<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1998
REGISTRATION NO. 333-49839
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SATELLINK COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
GEORGIA 4812 58-1850580
(State or other (Primary Standard Industrial (I.R.S. employer
jurisdiction of Classification Code Number) identification number)
incorporation or
organization)
1325 NORTHMEADOW PARKWAY
SUITE 120
ROSWELL, GEORGIA 30075
(770) 625-2599
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
DANIEL D. LENSGRAF
CHIEF FINANCIAL OFFICER
SATELLINK COMMUNICATIONS, INC.
1325 NORTHMEADOW PARKWAY
SUITE 120
ROSWELL, GEORGIA 30075
PHONE: (770) 625-2599
FACSIMILE: (770) 625-2651
(Name, address, including zip code and telephone number, including area code,
of agent for service)
---------------
COPIES TO:
M. HILL JEFFRIES, ESQ. JAMES WALKER IV, ESQ.
SCOTT D. DICKINSON, ESQ. TERRESA R. TARPLEY, ESQ.
ALSTON & BIRD LLP NELSON MULLINS RILEY & SCARBOROUGH,
ONE ATLANTIC CENTER L.L.P.
1201 WEST PEACHTREE STREET FIRST UNION PLAZA, SUITE 1400
ATLANTA, GEORGIA 30309-3424 999 PEACHTREE STREET, N.E.
PHONE: (404) 881-7000 ATLANTA, GEORGIA 30309-3464
FACSIMILE: (404) 881-7777 PHONE: (404) 817-6000
FACSIMILE: (404) 817-6050
---------------
Approximate date of commencement of proposed sale to public: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVENESS OF THE REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 15, 1998
PROSPECTUS
3,650,000 SHARES
LOGO
OF SATELLINK COMMUNICATIONS, INC. APPEARS HERE
COMMON STOCK
Of the 3,650,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby, 2,750,000 shares are being offered by
Satellink Communications, Inc. (the "Company" or "Satellink"), and 900,000
shares are being offered by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling
Shareholders. See "Use of Proceeds."
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock. It currently is anticipated that the initial public offering
price of the Common Stock will be between $10.00 and $12.00 per share. See
"Underwriting" for information relating to the determination of the initial
public offering price. The Company has applied for the Common Stock to be
listed for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "STLK."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)........................ $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 547,500 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discount will be $ and the total Proceeds to Company will
be $ . See "Underwriting."
-----------
The shares of Common Stock are offered subject to receipt and acceptance by
the several Underwriters, to prior sale and to the Underwriters' right to
reject orders in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares of Common Stock
will be available for delivery on or about , 1998.
-----------
J.C.Bradford&Co. Morgan Keegan & Company, Inc.
, 1998
<PAGE>
[DESCRIPTION OF U.S. MAP SHOWING THE COMPANY'S COVERAGE AREA]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless the context indicates otherwise,
all references to the "Company" or "Satellink" include Satellink
Communications, Inc. and its subsidiaries. Unless otherwise indicated, all
information contained herein: (i) reflects the conversion of all outstanding
shares of Series A Convertible Preferred Stock, par value $0.01 per share (the
"Series A Preferred Stock"), and Series C Convertible Preferred Stock, par
value $0.01 per share (the "Series C Preferred Stock"), into Common Stock upon
the completion of the Offering; (ii) reflects a 1.3-for-one stock split to be
effected immediately prior to the effectiveness of the Offering; (iii) assumes
that the Company redeems all outstanding shares of Series D Redeemable
Preferred Stock, par value $0.01 per share (the "Series D Preferred Stock")
between June 30, 1998 and December 31, 1998 as described in "Certain
Transactions"; and (iv) assumes no exercise of the Underwriters' over-allotment
option. The Company's fiscal year ends on July 31, and references to particular
fiscal years of the Company refer to the twelve months ended on July 31 of the
year indicated. See the consolidated financial statements and the notes
thereto.
THE COMPANY
Satellink provides paging and enhanced personal telecommunications services
to businesses and individuals in smaller metropolitan areas and major cities in
the southeastern and southwestern United States. The Company has provided
paging and voicemail services since 1988. In 1995, the Company began
development of its proprietary Satellink Telecommunications Application
Resource Network (the "STAR*Net") in anticipation of increased subscriber
demand for a broad spectrum of personal telecommunications services from a
single provider. The STAR*Net platform allows the Company to provide an
integrated suite of personal telecommunications services to businesses and
individuals in markets not generally targeted by major providers. The Company
intends to capitalize on its STAR*Net platform by marketing enhanced services
to its existing paging and voicemail subscriber base and by attracting new
subscribers who would otherwise use multiple providers to fulfill their
personal telecommunications needs.
Through the STAR*Net platform, which integrates carrier grade telephony
platform hardware with the Company's proprietary software, Satellink provides
its subscribers with single telephone number access to paging, voicemail, long
distance and "find me" services. The STAR*Net platform also allows the Company
to offer prepaid and postpaid long distance calling cards and inbound 1-800
service. The Company believes that the STAR*Net platform's scalable and
flexible architecture and relatively low cost of implementation give the
Company a competitive advantage by allowing it to quickly add and customize
services and offer enhanced services in smaller markets where the
implementation of a more expensive architecture is not economically justified.
The Company delivers paging services by broadcasting messages over: (i) FM
subcarrier frequencies that are leased by the Company in Georgia and Alabama
and that are linked with the CUE Paging Corporation ("CUE") nationwide FM
paging network, which reaches over 95% of the population of the United States
and Canada and covers 60,000 miles of interstate highway; (ii) Company-owned
VHF and UHF paging networks in Georgia and Louisiana; and (iii) VHF, UHF, 900
MHz and narrowband personal communications service ("PCS") paging networks
operated by third parties from which the Company purchases and resells local,
regional and nationwide service. The Company's use of the STAR*Net platform and
multiple message distribution networks in its market areas allows the Company
to offer its customers an assortment of service and pricing options not readily
available from many of the Company's competitors.
Satellink's paging and voicemail subscriber base has increased through
internal growth and acquisitions from approximately 27,000 subscribers as of
July 31, 1995 to approximately 165,000 subscribers as of May 31, 1998. Net
monthly revenues have increased from $700,000 for the month ended January 31,
1995 to $1.8 million for the month ended April 30, 1998.
3
<PAGE>
The Company's primary objective is to become a leading regional provider of
enhanced personal telecommunications services. The Company intends to achieve
its objective by pursuing the following strategies:
. Expand Subscriber Base Through Acquisitions. The Company intends to
increase its subscriber base and its opportunities to cross-market
STAR*Net services by identifying and acquiring other providers of
paging, voicemail and other personal telecommunications services. Based
on its experience acquiring and integrating 12 paging and voicemail
operators since February 1996, the Company believes that it can generate
cost savings through integration of acquired companies, particularly
from its increased purchasing power for equipment and airtime. Any cost
savings would effectively reduce the multiple paid for acquired
companies, thereby increasing the Company's return on invested capital.
The Company intends to continue to focus on smaller acquisition
candidates because it expects larger providers to focus increasingly on
internal growth and larger acquisitions, thereby decreasing competition
for smaller acquisition candidates.
. Cross-Market an Integrated Suite of Customized Services to Existing and
Acquired Subscribers. The Company intends to cross-market additional
STAR*Net services to its existing and acquired paging and voicemail
subscribers. The Company believes that its paging and voicemail
subscribers are mobile individuals who are likely to use additional
personal telecommunications services. The Company believes these
subscribers will be more likely to purchase these services from the
Company because: (i) the Company owns the subscribers' access numbers
and is able to offer them the ability to change service plans and
coverage areas without changing access numbers; (ii) the Company is able
to provide its subscribers with unified billing for a variety of
personal telecommunications services; and (iii) existing subscribers are
familiar with the Company and have purchased services from the Company
in the past.
. Expand the Suite of Customized Services. The Company intends to
continually develop new STAR*Net services. Current planned services
under development include Internet-based voicemail delivery and receipt,
local access voicemail between cities, text-to-speech playback of e-mail
messages, Internet e-mail pager notification and narrowband PCS connect.
The Company believes these services will, when combined with existing
STAR*Net service offerings, provide it with additional cross-marketing
opportunities to existing and new subscribers.
. Focus on Niche Markets. Based on its analysis of its target markets, the
Company believes that smaller metropolitan markets throughout the
Southeast and Southwest are underserved by larger providers of personal
telecommunications services who focus on more densely-populated
metropolitan areas. These smaller markets are attractive to Satellink
because management believes these markets have reduced competition for
personal telecommunications services, limited availability of
alternative services such as cellular telephones and lower market
penetration rates for personal telecommunications services.
Approximately 45% of the Company's paging subscribers utilize regional
or national paging services compared to approximately 33% of total
paging subscribers in the United States who use such services. The
Company believes this reflects its ability to serve mobile individuals
who require the broad, uninterrupted coverage area provided by the
Company. The Company intends to continue implementing its niche market
strategy by opening additional offices in smaller metropolitan markets,
acquiring other providers of paging, voicemail and other personal
telecommunications services in existing and additional markets and
utilizing its direct sales force in markets in Georgia, Alabama,
Louisiana and Texas.
The Company was incorporated under the laws of the State of Georgia on June
2, 1988. The mailing address of its principal executive office is 1325
Northmeadow Parkway, Suite 120, Roswell, Georgia 30075, and its telephone
number is (770) 625-2599.
4
<PAGE>
ACQUISITIONS
Acquisitions have contributed significantly to the Company's growth. The
following table provides a summary of acquisitions in which the Company
acquired more than 5,000 subscribers. The Company has paid an aggregate
consideration of approximately $27.0 million in connection with these
acquisitions.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF
SUBSCRIBERS
DATE ------------------------
NAME OF ACQUIRED COMPANY LOCATIONS ACQUIRED PAGING VOICEMAIL
- ------------------------ ---------------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Atlanta Voice Page, Atlanta February 1996 11,500 --
Inc....................
C.R., Inc. ............. Dallas May 1996 10,500 --
Message World........... Atlanta February 1997 -- 5,300
Premier Paging,
Inc./Premier Paging Baton Rouge and April 1998 10,000 --
of New Orleans, Inc.... New Orleans
Hyde's Stay in Touch, Shreveport, Monroe and May 1998 39,000 --
Inc. .................. Alexandria, Louisiana
</TABLE>
In addition to the above acquisitions, since the commencement of the
Company's acquisition program in February 1996, the Company has consummated six
acquisitions for an aggregate consideration of $2.9 million, through which it
acquired a total of 7,600 paging subscribers. The Company is currently engaged
in preliminary discussions with several other acquisition candidates, but it
has no binding commitments to acquire any of such candidates. See "Risk
Factors -- Ability to Manage Growth; Acquisition Risks" and "Use of Proceeds."
THE OFFERING
Common Stock offered by the 2,750,000 shares
Company............................
Common Stock offered by the Selling
Shareholders.......................
900,000 shares
Common Stock to be outstanding
after the Offering.................
7,380,297 shares(1)
Use of proceeds.....................
To repay indebtedness and redeem Series D
Preferred Stock. See "Use of Proceeds"
and "Certain Transactions."
Proposed Nasdaq National Market STLK
symbol.............................
- --------
(1) Reflects the conversion of all outstanding shares of Series A Preferred
Stock and Series C Preferred Stock into Common Stock on the closing date of
the Offering (the "Closing Date"). Excludes 1,631,296 shares of Common
Stock that will be subject to vested options and warrants and 153,422
shares of Common Stock that will be subject to outstanding but unvested
options on the Closing Date. See "Management -- Incentive Plan," "Shares
Eligible for Future Sale" and note 7 to consolidated financial statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND ARPU)
The following table sets forth certain historical and pro forma consolidated
financial and operating data for the Company. This information should be read
in conjunction with "Use of Proceeds," "Selected Consolidated Financial and
Operating Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's consolidated financial statements and
notes thereto, including the unaudited pro forma consolidated financial
information, and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31, NINE MONTHS ENDED APRIL 30,
------------------------------------------ ---------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1995 1996 1997 1997(1) 1997 1998 1998(5)
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Service, rent and
maintenance revenues... $ 6,885 $ 9,839 $ 16,308 $ 20,478 $ 11,899 $ 14,577 $ 17,877
Product sales........... 526 975 1,264 2,508 856 903 1,967
--------- --------- --------- --------- --------- --------- ---------
Total revenues......... 7,411 10,814 17,572 22,986 12,755 15,480 19,844
Cost of products sold... (468) (960) (1,201) (2,443) (840) (801) (1,970)
--------- --------- --------- --------- --------- --------- ---------
Net revenues........... 6,943 9,854 16,371 20,543 11,915 14,679 17,874
--------- --------- --------- --------- --------- --------- ---------
Service, rent and
maintenance expenses... 2,718 3,879 6,542 7,149 4,870 5,475 5,799
Selling and marketing
expenses............... 1,222 1,602 2,314 2,635 1,696 2,261 2,469
General and
administrative
expenses............... 887 1,732 3,039 4,396 2,095 2,635 3,487
Engineering expenses.... 567 516 638 641 473 631 631
Depreciation and
amortization........... 845 1,204 2,242 3,279 1,605 2,130 2,793
Fixed asset impairment.. -- -- -- -- -- 834 834
--------- --------- --------- --------- --------- --------- ---------
Operating income........ 704 921 1,596 2,443 1,176 713 1,861
Other income............ 90 91 90 151 69 180 450
Interest expense........ (704) (873) (1,564) (2,884) (1,100) (1,740) (1,033)
Accretion of stock
warrants(2)............ (643) (854) (1,773) (1,773) (1,252) (628) --
(Loss) income from joint
venture................ -- (96) 26 26 20 99 99
Minority interest....... -- (2) (3) (3) (2) (8) (8)
--------- --------- --------- --------- --------- --------- ---------
(Loss) income before
income tax provision,
extraordinary item and
cumulative effect of
change in accounting
principle.............. (553) (813) (1,628) (2,040) (1,089) (1,383) 1,369
Income tax provision.... -- -- -- -- -- -- (520)
--------- --------- --------- --------- --------- --------- ---------
(Loss) income before
extraordinary item and
cumulative effect of
change in accounting
principle.............. (553) (813) (1,628) (2,040) (1,089) (1,383) 849
Extraordinary loss on
early retirement of
debt(3)................ -- (132) -- -- -- -- --
Cumulative effect of
change in accounting
principle.............. -- -- -- -- -- (629) --
--------- --------- --------- --------- --------- --------- ---------
Net (loss) income ..... (553) (945) (1,628) (2,040) (1,089) (2,012) 849
--------- --------- --------- --------- --------- --------- ---------
Preferred stock
dividends.............. 88 334 438 438 329 361 --
--------- --------- --------- --------- --------- --------- ---------
Net (loss) income
attributable to common
shareholders........... $ (641) $ (1,279) $ (2,066) $ (2,478) $ (1,418) $ (2,373) $ 849
========= ========= ========= ========= ========= ========= =========
Allocation to Class A
Common Stock.......... $ (599) $ (1,205) $ (2,035) $ (2,441) $ (1,397) $ (2,371) $ 849
Allocation to Class B
Common Stock.......... (42) (74) (31) (37) (21) (2) N/A
Net (loss) income per
share (4):
Loss from extraordinary
item--basic:
Class A Common Stock... $ -- $ (0.04) $ -- $ -- $ -- $ -- $ --
Class B Common Stock... -- (3.79) -- -- -- -- --
Loss from cumulative
effect of change in
accounting principle:
Class A Common Stock... $ -- $ -- $ -- $ -- $ -- $ (0.21) $ --
Class B Common Stock... -- -- -- -- -- (17.97) --
Net loss attributable
to common
shareholders--basic:
Class A Common Stock... (0.21) (0.43) (0.69) (0.83) (0.47) (0.79) 0.12
Class B Common Stock... (17.61) (36.68) (58.24) (69.86) (39.96) (67.10) N/A
Net income attributable
to common
shareholders--diluted. N/A N/A N/A N/A N/A N/A 0.10
Weighted average common
shares outstanding--
basic:
Class A Common Stock... 2,872,417 2,775,792 2,952,811 2,952,811 2,952,811 3,015,800 7,344,165
Class B Common Stock... 2,418 2,013 535 535 535 29 N/A
Weighted average common
shares outstanding--
diluted................ N/A N/A N/A N/A N/A N/A 8,256,548
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AT APRIL 30, 1998
---------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(5)
------- ------------ -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 557 $ 1,354 $ 1,754
Property and equipment, net................... 11,165 11,665 11,665
Total assets.................................. 34,994 47,523 48,823
Long-term debt, less current maturities....... 25,263 37,491 14,664
Total shareholders' (deficit) equity.......... (8,233) (8,233) 28,869
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JULY 31, NINE MONTHS ENDED APRIL 30,
------------------------------------ ------------------------------
PRO PRO FORMA
FORMA AS ADJUSTED
1995 1996 1997 1997(1) 1997 1998 1998(5)
------- -------- ------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash provided by (used
in) operations......... $ 726 $ 896 $ 1,974 $ 2,953 $ 1,017 $ 645 $ 1,834
Cash used in investing
activities............. (1,649) (11,019) (8,033) (8,880) (4,762) (11,962) (12,670)
Cash provided by
financing activities... 959 10,601 5,728 5,255 3,289 11,379 10,782
Adjusted EBITDA(6)...... 1,639 2,264 3,951 5,896 2,867 3,949 6,029
Adjusted EBITDA
margin(7).............. 23.6% 23.0% 24.1% 28.7% 24.1% 26.9% 33.7%
Units in service (end of
period)................ 27,271 65,418 95,172 129,407 90,067 122,569 162,757
Average revenues per
unit(8)................ $ 24.91 $ 17.72 $ 16.99 $ 17.57 $ 17.03 $ 14.98 $ 13.60
Capital expenditures.... $(1,528) $ (1,911) $(3,647) $ (4,231) $(2,870) $ (5,793) $ (6,037)
Cash dividends and
distributions(9)....... (77) (334) (450) (935) (307) (356) (526)
</TABLE>
- --------
(1) The pro forma statements of operations and other data give effect to the
acquisition of Message World and of Hyde's Stay in Touch, Inc. and its
affiliated company (the "Hyde's Acquisition") and the issuance of $12.2
million in additional debt to finance the Hyde's Acquisition as if they had
occurred at the beginning of the period presented, and the pro forma
balance sheet data give effect to the Hyde's Acquisition and the related
financings as if they had occurred at April 30, 1998. The pro forma
financial information does not purport to represent what the Company's
results of operations would have been if the acquisition of Message World,
the Hyde's Acquisition and the related financing had in fact occurred on
such date, nor does it purport to indicate the future financial position or
results of future operations of the Company. The pro forma adjustments are
based on currently available information and certain assumptions that
management believes to be reasonable.
(2) Represents a non-cash expense, calculated pursuant to a formula based on
the Company's Adjusted EBITDA, associated with the put feature of warrants
(the "Creditanstalt Warrants") issued by the Company to Creditanstalt-
Bankverein ("Creditanstalt"), as agent for the lenders under the Company's
credit arrangements (the "Credit Facility"). The put feature of the
Creditanstalt Warrants will be canceled on the Closing Date.
(3) As a result of early retirement of debt in fiscal 1996, the Company
recorded a loss of $132,000, net of income taxes.
(4) Basic and diluted net (loss) income per share under the two class method
are computed separately for holders of Class A and Class B Common Stock
using the weighted average number of shares of Class A and Class B Common
Stock outstanding. Diluted net income per share differs from basic earnings
per share only for periods in which earnings are positive. Net loss
attributable to Class A and Class B shareholders is allocated based on the
extent to which each class shares in the Company's loss. The Company's
Class A and Class B common shareholders receive dividends at a ratio of
1:84.5. For the calculation of basic and diluted net loss per share, see
the Company's consolidated statements of operations for the periods
presented. See also "Capitalization."
(5) Adjusted to reflect the effect of the Hyde's Acquisition, the issuance of
$12.2 million in additional debt to finance the Hyde's Acquisition and the
sale of 2,750,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $11.00 per share (the midpoint
of the price range set forth on the cover page of this Prospectus) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
(6) Adjusted EBITDA represents earnings before interest, taxes, depreciation,
amortization, fixed asset impairment, accretion of stock warrants,
extraordinary item and cumulative effect of change in accounting principle.
Adjusted EBITDA is a measure of financial performance that is often used in
the personal telecommunications industry to compare companies on the basis
of liquidity, capital resources and leverage and to determine a company's
ability to service debt. Adjusted EBITDA also is one of the financial
measurements used to determine whether the Company is in compliance with
its covenants under the Credit Facility. However, Adjusted EBITDA should
not be considered in isolation or as an alternative to net loss, income
from operations, cash flows from operating activities or any other measure
of performance under generally accepted accounting principles ("GAAP").
Further, Adjusted EBITDA may be calculated differently by different
companies within the personal telecommunications industry. Thus, Adjusted
EBITDA as presented herein may not be comparable to Adjusted EBITDA or
other similarly titled measures reported by other companies. Adjusted
EBITDA for fiscal 1996 excludes $145,000 related to a one-time charge to
write off research and development.
(7) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net
revenues.
(8) Average revenues per unit ("ARPU") equals the average net revenues for a
given period divided by the average number of units in service during such
period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
(9) For all periods other than the pro forma periods, consists of cash paid as
dividends on the Company's Series A Preferred Stock and Series C Preferred
Stock. No dividends have been paid on the Company's Common Stock. See
"Dividend Policy." For the pro forma periods, represents the cash paid as
dividends as noted previously and the distributions to the former owner of
Hyde's.
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should consider the following factors
carefully in evaluating an investment in the Common Stock offered hereby. This
Prospectus contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objectives of management
for future operations, and projections of revenues and other financial items
that are based on the beliefs of, assumptions made by and information
currently available to the Company's management. Forward-looking statements
are identified by the use of words such as "expects," "estimates,"
"anticipates," "believes," "intends," "plans" and similar expressions and
variations thereof. The cautionary statements set forth in this "Risk Factors"
section and elsewhere in this Prospectus identify important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
expressed in or implied by such forward-looking statements.
ABILITY TO MANAGE GROWTH; ACQUISITION RISKS
Demands in managing continued growth, including difficulties in predicting
the growth in network usage and required capacity, could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company's systems, procedures,
controls and existing space will be adequate to support expansion of the
Company's operations. The Company has experienced substantial growth in
revenue and personnel in recent years. The Company's growth has placed
significant demands on all aspects of the Company's business, including its
administrative, technical and financial personnel and systems. Additional
expansion by the Company may further strain the Company's management,
financial and other resources. The Company's future operating results will
substantially depend on the ability of its officers and key employees to
manage changing business conditions and to implement and improve its
technical, administrative, financial control and reporting systems. If the
Company is unable to respond to and manage changing business conditions, then
the quality of the Company's services, its ability to retain key personnel and
its results of operations could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Growth Strategy" and "Management."
The Company continually evaluates acquisition opportunities, and a
significant portion of the Company's recent growth has been accomplished
through acquisitions. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, services, products and
personnel of the acquired company, the diversion of management's attention
from other business concerns, the entrance into markets in which the Company
has little or no prior experience and the potential loss of key employees and
subscribers of the acquired company. Acquisitions may also result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt, the assumption of known and unknown liabilities, the write-
off of amortization expenses related to goodwill and other intangible assets,
all of which could have a material adverse effect on the Company's business,
financial condition and results of operations. If assumptions prove to be
incorrect and the potential liabilities ultimately exceed established
reserves, the Company's business, financial condition and results of
operations could be materially adversely affected. In the future, the Company
may take charges in connection with acquisitions. There can be no assurance
that the costs and expenses incurred will not exceed the estimates upon which
such charges are based. The Company is unable to predict whether any
prospective acquisition will occur or the likelihood that any acquisition will
be completed. See "Business -- Acquisitions."
HISTORY OF PRIOR LOSSES
The Company incurred net losses during each of its last five fiscal years,
including net losses of $233,000 during fiscal 1993, $245,000 during fiscal
1994, $641,000 during fiscal 1995, $1.2 million during fiscal 1996 and $2.0
million during fiscal 1997, as well as net losses of $1.1 million during the
nine months ended April 30, 1997 and $2.0 million during the nine months ended
April 30, 1998.
8
<PAGE>
Although the Company has experienced significant growth in revenues in
recent fiscal years and expects to become profitable upon consummation of the
Offering due to the elimination of the put feature of the Creditanstalt
Warrants and related accretion, there can be no assurance that revenue growth
can be sustained or that the Company will become or remain profitable
following the consummation of the Offering. The Company's ability to maintain
profitability depends on a number of factors, including increasing revenues
while reducing costs, maintaining current subscribers, attracting new
subscribers, implementing its business strategies and many other factors
outside the Company's control. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Growth
Strategies."
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SERVICES
The Company's future success will depend in significant part on its ability
to anticipate industry standards, continue to apply advances in technologies,
enhance its current services, develop and introduce new services in a timely
fashion, enhance its software and the STAR*Net platform and compete
successfully with products and services based on evolving or new technologies.
The market for the Company's services is characterized by rapid technological
change, frequent new product introductions and evolving industry standards.
The Company expects development and introduction of new products and
services, along with enhancements to existing products and services, will
compete with the services offered by the Company. Among the new and evolving
technologies with which the Company expects to compete are notebook computers
equipped with sound cards, fax modems and cellular modems, portable Internet
appliances which would allow connection to the Internet over wireless networks
and personal digital assistants with enhanced communications features. The
Company intends to introduce additional services in 1998, several of which are
described in this Prospectus. Development of these services has required and
will require the implementation of new technologies and the integration of
these technologies into the STAR*Net platform. Several of the Company's
competitors have developed and introduced services that are functionally
identical to the STAR*Net services that the Company currently offers and
intends to offer. For example, products currently exist which provide text-to-
voice e-mail conversion and "find me" services, and several competitors have
developed single number services for all of their communications devices.
There can be no assurance that the Company's current and future STAR*Net
services will meet with market acceptance or will compete effectively with the
services that are currently offered or that will be offered by the Company's
competitors. There can be no assurance that the Company will be successful in
developing and marketing service enhancements or new services that respond to
these or other technological changes or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of its services, or that
its new services, and the enhancements thereto, will adequately meet the
requirements of the marketplace and achieve market acceptance. Delays in the
introduction of new services, the inability of the Company to develop such new
services or the failure of such services to achieve market acceptance could
have a material adverse effect on the Company's business, financial condition
and results of operation. See "Business -- Industry," " -- Services" and "--
Proprietary Rights and Technology."
RISKS ASSOCIATED WITH THE STAR*NET ROLLOUT
The Company has limited experience in developing and marketing STAR*Net
services. Additionally, the Company has limited experience in establishing new
networks and replacing existing networks using the STAR*Net technology. There
can be no assurance that the Company will be successful in developing and
marketing STAR*Net services, establishing new networks or replacing existing
networks in a timely and cost-effective manner. The Company may experience
unexpected delays or problems, including system errors or failures, in
developing and marketing STAR*Net services or establishing new networks using
the STAR*Net technology. Additionally, the Company may experience
difficulties, including service interruption or failure, in transferring
subscribers from existing networks to the STAR*Net platform. Significant delay
or difficulty in establishing the STAR*Net platform or in developing and
marketing STAR*Net services could have a material adverse effect on the
Company's business, financial condition and results of operations.
9
<PAGE>
RISKS ASSOCIATED WITH JOINT VENTURES
FM Concepts, Ltd. ("FM Concepts") is a joint venture owned equally by the
Company, certain affiliates of C.R., Inc. ("C.R.") and Cape Fear Paging of
North Carolina, Inc. ("Cape Fear"). FM Concepts was formed in 1995 for a 40
year term to develop an FM pager (the "FM Concepts Pager") for use by the
Company, C.R. and Cape Fear. The Company does not control FM Concepts, and
there can be no assurance that FM Concepts will use its resources in a manner
consistent with the Company's strategies. Additionally, FM Concepts can
require each of the Company, C.R. and Cape Fear to contribute up to an
aggregate of $250,000 to FM Concepts, and the Company cannot require FM
Concepts to return any or all of its contribution. Although the Company has
contributed approximately $227,000 to FM Concepts as of April 30, 1998, the FM
Concepts Pager is at an experimental stage, and there can be no assurance that
it will ever reach the production stage. There can also be no assurance that
the FM Concepts Pager will function in accordance with design specifications
or that subscribers will view it as an attractive alternative to traditional
pagers or competing FM pagers. FM Concepts intends to outsource the production
of the FM Concepts Pager to a third party manufacturer; however, there can be
no assurance that FM Concepts will successfully identify a suitable
manufacturer or that any manufacturer will be able to produce the FM Concepts
Pager according to design specifications in a cost-effective manner. See
"Business -- Proprietary Rights and Technology" and "-- Pagers."
The Company currently purchases FM radio pagers from FM Concepts, L.L.C.
("FM Concepts II"), a joint venture that was formed in 1996 and is owned
equally by the Company and Cape Fear. FM Concepts II is not controlled by the
Company, and, therefore, there can be no assurance that FM Concepts II will
utilize its resources in a manner consistent with the Company's strategies.
Additionally, FM Concepts II can require each of the Company and Cape Fear to
contribute up to an aggregate of $250,000 to FM Concepts II's capital, and the
Company cannot require FM Concepts II to return any or all of its
contribution. As of April 30, 1998, the Company had contributed approximately
$235,000 to FM Concepts II. FM Concepts II and CUE have been licensed by Nokia
Oy AB ("Nokia") to manufacture and distribute pagers using Nokia's FM paging
technology throughout North America. FM Concepts II has contracted with Info
Telecom S.A. ("Info Telecom"), a French producer, to manufacture FM pagers for
distribution in North America. The Company believes that its participation in
the FM Concepts II joint venture combined with the outsourcing of production
of FM pagers allows it to obtain FM pagers at a more favorable cost than if it
purchased such pagers directly from a third party because it will not have to
pay the markup ordinarily charged by such manufacturers. See "Business --
Pagers."
COMPETITION
The telecommunications services industry is intensely competitive, rapidly
evolving and subject to rapid technological change. The Company expects
competition to increase in the future. Many of the Company's current and
potential competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. Competition from these competitors could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company attempts to differentiate itself from its competitors by
offering an integrated suite of telecommunications services. Other providers
currently offer each of the individual services and certain combinations of
the services offered by the Company. For example, Premiere Technologies, Inc.
("Premiere Technologies") offers bundled telecommunications services which are
similar to those offered by the Company. Octel Communications Corporation
("Octel") and Microsoft Corporation ("Microsoft") recently announced a service
called "Unified Messenger," which places all voicemail, e-mail and fax
messages in a single mailbox accessible by computer or telephone. The
Company's nationwide mobile communications services and features compete with
services provided by companies such as AT&T Corp. ("AT&T"), MCI Communications
Corp. ("MCI") and Sprint Corp. ("Sprint") as well as smaller interexchange
long distance providers. The Company's voicemail services compete with
voicemail services provided by AT&T, certain regional Bell operating companies
("RBOCs") and other service bureaus as well as by equipment manufacturers,
such as Octel, Northern Telecom, Inc. ("NorTel"), Siemens Business
Communications Systems, Inc. ("Siemens"), Centigram
10
<PAGE>
Communications Corporation ("Centigram"), Boston Technology, Inc. ("Boston
Technology") and Digital Sound Corporation ("Digital Sound"). The Company's
paging services compete primarily with those offered by Paging Network, Inc.
("PageNet"), the world's largest provider of paging services, AirTouch
Communications, Inc. ("AirTouch"), Arch Communications, Inc. ("Arch"),
MobileMedia Communications, Inc. ("MobileComm"), SkyTel Corporation
("SkyTel"), a subsidiary of Mobile Telecommunications Technologies Corp.
("MTEL"), PageMart, Inc. ("PageMart") and Metrocall, Inc. ("Metrocall"). The
Company expects that other parties will develop and implement information and
telecommunications service platforms similar to its platform, thereby
increasing competition for the Company's services. See "Business --
Competition."
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, as amended (the "1996 Act"), which allows the
RBOCs, as is the case with other local exchange carriers ("LECs"), to provide
long distance telephone service between Local Access and Transport Areas
("LATAs"). The 1996 Act will likely significantly increase competition for
long distance services. The new legislation also grants the FCC the authority
to deregulate other aspects of the telecommunications industry, which may in
the future, if authorized by the FCC, facilitate the offering of an integrated
suite of information and telecommunications services by the RBOCs in
competition with the Company. Such increased competition could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Legislative Matters" and "-- Government
Regulation."
Telecommunications companies compete for consumers primarily based on price,
with major long distance carriers and paging companies conducting extensive
advertising campaigns to capture market share. There can be no assurance that
a decrease in the rates charged for communications services by the major long
distance carriers, major paging companies or other competitors, whether caused
by general competitive pressures or the entry of the RBOCs and other LECs into
the bundled telecommunications market, would not have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company expects that the information and telecommunications
services markets will continue to attract new competitors and new
technologies, possibly including alternative technologies that are more
sophisticated and cost effective than the Company's technology. See "Business
- -- Competition."
UNCERTAINTY OF MARKET ACCEPTANCE OF PERSONAL TELECOMMUNICATIONS SERVICES
The Company's future success depends upon the market acceptance of its
existing and future personal telecommunications products and services.
Personal telecommunications services integrate the functionality of telephones
and computers and thus represent a departure from standards for information
and telecommunications services. Market acceptance of personal
telecommunications products and services generally requires that individuals
and enterprises accept a new way of exchanging information. The Company
believes that broad market acceptance of its personal telecommunications
products and services will depend on several factors, including ease of use,
price, reliability, access and quality of service, system security, product
functionality and the effectiveness of marketing and distribution efforts.
There can be no assurance that the Company's personal telecommunications
products and services will achieve broad market acceptance or that such market
acceptance will occur at the rate which the Company currently anticipates. A
decline in the demand for, or the failure to achieve broad market acceptance
of, the Company's personal telecommunications product and services would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "-- Technological Change; Dependence on New
Services" and "Business -- Industry" and "-- Services."
DEPENDENCE ON NETWORKS, SWITCHING FACILITIES AND THE STAR*NET PLATFORM;
DAMAGE, FAILURE AND DOWNTIME
There can be no assurance that a fire, act of sabotage, technical failure,
natural disaster or a similar event would not cause the failure of all or a
portion of the Company's network, a third party network on which the Company
relies, or any of the Company's switching facilities or STAR*Net platforms,
thereby resulting in an interruption of the Company's services. On May 18 and
19, 1998, the Galaxy 4 satellite, which is owned by
11
<PAGE>
PanAmSat and transmits paging messages for a majority of the pagers in service
in the United States, malfunctioned, resulting in an interruption of paging
service to up to 40 million paging subscribers in the United States, including
approximately 25% of the Company's subscribers. Because the Company uses
multiple message distribution networks and the majority of the Company's
subscribers are serviced through the CUE nationwide FM paging network and
Company-owned VHF and UHF paging networks, most of the Company's subscribers
were not affected by the malfunction of the Galaxy 4 satellite. However, there
can be no assurance that a technical malfunction such as the one that affected
the Galaxy 4 satellite will not affect one or more of the Company's
distribution networks, resulting in an interruption of the Company's services.
Such an interruption could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company currently maintains switching facilities and STAR*Net platforms
in Atlanta, Albany, Augusta, Cordele, Macon, Savannah and Valdosta, Georgia;
Birmingham, Alabama; Baton Rouge and New Orleans, Louisiana; and Dallas,
Texas. The Company's network service operations are dependent upon its ability
to protect the equipment and data at its switching facilities and STAR*Net
platforms against potential damage that may be caused by fire, power loss,
technical failures, unauthorized intrusion, natural disasters, sabotage and
other similar events. The Company has implemented monitored security systems,
controlled access and automated data backup procedures, uninterruptable power
supply systems and automated system trouble alerts. Nevertheless, any damage
to the Company's switching facilities or STAR*Net platforms could have a
material adverse effect on the Company business, financial condition and
results of operations. See "Business -- Paging Infrastructure" and "-- The
STAR*Net Platform."
LIMITATIONS OF CUE PAGING NETWORK
The Company's FM subcarrier paging network is located in Alabama and Georgia
and is linked with the CUE nationwide FM subcarrier paging network, through
which the Company delivers nationwide FM paging service. Accordingly, the
Company is dependent upon CUE for continued maintenance and development of its
nationwide FM subcarrier paging network. CUE is under no contractual
obligation to upgrade or further develop the network to accommodate new
technologies or subscribers beyond its current capabilities. The Company
estimates that the CUE network is currently operating at approximately 60% of
capacity and, assuming the continuation of historical growth rates on the CUE
network, that sufficient capacity is available to accommodate the Company's FM
subscriber growth for the next five years. There can be no assurance, however,
that the Company's estimate of the CUE network capacity or its projection of
the Company's subscriber growth are accurate. If CUE fails to maintain its
nationwide network, fails to upgrade or further develop the network or if the
Company's estimates of network capacity or projections of subscriber growth
are inaccurate, the Company may experience a material adverse effect on its
business, financial condition and results of operations. See "-- Technological
Change; Dependence on New Services" and "Business -- Paging Infrastructure."
LIMITATIONS OF FM PAGING TECHNOLOGY
There can be no assurance that the Company's potential or existing
subscribers will accept the inherent limitations of the FM Concepts Pager or
that a third party will not develop a superior FM pager to which the Company
does not have access at competitive prices. The cost of pagers varies, based
in part on their messaging capability and whether they utilize traditional or
FM paging technology. FM radio pagers currently used by the Company are
designed to scan the entire FM band in search of paging broadcasts and
currently only receive numeric messages. The FM pagers currently purchased by
the Company are more expensive and approximately 50% larger than traditional
pagers. Reduced acceptance of FM pagers or increased competition from FM and
traditional pager providers could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Technological Change; Dependence on New Services," "-- Risks Associated with
Joint Ventures," "-- Limited Protection of Proprietary Rights and Technology,"
"Business -- Pagers" and "-- Proprietary Rights and Technology."
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS
The Company's operating results may vary significantly in the future.
Certain factors that may cause the Company's future operating results to vary
include, without limitation: (i) the timing of new service announcements; (ii)
market acceptance of new and enhanced versions of the Company's services;
(iii) potential acquisitions; (iv) competitive pricing pressures; (v) changes
in legislation and regulation that may affect the competitive environment for
the Company's communications services; and (vi) general economic and seasonal
12
<PAGE>
factors. Quarterly revenues are difficult to forecast because the market for
the Company's existing and planned services is rapidly evolving. The Company's
expense levels are based, in part, on its expectations as to future revenues.
If revenue levels are below expectations, the Company may be unable or
unwilling to reduce expenses proportionately and operating results would
likely be adversely affected. As a result, the Company believes that period-
to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to all of the foregoing factors, it is likely that in some future quarter
or quarters the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the market price of the
Company's Common Stock will likely be materially adversely affected. See "--
Ability to Manage Growth; Acquisition Risks" and "-- Risks Associated with the
STAR*Net Rollout."
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL
The Company's success is largely dependent upon its President and Chief
Executive Officer, Jerry W. Mayfield, the loss of whom could have a material
adverse effect on the Company. The Company also believes that to be successful
it must hire and retain highly qualified engineering, product development and
marketing personnel. Competition in the recruitment of highly qualified
engineering and product development personnel in the information and
telecommunications services industry is intense. Additionally, turnover in
marketing personnel is high, and the Company may not be able to recoup its
investment in a marketing representative before that person leaves the
Company. The inability of the Company to locate, hire and retain such
personnel may have a material adverse effect on the Company. No assurance can
be given that the Company will be able to retain its key employees or that it
will be able to attract qualified personnel in the future. The Company
maintains and is the beneficiary of a life insurance policy in the amount of
$1.0 million on the life of Mr. Mayfield. See "Management" and "Business --
Employees."
YEAR 2000 RISKS
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips using dates that have been stored
as two digits rather than four (e.g., "98" for 1998). On January 1, 2000, any
clock or date recording mechanism, including date sensitive software, which
uses only two digits to represent the year may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures
or miscalculations causing disruption of operations, including, among other
things, a temporary inability to process transactions, send invoices or
perform similar tasks.
The Company has assessed the Year 2000 issue with respect to the software
used by the Company in providing its services and with respect to its
computerized information and operating systems. Based on discussions with its
current software vendors and an internal assessment of its in-house computer
systems, the Company believes that it has completed substantially all
modifications to its affected software programs and computerized systems and
that minimal additional work is required to finalize these modifications. The
Company expects to fully complete all Year 2000 modifications by early 1999,
leaving adequate time to assess and correct any significant issues that may
materialize. Management does not believe that the remaining costs to resolve
the Company's Year 2000 issues will be material to the Company's results of
operations. Management has applied a substantial amount of judgment in
arriving at this assessment; consequently, there can be no assurance that this
assessment of the remaining costs to be incurred to remediate all Year 2000
issues will prove to be accurate, and actual results could differ materially
from such assessment.
The Company is also discussing the Year 2000 issue with its significant
customers and suppliers to determine the extent to which the Company is
vulnerable to those third parties' failures to remediate their own Year 2000
issues. The Company is not yet certain as to the extent to which the computer
software and business systems of its customers and suppliers are Year 2000
compliant. If systems of third parties on which the Company's systems rely are
not timely converted or if such conversions are incompatible with the
Company's systems, or if the Company fails to timely complete the remaining
modifications to its own systems, the Year 2000 issue could have a material
adverse effect on the Company's business, financial condition and results of
operations.
13
<PAGE>
RISK OF SOFTWARE FAILURES OR ERRORS
The software developed and utilized by the Company in providing its services
may contain undetected errors. Although the Company tests its software prior
to placing the software on its network, there can be no assurance that errors
will not be found in the software after the software is placed into use. Any
such errors may result in: (i) partial or total failure of the Company's
network; (ii) additional and unexpected expenses to fund further product
development or to add programming personnel to complete a development project;
and (iii) loss of revenues because of the inability of subscribers to use the
network or the cancellation by subscribers of their service with the Company,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operation. See "-- Dependence on Networks,
Switching Facilities and the STAR*Net Platform; Damage, Failure and Downtime,"
"Business -- Paging Infrastructure," "-- Technical Support" and "--
Proprietary Rights and Technology."
DEPENDENCE UPON TELECOMMUNICATIONS PROVIDERS; NO GUARANTEED SUPPLY
Other than certain local and regional paging networks, the Company does not
own a transmission network and, accordingly, depends on MCI and other
facilities-based and non-facilities based carriers for transmission of its
subscribers' long distance calls and the majority of its paging data. These
long distance telecommunications and paging services generally are procured
pursuant to supply agreements for terms of up to three years, subject to
earlier termination in certain events. Certain of these agreements provide for
minimum purchase requirements. Further, the Company is dependent upon LECs for
call origination and termination. The Company's ability to maintain and expand
its business depends, in part, on its ability to continue to obtain
telecommunications services on favorable terms from long distance and paging
carriers and the cooperation of both interexchange carriers and LECs in
originating and terminating service for its subscribers in a timely manner.
The partial or total loss of the ability to initiate or terminate calls would
result in a loss of revenues by the Company and could lead to a loss of
subscribers, which could have a material adverse effect on the Company's
business, financial condition and results of operation. See "Business --
Paging Infrastructure."
RISK OF LOSS FROM RETURNED TRANSACTIONS; FRAUD; BAD DEBT; THEFT OF SERVICES
From time to time, persons have gained unauthorized access to the Company's
network and obtained services without rendering payment to the Company by
unlawfully using the access numbers and personal identification numbers
("PINs") of authorized users. No assurance can be given that future losses due
to unauthorized use of access numbers and PINs will not be material. The
Company attempts to manage these risks through its internal controls and
billing system. The STAR*Net platform is designed to prohibit a single access
number and PIN from establishing multiple simultaneous connections to the
platform, and the Company establishes preset spending limits for each
subscriber. Although the Company believes that its risk management and bad
debt reserve practices are adequate, there can be no assurance that the
Company's risk management practices or reserves will be sufficient to protect
the Company from unauthorized or returned transactions or thefts of services
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
REGULATION
STAR*Net Services
Various regulatory factors affect the Company's financial performance and
its ability to compete. The Company is subject to regulation by the FCC and to
entry and rate regulation by various state public service and public utility
commissions ("PUCs") and is otherwise affected by regulatory decisions, trends
and policies made by these agencies. FCC rules currently require interexchange
carriers to permit resale of their transmission services. FCC rules also
require most LECs to provide all interexchange carriers with equal access to
local exchange facilities for purposes of origination and termination of local
and long distance calls. In the unlikely event that either or both of these
requirements are eliminated, the Company could be adversely affected.
Moreover, the underlying carriers that provide services to the Company or that
originate or terminate the
14
<PAGE>
Company's traffic may increase rates or experience disruptions in service due
to factors outside the Company's control, which could cause the Company to
experience increases in its costs for telecommunications services or
disruptions in transmitting its subscribers' local and long distance calls.
See "Business -- Government Regulation."
In order to provide intrastate long distance service, the Company
generally is required to obtain certification from state PUCs, to register
with such state PUCs or to be found exempt from registration by such state
PUCs. The Company's facilities do not prevent subscribers from using the
facilities to make long distance calls in any state, including states in which
the Company currently is not authorized to provide intrastate
telecommunications services and operator services. Regulatory action against
the Company by one or more state PUCs resulting from the availability of long
distance telecommunications and operator services through the Company's
facilities in states where the Company is not authorized to provide such
services could have a material adverse effect on the Company's business,
financial condition and results of operations.
The 1996 Act is intended to increase competition in the long distance and
local telecommunications markets. The 1996 Act opens competition in the local
services market and, at the same time, contains provisions intended to protect
new competitors from unfair competition by incumbent LECs, including the
RBOCs. The 1996 Act allows RBOCs to provide long distance service outside of
their local service territories but bars them from immediately offering in-
region inter-LATA long distance services until certain conditions are
satisfied. An RBOC must apply to the FCC to provide in-region inter-LATA long
distance services and must satisfy a set of pro-competitive criteria intended
to ensure that RBOCs open their own local markets to competition before the
FCC will approve such application. The FCC has approved the applications of
certain RBOCs to provide in-region inter-LATA long distances services.
Moreover, as a result of the 1996 Act, the Company may experience increased
competition from others, including the RBOCs. In addition, the Company may be
subject to additional regulatory requirements and fees resulting from the
implementation of the 1996 Act, including universal service assessments,
access charge assessments, payphone compensation surcharges, local number
portability and cost recovery assessments. See "Business -- Legislative
Matters."
Paging Operations
Federal Regulation. The Company's paging operations are subject to
regulation by the FCC under the Federal Communications Act of 1934, as amended
(the "Communications Act"). The FCC has granted the Company licenses to use
the radio frequencies necessary to conduct its paging operations. Licenses
issued by the FCC to the Company set forth the technical parameters for each
station, such as location, frequency, signal strength, tower height, etc.,
under which the Company is authorized to operate.
License Grant and Renewal. The FCC licenses granted to the Company are for
varying terms of up to 10 years, at the end of which license renewal
applications must be filed with and granted by the FCC. The Company holds
various FCC radio licenses which are used in connection with its paging
operations. The license expiration dates for these licenses are staggered,
with only a portion of the licenses expiring in any particular calendar year.
Licensees in the paging service normally enjoy a "renewal expectancy," unless
it can be demonstrated by a competitor that the licensee has not operated the
station in conformance with the FCC's rules, or that the licensee has not
provided adequate service to the public. Such challenges have been rare, and
the vast majority of license renewal applications are granted in the normal
course. Although the Company is unaware of any circumstances which could
prevent the grant of its license renewal applications, no assurance can be
given that any of the Company's license renewal applications will be free of
competing applications or will be granted by the FCC. Furthermore, the FCC has
the authority to restrict the operations of licensed radio facilities or,
following a hearing pursuant to the Communications Act, to revoke or
involuntarily modify radio licenses. To date, none of the Company's licenses
have ever been revoked or modified involuntarily.
FCC Regulatory Developments. The FCC has enacted regulations regarding
auctions for the award of radio licenses. Pursuant to such rules, the FCC may,
at any time, require auctions for new or existing services prior to the award
of any license. Accordingly, there can be no assurance that the Company will
be able to procure additional frequencies, or expand existing paging networks
into new service areas.
15
<PAGE>
In March 1994, the FCC adopted rules pursuant to which the FCC auctions
licenses for blocks of spectrum on a "market area basis." The winner of the
license is given the right to use a certain frequency or group of frequencies
throughout a defined geographic area (such as a Rand-McNalley Basic Trading
Area ("BTA") or Major Trading Area ("MTA")), and can construct and operate
transmitters throughout this market area without FCC licensing of individual
stations. In some cases, existing users of the designated frequencies must be
protected from interference or furnished with alternative means of
communications. The FCC has completed auctions to license various radio
services on a market area basis, including narrowband PCS or two-way paging,
broadband PCS, and the first phase of the 800 MHz trunked specialized mobile
radio auction, which concluded in December 1997. In these auctions, successful
bidders have made significant auction payments in order to obtain spectrum.
With respect to its paging operations, the Company may choose to
participate in the market area licensing auctions for paging services. The
first auction for the 900 MHz paging bands is tentatively scheduled for the
third quarter of calendar year 1998. The lower paging bands, e.g., the
exclusive 150 and 450 MHz frequencies, are likely to be auctioned in 1999. The
Company believes that most bidders in the auctions will be larger carriers,
with significant resources to build out large regional systems. The FCC is
currently not proposing to auction the shared private carrier paging
frequencies licensed under its rules.
On February 8, 1996, the FCC announced a freeze on the acceptance of
applications for new or modified transmitter facilities in paging services.
This freeze was temporarily lifted to permit the filing of expansion
applications by incumbent paging carriers. With respect to applications to
expand paging systems licensed on exclusive paging frequencies, the FCC has
indicated that it will not process any expansion application filed after July
31, 1996; and that any pending application which is mutually exclusive with
another pending application, due to the possibility of harmful electrical
interference, will be dismissed. However, with respect to shared paging
channels, licensed under the FCC's rules, e.g., 462.850 MHz, the FCC is
permitting incumbent licensees to file expansion applications without
restriction. Thus, while the Company may be licensed on a particular shared
frequency at a particular site in Georgia, it could expand its paging system
throughout the southeastern United States, or elsewhere. Such flexibility is
not currently available to the Company for its paging system licensed on
exclusive frequencies under the FCC's rules. Currently, the only method for
expanding its paging system licensed under the FCC's rules is through
acquisition of existing stations, with FCC approval, which the Company did
during the first quarter of calendar year 1998.
The FCC has fully implemented its rules regarding the classification of
the services offered by paging carriers as either Commercial Mobile Radio
Services ("CMRS") or Private Mobile Radio Services ("PMRS"). Previously,
paging licensees had been classified either as "common carriers" or "private
carrier paging carriers." Pursuant to the FCC's rules, which aim to reduce the
disparities in the regulatory treatment of similar mobile services, the
Company's paging services are classified as CMRS, since the radio facilities
are interconnected to the public switched telephone network and service is
provided to the general public on a for-profit basis. The Company believes
that such parity will remove certain regulatory advantages which private
carriers, such as itself, enjoyed under the previous regulatory scheme. It
should be noted that certain disparities still exist between the exclusive
frequencies and the shared frequencies licensed under the FCC's rules, which
can affect the Company's ability to respond to subscriber demands in a timely
manner. In particular, the Company generally cannot expand its exclusive
paging channel coverage except by acquisition of another carrier's station on
the same channel or by being a winning bidder in the upcoming paging auctions.
These auctions will feature "overlay" licenses, with the winning bidder being
required to protect existing licensees within the designated service area. If
the Company is the successful bidder for its areas of interest, it will be
able to expand the coverage of its existing operations without further FCC
approval, within the licensed market areas. If instead, the Company is not the
successful bidder, then it will be unable to expand its existing coverage
unless it obtains the permission of the winning bidder. However, the winning
bidder would have to protect the Company's existing coverage areas from
interference.
Separate and distinct from the Company's paging facilities discussed above
is the Company's FM subcarrier paging system. While the FCC requires carriers,
such as the Company, to file applications prior to
16
<PAGE>
initiating service on "leased subcarrier facilities of broadcast stations,"
such applications are not barred by the FCC's freeze on applications for
paging channels. Thus, it would be possible for the Company to expand its FM
subcarrier paging system, should the need arise.
The 1996 Act may affect the Company's paging business. Some aspects of the
new statute could have a beneficial effect on the Company's paging business.
For example, proposed federal guidelines regarding antenna siting issues may
potentially remove local and state barriers to the construction of
communications facilities (although such restrictions are now being litigated
in the courts and debated in Congress), and efforts to increase competition in
the local exchange and interexchange industries may reduce the cost to the
Company of acquiring necessary communications services and facilities. On the
other hand, some provisions relating to common carrier interconnection, pay
phone rates, enhanced 911 (E-911), telephone number portability, equal access,
the assignment of new area codes, universal service fund and telephone relay
service fund contributions, resale requirements and auction authority may
place additional burdens upon the Company or subject the Company to increased
competition.
Paging carriers are indirectly affected by Federal Aviation Administration
("FAA") regulations to the extent that proposed antenna sites may require
prior FAA approval. In those circumstances where antenna structure clearance
is required, the FCC will not grant an application for new or modified
facilities until such clearance is obtained from the FAA. Under the FCC's
rules, the tower owner is generally the entity that is required to secure such
approval.
The FCC has recently issued stricter guidelines with respect to radio
frequency (RF) radiation hazards. Generally, most paging facilities will be
categorically exempt, provided the base station and antenna system meet
certain criteria governing power and antenna height. In those circumstances
where the base station does not meet the criteria for exemption, it may be
necessary for the Company to modify its facility or relocate to another
antenna structure. If an exclusive paging channel is involved, the Company's
choices for relocation will be limited to certain sites within its service
area, since the Company may not expand its composite interference contour.
With respect to the shared paging frequencies the Company will be free to
relocate upon the receipt of FCC approval. See "Business -- Government
Regulation."
LIMITED PROTECTION OF PROPRIETARY RIGHTS AND TECHNOLOGY
The Company relies primarily on a combination of intellectual property laws
and contractual provisions to protect its proprietary rights and technology.
These laws and contractual provisions provide only limited protection of the
Company's proprietary rights and technology. Despite the Company's efforts to
protect its proprietary rights and technology, unauthorized parties may
attempt to copy aspects of the Company's software or services or to obtain and
use information that the Company regards as proprietary. Although the Company
is not aware of any current or previous infringement on its proprietary rights
and technology, there can be no assurance that the Company's means of
protecting its proprietary rights and technology will be adequate or that the
Company's competitors will not independently develop similar technology. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as the laws of the United States See
"Business -- Proprietary Rights and Technology."
RISKS OF INFRINGEMENT CLAIMS
Many patents, copyrights and trademarks have been issued in the general
areas of information and telecommunications services and personal
telecommunications. In the ordinary course of its business, third parties may
claim that the Company's current or future products or services infringe the
patent, copyright or trademark rights of such third parties. No assurance can
be given that actions or claims alleging patent, copyright or trademark
infringement will not be brought against the Company with respect to current
or future products or services or that, if such actions or claims are brought,
the Company will ultimately prevail. Any such claiming parties may have
significantly greater resources than the Company to pursue litigation of such
claims. Any such claims, whether with or without merit, could be time
consuming, distract management's attention, result in costly
17
<PAGE>
litigation, cause delays in introducing new or improved products and services,
require the Company to enter into royalty or licensing agreements, or cause
the Company to discontinue use of the challenged technology, tradename or
service mark at potentially significant expense to the Company associated with
the marketing of a new name or the development or purchase of replacement
technology, all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Proprietary Rights and Technology."
CONCENTRATION OF STOCK OWNERSHIP; VOTING CONTROL BY DIRECTORS AND EXECUTIVE
OFFICERS
On the Closing Date the present directors, executive officers and their
respective affiliates will beneficially own 3,633,759 shares (approximately
43.8%) of the Company's Common Stock, including options and warrants that are
exercisable as of the Closing Date. In addition, the present directors,
executive officers and their respective affiliates hold options to acquire
128,018 shares of Common Stock that are not exercisable within 60 days of the
Closing Date, which together with shares currently beneficially owned would
represent approximately 44.6% of the Common Stock outstanding after completion
of the Offering, giving effect to the exercise of those options. As a result,
these shareholders, voting together, will be able to control or exercise
significant influence over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership also may have the effect of
delaying or preventing a change in control of the Company. Purchasers in the
Offering will become minority shareholders of the Company and will be unable
to control the management or business policies of the Company. See "Principal
and Selling Shareholders" and "Description of Capital Stock -- Certain
Provisions of the Articles, Bylaws and the Georgia Code."
ABSENCE OF PRIOR PUBLIC MARKET; OFFERING PRICE DETERMINED BY AGREEMENT;
VOLATILITY OF MARKET PRICE
Prior to this Offering, there has been no public market for the Common
Stock, although the Company has applied for listing of the Common Stock on the
Nasdaq National Market in connection with this Offering. The initial public
offering price of the Common Stock will be determined solely by negotiations
among the Company and the Underwriters and will not necessarily be related to
the Company's book value, net worth or any other established criteria of value
and may not be indicative of the market price for shares of Common Stock after
the Offering. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price for the Common
Stock. From time to time after the Offering, there may be significant
volatility in the market price for the Common Stock, and there can be no
assurance that the market price of the Common Stock will not decline below the
initial public offering price. The stock market has from time to time
experienced significant price and volume fluctuations, which have particularly
affected the market prices of the stocks of high technology companies, and
which may be unrelated to the operating performance of particular companies.
Factors such as actual or anticipated operating results, growth rates, changes
in estimates by analysts, market conditions in the industry, announcements by
competitors, regulatory actions and general economic conditions will vary from
period to period. As a result of the foregoing, the Company's operating
results and prospects from time to time may be below the expectations of
public market analysts and investors. Any such event would likely result in a
material adverse effect on the price of the Common Stock.
18
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
All of the outstanding shares of Common Stock, as well as shares of Common
Stock issuable upon exercise of outstanding options or warrants, are or will
be eligible for future sale in the public market pursuant to Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act"). Sales of such
shares in the public market, or the perception that such sales may occur,
could adversely affect the market price of the Common Stock or impair the
Company's ability to raise additional capital in the future through the sale
of equity securities.
Immediately following the completion of the Offering, there will be
7,380,297 outstanding shares of Common Stock (7,927,797 shares if the
Underwriters' over-allotment option is exercised in full) and options and
warrants to purchase an additional 1,784,718 shares of Common Stock. The
3,650,000 shares of Common Stock offered hereby (4,197,500 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction under the Securities Act by persons other than
"affiliates" of the Company. Of the remaining 3,730,297 shares of Common Stock
that will be outstanding upon the completion of the Offering, 209,865 shares
will be eligible for immediate sale in the public market without restriction.
Beginning 180 days after the date of this Prospectus (or earlier with the
written consent of J.C. Bradford & Co.), 3,520,432 additional shares will be
available for immediate sale in the public market, subject to the provisions
of Rule 144, upon the expiration of certain lock-up agreements between the
Underwriters and each of the Company's directors and executive officers, the
Selling Shareholders and each holder of more than 5% of the Company's Common
Stock (the "Lock-Up Agreements"). If a shareholder should request J.C.
Bradford & Co. to waive the 180-day lock-up period as to all or a portion of
such shareholder's shares, J.C. Bradford & Co. would take into consideration
the number of shares as to which such request relates, the identity of the
requesting shareholder, the relative demand for additional shares of Common
Stock in the market, the period of time since the completion of the Offering,
and the average volume and price performance of the Common Stock during such
period.
The Company has entered into registration rights agreements with several
shareholders, option holders and warrant holders (collectively, the
"Registration Rights Holders") pursuant to which the Company is obligated to
register shares of Common Stock on behalf of the Registration Rights Holders.
Pursuant to certain demand registration rights, certain of the Registration
Rights Holders are entitled to demand at any time that the Company file a
registration statement and register up to an aggregate of 2,143,256 shares of
Common Stock. Additionally, pursuant to certain piggyback registration rights,
the Registration Rights Holders are entitled to include up to an aggregate of
2,557,956 shares of Common Stock in any registration statement (other than a
registration statement on Form S-4 or Form S-8) filed by the Company
subsequent to the Offering. All of the Registration Rights Holders will be
prevented, however, from exercising any registration rights for a period of
180 days after the completion of the Offering as a result of the Lock-Up
Agreements. If, following the expiration of the 180-day lock-up period, the
Company were required to file a registration statement upon demand of any
Registration Rights Holder or include shares of Common Stock pursuant to the
exercise of piggyback registration rights in a registration statement
otherwise filed by the Company, all of such registered shares generally would
then be eligible for immediate sale in the public market. See "Certain
Transactions" and "Shares Eligible for Future Sale."
The Company intends to file a Registration Statement on Form S-8 as soon as
practicable after the completion of the Offering to register 1,000,000 shares
of Common Stock, of which 153,422 shares are subject to outstanding but
unvested options, that are available for issuance pursuant to the Company's
1997 Long-Term Incentive Plan (the "Plan"). All of such registered shares also
generally would then be eligible for immediate sale in the public market
unless such sale is contractually restricted. See "Certain Transactions,"
"Shares Eligible for Future Sale" and "Underwriting."
DILUTION
The initial public offering price is substantially higher than the tangible
book value per share of the outstanding Common Stock. Investors purchasing
shares of Common Stock in the Offering therefore will incur immediate and
substantial dilution, and existing shareholders will receive a material
increase in the tangible book value per share of their shares of Common Stock.
At an initial public offering price of $11.00 per share (the midpoint of the
price range set forth on the cover page of this Prospectus), the immediate
dilution to new investors would be $10.83 per share. In addition, investors
purchasing shares of Common Stock in the Offering will incur additional
dilution to the extent outstanding options and warrants are exercised. See
"Dilution."
19
<PAGE>
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE ARTICLES, BYLAWS AND THE
GEORGIA CODE
The Board of Directors of the Company may issue preferred stock without
shareholder action. The existence of this "blank check" preferred stock could
render more difficult or discourage an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest or otherwise.
Additionally, effective as of the first annual meeting of shareholders held
after the completion of the Offering, the Board of Directors will be divided
into three classes of directors, with directors to be elected for staggered
three year terms. Such staggered terms may delay the ability of the Company's
shareholders to change control of the Company through the replacement of
directors and therefore inhibit the shareholders' ability to obtain the
maximum value for their shares of Common Stock that might otherwise be
realized. The Company is subject to certain provisions of the Georgia Business
Corporation Code, as amended (the "Georgia Code"), which relate to business
combinations with interested shareholders. In addition to considering the
effects of any action on the Company and its shareholders, the Company's
Restated Articles of Incorporation (the "Articles") permit the Board of
Directors and the committees and individual members thereof to consider the
interests of various constituencies, including employees, customers, suppliers
and creditors of the Company, communities in which the Company maintains
offices or operations and other factors which such directors deem pertinent in
carrying out and discharging the duties and responsibilities of such positions
and in determining what is believed to be in the best interests of the
Company. See "Management -- Board of Directors" and "Description of Capital
Stock -- Certain Provisions of the Articles, Bylaws and the Georgia Code."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Common Stock offered by the Company at an assumed initial public offering
price of $11.00 per share (the midpoint of the price range set forth on the
cover page of this Prospectus) are estimated to be approximately $27.2 million
(approximately $32.8 million if the Underwriters' over-allotment option is
exercised in full) after deducting estimated underwriting discounts and
Offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of the shares offered by the Selling Shareholders. See
"Principal and Selling Shareholders."
The Company presently intends to use the net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
DOLLAR APPROXIMATE
AMOUNT PERCENTAGE
----------- -----------
<S> <C> <C>
To repay outstanding indebtedness and accrued
interest........................................... $22,700,000 84%
To redeem all outstanding shares of Series D
Preferred Stock.................................... 4,500,000 16
----------- ---
Total............................................. $27,200,000 100%
=========== ===
</TABLE>
The Company currently intends to use approximately $21.8 million of the net
proceeds to repay outstanding indebtedness under the Company's Credit Facility
with Creditanstalt which indebtedness totaled $37.9 million at June 12, 1998.
The Credit Facility carries a variable interest rate based on, at the
Company's election: (i) Creditanstalt's prime rate plus an incentive pricing
spread based on certain financial ratios of the Company; or (ii) LIBOR plus an
incentive pricing spread. The Company has historically utilized the Credit
Facility for working capital and to finance acquisitions. As of May 31, 1998,
the outstanding balance under the Credit Facility accrued interest at a rate
of 9.72%. During the past 12 months, the Company borrowed approximately $20.2
million under the Credit Facility which was used to acquire five companies and
for capital expenditures and general corporate purposes
The Company expects to use approximately $4.5 million of the net proceeds to
redeem all shares of its Series D Preferred Stock outstanding prior to the
Offering. Such shares of Series D Preferred Stock were issued in April 1998,
and the proceeds from such issuance were used to finance a portion of the
purchase price of Premier Paging, Inc. and Premier Paging of New Orleans, Inc.
(collectively, "Premier Paging"). Additionally, the issuance and sale of
shares of Series D Preferred Stock increased the Company's available
borrowings under the Credit Facility from $30.0 million to $40.0 million. On
the Closing Date, the Company will amend its Articles to eliminate the Series
D Preferred Stock. See "Certain Transactions."
The anticipated reduction in amounts outstanding under the Credit Facility
will increase the availability of bank credit for general business purposes,
including acquisitions of businesses, products or technologies of strategic
importance to the Company. The Company currently is engaged in preliminary
discussions with other potential acquisition candidates. Although it has no
binding commitments to acquire any of such other potential candidates,
management believes that the Company may acquire one or more of these
candidates in the future by using available borrowings under the Credit
Facility. There can be no assurance that the Company will complete any
acquisitions on terms favorable to the Company, if at all. See "Risk Factors
- -- Ability to Manage Growth, Acquisition Risks," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Acquisitions."
21
<PAGE>
DIVIDEND POLICY
The Company presently intends to employ all available funds for the
expansion of its business and, therefore, does not anticipate declaring or
paying cash dividends on the Common Stock in the foreseeable future. The
Company has not paid cash dividends on its Common Stock in the past, and the
payment of cash dividends, if any, in the future will depend upon the
Company's earnings, financial condition, capital requirements, cash flow, long
range plans and such other factors as the Board of Directors of the Company
may deem relevant at that time. The terms of the Credit Facility prohibit the
Company, without the prior written consent of the Company's lenders, from
paying cash dividends in any fiscal year in an amount exceeding the lesser of
25% of the Company's excess cash flow (as defined in the Credit Facility) for
the immediately preceding fiscal year or $350,000. Additionally, the
designation of the Company's Series B Preferred Stock provides that dividends
and other distributions, payable in cash or other property, shall be paid on
the Series B Preferred Stock equally, ratably and on a parity with such
dividends and other distributions paid on the Common Stock. See "Description
of Capital Stock."
22
<PAGE>
CAPITALIZATION
The following table sets forth the indebtedness and capitalization of the
Company at April 30, 1998: (i) on a historical basis; (ii) on a pro forma
basis to reflect the Hyde's Acquisition and the issuance of $12.2 million in
additional debt to finance the Hyde's Acquisition; and (iii) on a pro forma as
adjusted basis to reflect an increase in authorized shares of Common Stock to
50,000,000 shares, the conversion of all issued and outstanding shares of
Series A Preferred Stock and Series C Preferred Stock into shares of Common
Stock, the sale by the Company of 2,750,000 shares of the Common Stock offered
hereby and the application of the estimated net proceeds therefrom to repay
indebtedness and redeem Series D Preferred Stock as described in "Use of
Proceeds." On the Closing Date, the Company will amend its Articles to
redesignate the Class A Common Stock and Series B Preferred Stock as Common
Stock and Non-Voting Preferred Stock, respectively, and to eliminate the Class
B Common Stock, Series A Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock. The following table should be read in conjunction with
"Selected Consolidated Financial and Operating Data," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto,
including the unaudited pro forma consolidated financial information, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT APRIL 30, 1998
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt (including current portion of
long-term debt)................................ $ 1,200 $ 1,200 $ 1,200
======= ======= =======
Long-term debt.................................. $25,263 $37,491 $14,302
Stock warrants................................ 5,432 5,432 --
Series C Redeemable Convertible Preferred
Stock, $0.01 par value; 3,500 shares
authorized, issued and outstanding, actual
and pro forma; 0 shares authorized, issued
and outstanding, pro forma as adjusted....... 3,500 3,500 --
Series D Redeemable Preferred Stock, $0.01 par
value; 4,500 shares authorized, issued and
outstanding, actual and pro forma; 0 shares
authorized, issued and outstanding, pro forma
as adjusted.................................. 4,043 4,043 --
Shareholders' (deficit) equity:
Series A Convertible Preferred Stock, $0.01
par value; 7,500 shares authorized and 7,360
shares issued and outstanding, actual and pro
forma; 0 shares authorized, issued and
outstanding, pro forma as adjusted........... -- -- --
Series B Convertible Preferred Stock, $0.01
par value; 30,000 shares authorized and 0
shares issued and outstanding................ -- -- --
Class A Common Stock, $0.01 par value;
5,000,000 shares authorized and 3,054,377
shares issued and outstanding, actual and pro
forma; 50,000,000 shares authorized and
7,380,297 shares issued and outstanding, pro
forma as adjusted(1)......................... 31 31 74
Class B Common Stock, $0.01 par value; 20,000
shares authorized and 0 shares issued and
outstanding, actual and pro forma; 0 shares
authorized, issued and outstanding, pro forma
as adjusted.................................. -- -- --
Additional paid-in capital.................... 2,537 2,537 33,226
Stock warrants................................ -- -- 5,432
Accumulated deficit........................... (10,801) (10,801) (9,501)
------- ------- -------
Total shareholders' (deficit) equity........ (8,233) (8,233) 29,231
------- ------- -------
Total capitalization...................... $30,005 $42,233 $43,533
======= ======= =======
</TABLE>
- --------
(1) Excludes 1,784,718 shares of Common Stock that were subject to outstanding
options and warrants at April 30, 1998 at a weighted average exercise
price of $1.45 per share. See "Management -- Incentive Plan," "Shares
Eligible for Future Sale" and note 7 to consolidated financial statements.
23
<PAGE>
DILUTION
As of April 30, 1998, the net tangible book value of the Company was
approximately $(25,956,000), or $(8.50) per share of Common Stock. "Net
tangible book value per share" is defined as the book value of tangible assets
of the Company less all liabilities, divided by the number of issued and
outstanding shares of Common Stock. After giving effect to the conversion of
all outstanding shares of Series A Preferred Stock and Series C Preferred
Stock into Common Stock and the sale by the Company of the 2,750,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$11.00 per share and after deducting the estimated underwriting discounts and
Offering expenses payable by the Company, the pro forma net tangible book
value of the Company as of April 30, 1998, would have been approximately
$1,276,000 or $0.17 per share. This represents an immediate increase in net
tangible book value of $8.67 per share to existing shareholders and an
immediate dilution in net tangible book value of $10.83 per share to
purchasers of shares of Common Stock in the Offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $11.00
------
Net tangible book value before the Offering................ $(8.50)
Increase per share attributable to new shareholders........ 8.67
------
Pro forma net tangible book value per share ................. 0.17
------
Dilution per share to new shareholders....................... $10.83
======
</TABLE>
The following table sets forth, as of April 30, 1998, on a pro forma basis
giving effect to the conversion of the Series A Preferred Stock and Series C
Preferred Stock into Common Stock, the number of shares of Common Stock
acquired from the Company, the total consideration paid and the average price
per share paid by existing shareholders and new investors, assuming the sale
of 2,750,000 shares of Common Stock hereby at an assumed initial public
offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........... 4,630,292 62.7% $ 6,393,104 17.4% $ 1.38
New investors................... 2,750,000 37.3% 30,250,000 82.6% 11.00
--------- ------ ----------- ------
Total......................... 7,380,292 100.0% $36,643,104 100.0%
========= ====== =========== ======
</TABLE>
The foregoing tables do not take into account the exercise of outstanding
options and warrants to acquire 1,784,718 shares of Common Stock. Assuming
that all such options and warrants were exercised and that the full amount of
cash consideration was received therefrom, dilution per share to new investors
would be $0.42. See "Management -- Incentive Plan," "Certain Transactions --
Non-Voting Preferred Stock Warrant Issuance" and note 7 to consolidated
financial statements.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND ARPU)
The following table sets forth selected historical and pro forma
consolidated financial and operating information of the Company. The selected
historical consolidated financial data as of July 31, 1996 and 1997 and for
the fiscal years ended July 31, 1995, 1996 and 1997 have been derived from the
consolidated financial statements of the Company included in this Prospectus,
which have been audited by Arthur Andersen LLP, independent public
accountants. The selected historical consolidated financial data as of July
31, 1993, 1994 and 1995 and for the years ended July 31, 1993 and 1994 have
been derived from audited consolidated financial statements of the Company
that are not included in this Prospectus. The selected historical consolidated
financial data as of and for the nine months ended April 30, 1997 and 1998
have been derived from unaudited consolidated financial statements of the
Company and, in the opinion of management, include all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of such
information. Operating results for the nine months ended April 30, 1998 are
not necessarily indicative of the results that may be expected for the entire
fiscal year. The selected historical and pro forma consolidated financial data
are qualified by reference to, and should be read in conjunction with, the
Company's consolidated financial statements and the notes thereto, including
the unaudited pro forma consolidated financial information, included in this
Prospectus, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED JULY 31, NINE MONTHS ENDED APRIL 30,
---------------------------------------------------------------- ---------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(5)
--------- --------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Service, rent and
maintenance
revenues.......... $ 5,012 $ 5,980 $ 6,885 $ 9,839 $ 16,308 $ 20,478 $ 11,899 $ 14,577 $ 17,877
Product sales...... 367 449 526 975 1,264 2,508 856 903 1,967
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.... 5,379 6,429 7,411 10,814 17,572 22,986 12,755 15,480 19,844
Cost of products
sold.............. (320) (416) (468) (960) (1,201) (2,443) (840) (801) (1,970)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net revenues...... 5,059 6,013 6,943 9,854 16,371 20,543 11,915 14,679 17,874
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Service, rent and
maintenance
expenses.......... 2,019 2,335 2,718 3,879 6,542 7,149 4,870 5,475 5,799
Selling and
marketing
expenses.......... 723 801 1,222 1,602 2,314 2,635 1,696 2,261 2,469
General and
administrative
expenses.......... 822 842 887 1,732 3,039 4,396 2,095 2,635 3,487
Engineering
expenses.......... 482 453 567 516 638 641 473 631 631
Depreciation and
amortization...... 613 713 845 1,204 2,242 3,279 1,605 2,130 2,793
Fixed asset
impairment........ -- 297 -- -- -- -- -- 834 834
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating income... 400 572 704 921 1,596 2,443 1,176 713 1,861
Other income....... 62 144 90 91 90 151 69 180 450
Interest expense... (576) (523) (704) (873) (1,564) (2,884) (1,100) (1,740) (1,033)
Accretion of stock
warrants(2)....... (140) (350) (643) (854) (1,773) (1,773) (1,252) (628) --
(Loss) income from
joint venture..... -- -- -- (96) 26 26 20 99 99
Minority interest.. -- -- -- (2) (3) (3) (2) (8) (8)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(Loss) income
before income tax
benefit,
extraordinary
item and
cumulative effect
of change in
accounting
principle......... (254) (157) (553) (813) (1,628) (2,040) (1,089) (1,383) 1,369
Income tax
benefit........... 41 -- -- -- -- -- -- -- (520)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(Loss) income
before
extraordinary item
and cumulative
effect of change
in accounting
principle......... (213) (157) (553) (813) (1,628) (2,040) (1,089) (1,383) 849
Extraordinary gain
(loss) on early
retirement of debt(3).. 68 -- -- (132) -- -- -- -- --
Cumulative effect
of change in
accounting
principle......... -- -- -- -- -- -- -- (629) --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net (loss)
income........... (145) (157) (553) (945) (1,628) (2,040) (1,089) (2,012) 849
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Preferred stock
dividends......... 88 88 88 334 438 438 329 361 --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net (loss) income
attributable to
common
shareholders...... $ (233) $ (245) $ (641) $ (1,279) $ (2,066) $ (2,478) $ (1,418) $ (2,373) $ 849
========= ========= ========= ========= ========= ========= ========= ========= =========
Allocation to
Class A Common
Stock............ $ (215) $ (226) $ (599) $ (1,205) $ (2,035) $ (2,441) $ (1,397) $ (2,371) $ 849
Allocation to
Class B Common
Stock............ (18) (19) (42) (74) (31) (37) (21) (2) N/A
Net (loss) income
per share(4):
Gain (loss) from
extraordinary
item--basic:
Class A Common
Stock........... $ 0.02 $ -- $ -- $ (0.04) $ -- $ -- $ -- $ -- $ --
Class B Common
Stock........... 1.85 -- -- (3.79) -- -- -- -- --
Loss from
cumulative effect
of change in
accounting
principle:
Class A Common
Stock........... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ (0.21) $ --
Class B Common
Stock........... -- -- -- -- -- -- -- (21.69) --
Net loss
attributable to
common
shareholders--
basic:
Class A Common
Stock........... (0.08) (0.08) (0.21) (0.43) (0.69) (0.83) (0.47) (0.79) 0.12
Class B Common
Stock........... (6.34) (6.57) (17.61) (36.68) (58.24) (69.86) (39.96) (67.10) N/A
Net income
attributable to
common shares--
diluted.......... N/A N/A N/A N/A N/A N/A N/A N/A 0.10
Weighted average
common shares
outstanding--
basic:
Class A Common
Stock........... 2,865,034 2,911,451 2,872,417 2,775,792 2,952,811 2,952,811 2,952,811 3,015,800 7,344,165
Class B Common
Stock........... 2,821 2,821 2,418 2,013 535 535 535 29 N/A
Weighted average
common shares
outstanding--
diluted.......... N/A N/A N/A N/A N/A N/A N/A N/A 8,256,548
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AT JULY 31, AT APRIL 30,
----------------------------------------- ---------------------------
PRO FORMA
AS ADJUSTED
1993 1994 1995 1996 1997 1997 1998 1998(5)
-------- ------ ------ ------ ------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working (deficit)
capital................ $ (1,001) $ (635) $ (184) $ (607) $(1,219) $ 395 $ 557 $1,754
Property and equipment,
net.................... 2,476 2,895 3,773 5,906 8,753 7,437 11,165 11,665
Total assets............ 3,980 4,778 5,870 17,935 25,122 21,251 34,994 48,823
Long-term debt, less
current maturities..... 3,349 3,792 5,826 12,278 18,411 16,359 25,263 14,664
Total shareholders'
equity (deficit)....... (1,869) (1,802) (3,151) (4,180) (6,029) (5,374) (8,233) 28,869
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JULY 31, NINE MONTHS ENDED APRIL 30,
----------------------------------------------------- ------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(5)
------ ------- ------- ------- ------- --------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash provided by (used
in) operations......... $ 461 $ 971 $ 726 $ 896 $ 1,974 $ 2,953 $ 1,017 $ 645 $ 1,834
Cash used in investing
activities............. (573) (1,177) (1,649) (11,019) (8,033) (8,880) (4,762) (11,962) (12,670)
Cash provided by
financing activities... 193 125 959 10,601 5,728 5,255 3,289 11,379 10,782
Adjusted EBITDA(6)...... 1,075 1,726 1,639 2,264 3,951 5,896 2,867 3,949 6,029
Adjusted EBITDA
margin(7).............. 21.2% 28.7% 23.6% 23.0% 24.1% 28.7% 24.1% 26.9% 33.7%
Units in service (end of
period)................ 15,313 19,179 27,271 65,418 95,172 129,407 90,067 122,569 162,757
Average revenues per
unit(8)................ $28.67 $ 29.05 $ 24.91 $ 17.72 $ 16.99 $ 17.57 $ 17.03 $ 14.98 $ 13.60
Capital expenditures.... $ (517) $ (971) $(1,528) $(1,911) $(3,647) $ (4,231) $(2,870) $ (5,793) $ (6,037)
Cash dividends and
distributions(9)....... (128) (100) (77) (334) (450) (935) (307) (356) (526)
</TABLE>
- --------
(1) The pro forma statements of operations and other data give effect to the
acquisition of Message World, the Hyde's Acquisition and the issuance of
an additional $12.2 million in debt to finance the Hyde's Acquisition as
if they had occurred at the beginning of the period presented, and the pro
forma balance sheet data give effect to the Hyde's Acquisition and the
related financing as if they had occurred at April 30, 1998. The pro forma
financial information does not purport to represent what the Company's
results of operations would have been if the acquisition of Message World,
the Hyde's Acquisition and the related financing had in fact occurred on
such date, nor does it purport to indicate the future financial position
or results of future operations of the Company. The pro forma adjustments
are based on currently available information and certain assumptions that
management believes to be reasonable.
(2) Represents a non-cash expense, calculated pursuant to a formula based on
the Company's Adjusted EBITDA, associated with the put feature of the
Creditanstalt Warrants. The put feature of the Creditanstalt Warrants will
be canceled on the Closing Date.
(3) As a result of early retirement of debt in fiscal 1993 and fiscal 1996,
the Company recorded a gain of $68,000 in fiscal 1993 and a loss of
$132,000 in fiscal 1996, net of income taxes.
(4) Basic and diluted net (loss) income per share under the two class method
are computed separately for holders of Class A and Class B Common Stock
using the weighted average number of shares of Class A and Class B Common
Stock outstanding. Diluted net income per share is only applicable for
period in which earnings are positive. Net loss attributable to Class A
and Class B shareholders is allocated based on the extent to which each
class shares in the Company's loss. The Company's Class A and Class B
common shareholders receive dividends at a ratio of 1:84.5. For the
calculation of basic and diluted net loss per share, see the Company's
consolidated statements of operation for the periods presented. See also
"Capitalization."
(5) Adjusted to reflect the effect of the Hyde's Acquisition, the issuance of
$12.2 million in additional debt to finance the Hyde's Acquisition and the
sale of 2,750,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $11.00 per share (the midpoint
of the price range set forth on the cover page of this Prospectus) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
(6) Adjusted EBITDA represents earnings before interest, taxes, depreciation,
amortization, fixed asset impairment, accretion of stock warrants,
extraordinary item and cumulative effect of change in accounting
principle. Adjusted EBITDA is a measure of financial performance that is
often used in the personal telecommunications industry to compare
companies on the basis of liquidity, capital resources and leverage and to
determine a company's ability to service debt. Adjusted EBITDA also is one
of the financial measurements used to determine whether the Company is in
compliance with its covenants under the Credit Facility. However, Adjusted
EBITDA should not be considered in isolation or as an alternative to net
loss, income from operations, cash flows from operating activities or any
other measure of performance under GAAP. Further, Adjusted EBITDA may be
calculated differently by different companies within the personal
telecommunications industry. Thus, Adjusted EBITDA as presented herein may
not be comparable to Adjusted EBITDA or other similarly titled measures
reported by other companies. Adjusted EBITDA for fiscal 1996 excludes
$145,000 related to a one-time charge to write off purchased research and
development.
(7) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net
revenues.
(8) ARPU equals the average net revenues for a given period divided by the
average number of units in service during such period. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(9) For all periods other than the pro forma periods, consists of cash paid as
dividends on the Company's Series A Preferred Stock and Series C Preferred
Stock. No dividends have been paid on the Company's Common Stock. See
"Dividend Policy." For the pro forma periods, represents the cash paid as
dividends as noted previously and the distributions to the former owner of
Hyde's.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objectives of management
for future operations, and projections of revenue and other financial items
that are based on the beliefs of, assumptions made by and information
currently available to the Company's management. Forward-looking statements
are identified by the use of words such as "expects," "estimates,"
"anticipates," "believes," "intends," "plans" and similar expressions and
variations thereof. The cautionary statements set forth in the "Risk Factors"
section and elsewhere in this Prospectus identify important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
expressed in or implied by such forward-looking statements. The following
discussion should be read in connection with the discussion set forth in "Risk
Factors" and with the consolidated financial statements and the notes thereto
included elsewhere in this Prospectus.
OVERVIEW
Satellink provides paging and enhanced telecommunications services to
businesses and individuals in smaller metropolitan areas and major cities in
the southeastern and southwestern United States. The Company delivers its
services through its STAR*Net platform, which is accessible from and provides
access to a variety of devices, including pagers, telephones and computers.
The STAR*Net platform is modular and scalable, which allows the Company to
quickly customize its services to meet the needs of its subscribers and expand
system capacity.
Satellink's revenues consist of: (i) service, rent and maintenance revenues;
and (ii) product sales. Service, rent and maintenance revenues consist
primarily of recurring revenues from paging and voicemail services. The
Company bills the fixed portion of the fees it charges for paging and
voicemail services in advance and bills usage-related fees in arrears. The
majority of the Company's revenues are recurring in nature (approximately
92.9%, 91.0%, 92.8% and 94.2% for fiscal 1995, 1996 and 1997 and for the nine
months ended April 30, 1998, respectively) and are derived from periodic
(usually monthly) fixed and usage-related fees charged to paging and voicemail
subscribers. While a subscriber continues to use the Company's services,
operating results benefit from a recurring revenue stream with minimal
requirements for incremental selling expenses. Service, rent and maintenance
revenues are recognized during the periods in which the services are provided.
Product sales revenues include the revenues derived from the sale of pagers
and other subscriber equipment and accessories and are recognized during the
periods in which sales occur. Net revenues include service, rent and
maintenance revenues and product sales revenues less the cost of products
sold. The Company's total revenues have increased from approximately $5.4
million for fiscal 1993 to approximately $17.6 million for fiscal 1997 and
were approximately $15.5 million for the nine months ended April 30, 1998. The
cost of products sold, which consists of the cost of subscriber equipment
sold, has increased from approximately $320,000 for fiscal 1993 to
approximately $1.2 million for fiscal 1997. Net revenues have increased from
approximately $5.1 million for fiscal 1993 to approximately $16.4 million for
fiscal 1997. Net revenues for the nine months ended April 30, 1998 were
approximately $14.7 million.
Service, rent and maintenance expenses include: subcarrier, tower and
satellite channel lease cost; data delivery telephone costs; third party
carriers' airtime expense; and network maintenance expense. Selling and
marketing expenses include salaries, commissions, travel and administrative
costs for the Company's sales force and related marketing and advertising
expenses. General and administrative expenses include expenses associated with
executive management, accounting, billing, customer service, office
telephones, office rents and maintenance and employee benefits. Engineering
expenses include costs associated with technical support personnel and
information services. The Company has experienced a decline in total average
operating expenses per unit in service (operating expenses per unit before
depreciation, amortization, restructuring and other one-time charges, and
accretion of stock warrants) from $22.93 for fiscal 1993 to $12.95 for fiscal
1997. Operating expenses per unit in service was $11.15 for the nine months
ended April 30, 1998.
27
<PAGE>
Depreciation is calculated on a straight line basis over periods ranging
from five to 20 years depending on the nature of the asset. Amortization is
calculated on a straight-line basis over periods ranging from five to 30
years.
Other income consists primarily of income from late fees, finance charges
and income derived from the sale of used subscriber equipment.
Interest expense consists primarily of interest paid under the Credit
Facility and, to a lesser extent, interest paid in connection with unsecured
promissory notes issued by the Company to finance certain acquisitions.
Accretion of stock warrants is a non-cash expense associated with the put
feature of the Creditanstalt Warrants. The expense has been calculated using a
formula based on the Company's Adjusted EBITDA. The put feature of the
Creditanstalt Warrants is canceled upon completion of a qualified initial
public offering of Common Stock which yields net proceeds to the Company of at
least $10.0 million.
Income (loss) from joint venture includes the net income of FM Concepts II,
a joint venture that is owned equally by the Company and Cape Fear. FM
Concepts II purchases and resells Info Telecom FM pagers. The Company accounts
for FM Concepts II under the equity method of accounting.
Minority interest represents the minority owner's share of the income or
loss associated with the operations of DirectLink Communications, L.L.C.
("Direct Link"). Direct Link provides personal telecommunications services to
consumers through a retail location in Duluth, Georgia. Until January 1998,
the general manager of Direct Link held 15% of the membership interest in
Direct Link. In February 1998, the Company acquired the 15% interest. The
Company will not report a minority interest associated with Direct Link after
fiscal 1998.
ARPU equals the average net revenues for a given period divided by the
average number of units in service during such period. ARPU for fiscal 1993,
1994, 1995, 1996 and 1997 and for the nine months ended April 30, 1998 was
$28.67, $29.05, $24.91, $17.72, $16.99 and $14.98, respectively. The downward
trend is the result of the acquisitions of paging companies which primarily
provide local service, a shift in product mix and increasing competitive
pressures. At July 31, 1993, local, regional and nationwide subscribers as a
percentage of total subscribers equaled 15.4%, 63.4% and 21.1%, respectively.
At April 30, 1998, local, regional, nationwide and voicemail subscribers as a
percentage of total subscribers equaled 43.4%, 27.7%, 16.7% and 12.2%,
respectively.
Adjusted EBITDA represents earnings before interest, taxes, depreciation,
amortization, fixed asset impairment and one-time reengineering charges,
accretion of stock warrants and extraordinary item. Adjusted EBITDA is a
measure of financial performance that is often used in the personal
telecommunications industry to compare companies on the basis of liquidity,
capital resources and leverage and to determine a company's ability to service
debt. Adjusted EBITDA also is one of the financial measurements used to
determine whether the Company is in compliance with its covenants under the
Credit Facility. However, Adjusted EBITDA should not be considered in
isolation or as an alternative to net loss, income from operations, cash flows
from operating activities or any other measure of performance under GAAP.
Further, Adjusted EBITDA may be calculated differently by different companies
within the personal telecommunications industry. Thus, Adjusted EBITDA as
presented herein may not be comparable to Adjusted EBITDA or other similarly
titled measures reported by other companies.
28
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenues represented by
certain items in the Company's statements of operations for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED JULY 31, APRIL 30,
------------------------ -------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance reve-
nues............................... 99.2% 99.8% 99.6% 99.8% 99.3%
Product sales....................... 7.6 9.9 7.7 7.2 6.2
------ ------ ------ ----- -----
Total revenues..................... 106.8 109.7 107.3 107.0 105.5
Cost of products sold............... (6.8) (9.7) (7.3) (7.0) (5.5)
------ ------ ------ ----- -----
Net revenues....................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ----- -----
Service, rent and maintenance ex-
penses............................. 39.1 39.4 40.0 40.9 37.3
Selling and marketing expenses...... 17.6 16.3 14.1 14.2 15.4
General and administrative ex-
penses............................. 12.8 17.6 18.6 17.6 17.9
Engineering expenses................ 8.2 5.2 3.9 4.0 4.3
Depreciation and amortization....... 12.2 12.2 13.7 13.5 14.5
Fixed asset impairment.............. -- -- -- -- 5.7
------ ------ ------ ----- -----
Operating income.................... 10.1 9.3 9.7 9.8 4.9
Other income........................ 1.3 0.9 0.5 0.6 1.2
Interest expense.................... (10.1) (8.8) (9.6) (9.2) (11.8)
Accretion of stock warrants......... (9.3) (8.7) (10.8) (10.5) (4.3)
(Loss) income from joint venture.... -- (1.0) 0.2 0.2 0.7
Minority interest................... -- -- -- -- (0.1)
------ ------ ------ ----- -----
(Loss) income before income tax
provision and extraordinary item... (8.0) (8.3) (10.0) (9.1) (9.4)
Income tax provision................ -- -- -- -- --
------ ------ ------ ----- -----
(Loss) income before extraordinary
item............................... (8.0) (8.3) (10.0) (9.1) (9.4)
Extraordinary loss on early
retirement of debt................. -- (1.3) -- -- --
Cumulative effect of change in
accounting principle............... -- -- -- -- (4.3)
------ ------ ------ ----- -----
Net (loss) income.................. (8.0) (9.6) (10.0) (9.1) (13.7)
------ ------ ------ ----- -----
Preferred stock dividends........... (1.3) (3.4) (2.6) (2.8) (2.5)
------ ------ ------ ----- -----
Net (loss) income attributable to
common shareholders................ (9.3)% (13.0)% (12.6)% (11.9)% (16.2)%
====== ====== ====== ===== =====
Adjusted EBITDA..................... 23.6 % 23.0 % 24.1 % 24.1 % 26.9 %
</TABLE>
NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997
Total Revenues. Total revenues increased $2.7 million, or 21.4%, to $15.5
million for the nine months ended April 30, 1998 from $12.8 million for the
nine months ended April 30, 1997. This increase was primarily due to an
increased number of subscribers resulting from internal growth and
acquisitions. Total subscribers increased 33,000, or 36.1%, to 123,000 at
April 30, 1998 from 90,000 at April 30, 1997. Of this increase in subscribers,
45.8% resulted from internal growth and 54.2% resulted from acquisitions.
During the period from February 1, 1997 through April 30, 1998, the Company
completed seven acquisitions which added 17,600 subscribers. Product sales
increased $47,000, or 5.5%, to $903,000 for the nine months ended April 30,
1998 from $856,000 for the nine months ended April 30, 1997, but decreased as
a percentage of net revenues to 6.2% for the nine months ended April 30, 1998
from 7.2% for the nine months ended April 30, 1997. The increase in product
sales was related to subscriber base growth while the decline in product sales
as a percentage of net revenues reflects increased voicemail and other
services revenues which do not require subscriber equipment.
29
<PAGE>
Cost of Products Sold. Cost of products sold decreased $39,000, or 4.9%, to
$801,000 for the nine months ended April 30, 1998 from $840,000 for the nine
months ended April 30, 1997. The gross margin on products sold increased to
11.3% for the nine months ended April 30, 1998 from 1.9% for the nine months
ended April 30, 1997. The decrease in cost of products sold and the increase
in gross margin were primarily attributable to lower product costs associated
with the changing mix of products sold and declining prices for subscriber
equipment.
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses increased $605,000, or 12.4%, to $5.5 million for the nine months
ended April 30, 1998 from $4.9 million for the nine months ended April 30,
1997. This increase reflects an increase in airtime expense paid to third
party service providers associated with subscriber base growth and related
increased telephone expense. Telephone expense increased due to additional
telephone facilities and increased voicemail usage. Service, rent and
maintenance expenses decreased as a percentage of net revenues to 37.3% for
the nine months ended April 30, 1998 from 40.9% for the nine months ended
April 30, 1997. The decrease in service, rent and maintenance expenses as a
percentage of net revenues reflects economies of scale as the subscriber base
has grown.
Selling and Marketing Expenses. Selling and marketing expenses increased
$565,000, or 33.3%, to $2.3 million for the nine months ended April 30, 1998
from $1.7 million for the nine months ended April 30, 1997. This increase
reflects sales staff compensation related to increased sales activity and
advertising. Selling and marketing expenses increased as a percentage of net
revenues to 15.4% for the nine months ended April 30, 1998 from 14.2% for the
nine months ended April 30, 1997.
General and Administrative Expenses. General and administrative expenses
increased $540,000, or 25.8%, to $2.6 million for the nine months ended
April 30, 1998 from $2.1 million for the nine months ended April 30, 1997.
This increase reflects higher office costs and customer service staffing
levels associated with subscriber base growth. This increase also relates to
costs incurred by the Company in connection with the introduction of new
STAR*Net products. For these reasons, general and administrative expenses also
increased as a percentage of net revenues to 17.9% for the nine months ended
April 30, 1998 from 17.6% for the nine months ended April 30, 1997.
Engineering Expenses. Engineering expenses increased $158,000, or 33.4%, to
$631,000 for the nine months ended April 30, 1998 from $473,000 for the nine
months ended April 30, 1997. This increase reflects higher staffing levels and
costs associated with upgrading the Company's information systems and
capabilities and the introduction of new STAR*Net products.
Adjusted EBITDA. Adjusted EBITDA increased $1.2 million, or 40.3%, to $4.0
million for the nine months ended April 30, 1998 from $2.9 million for the
nine months ended April 30, 1997. As a percentage of net revenues, Adjusted
EBITDA increased to 27.4% for the nine months ended April 30, 1998 from 24.1%
for the nine months ended April 30, 1997.
Depreciation and Amortization. Depreciation and amortization increased
$525,000, or 32.7%, to $2.1 million for the nine months ended April 30, 1998
from $1.6 million for the nine months ended April 30, 1997. This increase
reflects an increase in pagers, switches and other depreciable assets
associated with the increased subscriber base and increased amortization
related to acquired intangible assets.
Operating Income. Operating income decreased $1.1 million, or 92.8%, to
$85,000 for the nine months ended April 30, 1998 from $1.2 million for the
nine months ended April 30, 1997. This decrease reflects a $1.5 million one-
time charge for the write-down of traditional paging terminals removed from
service in connection with the Company's implementation of its STAR*Net
platform, write-off of assets associated with the Company's previous billing
system which was replaced and a write-off of reengineering cost previously
capitalized. Excluding the one-time charge, operating income would have been
$1.6 million for the nine months ended April 30, 1998, a 37.7% increase over
the nine months ended April 30, 1997.
30
<PAGE>
Other Income. Other income increased $111,000, or 160.9%, to $180,000 for
the nine months ended April 30, 1998 from $69,000 for the nine months ended
April 30, 1997. This increase was related to increased sales of used
subscriber equipment as the Company accepted more used units as trade-ins and
resold such units. This increase also reflects increased late fees associated
with the larger subscriber base.
Interest Expense. Interest expense increased $640,000, or 58.2%, to $1.7
million for the nine months ended April 30, 1998 from $1.1 million for the
nine months ended April 30, 1997. This increase primarily reflects an increase
in the average level of debt outstanding due to acquisitions completed during
the second half of fiscal 1997 and, to a lesser extent, higher bank lending
rates during the nine months ended April 30, 1998.
Accretion of Stock Warrants. Accretion of stock warrants expense decreased
$624,000, or 49.8%, to $628,000 in nine months ended April 30, 1998 from $1.3
million for the nine months ended April 30, 1997.
Income (Loss) From Joint Venture. Income from joint venture increased
$79,000, or 395.0%, to $99,000 for the nine months ended April 30, 1998 from
$20,000 for the nine months ended April 30, 1997. This increase was related to
a decrease in wholesale prices for FM pagers that was not passed on from FM
Concepts II to the Company.
Minority Interest. Minority interest expense increased $6,000 to $8,000 for
the nine months ended April 30, 1998 from $2,000 for the nine months ended
April 30, 1997. This increase was related to increased profits at Direct Link.
Net Loss. Net loss increased $923,000, or 84.8%, to $2.0 million for the
nine months ended April 30, 1998 from $1.1 million for the nine months ended
April 30, 1997. This increase reflects the factors described above. Excluding
the effect of the accretion of stock warrants and the one-time charge for the
write-down of traditional paging terminals removed from service in connection
with the Company's implementation of its STAR*Net platform and the write-off
of assets associated with the Company's previous billing system which was
replaced, net income decreased $13,000, or 8.0%, to $150,000 for the nine
months ended April 30, 1998 from $163,000 for the nine months ended April 30,
1997.
FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
Total Revenues. Total revenues increased $6.8 million, or 63.0%, to $17.6
million for fiscal 1997 from $10.8 million for fiscal 1996. This increase was
primarily due to an increased number of subscribers resulting from internal
growth and acquisitions. Total subscribers increased 30,000, or 46.2%, to
95,000 at July 31, 1997 from 65,000 at July 31, 1996. Of this increase in
subscribers, 63.0% resulted from internal growth and 37.0% resulted from
acquisitions. Results for fiscal 1997 include twelve months of operations of
C.R. and Atlanta Voice Page, Inc. ("AVP"), which were acquired in February and
June, 1996, respectively, through which the Company added 22,000 paging
subscribers. Also during fiscal 1997, the Company completed five smaller
acquisitions through which it added 11,900 subscribers. Results of operations
of the acquired companies were included from the various acquisition dates.
Product sales increased $289,000, or 29.6%, to $1.3 million for fiscal 1997
from $1.0 million for fiscal 1996. This increase was related to subscriber
base growth. Product sales decreased as a percentage of net revenues to 7.7%
for fiscal 1997 from 9.9% for fiscal 1996. The decline in product sales as a
percentage of net revenues reflects increased voicemail and other services
revenues which do not require subscriber equipment.
Cost of Products Sold. Cost of products sold increased $241,000, or 25.1%,
to $1.2 million for fiscal 1997 from $1.0 million for fiscal 1996. This
increase was associated with continued subscriber base growth. Gross margin on
products sold increased to 5.0% for fiscal 1997 from 1.5% for fiscal 1996.
This increase was primarily attributable to lower product costs associated
with the changing mix of products sold and declining prices for subscriber
equipment.
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses increased $2.7 million, or 68.7%, to $6.5 million for fiscal 1997
from $3.9 million for fiscal 1996. This increase reflects an increase in
airtime expense paid to third party service providers and an increase in
subcarrier and tower lease expenses
31
<PAGE>
primarily associated with the acquisitions of C.R. and AVP. Results of
operations for C.R. and AVP are reflected for all of fiscal 1997 but only the
last two months and six months, respectively, of fiscal 1996. Telephone
expense increased as a result of additional telephone facilities and increased
voicemail usage. Service, rent and maintenance expenses increased as a
percentage of net revenues to 40.0% for fiscal 1997 from 39.4% for fiscal
1996. The increase in service, rent and maintenance expenses as a percentage
of net revenues reflects increases in telephone and airtime costs as a
percentage of net revenues.
Selling and Marketing Expenses. Selling and marketing expenses increased
$712,000, or 44.4%, to $2.3 million for fiscal 1997 from $1.6 million for
fiscal 1996. This increase reflects sales staff compensation related to
increased sales activity and advertising, both of which resulted in subscriber
base growth. Selling and marketing expenses decreased as a percentage of net
revenues to 14.1% for fiscal 1997 from 16.3% for fiscal 1996.
General and Administrative Expenses. General and administrative expenses
increased $1.3 million, or 75.5%, to $3.0 million for fiscal 1997 from $1.7
million for fiscal 1996. This increase reflects higher staffing levels
associated with the subscriber base growth, as well as higher office costs.
General and administrative expenses increased as a percentage of net revenues
to 18.6% for fiscal 1997 from 17.6% for fiscal 1996.
Engineering Expenses. Engineering expenses increased $122,000, or 23.6%, to
$638,000 for fiscal 1997 from $516,000 for fiscal 1996. This increase reflects
higher staffing levels associated with the subscriber base growth and related
systems.
Adjusted EBITDA. Adjusted EBITDA increased $1.7 million, or 74.6%, from $2.3
million for fiscal 1996 to $4.0 million for fiscal 1997. As a percentage of
net revenues, Adjusted EBITDA increased from 23.0% for fiscal 1996 to 24.1%
for fiscal 1997.
Depreciation and Amortization. Depreciation and amortization increased $1.0
million, or 86.2%, to $2.2 million for fiscal 1997 from $1.2 million for
fiscal 1996. This increase reflects an increase in depreciable assets
associated with the increased subscriber base and increased amortization
related to acquired intangible assets.
Operating Income. Operating income increased $675,000, or 73.3%, to $1.6
million for fiscal 1997 from $921,000 for fiscal 1996.
Other Income. Other income decreased $1,000, or 1.1%, to $90,000 for fiscal
1997 from $91,000 for fiscal 1996.
Interest Expense. Interest expense increased $691,000, or 79.2%, to $1.6
million for fiscal 1997 from $873,000 for fiscal 1996. This increase primarily
reflects an increase in the average level of debt outstanding because of
acquisitions during fiscal 1997 and the second half of fiscal 1996 and, to a
lesser extent, higher bank lending rates during fiscal 1997.
Accretion of Stock Warrants. Accretion of stock warrants expense increased
$919,000, or 107.6%, to $1.8 million for fiscal 1997 from $854,000 for fiscal
1996.
Income (Loss) From Joint Venture. Income from joint venture increased
$122,000 to $26,000 for fiscal 1997 from ($96,000) for fiscal 1996. This
increase represents the Company's share of income earned through the resale of
FM pagers by FM Concepts II. Additionally, during fiscal 1996, FM Concepts II
recognized a charge for research and development of $436,000, of which the
Company's share was $145,000.
Minority Interest. Minority interest expense increased $300 to $2,800 for
fiscal 1997 from $2,500 for fiscal 1996.
Net Loss. Net loss increased $683,000, or 72.3%, to $1.6 million for fiscal
1997 from $945,000 for fiscal 1996. This increase reflects the factors
described above. Excluding the effect of the accretion of stock warrants and a
$132,000 extraordinary charge on early retirement of debt for fiscal 1996, net
income increased $104,000, or 247.6%, to $145,000 for fiscal 1997 from $41,000
for fiscal 1996.
32
<PAGE>
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
Total Revenues. Total revenues increased $3.4 million, or 45.9%, to $10.8
million for fiscal 1996 from $7.4 million for fiscal 1995. This increase was
primarily due to an increased number of subscribers resulting from
acquisitions and internal growth. Total subscribers increased 38,000, or
139.9%, to 65,000 at July 31, 1996 from 27,000 at July 31, 1995. Of this
increase, 57.9% resulted from acquisitions and 42.1% resulted from internal
growth. Results for fiscal 1996 include the operations of C.R. and AVP, which
were acquired in February and June 1996, respectively, and through which the
Company added 22,000 paging subscribers. The Company did not complete any
acquisitions during fiscal 1995. Product sales increased $449,000, or 85.4%,
to $975,000 for fiscal 1996 from $526,000 for fiscal 1995. Product sales
increased as a percentage of net revenues to 9.9% for fiscal 1996 from 7.6%
for fiscal 1995. The increase in product sales as a percentage of net revenues
reflects a shift in product mix from voicemail services to paging services.
Cost of Products Sold. Cost of products sold increased $492,000, or 105.1%,
to $960,000 for fiscal 1996 from $468,000 for fiscal 1995. This increase was
primarily attributable to increased product sales associated with subscriber
base growth. Gross margin on products sold decreased to 1.5% for fiscal 1996
from 11.0% for fiscal 1995. This decrease was primarily attributable to price
decreases designed to encourage increased sales.
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses increased $1.2 million, or 42.7%, to $3.9 million for fiscal 1996
from $2.7 million for fiscal 1995. This increase reflects an increase in
airtime expense paid to third party service providers and an increase in
subcarrier and tower lease expenses primarily associated with the acquisitions
of C.R. and AVP. Results of operations for C.R. and AVP are reflected in the
last two months and six months, respectively, of fiscal 1996. Telephone
expense increased due to additional telephone facilities and increased
voicemail usage associated with the C. R. acquisition. Service, rent and
maintenance expense increased as a percentage of net revenues to 39.4% for
fiscal 1996 from 39.1% for fiscal 1995. The increase in service, rent and
maintenance expense as a percentage of net revenues reflects an increase in
third party airtime expense as a percentage of net revenues and a lower profit
margin on product sales.
Selling and Marketing Expenses. Selling and marketing expenses increased
$380,000, or 31.1%, to $1.6 million for fiscal 1996 from $1.2 million for
fiscal 1995. This increase reflects sales staff compensation related to
increased sales activity and advertising, both of which resulted in subscriber
base growth. Selling and marketing expenses decreased as a percentage of net
revenues to 16.3% for fiscal 1996 from 17.6% for fiscal 1995.
General and Administrative Expenses. General and administrative expenses
increased $845,000, or 95.3%, to $1.7 million for fiscal 1996 from $887,000
for fiscal 1995. This increase reflects additions to senior management and
higher staffing levels associated with subscriber base growth, as well as
higher office costs. General and administrative expenses increased as a
percentage of net revenues to 17.6% for fiscal 1996 from 12.8% for fiscal
1995.
Engineering Expenses. Engineering expenses decreased $51,000, or 9.0%, to
$516,000 for fiscal 1996 from $567,000 for fiscal 1995. This decrease reflects
lower staffing levels primarily due to a vacancy in the position of manager of
management information systems for the majority of fiscal 1996.
Adjusted EBITDA. Adjusted EBITDA increased $625,000, or 38.1%, to $2.3
million for fiscal 1996 from $1.6 million for fiscal 1995. As a percentage of
net revenues, Adjusted EBITDA decreased to 23.0% for fiscal 1996 from 23.6%
for fiscal 1995.
Depreciation and Amortization. Depreciation and amortization increased
$359,000, or 42.5%, to $1.2 million for fiscal 1996 from $845,000 for fiscal
1995. This increase reflects a greater number of pagers associated with the
increased subscriber base and increased amortization related to acquired
intangible assets.
33
<PAGE>
Operating Income. Operating income increased $217,000, or 30.8%, to $921,000
for fiscal 1996 from $704,000 for fiscal 1995. This increase reflects
increased net revenues, partially offset by increased general and
administrative expenses.
Other Income. Other income increased $1,000, or 1.1%, to $91,000 for fiscal
1996 from $90,000 for fiscal 1995.
Interest Expense. Interest expense increased $169,000, or 24.0%, to $873,000
for fiscal 1996 from $704,000 for fiscal 1995. This increase primarily
reflects a decrease in the average level of debt outstanding due to the
repayment of debt following the issuance of 3,500 shares of Series C Preferred
Stock in November 1995 and, to a lesser extent, lower bank lending rates
during fiscal 1996.
Accretion of Stock Warrants. Accretion of stock warrants expense increased
$211,000, or 32.8%, to $854,000 for fiscal 1996 from $643,000 for fiscal 1995.
Income (Loss) From Joint Venture. Loss from joint venture was ($96,000) for
fiscal 1996. As the Company began reporting the equity interest in FM Concepts
II in November 1995, there was no equity income or loss for fiscal 1995.
During fiscal 1996, FM Concepts II recognized a charge for research and
development of $436,000, of which the Company's share was $145,000, which was
partially offset by the Company's share of income earned through the resale of
FM pagers by FM Concepts II.
Minority Interest. Minority interest expense was $2,500 for fiscal 1996,
reflecting the Company's initial investment in Direct Link during fiscal 1996.
Net Loss. Net loss increased $392,000, or 70.9%, to $945,000 for fiscal 1996
from $553,000 for fiscal 1995. This increase reflects the factors described
above. Excluding the effect of the accretion of stock warrants charge and a
$132,000 extraordinary charge on early retirement of debt for fiscal 1996, net
income decreased $49,000 to $41,000 for fiscal 1996 from $90,000 for fiscal
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its primary cash requirements from borrowings under the
Credit Facility and cash flows from operations. Borrowings under the Company's
Credit Facility have been used to fund acquisitions, capital expenditures and
general corporate requirements. The Company had outstanding borrowings under
the Credit Facility of $5.7 million, $12.6 million, $18.8 million and $25.6
million as of July 31, 1995, 1996 and 1997 and April 30, 1998, respectively.
As of June 12, 1998, the Company had outstanding borrowings under the Credit
Facility of $37.9 million. The Credit Facility was increased in March 1998 to
$40.0 million from $25.0 million. The Credit Facility carries a variable rate
of interest based on, at the Company's election: (i) Creditanstalt's prime
rate plus 2%; or (ii) LIBOR plus 4%. The Credit Facility is secured by
substantially all of the Company's assets.
The Company's cash balances were $46,000, $525,000 and $193,000 at July 31,
1995, 1996 and 1997, respectively, and $255,000 at April 30, 1998. Net cash
provided by operating activities was $726,000, $896,000 and $2.0 million for
the years ended July 31, 1995, 1996 and 1997, respectively, and $645,000 for
the nine months ended April 30, 1998.
Net cash used in investing activities was $1.7 million, $11.0 million and
$8.0 million for the years ended July 31, 1995, 1996 and 1997, respectively,
and $12.0 million for the nine months ended April 30, 1998. Investing
activities during fiscal 1995 included $1.5 million net purchases of property
and equipment and a $120,000 investment in the FM Concepts II joint venture.
Investing activities during fiscal 1996 included $9.0 million for the
purchases of businesses, $1.9 million net purchases of property and equipment
and $158,000 of further investment in the FM Concepts II joint venture.
Investing activities during fiscal 1997 included $4.4 million for the
purchases of businesses, and $3.6 million net purchases of property and
equipment. Investing
34
<PAGE>
activities during the nine months ended April 30, 1998 included $5.8 for the
purchases of businesses, $5.8 million net purchases of property and equipment
and $341,000 of further investment in the FM Concepts II joint venture.
Net cash provided by financing activities was $1.0 million, $10.6 million
and $5.7 million for the years ended July 31, 1995, 1996 and 1997,
respectively, and $11.4 million for the nine months ended April 30, 1998.
Included in cash provided from financing activities for fiscal 1995 was $1.6
million of proceeds from issuance of long-term debt and $200,000 of proceeds
from subscriptions receivable partially offset by $707,000 for the purchase
and retirement of Common Stock, $77,000 of dividends on Series A Preferred
Stock and Series C Preferred Stock and $36,000 of other financing activities.
Included in cash provided by financing activities for fiscal 1996 was $7.2
million of proceeds from the issuance of long-term debt, $3.5 million proceeds
from the issuance of Series A Preferred Stock and Series C Preferred Stock,
$250,000 of proceeds from the issuance of Common Stock partially offset by
$334,000 of dividends on Series A Preferred Stock and Series C Preferred
Stock. Included in cash provided by financing activities for fiscal 1997 was
$6.2 million of proceeds from issuance of long-term debt partially offset by
$450,000 of dividends on Series A Preferred Stock and Series C Preferred Stock
and $60,000 of other financing activities. Included in net cash provided by
financing activities in the nine months ended April 30, 1998 was $7.1 million
of proceeds from issuance of long-term debt, $4.5 million of proceeds from the
issuance of Series D Preferred Stock, and $100,000 of proceeds from the
issuance of Common Stock partially offset by $356,000 of dividends on Series A
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock.
The Company had a working capital (deficit) of $(184,000) at July 31, 1995,
$(607,000) at July 31, 1996, $(1.2 million) at July 31, 1997 and $557,000 at
April 30, 1998.
On April 3, 1998, the Company issued $4.5 million of Series D Preferred
Stock, a portion of the proceeds of which was used to finance a portion of the
$4.3 million purchase price (the "Premier Acquisition") of Premier Paging. The
Premier Acquisition was also financed with an unsecured four year note in the
principal amount of $900,000. The note bears interest at 9% per year. The
remaining proceeds from the sale of the Series D Preferred Stock were used for
working capital. The Series D Preferred Stock pays a monthly coupon of 8.5%
per annum.
On May 1, 1998, the Company borrowed $11.4 million under the Credit Facility
to finance the Hyde's Acquisition and other working capital purposes. The
Company intends to repay a portion of amounts outstanding under the Credit
Facility and redeem the Series D Preferred Stock with the net proceeds of the
Offering. While there can be no assurance, the Company estimates that the
proceeds of the Offering, funds to be provided by operations and funds
available under the Credit Facility will be sufficient to meet the Company's
anticipated needs for working capital for the next twelve months. This
estimate is a forward-looking statement that is subject to risks and
uncertainties. Actual results and working capital needs could differ
materially from those estimated due to a number of factors, including the use
of such proceeds to fund acquisitions and the factors discussed under "Risk
Factors." In addition, acquisitions may require additional debt and equity
financing. The Company has no present plans to make any other significant
capital expenditures.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
general purpose financial statements. This statement is effective for periods
beginning after December 15, 1997. The adoption of SFAS 130 is not expected to
have an impact on the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement is effective
for financial statements for periods beginning after December 15, 1997. The
adoption of SFAS 131 is not expected to have a material impact on the
Company's financial statements.
35
<PAGE>
BUSINESS
GENERAL
Satellink provides paging and enhanced personal telecommunications services
to businesses and individuals in smaller metropolitan areas and major cities
in the southeastern and southwestern United States. The Company has provided
paging and voicemail services since 1988. In 1995, the Company began
development of its proprietary STAR*Net platform in anticipation of increased
subscriber demand for a broad spectrum of personal telecommunications services
from a single provider. The STAR*Net platform allows the Company to provide an
integrated suite of personal telecommunications services to businesses and
individuals in markets not generally targeted by major providers. The Company
intends to capitalize on its STAR*Net platform by marketing enhanced services
to its existing paging and voicemail subscriber base and by attracting new
subscribers who would otherwise use multiple providers to fulfill their
personal telecommunications needs.
Through the STAR*Net platform, which integrates carrier-grade telephony
platform hardware with the Company's proprietary software, Satellink provides
its subscribers with single telephone number access to paging, voicemail, long
distance and "find me" services. The STAR*Net platform also allows the Company
to offer prepaid and postpaid long distance calling cards and inbound 1-800
service. The Company believes that the STAR*Net platform's scalable and
flexible architecture and relatively low cost of implementation give the
Company a competitive advantage by allowing it to quickly add and customize
services and offer enhanced services in smaller markets where the
implementation of a more expensive architecture is not economically justified.
The Company delivers paging services by broadcasting messages over: (i) FM
subcarrier frequencies that are leased by the Company in Georgia and Alabama
and that are linked with the CUE nationwide FM paging network, which reaches
over 95% of the population of the United States and Canada and covers 60,000
miles of interstate highway; (ii) Company-owned VHF and UHF paging networks in
Georgia and Louisiana; and (iii) VHF, UHF, 900 MHz and narrowband PCS paging
networks operated by third parties from which the Company purchases and
resells local, regional and nationwide service. The Company's use of the
STAR*Net platform and multiple message distribution networks in its market
areas allows the Company to offer to its customers an assortment of service
and pricing options not readily available from many of the Company's
competitors.
Satellink's paging and voicemail subscriber base has increased through
internal growth and acquisitions from approximately 27,000 subscribers as of
July 31, 1995 to approximately 165,000 subscribers as of May 31, 1998. Net
monthly revenues have increased from $700,000 for the month ended January 31,
1995 to $1.8 million for the month ended April 30, 1998.
INDUSTRY
Recent technological developments in the paging industry include new paging
services such as "confirmation" or "response" paging, narrowband PCS voice
paging, two-way paging and notebook and sub-notebook computer wireless data
applications. Industry sources estimate that there were approximately 43.1
million pagers in service in the United States at December 31, 1996, which
were serviced by over 2,000 licensed paging companies. Of these paging
companies, the ten largest serve approximately 80% of the total paging
subscribers in the United States. From 1990 through 1996, the number of pagers
in service in the United States grew at a compound annual rate of 27.0% and
the number of pagers in service is projected to grow at a compound annual rate
of approximately 9.0% from 1996 through 2001. Factors contributing to this
growth include: (i) declining costs of service; (ii) increasing consumer
awareness of the benefits of mobile communications; (iii) introduction of new
or enhanced paging equipment and services; and (iv) expanding channels of
distribution.
Recent technological developments in the wireless communications industry
have allowed providers to offer new and enhanced services. For example, PCS
providers are currently offering a variety of personal telecommunications
services, many of which are similar to the Company's services. According to a
1998 Price
36
<PAGE>
Waterhouse survey, total PCS subscribers in the United States are projected to
grow from less than 1 million in 1997 to approximately 45 million by 2001.
These subscribers will use services provided through several different types of
PCS technology, including time division multiple access, code division multiple
access and newly developed PCS technologies using the 1910 MHz to 1930 MHz
band. Current PCS-based service offerings include advanced paging and messaging
for voice and data, including two-way messaging and facsimile transmission,
next-generation mobile telephone service and two-way voice, data and video
communications. Future PCS-based service offerings are expected to include
personal digital assistants, portable facsimile machines, wireless replacements
for portions of the wireline telephone network and other kinds of short-range
communications.
The Company believes that future developments in the paging and wireless
communications industry will include: (i) technological improvements that
permit increased service and applications to a wider market on a cost-effective
basis; (ii) consolidation of smaller, single-market operators into larger,
multi-market paging companies; and (iii) increased numbers of pagers in
service, as a result of general expansion into consumer and retail markets.
GROWTH STRATEGY
The Company's primary objective is to become a leading regional provider of
enhanced personal telecommunications services. The Company intends to achieve
its objective by pursuing the following strategies:
. Expand Subscriber Base Through Acquisitions. The Company intends to
increase its subscriber base and its opportunities to cross-market
STAR*Net services by identifying and acquiring other providers of
paging, voicemail and other personal telecommunications services. Based
on its experience acquiring and integrating 12 paging and voicemail
operators since February 1996, the Company believes that it can generate
cost savings through integration of acquired companies, particularly
from its increased purchasing power for equipment and airtime. Any cost
savings would effectively reduce the multiple paid for acquired
companies, thereby increasing the Company's return on invested capital.
The Company intends to continue to focus on smaller acquisition
candidates because it expects larger providers to focus increasingly on
internal growth and larger acquisitions, thereby decreasing competition
for smaller acquisition candidates.
. Cross-Market an Integrated Suite of Customized Services to Existing and
Acquired Subscribers. The Company intends to cross-market additional
STAR*Net services to its existing and acquired paging and voicemail
subscribers. The Company believes that its paging and voicemail
subscribers are mobile individuals who are likely to use additional
personal telecommunications services. The Company believes these
subscribers will be more likely to purchase these services from the
Company because: (i) the Company owns the subscribers' access numbers
and is able to offer them the ability to change service plans and
coverage areas without changing access numbers; (ii) the Company is able
to provide its subscribers with unified billing for a variety of
personal telecommunications services; and (iii) existing subscribers are
familiar with the Company and have purchased services from the Company
in the past.
. Expand the Suite of Customized Services. The Company intends to
continually develop new STAR*Net services. Current planned services
under development include Internet-based voicemail delivery and receipt,
local access voicemail between cities, text-to-speech playback of e-mail
messages, Internet e-mail pager notification and narrowband PCS connect.
The Company believes these services will, when combined with existing
STAR*Net service offerings, provide it with additional cross-marketing
opportunities to existing and new subscribers.
. Focus on Niche Markets. Based on its analysis of its target markets, the
Company believes that smaller metropolitan markets throughout the
Southeast and Southwest are underserved by larger providers of personal
telecommunications services, who focus on more densely populated
metropolitan areas. These smaller markets are attractive to Satellink
because management believes these markets have reduced competition for
personal telecommunications services, limited availability of
alternative services such as cellular telephones and lower market
penetration rates for personal telecommunications services.
Approximately 45% of the Company's paging subscribers utilize
37
<PAGE>
regional or national paging services compared to approximately 33% of
total paging subscribers in the United States who use such services. The
Company believes this reflects its ability to serve mobile individuals
who require the broad, uninterrupted coverage area provided by the
Company. The Company intends to continue implementing its niche market
strategy by opening additional offices in smaller metropolitan markets,
acquiring other providers of paging, voicemail and other personal
telecommunications services in existing and additional markets and
utilizing its direct sales force in markets in Georgia, Alabama,
Louisiana and Texas.
ACQUISITIONS
Acquisitions have contributed significantly to the Company's growth. The
following table provides a summary of acquisitions in which the Company
acquired more than 5,000 subscribers. The Company has paid an aggregate
consideration of approximately $27.0 million in connection with these
acquisitions.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER
OF SUBSCRIBERS
DATE --------------------
NAME OF ACQUIRED COMPANY LOCATIONS ACQUIRED PAGING VOICEMAIL
- ------------------------ ---------------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Atlanta Voice Page, Atlanta February 1996 11,500 --
Inc. ..................
C.R., Inc............... Dallas May 1996 10,500 --
Message World........... Atlanta February 1997 -- 5,300
Premier Paging,
Inc./Premier Paging Baton Rouge and April 1998 10,000 --
of New Orleans, Inc.... New Orleans
Hyde's Stay in Touch, Shreveport, Monroe and May 1998 39,000 --
Inc. .................. Alexandria, Louisiana
</TABLE>
In addition to the above acquisitions, since the commencement of the
Company's acquisition program in February 1996, the Company has consummated
six acquisitions for aggregate consideration of $2.9 million, through which it
acquired a total of 7,600 paging subscribers. The Company is currently engaged
in preliminary discussions with several other acquisition candidates, but it
has no binding commitments to acquire any of such candidates. See "Risk
Factors -- Ability to Manage Growth; Acquisition Risks" and "Use of Proceeds."
38
<PAGE>
SERVICES
The Company provides an integrated suite of paging, voicemail and enhanced
personal telecommunications services. A subscriber can select any single
service or combination of services, all of which can be accessed through a
single local or 1-800 access number. The following table summarizes each
current and planned service offering.
SERVICE OFFERING DESCRIPTION
CURRENT SERVICES
STAR*Paging Satellink provides local, regional or national
paging service at a variety of price points
through traditional, FM and third party
networks. Unlike traditional paging technology,
FM paging technology utilizes existing FM radio
station transmitters to reach 95% of the
population of the United States and Canada.
STAR*Message The Company provides subscribers with an
outsourced voicemail solution that allows
subscribers to avoid the capital investment
necessary to establish their own standalone
voicemail system.
STAR*FindMe Satellink can provide a subscriber with a
personal local or 1-800 number that serves as a
single point of access from which callers can
select various messaging options or attempt to
locate the subscriber at up to four
predetermined phone numbers.
STAR*Calling A subscriber can place worldwide long distance
calls from the United States while accessing
the STAR*Net voicemail box, thereby allowing
the customer to return a voicemail message,
listen to additional voicemail messages and
make additional calls without redialing an
access number or PIN. Additionally, a
subscriber can use prepaid or traditional
calling cards to place long distance calls.
One number services The STAR*Net platform, combined with the
Company's flexibility in network choice, allows
a subscriber to change coverage area or type of
service without changing the subscriber's local
or 1-800 access number.
STAR*Toll Free A subscriber can establish a single 1-800
number from which the subscriber can forward
calls to a different number at a cost that is
generally lower than that charged by
traditional 1-800 providers.
SERVICES UNDER DEVELOPMENT
STAR*MeetMe Without special equipment or operator
assistance, a subscriber would be able to
initiate a conference call from any telephone
in which up to 16 individuals could
participate.
STAR*Web A subscriber would be able to access paging,
voicemail or e-mail messages through the
Internet.
Local access voicemail A subscriber would be able to leave messages
for other subscribers in networked cities
without dialing a long distance number.
Text-to-speech playback A subscriber would be able to access Internet
or LAN e-mail messages via the subscriber's
voicemail.
Internet e-mail pager A subscriber would be able to receive a paging
notification message to notify the subscriber of the receipt
of Internet e-mail messages.
PAGING INFRASTRUCTURE
The Company operates multiple paging distribution networks and has reseller
and other arrangements with third parties which enable the Company to
distribute its multiple service offerings in ways that address the needs of a
variety of subscribers. The majority of these services utilize the Company's
FM and traditional paging
39
<PAGE>
networks and traditional paging networks owned and operated by third party
carriers. A portion of these services also utilize the CUE FM paging network,
which allows the Company to reach over 95% of the population of the United
States and Canada and covers 60,000 miles of interstate highway. Despite the
Company's multiple distribution networks, there can be no assurance that the
Company's subscribers will not experience downtime due to the failure of the
Company's network, a third party's network on which the Company relies or any
of the Company's switching facilities or its STAR*Net platforms. See "Risk
Factors -- Dependence on Networks, Switching Facilities and the STAR*Net
Platform; Damage, Failure and Downtime."
FM Network
The Company's FM network operates by broadcasting on the sideband of FM
radio stations in Georgia and Alabama. The Company has entered into agreements
with over 30 FM radio stations pursuant to which the stations agree to
transmit paging messages on a 57 KHz subcarrier concurrently with their
regular radio broadcasts. Because most FM radio stations have significantly
higher power output and taller towers than traditional paging transmitters,
the Company is able to deliver messages over its FM network using fewer
transmitters than would be necessary to cover the same geographic area with a
traditional paging network. This allows the Company to enter a new local
market by installing injecting a 57 KHz subcarrier into an existing FM radio
station rather than building a network of paging towers equipped with low-
powered traditional paging transmitters.
Paging messages broadcast over the Company's FM network are broadcast from
all 30 radio stations. The Company's pagers are programmed to scan the FM
frequency spectrum to locate a station broadcasting the Company's 57 KHz
paging signal, allowing subscribers to move within the coverage area without
interruption of paging service. The Company's FM network is linked to a
national FM network operated by CUE and made up of over 500 FM radio stations
throughout the United States and Canada. The CUE network reaches over 95% of
the population of the United States and Canada and covers 60,000 miles of
interstate highway. Numeric paging messages are broadcast over the CUE network
through a relay system whereby the Company transmits a paging message to CUE's
main terminal which then transmits the message to a satellite which, in turn,
retransmits the message either to all participating FM stations for nationwide
subscribers or to selected FM stations for regional subscribers. The Company
offers regional, nationwide and North American paging through the CUE network,
and CUE bills the Company for paging distribution depending on the coverage
provided. Additionally, the Company pays a co-operative advertising fee to CUE
based on the number of Company pagers connected to the CUE network. See "Risk
Factors -- Limitations of CUE Paging Network."
Traditional Paging Networks
The Company has developed traditional paging networks in Georgia and
Louisiana. The traditional paging network broadcasts messages on specified
frequencies, including 462.850 MHz, 462.825 MHz and 152.240 MHz. These
messages are broadcast from Company-owned transmitters located principally in
the metropolitan Atlanta area and southern Louisiana. Such transmitters are
mounted on radio towers owned by third parties who lease tower space to the
Company and other broadcasters of radio and other transmissions. Each Company-
owned transmitter is operated pursuant to an FCC-issued license. See "--
Government Regulation."
Third Party Carrier Network
In addition to maintaining its own traditional paging network, the Company's
switching facilities are networked to traditional regional and nationwide
paging networks owned and operated by third parties, including PageNet,
Preferred Networks, Inc. ("Preferred Network"), A+ Network, Inc. ("A+
Network"), BestCom and others. Paging data is transferred from the Company's
switch to the third party network, which then transmits the data over its
network. The Company has entered into a nationwide resale agreement with
PageNet pursuant to which the Company can resell PageNet airtime anywhere in
the United States. Under this reseller agreement, the Company can access new
paging markets by installing the STAR*Net platform to receive incoming calls
and forward such calls to the PageNet network for broadcast. The Company is
also a party to a national reseller agreement with SkyTel pursuant to which
the Company can resell SkyTel's one-way and two-way nationwide paging
services.
40
<PAGE>
THE STAR*NET PLATFORM
Incoming calls to the Company's subscribers are received by either a
traditional switching platform or by the STAR*Net platform. Traditional
switching platforms, such as a Zetron platform, provide only for the delivery
of paging and voicemail messages. The STAR*Net platform allows the Company not
only to deliver paging and voicemail messages in the same manner as a
traditional platform, but also to relay incoming data to a variety of
distribution mechanisms, such as switched 1-800 service and, in the future,
the Internet. Further, the STAR*Net platform allows incoming calls to access
trunk lines from which a subscriber can place long-distance calls or
conference calls. The STAR*Net platform also combines with the Company's one
number capability to allow it to switch a subscriber from one service to
another or one network to another without issuing a new telephone number to
the subscriber. Accordingly, the Company can switch a subscriber between
paging networks with different coverage areas or between paging networks with
less paging traffic, which often results in more reliable and timely message
delivery, without changing the subscriber's access number.
The STAR*Net platform is a software-driven system that utilizes carrier
grade telephony platform hardware combined with the Company's proprietary
software. A STAR*Net platform is generally located in each of the Company's
markets, thereby providing access to the Company's multiple message
distribution networks. Customers in market areas where a separate STAR*Net
platform has not been installed may still obtain access to the broad range of
personal telecommunications services available through the STAR*Net platform
through 1-800 access numbers that connect into a STAR*Net platform. Because
the STAR*Net platform relies on readily available and relatively inexpensive
hardware components, the Company is able to enter new markets without the
substantial capital investment associated with traditional switching
equipment. Additionally, the Company believes that the flexible and scalable
architecture of the STAR*Net platform will allow it to be easily modified to
accommodate new services without replacing or materially modifying the
existing hardware. In addition to functioning as part of the Company's
network, the STAR*Net platform can be customized to meet the specific needs of
a subscriber, such as: (i) a school system that implements an automated system
through which students can access grades and teacher comments, register for
courses or be notified directly of their grades through an autodialed
telephone message; or (ii) a small business that needs an integrated voicemail
system but cannot afford the capital investment associated with a traditional
voicemail system.
The Company currently maintains switching facilities and STAR*Net platforms
in Atlanta, Albany, Augusta, Cordele, Macon, Savannah and Valdosta, Georgia;
Birmingham, Alabama; Baton Rouge and New Orleans, Louisiana; and Dallas,
Texas. The Company's network service operations are dependent upon its ability
to protect the equipment and data at its switching facilities against
potential damage that may be caused by fire, power loss, technical failures,
unauthorized intrusion, natural disasters, sabotage and other similar events.
The Company has therefore implemented monitored security systems, controlled
access, automated data backup procedures, uninterrupted power supply systems
and automated system trouble alerts.
SALES, MARKETING AND CUSTOMER SERVICE
Historically, the Company has relied on its direct sales force to obtain
paging and voicemail customers. The Company's sales and marketing strategy
incorporates a multi-channel distribution system that utilizes the following
distribution channels to access different market segments: (i) the Company's
direct sales staff that concentrates on business accounts; (ii) Company-
employed database telemarketing sales staff which uses computerized lead
management and professional telemarketing techniques to identify primarily
small businesses and professionals as potential subscribers; and (iii) Company
retail stores that are designed to sell higher ARPU products and services to
the consumer market. As of April 30, 1998, the Company employed 50 sales
representatives, including the Company's direct sales staff, telemarketing
professionals and sales representatives who call on retailers.
The Company's sales representatives are typically recent college graduates
who attend a weeklong training program administered by the Company's senior
marketing personnel. Sales representatives are compensated through salary plus
a commission generally based on the first month's recurring revenue generated
by each new subscriber. See "Risk Factors -- Dependence on Key Management and
Personnel."
41
<PAGE>
In connection with the development of the STAR*Net platform and rollout of
STAR*Net services, the Company has commenced an intensive program designed to
educate its sales representatives about STAR*Net services and to encourage
them to cross-market these services to existing paging and voicemail
subscribers. In the future, this program will be incorporated into the
Company's ongoing training program. The sales representatives will initially
focus on cross-marketing STAR*Net services to larger, multi-unit subscribers.
The Company also intends to hire additional outside sales representatives for
the Company's retail outlets to focus on marketing STAR*Net services to multi-
unit subscribers. At the same time, the Company intends to market STAR*Net
services to individual and small business subscribers through billing inserts
and telemarketing. Because sales representatives are compensated based on the
first month's recurring revenue generated by each subscriber, the Company
believes its sales representatives are encouraged to promote and cross-sell
STAR*Net services that generate higher monthly recurring revenue.
The Company maintains a customer service center in Roswell, Georgia. This
center employs 18 full-time customer service personnel who are available via a
toll-free call daily from 8:00 a.m. until midnight. Additionally, customer
service calls received between midnight and 8:00 a.m. are forwarded via paging
message to on-call customer service personnel, who return the service calls
within 30 minutes of receipt of the paging message. Customer service personnel
are trained to educate and assist Satellink's subscribers in the use of the
Company's services and to resolve billing and technical issues. The Company's
customer service center can accommodate an additional eight full-time customer
service representatives.
SUBSCRIBERS
Satellink markets its services to large and small businesses and, to a
lesser extent, individuals who require advanced, high-volume personal
telecommunications services. Approximately 44% of the Company's paging
subscribers utilize regional or national paging services, compared to
approximately 33% of total paging subscribers in the United States that use
such services. The Company believes this reflects its focus on mobile
individuals who require the broad, uninterrupted coverage area provided by the
Company. These subscribers have traditionally included truck drivers and other
small business operators and employees, professionals, medical personnel,
sales and service providers, construction and trades people, and real estate
brokers and developers. Additionally, paging and voicemail service is
increasingly being adopted by individuals for private, nonbusiness uses such
as communicating with family members and friends. The Company also believes
that its focus on business and high-volume individual subscribers results in
increased revenues, reduced subscriber turnover and provides an attractive
base to which to market additional personal telecommunications services.
PAGERS
The majority of the Company's paging services are delivered through either:
(i) numeric display pagers, which permit a subscriber to receive a telephone
number or other numeric coded information and to store several such numeric
messages that the customer can recall when desired; or (ii) alphanumeric
display pagers, which allow the subscriber to receive and store text messages.
The Company utilizes pagers for traditional paging subscribers that are
manufactured by Motorola, NEC, Panasonic and other manufacturers. The Company
utilizes Info Telecom numeric pagers for FM paging subscribers. Certain
traditional pagers are among the smallest available and have time and date
stamping capability and average battery life of five weeks. Info Telecom
pagers are more expensive and approximately 50% larger than many traditional
pagers and have an average battery life of five weeks; however, these pagers
do not have time and date stamping capability.
The Company is seeking to address the limitations of the Info Telecom pager
through its participation in a joint venture which is developing a new FM
pager, the FM Concepts Pager, which is expected to be 25% smaller than the
Info Telecom pager and have similar capabilities to those of many popular
traditional pagers. The Company plans to introduce the FM Concepts Pager
during the first quarter of fiscal 1999 and believes the FM Concepts Pager can
be produced at approximately 75% of the cost of its current FM pager. These
cost savings can be passed on to new subscribers, thereby making FM paging a
more cost-effective alternative for new
42
<PAGE>
subscribers. There can be no assurance that the Company's potential or
existing subscribers will accept the inherent limitations of the FM Concepts
Pager or that a third party will not develop a superior FM pager to which the
Company does not have access at competitive prices. Reduced acceptance of FM
pagers or increased competition from FM pager providers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Proprietary Rights and Technology" and "Risk Factors --
Risks Associated with Joint Ventures."
The Company's business subscribers either lease or buy their pagers, and its
individual subscribers buy their pagers. Both business and individual
subscribers then subscribe for either local, regional, multi-regional or
nationwide service. Contracts with large unit volume subscribers are typically
for two to three year terms, while contracts with smaller volume subscribers
generally have one year terms with annual renewals. The volume discounts on
lease costs and service fees are typically offered to large unit volume
subscribers. Annual loss protection allows subscribers who lease pagers to
limit their costs of replacement upon loss or destruction of the pager.
Maintenance services are offered to subscribers who own their own pagers.
The Company purchases a variety of models of traditional pagers from
Motorola and certain other manufacturers and sells or leases these pagers to
its customers. Traditional pagers are capable of receiving a signal on a
single frequency and are capable of receiving alphanumeric messages. The cost
of different model pagers varies based on the model's messaging capability and
whether it is a traditional or FM radio pager. The Company and most of its
competitors sell pagers without a significant markup. The absence of a markup
inhibits the Company's ability to compete on the basis of price. Accordingly,
the cost at which the Company is able to obtain pagers directly relates to the
price at which the Company is able to sell pagers and generate recurring
revenues from providing services to the purchasers of such pagers.
PROPRIETARY RIGHTS AND TECHNOLOGY
In 1995, the Company began development of the STAR*Net platform in
anticipation of increased demand for a broad spectrum of personal
telecommunications services from a single provider. The STAR*Net platform
utilizes off-the-shelf servers, typically produced by Compaq Computer
Corporation or Hewlett-Packard Company, augmented by commercially available
add-ons such as telephony hardware produced by Dialogic Corporation. The
STAR*Net platform's proprietary software is written in "C" and was developed
by a team of Company and independent contractor programmers. See "-- The
STAR*Net Platform" and "Risk Factors -- Technological Change; Dependence on New
Services" and "-- Risk of Software Failures or Errors."
FM Concepts is a joint venture owned equally by the Company, certain
affiliates of C.R. and Cape Fear. FM Concepts was formed in 1995 for a 40-year
term to develop a new FM pager, the FM Concepts Pager. The Company does not
control FM Concepts, and there can be no assurance that FM Concepts will
utilize its resources in a manner consistent with the Company's strategies.
Additionally, FM Concepts can require each of the Company, C.R. and Cape Fear
to contribute up to an aggregate of $250,000 to the capital of FM Concepts,
and the Company cannot require FM Concepts to return any or all of its
contribution. Although the Company has contributed approximately $227,000 to
FM Concepts as of April 30, 1998, the FM Concepts Pager is at an experimental
stage, and there can be no assurance that it will ever reach the production
stage. There can be no assurance that, once produced, the FM Concepts Pager
will function in accordance with design specifications or that subscribers
will view it as an attractive alternative to traditional pagers or competing
FM pagers. FM Concepts intends to outsource the production of the FM Concepts
Pager to a third party manufacturer; however, there can be no assurance that
FM Concepts will successfully identify a suitable manufacturer or that any
manufacturer will be able to produce the FM Concepts Pager according to design
specifications and/or in a cost-effective manner. See "Risk Factors -- Risks
Associated with Joint Ventures."
The Company intends to use the FM Concepts Pager to reduce its dependence on
Info Telecom pagers produced under license by FM Concepts II, a joint venture
that was formed in 1996 and is owned equally by the Company and Cape Fear. FM
Concepts II is not controlled by the Company, and, therefore, there can be no
43
<PAGE>
assurance that FM Concepts II will utilize its resources in a manner
consistent with the Company's strategies. FM Concepts II can require each of
the Company and Cape Fear to contribute up to an aggregate of $250,000 to the
capital of FM Concepts II, and the Company cannot require FM Concepts II to
return any or all of its contributions. As of April 30, 1998, the Company had
contributed approximately $235,000 to FM Concepts II. FM Concepts II and CUE
have been licensed by Nokia to manufacture and distribute pagers using Nokia's
FM paging technology throughout North America. FM Concepts II has contracted
with Info Telecom, a French manufacturer, to produce FM pagers for
distribution in North America. The Company believes that its participation in
the FM Concepts II joint venture combined with the outsourcing of production
of FM pagers allows it to obtain FM pagers at a more favorable cost than if it
purchased such pagers directly from a third party manufacturer because it will
not have to pay the markup ordinarily charged by such manufacturers. See "Risk
Factors -- Risks Associated with Joint Ventures" and "-- Limitations of FM
Paging Technology."
The Company's ability to compete is dependent in part upon its proprietary
technology, particularly its newly-developed STAR*Net platform and FM Concepts
Pager. The Company relies primarily on a combination of intellectual property
laws and contractual provisions to protect its proprietary rights and
technology. These laws and contractual provisions provide only limited
protection of the Company's proprietary rights and technology. The Company's
proprietary rights and technology include confidential information and trade
secrets which the Company attempts to protect through confidentiality and
nondisclosure agreements. The Company typically attempts to protect its
confidential information and trade secrets through these contractual
provisions for the term of the applicable agreement and, to the extent
permitted by applicable law, for some negotiated period of time following
termination of the agreement, typically one to two years at a minimum.
Despite the Company's efforts to protect its proprietary rights and
technology through intellectual property laws and contractual provisions,
there can be no assurance that others will not be able to copy or otherwise
obtain and use the Company's proprietary technology without authorization, or
independently develop technologies that are similar or superior to the
Company's technology. However, the Company believes that, due to the rapid
pace of technological change in the information and telecommunications service
industry, factors such as the technological and creative skills of its
personnel, new product developments, frequent product enhancements and the
timeliness and quality of support services are more important to establishing
and maintaining a competitive advantage in the industry. See "Risk Factors --
Limited Protection of Proprietary Rights and Technology."
Many patents, copyrights and trademarks have been issued in the general
areas of information and personal telecommunications services. In the ordinary
course of its business third parties may claim that the Company's current or
future products or services infringe the patent, copyright or trademark rights
of such third parties. Although the Company believes that any such claims will
not adversely impact its business, there can be no assurance that such claims
will not be successful or that the existence or threat of such claims will not
have an adverse effect on the Company's business, financial condition and
results of operations.
TECHNICAL SUPPORT
Satellink's technical support and development personnel are responsible for
developing, testing and supporting proprietary software applications, as well
as creating and improving enhanced system features and services. The Company's
technical support and development strategy is to focus its efforts on
enhancing its proprietary software and integrating its software with readily
available software and hardware when feasible. Satellink continually develops
software and periodically introduces major and minor enhancements of its
software.
The Company's technical support and development personnel developed the
STAR*Net platform over a three-year period using off-the-shelf hardware and
proprietary software. These personnel continuously evaluate and develop new
applications for and additions to the STAR*Net platform in order to fulfill
the actual or anticipated needs of subscribers and to respond to technological
and marketplace developments. There can be no assurance, however, that the
Company's personnel will be able to successfully identify such needs or
developments or develop and implement new technologies or applications in
response thereto.
44
<PAGE>
As of April 30, 1998, Satellink had seven employees and four independent
contractors in technical support and development positions. In addition to
developing and monitoring the STAR*Net platform, this technical support and
development team continuously monitors and performs necessary improvements to
the Company's billing systems and messaging systems and network connections to
determine if software or hardware modifications are necessary. Satellink's
technical support and development personnel also engage in joint development
efforts with the Company's strategic partners and vendors, including, but not
limited to the development of the FM Concepts Pager.
COMPETITION
The Company believes that its focus on business and high-volume individual
subscribers distinguishes the Company from larger providers, many of whom
focus on selling their services to a larger number of lower-volume
subscribers. Based on its analysis of its target markets, the Company believes
it has identified a market niche in smaller metropolitan markets throughout
the Southeast and Southwest that it believes are underserved by larger
providers of personal telecommunications services who focus on more densely-
populated metropolitan markets. However, the information and
telecommunications services industry is intensely competitive, rapidly
evolving and subject to rapid technological change. The Company expects
competition to increase in the future. Many of the Company's current and
potential competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. Competition from these competitors could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company attempts to differentiate itself from its competitors by
offering an integrated suite of telecommunications services. Other providers
currently offer each of the individual services and certain combinations of
the services offered by the Company. For example, Premiere Technologies offers
bundled telecommunications services which are similar to those offered by the
Company. Octel and Microsoft recently announced a service called "Unified
Messenger," which places all voicemail, e-mail and fax messages in a single
mailbox available by computer or telephone. The Company's nationwide mobile
communications services and features compete with services provided by
companies such as AT&T, MCI and Sprint as well as smaller interexchange long
distance providers. The Company's voicemail services compete with voicemail
services provided by AT&T, certain RBOCs and other service bureaus as well as
by equipment manufacturers, such as Octel, Nortel, Siemens, Centigram, Boston
Technology and Digital Sound. The Company's paging services compete primarily
with those offered by PageNet, the world's largest provider of paging
services, AirTouch, Arch, MobileComm, SkyTel, PageMart and Metrocall. The
Company expects that other parties will develop and implement information and
telecommunications service platforms similar to its platform, thereby
increasing competition for the Company's services.
In addition, on February 8, 1996, President Clinton signed into law the 1996
Act, which allows the RBOCs, as is the case with other LECs, to provide long
distance telephone service between LATAs and will likely significantly
increase competition for long distance services. The new legislation also
grants the FCC the authority to deregulate other aspects of the
telecommunications industry, which in the future may, if authorized by the
FCC, facilitate the offering of an integrated suite of information and
telecommunications services by the RBOCs in competition with the Company. Such
increased competition could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Legislative
Matters."
Telecommunications companies compete for consumers primarily based on price,
with major long distance carriers and paging companies conducting extensive
advertising campaigns to capture market share. There can be no assurance that
a decrease in the rates charged for communications services by the major long
distance carriers, major paging companies or other competitors, whether caused
by general competitive pressures or the entry of the RBOCs and other LECs into
the bundled telecommunications market, would not have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company expects that the information and telecommunications
services markets will continue to attract new competitors and new
technologies, possibly including alternative technologies that are more
sophisticated and cost effective than the Company's technology.
45
<PAGE>
LEGISLATIVE MATTERS
The 1996 Act was intended to increase competition in the long distance and
local telecommunications markets. The 1996 Act opens competition in the local
services market and, at the same time, contains provisions intended to protect
consumers and businesses from unfair competition by incumbent LECs, including
the RBOCs. The 1996 Act allows RBOCs to provide long distance service outside
of their local service territories but bars them from immediately offering in-
region inter-LATA long distance services until certain conditions are
satisfied. An RBOC must apply to the FCC to provide in-region inter-LATA long
distance services and must satisfy a set of pro-competitive criteria intended
to ensure that RBOCs open their own local markets to competition before the
FCC will approve such application. Further, while the FCC has final authority
to determine whether an RBOC application is granted, the FCC must consult with
the Department of Justice to determine if, among other things, the entry of
the RBOC would be in the public interest, and with the relevant state to
determine that the pro-competitive criteria have been satisfied. The Company
is unable to determine how the FCC will rule on any such applications.
The 1996 Act provides a framework for the Company and other long distance
carriers to compete with LECs by reselling local telephone service, by
interconnecting to LEC network facilities at various points in the network, or
by building new local service facilities. In the future, the Company may
decide to lease unbundled network elements, which could also be used as a
platform to provide access to the Company's services, or to build local
service facilities. The Company's decision to enter the local services market
is dependent on the economic viability of the options and on the regulatory
environment, which will likely vary by state.
GOVERNMENT REGULATION
The Company provides telecommunications services. Consequently, the Company
is subject to extensive federal and state regulation in the United States.
Various international authorities may also seek to regulate the services
provided by Satellink.
Tariffs and Detariffing. The Company is classified by the FCC as a non-
dominant carrier for its domestic interstate and international common carrier
telecommunications services. Common carriers that provide domestic interstate
and international telecommunications services must maintain tariffs on file
with the FCC describing rates, terms and conditions of service. While the
tariffs of non-dominant carriers, such as the Company, are subject to FCC
review, they are presumed to be lawful upon filing with the FCC. Currently,
the Company either has applied for and received, or is in the process of
applying for and receiving, all necessary authority from the FCC to provide
domestic interstate and international telecommunications services.
In October 1996, the FCC issued an order detariffing long distance services
which prohibited non-dominant long distance carriers from filing tariffs for
domestic, interstate, long distance services in the future. The FCC's
scheduled detariffing rules were to become effective September 22, 1997. The
detariffing rules were appealed by several parties, and in February 1997, the
U.S. Court of Appeals for the District of Columbia Circuit issued a temporary
stay preventing the rules from taking effect pending judicial review. The
Company is currently unable to predict what impact the outcome of the FCC's
detariffing proceeding will have on the Company.
Local Interconnection and Resale. In August 1996, the FCC adopted an order
(the "Interconnection Order") which established a minimum set of rules
relating to the manner in which all telecommunications carriers would be able
to interconnect with the LECs' networks. The Interconnection Order addressed
several important interconnection issues, including unbundled network element
purchase, resale discounts, and negotiation and arbitration procedures between
LECs and long distance carriers.
Several states, companies, associations and other entities appealed the
Interconnection Order. On July 18, 1997, the U.S. Court of Appeals for the
Eighth Circuit overturned many of the rules established by the FCC's
Interconnection Order governing, among other things, the pricing of
interconnection, resale and unbundled network elements. The Court's decision
substantially limits the FCC's jurisdiction and expands the state regulators'
jurisdiction to set and enforce rules governing the development of local
competition.
46
<PAGE>
The FCC and other parties have appealed the Court's ruling to the U.S.
Supreme Court, and the Supreme Court has agreed to hear the appeal. The case
is expected to be argued before the Supreme Court in the Fall of 1998, and the
Court is expected to issue a decision in the spring of 1999. The Company is
unable to predict what impact the Court's decision will have on its ability to
offer competitive local service, and no assurance can be given that the
Court's decision will not have a material adverse effect on the Company's
business, financial condition and results of operation.
Federal Regulation. The Company's paging operations are subject to
regulation by the FCC under the Communications Act. The FCC has granted the
Company licenses to use the radio frequencies necessary to conduct its paging
operations. Licenses issued by the FCC to the Company set forth the technical
parameters for each station, such as location, frequency, signal strength and
tower height under which the Company is authorized to operate.
License Grant and Renewal. The FCC licenses granted to the Company are for
varying terms of up to 10 years. At the end of such terms, license renewal
applications must be filed with and granted by the FCC. The Company holds
various FCC radio licenses which are used in connection with its paging
operations. The license expiration dates for these licenses are staggered,
with only a portion of the licenses expiring in any particular calendar year.
Licensees in the paging services industry normally enjoy a license "renewal
expectancy," unless it can be demonstrated by a competitor that the licensee
has not operated the station in conformance with the FCC's rules, or that the
licensee has not provided adequate service to the public. Such challenges have
been rare, and the vast majority of license renewal applications are granted
in the normal course. Although the Company is unaware of any circumstance
which could prevent the grant of its license renewal applications, no
assurance can be given that any of the Company's license renewal applications
will be free of competing applications or will be granted by the FCC.
Furthermore, the FCC has the authority to restrict the operations of licensed
radio facilities or, following a hearing pursuant to the Communications Act,
to revoke or involuntarily modify radio licenses. To date, none of the
Company's licenses have ever been revoked or modified involuntarily.
FCC Regulatory Developments. The FCC has enacted regulations regarding
auctions for the award of radio licenses. Pursuant to such rules, the FCC may,
at any time, require auctions for new or existing services prior to the award
of any license. Accordingly, there can be no assurance that the Company will
be able to procure additional frequencies, or expand existing paging networks
into new service areas.
In March 1994, the FCC adopted rules pursuant to which the FCC auctions
licenses for blocks of spectrum on a "market area basis." The winner of the
license is given the right to use a certain frequency or group of frequencies
throughout a defined geographic area (such as a BTA or MTA and can construct
and operate its transmitters throughout this market area without FCC licensing
of individual stations. In some cases, existing users of the designated
frequencies must be protected from interference or furnished with alternative
means of communications. The FCC has completed auctions to license various
radio services on a market area basis, including narrowband PCS or two-way
paging, broadband PCS, and the first phase of the 800 MHz trunked specialized
mobile radio auction, which concluded in December 1997. In these auctions,
successful bidders have made significant auction payments in order to obtain
spectrum.
With respect to its paging operations, the Company may choose to participate
in the market area licensing auctions for paging services. The first auction,
for the 900 MHz paging bands is tentatively scheduled for the third quarter of
calendar year 1998. The lower paging bands, e.g., the exclusive 150 and 450
MHz frequencies, are likely to be auctioned in 1999. The Company believes that
most bidders in the auctions will be larger carriers, with significant
resources to build out large regional systems. The FCC is currently not
proposing to auction the shared private carrier paging frequencies licensed
under its rules.
On February 8, 1996, the FCC announced a freeze on the acceptance of
applications for new or modified transmitter facilities in paging services.
This freeze was temporarily lifted to permit the filing of expansion
applications by incumbent paging carriers. With respect to applications to
expand paging systems licensed on
47
<PAGE>
exclusive paging frequencies, the FCC has indicated that it will not process
any expansion application filed after July 31, 1996; and that any pending
application which is mutually exclusive with another pending application, due
to the possibility of harmful electrical interference, will be dismissed.
However, with respect to shared paging channels, licensed under the FCC's
rules, e.g., 462.850 MHz, the FCC is permitting incumbent licensees to file
expansion applications without restriction. Thus, while the Company may be
licensed on a particular shared frequency at a particular site in Georgia, it
could expand its paging system throughout the southeastern United States, or
elsewhere. Such flexibility is not currently available to the Company for its
paging system licensed on exclusive frequencies under the FCC's rules.
Currently, the only method for expanding its paging system licensed under the
FCC's rules is through acquisition of existing stations, with FCC approval,
which the Company did during the first quarter of calendar year 1998.
The FCC has fully implemented its rules regarding the classification of the
services offered by paging carriers as either CMRS or PMRS providers.
Previously, paging licensees had been classified either as common carriers or
private carrier paging carriers. Pursuant to the FCC's rules, which aim to
reduce the disparities in the regulatory treatment of similar mobile services,
the Company's paging services are classified as CMRS, since the radio
facilities are interconnected to the public switched telephone network and
service is provided to the general public on a for-profit basis. The Company
believes that such parity will remove certain regulatory advantages which
private carriers, such as itself, enjoyed under the previous regulatory
scheme. Certain disparities still exist between the exclusive frequencies and
the shared frequencies licensed under the FCC's rules, which can affect the
Company's ability to respond to subscriber demands in a timely manner. In
particular, the Company generally cannot expand its exclusive paging channel
coverage except by acquisition of another carrier's station on the same
channel or by the winning bidder in the upcoming paging auctions. These
auctions will feature "overlay" licenses, with the winning bidder being
required to protect existing licensees within the designated service area. If
the Company is the successful bidder for its areas of interest, it will be
able to expand the coverage of its existing operations without further FCC
approval, within the licensed market areas. If instead, the Company is not the
successful bidder, then it will be unable to expand its existing coverage
unless it obtains the permission of the winning bidder. However, the winning
bidder would have to protect the Company's existing coverage areas from
interference.
Separate and distinct from the Company's paging facilities discussed above
is the Company's FM sub-carrier paging system. While the FCC requires
carriers, such as the Company, to file applications prior to initiating
service on leased subcarrier facilities of broadcast stations, such
applications are not barred by the FCC's freeze on applications for paging
channels. Thus, it would be possible for the Company to expand its FM
subcarrier paging system, should the need arise.
The 1996 Act may affect the Company's paging business. Some aspects of the
new statute could have a beneficial effect on the Company's paging business.
For example, proposed federal guidelines regarding antenna siting issues may
potentially remove local and state barriers to the construction of
communications facilities (although such restrictions are now being litigated
in the courts and debated in Congress), and efforts to increase competition in
the local exchange and interexchange industries may reduce the cost to the
Company of acquiring necessary communications services and facilities. On the
other hand, some provisions relating to common carrier interconnection, pay
phone rates, enhanced 911 (E-911), telephone number portability, equal access,
the assignment of new area codes, universal service fund and telephone relay
service fund contributions, resale requirements and auction authority may
place additional burdens upon the Company or subject the Company to increased
competition.
Paging carriers are indirectly affected by FAA regulations to the extent
that proposed antenna sites may require prior FAA approval. In those
circumstances where antenna structure clearance is required, the FCC will not
grant an application for new or modified facilities until such clearance is
obtained from the FAA. Under the FCC's rules, the tower owner is generally the
entity that is required to secure such approval.
The FCC has recently issued stricter guidelines with respect to radio
frequency ("RF") radiation hazards. Generally, most paging facilities will be
categorically exempt, provided the base station and antenna system meet
48
<PAGE>
certain criteria governing power and antenna height. In those circumstances
where the base station does not meet the criteria for exemption, it may be
necessary for the Company to modify its facility or relocate to another
antenna structure. If an exclusive paging channel is involved, the Company's
choices for relocation will be limited to certain sites within its service
area, since the Company may not expand its composite interference contour.
With respect to the shared paging frequencies, the Company will be free to
relocate upon the receipt of FCC approval, which could take some time.
Universal Service Reform. On May 8, 1997, the FCC released an order
establishing a significantly expanded federal telecommunications subsidy
regime. For example, the FCC established new subsidies for schools and
libraries with an annual cap of $2.25 billion and for rural health care
providers with an annual cap of $400 million. Providers of interstate
telecommunications service, such as the Company, as well as certain other
entities, must make contributions to the federal programs. The Company's
contribution to schools, libraries, and rural health care funds will be based
on its gross end user revenues for intrastate, interstate, and international
telecommunications services. The Company's contribution to other federal
subsidy funds will be based upon its gross end user revenues for interstate
and international telecommunications services. Several parties have appealed
the May 8, 1997 Order, and those appeals have been consolidated in the U.S.
Court of Appeals for the Fifth Circuit. No assurance can be given that the
FCC's ultimate universal service contribution requirements will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Access Charge Reform. On May 16, 1997, the FCC released an Access Charge
Reform Order, which revised rules governing the interstate switched access
charge rate structure of price cap LECs. The new rules are intended to
eliminate implicit subsidies and to establish rate structures that better
reflect the manner in which costs are incurred. The new rules substantially
increase the costs that price cap LECs recover through monthly, non-traffic
sensitive access charges and substantially decrease the costs that price cap
LECs recover through traffic sensitive access charges. The manner in which the
FCC implements its approach to lowering access charge levels will have an
effect on the prices the Company pays for originating and terminating
interstate traffic. Portions of the Access Charge Reform Order have been
appealed. In light of the uncertainty regarding ultimate disposition of the
Access Charge Reform proceeding by the FCC and the courts, the Company is
unable to predict what impact the FCC's revised access charge scheme will have
on its access charge cost structure.
Payphone Compensation. In September 1996, the FCC issued an order adopting
rules to implement the 1996 Act's requirements establishing "a per call
compensation plan to ensure all payphone service providers are fairly
compensated for each and every completed call using their payphone." This
order included a specific fee to be paid to each payphone service provider by
long distance carriers and intra-LATA toll providers (including LECs) on all
"dial around" calls, including debit card and calling card calls. On July 1,
1997, the U.S. Court of Appeals for the D.C. Circuit overturned some of the
FCC rules for the implementation plan.
On October 7, 1997, the FCC issued a second order, revising the per-call
compensation amount to be paid to payphone service providers. Specifically,
the FCC decreased the compensation amount to $0.284 per call. The Company
began paying this per-call amount on October 7, 1997. This compensation amount
will remain in effect until October 6, 1999, when a market-based rate will
become effective. Although the Company expects to incur additional costs to
receive "dial around" calls that originate from payphones, the FCC has
permitted long distance carriers, such as the Company, to pass such costs
through to their customers.
State Regulation. Most PUCs require carriers that wish to provide intrastate
common carrier services to be authorized to provide such services. The Company
either has applied for and received, or is in the process of applying for and
receiving, all necessary authorizations to provide intrastate long distance
services.
The Company is generally not subject to price regulation or to rate of
return regulation for its intrastate services. In most states, however, the
Company is required to file tariffs setting forth the terms, conditions and
prices for its intrastate services. In some state jurisdictions, the tariff
can list a rate range for intrastate services. The Company may be subject to
additional regulatory burdens in some states, such as compliance with quality
of service requirements or remittance of contributions to support state
sponsored universal service. The
49
<PAGE>
Company's ability to incur long-term indebtedness is subject to prior PUC
approval in some state jurisdictions. In addition, some state PUCs regulate
the issuance of securities and the transfer of control of entities subject to
their jurisdiction. These state regulations may have attached to the Company's
recent acquisitions. Currently, the Company is reviewing whether and to what
extent additional regulatory compliance is required in this regard. See "Risk
Factors -- Regulation."
PROPERTIES
The Company's corporate headquarters occupy approximately 10,000 square feet
of office space in Roswell, Georgia under a lease expiring in November 2001.
The Company's main network switching center, along with its Atlanta sales
force, occupies approximately 7,000 square feet of office space in Roswell,
Georgia under a lease expiring in November 2001. The Company also occupies
office space for sales and network operation in Birmingham, Alabama; Albany,
Cordele and Valdosta, Georgia; Baton Rouge and New Orleans, Louisiana; and
Dallas, Texas. The Company believes that its current space is sufficient to
meet its present needs and does not anticipate any difficulty securing
additional space, as needed, on terms acceptable to the Company.
EMPLOYEES
At April 30, 1998, the Company had 175 employees, of whom 24 were technical
support personnel (seven of whom also perform development functions), 99 were
sales and marketing personnel and 52 were managerial and administrative
employees. Except for the Company's 401(k) Plan, the Company does not have any
collective bargaining, employment, pension or compensation arrangements with
any of its employees. The Company considers its relations with its employees
to be good. See "Management."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding that it believes would
have a material adverse effect on its business, financial condition or results
of operations.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company and their ages as of
April 30, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jerry W. Mayfield............. 51 Chairman of the Board, President and Chief
Executive Officer
David C. Massey............... 51 Senior Vice President -- Sales & Marketing
and Director
Robert P. Poche............... 42 Senior Vice President -- Systems &
Technology and Director
James O. Carpenter............ 48 Director
Marc A. Comeaux............... 43 Director
Robert D. Gage, IV............ 43 Director
Gordon E. Kaiser.............. 54 Director
Stiles A. Kellett, Jr. ....... 54 Director
Daniel D. Lensgraf............ 35 Senior Vice President -- Finance &
Administration, Chief Financial Officer
and Secretary
</TABLE>
Jerry W. Mayfield has been Chairman of the Board, President and Chief
Executive Officer of the Company since May 1994. Mr. Mayfield served as
Executive Vice President of the Company from the time of its formation in 1988
until May 1994 and has been a director of the Company since its formation.
From 1984 until 1986, Mr. Mayfield served as Chief Executive Officer of
Rainbow Chevron Corporation, an oilfield services company in Lafayette,
Louisiana, and from 1970 to 1984, Mr. Mayfield was a partner in the New
Orleans, Louisiana office of Arthur Andersen LLP. Mr. Mayfield is a Certified
Public Accountant.
David C. Massey has been Senior Vice President -- Sales & Marketing of the
Company since February 1993 and a director of the Company since December 1995.
Mr. Massey has primary responsibility for the Company's sales and marketing
programs, including the supervision of all sales representatives. Mr. Massey
is a Certified Public Accountant.
Robert P. Poche has been Senior Vice President -- Systems & Technology since
the Company's formation in 1988 and was elected a director of the Company in
1995. Mr. Poche has primary responsibility for the Company's technical support
and development programs and was instrumental in the development of the
STAR*Net platform. Mr. Poche is a licensed registered professional engineer.
James O. Carpenter has been a director of the Company since its formation in
1988. Since 1987, Mr. Carpenter has been the Managing Partner of Rock Lake
Planting Company, Inc., a Mississippi-based agriculture concern. Mr. Carpenter
is a Certified Public Accountant.
Marc A. Comeaux has been a director of the Company since its formation in
1988. Since January 1996, Mr. Comeaux has been President of Acadia Fine Foods,
Inc., a restaurant operator in Alpharetta, Georgia. From May 1994 through
December 1995, Mr. Comeaux was President of Teledata Solutions, Inc., a
consulting firm. Mr. Comeaux served as President and Chief Executive Officer
of the Company from 1988 until May 1994.
Robert D. Gage, IV has been a director of the Company since its formation in
1988. Mr. Gage has been President and Chief Executive Officer of the Port
Gibson Bank, Port Gibson, Mississippi for more than five years.
Gordon E. Kaiser has been a director of the Company since April 1990. Mr.
Kaiser has been President and Chief Executive Officer of CUE, an owner of a
nationwide FM paging network for more than five years. Mr. Kaiser is an
attorney and was formerly a partner in Gowling & Henderson, Toronto, Canada.
51
<PAGE>
Stiles A. Kellett, Jr. has been a director of the Company since December
1995. Mr. Kellett has been Chairman of the Board of Directors of Kellett
Investment Corp. since 1995. From 1978 to 1995, Mr. Kellett served as Chairman
of the Board of Directors of Convalescent Services, Inc., a long-term health
care company in Atlanta, Georgia. Mr. Kellett also serves as a director of
WorldCom, Inc. and Mariner Health Group, Inc.
Daniel D. Lensgraf has been Senior Vice President -- Finance &
Administration, Chief Financial Officer and Secretary of the Company since
August 1995. From May 1992 until August 1995, Mr. Lensgraf was employed as a
Senior Associate in the Corporate Finance Group of Creditanstalt.
Directors of the Company are elected at the annual meeting of shareholders.
Executive officers of the Company are appointed at the first meeting of the
Board of Directors after each annual meeting of shareholders. Directors and
executive officers are elected to serve until they resign, are removed or
otherwise are disqualified to serve, or until their successors are elected and
qualified. The Company is not party to any employment agreements with its
executive officers.
BOARD OF DIRECTORS
The Company's Board of Directors (the "Board") is comprised of eight members
who, beginning with the Company's first annual meeting of shareholders
following the Offering, will be divided into three classes, which will be as
nearly equal in number as possible. The directors in each class will be
elected by the shareholders for a term of three years and until their
successors are elected and qualified. The term of office of one of the classes
of directors will expire each year, and a new class of directors will be
elected by the shareholders each year at the annual meeting of shareholders.
The composition of the three classes of directors will be determined by a vote
of the Company's shareholders at the first annual meeting of shareholders
following the Offering. See "Description of Capital Stock -- Certain
Provisions of the Articles, Bylaws and the Georgia Code."
Pursuant to a Stockholders Agreement (the "Stockholders Agreement") dated
August 1, 1988 by and between the Company and certain of its shareholders, the
shareholders party thereto have agreed to vote the Common Stock held by them
for the election of Messrs. Mayfield, Comeaux and the president of CUE
(currently Mr. Kaiser) to the Board of Directors. The shareholders party
thereto have also agreed to vote the Common Stock held by them for the
election of Messrs. Gage and Carpenter to the Board of Directors so long as
Messrs. Gage, Carpenter, Ira Carpenter, Jr. and Charles R. Carpenter own, in
the aggregate, at least 20% of the voting stock of the Company. Pursuant to
the Kellett Agreement (as defined in "-- Compensation Committee Interlocks and
Insider Participation" below), the Company agreed to cause its management to
nominate Mr. Kellett and use its best efforts to cause Mr. Kellett's election
to the Board of Directors. The Stockholders Agreement and the Kellett
Agreement will terminate on the Closing Date, and there will be no further
voting arrangements with respect to the election of directors.
COMPENSATION OF DIRECTORS
Prior to the completion of the Offering, each director who is not an
employee of the Company receives fees of $750 and $500 for each meeting of the
Board of Directors and each committee thereof, respectively, attended in
person. Following the completion of the Offering, the Board intends to begin
paying each director who is not an employee of the Company an annual fee of
$6,000 as well as fees of $1,000 and $500 for each meeting of the Board of
Directors and committee thereof, respectively, attended in person. Directors
are reimbursed for their out-of-pocket expenses incurred in connection with
their service on the Board of Directors. In addition, following the completion
of the Offering, directors may receive discretionary grants of options to
purchase shares of Common Stock pursuant to the Plan. See "-- Incentive Plan."
MEETINGS AND COMMITTEES
The Board of Directors conducts its business through meetings of the full
Board and through committees of the Board, including the Audit Committee (the
"Audit Committee") and the Compensation Committee (the "Compensation
Committee").
52
<PAGE>
The Audit Committee is responsible for reviewing with the Company's
independent accountants their audit plan, the scope and results of their audit
engagement and the accompanying management letter, if any, reviewing the scope
and results of the Company's internal auditing procedures, consulting with the
independent accountants and management with regard to the Company's accounting
methods and the adequacy of its internal accounting controls, approving
professional services provided by the independent accountants, reviewing the
independence of the independent accountants, and reviewing the range of the
independent accountants' audit and non-audit fees. The Audit Committee is
comprised of James O. Carpenter (Chairman), Marc A. Comeaux and Gordon E.
Kaiser, none of whom served as an officer or employee of the Company during
fiscal 1997.
The Compensation Committee is responsible for establishing the compensation
of executive officers and for administering and interpreting the Company's
Plan. The Compensation Committee consists of Stiles A. Kellett, Jr.
(Chairman), James O. Carpenter and Robert D. Gage, IV, none of whom served as
an officer or employee of the Company during fiscal 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On November 17, 1995, the Company issued and sold 2,000 shares of Series C
Preferred Stock to Mr. Kellett and an affiliate of Mr. Kellett for an
aggregate purchase price of $2.0 million. In connection with the sale of the
Series C Preferred Stock, the Company entered into a letter agreement with Mr.
Kellett (the "Kellett Agreement") pursuant to which the Company agreed to
cause its management to nominate Mr. Kellett to serve on the Board and to use
its best efforts to cause Mr. Kellett's election to the Board until the
earlier to occur of: (i) Mr. Kellett and his affiliates cease to own at least
50% of the 2,000 shares of Series C Preferred Stock acquired by him and his
affiliate (or shares of Common Stock issued upon the conversion thereof); or
(ii) the consummation of an initial public offering of Common Stock resulting
in proceeds to the Company of at least $10.0 million. The Kellett Agreement
will terminate according to its terms on the Closing Date. Pursuant to the
terms and conditions of the designation of the Series C Preferred Stock, on
the Closing Date each issued and outstanding share of Series C Preferred Stock
will be converted into 272.5725 shares of Common Stock without further action
on the part of the Company or the holders of the Series C Preferred Stock. It
is expected that Mr. Kellett will continue to serve as a director of the
Company at least until the first election of directors by the shareholders
following the Offering. See "Certain Transactions -- Series C Preferred Stock
Issuance."
On April 3, 1998, the Company issued and sold 1,500 shares of Series D
Preferred Stock to an affiliate of Mr. Kellett for $1.5 million. Pursuant to
the terms of the Series D Preferred Stock, all outstanding shares of Series D
Preferred Stock will be redeemed on the Closing Date through proceeds realized
from the Offering. See "Certain Transactions -- Series D Preferred Stock and
Related Warrant Issuance."
53
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation
The following table summarizes the compensation paid by the Company for
services rendered for fiscal 1997 by the Company's Chief Executive Officer and
the Company's other executive officers whose total salary and bonus for fiscal
1997 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- --------------------
SECURITIES ALL OTHER
NAME AND FISCAL UNDERLYING COMPENSA-
PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(#) TION(2)
------------------ ------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Jerry W. Mayfield........... 1997 $172,000 $10,000 -- $3,445
Chairman of the Board,
President and Chief
Executive Officer
David C. Massey............. 1997 121,000 8,000 -- 2,425
Senior Vice President --
Sales & Marketing
Robert P. Poche............. 1997 121,000 8,000 -- 2,425
Senior Vice President --
Systems & Technology
Daniel D. Lensgraf.......... 1997 110,000 8,000 -- 1,100
Senior Vice President --
Finance & Administration,
Chief Financial Officer and
Secretary
</TABLE>
- --------
(1) Consists of a discretionary bonus paid to the Named Executive Officers
based on the Company's performance during fiscal 1997.
(2) Represents contributions by the Company under its 401(k) Profit Sharing
Plan on behalf of the Named Executive Officers.
Stock Option Grants
The Company did not grant any stock options or stock appreciation rights
during fiscal 1997.
Option Values as of July 31, 1997
The following table sets forth information concerning the stock options held
by each of the Named Executive Officers as of July 31, 1997. No options were
exercised, and no stock appreciation rights were exercised or outstanding,
during fiscal 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT JULY 31, 1997 OPTIONS AT JULY 31, 1997(1)
------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Jerry W. Mayfield..... -- -- -- --
David C. Massey....... -- -- -- --
Robert P. Poche....... -- -- -- --
Daniel D. Lensgraf.... 28,167 56,332 $ 259,837 $ 519,652
</TABLE>
- --------
(1) There was no public trading market for the Common Stock at July 31, 1997.
Accordingly, these values have been calculated based on an assumed initial
public offering price of $11.00 per share, less the applicable exercise
price. See "Principal and Selling Shareholders."
54
<PAGE>
INCENTIVE PLAN
The Plan was adopted by the Board of Directors of the Company on September
18, 1997 and was approved by the Company's shareholders on December 18, 1997.
The purpose of the Plan is to promote the success, and enhance the value, of
the Company by linking the personal interests of key employees, officers and
directors to those of the shareholders, and by providing such persons with an
incentive for outstanding performance. The Plan is further intended to provide
flexibility to the Company in its ability to motivate, attract and retain the
services of persons upon whose judgment, interest and special effort the
successful conduct of its operation largely is dependent. The Plan authorizes
the granting of awards to key employees, officers and directors of the Company
or its subsidiaries in the following forms: (i) options (both incentive stock
options and non-qualified stock options) to purchase shares of stock; (ii)
stock appreciation rights; (iii) performance shares; (iv) restricted stock;
and (v) other stock-based awards. The Plan authorizes the issuance of up to
1,000,000 shares of Common Stock, and options for the purchase of 153,422 of
such shares have been granted and are outstanding as of April 30, 1998.
401(K) PLAN
The Company sponsors a defined contribution plan (the "401(k) Plan") for
eligible employees of the Company under Section 401(k) of the Internal Revenue
Code of 1986, as amended. Participants may contribute up to 15% of their
annual salaries to the 401(k) Plan, subject to certain limitations. All
contributions made by an employee are fully vested and are not subject to
forfeiture. The Company may make discretionary matching contributions to the
401(k) Plan on behalf of all eligible employees. During fiscal 1997, the
Company made matching contributions equal to 40% of the eligible contribution
made by each employee to the 401(k) Plan.
55
<PAGE>
CERTAIN TRANSACTIONS
NON-VOTING PREFERRED STOCK WARRANT ISSUANCE
In connection with the Credit Facility, the Company issued the Creditanstalt
Warrants for the purchase of 14,074 shares of Non-Voting Preferred Stock or
1,189,253 shares of Common Stock (the "Warrant Shares"), at the election of
Creditanstalt, at a weighted average price of $0.06 per share of Common Stock.
The Creditanstalt Warrants are exercisable from time to time on or before
December 3, 2005. The Creditanstalt Warrants provide that, subject to certain
conditions and exceptions, the holder of the Creditanstalt Warrants (the
"Warrant Holder") may not exercise Creditanstalt Warrants to purchase shares
of Common Stock if the purchase of such shares, when aggregated with shares of
Common Stock previously issued pursuant to the Creditanstalt Warrants or
issued upon conversion of Non-Voting Preferred Stock issued pursuant to the
Creditanstalt Warrants, would exceed 4.99% of the aggregate number of shares
of Common Stock outstanding as of the time of the exercise of the
Creditanstalt Warrants. The Creditanstalt Warrants further provide that in no
event shall any Creditanstalt Warrants be exercisable for shares of Common
Stock or Non-Voting Preferred Stock which, when aggregated with all other
shares of Common Stock and Non-Voting Preferred Stock then held by
Creditanstalt or its affiliates, would, upon issuance, represent in excess of
24.99% of the total shareholders' equity of the Company, including all series
of Preferred Stock, determined in accordance with GAAP. The Creditanstalt
Warrants provide the Warrant Holder with certain rights with respect to the
registration of the Creditanstalt Warrants and the Warrant Shares under the
Securities Act, subject to certain terms and conditions. See "Description of
Capital Stock -- Preferred Stock" and "Shares Eligible for Future Sale --
Registration Rights."
SERIES C PREFERRED STOCK ISSUANCE
On November 17, 1995, the Company issued and sold 1,000 shares of Series C
Preferred Stock to Creditanstalt, an aggregate of 2,000 shares to Stiles A.
Kellett, Jr. and an affiliate of Mr. Kellett and 500 shares to an unaffiliated
accredited investor (the "Series C Investors") for aggregate cash
consideration of $3.5 million (the "Series C Issuance"). See "Management --
Compensation Committee Interlocks and Insider Participation." Pursuant to the
terms and conditions of the Series C Preferred Stock, on the Closing Date each
issued and outstanding share of Series C Preferred Stock will be converted
into 272.5725 shares of Common Stock without further action on the part of the
Company or the Series C Investors. The terms of the Series C Preferred Stock
provide the Series C Investors with certain rights with respect to the
registration under the Securities Act of the Series C Preferred Stock or the
Common Stock issuable upon conversion of the Series C Preferred Stock, subject
to certain terms and conditions. See "Shares Eligible for Future Sale --
Registration Rights."
SERIES D PREFERRED STOCK AND RELATED WARRANT ISSUANCE
On April 3, 1998, the Company issued and sold an aggregate of 4,500 shares
of Series D Preferred Stock for $1,000 per share. Of such shares, 1,000 were
issued to Creditanstalt, 1,500 were issued to an affiliate of Mr. Kellett, 300
were issued to Mr. Carpenter, 200 were issued to Mr. Gage, 100 were issued to
each of CUE and Mr. Poche and 500 were issued to an affiliate of Messrs.
Mayfield, Massey and Lensgraf. Pursuant to the terms of the Series D Preferred
Stock, all outstanding shares of Series D Preferred Stock will be redeemed on
the Closing Date through proceeds realized from the Offering. The issuance and
sale of the Series D Preferred Stock to directors and executive officers of
the Company was approved by the shareholders of the Company. See "Use of
Proceeds."
In connection with the Series D Issuance, the Company issued warrants to
purchase an aggregate of 163,800 shares of Common Stock (or, with respect to
Creditanstalt and at the election of Creditanstalt, 430.769 shares of Non-
Voting Preferred Stock) at a price of $4.62 per share (the "Series D
Warrants"). In the event the Company does not redeem the Series D Preferred
Stock by June 30, 1998, December 31, 1998, December 31, 1999 and December 31,
2000, the aggregate number of shares of Common Stock subject to the Series D
Warrants increases to 245,700, 327,600, 409,500 and 491,400, respectively (or,
with respect to Creditanstalt, 646.1535, 861.5379,
56
<PAGE>
1,076.9225 and 1,292.3070 shares Non-Voting Preferred Stock, respectively).
The Series D Warrants are exercisable at any time or from time to time on or
prior to April 3, 2008. The Series D Warrants provide that, subject to certain
conditions and exceptions, the holder of the Series D Warrants (the "Series D
Warrant Holder") may not exercise Series D Warrants to purchase shares of
Common Stock if the purchase of such shares, when aggregated with shares of
Common Stock previously issued pursuant to the Series D Warrants or issued
upon conversion of Non-Voting Preferred Stock issued pursuant to the Series D
Warrants, would exceed 4.99% of the aggregate number of shares of Common Stock
outstanding as of the time of the exercise of the Series D Warrants. The
Series D Warrants further provide that in no event shall any Series D Warrant
be exercisable for shares of Common Stock or Non-Voting Preferred Stock which,
when aggregated with all other shares of Common Stock and Non-Voting Preferred
Stock then held by Creditanstalt or its affiliates, would, upon issuance,
represent in excess of 24.99% of the total shareholders' equity of the
Company, including all series of Preferred Stock, determined in accordance
with GAAP. The terms of the Series D Warrants provide the Series D Warrant
Holders with certain rights with respect to the registration under the
Securities Act of the shares issuable upon exercise of the Series D Warrants,
subject to certain terms and conditions. See "Shares Eligible For Future Sale
- -- Registration Rights."
OTHER TRANSACTIONS
Since 1988, the Company has maintained an ongoing relationship with CUE
pursuant to which the Company's FM subcarrier paging network is linked with
the CUE nationwide FM paging network. In April 1988, the Company issued and
sold 403,374 shares of Common Stock to CUE at a price of $0.74 per share of
Common Stock. In April 1991, the Company issued and sold 950 shares of Series
A Preferred Stock, which are convertible into 80,275 shares of Common Stock,
to CUE at a price of $1.18 per share of Common Stock. Additionally, since
April 1990, Mr. Gordon E. Kaiser, President and Chief Executive Officer of
CUE, has served as a director of the Company. As of April 30, 1998, CUE owned
approximately 8.4% of the outstanding Common Stock of the Company on a fully
diluted basis. CUE from time to time provides the Company with various paging
services, consisting principally of airtime and network services for the
purpose of providing regional and nationwide paging. The amounts paid by the
Company to CUE for such services during fiscal 1995, 1996 and 1997 and for the
nine months ended April 30, 1998 were $1.7 million, $2.5 million, $4.2 million
and $3.2 million, respectively. The Company will periodically have outstanding
affiliated receivables and payables related to the timing of payments for such
services.
Creditanstalt is a lender and agent for the lenders under the Company's
$40.0 million Credit Facility. As of June 12, 1998, total indebtedness under
the Credit Facility was $37.9 million. The amounts paid by the Company to
Creditanstalt, as agent for the lenders, under the Credit Facility for fiscal
1995, 1996 and 1997 and for the nine months ended April 30, 1998 were
$700,000, $1.0 million, $1.6 million and $1.1 million, respectively. The
Company intends to use $21.8 million of the net proceeds to repay outstanding
indebtedness under the Credit Facility. See "Use of Proceeds."
The Company believes that none of the transactions described above were on
terms more favorable to officers, directors and principal shareholders than
could have been obtained in a transaction with an unaffiliated party. The
Company requires all material transactions between the Company and its
officers, directors or other affiliates to: (i) be approved by a majority of
the disinterested members of the Board of Directors of the Company and (ii) be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
57
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 30, 1998, and as adjusted to reflect
the sale of the Common Stock offered hereby, by: (i) each director of the
Company who beneficially owns Common Stock; (ii) each Named Executive Officer
of the Company; (iii) all directors and executive officers of the Company as a
group; (iv) each person known to the Company to beneficially own more than 5%
of the Common Stock; and (v) each of the Selling Shareholders. Unless
otherwise indicated, all shares of Common Stock are owned directly and the
indicated person has sole voting and investment power. All share amounts
assume the automatic conversion of all issued and outstanding shares of Series
A Preferred Stock and Series C Preferred Stock into shares of Common Stock on
the Closing Date and the redemption of all issued and outstanding shares of
Series D Preferred Stock on the Closing Date.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED AFTER
PRIOR TO OFFERING(1) NUMBER OF OFFERING
----------------------- SHARES -----------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- ------------ ------------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Creditanstalt American Corporation(2)........... 1,516,425 25.8 339,824 1,176,601 13.8
Jerry W. Mayfield(3)............................ 594,636 12.8 -- 594,636 8.0
Kellett Partners, L.P. and Stiles A.
Kellett, Jr.(4)................................ 602,593 12.8 -- 602,593 8.1
David C. Massey(5).............................. 546,086 11.7 -- 546,086 7.4
CUE Paging Corporation and Gordon E.
Kaiser(6)...................................... 504,528 9.8 -- 504,528 6.4
Robert D. Gage, IV(7)........................... 485,605 10.0 -- 485,605 6.4
James O. Carpenter(8)........................... 449,639 9.7 -- 449,639 6.1
Marc A. Comeaux(9).............................. 322,954 6.9 40,000 236,521 3.2
Robert P. Poche(10)............................. 154,357 3.3 15,000 139,357 1.9
Daniel D. Lensgraf(11).......................... 74,793 1.6 -- 74,793 1.0
Dr. David Autin................................. 60,963 1.3 50,000 10,963 *
Dr. E. Paul Breaux.............................. 100,893 2.2 100,893 -- --
Campbell Investment Group....................... 171,332 3.7 142,100 29,232 *
Ira J. Carpenter, Jr............................ 87,358 1.9 39,000 48,358 *
Audrey B. Menard(12)............................ 88,683 1.9 88,683 -- --
Mary E. Menard.................................. 84,500 1.8 84,500 -- --
All directors and executive officers as a group
(9 persons).................................... 3,735,192 66.8 55,000 3,680,192 43.8
</TABLE>
- --------
* Less than 1%.
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares that such person or group has the
right to acquire within 60 days after April 30, 1998 with respect to which
such person has or shares voting or investment power. For purposes of
computing the percentages of outstanding shares held by each person or
group of persons, shares which such person or group has the right to
acquire within 60 days after such date are deemed to be outstanding for
purposes of computing the percentage for such person or group but are not
deemed to be outstanding for the purpose of computing the percentage of
any other person or group. See "Use of Proceeds."
(2) Includes 1,189,253 shares of Common Stock issuable upon exercise of the
Creditanstalt Warrants and 54,600 shares of Common Stock issuable upon
exercise of the Series D Warrants. The address of Creditanstalt is 245
Park Avenue, New York, New York 10167.
(3) Includes 10,920 shares of Common Stock issuable upon exercise of the
Series D Warrants. Mr. Mayfield's address is 1325 Northmeadow Parkway,
Suite 120, Roswell, Georgia 30075.
(4) Includes 520,692 shares of Common Stock held by Kellett Partners, L.P., of
which Mr. Kellett is the General Partner, and 81,900 shares of Common
Stock issuable upon exercise of the Series D Warrants. The address of
Kellett Partners, L.P. and Mr. Kellett is 200 Galleria Parkway, Suite
1800, Atlanta, Georgia 30395.
(5) Includes 32,390 shares of Common Stock held in trust for Mr. Massey's
children and as to which Mr. Massey disclaims beneficial ownership and
10,920 shares of Common Stock issuable upon exercise of the Series D
Warrants. Mr. Massey's address is 1325 Northmeadow Parkway, Suite 120,
Roswell, Georgia 30076.
58
<PAGE>
(6) Includes 499,068 shares of Common Stock held by CUE Paging Corporation,
of which Mr. Kaiser is the President and Chief Executive Officer, and
5,460 shares of Common Stock issuable upon exercise of the Series D
Warrants. The address of CUE Paging Corporation is 5 Corporate Park,
Suite 100, Irvine, California 92609.
(7) Includes 238,412 shares of Common Stock held by Gage Partners, of which
Mr. Gage is the General Partner, and 10,920 shares of Common Stock
issuable upon exercise of the Series D Warrants. Mr. Gage's address is
Post Office Box 608, Port Gibson, Mississippi 39150.
(8) Includes 16,380 shares of Common Stock issuable upon exercise of the
Series D Warrants. Mr. Carpenter's address is Post Office Box 608, Port
Gibson, Mississippi 39150.
(9) Includes 46,433 shares of Common Stock held on behalf of Mr. Comeaux's
mother-in-law, Audrey E. Menard, and as to which Mr. Comeaux disclaims
beneficial ownership. Mr. Comeaux's address is 3640 Schooner Ridge Drive,
Alpharetta, Georgia 30202.
(10) Includes 5,460 shares of Common Stock issuable upon exercise of the
Series D Warrants.
(11) Includes 5,460 shares of Common Stock issuable upon exercise of the
Series D Warrants. Additionally, Mr. Lensgraf holds unvested options to
purchase 28,167 shares of Common Stock, which options will vest on the
Closing Date; such shares are included in the shares shown as
beneficially owned after the Offering but are not included in the shares
shown as beneficially owned prior to the Offering.
(12) Includes 46,433 shares of Common Stock held on Ms. Menard's behalf by her
son-in-law, Marc A. Comeaux, all of which shares will be sold in the
Offering.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's capital stock currently is divided into two classes of Common
Stock, designated Class A Common Stock, par value $0.01, and Class B Common
Stock, par value $0.01, and four series of Preferred Stock, designated Series
A Convertible Preferred Stock, par value $0.01, Series B Convertible Preferred
Stock, par value $0.01, Series C Convertible Preferred Stock, par value $0.01,
and Series D Preferred Stock, par value $0.01. On the Closing Date, the Class
A Common Stock will be redesignated as Common Stock, par value $0.01, and the
Series B Preferred Stock will be redesignated as Non-Voting Preferred Stock,
par value $0.01. In addition, the Class B Common Stock will be eliminated,
each outstanding share of Series A Preferred Stock will be converted into 84.5
shares of Common Stock, each outstanding share of Series C Preferred Stock
will be converted into 272.5725 shares of Common Stock and each outstanding
share of Series D Preferred Stock will be redeemed using a portion of the net
proceeds from the Offering. Accordingly, no information regarding the terms of
the Class B Common Stock, Series A Preferred Stock, the Series C Preferred
Stock or the Series D Preferred Stock is provided below. See "Capitalization."
As of the completion of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock and 10,030,000
shares of Preferred Stock. Of the 10,030,000 shares of Preferred Stock, 30,000
shares have been designated by the Board of Directors as Non-Voting Preferred
Stock.
The following summary is subject to and qualified in its entirety by the
provisions of the Company's Articles and Bylaws (the "Bylaws") and by the
provisions of applicable law.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters on
which the holders of Common Stock are entitled to vote. Holders of Common
Stock have no preemptive, conversion, redemption or sinking fund rights. In
the event of a liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to share ratably in the assets of the Company, if
any, remaining after the payment of all debts and liabilities of the Company
and the liquidation preference of any outstanding class or series of Preferred
Stock. The outstanding shares of Common Stock are, and the shares of Common
Stock offered by the Company hereby when issued will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to the Non-Voting Preferred Stock and any series of
Preferred Stock which the Company may issue in the future as described below.
PREFERRED STOCK
The Board of Directors has the authority, pursuant to the Articles, to issue
the Preferred Stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series without further vote
or action by the shareholders. The issuance of Preferred Stock by the Board of
Directors could adversely affect the rights of holders of Common Stock.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
shareholders and may adversely affect the voting and other rights of the
holders of Common Stock. Other than the Creditanstalt Warrants, there are
currently no agreements or understandings regarding the issuance of Preferred
Stock which agreements or understandings will survive the consummation of the
Offering, and the Board of Directors has no present intention of issuing any
shares of Preferred Stock except for shares of Non-Voting Preferred Stock that
may be issued upon exercise of the Creditanstalt Warrants.
60
<PAGE>
The Board of Directors has designated the Non-Voting Preferred Stock solely
for the purpose of fulfilling the Company's obligations under the
Creditanstalt Warrants. The designation of the Non-Voting Preferred Stock does
not restrict the Company from issuing additional securities of any kind,
including shares of Preferred Stock of any class, series or designation,
provided, that issuances of Non-Voting Preferred Stock shall be limited to
issuance upon exercise of the Creditanstalt Warrants. Dividends and other
distributions, payable in cash or other property, shall be paid on the Non-
Voting Preferred Stock equally, ratably and on a parity with such dividends
and other distributions paid on the Common Stock, as when and such dividends
and other distributions are declared by the Board of Directors, as though the
Common Stock and Non-Voting Preferred Stock were one and the same class.
Holders of Non-Voting Preferred Stock are not entitled to vote or give consent
to or on any matter submitted to the Company's shareholders except as
specifically provided by the Georgia Code. Upon liquidation of the Company,
the Non-Voting Preferred Stock is entitled to a preference of $0.01 per share
prior to any payment on the Common Stock or any class or series of stock
ranking junior to the Non-Voting Preferred Stock. Each share of Non-Voting
Preferred Stock is convertible into 84.5 shares of Common Stock. See "Certain
Transactions -- Non-Voting Preferred Stock Warrant Issuance."
CERTAIN PROVISIONS OF THE ARTICLES, BYLAWS AND THE GEORGIA CODE
The Company's Articles and Bylaws as of the Closing Date will contain, and
the Georgia Code currently contains, certain provisions, described below, that
could delay, defer or prevent a change in control of the Company that a
shareholder may deem to be in such shareholder's best interest.
Number, Term and Removal of Directors. The Company's Articles and Bylaws
will provide that the Company's Board of Directors shall be comprised of three
to 11 members, as determined from time to time by resolution of the Board of
Directors. At the first annual meeting of shareholders held after completion
of the Offering, the Board of Directors will be divided into three classes of
approximately equal numbers of directors. Each class of directors will serve
for a term of three years, and the shareholders will elect one new class of
directors each year. Any director may be removed from office but only for
cause and only by the affirmative vote of the holders of at least 75% of all
classes of stock entitled to vote in the election of directors. Any vacancies
on the Board of Directors for any reason, including vacancies resulting from
an increase in the number of directors, may be filed only by the Board of
Directors, acting by the affirmative vote of two-thirds of the total number of
directors then remaining in office. Any director appointed to fill a vacancy
shall be elected for the unexpired term of the predecessor in office and until
the successor is elected and qualified, except that when a directorship is to
be filled by reason of an increase in the number of directors, the term of
such director shall expire at the next election of directors by the
shareholders and upon the election and qualification of the successor.
Call of and Notices Relating to Shareholder Meetings; Actions by Written
Consent of Shareholders. The Company's Bylaws will provide as of the Closing
Date that special meetings of shareholders or special meetings in lieu of
annual meetings of shareholders may be called at any time by the Board of
Directors, the Chairman of the Board or the President, or any holder or
holders of 25% or more of the votes entitled to be cast on the issue or issues
to be considered at the proposed special meeting. Meetings of the shareholders
are to be held at such time and place and on such date as specified in the
notice of the meeting. Notice of annual or special shareholders' meetings
shall be given not less than 10 nor more than 60 days before the date of the
meeting, and notice of any special meeting of shareholders shall state the
purpose or purposes for which the meeting is called. Actions required to be
taken at a shareholders' meeting may be taken without a meeting if the action
is taken by persons who would be entitled to vote at a meeting shares having
voting power to cast not less than the minimum number (or numbers, in the case
of voting by groups) of votes that would be necessary to authorize or take
such action at a meeting at which all shareholders entitled to vote were
present and voted. The action must be evidenced by one or more written
consents describing the action taken, signed by the shareholders entitled to
take action without a meeting and delivered to the Company for inclusion in
the minutes or filing with the corporate records.
Georgia Business Combination Statute. Pursuant to the Bylaws, as of the
Closing Date, the Company will be subject to the provisions of the Georgia
Code prohibiting various "business combinations" involving
61
<PAGE>
"interested shareholders" for a period of five years after the shareholder
becomes an interested shareholder of the Company. Such provisions prohibit any
business combination with an interested shareholder unless either (i) prior to
such time, the Board of Directors approves either the business combination or
the transaction by which such shareholder became an interested shareholder,
(ii) in the transaction that resulted in the shareholder becoming an
interested shareholder, the interested shareholder became the beneficial owner
of at least 90% of the outstanding voting stock of the Company which was not
held by directors, officers, affiliates thereof, subsidiaries or certain
employee stock option plans of the Company, or (iii) subsequent to becoming an
interested shareholder, such shareholder acquired additional shares resulting
in such shareholder owning at least 90% of the outstanding voting stock of the
Company and the business combination is approved by a majority of the
disinterested shareholders' shares not held by directors, officers, affiliates
thereof, subsidiaries or certain employee stock options plans of the Company.
Under the relevant provisions of the Georgia Code, a "business combination" is
defined to include, among other things, (i) any merger, consolidation, share
exchange or any sale, transfer or other disposition (or series of related
sales or transfers) of assets of the Company having an aggregate book value of
10% or more of the Company's net assets (measured as of the end of the most
recent fiscal quarter), with an interested shareholder of the Company or any
other corporation which is or, after giving effect to such business
combination, becomes an affiliate of any such interested shareholder, (ii) the
liquidation or dissolution of the Company, (iii) the receipt by an interested
shareholder of any benefit from any loan, advance, guarantee, pledge, tax
credit or other financial benefit from the Company, other than in the ordinary
course of business and (iv) certain other transactions involving the issuance
or reclassification of securities of the Company which produce the result that
5% or more of the total equity shares of the Company, or of any class or
series thereof, is owned by an interested shareholder. An "interested
shareholder" is defined by the Georgia Code to include any person or entity
that, together with its affiliates, beneficially owns or has the right to own
10% or more of the outstanding voting shares of the Company, or any person
that is an affiliate of the Company and has, at any time within the preceding
two-year period, been the beneficial owner of 10% or more of the outstanding
voting shares of the Company. The restrictions on business combinations shall
not apply to any person who was an interested shareholder before the adoption
of the Bylaw which made the provisions applicable to the Company nor to any
persons who subsequently become interested shareholders inadvertently,
subsequently divest sufficient shares so that the shareholder ceases to be an
interested shareholder and would not, at any time within the five-year period
immediately before a business combination involving the shareholder, have been
an interested shareholder but for the inadvertent acquisition.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock.
Sales of substantial amounts of shares of the Common Stock in the public
market following the Offering, or the perception that such sales could occur,
could adversely affect the market price of the Common Stock prevailing from
time to time and could impair the Company's ability to raise capital in the
future through sales of its equity securities at a time and price which it
deems appropriate.
On the Closing Date, assuming no exercise of outstanding options or
warrants, the Company will have 7,380,297 shares of Common Stock outstanding.
The 3,650,000 shares of Common Stock sold in the Offering will be freely
tradeable without restriction or further registration under the Securities
Act, except that any shares purchased by "affiliates" of the Company, as that
term is defined in Rule 144 of the Commission ("Affiliates"), may generally
only be sold in compliance with Rule 144. The remaining 3,730,297 shares of
Common Stock are "restricted securities" as defined in Rule 144. Restricted
securities may be sold in the public market only if they are registered under
the Securities Act or if they qualify for an exemption from registration such
as that provided by Rule 144 of the Commission.
SALES OF RESTRICTED SECURITIES
On the Closing Date, subject to the provisions of Rule 144, 209,865 shares
of Common Stock will be eligible for immediate sale in the public market
pursuant to Rule 144(k). Beginning 180 days after the date of this Prospectus
(or earlier with the written consent of J.C. Bradford & Co.) 3,520,432
additional shares will be available for immediate sale in the public market,
subject to the provisions of Rule 144, upon the expiration of the Lock-Up
Agreements between the Underwriters and the directors, executive officers,
Selling Shareholders and each holder of more than 5% of the Company's Common
Stock. See "--Lock-Up Agreements."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year,
including a person who may be deemed an Affiliate of the Company, is entitled
to sell, within any three-month period, a number of shares of Common Stock
equal to the greater of 1% of the outstanding Common Stock (approximately
73,803 shares after giving effect to the Offering) and the average weekly
reported trading volume of the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are subject to certain restrictions
relating to manner of sale, notice and availability of current public
information about the Company. In addition, under Rule 144(k), a person who is
not an Affiliate and has not been an Affiliate at any time during the 90 days
preceding a sale, and who has beneficially owned shares for at least two
years, would be entitled to sell such shares immediately following the
Offering without regard to the volume limitations, manner of sale provisions
or notice or other requirements of Rule 144.
OPTIONS
As of May 19, 1998, options and warrants to purchase an aggregate of
1,784,718 shares of Common Stock were outstanding and, assuming the exercise
by Creditanstalt of Creditanstalt Warrants to purchase 339,824 shares of
Common Stock to be sold by Creditanstalt in the Offering, as of the Closing
Date, option, and warrants to purchase an aggregate of 1,444,894 shares of
Common Stock will be outstanding. Of such shares of Common Stock, 350,718 will
be eligible for sale beginning 90 days after the date of this Prospectus,
subject to the provisions of Rule 144 and Rule 701 of the Securities and
Exchange Commission (the "Commission"). An additional 1,094,176 shares of
Common Stock that are subject to currently outstanding options and warrants
will become eligible for sale upon the expiration of the Lock-Up Agreements
beginning 180 days after the date of this Prospectus, subject to the
provisions of Rule 144 .
The Company intends to file a Registration Statement on Form S-8 as soon as
practicable after the completion of the Offering to register 1,000,000 shares
of Common Stock, of which 153,422 shares are subject to outstanding but
unvested options, that are available for issuance pursuant to the Plan. All of
such registered shares also generally would then be eligible for immediate
sale in the public market, subject to Lock-Up Agreements, if applicable, and
compliance with certain provisions of Rule 144 by Affiliates.
63
<PAGE>
LOCK-UP AGREEMENTS
The directors, executive officers, Selling Shareholders and each holder of
more than 5% of the Company's Common Stock have agreed with the Underwriters,
pursuant to the Lock-Up Agreements, not to directly or indirectly, without the
prior written consent of J.C. Bradford & Co., (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (including, without limitation, shares of Common Stock or
securities convertible into or exercisable or exchangeable for Common Stock
which may be deemed beneficially owned by them), or (ii) enter into any swap
or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Common Stock for a period of
180 days after the date of this Prospectus. Notwithstanding the foregoing, the
Lock-Up Agreements permit, during the 180-day lock-up period, (i) transfers
made by gift, provided the donee thereof agrees in writing to be bound by the
terms of the Lock-Up Agreement, (ii) transfers to the transferor's affiliates,
as such term is defined by Rule 405 under the Securities Act, provided any
such transferee agrees to be bound by the terms of the Lock-Up Agreement and
(iii) transfers made with the prior written consent of J.C. Bradford & Co.
Additionally, each party to a Lock-Up Agreement has agreed that during the
180-day lock-up period, such party will not make any demand for, or exercise
any right with respect to, the registration of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock without the prior written consent of J.C. Bradford & Co. See "Principal
and Selling Shareholders."
REGISTRATION RIGHTS
Non-Voting Preferred Stock Registration Rights
The Creditanstalt Warrants provide that, upon the written demand of any
Warrant Holder at any time from time to time after the earlier of: (i) six
months following the consummation of the Offering; or (ii) December 3, 1998
requesting that the Company effect the registration under the Securities Act
of Creditanstalt Warrants or shares of Common Stock or Non-Voting Preferred
Stock issuable upon the exercise of Creditanstalt Warrants (the "Warrant
Shares"), the Company shall give written notice of such demand to all other
Warrant Holders. If the Company receives requests for the registration of at
least an aggregate of 1,000 Creditanstalt Warrants or Warrant Shares (or if
less than an aggregate of 1,000 Creditanstalt Warrants or Warrant Shares are
outstanding, the remainder of Warrant Shares not registered under the
Securities Act), the Company shall file a registration statement under the
Securities Act for the registration of the Creditanstalt Warrants or Warrant
Shares, as appropriate (a "Demand Registration"). The Company is obligated to
effect up to three Demand Registrations on behalf of the Warrant Holders.
The Creditanstalt Warrants further provide that if, at any time after
December 3, 1995, the Company proposes to register any of its securities under
the Securities Act (except pursuant to a registration statement filed on Form
S-8 or S-4 or such other form as shall be prescribed under the Securities Act
for substantially similar purposes), it will give written notice to all
holders of Creditanstalt Warrants and Warrant Shares of its intention to
register such securities. Upon the written request of any Warrant Holder given
within 10 days of the Company's notice of registration, the Company shall use
its reasonable best efforts to effect the registration of the Creditanstalt
Warrants and/or the Warrant Shares which it shall have been so requested to
register by including such Creditanstalt Warrants and/or Warrant Shares in the
proposed registration statement. If the proposed registration is for an
underwritten public offering, only Creditanstalt Warrants or Warrant Shares
which are to be included in the underwriting may be included in such
registration, and the Company shall have the right to designate the managing
underwriter(s) in any such underwritten public offering, provided that, (i)
the Company shall use its best efforts to cause the managing underwriter(s) to
include the Creditanstalt Warrants or Warrant Shares in the underwriting; and
(ii) if the managing underwriter(s) advises the Warrant Holders and all other
persons seeking to include securities of the Company held by them in such
registration statement ("Other Security Holders") in writing that the total
amount of securities which they and the Company and any Other Security Holders
intend to include in such offering is sufficiently large to materially and
adversely affect the success of such offering, the amount of securities to be
offered shall be reduced.
64
<PAGE>
Series C Preferred Stock Registration Rights
The agreement relating to the Series C Issuance (the "Series C Purchase
Agreement") provides that, upon the written demand of any Series C Investor at
any time from time to time after the earlier of: (i) six months following the
consummation of the Offering; or (ii) November 17, 2000 requesting that the
Company effect the registration under the Securities Act of shares of Series C
Preferred Stock or Common Stock issuable upon conversion of such shares of
Series C Convertible Stock ("Series C Shares"), the Company shall give written
notice of such demand to all other Series C Investors. If the Company receives
requests for the registration of at least an aggregate of at least one-fifth
of the Series C Shares (or if less than an aggregate of one-fifth of are
outstanding, the remainder of Series C Shares not registered under the
Securities Act), the Company shall file a registration statement under the
Securities Act for the registration of the Series C Shares (a "Series C Demand
Registration"). The Company is obligated to effect not more than two Series C
Demand Registrations on behalf of the Series C Investors.
The Series C Purchase Agreement further provides that if, at any time after
November 17, 1995, the Company proposes to register any of its securities
under the Securities Act (except pursuant to a registration statement filed on
Form S-8 or S-4 or such other form as shall be prescribed under the Securities
Act for substantially similar purposes), it will give written notice to all
Series C Investors of its intention to register such securities. Upon the
written request of any Series C Investor given within 10 days of the Company's
notice of registration, the Company shall use its reasonable best efforts to
effect the registration of the Series C Shares which it shall have been so
requested to register by including such Series C Shares in the proposed
registration statement. If the proposed registration is for an underwritten
public offering, only Series C Shares which are to be included in the
underwriting may be included in such registration, and the Company shall have
the right to designate the managing underwriter(s) in any such underwritten
public offering, provided that: (i) the Company shall use its best efforts to
cause the managing underwriter(s) to include the Series C Shares in the
underwriting; and (ii) if the managing underwriter(s) advises the Series C
Investors and all other persons seeking to include securities of the Company
held by them in such registration statement ("Other Security Holders") in
writing that the total amount of securities which they and the Company and any
Other Security Holders intend to include in such offering is sufficiently
large to materially and adversely affect the success of such offering, the
amount of securities to be offered shall be reduced.
Series D Preferred Stock Registration Rights
The agreement relating to the Series D Issuance (the "Series D Purchase
Agreement") further provides that if, at any time after April 3, 1998, the
Company proposes to register any of its securities under the Securities Act
(except pursuant to a registration statement filed on Form S-8 or S-4 or such
other form as shall be prescribed under the Securities Act for substantially
similar purposes), it will give written notice to all of its intention to
register such securities. Upon the written request of any Series D Warrant
Holder given within 10 days of the Company's notice of registration, the
Company shall use its reasonable best efforts to effect the registration of
the shares issuable upon exercise of the Series D Warrants (the "Series D
Warrant Shares") which it shall have been so requested to register by
including such Series D Warrant Shares in the proposed registration statement.
If the proposed registration is for an underwritten public offering, only
Series D Warrant Shares which are to be included in the underwriting may be
included in such registration, and the Company shall have the right to
designate the managing underwriter(s) in any such underwritten public
offering, provided that: (i) the Company shall use its commercially reasonable
efforts to cause the managing underwriter(s) to include the Series D Warrant
Shares in the underwriting; and (ii) if the managing underwriter(s) advises
the Series D Warrant Holders and all other persons seeking to include
securities of the Company held by them in such registration statement in
writing that the total amount of securities which they and the Company and any
other security holders intend to include in such offering is sufficiently
large to materially and adversely affect the success of such offering, the
amount of securities to be offered shall be reduced.
Breckenridge Registration Rights
Since 1995, the Company has maintained an ongoing relationship with The
Breckenridge Group, Inc. ("Breckenridge"), an Atlanta-based investment banking
firm. Breckenridge has advised the Company on
65
<PAGE>
significant acquisitions consummated since February 1996. In July 1997, in
consideration of Breckenridge's agreement to forgive the cash payment of
outstanding advisory fees and to advise the Company on future acquisitions,
the Company issued options to purchase an aggregate of 169,000 shares of
Common Stock to principals of Breckenridge. The Breckenridge Options provide
for an exercise price of $3.68 per share and are exercisable in full at any
time on or prior to May 31, 2002. The exercise price of the Breckenridge
Options was based on recent sales prices for shares of Common Stock in arms'
length transactions and the issuance of the Breckenridge Options was approved
by the Board.
The Breckenridge Options provide that if, at any time prior to May 31, 2002,
the Company proposes to register any of its securities under the Securities
Act (except pursuant to a registration statement filed on Form S-8 or S-4 or
such other form as shall be prescribed under the Securities Act for
substantially similar purposes), other than in connection with an underwritten
initial public offering which produces gross proceeds to the Company in excess
of $30,000,000, it will give written notice to all holders of Breckenridge
Options of its intention to register such securities. Upon the written request
of any holder of Breckenridge Options given within 20 business days of the
Company's notice of registration, the Company shall use its reasonable best
efforts to effect the registration of the shares of Common Stock issuable upon
exercise of the Breckenridge Options (the "Breckenridge Shares") which it
shall have been so requested to register by including such shares of Common
Stock in the proposed registration statement. If the proposed registration is
for an underwritten public offering, only Breckenridge Shares which are to be
included in the underwriting may be included in such registration, and the
Company shall have the right to designate the managing underwriter(s) in any
such underwritten public offering, provided that: (i) the Company shall use
its best efforts to cause the managing underwriter(s) to include the
Breckenridge Shares in the underwriting; and (ii) if the managing
underwriter(s) advises the holders of Breckenridge Options and all other
persons seeking to include securities of the Company held by them in such
registration statement ("Other Security Holders") in writing that the total
amount of securities which they and the Company and any Other Security Holders
intend to include in such offering is sufficiently large to materially and
adversely affect the success of such offering, the amount of securities to be
offered shall be reduced. See "Risk Factors -- Shares Eligible for Future
Sale."
66
<PAGE>
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the underwriters named below (the "Underwriters"), acting
through J.C. Bradford & Co. and Morgan Keegan & Company, Inc., as
representatives of the several Underwriters (the "Representatives"), have
agreed, severally, to purchase from the Company and the Selling Shareholders
the number of shares of Common Stock set forth below opposite their respective
names.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ---------
<S> <C>
J.C. Bradford & Co.................................................
Morgan Keegan & Company, Inc.......................................
---
Total............................................................
===
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions contained therein, to purchase all shares of Common Stock
offered hereby, if any of such shares are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose initially to offer the shares of
Common Stock to the public at the initial public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the Offering, the public offering price and such
concessions may be changed. The Representatives have informed the Company and
the Selling Shareholders that the Underwriters do not intend to confirm sales
to accounts over which they exercise discretionary authority.
The Offering of the shares of Common Stock is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days from the date of this Prospectus, to purchase up to 547,500
additional shares of Common Stock to cover over-allotments, if any. To the
extent that the Underwriters exercise this option, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the table above bears to the total number of shares in such table, and the
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the 3,650,000 shares of Common
Stock offered hereby. If purchased, the Underwriters will sell such additional
shares on the same terms as those on which the 3,650,000 shares are being
offered.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price has been determined by negotiation among the
Company, the Selling Shareholders and the Representatives. In determining such
price, consideration was given to, among other things, the financial and
operating history and trends of the Company, the experience of its management,
the position of the Company in its industry, the Company's prospects and the
Company's financial results. Additionally, consideration was given to the
status of the securities markets, market conditions for new offerings of
securities and the prices of similar securities of comparable companies.
67
<PAGE>
The Company, its executive officers and directors, the Selling Shareholders
and each holder of more than 5% of the Company's Common Stock have agreed with
the Representatives, subject to certain exceptions, not to offer to sell or
otherwise dispose of any shares of Common Stock, options or warrants to
purchase Common Stock or other securities convertible into or exchangeable for
Common Stock for a period of 180 days from the date of this Prospectus without
the prior written consent of J.C. Bradford & Co., except that the Company may
issue shares in connection with the exercise of stock options granted pursuant
to the Plan. See "Risk Factors -- Shares Eligible for Future Sale" and "Shares
Eligible for Future Sale -- Lock-Up Agreements."
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and controlling persons, if any,
against certain civil liabilities, including liabilities under the Securities
Act, or will contribute to payments that the Underwriters or any such
controlling persons may be required to make in respect thereof.
In connection with the Offering, the Underwriters and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in the Common Stock for their own account. To cover over-allotments
or to stabilize the price of the Common Stock, the Underwriters may bid for,
and purchase, shares of Common Stock in the open market. The Underwriters may
also impose a penalty bid whereby they may reclaim selling concessions allowed
to an underwriter or a dealer for distributing Common Stock in the Offering,
if the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short position, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of
Common Stock in market making transactions. These activities may stabilize or
maintain the market price of Common Stock above market levels that may
otherwise prevail. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby and certain other
legal matters will be passed upon for the Company by Alston & Bird llp,
Atlanta, Georgia. Certain legal matters related to the Offering will be passed
upon for the Underwriters by Nelson Mullins Riley & Scarborough, L.L.P.,
Atlanta, Georgia.
EXPERTS
The historical financial statements of the Company as of July 31, 1996 and
1997 and January 31, 1998 and for each of the three years in the period ended
July 31, 1997 and for the six months ended January 31, 1998, of AVP and C.R.
as of December 31, 1995 and for the year then ended, and of Message World as
of December 31, 1996 and for the year then ended included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The historical financial statements of Hyde's as of December 31, 1997 and
1996, and for each of the years then ended included in the Prospectus have
been audited by James N. Rachel, independent auditor, as indicated in his
report with respect thereto, and are included herein in reliance upon his
authority as an expert in giving said report.
68
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement, including the exhibits and
schedules filed or incorporated as a part thereof. Statements contained herein
concerning the provisions of any document are necessarily summarized and in
each instance reference is made to the copy of the document filed as an
exhibit or schedule to the Registration Statement. Each such statement is
qualified in its entirety by reference to the copy of the applicable documents
filed with the Commission.
After effectiveness of the Registration Statement, the Company will file
periodic reports and other information with the Commission under the
Securities Exchange Act of 1934, as amended. The Registration Statement,
including the exhibits and schedules thereto, and the periodic reports and
other information filed in connection therewith, may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Seven World Trade Center, New York, New York 10048 and
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Such
reports, proxy and information statements and other information may be found
on the Commission's site address, http://www.sec.gov. Copies of such material
also can be obtained from the Company upon request.
69
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of July 31, 1996 and 1997 and January 31,
1998................................................................... F-4
Consolidated Statements of Operations for the Years Ended July 31, 1995,
1996, and 1997 and for the Six Months Ended January 31, 1997 and 1998.. F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the Years
Ended July 31, 1995, 1996, and 1997 and for the Six Months Ended
January 31, 1998....................................................... F-7
Consolidated Statements of Cash Flows for the Years Ended July 31, 1995,
1996, and 1997 and for the Six Months Ended January 31, 1997 and 1998.. F-8
Notes to Consolidated Financial Statements................................ F-9
Condensed Financial Statements as of April 30, 1998 (Unaudited)
Condensed Balance Sheets as of July 31, 1997 and April 30, 1998
(Unaudited)............................................................ F-24
Condensed Statements of Operations for the Nine Months Ended April 30,
1997 and 1998 (Unaudited).............................................. F-26
Condensed Statement of Cash Flows for the Nine Months Ended April 30,
1997 and 1998 (Unaudited).............................................. F-27
Condensed Notes Financial Statements...................................... F-28
ATLANTA VOICE PAGE, INC.
Report of Independent Public Accountants.................................. F-30
Financial Statements:
Balance Sheet as of December 31, 1995................................... F-31
Statement of Operations for the Year Ended December 31, 1995............ F-32
Statement of Shareholders' Deficit for the Year Ended December 31, 1995. F-33
Statement of Cash Flows for the Year Ended December 31, 1995............ F-34
Notes to Financial Statements............................................. F-35
C.R., INC.
Report of Independent Public Accountants.................................. F-38
Financial Statements:
Balance Sheet as of December 31, 1995................................... F-39
Statement of Operations for the Year Ended December 31, 1995............ F-40
Statement of Shareholders' Equity for the Year Ended December 31, 1995.. F-41
Statement of Cash Flows for the Year Ended December 31, 1995............ F-42
Notes to Financial Statements............................................. F-43
</TABLE>
F-1
<PAGE>
PAGE
----
MESSAGE WORLD
Report of Independent Public Accountants.................................. F-47
Financial Statements:
Balance Sheet as of December 31, 1996................................... F-48
Statement of Operations for the Year Ended December 31, 1996............ F-49
Statement of (Accumulated Deficit) Retained Earnings for the Year Ended
December 31, 1996...................................................... F-50
Statement of Cash Flows for the Year Ended December 31, 1996............ F-51
Notes to Financial Statements............................................. F-52
HYDE'S STAY IN TOUCH, INC.
Independent Auditor's Report.............................................. F-55
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996......................... F-56
Statements of Income for the Year Ended December 31, 1997 and 1996...... F-57
Statements of Retained Earnings for the Year Ended December 31, 1997 and
1996................................................................... F-58
Statements of Cash Flows for the Year Ended December 31, 1997 and 1996.. F-59
Notes to Financial Statements............................................. F-60
Financial Statements (Unaudited):
Balance Sheet as of April 30, 1998...................................... F-66
Statement of Income for the Four Months ended April 30, 1998 and 1997
(Unaudited)............................................................ F-67
Statement of Cash Flows for the Four Months ended April 30, 1998 and
1997 (Unaudited)....................................................... F-68
Condensed Notes to Financial Statements................................... F-69
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Financial Information.................... F-70
Unaudited Pro Forma Consolidated Balance Sheet as of April 30, 1998....... F-71
Unaudited Pro Forma Consolidated Statement of Operations for the Nine
Months Ended April 30, 1998.............................................. F-73
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended July 31, 1997...................................................... F-76
F-2
<PAGE>
AFTER THE STOCK SPLIT TRANSACTION REFERRED TO IN NOTE 13 TO SATELLINK
COMMUNICATIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS IS EFFECTED, WE EXPECT
TO BE IN A POSITION TO RENDER THE FOLLOWING AUDIT REPORT.
/s/ Arthur Andersen LLP
June 12, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Satellink Communications, Inc.:
We have audited the accompanying consolidated balance sheets of SATELLINK
COMMUNICATIONS, INC. (a Georgia corporation) AND SUBSIDIARIES as of July 31,
1996 and 1997 and January 31, 1998 and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the
three years in the period ended July 31, 1997 and the six months ended January
31, 1998. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Satellink
Communications, Inc. and subsidiaries as of July 31, 1996 and 1997 and January
31, 1998 and the results of their operations and their cash flows for each of
the three years in the period ended July 31, 1997 and the six months ended
January 31, 1998 in conformity with generally accepted accounting principles.
Atlanta, Georgia
, 1998
F-3
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1996 AND 1997 AND JANUARY 31, 1998
<TABLE>
<CAPTION>
JULY 31,
------------------------ JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. $ 524,708 $ 193,346 $ 255,861
Accounts receivable, net
of allowance for doubtful
accounts of $198,911,
$445,028 and $526,019 as
of July 31, 1996 and 1997
and January 31, 1998,
respectively............. 2,143,173 2,698,481 3,801,322
Other receivables......... 44,746 147,470 235,633
Inventory................. 165,564 268,201 283,576
Prepaid expenses and other
current assets........... 276,135 362,053 391,013
----------- ----------- -----------
Total current assets.... 3,154,326 3,669,551 4,967,405
----------- ----------- -----------
PROPERTY AND EQUIPMENT (Note
2):
Paging systems and
equipment................ 6,863,669 8,973,493 11,337,792
Computer and terminal
equipment................ 2,003,412 3,745,525 3,085,452
Furniture and fixtures.... 188,377 297,686 387,194
Leasehold improvements.... 81,063 107,766 108,966
----------- ----------- -----------
9,136,521 13,124,470 14,919,404
Less accumulated
depreciation............. (3,230,160) (4,371,932) (4,520,142)
----------- ----------- -----------
Property and equipment,
net.................... 5,906,361 8,752,538 10,399,262
----------- ----------- -----------
OTHER LONG TERM ASSETS:
Goodwill, net of
accumulated amortization
of $56,257, $288,718, and
$448,000 as of July 31,
1996 and 1997 and January
31, 1998, respectively
(Note 2)................. 6,584,173 9,447,098 9,695,292
Other intangible assets,
net of accumulated
amortization of
$1,112,743, $1,697,281,
and $1,436,345 as of July
31, 1996 and 1997 and
January 31, 1998,
respectively (Note 2).... 2,064,229 2,999,874 2,967,988
Investments in joint
ventures (Note 4)........ 193,085 219,627 337,082
Other..................... 33,074 33,291 0
----------- ----------- -----------
Total other long term
assets................. 8,874,561 12,699,890 13,000,362
----------- ----------- -----------
Total assets............ $17,935,248 $25,121,979 $28,367,029
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1996 AND 1997 AND JANUARY 31, 1998
<TABLE>
<CAPTION>
JULY 31,
------------------------ JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long term debt
(Note 6)............................. $ 811,749 $ 917,326 $ 428,000
Accounts payable and accrued liabili-
ties (Note 2)........................ 1,792,340 2,434,295 2,851,585
Customer deposits..................... 395,506 372,140 247,468
Deferred revenues..................... 661,785 1,076,248 1,092,874
Accrued dividends on preferred stock.. 99,447 88,047 43,887
----------- ----------- -----------
Total current liabilities........... 3,760,827 4,888,056 4,663,814
----------- ----------- -----------
LONG-TERM DEBT, less current maturities
(Note 6)............................... 12,278,139 18,410,822 23,441,212
----------- ----------- -----------
STOCK WARRANTS (Note 7)................. 2,573,615 4,346,722 4,575,596
----------- ----------- -----------
MINORITY INTEREST....................... 2,522 5,351 11,022
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
SERIES C REDEEMABLE CONVERTIBLE PRE-
FERRED STOCK (Note 8):
$0.01 par value; 3,500 shares
authorized; 3,500 shares issued and
outstanding at July 31, 1996 and 1997
and January 31, 1998; entitled to a
maximum of $1,000 per share plus
accrued dividends in liquidation,
dissolution, or windup of the
Company.............................. 3,500,000 3,500,000 3,500,000
SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 7):
Series A convertible preferred stock
$.01 par value; 7,500 shares
authorized, 7,360 shares issued and
outstanding at July 31, 1996 and 1997
and January 31, 1998, entitled to a
maximum of $290 per share plus
accrued dividends in liquidation,
dissolution, or windup of the
Company.............................. 74 74 74
Series B convertible preferred stock,
$.01 par value; 0, 30,000 and 30,000
shares authorized at July 31, 1996
and 1997 and January 31, 1998,
respectively, 0 shares issued and
outstanding.......................... -- -- --
Common stock, $.01 par value:
Class A voting, 5,000,000 shares
authorized, 2,907,519, 2,952,811,
and 3,054,377 shares issued and
outstanding at July 31, 1996 and
1997 and January 31, 1998,
respectively........................ 29,076 29,529 30,544
Class B nonvoting, 20,000 shares
authorized, 1,071.32, 535.65, and 0
shares issued and outstanding at
July 31, 1996 and 1997 and January
31, 1998, respectively.............. 10 5 --
Additional paid in capital............ 2,152,931 2,369,806 2,468,796
Accumulated deficit................... (6,361,946) (8,428,386) (10,324,029)
----------- ----------- -----------
Total shareholders' equity
(deficit).......................... (4,179,855) (6,028,972) (7,824,615)
----------- ----------- -----------
Total liabilities and shareholders'
equity (deficit)................... $17,935,248 $25,121,979 $28,367,029
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997
AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JULY 31, JANUARY 31,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Service, rent and main-
tenance revenues...... $6,885,352 $ 9,839,199 $16,308,042 $7,676,578 $ 9,480,557
Product sales.......... 525,615 975,144 1,264,418 577,833 637,266
---------- ----------- ----------- ---------- -----------
Total revenues....... 7,410,967 10,814,343 17,572,460 8,254,411 10,117,823
Cost of products sold.. (468,473) (959,575) (1,201,271) (574,225) (555,935)
---------- ----------- ----------- ---------- -----------
Net revenues......... 6,942,494 9,854,768 16,371,189 7,680,186 9,561,888
OPERATING EXPENSES:
Service, rent and main-
tenance............... 2,717,621 3,878,639 6,541,774 3,189,023 3,598,094
Selling and marketing.. 1,222,030 1,602,467 2,313,930 1,080,652 1,431,693
General and administra-
tive.................. 886,671 1,732,122 3,039,390 1,291,254 1,781,163
Engineering............ 566,962 515,599 638,387 319,497 382,606
Depreciation and amor-
tization.............. 845,160 1,204,478 2,241,518 1,015,933 1,392,526
Fixed asset impairment. -- -- -- -- 833,996
---------- ----------- ----------- ---------- -----------
Total operating
expenses............ 6,238,444 8,933,305 14,774,999 6,896,359 9,420,078
---------- ----------- ----------- ---------- -----------
OPERATING INCOME ....... 704,050 921,463 1,596,190 783,827 141,810
---------- ----------- ----------- ---------- -----------
OTHER INCOME (EXPENSE):
Other income........... 89,689 91,413 89,808 40,927 96,004
Interest expense....... (703,766) (872,673) (1,564,067) (698,698) (1,112,287)
Accretion of stock war-
rants (Note 7)........ (643,000) (854,350) (1,773,107) (886,554) (228,874)
(Loss) income from
joint venture (Note
4).................... -- (95,715) 26,123 30,729 60,999
Minority interest...... -- (2,522) (2,829) (3,203) (5,673)
---------- ----------- ----------- ---------- -----------
(1,257,077) (1,733,847) (3,224,072) (1,516,799) (1,189,831)
---------- ----------- ----------- ---------- -----------
LOSS BEFORE INCOME TAX
BENEFIT, EXTRAORDINARY
ITEM AND CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE... (553,027) (812,384) (1,627,882) (732,972) (1,048,021)
INCOME TAX BENEFIT...... -- -- -- -- --
---------- ----------- ----------- ---------- -----------
LOSS BEFORE
EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE.............. (553,027) (812,384) (1,627,882) (732,972) (1,048,021)
EXTRAORDINARY LOSS ON
EARLY RETIREMENT OF
DEBT, net of taxes of
approximately $88,000.. -- 132,130 -- -- --
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (NOTE 2)..... -- -- -- -- 628,700
---------- ----------- ----------- ---------- -----------
NET LOSS................ (553,027) (944,514) (1,627,882) (732,972) (1,676,721)
---------- ----------- ----------- ---------- -----------
PREFERRED STOCK
DIVIDENDS.............. 88,320 334,295 438,558 218,922 218,922
---------- ----------- ----------- ---------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS.... $ (641,347) $(1,278,809) $(2,066,440) $ (951,894) $(1,895,643)
========== =========== =========== ========== ===========
Allocation of earnings
to:
Class A................ $ (598,752) $(1,204,953) $(2,035,280) $ (937,540) $(1,893,759)
Class B................ (42,595) (73,856) (31,160) (14,354) (1,884)
BASIC AND DILUTED NET
LOSS PER SHARE (NOTE
2):
Loss from extraordinary
item:
Class A................ $ -- $ (0.04) $ -- $ -- $ --
Class B................ -- (3.79) -- -- --
Loss from cumulative
effect of change:
Class A................ $ -- $ -- $ -- $ -- $ (0.21)
Class B................ -- -- -- -- (17.97)
Net loss attributable
to common sharehold-
ers:
Class A................ (0.21) (0.43) (0.69) (0.32) (0.63)
Class B................ (17.61) (36.68) (58.24) (26.83) (53.83)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Class A................ 2,872,417 2,775,792 2,952,811 2,952,811 2,995,681
Class B................ 2,418 2,013 535 535 35
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997 AND FOR THE SIX MONTHS ENDED
JANUARY 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------- PREFERRED STOCK
CLASS A CLASS B SERIES A
------------------ -------------- ----------------- PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ------ ------ -------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 31, 1994,
as previously reported
....................... 2,347,852 $23,479 2,821 $ 28 7,360 $ 74 $2,615,355 $ (4,441,790) $(1,802,854)
Thirteen for ten Class
A common stock split
(Note 13)............. 704,356 7,044 -- -- -- -- (7,044) -- --
--------- ------- ------ ----- -------- ------- ---------- ------------ -----------
BALANCE, July 31, 1994 . 3,052,208 30,523 2,821 28 7,360 74 2,608,311 (4,441,790) (1,802,854)
Net loss attributable
to common
shareholders.......... -- -- -- -- -- -- -- (641,347) (641,347)
Purchase and retirement
of common stock....... (334,814) (3,348) (750) (7) -- -- (703,490) -- (706,845)
--------- ------- ------ ----- -------- ------- ---------- ------------ -----------
BALANCE, July 31, 1995.. 2,717,394 27,175 2,071 21 7,360 74 1,904,821 (5,083,137) (3,151,046)
Net loss attributable
to common
shareholders.......... -- -- -- -- -- -- -- (1,278,809) (1,278,809)
Issuance of Class A
common stock.......... 105,625 1,056 -- -- -- -- 248,944 -- 250,000
Adjustment for
conversion of Class B
to Class A common
stock................. 84,500 845 (1,000) (11) -- -- (834) -- --
--------- ------- ------ ----- -------- ------- ---------- ------------ -----------
BALANCE, July 31, 1996.. 2,907,519 29,076 1,071 10 7,360 74 2,152,931 (6,361,946) (4,179,855)
Net loss attributable
to common
shareholders.......... -- -- -- -- -- -- -- (2,066,440) (2,066,440)
Adjustment for
conversion of Class B
to Class A common
stock................. 45,292 453 (536) (5) -- -- (448) -- --
Issuance of stock
options (Note 7)...... -- -- -- -- -- -- 217,323 -- 217,323
--------- ------- ------ ----- -------- ------- ---------- ------------ -----------
BALANCE, July 31, 1997.. 2,952,811 29,529 535 5 7,360 74 2,369,806 (8,428,386) (6,028,972)
Net loss attributable
to common
shareholders.......... -- -- -- -- -- -- -- (1,895,643) (1,895,643)
Adjustment for
conversion of Class B
to Class A common
stock................. 45,233 452 (535) (5) -- -- (447) -- --
Exercise of stock
options (Note 7)...... 56,333 563 -- -- -- -- 99,437 -- 100,000
--------- ------- ------ ----- -------- ------- ---------- ------------ -----------
BALANCE, January 31,
1998................... 3,054,377 $30,544 -- $ -- 7,360 $ 74 $2,468,796 $(10,324,029) $(7,824,615)
========= ======= ====== ===== ======== ======= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997
AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JULY 31, JANUARY 31,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $ (553,027) $ (944,514) $(1,627,882) $ (732,972) $(1,676,721)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Minority interest...... -- 2,522 2,829 3,203 5,673
(Income) loss from
joint venture......... -- 95,715 (26,123) (30,729) (60,999)
Depreciation and
amortization.......... 845,160 1,204,478 2,241,518 1,015,933 1,392,526
Extraordinary loss on
early retirement of
debt.................. -- 132,130 -- -- -
Asset Impairment....... -- -- -- -- 1,533,996
Accretion of stock
warrants.............. 643,000 854,350 1,773,107 886,554 228,874
Changes in operating
assets and
liabilities:
Accounts receivable... (309,274) (970,305) (425,434) (357,474) (1,102,841)
Other receivables..... (5,316) 54,509 (82,724) 21,841 (88,163)
Net investment in
sales type leases.... 9,000 -- -- -- -
Prepaid expenses and
other current as-
sets................. (72,706) (125,206) (85,918) (98,370) (28,960)
Other assets.......... 59,912 (291,312) (462,137) (63,238) (526,899)
Accounts payable and
accrued liabilities.. (10,091) 730,900 641,955 (433,275) 417,290
Customer deposits..... 37,462 47,180 (23,366) (6,870) (124,672)
Deferred revenues..... 81,484 105,453 48,576 (51,665) 16,626
----------- ------------ ----------- ----------- -----------
Total adjustments.... 1,278,631 1,840,414 3,602,283 885,910 1,662,541
----------- ------------ ----------- ----------- -----------
Net cash provided by
(used in) operating
activities.......... 725,604 895,900 1,974,401 152,938 (14,270)
----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of
businesses, net of
cash acquired......... -- (8,949,546) (4,386,230) -- (590,000)
Purchases of property
and equipment, net.... (1,528,398) (1,910,553) (3,647,266) (1,235,165) (3,654,741)
Investment in joint
venture............... (120,331) (158,469) (419) (305,377) (56,456)
----------- ------------ ----------- ----------- -----------
Net cash used in in-
vesting activities.. (1,648,729) (11,018,568) (8,033,915) (1,540,542) (4,301,197)
----------- ------------ ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of preferred stock.... -- 3,500,000 -- -- -
Proceeds from
subscriptions
receivable............ 200,000 -- -- -- -
Payment of preferred
stock dividends....... (77,000) (334,295) (449,958) (243,348) (263,082)
Proceeds from issuance
of long term debt,
net................... 1,578,445 7,185,388 6,238,260 984,015 4,541,064
Proceeds from issuance
of common stock....... -- 250,000 -- -- 100,000
Purchase and retirement
of common stock....... (706,845) -- -- -- -
Other financing
activities............ (36,036) -- (60,150) 181,134 -
----------- ------------ ----------- ----------- -----------
Net cash provided by
financing activi-
ties................ 958,564 10,601,093 5,728,152 921,801 4,377,982
----------- ------------ ----------- ----------- -----------
NET INCREASE (DECREASE)
IN PERIOD.............. 35,439 478,425 (331,362) (465,803) 62,515
CASH AT BEGINNING OF
PERIOD................. 10,844 46,283 524,708 524,708 193,346
----------- ------------ ----------- ----------- -----------
CASH AT END OF YEAR..... $ 46,283 $ 524,708 $ 193,346 $ 58,905 $ 255,861
=========== ============ =========== =========== ===========
CASH PAID FOR INTEREST.. $ 600,047 $ 632,729 $ 1,412,766 $ 700,400 $ 741,663
=========== ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS OPERATIONS
Satellink Communications, Inc. (the "Company" or "Satellink") (a Georgia
corporation), formerly Satellink Paging Inc., is a communications company
providing local, regional, and nationwide paging, voicemail, and other
enhanced telecommunications services. The Company has provided paging and
voicemail services since 1988.
The Company has a distribution agreement with CUE Paging Corporation
("CUE"), a nationwide satellite paging company presently offering service in
over 500 cities throughout the United States and Canada, to construct and
operate regional paging systems utilizing FM subcarrier technology in the
states of Georgia and Alabama. At January 31, 1998, CUE owned approximately
14% and 13% of the Company's Class A Common Stock and Series A Preferred
Stock, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned subsidiary, Satellink Paging, LLC and its
majority owned subsidiary, DirectLink Communications, L.L.C. ("Direct Link")
(Notes 5 and 13). All significant intercompany accounts and transactions have
been eliminated in consolidation. The consolidated statement of operations for
the six months ended January 31, 1997 is unaudited and, in the opinion of
management of the Company, includes all normal recurring adjustments necessary
for a fair presentation of the results for the interim period. The results of
operations for the six months ended January 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all short-term highly liquid investments with an
original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, debt,
and other short-term assets and liabilities. Based on the short-term nature or
variable interest rate of these financial instruments, the estimated fair
value of the Company's financial instruments approximates their carrying value
as of July 31, 1996, July 31, 1997, and January 31, 1998.
LONG-LIVED ASSETS
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and cost in excess of net assets acquired related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The effect of adopting SFAS No. 121 was not
material.
The Company periodically reviews the values assigned to long-lived assets
such as property and equipment, goodwill and other intangible assets to
determine whether any impairment exists. If circumstances suggest that the
asset values may be impaired, an assessment of the assets' estimated fair
value is performed based on the estimated undiscounted cash flows expected to
be generated from such assets over the remaining life of the long-
F-9
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lived assets, and an impairment loss is recognized in income from operations
at the amount in which the assets' estimated fair value is exceeded by the
assets' carrying value. Management believes that the long-lived assets in the
accompanying consolidated balance sheets are appropriately valued.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for renewals and
improvements are capitalized, and replacements, maintenance, and repairs that
do not improve or extend the lives of the respective assets are expensed as
incurred. Depreciation is provided on a straight-line basis over the remaining
estimated useful lives, as follows:
<TABLE>
<S> <C>
Paging equipment........................................... 5 years
Paging systems............................................. 10 to 20 years
Computers and terminal equipment........................... 5 to 10 years
Furniture and fixtures..................................... 5 to 10 years
Leasehold improvements..................................... 5 to 10 years
</TABLE>
In the six months ended January 31, 1998 the Company implemented a new
communications platform, the Satellink Telecommunications Application Resource
Network ("STAR*Net"). In conjunction with such implementation, the existing
platform including associated equipment has been removed or is expected to be
removed as a part of the conversion to the new STAR*Net system. Accordingly,
the Company recognized a loss totaling $833,996 related to the impairment of
the existing equipment, which is in the process of being replaced. The Company
estimated the fair value of the existing equipment, based upon the Company's
intention to dispose of the equipment. The remaining net book value of the
impaired assets is immaterial.
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of cost over the fair market value of the identifiable assets
acquired ("goodwill") is being amortized on a straight-line basis over a
period of 30 years.
Other intangible assets, net of accumulated amortization, as of July 31,
1996 and 1997 and January 31, 1998, consisted of the following:
<TABLE>
<CAPTION>
AS OF JULY 31, AS OF
--------------------- JANUARY 31,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Acquired subscriber bases.................. $1,190,333 $1,991,236 $2,049,340
Affiliate fees............................. 268,518 468,941 455,278
Noncompete agreements...................... 374,812 255,139 186,797
Debt issuance costs........................ 230,566 230,476 201,076
FCC licenses............................... -- 54,082 75,497
---------- ---------- ----------
$2,064,229 $2,999,874 $2,967,988
========== ========== ==========
</TABLE>
Acquired subscriber bases related to the Company's acquisitions are
amortized on a straight-line basis over five years. Affiliate fees are
amortized on a straight-line basis over periods ranging from 10 to 20 years.
Federal Communications Commission ("FCC") licenses are amortized on a
straight-line basis over a period of 10 years.
In connection with the Company's acquisitions (Note 3), certain shareholders
of the sellers have entered into noncompete agreements with the Company.
Amounts assigned to noncompete agreements are being amortized on a straight-
line basis over three to five years in accordance with the terms of the
related agreements.
Subsequent to an acquisition that results in the recording of goodwill or
other intangible assets ("intangible
F-10
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets"), the Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated useful life
of intangible assets may warrant revision or that the remaining balance of
intangible assets may not be recoverable. When factors indicate that
intangible assets should be evaluated for possible impairment, the Company
uses an estimate of the related business segment's undiscounted net income or
cash flows, as appropriate, over the remaining life of the intangible assets
in measuring whether such intangible assets are recoverable in accordance with
Accounting Principles Bulletin No. 17.
The Company has incurred debt issuance costs in connection with its long-
term debt (Note 6). These costs are capitalized and are amortized to interest
expense using the effective interest method over the term of the related debt.
On November 20, 1997, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 97-13, "Accounting for Costs Incurred in Connection
with a Consulting Contract or an Internal Project that Combines Business
Process Reengineering and Information Technology" ("EITF 97-13"). EITF 97-13
requires that the cost of business process reengineering activities, whether
done internally or by third parties, is expensed as incurred. EITF 97-13 also
applies when business process reengineering activities are part of a project
to acquire, develop, or implement internal-use software. During the six months
ended January 31, 1998, the Company adopted EITF 97-13. The Company has
recorded the cumulative effect of adopting EITF 97-13 as a non-cash charge
related to reengineering costs previously capitalized, which totaled $628,700.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred taxes are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of July 31, 1996 and 1997, and
January 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
AS OF JULY 31, AS OF
--------------------- JANUARY 31,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Accounts payable.......................... $ 810,585 $1,228,568 $1,521,269
Accounts payable-related parties (Note
11)...................................... 340,872 355,602 368,666
Accrued interest.......................... 196,167 347,470 285,905
Accrued professional fees................. 153,332 30,000 16,458
Other accrued liabilities................. 291,384 472,655 659,287
---------- ---------- ----------
$1,792,340 $2,434,295 $2,851,585
========== ========== ==========
</TABLE>
REVENUE RECOGNITION AND DEFERRED REVENUES
The Company's revenues consist of: (i) service, rent, and maintenance
revenues; and (ii) product sales. Service, rent, and maintenance revenues
consist primarily of recurring revenues received from paging and voicemail
services. The Company bills the fixed portion of the fees it charges for
paging and voicemail services in advance and bills usage-related fees in
arrears.
The Company's policy is to record revenue at the time the service is
provided. Deferred revenues represent advance billings for recurring charges
to customers. The deferred revenues relating to recurring charges are
recognized when earned, primarily in the following month.
F-11
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING
The Company expenses all advertising costs as incurred. The Company incurred
and expensed advertising costs in the approximate amounts of $214,000,
$206,000, $284,000, and $152,000 during the years ended July 31, 1995, 1996
and 1997 and for the six months ended January 31, 1998, respectively.
BASIC LOSS PER SHARE
During 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 establishes accounting
standards for calculating earnings per share. All share and per share
information presented in these financial statements has been calculated in
accordance with this statement.
Earnings per share is presented using the two class method. Earnings
attributable to each class of common stock are allocated between each class of
stock based on the extent to which each class shares in the Company's
earnings. The Company's Class A and Class B common shareholders share in
dividends at a 1:65 ratio. All convertible preferred stock, options, and
warrants currently outstanding are antidilutive for all periods presented.
On February 4, 1998, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 98 "Computation of Earnings Per Share." SAB
No. 98 requires the retroactive inclusion of nominal issuances of common stock
and common stock equivalents in earnings per share calculations for all
periods presented and precludes the use of treasury stock method for these
issuances. Management believes that all issuances of common stock and stock
options have been made at the current market value at the time of issuance and
that there have been no nominal issuances.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair value.
REGULATION
Various regulatory factors affect the Company's financial performance and
its ability to compete. The Company is subject to regulation by the FCC and by
various state public service and public utility commissions, and is otherwise
affected by regulatory decisions, trends and policies made by these agencies.
3. ACQUISITIONS
During the years ended July 31, 1996 and 1997, and the six months ended
January 31, 1998, Satellink made the acquisitions set forth below. The
acquisitions have been accounted for as purchases in accordance with APB No.
16, and accordingly the purchase price has been allocated to the assets
acquired based on the estimated fair values as of the acquisition dates. The
excess of the cost over the estimated fair value of the net tangible assets
acquired has been allocated to goodwill and certain identifiable intangible
assets.
ATLANTA VOICE PAGE, INC. ("AVP")
Effective February 2, 1996, Satellink acquired substantially all of the
assets of AVP under the terms of an asset purchase agreement. The acquired
assets consisted primarily of local paging subscribers, a paging system,
pagers and spare parts, accounts receivable, and furniture and fixtures. The
purchase price was approximately $3,200,000 before recording certain
acquisition expenses and adjustments and was financed through the Company's
term loan and revolving credit facility.
F-12
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C.R., INC. ("CR")
Effective May 31, 1996, Satellink acquired substantially all of the assets
of CR under the terms of an asset purchase agreement. The acquired assets
consisted primarily of regional and nationwide paging subscribers, a CUE
paging regional affiliate agreement, notes receivable, deposits, equipment,
and furniture and fixtures. The purchase price was approximately $5,700,000
before recording certain acquisition expenses and adjustments and was financed
through the Company's term loan and revolving credit facility.
MESSAGE WORLD ("MW")
Effective February 1, 1997, Satellink acquired substantially all of the
assets of MW under the terms of an asset purchase agreement. The acquired
assets consisted primarily of local voicemail subscribers, a voicemail system,
pagers and spare parts, accounts receivable, and furniture and fixtures. The
purchase price was approximately $1,400,000 before recording certain
acquisition expenses and adjustments and was financed through the Company's
term loan and revolving credit facility.
CALL ONE, INC. ("CALL")
Effective February 15, 1997, Satellink acquired substantially all of the
assets of Call under the terms of an asset purchase agreement. The acquired
assets consisted primarily of voice mail subscribers. The purchase price was
approximately $250,000 before recording certain acquisition expenses and
adjustments and was financed through the Company's term loan and revolving
credit facility.
SATELINK PAGING, INC. ("SPI")
Effective May 23, 1997, Satellink acquired all of the outstanding capital
stock of SPI under the terms of a stock purchase agreement. Subsequent to the
acquisition, SPI was merged into Satellink Paging, LLC. The acquired assets
consisted primarily of local paging subscribers, a paging terminal and
transmitter, pagers and spare parts, accounts receivable, an FCC license, and
furniture and fixtures. The purchase price was approximately $1,650,000 before
recording certain acquisition expenses and adjustments and was financed
through the Company's term loan and revolving credit facility.
FAST COMMUNICATIONS, INC. ("FAST")
Effective May 23, 1997, Satellink acquired substantially all of the assets
of Fast under the terms of an asset purchase agreement. The acquired assets
consisted primarily of local paging subscribers, a paging terminal, pagers and
spare parts, accounts receivable, an airtime credit from a paging carrier, and
furniture and fixtures. The purchase price was approximately $330,000 before
recording certain acquisition expenses and adjustments and was financed
through the Company's term loan and revolving credit facility.
THE DREXLER COMPANY, INC. D/B/A FLINT RIVER PAGING ("FLINT")
Effective May 23, 1997, Satellink acquired substantially all of the assets
of Flint under the terms of an asset purchase agreement. The acquired assets
consisted primarily of local paging subscribers, a paging terminal, pagers and
spare parts, accounts receivable, an FCC license, and furniture and fixtures.
The purchase price was approximately $125,000 before recording certain
acquisition expenses and adjustments and was financed through the Company's
term loan and revolving credit facility.
RADIOFONE OF GEORGIA, INC. ("RADIOFONE")
Effective September 10, 1997, Satellink acquired substantially all of the
assets of Radiofone under the terms of an asset purchase agreement. The
acquired assets consisted primarily of local subscribers, a paging terminal,
F-13
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an FCC license, pagers, and furniture and fixtures. The purchase price was
approximately $190,000 before recording certain acquisition expenses and was
financed through the Company's term loan and revolving credit facility.
WALL COMMUNICATIONS, INC. D/B/A SATELLITE PAGING COMPANY ("WALL")
Effective October 1, 1997, Satellink acquired substantially all of the
assets of Wall under the terms of an asset purchase agreement. The acquired
assets consisted primarily of paging subscribers, a Regional Affiliate
Agreement with CUE, pagers, and furniture and fixtures. The purchase price was
approximately $400,000 before recording certain acquisition expenses and was
financed through the Company's revolving credit facility.
The following unaudited pro forma information has been prepared assuming
that the acquisitions occurred at the beginning of the year of acquisition and
the year immediately preceding. The unaudited pro forma information is
presented for informational purposes only and may not be indicative of the
results of operations as they would have been had the acquisitions been
consummated at the beginning of the respective periods, nor is the information
necessarily indicative of the results of operation which may occur in the
future operations of the combined entities.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JULY 31, ENDED
------------------------- JANUARY 31,
1995 1996 1997 1998
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Pro forma revenues................... $12,930 $17,104 $19,554 $10,206
Pro forma income before extraordinary
item................................ (1,437) (1,640) (1,956) (1,688)
Pro forma net loss attributable to
common shareholders.. (1,525) (2,107) (2,394) (1,907)
Allocation of earnings to:
Class A............................ (1,423) (1,985) (2,358) (1,905)
Class B............................ (102) (122) (36) (2)
Pro forma earnings per share:
Class A............................ $ (0.64) $ (0.93) $ (1.04) $ (0.83)
Class B............................ (51.09) (61.11) (71.81) (3.81)
</TABLE>
4. INVESTMENT IN JOINT VENTURE
On May 25, 1995, the Company entered into a joint venture agreement with CR
(which was subsequently acquired in June 1996) (Note 3) and an additional
paging company to form and operate a third-party supplier, FM Concepts, Ltd.
("FM Concepts"). Under the terms of the agreement, the Company was obligated
to make capital contributions to FM Concepts totaling $250,000.
In conjunction with the CR acquisition, FM Concepts was reorganized and
contributed all of its assets with the exception of its pager development
project to FM Concepts, L.L.C. The Company's ownership percentage in both FM
Concepts and FM Concepts L.L.C. was 33.3%. As a result of the acquisition, the
Company acquired an additional 16.7% ownership interest in FM Concepts L.L.C.,
bringing its ownership percentage to 50% at July 31, 1997.
Due to the terms of the joint venture agreement, the Company's 50% ownership
interest does not grant the Company control over the operations of the joint
venture; however, it does exercise significant influence. Accordingly, the
Company accounts for its investments in FM Concepts and FM Concepts L.L.C.
using the equity method of accounting. Accordingly, the Company's net
investment has been reported as investment in joint ventures in the
accompanying consolidated balance sheets. The Company has adjusted the
investment account balance according to its pro rata ownership percentage.
F-14
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT IN DIRECT LINK
On December 1, 1995, the Company acquired 60% of the membership interests of
Direct Link for $21,300. This acquisition increased the Company's ownership
percentage in Direct Link to 85%. The consolidated financial statements
include the accounts of Direct Link. The minority interest represents the 15%
separate ownership in Direct Link.
The Company also agreed to make additional investments in Direct Link in the
form of a promissory note not to exceed $400,000. The promissory note will
bear interest at the prime rate plus 2%. As of July 31, 1997 and January 31,
1998, the aggregate amount outstanding under the promissory note totaled
$380,799 which is eliminated in consolidation.
6. LONG-TERM DEBT
Long-term debt at July 31, 1996 and 1997 and January 31, 1998 consisted of
the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------- JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
$8,000,000 note payable to bank, variable
interest rate (9.83% at January 31, 1998),
net of unamortized discount of $226,182,
$188,892, and $166,182 at July 31, 1996
and 1997 and January 31, 1998,
respectively, payable in quarterly
installments;principal due in full on
March 31, 2002; secured by all of the
assets of Satellink Paging, LLC and a
pledge of 100% of the Company's ownership
interest in Satellink Paging, LLC......... $ 5,273,818 $ 7,811,018 $ 7,833,818
$17,000,000 revolving credit facility,
variable interest rate (9.83% at January
31, 1998); interest only with principal
payable in full on March 31, 2002; secured
by all of the assets of Satellink Paging,
LLC and a pledge of 100% of the Company's
ownership interest in Satellink Paging,
LLC....................................... 7,350,092 10,957,394 16,007,394
Notes payable to sellers, interest at 8%
(Note 3)................................. 465,978 559,736 28,000
----------- ----------- -----------
13,089,888 19,328,148 23,869,212
Less current portion...................... 811,749 917,326 428,000
----------- ----------- -----------
$12,278,139 $18,410,822 $23,441,212
=========== =========== ===========
</TABLE>
Following are maturities of long-term debt as of January 31, 1998 for each
of the next five years ending on July 31:
<TABLE>
<S> <C>
Six months ending July 31, 1998.............................. $ 428,000
1999......................................................... 1,600,000
2000......................................................... 1,700,000
2001......................................................... 2,200,000
2002......................................................... 17,941,212
-----------
Total.................................................... $23,869,212
===========
</TABLE>
The fair values of long-term debt, including current maturities, at July 31,
1996 and 1997 and January 31, 1998 approximate the carrying values due to the
variable rates of the instruments.
F-15
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1997, the Company amended its term loan and revolving credit
facility (the "New Credit Facility") with Creditanstalt-Bankverein
("Creditanstalt"), providing for maximum borrowings of $25,000,000. The New
Credit Facility was divided into a $17,000,000 revolving line of credit (the
"Revolver") and an $8,000,000 term note (the "Term Note"). The Revolver and
Term Note are both due in full on March 31, 2002 and bear interest, at the
Company's option, at either a Eurodollar interest rate option, as defined,
plus 4% or the prime rate plus 2%.
Under the most restrictive covenants of the New Credit Facility, the Company
must maintain a ratio of operating cash flow to interest expense, as defined,
and achieve specified levels of earnings under the terms of the agreement. As
of January 31, 1998, the Company was in compliance with these debt covenants.
7. EQUITY
COMMON STOCK
During 1996, the Company amended its Articles of Incorporation and increased
the number of authorized shares of Class A Common Stock to 5,000,000 shares
and approved the conversion of all outstanding shares of Class B Common Stock
into Class A Common Stock. As of January 31, 1998, 2,071 shares of Class B
Common Stock had been converted into 175,025 shares of Class A Common Stock.
There are no remaining shares of Class B Common Stock outstanding.
During June 1997, the Company's board of directors approved a 64-for-1 share
dividend to shareholders of record as of June 30, 1997. All share information
has been restated to give effect to the stock dividend.
CONVERTIBLE PREFERRED STOCK
During September 1991, the Company sold 7,360 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") for $100 per share and
received proceeds of $736,000. The Series A Preferred Stock carries a 12% cash
coupon, which is paid monthly. In the event of liquidation of the Company,
holders of Series A Preferred Stock are entitled to $100 plus accrued
dividends and cumulative premium at $38 per annum not to exceed $190 per
share. Each share of Series A Preferred Stock is callable by the Company any
time following the third anniversary of the original issue date, as defined,
and is convertible into 65 shares of Class A Common Stock of the Company.
During 1996, the Company amended its Articles of Incorporation and increased
the number of authorized shares of Series B Convertible Preferred Stock
("Series B Preferred Stock") to 30,000 shares. The Series B Preferred Stock is
nonvoting, and the holders will receive dividends equal to those paid to the
holders of the Company's Common Stock when such dividends are declared. In the
event of liquidation of the Company, holders of Series B Preferred Stock are
entitled to the identical privileges as the holders of the Company's Common
Stock. Each share of Series B Preferred Stock is convertible into 65 shares of
Class A Common Stock.
STOCK WARRANTS
In connection with the Company's original financing agreement with
Creditanstalt, the Company issued a warrant to Creditanstalt to purchase
either 1,009,859 shares of Class A Common Stock or 11,951 shares of Series B
Preferred Stock at an exercise price of $.01 per share. The cost of the
proceeds from the term loan and facility was allocated between long-term debt
and stock warrants. The estimated $450,000 fair market value of the stock
warrants at the date of grant was included in long-term liabilities in the
accompanying consolidated balance sheets. Due to the Company increasing its
line of credit in 1995, Creditanstalt was issued an additional warrant to
purchase 162,324 shares of Class A Common Stock or 1,921 shares of Series B
Preferred Stock at an exercise
F-16
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
price of $.01 per share. The estimated $94,682 fair market value of the stock
warrant at the date of grant was included in long-term liabilities in the
accompanying consolidated balance sheets. During June 1996, the Company
amended its credit agreement. In connection with the amendment, the Company
issued additional warrants to purchase 35,152 and 28,138 shares of either
Class A Common Stock at exercise prices of $.01 per share and $3.08 per share,
respectively, or 416 and 333 shares of Series B Preferred Stock at exercise
prices of $.01 per share and $200 per share, respectively. The estimated
$68,180 fair value of the stock warrants at the date of grant was included in
long-term liabilities in the accompanying consolidated balance sheets. The
debt discounts are being amortized to warrant accretion expense over the term
of the term loan and facility. The difference between the estimated fair
market value of the stock warrants at the issue date and their estimated
redemption prices will be accreted as a direct charge to earnings over the
term of the facility and term loan. During fiscal 1995, 1996, and 1997 and the
six months ended January 31, 1998, the Company recorded incremental warrant
accretion expense in the amount of $643,000, $854,350, $1,773,107, and
$228,874, respectively, to reflect the increase in the estimated redemption
price of the stock warrants. In addition to the warrant issuances noted above,
the Company retired 585 warrants and repurchased 34,970 warrants from
Creditanstalt during fiscal year 1996.
The Company may be required to repurchase the unexercised warrants over the
period from November 17, 2001 through December 3, 2006 at a price per share
which values the Company's equity at ten times operating cash flows for the
most recent 12-month period less debt, as defined in the warrant agreement.
The warrants represent rights to purchase approximately 23% of the Company's
outstanding capital stock.
Upon the completion of an initial public offering, the right to put the
warrants back to the Company for cash is contractually eliminated.
STOCK OPTIONS
On August 1, 1995, the Company granted an option to an employee to purchase
84,500 shares of the Company's Class A Common Stock at an exercise price of
$2.31 per share (the estimated fair value at the date of grant). The option
has a term of five years and vests ratably over a period of four years.
During fiscal 1997, the Company granted an option to an outside consultant
to purchase 169,000 shares of the Company's Class A Common Stock at an
exercise price of $4.78 per share (the estimated fair value at the date of
grant). The option was in consideration for services provided regarding the
Company's acquisitions and has been recorded in additional paid-in capital in
the accompanying consolidated balance sheets based on the estimated fair value
of the services received. The option has a term of five years and vested
immediately.
During the six months ended January 31, 1998, the Company granted options to
employees to purchase 140,898 shares of the Company's Class A Common Stock at
an exercise price of $6.00 per share (the estimated fair value at the date of
grant). The options have terms of ten years and vest ratably over a period of
three years.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value-based method of accounting for
employee stock options or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
APB 25, "Accounting for Stock Issued to Employees" ("APB 25"). Entities
electing to remain with the accounting methodology required by APB 25 must
make pro forma disclosures of net income and earnings per share as if the fair
value-based method of accounting defined in SFAS No. 123 were used.
The Company has elected to account for its stock-based compensation plans
under APB 25, under which the Company has recognized no compensation cost.
However, the Company has computed, for pro forma
F-17
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosure purposes, the estimated fair value of all options for shares of the
Company's Common Stock granted to employees during the years ended July 31,
1996 and 1997 and the six months ended January 31, 1998 using the Black-
Scholes option-pricing model as allowed under by SFAS No. 123 and based on the
following assumptions:
<TABLE>
<CAPTION>
JULY 31, JULY 31, JANUARY 31,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Risk free interest rate.................. 6.27% 6.27%-6.52% 5.80%-6.52%
Expected dividend yield.................. 0% 0% 0%
Expected lives........................... Five years Five years Five years
Expected volatility...................... 0% 0% 0%
</TABLE>
The total fair value of the options granted during the years ended July 31,
1996 and 1997 and the six months ended January 31, 1998 was computed as
$39,435, $169,686, and $165,399, respectively, which would be amortized over
the vesting period of the options. If the Company had accounted for these
options in accordance with SFAS No. 123, the Company's reported pro forma net
loss attributable to common shareholders and earnings per share for the years
ended July 31, 1996 and 1997 and for the six months ended January 31, 1998
would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JULY 31, ENDED
------------------------ JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss attributable to common
shareholders:
As reported
Class A......................... $(1,221,229) $(2,042,387) $(1,894,193)
Class B......................... (57,580) (24,053) (1,450)
----------- ----------- -----------
Total......................... $(1,278,809) $(2,066,440) $(1,895,643)
=========== =========== ===========
Pro forma
Class A......................... $(1,233,555) $(2,222,639) $(1,920,963)
Class B......................... (58,399) (26,632) (1,488)
----------- ----------- -----------
Total......................... $(1,291,954) $(2,249,271) $(1,922,451)
=========== =========== ===========
Basic net loss per share
attributable to common
shareholders, per share:
As reported
Class A......................... $ (0.44) $ (0.69) $ (0.63)
Class B......................... (28.60) (44.96) (41.10)
Pro forma
Class A......................... (0.44) (0.75) (0.64)
Class B......................... (29.01) (49.78) (42.51)
</TABLE>
F-18
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the transactions under the Company's stock
option plan:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF PRICE
OPTIONS PER SHARE
------- ---------
<S> <C> <C>
Outstanding at July 31, 1995.............................. -- $--
Granted................................................. 84,500 1.78
-------
Outstanding at July 31, 1996.............................. 84,500 1.78
Granted................................................. 169,000 3.68
-------
Outstanding at July 31, 1997.............................. 253,500 3.05
Granted................................................. 140,898 4.62
Exercised............................................... (56,333) 1.78
-------
Outstanding at January 31, 1998........................... 338,065 3.91
=======
</TABLE>
At July 31, 1997 and January 31, 1998, respectively, there were 253,500 and
338,065 options outstanding with a weighted average remaining contractual life
of 3.33 and 4 years, respectively, and a weighted average exercise price of
$3.05 and $3.91, respectively. There were 225,333 and 214,779 options
exercisable at a weighted average exercise price of $3.21 and $3.52 per share
as July 31, 1997 and January 31, 1998, respectively. The weighted average
grant date fair value of options granted during the year ended July 31, 1997
and for the six months ended January 31, 1998 was $1.01 and $1.18,
respectively.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
During November 1995, the Company sold 3,500 shares of Series C Redeemable
Preferred Stock (the "Series C Preferred Stock") for $1,000 per share and
received proceeds of $3,500,000. The Series C Preferred Stock carries a 10%
cash coupon, which is paid monthly. Each share of Series C Preferred Stock may
be converted (subject to antidilution provisions), at the holders' option, at
any time into approximately 272.57 shares of the Company's Class A Common
Stock or 3.23 shares of Series B Convertible Preferred Stock. The Series C
Preferred Stock is redeemable (at the original purchase price plus accrued
dividends) on November 17, 2002. The Company paid dividends in the amounts of
$70, $100, and $50 per share during the years ended July 31, 1996 and 1997 and
the six months ended January 31, 1998, respectively.
9. INCOME TAXES
The Company recorded no federal or state income tax benefit for each of the
three years ended July 31, 1997 and the six months ended January 31, 1998 due
to the level of pre-tax losses incurred in recent years.
The reconciliation of the effective income tax rate to the federal statutory
tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------- SIX MONTHS ENDED
1995 1996 1997 JANUARY 31, 1998
------ ------ ------ ----------------
<S> <C> <C> <C> <C>
Federal income tax statutory
rate........................... (34)% (34)% (34)% (34)%
Effect of net operating loss
carryforward and valuation
allowance...................... 38 38 38 38
State income tax, net of Federal
benefit........................ (4) (4) (4) (4)
------ ------ ------ ---
Effective income tax rate....... 0 % 0 % 0 % 0 %
====== ====== ====== ===
</TABLE>
F-19
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following as of July
31, 1996 and 1997 and January 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards... $ 1,886,268 $ 2,084,978 $ 2,903,302
Bad debt reserve................... 79,564 143,480 114,576
Other.............................. 51,072 57,339 76,782
----------- ----------- -----------
2,016,904 2,285,797 3,094,660
Deferred tax liabilities:
Accelerated depreciation........... (873,057) (1,239,386) (1,749,111)
----------- ----------- -----------
Total net deferred tax asset
before valuation allowance...... 1,143,847 1,046,411 1,345,549
----------- ----------- -----------
Less valuation allowance........... (1,143,847) (1,046,411) (1,345,549)
----------- ----------- -----------
Total net deferred taxes......... $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
The increase in the valuation allowance for the six months ended January 31,
1998 was $299,138, related to additional operating loss carryforwards. The
decrease in the valuation allowance for the years ended July 31, 1996 and 1997
was $8,704 and $97,436 related to changes in certain temporary differences,
net of additional operating loss carryforwards.
As of July 31, 1997 and January 31, 1998, the Company had net operating loss
carryforwards, which expire at various dates through 2010, of approximately
$5,212,000 and $7,258,000, respectively. The issuance of stock by the Company
may result in an "ownership change" as defined by the Tax Reform Act of 1986.
Therefore, the unused net operating loss carryforwards could be subject to
limitation. Also, the net operating loss carryforwards used to offset any
taxes calculated, as alternative minimum tax, could be less than the regular
net operating loss carryforwards. Based on pretax losses incurred in recent
years, management has established a valuation allowance against the entire net
deferred tax asset balance. Management believes that through various tax
planning strategies and the Company's overall business plan that the Company
will generate sufficient future taxable income to realize the deferred tax
assets; however, at this time, insufficient objective information exists to
conclude that realization is more likely than not. In the event the planned
initial public offering of Common Stock is completed (Note 13), and the net
proceeds are used to reduce long-term debt and related interest expense, it is
likely that all or a significant portion of the valuation allowance will be
reversed at that time.
The Company made no tax payments during the years ended July 31, 1995, 1996
and 1997, and the six months ended January 31, 1998.
10. COMMITMENTS, CONTINGENCIES, RISKS AND UNCERTAINTIES
OPERATING LEASES
The Company leases office space, antenna sites, and subcarrier frequencies
under noncancelable operating leases expiring on various dates through 2001.
The majority of the subcarrier frequency leases have additional renewal terms
ranging from 10 to 14 years at the option of either party. Because the
Company's operations are dependent upon the availability of antenna sites and
subcarrier frequencies, management expects that most leases will be renewed or
replaced by other leases. The Company recorded lease expense of approximately
$473,000, $757,000, $846,000, and $566,000 for the years ended July 31, 1995,
1996 and 1997 and for the six months ended January 31, 1998, respectively,
related to these operating leases.
F-20
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future payments under noncancelable operating leases as of January
31, 1998 for each of the next five years ending July 31 are as follows:
<TABLE>
<S> <C>
Six months ending July 31, 1998.................................. $ 458,000
1999............................................................. 692,000
2000............................................................. 546,000
2001............................................................. 266,000
2002............................................................. 45,000
----------
$2,007,000
==========
</TABLE>
LEGAL PROCEEDINGS
The Company is subject to lawsuits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of these
pending legal proceedings will not have a material adverse effect on the
Company's business or financial condition.
DEPENDENCE UPON TELECOMMUNICATIONS PROVIDERS -- NO GUARANTEED SUPPLY
Other than certain local and regional paging networks, the Company does not
own a transmission network and, accordingly, depends on MCI Communications
Corporation and other facilities-based and non-facilities based carriers for
transmission of its subscribers' long distance calls and the majority of its
paging data. These long distance telecommunications and paging services
generally are procured pursuant to supply agreements for terms of up to three
years, subject to earlier termination in certain events. Certain of these
agreements provide for minimum purchase requirements. Further, the Company is
dependent upon local exchange carriers ("LECs") for call origination and
termination. The Company's ability to maintain and expand it business depends,
in part, on its ability to continue to obtain telecommunications services on
favorable terms from long distance and paging carriers and the cooperation of
both interexchange carriers and LECs in originating and terminating service
for its subscribers in a timely manner. The partial or total loss of the
ability to initiate or terminate calls would result in a loss of revenues by
the Company and could lead to a loss of subscribers, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISK OF LOSS FROM RETURNED TRANSACTIONS, FRAUD, BAD DEBT, AND THEFT OF
SERVICES
From time to time, persons have gained unauthorized access to the Company's
network and obtained services without rendering payment to the Company by
unlawfully using the access numbers and personal identification numbers
("PINs") of authorized users. No assurance can be given that future losses due
to unauthorized use of access numbers and PINs will not be material. The
Company attempts to manage these risks through its internal controls and
billing system. The STAR*Net platform is designed to prohibit a single access
number and PIN from establishing multiple simultaneous connections to the
platform, and the Company establishes preset spending limits for each
subscriber. Although the Company believes that its risk management and bad
debt reserve practices are adequate, there can be no assurance that the
Company's risk management practices or reserves will be sufficient to protect
the Company from unauthorized or returned transactions or thefts of services
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON NETWORKS, SWITCHING FACILITIES AND THE STAR*NET PLATFORMS;
DAMAGE, FAILURE, AND DOWNTIME
There can be no assurance that a fire, act of sabotage, technical failure,
natural disaster, or a similar event would not cause the failure of all or a
portion of the Company's network, a third party network on which the Company
relies, or any of its switching facilities or STAR*Net platforms, thereby
resulting in an interruption of
F-21
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's services. On May 18 and 19, 1998, the Galaxy 4 satellite, which
is owned by PanAmSat and transmits paging messages for a majority of the
pagers in service in the United States, malfunctioned, resulting in an
interruption of paging service to up to 40 million paging subscribers in the
United States, including approximately 25% of the Company's subscribers.
Because the Company uses multiple message distribution networks and the
majority of the Company's subscribers are serviced through the CUE nationwide
FM paging network and Company-owned VHF and UHF paging networks, most of the
Company's subscribers were not affected by the malfunction of the Galaxy 4
satellite. However, there can be no assurance that a technical malfunction
such as the one that affected the Galaxy 4 satellite will not affect one or
more of the Company's distribution networks, resulting in an interruption of
the Company's services. Such an interruption could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company currently maintains switching facilities and STAR*Net platforms
in Atlanta, Albany, Augusta, Cordele, Macon, Savannah and Valdosta, Georgia;
Birmingham, Alabama; Baton Rouge and New Orleans, Louisiana; and Dallas,
Texas. The Company's network service operations are dependent on its ability
to protect the equipment and data at its switching facilities and STAR*Net
platforms against potential damage that may be caused by fire, power loss,
technical failures, unauthorized intrusion, natural disasters, sabotage and
other similar events. The Company has implemented monitored security systems,
controlled access and automated data backup procedures, uninterruptable power
supply systems and automated system trouble alerts. Nevertheless, any damage
to the Company's switching facilities or Star*Net platforms could have a
material adverse effect on the Company's business, financial condition and
results of operations.
LIMITATIONS OF CUE PAGING NETWORK
The Company's FM subcarrier paging network is located in Alabama and Georgia
and is linked with the CUE nationwide FM subcarrier paging network, through
which the Company delivers nationwide FM paging service. Accordingly, the
Company is dependent upon CUE for continued maintenance and development of its
nationwide FM subcarrier paging network. CUE is under no contractual
obligation to upgrade or further develop the network to accommodate new
technologies or subscribers beyond its current capabilities. The Company
estimates that the CUE network is currently operating at approximately 60% of
capacity and, assuming the continuation of historical growth rates on the CUE
network, that sufficient capacity is available to accommodate the Company's FM
subscriber growth for the next five years. There can be no assurance, however,
that the Company's estimate of the CUE network capacity or its projection of
the Company's subscriber growth are accurate. If CUE fails to maintain its
nationwide network, fails to upgrade or further develop the network or if the
Company's estimates of network capacity or projections of subscriber growth
are inaccurate, the Company may experience a material adverse effect on its
business, financial condition and results of operations.
11. RELATED-PARTY TRANSACTIONS
The Company pays CUE monthly amounts for regional and nationwide airtime
charges, various telephone charges, and co-op advertising fees. Approximately
$1,681,920, $2,513,000, $4,244,000, and $2,135,865 was paid to CUE for the
years ended July 31, 1995, 1996, 1997 and the six months ended January 31,
1998, respectively, and has been recorded in services, rent and maintenance in
the accompanying consolidated statements of operations. Approximately
$356,000, $341,000, and $369,000 was payable to CUE and is included in
accounts payable and accrued liabilities in the accompanying consolidated
balance sheets as of July 31, 1996 and 1997 and January 31, 1998,
respectively.
The Company purchases pagers from FM Concepts. Approximately $1,421,000,
$1,512,000, and $910,000 was paid to FM Concepts for the years ended July 31,
1996 and 1997 and the six months ended January 31, 1998, respectively and has
been recorded in property and equipment in the accompanying consolidated
balance
F-22
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sheets. Approximately $112,000, $0, and $0 was payable to FM Concepts at July
31, 1996 and 1997 and January 31, 1998, respectively, and is included in the
accompanying consolidated balance sheets.
12. RETIREMENT PLAN
Effective April 1, 1995, the Company adopted a 401(k) retirement plan
covering substantially all employees, which provides for discretionary
employer-matching contributions. The Company contributed $0, $9,500, $20,600,
and $0 during the years ended July 31, 1995, 1996 and 1997, and the six months
ended January 31, 1998, respectively.
13. SUBSEQUENT EVENTS (UNAUDITED)
On January 1, 1998, the Company acquired 15% of the common stock of Direct
Link. This acquisition increased the Company's ownership percentage in Direct
Link to 100%.
March 11, 1998, the Company increased its Revolver from $25 million to $30
million with an additional increase to $40 million contingent on the Company
raising at least $3 million on terms that are satisfactory to the lenders. The
Company paid $150,000 for the increase in the Revolver.
Effective April 1, 1998, the Company acquired substantially all of the
assets of Premiere Paging, Inc. and Premiere Paging of New Orleans, Inc. under
the terms of an asset purchase agreement. The acquired assets consisted
primarily of local subscribers, paging terminals, FCC licenses, pagers, and
furniture and fixtures. The purchase price was approximately $4,300,000 before
recording certain acquisition expenses and was financed through the proceeds
from the issuance of Series D Convertible Preferred Stock.
On April 3, 1998, the Company sold 4,500 shares of Series D Convertible
Preferred Stock ("Series D Preferred Stock") together with 126,000 detachable
stock warrants with an exercise price of $6.00 per share and received
aggregate proceeds of $4.5 million. The proceeds were allocated $4,043,000 to
the Series D Preferred Stock and $457,000 to the stock warrants based on their
relative fair values at the date of issuance. The Series D Preferred Stock
carries an 8.55% cash coupon, which is payable monthly. The securities may be
redeemed at the purchaser's option any time after the first anniversary of the
closing date. The Company may call the Series D Preferred Stock for redemption
any time after the first anniversary of the closing date but will be required
to redeem the Series D Preferred Stock in conjunction with an initial public
offering. The stock warrants are exercisable immediately and expire in 2008.
On May 1, 1998, the Company acquired Hyde's Stay in Touch, Inc. The
estimated purchase price was approximately $12,200,000 and was financed by
additional debt under the Revolver and a promissory note.
In April of 1998, the Company increased its authorized Class A Common Stock
to 50,000,000 common shares.
The Company has filed a registration statement on Form S-1 with the
Securities and Exchange Commission for an initial public offering of 3.65
million shares of Common Stock, of which 2.75 million shares will be offered
and sold by the Company and 900,000 shares will be offered and sold by certain
shareholders of the Company. Shares of the Company's Class A Common Stock will
be renamed Common Stock upon the completion of the initial public offering.
There can be no assurance that this initial public offering will be completed.
On , 1998, the Company effectuated a 1.3-for-one split. All share and
per share amounts have been retroactively adjusted to effect this split.
F-23
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1997 AND APRIL 30,1998
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 193,346 $ 255,167
Accounts receivable, net............................ 2,698,481 4,322,969
Other receivables................................... 147,470 265,363
Inventory........................................... 268,201 170,855
Prepaid expenses and other current assets........... 362,053 532,050
----------- -----------
Total current assets.............................. 3,669,551 5,546,404
----------- -----------
PROPERTY AND EQUIPMENT:
Paging systems and equipment........................ 8,973,493 11,715,061
Computer and terminal equipment..................... 3,745,525 3,749,147
Furniture and fixtures.............................. 297,686 537,539
Leasehold improvements.............................. 107,766 108,966
----------- -----------
13,124,470 16,110,713
Less accumulated depreciation....................... (4,371,932) (4,945,836)
----------- -----------
Property and equipment, net....................... 8,752,538 11,164,877
----------- -----------
OTHER LONG TERM ASSETS:
Goodwill, net....................................... 9,447,098 13,827,596
Other intangible assets, net........................ 2,999,874 3,895,013
Investments in joint ventures....................... 219,627 560,363
Other............................................... 33,291 0
----------- -----------
Total other long term assets...................... 12,699,890 18,282,972
----------- -----------
Total assets...................................... $25,121,979 $34,994,253
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-24
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1997 AND APRIL 30, 1998
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long term debt........... $ 917,326 $ 1,200,000
Accounts payable and accrued liabilities....... 2,434,295 2,132,040
Customer deposits.............................. 372,140 280,898
Deferred revenues.............................. 1,076,248 1,283,797
Accrued dividends on preferred stock........... 88,047 93,011
----------- -----------
Total current liabilities.................... 4,888,056 4,989,746
----------- -----------
LONG-TERM DEBT, less current maturities.......... 18,410,822 25,262,612
----------- -----------
STOCK WARRANTS................................... 4,346,722 5,432,162
----------- -----------
MINORITY INTEREST................................ 5,351 --
----------- -----------
COMMITMENTS AND CONTINGENCIES
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK:
$0.01 par value; 3,500 shares authorized, 3,500
shares issued and outstanding at July 31, 1997
and April 30, 1998; entitled to a maximum of
$1,000 per share plus accrued dividends in
liquidation, dissolution, or windup of the
Company....................................... 3,500,000 3,500,000
Series D redeemable preferred stock, $.01 par
value; 0 and 4,500 shares authorized, issued,
and outstanding at July 31, 1997 and April 30,
1998, respectively............................ -- 4,043,000
SHAREHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock $.01 par
value; 7,500 shares authorized, 7,360 shares
issued and outstanding at July 31, 1997 and
April 30, 1998, entitled to a maximum of $290
per share plus accrued dividends in
liquidation, dissolution, or windup of the
Company....................................... 74 74
Series B convertible preferred stock, $.01 par
value; 30,000 shares authorized at July 31,
1997 and April 30, 1998, 0 shares issued and
outstanding................................... -- --
Common stock, $.01 par value:
Class A voting, 5,000,000 shares authorized,
2,952,811 and 3,054,377 shares issued and
outstanding at July 31, 1997 and April 30,
1998,
respectively................................. 29,528 30,544
Class B nonvoting, 20,000 shares authorized,
535.65 and 0 shares issued and outstanding at
July 31, 1997 and April 30, 1998,
respectively................................. 5 --
Additional paid in capital..................... 2,369,807 2,537,282
Accumulated deficit............................ (8,428,386) (10,801,167)
----------- -----------
Total shareholders' deficit.................. (6,028,972) (8,233,267)
----------- -----------
Total liabilities and shareholders' equity
(deficit)................................... $25,121,979 $34,994,253
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-25
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
REVENUES:
Service, rent and maintenance revenues.............. $11,899,261 $14,577,001
Product sales....................................... 855,636 903,454
----------- -----------
Total revenues.................................... 12,754,897 15,480,455
Cost of products sold............................... (840,014) (801,288)
----------- -----------
Net revenues...................................... 11,914,883 14,679,167
OPERATING EXPENSES:
Service, rent and maintenance....................... 4,870,267 5,475,108
Selling and marketing............................... 1,696,360 2,260,730
General and administrative.......................... 2,094,709 2,634,702
Engineering......................................... 473,940 631,056
Depreciation and amortization....................... 1,604,970 2,130,085
Fixed asset impairment ............................. -- 833,996
----------- -----------
Total operating expenses.......................... 10,740,246 13,965,677
----------- -----------
OPERATING INCOME .................................... 1,174,637 713,490
----------- -----------
OTHER INCOME (EXPENSE):
Other income........................................ 69,293 180,433
Interest expense.................................... (1,099,857) (1,740,176)
Accretion of stock warrants ........................ (1,251,823) (628,440)
(Loss) income from joint venture ................... 20,353 98,970
Minority interest................................... (1,828) (7,740)
----------- -----------
(2,263,862) (2,096,953)
----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE .......................................... (1,089,225) (1,383,463)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.. -- (628,700)
----------- -----------
NET LOSS............................................. (1,089,225) (2,012,163)
----------- -----------
PREFERRED STOCK DIVIDENDS............................ 328,743 360,618
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS......... $(1,417,968) $(2,372,781)
=========== ===========
Allocation of earnings to:
Class A............................................. $(1,396,587) $(2,370,835)
Class B............................................. (21,381) (1,946)
BASIC AND DILUTED NET LOSS PER SHARE
Loss from cumulative effect of change:
Class A............................................. $ -- $ (0.21)
Class B............................................. -- (17.97)
Net loss attributable to common shareholders:
Class A............................................. (0.47) (0.79)
Class B............................................. (39.96) (67.10)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Class A............................................. 2,952,811 3,015,800
Class B............................................. 535 29
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-26
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(1,089,225) $(2,012,163)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest................................... 1,828 7,740
Depreciation and amortization....................... 1,604,970 2,130,085
Asset Impairment.................................... 0 1,533,996
Accretion of stock warrants......................... 1,251,823 628,440
Changes in operating assets and liabilities:
Accounts receivable................................ (592,097) (1,502,791)
Other receivables.................................. 8,407 (117,893)
Prepaid expenses and other current assets.......... (73,750) (16,224)
Other assets....................................... (486,391) (756,004)
Accounts payable and accrued liabilities........... 323,295 865,644
Customer deposits.................................. (1,138) 91,242
Deferred revenues.................................. 69,235 (207,549)
----------- -----------
Total adjustments................................. 2,106,182 2,656,686
----------- -----------
Net cash provided by operating activities......... 1,016,957 644,523
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired....... (1,872,394) (5,827,847)
Purchases of property and equipment, net............ (2,869,668) (5,792,929)
Investment in joint venture......................... (20,065) (340,736)
----------- -----------
Net cash used in investing activities............. (4,762,127) (11,961,512)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock........... -- 4,500,000
Payment of preferred stock dividends................ (306,663) (355,654)
Proceeds from issuance of long term debt, net....... 3,595,709 7,134,464
Proceeds from issuance of common stock.............. -- 100,000
----------- -----------
Net cash provided by financing activities......... 3,289,046 11,378,810
----------- -----------
NET (DECREASE) INCREASE IN PERIOD.................... (456,124) 61,821
CASH AT BEGINNING OF PERIOD.......................... 524,708 193,346
----------- -----------
CASH AT END OF PERIOD................................ $ 68,584 $ 255,167
=========== ===========
CASH PAID FOR INTEREST............................... $ 1,103,208 $ 1,838,396
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-27
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of Regulation
S-X of the Securities and Exchange Commission. The accompanying unaudited
condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of financial
position and results for the interim periods presented. All such adjustments
are of a normal recurring nature. It is suggested that these condensed
financial statements be read in conjunction with the annual consolidated
financial statements of Satellink Communications, Inc. and its subsidiaries
(the "Company") and the notes thereto.
2. On April 1, 1998, the Company acquired substantially all of the assets of
Premiere Paging, Inc. and Premiere Paging of New Orleans, Inc. under the terms
of an asset purchase agreement. The acquired assets consisted primarily of
local subscribers, paging terminals, FCC licenses, pagers, and furniture and
fixtures. The purchase price was approximately $4,300,000 before recording
certain acquisition expenses and was financed through the issuance of Series D
Redeemable Preferred Stock ("Series D Preferred Stock").
In the fourth quarter of the Company's fiscal year ended 1998, the Company
is planning an offering of its common stock to repay outstanding indebtedness
under the Company's Credit Facility with Creditanstalt and to redeem all
shares of its Series D Preferred Stock outstanding (the "Offering"). The
Company plans to issue 2,750,000 shares in the Offering. There can, however,
be no assurance that the Offering can be completed. There are significant
potential risks associated with this Offering as well as the Company's ability
to compete profitably in this industry. See the "Risk Factors" section (pages
8 to 20) in the foregoing Prospectus related to the proposed Offering for a
discussion of these risks.
Any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in anticipated expenses, increases in the number of
subscribers acquired, or significant acquisition opportunities could have a
material adverse effect on the Company's liquidity and capital resources and
would require the Company to raise additional capital from public or private
equity or debt sources in order to finance operating losses, anticipated
growth and contemplated capital expenditures. If such sources of financing are
insufficient or unavailable, the Company will be required to modify its growth
and operating plans in accordance with the extent of available funding and
attempt to attain profitability in its existing markets. The Company may need
to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary business or the
development of new products, or otherwise respond to unanticipated competitive
pressures. There can be no assurance that the Company will be able to raise
any such capital on terms acceptable to the Company or at all.
3. On April 3, 1998, the Company sold 4,500 shares of Series D Preferred
Stock together with 126,000 detachable stock warrants with an exercise price
of $6.00 per share and received aggregate proceeds of $4.5 million. The
proceeds were allocated $4,043,000 to the Series D Preferred Stock and
$457,000 to the stock warrants based on their relative fair values at the date
of issuance. The Series D Preferred Stock carries an 8.5% cash coupon, which
is payable monthly. The securities may be redeemed at the purchaser's option
any time after the first anniversary of the closing date. The Company may call
the Series D Preferred Stock for redemption any time after the first
anniversary of the closing date but will be required to redeem the Series D
Preferred Stock in conjunction with an initial public offering. The stock
warrants are exercisable immediately and expire in 2008.
4. On March 11,1998, the Company increased it Revolver from $25 million to
$30 million with an additional increase to $40 million contingent on the
Company raising at least $3 million on terms that are satisfactory to the
lenders. The Company paid $150,000 for the increase in the Revolver.
F-28
<PAGE>
5. During 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earning Per Share." SFAS No. 128 establishes
accounting standards for calculating earnings per share. All share and per
share information presented in these financial statements has been calculated
in accordance with this statement.
Earnings per share is presented using the two class method. Earnings
attributable to each class of common stock are allocated between each class of
stock based on the extent to which each class shares in the Company's
earnings. The Company's Class A and Class B common shareholders share in
dividends at a 1:84.5 ratio. All convertible preferred stock, options, and
warrants currently outstanding are antidilutive for all periods presented.
On February 4, 1998, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 98 "Computation of Earnings Per Share." SAB
No. 98 requires the retroactive inclusion of nominal issuances of common stock
and common stock equivalents in earnings per share calculations for all
periods presented and precludes the use of treasury stock method for these
issuances. Management believes that all issuances of common stock and stock
options have been made at the current market value at the time of issuance and
that there have been no nominal issuances.
6. There was no provision for or cash payment of income taxes for the three
months and nine months ended April 30, 1997 and 1998, respectively, as the
Company had a net taxable loss for these periods and anticipates a net taxable
loss for the year ended July 31, 1998.
7. On May 1, 1998, the Company acquired substantially all of the assets of
Hyde's Stay In Touch, Inc. and its affiliated company under the terms of a
stock purchase agreement. The acquired assets consisted primarily of local
subscribers, paging terminals, pagers and receivables. The purchase price was
approximately $12.2 million, before certain acquisition expenses, and was
financed through the Company's Revolver and a promissory note.
On , 1998, the Company effectuated a 1.3-for-one split. All share and
per share amounts have been retroactively adjusted to effect this split.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlanta Voice Page, Inc.:
We have audited the accompanying balance sheet of ATLANTA VOICE PAGE, INC.
(a Georgia corporation) as of December 31, 1995 and the related statement of
operations, shareholders' deficit, 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 Atlanta Voice Page, Inc.
as of December 31, 1995 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 9, 1998
F-30
<PAGE>
ATLANTA VOICE PAGE, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................. $ 37,963
Accounts receivable.............................................. 94,940
Inventory........................................................ 21,332
----------
Total current assets........................................... 154,235
----------
PROPERTY AND EQUIPMENT, at cost:
Paging systems and equipment..................................... 701,699
Computer and terminal equipment.................................. 272,006
Office equipment................................................. 51,703
Furniture and fixtures........................................... 4,648
----------
1,030,056
Less accumulated depreciation.................................... (595,804)
----------
Property and equipment, net.................................... 434,252
----------
OTHER ASSETS:
Goodwill......................................................... 13,049
Intangible assets, net of accumulated amortization of $161,667... 3,333
Deposits......................................................... 1,585
----------
Total other assets............................................. 17,967
----------
$ 606,454
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 4).................... $ 317,493
Accounts payable and accrued liabilities......................... 37,732
Line of credit (Note 3).......................................... 27,000
Deferred revenues................................................ 106,894
Customer deposits................................................ 19,754
----------
Total current liabilities...................................... 508,873
----------
LONG-TERM DEBT, less current maturities (Note 4)................... 222,618
----------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' DEFICIT:
Common stock, $.10 par value:
Voting, 10,000,000 shares authorized, 1,000,000 shares issued
and outstanding................................................ 100,000
Accumulated deficit............................................. (225,037)
----------
Total shareholders' deficit.................................... (125,037)
----------
$ 606,454
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-31
<PAGE>
ATLANTA VOICE PAGE, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
REVENUES:
Service, rent and maintenance revenues............................ $ 962,315
Product sales..................................................... 248,264
---------
Total revenues.................................................. 1,210,579
---------
OPERATING EXPENSES:
Services, rent and maintenance.................................... 127,397
Selling and marketing............................................. 161,490
General and administrative........................................ 287,116
Depreciation and amortization..................................... 210,598
Cost of products sold............................................. 330,973
---------
Total operating expenses........................................ 1,117,574
---------
OPERATING INCOME.................................................... 93,005
---------
OTHER INCOME (EXPENSE):
Other income...................................................... 181
Interest expense.................................................. (95,241)
---------
(95,060)
---------
NET LOSS............................................................ $ (2,055)
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-32
<PAGE>
ATLANTA VOICE PAGE, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 1,000,000 $100,000 $(222,982) $(122,982)
Net loss........................... 0 0 (2,055) (2,055)
--------- -------- --------- ---------
BALANCE, December 31, 1995........... 1,000,000 $100,000 $(225,037) $(125,037)
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE>
ATLANTA VOICE PAGE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (2,055)
--------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization..................................... 210,598
Gain on sale of property and equipment............................ (95)
Changes in operating assets and liabilities:
Accounts receivable.............................................. (70,519)
Inventory........................................................ (21,332)
Other assets..................................................... 32
Accounts payable and accrued liabilities......................... 13,087
Customer deposits................................................ (2,031)
Deferred revenues................................................ 106,894
--------
Total adjustments............................................... 236,634
--------
Net cash provided by operating activities....................... 234,579
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment........................ 61,001
Purchases of property and equipment................................. (182,496)
--------
Net cash used in investing activities........................... (121,495)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............................ 165,454
Payments on long-term debt.......................................... (271,968)
--------
Net cash used in financing activities........................... (106,514)
--------
NET INCREASE IN CASH................................................. 6,570
CASH AT BEGINNING OF YEAR............................................ 31,393
--------
CASH AT END OF YEAR.................................................. $ 37,963
========
INTEREST PAID........................................................ $ 90,329
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-34
<PAGE>
ATLANTA VOICE PAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND BUSINESS OPERATIONS
Atlanta Voice Page, Inc. (the "Company") (a Georgia corporation) is a
communications company providing local, regional, and nationwide voice paging
services to approximately 15,000 subscribers. The Company operates its own
local paging systems utilizing FM subcarrier technology and purchases regional
and nationwide airtime from PageNet, Porta-Phone, and MobileComm.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION AND DEFERRED REVENUES
The Company's policy is to recognize revenue at the time the service is
provided. Deferred revenues represent advance billings and collections for
charges from new and existing customers. The deferred revenues related to the
charges are recognized when earned, primarily in the following month.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
FAIR VALUE OF FINANCIAL INVESTMENTS
As of December 31, 1995, the estimated fair value of the Company's financial
instruments approximates their carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for renewals and
improvements are capitalized, and replacements, maintenance, and repairs,
which do not improve or extend the lives of the respective assets, are
expensed as incurred. Depreciation is provided on a straight-line basis over
the remaining estimated useful lives, as follows:
<TABLE>
<S> <C>
Paging equipment................................................. 5 years
Paging systems................................................... 15 years
Computer and terminal equipment.................................. 3 years
Office equipment................................................. 2 years
Furniture and fixtures........................................... 5 years
</TABLE>
As of December 31, 1995, depreciation expense totaled $200,598 and is
included in depreciation and amortization in the accompanying statement of
operations.
F-35
<PAGE>
ATLANTA VOICE PAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventory consists of pagers held for sale. Inventory is valued at the lower
cost or market (determined on a first-in, first-out basis).
INTANGIBLE ASSETS
The Company was formed in 1991 when its original shareholder purchased the
assets and assumed all of the liabilities of Atlanta Voice Page, a division of
Comlite Systems Inc. ("Comlite"). Consideration provided for this purchase was
primarily debt of the Company, collateralized by the assets of the Company.
The assets purchased consisted primarily of local paging subscribers, a paging
system, pagers and spare parts, accounts receivable, and furniture and
fixtures. The assets purchased were recorded at their estimated fair value at
the acquisition date. The excess cost over the fair market value of the assets
acquired ("goodwill") is being amortized on a straight-line basis over a 15-
year period. The other intangible assets purchased relate to service contracts
acquired in 1991 and are being amortized on a straight-line basis over five
years.
The Company periodically reviews the carrying values assigned to goodwill
and other intangible assets based on expectations of future cash flows and
operating income generated by the underlying tangible assets in determining
whether intangible assets are recoverable.
LONG-LIVED ASSETS
Long-lived assets are evaluated regularly for other than temporary
impairment. If circumstances suggest that the asset values may be impaired, an
assessment of the assets' estimated fair value is performed and an impairment
loss is recognized in income from operations in the amount at which the
assets' carrying value exceeds the assets' estimated fair value. As of
December 31, 1995, none of the companies long-lived assets were considered to
be impaired.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 1995 consisted of
the following:
<TABLE>
<S> <C>
Accounts payable................................................. $13,045
Accrued payroll.................................................. 10,950
Accrued payroll taxes............................................ 10,604
Other accrued liabilities........................................ 3,133
-------
$37,732
=======
</TABLE>
INCOME TAXES
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be taxed as an S corporation. In lieu of corporate
income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision
or liability for federal income taxes has been included in these financials.
3. LINE OF CREDIT
The Company maintains a line of credit with maximum borrowings of $50,000.
The line of credit is payable on demand, otherwise it matures June 8, 1996. It
bears interest at prime plus 2% (10.5% at December 31, 1995), which is payable
monthly. The outstanding balance at December 31, 1995 was $27,000.
F-36
<PAGE>
ATLANTA VOICE PAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt at December 31, 1995 consisted of the following:
<TABLE>
<S> <C>
Notes payable to Associated Capital, various interest rates (rang-
ing from 11.8% to 14.5% at December 31, 1995); principal and in-
terest payable in monthly installments; secured by the assets
purchased;maturing at various dates through January 1999......... $286,485
Note payable to Satellink Communications, Inc., interest at 8%;
principal and interest due in full on May 15, 1996............... 110,000
Note payable to shareholder, interest at 11%; principal and inter-
est payable in 60 monthly installments; maturing August 2000..... 102,981
Note payable to First of America Trust Company, interest at 10%;
principal and interest payable in 37 monthly installments; matur-
ing May 1998..................................................... $ 40,645
--------
540,111
Less current portion.............................................. 317,493
--------
$222,618
========
</TABLE>
Scheduled future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996................................................................ $317,493
1997................................................................ 121,677
1998................................................................ 59,671
1999................................................................ 24,170
2000 and thereafter................................................. 17,100
--------
$540,111
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space under a noncancelable operating lease
expiring on November 30, 1996. The Company recorded lease expenses of
approximately $14,485 in 1995, related to this operating lease. The future
minimum payment due in 1996 under this lease was $13,672 at December 31, 1995.
6. SUBSEQUENT EVENT
Effective February 1, 1996, Satellink Communications, Inc. acquired
substantially all of the assets of the Company under the terms of an asset
purchase agreement. The assets sold consisted primarily of local paging
subscribers, a paging system, pagers and spare parts, accounts receivable, and
furniture and fixtures. The sale price was approximately $3,200,000 before
recording certain acquisition expenses and adjustments.
F-37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of C.R., Inc.:
We have audited the accompanying balance sheet of C.R., INC. (a Texas
corporation) as of December 31, 1995 and the related statements of operations,
shareholders' 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 C.R., Inc. as of December
31, 1995 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 9, 1998
F-38
<PAGE>
C.R., INC.
BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 30,056
Accounts receivable, net of allowance for doubtful account of
$110,138....................................................... 670,300
Note receivable from Nations Link (Note 3)...................... 52,274
Inventory....................................................... 38,477
Other receivables............................................... 24,692
Prepaid expenses and other current assets....................... 10,814
-----------
Total current assets.......................................... 826,613
-----------
PROPERTY AND EQUIPMENT, at cost:
Paging systems equipment........................................ 1,588,023
Furniture and fixtures.......................................... 143,606
Leasehold improvements.......................................... 9,061
-----------
1,740,690
Less accumulated depreciation................................... (1,441,125)
-----------
Property and equipment, net................................... 299,565
-----------
OTHER ASSETS:
Acquired customer base, net of accumulated amortization of
$17,719........................................................ 35,437
Other intangible assets, net of accumulated amortization of
$37,500........................................................ 40,500
Other........................................................... 5,487
-----------
Total other assets............................................ 81,424
-----------
$ 1,207,602
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities, including $242,313
payable to affiliate (Note 6).................................. $ 555,435
Customer deposits............................................... 111,847
Current maturities of long term debt (Note 4)................... 42,546
-----------
Total current liabilities..................................... 709,828
-----------
LONG-TERM DEBT, less current maturities........................... 5,107
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized, issued, and
outstanding.................................................... 1,000
Additional paid in capital...................................... 328,936
Accumulated equity.............................................. 162,731
-----------
Total shareholders' equity.................................... 492,667
-----------
$ 1,207,602
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-39
<PAGE>
C.R., INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
REVENUES:
Service, rent and maintenance revenue.......................... $4,046,182
Product sales.................................................. 261,363
----------
Total revenues............................................... 4,307,545
----------
OPERATING EXPENSES:
Services, rent and maintenance................................. 1,766,926
Selling and marketing.......................................... 233,232
General and administrative..................................... 1,348,092
Research and development....................................... 115,542
Depreciation and amortization.................................. 433,280
Cost of product sales.......................................... 223,626
----------
Total operating expenses..................................... 4,120,698
----------
OPERATING INCOME................................................. 186,847
----------
OTHER INCOME (EXPENSE):
Gain on sale of assets......................................... 106,906
Other income................................................... 6,213
Interest expense, net of interest income of $3,251............. (56,171)
----------
56,948
----------
NET INCOME....................................................... $ 243,795
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-40
<PAGE>
C.R., INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK
------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL EQUITY TOTAL
------ ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994....... 1,000 $1,000 $328,936 $ 295,318 $ 625,254
Net income..................... 0 0 0 243,795 243,795
Forgiveness of note receivable
from affiliates (Note 6)...... 0 0 0 (376,382) (376,382)
----- ------ -------- --------- ---------
BALANCE, December 31, 1995....... 1,000 $1,000 $328,936 $ 162,731 $ 492,667
===== ====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-41
<PAGE>
C.R., INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $243,795
--------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 433,280
Research and development......................................... 115,542
Gain on sale of assets........................................... (106,906)
Changes in operating assets and liabilities:
Accounts and other receivables................................. (151,947)
Prepaid expenses and other assets.............................. 13,036
Accounts payable and accrued liabilities....................... 257,893
Customer deposits.............................................. 15,490
--------
Total adjustments............................................ 576,388
--------
Net cash provided by operating activities.................... 820,183
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................ (358,638)
Proceeds from sale of property and equipment....................... 228,482
Advances to affiliate.............................................. (397,188)
--------
Net cash used in investing activities........................ (527,344)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term debt....................................... (440,791)
--------
NET DECREASE IN CASH................................................. (147,952)
CASH AT BEGINNING OF YEAR............................................ 178,008
--------
CASH AT END OF YEAR.................................................. $ 30,056
========
SUPPLEMENTAL INFORMATION:
Interest paid...................................................... $ 59,422
========
Forgiveness of note receivable due from shareholders............... $376,382
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-42
<PAGE>
C.R., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND BUSINESS OPERATIONS
C.R., Inc. (the "Company"), a Texas corporation, is a communications company
providing local, regional, and nationwide paging and voicemail services to
approximately 9,500 subscribers in Texas, New Mexico, Oklahoma, Arkansas, and
Louisiana.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company's policy is to recognize revenue at the time the service is
provided.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
investments purchased with an original maturity of three months or less to be
cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1995, the estimated fair value of the Company's financial
instruments approximates their carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for renewals and
improvements are capitalized, and replacements, maintenance, and repairs that
do not improve or extend the lives of the respective assets are expensed as
incurred. Depreciation is provided on a straight-line basis over the remaining
estimated useful lives, as follows:
<TABLE>
<S> <C>
Paging systems equipment.................................... 3 to 5 years
Furniture and fixtures...................................... 5 to 7 years
Leasehold improvements...................................... 5 to 39 years
</TABLE>
As of December 31, 1995, depreciation expense totaled $426,032 and is
included in depreciation and amortization in the accompanying statement of
operations.
INVENTORY
Inventory includes pagers held for sale. Inventory is valued at the lower of
cost or market (determined on a first-in, first-out basis).
F-43
<PAGE>
C.R., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, at December 31, 1995
consisted of the following:
<TABLE>
<S> <C>
Affiliate License................................................. $40,500
Acquired customer base............................................ 35,437
Other............................................................. 5,487
-------
$81,424
=======
</TABLE>
Affiliate license represents a contract with CUE Paging Corporation ("CUE"),
a nationwide satellite paging company presently offering the exclusive right
to purchase airtime and network services in the Dallas, Texas, metropolitan
area and southern Louisiana, to provide regional paging in these service areas
utilizing FM subcarrier technology. The affiliate license is recorded at cost
and amortized on the straight-line basis over the ten-year contract period.
Acquired customer base represents customer accounts purchased by the Company
and is carried on the balance sheet at cost, net of accumulated amortization.
The assets are being amortized on the straight-line basis over a period of 15
years.
The Company periodically reviews the carrying values assigned to goodwill
and other intangible assets based on expectations of future cash flows and
operating income generated by the underlying tangible assets in determining
whether the intangible assets are recoverable.
As of December 31, 1995, amortization expense totaled $14,748 and is
included in depreciation and amortization in the accompanying statement of
operations.
LONG-LIVED ASSETS
Long-lived assets are evaluated regularly for other than temporary
impairment. If circumstances suggest that the asset values may be impaired, an
assessment of the assets' estimated fair value is performed and an impairment
loss is recognized in income from operations in the amount at which the
assets' carrying value exceeds the assets' estimated fair value. As of
December 31, 1995, none of the Company's long-lived assets were considered to
be impaired.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 1995 consisted of
the following:
<TABLE>
<S> <C>
Accounts payable................................................ $238,931
Other accrued liabilities....................................... 74,289
--------
$313,220
========
</TABLE>
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising costs
totaled $94,740 as of December 31, 1995 and are included in selling and
marketing in the accompanying statement of operations.
CUSTOMER DEPOSITS
The Company requires a last-month advance from certain customers as a
deposit to guarantee payment. The customer deposits are held up to six months
and then applied to the customer's account. The Company had $111,847 in
customer deposits as of December 31, 1995.
F-44
<PAGE>
C.R., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENT IN NATIONS LINK
On May 25, 1995, the Company entered into a joint venture agreement with
Satellink Communications, Inc. ("Satellink") and Cape Fear Paging of North
Carolina, Inc. to form and operate a third-party supplier, Nations Link, Ltd.
("Nations Link"). The Company's ownership percentage in the joint venture was
approximately 33%. The Company does not have control over the operations of
the joint venture; however, it does exercise significant influence.
Accordingly, the Company accounts for its investment in Nations Link using the
equity method of accounting. During fiscal 1995, the Company wrote-off its
investment in Nations Link and recorded a total of $115,542 in research and
development expense related to pager design. The Company also had unsecured
and noninterest bearing advances outstanding to Nations Link totaling $52,275
as of December 31, 1995, which are included in the accompanying balance sheet.
4. NOTE PAYABLE
On February 24, 1995, the Company converted substantially all of its capital
lease obligations into a 10% promissory note of $245,000, payable in equal
monthly installments of $21,539, including interest, through February 29,
1996. Remaining future minimum payments under the note payable as of December
31, 1995 was $42,546.
5. TAX STATUS
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be taxed as an S corporation. In lieu of corporate
income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision
or liability for federal income taxes has been included in these financial
statements.
6. RELATED-PARTY TRANSACTIONS
On May 16, 1994, the shareholders of the Company formed a new company, Call
One, Inc ("Call One"). Call One is intended to be the sole provider of message
center services for the Company. Advances in the amount of $76,382 were made
to Call One by the Company during 1995 and are recorded as a reduction to
accumulated equity in the accompanying statement of shareholders' equity as
collection of the advances is not anticipated.
Prior to January 1, 1995, the Company had advanced $300,000 to Call One and
Nations Link and classified these advances as due from affiliates. As of
December 31, 1995, the Company's shareholders agreed to forgive the entire due
from affiliates balance. The forgiveness of these advances is reflected as a
reduction in accumulated equity in the accompanying statement of shareholders'
equity.
The Company receives message center services from Call One. The services
include base box charges ranging from $8,000 to $12,000 per month and 100 to
110 minutes at $.32 per minute. Average monthly charges of the Company are
approximately $40,000. As of December 31, 1995, the Company owed Call One
$242,313 for services received during fiscal 1995. The liability is recorded
in accounts payable and accrued liabilities in the accompanying balance sheet.
During 1995, the Company paid approximately $100,000 in management fees to a
shareholder of the Company for services provided throughout the year.
F-45
<PAGE>
C.R., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space under a noncancelable operating lease
expiring on May 31, 1996. The Company recorded lease expense of approximately
$60,500 in 1995, related to this operating lease. The future minimum payments
due in 1996 under this lease was approximately $25,000.
8. SUBSEQUENT EVENT
Effective June 1, 1996, Satellink acquired substantially all of the assets
of the Company under the terms of an asset purchase agreement. The acquired
assets consisted primarily of regional and nationwide paging subscribers, a
CUE paging regional affiliate agreement, notes receivable, deposits,
equipment, and furniture and fixtures. The purchase price was approximately
$5,700,000.
F-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Saner Communications, Inc.:
We have audited the accompanying balance sheet of MESSAGE WORLD (an
unincorporated division of Saner Communications, Inc., a Georgia corporation)
as of December 31, 1996 and the related statements of operations, (accumulated
deficit), retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Division'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 Message World as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 9, 1998
F-47
<PAGE>
MESSAGE WORLD
BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 49,455
Accounts receivable................................................. 69,411
Other receivables................................................... 652
Inventory........................................................... 10,000
--------
Total current assets.............................................. 129,518
--------
PROPERTY AND EQUIPMENT, AT COST:
Paging systems and equipment........................................ 152,173
Voicemail equipment................................................. 175,000
Furniture and fixtures.............................................. 16,836
Computer and terminal equipment..................................... 7,892
--------
351,901
Less accumulated depreciation....................................... (206,901)
--------
Property and equipment, net....................................... 145,000
--------
OTHER ASSETS.......................................................... 3,788
--------
$278,306
========
LIABILITIES AND RETAINED EARNINGS
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............................ $ 27,654
Customer deposits................................................... 493
Current maturities of capital lease obligation (Note 3)............. 48,972
Deferred revenue.................................................... 61,486
--------
Total current liabilities......................................... 138,605
--------
CAPITAL LEASE OBLIGATION, NET OF CURRENT MATURITIES (NOTE 3).......... 87,501
--------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
RETAINED EARNINGS..................................................... 52,200
--------
$278,306
========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-48
<PAGE>
MESSAGE WORLD
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUES:
Service, rent and maintenance revenues........................... $593,628
Product sales.................................................... 148,530
--------
Total revenues................................................. 742,158
--------
OPERATING EXPENSES:
Services, rent, and maintenance.................................. 120,338
Selling and marketing............................................ 115,005
General and administrative....................................... 208,074
Engineering...................................................... 5,985
Depreciation..................................................... 16,969
Cost of products sold............................................ 25,761
--------
Total operating expenses....................................... 492,132
--------
OPERATING INCOME................................................... 250,026
INTEREST EXPENSE................................................... (18,299)
--------
NET INCOME......................................................... $231,727
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-49
<PAGE>
MESSAGE WORLD
STATEMENT OF (ACCUMULATED DEFICIT) RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
BALANCE, December 31, 1995....................................... $(179,527)
Net income..................................................... 231,727
---------
BALANCE, December 31, 1996....................................... $ 52,200
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-50
<PAGE>
MESSAGE WORLD
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 231,727
---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 16,969
Changes in operating assets and liabilities:
Accounts receivable............................................ 16,280
Other receivables.............................................. (611)
Accounts payable and accrued liabilities....................... (258,337)
Customer deposits.............................................. (1,097)
---------
Total adjustments............................................. (226,796)
---------
Net cash provided by operating activities..................... 4,931
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (1,969)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligation................. (27,189)
---------
NET DECREASE IN CASH................................................ (24,227)
CASH AND CASH EQUIVALENTS, beginning of year........................ 73,682
---------
CASH AND CASH EQUIVALENTS, end of year.............................. $ 49,455
=========
INTEREST PAID....................................................... $ 18,299
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-51
<PAGE>
MESSAGE WORLD
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS OPERATIONS
Saner Communications, Inc., a Georgia S corporation ("Saner"), is engaged in
providing local voice mailbox services to approximately 5,000 subscribers in
the Atlanta, Georgia, area through Message World, an unincorporated division
of Saner. Message World purchases airtime solely through Preferred Networks,
Incorporated ("PNI"). The financial statements and related footnotes contained
herein reflect the operations of Message World. Substantially all of the
assets and operations of Saner are included in Message World; consequently,
these financial statements include substantially all costs and expenses of
Saner, with the exception of certain immaterial clerical costs recorded
directly by Saner.
Saner has elected under the Internal Revenue Code to be taxed as an S
corporation. The shareholders of an S corporation are taxed on their
proportionate share of Saner's taxable income. Therefore, no provision or
liability for federal income taxes has been included in these financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Message World's policy is to recognize revenue at the time the service is
provided.
CASH AND CASH EQUIVALENTS
Message World considers cash and cash equivalents to include cash on hand
and temporary cash investments purchased with an original maturity of three
months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1996, the estimated fair value of Message World's
financial instruments approximates their carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for renewals and
improvements are capitalized, and replacements, maintenance, and repairs which
do not improve or extend the lives of the respective assets are expensed as
incurred. Depreciation is provided on a straight-line basis over the remaining
estimated useful lives, as follows:
<TABLE>
<S> <C>
Paging system and equipment................................ 5 years
Voicemail equipment........................................ 10 to 20 years
Computers and terminal equipment........................... 5 to 10 years
Furniture and fixtures..................................... 5 to 10 years
Leasehold improvements..................................... 5 to 10 years
</TABLE>
F-52
<PAGE>
MESSAGE WORLD
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORY
Inventory consists of pagers held for sale. Inventory is valued at the lower
of cost or market (determined on a first-in, first-out basis).
LONG-LIVED ASSETS
Long-lived assets are evaluated regularly for other than temporary
impairment. If circumstances suggest that the asset values may be impaired, an
assessment of the assets' estimated fair value is performed and an impairment
loss is recognized in income from operations in the amount at which the
assets' carrying value exceeds the assets' estimated fair value. As of
December 31, 1996, none of Message World's long-lived assets were considered
to be impaired.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 1996 consisted of
the following:
<TABLE>
<S> <C>
Accounts payable.................................................. $23,636
Accrued payroll................................................... 4,018
-------
$27,654
=======
</TABLE>
3. CAPITAL LEASES
Message World leases voicemail equipment under a noncancelable capital
lease. The equipment will revert to Message World upon the maturity of the
lease in October 1999. At December 31, 1996, the net book value of this
equipment was $145,000. The effective interest rate on this lease was
approximately 11.5%.
Future minimum payments under the noncancelable capital lease as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $ 48,972
1998............................................................. 45,133
1999............................................................. 42,368
--------
$136,473
========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Message World leases office space under a noncancelable operating lease
expiring on July 14, 2000. Message World recorded lease expense of
approximately $24,299 in 1996 related to these operating leases.
Future minimum payments under noncancelable operating leases as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $ 35,371
1998............................................................. 36,786
1999............................................................. 38,257
2000............................................................. 24,452
--------
$134,866
========
</TABLE>
F-53
<PAGE>
MESSAGE WORLD
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED-PARTY TRANSACTIONS
Message World purchases airtime from PNI, in which Saner is a shareholder.
During 1996, Message World purchased approximately $66,000 of airtime from
PNI.
6. SUBSEQUENT EVENT
Effective February 1, 1997, Satellink Communications, Inc. acquired
substantially all of the assets of Message World under the terms of an asset
purchase agreement. The assets sold consisted primarily of local voicemail
subscribers, a voicemail equipment, pagers and spare parts, accounts
receivable, and furniture and fixtures. The purchase price was approximately
$1,600,000 before recording certain acquisition expenses and adjustments.
F-54
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholders of Hyde's Stay in Touch, Inc.
I have audited the accompanying Balance Sheets of Hyde's Stay in Touch, Inc.
as of December 31, 1997 and 1996 and the related Statements of Income,
Retained Earnings and Cash Flows for the years then ended. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing
standards. These standards require that I 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. I believe that my audits provide a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hyde's Stay in Touch, Inc. as
of December 31, 1997 and 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
James N. Rachel
/s/ James N. Rachel
Shreveport, Louisiana
February 23, 1998
F-55
<PAGE>
HYDE'S STAY IN TOUCH, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................ $ 119,684 $ 124,550
Investments--Trading securities..................... 843,982 434,282
Accounts receivable................................. 581,074 444,877
Inventory........................................... 279,686 356,646
Prepaid expenses.................................... 2,950 4,725
---------- ----------
Total Current Assets.............................. 1,827,376 1,365,080
Property and Equipment, net........................... 891,434 758,352
Other Assets;
Loan fees, net...................................... 3,334 5,834
Deposits............................................ 3,730 2,730
Due from Budget Phone, Inc. ........................ 358,592 225,332
---------- ----------
Total Other Assets................................ 365,656 233,896
---------- ----------
TOTAL ASSETS.......................................... $3,084,466 $2,357,328
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................... $ 100,659 $ 190,063
Accrued expenses.................................... 11,504 11,694
Current maturity of long term debt.................. 544,924 566,426
---------- ----------
Total Current Liabilities......................... 657,087 768,183
Long Term Liabilities:
Long term debt, excluding current portion........... 1,430,992 199,362
---------- ----------
Total Liabilities................................. 2,088,079 967,545
Commitments and Contingencies (Note H and I)
Stockholders' Equity:
Common stock........................................ 706 1,000
Retained earnings................................... 995,681 1,388,783
---------- ----------
Total Stockholders' Equity........................ 996,387 1,389,783
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $3,084,466 $2,357,328
========== ==========
</TABLE>
See Accompanying Notes and Auditor's Report.
F-56
<PAGE>
HYDE'S STAY IN TOUCH, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues
Fees and airtime, net of returns & allowances......... $3,859,167 $3,363,014
Pager, hardware, and accessory sales.................. 926,867 874,920
Dealer airtime........................................ 373,984 331,712
Dealer hardware sales................................. 224,902 68,768
Trade income.......................................... 40,615 41,325
---------- ----------
Total Revenues...................................... 5,425,535 4,679,739
Cost of Products Sold................................... (1,299,809) (998,243)
---------- ----------
4,125,726 3,681,496
Operating Expenses
General and administrative............................ 1,711,269 1,853,618
Selling and marketing................................. 277,068 235,806
Depreciation and amortization......................... 224,865 200,560
Service, rent & maintenance........................... 515,169 492,235
---------- ----------
Total Operating Expenses............................ 2,728,371 2,782,219
---------- ----------
Income From Operations.................................. 1,397,355 899,277
Other Income (Expense)..................................
Interest income....................................... 37,378 28,188
Unrealized gain (loss) on investment.................. 72,365 (3,760)
Other income.......................................... 17,144 26,311
Rent income........................................... 7,560 2,720
Gain (loss) on sale of assets......................... -- --
Interest expense...................................... (40,904) (34,775)
---------- ----------
Total Other Income (Expense)........................ 93,543 18,684
---------- ----------
Net Income.............................................. $1,490,898 $ 917,961
========== ==========
</TABLE>
See Accompanying Notes and Auditor's Report.
F-57
<PAGE>
HYDE'S STAY IN TOUCH, INC.
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Beginning Retained Earnings......................... $ 1,388,783 $1,041,901
Net Income.......................................... 1,490,898 917,961
Stockholder Distributions........................... (416,413) (571,079)
Retirement of Treasury Stock........................ (1,467,587) --
----------- ----------
Ending Retained Earnings............................ $ 995,681 $1,388,783
=========== ==========
</TABLE>
See Accompanying Notes and Auditor's Report.
F-58
<PAGE>
HYDE'S STAY IN TOUCH, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
----------------------
1997 1996
----------- ---------
<S> <C> <C>
Cash Flow From Operating Activities:
Net income............................................ $ 1,490,898 $ 917,961
Adjustments to reconcile net income to net cash
provided by operating activities:
Unrealized (gain) loss on investments............... (72,365) 3,760
Amortization........................................ 2,500 2,500
Depreciation........................................ 222,365 198,060
(Increase) Decrease in:
Accounts receivable................................. (136,197) (62,379)
Inventory........................................... 76,960 (91,505)
Prepaid expenses.................................... 1,775 2,251
Rental deposits..................................... (1,000) --
Increase (Decrease) in:
Accounts payable.................................... (89,404) 165,880
Accrued expenses.................................... (190) (16,165)
----------- ---------
Net Cash Provided (Used) by Operating Activities... 1,495,342 1,120,363
Cash Flows From Investing Activities:
Acquisition of fixed assets........................... (478,991) (250,764)
Sale of fixed assets.................................. 123,543 4,524
Purchases of trading securities....................... (337,335) (321,811)
----------- ---------
Net Cash Provided (Used) by Investing Activities... (692,783) (568,051)
Cash Flows From Financing Activities:
Principal reduction of debt........................... (566,434) (127,689)
Loan proceeds......................................... 1,776,562 430,191
Stockholder distributions............................. (416,413) (571,079)
Advance to Budget Phone, Inc. ........................ (133,260) (225,332)
Stock redemption...................................... (1,467,880) --
----------- ---------
Net Cash Provided (Used) by Financing Activities... (807,425) (493,909)
----------- ---------
Net (Decrease) Increase In Cash........................ (4,866) 58,403
Beginning Cash......................................... 124,550 66,147
----------- ---------
Ending Cash............................................ $ 119,684 $ 124,550
=========== =========
</TABLE>
See Accompanying Notes and Auditor's Report.
F-59
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
The Company was organized in 1988 and is licensed by the Federal
Communications Commission (FCC) as a private paging carrier. It specializes in
one-way communications through a networking of UHF and VHF MHz frequencies.
The business provides state of the art paging and voicemail services to over
38,000 subscribers. The Company's coverage area includes eastern Texas, all of
the State of Louisiana and portions of Mississippi.
ACCOUNTING METHOD
The accrual method of accounting is used for both financial and income tax
reporting purposes.
CASH AND MARKETABLE SECURITIES
For purposes of the financial statements of cash flows, the Company
considers cash in operating bank accounts and cash on hand as cash.
The Company's marketable securities that are bought and held primarily for
the purpose of selling them in the near term are classified as trading
securities. Trading securities are recorded at fair value on the balance sheet
in current assets, with the change in fair value during the period included in
earnings.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimated.
CONCENTRATION OF CREDIT RISK
The Company occasionally maintains deposits in excess of federally insured
limits. Statement of Financial Accounting Standards No. 105 identifies this as
a concentration of credit risk requiring disclosure, regardless of the degree
of risk. The risk is managed by maintaining all deposits in high quality
financial institutions.
ACCOUNTS RECEIVABLE
All accounts receivable at December 31, 1997 and 1996 are considered by
management to be collectible and therefore no allowance for bad debts was
deemed necessary.
INVENTORIES
Inventories consist of pagers, which are valued at the lower of market, with
cost determined on a first-in, first-out basis.
F-60
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
LOAN FEES
The Company is amortizing a SBA loan fee of $12,502 over sixty months. At
December 31, 1997, sixteen months remained to be amortized.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are expensed as incurred while renewals and betterments are
capitalized.
Depreciation and amortization have been provided using the straight-line
method over the useful lives of the assets as follows:
<TABLE>
<S> <C>
Office furniture and fixtures.................................. 10 years
Vehicles....................................................... 3 years
Leased equipment............................................... 3 years
Machinery and equipment........................................ 5-10 years
Leasehold improvements......................................... 10-40 years
</TABLE>
Leased equipment consists of pagers, which are leased to customers on a
monthly basis.
These pagers are added to a leased pool on an accrual basis. The pool is
then depreciated over a three-year period.
Depreciation for the years ended December 31, 1997 and 1996 was $222,365 and
$198,060, respectively.
REVENUE RECOGNITION
Revenue is recognized when services are provided.
INCOME TAXES
Under the provisions of the Internal Revenue Code, the Company has elected
to be taxed as an "S" corporation. Under such election, the Company's federal
taxable income or loss and tax credits are passed through to the individual
stockholders.
NOTE B: INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities classified as trading securities are
summarized as follows at December 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
GAIN LOSS VALUE
---------- ---------- --------
<S> <C> <C> <C>
Eaton Vance Municipals....................... $ 8,898 $ -- $135,704
Oppenheimer Value Fund....................... 8,889 -- 113,229
Oppenheimer Income Fund...................... 33,964 -- 261,517
John Hancock Bank Fund....................... 27,137 -- 81,575
Eaton Vance Growth Fund...................... 1,511 -- 51,511
Franklin Templeton Mutual.................... -- 8,034 200,446
------- ------ --------
$80,399 $8,034 $843,982
======= ====== ========
</TABLE>
F-61
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
Investments in marketable securities classified as trading securities are
summarized as follows at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
GAIN LOSS VALUE
---------- ---------- --------
<S> <C> <C> <C>
Eaton Vance Municipals....................... $ -- $2,066 $120,339
Oppenheimer Value Fund....................... 1,106 -- 52,466
Oppenheimer Income Fund...................... -- 5,585 208,101
John Hancock Bank Fund....................... 2,785 -- 53,376
------ ------ --------
$3,891 $7,651 $434,282
====== ====== ========
</TABLE>
NOTE C: ACCOUNTS RECEIVABLE
Accounts Receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accounts Receivable Trade................................. $488,882 $390,780
Trade Out Receivables..................................... 22,562 13,247
Accounts Receivable Employees............................. 69,630 40,850
-------- --------
$581,074 $444,877
======== ========
</TABLE>
NOTE D: INVENTORIES
Inventories consist of various types of pagers held in each of the various
business locations the Company operates. The total value at lower of cost or
market at December 31, 1997 and 1996 was $279,686 and $356,646, respectively.
NOTE E: PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Office furniture and fixtures......................... $ 45,309 $ 39,805
Vehicles.............................................. 13,423 13,423
Leased equipment...................................... 637,571 577,492
Machinery and equipment............................... 1,193,557 920,556
Leasehold improvements................................ 56,509 39,647
---------- ----------
1,946,369 1,590,923
Less: Accumulated depreciation........................ 1,054,935 832,571
---------- ----------
$ 891,434 $ 758,352
========== ==========
NOTE F: PREPAID EXPENSES
Prepaid expenses consist of the following:
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Prepaid Insurance..................................... $ 2,950 $ 4,725
========== ==========
</TABLE>
F-62
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE G: ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Interest payable............................................. $ 4,934 $ 767
Sales tax payable............................................ 6,153 9,652
Payroll tax payable.......................................... 417 1,275
------- -------
$11,504 $11,694
======= =======
</TABLE>
NOTE H: LEASE COMMITMENTS
The Company leases building facilities and an auto under agreements which
have been classified as operating leases.
Future lease commitments under operating leases at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING OPERATING
DECEMBER 31 LEASES
------------ ---------
<S> <C>
1998........................................................ $ 87,453
1999........................................................ 66,797
2000........................................................ 51,225
2001........................................................ 9,990
2002........................................................ 5,960
--------
Total minimum lease payments.................................. $221,425
========
</TABLE>
Future lease commitments under capital leases at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING OPERATING
DECEMBER 31 LEASES
------------ ---------
<S> <C>
1997....................................................... $ 63,114
1998....................................................... 87,453
1999....................................................... 66,797
2000....................................................... 51,225
2001....................................................... 9,990
--------
Total minimum lease payments.................................. $278,579
========
</TABLE>
The Company rents space on several transmission towers throughout its
coverage area. Many of the rentals are verbal and on a month to month basis.
Industry standard is sixty days notice to vacate.
Total rental expense on the operating leases for the years ended December
31, 1997 and 1996 was $174,377 and $156,778, respectively.
F-63
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE I: LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Note payable to Commercial National Bank in
Shreveport, Louisiana, a $300,000 revolving line
of credit maturing May 31, 1997, at a variable
interest rate. This note is collateralized by
accounts receivable and personal guaranty of
Robert D. Hyde, Jr................................ $ 150,000 $ 285,000
Note payable to Commercial National Bank in
Shreveport, Louisiana, payable in monthly
installments of $13,180 including interest at
8.00% through March 27, 1999. This note is a U.S.
Small Business Administration loan and is
collateralized by equipment, inventory, accounts
receivable, and personal guaranty of Robert D.
Hyde, Jr.......................................... 199,354 335,597
Note payable to the Estate of Shirley Ann Gunstream
Hyde, dated December 31, 1997, payable with
interest at 8.00% on December 31, 1998............ 187,732 145,191
Note payable to Danny Hagen Gunstream Trust,
payable in monthly installments of $9,278.90
including interest at 8.00% through February 10,
2013. The note is secured by the personal guaranty
of R. Daniel Hyde, Jr. The note can be accelerated
under certain conditions of the sale of company
stock............................................. 970,950 --
Note payable to the congregation of St. John's
Roman Catholic Church of Caddo Parish, Louisiana,
payable in monthly installments of $5,676.88
including interest at 8.00% through November 10,
2007.............................................. 467,880 --
---------- ---------
Total long term debt............................. 1,975,916 765,788
Current portion.................................. (544,924) (566,426)
---------- ---------
Long term portion................................ $1,430,992 $ 199,362
========== =========
</TABLE>
The interest expense for the years ended December 31, 1997 and 1996 was
$40,904 and $34,775, respectively.
Maturities of the notes for each of the five years succeeding December 31 are
as follows:
<TABLE>
<CAPTION>
YEAR 1997 1996
---- -------- --------
<S> <C> <C>
1st........................................................ $544,924 $566,426
2nd........................................................ 123,538 147,542
3rd........................................................ 77,860 51,820
4th........................................................ 84,125 --
5th........................................................ 91,110 --
-------- --------
$921,557 $765,788
======== ========
</TABLE>
F-64
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE J: CAPITAL STOCK
The capital stock consists of 1,000 authorized shares of no par value common
stock. At December 31, 1996 there were 100 shares outstanding of which 50 were
held by Mr. R. Daniel Hyde, Jr. and 50 by the Estate of Shirley Hyde. Mr. Hyde
is the executor of the estate. In her will, Mrs. Hyde made bequeaths to
St. John's Catholic Church and to the Hagen Gunstream Trust. On December 19,
1997 these gifts were transferred from the estate to the donees in the form of
29.36 shares of stock of Hyde's Stay In Touch, Inc., valued at $50,000 per
share as determined by an independent valuation. Simultaneous with the
transfer, the stock was redeemed by the Company as treasury stock to be
retired. The stock redemption resulted in corporate notes to the donees as set
forth in Note I. At December 31, 1997 there were 70.64 shares of stock issued
and outstanding.
NOTE K: RELATED PARTY TRANSACTIONS
Payments made by the Company to the stockholders during the year were
charged to wages, administration fees, or stockholder distributions. The note
payable to the Estate of Shirley Ann Gunstream Hyde was established to
equalize stockholders' distributions. The amount of the note represents the
Estate's portion of the unfunded stockholders distributions at December 31,
1997 and 1996 which was $187,732 and $145,191, respectively. Except as set
forth in Note G there were no receivables from nor payables to the
stockholders at December 31, 1997 or 1996.
The Company's sole surviving stockholder owns the majority of the stock of
Budget Phone, Inc. Advances to Budget Phone, Inc. by the Company totaled
$358,592 and $225,332 at December 31, 1997 and 1996, respectively.
NOTE L: CASH FLOW INFORMATION
The total interest paid for cash flow purposes for the years ended December
31, 1997 and 1996 was $30,954 and $34,008, respectively.
F-65
<PAGE>
HYDE'S STAY IN TOUCH, INC.
BALANCE SHEET
AS OF APRIL 30, 1998
<TABLE>
<CAPTION>
APRIL 30,
1998
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current Assets:
Cash.............................................................. $ 37,736
Investments--Trading securities................................... 1,213,078
Accounts receivable............................................... 537,601
Inventory......................................................... 435,467
Prepaid expenses.................................................. 124,390
----------
Total Current Assets............................................ 2,348,272
Property and Equipment, net......................................... 819,462
Other Assets:
Loan fees, net.................................................... 2,501
Deposits.......................................................... 3,730
Due from Budget Phone, Inc........................................ 368,355
----------
Total Other Assets.............................................. 374,586
----------
TOTAL ASSETS........................................................ $3,542,320
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable.................................................. $ 142,264
Accrued expenses.................................................. 39,751
Current maturity of long term debt................................ 566,123
----------
Total Current Liabilities....................................... 748,138
Long Term Liabilities:
Long term debt, excluding current portion......................... 1,359,047
----------
Total Liabilities............................................... 2,107,185
Stockholder's Equity:
Common stock...................................................... 706
Retained earnings................................................. 1,434,429
----------
Total Stockholder's Equity...................................... 1,435,135
----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.......................... $3,542,320
==========
</TABLE>
See Accompanying Notes
F- 66
<PAGE>
HYDE'S STAY IN TOUCH, INC.
STATEMENTS OF INCOME
FOR THE FOUR MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
APRIL 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues
Fees and airtime, net of returns & allowances.......... $1,493,198 $1,268,369
Pager, hardware, and accessory sales................... 422,024 328,575
Dealer airtime......................................... 132,925 125,683
Dealer hardware sales.................................. 148,844 80,633
---------- ----------
Total Revenues...................................... 2,196,991 1,803,260
Cost of Products Sold................................... (573,753) (424,354)
---------- ----------
1,623,238 1,378,906
Operating Expenses
General and administrative............................. 615,348 547,726
Selling and marketing.................................. 94,213 112,877
Depreciation and amortization.......................... 73,476 78,546
Service, rent and maintenance.......................... 147,208 198,878
---------- ----------
Total Operating Expenses............................ 930,245 938,027
---------- ----------
Income from Operations.................................. 692,993 440,879
Other Income (Expense)
Interest income........................................ 3,071 2,545
Unrealized gain (loss) on investment................... 91,025 16,582
Gain (Loss) on disposition of assets................... 44,135 --
Other income........................................... 10,676 1,903
Rent income............................................ 4,750 --
Interest expense....................................... (51,911) (17,927)
---------- ----------
Total Other Income (Expense)........................ 101,746 3,103
---------- ----------
Net Income.............................................. $ 794,739 $ 443,982
========== ==========
</TABLE>
See Accompanying Notes
F-67
<PAGE>
HYDE'S STAY IN TOUCH, INC.
STATEMENTS OF CASH FLOWS
FOR THE FOUR MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
APRIL 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash Flow from Operating Activities:
Net income................................................ $794,739 $443,982
Adjustments to reconcile net income to net cash provided
by operating activities:
Unrealized (gain) loss on investments................... (91,025) (16,582)
Gain on disposition of fixed assets..................... (44,135) --
Amortization............................................ 833 833
Depreciation............................................ 72,643 74,122
(Increase) Decrease in:
Accounts receivable..................................... 43,473 (58,433)
Inventory............................................... (155,781) 42,673
Prepaid expenses........................................ (121,440) (6,119)
Increase (Decrease) in:
Accounts payable........................................ 41,605 57,975
Accrued expenses........................................ 28,247 25,766
-------- --------
Net Cash Provided (Used) by
Operating Activities.................................. 569,159 564,217
Cash Flows from Investing Activities:
Acquisition of fixed assets............................... (111,605) (104,663)
Purchases of trading securities........................... (278,071) --
-------- --------
Net Cash Provided (Used) by
Investing Activities................................... (389,676) (104,663)
Cash Flows from Financing Activities:
Principal reduction of debt............................... (50,746) (329,253)
Stockholder distributions................................. (200,922) (89,211)
Advance to Budget Phone, Inc.............................. (9,763) (22,856)
-------- --------
Net Cash Provided (Used) by
Financing Activities................................... (261,431) (441,320)
-------- --------
Net (Decrease) Increase In Cash............................ (81,948) 18,234
Beginning Cash............................................. 119,684 124,550
-------- --------
Ending Cash................................................ $ 37,736 $142,784
======== ========
</TABLE>
See Accompanying Notes
F-68
<PAGE>
HYDE'S STAY IN TOUCH, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of Regulation
S-X of the securities and Exchange Commission. The accompanying unaudited
condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of financial
position and results for the interim periods presented. All such adjustments
are of a normal recurring nature. It is suggested that these condensed
financial statements be read in conjunction with the annual consolidated
financial statements of the Company and the notes thereof.
2. On May 1, 1998, Satellink Communications, Inc. acquired substantially all
of the assets of Hyde's Stay in Touch, Inc.
F-69
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet as of April 30,
1998 has been prepared to give effect to the following events and transactions
(collectively, the "Transactions") as if each occurred on April 30, 1998: (i)
the acquisition (the "Hyde's Acquisition") of Hyde's Stay In Touch, Inc.
("Hyde's"), including the increase in the Revolving Credit Facility and
issuance of a promissory note, which totaled in the aggregate approximately
$12.2 million, and (ii) the sale and issuance of 2,750,000 shares of Common
Stock at an estimated initial public offering price of $11.00 per share.
The unaudited pro forma consolidated statement of operations for the nine
months ended April 30, 1998 has been prepared by combining Satellink's
unaudited historical results of operations for that period with Hyde's
unaudited historical results of operations for the same period adjusted to
give effect to the Transactions as if they had occurred on August 1, 1996.
Note that the months of August and September 1997 are included in statements
of operations for both the nine months ended April 30, 1998 and the year ended
July 31, 1997. Revenues, operating income and net income for the two months
ended September 30, 1997 were $849,287, $275,957 and $290,525, respectively.
The unaudited pro forma consolidated statement of operations for the year
ended July 31, 1997 has been prepared by combining Satellink's audited
historical results of operations for the year ended July 31, 1997 with Hyde's
unaudited historical results of operations for the year ended September 30,
1997 adjusted to give effect to the Transactions as if they had occurred on
August 1, 1996. In addition, the unaudited pro forma consolidated statement of
operations for the year ended July 31, 1997 gives effect to Satellink's
February 1, 1997 acquisition of Message World as if it had occurred on August
1, 1996.
This unaudited pro forma consolidated financial information is prepared for
informational purposes only and is not necessarily indicative of future
results or of actual results that would have been achieved had the
Transactions been consummated at the beginning of the periods presented.
Because the Hyde's Acquisition was consummated subsequent to April 30, 1998,
the Company's estimated allocation of the purchase price should be considered
preliminary. The Company is undertaking a full investigation of the allocation
of the purchase price among the assets acquired. Although the allocation is
preliminary, the final allocation is not expected to be materially different.
The unaudited pro forma consolidated financial information should be read in
conjunction with "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Consolidation and Results of Operations" and the
consolidated financial statements of Satellink, Hyde's, and Message World and
related notes thereto included elsewhere in the Prospectus.
The pro forma financial statements are based upon available information and
certain assumptions that management believes are reasonable. Final adjustments
may differ from the pro forma adjustments herein.
F-70
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------- CONSOLIDATED
SATELLINK PRO FORMA PRO FORMA AS ADJUSTED
COMMUNICATIONS, HYDE'S STAY ACQUISITION PRO FORMA OFFERING FOR THE
INC. IN TOUCH, INC.(A) ADJUSTMENTS CONSOLIDATED ADJUSTMENTS OFFERING(E)
--------------- ----------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 255,167 $ 37,736 $ (37,736)(b) $ 255,167 $ -- $ 255,167
Investments............ -- 1,213,078 (1,213,078)(b) -- -- --
Accounts receivable,
net................... 4,322,969 537,601 -- 4,860,570 -- 4,860,570
Other receivables...... 265,363 -- -- 265,363 -- 265,363
Inventory.............. 170,855 435,467 -- 606,322 -- 606,322
Deferred tax asset..... -- -- -- -- 400,000 (i) 400,000
Prepaid expenses and
other current assets.. 532,050 124,390 -- 656,440 -- 656,440
------------ ---------- ----------- ------------ ----------- -----------
Total current assets... 5,546,404 2,348,272 (1,250,814) 6,643,862 400,000 7,043,862
Property and equipment,
net.................... 11,164,877 819,462 (319,462)(c) 11,664,877 -- 11,664,877
Goodwill, net........... 13,827,596 -- 8,356,540 (c) 22,184,136 -- 22,184,136
Other intangible assets,
net.................... 3,895,013 -- 2,200,000 (c) 6,095,013 -- 6,095,013
Investment in joint
venture................ 560,363 -- -- 560,363 -- 560,363
Other assets............ -- 374,586 -- 374,586 900,000 (i) 1,274,586
------------ ---------- ----------- ------------ ----------- -----------
Total assets........... $ 34,994,253 $3,542,320 $ 8,986,264 $ 47,522,837 1,300,000 48,822,837
============ ========== =========== ============ =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of
long term debt........ $ 1,200,000 $ 566,123 $ (566,123)(b) $ 1,200,000 -- $ 1,200,000
Accounts payable and
accrued liabilities... 2,132,040 182,015 (182,015)(b) 2,432,040 -- 2,432,040
300,000 (c)
Customer deposits...... 280,898 -- -- 280,898 -- 280,898
Deferred revenues...... 1,283,797 -- -- 1,283,797 -- 1,283,797
Accrued dividends on
preferred stock....... 93,011 -- -- 93,011 -- 93,011
------------ ---------- ----------- ------------ ----------- -----------
Total current
liabilities........... 4,989,746 748,138 (448,138) 5,289,746 -- 5,289,746
Long-term debt, less
current maturities..... 25,262,612 1,359,047 (1,359,047)(b) 37,491,196 (23,189,000)(e) 14,302,196
12,228,584 (d)
Stock warrants.......... 5,432,162 -- -- 5,432,162 (5,432,162)(f) --
Series C redeemable
preferred stock........ 3,500,000 -- -- 3,500,000 (3,500,000)(g) --
Series D redeemable
preferred stock........ 4,043,000 -- -- 4,043,000 (4,043,000)(e) --
Shareholders' Equity
(Deficit):
Series A convertible
preferred stock....... 74 -- -- 74 (74)(h) --
Class A voting common
stock................. 30,544 706 (706)(d) 30,544 27,500 (e) 73,803
9,540 (g)
6,219 (h)
Additional paid in
capital............... 2,537,282 -- -- 2,537,282 27,204,500 (e) 33,226,097
3,490,460 (g)
(6,145)(h)
Stock warrants......... -- -- -- -- 5,432,162 (f) 5,432,162
Accumulated earnings
(deficit)............. (10,801,167) 1,434,429 (1,434,429)(d) (10,801,167) 1,300,000 (i) (9,501,167)
------------ ---------- ----------- ------------ ----------- -----------
Total shareholders'
equity (deficit)...... (8,233,267) 1,435,135 (1,435,135) (8,233,267) 37,102,162 29,230,895
------------ ---------- ----------- ------------ ----------- -----------
Total liabilities and
shareholders' equity
(deficit)............. $ 34,994,253 $3,542,320 $ 8,986,264 $ 47,522,837 $ 1,300,000 $48,822,837
============ ========== =========== ============ =========== ===========
</TABLE>
F-71
<PAGE>
- --------
ACQUISITION ADJUSTMENTS:
(a) Derived from the unaudited balance sheet of Hyde's as of April 30, 1998.
(b) Reflects a reduction of certain assets and liabilities that will not be
acquired or assumed from Hyde's by the Company, pursuant to the stock
purchase agreement.
(c) Reflects the Company's purchase price allocation arising from the
acquisition of Hyde's by the Company as if such acquisition had occurred
on April 30, 1998. A summary of the computation follows:
<TABLE>
<S> <C>
Purchase price.............................................. $12,228,584
Less: Net tangible assets acquired.......................... (2,291,506)
Plus: Fair value adjustments to net tangible assets
acquired................................................... 319,462
Less: Identifiable intangible assets:
Customer base.............................................. (2,000,000)
FCC License................................................ (100,000)
Non-Compete................................................ (100,000)
-----------
8,056,540
Plus: Transaction costs of purchase acquisition............. 300,000
-----------
Excess purchase price over the fair value of Hyde's net
assets acquired (i.e. goodwill)............................ $ 8,356,540
===========
</TABLE>
Because the Hyde's acquisition was consummated subsequent to April 30,
1998, the Company's estimated allocation of the purchase price should be
considered preliminary. The Company is undertaking a full investigation of
the allocation of the purchase price among the assets acquired. Management
does not expect the final allocation of value among assets acquired to have
a material effect on the Company's results of operations.
(d) Reflects the increase in the Revolving Credit Facility and issuance of a
promissory note, which totaled approximately $12,228,584 related to the
Hyde's Acquisition and the elimination of Hyde's historical shareholders'
equity.
OFFERING ADJUSTMENTS:
(e) Reflects the sale of 2,750,000 shares of Common Stock offered by the
Company hereby at an assumed offering price of $11.00 and application of
the proceeds therefrom as follows:
<TABLE>
<S> <C>
Gross proceeds from the offering............................. $30,250,000
Underwriting discounts and commissions at 7%................. (2,118,000)
Expenses related to the offering............................. (900,000)
-----------
Net proceeds to the Company................................ 27,232,000
Reduction of the revolving line of credit and term loan...... (23,189,000)
Redemption of Series D preferred stock....................... (4,043,000)
-----------
Net increase in cash and cash equivalents.................. $ --
===========
</TABLE>
(f) Reflects reclassification of stock warrants to shareholders' equity
related to the elimination of the put feature upon completion of an
initial public offering.
(g) Reflects the conversion of 3,500 shares of Series C Convertible Preferred
Stock into approximately 272.5725 shares each of the Company's Class A
Common Stock pursuant to the designation of the Series C Convertible
Preferred Stock.
(h) Reflects the conversion of 7,360 shares of Series A Convertible Preferred
Stock into 84.5 shares each of the Company's Class A Common Stock pursuant
to the designation of the Series A Convertible Preferred Stock.
(i) Reflects the recognition of the Company's net deferred tax asset as of
April 30, 1998. As a result of the debt and corresponding interest expense
reduction in conjunction with the initial public offering, management
believes that it is more likely than not that the net deferred tax asset
is realizable upon completion of the initial public offering.
F-72
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------- PRO FORMA
HYDE'S STAY PRO FORMA PRO FORMA CONSOLIDATED
SATELLINK IN TOUCH, ACQUISITION PRO FORMA OFFERING AS ADJUSTED
COMMUNICATIONS, INC. INC. (A) ADJUSTMENTS CONSOLIDATED ADJUSTMENTS FOR THE OFFERING
-------------------- ----------- ----------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Service, rent, and
maintenance........... $14,577,001 $3,300,323 $ -- $17,877,324 $ -- $17,877,324
Product sales.......... 903,454 1,063,509 -- 1,966,963 -- 1,966,963
----------- ---------- --------- ----------- ---------- -----------
Total revenues......... 15,480,455 4,363,832 -- 19,844,287 -- 19,844,287
Cost of products sold.. 801,288 1,168,955 1,970,243 -- 1,970,243
----------- ---------- --------- ----------- ---------- -----------
Net revenues........... 14,679,167 3,194,877 -- 17,874,044 -- 17,874,044
OPERATING EXPENSES:
Services, rent and
maintenance........... 5,475,108 323,773 -- 5,798,881 -- 5,798,881
Selling and marketing.. 2,260,730 208,676 -- 2,469,406 -- 2,469,406
General and
administrative........ 2,634,702 1,230,554 (378,000)(b) 3,487,256 -- 3,487,256
Engineering............ 631,056 -- -- 631,056 -- 631,056
Fixed asset impairment. 833,996 -- -- 833,996 -- 833,996
Depreciation and
amortization.......... 2,130,085 193,376 469,143 (c) 2,792,604 -- 2,792,604
----------- ---------- --------- ----------- ---------- -----------
Total operating
expenses.............. 13,965,677 1,956,379 91,143 16,013,199 -- 16,013,199
----------- ---------- --------- ----------- ---------- -----------
OPERATING INCOME (LOSS). 713,490 1,238,498 (91,143) 1,860,845 -- 1,860,845
----------- ---------- --------- ----------- ---------- -----------
OTHER INCOME (EXPENSES):
Other income........... 180,433 269,647 -- 450,080 -- 450,080
Interest expense....... (1,740,176) (69,701) (885,960)(d) (2,695,837) 1,662,278 (e) (1,033,559)
Accretion of stock
warrants.............. (628,440) -- -- (628,440) 628,440 (f) --
Income from joint
venture............... 98,970 -- -- 98,970 -- 98,970
Minority interest...... (7,740) -- -- (7,740) -- (7,740)
----------- ---------- --------- ----------- ---------- -----------
Total other income
(expenses)............ (2,096,953) 199,946 (885,960) (2,782,967) 2,290,718 (492,249)
----------- ---------- --------- ----------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION... (1,383,463) 1,438,444 (977,103) (922,122) 2,290,718 1,368,596
INCOME TAX PROVISION.... -- -- -- -- (520,066) (g) (520,066)
----------- ---------- --------- ----------- ---------- -----------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE.............. (1,383,463) 1,438,444 (977,103) (922,122) 1,770,652 848,530
PREFERRED STOCK
DIVIDENDS.............. 360,618 -- -- 360,618 (360,618) (h) --
----------- ---------- --------- ----------- ---------- -----------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE ATTRIBUTABLE
TO COMMON SHAREHOLDERS. $(1,744,081) $1,438,444 $(977,103) $(1,282,740) $2,131,270 $ 848,530
=========== ========== ========= =========== ========== ===========
PRO FORMA INCOME (LOSS)
ATTRIBUTABLE TO COMMON
SHAREHOLDERS(I):
Class A Common Stock... $(1,772,626) $ 848,530
Class B Common Stock... (1,455) N/A
BASIC NET INCOME (LOSS)
PER SHARE:
Class A Common Stock .. $ (0.59) $ 0.12
Class B Common Stock .. (50.17) N/A
DILUTED NET INCOME PER
SHARE.................. N/A $ 0.10
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING--BASIC(J):
Class A Common Stock .. 3,015,800 7,344,165
Class B Common Stock .. 29 N/A
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING--
DILUTED(K):............ N/A 8,256,548
</TABLE>
- --------
ACQUISITION ADJUSTMENTS:
(a) Historical amounts related to the Hyde's Acquisition in the pro forma
statement of operations for the nine months ended April 30, 1998 have been
derived from Hyde's unaudited financial statements for that period, which
are not included in the Prospectus. Note that the months of August and
September 1997 are included here and also in the pro forma statement of
operations for the year ended July 31, 1997. Revenues, operating income
and net income for the two months ended September 1997 were $849,287,
$275,957, and $290,525, respectively.
(b) Reflects a reduction in distributions, reflected as expense, to the owner
of Hyde's who received S corporation distributions to pay taxes related to
ownership. The owner's salary remains as an expense in the pro forma
statement of operations.
F-73
<PAGE>
(c) Reflects additional depreciation and amortization expense associated with
the increase in the basis of the acquired assets to fair market value at
the date of the Hyde's Acquisition offset by the estimated amount of
depreciation expense associated with the write-down of Hyde's net tangible
assets acquired at fair value. Amounts allocated to customer base, FCC
licenses, covenant not to compete, goodwill and equipment in connection
with the Hyde's Acquisition will be amortized over five, ten, two, thirty,
and ten years, respectively. Given that the Hyde's Acquisition was
consummated subsequent to April 30, 1998, the Company's estimated
allocation of the purchase price is preliminary. The Company is
undertaking a full investigation of the allocation of the purchase price
among the assets acquired. Management does not expect the final allocation
of value among assets acquired to have a material effect on the Company's
results of operations.
(d) Reflects the increase in interest expense attributable to borrowings used
to effect the Hyde's Acquisition at an estimated interest rate of (9.66% -
LIBOR + 4%), which represents the Company's interest rate at the time of
the consummation of the acquisition.
OFFERING ADJUSTMENTS:
(e) Reflects a reduction of interest expense related to the payoff of
outstanding long term debt from the proceeds of the offering at the
Company's blended historical rate of 9.75%.
(f) Reflects the elimination of the warrant accretion as the put feature is
contractually eliminated upon completion of an initial public offering.
(g) Reflects income tax effect, using an effective rate of 38%, related to the
Company's pro forma results of operations . Pro forma results of
operations do not include any impact from changes in the valuation reserve
which has been recorded against net operating loss carryforwards
historically incurred by the Company since recognition of the Company's
deferred tax asset is a material nonrecurring credit which results
directly from the Offering and the Hyde's Acquisition. Upon completion of
the initial public offering and application of the proceeds to repay
certain debt, management believes that it is more likely than not that the
deferred tax asset will be realized. Consequently, management anticipates
recognizing its deferred tax asset in its historical results of operations
within the next 12 months.
(h) Reflects a decrease of $262,503 in dividends related to the conversion of
Series C Preferred Stock which is automatically converted to Common Stock
in the event of an initial public offering and a decrease of $66,240
related to the conversion of Series A Preferred Stock which the Company
intends to convert into Common Stock in connection with the initial public
offering and the decrease of $31,875 in dividends related to the
redemption of Series D Preferred Stock which is required to be redeemed in
the event of an initial public offering.
(i) The Company is required to present earnings per share for each class of
outstanding common stock. Net income attributable to Class A and Class B
shareholders is allocated between each class based on the extent to which
each class shares in the Company's earnings. Class A and Class B
shareholders share in earnings at a 1:84.5 ratio.
F-74
<PAGE>
(j) Basic weighted average common shares outstanding are comprised of the
following for each class of common stock:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- -------
<S> <C> <C>
Weighted average shares outstanding prior to initial
public offering......................................... 3,015,800 29
Conversion of Class B Common Stock....................... 2,450 (29)
Conversion of Series A Convertible Preferred Stock....... 621,920 --
Conversion of Series C Convertible Preferred Stock....... 953,995 --
Issuance of common shares from the initial public
offering................................................ 2,750,000 --
--------- ---
Pro forma weighted average shares outstanding............ 7,344,165 --
========= ===
</TABLE>
(k) Diluted net income per share differs from basic earnings per share only for
periods in which earnings are positive. Weighted average common shares
outstanding for diluted net income per share consists of the following:
<TABLE>
<CAPTION>
CLASS A
---------
<S> <C>
Pro forma weighted average common shares outstanding............... 7,344,165
Effect of dilutive stock options and warrants...................... 912,383
---------
Pro forma diluted weighted average common shares outstanding....... 8,256,548
=========
</TABLE>
F-75
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------- PRO FORMA
SATELLINK PRO FORMA PRO FORMA CONSOLIDATED
COMMUNICATIONS, MESSAGE HYDE'S STAY ACQUISITION PRO FORMA OFFERING AS ADJUSTED
INC. WORLD(A) IN TOUCH, INC.(B) ADJUSTMENTS CONSOLIDATED ADJUSTMENTS FOR THE OFFERING
--------------- -------- ----------------- ----------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Service, rent,
and maintenance. $16,308,042 $230,768 $3,939,527 $ -- $20,478,337 $ -- $20,478,337
Product sales.... 1,264,418 130,409 1,113,468 -- 2,508,295 -- 2,508,295
----------- -------- ---------- ----------- ----------- ---------- -----------
Total revenues... 17,572,460 361,177 5,052,995 -- 22,986,632 -- 22,986,632
Cost of products
sold............ 1,201,271 37,941 1,204,171 -- 2,443,383 -- 2,443,383
----------- -------- ---------- ----------- ----------- ---------- -----------
Net revenues..... 16,371,189 323,236 3,848,824 -- 20,543,249 -- 20,543,249
OPERATING
EXPENSES:
Services, rent,
and maintenance. 6,541,774 56,782 550,645 -- 7,149,201 -- 7,149,201
Selling and mar-
keting.......... 2,313,930 56,195 264,498 -- 2,634,623 -- 2,634,623
General and
administrative.. 3,039,390 91,307 1,727,242 (462,000)(c) 4,395,939 -- 4,395,939
Engineering...... 638,387 3,200 -- -- 641,587 -- 641,587
Depreciation and
amortization.... 2,241,518 16,969 210,262 809,710 (d) 3,278,459 -- 3,278,459
----------- -------- ---------- ----------- ----------- ---------- -----------
Total operating
expenses........ 14,774,999 224,453 2,752,647 347,710 18,099,809 -- 18,099,809
----------- -------- ---------- ----------- ----------- ---------- -----------
OPERATING INCOME.. 1,596,190 98,783 1,096,177 (347,710) 2,443,440 -- 2,443,440
----------- -------- ---------- ----------- ----------- ---------- -----------
OTHER INCOME
(EXPENSES):
Other income..... 89,808 -- 61,448 -- 151,256 -- 151,256
Interest expense. (1,564,067) (18,299) (35,736) (1,266,737)(e) (2,884,839) 2,209,550 (f) (675,289)
Accretion of
stock warrants.. (1,773,107) -- -- -- (1,773,107) 1,773,107 (g) --
Income from joint
venture......... 26,123 -- -- -- 26,123 -- 26,123
Minority
interest........ (2,829) -- -- -- (2,829) -- (2,829)
----------- -------- ---------- ----------- ----------- ---------- -----------
Total other
income
(expenses)...... (3,224,072) (18,299) 25,712 (1,266,737) (4,483,396) 3,982,657 (500,739)
INCOME (LOSS)
BEFORE INCOME TAX
PROVISION........ (1,627,882) 80,484 1,121,889 (1,614,447) (2,039,956) 3,982,657 1,942,701
INCOME TAX
PROVISION........ -- -- -- -- -- (738,226)(h) (738,226)
----------- -------- ---------- ----------- ----------- ---------- -----------
NET INCOME (LOSS). (1,627,882) 80,484 1,121,889 (1,614,447) (2,039,956) 3,244,431 1,204,475
PREFERRED STOCK
DIVIDENDS........ 438,558 -- -- -- 438,558 (438,558)(i) --
----------- -------- ---------- ----------- ----------- ---------- -----------
NET LOSS
ATTRIBUTABLE TO
COMMON
SHAREHOLDERS..... $(2,066,440) $ 80,484 $1,121,889 $(1,614,447) $(2,478,514) $3,682,989 $ 1,204,475
=========== ======== ========== =========== =========== ========== ===========
PRO FORMA LOSS
ATTRIBUTABLE TO
COMMON
SHAREHOLDERS(J):
Class A Common
Stock........... $(2,042,387) $ 1,204,475
Class B Common
Stock........... (24,053) N/A
BASIC NET INCOME
(LOSS) PER SHARE:
Class A Common
Stock........... $ (0.69) $ 0.16
Class B Common
Stock........... (44.96) N/A
DILUTED INCOME PER
SHARE(L)......... N/A 0.15
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES
OUTSTANDING--
BASIC(K):
Class A Common
Stock........... 2,952,811 7,323,933
Class B Common
Stock........... 535 N/A
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES
OUTSTANDING--
DILUTED(L)....... N/A 8,230,403
</TABLE>
F-76
<PAGE>
- --------
ACQUISITION ADJUSTMENTS:
(a) The Message World acquisition was completed on February 1, 1997.
Historical amounts for Satellink in the pro forma statement of operations
for the year ended July 31, 1997 include the results of operations of
Message World subsequent to the acquisition date. Historical amounts shown
for Message World reflect its unaudited results of operations for the six
months ended January 31, 1997.
(b) Historical amounts related to the Hyde's Acquisition in the pro forma
statement of operations for the year ended July 31, 1997 have been derived
from its unaudited financial statements for the annual period ended
September 30, 1997. Note that the months of August and September 1997 are
included here and also in the pro forma statement of operations for the
nine months ended April 30, 1998. Revenues, operating income and net
income for the two months ended September 30, 1997 were $849,287,
$275,957, and $290,525, respectively.
(c) Reflects a reduction in distributions, reflected as expense, to the owner
of Hyde's who received S corporation distributions to pay taxes related to
ownership. The owner salary remains as expense in the pro forma statement
of operations.
(d) Reflects additional depreciation and amortization expense associated with
the increase in the basis of the acquired assets to fair market value at
the date of acquisition for Message World and Hyde's (the "Acquisitions").
Amounts allocated to the Message World name will be amortized over ten
years. Amounts allocated to customer base, FCC licenses, covenant not to
compete, goodwill and equipment in connection with the Acquisitions will
be amortized over five, ten, two, thirty and ten years, respectively.
Because the Hyde's Acquisition was consummated subsequent to April 30,
1998, the Company's estimated allocation of the purchase price should be
considered preliminary. The Company is undertaking a full investigation of
the allocation of the purchase price among the assets acquired. Management
does not expect the final allocation of value among assets acquired to
have a material effect on the Company's results of operations.
(e) Reflects the increase in interest expense attributable to borrowings used
to affect the Hyde's Acquisition at an estimated interest rate of (9.66% -
LIBOR + 4%), which represents the Company's interest rate at the time of
the consummation of the Hyde's Acquisition and the incremental interest
expense related to the Message World acquisition at the Company's blended
interest rate of 9.72%.
OFFERING ADJUSTMENTS:
(f) Reflects a reduction of interest expense related to the pay off of
outstanding long term debt from the proceeds of the offering at the
Company's blended historical rate of 9.72%.
(g) Reflects the elimination of the warrant accretion as the put feature is
contractually eliminated upon completion of an initial public offering.
(h) Reflects income tax effect, using an effective rate of 38%, related to the
Company's pro forma results of operations. Pro forma results of operations
do not include any impact from changes in the valuation reserve which has
been recorded against net operating loss carryforwards historically
incurred by the Company since recognition of the Company's deferred tax
asset is a material nonrecurring credit which results directly from the
Offering and the Hyde's Acquisition. Upon completion of the offering, and
application of the proceeds to repay certain debt, management believes
that it is more likely than not that the deferred tax asset will be
realized. Consequently, management anticipates recognizing its deferred
tax asset in its historical results of operation within the next 12
months.
(i) Reflects a decrease of $350,000 in dividends related to the conversion of
Series C Convertible Preferred Stock which is automatically converted to
Common Stock in the event of an initial public offering and a decrease of
$88,558 related to the conversion of Series A Convertible Preferred Stock
which the Company intends to convert into Common Stock in connection with
the initial public offering.
F-77
<PAGE>
(j) The Company is required to present earnings per share for each class of
outstanding common stock. Net income attributable to Class A and Class B
shareholders is allocated between each class based on the extent to which
each class shares in the Company's earnings. Class A and Class B
shareholders share in earnings at a 1:84.5 ratio.
(k) Basic weighted average common shares outstanding are comprised of the
following for each class of common stock:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- -------
<S> <C> <C>
Weighted average shares outstanding prior to initial
public offering......................................... 2,952,811 535
Conversion of Class B common stock....................... 45,207 (535)
Conversion of Series A preferred stock................... 621,920 --
Conversion of Series C preferred stock................... 953,995 --
Issuance of common stock in the initial public offering.. 2,750,000 --
--------- ----
Pro forma weighted average shares outstanding............ 7,323,933 0
========= ====
</TABLE>
(l) Diluted earnings per share differs from basic earnings per share only for
periods in which earnings are positive. Weighted average common shares
outstanding for diluted net income per share consists of the following:
<TABLE>
<CAPTION>
CLASS A
---------
<S> <C>
Pro forma weighted average common shares outstanding............... 7,323,933
Effect of dilutive stock options and warrants...................... 906,470
---------
Pro forma weighted average common shares outstanding............... 8,230,403
=========
</TABLE>
F-78
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Consolidated Financial and Operating Data........................ 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
Business.................................................................. 36
Management................................................................ 51
Certain Transactions...................................................... 56
Principal and Selling Shareholders........................................ 58
Description of Capital Stock.............................................. 60
Shares Eligible for Future Sale........................................... 63
Underwriting.............................................................. 67
Legal Matters............................................................. 68
Experts................................................................... 68
Available Information..................................................... 69
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,650,000 SHARES
LOGO
OF SATELLINK COMMUNICATIONS, INC. APPEARS HERE
COMMON STOCK
----------------
PROSPECTUS
----------------
J.C.Bradford&Co.
Morgan Keegan &
Company, Inc.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered hereby, other
than underwriting discounts and commissions. All amounts except the SEC
registration fee and the NASD filing fee are estimated.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 14,860
NASD filing fee................................................. 5,537
Accounting fees and expenses.................................... 350,000
Nasdaq National Market listing fee.............................. 40,000
Legal fees and expenses......................................... 260,000
Printing and engraving expenses................................. 200,000
Blue sky fees and expenses...................................... 2,000
Directors and officers' insurance............................... 15,000
Transfer agent and registrar fees and expenses.................. 10,000
Miscellaneous................................................... 2,603
--------
Total......................................................... $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws state that the Company shall indemnify and save harmless the
directors, officers, employees and agents of the Company for personal losses
or damages incurred for acts or omissions done or not done on behalf of the
Company in accordance with the Company's indemnification policy (the
"Policy"). The Policy provides that the Company shall indemnify and hold
harmless any person who was or who is a party or who is threatened to be made
a party to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than in an
action by or in the right of the Company) by reason of the fact that he or she
is or was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or
agent of another company, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding, if he or she acted in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful. No indemnification shall be made in respect of any claim, issue or
matter as to which a director, officer, employee or agent of the Company shall
have been adjudged to be liable to the Company, unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of the case, such person is fairly
and reasonably entitled to indemnify for such expenses which the court shall
deem proper. To the extent that a director, officer, employee or agent of the
Company has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the Policy, he or she shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith. Otherwise, any
indemnification shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he or she
has met the applicable standard of conduct. Such a determination shall be
made: (1) by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding; (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel then employed
by the Company, in a written opinion; or (3) by the affirmative vote of a
majority of the shares entitled to vote thereon.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On November 17, 1995, the Company issued and sold 3,500 shares of Series C
Convertible Preferred Stock to Creditanstalt, Stiles A. Kellett, Jr., an
affiliate of Mr. Kellett and an unaffiliated accredited investor for cash
consideration of $1,000 per share and received proceeds of $3,500,000 in a
transaction exempt from registration pursuant to Sections 4(2) and 4(6) of the
Securities Act and Rule 505 of Regulation D thereunder. In accordance with the
terms and conditions of the designation of the Series C Convertible Preferred
Stock, contemporaneously with the consummation of the Offering, each issued
and outstanding share of Series C Convertible Preferred Stock will be
converted into 272.5725 shares of Common Stock without any further action on
the part of the Company or the Series C Investors.
During 1996, the Company approved the conversion of all outstanding shares
of Class B Common Stock into Class A Common Stock. As of January 31, 1998,
2,071 shares of Class B Common Stock have been converted into 175,025 shares
of Class A Common Stock, and there are no remaining shares of Class B Common
Stock outstanding. In February 1996, the Company issued and sold 105,625
shares of Class A Common Stock for cash consideration of $2.37 per share and
received proceeds of $250,000 in a transaction exempt from registration under
the Securities Act pursuant to Section 4(2) thereunder.
On April 3, 1998, the Company issued and sold 4,500 shares of Series D
Redeemable Preferred Stock for cash consideration of $1,000 per share in a
transaction exempt from registration under the Securities Act pursuant to Rule
506 of Regulation D thereunder. The shares of Series D Redeemable Preferred
Stock were offered to and purchased by a limited number of accredited
investors, including certain directors and executive officers of the Company.
Pursuant to the terms of the designation of the Company's Series D Redeemable
Preferred Stock, all outstanding shares of Series D Redeemable Preferred Stock
will be redeemed contemporaneously with the consummation of the Offering
through proceeds realized from the Offering.
On August 1, 1995, the Company granted an option to an employee to purchase
84,500 shares of Common Stock at an exercise price of $1.78 per share (the
estimated fair value at the date of grant). The option has a term of five
years and vests ratably over a period of three years. In January 1998, the
employee partially exercised his option and purchased 56,332 shares of Common
Stock for cash consideration of $100,099. During fiscal 1997, the Company
granted to principals of Breckenridge options to purchase 169,000 shares of
Common Stock at an exercise price of $3.68 per share (the estimated fair value
at the date of grant) in consideration of services provided in connection with
several of the Company's acquisitions. These options have a term of five years
and vested immediately. During the six months ended January 31, 1998, the
Company granted options to employees to purchase 140,910 shares of Common
Stock at an exercise price of $4.62 per share (the estimated fair value at the
date of grant). These options to employees have terms of ten years and vest
ratably over a period of four years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as a part of this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1 ** Underwriting Agreement.
3.1** Restated Articles of Incorporation of the Company.
3.2** Bylaws of the Company.
3.3** Amended and Restated Articles of Incorporation of the Company
3.4** Amended and Restated Bylaws of the Company
4.1** Stockholders Agreement, dated August 1, 1988, by and between Satellink
Paging, Inc. and the several stockholders of the Company.
4.2** Debenture Purchase Agreement and Amendment to Stockholders Agreement,
dated July 25, 1989, by and between Satellink Paging, Inc. and the
several stockholders of the Company.
4.3** Series A Preferred Stock Purchase Agreement and Second Amendment to
Stockholders Agreement, dated by and among Satellink Paging, Inc., the
several purchasers and the several security holders of the Company.
4.4** Second Amended and Restated Warrant Agreement, as amended, dated
November 17, 1995, by and between Satellink Paging, Inc. and
Creditanstalt American Corporation.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.5** First Amendment, dated May 31, 1996, to Second Amended and Restated
Warrant Agreement by and between Satellink Paging, Inc. and
Creditanstalt American Corporation
4.6** Second Amendment, dated June 27, 1997, to Second Amended and Restated
Warrant Agreement by and between Satellink Paging, Inc. and
Creditanstalt American Corporation.
4.7** Series C Convertible Preferred Stock Securities Purchase Agreement,
dated November 17, 1995, by and among Satellink Paging, Inc. and
Creditanstalt American Corporation. (The Company has entered into
agreements substantially similar in all material respects to this
agreement. A schedule of such similar agreements is attached to this
exhibit).
4.8** Form of Preferred Stock and Warrant Purchase Agreement, dated April
3, 1998, by and among Satellink Communications, Inc. and the several
purchasers of Series D Preferred Stock.
5** Form of opinion regarding legality.
10.1** Satellink Communications, Inc. 1997 Long-Term Incentive Plan.
10.2** Asset Purchase Agreement, dated February 1, 1997, by and among
Satellink Paging, LLC, Saner Communications, Inc. and Michael J.
Saner.
10.3** Merger Agreement, dated May 23, 1997, by and among Satellink Paging,
Inc., A. Lee Pickard and Satellink Paging, LLC.
10.4** Shareholder Agreement, dated May 25, 1995, between C.R., Inc., Cape
Fear Paging Company of North Carolina and Satellink Paging, Inc.
10.5** Merger Agreement, dated January 27, 1998, by and among Premier
Paging, Inc., Premier Paging of New Orleans, Inc., the shareholders
of Premier Paging, Inc., the shareholders of Premier Paging of New
Orleans, Inc. and Satellink Paging, LLC.
10.6** Asset Purchase Agreement, dated May 31, 1996, between Satellink
Paging, Inc., C.R., Inc., James Sowell, Larry Simmons and Jay Lee
Jameson, as Trustee of The Safeton Trust.
10.7** Asset Purchase Agreement, dated February 15, 1997, by and among
Satellink Paging, LLC, Call One, Inc., James Sowell, Larry Simmons
and Jay Lee Jameson, as Trustee of The Safeton Trust.
10.8** Option to Purchase Common Stock of Satellink Communications, Inc.
executed in favor of Donald W. Rochow of The Breckenridge Group, Inc.
(The Company has entered into agreements substantially similar in all
material respects to this agreement. A schedule of such similar
agreements is attached to this exhibit).
10.9** Third Amended and Restated Loan and Security Agreement, dated June
27, 1997, by and among Satellink Communications, Inc., Satellink
Paging, LLC, certain named Lenders and Creditanstalt-Bankverein.
10.10** First Amendment, dated March 11, 1998, to Third Amended and Restated
Loan and Security Agreement by and among Satellink Communications,
Inc., Satellink Paging, LLC, certain named Lenders and Creditanstalt-
Bankverein.
10.11* Agreement with Cape Fear Paging Company of North Carolina.
10.12*** Sales and Distribution Agreement, dated May 21, 1996, between Paging
Network of Atlanta, Inc. and Satellink Paging, Inc.
10.13*** Agency Agreement for Private Carrier Paging (Georgia), dated March 4,
1992, between Preferred Networks, Inc. and Satellink Paging, Inc.
10.14 Non-exclusive Reseller Agreement, dated January 18, 1994, between
Satellink Paging, Inc. and Alabama Network USA, Inc.
10.15 Pager Supply Agreement, dated May 5, 1997, between FM Concepts,
L.L.C. and Info Telecom S.A.
10.16*** Distribution Agreement, dated April 2, 1990, between CUE Paging
Corporation and Satellink Paging, Inc., as amended by that certain
Amendment to the Distribution Agreement, dated April 2, 1990.
10.17*** Regional Affiliate Agreement, dated August 20, 1990, between CUE
Paging Corporation and C.R., Inc., as assigned to Satellink Paging,
Inc.
10.18*** Distribution Agency Agreement, dated November 29, 1989 between
Satellink Paging, Inc. and Southern Connections, Inc. (The Company
has entered into agreements substantially similar in all material
respects to this agreement. A schedule of such similar agreements is
attached to this exhibit).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.19*** Reseller Agreement, dated October 17, 1997, between Destineer
Corporation and Satellink Paging , Inc. d/b/a/ Satellink Messaging
10.20** Stock Purchase Agreement, dated April 9, 1998 by and among Satellink
Paging, LLC and Hyde's Stay In Touch, Inc. and R. Daniel Hyde, Jr.
10.21** Amendment to Stock Purchase Agreement, dated May 1, 1998, by and
among Satellink Paging, LLC and Hyde's Stay in Touch, Inc. and R.
Daniel Hyde, Jr.
10.22** Stock Purchase Agreement, dated May 1, 1998, by and among Satellink
Paging, LLC and 9077 Broadcasting, Inc. and R. Daniel Hyde, Jr.
21** Subsidiaries of the Company.
23.1** Consent of Alston & Bird LLP (included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of James N. Rachel.
24** Power of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
***Previously filed with portions omitted pursuant to a request for
confidential treatment.
(b) The following Financial Statement Schedules of Satellink Communications,
Inc. are included in this Registration Statement:
Not Applicable.
ITEM 17. UNDERTAKINGS.
(f) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Roswell, State of Georgia, on the 15th day of June, 1998.
SATELLINK COMMUNICATIONS, INC.
By: /s/ Jerry W. Mayfield
----------------------------------
JERRY W. MAYFIELD
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to this Registration Statement has been signed below by the following
persons in the capacities indicated on June 15, 1998.
SIGNATURE TITLE
/s/ Jerry W. Mayfield Chairman of the Board,
- ------------------------------------- President and Chief
Jerry W. Mayfield Executive Officer
(Principal Executive
Officer)
/s/ Daniel D. Lensgraf Senior Vice President--
- ------------------------------------- Finance & Administration
Daniel D. Lensgraf and Chief Financial Officer
(Principal Financial and
Accounting Officer)
* Director
- -------------------------------------
James O. Carpenter
* Director
- -------------------------------------
Marc A. Comeaux
II-5
<PAGE>
SIGNATURE TITLE
* Director
- -------------------------------------
Robert D. Gage, IV
* Director
- -------------------------------------
Gordon E. Kaiser
* Director
- -------------------------------------
Stiles A. Kellett, Jr.
* Director
- -------------------------------------
David C. Massey
* Director
- -------------------------------------
/s/ Jerry W. Mayfield
By:
Robert P. Poche
_____________________________
Attorney-in-Fact
II-6
<PAGE>
SATELLINK COMMUNICATIONS, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JULY 31, 1995,
1996, 1997, AND THE SIX MONTHS ENDED JANUARY 31,1998
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS ENDING
DESCRIPTION AND BALANCE EXPENSE WRITEOFFS BALANCE
----------- --------------- ------- --------- -------
<S> <C> <C> <C> <C>
1995 Allowance for doubtful accounts. 92,000 16,405 (47,644) 60,761
1996 Allowance for doubtful accounts. 60,761 179,722 (41,573) 198,911
1997 Allowance for doubtful accounts. 198,911 523,117 (277,000) 445,028
January 31, 1998 Allowance for
doubtful accounts................... 445,028 326,339 (245,348) 526,019
</TABLE>
S-1
<PAGE>
EXHIBIT 10.14
NON-EXCLUSIVE
RESELLER AGREEMENT
This Agreement is entered into as of the ____ day of _________, 19__ by and
between ALABAMA NETWORK USA, INC., hereinafter referred to as "Network," an
Alabama Corporation, located at 40 South Palafox Street, Pensacola, FL 32501,
and SATELLINK PAGING, INC, hereinafter referred to as "Reseller," located at
1100 Northmeadow Parkway, #100, Roswell, GA 30076.
WHEREAS, Network owns and operates a private carrier paging system ("the
system") on 152.480 MHz, with a geographic coverage area as defined in Exhibit
A; and
WHEREAS, Network provides paging service within this geographic coverage area,
as defined in Exhibit A; however, Reseller agrees not to construct, purchase or
continue to utilize or operate a private carrier paging system on 152.480 MHz
within this geographic coverage area without prior written consent from Network
during the term of this Agreement and for a period of three (3) years after
termination of this Agreement.
WHEREAS, Network and Reseller desire to enter into an agreement whereby Reseller
may purchase from Network, paging units which access Network's system, as
defined by Exhibit "A," and to then in turn resell those paging units to
subscribers in Reseller's marketing area.
NOW THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 System: A network which provides communications services on local,
regional, intrastate, interstate and/or international system(s) by means of
a signal transmission via satellite to earth stations and/or terrestrial
data circuits in various markets and to one or more paging transmitters in
each such market which transmit information on frequency 152.480 MHz.
1.2 Reseller: An entity which contracts with Network to purchase its products
and services for resale to Subscribers.
1.3 Subscriber: A person or entity that contracts with Resellers to purchase
the services provided over the System.
1.4 Market Area: The county(ies) in which Reseller is licensed per Exhibit "A".
initial /s/ DCM
--------
1
<PAGE>
2. LICENSE
Subject to the terms and conditions hereof, Network hereby grants to Reseller a
license to resell, market, promote, and advertise Network's products and
services in the Market Area in accordance with applicable Federal Communications
Commission regulations. In connection therewith, Reseller is authorized to use
the trademark, service mark, and logo of Network subject to the approval of
Network which shall not be unreasonably withheld. Reseller is not authorized to
resell, market, promote, or advertise Network's products and services outside of
the Market Area.
3. TERM
The initial term of this Agreement shall be for a period of 5 year(s) from the
date of execution of the Agreement, unless earlier terminated in accordance with
the default provisions of this Agreement. This Agreement shall automatically
extend for an additional two (2) year(s) unless terminated by written notice by
either party at least forty-five (45) days prior to the end of the initial
term.
4. RATES
4.1 The monthly rate per unit shall be:
================================================================================
COVERAGE PAGER TYPE PHONE NUMBER RATE
- --------------------------------------------------------------------------------
a) Local Tone Only 7-Digit $ 4.00
Display $ 5.00
Alpha-Numeric $10.00
+$.20 a call over 350
b) Statewide Tone Only 7-Digit $ 8.00
Display $10.00
+$.20 a call over 350
c) Southeast Region Tone Only 7-Digit $14.00
Display $16.00
+$.20 a call over 350
- --------------------------------------------------------------------------------
initial /s/ DCM
-------
2
<PAGE>
================================================================================
COVERAGE PAGER TYPE PHONE NUMBER RATE
- --------------------------------------------------------------------------------
d) Nationwide Tone Only 800 number $22.00
Display $24.00
+$.20 a call over 100
includes Message
Memory (TM)
- --------------------------------------------------------------------------------
Primary 800 number available at an additional $6.00 + $.20 per call after 100
calls.
- --------------------------------------------------------------------------------
Message Memory (TM) available on 800-access number for additional $6.00.
- --------------------------------------------------------------------------------
Voice Mail available on 800-access number for additional $16.00.
================================================================================
4.2 Network reserves the right to determine baud rate and format of all pagers
on the system.
4.3 All Capcodes must be coordinated through Network.
4.4 Billing for paging units in service for a portion of a month shall be pro-
rated.
4.5 The rates herein may be increased by Network not more often than annually,
following a sixty (60) day written notice and shall not exceed fifteen
(15%) percent per year.
4.6 In the case of a rate increase from the local telephone company, causing
the actual cost of the paging units to rise, Network shall have the right
to increase the costs of paging units by the increased amount in order to
maintain the same profit levels. Documentation of this rate increase,
should it occur, will be provided to Reseller. In the event the telephone
rate increase exceeds $2.00 per paging unit, Reseller shall have the option
to renegotiate or terminate this Agreement.
5. PAYMENT TERMS
Reseller shall pay invoices issued by Network within ten (10) days of receipt.
In the event of a dispute as to a bill, the parties shall use their best efforts
to resolve such dispute as quickly as possible. Network may suspend service to
the paging units should Reseller not pay the invoices on a timely basis.
initial /s/ DCM
--------
3
<PAGE>
6. RESELL RATES
The rates at which Reseller resells services to its subscribers shall be set by
Reseller at its sole discretion.
7. MAINTENANCE
In consideration for Reseller's commitment under this Agreement, Network
guarantees that it shall maintain a first class paging system. In the event of
system problems, Reseller shall immediately notify Network. Network shall use
best efforts to correct such problems of which it becomes or is made aware.
8. COMPLIANCE
Reseller recognized that Network is a private carrier, licensed as such by the
Federal Communications Commission, and subject to FCC rules and regulations.
Reseller agrees that it shall comply with all such rules and regulations as a
reseller on Network's system. Network shall have sole responsibility for
ensuring that its system construction and operation are in compliance with FCC
rules and regulations, and Reseller shall have no responsibility or liability
for the system's performance or failure to perform.
9. DEFAULT
Default hereunder shall consist of any knowing, material failure by either party
to perform any covenant or obligation as required by this Agreement or any
material misrepresentation by either party as to the covenants contained herein,
including those contained in the recitals at the outset of the Agreement. In the
event of default, the non-defaulting party shall notify the defaulting party in
writing of the nature and specifics of the act of default and, unless the
defaulting party cures the default within twenty (20) days of receipt of notice,
the Agreement may be terminated by the non-defaulting party sixty (60) days from
the expiration of the twenty (20) day cure period.
10. INDEMNIFICATION
10.1 Reseller shall indemnify and hold Network harmless from any loss incurred
by Network as a result of acts or omissions by Reseller or any subscribers
of Reseller and any claim or lawsuit or damages growing out of the
negligence or misconduct or breach of this Agreement by Reseller or any
subscriber of Reseller. This indemnification shall include reasonable
attorneys' fees, including fees associated with any appeal. Network shall
be permitted to participate in the defense of the claim or lawsuit.
initial /s/ DCM
--------
4
<PAGE>
10.2 The parties' performance under this Agreement shall be excused during such
time as performance is prevented by government order, acts of nature, riot,
war, or other similar circumstances beyond the parties' control.
11. RELATIONSHIP OF THE PARTIES
11.1 Network and Reseller agree that at all times during the term of this
Agreement each shall endeavor to render prompt, courteous and efficient
service to the other and to the public, will be governed by the highest
standards of honesty, integrity, and fair dealing, and will do nothing
which discredits, reflects adversely upon, or in any manner injures the
reputation or goodwill of the other. Neither party shall disclose to any
third party any information supplied to it by the other party where such
information has been designated as confidential or proprietary and where
such information is not otherwise generally available to the public.
11.2 Those entities to which Reseller sells service under this Agreement shall
be Reseller's subscribers and Reseller shall have responsibility for
billing and collecting from and servicing those subscribers. Neither party
shall have any privity of contract with the other's subscribers.
11.3 Neither party shall be an agent of the other. Each shall act at its own
risk and for its own benefit. Neither shall bind the other to any legal
commitment, nor shall either have any fiduciary obligation to the other.
11.4 During the term, and for three years following termination of this
agreement, Reseller will not construct, operate, or enter into a network
relationship in the markets listed on Exhibit A hereof on the 152.480 MHz
frequency without prior written consent of Alabama Network USA, Inc.
11.5 Reseller acknowledges Network's unique relationship with other paging
operations on 152.480 MHz outside of the cities listed on the Exhibits.
Reseller agrees not to construct, network, or otherwise transmit a signal
on 152.480 MHz, outside of the Exhibits attached, without the written
consent of Network USA. Network will not unreasonably withhold its approval
if requested in writing by Reseller.
11.6 In no event shall Reseller solicit, directly or indirectly, Network's
subscriber base.
12. ASSIGNMENT
12.1 Reseller shall not assign its interest under this Agreement without
Network's consent, which shall not be withheld unreasonably.
initial /s/ DCM
--------
5
<PAGE>
12.2 If, during the term of this Agreement, Reseller receives in writing a bona
fide third party offer for the system or its subscriber base on the system,
it shall, prior to accepting such offer, extend to Network a written option
to match such offer. Network shall have thirty (30) days from receipt of
the written option to accept or decline its option to match the purchase
offer. During the thirty (30) days, Reseller will cooperate with Network to
allow Network to evaluate the offer, including as might be necessary, a
confidential review of Reseller's business and subscriber paging records.
If any part of the third party offer is non-monetary, Network shall be
allowed to make a cash equivalent offer. If the parties cannot agree as to
the cash equivalency, an agreed upon disinterested third party shall value
the non-monetary portion of the offer and the parties shall be bound by the
valuation. The parties shall act to obtain such valuation as expeditiously
as possible, within thirty (30) days, but if the valuation is not made
within the thirty (30) day option period, the option period shall be
extended until such valuation is obtained. Network shall bear the cost of
such third party valuation.
13. GOVERNING LAW AND SEVERABILITY
13.1 This Agreement shall be enforced and interpreted in accordance with the law
of the State of Florida.
13.2 If any part of this Agreement is for any reason declared invalid by court
order or order of any regulatory agency, such order shall not affect the
remaining portions of the Agreement.
13.3 Waiver of any provision hereunder must be in writing and shall operate as a
waiver of that provision at that time only. This Agreement shall be binding
upon all successors and assigns of either party.
13.4 This Agreement supersedes all other written or verbal agreements of similar
effect as between Network and Reseller. Any amendment to this Agreement
must be in writing, signed by an authorized representative of each party.
13.5 In the event this Agreement, or any portion thereof, is found to be in
violation in any respect of any federal, state, or local law, regulation or
ordinance, then only that particular portion of the Agreement shall be null
and void and all liability in connection with that particular portion of
the Agreement shall cease immediately. In such event, and subject to order
of the applicable federal, state, or local authority, those subscribers
previously contracted with under this Agreement shall continue to receive
service and Reseller shall continue to pay Network for the paging units
associated with such subscribers.
initial /s/ DCM
--------
6
<PAGE>
14. NOTICES
All notices required or permitted under this Agreement shall be in writing and
be deemed communicated on the date when delivered by registered mail, to the
other party at the address below:
President SATELLINK PAGING, INC
ALABAMA NETWORK USA
40 South Palafox Street
Pensacola, FL 32501
15. EFFECTS OF HEADINGS
Headings to paragraphs of this Agreement are to facilitate reference only, do
not form a part of this Agreement, and shall not in any way affect the
interpretation hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement.
ALABAMA NETWORK USA, INC. SATELLINK PAGING, INC
BY: /s/ Lee A. Newkirk BY: /s/ David C. Massey
---------------------------- ------------------------------
TITLE: D.M. TITLE: Sr. V.P. Sales & Marketing
------------------------- ---------------------------
DATE: January 27, 1994 DATE: January 18, 1994
-------------------------- ----------------------------
WITNESS: [illegible] WITNESS: [illegible]
----------------------- -------------------------
WITNESS: Tommy Howie WITNESS: [illegible]
----------------------- -------------------------
7
<PAGE>
EXHIBIT A
MARKET AREA
- --------------------------------------------------------------------------------
In accord with Paragraph 2 of this Agreement, Reseller is licensed to promote
and resell Networks products and services in the following counties/parishes
and/or independent cities in the below-named Market Area:
Birmingham, AL --Market Area
-----------------
(1) Blount
-----------------
(2) Calhouon
-----------------
(3) Cobb
-----------------
(4) Etowah
-----------------
(5) Fayette
-----------------
(6) Jefferson
-----------------
(7) Shelley
-----------------
(8) Talladega
-----------------
(9) Tuscaloosa
-----------------
(10) Walker
-----------------
initial /s/ DCM
---------
8
<PAGE>
AMENDMENT FOR AGREEMENT
BETWEEN
SATELLINK
AND
NETWORK USA
Whereas, Satellink ("Reseller") and Network USA ("NUSA") have entered into a
contract ("Agreement") for Affiliation dated January l8th, 1994, the parties
hereby agree to modify this Agreement as follows:
1. Relative to Paragraph 4.1 of the Agreement, the contract is amended to
include the following:
================================================================================
PRICE SCHEDULE
- --------------------------------------------------------------------------------
Coverage Pager Type Phone Number Price
- --------------------------------------------------------------------------------
Local Tone Georgia DID $ 6.50*
Digital $ 6.50*
Alpha $10.00*
- --------------------------------------------------------------------------------
Tone 7-Digit $ 2.00*
Digital $ 3.00*
Alpha $ 8.00*
- --------------------------------------------------------------------------------
Wide Area Tone Georgia DID $ 6.50*
Digital $ 7.50*
Alpha $13.00*
- --------------------------------------------------------------------------------
Tone 7-Digit $ 3.50*
Digital $ 4.50*
Alpha $ 8.50*
- --------------------------------------------------------------------------------
Statewide Tone Georgia DID $ 9.50*
Digital $10.50*
- --------------------------------------------------------------------------------
Tone 7-Digit $ 4.00*
Digital $ 6.00*
- --------------------------------------------------------------------------------
Southeast Tone Georgia DID $14.00*
Digital $16.00*
- --------------------------------------------------------------------------------
Tone 7-Digit $11.00*
Digital $12.00*
- --------------------------------------------------------------------------------
Nationwide Tone 800 $22.00**
Digital $24.00**
- --------------------------------------------------------------------------------
*+ $.20 a call after 350 **+ $.20 a call after 100
================================================================================
<PAGE>
AMENDMENT FOR AGREEMENT
BETWEEN
SATELLINK PAGING, INC
AND
NETWORK USA
Whereas, Satellink Paging, Inc. ("Reseller") and Network USA ("NUSA") have
entered into a contract ("Agreement") dated September 15, 1993, the parties
hereby agree to modify this Agreement as follows:
1. Relative to Exhibit "A" of the Agreement, the contract is amended to
include the following market area:
Montgomery, AL
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by and
through their duly authorized representatives as of the date last written below.
FLORIDA NETWORK USA, INC. RESELLER
BY: /s/ Lee A. Newkirk BY: /s/ David C. Massey
---------------------------- ------------------------------
TITLE: D.M. TITLE: Sr. V.P. Sales & Marketing
------------------------- ---------------------------
DATE: January 27, 1994 DATE: January 18, 1994
-------------------------- ----------------------------
WITNESS: [illegible] WITNESS: [illegible]
----------------------- -------------------------
<PAGE>
AMENDMENT FOR NONEXCLUSIVE RESELLER AGREEMENT
BETWEEN
SATELLINK PAGING
AND
NETWORK USA
Whereas, Satellink Paging ("Reseller") and Network USA ("NUSA") have entered
into a contract ("Agreement"), the parties hereby agree to modify this Agreement
as follows:
1. Relative to Paragraph 4.1 of the Agreement, the contract is amended to
include the following prices:
================================================================================
Price Schedule
- --------------------------------------------------------------------------------
Coverage Type of Pager Price
- --------------------------------------------------------------------------------
Nationwide Display $20.00*
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
*+ $.20 per call over 100
================================================================================
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by and
through their duly authorized representatives as of the date last written below.
FLORIDA NETWORK USA, INC. SATELLINK PAGING
BY:[/s/ illegible] BY:[/s/ illegible]
---------------------------- ------------------------------
TITLE: Reseller Manager TITLE: Atlanta Sales Manager
------------------------- ---------------------------
DATE: April 13, 1995 DATE: April 7, 1995
-------------------------- ----------------------------
WITNESS: /s/ Tammy Howie WITNESS: [illegible]
----------------------- -------------------------
<PAGE>
EXHIBIT 10.15
SUPPLY AGREEMENT
BETWEEN
NATIONSLINK LP
AND
INFO TELECOM S.A.
VERSION 1.1
<PAGE>
Supply agreement NationsLink LP - Info Telecom S.A. Page 1 / 4
- --------------------------------------------------------------------------------
SUPPLY AGREEMENT
THIS AGREEMENT, made and entered by
BETWEEN NATIONSLINK LP, an American corporation, having its principal office at
210, 25th Avenue North, Suite 800, Nashville, Tennessee, USA
(hereinafter referred to as "NationsLink").
AND INFO TELECOM S.A., a French corporation, having its principal office at
rue de la Foret, BP 9, 67 552 Vendenheim Cedex, France (hereinafter
referred to as "INFO").
WHEREAS Info has acquired certain equipment and know-how useful or used in the
manufacture of certain pagers; and
WHEREAS NationsLink has agreed to buy from Info quantities of the said pagers,
subject to and in accordance with the terms and conditions hereof.
NOW IT IS THEREFORE AGREED AS FOLLOWS
1. DEFINITIONS
Pager or Pagers means the FM201, FM100, FM210 and FM110 pagers initially
developed by Nokia Mobiles Phones Ltd and its subsidiaries.
2. MINIMUM PURCHASE
From June 1997 and until the expiration of the present agreement,
NationsLink agrees to buy from Info a minimum quantity of one thousand five
hundreds (1,500) pagers per month.
3. ADDITIONAL QUANTITIES
The quantities of pagers that Info would deliver to NationsLink may be
increased in accordance with the rolling forecast procedure described
hereinafter:
During each month of the present agreement, NationsLink will send to Info a
three month rolling forecast which specifies the quantity to be delivered
each month.
The parties agree that the quantities for the first month of each rolling
forecast shall be considered as firm orders and therefore fixed.
Quantities for the second month of each rolling forecast shall be eighty-
five percent (85%) firm.
Quantities for the third month of each rolling forecast shall be fifty
percent (50%) firm.
4. DELIVERIES
The pagers shall be delivered Free On Board any French port.
<PAGE>
Supply agreement NationsLink LP - Info Telecom S.A. Page 2 / 4
- --------------------------------------------------------------------------------
The initial deliveries shall be made according to the following schedule:
TER 500 units on June 20, 1997
TER 500 units on July 10, 1997
TER 750 units plus any additional quantity ordered for the month of July on
July 30, 1997
Then starting from August 1997, the ordered quantity related to each month
shall be delivered at the end of the said month.
Within 30 days from the delivery of each lot, NationsLink shall have the
right to perform a quality inspection on each lot delivered by Info. This
inspection shall be performed based on the following procedure:
Initial lots: 100 % sampling. Major defects shall represent less than 1.5 %
of the total quantity in the lot
Subsequent lots: Upon two successful 100% sampling with a major defects
rate of less than 1.5 %, the quality inspections shall be performed based
on AQL tables contained in the IS02859 standard using an AQL level of 1.5
level 11 for major defects.
Major defects means defects such as low sensitivity, failing to meet
product's specifications, wrong functioning of the LCD display or buttons.
In case two (2) subsequent lots fails to pass the quality inspection
specified here above, NationsLink shall have the right to send back the
second lot to Info, unless Info arranges to sort in NationsLink's premises
the defective lot at its own expenses.
5. PROTOTYPES
Info shall provide to NationsLink ten (10) prototypes of the Pager on or
before May 30. In case Info fails to supply the prototypes on time,
NationsLink shall have the right to delay the delivery of the first lot of
1,000 pagers accordingly.
6. PRICE
The net selling price of the Pager shall be USD 91.00 per unit.
The parties shall have the right to revise the net selling price three
month after the effective date of the present agreement and then every six
month. The price shall be modified only in case the net cost of the
components and materials used to produce the Pager shall vary for more than
three percent (3%) when compared to the beginning of the previous three or
six months period.
7. PAYMENT TERMS
NationsLink shall pay for each lot of pagers within ten (10) working days
from the delivery date.
The interest rate for late payments shall be equal to 0.75% per month
starting from the delivery date plus ten (10) working days.
<PAGE>
Supply agreement NationsLink LP - Info Telecom S.A. Page 3 / 4
- --------------------------------------------------------------------------------
8. ROYALTIES
NationsLink shall be responsible for paying any applicable royalties
related to the use or sales of the Pager on the American or Canadian
market.
9. WARRANTY
As a matter of warranty, Info shall supply three percent (3%) of the pagers
in each lot free of charge. In exchange, Info shall not be held responsible
for the repairing of under warranty pagers.
The parties agree to review every six (6) months during the term of this
agreement the warranty buy-back procedure described here above taking into
account the real return rates of the pagers.
Real return rates of the pagers shall mean the percentage of pagers sent
back defective by NationsLink customers within fourteen (14) months from
Info's delivery date. This calculation shall not include the pagers that
are sent back as defective due to a wrong usage by the end user.
10. TERRITORY
Info agrees not to supply the Pager to any other party in the USA or
Canada, other than NationsLink and Cue Network Corporation or its
subsidiaries as long as the monthly average quantity (calculated on a
rolling average basis) of pagers purchased by NationsLink and Cue Network
Corporation or its subsidiaries is equal to or exceeds three thousands
(3,000) units per month.
NationsLink agrees not to resell any pagers to any other party which intend
to market or use the said pagers outside of USA or Canada without obtaining
Info's prior written consent.
11. TERM
The term of this agreement shall commence, on the date of the last
signature being applied to this agreement and shall expire on December
31st, 1997. January 31, 1998 /s/ TER
This agreement shall be automatically renewed for another term of one year
unless one of the parties informs the other party of its intention not to
renew the agreement, by serving a written notice at least thirty (30) days
before the expiration date of the agreement.
12. NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by certified mail, return
receipt requested.
13. TERMINATION
If either party:
<PAGE>
Supply agreement NationsLink LP - Info Telecom S.A. Page 4 / 4
- --------------------------------------------------------------------------------
(i) becomes insolvent or bankrupt or admits its inability to pay its debts
as they mature, or makes an assignment for the benefit of its creditors, or
ceases to function as going concern or to conduct its operation in the
normal course of business; or
(ii) materially breaches this agreement, and fails to remedy such breach to
the satisfaction of the other party within thirty days after receipt of
written notice from the party claiming the breach;
the other party shall have the right to terminate this agreement
immediately.
14. SEVERABILITY
If any of the provisions contained in this agreement are deemed invalid,
illegal, or unenforceable, the remaining provisions contained herein shall
not in any way be affected or impaired.
15. ARBITRATION
All disputes arising from this contract/Charter Party shall be finally
settled in accordance with the ICC-CMI International Maritime Arbitration
rules by one or more arbitrators appointed in accordance with the said
rules.
16. ENTIRE AGREEMENT
This agreement, including all amendments and schedules constitutes the
entire agreement between the parties pertaining to the subject matter
hereof. All variation of this agreement must be made in writing and signed
by both NationsLink and Info.
17. FORCE MAJEURE
Non-performance of either party shall be excused to the extent that
performance is rendered impossible by strike, fire, flood, government acts,
orders or restrictions or any other reason where failure to perform is
beyond the control of the non-performing party.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
by their duly authorized officers in two originals.
For and on behalf of For and on behalf of
NATIONSLINK LP INFO TELECOM S.A.
Name: [illegible] Name: SAAD Sami
------------------------- --------------------------
Title: General Manager Title: Managing Director
------------------------ -------------------------
Date: May 5, 1997 Date: April 25, 1997
------------------------- --------------------------
Place: Nashville Place: Strasbourg
------------------------ -------------------------
Signature: /s/ illegible Signature: /s/ SAAD Sami
-------------------- ---------------------
<PAGE>
Addendum to Distribution Agreement Between InfoTelecom and NationsLink, LLC.
This is confirmation of phone conversations between InfoTelecom and NationsLink,
LLC to extend the current Distribution Agency Agreement until May 30, 1998 under
the current pricing and terms of the current contract
- ----------------------------- -------------------------------
For InfoTelecom For NationsLink, LLC
President General Manager
- ----------------------------- -------------------------------
Title Title
Date: December 19, 1997 Date: December 19, 1997
------------------------ --------------------------
<PAGE>
Exhibit 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Atlanta, Georgia
April 8, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITOR
As Independent auditor for Hyde's Stay In Touch, Inc., I hereby consent to the
use of my report and to the references to me included in or made part of this
registration statement.
James N. Rachel
/s/ James N. Rachel
Shreveport, Louisiana
April 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SATELLINK
COMMUNICATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 255,167
<SECURITIES> 0
<RECEIVABLES> 4,322,969
<ALLOWANCES> 0
<INVENTORY> 170,885
<CURRENT-ASSETS> 532,050
<PP&E> 16,110,713
<DEPRECIATION> 4,945,836
<TOTAL-ASSETS> 34,994,253
<CURRENT-LIABILITIES> 4,989,746
<BONDS> 0
7,543,000
74
<COMMON> 30,544
<OTHER-SE> 5,432,162
<TOTAL-LIABILITY-AND-EQUITY> 34,994,253
<SALES> 0
<TOTAL-REVENUES> 15,480,455
<CGS> 801,288
<TOTAL-COSTS> 14,766,965
<OTHER-EXPENSES> 2,096,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,740,176
<INCOME-PRETAX> (1,383,463)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,383,463)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (628,700)
<NET-INCOME> (2,012,163)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> (67.10)
</TABLE>
