase an additional 634 shares of Class A Common Stock. The
additional Warrant Shares were issued subject to the Senior Note agreement
having allocated 10% of Class A Common Stock, on a fully diluted basis, to the
holders of the Notes. The need to issue the additional shares arose from the
issuance of Warrants to the participating banks involved in the Revolvers
agreement.
F-7
<PAGE>
TELETRAC, INC.
NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVENTORIES
Inventories consisted of the following at December 31, 1996 and September
30, 1997 (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Vehicle Location Units................................. $ 2,087,976 $ 1,680,010
Messaging Units........................................ 356,528 844,065
Computers & Software................................... 84,377 354,485
Other Inventory........................................ 254,051 459,915
----------------- ------------------
Total Inventory...................................... $ 2,782,932 $ 3,338,475
----------------- ------------------
----------------- ------------------
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, consisted
of the following at December 31, 1996 and September 30, 1997 (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
System Equipment....................................... $ 4,986,898 $ 10,136,267
Automobiles............................................ 89,545 363,700
Furniture & Fixtures................................... 761,937 1,394,643
Computer Equipment..................................... 2,411,855 3,358,260
Leasehold Improvements................................. 42,539 215,444
Construction in Progress............................... 9,774,693 11,972,271
----------------- ------------------
Total Property & Equipment............................. $ 18,067,467 $ 27,440,585
----------------- ------------------
Accumulated Depreciation............................... ($ 1,221,666) ($ 2,873,229)
----------------- ------------------
Net Property & Equipment............................... $ 16,845,801 $ 24,567,356
----------------- ------------------
----------------- ------------------
</TABLE>
F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Teletrac, Inc.:
We have audited the accompanying consolidated balance sheet of Teletrac,
Inc. (a Delaware corporation) and subsidiary, as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Teletrac, Inc., and
subsidiary as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Kansas City, Missouri,
February 5, 1997
F-9
<PAGE>
TELETRAC, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $27,639,168
Accounts receivable- less allowances of $460,000............................. 2,504,173
Inventory- less reserves of $155,642......................................... 2,782,932
Prepaid expenses and other current assets.................................... 2,113,076
----------
Total current assets..................................................... 35,039,349
RESTRICTED CASH................................................................ 1,256,285
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,221,666.......... 16,845,801
LICENSES AND OTHER, net of accumulated amortization of $38,355................. 571,899
----------
Total assets............................................................. $53,713,334
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $1,547,566
Accrued expenses............................................................. 1,483,338
Notes payable................................................................ 1,001,015
Current portion of leases payable............................................ 381,325
Refrequencing liability...................................................... 7,234,158
----------
Total current liabilities................................................ 11,647,402
----------
LONG-TERM LEASES PAYABLE....................................................... 1,615,344
PREFERRED STOCK, undesignated, 190,477 shares authorized, none issued or
outstanding.................................................................. --
PREFERRED STOCK, redeemable cumulative, 15% dividend, 190,477 shares authorized
and 190,476.19 shares issued and outstanding................................. 33,340,000
STOCKHOLDERS' EQUITY:
Common stock, Class A, $0.01 par value, 507,934 shares authorized and 249,000
issued and outstanding..................................................... 2,490
Common stock, Class B, $0.01 par value, 70,000 shares authorized and none
issued or outstanding...................................................... --
Paid-in capital.............................................................. 22,024,094
Accumulated deficit.......................................................... (14,915,996)
----------
Total stockholders' equity............................................... 7,110,588
----------
Total liabilities and stockholders' equity............................... $53,713,334
----------
----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-10
<PAGE>
TELETRAC, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATING REVENUES............................................................. $15,956,984
OPERATING EXPENSES:
Cost of revenues............................................................. 7,030,847
Selling, general and administrative.......................................... 14,035,038
Engineering.................................................................. 5,149,488
Research and development..................................................... 1,001,000
Refrequencing costs.......................................................... 1,340,315
Depreciation and amortization................................................ 1,254,049
-----------
Loss from operations....................................................... (13,853,753)
-----------
OTHER EXPENSE (INCOME):
Interest expense............................................................. 108,600
Interest income.............................................................. (170,884)
-----------
Total other income......................................................... (62,284)
-----------
Loss before income taxes................................................... (13,791,469)
INCOME TAXES................................................................... --
-----------
NET LOSS....................................................................... $(13,791,469)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-11
<PAGE>
TELETRAC, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID-IN ACCUMULATED
CLASS A CLASS B CAPITAL DEFICIT
--------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995..................................... $ 190 $ 37 $ 2,267,025 $ (784,527)
Issuance of common stock....................................... 1,980 283 21,634,814 --
Conversion of Class B common to Class A common................. 320 (320) -- --
Cost of issuance of preferred stock............................ -- -- (1,877,745) --
Net loss....................................................... -- -- -- (13,791,469)
Preferred stock dividends...................................... -- -- -- (340,000)
--------- ----- ------------- --------------
BALANCE, December 31, 1996..................................... $ 2,490 $ -- $ 22,024,094 $ (14,915,996)
--------- ----- ------------- --------------
--------- ----- ------------- --------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-12
<PAGE>
TELETRAC, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net loss..................................................................... $(13,791,469)
Adjustments to reconcile net loss to cash used in operating activities--
Depreciation and amortization.............................................. 1,254,049
Changes in working capital and other assets and liabilities, net of
acquisition--
Receivables.............................................................. (1,668,164)
Restricted cash.......................................................... 66,904
Inventory................................................................ (2,674,519)
Prepaids and other....................................................... (1,448,858)
Accounts payable and accrued expenses.................................... 2,084,258
Deferred revenue......................................................... (745,221)
Refrequencing liability.................................................. 1,298,088
Other liabilities........................................................ (609,872)
Cash used in operating activities...................................... (16,234,804)
-----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net.............................. (7,097,173)
Acquisition of AirTouch Teletrac............................................. (2,098,875)
-----------
Cash used in investing activities...................................... (9,196,048)
-----------
FINANCING ACTIVITIES:
Issuance of common stock, net................................................ 21,637,077
Issuance of preferred stock, net............................................. 31,122,255
-----------
Cash provided by financing activities.................................. 52,759,332
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................................... 27,328,480
CASH AND CASH EQUIVALENTS, beginning of year................................... 310,688
-----------
CASH AND CASH EQUIVALENTS, end of year......................................... $27,639,168
-----------
-----------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest....................................... $ 107,549
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-13
<PAGE>
TELETRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS ACTIVITIES:
Teletrac, Inc. (the Company), and its wholly owned subsidiary, Teletrac
Licensing, Inc., are licensed by the Federal Communications Commission (FCC) to
construct and operate radio location networks for the purpose of locating,
tracking and communicating with commercial fleet and consumer vehicles as a
result of its acquisition of AirTouch Teletrac (see Note 2). The Company has
operating networks in six U.S. cities, Chicago, Dallas, Detroit, Houston, Los
Angeles and Miami, and has site specific licenses in approximately 20 additional
cities. The networks consist of antennas, transmission and receiving equipment,
customer-owned vehicle locating units (VLUs) that receive and transmit signals,
and operating centers that interpret and relay the transmissions.
SIGNIFICANT RISKS AND UNCERTAINTIES
The Company and its predecessors have incurred losses in each year of
operations. The Company expects to continue to incur net losses as it pursues
plans to expand its operating networks, product offerings and customer base.
There can be no assurance that the Company will be profitable in the future.
The Company is facing increased competition for its services. Certain of the
Company's competitors are larger and have substantially greater financial,
research and development and sales and markting capabilities. Additionally,
there can be no assurance additional competitors will not enter markets that the
Company serves or plans to serve and that the Company will be able to withstand
the competition. Moreover, changes in technology could lower the cost of
competitive services to a level where the Company's services would be less
competitive, which could have a material adverse effect on the Company's
business and the ability to realize its assets.
2. PURCHASE OF AIRTOUCH TELETRAC:
On January 17, 1996, the Company purchased the assets of AirTouch Teletrac, a
California general partnership, from AirTouch Services, for $3,099,000 in cash,
and the assumption of certain liabilities and working capital as defined. An
amount of $2,099,000 was paid at closing, with $1,000,000 due one year from the
date of closing. Funds necessary for the closing were provided by the current
common stockholders of the Company through sales of common stock. The allocation
of purchase price was made first to the current assets and liabilities and
assumed liabilities, and the remainder to the long-term assets in proportion to
the fair values of the assets, as follows (in thousands):
<TABLE>
<CAPTION>
ASSETS AND
LIABILITIES
ACQUIRED
JANUARY 17,
1996
---------------
<S> <C>
Working capital.............................................................. $ 217
Property and equipment....................................................... 8,218
Licenses..................................................................... 600
Refrequencing liability...................................................... (5,936)
-------
Total.................................................................. $ 3,099
-------
-------
</TABLE>
F-14
<PAGE>
TELETRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company services the commercial market for use in fleet management and the
consumer market for individual vehicle tracking. The commercial systems include
VLUs, computer hardware, and vehicle tracking software. The sales of commercial
systems are recognized upon shipment of the system, and the commercial service
fee revenues are recognized monthly as the services are provided.
The VLUs for the consumer market are sold along with monthly service contracts.
Service revenues for the consumer market may be paid in advance and are
recognized monthly as earned. Unearned service fees are recorded as deferred
revenue and included in accrued expenses in the accompanying balance sheet.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to be temporary cash investments
with an original maturity of three months or less.
INVENTORIES
Inventories consist of VLUs, computer systems and other receiving and
transmitting equipment held for sale. Inventory is stated at the lower of cost
or market using the first-in, first-out method of valuation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
COST LIVES
--------- -----------
<S> <C> <C>
System equipment...................................................... $ 4,832 7
Computers and office equipment........................................ 2,412 3
Furniture and fixtures................................................ 578 7
Other................................................................. 471 3-7
Construction in progress.............................................. 9,774
---------
Property and equipment................................................ 18,067
Less--Accumulated depreciation........................................ 1,221
---------
Net property and equipment............................................ $ 16,846
---------
---------
</TABLE>
Repairs, maintenance and renewal of minor items are charged to expense as
incurred. Major renewals and improvements are capitalized and depreciated over
their remaining useful lives. Leasehold improvements
F-15
<PAGE>
TELETRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
are amortized using the straight-line method over the lesser of the estimated
useful life of the asset or the remaining term of the underlying lease.
LICENSES
Licenses, as acquired from AirTouch Services, represent a long-term intangible
asset that allows FCC authorization to broadcast at designated frequencies. They
are amortized using the straight-line method over 15 years. FCC license terms
are for 5-year periods with unlimited options to renew for subsequent 5-year
periods.
INCOME TAXES
The Company is a C corporation for federal income tax purposes. Deferred tax
assets or liabilities are computed based on the difference between the financial
statement and income tax basis of assets and liabilities applying tax
regulations existing at the end of the reporting period. The Company has fully
reserved its deferred tax asset, principally the net operating loss carryforward
generated, as of December 31, 1996.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include Teletrac, Inc., and
its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
4. STOCKHOLDERS' EQUITY:
The Company's Restated Certificate of Incorporation, dated December 4, 1996,
provides for 958,888 authorized shares of capital stock, consisting of 507,934
shares of authorized Class A common stock at $0.01 par value per share, 70,000
shares of authorized Class B common stock at $0.01 par value per share, 190,477
shares of authorized Series A Redeemable Convertible Participating preferred
stock at $0.01 par value per share, and 190,477 shares of authorized
undesignated preferred stock at $0.01 par value per share.
COMMON STOCK
The Class A common stock and Class B common stock are substantially identical in
all respects and entitle the holders to the same rights, preferences and
privileges. However, owners of Class B common stock have no right to vote on any
matters to be voted on by the Company's stockholders except as a separate class
on any proposed merger or consolidation of the Company, or any recapitalization
or reorganization in which shares of Class B common stock would receive
treatment different from or be exchanged for consideration different on a per
share basis from the consideration received with respect to or in exchange for
shares of Class A common stock. Owners of Class B common stock, upon the
occurrence of certain conversion events, have the right to exchange equivalent
shares of their Class B common stock for shares of Class A common stock. In
December 1996 all then outstanding Class B common stock was converted into Class
A common stock.
F-16
<PAGE>
TELETRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
PREFERRED STOCK
During December 1996, 190,476.19 shares of $0.01 par value Series A Redeemable
Convertible Participating preferred stock were issued for net cash proceeds of
$31,122,255. They entitle holders to receive cumulative, compounding dividends
at the rate of 15 percent per annum. Dividends accrue on a daily basis from the
issuance date and are payable as declared by the board of directors. As of
December 31, 1996, $340,000 was accrued for dividends. Holders are entitled to
voting rights, preference on liquidation, voluntary equal share conversion into
common stock at a defined conversion price, and automatic equal share conversion
into common stock after either a qualified public stock offering or a certain
non-qualified public stock offering as defined. Additionally, on or after
December 4, 2001, at the election of the holders of a majority of the
outstanding preferred stock, the Company is obligated to redeem the preferred
stock at a cash price equal to the liquidation preference amount of $173.25 per
share plus cumulative unpaid dividends. From and after December 4, 2003 the
redemption price will be equal to the greater of the liquidation preference
amount or the fair market value of the preferred stock.
STOCK OPTIONS
The Company has two stock option plans, the 1995 Stock Option Plan (the 1995
Plan) and the 1996 Stock Option Plan (the 1996 Plan). The Company accounts for
these plans in accordance with Accounting Principles Board Opinion No. 25 under
which no compensation cost has been recognized in 1996. Had compensation cost
been recognized in accordance with Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock Based Compensation," the Company's
operating loss would have been increased by $506,000 for the year ended 1996.
The plans permit grants of nonqualified, and incentive stock options. The
Company has reserved 43,060 and 25,083 shares of its common stock under the 1995
Plan and the 1996 Plan, respectively. Under the 1995 Plan the exercise prices
and vesting periods of the options are as follows:
<TABLE>
<CAPTION>
DATE PRICE VESTING AMOUNT
- --------------------------------------------------------------- --------- ---------------------
<S> <C> <C>
One year after grant........................................... $ 100 One-third of grant
Two years after grant.......................................... 125 One-third of grant
Three years after grant........................................ 150 One-third of grant
</TABLE>
During 1996, 43,060 options were granted under the 1995 Plan at a weighted
average price of $125. The weighted average fair value of the options issued
during 1996 was $119. No options were canceled or exercised during 1996. During
1996, 510 options were forfeited. The options outstanding at December 31, 1996,
have a weighted average remaining contract life of approximately seven years and
none were exercisable as of December 31, 1996.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the 1996 grants: risk-free interest rate from 5.48 to 6.87
percent; an expected option life of 7 years; and no expected dividend yields.
Options granted under the 1996 Plan must have exercise prices equal to the fair
market value as determined by the board of directors, and the term of the
options shall not exceed ten years from grant date. No shares under the 1996
Plan have been granted.
F-17
<PAGE>
TELETRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
5. CAPITAL LEASES:
The Company holds leases on telephony and frequency receiving and transmitting
equipment for periods greater than one year. Minimum payments under such capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
PRINCIPAL INTEREST TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
1997........................................ $ 381 $ 187 $ 568
1998........................................ 403 147 550
1999........................................ 446 104 550
2000........................................ 494 56 550
Thereafter.................................. 273 10 283
----------- ----- ---------
$ 1,997 $ 504 $ 2,501
----------- ----- ---------
----------- ----- ---------
</TABLE>
6. REFREQUENCING LIABILITY:
In 1995 the FCC issued an order which requires the Company to relocate its
existing operating frequency from a portion of the 925 MHz band to a portion of
the 927 MHz band. As a result, the Company has recorded a liability, including
$5,936,000 assumed in the acquisition, for the cost of implementing the order so
that the Company can continue to deliver its contractual service obligation to
its customers. The cost recorded during 1996 of $1,340,000 represents the
estimated costs to comply with this obligation for all customers added to
service during 1996.
7. EMPLOYEE BENEFIT PLANS:
The Company sponsors a defined contribution profit sharing 401(k) plan which
covers all full-time employees. The benefits of this plan are based on years of
service, the employee's compensation, employee contributions and earnings of
plan assets. The Company's funding policy is to contribute an amount equal to
$0.50 for every dollar contributed by the employees up to $1,000 annually. The
Company has accrued $121,000 during 1996.
8. INCOME TAXES:
Deferred income taxes are provided for temporary differences between the
financial accounting basis and tax basis of assets and liabilities and temporary
differences in reporting income and expense.
The Company has net operating losses (NOLs) which it can carryforward up to 15
years to reduce taxable income in the future. The Company's NOLs and Alternative
Minimum Tax (AMT) NOLs total approximately $13,300,000 and $12,700,000,
respectively. The NOLs and AMT NOLs may be utilized through 2011. The Company
has fully reserved these deferred tax assets and has provided no income tax
benefit related thereto.
F-18
<PAGE>
TELETRAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The components of net deferred tax assets (liabilities) are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
<S> <C> <C> <C>
CURRENT NONCURRENT TOTAL
----------- ----------- ---------
Deferred tax asset--
NOL.......................................................... $ -- $ 5,040
Allowance for doubtful accounts.............................. 175 --
Start-up costs, capitalized for income tax purposes, net .... -- 279
Other........................................................ 88 --
Deferred tax liabilities..................................... (32) (26)
----------- -----------
Net deferred tax assets...................................... $ 231 $ 5,293 $ 5,524
----------- -----------
----------- -----------
Tax asset reserve............................................ (5,524)
---------
Net deferred taxes........................................... $ --
---------
---------
</TABLE>
The Company's utilization of its NOLs many be limited in the future due to its
issuance of preferred stock and the IRS regulations pertaining to change in
control.
9. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases for office space and antenna sites for periods
greater than one year. Minimum payments under such operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
1997................................................ $ 2,399
1998................................................ 2,353
1999................................................ 1,844
2000................................................ 1,265
Thereafter.......................................... 841
---------
$ 8,702
---------
---------
</TABLE>
The Company purchases all of its VLU's from a single foreign supplier, and has
entered into a commitment with the supplier to purchase 200,000 units beginning
October 1996, through October 1998. The agreement allows the Company to extend
this period until November 2000 and has a provision to buy-out of the commitment
at a nominal fee. As of December 31, 1996, the remaining purchase commitment is
approximately $35,700,000, including $1,500,000 which has been prepaid by the
Company. Related to this commitment, at December 31, 1996, the Company
maintained a $1,750,000 irrevocable letter of credit to support the purchase of
the VLU's, of which $1,250,000 is funded and is recorded as restricted cash in
the accompanying balance sheet. Additionally, the Company has committed to
acquire other equipment and fund certain research and development activities of
approximately $2,900,000 and $3,500,000, respectively.
The Company is party to certain litigation and claims arising in the normal
course of business. In the opinion of management, the amount of liability
arising from these lawsuits would not be material to the financial position or
results of operations of the Company.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Teletrac, Inc:
We have audited the accompanying balance sheet of AirTouch Teletrac General
Partnership as of December 28, 1995, and the related statements of operations
and changes in partners' deficit and cash flows for the period from January 1,
1995, to December 28, 1995. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AirTouch Teletrac General
Partnership as of December 28, 1995, and the results of its operations and its
cash flows for the period from January 1, 1995, to December 28, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
May 1, 1996
F-20
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
BALANCE SHEET
DECEMBER 28, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash........................................................................ $ --
Accounts receivable, net of allowance for doubtful accounts of $290,094..... 1,804,213
Inventory................................................................... 501,915
Other current assets........................................................ 394,916
------------
Total current assets.................................................. 2,701,044
PROPERTY, PLANT AND EQUIPMENT, net............................................ 7,836,070
INTANGIBLE ASSETS, net........................................................ 600,000
------------
Total assets.......................................................... $ 11,137,114
------------
------------
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
<S> <C>
CURRENT LIABILITIES:
Accounts payable--Trade..................................................... $ 183,875
Due to affiliates........................................................... 15,995,945
Accrued salaries and benefits............................................... 2,910,760
Other current liabilities................................................... 1,203,747
------------
Total current liabilities............................................. 20,294,327
REFREQUENCING LIABILITY....................................................... 5,936,070
CONVERTIBLE DEBT.............................................................. 226,100,585
OTHER NON-CURRENT LIABILITIES................................................. 224,088
------------
Total liabilities..................................................... 252,555,070
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
PARTNERS' DEFICIT............................................................. (241,417,956)
------------
Total liabilities and partners' deficit............................... $ 11,137,114
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
STATEMENT OF OPERATIONS AND CHANGES IN PARTNERS' DEFICIT
FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 28, 1995
<TABLE>
<S> <C>
REVENUES...................................................................... $ 13,244,367
OPERATING EXPENSES:
Cost of products sold....................................................... 4,322,710
Selling, general and administrative......................................... 23,673,935
Depreciation and amortization............................................... 4,458,454
Asset impairment............................................................ 10,966,716
Refrequencing costs......................................................... 5,936,070
------------
Loss from operations...................................................... (36,113,518)
OTHER EXPENSES:
Interest expense............................................................ 21,239,650
Other, net.................................................................. 26,988
------------
Net loss.................................................................. (57,380,156)
PARTNERS' DEFICIT:
Balance, December 31, 1994.................................................. (184,037,800)
------------
Balance, December 28, 1995.................................................. $(241,417,956)
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 28, 1995
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net loss..................................................................... $(57,380,156)
Adjustments to reconcile net loss to net cash used for operating activities--
Depreciation and amortization.............................................. 4,458,454
Asset impairment........................................................... 10,966,716
Refrequencing costs........................................................ 5,936,070
Changes in operating assets and liabilities--
Accounts receivable, net................................................. 633,387
Inventory................................................................ 1,046,485
Other current assets..................................................... (45,916)
Accounts payable--Trade.................................................. (461,118)
Due to affiliates........................................................ 11,150,645
Increase in other liabilities.............................................. 165,371
-----------
Net cash used for operating activities................................. (23,530,062)
-----------
INVESTING ACTIVITIES:
Retirements of property, plant and equipment, net............................ 110,160
-----------
Net cash provided by investing activities.............................. 110,160
-----------
FINANCING ACTIVITIES:
Proceeds from convertible debt............................................. 22,905,585
Other...................................................................... (31,483)
-----------
Net cash provided by financing activities.............................. 22,874,102
-----------
NET DECREASE IN CASH........................................................... (545,800)
CASH, December 31, 1994........................................................ 545,800
-----------
CASH, December 28, 1995........................................................ $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest to affiliate.......................................... $ 9,763,242
Cash paid for income taxes................................................... --
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 28, 1995
1. ORGANIZATION AND NATURE OF BUSINESS:
NATURE OF OPERATIONS
AirTouch Teletrac General Partnership (the Partnership) was formed on December
16, 1987, under the laws of the State of California. The Partnership has been
licensed by the Federal Communications Commission (FCC) to construct and operate
radio location networks. During 1995 the Partnership operated in six U.S. cities
as follows: Chicago, Dallas, Detroit, Houston, Los Angeles and Miami.
The set up of the location network is capital intensive, and the Partnership has
been dependent upon the financial support of its majority partner, Location
Technologies Inc. (LTI), and its parent, AirTouch Communications.
The principal operation consists of tracking vehicles through signals sent by
Vehicle Location Units (VLUs) placed in a vehicle and received by a base unit.
The system processes the signals and provides the location and movement of a
vehicle on an electronic map grid display.
OWNERSHIP
During 1995 certain of the partners, North American Teletrac and International
Teletrac Services, sold all ownership interests in the Partnership to AirTouch
Services (ATS) and LTI. LTI also transferred two percent of its ownership
interest in the Partnership to ATS during 1995. Prior to the dissolution of the
Partnership on December 28, 1995, the partners' ownership interests were as
follows:
<TABLE>
<S> <C>
Location Technologies, Inc., a wholly owned subsidiary
of AirTouch Services............................................... 73%
AirTouch Services, a wholly owned subsidiary of
AirTouch Communications............................................ 27%
</TABLE>
On December 28, 1995, LTI merged with ATS, thereby dissolving the Partnership by
operation of law. Accordingly, the accompanying financial statements are as of
December 28, 1995, and for the period from January 1, 1995, to December 28,
1995. No material transactions or events of the business occurred between
December 28, 1995, and December 31, 1995.
SUBSEQUENT SALE OF ASSETS
On January 17, 1996, ATS sold substantially all of the assets previously owned
by the Partnership to Teletrac, Inc., a Delaware corporation, for $2,500,000,
the assumption of the refrequencing liability, and an adjustment for working
capital, as defined. An amount of $1,500,000 was paid in cash at closing, with
$1,000,000 due on the earlier of one year from the date of closing or the date
on which the order issued by the FCC addressing emission mask standards for
multilateration vehicle location systems shall have become final.
As a result of the subsequent sale, management determined that the net
realizable value of the long- term assets (property, plant, equipment and
intangible assets) was less than net book value. The impairment of property,
plant and equipment, FCC licenses, and goodwill of $2,249,000, $2,610,000, and
$6,108,000, respectively, was recorded in the 1995 statement of operations.
F-24
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Partnership serviced the commercial market for use in fleet management and
the consumer market for individual vehicle tracking. The commercial systems
include VLUs, computer hardware, and vehicle tracking software. The sales of
commercial systems are recognized upon shipment of the system, and the
commercial service fee revenues are recognized monthly as the services are
provided based on the number of VLUs in the fleet.
The VLUs for the consumer market were manufactured by third parties and were
sold to consumers through unrelated retailers. The Company's service contracts
to individual consumers were initiated by the retailers. Service revenues for
the consumer market may be paid in advance and are recognized monthly as earned.
Unearned service fees are recorded as deferred revenue and included in other
current liabilities in the accompanying balance sheet.
INVENTORIES
Inventories consist of VLUs, computer systems and related components. Inventory
is stated at the lower of cost or market using the first-in, first-out method of
valuation.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were recorded at cost. Subsequent to 1995
substantially all of the Partnership's assets were sold (Note 1). As a result,
property, plant and equipment were determined to be impaired and were recorded
at their net realizable values as of December 28, 1995. Property, plant and
equipment includes the following:
<TABLE>
<S> <C>
Equipment...................................................... $22,896,113
Office furniture and equipment................................. 1,276,205
Vehicles....................................................... 349,296
Leasehold improvements......................................... 190,085
----------
24,711,699
Less- Accumulated depreciation and amortization................ (16,875,629)
----------
Net property, and equipment.................................. $7,836,070
----------
----------
</TABLE>
F-25
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1995
Repairs, maintenance and renewal of minor items were charged to expense as
incurred. Major renewals and improvements are capitalized and depreciated over
their remaining useful lives. Depreciation is recorded using the straight-line
method over the applicable estimated useful lives as follows:
<TABLE>
<S> <C>
Equipment......................................................... 3-7 years
Office furniture and equipment.................................... 5 years
Vehicles.......................................................... 3 years
</TABLE>
Leasehold improvements were amortized using the straight-line method over the
lesser of the estimated useful life of the asset or the remaining terms of the
underlying lease.
INTANGIBLE ASSETS
Intangible assets represent the cost of acquiring FCC licenses as well as
goodwill resulting from an acquisition of a previous network partner. Both FCC
licenses and goodwill were amortized using the straight-line method over 20
years. FCC license terms are for a five-year period with unlimited options to
renew for subsequent five-year periods. As discussed above, subsequent to 1995
substantially all of the Partnership's assets were sold (Note 1). As a result,
the intangible assets were determined to be impaired and were recorded at their
net realizable values as of December 28, 1995. The goodwill previously recorded
was fully impaired and the FCC licenses were written down to $600,000.
PARTNERSHIP INCOME ALLOCATION
Partnership profits and losses were allocated based on the partners' percentage
ownership interest in the Partnership during the year.
INCOME TAXES
No provision has been made for federal or state income taxes since such taxes,
if any, are the responsibility of the individual partners.
3. RELATED-PARTY TRANSACTIONS:
CONVERTIBLE DEBT
The Partnership had convertible debt payable to LTI. Interest on the debt was at
prime plus 2 percent on the outstanding debt balance. Included in the due to
affiliate balance at December 28, 1995, is interest payable of approximately
$15,900,000.
The debt was collateralized by the equipment, inventory, accounts receivable,
and all proceeds and products of the Partnership. The debt was not assumed by
the new owners (Note 1).
The outstanding principal balance could have been converted into shares of
AirTouch Teletrac stock if the Partnership would have elected to undertake an
initial public offering. In conjunction with the merger of ATS and LTI,
discussed in Note 1, the debt was eliminated.
INSURANCE
The Partnership was covered under an insurance policy held by an affiliate.
Insurance expense passed through by this affiliate for the period from January
1, 1995, to December 28, 1995, was $244,000.
F-26
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1995
4. EMPLOYEE BENEFITS:
EMPLOYEE INCENTIVE PLANS
The Partnership maintained a short-term incentive plan (STIP) for certain
employees which was based on the achievement of certain performance measures and
targets. Costs related to the STIP of approximately $673,000 have been recorded
in the 1995 statement of operations.
The Partnership also maintained an Equity Incentive Plan (EI Plan) for certain
key employees. Under the EI Plan the Partnership was authorized to grant stock
appreciation rights (SARs) to the key employees which are exercisable over a
specified period of time based on the price of the AirTouch Communications
stock. Cost of approximately $211,000 is included in the 1995 statement of
operations.
SEVERANCE AND STAY-ON PROGRAM
As a result of a planned downsizing of the Partnership's operations and the
subsequent sale of the assets, the Partnership severed its employment
relationships with substantially all of its employees during 1995 and through
early 1996. The severance program provided for severance payments to be made to
employees in accordance with a formula that considers years of service and
salary. Severance payments were made when the employment relationships were
severed, which in certain instances occurred in 1996. All costs related to the
severance program, which totaled approximately $2,400,000, have been recorded in
the 1995 statement of operations.
In addition to the severance program, certain employees were provided an added
incentive to continue working for the Partnership after the sale was announced
to provide closure and transition of the Partnership's activities (Stay-On
Plan). Generally, those eligible employees were paid 25% of their monthly salary
times the number of months worked subsequent to June 1, 1995, with partial
months being credited as full months. Costs related to the Stay-On Plan which
relate to services provided in 1995 were approximately $804,000.
5. COMMITMENTS AND CONTINGENCIES:
SIGNIFICANT SUPPLIER AGREEMENTS
The Partnership entered into several purchase agreements with a foreign
supplier, the Partnership's sole supplier of VLUs, whereby VLUs would be
supplied at a set price, provided prepayments were made to finance the
production of the units. At December 28, 1995, the total open commitments under
these agreements were approximately $1,900,000.
The Partnership entered into an agreement with a software company to develop and
update the mapping software utilized in all of the Partnership's operating
locations to track vehicles. In 1995 the Partnership paid a fee of $325,000 for
the service which expired in January 1996.
The Partnership also had various other purchase commitments outstanding at
year-end of approximately $1,185,000.
Substantially all significant supplier agreements were assumed by or
renegotiated by Teletrac, Inc.
LEASES
The Partnership leased various facilities under noncancellable operating leases
expiring through 2000. Most of the leases were either assumed by or subleased to
Teletrac, Inc.
F-27
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1995
Total rental expense under all operating leases was $2,027,000 for the period
from January 1, 1995, to December 28, 1995.
OTHER
The Partnership was party to a dispute regarding the registration of the
trademark "Teletrac" by an unrelated party. No accrual has been made in the
accompanying financial statements for this contingency since management is
unable to establish the likelihood of loss, if any, which may be incurred.
The Partnership was a party to various other lawsuits arising in the ordinary
course of business. In the opinion of management, based on a review of such
litigation with legal counsel, any losses resulting from these actions are not
expected to materially impact the financial position or results of operations of
the Partnership.
6. REFREQUENCING COSTS:
In 1995 the FCC issued an order which required the Partnership to relocate its
existing operating frequency from a portion of the 925 MHz band to a portion of
the 927 MHz band. As a result, the Partnership has recorded a liability and a
related expense for the cost of implementing the order in order to continue
delivering the Partnership's contractual service obligation to its customers.
The cost recorded of $5,936,070 represents the estimated cost to comply with
this obligation to customers at December 28, 1995.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
AirTouch Teletrac General Partnership
We have audited the accompanying balance sheet of AirTouch Teletrac General
Partnership (the "Partnership") as of December 31, 1994, and the related
statements of operations, partners' deficit, and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 audit provides a reasonable basis for our opinion.
The Partnership is currently in negotiations for the sale of substantially
all of the Partnership's assets and assumption of certain liabilities. See Note
11.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AirTouch Teletrac General
Partnership as of December 31, 1994, and results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going-concern. As discussed in Note 2, the
Partnership has incurred net losses and negative cash flows from operations. In
addition, the Partnership is highly leveraged and has relied substantially on
continued financial support from its general partner, which is a wholly-owned
subsidiary of AirTouch Communications. As discussed in Note 2, this financial
support may not continue. These factors raise substantial doubt about the
Partnership's ability to continue as a going-concern. Plans in regard to these
matters are also described in Note 2 as well as Note 11. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
COOPERS & LYBRAND LLP
Newport Beach, California
February 3, 1995, except for
Note 11, as to which the
date is September 8, 1995
F-29
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash........................................................................... $ 545,800
Accounts receivable, less allowance for doubtful accounts of $479,700.......... 2,437,600
Inventory, net of reserve of $154,200.......................................... 1,548,400
Other current assets........................................................... 349,000
----------
Total current assets......................................................... 4,880,800
Property, plant and equipment, net............................................. 14,017,400
Intangible assets, net......................................................... 9,954,000
----------
Total assets................................................................. $28,852,200
----------
----------
</TABLE>
LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Accounts payable--trade........................................................ $ 791,000
Due to affiliates.............................................................. 4,845,300
Accrued salaries and benefits.................................................. 2,467,000
Other current liabilities...................................................... 1,501,500
-----------
Total current liabilities.................................................... 9,604,800
Net indebtedness to ITS........................................................ 49,500,000
Convertible debt............................................................... 153,695,000
Capital leases, net of current portion......................................... 82,800
Loan payable................................................................... 7,400
-----------
Total liabilities............................................................ 212,890,000
Commitments and contingencies (Notes 7 and 10)................................. --
Partners' deficit.............................................................. (184,037,800)
-----------
Total liabilities and partners' deficit........................................ $28,852,200
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Revenues....................................................................... $15,336,000
Operating expenses:
Cost of revenues........................................................... 6,356,800
Selling and advertising.................................................... 1,814,100
Salaries and benefits...................................................... 14,747,700
General and administration................................................. 11,672,300
Depreciation and administration............................................ 5,218,200
-----------
Loss from operations..................................................... (24,473,100)
Other expense (income):
Interest expense........................................................... 15,610,100
Interest income............................................................
Other...................................................................... (258,700)
-----------
Net loss................................................................. ($39,824,500)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
STATEMENT OF PARTNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Balance, December 31, 1993.................................................... ($144,713,300)
Capital contribution.......................................................... 500,000
Net loss for the year......................................................... (39,824,500)
------------
Balance, December 31, 1994.................................................... ($184,037,800)
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
CASH FROM (USED FOR) OPERATING ACTIVITIES:
Net loss..................................................................... $(39,824,500)
Adjustments to reconcile net loss for items current not affecting operating
cash flows:
Depreciation and amortization.............................................. 5,218,200
Loss on disposal of fixed assets........................................... 1,263,200
Changes in operating assets and liabilities:
Accounts receivable, net................................................. 701,000
Inventory, net........................................................... 47,900
Other current assets..................................................... 1,128,200
Accounts payable--trade.................................................. (750,800)
Due to affiliates........................................................ 1,598,800
Accrued salaries and benefits............................................ (2,405,700)
Other current liabilities................................................ (289,600)
-----------
Cash used for operating activities....................................... (33,313,300)
-----------
CASH USED FOR INVESTING ACTIVITIES:
Additions to property, plant and equipment................................... (858,600)
-----------
Cash used for investing activities....................................... (858,600)
-----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from convertible debt............................................... 32,695,000
Partner capital contributions................................................ 500,000
Loan repayment............................................................... (9,300)
Payment on capital lease obligation.......................................... (53,500)
-----------
Cash provided by financing activities.................................... 33,132,200
-----------
Change in cash........................................................... (1,039,700)
-----------
Beginning cash................................................................. 1,585,500
-----------
Ending cash.................................................................... $ 545,800
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
AirTouch Teletrac General Partnership (the "Partnership") was formed on
December 16, 1987 under the laws of the State of California. The Partnership has
been licensed by the Federal Communications Commission ("FCC") to construct and
operate radio location networks in 127 U.S. cities. Since its inception, the
Partnership was subcontracting the operations of the network to International
Teletrac Systems, Inc. ("ITS"), a wholly-owned subsidiary of North American
Teletrac ("NAT"), an affiliate, under an operating and supply agreement.
Effective March 31, 1992, the Partnership exercised its option to acquire
substantially all operations, assets, and liabilities (except certain debt--see
Note 6) of ITS (the "Acquisition").
Prior to October 1991, the Partnership was precluded by a judicial consent
decree from, among other things, having an investment in, or participating in
the management of, ITS or obtaining any information about ITS not available to
the general public. However, the Partnership purchased an option to acquire ITS
and guaranteed ITS' debt (Note 6) thereby assuming most of ITS' business risk.
Accordingly, the acquired assets, liabilities, and results of operations of ITS
have been consolidated in the Partnership's financial statements for all periods
presented herein.
At the time of exercise of the option, the Partnership recorded goodwill of
$6,913,800 which approximates the cash paid to ITS. During 1993, an additional
$603,500 was paid on behalf of ITS and, accordingly, has been recorded as
goodwill.
In consideration for its contribution of certain assets and liabilities, ITS
was allocated a 24% partnership interest which was transferred from NAT's
original interest. Accordingly, at December 31, 1994, the partners' ownership
interests are as follows:
<TABLE>
<S> <C>
Location Technologies, Inc. ("LTI"), a wholly-owned
subsidiary of AirTouch Communications...................... 51%
North American Teletrac ("NAT").............................. 25%
International Teletrac Systems, Inc. ("ITS"), a wholly-owned
subsidiary of NAT.......................................... 24%
</TABLE>
Prior to April 1, 1994, LTI was a wholly-owned subsidiary of PacTel
Corporation, which in turn was 86.1% owned by Pacific Telesis Group. On April 1,
1994, the Wireless Division of Pacific Telesis Group spun off and formed a
separate company operating as AirTouch Communications.
At December 31, 1994, the Partnership operated in six cities. The set up of
the location network is capital intensive, and the Partnership is currently
dependent upon the financial support of its majority partner, LTI and its
parent, AirTouch Communications.
Vehicles are tracked through signals sent by Vehicle Location Units ("VLUs")
placed in the vehicle and received by base stations which have been
strategically installed throughout the coverage area. The signals are processed
by the base stations and sent by telephone to the master station. The system
then determines the location of the vehicle and movement on an electronic map
grid display. The master station can relay the tracking information to the
commercial fleet dispatcher or law enforcement agencies.
2. MANAGEMENT'S PLANS:
The Partnership's financial statements have been prepared on a going-concern
basis which contemplates the realization of assets and a liquidation of
liabilities in the ordinary course of business. The
F-34
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. MANAGEMENT'S PLANS: (CONTINUED)
Partnership has incurred substantial net losses and negative cash flows from
operations. In addition, the Partnership has a working capital deficiency and is
highly leveraged.
To date, substantially all of the cash to fund the operations of the
Partnership had been provided by its affiliate, LTI, in the form of convertible
debt. This financial support may not continue.
There is a pending sale to sell substantially all of the Partnership's
assets to a third party who will also assume certain of the Partnership's
liabilities. See discussion of this pending sale in Note 11.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION:
The Partnership services the commercial market for use in fleet management
and the consumer market for individual vehicle tracking. The commercial systems
include VLUs, computer hardware, and vehicle tracking software. The sales of
commercial systems are recognized upon shipment of the system, and the
commercial service fee revenues are recognized monthly based on the number of
VLUs in the fleet.
The VLUs for the consumer market are manufactured by third parties and are
sold to consumers through unrelated retailers. The Company's service contracts
to individual consumers are initiated by the retailers. Service revenues for the
consumer market are usually paid in advance and are recognized monthly as
earned. Unearned service fees are recorded as deferred revenue and included in
other current liabilities in the accompanying balance sheets.
INVENTORIES:
Inventories consist of VLUs and computer systems for commercial customers
and are stated at the lower of cost or market using the first-in, first-out
method of valuation. The Company has $140,600 of inventory on consignment with
third parties at December 31, 1994.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost, are depreciated using the
straight-line method over their estimated useful lives, which are generally as
follows:
<TABLE>
<S> <C>
Equipment................................................. 3-7 years
Office furniture and equipment............................ 5 years
Vehicles.................................................. 3 years
</TABLE>
Leasehold improvements are amortized using the straight-line method over the
lesser of the estimated useful life of the asset or the remaining terms of the
underlying lease.
Repairs, maintenance, and renewal of minor items are charged to expense as
incurred. Major renewals and improvements are capitalized and depreciated over
the remaining useful lives of the assets.
INTANGIBLE ASSETS:
Intangible assets represent the cost of acquiring FCC licenses as well as
goodwill resulting from the Acquisition. Both FCC licenses and goodwill are
amortized using the straight-line method over twenty
F-35
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
years. The Partnership periodically reviews these intangible assets to determine
if its carrying costs will be recovered from future operations and, accordingly,
a reduction in carrying value should be recorded. No such reductions have
occurred to date.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
ADVERTISING:
Advertising costs are expensed as incurred.
PARTNERSHIP INCOME:
Subsequent to the Acquisition, Partnership's profits and losses are
allocated based on the partners' percentage ownership interest in the
Partnership.
INCOME TAXES:
No provisions have been made for federal or state income taxes since such
taxes, if any, are the responsibility of the individual partners.
STATEMENT OF CASH FLOWS:
The Company prepares its statement of cash flows using the indirect method
as prescribed by Statement of Financial Accounting Standards No. 95. The Company
considers all investment instruments at date of purchase with maturities of less
than three months to be cash equivalents. The Partnership paid $13,780,500 in
interest in 1994. (See Note 6 for interest paid on convertible debt.) In 1994,
the Partnership did not enter into any capital lease obligations for new
equipment.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, 1994 consist of the following:
<TABLE>
<S> <C>
Equipment...................................................... $22,958,400
Office furniture and equipment................................. 1,262,400
Vehicles....................................................... 385,100
Leasehold improvements......................................... 175,400
----------
24,781,300
Less, accumulated depreciation and amortization................ 10,763,900
----------
$14,017,400
----------
----------
</TABLE>
F-36
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS:
Intangible assets at December 31, 1994 consist of the following:
<TABLE>
<S> <C>
FCC licenses.................................................... $4,719,300
Goodwill........................................................ 7,517,300
12,236,600
Less, accumulated depreciation and amortization................. 2,282,600
---------
$9,954,000
---------
---------
</TABLE>
FCC licenses represent the cost of acquiring these licenses and are
amortized over a period of 20 years. FCC license term is for a 5-year period
with unlimited options to renew for subsequent 5-year periods.
Goodwill results from the application of the purchase method of accounting
with respect to the Acquisition.
6. RELATED PARTY TRANSACTIONS:
NET INDEBTEDNESS TO ITS:
The net indebtedness at December 31, 1994 represents the following:
<TABLE>
<S> <C>
Preferred capital account...................................... $69,700,000
Note receivable from ITS....................................... (20,200,000)
----------
$49,500,000
----------
----------
</TABLE>
Pursuant to the Acquisition, ITS has a "Preferred Capital Account" on which
the Partnership is required to make quarterly payments to ITS at prime plus 3%.
The Preferred Capital Account has all the debt features associated with the ITS
outstanding debt ($49,500,000--see next paragraph) and a $20,200,000 note
payable to the Partnership. These two debt instruments were not part of the
Acquisition and therefore not assumed by the Partnership. However, the note
receivable from ITS was reclassified and netted against the Preferred Capital
Account to reflect the substance of this transaction. The note receivable bears
interest at prime plus 3% (11.5% at December 31, 1994) and matures May 1998.
Subsequent to year-end, the Partnership intends to assign its preferred capital
account of $49,500,000 and ITS' equity in the Partnership to AirTouch Services,
an affiliate. In addition, the Partnership intends to assign the preferred
capital account of $20,200,000 and the related note receivable to LTI.
The Partnership guarantees the outstanding debt of ITS. The guaranteed debt
outstanding balance at December 31, 1994 was $49,500,000. Of this amount,
$9,500,000 is due no later than December 20, 1995, and the remaining balance is
due no later than January 31, 1996. The outstanding debt of ITS is held by
AirTouch Services, a wholly-owned subsidiary of AirTouch Communications.
CONVERTIBLE DEBT:
The Partnership has convertible debt payable to LTI. The Partnership pays
interest quarterly at prime plus 2% on the outstanding debt balance. Included in
the due to affiliate balance at December 31, 1994 is
F-37
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS: (CONTINUED)
interest payable of $3,879,800. Interest paid to the affiliate for the year
ended December 31, 1994 was $13,862,600. The principal balance is due when the
debt matures as follows:
<TABLE>
<S> <C>
1998.......................................................... $37,500,000
1999.......................................................... 52,600,000
2000.......................................................... 63,595,000
-----------
$153,695,000
-----------
-----------
</TABLE>
The debt is collateralized by the equipment, inventory, accounts receivable,
and all proceeds and products of the Partnership.
The outstanding debt's principal may be converted into shares of AirTouch
Teletrac stock if the Partnership elects to undertake an initial public
offering. After conversion, LTI and its affiliates' aggregate stock ownership
cannot exceed 70% of the total outstanding shares. However, subsequent to
year-end, the intent is that the debt will be held by AirTouch Services due to a
proposed merger of LTI and AirTouch Services, with AirTouch Services as the
surviving entity.
DEPENDENCE ON AFFILIATE:
Substantially all of the cash to fund the operations of the Partnership has
been provided by its affiliate, LTI, in the form of convertible debt.
INSURANCE:
The Partnership is covered under an insurance policy held by an affiliate.
Insurance expense passed through by this affiliate for the year ended December
31, 1994 was $57,600.
7. COMMITMENTS:
SIGNIFICANT SUPPLIER AGREEMENTS:
On July 30, 1991 and July 1, 1993, ITS and AirTouch Teletrac entered into
several purchase agreements with a foreign supplier whereby VLUs would be
supplied at a set price, provided ITS made prepayments to finance the production
of the units. At December 31, 1994, the total open commitments under these
agreements amounted to $3,725,300.
MAINTENANCE AGREEMENT:
Effective January 1, 1991, ITS entered into a 5-year agreement with the
aforementioned supplier whereby the supplier will perform maintenance and repair
on all base stations purchased by ITS from that supplier. At December 31, 1994,
the total remaining commitment on this agreement is approximately $241,000.
ROYALTIES:
ITS entered into an agreement with a software company to develop the mapping
software utilized in all the Partnership's operating locations to track
vehicles.
F-38
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS: (CONTINUED)
The Partnership pays a royalty fee for each copy of mapping software sold to
an end user (corporate customer).
In addition, beginning January 1, 1993, the Partnership has guaranteed to
pay an operational fee of $1,500 per month for each metropolitan area on line
for updates to the mapping software. At December 31, 1994, there were 6 cities
on line and the resulting minimum operational fee commitment amounts to $4,500
for 1995.
For commercial customers using the mapping software (tracking their own
vehicles), the Partnership pays a monthly fee per vehicle.
The above agreement had an original expiration date of January 14, 1995.
This agreement has been amended, which extends the term of the agreement for one
year through January 14, 1996 under the original terms and conditions of the
original agreement except for the payment terms which have been revised to a
flat fee of $325,000 payable in four equal installments during the term of the
agreement.
Total operational fees and royalties for the year ended December 31, 1994
amounted to approximately $256,125.
LEASES:
The Partnership leases various facilities under noncancellable operating
leases expiring through 1997. The Company is responsible for maintenance,
repairs, taxes, and insurance on these operating leases.
Future minimum rental payments required under operating leases that have
initial or remaining noncancellable lease terms in excess of one year are as
follows:
<TABLE>
<S> <C>
1995............................................................ $ 921,200
1996............................................................ 665,700
1997............................................................ 147,200
---------
$1,734,100
---------
---------
</TABLE>
Total rental expense under all operating leases was $2,443,600 for the year
ended December 31, 1994.
8. EMPLOYEE BENEFIT PLAN:
On December 1, 1993, the Partnership revised the profit sharing plan which
qualifies as a cash or deferred arrangement under Section 401(k) of the Internal
Revenue Code. Under this plan, eligible participating employees may elect to
contribute up to 25% of their monthly salaries. The Partnership contributes to
the plan on behalf of the participating employee an amount equal to 25% of
employee contributions to a maximum of $2,000 per employee per calendar year.
Participants are at all times fully vested in their contributions and in the
Partnership's contributions according to the following schedule:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTED PERCENTAGE
- ---------------------------------------------------------------------------- -----------------
<S> <C>
2........................................................................... 30%
3........................................................................... 50%
4........................................................................... 75%
5........................................................................... 100%
</TABLE>
F-39
<PAGE>
AIRTOUCH TELETRAC GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN: (CONTINUED)
The Partnership's contributions to the plan for the year ended December 31,
1994 amounted to approximately $201,400.
9. MAJOR SUPPLIER:
The Partnership purchases substantially all of its equipment from one
supplier.
10. CONTINGENCIES:
The Partnership is a party to various lawsuits arising in the ordinary
course of business. In the opinion of management, based on a review of such
litigation with legal counsel, any losses resulting from these actions are not
expected to materially impact the financial condition of the Partnership.
11. SUBSEQUENT EVENT (UNAUDITED):
Under an Asset Purchase Agreement, drafted in August of 1995, between
AirTouch Services and a third party, there is a pending sale of substantially
all of the Partnership's assets and assumption of certain liabilities. The
purchase price for the above is estimated to be $5,000,000. In addition, if
certain events occur relating to FCC actions prior to Buyer capital or
contractual commitment, it is estimated that an additional sum of $6,800,000
will be paid in two equal installments without interest on the first and second
anniversaries of the closing date or the date on which such FCC action is
issued, whichever is later.
If the sale is consummated under its terms as drafted, the Partnership may
incur significant losses. Such loss, assuming a $5,000,000 purchase price, is
estimated to be approximately $25,000,000.
F-40
