<PAGE>
As filed with the Securities and Exchange Commission on March 26, 1999
Registration No. 333-71365
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- -------------------------------------------------------------------------------
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)
4400 River Green Parkway
Suite 100
Duluth, Georgia 30096
(770) 814-5499
(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.
4400 River Green Parkway
Suite 100
Duluth, Georgia 30096
Phone: (770) 814-5499
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. Jon H. Klapper, Esq.
Scott D. Dickinson, Esq. William J. Ching, 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) 881-4777 Phone: (404) 817-6000
Facsimile: (404) 817-6050
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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. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Amount Proposed Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) per Share(2) Price(2) Fee(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value per share....... 5,750,000 $11.00 $63,250,000 $17,584.00
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
(1) Includes 750,000 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(a).
(3) Previously paid.
---------------
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.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 26, 1999
PROSPECTUS
5,000,000 Shares
[LOGO OF SATELLINK COMMUNICATIONS, INC. APPEARS HERE]
Common Stock
This is an initial public offering of 5,000,000 shares of our common stock.
Satellink is offering 4,000,000 of these shares, and our shareholders are
offering 1,000,000 of these shares.
There is currently no public market for our common stock, but we have applied
for the common stock to be listed on The Nasdaq Stock Market's National Market
under the symbol "STLK." We expect that the initial public offering price will
be between $9.00 and $11.00 per share.
See "Risk Factors" beginning on page 9 for a discussion of factors that you
should consider before you invest in our common stock.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discount........................................... $ $
Proceeds to Satellink........................................... $ $
Proceeds to the Selling Shareholders............................ $ $
</TABLE>
Satellink has granted the underwriters an option to purchase up to 750,000
additional shares of common stock to cover over-allotments.
-----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
-----------
J.C.Bradford&Co. Morgan Keegan & Company, Inc.
, 1999
<PAGE>
U.S. MAP SHOWING SATELLINK'S STAR*NET LOCATIONS
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It may not contain all of the information that is important to you. You should
read the entire prospectus carefully, especially "Risk Factors" and the
financial statements and notes to the financial statements before making any
decision to invest in our common stock. Our fiscal year ends on July 31, and
references to a particular fiscal year refer to the 12 months ended on July 31
of that year. On December 8, 1998, Satellink merged with the Cape Fear Paging
Companies in a transaction accounted for as a pooling of interests. All
financial and operating data reflect the merger. Unless otherwise stated, all
information in this prospectus assumes that the shares of common stock will be
sold to the public at $10.00 per share and that the underwriters will not
exercise their over-allotment option.
Satellink
Satellink is a leading regional provider of messaging and multiple personal
telecommunications services to businesses and individuals. We provide these
services in smaller metropolitan areas and major cities in the southeastern and
southwestern United States. Through our proprietary STAR*Net telecommunications
platform and the use of networks we own as well as networks owned by other
companies, we offer our subscribers an assortment of service and pricing
options not readily available from many of our competitors. Founded in 1988,
Satellink has increased its subscriber base through internal growth and
acquisitions from approximately 105,700 subscribers as of July 31, 1996 to
approximately 222,000 subscribers as of January 31, 1999.
Traditionally, paging companies have been able to deliver only a few types of
personal telecommunications services, usually paging and voicemail. One of the
reasons for this is that most equipment that processes and delivers pages, or
switching platforms, cannot deliver other services without expensive
modification or replacement. In 1995, we began development of our proprietary
Satellink Telecommunications Application Resource Network, or STAR*Net, in
anticipation of increased demand for multiple personal telecommunications
services from a single provider. Through the STAR*Net platform, which
integrates readily available and relatively inexpensive hardware with our
proprietary software, we offer our subscribers paging services as well as other
personal telecommunications services marketed under the "STAR*Net" name.
Some of our current STAR*Net services are:
. single telephone number access to paging, voicemail and long distance;
. ""find me" services, which automatically attempt to locate the
subscriber by calling a series of telephone numbers;
. prepaid calling cards, such as a calling card one might purchase at a
convenience store;
3
<PAGE>
. postpaid long distance calling cards, for which one must establish an
account and pay a monthly bill;
. inbound 1-800 service;
. the ability to originate a phone call from within a subscriber's
voicemail; and
. Internet e-mail delivery via alphanumeric pager.
While we do not have STAR*Net platforms in place throughout our network,
approximately 30% of our subscribers currently receive messaging and other
personal telecommunications services through a STAR*Net platform. As we install
STAR*Net platforms throughout our network, subscribers will be able to receive
existing messaging and voicemail services and additional STAR*Net services. We
expect approximately 75% of our subscribers to be serviced by a STAR*Net
platform within the next 18 months.
Growth Strategy
Our primary objective is to become a leading national provider of messaging
and multiple personal telecommunications services. We intend to achieve our
objective by pursuing the following strategies:
. Focus on Niche Markets.
We target smaller metropolitan markets throughout the southeastern and
southwestern United States that we believe are underserved by larger providers
of personal telecommunications services who focus on more densely-populated
metropolitan areas. Each STAR*Net platform costs approximately $25,000, which
is significantly less than comparable switching platforms. This allows us to
offer our services in these smaller markets where the implementation of a more
expensive platform is not economically justified. We also focus on providing
regional and national coverage, which generates higher revenue per subscriber
as compared to local coverage.
. Capitalize on Enhanced STAR*Net Services to Attract New Subscribers.
Satellink believes that the introduction of the STAR*Net services has
expanded our target market because potential new subscribers now include users
of other personal telecommunications services in addition to traditional paging
and voicemail services. We also believe that businesses and individuals who
currently use multiple providers for their personal telecommunications needs
will be attracted to Satellink because we are able to provide them with a suite
of services and a single bill for all of their services.
. Expand Subscriber Base Through Acquisitions.
Satellink intends to continue increasing our subscriber base and our
opportunities to cross-market STAR*Net services by identifying and acquiring
providers of paging, voicemail and other personal telecommunications services.
Since January 1996, we have acquired 13 paging and voicemail operators for an
aggregate consideration of $37.0 million and 2.5 million shares of our common
stock.
4
<PAGE>
. Cross-Market Our STAR*Net Services to Existing and Acquired Subscribers.
We intend to continue cross-marketing STAR*Net services to our existing and
acquired subscribers. We believe that our subscribers are mobile individuals
who are likely to use multiple personal telecommunications services and
purchase these services from us.
. Develop New STAR*Net Services.
Satellink intends to develop new STAR*Net services and offer them along with
existing STAR*Net services. We plan to offer unified messaging services, which
will allow a subscriber to retrieve messages sent to a voice mailbox, pager,
fax machine or e-mail address through a number of methods. These combined
services will allow us to offer existing and new subscribers the opportunity to
purchase a variety of services from a single provider.
The Offering
Common stock offered by Satellink......... 4,000,000 shares
Common stock offered by the selling
shareholders.............................
1,000,000 shares
Common stock to be outstanding after the
offering.................................
11,485,316 shares
Use of proceeds........................... To repay indebtedness and redeem
our Series D preferred stock
Proposed Nasdaq National Market symbol.... STLK
5
<PAGE>
Summary Financial and Operating Data
You should read the following summary historical and pro forma financial and
operating data in conjunction with "Use of Proceeds," our consolidated
financial statements and related notes, including the unaudited interim and pro
forma consolidated financial information, and other financial information which
appears later in this prospectus.
The pro forma statements of operations and other data reflect the acquisition
of Hyde's Stay In Touch, Inc. and its affiliated company as if it had occurred
at the beginning of the periods presented. The pro forma financial information
does not represent what our results of operations would have been if the
acquisition had occurred on such date, nor does it indicate our future
financial position or results of future operations. The pro forma adjustments
are based on currently available information and certain assumptions that we
believe are reasonable. The "As Adjusted" column reflects our sale of 4,000,000
shares of common stock and the application of the estimated net proceeds.
Adjusted EBITDA represents earnings before interest, taxes, depreciation and
amortization, fixed asset impairment, nonrecurring charges, write-off of
offering costs, accretion of stock warrants, extraordinary item and the
cumulative effect of a change in accounting principle. Adjusted EBITDA is a
measure of financial performance that is often used 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 we are in compliance with the covenants
of our credit facility. However, Adjusted EBITDA should not be considered in
isolation or as an alternative to net income (loss), operating income, cash
provided by operating activities or any other measure of performance under
generally accepted accounting principles. Adjusted EBITDA may be calculated
differently by different companies. Thus, Adjusted EBITDA as presented may not
be comparable to Adjusted EBITDA or other similarly titled measures reported by
other companies. Adjusted EBITDA for fiscal 1996 excludes $440,000 related to
research and development expenses. Adjusted EBITDA margin is calculated by
dividing Adjusted EBITDA by net revenues.
6
<PAGE>
<TABLE>
<CAPTION>
Six Months
Years Ended July 31, Ended January 31,
---------------------------------------------- -----------------------------------
Pro Forma As Adjusted
1996 1997 1998 1998 1998 1999 1999
---------- ---------- ---------- ---------- ---------- ---------- -----------
(Dollars in thousands, except per share data and ARPU)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Service, rent and
maintenance revenue.... $ 21,285 $ 31,194 $ 37,339 $ 40,639 $ 17,652 $ 22,008 $ 22,008
Product sales........... 1,836 2,315 2,322 3,386 930 1,756 1,756
---------- ---------- ---------- ---------- ---------- ---------- -----------
Total revenues......... 23,121 33,509 39,661 44,025 18,582 23,764 23,764
Cost of products sold... (1,396) (1,968) (1,515) (2,684) (561) (1,525) (1,525)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net revenues........... 21,725 31,541 38,146 41,341 18,021 22,239 22,239
Operating expenses...... 17,004 25,368 28,858 30,243 13,621 16,247 16,247
Depreciation and
amortization........... 2,222 4,181 5,130 5,854 2,225 2,776 2,776
Research and
development............ 440 -- -- -- -- -- --
Nonrecurring charges.... -- -- -- -- -- 1,629 1,629
Fixed asset impairment.. -- -- 834 834 834 -- --
---------- ---------- ---------- ---------- ---------- ---------- -----------
Operating income........ 2,059 1,992 3,324 4,410 1,341 1,587 1,587
Other income (expense)
....................... (17) 494 695 966 (81) 472 472
Interest expense........ (909) (2,289) (3,832) (4,788) (1,463) (2,430) (935)
Accretion of stock
warrants (1)........... (854) (1,773) (450) (450) (229) (119) --
Write-down of offering
costs.................. -- -- -- -- -- (570) --
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before
income tax expense,
extraordinary item and
cumulative effect of
change in accounting
principle.............. 279 (1,576) (263) 138 (432) (1,060) 1,124
Income tax expense...... 578 390 630 630 558 88 427
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. (299) (1,966) (893) (492) (990) (1,148) 697
Extraordinary loss on
early retirement of
debt................... (132) -- -- -- -- -- --
Cumulative effect of
change in accounting
principle.............. -- -- (629) -- (629) -- --
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) ..... (431) (1,966) (1,522) (492) (1,619) (1,148) 697
Preferred stock
dividends.............. 334 439 630 631 219 508 --
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income (loss)
attributable to common
shareholders........... $ (765) $ (2,405) $ (2,152) $ (1,123) $ (1,838) $ (1,656) $ 697
========== ========== ========== ========== ========== ========== ===========
Allocation to Class A
common stock.......... $ (739) $ (2,384) $ (2,151) $ (1,123) $ (1,837) $ (1,656) $ 697
Allocation to Class B
common stock.......... (26) (21) (1) -- (1) -- --
Net income (loss) per
share (2):
Loss from extraordinary
item -- basic:
Class A common stock... $ (0.03) $ -- $ -- $ -- $ -- $ -- $ --
Class B common stock... (2.23) -- -- -- -- -- --
Loss from cumulative
effect of change in
accounting principle:
Class A common stock... $ -- $ -- $ (0.11) $ -- $ (0.11) $ -- $ --
Class B common stock... -- -- (9.59) -- (9.68) -- --
Net income (loss)
attributable to common
shareholders -- basic:
Class A common stock... $ (0.15) $ (0.47) $ (0.39) $ (0.20) $ (0.33) $ (0.30) $ 0.06
Class B common stock... (12.90) (39.36) (32.77) -- (28.29) -- --
Net income (loss)
attributable to common
shareholders --
diluted:
Class A common stock... $ (0.15) $ (0.47) $ (0.39) $ (0.20) $ (0.33) $ (0.30) $ 0.05
Class B common stock... (12.90) (39.36) (32.77) -- (28.29) -- --
Weighted average common
shares outstanding --
basic:
Class A common stock... 4,841,962 5,117,657 5,545,168 5,545,168 5,486,730 5,588,296 11,485,316
Class B common stock... 2,013 535 22 22 35 -- --
Weighted average common
shares outstanding --
diluted:
Class A common stock... 4,841,962 5,117,657 5,545,168 5,545,168 5,486,730 5,588,296 13,269,662
Class B common stock... 2,013 535 22 22 35 -- --
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
At January 31, 1999
--------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Balance Sheet Data:
Working capital............................................ $ 2,311 $ 2,313
Property and equipment, net................................ 22,763 22,763
Total assets............................................... 67,024 67,027
Long term debt, less current maturities.................... 53,486 21,686
Total shareholders' equity (deficit) ...................... (7,949) 36,921
</TABLE>
<TABLE>
<CAPTION>
Six Months
Years Ended July 31, Ended January 31,
------------------------------------------ ---------------------------------
Pro Forma As Adjusted
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Cash provided by
operating activities... $ 4,189 $ 4,523 $ 5,369 $ 8,127 $ 1,574 $ 4,048 $ 5,078
Cash used in investing
activities............. (15,329) (14,354) (29,738) (15,984) (5,871) (9,520) (9,520)
Cash provided by financ-
ing activities......... 11,972 9,288 24,241 7,729 4,021 5,380 5,859
Adjusted EBITDA......... 4,265 6,668 9,984 12,063 4,319 6,484 6,484
Adjusted EBITDA margin.. 19.6 % 21.1 % 26.2 % 27.4 % 24.0 % 29.2 % 29.2 %
Subscribers (end of pe-
riod).................. 105,748 146,717 207,067 207,067 163,394 221,966 221,966
Average revenues per
unit (3)............... $ 22.14 $ 20.82 $ 17.97 $ 19.48 $ 19.37 $ 17.28 $ 17.28
Capital expenditures.... $ (4,930) $ (5,393) $ (8,759) $ (8,759) $ (5,281) $ (8,739) $ (8,739)
Cash dividends and dis-
tributions (4)......... (334) (450) (519) -- (263) (479) --
</TABLE>
- --------
(1)See note 6 to consolidated financial statements.
(2)See note 2 to consolidated financial statements.
(3) Average revenues per unit, or ARPU, equals the net revenues for a given
period divided by the average number of subscribers during such period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(4)See note 6 to consolidated financial statements and "Dividend Policy."
8
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. In addition
to the other information contained in this prospectus, you should carefully
consider the following risk factors before purchasing our common stock.
If we are unable to effectively manage our growth, our business could suffer
Satellink has experienced substantial increases in revenue and personnel in
recent years. This growth has strained our administrative, technical and
financial resources. Future growth could further strain our resources.
Our future operating results will depend heavily on our ability to manage our
business in the face of our growth and changing industry conditions. If we do
not respond appropriately to growth and change, the quality of our services,
our ability to retain key personnel and our business in general could be
negatively affected. For example, a particular problem we face is predicting
growth in network usage and the capacity necessary to support our networks. If
we do not correctly predict the growth in network usage and required capacity,
our business, financial condition and operating results could be negatively
affected.
Acquisitions could negatively affect our operations, financial performance and
stock price
Much of Satellink's recent growth is due to acquisitions, and we are
continually evaluating possible future acquisitions. However, acquisitions
involve many risks that could negatively affect our business, financial
condition or operating results, including:
. problems integrating the operations of the acquired company;
. diversion of management's attention;
. potential problems as we enter into new markets;
. loss of key employees or subscribers;
. the potential dilution of common stock;
. incurrence of debt held by the acquired company;
. assumption of known or unknown liabilities;
. incurrence of amortization expenses relating to goodwill and other
intangible assets; and
. unexpected transaction expenses.
On December 8, 1998, we completed the merger of Cape Fear Paging Company of
North Carolina, Cape Fear Paging Company and CF Paging Corporation with our
wholly-owned subsidiary. This acquisition was the largest acquisition that we
have made to date. We cannot guarantee that Cape Fear and Satellink will be
successfully integrated or that the integration will be done on a timely basis.
We cannot guarantee that we will complete any future acquisitions.
9
<PAGE>
We have a history of net losses and cannot guarantee that we will be profitable
We have incurred net losses for each of the last four fiscal years and cannot
guarantee that we will be profitable in the future. Our net losses for each of
the last four fiscal years were:
<TABLE>
<S> <C>
1998...................................... $1.5 million
1997...................................... $2.0 million
1996...................................... $ 430,000
1995...................................... $ 330,000
</TABLE>
Our profitability depends on many factors, including:
. maintaining our subscriber base;
. attracting new subscribers; and
. effectively implementing our business strategies.
Changes in technology might harm our business
The telecommunications industry is characterized by rapidly changing
technology and evolving industry standards. We may not be able to keep up with
technological changes or develop new services to meet new standards. Also,
subscriber needs frequently change, and competitors constantly introduce new
services. To be successful, we must:
. use leading technologies effectively;
. continue developing our technical expertise;
. enhance our existing services;
. develop new services; and
. meet changing subscriber needs on a timely and cost-effective basis.
We cannot guarantee that we will be able to use new technologies to meet our
subscribers' needs and effectively compete against competitors' new products.
If we are unable to do so, our business, financial condition and operating
results could be negatively affected.
Our STAR*Net platform and services may not be successful
Development of new services requires us to design and successfully integrate
new technologies into our STAR*Net platform. We cannot guarantee that we will
be able to design and integrate these technologies. Several of our competitors
have introduced services that are functionally similar to our STAR*Net
services. We cannot guarantee that present or potential subscribers will accept
our new STAR*Net services or that they will not choose to use our competitors'
services. If we cannot develop new products and services on a timely basis, our
business, financial condition and operating results could be negatively
affected.
We have only limited experience with STAR*Net services
We have limited experience in developing and marketing STAR*Net services, as
well as establishing new networks and replacing existing networks with the
STAR*Net platform.
10
<PAGE>
Because of our inexperience with STAR*Net services, we may experience
unexpected delays or problems in developing and marketing new services,
replacing existing networks or establishing new networks. We also may have
problems transferring subscribers from existing networks to the STAR*Net
platform. Our inexperience with the STAR*Net platform may negatively affect our
business, financial condition and operating results.
Competition in the telecommunications industry creates pricing pressure on our
business
The telecommunications service industry is very competitive and subject to
rapid technological change. Telecommunications companies compete primarily
based on price. In addition, major long distance carriers and paging companies
conduct extensive advertising campaigns to attract customers. If these
competitors decrease their rates or otherwise attract our subscribers, we could
be at a competitive disadvantage. We expect other companies to develop and
market services similar to ours, which could further increase competition.
In addition, we expect competition to increase in the future. Many of our
competitors, such as AT&T Corporation, MCI WorldCom, Inc. and Sprint Corp.,
have longer operating histories, greater name recognition, larger customer
bases and greater resources than we have. We may not compete successfully
against current or future competitors, and the competitive pressures that we
face may negatively affect our business, financial condition and operating
results.
Several of our competitors offer many of the same services and service
combinations that we offer. For example, Premiere Technologies, Inc. offers
bundled telecommunications services similar to ours. In addition, Octel
Communications Corporation and Microsoft Corporation recently announced a
service called "Unified Messenger," which places all voicemail, e-mail and fax
messages in a single mailbox that is accessible by telephone or computer. We
cannot guarantee that our subscribers will continue to choose our services over
services offered by competitors.
On February 8, 1996, President Clinton signed into law the Telecommunications
Act of 1996, or the Telecom Act. The new law allows Regional Bell Operating
Companies, or Baby Bells, to provide long distance telephone service between
local calling areas. The Telecom Act probably will significantly increase
competition for long distance services. In addition, the new legislation gives
the Federal Communications Commission authority to deregulate other aspects of
the telecommunications industry. Possible FCC deregulation could include
allowing the Baby Bells to offer an integrated group of information and
telecommunications services to customers. If the FCC approves this type of
deregulation, our competition will further increase and our business, financial
condition and operating results could be negatively affected.
Market acceptance of personal telecommunications services remains uncertain
Our success depends upon our subscribers' and potential subscribers'
acceptance of our present and future services. Our personal telecommunications
services integrate the functions of telephones and computers. Satellink's
services are different from traditional methods of
11
<PAGE>
communication and require that users be open to new ways of communicating. We
believe that broad acceptance and use of our services depends on ease of use,
price, reliability, quality of service, system security and functionality. In
addition, we must effectively market and distribute our services. If demand for
our services declines or we fail to attract new subscribers, our business,
financial condition and operating results could be negatively affected.
Technical failures and natural disasters could interrupt service on our
networks and the STAR*Net platform
We rely on our own network, third-party networks, STAR*Net platforms and
other equipment to offer our services. A fire, act of sabotage, technical
failure, natural disaster or similar event could impact these networks,
platforms and other equipment and cause an interruption in our services. For
example, on May 18 and 19, 1998, the Galaxy 4 satellite owned by PanAmSat
malfunctioned. PanAmSat transmits paging messages for a majority of the pagers
in use in the United States. The satellite malfunction interrupted paging
service of up to 40 million subscribers in the United States, including
approximately 25% of our subscribers. Future technical malfunctions of our own
network, third-party networks, STAR*Net platforms or other equipment could
disrupt service on a larger scale.
CUE Paging Corporation might not maintain the network upon which we are
dependent
An FM subcarrier paging network is a network of FM radio stations that
broadcast paging messages on a portion of the frequency on which they broadcast
their regular programming. Our FM subcarrier paging network is linked with the
CUE nationwide FM subcarrier paging network, which we do not control. We
deliver nationwide paging service through this network and depend on CUE to
maintain and develop its paging network. CUE is not obligated to upgrade or
further develop its network to accommodate new technologies or subscribers. We
estimate that the CUE network now operates at approximately 60% of capacity.
Assuming that historical growth rates on the CUE network continue as they have
in the past and that CUE continues to maintain its network, we estimate that
the CUE network can accommodate our projected subscriber growth for the next
five years. However, our estimate of the capacity of the CUE network and our
projections concerning subscriber growth could be inaccurate. If our estimates
are incorrect or if CUE fails to maintain or upgrade its network, our business,
financial condition and operating results could be negatively affected.
We need to enter into favorable contracts with other telecommunications
providers to succeed
Our ability to maintain and expand our business depends in part on our
ability to enter into favorable contracts with long-distance and paging
carriers. We depend on other telecommunications providers for transmission of
our subscribers' long-distance calls and the majority of our paging data. Our
agreements with our carriers are generally for three-year
12
<PAGE>
terms but are subject to early termination. Some contracts also contain minimum
purchase requirements. In addition, our success depends on local and long
distance telephone companies originating and terminating our service in a
timely manner. The partial or total loss of our ability to initiate or
terminate calls would result in a loss of revenues and could lead to a loss of
subscribers.
Subscribers may reject our FM pagers because of technology limitations
Our existing FM pagers receive only numeric messages and are more expensive
and approximately 50% larger than traditional pagers. Our present or potential
subscribers may decide not to accept the inherent limitations of our FM pagers,
or another company may develop a superior FM pager that we cannot purchase at
competitive prices. In these instances, our ability to attract and retain
subscribers would be negatively affected.
Our operating results are difficult to predict and unexpected results could
harm our stock price
Our future operating results depend on a number of factors, including:
. subscribers' acceptance of our new and new services;
. changes in laws and regulations that affect our business;
. the timing of the introduction of new services;
. the number, size and successful integration of acquired companies;
. competitive pricing pressures; and
. general economic and seasonal conditions.
Quarterly revenues and expenses are difficult to predict because the market
for our services is rapidly evolving. Our expense levels are based, in part, on
our expectations about future revenues. If our actual revenue levels do not meet
our projections or if our expenses exceed our projections, operating results
will likely be negatively affected. Due to many factors, we believe that period-
to-period comparisons of our business are not necessarily meaningful. Because
our industry changes so quickly, our operating results in future quarters could
be below the expectations of public market analysts and investors. If we do not
meet these expectations, our stock price could fall significantly.
Our success depends upon our ability to attract and retain key personnel
Our success depends significantly upon the continued employment of our
President and Chief Executive Officer, Jerry W. Mayfield. Our success also
depends on our ability to attract and retain highly qualified engineering,
product development and marketing personnel. In our industry, competition is
intense for the recruitment of highly qualified engineering and product
development personnel. In addition, turnover of sales and marketing personnel
is high. We may not recoup the costs of training sales and marketing
representatives if they leave after a short time of employment. We may not
successfully retain or integrate existing personnel or identify and hire
additional personnel. If we lose the services of key personnel or are unable to
attract additional qualified personnel, our business, financial condition and
operating results could be negatively affected.
Failure to obtain year 2000 compliance may harm our business
The Year 2000 issue is the result of potential problems with computer systems
or any equipment with computer chips that store dates as two digits rather than
four, such as "99"
13
<PAGE>
for 1999. On January 1, 2000, these systems and equipment may read "00" as the
year 1900 instead of the year 2000. This problem could result in an
interruption in, or failure of, certain of our normal business activities and
operations if our systems are unable to recognize the difference between "2000"
and "1900" and function normally.
We are also discussing the Year 2000 issues with our significant subscribers
and suppliers. If they are unprepared for Year 2000 problems, our business
activities and operations could be negatively affected. We are not yet certain
to what extent our significant subscribers and suppliers have discovered and
resolved their Year 2000 issues. If their systems are not timely converted or
if their converted systems are not compatible with ours, our business,
financial condition and operating results could be negatively affected.
Our software may contain undetected bugs that could affect its performance
Our software may contain errors, or "bugs," that we have not been able to
detect. These bugs could result in a partial or total failure of our network.
In addition, the cost to fix the errors or to further develop the software
could be high. Our revenues could decrease because of subscribers' inability to
use the network or their decisions to cancel their subscriptions because of
problems caused by the errors.
Unauthorized transactions may harm our customer relationships and result in bad
debt write-offs
By unlawfully using the access numbers and PINs of authorized users, people
have occasionally gained unauthorized access to our network and services. They
are then able to use our services without paying for them. This could strain
our relations with our subscribers if their bills contain unauthorized charges
for which they must contact our customer service representatives to have
removed. In addition, large amounts of unauthorized use may force us to write-
off significant amounts of bad debt. Our business, financial condition and
operating results could be negatively affected by large amounts of unauthorized
use and the write-off of significant amounts of bad debt.
Changes in federal, state and local regulation may result in increased
competition and costs
Changes in federal, state and local regulation may increase our competition,
force us to comply with new regulatory requirements that could be time
consuming and subject us to increased costs. For example, the FCC may soon
approve some local exchange carriers' applications to provide long-distance
services to customers within their local service territories, including
applications of Baby Bells. As a result, we may soon face increased
competition. In addition, we may be subject to additional regulatory
requirements and costs because of the Telecom Act.
Our business could be harmed if the FCC does not renew our licenses
If we are unable to renew our FCC licenses, our business, financial condition
and results of operations could be adversely affected. One of our competitors
could file a competing application or the FCC could decide not to renew our
licenses. In addition, the FCC has the authority to restrict the operations of
licensed radio facilities or, following a hearing under the Communications Act
of 1934, revoke or modify radio licenses.
14
<PAGE>
Our business could be harmed if the FCC does not grant us additional licenses
FCC rules and policies regarding license applications could limit our ability
to obtain additional frequencies or expand existing paging networks into new
services areas. The FCC may, at any time, require auctions for new or existing
services prior to the award of any license. Additionally, the FCC no longer
accepts many types of applications for licenses on exclusive paging
frequencies. If we are unable to obtain additional frequencies or expand our
existing networks, our ability to compete could be severely limited and we
could lose subscribers.
Recently enacted FCC rules could eliminate some of our competitive advantages
The FCC has fully implemented rules classifying the services offered by
paging carriers as either commercial mobile radio services or private mobile
radio services. These FCC rules aim to reduce the disparate regulatory
treatment given to similar mobile services. We believe that these parity rules
will remove some regulatory advantages that we and other private carriers
previously received.
We have only limited protection of our proprietary rights and technology
We rely primarily on a combination of intellectual property laws and
contracts to protect our proprietary rights and technology. However, these laws
and contractual provisions provide only limited protection. Unauthorized
parties may attempt to copy aspects of our software or services or to obtain
and use proprietary information. Although we do not know of any present or past
infringements, we cannot be certain that our means of protecting our
proprietary rights and technology will be successful. Alternatively, our
competitors could independently develop similar technology. Also, some foreign
countries' laws do not offer as much protection of our proprietary rights as
laws in the United States.
We may not be successful in avoiding claims that we infringe others'
proprietary rights
Many patents, copyrights and trademarks have been issued in the general areas
of information and telecommunications services as well as personal
telecommunications. In the ordinary course of our business, third parties may
claim that our services infringe on their patent, copyright or trademark
rights. Third parties making infringement claims may have significantly greater
resources than we do to pursue litigation, and we cannot be certain that we
would prevail in an infringement action.
Infringement claims, whether with or without merit, could be time consuming,
distract management, result in costly litigation, delay the introduction of new
services and require us to enter into royalty or licensing agreements. As a
result of an infringement claim, we could be required to discontinue use of a
specific technology, tradename or service mark. In such instances, it could be
expensive for us to develop or buy replacement technology or market a new name.
Consequently, whether justified or not, infringement claims could have a
negative effect on our business, financial condition and operating results.
A reduction in our goodwill amortization period could result in a significant
write-off of goodwill in the future
As of January 31, 1999, our total assets were approximately $67 million, of
which approximately $28 million, or approximately 41.9% of total assets, was
goodwill. Any write-
15
<PAGE>
off of a significant portion of unamortized goodwill would negatively affect
our results of operations. We are amortizing our goodwill on a straight-line
basis over 30 years based on our evaluation of the attributes of the acquired
businesses. However, other companies in the messaging and personal
telecommunications industry may apply different amortization periods with
regard to acquired companies. In addition, we may be required to shorten the
amortization period for goodwill in future periods based on the prospects of
acquired companies. We evaluate, on a regular basis, whether events and
circumstances have occurred that indicate that all or a portion of the carrying
value of goodwill may no longer be recoverable, in which case a charge to
earnings for impairment losses could become necessary. A write-off of goodwill
could become necessary if the anticipated undiscounted cash flows of an
acquired company do not support the carrying value of long-lived assets,
including goodwill. At present, no evidence exists that would indicate
impairment losses may be necessary in future periods.
Investors will not be able to exert control over Satellink
If you purchase our common stock, you will become a minority shareholder of
Satellink and will not be able to control our management or business. Upon the
completion of the offering, our directors, officers and their affiliates will
beneficially own 3,993,722 shares, or approximately 34.8% of our common stock,
including exercisable options and warrants. Our directors, officers and their
affiliates also will hold options to acquire 146,750 shares of common stock
that are not immediately exercisable. If exercised, these options, taken with
the shares owned and the exercisable options, would give the directors,
officers and their affiliates ownership of approximately 36.1% of our common
stock. Consequently, our directors, officers and their affiliates could control
or exercise significant influence over the election of directors and all other
matters requiring shareholder approval. As shareholders, our directors,
officers and their affiliates also could prevent a change of control or
ownership of Satellink.
Our stock has not previously traded on a public market and its price may be
volatile
Prior to the offering, our common stock has not been traded on a public
market. We have applied for listing of our common stock on the Nasdaq National
Market. The initial public offering price will be determined by negotiations
between Satellink and the underwriters. The initial price may not be related to
our book value, net worth or any other established criteria of value. In
addition, the initial price may not be indicative of the market price for the
common stock after the offering. The price of our stock after the offering may
fluctuate significantly and may fall below the initial price. The stock market
at times experiences significant price and volume fluctuations that may be
unrelated to the operating results of particular companies. The stock market's
fluctuations particularly affect the stock prices of high technology companies
such as Satellink. Our stock price could be affected by the following factors,
among others:
. actual or anticipated operating results;
. growth rates;
. changes in analysts' estimates;
. industry conditions;
. competitors' announcements;
16
<PAGE>
. regulatory actions; and
. general economic conditions.
If our operating results are below the expectations of analysts and
investors, our stock price could fall significantly.
Additional shares will be eligible for public sale in the future and could
cause our stock price to drop
The market price of our common stock could drop as a result of sales of a
large number of shares in the market after the offering, or the perception that
such sales could occur. These factors also could make it more difficult for us
to raise funds through future offerings.
There will be 11,485,316 shares of common stock outstanding immediately after
the offering. Of these shares, the shares sold in the offering, except for any
shares purchased by "affiliates" of Satellink as defined in Rule 144 under the
Securities Act of 1933, as well as 275,599 of the currently outstanding shares
will be freely transferable without restriction or further registration under
the Securities Act. 3,675,798 shares are subject to the provisions of 180 day
lock-up agreements signed by our executive officers and directors, holders of
more than 5% of our common stock, all of the selling shareholders and all of
the holders of registration rights. These lock-up agreements also apply to
1,239,175 shares that are subject to outstanding options and warrants that will
be exercisable upon expiration of the 180-day lock-up period. The remaining
2,533,919 shares of common stock outstanding will be "restricted securities" as
defined in Rule 144. These shares may be sold in the future without
registration under the Securities Act to the extent permitted by Rule 144 or an
exemption under the Securities Act. Additionally, we have granted registration
rights to some of our shareholders, as well as to holders of options and
warrants to buy our common stock, that allow them to require us to register
their common stock for public sale under certain circumstances. We also plan to
register under the Securities Act all of the common stock issuable under our
1997 long-term incentive plan.
Purchasers' shares will be immediately diluted
The initial public offering price is substantially higher than the tangible
book value per share of our outstanding common stock. Investors purchasing
shares in the offering will incur immediate and substantial dilution. At the
same time, existing shareholders will receive a significant increase in the
tangible book value per share of their shares. At an initial public offering
price of $10.00 per share, the immediate dilution to new investors would be
$9.70 per share. In addition, purchasers' shares will be further diluted to the
extent outstanding options and warrants are exercised.
Several measures that we have adopted have anti-takeover effects
Several measures that we have adopted limit the ability of shareholders or
others to change or gain control of Satellink. Our board of directors may issue
preferred stock, with any rights it may wish to assign, without shareholder
action. The existence of this "blank check" preferred stock could discourage or
make difficult a tender offer, merger, proxy contest or other attempt to gain
control. In addition, our board of directors will be divided into three classes
of directors at the first annual shareholders meeting held after the
17
<PAGE>
completion of the offering. The directors will then be elected for staggered
three-year terms, which could affect shareholders' ability to change control of
Satellink. In addition to considering the best interests of Satellink and its
shareholders, our articles of incorporation also permit directors to consider
the interests of other constituencies when considering any change of control
transaction. Directors may consider the impact of their decisions on employees,
customers, suppliers, creditors and the communities in which Satellink operates
as well as other factors that the directors deem pertinent when carrying out
their responsibilities. We have also elected to be subject to provisions of the
Georgia Business Corporation Code that can make more difficult and discourage
business combinations with interested shareholders.
The terms and covenants in our credit facility may limit how we conduct our
business
Our credit facility contains several terms and covenants that impact our
business strategies. For example:
. our ability to obtain additional financing may be impaired, which could
slow our growth and capital investment;
. a portion of our cash flow will be used to pay principal and interest on
our debt, which will reduce the funds available for working capital,
capital expenditures and acquisitions;
. the covenants in our credit facility require us to meet certain
financial objectives and impose other restrictions on business
operations. These covenants limit our ability to borrow additional funds
or dispose of assets, and may limit our flexibility in planning for and
reacting to changes in our business;
. our debt level and these covenants in our credit facility may place us
at a competitive disadvantage; and
. borrowings under our credit facility are at floating rates of interest,
which could result in higher interest expense in the event of an
increase in interest rates.
Our ability to pay principal and interest on our debt depends on our
financial and operating performance, which is subject to prevailing economic
conditions and to financial, business and other factors beyond our control. Our
operating results may not generate sufficient cash flow to pay our obligations.
If we are unable to pay our debts, we will have to pursue alternative
strategies, such as selling assets, refinancing or restructuring our
indebtedness or selling additional equity capital. However, our lender's
consent would be required before we could take any of these actions.
A default under our credit facility may harm our business
We must continue to satisfy financial and operating covenants contained in
our credit facility. If we fail to comply with these covenants, we will be in
default under our credit facility. If we default under our credit facility, our
lenders could:
. elect to declare all amounts borrowed to be immediately due and payable,
together with accrued and unpaid interest; and/or
. terminate their commitments to make further extensions of credit under
our credit facility.
The collateral under our credit facility consists of substantially all of our
assets. If we are unable to pay our obligations to our lenders, they could
foreclose on any or all of this collateral.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus, including some statements in
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," are forward-
looking statements about what may happen in the future. They include statements
regarding our current beliefs, goals and expectations about matters such as our
expected financial position and operating results, our business strategy and
our financing plans. These statements can sometimes be identified by our use of
forward-looking words such as "anticipate," "estimate," "expect," "intend,"
"may," "will" and similar expressions. We cannot guarantee that our forward-
looking statements will turn out to be correct or that our beliefs and goals
will not change. Our actual results could be very different from and worse than
our expectations for various reasons, including those discussed in "Risk
Factors."
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<PAGE>
USE OF PROCEEDS
The net proceeds to Satellink from the sale of the 4,000,000 shares of common
stock offered by Satellink are estimated to be approximately $36.3 million
after deducting estimated underwriting discounts and offering expenses payable
by Satellink.
Satellink 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.......................................... $31,800,000 88%
To redeem all outstanding shares of Series D
preferred stock................................... 4,500,000 12
----------- ---
Total............................................ $36,300,000 100%
=========== ===
</TABLE>
Satellink currently intends to use approximately $31.8 million of the net
proceeds to repay outstanding indebtedness under Satellink's credit facility
with Bank Austria Creditanstalt, which indebtedness totaled $52.7 million at
January 31, 1999. The indebtedness to be repaid would otherwise mature as
follows:
. $2.8 million during fiscal 2000;
. $3.8 million during fiscal 2001;
. $3.8 million during fiscal 2002;
. $3.8 million during fiscal 2003; and
. $17.6 million during fiscal 2004.
The credit facility carries a variable interest rate based on, at Satellink's
election, Creditanstalt's prime rate plus 2% or LIBOR plus 4%. Satellink has
historically utilized the credit facility for working capital and to finance
acquisitions. As of February 28, 1999, the outstanding balance under the credit
facility accrued interest at a rate of 9.2%. During the past 12 months,
Satellink borrowed approximately $28.8 million under the credit facility, which
was used for three acquisitions and for capital expenditures and general
corporate purposes.
Satellink 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. These shares were issued in April 1998, and the proceeds from this
issuance were used to finance a portion of the purchase price of Premier
Paging, Inc., Premier Paging of New Orleans, Inc and Hyde's Stay in Touch, Inc.
Upon the closing of the offering, Satellink will amend its articles of
incorporation 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 Satellink. Satellink currently
20
<PAGE>
is engaged in preliminary discussions with potential acquisition candidates.
Although it has no binding commitments to acquire any of such candidates,
management believes that Satellink 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 Satellink will complete any acquisitions on terms
favorable to Satellink, if at all. See "Risk Factors -- Acquisitions could
negatively affect our operations, financial performance and stock price,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Acquisitions."
DIVIDEND POLICY
Satellink 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. Satellink 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 Satellink's earnings,
financial condition, capital requirements, cash flow, long range plans and
other factors that the board of directors may deem relevant at that time. The
terms of the credit facility prohibit Satellink, without the prior written
consent of its lenders, from paying cash dividends in any fiscal year in an
amount exceeding the lesser of 25% of Satellink's excess cash flow for the
immediately preceding fiscal year or $350,000. Additionally, the designation of
Satellink's non-voting preferred stock provides that 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 dividends and
other distributions paid on the common stock. See "Description of Capital
Stock."
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<PAGE>
CAPITALIZATION
The following table sets forth the indebtedness and capitalization of
Satellink at January 31, 1999 from a historical basis and as adjusted to
reflect: (1) the conversion of all issued and outstanding shares of Series A
preferred stock and Series C preferred stock into shares of common stock; (2)
the exercise of warrants to purchase 321,096 shares of common stock to be sold
in the offering by a selling shareholder; (3) the sale by Satellink of
4,000,000 shares of the common stock offered hereby; and (4) the application of
the estimated net proceeds to repay indebtedness and redeem Series D preferred
stock.
Upon the closing of the offering, Satellink will amend its articles of
incorporation 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.
<TABLE>
<CAPTION>
At January 31, 1999
--------------------------
Actual As Adjusted
----------- -------------
(Dollars in thousands)
<S> <C> <C>
Short-term debt (including current portion of
long-term debt)................................ $ -- $ --
=========== ===========
Long-term debt.................................. $ 53,486 $ 21,686
Stock warrants.................................. 5,896 --
Series C redeemable convertible preferred stock;
3,500 shares authorized, issued and
outstanding, actual; 0 shares authorized,
issued and outstanding, as adjusted............ 3,500 --
Series D redeemable preferred stock; 4,500
shares authorized, issued and outstanding,
actual; 0 shares authorized, issued and
outstanding, as adjusted....................... 3,672 --
Shareholders' equity (deficit):
Series A convertible preferred stock; 7,500
shares authorized and 7,360 shares issued and
outstanding, actual; 0 shares authorized,
issued and outstanding, as adjusted............ -- --
Series B convertible preferred stock; 30,000
shares authorized and 0 shares issued and
outstanding.................................... -- --
Class A common stock; 50,000,000 shares
authorized and 5,588,296 shares issued and
outstanding, actual; and 11,164,220 shares
issued and outstanding, as adjusted (1)........ 56 115
Class B common stock; 20,000 shares authorized
and 0 shares issued and outstanding, actual; 0
shares authorized, issued and outstanding, as
adjusted....................................... -- --
Additional paid-in capital...................... -- 41,074
Stock warrants.................................. -- 4,565 (2)
Accumulated deficit............................. (8,005) (8,833)(3)
----------- -----------
Total shareholders' equity (deficit)........ (7,949) 36,921
----------- -----------
Total capitalization....................... $ 58,605 $ 58,607
=========== ===========
</TABLE>
- --------
(1) Excludes 1,784,346 shares of common stock that were subject to outstanding
options and warrants at January 31, 1999 at a weighted average exercise
price of $2.86 per share. See "Management -- Long-Term Incentive Plan,"
"Shares Eligible for Future Sale" and Note 6 to the consolidated financial
statements.
(2) Includes a reduction in value of stock warrants of $1,330,000 related to
the exercise of 321,096 warrants in the offering.
(3) Includes a loss of approximately $828,063 that Satellink expects to incur
upon redemption of the Series D preferred stock. This loss represents the
difference between the $4,500,000 redemption value of the Series D
preferred stock and the $3,671,937 carrying value of this stock.
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<PAGE>
DILUTION
As of January 31, 1999, the net tangible book value of Satellink was
approximately $(41,480,000), or $(7.42) per share of common stock. "Net
tangible book value per share" is defined as the book value of Satellink's
tangible assets less all liabilities, divided by the number of issued and
outstanding shares of common stock. The pro forma net tangible book value of
Satellink as of January 31, 1999 would have been approximately $3,390,000 or
$0.30 per share, after giving effect to: (1) the conversion of all outstanding
shares of Series A preferred stock and Series C preferred stock into common
stock; (2) the exercise of warrants to purchase 321,096 shares of common stock
to be sold in the offering by a selling shareholder; (3) the sale by Satellink
of 4,000,000 shares of common stock at an assumed initial public offering price
of $10.00 per share; and (4) deduction of the estimated underwriting discounts
and offering expenses payable by Satellink.
This represents an immediate increase in net tangible book value of $7.72 per
share to existing shareholders and an immediate dilution in net tangible book
value of $9.70 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.................. $10.00
------
Net tangible book value before the offering.................... (7.42)
Increase per share attributable to new shareholders............ 7.72
-----
Pro forma net tangible book value per share...................... 0.30
------
Dilution per share to new shareholders........................... $ 9.70
======
</TABLE>
The following table sets forth as of January 31, 1999, on a pro forma basis
giving effect to the conversion of the Series A preferred stock and Series C
preferred stock into common stock and the exercise of warrants to purchase
321,096 shares of common stock to be sold in the offering by a selling
shareholder, (1) the number of shares of common stock acquired from Satellink,
(2) the total consideration paid and (3) the average price per share paid by
existing shareholders and by new investors, assuming the sale of 4,000,000
shares of common stock in the offering at an assumed initial public offering
price of $10.00 per share.
<TABLE>
<CAPTION>
Average
Price
Shares Purchased Total Consideration Per Share
------------------ ------------------- ---------
Number Percent Amount Percent
---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 7,485,316 65.2% $ 3,558,429 8.2% $ 0.48
New investors.................. 4,000,000 34.8 40,000,000 91.8 10.00
---------- ----- ----------- -----
Total.......................... 11,485,316 100.0% $43,558,429 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables do not take into account the exercise of outstanding
options and warrants to acquire 1,784,346 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 $9.36. See "Management -- Long-Term Incentive Plan," "Certain
Transactions -- Non-Voting Preferred Stock Warrant Issuance" and note 6 to the
consolidated financial statements.
23
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical and pro forma consolidated
financial and operating information of Satellink. The selected historical
consolidated financial data as of July 31, 1997 and 1998 and for the fiscal
years ended July 31, 1996, 1997 and 1998 have been derived from Satellink's
consolidated financial statements 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, 1994, 1995 and 1996 and
for the years ended July 31, 1994 and 1995 have been derived from Satellink's
unaudited consolidated financial statements that are not included in this
prospectus. The selected historical consolidated financial data as of and for
the six months ended January 31, 1998 and 1999 have been derived from
Satellink's unaudited consolidated financial statements 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 six months ended January 31, 1999 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, Satellink's consolidated
financial statements and the notes to the consolidated financial statements,
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."
The pro forma statements of operations data reflect the acquisition of Hyde's
Stay In Touch, Inc. and its affiliated company as if it had occurred at the
beginning of the periods presented. The pro forma financial information does
not represent what Satellink's results of operations would have been if the
acquisition had occurred on such date, nor does it indicate Satellink's future
financial position or results of future operations. The pro forma adjustments
are based on currently available information and certain assumptions that we
believe are reasonable. The "As Adjusted" column reflects the sale of 4,000,000
shares of common stock offered by Satellink in this offering and the
application of the estimated net proceeds from the offering.
24
<PAGE>
<TABLE>
<CAPTION>
Years Ended July 31, Six Months Ended January 31,
---------------------------------------------------------------------- ----------------------------------
Pro Forma As Adjusted
1994 1995 1996 1997 1998 1998 1998 1999 1999
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -----------
(Dollars in thousands, except per share data and ARPU)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Service, rent and
maintenance
revenues........ $ 13,610 $ 16,580 $ 21,285 $ 31,194 $ 37,339 $ 40,639 $ 17,652 $ 22,008 $ 22,008
Product sales.... 906 1,251 1,836 2,315 2,322 3,386 930 1,756 1,756
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -----------
Total revenues.. 14,516 17,831 23,121 33,509 39,661 44,025 18,582 23,764 23,764
Cost of products
sold............ (825) (1,108) (1,396) (1,968) (1,515) (2,684) (561) (1,525) (1,525)
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -----------
Net revenues.... 13,691 16,723 21,725 31,541 38,146 41,341 18,021 22,239 22,239
Service, rent and
maintenance
expenses........ 5,193 6,782 8,962 13,517 15,600 15,924 7,496 8,379 8,379
Selling and
marketing
expenses........ 1,747 2,736 3,053 4,281 4,764 4,973 2,198 3,214 3,214
General and
administrative
expenses........ 2,231 2,874 4,320 6,573 7,332 8,184 3,371 3,784 3,784
Engineering
expenses........ 552 673 669 997 1,162 1,162 556 870 870
Depreciation and
amortization.... 1,755 1,916 2,222 4,181 5,130 5,854 2,225 2,776 2,776
Research and
development..... -- -- 440 -- -- -- -- -- --
Nonrecurring
charges......... -- -- -- -- -- -- -- 1,629 1,629
Fixed asset
impairment...... 297 -- -- -- 834 834 834 -- --
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -----------
Operating
income.......... 1,916 1,742 2,059 1,992 3,324 4,410 1,341 1,587 1,587
Other income
(expense)....... 182 13 (17) 494 695 966 (81) 472 472
Interest
expense......... (769) (926) (909) (2,289) (3,832) (4,788) (1,463) (2,430) (935)
Accretion of
stock
warrants(1)..... (350) (643) (854) (1,773) (450) (450) (229) (119) --
Write-down of
offering costs.. -- -- -- -- -- -- -- (570) --
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -----------
Income (loss)
before income
tax expense,
extraordinary
item and
cumulative
effect of change
in accounting
principle....... 979 296 279 (1,576) (263) 138 (432) (1,060) 1,124
Income tax
expense......... 492 626 578 390 630 630 558 88 427
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -----------
Income (loss)
before
extraordinary
item and
cumulative
effect of change
in accounting
principle....... 487 (330) (299) (1,966) (893) (492) (990) (1,148) 697
Extraordinary
loss on early
retirement of
debt ........... -- -- (132) -- -- -- -- -- --
Cumulative effect
of change in
accounting
principle....... -- -- -- -- (629) -- (629) -- --
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -----------
Net income
(loss)......... 487 (330) (431) (1,966) (1,522) (492) (1,619) (1,148) 697
Preferred stock
dividends....... 88 88 334 439 630 631 219 508 --
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- -----------
Net income (loss)
attributable to
common
shareholders.... $ 399 $ (418) $ (765) $ (2,405) $ (2,152) $ (1,123) $ (1,838) $ (1,656) $ 697
========== ========== ========== ========== ========== ========== ========= ========== ===========
Allocation to
Class A common
stock.......... $ 385 $ (401) $ (739) $ (2,384) $ (2,151) $ (1,123) $ (1,837) $ (1,656) $ 697
Allocation to
Class B common
stock.......... 14 (17) (26) (21) (1) -- (1) -- --
Net income (loss)
per share (2):
Loss from
extraordinary
item -- basic:
Class A common
stock.......... $ -- $ -- $ (0.03) $ -- $ -- $ -- $ -- $ -- $ --
Class B common
stock.......... -- -- (2.23) -- -- -- -- -- --
Loss from
cumulative
effect of
change in
accounting
principle:
Class A common
stock.......... $ -- $ -- $ -- $ -- $ (0.11) $ -- $ (0.11) $ -- $ --
Class B common
stock.......... -- -- -- -- (9.59) -- (9.68) -- --
Net income
(loss)
attributable to
common
shareholders --
basic:
Class A common
stock.......... $ 0.08 $ (0.08) $ (0.15) $ (0.47) $ (0.39) $ (0.20) $ (0.33) $ (0.30) $ 0.06
Class B common
stock.......... 6.46 (6.86) (12.90) (39.36) (32.77) -- (28.29) -- --
Net income
(loss)
attributable to
common
shares --
diluted:
Class A common
stock.......... $ 0.06 $ (0.08) $ (0.15) $ (0.47) $ (0.39) $ (0.20) $ (0.33) $ (0.30) $ 0.05
Class B common
stock.......... 4.75 (6.86) (12.90) (39.36) (32.77) -- (28.29) -- --
Weighted average
common shares
outstanding --
basic:
Class A common
stock.......... 4,977,621 4,938,587 4,841,962 5,117,657 5,545,168 5,545,168 5,486,730 5,588,296 11,485,316
Class B common
stock.......... 2,821 2,418 2,013 535 22 22 35 -- --
Weighted average
common shares
outstanding --
diluted:
Class A common
stock.......... 6,844,790 4,938,587 4,841,962 5,117,657 5,545,168 5,454,168 5,486,730 5,588,296 13,269,662
Class B common
stock.......... 2,821 2,418 2,013 535 22 22 35 -- --
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
At July 31, At January 31,
---------------------------------------------- -------------------------------
As Adjusted
1994 1995 1996 1997 1998 1998 1999 1999
------- ------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital
(deficit).............. $ 1,587 $ 2,987 $ 1,255 $ (1,798) $ (3,150) $ 1,895 $ 2,311 $ 2,313
Property and equipment,
net.................... 3,730 4,760 8,615 13,041 17,251 15,008 22,763 22,763
Total assets............ 8,614 10,738 24,135 36,047 62,662 39,464 67,024 67,027
Long-term debt, less
current maturities..... 6,223 8,748 15,951 24,065 41,342 29,777 53,486 21,686
Total shareholders'
equity (deficit)....... (640) (1,677) (2,192) (4,365) (6,154) (5,698) (7,949) 36,921
<CAPTION>
Years Ended July 31, Six Months Ended January 31,
--------------------------------------------------------- -------------------------------
Pro Forma As Adjusted
1994 1995 1996 1997 1998 1998 1998 1999 1999
------- ------- -------- -------- -------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Cash provided by
operating activities... $ 925 $ 806 $ 4,189 $ 4,523 $ 5,369 $ 8,127 $ 1,574 $ 4,048 $ 5,078
Cash used in investing
activities............. (2,146) (2,803) (15,329) (14,354) (29,738) (15,984) (5,871) (9,520) (9,520)
Cash provided by
financing activities... 1,255 1,654 11,972 9,288 24,241 7,729 4,021 5,380 5,859
Adjusted EBITDA......... 4,150 3,781 4,265 6,668 9,984 12,063 4,319 6,484 6,484
Adjusted EBITDA margin.. 30.3% 22.6% 19.6% 21.1% 26.2% 27.4% 24.0% 29.2% 29.2%
Subscribers (end of
period)................ 44,001 57,808 105,748 146,717 207,067 207,067 163,394 221,966 221,966
Average revenues per
unit (3)............... $ 32.92 $ 27.38 $ 22.14 $ 20.82 $ 17.97 $ 19.48 $ 19.37 $ 17.28 $ 17.28
Capital expenditures.... $(2,146) $(2,803) $ (4,930) $ (5,393) $ (8,759) $(8,759) $ (5,281) $ (8,739) $(8,739)
Cash dividends and
distributions (4)...... (100) (77) (334) (450) (519) -- (263) (479) --
</TABLE>
- --------
(1) See note 6 to consolidated financial statements.
(2) See note 2 to consolidated financial statements.
(3) Average revenues per unit, or ARPU, equals the net revenues for a given
period divided by the average number of subscribers during such period.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
(4) See note 6 to consolidated financial statements and "Dividend Policy."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. On December 8, 1998,
Satellink merged with the Cape Fear Paging Companies in a transaction accounted
for as a pooling of interests. All financial and operating data reflect the
merger.
Overview
Satellink is a leading regional provider of messaging and multiple personal
telecommunications services to businesses and individuals. Satellink provides
these services in smaller metropolitan areas and major cities in the
southeastern and southwestern United States. Through Satellink's proprietary
STAR*Net platform and the use of networks Satellink owns, as well as networks
owned by other companies, Satellink offers its subscribers an assortment of
service and pricing options not readily available from many of its competitors.
The low-cost STAR*Net platform allows Satellink to quickly customize its
services to meet the needs of its subscribers and expand system capacity.
Satellink's revenues consist of service, rent and maintenance revenues and
product sales. Service, rent and maintenance revenues consist of revenues from
messaging and other personal telecommunications services. Satellink bills the
fixed portion of the fees it charges for these services in advance and bills
usage-related fees in arrears. The majority of Satellink's revenues are
recurring in nature, approximately 92.1%, 93.1%, 94.1% and 92.6% for fiscal
1996, 1997 and 1998 and for the six months ended January 31, 1999,
respectively. Satellink's revenues are derived from periodic fixed and usage-
related fees charged to subscribers. While a subscriber continues to use
Satellink'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 cost of products sold consists of the cost of subscriber equipment.
Service, rent and maintenance expenses include: subcarrier, tower and
satellite channel lease costs; data delivery telephone costs; third party
carriers' airtime expenses; and network maintenance expenses. Selling and
marketing expenses include salaries, commissions, travel and administrative
costs for Satellink'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.
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 three 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 Satellink to finance acquisitions.
Accretion of stock warrants represents non-cash expense or income associated
with the put feature of the Creditanstalt warrants. The expense or income has
been calculated using a formula based on Satellink's Adjusted EBITDA. The put
feature of the Creditanstalt warrants is canceled upon completion of the
offering.
Income tax expense consists of the expense associated with one of the Cape
Fear Paging Companies. The Cape Fear Paging Companies consisted of one S
corporation and two C corporations. The income tax expense reflects the expense
associated with the C corporation. Upon the completion of the merger, which was
accounted for as a pooling of interest, each of the Cape Fear Paging Companies
was merged with a wholly-owned subsidiary of Satellink. In the future,
Satellink and the Cape Fear Paging Companies will recognize income tax expense
on a consolidated net basis.
ARPU equals the net revenues for a given period divided by the average number
of subscribers during such period. ARPU for fiscal 1996, 1997 and 1998 and for
the six months ended January 31, 1999 was $22.14, $20.82, $17.97 and $17.28,
respectively. The downward trend is the result of the acquisitions of paging
companies that primarily provide local service and competitive pressures. At
August 1, 1995, local, regional and nationwide subscribers as a percentage of
total subscribers equaled 16.7%, 58.8% and 24.5%, respectively. At January 31,
1999, local, regional and nationwide subscribers as a percentage of total
subscribers equaled 48.6%, 34.0% and 17.4%, respectively.
28
<PAGE>
Results of Operations
The following table sets forth the percentage of net revenues represented by
items in Satellink's statements of operations:
<TABLE>
<CAPTION>
Six Months
Years Ended July Ended
31, January 31,
--------------------- -------------
1996 1997 1998 1998 1999
----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance
revenues.............................. 98.0% 98.9% 97.9% 98.0% 99.0%
Product sales.......................... 8.5 7.3 6.1 5.1 7.9
----- ----- ----- ------ -----
Total revenues....................... 106.5 106.2 104.0 103.1 106.9
Cost of products sold.................. (6.5) (6.2) (4.0) (3.1) (6.9)
----- ----- ----- ------ -----
Net revenues......................... 100.0 100.0 100.0 100.0 100.0
Service, rent and maintenance
expenses.............................. 41.2 42.8 40.9 41.6 37.7
Selling and marketing expenses......... 14.1 13.6 12.5 12.2 14.5
General and administrative expenses.... 19.9 20.8 19.2 18.7 17.0
Engineering expenses................... 3.1 3.2 3.1 3.1 3.9
Depreciation and amortization.......... 10.2 13.3 13.4 12.4 12.5
Research and development............... 2.0 -- -- -- --
Nonrecurring charges................... -- -- 2.2 4.6 7.3
----- ----- ----- ------ -----
Operating income....................... 9.5 6.3 8.7 7.4 7.1
Other income (expense)................. -- 1.6 1.8 (0.4) 2.1
Interest expense....................... (4.3) (7.3) (10.0) (8.1) (10.9)
Accretion of stock warrants............ (3.9) (5.6) (1.2) (1.3) (0.5)
Writedown of offering costs............ -- -- -- -- (2.6)
----- ----- ----- ------ -----
Income (loss) before income tax
provision and extraordinary item...... 1.3 (5.0) (0.7) (2.4) (4.8)
Income tax provision................... 2.7 1.2 1.6 3.1 (0.4)
----- ----- ----- ------ -----
Loss before extraordinary item......... (1.4) (6.2) (2.3) (5.5) (5.2)
Extraordinary loss on early retirement
of debt............................... (0.6) -- -- -- --
Cumulative effect of change in
accounting principle.................. -- -- (1.7) (3.5) --
----- ----- ----- ------ -----
Net loss............................. (2.0) (6.2) (4.0) (9.0) (5.2)
Preferred stock dividends.............. (1.5) (1.4) (1.6) (1.2) (2.2)
----- ----- ----- ------ -----
Net loss attributable to common
shareholders.......................... (3.5)% (7.6)% (5.6)% (10.2)% (7.4)%
===== ===== ===== ====== =====
</TABLE>
Six Months Ended January 31, 1999 Compared to Six Months Ended January 31, 1998
Total Revenues. Total revenues increased $5.2 million, or 28.0%, to $23.8
million for the six months ended January 31, 1999 from $18.6 million for the
six months ended January 31, 1998. This increase was primarily due to growth in
subscribers both internally and from acquisitions. Total subscribers increased
58,600, or 35.9%, to 222,000 at January 31, 1999 from 163,400 at January 31,
1998. Of this increase in subscribers, internal growth accounted for 9,600 new
subscribers and two acquisitions during the period accounted for 49,000 new
subscribers. Product sales increased $871,000, or 93.8%, to $1.8 million for
the six months ended January 31, 1999 from $929,000 for the six months ended
January 31, 1998, and increased as a percentage of net revenues to 7.9% for the
six months ended January 31, 1999 from 5.1% for the six months ended
January 31, 1998. The increase in product sales and the increase in product
sales as a percentage of net revenue was primarily the result of subscriber
base growth.
29
<PAGE>
Cost of Products Sold. Cost of products sold increased $939,000, or 167.4%,
to $1.5 million for the six months ended January 31, 1999 from $561,000 for the
six months ended January 31, 1998. The gross margin on products sold decreased
to 13.1% for the six months ended January 31, 1999 from 39.7% for the six
months ended January 31, 1998. The increase in cost of products sold was
attributable to increased product sales while the decrease in gross margin was
primarily attributable to lower prices paid by customers for subscriber
equipment.
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses increased $900,000, or 12.0%, to $8.4 million for the six months ended
January 31, 1999 from $7.5 million for the six months ended January 31, 1998.
This increase reflects an increase in airtime expense paid to third party
service providers associated with subscriber base growth and related increased
telephone expenses. Telephone expenses increased due to additional telephone
facilities and increased voicemail usage. Service, rent and maintenance
expenses decreased as a percentage of net revenues to 37.7% for the six months
ended January 31, 1999 from 41.6% for the six months ended January 31, 1998.
This decrease reflects Satellink's ability to achieve certain economies of
scale as the subscriber base has grown.
Selling and Marketing Expenses. Selling and marketing expenses increased $1.0
million, or 45.5%, to $3.2 million for the six months ended January 31, 1999
from $2.2 million for the six months ended January 31, 1998. Selling and
marketing expenses increased as a percentage of net revenues to 14.5% for the
six months ended January 31, 1999 from 12.2% for the six months ended January
31, 1998. These increases reflect increased expenditures for sales and
marketing activities, advertising and the hiring of a new director of
marketing.
General and Administrative Expenses. General and administrative expenses
increased $400,000, or 11.8%, to $3.8 million for the six months ended January
31, 1999 from $3.4 million for the six months ended January 31, 1998. This
increase reflects higher office costs and customer service staffing levels
associated with subscriber base growth. This increase also relates to costs
incurred by Satellink in connection with the introduction of new STAR*Net
services. General and administrative expenses decreased as a percentage of net
revenues to 17.0% for the six months ended January 31, 1997 from 18.7% for the
six months ended January 31, 1998.
Engineering Expenses. Engineering expenses increased $314,000, or 56.5%, to
$870,000 for the six months ended January 31, 1999 from $556,000 for the six
months ended January 31, 1999. This increase reflects higher staffing levels
and costs associated with upgrading Satellink's information systems and
capabilities and the introduction of new STAR*Net services.
Depreciation and Amortization. Depreciation and amortization increased
$600,000, or 27.3%, to $2.8 million for the six months ended January 31, 1999
from $2.2 million for the six months ended January 31, 1998. This increase
reflects an increase in pagers, switches and other depreciable assets
associated with the growth of the subscriber base and amortization related to
acquired intangible assets.
30
<PAGE>
Operating Income. Operating income increased $300,000, or 23.1%, to $1.6
million for the six months ended January 31, 1999 from $1.3 million for the six
months ended January 31, 1998. This increase reflects Satellink's ability to
achieve certain economies of scale related to subscriber base growth.
Interest Expense. Interest expense increased $900,000, or 60%, to $2.4
million for the six months ended January 31, 1999 from $1.5 million for the six
months ended January 31, 1998. This increase primarily reflects the growth in
the debt outstanding under the credit facility due to acquisitions completed
during the second half of fiscal 1997.
Accretion of Stock Warrants. Accretion of stock warrants decreased $110,000,
or 48.0%, to $119,000 for the six months ended January 31, 1999 from $229,000
for the six months ended January 31, 1998. Changes in the value of the warrants
are based on a formula contained in the put feature of the Creditanstalt
warrants.
Income Tax Expense. Income tax expense decreased $470,000, or 84.2%, to
$88,000 for the six months ended January 31, 1999 from $558,000 for the six
months ended January 31, 1999.
Net Loss. Net loss decreased $500,000, or 31.3%, to $1.1 million for the six
months ended January 31, 1999 from $1.6 million for the six months ended
January 31, 1998. This increase reflects the factors described above. Excluding
the effect of the accretion of stock warrants, net loss decreased $400,000, or
28.6%, to $1.0 million for the six months ended January 31, 1999 from $1.4
million for the six months ended January 31, 1998.
Fiscal Year Ended July 31, 1998 Compared to Fiscal Year Ended July 31, 1997
Total Revenues. Total revenues increased $6.2 million, or 18.5%, to $39.7
million for fiscal 1998 from $33.5 million for fiscal 1997. This increase was
primarily due to growth in subscribers both internally and from acquisitions.
Total subscribers increased 60,400, or 41.2%, to 207,100 at July 31, 1998 from
146,700 at July 31, 1997. Of this increase in subscribers, internal growth
accounted for 9,600 new subscribers and four acquisitions during the period
accounted for 50,800 new subscribers. Product sales increased $7,000, or 0.3%,
to $2.3 million for fiscal 1998, but decreased as a percentage of net revenues
to 6.1% for fiscal 1998 from 7.3% for fiscal 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.
Cost of Products Sold. Cost of products sold decreased $500,000, or 25.0%, to
$1.5 million for fiscal 1998 from $2.0 million for fiscal 1997. The gross
margin on products sold increased to 34.8% for fiscal 1998 from 15.0% for
fiscal 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 the declining cost for subscriber equipment.
31
<PAGE>
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses increased $2.1 million, or 15.4%, to $15.6 million for fiscal 1998
from $13.5 million for fiscal 1997. This increase reflects an increase in
airtime expenses paid to third party service providers associated with
subscriber base growth and related increased telephone expenses. Telephone
expenses increased due to additional telephone facilities and increased
voicemail usage. Service, rent and maintenance expenses decreased as a
percentage of net revenues to 40.9% for fiscal 1998 from 42.8% for fiscal 1997.
This decrease reflects Satellink's ability to achieve certain economies of
scale as the subscriber base has grown.
Selling and Marketing Expenses. Selling and marketing expenses increased
$500,000, or 11.6%, to $4.8 million for fiscal 1998 from $4.3 million for
fiscal 1997. This increase reflects increased expenditures for sales and
marketing activities, including the hiring and compensation of additional sales
representatives, and advertising. Selling and marketing expenses decreased as a
percentage of net revenues to 12.5% for fiscal 1998 from 13.6% for fiscal 1997.
General and Administrative Expenses. General and administrative expenses
increased $700,000, or 10.6%, to $7.3 million for fiscal 1998 from $6.6 million
for fiscal 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 Satellink in connection with the introduction
of new STAR*Net services. General and administrative expenses decreased as a
percentage of net revenues to 19.2% for fiscal 1998 from 20.8% for fiscal 1997.
Engineering Expenses. Engineering expenses increased $203,000, or 20.4%, to
$1.2 million for fiscal 1998 from $997,000 for fiscal 1997. This increase
reflects higher staffing levels and costs associated with upgrading Satellink's
information systems and capabilities and the introduction of new STAR*Net
services.
Depreciation and Amortization. Depreciation and amortization increased
$900,000, or 21.4%, to $5.1 million for fiscal 1998 from $4.2 million for
fiscal 1997. This increase reflects an increase in pagers, switches and other
depreciable assets associated with the growth of the subscriber base and
amortization related to acquired intangible assets.
Operating Income. Operating income increased $1.3 million, or 65.0%, to
$3.3 million for fiscal 1998 from $2.0 million for fiscal 1997. The fiscal 1998
results include an $834,000 one-time charge for the write-down of traditional
paging terminals removed from service in connection with Satellink's
implementation of its STAR*Net platform and the write-off of assets associated
with Satellink's previous billing system which was replaced. Excluding the one-
time charge, operating income would have been $4.1 million for fiscal 1998, a
108.8% increase over fiscal 1997.
Interest Expense. Interest expense increased $1.5 million, or 65.2%, to $3.8
million for fiscal 1998 from $2.3 million for fiscal 1997. This increase
primarily reflects the growth in the debt outstanding under the credit facility
due to acquisitions completed during the second half of fiscal 1997 and fiscal
1998, and to a lesser extent, higher bank lending rates during fiscal 1998.
32
<PAGE>
Accretion of Stock Warrants. Accretion of stock warrants expense decreased
$1.4 million, or 77.8%, to $450,000 for fiscal 1998 from $1.8 million for
fiscal 1997.
Income Tax Expense. Income tax expense increased $240,000, or 61.5%, to
$630,000 for fiscal 1998 from $390,000 for fiscal 1997.
Net Loss. Net loss decreased $500,000, or 25.0%, to $1.5 million for fiscal
1998 from $2.0 million for fiscal 1997. This decrease reflects the factors
described above. Excluding the effect of the accretion of stock warrants, the
one-time charge for the write-down of traditional paging terminals removed from
service in connection with Satellink's implementation of its STAR*Net platform,
the write-off of assets associated with Satellink's previous billing system
that was replaced and the cumulative effect of a change in accounting
principle, net income increased $584,000 to $391,000 for fiscal 1998 from a
loss of $193,000 for fiscal 1997.
Fiscal Year Ended July 31, 1997 Compared to Fiscal Year Ended July 31, 1996
Total Revenues. Total revenues increased $10.4 million, or 45.0%, to $33.5
million for fiscal 1997 from $23.1 million for fiscal 1996. This increase was
primarily due to growth in subscribers both internally and from acquisitions.
Total subscribers increased 41,000, or 38.8%, to 146,700 at July 31, 1997 from
105,700 at July 31, 1996. Of this increase in subscribers, internal growth
accounted for 14,600 new subscribers and six acquisitions during the period
accounted for 26,400 new subscribers. Results for fiscal 1997 include 12 months
of operations of C.R., Inc. and Atlanta Voice Page, Inc., which were acquired
in February and June, 1996, respectively, and through which Satellink added
22,000 paging subscribers. Also during fiscal 1997, Satellink completed four
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 $500,000, or 27.8%, to $2.3 million for fiscal
1997 from $1.8 million for fiscal 1996. This increase was related to subscriber
base growth. Product sales decreased as a percentage of net revenues to 7.3%
for fiscal 1997 from 8.5% for fiscal 1996. This decrease reflects increased
voicemail and other services revenues which do not require subscriber
equipment.
Cost of Products Sold. Cost of products sold increased $600,000, or 42.9%, to
$2.0 million for fiscal 1997 from $1.4 million for fiscal 1996. This increase
was associated with continued subscriber base growth. Gross margin on products
sold decreased to 13.0% for fiscal 1997 from 22.2% for fiscal 1996. This
decrease was primarily attributable to lower prices paid by customers for
subscriber equipment.
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses increased $4.5 million, or 50.0%, to $13.5 million for fiscal 1997
from $9.0 million for fiscal 1996. This increase reflects an increase in
airtime expense paid to third party service providers and in subcarrier and
tower lease expenses primarily associated with the acquisitions of C.R., Inc.
and Atlanta Voice Page, Inc. Results of operations for C.R., Inc. and Atlanta
Voice Page, Inc. are reflected for all of fiscal 1997 but are included only in
the last two months and six months, respectively, of fiscal 1996. Telephone
expenses increased
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as a result of additional telephone facilities and increased voicemail usage.
Service, rent and maintenance expenses increased as a percentage of net
revenues to 42.8% for fiscal 1997 from 41.2% for fiscal 1996. This increase
primarily reflects increases in telephone and airtime costs as a percentage of
net revenues.
Selling and Marketing Expenses. Selling and marketing expenses increased
$1.2 million, or 38.7%, to $4.3 million for fiscal 1997 from $3.1 million for
fiscal 1996. This increase reflects increased expenditures for sales and
marketing activities, including the hiring and compensation of additional sales
representatives, and advertising. Selling and marketing expenses decreased as a
percentage of net revenues to 13.6% for fiscal 1997 from 14.1% for fiscal 1996.
General and Administrative Expenses. General and administrative expenses
increased $2.3 million, or 53.5%, to $6.6 million for fiscal 1997 from $4.3
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 20.8% for fiscal 1997 from 19.9% for fiscal 1996.
Engineering Expenses. Engineering expenses increased $328,000, or 49.0%, to
$997,000 for fiscal 1997 from $669,000 for fiscal 1996. This increase reflects
higher staffing levels associated with the subscriber base growth and related
systems.
Depreciation and Amortization. Depreciation and amortization increased $2.0
million, or 90.9%, to $4.2 million for fiscal 1997 from $2.2 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 decreased $100,000, or 4.8%, to $2.0
million for fiscal 1997 from $2.1 million for fiscal 1996.
Interest Expense. Interest expense increased $1.4 million, or 154.0%, to $2.3
million for fiscal 1997 from $909,000 for fiscal 1996. This increase primarily
reflects the growth in the debt outstanding under the credit facility due to
acquisitions during fiscal 1997 and the second half of fiscal 1996 and, to a
lesser extent, higher interest rates during fiscal 1997.
Accretion of Stock Warrants. Accretion of stock warrants expense increased
$946,000, or 110.8%, to $1.8 million for fiscal 1997 from $854,000 for fiscal
1996.
Income Tax Expense. Income tax expense decreased $188,000, or 32.5%, to
$390,000 for fiscal 1997 from $578,000 for fiscal 1996.
Net Loss. Net loss increased $1.6 million, or 372.1%,to $2.0 million for
fiscal 1997 from $430,000 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
loss increased $740,000, or 136.0%, to $200,000 for fiscal 1997 from net income
of $556,000 for fiscal 1996.
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Liquidity and Capital Resources
Satellink has met its primary cash requirements from borrowings under the
credit facility and cash flows from operations. Borrowings under the credit
facility have been used to fund acquisitions, capital expenditures and general
corporate needs. Satellink had outstanding borrowings under the credit facility
of $12.6 million, $18.8 million and $38.3 million as of July 31, 1996, 1997 and
1998, respectively, and $52.8 million as of January 31, 1999. The credit
facility was increased in October 1998 to $55.0 million from $40.0 million. The
credit facility carries a variable rate of interest based on, at Satellink's
election, Bank Austria Creditanstalt's prime rate plus 2% or LIBOR plus 4%. The
credit facility is secured by substantially all of Satellink's assets.
Satellink's cash balances were $1.2 million, $666,000 and $538,000 at July
31, 1996, 1997 and 1998, respectively, and $445,000 at January 31, 1999. Net
cash provided by operating activities was $4.2 million, $4.5 million and $5.4
million for the years ended July 31, 1996, 1997 and 1998, respectively, and
$4.0 million for the six months ended January 31, 1999.
Adjusted EBITDA was $4.3 million, $6.7 million and $10.0 million for the
years ended July 31, 1996, 1997 and 1998, respectively, and $6.5 million for
the six months ended January 31, 1999. As a percentage of revenues, Adjusted
EBITDA was 19.6%, 21.1% and 26.2% for the years ended July 31, 1996, 1997 and
1998, respectively, and 29.3% for the six months ended January 31, 1999.
Net cash used in investing activities was $15.3 million, $14.4 million and
$29.7 million for the years ended July 31, 1996, 1997 and 1998, respectively,
and $9.5 million for the six months ended January 31, 1999. Investing
activities during fiscal 1996 included $10.4 million for acquisitions and $4.9
million net purchases of property and equipment. Investing activities during
fiscal 1997 included $9.0 million for acquisitions and $5.4 million net
purchases of property and equipment. Investing activities during fiscal 1998
included $21.0 million for acquisitions and $8.8 million net purchases of
property and equipment. Investing activities during the six months ended
January 31, 1999 included $781,000 for acquisitions and $8.7 million net
purchases of property and equipment.
Net cash provided by financing activities was $12.0 million, $9.3 million and
$24.2 million for the years ended July 31, 1996, 1997 and 1998, respectively,
and $5.4 million for the six months ended January 31, 1999. Cash provided by
financing activities for fiscal 1996 included $8.6 million of proceeds from the
issuance of long-term debt, $3.5 million of 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. Cash provided by
financing activities for fiscal 1997 included $10.0 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. Net cash provided by financing activities for fiscal 1998 included
$20.4 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
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proceeds from the issuance of common stock, partially offset by $519,000 of
dividends on Series A preferred stock, Series C preferred stock and Series D
preferred stock and $206,000 of other financing activities. Cash provided by
financing activities for the six months ended January 31, 1999 included $6.0
million from the issuance of long term debt, partially offset by $479,000 of
dividends on Series A preferred stock, Series C preferred stock and Series D
preferred stock, and $150,000 of other financing activity.
Satellink had negative working capital of $1.8 million and $3.1 million at
July 31, 1997 and 1998, respectively, and working capital of $2.3 million at
January 31, 1999.
On April 3, 1998, Satellink issued $4.5 million of Series D preferred stock,
a portion of the proceeds of which was used to finance the acquisition of
Premier Paging and Hyde's Stay in Touch. The acquisition of Premier 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, Satellink borrowed $11.4 million under the credit facility to
finance the acquisition of Hyde's Stay in Touch, Inc. and other working capital
purposes. Satellink 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. This indebtedness matures as follows:
. $2.8 million during fiscal 2000;
. $3.8 million during fiscal 2001;
. $3.8 million during fiscal 2002;
. $3.8 million during fiscal 2003; and
. $38.5 million during fiscal 2004.
While there can be no assurance, Satellink 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 Satellink's anticipated needs for
working capital for the next 12 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. Satellink has no present plans to
make any other significant capital expenditures.
Impact of Year 2000
Many existing computer hardware and software systems are designed to use two
digits to identify a year in date fields, such as "99" for "1999." A system is
Year 2000 compliant if it can recognize the difference between the years "1900"
and "2000." If they are not Year 2000 compliant, these systems could fail or
could create erroneous results when working with dates beyond the year 1999.
This is commonly referred to as the "Year 2000 issue." Satellink believes that
the Year 2000 issue may affect it through its services and internal operations.
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Readiness Status
Satellink has substantially completed its assessment of the state of
readiness of its services and its internal operations. Satellink has
implemented plans intended to ensure that all of its services as well as its
internal operations will be Year 2000 compliant. These plans, which were
developed by internal personnel without third party assistance, are described
below.
Satellink designed the STAR*Net platform to be Year 2000 compliant. The
STAR*Net platform is based on Microsoft's MS-DOS 6.22 operating system, which
Microsoft has certified to be Year 2000 compliant. In 1998, Satellink tested
STAR*Net for Year 2000 compliance on several hardware platforms and found no
failures.
Satellink uses three switches manufactured by Glenayre Electronics. They are
the GL-3000 paging terminal, the GL-3900 TAS terminal and the MVP voice mail
terminal. These three terminals are not Year 2000 compliant. Glenayre has
produced a Year 2000 compliant software upgrade to each terminal which is
presently available. However, Satellink has elected to retire these terminals
and migrate the existing customers to STAR*Net platforms by October 1999. If
for any reason the Glenayre terminals must remain in use after October 1999,
Satellink will purchase and install the Glenayre software upgrades at a total
estimated cost of $28,000. Glenayre has assured Satellink that it will continue
to support these terminals after the Year 2000.
Satellink delivers paging services by broadcasting messages over various
paging networks, some of which it owns and some of which are owned by third
parties. Satellink has tested the paging networks that it owns and has found
them to be Year 2000 compliant. Satellink also has received written assurances
from the operators of the other paging networks that these paging networks are
Year 2000 compliant. However, if any of the paging networks tested by Satellink
are not Year 2000 compliant, it could negatively affect the functionality of
Satellink's paging services.
Although Satellink believes that its services currently are, or by October
1999 will be, Year 2000 compliant, Satellink cannot guarantee that its current
or future services, or those of the paging networks used by it, contain or will
contain all necessary date code changes or that errors will not be found later.
The costs to resolve any resulting Year 2000 related problems could negatively
impact Satellink's business, financial condition and operating results.
Satellink has identified and assessed the Year 2000 readiness of most of the
material information technology and non-information technology systems,
including accounting systems, billing systems, telephone equipment and systems,
and telephone service providers, used internally as part of Satellink's
operations, but such work is ongoing. Satellink's only accounting system is the
Real World Accounting system, which is not Year 2000 compliant. However,
Satellink has ordered a Year 2000 compliant upgrade, which is scheduled to be
installed by May 1, 1999 at a total estimated cost of $3,000.
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Satellink uses billing systems provided by In-Touch and by Beep Plus. Both
companies have certified that their systems are Year 2000 compliant. The In-
Touch system uses a Unix operating system that does not rely on 2-digit values
for the year, which minimizes the chance of a Year 2000 problem. The Beep Plus
system uses the Microsoft MS-DOS 6.22 system, which Microsoft has certified to
be Year 2000 compliant. Additionally, Satellink developed a portion of its
billing software using Microsoft Access, which Microsoft has certified to be
Year 2000 compliant.
Satellink uses office telephone systems and equipment from three major
vendors: Siemens, Toshiba and Lucent. These vendors have certified that their
equipment is Year 2000 compliant. Satellink also uses call-tracking software
from Tap-it Software. This software in its present configuration is not Year
2000 compliant. Satellink has ordered an update to this system that has been
certified to be Year 2000 complaint, and Satellink expects that this update
will be installed and tested by April 1, 1999. The total estimated cost of this
upgrade is $1,000. Satellink uses the telephone services of most of the major
telephone companies, including BellSouth, GTE, MCI WorldCom, Sprint and
Southwestern Bell. These vendors have certified the Year 2000 readiness of the
services used by Satellink.
Satellink continues to assess and test its remaining internal operating
systems for Year 2000 compliance. Satellink expects its testing of these
remaining systems to be complete by October 1999. Satellink believes that it
has appropriate plans in place to achieve timely Year 2000 readiness for all of
its internal systems. Satellink believes further that the costs of the
remaining assessment, testing and any required remediation will not be
significant. However, Satellink's on-going assessment and testing program may
in the future reveal Year 2000 issues which are not currently identified or
fully understood.
As indicated above, Satellink depends heavily on third party providers for
most of its critical internal operating systems, as well as for certain
critical aspects of the services that it provides. If these third party
providers are incorrect in their certifications that their services are Year
2000 compliant, Satellink's business, financial condition and operating results
could be negatively affected.
Satellink's services as well as its internal operations also could be
negatively impacted by Year 2000 issues affecting vendors and other third
parties with which Satellink has relationships, such as utilities, distributors
and banks. Satellink has gathered written materials published by all third
parties upon which Satellink's services and internal operations significantly
depend or have otherwise communicated directly with such third parties to
determine the Year 2000 readiness of their business operations or the services
they supply to Satellink. While Satellink has collected many responses and
other materials from such third parties regarding their Year 2000 readiness,
the process is ongoing. Satellink expects to have received information on all
third parties upon which it significantly relies by October 1999. Satellink is
not certain that the Year 2000 issue will be properly and timely resolved by
all of the third parties upon which it relies. If not so resolved, it could
negatively affect Satellink's business, financial condition and operating
results.
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Costs to Address the Year 2000 Issue
Satellink has incurred approximately $50,000 in costs to make its services
and internal systems Year 2000 compliant. Other than an additional $28,000 that
Satellink would incur if it purchases the Glenayre software update for its
Glenayre switches, Satellink does not expect to incur material additional costs
to remedy any remaining Year 2000 problems with its services and internal
systems. However, Satellink cannot currently assess the costs of remedying
problems resulting from the Year 2000 issues of others. If the costs of
remedying these Year 2000 problems prove to be significant, it may negatively
affect Satellink's business, financial condition and operating results.
Risks
Satellink's business is heavily dependent upon the constant availability of
telecommunications services and other utilities. As a result, Satellink
currently believes that the most reasonably likely worst case Year 2000
scenario would involve the temporary interruption of telephone, electric power
or other utility supplies to Satellink's facilities due to a failure of a
utility supplier to be Year 2000 compliant. In addition, despite assurances and
testing, it is also possible that the services or internal systems of some of
the third parties upon which Satellink significantly depends may not be Year
2000 compliant. Such failure could negatively affect Satellink's business,
financial condition and operating results.
In addition, "business interruption" litigation may arise out of the Year
2000 issue. Satellink is not aware of any possible claim against it arising
from instances of business interruption. However, Satellink cannot assure that
customers or others will not bring Year 2000 related claims against Satellink.
Any such claims, with or without merit, could be time consuming and expensive
for Satellink to defend or resolve. Any adverse outcome in any such litigation
could subject Satellink to significant liability. As a result, business
interruption litigation could negatively affect Satellink's business, financial
condition and operating results.
Contingency Plans
Satellink has not established a contingency plan to address the most
reasonably likely worst case scenario described above. Satellink is currently
considering whether it is feasible to attempt to develop a contingency plan
that could address such a far-reaching worst case scenario.
Cautionary Statements
The continued assessment, progress and timing of Satellink's Year 2000
readiness efforts and potential exposures as described above depend upon the
cooperation and responsiveness of third parties, the accuracy and reliability
of responses provided and testing procedures, and the availability of skilled
resources, both internal and external, to address Year 2000 issues that exist
or may arise. There can be no assurance that assessments to date will prove to
be accurate. Serious deficiencies which are not currently identified or fully
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understood may arise in the future and may negatively affect Satellink's
business, financial condition and operating results. Satellink plans to
continue its assessment of Year 2000 issues and develop appropriate contingency
plans where necessary in an effort to minimize potential exposure to the Year
2000 issue.
Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports 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
Satellink's financial statements.
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BUSINESS
General
Founded in 1988, Satellink is a leading regional provider of messaging and
multiple personal telecommunications services to businesses and individuals.
Satellink provides these services in smaller metropolitan areas and major
cities in the southeastern and southwestern United States. Satellink has
increased its subscriber base through internal growth and acquisitions from
approximately 105,700 subscribers as of July 31, 1996 to approximately 222,000
subscribers as of January 31, 1999.
In 1995, Satellink began development of its proprietary STAR*Net platform in
anticipation of increased demand for multiple personal telecommunications
services from a single provider. The STAR*Net platform allows Satellink to
provide messaging services and other personal telecommunications services to
businesses and individuals in smaller markets not generally targeted by major
providers. Current services provided by the STAR*Net platform when combined
with services under development will allow us to offer unified messaging
services. If an existing subscriber is only purchasing a few STAR*Net services,
we will try to sell more STAR*Net services to that subscriber. We will also try
to use our STAR*Net services to attract new subscribers who would otherwise use
multiple providers to fulfill their personal telecommunications needs.
Through the STAR*Net platform, which integrates readily available and
relatively inexpensive hardware with Satellink's proprietary software,
Satellink provides its subscribers messaging and other personal
telecommunications services marketed under the STAR*Net name.
Some of our current STAR*Net services are:
. single telephone number access to paging, voicemail and long distance;
. ""find me" services;
. prepaid calling cards;
. postpaid long distance calling cards;
. inbound 1-800 service;
. the ability to originate a phone call from within a subscriber's
voicemail; and
. Internet e-mail delivery via alphanumeric pager.
At a cost of approximately $25,000 per platform, each STAR*Net platform costs
significantly less than a comparable switching platform. This allows Satellink
to offer its services in smaller markets where the implementation of a more
expensive platform is not economically justified. Satellink believes that the
STAR*Net platform's flexibility, ease of expansion and relatively low cost of
implementation provide a competitive advantage by allowing it to quickly add
and customize services.
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Satellink delivers paging services by broadcasting messages over the
following networks:
. an FM subcarrier network that it owns in Alabama, Georgia, Kentucky and
Tennessee and that is 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;
. VHF and UHF paging networks in Georgia and Louisiana that it owns; and
. VHF, UHF, 900 MHz and narrowband PCS paging networks operated by third
parties from which Satellink purchases and resells local, regional and
nationwide service.
Satellink has exclusive regional distribution rights on the CUE system in the
areas where it owns the network as well as in North Carolina, southern
Louisiana and Dallas/Fort Worth. Satellink's use of the STAR*Net platform and
multiple networks in its market areas allows Satellink to offer an assortment
of service and pricing options not readily available from many of its
competitors.
Satellink's principal executive offices are located at 4400 River Green
Parkway, Suite 100, Duluth, Georgia 30096, and the telephone number is (770)
814-5499. Satellink maintains a website on the Internet at www.satellink.net.
Information contained in the website is not part of this prospectus.
Industry
The telecommunications industry has been characterized by high levels of
competition and consolidation over the past 15 years as a result of
deregulation and the breakup of AT&T. The Telecom Act further increased
competition by allowing many telecommunications companies to enter markets from
which they were previously excluded. One result was further industry
consolidation as companies acquired other companies in their market segment as
well as companies in different market segments. Additionally, many companies
are attempting to broaden their product and service offerings and sell those
products to existing and new customers. Many companies which once regarded
themselves as primarily long distance carriers, local exchange carriers, paging
companies, cellular companies, cable companies or Internet service providers
now compete with each other. For example, Satellink's messaging and multiple
personal telecommunications services now compete with services offered by
companies as diverse as BellSouth, MCI WorldCom and Premiere Technologies, as
well as traditional paging and voice messaging competitors.
Satellink believes that the principal factors influencing financial results
in the telecommunications industry are price, cost of service, customer
acquisition cost, customer attrition, and the ability to sell multiple
services, which increases the revenue per customer. As the industry continues
to consolidate, Satellink believes that these factors will become increasingly
important.
The messaging and multiple personal telecommunications industry is large and
growing. The industry information in this paragraph and the next paragraph is
included in or derived from a 1998 report entitled The State of the Paging
Industry prepared by The Strategis Group. The U.S. paging industry had 48.2
million subscribers at December 31, 1997 and was estimated to grow to 53.4
million by December 31, 1998, an annual growth rate of
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10.8%. From 1990 through 1997, the number of subscribers grew from 9.9 million
to 48.2 million, a compound annual growth rate of 25.4%. From December 31, 1997
through 2002, the number of paging subscribers is forecast to grow at a
compound annual rate of 7.4%, reaching penetration of approximately 24% of the
U.S. population. Paging industry revenue was approximately $5.2 billion in
1997, with average revenues per unit of $9.57. For 1998, revenue is estimated
to be $6.2 billion, with average revenues per unit of $10.17. In a 1998 report
entitled The State of the Paging Industry, The Strategis Group forecast that in
2002 industry revenue and average revenues per unit will be $8.6 billion and
$10.69, respectively. The U.S. paging market is serviced by over 2,000 paging
companies. Of these companies, the five largest served approximately 51.0% of
the total subscribers as of December 31, 1997.
An important development in the paging market has been the recent development
of advanced messaging services, which include guaranteed messaging, two-way
text messaging and voice messaging. Advanced messaging was estimated to account
for approximately 600,000 subscribers as of December 31, 1998, or approximately
1.1% of the paging market. In its 1998 report, The Strategis Group forecast
that advanced messaging will grow to approximately 8.4 million subscribers, or
12.2% of the paging market, by 2002.
Another trend that provides growth opportunities for messaging and
telecommunications companies is unified messaging. Unified messaging allows a
subscriber to retrieve messages sent to a voice mailbox, pager, fax machine or
e-mail address through a number of methods. As the telecommunications industry
is increasingly focusing on user-friendly messaging capabilities, voicemail
companies, local exchange carriers, competitive local exchange carriers, and
Internet service providers are offering unified messaging. In the November 30,
1998 issue of Telephony, The Pelorus Group estimated that worldwide unified
messaging revenues could grow from $26.8 million in 1997 to $2.3 billion in
2002. Additionally, in the January 4, 1999 issue of RCR, Ovum estimated that
the global unified messaging market will reach $31 billion by 2006. The Pelorus
Group estimated in the same article that in the United States unified messaging
revenues could grow to $970 million by 2002. Ovum also estimated that by 2006
more than one-third of households and 75% of businesses in the United States
will subscribe to services that include unified messaging.
Growth Strategy
Satellink's primary objective is to become a leading national provider of
messaging and multiple personal telecommunications services. Satellink intends
to achieve its objective by pursuing the following strategies:
. Focus on Niche Markets. Satellink targets smaller metropolitan markets
throughout the southeastern and southwestern United States that it
believes are underserved by larger providers of personal
telecommunications services, who focus on more densely populated
metropolitan areas. Satellink 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 to obtain new subscribers in
smaller metropolitan markets. While
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Satellink serves larger markets, smaller markets are attractive to
Satellink because management believes these markets have reduced
competition for personal telecommunications services, limited
availability of competitive services and lower market penetration rates
for personal telecommunications services. Satellink also focuses on
providing regional and national coverage, which generates higher revenue
per subscriber as compared to local coverage. Approximately 18% of
Satellink paging subscribers currently utilize nationwide coverage
paging services as compared to approximately 8% of total paging
subscribers in the United States who used such services as of December
31, 1997. Satellink believes this reflects its ability to serve mobile
individuals who require the broad, uninterrupted coverage area provided
by Satellink.
. Capitalize on Enhanced STAR*Net Services to Attract New
Subscribers. Satellink intends to attract new subscribers by continuing
to aggressively market its STAR*Net services. Satellink believes that
the introduction of the STAR*Net services has expanded its target market
because potential new subscribers now include users of multiple personal
telecommunications services in addition to users of traditional paging
and voicemail services. In addition, Satellink believes that businesses
and individuals who currently use multiple providers for their personal
telecommunications needs will be attracted to Satellink because
Satellink is able to provide subscribers with a suite of services and a
single bill for all of their services. During the six-month period ended
January 31, 1999, approximately 45% of new STAR*Net subscribers selected
enhanced services in addition to traditional messaging services.
. Expand Subscriber Base Through Acquisitions. Satellink intends to
continue increasing its subscriber base and its opportunities to sell
STAR*Net services to its subscribers by identifying and acquiring
providers of paging, voicemail and other personal telecommunications
services. Based on its experience acquiring and integrating 13 paging
and voicemail operators since January 1996, Satellink believes that
acquisitions will generate cost savings through integration of acquired
companies, particularly from its increased purchasing power for
equipment and airtime and other resulting economics of scale. Any cost
savings would effectively reduce the multiple paid for acquired
companies, thereby increasing Satellink's return on invested capital.
Satellink intends to continue to focus on smaller acquisition candidates
because it expects larger providers to focus increasingly on internal
growth and larger acquisitions, decreasing competition for smaller
acquisition candidates.
. Cross-Market STAR*Net Services to Existing and Acquired Subscribers.
Satellink will try to sell additional STAR*Net services to its existing
and acquired subscribers. Satellink believes that its subscribers are
mobile individuals who are likely to use multiple personal
telecommunications services. Satellink believes these subscribers are
more likely to purchase these services from Satellink because:
. Satellink owns the subscribers' access numbers and is able to
offer them the ability to change service plans and coverage areas
without changing access numbers;
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. Satellink has developed a proprietary unified billing system that
enables it to provide its subscribers with a single bill for all
of Satellink's personal telecommunications services; and
. subscribers are familiar with Satellink and have purchased
services from it in the past.
. Develop New STAR*Net Services. Satellink intends to develop new STAR*Net
services and offer them along with existing STAR*Net services. These
combined services will constitute a unified messaging service and
provide Satellink with additional marketing opportunities to existing
and new subscribers. Services under development include Internet-based
conference calling, local access voicemail between cities, text-to-
speech playback of e-mail messages and narrowband PCS.
Acquisitions
Acquisitions have contributed significantly to Satellink's growth. The
following table provides a summary of acquisitions in which Satellink acquired
more than 5,000 subscribers. Satellink paid an aggregate cash consideration of
approximately $34.0 million and issued approximately 2.5 million shares of its
common stock in connection with these acquisitions.
<TABLE>
<CAPTION>
Approximate
Date Number
Name of Acquired Company Locations Acquired of Subscribers
----------------------------- ----------------------- ------------- --------------
<C> <S> <C> <C>
Cape Fear Paging Companies...
Nashville and Jackson, December 1998 59,000
TN, Raleigh and
Fayetteville, NC
Hyde's Stay in Touch, Inc. .. Shreveport, Monroe and May 1998 39,000
Alexandria, LA
Premier Paging, Inc. ........ Baton Rouge, New April 1998 10,000
Orleans, Denham Springs
and Hammond, LA
Message World................ Atlanta, GA February 1997 5,300
C.R., Inc. .................. Dallas, TX May 1996 10,500
Atlanta Voice Page, Inc. .... Atlanta, GA February 1996 11,500
</TABLE>
Since January 1996 Satellink has completed seven additional acquisitions for
aggregate consideration of approximately $3.0 million. Through these
acquisitions, Satellink acquired approximately 8,900 paging subscribers,
generally in smaller metropolitan markets. Satellink 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 --
Acquisitions could negatively affect our operations, financial performance and
stock price" and "Use of Proceeds."
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Services
Satellink provides a wide variety of messaging and other 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. Satellink's current services combined with its services
under development will allow Satellink to offer unified messaging services. The
following table summarizes each of Satellink's current and planned services.
<TABLE>
<CAPTION>
Current Services
----------------
<C> <S>
STAR*Paging Satellink provides a variety of local, regional or
national paging services through traditional, FM and
third party networks. Satellink's paging network is
able to reach 95% of the population of the United
States and Canada.
STAR*Message Satellink provides subscribers with an outsourced
voicemail solution that allows subscribers to avoid
the capital investment necessary to establish their
own stand alone voicemail system.
STAR*FindMe Satellink provides 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 Satellink enables a subscriber to place worldwide
long distance calls from the United States while
accessing the STAR*Net voicemail box, thereby
allowing the subscriber 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 postpaid Satellink calling cards to place
long distance calls.
One number services Satellink enables a subscriber to change coverage
area or type of service without changing the
subscriber's local or 1-800 access number.
STAR*Toll Free Satellink provides a subscriber the opportunity to
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.
STAR*MeetMe Satellink enables a subscriber to initiate a
conference call from any telephone with up to 16
participants without operator assistance.
STAR*Mail Satellink enables a subscriber to receive an e-mail
message via an alphanumeric pager.
MessageLink.Net Satellink provides a subscriber unlimited Internet
access service for $19.95 per month.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Services Under Development
--------------------------
<C> <S>
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.
STAR.Conference An individual would be able to initiate, monitor
and manage conference calls with up to eight
participants via Satellink's website.
</TABLE>
Paging Infrastructure
Satellink operates multiple networks and has reseller and other arrangements
with third parties which enable Satellink to distribute its services in ways
that address the needs of a variety of subscribers. The majority of these
services utilize Satellink's FM and traditional paging 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 Satellink to
reach over 95% of the population of the United States and Canada and covers
60,000 miles of interstate highway. Despite Satellink's multiple networks,
there can be no assurance that Satellink's subscribers will not experience
downtime due to the failure of Satellink's network, a third party's network on
which Satellink relies or any of Satellink's switching facilities or its
STAR*Net platforms. See "Risk Factors -- Technical failures and natural
disasters could interrupt service on our networks and the STAR*Net platform."
FM Network
Satellink's FM network operates by broadcasting on the sideband of FM radio
stations in Alabama, Georgia, Kentucky and Tennessee. Satellink has entered
into agreements with approximately 55 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, Satellink 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 Satellink to enter a new local
market by installing equipment to inject 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 Satellink's FM network are broadcast from
approximately 55 radio stations. Satellink's pagers are programmed to scan the
FM
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<PAGE>
frequency spectrum to locate a station broadcasting Satellink's 57 KHz paging
signal, allowing subscribers to move within the coverage area without
interruption of paging service. Satellink'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 Satellink 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. Satellink
offers regional, nationwide and North American paging through the CUE network,
and CUE bills Satellink for paging distribution depending on the coverage
provided. Additionally, Satellink pays a co-operative advertising fee to CUE
based on the number of Satellink pagers connected to the CUE network. See "Risk
Factors -- CUE Paging Corporation might not maintain the network upon which we
are dependent."
Traditional Paging Networks
Satellink has developed or acquired traditional paging networks in Georgia,
Kentucky, Louisiana, North Carolina and Tennessee. The traditional paging
network broadcasts messages on VHF, UHF and 900 MHz. These messages are
broadcast from transmitters owned by Satellink. Such transmitters are mounted
on radio towers owned by third parties who lease tower space to Satellink and
other broadcasters of radio and other transmissions. Each transmitter owned by
Satellink is operated pursuant to an FCC-issued license. See "-- Government
Regulation."
Third Party Carrier Network
In addition to maintaining its own traditional paging network, Satellink's
equipment is linked with traditional regional and nationwide paging networks
owned and operated by third parties, including PageNet, Preferred Networks,
Inc., Metrocall, Inc., BestCom and others. Paging data is transferred from
Satellink's system to the third party network, which then transmits the data
over its network. Satellink has entered into a nationwide resale agreement with
PageNet pursuant to which Satellink can resell PageNet airtime anywhere in the
United States. Under this reseller agreement, Satellink 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. Satellink is also a
party to a national reseller agreement with SkyTel pursuant to which Satellink
can resell SkyTel's one-way and two-way nationwide paging services.
The STAR*Net Platform
Incoming calls to or from Satellink's subscribers are received by either a
traditional switching platform or by the STAR*Net platform. Traditional
switching platforms provide only for the delivery of paging and voicemail
messages. The STAR*Net platform allows Satellink 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,
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<PAGE>
such as switched 1-800 service and, in the future, the Internet. In addition,
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 Satellink'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,
Satellink can switch a subscriber between paging networks with different
coverage areas or 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 readily
available and relatively inexpensive hardware combined with Satellink's
proprietary software. A STAR*Net platform is generally located in each of
Satellink's markets, thereby providing access to Satellink's multiple networks.
Subscribers in market areas where a separate STAR*Net platform has not been
installed may still obtain access to the broad range of multiple 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, Satellink is able to enter new markets without the substantial
capital investment associated with traditional switching equipment.
Additionally, Satellink believes that the flexibility and ease of expansion 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 Satellink's network, the STAR*Net platform
can be customized to meet the specific needs of a subscriber, such as a school
system that implements an automated system through which students can access
grades or register for courses or a small business that needs an integrated
voicemail system but cannot afford a traditional voicemail system.
Satellink currently maintains equipment and STAR*Net platforms in the
following locations:
.Albany, Atlanta, Augusta, Cordele, Macon, Savannah and Valdosta, Georgia;
.Birmingham, Alabama;
.Baton Rouge and New Orleans, Louisiana;
.Fayetteville, Lumberton and Raleigh, North Carolina;
.Clarksville and Nashville, Tennessee; and
.Dallas and Stevenville, Texas.
Satellink's network service operations are dependent upon its ability to
protect the equipment and data at its facilities against potential damage that
may be caused by fire, power loss, technical failures, unauthorized intrusion,
natural disasters, sabotage and other similar events. Satellink has therefore
implemented monitored security systems, controlled access, automated data
backup procedures, uninterrupted power supply systems and automated system
trouble alerts.
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<PAGE>
Sales, Marketing and Customer Service
Historically, Satellink has relied on its direct sales force to obtain
subscribers. Satellink's sales and marketing strategy incorporates a multi-
channel distribution system that utilizes the following distribution channels
to access different market segments:
. a direct sales staff that concentrates on business accounts;
. a database telemarketing sales staff which uses computerized lead
management and professional telemarketing techniques to identify
primarily small businesses and professionals as potential subscribers;
and
. retail stores that are designed to sell products and services that
produce higher average revenues per unit to the consumer market.
Satellink also has developed a major account program with sales
representatives and managers dedicated to establishing and maintaining
relationships with large clients. As of January 31, 1999, Satellink employed
125 sales representatives, including Satellink's direct sales staff,
telemarketing professionals, retail sales staff and sales representatives who
call on third-party retailers.
Satellink's sales representatives are typically recent college graduates who
attend a weeklong training program administered by Satellink's senior marketing
personnel. Sales representatives are compensated through salary plus a
commission generally based on recurring revenue generated by each new
subscriber. Satellink believes that this compensation system encourages its
sales representatives to sell multiple services to each new subscriber in order
to generate recurring revenues and increase the recurring revenue per new
subscriber. See "Risk Factors -- Our success depends upon our ability to
attract and retain key personnel."
In connection with the development of the STAR*Net platform and rollout of
STAR*Net services, Satellink has commenced an intensive program designed to
educate its sales representatives about STAR*Net services. The sales
representatives cross-market STAR*Net services to existing subscribers as well
as sell such services to new subscribers. Satellink also intends to hire
additional outside sales representatives for its retail outlets to focus on
marketing STAR*Net services to multi-unit subscribers. At the same time,
Satellink intends to market STAR*Net services to individual and small business
subscribers through billing inserts and telemarketing. Sales representatives
are compensated based on the first month's recurring revenue generated by each
subscriber, which promotes the cross-sale of STAR*Net services which generate
higher monthly recurring revenue.
Satellink maintains customer service centers in Roswell, Georgia and
Nashville, Tennessee. As of January 31, 1999, these centers employed 22 full-
time customer service personnel who are available via a toll-free call 24 hours
a day, 7 days a week. Satellink also has four customer services representatives
at its offices in Louisiana. Customer service calls received between midnight
and 8:00 a.m. are forwarded via a 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
50
<PAGE>
subscribers in the use of Satellink's services and to resolve billing and
technical issues. Satellink's customer service centers can accommodate an
additional 11 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. These subscribers have traditionally included
truck drivers and other small business operators and employees, utility
companies, professionals, medical personnel, sales and service providers,
construction and trade people, and real estate brokers and developers.
Additionally, messaging and multiple personal telecommunications services are
increasingly being adopted by individuals for private, nonbusiness uses such as
communicating with family members and friends. Satellink also believes that its
focus on business and high-volume individual subscribers generates increased
revenues, reduces subscriber turnover and provides an attractive base to market
additional personal telecommunications services. Based on the number of
individuals using Satellink's services, Satellink's largest subscribers include
Southern Company, the State of Tennessee, CSX Corporation, Tennessee Valley
Authority, Sprint, Carolina Power and Light and State Farm Insurance. No
subscriber represents more than 5% of Satellink's subscriber base.
Pagers
The majority of Satellink's paging services are delivered through either
numeric or alphanumeric display pagers. Numeric display pagers 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. Alphanumeric display pagers allow the subscriber to receive and store
text messages. Satellink utilizes pagers for traditional paging subscribers
that are manufactured by Motorola, NEC, Panasonic and other manufacturers.
Satellink utilizes Info Telecom numeric pagers for FM paging subscribers. Most
of the traditional pagers used by Satellink 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.
Satellink is seeking to address the limitations of the Info Telecom pager by
developing a new FM pager, the FM Concepts Pager, which is expected to be 25%
smaller than the Info Telecom pager and have capabilities similar to those of
many popular traditional pagers. Satellink plans to introduce the FM Concepts
Pager during the fourth quarter of fiscal 1999 and believes the FM Concepts
Pager can be produced at approximately 75% of the cost of its Info Telecom
pager. These cost savings can be passed on to new subscribers, thereby making
FM paging a more cost-effective alternative for new subscribers. There can be
no assurance that Satellink'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 Satellink does not have access at
competitive prices. Reduced acceptance of FM pagers or increased competition
from FM pager providers could have a material adverse
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<PAGE>
effect on Satellink's business, financial condition and results of operations.
See "-- Proprietary Rights and Technology."
Satellink'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.
Satellink purchases a variety of models of traditional pagers from Motorola
and other manufacturers and sells or leases these pagers to its subscribers.
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 pager. Satellink and most of its competitors sell pagers
without a significant markup. The absence of a markup inhibits Satellink's
ability to compete on the basis of price. Accordingly, the cost at which
Satellink is able to obtain pagers directly relates to the price at which it is
able to sell pagers and generate recurring revenues from providing services to
the purchasers of such pagers.
Proprietary Rights and Technology
In 1995, Satellink 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 Satellink and independent
contractor programmers. See "-- The STAR*Net Platform" and "Risk Factors --
Changes in technology might harm our business" and "-- Our software may
contain undetected bugs that could affect its performance."
Satellink intends to develop and use a new FM pager, the FM Concepts Pager,
to reduce its dependence on Info Telecom pagers. As of January 31, 1999, the FM
Concepts Pager was at an experimental stage, and there can be no assurance that
it will ever reach the production stage. In addition, 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. Satellink intends to
outsource the production of the FM Concepts Pager to a third party
manufacturer. However, there can be no assurance that Satellink 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.
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Satellink's ability to compete is dependent in part upon its proprietary
technology, particularly its newly-developed STAR*Net platform and FM Concepts
Pager. Satellink relies primarily on a combination of intellectual property
laws and contractual provisions to protect its proprietary rights and
technology. Satellink has identified several key components of the FM Concepts
Pager for which it intends to submit patent applications. In addition,
Satellink intends to submit several patent applications in connection with the
STAR*Net platform. These laws and contractual provisions provide only limited
protection of Satellink's proprietary rights and technology. Satellink's
proprietary rights and technology include confidential information and trade
secrets that Satellink attempts to protect through confidentiality and
nondisclosure agreements. Satellink generally 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 Satellink'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
Satellink's proprietary technology without authorization, or independently
develop technologies that are similar or superior to Satellink's technology.
However, Satellink 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 -- We have only limited protection
of our 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 Satellink's current or future
products or services infringe the patent, copyright or trademark rights of such
third parties. The success of any such claim could negatively affect
Satellink's business, financial condition and operating results.
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. Satellink'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.
Satellink's technical support and development personnel developed the
STAR*Net platform over a three-year period using carrier grade telephony
platform 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
53
<PAGE>
of subscribers and to respond to technological and marketplace developments.
There can be no assurance, however, that Satellink's personnel will be able to
successfully identify such needs or developments or develop and implement new
technologies or applications in response thereto.
As of January 31, 1999, Satellink had 14 employees and 6 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
Satellink'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 its strategic partners and vendors.
Competition
Satellink believes that its focus on business and individual subscribers
requiring regional or nationwide service distinguishes it from larger
providers, many of whom focus on selling local paging services to a larger
number of lower-volume subscribers. Satellink 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. Satellink expects
competition to increase in the future, especially as an increasing number of
telecommunications companies begin offering unified messaging services. Many of
Satellink'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 Satellink. Competition from these competitors could have a negative effect
on Satellink's business, financial condition and operating results.
Satellink attempts to differentiate itself from its competitors by offering a
wide variety of telecommunications services. Other providers currently offer
each of the individual services and certain combinations of the services
offered by Satellink. For example, Premiere Technologies offers bundled
telecommunications services which are similar to those offered by Satellink.
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. Satellink's nationwide mobile
communications services and features compete with services provided by
companies such as AT&T, MCI WorldCom and Sprint as well as smaller
interexchange long distance providers. Satellink's voicemail services compete
with voicemail services provided by AT&T, certain Baby Bells and other service
bureaus as well as by equipment manufacturers, such as Octel, Nortel, Siemens,
Centigram, Boston Technology and Digital Sound. Satellink'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.
Satellink expects that other parties will develop and implement information and
telecommunications service platforms similar to its
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<PAGE>
platform, thereby increasing competition for Satellink's services. We also
expect our services to compete against the following new products and
technologies:
. notebook computers equipped with sound cards, fax modems and cellular
modems;
. portable and wireless Internet appliances;
. personal digital assistants or personal communications systems phones;
and
. unified messaging services.
In addition, the Telecom Act may allow the Baby Bells, as is the case with
other local exchange carriers, or LECs, to provide long distance telephone
service between local calling areas. The Telecom 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 in the future may, if authorized by the FCC,
facilitate the offering of an integrated suite of information and
telecommunications services by the Baby Bells in competition with Satellink.
Such increased competition could have a negative effect on Satellink's
business, financial condition and operating results. 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 Baby Bells and other LECs
into the bundled telecommunications market, would not have a negative effect on
Satellink's business, financial condition and operating results. Satellink
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
Satellink's technology.
Legislative Matters
The Telecom Act was intended to increase competition in the long distance and
local telecommunications markets. The Telecom 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 Baby Bells. The Telecom Act allows Baby Bells to provide long
distance service outside of their local service territories but bars them from
immediately offering long distance services between local calling areas within
the Baby Bell's region until certain conditions are satisfied. A Baby Bell must
apply to the FCC to provide these long distance services and must satisfy a set
of pro-competitive criteria intended to ensure that Baby Bells open their own
local markets to competition before the FCC will approve such application.
Further, while the FCC has final authority to determine whether a Baby Bell
application is granted, the FCC must consult with the Department of Justice and
with the relevant state authority to determine that the pro-competitive
criteria have been satisfied. Satellink is unable to determine how the FCC will
rule on any such applications.
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The Telecom Act provides a framework for Satellink and other long distance
carriers to compete with LECs by reselling local telephone service, by
interconnecting to LEC network facilities at different points in the network or
by building new local service facilities. In the future, Satellink may decide
to lease unbundled network elements, which could also be used as a platform to
provide access to Satellink's services, or to build local service facilities.
Satellink'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
Satellink provides telecommunications services and consequently 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. Satellink 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. The tariffs of
non-dominant carriers, such as Satellink, may be implemented and changed on one
day's notice. The FCC usually does not review or require them to be changed
unless a complaint is filed. Currently, Satellink 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.
The order prohibits 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, but were
appealed by several parties. 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. Satellink is currently unable to
predict what impact the outcome of the FCC's detariffing proceeding will have
on it.
Local Interconnection and Resale. In August 1996, the FCC adopted an order
that established rules relating to the manner in which telecommunications
carriers can interconnect with the LECs' networks. The interconnection order
addressed several important interconnection issues, including the use of the
LEC's facilities and networks 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 order, including
rules governing the pricing of interconnection, resale and unbundled network
elements. The FCC and other parties appealed the Eighth Circuit Court's ruling
to the U.S. Supreme Court, and the case was argued before the Supreme Court in
the Fall of 1998. The Supreme Court issued a decision on January 25, 1999
affirming some portions of the case and remanding other matters back to both
the Eighth Circuit and the FCC. Until the Eighth Circuit and the FCC respond to
the Supreme Court remands, Satellink is unable to predict the impact on its
ability to offer competitive local service. No assurance can be given that the
Supreme Court's decision will not have a negative effect on Satellink's
business, financial condition and results of operation.
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<PAGE>
FCC Licenses. Satellink's paging operations are subject to FCC regulation
under the Communications Act of 1934. Satellink holds FCC licenses to use the
radio frequencies necessary to conduct its paging operations. The FCC licenses
set forth the technical parameters for each station under which Satellink is
authorized to operate, such as location, frequency, signal strength and tower
height.
License Grant and Renewal. Satellink's FCC licenses are for varying terms of
up to 10 years. The license expiration dates are staggered, and only a portion
of the licenses expire in any particular calendar year. At the end of the
license terms, Satellink must file a renewal application with the FCC.
Licensees in the paging services industry generally are renewed automatically,
unless a competitor demonstrates that the licensee has not operated the station
in conformance with FCC rules or that the licensee has not provided adequate
service to the public. Challenges by competitors are rare, and the vast
majority of license renewal applications are granted in the normal course.
Although Satellink is unaware of any circumstance which could prevent the grant
of its license renewal applications, no assurance can be given that any of
Satellink'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
under the Communications Act, to revoke or involuntarily modify radio licenses.
To date, none of Satellink's licenses have ever been revoked or modified
involuntarily.
FCC Regulatory Developments. Under FCC regulations governing the award of
radio licenses, 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 Satellink will be able to procure additional frequencies or
expand existing paging networks into new service areas.
In March 1994, the FCC adopted rules under which licenses for blocks of
spectrum are auctioned 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 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 and broadband PCS. In these
auctions, successful bidders have made significant auction payments in order to
obtain their blocks of spectrum.
Satellink has the option of participating in the market area licensing
auctions for paging services. It is anticipated that the FCC will schedule the
auction for the 900 MHz paging bands in 1999. The lower paging bands, e.g., the
exclusive 150 and 450 MHz frequencies, are likely to be auctioned in 1999 or
2000. Satellink believes that most bidders in the auctions will be larger
carriers, with significant resources to build out large regional systems. As a
result, Satellink may not be successful in acquiring additional frequencies
through the market area licensing auctions. The FCC is currently not proposing
to auction the shared private carrier paging frequencies licensed under its
rules.
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<PAGE>
On February 8, 1996, the FCC announced a freeze on applications for new or
modified transmitter facilities in paging services. The FCC temporarily lifted
the freeze to permit existing paging carriers' expansion applications. The FCC
has dismissed expansion applications filed after July 31, 1996 for paging
systems licensed on exclusive paging frequencies. The FCC also has dismissed
any pending application that was mutually exclusive with another pending
application due to the possibility of harmful electrical interference. However,
the FCC is accepting expansion applications from incumbent licensees with
respect to shared paging channels, e.g. 462,850 MHz. Therefore, although
Satellink 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. However, this method cannot be used to expand its
paging system licensed on exclusive frequencies under the FCC rules. Currently,
the only method for expanding that paging system is by acquiring existing
stations, with prior FCC approval, which Satellink did during 1998.
In 1996, the FCC fully implemented its rules classifying the services offered
by paging carriers as either commercial mobile radio service or private mobile
radio service. These FCC rules aim to reduce the disparities in the regulatory
treatment of similar mobile services. Satellink's paging services are
classified as commercial service under the rules because its radio facilities
are interconnected to the public switched telephone network and its services
are provided to the general public for profit. Satellink believes that the new
parity rules removed certain regulatory advantages that it and other private
carriers previously enjoyed. However, some disparities still exist between the
exclusive frequencies and the shared frequencies licensed by the FCC. These
disparities can affect Satellink's ability to respond timely to subscriber
demands. Specifically, Satellink will only be able to expand its exclusive
paging channel coverage through the acquisition of another carrier's station on
the same channel or by winning the bid in an upcoming paging auction.
The paging auctions will feature "overlay" licenses, and that the winning
bidder will be required to protect existing licensees in the designated service
area. If Satellink wins the bid for its areas, it will be able to expand the
coverage in the licensed market areas of its existing exclusive operations
without further FCC approval. If Satellink does not win the bid, it will be
unable to expand its existing coverage unless it obtains the consent of the
winning bidder and, if licensing partitioning is contemplated, the prior
approval of the FCC. However, the winning bidder would have to protect
Satellink's existing coverage areas from interference. Additionally, with
respect to its shared channel operations, Satellink is still able to license
additional facilities on a site by site basis.
Satellink's FM sub-carrier paging system is separate and distinct from
Satellink's paging facilities discussed above. Although the FCC requires
Satellink and other carriers to file applications prior to initiating service
on "leased subcarrier facilities of broadcast stations," these applications are
not included in the FCC's freeze on applications for paging systems. Thus,
Satellink can expand its FM subcarrier paging system if necessary.
The Telecom Act could have both positive and negative impacts on Satellink's
business. Proposed federal guidelines regarding antenna siting issues could
remove local and
58
<PAGE>
state barriers to the construction of communications facilities. In addition,
the local and state restrictions are now being litigated in the courts and
debated in Congress, and could be changed as a result of those processes.
Satellink's cost of acquiring necessary communications services and facilities
could decrease if competition in the local and interexchange industries
increased. However, some provisions of the Telecom Act could place additional
burdens on Satellink or subject it to increased competition such as:
.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.
FAA regulations indirectly affect paging carriers. Proposed antenna sites may
require prior FAA approval, and the tower owner usually is the party
responsible for obtaining the approval. If FAA approval is required, the FCC
will not grant an application for new or modified facilities the until the FAA
approves the antennae structure. Recently, the FCC issued stricter guidelines
with respect to radio frequency radiation hazards, although most paging
facilities will be categorically exempt if the base station and antenna system
meet specific criteria governing power and antenna height. If the base station
does not meet the exemption criteria, Satellink may have to modify its facility
or relocate to another antenna structure. Satellink's choices for relocation
will be limited to certain sites within its service area if an exclusive paging
channel is involved, because Satellink cannot expand its composite interference
contour. However, Satellink can move freely with respect to the shared paging
frequencies if it has FCC approval, which could take several months.
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 Satellink, as well as certain other
entities, must make contributions to the federal programs. Satellink'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. Satellink'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 negative
effect on Satellink's business, financial condition and operating results.
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<PAGE>
Access Charge Reform. On May 16, 1997, the FCC released an Access Charge
Reform Order, which revised rules governing the charges some LECs may impose on
interstate long distance carriers for the origination and termination of long
distance calls. 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 some LECs recover
through monthly, non-traffic sensitive access charges and substantially
decrease the costs that these LECs recover through traffic sensitive access
charges. The manner in which the FCC implements its approach to access charge
levels will have an effect on the prices Satellink pays for originating and
terminating interstate traffic.
Payphone Compensation. In September 1996, the FCC issued an order adopting
rules to implement the Telecom Act's requirements that all payphone service
providers be fairly compensated for every completed call made using their
payphone. This order included a specific fee to be paid to each payphone
service provider by long distance carriers and some 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, decreasing the per-call
compensation amount to be paid to payphone service providers to $0.284 per
call. Satellink 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 Satellink expects to incur
additional costs to receive "dial around" calls that originate from payphones,
the FCC has permitted long distance carriers, such as Satellink, to pass such
costs through to their customers.
State Regulation. Most public utility commissions require carriers that wish
to provide intrastate common carrier services to be authorized to provide such
services. Satellink 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.
Satellink is generally not subject to price regulation or to rate of return
regulation for its intrastate services. In most states, however, Satellink 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. Satellink 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. Satellink's ability to incur long-term indebtedness is
subject to prior public utility commission approval in some state
jurisdictions. In addition, some state public utility commissions regulate the
issuance of securities and the transfer of control of entities subject to their
jurisdiction. These state regulations may have attached to Satellink's recent
acquisitions. Currently, Satellink is reviewing whether and to what extent
additional regulatory compliance is required in this regard. See "Risk
Factors -- Changes in federal, state and local regulation may result in
increased competition and costs."
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<PAGE>
Properties
Satellink's corporate headquarters occupy approximately 9,000 square feet of
office space in Duluth, Georgia under a lease expiring in November 2004.
Satellink's main customer service center occupies approximately 10,000 square
feet of office space in Roswell, Georgia under a lease expiring in November
2001. Satellink's main network switching center, along with its Atlanta sales
force, occupies nearby office space of approximately 7,000 square feet in
Roswell, Georgia under a lease expiring in November 2001. Satellink also
occupies office space for sales and network operation in Birmingham, Alabama;
Albany, Cordele and Valdosta, Georgia; Baton Rouge and New Orleans, Louisiana;
Fayetteville and Raleigh, North Carolina; Nashville, Tennessee; and Dallas and
Stephenville, Texas. Satellink believes that its current space is sufficient to
meet its present needs and does not anticipate any difficulty securing
additional space, as needed, on acceptable terms.
Employees
At January 31, 1999, Satellink had 294 employees, of whom 14 were technical
support personnel (two of whom also performed development functions), 125 were
sales and marketing personnel and 155 were managerial and administrative
employees. In addition, at January 31, 1999, Satellink had six technical
support personnel who were independent contractors, all of whom also performed
development functions. Except for Satellink's 401(k) plan, Satellink does not
have any collective bargaining, employment, pension or compensation
arrangements with any of its employees. Satellink believes its relations with
its employees are good. See "Management."
Legal Proceedings
Satellink is not a party to any legal proceeding that it believes would have
a negative effect on its business, financial condition or operating results.
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<PAGE>
MANAGEMENT
Directors and Executive Officers of Satellink
The directors and executive officers of Satellink and their ages as of
January 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Jerry W. Mayfield................ 52 Chairman of the Board, President and
Chief Executive Officer
V. Weyher Dawson, Jr. ........... 44 Executive Vice President, Assistant
Secretary and Director
David C. Massey.................. 51 Senior Vice President-- Sales &
Marketing and Director
Robert P. Poche.................. 42 Senior Vice President-- Systems &
Technology and Director
Daniel D. Lensgraf............... 36 Senior Vice President-- Finance &
Administration, Chief Financial
Officer and Secretary
James O. Carpenter............... 48 Director
Marc A. Comeaux.................. 44 Director
Robert D. Gage, IV............... 44 Director
Gordon E. Kaiser................. 54 Director
Stiles A. Kellett, Jr. .......... 55 Director
</TABLE>
Jerry W. Mayfield has been Chairman of the Board, President and Chief
Executive Officer of Satellink since May 1994. Mr. Mayfield served as Executive
Vice President of Satellink from the time of its formation in 1988 until May
1994 and has been a director of Satellink 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.
V. Weyher Dawson, Jr. has been Executive Vice President, Assistant Secretary
and a Director of Satellink since January 1999. From 1989 until December 1998,
he served as president and as a director of the Cape Fear Paging Companies.
From 1979 to 1989, Mr. Dawson was the general manager of Cape Fear Broadcasting
Company. He presently serves on the board of directors of Cape Fear
Broadcasting Company.
David C. Massey has been Senior Vice President -- Sales & Marketing of
Satellink since February 1993 and a director of Satellink since December 1995.
Mr. Massey has primary responsibility for Satellink'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
Satellink's formation in 1988 and was elected a director of Satellink in 1995.
Mr. Poche has primary responsibility for Satellink'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.
Daniel D. Lensgraf has been Senior Vice President -- Finance &
Administration, Chief Financial Officer and Secretary of Satellink since August
1995. From May 1992 until August
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<PAGE>
1995, Mr. Lensgraf was employed as a Senior Associate in the Corporate Finance
Group of Bank Austria Creditanstalt.
James O. Carpenter has been a director of Satellink 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 Satellink 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 Satellink from
1988 until May 1994.
Robert D. Gage, IV has been a director of Satellink 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 Satellink since April 1990. Mr.
Kaiser has been President and Chief Executive Officer of CUE Paging
Corporation, 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.
Stiles A. Kellett, Jr. has been a director of Satellink 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 MCI
WorldCom, Inc.
Directors of Satellink currently are elected at the annual meeting of
shareholders to serve one-year terms. Executive officers of Satellink 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. Satellink is not party to any
employment agreements with its executive officers.
Board of Directors
Satellink's board of directors is comprised of nine members who, beginning
with Satellink's first annual meeting of shareholders following the offering,
will be divided into three equal classes. 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 Satellink'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 dated August 1, 1988 between Satellink
and certain of its shareholders, the shareholders agreed to vote the common
stock held by them
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<PAGE>
for the election of Messrs. Mayfield, Comeaux and the president of CUE,
currently Mr. Kaiser, to the board of directors. The shareholders 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 Satellink. Pursuant to an agreement with Mr. Kellett,
Satellink 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 upon the
closing of the offering, 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 a Satellink
employee receives fees of $750 and $500 for each meeting of the board of
directors and each board committee, respectively, attended in person. Following
the completion of the offering, the board intends to begin paying each director
who is not a Satellink employee an annual fee of $6,000 as well as fees of
$1,000 and $500 for each meeting of the board of directors and board committee,
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 "-- Long-Term Incentive Plan."
Meetings and Committees
The board of directors conducts its business through meetings of the full
board and through board committees, including the Audit Committee and the
Compensation Committee.
The Audit Committee's responsibilities include:
. reviewing with Satellink'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 Satellink's internal auditing
procedures;
. consulting with the independent accountants and management with regard
to Satellink'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
Satellink during fiscal 1998.
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<PAGE>
The Compensation Committee is responsible for establishing the compensation
of executive officers and for administering Satellink's long-term incentive
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 Satellink during fiscal 1998.
Compensation Committee Interlocks and Insider Participation
On November 17, 1995, Satellink 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, Satellink entered into a letter agreement with Mr. Kellett
pursuant to which Satellink agreed to cause its management to nominate Mr.
Kellett to serve on the Satellink board of directors and to use its best
efforts to cause Mr. Kellett's election to the board. The letter agreement will
terminate upon the closing of the offering. Each issued and outstanding share
of Series C preferred stock will then be converted into 272.5725 shares of
common stock without further action on the part of Satellink or the holders of
the Series C preferred stock. We expect that Mr. Kellett will continue to serve
as a director of Satellink 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, Satellink issued and sold 300 shares of Series D preferred
stock to Mr. Carpenter for $300,000, 200 shares to Mr. Gage for $200,000 and
1,500 shares 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 upon the closing of the offering through
proceeds realized from the offering. See "Certain Transactions -- Series D
Preferred Stock And Related Warrant Issuance."
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<PAGE>
Executive Compensation
Summary Compensation
The following table summarizes the compensation paid by Satellink for
services rendered for fiscal 1998 by Satellink's Chief Executive Officer and
Satellink's other executive officers whose total salary and bonus for fiscal
1998 exceeded $100,000 (collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
----------------- ------------
Number of
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............. 1998 $180,000 $50,400 37,267 $9,124
Chairman of the Board,
President and Chief
Executive Officer
V. Weyher Dawson.............. 1998 106,386 -- -- --
Executive Vice President and
Assistant Secretary
David C. Massey............... 1998 125,000 30,000 19,662 6,394
Senior Vice President --
Sales & Marketing
Robert P. Poche............... 1998 125,000 30,000 19,662 6,398
Senior Vice President --
Systems & Technology
Daniel D. Lensgraf............ 1998 120,000 28,800 17,875 5,700
Senior Vice President --
Finance & Administration,
Chief Financial Officer and
Secretary
</TABLE>
- --------
(1) Consists of a discretionary bonus paid to the Named Executive Officer based
on Satellink's performance during fiscal 1998.
(2) Represents contributions by Satellink under its 401(k) plan on behalf of
the Named Executive Officer.
Stock Option Grants
The following table sets forth information concerning each grant of stock
options to the Named Executive Officers during the year ended July 31, 1998.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term(1)
-------------------------------------------------------- ----------------------
Number of Percent of Total Exercise
Securities Options Granted to or Base Grant
Underlying Employees in Price Expiration Date
Name Options Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($) Value(2)
---- --------------- ------------------ -------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jerry W. Mayfield....... 37,267 24.3% $4.62(3) 7/31/07 392,027 665,669 $200,496
David C. Massey......... 19,662 12.8% $4.62(3) 7/31/07 206,833 351,206 $105,782
Robert P. Poche......... 19,662 12.8% $4.62(3) 7/31/07 206,833 351,206 $105,782
Daniel D. Lensgraf...... 17,875 11.7% $4.62(3) 7/31/07 188,034 319,286 $ 96,168
</TABLE>
- --------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC. There can be no assurance that the actual
stock price appreciation over the term will be at the assumed 5% and 10%
levels or at any other defined level. Unless the market price of the common
stock appreciates over the option term, no value will be realized from the
option grants made to the Named Executive Officers.
(2) Based on the difference between the exercise price and the assumed initial
public offering price of $10.00 per share.
(3) Options were granted at the fair market value of the common stock on the
date of grant as determined by the board of directors. These options vest
ratably over four years beginning with the date of the grant.
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<PAGE>
Option Values as of July 31, 1998
The following table sets forth information concerning the stock options held
by each of the Named Executive Officers as of July 31, 1998. No options were
exercised, and no stock appreciation rights were exercised or outstanding,
during fiscal 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number Of Value Of Unexercised
Securities Underlying In-The-Money
Unexercised Options Options At July 31,
At July 31, 1998 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jerry W. Mayfield........... -- 37,267 -- 200,496
David C. Massey............. -- 19,662 -- 105,781
Robert P. Poche............. -- 19,662 -- 105,781
Daniel D. Lensgraf.......... 28,167 17,875 231,533 96,168
</TABLE>
- --------
(1) There was no public trading market for the Common Stock at July 31, 1998.
Accordingly, these values have been calculated based on an assumed initial
public offering price of $10.00 per share, less the applicable exercise
price. See "Principal And Selling Shareholders."
Long-Term Incentive Plan
The long-term incentive plan was adopted by Satellink's board of directors on
September 18, 1997 and approved by the shareholders on December 18, 1997. The
long-term incentive plan's purpose is to promote the success and enhance the
value of Satellink 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 long-term incentive plan is
further intended to provide Satellink flexibility in motivating, attracting and
retaining individuals upon whose judgment, interest and special effort
Satellink's success is largely dependent. The long-term incentive plan
authorizes the granting of awards to key employees, officers and directors of
Satellink or its subsidiaries in the form of:
. options (both incentive stock options and non-qualified stock options)
to purchase shares of stock;
. stock appreciation rights;
. performance shares;
. restricted stock; and
. other stock-based awards.
The long-term incentive 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
had been granted and were outstanding as of December 31, 1998.
401(k) Plan
Satellink sponsors a defined contribution plan for eligible employees under
Section 401(k) of the Internal Revenue Code of 1986. Participants may
contribute up to 15% of their annual salaries to the 401(k) plan, subject to
certain limitations. All employee contributions are fully vested and are not
subject to forfeiture. Satellink may make discretionary matching contributions
to the 401(k) plan on behalf of all eligible employees. During fiscal 1998,
Satellink made matching contributions equal to 40% of the eligible contribution
made by each employee to the 401(k) plan.
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<PAGE>
CERTAIN TRANSACTIONS
Non-Voting Preferred Stock Warrant Issuance
In connection with its credit facility, Satellink issued to Bank Austria
Creditanstalt warrants for the purchase of 14,074 shares of non-voting
preferred stock or 1,189,253 shares of common stock, at the election of Bank
Austria Creditanstalt, at a weighted average price of $0.06 per share of common
stock. These warrants are exercisable from time to time on or before December
3, 2005. These warrants provide that, subject to certain conditions and
exceptions, the holders may not exercise their 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 warrants or issued upon
conversion of non-voting preferred stock issued pursuant to the warrants, would
exceed 4.99% of the aggregate number of shares of common stock outstanding as
of the time of the exercise of the warrants. These warrants further provide
that in no event shall any 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 Bank Austria
Creditanstalt or its affiliates, would, upon issuance, represent in excess of
24.99% of the total shareholders' equity of Satellink, including all series of
preferred stock, determined in accordance with GAAP. These warrants provide the
warrant holder with certain rights with respect to the registration of the
warrants and the shares to be issued under the warrants, subject to certain
terms and conditions. The put feature of these warrants will be canceled upon
completion of the offering. See "Description of Capital Stock -- Preferred
Stock" and "Shares Eligible For Future Sale -- Registration Rights."
Series C Preferred Stock Issuance
On November 17, 1995, Satellink issued and sold 1,000 shares of Series C
preferred stock to Bank Austria 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, for aggregate cash consideration of $3.5
million. See "Management --Compensation Committee Interlocks and Insider
Participation." Pursuant to the terms and conditions of the Series C preferred
stock, upon the closing of the offering 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 Satellink or the holders of Series C
preferred stock. The terms of the Series C preferred stock provide holders of
the stock 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, Satellink 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 Bank Austria Creditanstalt, 1,500 were issued to an affiliate of Mr.
Kellett, 300 were issued to Mr.
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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 upon the
closing of the offering through proceeds realized from the offering. The
issuance and sale of the Series D preferred stock to directors and executive
officers of Satellink was approved by Satellink's shareholders. See "Use Of
Proceeds."
In connection with the issuance of Series D preferred stock, Satellink issued
warrants to purchase an aggregate of 327,600 shares of common stock or, with
respect to Bank Austria Creditanstalt and at the election of Bank Austria
Creditanstalt, 861.579 shares of non-voting preferred stock, at a price of
$4.62 per share, or $390.00 per share for non-voting preferred stock. If
Satellink does not redeem the Series D preferred stock by December 31, 1999 and
December 31, 2000, the aggregate number of shares of common stock subject to
these warrants increases to 409,500 and 491,400, respectively or, with respect
to Bank Austria Creditanstalt, 1,076.9225 and 1,292.3070 shares of 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 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 of the 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 Bank
Austria Creditanstalt or its affiliates, would, upon issuance, represent in
excess of 24.99% of the total shareholders' equity of Satellink, including all
series of preferred stock, determined in accordance with GAAP. The terms of the
Series D warrants provide the 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, Satellink has maintained an ongoing relationship with CUE
pursuant to which Satellink's FM subcarrier paging network is linked with the
CUE nationwide FM paging network. In April 1988, Satellink 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, Satellink 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 Satellink. As of January 31, 1999, CUE owned
approximately 7.3% of the outstanding common stock of Satellink on a fully
diluted basis. CUE from time to time provides Satellink with different paging
services, principally airtime and network services for regional and nationwide
paging. Satellink paid $6.0 million, $8.6 million, $9.6 million and
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$4.8 million to CUE for such services during fiscal 1996 and 1997 and 1998 and
during the six months ended January 31, 1999, respectively. Satellink will
periodically have outstanding affiliated receivables and payables related to
the timing of payments for such services.
Bank Austria Creditanstalt is a lender and agent for the lenders under
Satellink's $55.0 million credit facility. As of January 31, 1999, total
indebtedness under the credit facility was $52.7 million. The amounts paid by
Satellink to Bank Austria Creditanstalt, as agent for the lenders, under the
credit facility for fiscal 1996, 1997 and 1998 and for the six months ended
January 31, 1999 were $900,000, $1.6 million, $2.7 million and $2.1 million,
respectively. Satellink intends to use a portion of the net proceeds to repay
outstanding indebtedness under the Credit Facility. See "Use of Proceeds."
On August 1, 1995, Satellink granted to Daniel D. Lensgraf, Vice President
and Chief Financial Officer, options to purchase up to 84,500 shares of common
stock of an exercise price of $1.78 per share. Mr. Lensgraf's options vested
over a three-year term and, as of January 31, 1999, all of these options had
vested.
Satellink requires all material transactions between Satellink and its
officers, directors or other affiliates to be approved by a majority of the
disinterested members of the board of directors and to be on terms no less
favorable to Satellink than could be obtained from unaffiliated third parties.
Satellink believes that none of the transactions described above were on terms
less favorable to Satellink than could have been obtained in a transaction with
an unaffiliated party.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of January 31, 1999, and as adjusted to
reflect the sale of the common stock offered by this prospectus, by: (1) each
director of Satellink who beneficially owns common stock; (2) each Named
Executive Officer; (3) all directors and executive officers of Satellink as a
group; (4) each person known to Satellink to beneficially own more than 5% of
the common stock; and (5) 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 and the
redemption of all issued and outstanding shares of Series D preferred stock
upon the closing of the offering.
<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>
Bank Austria
Creditanstalt (2)...... 1,534,625 18.2 321,096 1,213,529 10.5
Kellett Partners, L.P.
and Stiles A. Kellett,
Jr. (3)................ 629,612 8.7 150,000 479,612 4.1
Jerry W. Mayfield (4)... 607,592 8.5 -- 607,592 5.3
David C. Massey (5)..... 554,641 7.7 -- 554,641 4.8
CUE Paging Corporation
and Gordon E.
Kaiser (6)............. 670,020 9.4 -- 670,020 5.8
Robert D. Gage, IV (7).. 489,244 6.8 -- 489,244 4.3
James O. Carpenter (8).. 455,099 6.3 -- 455,099 4.0
Marc A. Comeaux (9)..... 322,954 4.5 106,433 216,521 1.9
Robert P. Poche (10).... 161,092 2.2 15,000 146,092 1.3
Daniel D.
Lensgraf (11).......... 109,249 1.5 -- 109,249 1.0
V. Weyher Dawson, Jr. .. 265,652 3.7 -- 265,652 2.3
Margaret H.
Dickson (12)........... 496,430 6.9 -- 496,430 4.3
Ann H. Lawing (13)...... 496,430 6.9 -- 496,430 4.3
David Autin............. 60,963 * 60,963 -- --
Ira Carpenter (14)...... 94,637 1.3 14,365 80,272 *
Clear Fir Partners...... 54,793 * 20,000 34,793 *
Mary M. Dominique....... 84,500 1.2 84,500 -- --
Audrey Menard (15)...... 88,683 1.2 88,683 -- --
Jay Menard.............. 84,500 1.2 84,500 -- --
Paul Breaux............. 100,893 1.4 100,893 -- --
All directors and
executive officers as a
group (10 persons)..... 4,265,155 57.5 3,993,722 34.8
</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 January 31, 1999 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 72,800 shares of common stock issuable upon
exercise of the Series D warrants. The address of Bank Austria
Creditanstalt is 245 Park Avenue, New York, New York 10167.
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(3) Includes 520,693 shares of common stock held by Kellett Partners, L.P., of
which Mr. Kellett is the general partner, and 109,200 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 30339. Mr. Kellett is a director of Satellink.
(4) Includes 14,560 shares of common stock issuable upon exercise of the
Series D warrants and 9,316 shares of common stock issuable upon exercise
of vested options. Mr. Mayfield's address is 1325 Northmeadow Parkway,
Suite 120, Roswell, Georgia 30075.
(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, 10,920
shares of common stock issuable upon exercise of the Series D warrants and
4,915 shares of common stock issuable upon exercise of vested options.
Mr. Massey's address is 1325 Northmeadow Parkway, Suite 120, Roswell,
Georgia 30076.
(6) Includes 662,740 shares of common stock held by CUE Paging Corporation, of
which Mr. Kaiser is the President and Chief Executive Officer, and 7,280
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 14,560 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 21,840 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 B. Menard, and as to which Mr. Comeaux disclaims
beneficial ownership. Mr. Comeaux is a director of Satellink.
(10) Includes 7,280 shares of common stock issuable upon exercise of the Series
D warrants and 4,915 shares of common stock issuable upon exercise of
vested options. Mr. Poche is Senior Vice President--Systems and Technology
of Satellink as well as a director.
(11) Includes 7,280 shares of common stock issuable upon exercise of the Series
D warrants and 32,635 shares of common stock issuable upon exercise of
vested options.
(12) Ms. Dickson's address is 1009 Drayton Road, Fayetteville, North Carolina
28303.
(13) Ms. Lawing's address is 1009 Drayton Road, Fayetteville, North Carolina
28303.
(14) Includes 7,280 shares of common stock issuable upon exercise of the Series
D warrants.
(15) Includes 46,433 shares of common stock held by Mr. Comeaux on behalf of
Ms. Menard.
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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 per share, and Class B
common stock, par value $0.01 per share, and four series of preferred stock,
designated Series A convertible preferred stock, par value $0.01 per share,
Series B convertible preferred stock, par value $0.01 per share, Series C
convertible preferred stock, par value $0.01 per share, and Series D preferred
stock, par value $0.01 per share. As of January 31, 1999, there were 30
beneficial owners of Satellink's common stock. Upon the closing of the
offering, Satellink will redesignate the Class A common stock as common stock,
par value $0.01 per share, and will redesignate the Series B preferred stock as
non-voting preferred stock, par value $0.01 per share. In addition, Satellink
will eliminate the Class B common stock and will convert each outstanding share
of Series A preferred stock into 84.5 shares of common stock. Satellink will
convert each outstanding share of Series C preferred stock into 272.5725 shares
of common stock and will redeem each outstanding share of Series D preferred
stock 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."
Upon the closing of the offering, Satellink's authorized capital stock 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 Satellink's articles of incorporation and 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 Satellink, holders of common
stock are entitled to share ratably in the assets of Satellink, if any,
remaining after the payment of all debts and liabilities of Satellink and the
liquidation preference of any outstanding class or series of preferred stock.
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
Satellink may issue in the future as described below.
Preferred Stock
The board of directors has the authority, pursuant to the articles of
incorporation, 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
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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 Satellink 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.
The board of directors has designated the non-voting preferred stock solely
for the purpose of fulfilling Satellink's obligations under the Creditanstalt
warrants. The designation of the non-voting preferred stock does not restrict
Satellink from issuing additional securities of any kind, including shares of
preferred stock of any class, series or designation. However, issuances of non-
voting preferred stock will be limited to issuances 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
Satellink's shareholders except as specifically provided by the Georgia Code.
Upon liquidation of Satellink, 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."
Provisions of the Articles of Incorporation, Bylaws and the Georgia Code
Satellink's articles of incorporation and bylaws as of the closing of the
offering will contain, and the Georgia Code currently contains, certain
provisions that could delay, defer or prevent a change in control of Satellink
that a shareholder may deem to be in the shareholder's best interest.
Number, Term and Removal of Directors. Satellink's articles of incorporation
and bylaws will provide that the board of directors will 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. A director may be removed from office 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
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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 remaining in office. Any director
appointed to fill a vacancy will be elected for the unexpired term of his or
her predecessor and until his or her successor is elected and qualified. If a
directorship is filled by reason of an increase in the number of directors, the
term of the new director will expire at the next election of directors by the
shareholders and upon the election and qualification of his or her successor.
Call of and Notices Relating to Shareholder Meetings; Actions by Written
Consent of Shareholders. Satellink's bylaws will provide as of the closing of
the offering that special meetings of shareholders or special meetings in lieu
of annual shareholders' meetings 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. 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
holding 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 Satellink for
inclusion in the minutes or filing with the corporate records.
Georgia Business Combination Statute. Pursuant to Satellink's bylaws, as of
the closing of the offering, Satellink will be subject to the provisions of the
Georgia Code prohibiting various "business combinations" involving "interested
shareholders" for a period of five years after the shareholder becomes an
interested shareholder of Satellink. Such provisions prohibit any business
combination with an interested shareholder unless either:
. prior to such time, the board of directors approves either the business
combination or the transaction by which such shareholder became an
interested shareholder;
. 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 Satellink that
was not held by directors, officers, affiliates thereof, subsidiaries or
certain employee stock option plans of Satellink; or
. subsequent to becoming an interested shareholder, such shareholder
acquired additional shares resulting in such shareholder owning at least
90% of Satellink's outstanding voting stock 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 Satellink.
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Under the relevant provisions of the Georgia Code, a "business combination"
is defined to include, among other things:
. any merger, consolidation, share exchange or any sale, transfer or
other disposition (or series of related sales or transfers) of
Satellink's assets having an aggregate book value of 10% or more of
Satellink's net assets with an interested shareholder or any other
corporation which is or, after giving effect to such business
combination, becomes an affiliate of any such interested shareholder;
. the liquidation or dissolution of Satellink;
. the receipt by an interested shareholder of any benefit from any loan,
advance, guarantee, pledge, tax credit or other financial benefit,
other than in the ordinary course of business; and
. certain other transactions involving the issuance or reclassification
of securities of Satellink which produce the result that 5% or more of
the total equity shares of Satellink, 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 Satellink, or
any person that is an affiliate of Satellink 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 Satellink. The restrictions on business
combinations do not apply to any person who was an interested shareholder
before the adoption of the bylaws which made the provisions applicable to
Satellink 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for the common stock.
If anyone was to sell substantial amounts of shares of Satellink's common stock
in the public market after the offering or if analysts or the public believed
anyone intended to sell a large number of shares, the market price of the
common stock could adversely be affected. This could impair Satellink's ability
to raise capital in the future through sales of its equity securities at a time
and price which it deems appropriate.
Upon the completion of the offering, assuming no exercise of outstanding
options or warrants other than the exercise of warrants by Creditanstalt for
321,096 shares of common stock, Satellink will have 11,485,316 shares of common
stock outstanding. The 5,000,000 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 Satellink,
as that term is defined in Rule 144 of the SEC, may generally only be sold in
compliance with Rule 144. The remaining 6,209,717 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.
Sales of Restricted Securities
Subject to the provisions of Rule 144, and upon the completion of the
offering, 275,599 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.,
3,675,798 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 Satellink'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 who has beneficially owned
restricted securities for at least one year, including a person who may be
deemed an affiliate of Satellink, 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 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 Satellink. 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.
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Options and Warrants
As of January 31, 1999, options and warrants to purchase an aggregate of
2,005,442 shares of common stock were outstanding. Of such shares of common
stock, 321,096 will be sold in the offering and 234,697 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 SEC. An additional 1,239,175 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.
Satellink 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 291,422 shares are subject to outstanding options,
that are available for issuance pursuant to the Incentive 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.
Lock-Up Agreements
The directors, executive officers, selling shareholders and each holder of
more than 5% of Satellink's common stock, who collectively own a total of
3,675,798 shares of common stock and 1,239,175 shares subject to options and
warrants that will be exercisable upon expiration of the 180-day lock-up
period, have entered into lock-up agreements with the underwriters. Pursuant to
the lock-up agreements, they have agreed not to directly or indirectly
(1) 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, or (2) 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. However, the lock-up agreements permit,
during the 180-day lock-up period:
. transfers made by gift, provided the donee thereof agrees in writing to
be bound by the terms of the lock-up agreement,
. transfers to the transferor's affiliates, as such term is defined by
Rule 405 under the Securities Act, provided the transferee agrees to be
bound by the terms of the lock-up agreement and
. transfers made with the prior written consent of J.C. Bradford & Co.
J.C. Bradford & Co. has advised the Company that it has no present intent to
waive the lock-up period. However, if a shareholder should request that J.C.
Bradford & Co. 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 the 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. Additionally, each
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party to a lock-up agreement has agreed that during the 180-day lock-up period,
the 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
holder requesting that Satellink 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, Satellink will give
written notice to all other warrant holders. If Satellink receives requests for
the registration of at least an aggregate of 1,000 Creditanstalt warrants or
shares subject to the warrants, or the remainder of shares subject to the
warrants not registered under the Securities Act if less than 1,000 warrants or
shares are outstanding, Satellink shall file a registration statement under the
Securities Act for the registration of the Creditanstalt warrants or shares
subject to the warrants, as appropriate. Satellink is obligated to effect up to
three registrations on behalf of the warrant holders upon their request.
The Creditanstalt warrants further provide that if, at any time after
December 3, 1995, Satellink proposes to register any of its securities under
the Securities Act, it will give written notice to all holders of Creditanstalt
warrants and shares subject to the warrants of its intention to register such
securities. Upon the written request of any warrant holder given within 10 days
of the registration notice, Satellink shall use its reasonable best efforts to
effect the registration of the Creditanstalt warrants and/or the shares subject
to the warrants requested to be included in the proposed registration
statement. If the proposed registration is for an underwritten public offering,
only Creditanstalt warrants or shares subject to the warrants that are to be
included in the underwriting may be included in such registration. Satellink
will have the right to designate the managing underwriter(s) in any such
underwritten public offering, provided that, Satellink shall use its best
efforts to cause the managing underwriter(s) to include the Creditanstalt
warrants or shares subject to the warrants in the underwriting. If the managing
underwriter(s) advises the warrant holders and all other persons seeking to
include Satellink securities held by them in such registration statement in
writing that the total amount of securities which they and Satellink 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 C Preferred Stock Registration Rights
The purchase agreement relating to the issuance of Series C preferred stock
provides that upon the written demand of any holder of Series C preferred
stock, at any time after the earlier of six months following the consummation
of the offering or November 17, 2000, requesting that Satellink effect the
registration under the Securities Act of shares of Series C preferred stock or
common stock issuable upon conversion of such shares, Satellink will give
79
<PAGE>
written notice of such demand to all other holders of Series C preferred stock.
If Satellink receives requests for the registration of an aggregate of at least
one-fifth of the Series C shares, Satellink will file a registration statement
under the Securities Act for the registration of the Series C shares. Satellink
is obligated to effect up to two registrations on behalf of the holders of
Series C preferred stock.
The Series C purchase agreement further provides that if Satellink proposes
to register any of its securities under the Securities Act, it will give
written notice to all holders of Series C preferred stock of its intention to
register such securities. Upon the written request of any Series C shareholder
given within 10 days of the registration notice, Satellink shall use its
reasonable best efforts to effect the registration of the Series C shares
requested to be included in the proposed registration statement. If the
proposed registration is for an underwritten public offering, only Series C
shares that are to be included in the underwriting may be included in such
registration. Satellink will have the right to designate the managing
underwriter(s) in any such underwritten public offering, provided
that Satellink shall use its best efforts to cause the managing underwriter(s)
to include the Series C shares in the underwriting. If the managing
underwriter(s) advises the Series C shareholders and all other persons seeking
to include securities of Satellink held by them in such registration statement
in writing that the total amount of securities which they and Satellink 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 purchase agreement relating to the issuance of Series D preferred stock
provides that if Satellink proposes to register any of its securities under the
Securities Act, it will give written notice to all holders of Series D
preferred stock of its intention to register such securities. Upon the written
request of any holder of Series D warrants given within 10 days of the
registration notice, Satellink shall use its reasonable best efforts to effect
the registration of the shares issuable upon exercise of the Series D warrants
requested to be included in the proposed registration statement. If the
proposed registration is for an underwritten public offering, only shares
issuable upon exercise of the Series D warrants that are to be included in the
underwriting may be included in such registration. Satellink shall have the
right to designate the managing underwriter(s) in any such underwritten public
offering, provided that Satellink shall use its best efforts to cause the
managing underwriter(s) to include the shares issuable upon exercise of the
Series D warrants in the underwriting. If the managing underwriter(s) advises
the Series D warrant holders and all other persons seeking to include Satellink
securities in such registration statement in writing that the total amount of
securities which they and Satellink 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, Satellink has maintained an ongoing relationship with The
Breckenridge Group, Inc., an Atlanta-based investment banking firm.
Breckenridge has advised Satellink on significant acquisitions consummated
since February 1996. In July 1997, in consideration
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<PAGE>
of Breckenridge's agreement to forgive the cash payment of outstanding advisory
fees and to advise Satellink on future acquisitions, Satellink 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 sales prices at the
time for shares of common stock in arms' length transactions, and the issuance
of the Breckenridge options was approved by the board of directors of
Satellink.
The Breckenridge options provide that if Satellink proposes to register any
of its securities under the Securities Act, at any time prior to May 31, 2002,
Satellink must notify all holders of Breckenridge options of its intention to
register its securities. This notice is not required if Satellink proposes to
enter into an underwritten initial public offering that produces gross proceeds
to Satellink in excess of $30,000,000. If any holder of Breckenridge options
notifies Satellink within 20 business days of the registration notice,
Satellink shall use its reasonable best efforts to effect the registration of
the shares of common stock issuable upon exercise of the Breckenridge options
requested to be included in the proposed registration statement. If the
proposed registration is for an underwritten public offering, only Breckenridge
shares that are to be included in the underwriting may be included in the
registration. Satellink shall have the right to designate the managing
underwriter(s) in any such underwritten public offering, provided that
Satellink will use its best efforts to cause the managing underwriter(s) to
include the Breckenridge shares in the underwriting. If the managing
underwriter(s) advises the holders of Breckenridge options and all other
persons seeking to include securities of Satellink held by them in such
registration statement in writing that the total amount of securities which
they and Satellink 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 -- Additional shares will be eligible for public sale in the
future and could cause our stock price to drop."
81
<PAGE>
UNDERWRITING
Pursuant to the underwriting agreement and subject to the terms and
conditions thereof, the underwriters named below, acting through J.C. Bradford
& Co. and Morgan Keegan & Company, Inc., as representatives of the several
underwriters, have agreed, severally, to purchase from Satellink and the
selling shareholders the number of shares of common stock set forth below
opposite their respective names.
<TABLE>
<CAPTION>
Number of
Name of Underwriters Shares
-------------------- ---------
<S> <C>
J.C. Bradford & Co.................................................
Morgan Keegan & Company, Inc.......................................
Total............................................................
</TABLE>
The underwriters have agreed, subject to the terms and conditions contained
in the underwriting agreement, to purchase all shares of common stock offered
hereby if any of such shares are purchased.
Satellink 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 stated 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 Satellink and the
selling shareholders that the underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by Satellink and the selling shareholders in connection with the
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' over-allotment option to purchase additional shares of
common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share......................................... $ $
Total to be paid by Satellink..................... $ $
Total to be paid by the selling shareholders...... $ $
</TABLE>
Other expenses of the offering, including the registration fees and the fees
of financial printers, counsel and the accountants, payable by Satellink are
expected to be approximately $900,000.
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
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<PAGE>
modification of the offer without notice. The underwriters reserve the right to
reject any offer for the purchase of shares.
Satellink has granted the underwriters an option, exercisable not later than
30 days from the date of this prospectus, to purchase up to 750,000 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 Satellink 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 5,000,000 shares of common stock offered
hereby. If purchased, the underwriters will sell such additional shares on the
same terms as those on which the 5,000,000 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
Satellink, 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 Satellink, the experience of its management,
the position of Satellink in its industry, Satellink's prospects and
Satellink'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.
Satellink, its executive officers and directors, the selling shareholders and
each holder of more than 5% of Satellink'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 Satellink may
issue shares in connection with the exercise of stock options granted pursuant
to the Plan. See "Risk Factors -- Additional shares will be eligible for public
sale in the future and could cause our stock price to drop " and "Shares
Eligible For Future Sale -- Lock-Up Agreements."
The underwriting agreement provides that Satellink 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
83
<PAGE>
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 by this prospectus and
certain other legal matters will be passed upon for Satellink 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 and financial statement schedule of
Satellink as of July 31, 1997 and 1998 and for each of the three years in the
period ended July 31, 1998 included in this prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports. Their reports are included
in this prospectus in reliance upon the authority of said firm as experts in
giving the 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 this prospectus have
been audited by James N. Rachel, independent auditor, as indicated in his
report, which is included in this prospectus in reliance upon his authority as
expert in giving the report.
ADDITIONAL INFORMATION
Satellink has filed with the SEC a registration statement on Form S-1 under
the Securities Act with respect to the common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement and its exhibits and schedules, as permitted by the
rules and regulations of the SEC. For further information with respect to
Satellink and the common stock, refer to the registration statement, including
the exhibits and schedules filed or incorporated with it. Statements contained
in this prospectus 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 SEC.
After effectiveness of the Registration Statement, Satellink will file
periodic reports and other information with the SEC under the Securities
Exchange Act of 1934. The registration
84
<PAGE>
statement, including the exhibits and schedules, and the periodic reports and
other information filed, may be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following Regional Offices of the SEC: 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 SEC,
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. Such reports,
proxy and information statements and other information may be found on the
SEC's site address, http://www.sec.gov. Copies of such material also can be
obtained from Satellink upon request.
85
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Satellink Communications, Inc. and Subsidiaries
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of July 31, 1997 and 1998................. F-3
Consolidated Statements of Operations for the Years Ended July 31, 1996,
1997, and 1998.......................................................... F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the Years
Ended July 31, 1996, 1997, and 1998..................................... F-6
Consolidated Statements of Cash Flows for the Years Ended July 31, 1996,
1997, and 1998.......................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Condensed Consolidated Financial Statements as of January 31, 1999
(Unaudited):
Condensed Consolidated Balance Sheets as of July 31, 1998, January 31,
1999 (Unaudited), and Pro Forma January 31, 1999 (Unaudited)............ F-27
Condensed Consolidated Statements of Operations for the Six Months Ended
January 31, 1998 and 1999 (Unaudited)................................... F-28
Condensed Consolidated Statement of Cash Flows for the Six Months Ended
January 31, 1998 and 1999 (Unaudited)................................... F-29
Notes to Condensed Consolidated Unaudited Financial Statements............ F-30
Hyde's Stay In Touch, Inc.
Independent Auditor's Report.............................................. F-34
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996.......................... F-35
Statements of Income for the Year Ended December 31, 1997 and 1996....... F-36
Statements of Retained Earnings for the Year Ended December 31, 1997 and
1996.................................................................... F-37
Statements of Cash Flows for the Year Ended December 31, 1997 and 1996... F-38
Notes to Financial Statements............................................. F-39
Financial Statements:
Balance Sheet as of April 30, 1998 (Unaudited)........................... F-45
Statements of Income for the Four Months Ended April 30, 1998 and 1997
(Unaudited)............................................................. F-46
Statements of Cash Flows for the Four Months Ended April 30, 1998 and
1997 (Unaudited)........................................................ F-47
Condensed Notes to Unaudited Financial Statements......................... F-48
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Satellink Communications, Inc. and Subsidiaries
<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Financial Information................... F-49
Unaudited Pro Forma Consolidated Statement of Operations for the Six-
Months Ended January 31, 1999........................................... F-50
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended July 31, 1998..................................................... F-52
</TABLE>
F-1
<PAGE>
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,
1997 and 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, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Satellink Communications, Inc.
and subsidiaries as of July 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 1998 in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, during the year ended July
31, 1998, the Company changed its method of accounting for certain
reengineering costs.
/s/ Arthur Andersen LLP
Atlanta, Georgia
December 18, 1998
F-2
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 666,032 $ 537,799
Accounts receivable, net of allowance for doubtful
accounts of $445,028 and $622,208 in 1997 and
1998, respectively................................ 3,453,150 5,715,651
Other receivables.................................. 234,433 544,363
Marketable securities.............................. 793,537 587,826
Inventory.......................................... 1,123,891 2,499,272
Prepaid expenses and other current assets (Note
2)................................................ 425,535 1,576,989
----------- ------------
Total current assets............................... 6,696,578 11,461,900
----------- ------------
PROPERTY AND EQUIPMENT (Note 2):
Paging systems and equipment....................... 16,095,844 20,601,562
Computer and terminal equipment.................... 4,288,456 5,816,071
Furniture and fixtures............................. 602,730 771,102
Leasehold improvements............................. 119,809 104,789
----------- ------------
21,106,839 27,293,524
Less accumulated depreciation...................... (8,065,682) (10,042,459)
----------- ------------
Property and equipment, net........................ 13,041,157 17,251,065
----------- ------------
OTHER LONG-TERM ASSETS:
Goodwill, net of accumulated amortization of
$404,604 and $956,003 in 1997 and 1998,
respectively (Note 2)............................. 12,553,334 27,667,639
Other intangible assets, net of accumulated
amortization of $2,054,812 and $2,794,118 in 1997
and 1998, respectively (Note 2)................... 3,722,288 6,281,685
Other.............................................. 33,191 --
----------- ------------
Total other long-term assets....................... 16,308,813 33,949,324
----------- ------------
Total assets....................................... $36,046,548 $ 62,662,289
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
JULY 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 5)....... $ 3,108,813 $ 6,135,525
Accounts payable and accrued liabilities (Note 2)... 2,968,994 5,464,701
Customer deposits................................... 674,995 646,686
Deferred revenues................................... 1,491,030 2,058,504
Deferred tax liabilities............................ 162,497 172,045
Accrued dividends on preferred stock................ 88,047 134,642
----------- -----------
Total current liabilities.......................... 8,494,376 14,612,103
----------- -----------
LONG-TERM DEBT, less current maturities (Note 5)..... 24,064,912 41,342,337
----------- -----------
STOCK WARRANTS (Notes 6 and 8)....................... 4,346,722 5,776,517
----------- -----------
MINORITY INTEREST.................................... 5,351 --
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note
7):
$.01 par value; 3,500 shares authorized; 3,500
shares issued and outstanding in 1997 and 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 (Note 8):
$.01 par value; 0 and 4,500 shares authorized,
issued, and outstanding in 1997 and 1998,
respectively....................................... -- 3,585,333
----------- -----------
SHAREHOLDERS' EQUITY (DEFICIT) (Note 6):
Series A convertible preferred stock, $.01 par
value; 7,500 shares authorized, 7,360 shares issued
and outstanding in 1997 and 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 in 1997 and 1998; 0
shares issued and outstanding...................... -- --
Common stock, $.01 par value:
Class A voting, 50,000,000 shares authorized,
5,486,730 and 5,588,296 shares issued and
outstanding in 1997 and 1998, respectively......... 54,868 55,883
Class B nonvoting, 20,000 shares authorized, 535.5
and 0 shares issued and outstanding in 1997 and
1998, respectively................................. 5 --
Accumulated deficit................................. (4,426,746) (6,227,845)
Unrealized gain on marketable securities............ 6,986 17,887
----------- -----------
Total shareholders' equity (deficit)............... (4,364,813) (6,154,001)
----------- -----------
Total liabilities and shareholders' equity......... $36,046,548 $62,662,289
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Service, rent, and maintenance
revenues............................. $21,284,575 $31,194,030 $37,338,780
Product sales......................... 1,835,942 2,315,379 2,322,688
----------- ----------- -----------
Total revenues...................... 23,120,517 33,509,409 39,661,468
Cost of products sold................. (1,395,971) (1,968,382) (1,514,984)
----------- ----------- -----------
Net revenues........................ 21,724,546 31,541,027 38,146,484
----------- ----------- -----------
OPERATING EXPENSES:
Service, rent, and maintenance........ 8,961,461 13,517,471 15,600,359
Selling and marketing................. 3,052,991 4,280,744 4,764,265
General and administrative............ 4,320,069 6,572,482 7,331,578
Engineering........................... 669,398 997,411 1,161,827
Depreciation and amortization......... 2,222,100 4,181,239 5,130,377
Research and development.............. 439,813 -- --
Fixed asset impairment (Note 2)....... -- -- 833,996
----------- ----------- -----------
Total operating expenses............ 19,665,832 29,549,347 34,822,402
----------- ----------- -----------
OPERATING INCOME 2,058,714 1,991,680 3,324,082
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Other income.......................... (13,363) 497,694 702,850
Interest expense...................... (908,804) (2,289,249) (3,831,924)
Accretion of stock warrants (Notes 6
and 8)............................... (854,350) (1,773,107) (449,795)
Minority interest..................... (2,522) (2,829) (7,740)
----------- ----------- -----------
(1,779,039) (3,567,491) (3,586,609)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE,
EXTRAORDINARY ITEM, AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.............................. 279,675 (1,575,811) (262,527)
INCOME TAX EXPENSE...................... 577,960 390,174 629,989
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................... (298,285) (1,965,985) (892,516)
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................................ (430,415) (1,965,985) (1,521,216)
PREFERRED STOCK DIVIDENDS............... 334,295 438,558 630,917
----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS........................... $ (764,710) $(2,404,543) $(2,152,133)
=========== =========== ===========
ALLOCATION OF LOSS TO:
Class A............................... $ (738,752) $(2,383,488) $(2,151,412)
Class B............................... $ (25,958) $ (21,055) $ (721)
BASIC AND DILUTED NET LOSS PER SHARE
(Note 2):
Loss from extraordinary item:
Class A............................. $ (0.03) $ -- $ --
Class B............................. $ (2.23) $ -- $ --
Loss from cumulative effect of change
in accounting principle:
Class A............................. $ -- $ -- $ (0.11)
Class B............................. $ -- $ -- $ (9.59)
Net loss attributable to common
shareholders:
Class A............................. $ (0.15) $ (0.47) $ (0.39)
Class B............................. $ (12.90) $ (39.36) $ (32.77)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Class A............................... 4,841,962 5,117,657 5,545,168
Class B............................... 2,013 535 22
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JULY 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
Common Stock
Preferred Stock --------------------------------
Series A Class A Class B
----------------- ----------------- -------------- Paid-In Accumulated Unrealized
Shares Amount Shares Amount Shares Amount Capital Deficit Gain Total
-------- ------- --------- ------- ------ ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 31,
1995............... 7,360 $ 74 4,783,564 $47,837 2,071 $ 21 $1,683,372 $(3,408,173) $ 3,853 $(1,673,016)
Net loss
attributable to
common
shareholders...... -- -- -- -- -- -- -- (764,710) -- (764,710)
Reclassification of
S corporation
losses............ -- -- -- -- -- -- (1,113,350) 1,113,350 -- --
Issuance of Class A
common stock...... -- -- 105,625 1,056 -- -- 248,944 -- -- 250,000
Net change in
unrealized gain on
marketable
securities........ -- -- -- -- -- -- -- -- 1,032 1,032
Adjustment for
conversion of
Class B to Class A
common stock...... -- -- 84,500 845 (1,000) (11) (834) -- -- --
-------- ------ --------- ------- ------ ----- ---------- ----------- ------- -----------
BALANCE, July 31,
1996............... 7,360 74 4,973,689 49,738 1,071 10 818,132 (3,059,533) 4,885 (2,186,694)
Net loss
attributable to
common
shareholders...... -- -- -- -- -- -- -- (2,404,543) -- (2,404,543)
Reflassification of
S corporation
losses............ -- -- -- -- -- -- (1,037,330) 1,037,330 -- --
Issuance of Class A
common stock...... -- -- 467,749 4,677 -- -- 2,323 -- -- 7,000
Net change in
unrealized gain on
marketable
securities........ -- -- -- -- -- -- -- -- 2,101 2,101
Adjustment for
conversion of
Class B to Class A
common stock...... -- -- 45,292 453 (536) (5) (448) -- -- --
Issuance of stock
options (Note 6).. -- -- -- -- -- -- 217,323 -- -- 217,323
-------- ------ --------- ------- ------ ----- ---------- ----------- ------- -----------
BALANCE, July 31,
1997............... 7,360 74 5,486,730 54,868 535 5 -- (4,426,746) 6,986 (4,364,813)
Net loss
attributable to
common
shareholders...... -- -- -- -- -- -- -- (2,152,133) -- (2,152,133)
Reclassification of
S corporation
losses ........... -- -- -- -- -- -- (351,034) 351,034 -- --
Net change in
unrealized gain on
marketable
securities........ -- -- -- -- -- -- -- -- 10,901 10,901
Adjustment for
conversion of
Class B to Class A
common stock...... -- -- 45,233 452 (535) (5) (447) -- -- --
Issuance of stock
options (Note 6).. -- -- -- -- -- -- 252,044 -- -- 252,044
Exercise of stock
options (Note 6).. -- -- 56,333 563 -- -- 99,437 -- -- 100,000
-------- ------ --------- ------- ------ ----- ---------- ----------- ------- -----------
BALANCE, July 31,
1998............... 7,360 $ 74 5,588,296 $55,883 -- $ -- $ -- $(6,227,845) $17,887 $(6,154,001)
======== ====== ========= ======= ====== ===== ========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (430,415) $ (1,965,985) $ (1,521,216)
------------ ------------ ------------
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Minority interest................ 2,522 2,829 7,740
Depreciation and amortization.... 2,222,100 4,181,239 5,130,377
Deferred income taxes............ 48,623 (21,126) 9,548
Extraordinary loss on early
retirement of debt.............. 132,130 -- --
Asset impairment................. -- -- 833,996
Cumulative effect of change in
accounting principle............ -- -- 628,700
Accretion of stock warrants...... 854,350 1,773,107 449,795
Changes in operating assets and
liabilities, net of the effects
of acquisitions:
Accounts receivable, net....... (54,726) (1,350,595) (1,737,603)
Other receivables.............. (10,184) (161,961) (309,930)
Marketable securities.......... 498,103 58,236 793,537
Inventory...................... 158,963 (283,723) (1,375,381)
Prepaid expenses and other
current assets................ (124,706) 326,200 (845,143)
Other assets................... 108,007 (586,157) (403,635)
Accounts payable and accrued
liabilities................... (28,282) 2,129,443 2,605,411
Customer deposits.............. 644,501 (215,322) (14,528)
Deferred revenues.............. 168,052 636,345 1,117,474
------------ ------------ ------------
Total adjustments............ 4,619,453 6,488,515 6,890,358
------------ ------------ ------------
Net cash provided by
operating activities........ 4,189,038 4,522,530 5,369,142
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of
cash acquired..................... (10,399,546) (8,960,645) (20,978,475)
Purchases of property and
equipment, net.................... (4,929,700) (5,393,089) (8,759,428)
------------ ------------ ------------
Net cash used in investing
activities.................. (15,329,246) (14,353,734) (29,737,903)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred
stock............................. 3,500,000 -- 4,500,000
Payment of preferred stock
dividends......................... (334,295) (449,958) (518,859)
Proceeds from issuance of long-term
debt, net......................... 8,556,386 9,791,335 20,365,148
Proceeds from issuance of common
stock............................. 250,000 7,000 100,000
Other financing activities......... -- (60,150) (205,761)
------------ ------------ ------------
Net cash provided by
financing activities........ 11,972,091 9,288,227 24,240,528
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 831,883 (542,977) (128,233)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................... 377,126 1,209,009 666,032
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................ $ 1,209,009 $ 666,032 $ 537,799
============ ============ ============
CASH PAID FOR INTEREST............... $ 1,337,063 $ 1,765,766 $ 3,486,792
============ ============ ============
CASH PAID FOR TAXES.................. $ 704,334 $ 353,000 $ 554,984
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996, 1997 AND 1998
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, voice mail, and other
enhanced telecommunications services. The Company has provided paging and voice
mail services since 1988.
In December 1998, the Company completed the acquisitions of Cape Fear Paging
Company, Cape Fear Paging Company of North Carolina, and CF Paging Corporation
(collectively, "Cape Fear Companies"). Cape Fear Companies are engaged in
providing local, regional, and nationwide paging and voice mail communications
services. The acquisitions of Cape Fear Companies were accounted for as a
pooling of interests. The accompanying consolidated financial statements have
been restated for all periods presented to give effect to these transactions
(Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries, Satellink Paging, LLC, FM Concepts,
Ltd., FM Concepts, L.L.C., and DirectLink Communications, L.L.C. ("DirectLink")
(Note 4). All significant intercompany accounts and transactions have been
eliminated in consolidation.
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.
Marketable Securities
The Company's marketable securities are categorized as available-for-sale
securities as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a separate
component of shareholders' equity (deficit) until realized. For the years ended
July 31, 1996, 1997, and 1998, gross realized gains and losses on sales of
available-for-sale securities were not material. The cost of securities sold is
based on the specific identification method.
Inventory
Inventory is valued at the lower of cost or market. Inventory consists
primarily of pagers and pager replacement parts.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets as of July 31, 1997 and 1998
consisted of the following:
F-8
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Deferred offering costs (Note 13)....................... $ 0 $ 696,496
Prepaid expenses........................................ 227,404 667,132
Other................................................... 198,131 213,361
-------- ----------
$425,535 $1,576,989
======== ==========
</TABLE>
Deferred offering costs associated with the Company's initial public offering
will be expensed if the Company is unable to complete its planned initial
public offering.
Long-Lived Assets
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
established 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 to the Company's consolidated financial statements.
The Company reviews its long-lived assets such as property and equipment,
goodwill, and other intangible assets for impairment at each balance sheet date
or whenever events or changes in circumstances indicate that the carrying
amount of an asset should be assessed. Management evaluates the tangible and
intangible assets related to each acquisition individually to determine whether
an impairment has occurred. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the assets are not sufficient to
recover the unamortized balance of the asset. Estimates of future cash flows
are based on many factors, including current operating results, expected market
trends, and competitive influences. If an impairment has occurred, a loss equal
to the difference between the carrying value of the asset and its fair value is
recognized. The resulting reduced carrying amount of the asset is accounted for
as its new cost and depreciated over the asset's remaining useful life.
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 15 years
</TABLE>
All costs in the software development process that are classified as research
and development are expensed as incurred until technological feasibility has
been established. Once technological feasibility has been established, such
costs are considered for capitalization. The Company's policy is to amortize
these costs using the greater of the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues for
that product or the straight-line method over the remaining estimated economic
life of the product. Amortization will begin when the product is available for
general release to customers, accordingly, no amortization related to software
cost has been charged to expense during the years ended July 31, 1996, 1997 and
1998. The amount of capitalized unamortized software cost included in the
accompanying consolidated balance sheet at July 31, 1997 and 1998 is $327,251
and $914,972, respectively.
In the year ended July 31, 1998, the Company implemented a new communications
platform, the Satellink Telecommunications Application Resource Network
("STAR*Net"). In conjunction with such implementation,
F- 9
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
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
on the Company's intention to sell the equipment. The Company is depreciating
the remaining net book value of the impaired assets over the remaining
estimated useful lives due to the assets currently being used in operations
until all traffic is transferred to the new STAR*Net system. Depreciation will
cease once all traffic is moved from the existing platform and the platform is
ready for sale.
Goodwill and Other Intangible Assets
The excess of cost over the fair market value of the identifiable assets
acquired is being amortized using the straight-line method over a period of 30
years.
Other intangible assets, net of accumulated amortization as of July 31, 1997
and 1998, consisted of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Acquired subscriber bases........................... $1,991,236 $4,518,386
Affiliate fees...................................... 557,538 544,166
Noncompete agreements............................... 530,556 309,455
Debt issuance costs................................. 257,209 393,104
FCC licenses........................................ 385,749 516,574
---------- ----------
$3,722,288 $6,281,685
========== ==========
</TABLE>
Acquired subscriber bases related to the Company's acquisitions are amortized
using the straight-line method 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 using the straight-
line method over a period of ten 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 using the
straight-line method 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, the Company continually evaluates whether later events
and circumstances have occurred that indicate that 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 cash flows over the
remaining life of the intangible assets in measuring whether such intangible
assets are recoverable in accordance with APB Opinion 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 using the
effective interest method over the term of the related debt.
The Company initially capitalized certain costs related to process
reengineering initiatives that were directed toward assessing the current state
of certain processes and reengineering those processes associated with its
customer service department and certain retail stores. On November 20, 1997,
the Emerging Issues Task Force of the Financial Accounting Standards Board
("FASB") reached a consensus on Issue No. 97-13,
F-10
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
"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,
be 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 year ended July 31, 1998, the
Company adopted EITF 97-13. Capitalized third-party and internally generated
costs related to operational efficiency improvement initiatives as of November
20, 1997 totaled $628,700 and have been written off through a cumulative effect
of a change in accounting principle in the accompanying statement of operations
for the year ended July 31, 1998. The Company incurred $234,000 and $466,000 of
costs related to these initiatives in fiscal 1997 and 1998, respectively, of
which $71,300 was incurred subsequent to November 20, 1997 and is recorded in
operating expenses in the accompanying statement of operations for the year
ended July 31, 1998.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities as of July 31, 1997 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Accounts payable.................................... $1,208,919 $1,749,013
Accounts payable -- related parties (Note 11)....... 545,095 1,164,735
Accrued interest.................................... 417,751 207,189
Accrued professional fees (Note 13)................. 60,000 741,444
Accrued wages, salaries, and related taxes.......... 410,029 762,177
Other accrued liabilities........................... 327,200 840,143
---------- ----------
$2,968,994 $5,464,701
========== ==========
</TABLE>
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.
Cape Fear Paging Company of North Carolina ("CFNC"), included herein, was
acquired in conjunction with the pooling-of-interests method of accounting
discussed in Note 3 and was treated as an S corporation for federal and state
income tax purposes. As such, in lieu of corporate income tax consequences
arising at CFNC's level, the individual shareholders were allocated their
proportionate shares of CFNC's taxable income or loss.
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 of
revenues received for enhanced voice messaging and personal telecommunications
services. The Company bills the fixed portion of the fees it charges for
enhanced voice messaging and personal telecommunications services in advance
and bills usage-related fees in arrears. Revenue from product sales is recorded
at the time title passes.
The Company's policy is to record revenue at the time the service is
performed. 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.
Research and Development
Research and development costs incurred in connection with the Company's
pager development project are charged to operations in the year incurred.
Approximately $439,800 was expensed related to the Company's
F-11
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
pager development project for the year ended July 31, 1996 and has been
recorded as research and development in the accompanying statements of
operations.
Advertising
The Company expenses all advertising costs as incurred. The Company incurred
and expensed advertising costs in the approximate amounts of $370,100,
$450,400, and $516,700 for the years ended July 31, 1996, 1997, and 1998,
respectively, and has recorded these costs as selling and marketing in the
accompanying consolidated statements of operations.
Commissions
The Company expenses commissions when earned by sales representatives.
Basic Loss Per Share
During 1997, the Company adopted 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 are 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 ("SEC") 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 the 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.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
marketable securities, 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 values of the Company's financial instruments
approximates their carrying value as of July 31, 1997 and 1998.
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 amounts of the Company's receivables approximates their fair values.
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 could be
affected by regulatory decisions, trends, and policies made by these agencies.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
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 No. 130 is not expected to have an impact on the
Company's financial statements.
F-12
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for the way
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 No. 131 is not expected to have a material impact on
the Company's financial statements.
3. ACQUISITIONS
Satellink has made the acquisitions set forth below. The acquisitions have
been accounted for as purchases and poolings of interest in accordance with the
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations."
Poolings of Interest
Cape Fear Companies
Effective December 8, 1998, the Company acquired all of the outstanding
shares of Cape Fear Companies in exchange for 2,533,893 shares of common stock
of the Company. The transactions were accounted for as a pooling of interests.
Prior to Cape Fear Companies' merger with Satellink, Cape Fear Companies
reported on a calendar year basis ending December 31. In accordance with the
SEC rules and interpretations, Cape Fear Companies' financial statements for
the 12-month periods ending September 30, 1996, 1997, and 1998 have been
combined with the Company's financial statements for the fiscal years ended
July 31, 1996, 1997, and 1998, respectively. The consolidated financial
statements have been restated for all periods presented to include the
operations of the Cape Fear Companies accounted for as a pooling of interests.
A reconciliation of previously reported operating results to those restated
for the poolings-of-interest transactions is as follows (in thousands, except
earnings per share data):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues:
Satellink, as previously reported.............. $10,814 $17,572 $22,848
Cape Fear Companies............................ 12,307 15,937 16,813
------- ------- -------
Satellink, as restated....................... $23,121 $33,509 $39,661
======= ======= =======
Loss from continuing operations:
Satellink, as previously reported.............. $ (812) $(1,628) $ (884)
Cape Fear Companies............................ 514 (338) (9)
------- ------- -------
Satellink, as restated....................... $ (298) $(1,966) $ (893)
======= ======= =======
Allocation of losses to:
Satellink, as previously reported:
Class A...................................... $(1,205) $(2,035) $(2,143)
------- ------- -------
Class B...................................... $ (74) $ (31) $ (1)
======= ======= =======
Satellink, as restated:
Class A...................................... $ (739) $(2,383) $(2,151)
======= ======= =======
Class B...................................... $ (26) $ (21) $ (1)
======= ======= =======
</TABLE>
F-13
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Basic and diluted net loss per share:
Satellink, as previously reported:
Class A...................................... $ (0.43) $ (0.69) $ (0.71)
======= ======= =======
Class B...................................... $(36.69) $(58.24) $(59.68)
======= ======= =======
Satellink, as restated:
Class A...................................... $ (0.15) $ (0.47) $ (0.39)
======= ======= =======
Class B...................................... $(12.90) $(39.36) $(32.77)
======= ======= =======
</TABLE>
Purchases
MidSouth Paging Network, Inc. ("MidSouth")
Effective October 15, 1996, the Company acquired substantially all of the
assets of MidSouth under the terms of an asset purchase agreement. The acquired
assets consisted primarily of local subscribers, pagers, paging terminals,
furniture and fixtures, and an FCC license. The purchase price was
approximately $4,000,000 before recording certain acquisition expenses and
adjustments and was financed through a note payable.
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 voice mail subscribers. The purchase price was
approximately $1,550,000 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.
Satellink 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.
F-14
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
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, 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.
Premier Paging, Inc. and Premier Paging of New Orleans, Inc. (collectively,
"Premier")
Effective April 1, 1998, the Company acquired substantially all of the assets
of Premier 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.
Hyde's Stay In Touch, Inc. ("Hyde's")
Effective May 1, 1998, Satellink acquired substantially all of the assets of
Hyde's 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 $12,200,000, before certain
acquisition expenses, and was financed through the Company's revolver and a
promissory note.
The following unaudited pro forma information has been prepared assuming that
the purchase 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
actual results of operations which would have occurred had the purchase
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 (in thousands, except
earnings per share data).
F-15
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Pro forma revenues....................................... $43,442 $45,632
Pro forma loss from continuing operations................ (4,460) (1,396)
Pro forma net loss attributable to common shareholders
from continuing operations.............................. (4,899) (2,656)
Allocation of earnings to:
Class A................................................ (4,856) (2,655)
Class B................................................ (43) (1)
Pro forma net loss per share:
Class A................................................ $ (0.95) $ (0.48)
Class B................................................ (80.37) (45.45)
</TABLE>
4. INVESTMENT IN DIRECTLINK
On December 1, 1995, the Company acquired 60% of the membership interests of
DirectLink for $21,300. This acquisition increased the Company's ownership
percentage in DirectLink to 85%. On January 1, 1998, the Company acquired the
remaining 15% of the common stock of DirectLink. The consolidated financial
statements include the accounts of DirectLink. The minority interest represents
the 15% separate ownership in DirectLink for the period from December 1, 1995
through July 31, 1996, the year ended July 31, 1997, and the five-month period
ended December 31, 1997.
The Company also agreed to make additional investments in DirectLink in the
form of a promissory note. The promissory note bears interest at the prime rate
plus 2%. As of July 31, 1997 and 1998, the aggregate amount outstanding under
the promissory note totaled $380,799 and $579,326, respectively, which is
eliminated in consolidation.
5. LONG-TERM DEBT
Long-term debt at July 31, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
$32,000,000 revolving credit facility, variable
interest rate (9.6875% at July 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..................... $10,957,394 $30,807,394
$8,000,000 note payable to bank, variable interest rate
(9.6875% at July 31, 1998), net of unamortized
discount of $188,892 and $143,382 at July 31, 1997 and
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................................. 7,811,018 7,456,618
$1,850,000 note payable to bank, interest at 9.76%
through November 2000 and the lower of 9.76% or LIBOR
plus 3% through maturity of November 2003; principal
and interest payable monthly; secured by certain
assets of the Company and guaranteed by certain
shareholders.......................................... 1,607,738 1,343,452
</TABLE>
F-16
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
$1,750,000 note payable to bank, interest at 9.84%
through November 2000 and the lower of 9.84% or
LIBOR plus 3% through maturity of November 2003;
principal and interest payable monthly; secured by
certain assets of the Company and guaranteed by
certain shareholders............................... $ 1,220,833 $ 1,120,833
$1,000,000 revolving credit facility, interest at
prime plus 1%, interest payable monthly with
principal and accrued interest due October 1998,
secured by certain assets of the Company........... -- 959,940
$1,470,000 note payable to bank, interest at 10.39%
through August 2000 and at the lower of 10.39% or
LIBOR plus 3% thereafter, payable in monthly
installments through maturity of August 2003;
secured by certain assets of the Company and
guaranteed by certain shareholders................. 1,032,569 911,310
$820,083 note payable to bank, interest at prime
plus 1%, principal and interest payments payable
monthly through January 2000; secured by certain
assets of the Company.............................. 592,011 318,921
$750,000 revolving credit facility, interest at
prime plus 1%, interest payable monthly with
principal payable in full in October 1998; secured
by leased pagers................................... -- 573,469
$500,000 term note with principal and interest
payable monthly at prime plus 1% until April 2000;
secured by certain assets of the Company........... 467,160 273,852
$500,000 revolving credit facility; interest at
prime plus 1%, monthly payments of interest until
demand payment of principal and interest; secured
by accounts receivable and inventory............... 464,000 --
$657,449 note payable to bank, interest at prime
plus 1%, principal and interest payments payable
monthly through October 1999; secured by paging
equipment.......................................... 456,652 255,674
$500,000 revolving credit facility, interest at
prime plus 1%, interest payable monthly with
principal payable in 30 installments beginning
August 1997........................................ 373,395 --
Other............................................... 125,886 215,766
----------- -----------
27,173,725 47,477,862
$1,200,000 note payable to bank, interest at prime
plus 1.5%, principal and interest payments payable
monthly through December 1999; secured by paging
equipment.......................................... 300,000 80,000
Less current portion................................ (3,108,813) (6,135,525)
----------- -----------
$24,064,912 $41,342,337
=========== ===========
</TABLE>
Note payable to shareholders, interest payable
annually at 5.85%, principal payments to begin in
1999............................................... 523,843 2,624,577
Notes payable to sellers, interest at 0% to 9% (Note
3)................................................. 1,241,226 536,056
F-17
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
Following are maturities of long-term debt as of July 31, 1998 for each of
the next five years ending on July 31:
<TABLE>
<S> <C>
1999............................................................. $ 6,135,525
2000............................................................. 3,382,251
2001............................................................. 2,897,134
2002............................................................. 34,280,734
2003............................................................. 739,363
Thereafter....................................................... 42,855
-----------
Total.......................................................... $47,477,862
===========
</TABLE>
The fair value of long-term debt, including maturities, at July 31, 1997 and
1998 approximates the carrying value due to the variable rate of the
instruments.
During 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 million. The New
Credit Facility was divided into a $17 million revolving line of credit (the
"Revolver") and an $8 million term note (the "Term Note").
In March 1998, the Company amended the New Credit Facility to increase its
Revolver from $25 million to $32 million. The Company paid $150,000 for the
increase in the Revolver.
The Revolver and the 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 July 31, 1998, the Company was in compliance with these debt covenants.
6. 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 July 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.
During October 1997, the Company's board of directors issued 4,677 shares of
Class A common stock in connection with the incorporation of CF Paging
Corporation.
In April 1998, the Company amended its articles of incorporation and
increased the number of authorized shares of Class A common stock to
50,000,000.
F-18
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
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 a 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 84.5 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 84.5 shares
of Class A common stock. The Company has never issued shares of the Series B
Preferred Stock.
Stock Warrants
In connection with the Company's original financing agreement with
Creditanstalt, the Company issued a warrant to Creditanstalt to purchase either
999,194 shares of Class A common stock or 11,404 shares of Series B Preferred
Stock at an exercise price of $.01 per share. The proceeds from the term loan
and credit facility were allocated between long-term debt and stock warrants.
The estimated $450,000 fair market value of stock warrants at the date of grant
was included in long-term liabilities in the accompanying consolidated balance
sheets. Due to the Company's 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
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 interest 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 is
being accreted as a direct charge to earnings over the term of the facility and
term loan. During fiscal 1996, 1997, and 1998, the Company recorded incremental
warrant accretion expense in the amount of $854,350, $1,773,107, and $449,795,
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 13% of the Company's
outstanding capital stock. The put feature of the warrants is cancelled upon
completion of a qualified initial public offering of common stock which yields
net proceeds to the Company of at least $10.0 million.
F-19
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
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
$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.
During the year ended July 31, 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 $3.68 per share (the estimated fair value at the
date of grant). The option was in consideration for services provided during
the years ended July 31, 1997 and 1998 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 year ended July 31, 1998, the Company granted options to employees
to purchase 153,422 shares of the Company's Class A common stock at an exercise
price of $4.62 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 four years.
Long-Term Incentive Plan
The Company's long-term incentive plan (the "Plan") was adopted by
Satellink's Board of Directors on September 18, 1997 and approved by the
shareholders on December 18, 1997. The Plan authorizes the issuance of up to
1,000,000 shares of common stock. The Plan's purpose is to promote the success
and enhance the value of Satellink by linking the personal interests of key
employees, officer 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 Satellink flexibility in motivating, attracting and
retaining individuals upon whose judgment, interest and special effort
Satellink's success is largely dependent. The Plan authorizes the granting of
awards to key employees, officers and directors of Satellink or its
subsidiaries in the form of options (both incentive stock options and non-
qualified stock options) to purchase shares of stock, stock appreciation
rights, performance shares, restricted stock, and other stock-based awards.
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 instruments 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 Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting methodology required by APB Opinion No.
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 Opinion No. 25, under which the Company has recognized no
compensation cost. However, the Company has computed, for pro forma 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, 1997 and 1998
using the Black-Scholes option pricing model, as allowed under SFAS No. 123 and
based on the following assumptions:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Risk-free interest rate.............................. 6.27%-6.52% 5.8%-6.52%
Expected dividend yield.............................. 0% 0%
Expected lives....................................... Five years Five years
Expected volatility.................................. 45% 45%
</TABLE>
F-20
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
The total fair value of the options granted during the years ended July 31,
1996, 1997, and 1998 was computed as $39,435, $328,968, and $113,565,
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, 1997 and 1998 would have
been as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net loss attributable to common shareholders:
As reported:
Class A...................................... $(2,383,488) $(2,151,412)
Class B...................................... (21,055) (721)
----------- -----------
Total...................................... $(2,404,543) $(2,152,133)
=========== ===========
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Pro forma:
Class A...................................... $(2,709,576) $(2,264,939)
Class B...................................... (23,935) (759)
----------- -----------
Total...................................... $(2,733,511) $(2,265,698)
=========== ===========
Basic net loss per share attributable to common
shareholders:
As reported:
Class A...................................... $ (0.47) $ (0.39)
Class B...................................... (39.36) (32.77)
Pro forma:
Class A...................................... (0.53) (0.41)
Class B...................................... (44.74) (34.50)
</TABLE>
The following table summarizes the transactions under the Company's stock
option plan:
<TABLE>
<CAPTION>
Weighted
Average
Number Price Per
of Options Share
---------- ---------
<S> <C> <C>
Outstanding at July 31, 1996............................ 84,500 $1.78
Granted............................................... 169,000 3.68
-------
Outstanding at July 31, 1997............................ 253,500 3.05
Granted............................................... 153,422 4.62
Exercised............................................. (56,333) 1.78
-------
Outstanding at July 31, 1998............................ 350,589
=======
</TABLE>
At July 31, 1997 and 1998, there were 253,500 and 350,589 options,
respectively, outstanding with a weighted average remaining contractual life of
3.33 and 4 years, respectively. There were 225,333 and 201,939 options
exercisable at a weighted average exercise price of $3.21 and $3.83 per share
as of July 31, 1997 and 1998, respectively. The weighted average fair value of
options granted during the years ended July 31, 1997 and 1998 was $1.01 and
$1.18, respectively.
F-21
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
7. 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 holder's 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 $100 per share during the years ended July 31, 1996, 1997, and
1998, respectively.
8. REDEEMABLE PREFERRED STOCK
On April 3, 1998, the Company sold 4,500 shares of Series D redeemable
preferred stock ("Series D Preferred Stock") together with 163,800 detachable
stock warrants with an exercise price of $4.62 per share and received aggregate
proceeds of $4,500,000. The proceeds were allocated $3,520,000 to the Series D
Preferred Stock and $980,000 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
Company's option any time after the first anniversary of the closing date and
at the purchaser's option after the fifth anniversary of the closing date. The
Company is 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. The Company paid dividends of $28.33 per share during the year
ended July 31, 1998. The difference between the carrying amount of the Series D
Preferred Stock and the exchange price of $4,500,000 is being accreted over
five years. The Company realized accretion expense of approximately $65,300 for
the year ended July 31, 1998, which is included in the accompanying
consolidated statements of operations as preferred stock dividends.
9. INCOME TAXES
The Company recorded no federal or state income tax benefit for each of the
three years ended July 31, 1996, 1997, and 1998 due to the level of pretax
losses incurred in recent years.
The reconciliation of the effective income tax rate to the federal statutory
tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- --------
<S> <C> <C> <C>
Federal income tax expense (benefit) at
statutory rate (34%)........................ $ 95,090 $(535,776) $(89,259)
State income tax expense (benefit) at net of
federal benefit (4%)........................ 11,187 (63,032) (10,501)
S corporation losses not subject to corporate
level taxes................................. 93,062 397,793 344,500
Valuation allowance.......................... 308,706 644,887 359,295
Other........................................ 69,915 (53,698) 25,954
-------- --------- --------
Income tax expense........................... $577,960 $ 390,174 $629,989
======== ========= ========
</TABLE>
F-22
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
Deferred tax assets (liabilities) are comprised of the following as of July
31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 2,105,288 $ 3,050,801
Bad debt reserve............................... 143,480 258,405
Other.......................................... 57,339 143,244
----------- -----------
2,306,107 3,452,450
Deferred tax liabilities:
Accelerated depreciation....................... (1,401,883) (2,198,479)
----------- -----------
Total net deferred tax asset before valuation
allowance................................... 904,224 1,253,971
Less valuation allowance......................... (1,066,721) (1,426,016)
----------- -----------
Total net deferred liabilities............... $ (162,497) $ (172,045)
=========== ===========
</TABLE>
Cape Fear Paging Company of North Carolina ("CFNC") included herein that was
acquired in conjunction with the pooling-of-interests method of accounting
discussed in Note 3 elected to be treated as an S corporation for federal and
state income tax purposes. As such, in lieu of corporate income tax
consequences arising at CFNC's level, the individual shareholders were
allocated their proportionate shares of CFNC's taxable income or loss.
The increase in the valuation allowance for the year ended July 31, 1998 was
$359,295, primarily related to additional operating loss carryforwards. The
decrease in the valuation allowance for the year ended July 31, 1997 was
$77,126 and related to changes in certain temporary differences, net of
additional operating loss carryforwards.
As of July 31, 1997 and 1998, the Company had net operating loss
carryforwards, which expire at various dates through 2010, of approximately
$5,212,000 and $9,352,000, 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 a majority of the
deferred tax asset balance. The entire deferred tax liability recognized
related to Cape Fear Paging Company ("CFPC"). For the years ended July 31, 1997
and 1998, CFPC was profitable as a separate taxable entity and management
recognized the deferred tax liability. Management believes that through various
tax planning strategies and the Company's overall business plan, 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.
10. COMMITMENT AND CONTINGENCIES
Operating Leases
The Company leases office space, antenna sites, and subcarrier frequencies
under noncancelable operating leases expiring on various dates through 2004.
The majority of the subcarrier frequency leases have additional renewal terms
ranging from 3 to 14 years at the option of either party. Because the Company's
operations are dependent on 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 $1,613,000,
$1,894,000, and $1,640,000 for the years ended July 31, 1996, 1997, and 1998,
respectively, related to these operating leases.
F-23
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
Minimum future payments under noncancelable operating leases as of July 31,
1998 for each of the next five years ended July 31 are as follows:
<TABLE>
<S> <C>
1999.............................................................. $1,587,150
2000.............................................................. 1,120,292
2001.............................................................. 651,095
2002.............................................................. 453,043
2003.............................................................. 279,618
Thereafter........................................................ 105,882
----------
$4,197,080
==========
</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 and results of operations.
Dependence on Other Telecommunications Providers
Except for a few local and regional paging networks, the Company does not own
a transmission network. The Company depends on MCI WorldCom and other
facilities-based and nonfacilities-based carriers for transmission of the
Company's subscribers' long-distance calls and the majority of paging data. The
Company has entered into supply agreements with MCI WorldCom and other carriers
to provide long-distance telecommunications and paging services. The contracts
are generally for a term of three years but are subject to early termination in
certain instances. Some of the contracts also contain minimum purchase
requirements. In addition, the Company depends on local exchange carriers for
call origination and termination. Satellink's ability to maintain and expand
business depends in part on its ability to enter into favorable contracts with
long-distance and paging carriers. The Company's success also depends on the
cooperation of interexchange and local exchange carriers originating and
terminating service in a timely manner. The partial or total loss of ability to
initiate or terminate calls would result in a loss of revenues and could lead
to a loss of subscribers.
Risk of Loss From Fraud, Bad Debt, and Theft of Services
By unlawfully using the access numbers and personal identification numbers
("PINs") of authorized users, various people have occasionally gained
unauthorized access to the Company's network and services. Unauthorized use of
access numbers and PINs in the future may be material to Satellink's business,
financial condition, and results of operations. The Company attempts to control
unauthorized use through internal controls and the Company's billing system.
The STAR*Net platform is designed to prohibit a single access number and PIN
from establishing multiple connections to the platform at the same time. The
Company has established preset spending limits for each subscriber. Although
the Company believes that risk management and bad debt reserve practices are
adequate, unauthorized transactions and theft of services could negatively
affect the Company's business, financial condition, and results of operations.
Dependence on Networks, Switching Facilities, and the STAR*Net Platform
The Company relies on its own network, third-party networks, its switching
facilities, and the STAR*Net platform to operate its services. A fire, act of
sabotage, technical failure, natural disaster, or similar event could impact
the networks, facilities, and platforms and cause an interruption in services.
For example, on May 18 and 19, 1998, the Galaxy 4 satellite owned by PanAmSat
malfunctioned. PanAmSat transmits paging messages
F-24
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
for a majority of the pagers in use in the United States. The satellite
malfunction interrupted the paging service of up to 40 million subscribers in
the United States, including approximately 25% of the Company's subscribers.
Most subscribers were not affected by the satellite malfunction because the
Company uses multiple message distribution networks. The majority of
subscribers are serviced through the CUE nationwide FM paging network and the
Company's VHF and UHF paging networks. However, future technical malfunctions
could have a much greater effect on the Company's customers or affect the
Company's other distribution networks.
At this time, the Company has switching facilities and STAR*Net platforms in
16 locations in the southeastern and southwestern United States. Network
services are dependent upon the Company's ability to protect the equipment and
data at the Company's switching facilities and the STAR*Net platforms. The
Company has implemented monitored security systems, controlled access
procedures, automated data backup, uninterruptable power supply systems, and
automated system trouble alerts at all locations. However, these safeguards
offer no guarantee that the Company's equipment and data will be protected.
Dependence on CUE Paging to Maintain its Network
The FM subcarrier paging network is located in Alabama, Kentucky, Tennessee,
and Georgia and is linked with the CUE nationwide FM subcarrier paging network.
This is the network through which the Company delivers nationwide paging
services, and therefore, the Company is dependent upon CUE to maintain and
develop its paging network. CUE is not under any contractual obligation to
upgrade or further develop its network to accommodate new technologies or
subscribers. The Company estimates that the CUE network is now operating at
approximately 60% of capacity. Assuming that historical growth rates on the CUE
network continue at the same pace, the Company estimates that the CUE network
can accommodate Satellink's subscriber growth for the next five years. However,
if the Company's estimates are incorrect or if CUE fails to maintain or upgrade
its network, Satellink's business, financial condition, and results of
operations could be negatively impacted.
Dependence on Liquidity and Capital Resources
Any increase 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 acquisition 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.
11. RELATED-PARTY TRANSACTIONS
CUE Paging Corporation
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
F-25
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JULY 31, 1996, 1997 AND 1998
construct and operate regional paging systems utilizing FM subcarrier
technology in the states of Georgia, Kentucky, Tennessee, and Alabama. At July
31, 1998, CUE owned approximately 9% and 13% of the Company's Class A common
stock and Series A preferred stock, respectively.
The Company pays CUE monthly amounts for regional and nationwide airtime
charges, various telephone charges, and co-op advertising fees. Approximately
$5,960,000, $8,563,000, and $9,610,000 were paid to CUE for the years ended
July 31, 1996, 1997, and 1998, respectively, and have been recorded in
services, rent, and maintenance in the accompanying consolidated statements of
operations. Approximately $777,000 and $838,000 were payable to CUE and are
included in accounts payable and accrued liabilities in the accompanying
consolidated balance sheets as of July 31, 1997 and 1998, respectively.
Cape Fear Broadcasting Company
Certain shareholders of the Company are shareholders in Cape Fear
Broadcasting Company, a North Carolina S corporation. The Company leases pagers
to Cape Fear Broadcasting Company, and Cape Fear Broadcasting Company provides
advertising for the Company. At July 31, 1997 and 1998, the Company had
payables of $189,493 and $323,636, respectively, which are classified as
accounts payable and accrued liabilities 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 $9,500, $20,600, and $34,600
during the years ended July 31, 1996, 1997, and 1998, respectively.
13. SUBSEQUENT EVENTS (UNAUDITED)
The Company plans to offer approximately 4,000,000 shares of its common stock
(approximately 4,750,000 shares if the underwriters' overallotment option is
exercised in full) for sale to the public at a proposed price range of $9 to
$11 per share during 1999 (the "Equity Offering"). There can be, however, no
assurance that the Equity Offering will be completed at a per share price
within the estimated range or at all. There are significant potential risks
associated with the Equity Offering as well as with the Company's ability to
compete profitably in this industry.
On September 17, 1998, the Company effected a 1.3-for-1 split. All share and
per share amounts have been retroactively adjusted to give effect to this
split.
On October 13, 1998, the Company amended the New Credit Facility to increase
its Revolver from $32 million to $40 million and the term loan from $8 million
to $15 million.
F-26
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND JANUARY 31, 1999
<TABLE>
<CAPTION>
Pro Forma
July 31, January 31, January 31,
1998 1999 1999
----------- ----------- ------------
(Unaudited) (Unaudited)
(Note 11)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.... $ 537,799 $ 444,991 $ 444,991
Accounts receivable, net..... 6,260,014 7,547,645 7,547,645
Marketable securities........ 587,826 -- --
Inventory.................... 2,499,272 1,536,832 1,536,832
Prepaid expenses and other
current assets.............. 1,576,989 1,200,474 1,200,474
----------- ----------- ------------
Total current assets......... 11,461,900 10,729,942 10,729,942
----------- ----------- ------------
PROPERTY AND EQUIPMENT, NET... 17,251,065 22,763,258 22,763,258
----------- ----------- ------------
OTHER LONG-TERM ASSETS:
Goodwill, net................ 27,667,639 28,054,793 28,054,793
Other intangible assets,
net......................... 6,281,685 5,476,109 5,476,109
----------- ----------- ------------
Total other long-term
assets...................... 33,949,324 33,530,902 33,530,902
----------- ----------- ------------
Total assets................. $62,662,289 $67,024,102 $ 67,024,102
=========== =========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-
term debt................... $ 6,135,525 $ -- $ --
Accounts payable and accrued
liabilities................. 5,464,701 3,889,850 3,889,850
Accrued nonrecurring
charges..................... -- 1,304,789 1,304,789
Customer deposits............ 646,686 656,415 656,415
Deferred revenues............ 2,058,504 2,232,244 2,232,244
Deferred tax liability....... 172,045 172,045 172,045
Accrued dividends on
preferred stock............. 134,642 164,082 164,082
----------- ----------- ------------
Total current liabilities.... 14,612,103 8,419,425 8,419,425
----------- ----------- ------------
LONG-TERM DEBT, less current
maturities................... 41,342,337 53,486,401 53,486,401
----------- ----------- ------------
STOCK WARRANTS................ 5,776,517 5,895,538 --
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES
SERIES C REDEEMABLE
CONVERTIBLE PREFERRED STOCK:
$0.01 par value; 3,500 shares
authorized, 3,500, 3,500
and, 0 shares issued and
outstanding at July 31,
1998, January 31, 1999, and
January 31, 1999 pro forma,
respectively, 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:
$0.01 par value, 4,500 shares
authorized, issued, and
outstanding................. 3,585,333 3,671,937 3,671,937
----------- ----------- ------------
SHAREHOLDERS' EQUITY
(DEFICIT):
Series A convertible
preferred stock $.01 par
value; 7,500 shares
authorized, 7,360, 7,360,
and 0 shares issued and
outstanding at July 31,
1998, January 31, 1999, and
January 31, 1999 pro forma,
respectively, 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, 1998
and January 31, 1999, 0
shares issued and
outstanding................. -- -- --
Common stock, $.01 par value:
Class A voting, 50,000,000
shares authorized,
5,588,296, 5,588,296, and
7,164,220 shares issued and
outstanding at July 31,
1998, January 31, 1999 and
January 31, 1999 pro forma,
respectively................ 55,883 55,883 71,642
Class B nonvoting, 20,000
shares authorized, 535.65,
0, and 0 shares issued and
outstanding at July 31,
1998, January 31, 1999 and
January 31, 1999 pro forma,
respectively................ -- -- --
Additional paid-in capital... -- -- 3,484,315
Stock warrants............... -- -- 5,895,538
Accumulated deficit.......... (6,227,845) (8,005,156) (8,005,156)
Unrealized gain on marketable
securities.................. 17,887 -- --
----------- ----------- ------------
Total shareholders'
(deficit) equity........... (6,154,001) (7,949,199) 1,446,339
----------- ----------- ------------
Total liabilities and
shareholders' equity....... $62,662,289 $67,024,102 $ 67,024,102
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-27
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 31, 1998 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
January 31
------------------------
1998 1999
----------- -----------
<S> <C> <C>
REVENUES:
Service, rent, and maintenance fees................ $17,652,075 $22,008,388
Product sales...................................... 929,460 1,755,982
----------- -----------
Total revenues................................... 18,581,535 23,764,370
Cost of products sold.............................. (560,881) (1,525,233)
----------- -----------
Net revenues..................................... 18,020,654 22,239,137
----------- -----------
OPERATING EXPENSES:
Service, rent, and maintenance..................... 7,496,318 8,379,110
Selling and marketing.............................. 2,197,786 3,214,146
General and administrative......................... 3,370,439 3,784,050
Engineering........................................ 556,278 869,702
Depreciation and amortization...................... 2,225,145 2,776,005
Restructuring and other one-time charges........... 833,996 1,628,789
----------- -----------
Total operating expenses......................... 16,679,962 20,651,802
----------- -----------
OPERATING INCOME.................................... 1,340,692 1,587,335
OTHER INCOME (EXPENSE):
Other income (expense)............................. (75,426) 472,160
Interest expense................................... (1,462,908) (2,430,262)
Accretion of stock warrants........................ (228,874) (119,021)
Minority interest.................................. (5,673) --
Write-off of offering costs........................ -- (570,000)
----------- -----------
LOSS BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE.................. (432,189) (1,059,788)
INCOME TAX EXPENSE.................................. 558,100 88,117
----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................... (990,289) (1,147,905)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.......................................... (628,700) --
----------- -----------
NET LOSS............................................ (1,618,989) (1,147,905)
PREFERRED STOCK DIVIDENDS........................... 219,162 508,414
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS........ $(1,838,151) $(1,656,319)
=========== ===========
ALLOCATION OF LOSS TO:
Basic and diluted:
Class A............................................ $(1,837,147) $(1,656,319)
Class B............................................ $ (1,004) $ --
BASIC AND DILUTED NET LOSS PER SHARE:
Net loss attributable to common shareholders:
Class A............................................ $ (0.33) $ (0.30)
Class B............................................ $ (28.29) $ --
Loss from cumulative effect of change:
Class A............................................ $ (0.11) $ --
Class B............................................ $ (9.68) $ --
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted:
Class A............................................ 5,486,730 5,588,296
Class B............................................ 35 --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-28
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JANUARY 31, 1998 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
January 31
------------------------
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(1,618,989) $(1,147,905)
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest.................................. 5,673 --
Depreciation and amortization...................... 2,225,145 2,776,005
Cumulative effect of change in accounting
principle......................................... 628,700 --
Nonrecurring charges............................... 833,996 1,628,789
Accretion of stock warrants........................ 228,874 119,021
Restatement related to pooling-of-interests
transaction (Note 2).............................. -- 120,992
Changes in operating assets and liabilities:
Accounts receivable............................... (1,317,332) (1,274,987)
Marketable securities............................. 34,536 569,939
Inventory......................................... 172,935 962,440
Prepaid expenses and other current assets......... (268,124) 376,515
Accounts payable and accrued liabilities.......... 1,236,243 (265,954)
Customer deposits................................. (55,047) 9,729
Deferred revenues................................. (532,734) 173,739
----------- -----------
Total adjustments................................ 3,192,865 5,196,228
----------- -----------
Net cash provided by operating activities........ 1,573,876 4,048,323
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired...... (590,000) (781,324)
Purchases of property and equipment, net........... (5,280,606) (8,739,372)
----------- -----------
Net cash used in investing activities............ (5,870,606) (9,520,696)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock........................... 100,000 --
Payment of preferred stock dividends............... (263,082) (478,974)
Proceeds from issuance of long-term debt, net...... 4,183,682 6,008,539
Other financing activities......................... -- (150,000)
----------- -----------
Net cash provided by financing activities........ 4,020,600 5,379,565
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............ (276,130) (92,808)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 666,032 537,799
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 389,902 $ 444,991
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-29
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared by management of Satellink Communications, Inc.
and its subsidiaries (the "Company" or "Satellink") in accordance with rules
and regulations of the Securities and Exchange Commission ("SEC"). Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In the opinion of management of the Company,
all adjustments (consisting only of normal recurring adjustments, except ads
disclosed herein) considered necessary for a fair presentation of the
consolidated financial statements have been included. Preparing financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, and expenses. Examples
include provisions for bad debts, carrying values, and useful lives assigned to
goodwill and other long-lived assets and accruals. Actual results could differ
from those estimates. These interim condensed consolidated financial statements
should be read in conjunction with the annual financial statements of Satellink
and the notes thereto.
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.
2. POOLING OF INTERESTS ACQUISITIONS
Effective December 8, 1998, the Company acquired all of the outstanding
shares of Cape Fear Companies in exchange for 2,533,893 shares of common stock
of Cape Fear Paging Company, Cape Fear Paging Company of North Carolina, and CF
Paging Corporation (collectively, "Cape Fear Companies"). The transactions were
accounted for as pooling of interests. Prior to Cape Fear Companies' merger
with Satellink, Cape Fear Companies reported on a calendar year basis ending
December 31. In accordance with the SEC's rules and interpretations, Cape Fear
Companies' financial statements for the 12-month period ending September 30,
1997 and 1998 have been combined with the Company's financial statements for
the fiscal year 1997 and 1998, respectively. The condensed consolidated
financial statements have been restated for all periods presented to include
the operations of the acquired entities accounted for as a pooling of
interests.
For the six months ended January 31, 1999, Cape Fear Companies' financial
position and operating results were restated to coincide with the Company's
quarter ended January 31, 1999. As a result of this restatement, Cape Fear
Companies' results of operations for the months ended August and September 1998
have been included in both the financial statements for the year ended July 31,
1998 and the six months ended January 31, 1999. Cape Fear Companies' revenues,
operating expenses, and net loss for the two months ended September 1998 were
approximately $2,736,514, $2,558,114, and $120,992, respectively. The operating
results for the six months ended January 31, 1998 have been prepared by
combining Satellink's results for the six months ended January 31, 1998 with
those of the Cape Fear Companies for the six months ended March 31, 1998.
F-30
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. NONRECURRING CHARGES
The Company recorded charges against income of approximately $1.6 million in
the second quarter of fiscal 1999 in connection with the acquisition of the
Cape Fear Companies. Such charges consist of transaction costs, principally
investment banking and professional fees, which must be expensed under pooling
of interests accounting. In addition, the Company has accrued the estimated
costs to exit certain facilities and discontinue certain business processes and
activities which are duplicative or redundant in the combined operations of the
Company and Cape Fear Companies. These costs consist of severance associated
with work force reduction and asset impairments for duplicative equipment.
A summary of the nonrecurring charges is as follows (in thousands):
<TABLE>
<S> <C>
Transaction costs.................................................. $ 943
Severance.......................................................... 247
Asset impairments.................................................. 439
------
$1,629
======
</TABLE>
The asset impairments represent the writedown of duplicative equipment which
the Company intends to dispose of as a result of the Cape Fear acquisitions.
The equipment has been written down to its estimated salvage value which is
immaterial to the financial statements. The Company anticipates that the
$1,190,000 accrued for transaction costs and severance will be fully paid
during the year ending July 31, 1999.
In addition to the above charges, the Company recorded a charge of $570,000
in the six months ended January 31, 1999 to write off deferred costs associated
with a planned initial public offering which has been withdrawn.
During 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, was removed as a part of the
conversion of the STAR*Net system. Accordingly, the Company recognized a loss
totaling $833,996 related to the impairment of the existing equipment. The
Company incurred $234,000 and $466,000 of costs related to these initiatives in
fiscal 1997 and 1998, respectively, of which $71,300 was incurred subsequent to
November 20, 1997 and is recorded in operating expenses in the accompanying
statement of operations for the six months ended January 31, 1998.
4. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which establishes
standards for the way 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 No. 131 is not expected to have a
material impact on the Company's financial statements.
5. NET LOSS PER SHARE
Net loss per share is computed in accordance with SFAS No. 128, "Earnings Per
Share." Net loss 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. In the first quarter of fiscal 1998, the final outstanding shares
of Class B common stock were converted to Class A common stock. Consequently,
only Class A loss per share for the six months ended January 31, 1999 are
presented.
F-31
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Basic net loss per share is computed by dividing net loss attributable to
common shareholders by the weighted average number of common shares outstanding
during the period and does not include any other potentially dilutive
securities. Diluted net income per share gives effect to all potentially
dilutive securities. The Company's Series A convertible preferred stock, Series
C redeemable convertible preferred stock, stock options, and stock warrants are
potentially dilutive securities. For all periods presented, the inclusion of
dilutive securities are anti-dilutive. Accordingly, diluted earnings per share
data is not presented.
On February 4, 1998, the SEC 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 the 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. COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income represents the change in equity of a business during a
period, except for investments by owners and distributions. Unrealized gains
adjustments represent the Company's only component of other comprehensive
income. These unrealized gains are considered immaterial for all periods
presented.
7. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company initially capitalized certain costs related to process
reengineering initiatives that were directed toward assessing the current state
of certain processes and reengineering those processes associated with its
customer service department and certain retail stores. 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, be 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. Capitalized third-party and internally
generated costs related to operational efficiency improvement initiatives as of
November 20, 1997 totaled $628,700 and have been written off through a
cumulative effect of a change in accounting principle in the accompanying
statement of operations for the six months ended January 31, 1998. The Company
incurred $234,000 and $466,000 of costs related to these initiatives in fiscal
1997 and 1998, respectively, of which $71,300 was incurred subsequent to
November 20, 1997 and is recorded in operating expenses in the accompanying
statement of operations for the six months ended January 31, 1998.
8. INCOME TAXES
The income tax provisions for the six months ended January 31, 1998 and 1999
represent income tax expenses associated with the operations of Cape Fear
Paging Company, a C corporation. Prior to Cape Fear Companies' merger with
Satellink, one of the Cape Fear Companies (Cape Fear Paging Company of North
Carolina) had elected to be treated as an S corporation, which is not subject
to corporate-level federal income tax. The remaining members of the Cape Fear
Companies were C corporations, which were subject to federal income tax.
No net income tax provision was recorded by Satellink or CF Paging
Corporation, as their taxable income was fully offset by net operating losses
("NOLs") generated in prior periods. Valuation allowances recorded against
these NOLs were reversed to reflect their utilization.
F-32
<PAGE>
SATELLINK COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. STOCK SPLIT
On September 17, 1998, the Company effected a 1.3-for-one split. All share
and per share amounts have been retroactively adjusted to give effect to this
split.
10. AMENDMENT TO CREDIT FACILITY
On October 13, 1998, the Company amended the New Credit Facility to increase
its Revolver from $32 million to $40 million and the Term Loan from $8 million
to $15 million.
11. SUBSEQUENT EVENTS
In the third quarter of the Company's fiscal year ended 1999, 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 4,000,000 shares of its common stock (approximately 4,750,000 shares
if the underwriters' overallotment option is exercised in full) in the
Offering. There can, however, be no assurance that the Offering can be
completed.
If the offering is completed, certain changes in Satellink's capitalization
will occur:
(i) each outstanding share of Series A Preferred Stock will be converted
into 84.5 shares of common stock;
(ii) each outstanding share of Series C Preferred Stock will be converted
into 272.5725 shares of common stock;
(iii) the put feature of the Company's stock warrants will be cancelled.
The pro forma equity column included on the accompanying condensed
consolidated balance sheets gives pro forma effect to these changes as of
January 31, 1999. It does not, however, give effect to the offering or the
receipt of proceeds therefrom.
The following reconciliation of actual liabilities and shareholders' equity
to the pro forma presentation as of January 31, 1999 follows:
<TABLE>
<CAPTION>
Series C Series A
Stock Redeemable Convertible Class A Additional Stock
Warrants Preferred Preferred Common Paid In Warrants
(Liabilities) Stock Stock Stock Capital (Equity)
------------- ----------- ----------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
As stated............... $ 5,895,538 $ 3,500,000 $ 74 $55,883 $ -- $ --
Pro forma adjustments
Conversion of Series A
Convertible Preferred
Stock................. -- -- (74) 6,219 (6,145) --
Conversion of Series C
Convertible Preferred
Stock................. -- (3,500,000) -- 9,540 3,490,460 --
Elimination of put
feature............... $(5,895,538) -- -- -- -- 5,895,538
----------- ----------- ----- ------- ---------- ----------
Pro forma $ -- $ -- $ -- $71,642 $3,484,315 $5,895,538
=========== =========== ===== ======= ========== ==========
</TABLE>
F-33
<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
By___________________________________
Shreveport, Louisiana
February 23, 1998
F-34
<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-35
<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-36
<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-37
<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
Purchases of trading securities...................... (337,335) (321,811)
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.... 1,158,007 798,552
----------- --------
Cash Flows From Investing Activities:
Acquisition of fixed assets............................ (478,991) (250,764)
Sale of fixed assets................................... 123,543 4,524
----------- --------
Net Cash Provided (Used) by Investing Activities.... (355,448) (246,240)
----------- --------
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-38
<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.
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.
F-39
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997 AND 1996
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
Gain Loss Fair 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-40
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1997 AND 1996
Investments in marketable securities classified as available-for-sale
securities are summarized as follows at December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Gain Loss Fair 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
========== ==========
</TABLE>
NOTE F: PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Prepaid Insurance............................................ $2,950 $4,725
====== ======
</TABLE>
F-41
<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
========
Future lease commitments under capital leases at December 31, 1996 are as
follows:
<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-42
<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-43
<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-44
<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 debts................................ 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-45
<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 & allowance........... $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 (Expenses)
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-46
<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)
Purchases of trading securities................. (278,071) --
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.................................... 291,088 564,217
-------- --------
Cash Flows from Investing Activities:
Acquisition of fixed assets....................... (111,605) (104,663)
-------- --------
Net Cash Provided (Used) by Investing
Activities...................................... (111,605) (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-47
<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-48
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated statement of operations for
the six months ended January 31, 1999 has been prepared by adjusting
Satellink's unaudited historical results of operations for that period to give
effect to the sale and issuance of 4,000,000 shares of Common Stock at an
estimated initial offering price of $10.00 per share (the "Offering") as if it
had occurred on August 1, 1997.
The unaudited pro forma consolidated statement of operations for the year
ended July 31, 1998 has been prepared by combining Satellink's audited
historical results of operations for the year ended July 31, 1998, which
includes Hyde's Stay In Touch, Inc. ("Hyde's") results of operations for the
period May 1, 1998 through July 31, 1998, with Hyde's unaudited historical
results of operations for the nine months ended April 30, 1998 (Acquisition
date). The unaudited pro forma consolidated statement of operations for the
year ended July 31, 1998 has been adjusted to give effect to the acquisition of
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 the Offering as if they had occurred on August 1, 1997.
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. 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 and Hyde's 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-49
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Consolidated
Satellink Offering As Adjusted For
Communications, Inc. Adjustments The Offering
-------------------- ----------- ---------------
<S> <C> <C> <C>
Revenues:
Services, rent, and
maintenance........... $22,008,388 -- $22,008,388
Product sales.......... 1,755,982 -- 1,755,982
----------- ---------- -----------
Total revenues....... 23,764,370 -- 23,764,370
Cost of products sold.. (1,525,233) -- (1,525,233)
----------- ---------- -----------
Net revenues......... 22,239,137 -- 22,239,137
----------- ---------- -----------
Operating expenses:
Services, rent, and
maintenance........... 8,379,110 -- 8,379,110
Selling and marketing.. 3,214,146 -- 3,214,146
General and
administrative........ 3,784,050 -- 3,784,050
Engineering............ 869,702 -- 869,702
Depreciation and
amortization.......... 2,776,005 -- 2,776,005
Restructuring and other
one-time charges...... 1,628,789 -- 1,628,789
----------- ---------- -----------
Total operating
expenses............ 20,651,802 -- 20,651,802
----------- ---------- -----------
Operating income......... 1,587,335 -- 1,587,335
----------- ---------- -----------
Other income (expenses):
Other income.......... 472,160 -- 472,160
Interest expense...... (2,430,262) 1,494,600 (a) (935,662)
Accretion warrants.... (119,021) 119,021 (b) --
Write-off of offering
costs................ (570,000) 570,000 (c) --
----------- ---------- -----------
Total other income
(expense)........... (2,647,123) 2,183,621 (463,502)
----------- ---------- -----------
Income before income tax
provision............... (1,059,788) 2,183,621 1,123,833
Income tax provision..... (88,117) (338,940)(d) (427,057)
----------- ---------- -----------
Net income (loss)........ (1,147,905) 1,844,681 696,776
Preferred stock
dividends............... 508,414 (508,414)(e) --
----------- ---------- -----------
Net income (loss)
attributable to common
shareholders............ $(1,656,319) $2,353,095 $ 696,776
=========== ========== ===========
Basic earnings per
share................... $ (0.30) $ 0.06
Diluted earnings per
share................... (0.30) 0.05
Weighted average number
of common shares
outstanding--basic(f)... 5,588,296 11,485,316
Weighted average number
of common shares
outstanding--
diluted(g).............. 5,588,296 13,269,662
</TABLE>
- --------
Offering Adjustments:
(a) Reflects reduction of actual expense incurred to the pay off of outstanding
long-term debt from the proceeds of the offering.
(b) Reflects the elimination of the warrant amortization as the put feature is
contractually eliminated upon completion of an initial public offering.
(c) Reflects the elimination of offering costs related to a withdrawn offering.
(d) 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
F-50
<PAGE>
recognition of the Company's deferred tax asset is a material nonrecurring
credit which results directly from the Offering. Upon completion of the
initial public offering and application of the proceeds to repay certain
debt, management believes that 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.
(e) Reflects a decrease of $175,002 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 $44,160
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 $289,252 in dividends and accretion of equity
issued related to the redemption of Series D Preferred Stock which is
required to be redeemed in the event of an initial public offering. The
Company expects to incur a loss of approximately $828,063 upon redemption
of the Series D Preferred Stock. This loss has been excluded from the pro
forma results of operations for the six months ended January 31, 1999.
(f) Basic weighted average common shares outstanding are comprised of the
following for each class of common stock:
<TABLE>
<CAPTION>
Class A
----------
<S> <C>
Weighted average shares outstanding prior to initial public
offering.................................................... 5,588,296
Conversion of Series A Convertible Preferred Stock........... 621,920
Conversion of Series C Convertible Preferred Stock........... 954,004
Exercise of stock warrants................................... 321,096
Issuance of common shares from the initial public offering... 4,000,000
----------
Pro forma weighted average shares outstanding................ 11,485,316
==========
</TABLE>
(g) 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............ 11,485,316
Effect of dilutive stock options and warrants................... 1,784,346
----------
Pro forma weighted average common shares outstanding............ 13,269,662
==========
</TABLE>
F-51
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------ Pro Forma Pro Forma Consolidated
Satellink Hyde's Stay In Acquisition Pro Forma Offering As Adjusted For
Communications, Inc. Touch, Inc. (a) Adjustments Consolidated Adjustments The Offering
-------------------- --------------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services, rent, and
maintenance............ $37,338,780 $3,300,323 $ -- $40,639,103 $ -- $40,639,103
Product sales........... 2,322,688 1,063,509 -- 3,386,197 -- 3,386,197
----------- ---------- ----------- ----------- ---------- -----------
Total revenues.......... 39,661,468 4,363,832 -- 44,025,300 -- 44,025,300
Cost of products sold... 1,514,984 1,168,955 -- 2,683,939 -- 2,683,939
----------- ---------- ----------- ----------- ---------- -----------
Net revenues............ 38,146,484 3,194,877 -- 41,341,361 -- 41,341,361
----------- ---------- ----------- ----------- ---------- -----------
Operating expenses:
Services, rent, and
maintenance............ 15,600,359 323,773 -- 15,924,132 -- 15,924,132
Selling and marketing... 4,764,265 208,676 -- 4,972,941 -- 4,972,941
General and
administrative......... 7,331,578 1,230,554 (378,000)(b) 8,184,132 -- 8,184,132
Engineering............. 1,161,827 -- -- 1,161,827 -- 1,161,827
Depreciation and
amortization........... 5,130,377 193,376 530,250 (c) 5,854,003 -- 5,854,003
Fixed asset impairment.. 833,996 -- -- 833,996 -- 833,996
----------- ---------- ----------- ----------- ---------- -----------
Total operating
expenses............... 34,822,402 1,956,379 152,250 36,931,031 -- 36,931,031
----------- ---------- ----------- ----------- ---------- -----------
Operating income
(loss)................. 3,324,082 1,238,498 (152,250) 4,410,330 -- 4,410,330
----------- ---------- ----------- ----------- ---------- -----------
Other income (expenses):
Other income............ 702,850 269,647 -- 972,497 -- 972,497
Interest expense........ (3,831,924) (69,701) (885,960)(d) (4,787,585) 4,295,580 (e) (492,005)
Accretion of stock
warrants............... (449,795) -- -- (449,795) 449,795 (f) --
Minority interest....... (7,740) -- -- (7,740) -- (7,740)
----------- ---------- ----------- ----------- ---------- -----------
Total other income
(expense).............. (3,586,609) 199,946 (885,960) (4,272,623) 4,745,375 472,752
----------- ---------- ----------- ----------- ---------- -----------
Income before income tax
provision.............. (262,527) 1,438,444 (1,038,210) 137,707 4,745,375 4,883,082
Income tax provision.... (629,989) -- -- (629,989) (1,225,582)(g) (1,855,571)
----------- ---------- ----------- ----------- ---------- -----------
Net income (loss)....... (892,516) 1,438,444 (1,038,210) (492,282) 3,519,793 3,027,511
Preferred stock
dividends.............. 630,917 -- -- 630,917 (630,917)(h) --
----------- ---------- ----------- ----------- ---------- -----------
Net income (loss)
attributable to common
shareholders........... $(1,523,433) $1,438,444 $(1,038,210) $(1,123,199) $4,150,710 $ 3,027,511
=========== ========== =========== =========== ========== ===========
Pro forma income (loss)
attributable to common
shareholders(i):
Class A common stock... (1,522,923) 3,027,511
Class B common stock... (510) --
Basic earnings per
share:
Class A common stock... (0.27) 0.26
Class B common stock... (23.18) --
Diluted earnings per share:
Class A common stock... (0.27) 0.24
Class B common stock... (23.18) --
Weighted average number
of common shares
outstanding--basic(j):
Class A common stock... 5,545,168 11,444,047
Class B common stock... 22 --
Weighted average number
of common shares
outstanding--
diluted(k):
Class A common stock... 5,545,168 12,579,141
Class B common stock... 22 --
</TABLE>
F-52
<PAGE>
- --------
Acquisition Adjustments:
(a) Historical amounts related to the Hyde's Acquisition in the pro forma
statement of operations for the year ended July 31, 1998 have been derived
from Hyde's unaudited financial statements for the nine months ended April
30, 1998 (the acquisition date), which are not included in the prospectus.
Financial information for the period May 1, 1998 through July 31, 1998 for
Hyde's is included in the historical amounts for Satellink.
(b) Reflects a reduction in salary expense to the owner of Hyde's who did not
continue employment with the Company. The reduction in salary expense is
net of the cost expected to be incurred by the Company to perform the
duties previously performed by the owner of Hyde's.
(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 acquisition for Hyde's Stay In Touch Inc. Amounts allocated to
customer base, covenant not to compete, goodwill and equipment in
connection with the acquisition will be amortized over five, two, thirty
and ten years, respectively. The purchase price allocation arising from the
acquisition of Hyde's by the Company is as follows:
<TABLE>
<S> <C>
Purchase price.................................................. $12,228,500
Less: Net tangible assets acquired.............................. (768,500)
Plus: Fair value adjustments to net tangible assets required.... 319,000
Less: Identifiable intangible assets:
Customer base.................................................. (2,009,000)
Non-Compete.................................................... (50,000)
-----------
9,720,000
Plus: Transaction costs of purchase acquisition................. 600,000
-----------
Excess purchase price over the fair value of Hyde's net assets
acquired (i.e. goodwill)....................................... $10,320,000
===========
</TABLE>
(d) 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.
Offering Adjustments:
(e) Reflects reduction of actual interest expense incurred related to the pay
off of outstanding long-term debt from the proceeds of the offering.
(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 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.
(h) Reflects 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, a decrease of
$88,084 related to the conversion of Series A Convertible preferred stock
which the Company intends to convert
F-53
<PAGE>
into common stock in connection with the initial public offering, and the
decrease of $192,833 related to the redemption of Series D redeemable
preferred stock with the proceeds from the 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.
(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..................................... 5,545,168 22
Conversion of Class B common stock................... 1,859 (22)
Conversion of Series A preferred stock............... 621,920 0
Conversion of Series C preferred stock............... 954,004 0
Exercise of stock warrants........................... 321,096 0
Issuance of common stock in the initial public
offering............................................ 4,000,000 0
---------- ---
Pro forma weighted average shares outstanding........ 11,444,047 0
========== ===
</TABLE>
(k) 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............ 11,444,047
Effect of dilutive stock options and warrants................... 1,135,094
----------
Pro forma weighted average shares outstanding................... 12,579,141
==========
</TABLE>
F-54
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any in-
formation or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus
does not offer to sell or buy any shares in any jurisdiction where it is unlaw-
ful to do so. The information contained in this prospectus is current only as
of its date.
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in the common stock, whether or not participating in
the offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation 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............................................................. 9
Special Note Regarding Forward-Looking Statements........................ 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial and Operating Data.................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 41
Management............................................................... 62
Certain Transactions..................................................... 68
Principal and Selling Shareholders....................................... 71
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 77
Underwriting............................................................. 82
Legal Matters............................................................ 84
Experts.................................................................. 84
Additional Information................................................... 84
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 Shares
[LOGO OF SATELLINK COMMUNICATIONS, INC. APPEARS HERE]
Common Stock
---------------
PROSPECTUS
---------------
J.C.Bradford&Co.
Morgan Keegan & Company, Inc.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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............................................... $ 17,584
NASD filing fee.................................................... 6,825
Accounting fees and expenses....................................... 345,000
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...................................................... 218
--------
Total............................................................ $900,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
The Bylaws of the Company 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
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 together with warrants to purchase an aggregate of
163,800 shares of common 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 and related warrants 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 December 8, 1998, the Company issued and sold 2,533,893 shares of common
stock to the shareholders of the Cape Fear Paging Companies in exchange for all
of the issued and outstanding capital stock of the Cape Fear Paging Companies
in a transaction exempt from the Securities Act pursuant to Rule 506 of
Regulation D thereunder.
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 fiscal
1998, the Company granted options to employees to purchase 153,422 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.
II-2
<PAGE>
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, dated November 28, 1990
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.
* 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<C> <S>
*10.8 Option to Purchase Common Stock of Satellink Communications, Inc.
executed in favor of Donald W. Rochow of The Breckenridge Group,
Inc. (Satellink 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 Merger Agreement, dated as of November 6, 1998, by and among Cape
Fear Paging Company of North Carolina, Cape Fear Paging Company, CF
Paging Corporation, the shareholders of Cape Fear Paging Company of
North Carolina, Cape Fear Paging Company and CF Paging Corporation,
and Satellink Communications, Inc. and Satellink Paging, LLC.
*/**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).
*/**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.
*10.23 Second Amendment, dated October 13, 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.
*21 Subsidiaries of the Company.
*23.1 Consent of Alston & Bird LLP (included in Exhibit 5).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<C> <S>
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of James N. Rachel.
*24 Power of Attorney (included in the signature page hereto).
*27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In
accordance with Rule 406(b)(2), these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
(b) The following Financial Statement Schedule of Satellink Communications,
Inc. is included in this Registration Statement:
Schedule II: Valuation and Qualifying Accounts for the Years Ended July 31,
1996, 1997 and 1998.
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused 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 26th day of March, 1999.
SATELLINK COMMUNICATIONS, INC.
/s/ Jerry W. Mayfield
By: _________________________________
Jerry W. Mayfield
Chairman of the Board, President
and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on March 26, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Jerry W. Mayfield Chairman of the Board, President and Chief
______________________________________ Executive Officer (Principal Executive Officer)
Jerry W. Mayfield
/s/ Daniel D. Lensgraf Senior Vice President -- Finance & Administration
______________________________________ and Chief Financial Officer (Principal Financial
Daniel D. Lensgraf and Accounting Officer)
* Director
______________________________________
James O. Carpenter
* Director
______________________________________
Marc A. Comeaux
* Director
______________________________________
Robert D. Gage, IV
* Director
______________________________________
Gordon E. Kaiser
* Director
______________________________________
Stiles A. Kellett, Jr.
* Director
______________________________________
David C. Massey
* Director
______________________________________
Robert P. Poche
* Director
______________________________________
</TABLE> V. Weyher Dawson
/s/ Daniel D. Lensgraf
*By: ____________________________
Daniel D. Lensgraf
Attorney-in-fact
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
To Satellink Communications, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Satellink Communications, Inc. (a Georgia corporation)
and subsidiaries as of July 31, 1997 and 1998 and for each of the three years
in the period ended July 31, 1998, and have issued our report thereon dated
December 18, 1998. Our audits were made for the purpose of forming an opinion
on those statements taken as a whole. The schedule listed under Schedule II
herein as it relates to Satellink Communications, Inc. and subsidiaries is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen llp
Atlanta, Georgia
December 18, 1998
S-1
<PAGE>
SATELLINK COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JULY 31, 1996,
1997, 1998.
<TABLE>
<CAPTION>
Charged to
Beginning Costs Ending
Description and Balance Expense Writeoffs Balance
----------- --------------- ------- --------- -------
<S> <C> <C> <C> <C>
1996 Allowance for doubtful
accounts.......................... 60,761 253,285 (115,136) 198,910
1997 Allowance for doubtful
accounts.......................... 198,910 968,945 (722,828) 445,027
1998 Allowance for doubtful
accounts.......................... 445,027 855,022 (677,841) 622,208
</TABLE>
S-2
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
EXHIBIT 10.16
DISTRIBUTION AGREEMENT
----------------------
This Agreement is made and entered into between CUE Paging
Corporation, a Delaware corporation, with its principal offices at 2737 Campus
Drive, Irvine, California ("CUE") and Satellink Paging, Inc., with its principal
place of business at 12 Perimeter Center East, Suite 1200, Atlanta, Georgia (the
"Distributor").
WHEREAS, CUE provides National Telecommunication Services using 57 KHz
subcarriers of FM broadcast stations and offers nationwide network services
which qualify under Part 90 of the Federal Communications Commission's Rules and
Regulations;
AND WHEREAS, the Distributor offers cellular telephone and/or paging
services and wishes to purchase Airtime and Network services from CUE to offer
nationwide and regional paging services in the Metropolitan Statistical Areas
("MSA"), indentified in Schedule "A;"
NOW THEREFORE, in consideration of the foregoing and the
representations and warranties contained in this Agreement, the parties agree as
follows:
1. Exclusivity. CUE hereby grants to the Distributor the exclusive
-----------
right to purchase Airtime and Network services from CUE in the MSA for the
purpose of providing regional paging and the non-exclusive right to purchase
Airtime and Network services for the purpose of providing nationwide paging in
the MSA.
1.1 The Distributor agrees:
(a) not to provide paging services using the CUE Network to
subscribers not located in the MSA;
(b) not to use FM subcarrier pagers other than pagers supplied
by CUE pursuant to paragraph 8 of this Agreement during the
first two (2) years of this Agreement; and
(c) not to use an FM subcarrier Network other than the CUE
Network or to purchase Airtime and Network services from any
supplier other than CUE during the term of this Agreement.
2. Network Charges. The Distributor agrees to purchase Network
---------------
services for FM subcarrier paging exclusively from CUE and to pay CUE pursuant
to Schedule "B":
<PAGE>
(a) A one-time installation charge of $____________, payable on
execution of this Agreement or on the date the regional FM
subcarrier transmitter commences, whichever is later; and
(b) a monthly charge of $________________.
3. Airtime Charges. The Distributor agrees to purchase Airtime on the CUE
---------------
Network at a rate of $*** per month per pager for nationwide service and $***
per month per pager for regional service provided that:
(a) the minimum average Airtime charge per pager shall be at least
$*** per month; and
(b) The minimum amount paid to CUE for Airtime by the Distributor
shall be $*** per month per MSA.
3.1 The Distributor agrees to provide within fifteen (15) days after
execution of this Agreement a list of all pager cap codes in service in the MSA
and to provide the additions and deletions on the 30th day of each month
thereafter during the term of this Agreement.
4. Price Increases. It is agreed that the monthly Airtime and Network
---------------
charges set out in Paragraphs 2 and 3 above shall remain constant for year 1990
at the prices set out therein, Thereafter, these charges may be increased at the
sole discretion of CUE provided that the price increase in any year will not
exceed the increase in the United States All Cities Consumer Price Index for
that year over the previous year.
5. Telephone Charges. The Distributor agrees to pay CUE the amount of
-----------------
$*** per month for each regional pager processed through CUE's paging terminal
to reimburse CUE for long distance phone charges incurred by CUE in providing
regional service to the Distributor.
6. Effective Date. The monthly Network charge referred to in Paragraph
--------------
2(b) and the Airtime charges referred to in Paragraphs 2(b), 3 and 5 commence on
the date this Agreement is executed or on the date the regional FM subcarrier
transmitter commences, whichever is later.
7. Cooperative Marketing Program. The Distributor and CUE each agree to
-----------------------------
fund a national advertising program by an
*** Denotes portions omitted pursuant to a request for confidential treatment.
2
<PAGE>
amount equal to $*** per month per pager using the CUE Network in the MSA.
This amount shall be paid monthly and shall be used to fund national marketing
activities of mutual benefit of the Distributor and CUE.
8. Equipment Supply. CUE agrees to supply the Distributor with
----------------
pagers which operate on the CUE Network at a price of $*** per pager, payable
within thirty (30) days of shipment by CUE of such pagers, provided that the
Distributor:
(a) provides CUE with monthly ninety (90) day rolling forecasts
indicating the number of pagers that the Distributor desires
to purchase or lease from CUE;
(b) purchases FM subcarrier pagers exclusively from CUE during
the first two (2) years of this Agreement; and
(c) does not resell or re-lease the pager to any other party
except end users or supply pagers to subscribers not located
in the MSA identified in Schedule "A,"
8.1. Equipment Lease. CUE shall also supply such pagers on a
---------------
thirty-six (36) month lease at $*** per month provided that:
(a) the Distributor meets the usual commercial credit
requirements imposed by third party leasing organizations;
and
(b) the Distributor meets all the requirements specified in
paragraphs 8(a), 8(b) and 8(c).
8.2 Rolling Forecast. In each rolling forecast, the number of pagers
----------------
forecasted for the first thirty (30) days shall be 100% firm, the number of
pagers forecasted for the second thirty (30) days shall be 75% firm and the
number of pagers forecasted for the third thirty (30) day period shall be 50%
firm.
8.3 The rolling forecast is to be provided by the Distributor to CUE
by the 15th day of each and every month during the term of this Agreement. The
first rolling forecast will be provided to CUE on the fourteenth (14th) day
after the execution of this Agreement.
*** Denotes portions omitted pursuant to a request for confidential treatment.
3
<PAGE>
8.4 Price Increases. The price for the pager, specified in Paragraph
---------------
6 above, shall remain constant in the years 1990 and 1991 and thereafter may be
changed at the sole discretion of CUE provided that the price change shall not
exceed the change in the United States All Cities Consumer Price Index for each
year after 1991 over 1990.
9. Regular Warranty. CUE warrants all pagers supplied hereunder
----------------
against defects in material and workmanship. CUE further warrants that the
pagers will respond correctly to at least forty-eight (48) of fifty (50) pages
when tested under laboratory conditions (the performance standard). CUE will
repair or replace all pagers sold hereunder that are defective in material or
workmanship warranted under normal conditions of service (defined as including
normal wear and tear, but excluding abuse or improper treatment) or fail to meet
the performance standard at any time within one year of delivery. CUE and the
Distributor agree that the failure of products to meet the performance standard
either when delivered to the buyer or after a period of service will impose
costs on the Distributor very difficult or impossible to determine precisely.
Accordingly, CUE agrees to pay the Distributor liquidated damages of $5.00 for
each unit in excess of 1.5% of those delivered in any month that fails to meet
the performance standard when received and further agrees to pay the Distributor
liquidated damages of $15.00 for each unit in excess of 10% of those delivered
in any month that under normal conditions of service fails to meet the
performance standard within one year of receipt by the buyer.
9.1 Extended Warranty. CUE will agree to extend the foregoing
-----------------
warranty for one year periods up to a total of three years for an annual fee not
to exceed 10% of the Distributor's original sales price.
9.2 Limitation of Warranty. The aforesaid warranties are expressly
----------------------
in lieu of all other conditions and warranties, express, implied or statutory,
including without limitation any implied warranties of merchantability or of
fitness and all other obligations and liabilities of CUE with respect to any
defect or deficiency applicable to or resulting directly or indirectly from the
products supplied hereunder whether in contact or in tort or otherwise. CUE's
warranty liability shall under no circumstances exceed the invoice price of any
product for which the warranty claim is made, nor shall CUE in any event be
liable for consequential or special damages or lost profits. In the absence of
evidence satisfactory to CUE as to the actual date of sales of any product for
use, such date shall for the purpose of this
4
<PAGE>
paragraph be deemed to be sixty (60) days from the date of sale to the
Distributor.
10. Payment Terms. Payment for equipment or services will be due
-------------
within thirty (30) days of receipt and in the event of any failure to pay within
this term the Distributor shall provide CUE with a Letter of Credit in an amount
equal to all future pager orders, which Letter of Credit shall be implemented
prior to shipment.
10.1 The Distributor agrees to pay CUE interest on any amounts unpaid
after the thirty (30) day period at the rate of prime plus two (2%) percent.
11. National Accounts. The Distributor agrees that it will
-----------------
participate in the National Accounts Program described in Paragraph 11.1 below.
11.1 The Distributor agrees that the National Accounts specified in
the attached Schedule "C" shall be billed by CUE directly and such National
Accounts shall be CUE-owned subscribers provided that:
(a) in the event the Distributor sells paging services in its
MSA to a National Account, the Distributor shall receive a
one-time fee of $*** per National Account, if
(i) the account has not already been signed by CUE as a
National Account;
(ii) the Distributor signs the National Account to an
agreement on CUE's National Account Program; and
(iii) the aggregate orders in the first six (6) months are
for a minimum of *** pagers;
(b) the Distributor will also receive a commission of $*** per
month for each National Account pager sold and installed in
the Distributor's MSA so long as such pagers are active and
paid for;
(c) the Distributor will receive a commission of $*** per month
for each pager sold to a
*** Denotes portions omitted pursuant to a request for confidential treatment.
5
<PAGE>
National Account signed by the Distributor where the pager
is located outside the MSA; and
(d) the Distributor will receive a service fee of $*** per
month per pager for each National Account pager shipped into
the MSA as a result of the sale by CUE or another
Distributor to such National Account.
12. National Message Center. The Distributor agrees to provide all
-----------------------
nationwide subscribers with access to the CUE National Message Center. The
Distributor shall pay to CUE an amount equal to $*** per minute for use of such
services.
13. Default. In the event the Distributor defaults with respect to
-------
any of the terms or conditions of this Agreement, including all amendments,
schedules and the two promissory notes attached hereto and incorporated herein
by reference, or fails to make any payment required hereunder for thirty (30)
consecutive days, upon notice from CUE, the Distributor shall transfer to CUE
all of the Distributor's current subscribers (or customers) using or being
provided with nationwide or regional services in the MSA. All contracts, billing
data and other pertinent information shall be transferred to CUE within ten (10)
days of the notice from CUE.
13.1 Upon transferring current subscribers to CUE, and CUE finding
such subscribers acceptable, the Distributor shall receive compensation equal to
$*** per pager, which compensation shall be first applied to any outstanding
indebtedness to CUE. In the occurrence of an Event of Default, the Distributor
not only agrees to transfer the Distributor's subscribers to CUE as provided for
in paragraph 13 above, but also agrees to cease using any CUE service mark,
trademark and/or name in the MSA.
14. Other Agreements. The Distributor agrees not to enter into any
----------------
agreements relating to paging except local paging with companies engaged in
supply of paging services without CUE's prior written approval.
15. Government Regulations. Services provided under this Agreement
----------------------
by both parties shall be in accordance with all applicable rules and regulations
of the Federal Communications Commission and any applicable State Regulatory
Commission.
*** Denotes portions omitted pursuant to a request for confidential treatment.
6
<PAGE>
16. Control of Network. It is understood that the control and
------------------
responsibility for the standards and quality of nationwide and regional data
distribution services supplied by CUE shall be retained, rest and remain solely
the prerogative and obligation of CUE. No provision of this Agreement shall be
construed as vesting in the Distributor any control whatsoever of CUE's radio
communication facilities and operations. The Distributor shall promptly, upon
the day of receipt, report to CUE any complaints received from subscribers
relating to the nationwide or regional services provided by CUE under this
Agreement.
17. Service. Each party shall make reasonable efforts to provide
-------
continuous, uninterrupted and errorless services to the other hereunder, but in
no event shall the providing party be liable to the receiving party for damages
incurred by it or its subscribers on account of any failure to provide such
services.
18. No Representations or Warranties. Except as provided in Paragraph
--------------------------------
9 of this Agreement, the Distributor shall not make any representations or
warranties, either express or implied, in regard to the nationwide and regional
services or pagers provided by CUE hereunder. The nationwide and regional
services and/or pagers shall carry only such warranties as shall be provided in
writing by CUE. CUE MAKES NO WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING
WARRANTIES AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH
RESPECT TO THE NATIONWIDE AND REGIONAL SERVICES OR THE PAGERS PROVIDED
HEREUNDER.
19. Independent Contractors. The respective parties hereto are
-----------------------
independent contractors and nothing herein shall be deemed to create a
relationship of partnership, joint venture, principal and agent or franchisee.
This Agreement does not entitle either party to make commitments of any kind for
the account of the other party as agent or otherwise or to assume or create any
obligations, express or implied, on behalf of the other party, or to bind the
other party in any respect, and each party agrees to, and will, indemnify and
hold the other party harmless in this regard.
20. Coverage of Signal. CUE's Nationwide Network shall provide
------------------
adequate coverage for nationwide and regional services in the MSA to the
Distributor. On execution of this Agreement, the Distributor shall have
satisfied itself that coverage being provided by CUE in the MSA is adequate to
meet the business requirements of the Distributor. CUE shall be under no
obligation to expand the CUE Network or the paging signal in the
7
<PAGE>
MSA unless such obligation is agreed to in writing by the parties and attached
hereto as a Schedule to this Agreement.
21. Termination. If the Distributor violates any provisions of this
-----------
Agreement, including all amendments and exhibits hereto, or fails to perform
any obligations hereunder and if upon being given thirty (30) days' written
notice by CUE of such violation, the Distributor does not correct any such
violation, or if such violation is willful, then CUE shall have the right of
cancellation of this Agreement by giving the Distributor sixty (60) days'
written notice. If this occurs, CUE shall have the right to require the
Distributor to transfer its subscribers to CUE in accordance with the provisions
of Paragraph 13 above. Such an occurrence will constitute an Event of Default as
defined in the promissory notes copies of which are attached hereto and entitles
CUE to all rights and remedies provided herein.
21.1 If CUE violates any provision of this Agreement or fails to
perform any obligations hereunder and if upon being given thirty (30) days'
written notice by the Distributor of such violation CUE does not correct any
such violation, or if such violation is willful, then the Distributor shall have
the right of cancellation of this Agreement by giving CUE sixty (60) days'
written notice.
21.2 Notwithstanding the provisions of Paragraph 21 above, this
Agreement shall automatically terminate, at the option of CUE, upon the
occurrence of (1) the Distributor ceasing to provide nationwide or regional
services hereunder for any reason, (2) the Distributor making any general
assignment or trust mortgage for the benefit of creditors or is adjudged a
bankrupt, or (3) transfer of ownership or control of the Distributor. In such
event, CUE shall have an immediate right to cancel this Agreement.
21.3 The parties recognize that the services offered by both parties
are communications services and that the termination of this Agreement cannot be
permitted to interfere with the continuity of such services to all subscribers.
Therefore, termination of this Agreement shall be effected in such "best
efforts" manner by both parties as to avoid, insofar as possible, any
interruption of services to subscribers. Provided, however, that if upon default
the Distributor does not transfer the subscribers to CUE as provided in
Paragraph 13 above, CUE may immediately deactivate or invalidate the
Distributor's subscribers upon notice to the Distributor.
8
<PAGE>
22. Discontinuance of Operations. In the event that CUE decides for
----------------------------
any reason to discontinue Network operations or services provided hereunder, CUE
shall:
(a) give the Distributor at least ninety (90) days' notice of
discontinuance of operation;
(b) if requested, assign any FM subcarrier agreements used to
provide service in the MSA to the Distributor; and
(c) offer to sell the Distributor, at the then depreciated cost,
any equipment located at the radio station, necessary to
operate on the FM subcarrier paging system.
23. Tradenames. The Distributor shall provide nationwide and
----------
regional paging services under its own name provided that whenever the
Distributor advertises paging services the advertisement shall contain the
following logo:
[LOGO OF CUE APPEARS HERE]
24. 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, or mailed to the parties at the following
addresses:
If to the Distributor: Satellink Paging, Inc.
Attention: President
12 Perimeter Center East
Suite 1200
Atlanta, Georgia 30346
With a Copy To: V. Scott Killingsworth
Powell, Goldstein, Frazer & Murphy
1100 C & S National Bank Building
35 Broad Street
Atlanta, Georgia 30335
9
<PAGE>
If to CUE: CUE Paging Corporation
Attention: President
2737 Campus Drive
Irvine, California 92715
25. Assignment. This Agreement and the rights granted may not be
----------
assigned or transferred in whole or in part by the Distributor without prior
written consent of CUE. Such consent shall also be required in the event that
the controlling shareholder interest in the Distributor changes. This Agreement
shall be binding upon and adhere to the benefit of the parties hereto and their
approved successors and assigns.
26. Severability. If any of the provisions contained in this Agreement be
------------
deemed invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein shall not in any
way be affected or impaired hereby.
27. Miscellaneous. This Agreement, including all amendments, schedules and
-------------
two (2) attached promissory notes which are hereby incorporated by reference:
(a) constitutes the entire Agreement between the parties pertaining
to the subject matter hereof and supersedes all prior agreements
and understandings, both written and oral. Any variation of this
Agreement must be made in writing and signed by both CUE and the
Distributor;
(b) except as expressly stated herein, is not intended to and shall
not confer upon any other person any rights or remedies hereunder
or otherwise with respect to the subject matter hereof; and
(c) shall be governed by the laws of the State of New York.
28. Term. The term of this Agreement if ten (10) years, subject to renewal
----
for a further ten (10) year term at the option of either party if the
Distributor is not in default in any payment of or terms and conditions of
this Agreement at the renewal date.
29. Arbitration. All disputes arising in connection with this Agreement
-----------
shall be finally settled under the Rules of
10
<PAGE>
Conciliation and Arbitration of the International Chamber of Commerce by three
(3) arbitrators appointed in accordance with the said Rules. The arbitration
shall be held in New York, New York.
IN WITNESS wherever the parties hereto have caused this Agreement to
be executed by their duly authorized officers this 2nd day of April, 1990.
CUE PAGING CORPORATION
By: Gordon E. Kaiser
________________________ -----------------------------------
Witness Title: Chairman & Chief Executive Officer
-----------------------------------
SATELLINK PAGING, INC.
By: Jerry W. Mayfield
________________________ -----------------------------------
Witness Title: Executive Vice President
-----------------------------------
11
<PAGE>
SCHEDULE "A"
------------
REGION
Metropolitan Statistical Area (MSA)
- -------------------------------------
1. Anniston, AL
2. *Birmingham, AL
3. Dothan, AL
4. *Florence, AL
5. Gadsden, AL
6. *Huntsville-Decatur, AL
7. *Mobile, AL
8. Montgomery, AL
9. *Tuscaloosa, AL
10. Albany, GA
11. Athens, GA
12. Atlanta, GA
13. Augusta, GA
14. Columbus, GA
15. Macon-Warner Robins, GA
16. Svannah, GA
17. *Asheville, NC
18. *Burlington, NC
19. Charlotte-Gastonia-Rockhill, NC
20. Fayetteville, NC
21. Greensboro-Winston-Salem-High Point, NC
22. Hickory, NC
23. Jacksonville, NC
24. Raleigh-Durham, NC
25. *Wilmington, NC
26. Anderson, SC
27. Charleston, SC
28. Columbia, SC
29. *Florence, SC
30. Greenville-Spartanburg, SC
31. *Biloxi-Gulfport, MS
32. *Jackson, MS
33. *Pascagoula, MS
????? on-MSA Markets
- -------------------
Baxley, GA 12. *Bude-Natchez, MS
Burnswick/Waycross, GA 13. *Columbus/Starkville, MS
Manchester, GA 14. *Greenwood, MS
Moultrie, GA 15. *Laurel, MS
Rockmart/Rome/Dalton, GA 16. *Oxford, MS
Valdosta 17. *Tupelo, MS
*Vidalia, GA
*Forest City, NC
*Lexington, NC
Washington/Greenville, NC
Evergreen, AL
Distributor will have operational within 120 days.
CUE has right to sell to MCCA within 120 days, as provided for in Paragraph
17 of the Amendment to the Distribution Agreement.
<PAGE>
SCHEDULE "B"
------------
NETWORK CHARGES
<TABLE>
<CAPTION>
MSA POPULATION MSA INSTALLATION MONTHLY
Class [000] Group Charge Charge
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A 6,000 plus 1 - 4 *** ***
B 4,000-5,999 5 - 7 $*** ***
C 2,500-3,999 8 - 13 $*** $***
D 1,000-2,499 14 - 37 $*** $***
E 500-999 38 - 74 $*** $***
F 250-499 75 - 132 $*** $***
G 100-249 133 - 258 $*** $***
H 50-99 259 + $*** $***
I 30-49 N/A $*** $***
</TABLE>
*** Denotes portions omitted pursuant to a request for confidential treatment.
13
<PAGE>
AMENDMENT
TO THE DISTRIBUTION AGREEMENT
DATED APRIL 2, 1990
This Amendment amends that certain Distribution Agreement dated April
2, 1990 between CUE Paging Corporation and Satellink Paging, Inc. (the
Distribution Agreement as herein amended is referred to herein as the
"Agreement").
1. The Agreement is contingent upon CUE and Satellink entering into
a mutually acceptable Financing Agreement, which Agreement shall become Schedule
"C" to the Agreement and shall be incorporated in the Agreement by reference.
2. CUE agrees to waive the payment provided under Paragraph 2 of the
Agreement on the condition that:
(a) Satellink retains ownership of the SCA generator equipment
located in the MSA identified in Schedule "A" of the
Agreement;
(b) Satellink retains the subcarrier leases applicable to these
MSAs and makes all necessary payments thereon to the
broadcasters/licensees;
(c) Satellink allows CUE to distribute nationwide paging signals
over the local subcarrier without charge;
(d) Satellink allows CUE to distribute non-paging traffic over
the local subcarrier without charge provided such traffic is
off-peak, provided, however, that paging traffic will have
priority over non-paging traffic;
(e) In the event that Satellink decides for any reason to
discontinue operations or services provided hereunder,
Satellink shall:
(i) give CUE at least ninety (90) days' notice of
discontinuance of operation;
(ii) if requested, assign any FM subcarrier agreements
used to provide service in the MSA to CUE; and
<PAGE>
(iii) offer to sell CUE, at the then depreciated cost,
any equipment located at the radio station,
necessary to operate on the FM subcarrier paging
system; and
(f) In the event that Satellink makes any general assignment or
trust mortgage for the benefit of creditors or is adjudged a
bankrupt, Satellink shall:
(i) give CUE at lease ninety (90) days' notice of
discontinuance of operation;
(ii) if requested, assign any FM subcarrier agreements
used to provide service in the MSA to CUE; and
(iii) offer to sell CUE, at the then depreciated cost,
any equipment located at the radio station
necessary to operate on the FM subcarrier paging
system.
3. (a) Paragraph 1 to the Agreement is hereby amended to provide
that the Distributor's exclusive right to purchase Airtime
and Network services for regional paging is subject to the
pre-existing contracts that CUE has entered into with
respect to regional paging listed on Schedule "D" hereto.
(b) With respect to nationwide paging services to customers in
the Distributor's MSA, (i) the pricing and discounts made
available by CUE to the Distributor will equal that made
available by CUE to any other distributor(s) and/or any
other national marketing contractor(s), and (ii) then either
the Distributor will receive a rebate from CUE, or such
other nationwide distributor(s) or national marketing
contractor(s) will be assessed an additional charge by CUE,
to adjust for the additional regional costs that Distributor
pays.
2
<PAGE>
4. Paragraph 1.1(a) of the Agreement is hereby amended to provide
that the Distributor may nevertheless continue to provide paging services to
those customers in the Distributor's client base as of April 1, 1990 that are
not located in the MSA. A list of each such customer is attached hereto as
Schedule "E."
5. For the purposes of this Agreement, (i) the Metropolitan
Statistical Areas referred to in Schedule A hereto shall mean cellular
Metropolitan Communications Commission; and (ii) a region, for delimiting
regional paging, shall mean any area not to exceed five (5) contiguous states
unless agreed to in writing.
6. Paragraph 7 of the Agreement is amended to provide that national
marketing activities shall be directed solely to publications and events
broadcast, disseminated or advertised nationwide. Sales leads resulting from
such national marketing activities that pertain to potential customers located
in the Distributor's MSA will be given to the Distributor.
7. Paragraph 8(c) of the Agreement is further amended to provide
that the Distributor may nevertheless sell or lease pagers and airtime (i) to
those authorized resellers listed in Schedule F, provided that the authorized
resellers will restrict their activities to those MSA's listed in Schedule F and
that if such authorized resellers fail to so restrict their activities the
Distributor will immediately terminate its relationship with that authorized
reseller, (ii) to those customers not located in the MSA that are in the
Distributor's existing client base, which customers are listed on Schedule E,
and (iii) to Arch Communications ("Arch"), provided that not later than 120 days
after the date hereof (as such period may be extended as hereinafter provided)
Distributor shall either terminate its existing Distribution Agency Agreement
with Arch or obtain from Arch an amendment to such agreement to provide that all
sales of Distributor's products and services by Arch thereunder shall be to end
users who shall be the direct customers of Distributor. The 120 days period
specified in clause (iii) shall be extended by CUE for up to an additional sixty
(60) days upon request of the Distributor subject to approval of such extension
by any third parties whose consent thereto may be required by the terms of any
agreements with such third parties to which CUE is a party. If Distributor shall
fail to terminate the Distribution Agency Agreement or to obtain the agreement
of Arch to the amendment thereof within the time and as provided above, then
upon the lapse of such time period, Distributor shall release all rights
3
<PAGE>
and interest in distributing, selling or promoting the products and services of
CUE within the MSA's located in the states of North Carolina and South Carolina
by executing all documents necessary for such release; and the principal balance
then remaining under the Distributor's five-year-term promissory note of even
date herewith in favor of CUE shall be reduced by a credit equal to the sum of
the fees paid by the Distributor with respect to North Carolina and South
Carolina plus the Distributor's start-up and buildout costs incurred in
connection therewith. Distributor shall provide adequate proof of fees paid and
start-up and buildout costs incurred. CUE covenants and agrees that, if
Distributor shall release its rights and interest with respect to the states of
North Carolina and South Carolina as above provided, CUE will not, for the
period of one (1) year following the effective date of such release, enter into
any Distribution Agreement or agreement or arrangement substantially similar
thereto with any entity that was on April 2, 1990 or at any time thereafter a
distributor or reseller of Distrubutor in any MSA located in either North
Carolina or South Carolina.
8. Paragraph 11.1 of the Agreement is amended to provide that with
respect to Kodak the parties will mutually agree on variations in the National
Account program that may be necessary to provide service to Kodak. Variations in
the National Account program for other subscribers is the Distributor's current
customer base will be discussed and considered by the Parties.
9. Paragraphs 13 and 13.1 of the Agreement are amended to provide
that, upon the transfer to CUE of the Distributor's current subscribers, the
compensation shall be the fair market value of such subscriber base as
determined by the mutual agreement of the parties or, failing such agreement,
determined by arbitration in accordance with Section 29 of the Agreement. The
$*** per pager paid by CUE upon such transfer shall be applied against the
fair market value so determined, and CUE shall promptly pay to the Distributor
the amount by which such fair market value exceeds $*** per pager, or the
Distributor shall refund to CUE the amount by which $*** per pager exceeds
such fair market value, as the case may be.
10. Paragraph 14 of the Agreement is amended to provide that the
Distributor may nevertheless enter into agreements to provide solely local
paging services without CUE's approval.
11. Paragraph 16 of the Agreement is amended to provide that the
control and responsibility for the equipment
*** Denotes portions omitted pursuant to a request for confidential treatment.
4
<PAGE>
owned or leased by the Distributor shall be retained, rest and remain solely the
prerogative and obligation of the Distributor. No provision of this Agreement
shall be construed as vesting in CUE any control whatsoever of the Distributor's
communication facilities and operations, absent an Event of Default or
termination of services by the Distributor.
12. (a) Paragraph 20 of the Agreement is amended to provide that the
Distributor may expand its system in the MSA in its sole
discretion and at its sole cost.
(b) Paragraph 20 of the Agreement is amended to provide that, if
the traffic over the CUE Network reaches 75% of capacity,
CUE will adjust its nationwide and regional service
distribution so as to optimize service.
13. The parties agree the Distributor shall attempt to raise, within
120 days of the date of this Agreement, new common equity funding for the
Distributor equal to at least twenty (20%) percent of the total debt of the
Distributor on the date of this Agreement, which shall be in the form of cash
invested for the issuance of additional shares of Distributor's common or
preferred stock. If the Distributor is unable to obtain such additional equity
funds, it shall, at its option, either:
(a) release all rights and interest in distributing, selling or
promoting the products and services of CUE within the MSA's
located in the states of North Carolina and South Carolina
by executing all documents necessary for such release; and
the principal balance then remaining under the Distributor's
five-year-term promissory note of even date herewith in
favor of CUE shall be reduced by a credit equal to the sum
of the fees paid by the Distributor with respect to North
and South Carolina plus the Distributor's start-up and
buildout costs incurred in connection therewith. Distributor
shall provide adequate proof of fees paid and start-up and
buildout costs incurred; or,
(b) Immediately reduce its debt to CUE, evidenced by the
Promissory Note, attached hereto as Exhibit "___" and
incorporated herein by
5
<PAGE>
reference, by the sum of Five Hundred Thousand and no/100 Dollars ($500,000).
14. The Distributor shall have a period of 120 days within which to
install the equipment for the provision of service to those Metropolitan
Statistical Areas in North Carolina, South Carolina and Alabama that are marked
with an asterisk on Schedule "A" to the Distribution Agreement. As to each such
Metropolitan Statistical Area with respect to which the Distributor does not
satisfy the foregoing requirement, the Distributor shall relinquish and reconvey
to CUE the Distributor's rights and interest in distributing, selling or
promoting the products and services of CUE within such Metropolitan Statistical
Areas and the principal balance then remaining under the Distributor's
five-year-term promissory note of even date herewith in favor of CUE shall be
reduced by a credit equal to the fees paid by the Distributor attributable to
such relinquished Metropolitan Statistical Areas.
15. Paragraph 1.1(c) is hereby amended to provide that if CUE Airtime
and Network services should suffer a lack of capacity, the Distributor shall
have the right to arrange additional Airtime and Network services through other
sources, provided that the Distributor notifies CUE in working of any lack of
capacity which Distributor believes exists or will exist at least 120 days
before utilizing any other such sources. Lack of adequate capacity shall be
deemed to exist if the response time between a completed call to the paging
switch and notification of the pager exceeds three (3) minutes at peak time of
day as verified by an independent engineer.
16. Paragraph 1.1(c) is hereby amended to provide that if CUE Airtime
and Network services should suffer a lack of capacity, the Distributor shall
have the right to arrange additional Airtime and Network services through other
sources, provided that the Distributor notifies CUE in working of any lack of
capacity which Distributor believes exists or will exist at least 120 days
before utilizing any other such sources. Lack of adequate capacity shall be
deemed to exist if the response time between a completed call to the paging
switch and notification of the pager exceeds three (3) minutes at peak time of
day as verified by an independent engineer.
17. (a) The parties agree that CUE, for a period of 120 days from
the date hereof, will attempt to sell all distribution
rights to its products and services within the state of
Mississippi to Mobile Communication
6
<PAGE>
Corporation of America ("MCCA"). If such rights are sold,
the principal balance then remaining due under the
Distributor's five-year-term promissory note of even date
herewith shall be reduced by the total cost of all capital
expenditures made by Distributor within the state of
Mississippi and by any and all franchise or affiliation fees
paid by Distributor. Distributor shall provide satisfactory
proof of the amount of such capital expenditures, franchise
and affiliation fees to CUE. Any amount received by CUE as
an affiliation fee for distribution rights formerly held by
Distributor in Mississippi in excess of the affiliation fee
paid by Distributor shall be paid to Distributor by CUE.
(b) If CUE fails to sell such distribution rights within 120
days, those rights shall continue in Distributor, provided
that Distributor agrees to establish operational facilities
in the following markets within one hundred eighty (180)
days of the date hereof:
1. Bude-Natchez, MS
2. Columbus/Starkville, MS
3. Greenwood, MS
4. Laurel, MS
5. Oxford, MS
6. Tupelo, MS
If Distributor will not agree to establish such facilities within one hundred
eighty (180) days of the date hereof or fails to establish such facilities
--
within one hundred eighty (180) days of the date hereof, distribution rights for
CUE's products and services in the state of Mississippi will be transferred to
CUE by Distributor for an amount determined and paid in accordance with the
terms outlined in Paragraph 17 (a).
18. All schedules contemplated in the Agreement or in this Amendment
that are not attached upon the execution hereof shall be prepared in good faith
and attached to the originals of such documents within fourteen (14) days after
the execution hereof, whereupon such schedules shall automatically be
incorporated therein.
7
<PAGE>
19. All rights and remedies provided either party to the Agreement in
the event of default or termination of services, whether contained in the
Agreement, its Amendments or its exhibits, shall survive the termination of the
Agreement.
AGREED TO AND ACCEPTED this 2nd day of April, 1990.
CUE PAGING CORPORATION
/s/ K. J. Smith By: /s/ Gordon E. Kaiser
- --------------- ---------------------------
Witness Title: Chairman and Chief Executive Officer
-------------------------------------
SATELLINK PAGING, INC.
By: /s/ Jerry W. Mayfield
_______________ ---------------------------
Witness Title: Executive Vice President
---------------------------
8
<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 part of this registration
statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 26, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITOR
As independent auditor, I hereby consent to the use of my report and to the
references to me included in or made part of this registration statement.
/s/ James N. Rachel
- -------------------------
James N. Rachel
Shreveport, Louisiana
March 25, 1999
