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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended June 30, 1998
Commission File No. 0-17316
SKYTEL COMMUNICATIONS, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
Delaware 64-0518209
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 South Lamar Street, Mtel Centre, Jackson, Mississippi 39201
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(Address of principal executive offices) (Zip Code)
(601) 944-1300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
59,578,306 shares of Common Stock,
par value $.01 per share, as of
July 31, 1998
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SKYTEL COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -- June 30, 1998 and December 31, 1997.
Consolidated Statements of Operations -- Six Months Ended June 30,
1998 and 1997, and Three Months Ended June 30, 1998 and 1997.
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1998
and 1997, and Three Months Ended June 30, 1998 and 1997.
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
ASSETS:
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 21,995,107 $ 19,812,116
Accounts receivable, net of allowances for losses 47,677,537 53,790,128
Assets held for sale 2,050,233 2,173,375
Other current assets 6,016,454 3,179,697
------------- -------------
TOTAL CURRENT ASSETS 77,739,331 78,955,316
------------- -------------
MESSAGING NETWORKS
Property and equipment, net 279,867,804 294,746,109
Certificates of authority and license cost, net 147,929,545 150,623,083
Network construction and development costs, net 63,365,314 70,383,491
------------- -------------
TOTAL MESSAGING NETWORKS 491,162,663 515,752,683
------------- -------------
GOODWILL, net 104,146,293 106,164,387
INVESTMENT IN UNCONSOLIDATED INTERNATIONAL VENTURES 18,311,290 16,786,882
OTHER ASSETS 20,413,401 24,085,628
------------- -------------
$ 711,772,978 $ 741,744,896
============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT:
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,021,433 $ 1,021,526
Accounts payable and accrued liabilities 96,605,508 90,090,298
Notes payable 20,000,000 22,000,000
------------- -------------
TOTAL CURRENT LIABILITIES 117,626,941 113,111,824
------------- -------------
LONG-TERM LIABILITIES 0 7,187,943
LONG-TERM DEBT, net of current liabilities 388,213,356 398,231,558
MINORITY INTEREST 24,876,071 26,879,386
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT
Preferred Stock, par value $.01 per share; 25,000,000 shares
authorized; 3,750,000 shares of $2.25 Cumulative Convertible
Exchangeable Preferred Stock outstanding in 1998 and 1997;
7.5% Cumulative Convertible Accruing PIK Preferred Stock,
shares outstanding: none in 1998 and 52,500 in 1997 37,500 38,025
Common Stock, par value $.01 per share;
100,000,000 shares authorized; shares issued:
59,572,031 in 1998 and 55,032,602 in 1997 595,720 550,326
Additional paid-in-capital 635,198,160 619,464,704
Accumulated deficit (449,617,185) (418,711,968)
Cumulative translation adjustment (5,157,585) (5,006,902)
------------- -------------
TOTAL STOCKHOLDERS' INVESTMENT 181,056,610 196,334,185
------------- -------------
$ 711,772,978 $ 741,744,896
============= =============
</TABLE>
See notes to consolidated financial statements.
3
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SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 247,634,733 $ 189,529,744 $ 126,120,432 $ 94,908,078
Expenses:
Operating 70,176,716 60,611,680 36,704,173 29,927,694
Selling, general and administrative 124,787,445 108,151,615 61,651,155 54,111,477
Depreciation and amortization 48,804,688 41,813,182 24,590,003 21,226,458
------------- ------------- ------------- -------------
243,768,849 210,576,477 122,945,331 105,265,629
------------- ------------- ------------- -------------
Operating income (loss) 3,865,884 (21,046,733) 3,175,101 (10,357,551)
Interest income 573,894 2,409,010 218,922 1,235,833
Interest expense (25,838,076) (28,359,864) (12,732,751) (12,761,662)
Gain (loss) on sale of assets (662,118) 7,837,485 (549,642) 678,926
Other expense (2,527,234) (2,221,390) (2,594,564) (44,445)
------------- ------------- ------------- -------------
Income (loss) before income taxes
and equity income (losses) (24,587,650) (41,381,492) (12,482,934) (21,248,899)
Provision for income taxes 2,022,208 2,418,869 969,977 1,183,952
Equity in income (losses) of investments 1,996,993 (777,857) 1,279,518 (708,723)
------------- ------------- ------------- -------------
Net income (loss) ($24,612,865) ($44,578,218) ($12,173,393) ($23,141,574)
Preferred dividend requirement 6,292,356 6,541,930 3,057,680 3,281,754
------------- ------------- ------------- -------------
Net income (loss) available to common
stockholders ($30,905,221) ($51,120,148) ($15,231,073) ($26,423,328)
============= ============= ============= =============
Net income (loss) per common share:
Basic ($0.55) ($0.94) ($0.27) ($0.49)
============= ============= ============= =============
Diluted ($0.55) ($0.94) ($0.27) ($0.49)
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
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SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($24,612,865) ($44,578,218) ($12,173,393) ($23,141,574)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 48,804,688 41,813,182 24,590,003 21,226,458
Provision for losses on accounts receivable and
paging inventory 9,448,430 11,125,658 4,446,354 4,448,909
Amortization of debt issuance costs 1,264,231 1,192,318 632,116 601,823
Foreign currency transaction (gain) loss 75,977 (185,240) 14,098 98,972
(Gain) loss on sale of assets 662,118 (7,837,485) 549,642 (678,926)
Minority interest income (loss) (303,639) 2,343,422 (174,430) (117,735)
Equity in (income) losses from investments (1,996,993) 777,857 (1,279,518) 708,723
Change in assets and liabilities:
(Increase) decrease in accounts receivable (1,259,234) 8,069,946 (2,660,729) 10,256,363
Decrease in assets held for sale 21,690 306,073 - 263,146
(Increase) decrease in other current assets (2,836,757) 15,210,984 (2,887,930) 16,196,745
Increase (decrease) in accounts payable and
accrued liabilities 5,932,003 (4,017,901) 9,888,632 (8,421,509)
------------ ------------- ------------ -------------
Net Cash Provided By Operating Activities 35,199,649 24,220,596 20,944,845 21,441,395
------------ ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets 565,406 33,553,627 287,241 13,901,058
Capital expenditures, net (27,311,540) (41,074,988) (10,746,164) (22,695,631)
Increase in investment in unconsolidated
international ventures (522,174) (1,016,220) (24,161) (412,748)
Acquisition of Argentinean paging company - (16,000,000) - (16,000,000)
Decrease in other assets 1,971,916 1,810,619 1,960,833 1,852,349
------------ ------------- ------------ -------------
Net Cash Used In Investing Activities (25,296,392) (22,726,962) (8,522,251) (23,354,972)
------------ ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (10,018,296) (5,514,805) (4,523) (363,686)
Payment of dividends on preferred stock (4,218,750) (4,218,750) (2,109,375) (2,109,375)
Sale of stock and exercise of options 6,516,780 466,783 3,616,224 204,265
------------ ------------- ------------ -------------
Net Cash Provided By (Used In) Financing Activities (7,720,266) (9,266,772) 1,502,326 (2,268,796)
------------ ------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 2,182,991 (7,773,138) 13,924,920 (4,182,373)
Cash and cash equivalents-beginning of period 19,812,116 25,744,724 8,070,187 22,153,959
------------ ------------- ------------ -------------
Cash and cash equivalents-end of period $ 21,995,107 $ 17,971,586 $ 21,995,107 $ 17,971,586
============ ============= ============ =============
</TABLE>
See notes to consolidated financial statements.
5
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SKYTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
SkyTel Communications, Inc., formerly Mobile Telecommunication
Technologies Corp., ("SkyTel" or the "Company") is a leading provider of
nationwide messaging services in the United States. SkyTel's principal
operations include one-way messaging services in the United States, advanced
messaging services on the narrowband personal communication services ("PCS")
network (the "Advanced Messaging Network") in the United States and
international one-way messaging operations. The Company's wholly-owned
subsidiary, SkyTel Corp., operates a one-way nationwide messaging system whereby
subscribers can be reached in thousands of towns and cities in the United States
by means of two dedicated 931 MHz frequencies licensed by the Federal
Communications Commission ("FCC"), a ground-based transmitter system, leased
satellite facilities and proprietary network software.
In September 1995, the Company launched commercial operation of the
Advanced Messaging Network, currently the only nationwide network in the United
States that utilizes spectrum allocated by the FCC for narrowband PCS. This
network enables subscribers to send and receive messages without the need to
know the location of the sender or receiver at the time of transmission, and
utilizes a proprietary system architecture designed and developed by SkyTel.
The Company's 100%-owned subsidiary, Destineer Corp., holds the FCC license
utilized by this network.
SkyTel, through its subsidiaries and joint ventures, operates one-way
wireless messaging systems in various countries outside the United States,
primarily in Latin America. In addition, SkyTel provides its subscribers with
access to an international messaging network that utilizes SkyTel's proprietary
technology and interconnects the systems operated by its international
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subsidiaries and joint ventures with systems in the United States, Canada,
Singapore and other countries.
For the second quarter of 1998, one-way messaging operations, the
Company's principal operating segment, reported revenues of $84.3 million,
operating income of $21.5 million and net income of $20.6 million. Advanced
messaging operations reported revenues of $32.2 million, an operating loss of
$12.4 million and a net loss of $22.5 million for the second quarter of 1998.
SkyTel's international operations reported revenues of $8.8 million, an
operating loss of $5.7 million and a net loss of $6.7 million for the quarter
ended June 30, 1998. For purposes of reporting operating income (loss) for the
Company's business segments, certain indirect operating and selling, general and
administrative expenses are allocated among the business segments based on
various financial and operational factors which reflect usage of services.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SkyTel and
its majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The Company's consolidated financial statements for the three and six
month periods ending June 30, 1998 and 1997 have not been audited by independent
public accountants. However, in the opinion of management, these financial
statements include all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation. The results for these periods
are not necessarily indicative of the results for the year ending December 31,
1998.
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3. EARNINGS (LOSS) PER SHARE
Net loss per share for the three and six month periods ending June 30,
1998 and 1997 is calculated by dividing the net loss (after deducting preferred
stock dividends) by the weighted average number of shares of common stock
outstanding during the period with no effect given to common stock equivalents
because such effect would be antidilutive. The weighted average number of
shares of common stock outstanding in the second quarter of 1998 and the first
six months of 1998 was 56,858,962 and 55,995,576, respectively. The weighted
average number of shares of common stock outstanding in the second quarter of
1997 and the first six months of 1997 was 54,473,783 and 54,459,398,
respectively. Basic and diluted per share amounts were the same for each of the
periods presented.
4. COMPREHENSIVE INCOME (LOSS)
In January 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting comprehensive income and its components. Comprehensive
income is defined as all changes in the equity of a business enterprise from
transactions and other events and circumstances, except those resulting from
investments by owners and distributions to owners. The Company reported a
comprehensive loss, which included the consolidated net loss and foreign
currency translation gains and losses, of $12.2 million and $24.1 million for
the quarters ended June 30, 1998 and 1997, respectively, and $24.8 million and
$46.6 million for the first six months of 1998 and 1997, respectively.
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5. INTEREST RATE SWAP AGREEMENTS
In April 1998, the Company entered into certain interest rate swap
agreements with respect to the $265 million outstanding principal amount of its
13.5% Senior Notes due 2002 (the "Senior Notes"). These agreements involve the
exchange of interest obligations on fixed and floating interest rate debt
without the exchange of the underlying principal amounts. The agreements have
varying maturities but in no instance exceed the maturity date of the Senior
Notes. The interest rate swap agreements establish an effective interest rate of
10.75% on the Senior Notes through December 15, 2000. During the period from
December 15, 2000 to December 15, 2002, the Company will be required to make
payments to the swap counterparty in an amount equal to 12.07% multiplied by the
principal amount of the Senior Notes plus a redemption premium of 6.75%. During
this period, the Company will receive an amount equal to the 3-month London
Interbank Offered Rate ("LIBOR") plus 1% (currently 8.69%) multiplied by the
principal amount of the Senior Notes plus a redemption premium of 6.75%. The
Company is continuing to record an amount equal to 13.5% of the principal amount
of the Senior Notes as interest expense in its consolidated statements of
operations.
6. PIK PREFERRED STOCK CONVERSION
In May 1998, the Company made an offer to the holders of its 7.5%
Cumulative Convertible Accruing Pay-In-Kind Preferred Stock (the "PIK Preferred
Stock") in order to encourage the voluntary conversion of the PIK Preferred
Stock into Common Stock of the Company. The Company agreed to reduce the
conversion price of the PIK Preferred Stock by 0.81% for any holder who
converted shares of PIK Preferred Stock into Common Stock of the Company on or
before May 15, 1998. The holders of the PIK Preferred Stock converted all the
outstanding shares of PIK Preferred Stock, together with all shares of PIK
Preferred Stock accrued as dividends as of the date of conversion, into an
aggregate of 3.4 million
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shares of Common Stock of the Company. As a result of the conversion, the
Company will no longer be required to accrue approximately $4.5 million of
annual stock dividends on the PIK Preferred Stock. Although dividends on the PIK
Preferred Stock were not treated as an expense on the Company's consolidated
statements of operations and, therefore, did not affect reported net income,
such dividends were deducted from net income for the purpose of determining net
income (loss) per common share.
7. STOCKHOLDER LITIGATION
On February 20, 1997, certain litigation was filed in the United States
District Court for the District of Columbia against the Company, its wholly-
owned subsidiary SkyTel Corp., and seven current and former officers and
directors. The complaint alleged certain violations of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), during the period January 19, 1995
through February 22, 1996. The plaintiffs sought unspecified damages and to have
the case certified as a class action. In December 1997, the United States
District Court for the District of Columbia granted a motion dismissing SkyTel
Corp. as a defendant in the litigation and in January 1998 transferred the case
to the United States District Court for the Southern District of Mississippi. On
May 4, 1998, the Company entered into an agreement in principle to settle this
litigation without any admission of liability on the part of the Company or any
of the individual defendants. Under the terms of the agreement in principle,
SkyTel agreed to make a cash payment of approximately $1.9 million into a
settlement fund. In addition, SkyTel's directors' and officers' liability
insurer separately agreed to make a cash contribution to a settlement fund.
The final settlement is subject to the execution of a definitive settlement
agreement and the approval of the United States District Court for the Southern
District of Mississippi. In the second quarter of 1998, the Company recorded a
charge to other expenses in its consolidated statements of operations in the
amount of $2.8 million related to the costs of this litigation and the proposed
settlement.
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8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid by SkyTel was $22.3 million and $26.8 million during the
six months ended June 30, 1998 and 1997, respectively, and was $17.7 million and
$20.7 million during the three months ended June 30, 1998 and 1997,
respectively. No federal income taxes were paid during these periods.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the consolidated financial condition
and results of operations of SkyTel for the three and six month periods ended
June 30, 1998 and 1997 and certain factors that will affect SkyTel's financial
condition.
Certain statements set forth in this Management's Discussion and Analysis
of Financial Condition and Results of Operations which are not historical facts
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995 that are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements. Among the factors that could cause actual results to differ
materially are competitive pressures, the continuing improved performance of the
Company's distribution channels, and the timely availability and market
acceptance of new products and value-added services. This Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Company's Consolidated Financial Statements and
the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
REVENUES
Revenues on a consolidated basis increased 31% in the six months ended
June 30, 1998 as compared to the six months ended June 30, 1997 and increased
33% in the second quarter of 1998 as compared to the second quarter of 1997.
This increase was primarily due to a 698% increase in revenues from advanced
messaging services in the first half of 1998 as compared to the first half of
1997 resulting, in large part, from sales of SkyWord(R) Plus units, an advanced
text messaging service with guaranteed
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delivery which was introduced by the Company in April 1997. The number of
advanced messaging units in service increased 531% in the second quarter of 1998
as compared to the second quarter of 1997 and 32% in the second quarter of 1998
as compared to the first quarter of 1998.
Revenues from one-way messaging operations in the United States increased
approximately 5% in the first half of 1998 as compared to the first half of 1997
and increased 2% in the second quarter of 1998 as compared to the second quarter
of 1997. This increase in revenues was attributable to a 4% increase in the
number of one-way paging units in service in the United States in the second
quarter of 1998 as compared to the second quarter of 1997.
As of June 30, 1998, the Company had 954,000 one-way messaging units in
service in the United States which included 28,700 prepaid paging units, as
compared to 920,300 one-way messaging units in service as of June 30, 1997. In
addition, SkyTel had 295,900 advanced messaging units in service as of June 30,
1998, an increase of 531% over the 46,900 advanced messaging units in service as
of June 30, 1997. Approximately 17% of net unit additions placed in service on
the Advanced Messaging Network in the second quarter of 1998 represented
conversions of units from one-way to advanced messaging services, as compared to
approximately 20% of net unit additions on the Advanced Messaging Network in the
first quarter of 1998.
Average revenue per domestic unit in service was $32.61 in the second
quarter of 1998 as compared to $30.50 in the second quarter of 1997 and $32.96
in the first quarter of 1998. Average revenue per one-way unit in service was
$30.18 in the second quarter of 1998 as compared to $30.16 in the second quarter
of 1997 and $31.29 in the first quarter of 1998. Average revenue per advanced
messaging unit was $41.28 in the second quarter of 1998 as compared to $39.79 in
the second quarter of 1997 and $41.15 in the first quarter of 1998.
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The Company intends to continue to emphasize the distribution of its
family of advanced messaging services, including SkyWord(R) Plus, two-way
interactive messaging and fixed location services. The Company also intends to
continue to feature its one-way services through the promotion of products and
services which more efficiently utilize the capacity of the FLEX(R) enabled one-
way messaging network, such as the Beepwear(TM) pager watch and prepaid paging
services, and the establishment of distribution channels which can effectively
market these products and services. The ability of the Company to continue to
achieve improved operating results will be dependent on the continued improved
performance of its direct and reseller distribution channels, the success of new
distribution channels and the timely availability and market acceptance of new
products and value-added services which the Company expects to introduce in 1998
on the Advanced Messaging Network. In addition, the Company cannot predict the
extent to which future revenues will be impacted by the introduction of services
competitive with those available on the Advanced Messaging Network.
During the first half of 1998, one-way messaging operations provided
approximately 70% of SkyTel's revenues as compared to 87% in the first half of
1997. Advanced messaging operations provided approximately 23% of consolidated
revenues during the first half of 1998 as compared to 4% in the first half of
1997. Other SkyTel operations provided less than 1% of revenues in the first
half of 1998 as compared to 2% in the first half of 1997.
SkyTel's consolidated revenues include revenues recorded by the
Company's international operations in Argentina, Colombia, Puerto Rico, Costa
Rica, Uruguay and Venezuela. Revenues recorded by the Company's consolidated
international operations provided approximately 7% of SkyTel's consolidated
revenues in both the first half of 1998 and the first half of 1997. The Company
continues to experience competition in Latin America from cellular telephone and
other telecommunication services, and plans to introduce new product offerings
in certain countries in an effort to accelerate development of the messaging
market in Latin America. The Company cannot predict the extent to which such
competitive services will affect the future operating results of the Company's
Latin American operations.
On July 1, 1998, Mtel Latin America, Inc. ("Mtel Latam") transferred 100%
of the outstanding shares of its wholly-owned subsidiary, Mtel Puerto Rico, Inc.
("Mtel Puerto Rico") to SkyTel. As a result of this
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transaction, SkyTel's ownership interest in Mtel Latam was reduced from 80% to
76% of the outstanding shares of Common Stock of Mtel Latam, and Newbridge Latin
America, L.P. increased ownership from 20% to 24% of the outstanding shares of
Common Stock in Mtel Latam. Effective in the third quarter of 1998, the results
of operations of Mtel Puerto Rico will be included in the results of operations
for the Company's domestic one-way messaging segment.
EXPENSES
Expenses include operating, selling, general and administrative, and
depreciation and amortization.
Operating expenses primarily consist of salaries, telephone costs and
transmitter and receiver site rentals associated with the Company's one-way and
advanced messaging operations in the United States and one-way international
messaging operations, as well as expenses associated with the maintenance of the
Company's operating equipment and facilities. These expenses on a consolidated
basis increased 16% in the first six months of 1998 as compared to the first six
months of 1997 and increased 23% in the second quarter of 1998 as compared to
the second quarter of 1997. This increase primarily reflects increased telephone
and system costs associated with the increasing one-way and advanced messaging
subscriber base in the United States, monthly rental expenses incurred in
connection with operating lease agreements entered into with Motorola Inc. in
the third and fourth quarters of 1997 pursuant to which the Company leased a
total of 50,000 SkyWord(R) Plus units valued at
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approximately $9.3 million, increased transmitter and receiver site rentals
resulting from the continued expansion of coverage of the Company's Advanced
Messaging Network in the United States and increased messaging unit
refurbishment costs. As a percentage of consolidated revenues, operating
expenses decreased to 28% in the first six months of 1998 as compared to 32% in
the first six months of 1997 and decreased to 29% in the second quarter of 1998
as compared to 32% in the second quarter of 1997. SkyTel expects to continue to
incur increased operating expenses during the remainder of 1998 and in future
periods, primarily as a result of the projected increase in the number of units
in service on its one-way and advanced messaging networks in the United States
and the continued expansion of coverage of the Advanced Messaging Network.
Operating expenses related to the one-way messaging system in the United
States decreased 0.1% in the first half of 1998 as compared to the first half of
1997 and decreased 4% in the second quarter of 1998 as compared to the second
quarter of 1997. As a percentage of revenues, operating expenses decreased to
22% in the first half of 1998 as compared to 23% in the first half of 1997 and
decreased to 23% in the second quarter of 1998 as compared to 24% in the second
quarter of 1997. Operating expenses related to advanced messaging operations in
the United States increased 57% in the first six months of 1998 as compared to
the first six months of 1997 and increased 93% in the second quarter of 1998 as
compared to the second quarter of 1997, but decreased as a percentage of
revenues to 48% in the first six months of 1998 as compared to 244% in the first
six months of 1997 and decreased to 47% in the second quarter of 1998 as
compared to 194% in the second quarter of 1997. Operating expenses of the
Company's international subsidiaries increased 14% in both the first half of
1998 and the second quarter of 1998 as compared to the respective prior year
periods, but decreased as a percentage of revenues to 29% in the first half of
1998 as compared to 33% in the first half of 1997 and decreased to 29% in the
second quarter of 1998 as compared to 32% in the second quarter of 1997.
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Selling, general and administrative expenses include marketing and
advertising costs, personnel costs associated with the direct sales and
marketing staff, costs associated with customer support operations and corporate
overhead costs, primarily salaries and administrative expenses. On a
consolidated basis, these expenses increased 15% in the first six months of 1998
as compared to the first six months of 1997 and increased 14% in the second
quarter of 1998 as compared to the second quarter of 1997. This increase
primarily reflects increased selling expenses related to the expansion of the
Company's direct sales force, advertising and marketing expenses incurred in
connection with the promotion of products and services on the Advanced Messaging
Network, general and administrative expenses related to the expansion of the
Company's customer support operations, such as customer service and billing
services, and other corporate overhead costs to service the continuing increase
in units in service on the Advanced Messaging Network. As a percentage of
consolidated revenues, selling, general and administrative expenses decreased to
50% in the first six months of 1998 as compared to 57% in the first six months
of 1997 and decreased to 49% in the second quarter of 1998 as compared to 57% in
the second quarter of 1997. Selling, general and administrative expenses on a
consolidated basis are expected to increase during the remainder of 1998 and in
future periods as a result of the Company's plans to continue to expand its
direct sales force in the United States and to incur additional marketing
expenses in connection with the promotion of products and services on the
Advanced Messaging Network.
Selling, general and administrative expenses related to the one-way
messaging system in the United States increased 4% in the first half of 1998 as
compared to the first half of 1997 and increased 6% in the second quarter of
1998 as compared to the second quarter of 1997. As a percentage of revenues,
selling, general and administrative expenses were 39% in both the first half of
1998 and the first half of 1997, and were 39% in the second quarter of 1998 as
compared to 37% in the second quarter of 1997. Selling, general and
administrative expenses related to
17
<PAGE>
advanced messaging operations in the United States increased 45% in the first
six months of 1998 as compared to the first six months of 1997 and increased 36%
in the second quarter of 1998 as compared to the second quarter of 1997, but
decreased as a percentage of revenues to 65% in the first six months of 1998 as
compared to 360% in the first six months of 1997 and decreased to 58% in the
second quarter of 1998 as compared to 343% in the second quarter of 1997.
Selling, general and administrative expenses of the Company's international
subsidiaries increased 18% in the first half of 1998 as compared to the first
half of 1997 and increased 21% in the second quarter of 1998 as compared to the
second quarter of 1997, but decreased as a percentage of revenues to 103% in the
first half of 1998 as compared to 113% in the first half of 1997 and decreased
to 108% in the second quarter of 1998 as compared to 112% in the second quarter
of 1997.
Depreciation and amortization increased 17% in the first six months of
1998 as compared to the first six months of 1997 and increased 16% in the second
quarter of 1998 as compared to the second quarter of 1997, primarily due to the
continued expansion of coverage of the Advanced Messaging Network and the
purchase of pagers and advanced messaging units to support the increase in the
Company's subscriber base. As a percentage of revenues, depreciation and
amortization expenses decreased to 20% in both the first six months of 1998 and
the second quarter of 1998 as compared to 22% in the comparable 1997 periods.
OPERATING INCOME (LOSS)
SkyTel reported a consolidated operating income of approximately $3.9
million for the first six months of 1998 as compared to a consolidated operating
loss of approximately $21.0 million for the first six months of 1997, and
consolidated operating income of $3.2 million for the second quarter of 1998 as
compared to a consolidated operating loss of $10.4 million for the second
quarter of 1997. For the three-
18
<PAGE>
month period ended June 30, 1998, one-way messaging operations recorded
operating income of $21.5 million, which was partially offset by an operating
loss of $12.4 million from advanced messaging operations and an operating loss
of $5.7 million from international operations.
The Company expects to report operating income on a consolidated basis
in 1998 and future periods as a result of its one-way messaging business in the
United States and declining operating losses from advanced messaging operations.
However, future levels of operating income will be dependent on the continued
improved performance of the Company's direct and reseller distribution channels,
the success of new distribution channels and the timely availability and market
acceptance of new products and value-added services which the Company expects to
introduce in 1998 on its Advanced Messaging Network. In addition, the Company
cannot predict the extent to which future operating results will be impacted by
the introduction of services competitive with those available on the Advanced
Messaging Network.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense decreased 9% in the first six months of 1998 as compared
to the first six months of 1997 and decreased 0.2% in the second quarter of 1998
as compared to the second quarter of 1997. This decrease is primarily due to
the inclusion in the first quarter of 1997 of approximately $2.9 million of fees
in connection with the amendment of the Company's bank credit facility and a
decrease in the outstanding balance under the bank credit facility in the first
six months and the second quarter of 1998 as compared to the first six months
and second quarter of 1997.
See Note 5 of Notes to Consolidated Financial Statements regarding the
completion of a series of interest rate swaps in April 1998 with respect to the
Company's Senior Notes. The interest rate swaps do not impact the amount of
interest expense recorded by the Company for financial reporting purposes with
respect to the Senior Notes.
19
<PAGE>
Interest income totaled $0.6 million in the first six months of 1998 as
compared to $2.4 million in the first six months of 1997 and totaled $0.2
million in the second quarter of 1998 as compared to $1.2 million in the second
quarter of 1997. Interest income in the second quarter and first half of 1997
included interest accrued on securities restricted for debt service related to
the Company's Senior Notes, the final balance of which was used to pay the
interest payment on the Senior Notes due on December 15, 1997.
PROVISION FOR INCOME TAXES
SkyTel recorded a provision for state and local income taxes of $2.0
million and $2.4 million in the first six months of 1998 and 1997, respectively,
and $1.0 million and $1.2 million in the second quarter of 1998 and 1997,
respectively. The Company reported net losses for federal income tax purposes
during the three and six month periods ended June 30, 1998 and 1997 and,
accordingly, no provision for federal income taxes has been made for such
periods.
PREFERRED STOCK DIVIDENDS
The Company accrued and paid dividends of approximately $2.1 million in
each of the quarters ended June 30, 1998 and 1997 on the Company's $2.25
Cumulative Convertible Exchangeable Preferred Stock (the "$2.25 Preferred
Stock"). In addition, the Company accrued approximately $0.9 million in the
second quarter of 1998 as compared to $1.2 million in the second quarter of 1997
related to stock dividends on the PIK Preferred Stock. The reduction in the
amount of dividends accrued on the PIK Preferred Stock in the second quarter of
1998 resulted from the conversion of all the outstanding shares of PIK Preferred
Stock by the holders thereof in May 1998. See Note 6 of Notes to Consolidated
Financial Statements for information relating to the conversion of the PIK
Preferred Stock. As a result of the conversion of the PIK Preferred Stock, the
Company eliminated the accrual of approximately $4.5
20
<PAGE>
million of annual stock dividends. Although dividends on the $2.25 Preferred
Stock and the PIK Preferred Stock were not treated as an expense on the
Company's consolidated statements of operations and, therefore, did not affect
reported net income, such dividends were deducted from net income for the
purpose of determining net income (loss) per common share.
NET INCOME (LOSS)
SkyTel recorded a consolidated net loss of approximately $24.6 million in
the six month period ended June 30, 1998 which, combined with the effect of
preferred stock dividends, resulted in a consolidated net loss per common share
of $0.55 for such period. This compares to a consolidated net loss of
approximately $44.6 million, or $0.94 per common share, in the first six months
of 1997. The consolidated net loss in the first six months of 1998 included a
$2.8 million charge in connection with the settlement of certain stockholder
litigation. See Note 7 of Notes to Consolidated Financial Statements. The
consolidated net loss in the first six months of 1997 was offset by a gain of
approximately $7.4 million from the sale of the Company's 19% equity interest in
a joint venture that conducts paging operations in Brazil. The Company recorded
a consolidated net loss of $12.2 million, or $0.27 per common share, in the
second quarter of 1998 as compared to a consolidated net loss of $23.1 million,
or $0.49 per common share, in the second quarter of 1997. For the second quarter
of 1998, the Company's one-way messaging operations recorded net income of $20.6
million, which was offset by a net loss of $22.5 million from advanced messaging
operations and a net loss of $6.7 million from international operations. The
Company expects to incur a net loss on a consolidated basis for the year ended
December 31, 1998; however, the Company expects to be profitable in the fourth
quarter of 1998.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
DOMESTIC
The Company invested a total of $5.6 million in the first half of 1998,
including $3.9 million in the second quarter of 1998, to fund the expansion of
its one-way messaging system and the procurement of messaging units to support
its one-way messaging subscriber base. In addition, in the first half of 1998,
the Company incurred capital expenditures of $17.0 million, including $5.6
million in the second quarter of 1998, for advanced messaging units and
infrastructure equipment related to the continued expansion of the Advanced
Messaging Network. Capital expenditures in the second quarter of 1998 were
funded with cash generated from one-way messaging operations and cash on-hand at
the beginning of the quarter.
During the second quarter of 1998, the Company did not increase its
outstanding borrowings under its bank credit facility, and had a balance of
$115.5 million of borrowings outstanding as of June 30, 1998. Letters of credit
in the amount of $5.2 million had been issued under the credit facility as of
June 30, 1998, and the credit available under the facility has been reduced by a
corresponding amount. As of June 30, 1998, the Company had borrowing
availability under the bank credit facility of approximately $79.3 million. The
Company may be required to incur additional borrowings under the bank credit
facility during the remainder of 1998 to fund capital expenditures and working
capital requirements, including the payment of interest on the Senior Notes, to
the extent that cash flows from operations do not satisfy these requirements. In
June 1998, the Company made its first cash interest payment on the Senior Notes
without benefit of escrowed funds.
In April 1998, the Company entered into certain interest rate swap
agreements with respect to the $265 million outstanding principal amount of the
Senior Notes. These agreements involve the exchange of interest obligations on
fixed and floating interest rate debt without the exchange of the underlying
principal amounts. The agreements have varying
22
<PAGE>
maturities but in no instance exceed the maturity date of the Senior Notes. The
interest rate swap agreements establish an effective interest rate of 10.75% on
the Senior Notes through December 15, 2000. During the period from December 15,
2000 to December 15, 2002, the Company will be required to make payments to the
swap counterparty in an amount equal to 12.07% multiplied by the principal
amount of the Senior Notes plus a redemption premium of 6.75%. During this
period, the Company will receive an amount equal to the 3-month London Interbank
Offered Rate ("LIBOR") plus 1% (currently 8.69%) multiplied by the principal
amount of the Senior Notes plus a redemption premium of 6.75%. The Company is
continuing to record an amount equal to 13.5% of the principal amount of Senior
Notes as interest expense in its consolidated statements of operations.
INTERNATIONAL
During the first half of 1998, Mtel Latam required approximately $1.3
million to fund capital expenditures and working capital requirements of its
subsidiaries and joint ventures in Latin America. On December 31, 1997, Mtel
Latam established a $20.0 million line of credit (the "Latam Line of Credit") to
fund capital expenditures and working capital requirements (other than
acquisitions). Borrowings under the Latam Line of Credit are evidenced by a
demand note and mature on September 30, 1998 or earlier at the discretion of the
issuing banks. As of June 30, 1998, Mtel Latam had borrowings of $20.0 million
outstanding under the Latam Line of Credit. Mtel Latam is currently in
discussions with its banks regarding an extension of the September 30, 1998
maturity date and an increase in the principal amount of the Latam Line of
Credit. If the maturity date is not extended and the borrowing availability
under the Latam Line of Credit increased, Mtel Latam will be required to seek
other sources of funds to repay the Latam Line of Credit and to fund capital
requirements through the
23
<PAGE>
remainder of 1998 and 1999. There can be no assurance that Mtel Latam will be
able to secure such additional funding on terms acceptable to Mtel Latam.
YEAR 2000
The Company will be required to modify its internal computer systems and
its messaging networks in light of the date change that will occur in the year
2000. The Company is currently assessing the impact of year 2000 issues on its
operations and is in the process of implementing programming changes that will
be required to address this issue. Although final cost estimates have not yet
been determined, the Company does not believe that year 2000 compliance costs
will have a material impact on the Company's results of operations in 1998. The
Company is also working with various vendors whose products and services may
materially impact the Company's year 2000 compliance and is not aware that any
such vendor will be unable to effect timely compliance.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5 ("SOP"), "Reporting on the Costs of Start-Up Activities," the
intent of which is to have all companies account for start-up costs
consistently. The SOP, which is effective for fiscal years beginning after
December 15, 1998, requires all companies to expense all start-up costs
previously capitalized and thereafter to expense all costs of start-up
activities as incurred. Prior to the issuance of the SOP, all companies had the
option of capitalizing or expensing costs associated with start-up activities in
accordance with generally accepted accounting principles. The SOP broadly
defines start-up activities as one-time activities related to the opening of a
new facility, the introduction of a new product or service, the commencement of
business in a new territory, the establishment of business
24
<PAGE>
with a new class of customer, the initiation of a new process in an existing
facility or the commencement of a new operation. As will be the case for all
companies that previously elected to capitalize start-up costs, the Company will
be required to expense all previously capitalized amounts and expects to record
a one-time cumulative effect of a change in accounting principle in the range of
approximately $40 - $60 million in the third quarter of 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that each
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded on the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
fair value of a derivative instrument be recognized currently in earnings unless
specific hedge accounting criteria are met. SkyTel has not yet quantified the
impact of adopting SFAS No. 133 and has not determined the timing or method of
adoption. However, the adoption of SFAS No. 133 could increase the volatility
in reported net income and other comprehensive income.
25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On February 20, 1997, a civil complaint was filed in the United States
District Court for the District of Columbia, Kris Lindblom and Jack Fefer v.
Mobile Telecommunication Technologies Corporation, SkyTel Corporation, J. Robert
Fugate, Leonard G. Kriss, M. Bernard Puckett, Thomas G. Barksdale, Calvin C.
LaRoche, Jai Bhagat and John N. Palmer, Civil Action No. 1:97CV00337. The
complaint had two counts, one alleging violations of Section 10(b) of the
Exchange Act against all defendants, and one alleging violations of Section
20(a) of the Exchange Act against the Company and defendants Palmer and Puckett.
The plaintiffs sought unspecified damages and to certify the case as a class
action. In December 1997, the United States District Court for the District of
Columbia granted a motion dismissing SkyTel Corp. as a defendant in the
litigation and in January 1998 transferred the case to the United States
District Court for the Southern District of Mississippi. On May 4, 1998, the
Company entered into an agreement in principle to settle this litigation without
any admission of liability on the part of the Company or any of the individual
defendants. Under the terms of the agreement in principle, the Company agreed to
make a cash payment of approximately $1.9 million into a settlement fund. In
addition, the Company's directors' and officers' liability insurer separately
agreed to make a cash contribution to a settlement fund. The final settlement
is subject to the execution of a definitive settlement agreement and the
approval of the United States District Court for the Southern District of
Mississippi. Subsequent to the filing of the complaint, the Company, as have
other companies involved in private securities litigation, received from the
staff of the Securities and Exchange Commission ("SEC") an informal inquiry
letter seeking documents pertaining to consultants and products used in the
development and operation of the Advanced Messaging Network. The Company is
cooperating with the SEC staff.
Except as set forth above and except for certain proceedings involving
the unpaired narrowband PCS license awarded to the Company by the FCC in July
1994 pursuant to a Pioneer's Preference which is described in "Item 1.
Business - Regulation" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, there are no material legal or regulatory proceedings
involving the Company except license applications and renewals and other
regulatory proceedings incident to the Company's business.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
26
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's 1998 Annual Meeting of Stockholders was held on May 21,
1998 (the "1998 Annual Meeting"). At the 1998 Annual Meeting, Haley Barbour,
Jai P. Bhagat, R Faser Triplett and R. Gerald Turner were elected directors of
the Company for a three year term expiring at the 2001 Annual Meeting of
Stockholders and until their respective successors are elected and qualified.
The holders of 50,190,404, 50,220,059, 50,240,860 and 50,089,230 shares of
Common Stock present in person or by proxy at the 1998 Annual Meeting voted in
favor of the election of Messrs. Barbour, Bhagat, Triplett and Turner,
respectively, and the holders of 311,692, 282,037, 261,236 and 412,866 shares of
Common Stock, respectively, withheld their vote for such nominees. Messrs.
Thomas G. Barksdale, John T. Stupka and E. Lee Walker will continue to serve as
directors of the Company until the 1999 Annual Meeting of Stockholders, and
Messrs. John N. Palmer, Gregory B. Maffei and John E. Welsh III will continue to
serve as directors of the Company until the 2000 Annual Meeting of Stockholders,
in each case until their respective successors are elected and qualified.
At the 1998 Annual Meeting, the stockholders of the Company approved a
proposal to adopt the Mobile Telecommunication Technologies Corp. 1998 Outside
Directors' Stock Option Plan (the "Outside Directors' Stock Option Plan"). The
proposal to adopt the Outside Directors' Stock Option Plan was approved by the
holders of 47,778,858 shares of Common Stock, constituting a majority of the
shares of Common Stock present in person or by proxy and actually voting at the
1998 Annual Meeting. The holders of 2,369,362 shares of Common Stock voted
against such proposal and the holders of 354,076 shares of Common Stock
abstained from voting with respect to such proposal.
At the 1998 Annual Meeting, the stockholders of the Company also
approved a proposal to amend the Restated Certificate of Incorporation of the
Company to change the name of the Company from "Mobile Telecommunication
Technologies Corp." to "SkyTel Communications, Inc." The
27
<PAGE>
proposal was approved by the holders of 49,876,494 shares of Common Stock,
constituting a majority of the shares of Common Stock issued and outstanding as
of the record date for the 1998 Annual Meeting. The holders of 357,291 shares of
Common Stock voted against such proposal and the holders of 268,511 shares of
Common Stock abstained from voting with respect to such proposal. The name
change was effective as of 5:30 P. M., Central Daylight Savings Time, on May 22,
1998.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following Exhibits are filed as part of this Quarterly Report
on Form 10-Q:
Exhibit No. Description
3.1 Certificate of Amendment of the
Restated Certificate of Incorporation
of the Company, filed May 22, 1998 with
Secretary of State of the State of Delaware,
amending the Restated Certificate of
Incorporation to change the name from "Mobile
Telecommunications Technologies Corp." to
"SkyTel Communications, Inc."
10.1* Mobile Telecommunication Technologies Corp.
1998 Outside Directors' Stock Option Plan.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated May 27, 1998
reporting that the name of the Company was changed from "Mobile
Telecommunication Technologies Corp." to "SkyTel Communications, Inc.",
effective as of 5:30 P.M., Central Daylight Savings Time, on May 22, 1998. The
Company's common stock began trading on The Nasdaq Stock Market under the
symbol "SKYT" effective as of the opening of The Nasdaq Stock Market on May 26,
1998.
__________
* Identifies each exhibit that is a "management contract or compensatory plan or
arrangement" required to be filed as an exhibit to this Quarterly Report on Form
10-Q pursuant to Item 6(a) of Form 10-Q.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKYTEL COMMUNICATIONS, INC.
Dated: August 13, 1998 By /s/ John T. Stupka
--------------------
John T. Stupka
President and Chief Executive Officer
Dated: August 13, 1998 By /s/ Robert Kaiser
-------------------
Robert Kaiser
Senior Vice President-Finance and
Chief Financial Officer
29
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
MOBILE TELECOMMUNICATION TECHNOLOGIES CORP.
--------------------------------------
MOBILE TELECOMMUNICATION TECHNOLOGIES CORP., a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: That the directors of the Corporation, by written consent,
adopted a resolution proposing and declaring advisable the following
amendment to the Restated Certificate of Incorporation of the Corporation:
RESOLVED, that the Restated Certificate of Incorporation of the
Corporation is hereby amended by deleting Article FIRST in its
entirety and substituting the following in lieu thereof:
"FIRST: The name of the corporation is SkyTel
Communications, Inc. (the "Corporation")."
SECOND: That thereafter, pursuant to resolution of the directors, by
majority vote of all outstanding stock entitled to vote thereon at a
meeting of stockholders of the Corporation in accordance with Section 222
of the General Corporation Law of the State of Delaware, the stockholders
voted in favor of this amendment to the Restated Certificate of
Incorporation.
THIRD: This amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: This Certificate of Amendment shall become effective as of
5:30 P.M., Central Daylight Savings Time, on May 22, 1998.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed and attested by its duly authorized officers, this
21st day of May, 1998.
MOBILE TELECOMMUNICATION TECHNOLOGIES CORP.
By: /s/ John T. Stupka
--------------------------------
John T. Stupka, President and
Chief Executive Officer
ATTEST
/s/ Leonard G. Kriss
- ----------------------------------
Leonard G. Kriss, Esq.,
Senior Vice President,
General Counsel and Secretary
-2-
<PAGE>
MOBILE TELECOMMUNICATION TECHNOLOGIES CORP.
1998 OUTSIDE DIRECTORS' STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1 INTRODUCTION.................................................... 1
SECTION 2 DEFINITIONS..................................................... 1
SECTION 3 ADMINISTRATION.................................................. 3
SECTION 4 ELIGIBILITY..................................................... 3
SECTION 5 SHARES SUBJECT TO PLAN.......................................... 4
SECTION 6 INITIAL GRANT OF OPTIONS........................................ 4
SECTION 7 FORMULA OPTIONS................................................. 4
SECTION 8 STOCK OPTIONS IN LIEU OF DIRECTOR FEES.......................... 5
SECTION 9 CHANGE IN CONTROL VESTING....................................... 6
SECTION 10 TERM OF PLAN................................................... 6
SECTION 11 INDEMNIFICATION OF COMMITTEE................................... 7
SECTION 12 AMENDMENT AND TERMINATION OF THE PLAN.......................... 7
SECTION 13 ADJUSTMENT IN OPTION SHARES AND EXERCISE PRICE................. 7
SECTION 14 WITHHOLDING TAXES.............................................. 8
SECTION 15 RIGHTS AS A STOCKHOLDER........................................ 8
SECTION 16 GOVERNING LAW.................................................. 8
SECTION 17 EFFECTIVE DATE................................................ 8
<PAGE>
MOBILE TELECOMMUNICATION TECHNOLOGIES CORP.
1998 OUTSIDE DIRECTORS' STOCK OPTION PLAN
SECTION 1. INTRODUCTION
The Mobile Telecommunication Technologies Corp. 1998 Outside
Directors' Stock Option Plan (the "Plan"), which is made effective as of March
5, 1998, provides each non-employee director with (a) an initial grant of non-
qualified stock options ("Options") to purchase 10,000 shares ("Option Shares")
of common stock of Mobile Telecommunication Technologies Corp. (the "Company")
upon his initial election to the Board of Directors of the Company, (b) an
annual grant of Options based upon the achievement of certain performance
criteria, and (c) an election to receive Options in lieu of annual cash director
fees, with the number of Options determined pursuant to the Black-Scholes
valuation method.
SECTION 2. DEFINITIONS
2.1 Definitions. The following words and phrases shall, when used
------------
herein, have the meanings set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
---
(b) "Affiliate" means (i) an entity that directly or through one or
---------
more intermediaries is controlled by the Company, and (ii) any entity in
which the Company has a significant equity interest, as determined by the
Company.
(c) "Agreement" means a stock option agreement, which is an
---------
agreement subject to the terms of the Plan.
(d) "Board of Directors" means the Board of Directors of the Company.
------------------
(e) "Change in Control" means the occurrence of any of the following
-----------------
events:
(i) any "person", as such term is used in Sections 13(d) and
14(d) of the Act (other than the Company, any trustee or any other
fiduciary holding securities under an employee benefit plan of the Company,
or any corporation owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions as their ownership of
Common Stock), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Act), directly or indirectly, of securities of the Company
representing thirty percent (30%) or more of the combined voting power of
the Company's voting securities then outstanding;
(ii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors, and any
new director (other than a director designated by a person who has entered
into an agreement with the Company to effect a transaction described in
clauses (i), (iii) or (iv) of this Section 2.1(e))
<PAGE>
whose election by the Board of Directors or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a
majority of the Board of Directors;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than eighty percent (80%) of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation
or (B) a merger or consolidation affected to implement a recapitalization
of the Company (or similar transaction) in which no "person" (as
hereinabove defined) acquires more than thirty percent (30%) of the
combined voting power of the Company's then outstanding voting securities;
or
(iv) the stockholders of the Company approve a plan or complete
liquidation of the Company or any agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.
(f) "Closing Price" means the last reported sale price for the
-------------
Common Stock on the Nasdaq Stock Market or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices for
the Common Stock as reported on the OTC Bulletin Board, or, if at any time the
Common Stock is not listed or admitted to trading on the Nasdaq Stock Market, on
the principal national securities exchange on which the Common Stock of the
Company is listed or admitted to trading, or if not listed or admitted to
trading on any national securities exchange, on the New York Stock Exchange
Composite Tape or, if the Common Stock is not listed or admitted to trading on
any national securities exchange or quoted on such exchange, the average of the
closing bid and asked prices for the Common Stock in the over-the-counter market
as furnished by any New York Stock Exchange member firm selected from time to
time by the Company for that purpose.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
----
(h) "Committee" means the committee appointed by the Board of
---------
Directors to administer the Plan.
(i) "Common Stock" means the common stock, par value $.01 per share,
------------
of the Company.
(j) "Director" means a director of the Company.
--------
(k) "Employee" means any person who is employed by the Company or
--------
an Affiliate for purposes of the Federal Insurance Contributions Act.
2
<PAGE>
(l) "Option" means an option to purchase Shares of the Company
------
granted pursuant to and in accordance with the provisions of the Plan.
(m) "Optionee" means a Director who is granted an Option pursuant
--------
to and in accordance with the provisions of the Plan.
(n) "Option Shares" means Shares subject to and issued pursuant to
-------------
an exercise of an Option granted under the Plan.
(o) "Share" means a share of Common Stock of the Company.
-----
SECTION 3. ADMINISTRATION
3.1 Delegation to Committee. The Plan shall be administered by the
-----------------------
Committee which shall consist of at least two Directors who are not eligible to
participate in the Plan. The members of the Committee shall be appointed by the
Board of Directors. The Board of Directors may from time to time remove members
from or add members to the Committee. Vacancies on the Committee shall be
filled by the Board of Directors.
3.2 Committee Actions. The Committee shall select one of its members
-----------------
as chairman, and shall hold meetings at such times and places as it may
determine. Acts approved by the majority of the Committee in a meeting at which
a quorum is present or acts reduced to or approved in writing by a majority of
the members of the Committee shall be the valid acts of the Committee. A quorum
shall be present at any meeting of the Committee which a majority of the
Committee members attend.
3.3 Finality. The Committee shall have the authority in its sole
--------
discretion to interpret the Plan, to grant Options under and in accordance with
the provisions of the Plan, and to make all other determinations and to take all
other actions it deems necessary or advisable for the implementation and
administration of the Plan or Agreements thereunder, except to the extent such
powers are herein reserved by the Board of Directors. All actions of the Board
of Directors and the Committee shall be final, conclusive and binding upon the
Optionees. No member of the Board of Directors or the Committee shall be liable
for any action taken or decision made in good faith relating to the Plan or any
grant of an Option thereunder. All Options granted pursuant to this Plan shall
be evidenced by an Agreement and shall be subject to the terms of the Plan and
such additional terms are as set forth in the Agreement.
SECTION 4. ELIGIBILITY
Directors who are not Employees of the Company or an Affiliate shall be
eligible to receive Options under the Plan on the terms and subject to the
restrictions hereinafter set forth.
3
<PAGE>
SECTION 5. SHARES SUBJECT TO PLAN
The aggregate number of Option Shares which may be issued under the
Plan shall at no time exceed 250,000. The limitations established by this
Section shall be subject to adjustment in accordance with the provisions of the
Plan. In the event that an Option expires or is terminated for any reason, the
Option Shares allocable to the unexercised portion of such Option may again be
subject to an Option under the Plan. In the event that an Optionee delivers
Shares as payment of the exercise price for an Option, such Shares may be
subject to Options under this Plan.
SECTION 6. INITIAL GRANT OF OPTIONS
6.1 Initial Grant of Formula Option Shares. Each person who is not
--------------------------------------
an Employee and first becomes a Director after the effective date of the Plan
shall be granted an Option to purchase 10,000 Option Shares on the date the
person is first elected a Director.
6.2 Exercise Price. The exercise price of each Share pursuant to an
--------------
Option described in this Section shall be the average of the Closing Prices for
the Common Stock during the sixty (60) trading days prior to the date of grant.
6.3 Vesting. Unless otherwise provided in an Agreement and subject
-------
to Section 9 hereof, each Option described in this Section shall vest according
to the following Vesting Schedule:
Years of Service Percent of
After Date of Grant Option Shares Vested
------------------- ---------------------
Less than one year 0
1 year 33 1/3%
2 years 66 2/3%
3 or more years 100%
For purposes of the Vesting Schedule, an Optionee shall be granted a "Year
of Service" for each full consecutive year of service as a Director of the
Company.
SECTION 7. FORMULA OPTIONS
7.1 Annual Grant of Formula Stock Options. Each Director who is not
-------------------------------------
an Employee shall annually be granted an Option to purchase Option Shares as of
the tenth business day following the issuance of the earnings press release for
the Company for the preceding calendar year (beginning with the press releases
relating to the 1997 calendar year) provided that such Director has served
continuously as a Director since the last annual meeting of stockholders of the
Company. Unless another award formula is selected by the Committee, Options will
be awarded annually under the Plan according to the following formula:
4
<PAGE>
(a) the Company's total return to stockholders ("TRS") for the
immediately preceding calendar year must exceed the rate of
return on a one year United States Treasury Bill for such
calendar year, assuming that such United States Treasury Bill had
been purchased on the first day of such calendar year; and
(b) the Company's TRS for the immediately preceding calendar year
meet or exceed the levels of TRS set forth below for a group of
companies in a telecommunications industry index selected by SIC
code or such other group of companies selected by the Committee
("TRS Achievement") ranked by percentile on the basis of relative
TRS Achievement:
Percentile of TRS Achievement Option Shares
----------------------------- -------------
Less than 40th 1,000
40th to 60th 3,000
Greater than 60th 5,000
7.2 Exercise Price. The exercise price of each Share pursuant to an
--------------
Option described in this Section shall be the average of the Closing Prices for
the Common Stock during the sixty (60) trading days prior to the date of grant
of the Formula Option.
7.3 Vesting. Unless otherwise provided in an Agreement and subject
-------
to Section 9 hereof, each Option described in this Section shall vest according
to the following Vesting Schedule:
Years of Service Percent Vested
After Date of Grant of Option Shares
------------------- ----------------
Less than one year 0
1 year 33 1/3%
2 years 66 2/3%
3 or more years 100%
For purposes of the Vesting Schedule, an Optionee shall be granted a "Year
of Service" for each full consecutive year of service as a Director of the
Company.
SECTION 8. STOCK OPTIONS IN LIEU OF DIRECTOR FEES
8.1 Option Payments. In lieu of receiving annual director fees in cash,
---------------
each Director who is not an Employee may elect to receive an Option to purchase
a number of Option Shares determined pursuant to Section 8.2 hereof. Such
election must be made by the Director on or before January 21 of the year for
which the election is made and such election must be to receive an Option in
lieu of the full amount of the director fees payable for the calendar year of
the election; provided, however that for 1998, a Director may elect to make an
election by a date
5
<PAGE>
determined by the Committee to be as soon as practicable following March 5, 1998
and such election must be to receive an Option in lieu of the full amount of the
unpaid director fees payable for the remainder of 1998. Such Option shall be
granted as of December 31 preceding the year for which the election is made, or
if December 31 is not a business day, the immediately preceding business day.
Unless otherwise provided in an Agreement and subject to Section 9 hereof, each
Option shall be exercisable no earlier than December 31 following the date of
grant of such Option.
8.2 Option Shares Formula. The number of Option Shares subject to an
---------------------
Option pursuant to this Section shall be determined pursuant to the Black-
Scholes valuation method:
<TABLE>
<S> <C>
Number of Option Shares subject to an Option = Annual Directors' Fees
----------------------
Black-Scholes Value
</TABLE>
For purposes of the above formula, the Black-Scholes Value means the value of an
option to purchase one share of Common Stock as determined by the Committee
pursuant to the Black-Scholes valuation method at the exercise price determined
pursuant to 8.3.
8.3 Exercise Price of Directors' Fee Options. The exercise price of each
----------------------------------------
Share subject to an Option pursuant to this Section shall be the Closing Price
on the date of grant.
8.4 Vesting. Unless otherwise provided in an Agreement, each Option
-------
described in this Section shall be fully vested as of the date of grant of such
Option, subject to a reduction of twenty percent (20%) of the Option Shares for
each regularly scheduled meeting of the Board of Directors that the Director
fails to attend during the calendar year for which the election is made.
SECTION 9. CHANGE IN CONTROL VESTING
Notwithstanding anything to the contrary contained in the Plan, in the
event of a Change in Control, each Option granted pursuant to the Plan which has
not previously been forfeited shall immediately vest and shall become
immediately exercisable as of the date of the Change in Control.
SECTION 10. TERM OF PLAN
The Plan shall be effective on the date hereof and shall continue to
be effective until ten (10) years following the earlier of the effective date of
the Plan or the date of stockholders approval of the Plan, unless sooner
terminated by the Board of Directors pursuant to Section 12 hereof. The Company
shall submit the Plan to its stockholders for approval within twelve (12) months
of the adoption of the Plan by the Board of Directors.
6
<PAGE>
SECTION 11. INDEMNIFICATION OF COMMITTEE
In addition to such other rights of indemnification that the members of the
Committee may have, each member of the Committee shall be indemnified by the
Company against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which it may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by it in
settlement thereof (provided the settlement has received the prior approval of
the Company) or paid by it in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in the action, suit or proceeding that the Committee member is liable
for negligence or misconduct in the performance of its duties; provided that
promptly after institution of the action, suit or proceeding the Committee
member shall in writing offer the Company the opportunity, at its own expense,
to handle and defend such matter. Upon the delivery to the Committee member of
written notice of assumption by the Company of the defense of such matter, the
Company will not be responsible to the Committee member for any further fees and
disbursements relating to the defense of such matter, including fees and
disbursements of counsel.
SECTION 12. AMENDMENT AND TERMINATION OF THE PLAN
The Board of Directors at any time may amend or terminate the Plan
without stockholder approval; provided, however, that the Board of Directors may
condition any amendment on the approval of the stockholders of the Company if
such approval is necessary or advisable with respect to tax, securities or other
applicable laws to which the Company, this Plan, optionees or eligible directors
are subject. No amendment or termination of the Plan shall adversely affect the
rights of an Optionee with regard to his Options without his consent.
SECTION 13. ADJUSTMENT IN OPTION SHARES AND EXERCISE PRICE
If (i) the number of Shares shall be increased or reduced by a change in
par value, split-up, stock split, reverse stock split, reclassification, merger,
consolidation, distribution of stock dividends or similar capital adjustments,
or (ii) the Company engages in a transaction for which the Committee determines
an adjustment is appropriate, then the Committee may make an adjustment in the
number and kind of Shares available for the granting of Options under the Plan.
In addition, the Committee may, in its sole and absolute discretion, make an
adjustment in the number, kind and price of Shares as to which outstanding
Options, or the portions thereof then unexercised, shall be exercisable, to the
end that the Optionee's proportionate interest is maintained as before the
occurrence of the event. The adjustment in outstanding Options will be made
without change in the total price applicable to the unexercised portion of the
Option and, if necessary, with a corresponding adjustment in the exercise price
per share. Any fractional Shares resulting from such adjustments shall be
eliminated. All adjustments made by the Committee under this Section shall be
conclusive.
7
<PAGE>
Notwithstanding the foregoing paragraph, the Committee shall have the
right to terminate the Options granted under the Plan in consideration of the
payment to the Optionees of the difference between (a) and (b) where (a) equals
the Closing Price on the date of termination of the Option Shares multiplied by
the number of Option Shares and (b) equals the aggregate Option exercise price
of the Option Shares.
SECTION 14. WITHHOLDING TAXES
To the extent required by law, the Company shall have the right to require
the recipient to remit to the Company an amount sufficient to satisfy any
federal, state and local withholding tax requirement, if any, prior to the
delivery of any certificate or certificates for such Shares. An optionee must
pay the withholding tax in cash or by certified check or by the Company
deducting a sufficient number of Shares from the Option Shares issued to satisfy
withholding taxes, in accordance with the Agreement.
SECTION 15. RIGHTS AS A STOCKHOLDER
An Optionee or a transferee of an Optionee shall have no rights as a
stockholder with respect to any Option or Option Shares until the date of the
issuance of a stock certificate to him for the Option Shares. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights for which the
record date is prior to the date the stock certificate is issued, except as
otherwise provided in the Plan.
SECTION 16. GOVERNING LAW
The laws of the State of Delaware shall govern this Plan.
SECTION 17. EFFECTIVE DATE
This Plan was approved by the Board of Directors on March 5, 1998 and
became effective as of such date.
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SKYTEL
COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,995,107
<SECURITIES> 0
<RECEIVABLES> 70,953,604
<ALLOWANCES> 23,276,067
<INVENTORY> 0
<CURRENT-ASSETS> 77,739,331
<PP&E> 467,026,003
<DEPRECIATION> 187,158,199
<TOTAL-ASSETS> 711,772,978
<CURRENT-LIABILITIES> 117,626,941
<BONDS> 388,213,356
37,500
0
<COMMON> 595,720
<OTHER-SE> 180,423,390
<TOTAL-LIABILITY-AND-EQUITY> 711,772,978
<SALES> 247,634,733
<TOTAL-REVENUES> 247,634,733
<CGS> 0
<TOTAL-COSTS> 243,768,849
<OTHER-EXPENSES> 2,527,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,838,076
<INCOME-PRETAX> (22,590,657)
<INCOME-TAX> 2,022,208
<INCOME-CONTINUING> (24,612,865)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,612,865)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
